After warning analysts in March to expect a break-even quarter, Open Solutions Inc. surprised Wall Street Tuesday by reporting first-quarter earnings of 21 cents a share, 50% better than a year earlier.
Net income for the core processing software maker rose 58%, to $4.7 million, and revenue 77%, to $66.7 million. The quarter included about a month of results from the former Bisys Group Inc. bank processing unit, which Open Solutions bought on March 3.
Executives of the Glastonbury, Conn., company said that about half of the earnings came from a one-time gain resulting from the Bisys deal.
Bisys had owned a license to provide Open Solutions software to its outsourcing clients. The changing of hands of the bank processing unit triggered a payment to Open Solutions, under an arrangement that Kenneth J. Saunders, Open Solutions' chief financial officer, said included "somewhat obscure rules about pre-existing arrangements."
The remaining growth came from higher-than-expected revenue and lower-than-expected spending on the Bisys integration, Mr. Saunders said.
Louis Hernandez, the chairman and chief executive, said, "So far, integration has been going very smoothly."
During the quarter, Open Solutions landed 26 sales of core processing software worth $37.3 million. About 65% of those were to credit unions, but they generated only about half of the quarter's revenue, because bank contracts are generally larger, Mr. Hernandez said.
Very few of the sales were attributable to Bisys. In fact, Mr. Hernandez said Bisys' sales had suffered because of uncertainty about its business while the unit was for sale. Bisys was able to extend contracts with several bank clients, which Mr. Hernandez said "gave us more of a cushion to establish relationships."
Mr. Hernandez reiterated that in a departure from its historic practice of discontinuing development on core systems acquired from other vendors, his company is committed to maintaining the Bisys system. He said some Bisys clients are considering switching to Open Solutions' system.
"We're not forcing them," Mr. Hernandez said. "We're actively in dialogue with many of them as we speak." He would not say when such a conversion might occur but said the process probably would take six to nine months.
Executives would not discuss their expectations about Bisys customer defections.
However, when it bought the assets of Liberty FiTech Systems Inc. in 2003, Open Solutions had assumed a 25% attrition rate and estimated that 15 clients would migrate to Open Solutions' core processing system, Mr. Saunders said. The actual attrition was closer to 5%, and 60 clients migrated, he said.
Asked about further buyouts, Mr. Hernandez said, "Our guidance does not contemplate any additional acquisitions."
The company continues to look at properties for sale, but prices are high because there are so many buyers, he said. He noted that Open Solutions took on $350 million of debt in the Bisys deal, so "we'd like to show a couple of quarters of paying down debt" before making more acquisitions.
Open Solutions projected second-quarter earnings of 13 cents to 15 cents and revenue of $92 million to $96 million. It raised its estimated 2006 earnings to 89 cents to 93 cents a share from 65 to 69 cents.
Mr. Saunders projected long-term organic growth in the 9% to 10% range, about twice that of other core processing providers.
David Koning, an analyst at the brokerage firm Robert W. Baird & Co., said the lower-than-expected integration spending was encouraging. And with strong contract signings and more banks asking for bids on core systems, "it seems like that momentum is continuing," he said. Mr. Koning rates Open Solutions "outperform."
Christopher F. Penny, an analyst at Friedman, Billings, Ramsey, said in a report that Open Solutions' healthy results and outlook were a return to earlier expectations. "It appears that management took the conservative approach" until the Bisys deal closed, said Mr. Penny, who also rates the company "outperform."
