Small-Bank Spending Helps Lift S1's Revenue Amid $4.3M Loss

A rise in technology spending from smaller banks and credit unions helped S1 Corp. in the fourth quarter, despite other challenges that led it to report a loss.

"The message was and has been from all vendors that the purse strings are loosening a bit and banks … are showing more willingness than they have in the past" to spend on technology, said John Kraft, an equity analyst for D.A. Davidson & Co. in Great Falls, Mont.

S1 is known primarily for its offerings to large banks. It was also among the first vendors to offer banks a consolidated dashboard view within its treasury management product. It also offers smaller banks Internet banking and teller platforms.

Christine Barry, a research director for Aite Group LLC in Boston, said smaller banks are currently among the most aggressive spenders in new technology.

"They are spending more in the online channel now as a result of the [economic] crisis," she said, particularly as they find they can "steal away business from larger institutions."

Gaining those new customers comes with costs, Barry said, since smaller banks must offer products and services that are comparable to what a larger bank offers.

"Those customers are coming with expectations for certain product offering that were provided by larger institutions," Barry said. "Smaller banks and credit unions are finding they need to enhance their capabilities."

S1 said it added 41 new clients in 2010.

"More than half of these we added in the payment segment," Johann Dreyer, chief executive for S1, said in its Friday earnings conference call. These include a top-20 U.S. bank, a top-five bank in South Africa, and a U.S. debit card network. S1 did not name the banks or the debit network.

Kraft said, "their products [are] solid and they are increasingly respected."

Nicole Sturgill, a research director at TowerGroup in Needham, Mass., said of S1, "they are much bigger outside the U.S., and they span the channels with different solutions."

S1 had a loss of $4.3 million in the fourth quarter, compared with a profit of $9.9 million in the same quarter a year earlier. For the full year, the company had a loss of $6.2 million compared with a profit of $30 million in 2009.

The loss was in part related to a project with a large international bank, which S1 did not name, but which S1 said became more costly than it had anticipated.

The international bank was one of its "projects that … [do] not have a product associated with it, and that we don't view as part of our go-forward business," Dreyer said.

S1's large financial institution segment had an operating loss of $3.5 million compared with a profit of $19.8 million in 2009, and its community banks business had an operating loss of $6.2 million compared with a loss of less than $1 million in 2009.

In payments, S1 reported full-year revenue of $55 million, a 3% drop from 2009.

For its large financial institution segment, S1 reported $96 million in revenue, a decrease of 26% from the previous year.

From community banks and credit unions, however, S1's revenue rose 10% to $58.5 million.

The increase in revenue for the company's smaller-bank segment was partially related to S1's $29 million acquisition of PM Systems Corp. in March 2010. PM brought with it strength in online banking capabilities for smaller banks, experts said, as well as a customer base.