The Atlanta banking technology vendor S1 Corp. says it hopes a deal announced this week will help it address its ongoing earnings slump, which it attributes in part to its shift to subscription pricing.
Moving from a software licensing model to a subscription one always involves some short-term financial pain, as a company trades large up-front payments for steady revenue. But S1's transition has been especially painful, because many of its customers have not taken out subscriptions for its newest products.
"It has been amazing to me how unbelievably satisfied they are with a 5-year-old product," James "Chip" Mahan 3d, its founder, chairman, and chief executive, said Wednesday during its fourth-quarter earnings conference call.
The solution could be a deal S1 announced Tuesday to offer its customers online authentication software from PassMark Security Inc. of Menlo Park, Calif. The deal will be "the catalyst for completing the bulk" of software upgrades for S1's customers this year, Mr. Mahan said on the call.
PassMark's software is designed to make more secure the login process for a financial company's Web site.
This type of software is becoming increasingly popular with banking companies trying to fight online fraud. In October the Federal Financial Institutions Examination Council recommended that financial companies implement stronger authentication procedures for online banking.
Avivah Litan, a vice president and research director at the Stamford, Conn., market research company Gartner Inc., said deals like the one between S1 and PassMark are becoming common among online banking providers that hope to benefit from their bank customers' need for improved authentication and transaction monitoring capabilities.
Mr. Mahan said that S1 would include the PassMark software only in versions 2.0 and higher of its Enterprise products. The company is encouraging customers to upgrade to the most recent version, 3.0, which is only sold on a subscription basis.
A significant number of customers are still using software that predates version 2.0, he said.
S1 introduced subscription pricing in August 2004, when it rolled out version 3.0 of Enterprise. The shift has dragged down earnings for several quarters. On Wednesday, S1 said its fourth-quarter revenue fell 19% from a year earlier, to $46 million, and it reported a net loss of $20.7 million, compared with net income of $2.9 million.
For the full year, it reported a net loss of $1.1 million, compared with net income of $15.6 million. Revenue fell 1%, to $204.1 million.
"We knew it would be a difficult quarter," Mr. Mahan said. S1 attributed $10.8 million of the fourth-quarter loss to restructuring costs.
In July, S1 ousted its CEO, Jaime Ellertson, and replaced him with Mr. Mahan, who had also been Mr. Ellertson's predecessor. Since then Mr. Mahan has undertaken numerous cost-cutting efforts, including eliminating jobs and closing facilities.
He also delayed the release of version 3.5 of Enterprise, which it has started to test with customers this quarter. On Wednesday he said the delay also contributed to the poor fourth-quarter results.
Chris Penny, an analyst at Friedman, Billings, Ramsey Group Inc., wrote in a research note published Thursday that S1 is focused on developing its Enterprise products. "Sales do not seem to be the highest priority." He cut his full-year forecast for S1, from a profit of 12 cents a share to a loss of 5 cents.
"Their progress to improve the financials is not yet showing, and it looks like it will take time," Mr. Penny wrote.
