It's a fact of life for bank vendors that drumming up business is a constant imperative, because sometimes - particularly after an intense merger-and-acquisition period, such as the one over the last year - customers will be lost to consolidation.
Bisys Group Inc.'s earnings report last week showed how a sustained period of bank M&A plays out at the vendor level.
The New York outsourcer said its information services group, which handles core processing and check imaging for banks, lost a large client in the last quarter (which it would not name but said had been acquired). Bisys also said the investment services group, which handles processing for mutual funds and the like, will soon lose two major customers: Bank One Corp. and J.P. Morgan Chase & Co., which has bought Bank One and plans to take the mutual fund work Bisys handles in-house.
Though some bank vendors have offered more details than others, it would be hard to find any major one that has not been affected by the recent bank M&A wave.
Some vendors have come out on the winning end - think of CheckFree Corp. picking up extra business from Bank of America Corp.'s purchase of FleetBoston Financial Corp., or TSYS Inc. emerging as JPMorgan Chase's card processor.
Other times a vendor must deal with a loss of business, either to a rival or to a decision to take the work in-house.
For instance, last year Online Resources Corp., a McLean, Va., Internet banking provider, lost two of its largest customers - and 20% of its recurring revenue - to consolidation. First Data Corp. came out on the losing end of the deal TSYS won. CheckFree lost the business of three companies - JPMorgan Chase, Wachovia Corp., and Wells Fargo & Co. - after they founded Spectrum EBP LLC to handle their e-billing. (Marshall & Ilsley Corp.'s Metavante Corp. division later bought Spectrum.)
The lesson, according to one veteran of the bank outsourcing business: "You better run faster in new sales, because you're going to lose existing accounts."
The veteran, M. Arthur Gillis, the president of Computer Based Solutions Inc., a Dallas consulting firm, also said, "There will be losses for anyone, and it's not because they're no good. Some banks leave for cause, but generally, it's a natural event for vendors to see the withering of their existing customer base, and there's nothing anyone can do about it."
The problem is that "some vendors don't move fast enough or aggressively enough" to compensate for that attrition, he said.
Bisys' net income for the fiscal fourth quarter, which ended June 30, fell 42% from the same period last year, to $18 million. It said the JPMorgan Chase and Bank One defections will prompt a "reasonably substantial" drop in the investment services division's revenue. Bisys placed the revenue decrease at 4% to 5%, or $20 million to $30 million, for fiscal 2005.
In the past fiscal year the unit provided $562.2 million of revenue, or 54% of Bisys' total.
"Now that both fund groups achieve enormous scale by combining their operations, [bank executives said] 'Let's give it a go internally,' " Russell P. Fradin, the president and chief executive officer, said in a conference call with analysts Wednesday to discuss the results. "I think it's fair to say it was the only option they considered."
JPMorgan Funds, a unit of JPMorgan Chase, operates a proprietary fund family with $107 billion of assets under management, while Bank One's One Group Mutual Funds has $103 billion. A JPMorgan Chase spokeswoman would not discuss the decision to drop Bisys, but she did say that the two fund families are still operating independently of each other.
Mr. Fradin said the loss of the business will affect revenue more than profit margins for Bisys, especially in the second half of its fiscal year. "Despite these distractions, we remain focused on serving our customers and growing our business in fiscal 2005 and beyond."
Bisys' results included one-time charges of $2.2 million, or 2 cents a share. Excluding those, pro forma net income of $20.2 million, or 17 cents a share, met analysts' expectations.
Excluding charges, Bisys projects earnings per share of 15 cents to 17 cents for the fiscal first quarter and 69 cents to 75 cents for the full year.
"In certain respects, it will be a rebuilding year," Mr. Fradin said.
In the information services division, which provides core processing for 1,400 institutions, "growth will be challenged in the near term due to the loss of a major client," Mr. Fradin said. He did not identify that customer, except to say it had been acquired.
Comparing the fiscal 2004 and 2005 results will be especially difficult, because the 2004 results include not only the processing revenue from that client, but also a "deconversion fee" it paid in the third and fourth quarters.
The customer loss was "a one-time event," said James Fox, a Bisys executive vice president and the chief financial officer. "We expect to grow our way through it, the way we always have in this business."
Information services is the smallest of Bisys' three divisions, but it is the most profitable one; it provided 20% of the parent's revenue and 42% of its operating earnings in the fiscal fourth quarter. Mr. Fox said the division's fiscal 2005 revenue should fall modestly, in line with the 2% decline last quarter from a year earlier. The operating margin, 28.5% in the fiscal fourth quarter, should fall 4 percentage points this quarter.
To help the troubled life insurance division, Bisys has implemented new controls to track financial results and new incentives for the sales force, executives said.
In June, Bisys restated earnings going back to 2001, taking charges of more than $100 million to correct overestimates of life insurance sales commissions, in a unit that has grown by acquisition.
Andrew W. Jeffrey, an analyst at Needham & Co., has an "underperform" rating on Bisys' stock. In a note to clients last week, he wrote that Bisys could have a tough time improving its profit margins.
"We continue arguing the Bisys' two primary business, insurance and investment, have essentially been commoditized," he wrote. "Each is characterized by significant competition, low barriers to entry and dubious economies of scale."
But Craig Peckham, an analyst at Jefferies & Co., who rates Bisys a "buy," was more optimistic. The shares "represent a compelling turnaround/contrarian idea, where investors can purchase three underlying businesses for little more than the price of two," he wrote in a note last week.
