Shares of S1 Corp., the Atlanta banking software vendor, fell 18% on Friday, to $4.29, on a pair of analyst downgrades after the company quit providing full-year earnings guidance.
In reporting late Thursday on its first-quarter earnings, S1 said an August move to subscription-based pricing had made results harder to predict.
The company said the switch hurt revenue but helped it win two multichannel contracts in the first quarter. It said it sold 25 product licenses in the quarter, including eight to new customers.
The price change accompanied an upgrade of Enterprise, S1's software suite. The upgrade added the ability to communicate customer information across all channels - so that, for example, a teller could see the details of a customer's last interaction with the call center.
Until last August, Enterprise was primarily an Internet banking package, for which banks paid a large up-front licensing fee and a smaller recurring maintenance fee.
First-quarter revenue was up just 11% from a year earlier, to $62.4 million, disappointing analysts. Net income of $720,000, or 1 cent a share, was up 62%. For the first time, S1 released charts that showed the quarterly impact of subscriptions on revenue.
S1's chief executive, Jaime Ellertson, told analysts that the switch to subscription pricing was an investment in long-term profits.
"A large number of sales opportunities in 2005 will be centered on our Enterprise suite, which is sold only on a subscription basis," he said.
When asked whether the pricing structure is hurting sales, he said, "We've had no customer deals - none - that have walked away because we have subscription pricing."
In the first quarter, for the first time, two financial institutions became new S1 customers with contracts that involved software for more than one channel, Mr. Ellertson said in an interview later.
The new customers are the $2.2 billion-asset United Nations Federal Credit Union of New York and the start-up St. Louis Bank. Both bought S1's Internet banking software and its interactive voice software.
The credit union had been using other software for both functions, Mr. Ellertson noted. S1's customers have typically waited six months, a year, or more before adding its software for a second banking channel, he said.
Analysts expressed doubt that S1 will get a flood of new customers signing up for multiple channels from the start.
Chris Penny, an analyst at Friedman, Billings, Ramsey Group Inc., downgraded the stock Friday to "market perform," from "outperform."
"The writing was on the wall," he said in a research note. "When any company tells you that it is shifting the way it sells its product and how it recognizes the revenue, flags should go up."
Mr. Penny said that he gave S1 the "benefit of the doubt" in the fourth quarter, after the pricing change was announced, but that he was concerned by the withdrawal of earnings guidance.
"Management indicated that the pipeline is strong in this application but is unable to project exactly how it is going to lay out for this year," he wrote. "If management doesn't know, how can investors know?"
Analyst Peter Swanson of Piper Jaffray & Co. also lowered his recommendation, to "market perform" from "outperform."
John Kraft, an analyst with the investment firm D.A. Davidson & Co. in Great Falls, Mont., said he was disappointed that S1 had stopped offering earnings guidance, even though his expectations were low.
"I've seen companies do this kind of a [pricing] transition before, and it is tough," said Mr. Kraft, who has a "neutral" rating the stock. Such a price change "lowers visibility" of future performance, he said, but S1 could still have suggested a range, even if it were extremely broad.
S1 has faced high expectations from analysts that it has not been able to meet, Mr. Kraft said.
"There's a lot of expectations that their sales are really going to pick up because their product is so sought after," he said. "The Enterprise strategy of being able to offer all sorts of different products from the same vendor and the same back end is a very appealing concept for bankers," but "getting all those different channel management teams to agree on the software is just hard."
Still, S1 is "plugging away" and living up to realistic expectations, Mr. Kraft said.
Gwenn Bezard, a research director at Aite Group LLC of Boston, was unimpressed by S1's first multichannel sales to new customers.
"It's easier to sell a multichannel solution" to a start-up, which is "building from scratch," he said, and "St. Louis and United Nations Credit Union are not banks that will make you jump to your feet and say, 'Wow!' "
