In his first quarter as S1 Corp.'s chief executive, Johann Dreyer has reorganized the way it breaks out its earnings, and his company issued earnings guidance for the first time since November 2005.
The accounting shift capped a turbulent year in which the Atlanta banking software vendor appointed a new CEO and completed a strategic review forced by investors. The review led to the sale of a unit, but not the company itself.
Even though "2006 was a very disruptive year," S1 has completed its most significant changes, and "I don't expect any noise in the company from the first of January," Mr. Dreyer said last week in a fourth-quarter earnings conference call with analysts. "We are running a clean business right now."
Analysts have applauded Mr. Dreyer's actions since he became the CEO in November, but they were cautious about sharing his optimism, given S1's storied history. Mr. Dreyer was group president of S1's Postilion until he succeeded James S. "Chip" Mahan 3rd, one of S1's founders, who resigned in October.
In its earnings report, S1 whittled itself down to two business units: one for its flagship Enterprise product line for midsize and big banking companies, and one named Postilion for everything else the company sells.
Postilion, which sells products for small and midsize companies, is often overlooked, Mr. Dreyer said in an interview after the conference call. "Very often, people thought everything in S1 was Enterprise, and other people, they thought nothing in S1 was Enterprise."
S1 has had problems in the past two years with its pricing model. In August 2004 it switched its Enterprise sales to a subscription model, rather than the more-common licensing model. Under subscriptions, customers pay a recurring fee, but many banks, especially large ones, preferred to pay the large, one-time charges of licensing. Mr. Dreyer dropped the subscription model when he became the CEO.
Another change in the fourth quarter was S1's fulfillment of a settlement with Ramius Capital Group LLC to explore strategic alternatives. Ramius, a New York investment management company, led a group that bought nearly 10% of S1's shares last year. Since then Ramius had been pressuring S1 to sell itself.
S1 satisfied Ramius' concerns in the fourth quarter in December by buying back 10.5 million of its shares for $55.8 million.
In August it sold its Financial Reporting Solutions business to investors. The sale helped appease Ramius and also provided S1 with enough cash to make a profit last year.
For the fourth quarter, it posted a loss of $12.2 million. The results were dragged down substantially by restructuring charges and other expenses. A year earlier, it had a net loss of $20.7 million from continuing operations.
Fourth-quarter revenue rose nearly 27% from a year earlier, to $50.2 million. Full-year revenue rose 7%, to $192.3 million, and full-year net income was $17.9 million, which included a gain of $30.1 million primarily from the FRS sale. The company reported a 2005 loss of $1.1 million.
For this quarter, S1 expects to report revenue of $46.5 million to $47.5 million and earnings of 3 to 5 cents a share. It did not provide full-year guidance.
Chris Penny, an analyst at Friedman, Billings, Ramsey & Co. Inc., wrote in a research note published Friday that S1's guidance does not by itself show that the company is guaranteed to recover from its challenges.
"While we have to give management credit for the actions it has taken to reduce expenses, we still do not believe that investors should get excited about management's 'moderate' growth expectations for revenue," he wrote.
John Kraft, an analyst with D.A. Davidson & Co. in Great Falls, Mont., said in an interview that providing first-quarter guidance "is a start" for S1. "It helps."
The new method of reporting earnings may be a positive sign, but it also "reminds you that the company is still in transition," he said.
Excluding one-time charges, Mr. Kraft estimated S1's earnings at zero cents a share, well below the 5 cents he had been expecting, but nevertheless he said the company shows some promise.
"They didn't meet our number, but I don't think people are concerned" about operating expenses, because S1 is clear about where it is headed, he said. "I'm feeling better that these guys have what it takes, but it's still early. There's just been a lot of disruption, so it's been tough."
The new management team is "not overly experienced" at running a public company "but they're straight-shooting, and that's important," Mr. Kraft said. "The company needs that."
