TSA posts year-end gains on the back of restructuring

"We're off to a nice start for fiscal 2006 and we believe the enterprise is performing well," said Philip G. Heasley, CEO. "In this the first quarter of our new structure we have produced good revenues, increased our customer base, and produced strong EPS. These results do contain both additional and new expenses. It is also the first full quarter that reflects S2 acquisition accounting. The results also include a tax benefit booked in the quarter and previously described in our Form 10-K."

The Company added seven new customers during the quarter and sold 32 new applications to existing customers. In addition, 15 customers licensed capacity upgrades valued at over $100 thousand. Activity during the quarter included licensing BASE24-es to a top bank in Pakistan, BASE24 to a top Mexican retailer and capacity upgrades by several top 500 world banks. In addition, the Company licensed its Proactive Risk Manager fraud detection solution to both new and existing customers.

"As part of the combination of business units announced in October, we have rebranded our solutions under the ACI Worldwide name," added Heasley. "We believe that this will allow us to leverage the ACI brand and more effectively globalize our entire solutions portfolio."

"The Company continues to invest in a number of key areas including product, technology and our corporate infrastructure," said Heasley. "We continue to see progress with our Proactive Risk Manager solution and see more interest in the market for payments convergence across the enterprise and for specific needs like transaction settlement. We believe our ongoing investments in BASE24-es are paying off. We signed a new license with a top bank in Pakistan and received customer acceptance from another BASE24-es user. We now have five stand-alone BASE24-es clients live in production environments running on a range of hardware platforms. We continue to validate the performance and efficiency of BASE24-es on multiple hardware platforms."

Revenues

Revenue was $85.1 million in the first fiscal quarter, a six percent increase over the same period last year, and an increase of eight percent over the fourth quarter of fiscal 2005. "Revenue increased year-over-year and sequentially," said Heasley. "In particular, our international business continues to perform well, growing over 18 percent year-over-year."

Revenue detail for the quarter is as follows: the Americas' revenues were $43.9 million, as compared to $41.4 million for the first quarter of fiscal 2005. The Americas' revenues consisted of U.S. revenues of $28.3 million and Americas' international revenues of $15.6 million, as compared to $32.7 million and $8.7 million, respectively, for the same period last year. Revenues for the Europe/Middle East/Africa region were $33.7 million, as compared to $31.4 million for the first quarter of fiscal 2005. Asia-Pacific's revenues were $7.5 million, as compared to $7.8 million for the first quarter of 2005. Total international revenues were $56.8 million, or 67 percent of total revenues, as compared to $47.9 million, or 59 percent of total revenues, for the first quarter of fiscal 2005.

Revenues for the quarter were comprised of software license fees of $43.4 million, maintenance fees of $25.3 million and services of $16.4 million. Recurring revenue was $46.4 million, compared to $42.9 million during the same period last year. Recurring revenue was comprised of monthly license fees of $17.7 million, maintenance fees of $25.3 million and services (facilities management fees) of $3.4 million. Recurring revenue comprised 55 percent of total revenues.

Expenses

Expenses for the quarter were $70.6 million, which included $6.3 million in expenses related to S2 and equity-based compensation expense. Expenses for last quarter totaled $67.9 million, which included $3.8 million in S2 expenses. Expenses for our first quarter of last fiscal year were $58.5 million. Excluding the S2 expenses and equity-based compensation expenses, the most recent quarter’s expenses represent a nominal increase over last quarter and a 10 percent increase over the same quarter last fiscal year.

During the quarter, the Company incurred additional expenses of approximately $2.0 million, including approximately $0.8 million related to previously deferred expenses linked to customer projects, approximately $0.7 million for sales commission associated with higher-than-expected sales activity and approximately $0.4 million for severance related to the combination of business units. The Company also incurred higher than expected expenses associated with strategic activities during the quarter. The Company adopted SFAS No. 123R, "Share-Based Payment", as of October 1, 2005. This resulted in expenses of $1.4 million during the quarter.

Operating Income

Operating income was $14.5 million, with an operating margin of 17.1 percent. This compared to operating income of $11.1 million, with an operating margin of 14.1 percent, for the fourth quarter of fiscal 2005, and $22.1 million, with an operating margin of 27.4 percent for the first quarter of fiscal 2005. The Company believes that the operating margin in the first quarter of fiscal 2005 was abnormally high and, therefore, not indicative of the operating margin in the first quarter of fiscal 2006 or that can be expected in the future.
Other Income

Other income for the quarter was $2.5 million, which was positively impacted by the impact of approximately $1.8 million of interest income recognized from the expected receipt of an income tax refund due to a tax settlement with the Internal Revenue Service (see discussion below).

Taxes

During the quarter, the Company's net income was positively impacted by a tax benefit of $4.1 million that was the result of adjustments to reserve accounts. The tax benefit was derived from the resolution of tax audits in the Company's favor by the Internal Revenue Service. Additionally, during the second fiscal quarter the Company expects to receive a cash refund of $10.7 million related to the tax settlement. This refund is not expected to have an effect on the second fiscal quarter profit and loss.

Including the impact of the tax settlement and anticipated refund, the Company's effective tax rate for the quarter was 10.9 percent. Tax provision for the quarter was $1.9 million. The Company continues to estimate an effective tax rate of 35 percent for the remainder of the fiscal year. That estimated rate could change based on continuing tax optimization efforts by the Company.

Net Income

Net income for the quarter was $15.2 million, compared to $12.9 million during the same period last year and $9.1 million in the fourth quarter of fiscal 2005. Net income was positively impacted by $5.3 million due to the tax settlement (including the impact of the expected payment and interest income) offset by approximately $1.3 million, assuming a 35 percent tax rate, in additional expenses in the quarter.

Earnings Per Diluted Share

Earnings per diluted share were $0.40, which includes $0.14 due to the tax settlement, offset by $0.03 in additional expenses. This compares to earnings per diluted share of $0.34 during the same period last year and $0.24 in the fourth quarter of fiscal 2005.

Operating Cash Flow and Cash Balance

Operating cash flow was $13.5 million compared to operating cash flow of $15.0 million in the first fiscal quarter of 2005. The Company's cash, cash equivalents and marketable securities as of December 31, 2005 were $157.8 million. This cash balance does not reflect the anticipated tax refund payment discussed above.

During the quarter, the Company repurchased 477,399 shares of its common stock for approximately $13.3 million. Through December 31, 2005, the Company has repurchased a total of 1,944,363 shares for approximately $46.7 million under its current stock purchase program. Total shares outstanding were 37.2 million as of December 31, 2005. During the first quarter, the Company received $3.3 million in proceeds from employee stock option exercises.

Backlog

As of December 31, 2005, the Company's 12-month backlog was $254.4 million, as compared to $250.0 million for the quarter ended September 30, 2005, which amount was recalculated under the revised methodology described below. The recurring portion of backlog, which includes monthly license fees, maintenance fees and facilities management fees, amounted to $183.1 million. The non-recurring portion of backlog, which totaled $71.3 million, includes other software license fees and services. In conjunction with the reporting of a 60-month backlog (see below), the Company has revised its methodology for calculating 12-month backlog, which is now consistent with that used in the 60-month calculation. Specifically, the amounts noted above in the 12-month backlog do not include adjustments for identified risk categories (such as amounts recognizable upon the receipt of customer payment) as was previously performed, and it assumes renewal of one-time license fees on a monthly fee basis if such renewal is expected to occur in the next 12 months.

For the first time, the Company is reporting its 60-month backlog. The 60-month backlog represents a forecast of expected revenues from existing customers, assuming normal renewal rates and renewals based on a recurring revenue structure with no increases in expected revenues from those contracts during the 60-month term. See Appendix A to this release for the specific assumptions used by the Company in the calculation of its 60-month backlog. As of December 31, 2005, the Company’s estimated 60-month backlog was $1.035 billion. For comparison purposes, as of September 30, 2005 the Company’s estimated 60-month backlog was $1.031 billion.

"We believe that the 60-month backlog provides additional visibility into the long-term, recurring nature of our business," said Heasley.

Guidance

The Company has revised its revenue estimate for fiscal 2006 from a range of $340 million to $358 million to a range of $345 million to $360 million. The Company has revised its diluted EPS estimate from a range of $1.32 to $1.46 to a range of $1.46 to $1.58.