TSA Q2 profits up 34% as banks re-architect payment sysems

Source: Transaction Systems Architects

Transaction Systems Architects, Inc. (Nasdaq:TSAI), today announced financial results for its second quarter of fiscal 2006 which ended March 31, 2006.

"We had a very strong second quarter, with a 19 percent growth in revenue and a 34 percent increase in diluted earnings per share," said Philip G. Heasley, CEO. "Factors that are serving to make older payment systems obsolete - regulatory change, rapidly growing payment volumes, industry consolidation and a view towards payments convergence - are all creating opportunities for TSA. Our international business is growing nicely, and we're having good success cross-selling a wide range of solutions into our customer base. Important industry mandates such as the Single European Payments Area (SEPA) and the EMV smart card initiative are creating new opportunities for us across the range of our enterprise payments portfolio."

The Company added seven new customers during the quarter and sold 15 new applications to existing customers. In addition, 25 customers licensed capacity upgrades each valued at a $100 thousand or more. Activity during the quarter included the licensing of BASE24 to two Tier 1 world banks in Asia, capacity upgrades by several Tier 1 world banks, retailers and payments processors and a new license for the Company's Smart Chip Manager solution by a current Tier 1 bank customer in the Middle East.

"We're essentially complete with the business reorganization, and have now rebranded all of our solutions under the ACI Worldwide brand," added Heasley. "The power of the brand is beginning to pay dividends in terms of new business opportunities, both in specific geographic regions and with global players. The themes of payments convergence and improving overall productivity in electronic payments systems are resonating, with both our customers and the market in general."

Revenues

Revenue was $89.8 million in the second quarter, a 19 percent increase over the same period last year and an increase of 6 percent over the first quarter of fiscal 2006. "In particular, our EMEA business continues to perform well, with revenue growing 49 percent year-over-year," said Heasley. "Our overall international business was also strong, with revenue increasing 30 percent over the same period last year, and it continues to comprise about two-thirds of our total revenue. We experienced good growth in professional services revenue, as we continue to work with our customers to enhance the productivity and performance of their mission-critical payments systems. We also had a good quarter licensing our cross-industry solutions to a wide range of customers in various industries."

Revenues for the Americas region were $43.6 million, as compared to $42.7 million for the second quarter of fiscal 2005. The Americas revenues consisted of U.S. revenues of $29.7 million and Americas international revenues of $13.9 million, as compared to $29.4 million and $13.3 million, respectively, for the same period last year. Revenues for the Europe/Middle East/Africa region were $37.3 million, as compared to $25.1 million for the second quarter of fiscal 2005. Asia-Pacific revenues were $8.9 million, as compared to $7.8 million for the second quarter of 2005. Total international revenues were $60.1 million, or 67 percent of total revenues, as compared to $46.2 million, or 61 percent of total revenues, for the second quarter of fiscal 2005.

Revenues were comprised of software license fees of $47.7 million, maintenance fees of $24.7 million and services of $17.4 million. Monthly recurring revenue was $45.0 million, compared to $43.3 million during the same period last year. Monthly recurring revenue was comprised of monthly license fees of $16.9 million, maintenance fees of $24.7 million and services (facilities management fees) of $3.4 million. Monthly recurring revenue comprised 50 percent of total revenues in the quarter.

Operating Expenses

Operating expenses for the quarter were $68.6 million, compared to $59.6 million in the second quarter of fiscal 2005 and $70.6 million in the first quarter of fiscal 2006. Included in the second quarter of fiscal 2006 expenses were an additional $0.8 million for sales commissions associated with higher-than-expected sales activity.

Operating Income

Operating income was $21.2 million with an operating margin of 23.6 percent. This compared to operating income of $16.0 million with an operating margin of 21.2 percent for the second quarter of fiscal 2005, and $14.5 million with an operating margin of 17.1 percent for the first quarter of fiscal 2006. "We've begun to recognize the accretion we expected from the S2 acquisition with a positive contribution from that business in the second quarter," added Heasley.

Other Income

Other income for the quarter was $1.9 million, compared to $1.0 million in the second quarter of fiscal 2005.

Taxes

The Company's effective tax rate for the quarter was 35.0 percent. Tax provision for the quarter was $8.1 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 and Diluted Earnings Per Share

Net income for the quarter was $15.0 million, or $0.39 per diluted share, compared to $11.2 million, or $0.29 per diluted share during the same period last year, an increase of 34 percent.

Operating Cash Flow and Cash Balance

Operating cash flow was $29.7 million compared to operating cash flow of $15.5 million in the second quarter of fiscal 2005. Included in the quarterly cash flow was the receipt from the Internal Revenue Service of $10.9 million reflecting a previously disclosed expected tax refund. The Company's cash, cash equivalents and marketable securities as of March 31, 2006, were $189.7 million. "Our operating cash flow was very strong this quarter," added Heasley. "Our healthy balance sheet positions us well to seek out opportunities in the market, in order to add to our solutions portfolio and continue to increase our international reach."

During the quarter, the Company repurchased 10,723 shares of its common stock for approximately $0.3 million. From the inception of the Company's stock repurchase plan through March 31, 2006, the Company has repurchased a total of 1,955,086 shares for approximately $47.0 million. Total shares outstanding were 37.4 million as of March 31, 2006. During the second quarter, the Company received $3.7 million in proceeds from employee stock option exercises.

Backlog

As of March 31, 2006, the Company's 12-month backlog was $257.5 million, as compared to $254.4 million for the quarter ended December 31, 2005. The monthly recurring portion of backlog, which includes monthly license fees, maintenance fees and facilities management fees, amounted to $186.9 million. The non-recurring portion of backlog, which totaled $70.6 million, includes other software license fees and services.

As of March 31, 2006, the Company's estimated 60-month backlog was $1.050 billion. For comparison purposes, as of December 31, 2005, the Company's estimated 60-month backlog was $1.035 billion. "The increases in our 12-month and 60-month backlogs were a direct result of continued strong sales activity, particularly in our international markets," added Heasley.

Guidance

The Company has revised its revenue estimate for fiscal 2006 from a range of $345 million to $360 million to a range of $348 million to $360 million. The Company has revised its diluted earnings per share estimate from a range of $1.46 to $1.58 to a range of $1.51 to $1.63.

Backlog Estimates

The Company's 12-month and 60-month backlog estimates are based on the Company's judgment about future events which, as described above, involve a number of risks and uncertainties. The Company estimates backlog using the methodology described in the Company's Form 10-Q filed on February 9, 2006 in the section entitled "Backlog" under Item 2.
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