One of Johann Dreyer's first decisions after taking over as chief executive of the banking technology vendor S1 Corp. was to abandon the subscription pricing model that had been championed by his two predecessors.
The Atlanta company introduced subscription pricing in 2004, but Mr. Dreyer said the change had alienated potential customers, especially large banks, which often prefer paying up-front licensing fees rather than a monthly tab for a software subscription.
"I wouldn't necessarily say that we've lost significant business," Mr. Dreyer said in an interview Thursday, "but we do lose sales cycles, and as an organization you're less effective if your pricing model is not in line with what your customer expects."
"Rather than fight a pricing model fight, let's get the business and deliver successfully into that customer base," he said.
S1 named Mr. Dreyer its CEO, president, and a director Thursday, barely a week after the resignation of James S. "Chip" Mahan 3rd, a co-founder. Mr. Dreyer was previously a group president in the company's Postilion payment processing business.
Mr. Mahan, who was also S1's CEO from 1995 to 2000, returned to the top post in July 2005 after the company ousted his successor Jaime Ellertson.
Mr. Ellertson had spearheaded the introduction of subscription pricing for S1's flagship Enterprise software line. Though Enterprise was initially offered through the traditional licensing model, in August 2004 S1 decided to sacrifice the large revenue bursts generated by licenses for the more stable, recurring subscription fees. Wall Street tends to like subscription pricing because it delivers a predictable revenue stream and because such contracts are generally more profitable in the long term. However, the transition period is often painful because quarterly sales plummet when not buoyed by large, up-front licensing payments.
When Mr. Mahan took over from Mr. Ellertson, the company told investors it planned to stick with subscription pricing, and it called the pricing shift a key factor in S1's poor performance in the preceding several quarters.
But the quarters since then have also been difficult - S1 lost $1 million in the first quarter of this year and $2.1 million in the second - and S1's stock has been mired in the $4 to $6 range for most of the last 18 months.
It said Thursday that it had moved into the black in a big way in the third quarter, with net income of $33.3 million but that most of this was due to a $31.5 million gain on the August sale of its financial reporting solutions unit. Third-quarter revenue was up 11%, to $51.9 million.
The languishing stock price has stimulated pressure from an activist shareholder, Ramius Capital Group LLC in New York, to sell the company. In August S1 sold the financial reporting unit to the Washington investment firm Carlyle Group and the London technology investor Kennet Partners Ltd. On Oct. 23, concurrent with Mr. Mahan's resignation, S1 said it would begin a Dutch auction to buy back about 15% of its outstanding shares for $55 million and that it is no longer evaluating other strategic options, such as a sale.
Mr. Dreyer said he also wants to push S1's non-Enterprise products, which may have been given short shrift due to the focus on Enterprise.
"In the past we've given a very specific Enterprise-only message," he said. "I'm not sure that everybody knows that we have an ATM product or that we have a voice banking product for community financial systems."
John Kraft, an analyst at the investment firm D.A. Davidson & Co. in Great Falls, Mont., said S1's new management is making good decisions. "The idea that they're going to go back to a perpetual license is the right move," he said, "but it kind of reminds people that they're still trying to get organized."
Though the pricing change was necessary for S1 to appeal to large banks, Mr. Kraft said, it was equally important that the company put to rest the speculation that it would sell itself. "Their competitors, you've got to believe, were pushing the uncertainty involved in potentially being for sale," he said.
Letting other products share the spotlight with Enterprise is "probably the right move," Mr. Kraft said. "They have credibility issues because that was what they pushed so hard for so long with investors, that it was going to be revolutionary in the industry … they made some pretty big claims."
Chris Penny, an analyst at Friedman, Billings, Ramsey & Co. Inc., wrote in a research note published Friday that S1's recent decisions would not transform the company overnight.
"We still believe that S1 needs to make some significant changes in order to bridge the disconnect between its product base and its infrastructure," he wrote. "S1 needs to rely on larger deals to drive profitability."
