Executives
G.Lynn Boggs - President, Chief Executive Officer, Director
Daniel Owens - Chief Financial Officer
Scott Meyerhoff - Executive Vice President, Finance and Strategy
Scot Kees - Corporate General Counsel
Analyst
John Kraft - D.A. Davidson & Co.
John Orrico - Water Island Capital, LLC
Goldleaf Financial Solutions Inc. (GFSI) Q3 2008 Earnings Call November 10, 2008 5:00 PM ET
Operator
Good afternoon day, ladies and gentlemen. Thank you for standing by. Welcome to the Goldleaf Financial Solutions third quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following today's presentation, the conference will be open for questions. (Operator's instructions) This conference is being recorded today Monday, November 10, 208.
At this time, I would now like to turn the conference over to Mr. Scot Kees, Corporate General Counsel. Please go ahead, sir.
Scot Kees
Alright, thank you. Before we begin, I would like to remind everyone that certain of our statements made today will be forward-looking in nature. These forward-looking statements are based on our current expectations, and include known and unknown risks, uncertainties, and other factors, many of which we are unable to predict or control, that may cause our actual results or performance to differ from those expressed on this call. These risks and uncertainties include those associated with our ability to identify, complete or integrate acquisitions, achieve anticipated financial performance, or achieve our growth plans. These risks and uncertainties, and related cautionary statements, are also detailed in our most recent annual report on Form 10-K and in our quarterly report on Form 10-Q filed today with the SEC. I will now turn the call over to Lynn Boggs, our President and Chief Executive Officer.
Lynn Boggs
Thank you, Scot. Joining me here today for our call are Dan Owens, our Chief Financial Officer and Scott Meyerhoff, our Executive Vice President, Finance and Strategy. I would like to take a few minutes to discuss the recent events, progress on corporate initiatives and of course, our financial results for the third quarter.
I am very excited about results for the third quarter. The Company achieved record revenue of $22.2 million in the quarter and exceeded $4.5 million in EBITDA. We continued to perform extremely well in a very challenging environment. Despite the turmoil in the financial sector, we were able to generate $5.4 million in positive operating cash flow, pay down bank debt by $3.5 million in the quarter and report a very strong EPS of $0.04 per share. We are currently down to $39 million of bank debt on a $45 million loan and have approximately $4 million of cash on the balance sheet at the end of the quarter.
We continue to see extremely strong internal growth rates in our payment business with acute rate pro forma year-over-year internal growth rate of approximately 31% and a year-to-date internal pro forma growth rate of approximately 34%. Our management team and employees continue to focus on delivering result that serves the needs of our clients and partners while building long-term shareholder value.
At this point, I would like to turn the call over to our Chief Financial Officer, Dan Owens to discuss the financial results in more detail. Dan?
Daniel Owens
Thank you, Lynn. We are very excited about the 2008 results of the third quarter. As Lynn indicated from an income statement perspective, we reported record quarterly revenue of $22.2 million, GAAP net income of $720,000 and non GAAP adjusted EBITDAS of $4.5 million. We also generated $5.4 million in positive operating cash flow and pay down bank debt by $3.5 million and in Q3 2008 with $3.8 million in cash and cash equivalent.
Total revenue for the three and nine months ended September 30, 2008 increased 55% and 47% to $22.2 million and $61.9 million as compared to $14.3 million and $42.1 million for the comparable period in 2007. Financial institution services revenue increased 69% and 62% to $19.6 million and $53.8 million for the three and nine month periods ended September 30, 2008 compared to $11.6 million and $33.2 million for the comparable periods ended September 30, 2007. The increase of $8 million and $20.6 million in financial institution services revenue for the three- and nine-month period ended September 30, '08 was due to an increase in revenue from the payment solutions and data management product offerings of $8.9 million and $23.5 million for the three- and nine-month period ended, offset by a decline in lending solutions of $0.9 million and $2.9 million respectively. The increase in payment solutions revenue includes the impact of the Alogen acquisition which was completed in the first quarter of 2008.
Payment and data management solutions which our offerings within the financial institution revenue caption now account for approximately 61% of the year-to-date revenues in '08 as compared to approximately 34% of the year-to-date revenues in '07.
Total other products and services decreased $483,000 to the nine-month period ended September 30, '08 versus September 30, '07. This line item includes the results of hardware sales and reflects the net decrease in scanner sales of $576,000, offset by an increase in miscellaneous and customer reimbursements of $95,000.
Gross profit increased by $5.1 million and $13.6 million for the three- and nine-month period ended September 30, '08 to $16.4 million and $46.7 million respectively and as compared to the September 30, '07 period. This increase is a result of a shift in focus to our higher margin payment and data management product offerings. We continue to focus on operating expenses with sequential improvement in the G&A line item. As a percent of revenue, general and administrative expenses were 27.8% and 30.4% for the three- and nine-month period ended '08 as compared to 36.8% and 37.4% for the same periods in September 2007.
Net bank interest expense of approximately $600,000 for the third quarter 2008 is based on an average debt outstanding during the period and reflects the recognition of a 3,000 unrealized gain related the interest rate swap entered into on January 31, 2008. Our current bank borrowing rate is 4.25%. The interest rate swap derivative is based on a $20 million notional amount, the Company receives a one-month LIBOR interest rate while paying a fixed rate of 2.95% over the period beginning February 8, 2008 and ending November 30, 2009. As of September 30, '08, the interest rate swap had an estimated asset value equal to $39,000.
Adjusted EBITDA or non GAAP measurement calculated as earnings before interest taxes, depreciation, amortization and non cash stock-based compensation as well as the effects of unusual or infrequent items for the three- and nine-month period ended September 30, '08 was $4.5 million and $11.4 million respectively as compared to $1.7 million and $4.4 million for the comparable periods ended in '07.
The principal adjustment in 2008 being the inclusion of $1.3 million in Alogent related revenue less $885,000 in Alogent related expenses as if the deal closed on January 1, '08 instead of January 17, 2008 and excluding one-time transaction related expenses of $589,000. Adjusted EBITDA for the 2007 amounts include the effects of severance related expense adjustments was totaled $627,000 for the nine months ended September 30, '07.
Net income for the third quarter 2008 was $720,000 as compared to $92,000 in the third quarter of '07. EPS increased to $0.04 per share in the quarter as compared to $0.01 per share in the comparable period ending September 30, '07. For the nine months ended September 30, '08, the Company reported net income of $528,000 and $0.03 per share compared to a net loss of $184,000 and a negative $0.01 per share for the nine months ended September 30, '07.
Now, I would like to turn the call back to Lynn for some final comments.
G. Lynn Boggs
Thanks, Dan. Based on the current economic environment, I would like to update our 2008 pro forma revenue guidance from $87 million to pro forma revenue in the $85 million to $86 million range. The adjustment is mainly due to declining revenue from hardware sales of scanners which are quickly becoming a commodity item. We have experienced increasing pricing pressures in this along with reduced shipments in terms of number of units.
On the very positive note, I would like to reiterate our 2008 pro forma EBITDAS guidance of $15 million. Our management team and employees have done very well at managing the Company's expense structure to ensure profitability while minimizing the revenue impact from our current environment. We are optimistic for continued performance throughout the remaining fiscal year 2008 and into 2009.
During the third quarter, we embarked on our 2009 budget planning initiative. The current environment has made this undertaking quite challenging as you can imagine. We expect to have this process completed by the year end and we will discuss the plans for 2009 in January.
In conclusion, I would like to take this opportunity to thank each and all of our hard working employees and our many business partners for our continued success. With that we will open the call up to any questions.
Question-and-Answer Session
Operator
(Operator's Instruction) Your first question comes from the line of John Kraft - D.A. Davidson & Co.
John Kraft - D.A. Davidson & Co.
First of all, nice work. It looks like a good quarter.
Lynn Boggs
Thank you, John. We think so.
John Kraft - D.A. Davidson & Co.
Lynn, first question here, as far as the guidance goes, the EBITDA guidance for the year sort of implies a sequential decline from what we did in Q3. Is there just some conservatism in your guidance or were there some quarter or Q3 things that maybe were robbed from what you would expect in Q4?
Lynn Boggs
I would not use the word rob there, John. I think I would use the fact that I think we finished some business and have business roll into Q3 that we fully expected in Q4. So, when you take those numbers back out, we would do the math and you get to a lower number than what we expected than that we actually received in Q3. I mean the $85 million to $86 million would imply that we ought to do somewhere in the 21.3 to 23.3 number for Q4 which obviously the midpoint were based around on where we are today on revenue and then the same thing on the EBITDAS of $11.4 million. We did $4 or $5 in Q3 and it puts you an implied number of somewhere around $3.6 million roughly in Q4. So we think probably a million to million $2 of revenue was pushed from Q4 down and somewhere around $800,000 or probably $700,000 of EBITDAS was pushed down into Q3. Scott, do you have anything to add to that?
Scott Meyerhoff
Yes, John the only other thing to add is obviously in the current environment. The Q4 is usually a nice purchasing period from scanners and additional licenses and in this environment, you have just taken the safety route, you just do not know if people are going to use the yearend budget opportunity to buy. They commonly happen most Q4s so we try to be conservative as well as Lynn alluded to some things that have been discussed a little bit early.
John Kraft - D.A. Davidson & Co.
Okay that is fair and then I guess specific to the scanners, it sounds like the pricing has been getting a little bit more competitive. Are there new vendors, new entrants there or what is happening? Also, are you starting to see one of your pressures as mentioned specifically that the larger institutions already bought the bulk of scanners so now you are seeing that just smaller institutions buying the scanners that sort of hurt the sales numbers, is that something you are seeing as well?
Lynn Boggs
I think there is two parts for it. I think there is a differentiation in the models that people are actually buying there, John. The average scanner we sold a year ago is probably in excess of $700. The average scanner in Q2 was somewhere around $600 that we sold. The average scanner in Q3 was down to $518. So you can see the price compression. There have been no new vendors that we see out there. I think the issue is some of the banks have bought a significant number as merchants change over. They are pushing those scanners out to new merchants and not needed a new one. That is certainly the add too and they bought the extra scanners on the front end and we are also seeing some buying just going out and purely buying the best price they can so we do not deliver as many scanners out there anymore.
John Kraft - D.A. Davidson & Co.
Sure, okay that is helpful. And then hopefully you can answer a few housekeeping questions here. In the past, Scott Meyerhoff, you have provided some transaction data for the last month of the quarter as well as merchant singed or sales for Alogent. Do you have some of that data handy?
Scott Meyerhoff
Yes, Daniel Owens will handle that.
Daniel Owens
We did, John, $1.5 million transactions in September as compared to $1.4 million in July. We certainly have not received the October sets as what we get into the September slot.
Lynn Boggs
Yes, I think a fair amount of transactions John but we did, we only got two months to jump on that because we already had in the call last time the July numbers.
John Kraft - D.A. Davidson & Co.
Sure, okay. And that was the legacy of Goldleaf business right?
Lynn Boggs
That is correct. On the total number of merchants in that signed category, we reported about 7900, if I recall correctly in the second quarter of this year and we are now currently at about just over 9300 total merchants.
John Kraft - D.A. Davidson & Co.
Okay, great and then one more for you, Dan. Tax rate looked higher this quarter. Is that just the normal bouncing around or is that some the 45% to 46% rate, what should we should be expecting going forward?
Daniel Owens
Yes, the 45.6 includes the permanent tax differences. Primarily the stock comp expense is a good rate for the rest of the year.
Operator
(Operator's instruction) Your next question comes from the line of John Orrico - Water Island Capital, LLC.
John Orrico - Water Island Capital, LLC
I have a couple of questions for you, Lynn and I will ask you all my questions if you could just comment if you would. The first is on your cash generation as you pay down from debt in the quarter which is nice to see and you are also are growing your cash balance as well. I wanted to get a sense from you on how you are going to view your cash generation capabilities going forward in terms of uses of cash away from paying down debt, whether it be any type of acquisitions you make or your ability to buyback stock and do your bank covenants forbid you from doing that? My second question had to do with insider activity, maybe you can comment a little bit about the current stock price and your thoughts about valuation and whether or not the executive firm plan to take advantage of the weakened stock price to increase their holdings and the third item I wanted you to address was given the carnage we have seen in the banking sector and while we are not experiencing the level of bank failures that we saw back in the S&L a couple of decades ago, there is clearly a lot of concern particularly among the small community banks and of course, many of those institutions that will participate in the federal bail out or how to access to capital the way some of the larger institutions will also? How does that impact your ability to sell into those firms? What are you seeing in the environment and how will it impact your ability to maintain the momentum you have demonstrated at least thus far this year which is a pretty phenomenal given the environment we are in. Thanks.
Lynn Boggs
Okay, John I will answer those in reverse if that is okay with you. I will start with where we stay in the banking environment today, where we are staying to what we are selling into and I will break it down into three categories and I will start with the first the larger banks, the large financial institutions. We are seeing delays. There is no questions about it. There is a high level of diligent that is taking place in every transaction but we are also seeing well likely for us so far our customers have been a net add instead of a delayed position. We are actually adding customers and some of the acquisition that have gone on so far and do not feel like from a pure current client partner that we have been in net loss position. So we have been lucky in that regard and we have net gains.
On a small community banks, we continue to see activity. We have a strong October. It was in at or above our plan that we have in place, we put in place to first of the year, actually better than September and better than August. So, the total number of contracts we signed which does reflect the middle in the cash business and GAAP earnings, we did see a large number of pure contract signed in October from the community banking side. How these are, you imagine like a lot of things in the plate. They are dealing with foreclosures. They are dealing with whether they are going to plot for start money. They are dealing with a lot of things right now that are distractions from decision process but so far we continue to see opportunities both in large bank and small bank institutions. The products we are selling is an [arrow out] product for them. It can get the deposits and reduce expenses.
So actually while we get one step out there and get concerned about it and worry about what is going on, we do not see any shuttering so far the things that just falling off the side or anything. They are now spending on nice to haves. They are really looking at all line asset deposit generation, mainly deposit generation, what they can do and if you look at the products that we are talking about the growth engine, those products get them all very, very well. So, we feel pretty good about it. We are cautiously optimistic but we feel pretty good.
On the stock buyback for employees or executives, as you may or may not be aware we are limited by certain things if we can or cannot do by inside our knowledge. I can tell you that I think the stock is extremely attractive at this point in time. I would hate to generate a price performance but I would say will be out there but I can tell you when you compare us to just about any buyers in the field when you compare us on a number of multiple of EBITDA, we compared some multiple of revenue, pick, it does not matter. Pick one, it does not matter which one it is. I think we are extremely inexpensive commodity today from the standpoint of a stock and management obviously over the time we will buy when we have an opportunity but we are just limited this buying any time we going to walk out the door by stock. We are limited about certain rules and regulations that govern, what can do and what we have know in our possession versus somebody outside of here.
Only our cash generation may be we will continue to generate the count of cash we have in the past. We think will be permanent in this of deploying that cash into both growth opportunities within our own products, on research and development, in new products that we roll out. We will look at acquisitions. We have look at acquisitions in the last 90 days with actually put bills in acquisitions in the last 90 days and feel very, very good about our banking relationship with Bank of America, Wachovia, and People’s Bank of Winder from the standpoint of the supportive where they are.
On a stock buyback plans for actually, buying back our own stock from a Company standpoint, it would require a change in our covenants. We would have to get permission from the bank to do that. We cannot just go out and make a purchase just because we decided to. We take a covenant change in our covenants today.
John Orrico – Water Island Capital, LLC
Great, thanks for addressing those. And I do realize you are going to be restricted as insiders to certain periods of the year in terms of buying your shares and I do guess that the banks would prevents you from utilizing cash to purchase stock and that mean not always be the investors cash when you are looking an acquisitions. So, what kind of acquisition opportunities are you looking at in terms of how you think? How you view, you are viewing the acquisition opportunities from the standpoint of addressing or complementing your current businesses? What can we expect are they smaller token acquisitions? Are you looking another large acquisition something that would be a gain change for the Company?
Lynn Boggs
It is, I heard and answer one time. Yes, yes, and yes. John, I think I will answer first on the back, I do not want to comment on your thing about there are certain times we cannot buy stock because of [windows 28.01] etc. There are also times we cannot buy because we have inside of our knowledge often just the normal course of business and that probably occurs less or more frequently than not because we are in the acquisition market a lot. With that said, I will turn over to Scott, let him actually answer the question about acquisitions in what we are looking at and what type of business is we are looking at today.
Scott Meyerhoff
Hey, John, how are you today?
John Orrico – Water Island Capital, LLC
Good. Scott, how are you doing?
Scott Meyerhoff
Good. I think to deal on what Lynn had said, we obviously there is people in the market we view the acquisitions as opportunistic, if it is a great opportunity and only a great opportunity if it is something that first offer on a price perspective and a multiple perspective it is going to be something that we can steal because of the blitz in the market much as most might be looking at our common stock they can the same type of thing. As to the focus on the acquisitions, the thing that is growing best for us that we are obviously more focus on as the payments processing and really everything that we look at relative to acquisitions would either be add on tokens would they distinct focus on the payments processing area. In the meantime, we have heard from many of our investors over the last year, people have said relative to the stock is focus on the executing and doing what you have said you were going to do which we feel we have done, go ahead and put up the numbers, hit the EBITDA, generate cash, pay down debt and do what you say you are going to do and really we feel like we spent the last 12 months executing on doing exactly what we said we are going to do. In the meantime if not for a tremendous opportunity on the acquisitions, we will take that cash, we will repay debt and we will grow the value of the franchise.
John Orrico – Water Island Capital, LLC
Okay, great. Well, just to finish up. You guys have done a great job and have done what you told us you were going to do this year, so thanks for that and I will let touch base with you offline if I have further questions. Thank you.
Operator
(Operator Instructions) And there are no further questions. At this time, I would like to turn back to management for any closing remarks.
Lynn Boggs
Thank you, Vince. We appreciate everybody participate on the call today. I think as you can tell by the total on the voice here, we really feel good about the quarter. We think, as Scott said, we put a plan in place at the first of the year when we finish the Alogent acquisition. We want to see the Company is come together. We want to see integration work. We want to see a growth in revenues and a growth to the payment side of our business. We have seen that a tremendous growth from January 1st to today. We experiencing, as everyone knows a very critical time in the banking histories and environment is greater critical time in the banking history. We think we are managing that process very carefully. We are not going to go out there and do something crazy but at the same time invest in great opportunities. We would like to gain market share during that period of time and we will going to do the things necessary that we feel like to gain that market share. So we are excited about the fourth quarter. I think we are all excited about 2009 and we appreciate Boggs at the stockholders and you support of us.
Thank you and have a great day.
Operator
Thank you, sir. Ladies and gentlemen this concludes our conference for today. If you would like to listen a replay of today’s conference please down 303-590-3000 or 1800 or 052236 using the access code of 11121662 followed the # key. ACT would like to thank you for your participation. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!
