Online banking has become so common, especially among big banks, that some vendors of software for it are refocusing on smaller customers and trying to manage their product lines better.
Last week two such vendors, Corillian Corp. of Hillsboro, Ore., and S1 Corp. of Atlanta, reported poor third-quarter earnings that largely reflected slowing demand from large customers.
"This is obviously a disappointing quarter," said Alex Hart, Corillian's president and chief executive, in a conference call with analysts Thursday evening. He said the company is trying to shift from a "historical dependence on a small number of very large deals."
"There's always been some saturation, given that there are only so many big banks," he said in an interview Friday. Corillian already serves four of the top 10: JPMorgan Chase & Co., Wachovia Corp., SunTrust Banks Inc., and one in the Northwest that he would not name.
Bart Narter, a senior analyst at Celent Communications LLC in Boston, agreed that the market for Internet banking software is getting tighter. "It's starting to get like musical chairs," he said.
Corillian had net income of $3.1 million in last year's third quarter and a net loss of $60,000 in this year's. Its revenue dropped 12%, to $11.9 million. It signed three new customers in the quarter and said two deals it had expected to clinch were delayed.
Mr. Hart said Corillian has been working to "productize" its software - making it more standardized so it can charge less to smaller banks, which would need less customization. All three of its third-quarter deals, which included a top-50 bank, were for the productized version.
That plan seems to be bearing fruit. "There are at least 12 deals that we are working on that could close in the fourth quarter," he said.
S1 had an even bigger loss: It lost $7.5 million, including $4.3 million in restructuring costs. A year earlier its net income was $3.2 million.
Revenue dropped 4%, to $57.9 million, and last month S1 laid off 8% of its work force to cut costs.
In July the company ousted its chief executive, Jaime Ellertson, who was succeeded by his predecessor, James "Chip" S. Mahan 3d, its chairman and founder. One of Mr. Mahan's first decisions was to delay the release of the next version of S1's Enterprise software package.
"Where we have stumbled is setting proper expectations and executing around that strategy," Mr. Mahan said during another Thursday evening conference call.
He also said the coming upgrade of the Enterprise suite, which includes modules for most banking channels, would be introduced gradually.
In an interview Andrew Kass, S1's senior vice president of product development and engineering, said: "In the past we introduced an application and then started numerous implementations at one time. This time, we're introducing seven applications simultaneously. We simply want to stagger our implementations"
Chris Penny, an analyst at Friedman, Billings, Ramsey Group Inc., said that in a market where fewer banks are shopping for online banking software and they have more options, S1 should be wary of releasing so many new products.
Indeed, Mr. Penny said, part of the company's problem is that it has too many products to support. "They need to reel in how many different versions of the [Enterprise] application they have," he said.
Mr. Narter said that "the adoption of S1 Enterprise is being hindered by S1's financial performance."
"Do you want to buy core infrastructure from a company that hasn't proven the viability of the platform in the marketplace?" he said.
Both companies' shares fell Friday. S1's stock was down 5.03% to $4.15. Corillian's fell even more sharply, down 20.06% to $2.47.
Though Corillian and S1 lost ground in the quarter, Digital Insight Corp., which sells similar products to smaller banks and credit unions, forged ahead.
Last month it reported revenue of $53.2 million, up 12% from a year earlier, and net income of $6.8 million, up 65%. Its customers enrolled a record number of users for online bill payment in the third quarter, and the company said the current quarter will probably be even stronger.
Mr. Hart said Corillian's recent acquisitions will help stabilize its revenue. On Aug. 18 it bought the online bill pay provider InteliData Technologies Corp. for $20 million in cash and stock.
And in August Corillian bought qbt Systems Inc., whose software connects various types of financial software.
Mr. Narter said qbt, which has 15 credit union customers, will help Corillian expand beyond large banks. "Qbt is very strong in credit unions," he said. "The acquisition of qbt certainly gives them entree into the credit union market."
