With double-digit revenue growth in the second quarter, S1 Corp. may have validated its return to a licensing model for its big-bank products.
The Atlanta vendor’s next task is to demonstrate that its renewed commitment and increased investment in technology for small banks also will pay off.
Revenue climbed 13% from a year earlier, to $52.6 million, and S1 swung to a $5 million profit, from a loss of more than $2 million. Johann Dreyer, its president and chief executive, called the quarter “our strongest fiscal quarter in many, many years.” Related Links
Most of these gains stemmed from the Enterprise unit, which sells to big banks.
S1 has high hopes for its Postilion unit, which caters to small financial companies and landed six customers in the quarter. Because the unit uses subscription pricing, which does not carry a large, up-front fee, the new customers did little for Postilion’s results in the quarter.
In November, when S1 promoted Mr. Dreyer from president of Postilion, he said that many potential customers were unaware his company even had products for small banks. Since then he has made that market a key part of its strategy.
Mr. Dreyer said that before he took over S1, its main focus had been on pushing Enterprise products, and that Postilion had languished. “We didn’t invest heavily in … [Postilion products], and we invested heavily on the Enterprise side,” he said during a second-quarter earnings conference call Thursday. “We were seen as forsaking that market and not investing as we should.”
But S1 has rolled out several applications for small financial companies in the past several months, including online banking and voice banking products. The new products sent “a very, very strong message” to small banks that S1 was paying attention to them, he said.
Mr. Dreyer also engineered a pricing shift for Enterprise products, from a subscription model, which generates a long-term revenue stream, to a licensing model.
In 2004 the company had begun using the subscription model for Enterprise products, but some large banking companies balked, preferring a licencing arrangement.
One of Mr. Dreyer’s first changes last year was abandoning subscription pricing for Enterprise. “What we are trying to do is put pricing models in place that suit the target market,” he said Thursday.
Enterprise landed no new customers in the second quarter, though Mr. Dreyer said that large banks have long sales cycles, and that the lack of new customers should not be seen as a sign that the unit is unhealthy.
Its revenue climbed 26%, to $28.8 million, and the unit generated net income of $2.4 million, compared with a $4.9 million loss a year earlier.
Postilion’s revenue was flat, at $23.8 million, and operating income fell 16%, to $2.5 million.
Also Thursday, S1 raised its full-year earnings guidance to a range of 26 to 29 cents a share, from its earlier range of 25 to 28 cents. It expects to report full-year revenue of $202 million to $206 million.
In November 2005 it stopped giving guidance altogether and resumed doing so only in March. Soon afterward its stock began a steady climb, from just over $5 a share to about $8 a share in June, where it plateaued before dropping late last month. On Thursday afternoon it was trading at $6.02 a share.
John Kraft, an analyst with the investment firm D.A. Davidson & Co., said he approved of both strategic shifts. “Trying to force big banks to buy on subscription, it just didn’t make any sense. I think you have to offer the product however the customer wants to pay for it,” he said.
Mr. Dreyer’s predecessors did not give Postilion the resources it needed, Mr. Kraft said. “I think the old management looked” at small banks “as second-tier to what they were really focusing on, which is the big banks,” he said. “They were losing customers left and right.”
Though the quarter was strong, Mr. Kraft said that Mr. Dreyer still needs to restore S1’s credibility in the eyes of investors. “The old management team told a good story, was sales oriented, was pretty promotional, and the new management team is really the opposite.” Mr. Dreyer and his team “understand that they need to set expectations that they can deliver on and not do what the company has done in the past: set expectations and not deliver.”
