Software vendor S1 Corp. said last week that its first-quarter earnings were generally favorable, but investors seemed more fixated on the its loss of 35 cents per share, which was higher than the consensus estimate of 23 cents.
S1's stock price dropped 30% on Wednesday, the day of the earnings announcement, to $41.50, and the stock closed Friday at $44, down 19% for the week and 69% from its 52-week high of $142.25.
The Atlanta company, which sells Internet banking software and services to banks, issued a press release that was highly upbeat about both its recent results and prospects. James S. Mahan 3d, chief executive officer, said S1 is maturing precisely at a moment when financial services companies the world over are beginning to "embrace the Internet as a strategic means to enhance their businesses.
"Our global sales teams are inundated with opportunities, and we are gaining tremendous traction in Asia and Europe, mirroring the successes we are seeing in the U.S. with financial institution customers of all sizes."
S1 reported first-quarter revenue of $50.4 million, up 320% from the comparable quarter a year earlier. The net loss was $75.2 million, a figure that included in the computation a $35.1 million gain from sales of investment securities.
Analysts said the selloff was also a response to changes S1 made in the way two of its subsidiaries - Edify Corp. and FICS Group - recognize revenue. S1 acquired both companies in the fourth quarter, and Robert Stockwell, chief financial officer of S1, said the change essentially sacrificed short-term profits in favor of longer-term, recurring revenues.
Edify, which had been S1's closest competitor, and FICS, a Brussels-based developer of corporate Internet banking systems, would typically record software sales as revenue immediately, a one-time event. S1 prefers a longer-term, recurring revenue business model that is spread across the life of a contract.
The change affected Wall Street's anticipated revenues from software licensing sales. Investors had expected between $13 million and $13.5 million in revenue from that category, while the actual result was only $10.7 million.
"We think internally, we have gone in a very positive direction and had converted those organizations very quickly," Mr. Stockwell said of the change. "The good news is that we got results in stronger long-term revenues. The bad news is you take a one-time hit associated with that type of conversion."
Luke Fouke, a senior analyst at Friedman Billings Ramsey & Co., was not concerned about S1's long-term prospects. He cited S1's claims that it has 800 global financial customers, including Bank One Corp., Citigroup, and Chase Manhattan Corp., and 2.9 million end-users globally. What is more, the company has added 23 financial institution customers for its software and services in the first quarter, and 90 additional projects are under way.
"With software, the margins are great, virtually all profit, so if you lose that revenue, it just runs right through the income statement and whacks everything out of proportion," Mr. Fouke said.
"Fundamentally, I would call this a little bit of a stumble," he added. "In the technology world, even if you hit your numbers, you can go down because the Street is looking for you to solidly beat your numbers," he said.
Jeffery Baker, an analyst at SunTrust Equitable Securities, said: "Believe it or not, as bad as the stock got hit, as bad as the quarter looks on the surface, management made some major difficult decisions that should be applauded by everybody on the Street.
"This is the type of management team that has a discipline that it will stick to regardless," he said.
Mr. Stockwell said S1 ended the first quarter with $83 million in cash and another $38.5 million worth of marketable securities. He expects S1 to reach a financial break-even point in the fourth quarter, which would mean that S1 does not have a near-term need to tap the markets for operating funds.
Analysts are also confident that S1 will reach the break-even point this year, which would be the first time since it went public in early 1996.
S1 officials say the company can now afford to "walk away" from certain contracts that it deems less than favorable. For example, the company had closely considered whether to work with Huntington Bancshares, which last month announced the formation of e-Bank. Huntington's e-Bank would sell technology to financial institutions, particularly to mid-tier banks in search of inexpensive ways to give the top-flight service that is associated with the largest banks.
Mr. Stockwell said a deal with Huntington - an early financial backer of S1 - would have caused his company to stray too far from its core business. The Columbus, Ohio, bank ultimately went to Corillian Corp., an S1 competitor, which has shown a willingness to cut both financial and commercial deals with potential customers to help it develop a brand awareness.
"Now Corillian has to answer to its shareholders, and there are no pre-IPO options anymore," Mr. Baker said. He said Corillian's strategy is similar to the one S1 followed in its formative years.
Corillian, which went public in April at $8 a share, sold shares prior to its IPO to Huntington, 724 Solutions Inc., and Lehman Brothers Holdings Inc. Each investor purchased $7 million in shares of Corillian stock. The software vendor also issued pre-IPO warrants to Bank One, representing 250,000 shares of common stock, at a price of about $1.7 million, an SEC statement said.
Shares of Corillian stock closed Friday at $28, up 124% for the week.
Corillian has been "putting equity on the table and offering that in conjunction with the commercial relationship and they have scored some points in that regard," Mr. Stockwell said.
"That is becoming less and less important as we move forward, but it is something we did as a younger company," he said. "You can keep doing that if it is the right relationship."