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Fundtech Ltd. (NASDAQ:FNDT)

Q2 2011 Earnings Call

August 3, 2011 8:30 am ET

Executives

Margie Petrasek – Investor Relations

Reuven Ben Menachem – Chief Executive Efficer and Co-founder

Michael Sgroe – President and Chief Operating Officer

Yoram Bibring – Chief Financial Officer

Analysts

George Sutton – Craig-Hallum Capital

John Kraft – DA Davidson & Co.

Raghavan Sarathy – Dougherty & Company LLC

Operator

Good day, and welcome to the Fundtech Second Quarter 2011 Financial Results Conference Call. Today’s call is being recorded. All participant lines are currently in a listen-only mode. And at the end of the presentation, we will conduct a question-and-answer session.

For opening remarks and introduction, I would like to turn the conference over to Margie Petrasek. Please go ahead.

Margie Petrasek

Thank you. Good morning, everyone, and welcome to Fundtech Limited second quarter 2011 financial results conference call. As a reminder, today's call is being recorded. Joining me on the call are the Chief Executive Officer, Reuven Ben Menachem; President and Chief Operating Officer, Michael Sgroe; and Chief Financial Officer, Yoram Bibring.

As a reminder, some of the comments made in this call by management, including any guidance about further or future periods and the responses to your questions, may contain forward-looking information. Such statements are subject to the risks and uncertainties as described in the Safe Harbor language in the company's press releases and filings with the SEC. Please refer to the Safe Harbor language contained therein. The company has no duty to update such forward-looking statements.

I would now like to turn the call over to Mr. Ben Menachem. Reuven?

Reuven Ben Menachem

Thank you, Margie. Good morning everyone. This morning we announced another excellent revenues and profitability quarter for Fundtech. Revenues were $40.5 million representing 16% year-over-year growth and 9% sequential growth. Our non-GAAP EPS was $0.27, which is the high-end of our guidance.

I want to start with our exciting merger with S1. On June 27, 2011, we announced that we entered into a merger agreement with S1 Corporation, which contemplate a stock-for-stock transaction. The merger agreement with S1 has been filed with the Securities and Exchange Commission.

The merger with S1 is subject to the satisfaction of closing conditions including, but not limited to a receipt of shareholders; approval, regulatory approvals and court approval in Israel. In addition, as we said in our press release on July 26, 2011, we are also aware of the proposal ACI Worldwide had made to S1.

The merger agreement between S1 and Fundtech remains in effect, and we continue to execute under this agreement. So I want to repeat. The merger agreement between S1 and Fundtech remains in effect and we continue to execute under this agreement. Given all that is in process with the merger, we will not speak to it further on this call. We also will not provide any forward-looking information other than as provided in the guidance.

Next to our ongoing business in the second quarter, our messaging business, which is conducted by our wholly-owned subsidiary, BBP, had a very strong quarter adding 12 new customers and adding three customers (inaudible) cost selling in the U.S. We also closed two important GPP-SP, our next generation SOA platform. One is a global liquidity management (inaudible) and the other was a (inaudible), processing much low value transactions.

And so with that I now would like to hand over to Mike, who will update you on our operations. Mike?

Michael Sgroe

Thank you, Reuven, and good morning, everyone. During the second quarter, we closed 130 new deals including 20 new system sales and signed 14 new bank customers. This in comparison to 110 deals, five new system sales and four new bank customers in Q1. Other 20 new system sales, two are GPP-SP wins. One is a sale of our U.S. payments platform. Two are sales of our iSeries based payments platform in Europe and 15 are new clients of our SWIFT Service Bureau offerings in Europe and the U.S. Of the 20 new system sales, 15 are in our service bureau and five are in-house.

And moving onto our business segments and starting with cash management. Last quarter, we signed two clients in Thailand for upgrades to the latest version of Global CASHplus. These deals follow on the large Global CASHplus deal on the Pacific Rim, which we announced in the first quarter and the large deal for deployment across 31 countries in Africa that was signed in the latter part of 2010.

We’re encouraged by the growing strength of Global CASHplus as evidenced by the recent wins, favorable feedback, and solid pipeline. In the U.S. work is moving forward on migration of the North America Cash Management functionality to our server based services platform. Both the North America product and global R&D teams are meeting this week in Israel to continue to progress this important initiative.

Moving on to Payments; our lager Global PAYplus projects at Citibank, Barclays, HSBC and Bank of America are progressing well. Since our last call GPP-SP was moved to production at Bank of America, in support of the bank’s clearing activities in India. The bank also moved to pilot with its deployment of the payment services hub with a progressively larger roll out plan for the weeks and months ahead.

At Barclays, the bank went live with GPP in support of UK high value clearing. And at Citibank, the combined teams successfully completed an important initiative to move all the bank’s current Global PAYplus base operating geographies to a single unified code base of GPP. This in turn sets the stage for further extension of GPP to additional operating locations across the bank.

Following on Reuven’s comments regarding on newest Global PAYplus wins, both projects have gotten off to a very good start with teams from each of the banks and Fundtech fully engaged.

This quarter we also announced two wins in Europe for our iSeries payments platform referred to as PAYplus FTS, and recently we were informed by a large European bank that they have selected our integrated suite offering to enable them to comply with SEPA requirements with minimal change for their legacy payments platforms. This set of offerings along with Global PAYplus represent us a strongest suite of solutions available to the SEPA market today.

And in the U.S. our payments business had a good quarter and continues to make progress with migration of our U.S. customer base to the latest version of PAYplus USA in support of the Fed’s upcoming mandatory format changes. Today we have converted 30% of PAYplus clients to the new software and are on track to migrate the entire client base by October. We are also very encouraged by the growing interest in the extended set of capabilities available for PAYplus USA, particularly our data monitoring fraud protection module and our foreign exchange module.

Our Financial Messaging unit had a very strong quarter. Of particular note is the growing success of our U.S. based SWIFT service bureau. We launched activities in the U.S. in the latter half of 2010 and to-date have signed 7 banks and one corporate client, and have a growing pipeline of prospects.

And finally recognizing the limits on what we can discuss regarding our announced merger with S1, I can say that we have commenced planning activities on the integration of the two companies.

And with that I’ll now hand it over to Yoram. Yoram?

Yoram Bibring

Thanks, Mike, and good morning, everyone. Second quarter revenues of $40.5 million and cash EPS was $0.27. Our revenues in the quarter were up 16% compared to the second quarter of 2010 and 9% up sequentially compared to the first quarter of 2010.

Compared to the first quarter, license revenue were down by $700,000, service revenue were up by $2.5 million, maintenance revenues were up by $500,000 and hosting revenues were up by $900,000.

Including stock-based compensation expenses, our gross margin in the second quarter was 51.4% unchanged from the first quarter. Included in our expenses for the second quarter is $899,000 relating to stock-based compensation expenses. These expenses were allocated as follows: $125,000 in maintenance, hosting and services costs, $75,000 in software development costs, $197,000 in selling and marketing costs and $502,000 in G&A costs. The following analysis excludes the impact of the stock-based compensation expenses.

Research and Development expenses were $5.5 million unchanged from the first quarter. Second quarter sales and marketing expenses were $5.3 million, up $700,000 compared to the first quarter, primarily due to high commissions. G&A expenses were $6.5 million up $1.4 million from the first quarter. Second quarter G&A expenses included one-time costs of $1.1 million, these one-time costs were cost associated with the S1 merger, as well as accrual relating to a claim filed by a customer.

Second quarter operating profit before all amortization expenses, stock compensation expenses and expenses relating to the S1 merger was $4.5 million compared with $4.1 million in the first quarter and $4.6 million in the second quarter of 2010.

On GAAP basis, the second quarter operating profit was $2.4 million compared to $2.9 in the first quarter and $3.5 million in the second quarter of 2010. Net financial income in the first quarter was approximately $100,000.

Income taxes were $400,000, of which $67,000 were deferred taxes. On GAAP basis, our net income for the second quarter was $2.1 million or $0.13 per share on a fully diluted basis, compared to $2.4 million or $0.15 per diluted share in the first quarter and $2.4 million or $0.15 per diluted share in the second quarter of 2010.

Second quarter net income before amortization of intangibles, stock-based compensation and deferred taxes known as adjusted non-GAAP net income was approximately $4.2 million, a $0.27 per share on a fully diluted basis, compared to $3.6 million, or $0.23 per diluted share in the first quarter and $3.5 million or $0.22 per diluted share in the second quarter of 2010. This number also excluded the $800,000 of the merger costs.

Moving on to the balance sheet, cash, short-term deposits and marketable securities and long-term marketable securities were $74.9 million on June 30, down by $6.8 million from the end of the first quarter. As you know, our cash flow is cyclical due to the collection of annual maintenance in European hosting fees during the first quarter.

Year-over-year cash and equivalents increased by $19.6 million, and our trailing 12 months operating cash flows were $24.1 million. And trailing 12 months free cash flows that equates to operating cash flows less CapEx was $20 million. Our DSOs with 71 days at the end of the quarter compared to 69 days at the end of March and 68 days on June 30, 2010.

During the quarter, we paid a dividend of $0.10 per share, which amounted to a cash outlay of $1.5 million. The S1 merger agreements prohibits us from distributing any additional dividends prior to the closing of the merger.

Moving on to the guidance. The financial guidance provided is current as of today only and Fundtech undertakes no obligation to update its estimates.

For 2011, Fundtech is increasing its revenue guidance, primarily due to the weakening of the U.S. Dollar vs. the Swiss Franc, that impacts our messaging business, while reducing guidance for GAAP earning per share due to the costs incurred during the second quarter in connection with the S1 merger agreement and we’re keeping our non-GAAP guidance unchanged as follows.

Fundtech estimates that revenues for 2011 will be between $160 million and $163 million compared to previous guidance of $155 million to $160 million; but GAAP net income per diluted share will be between $0.71 and $0.81 compared to the prior guidance of $0.76 and $0.86; and that non-GAAP net income per diluted share, before all amortization expenses, stock-based compensation expenses, costs incurred in connection with the S1 merger in the third and fourth quarter and deferred taxes, will be between $1.03 and $1.13 unchanged compared to the prior guidance.

Fundtech estimates that financial income for the year 2011 will be $600,000 and that tax expenses, excluding deferred taxes, will be approximately $2.2 million. We estimate that annual amortization expenses for the year will be approximately $1.4 million and that stock-based compensation expenses will be approximately $3.6 million. And we estimate that the number of shares to be used for the calculation of the annual net income per share would be 16 million shares.

For the third quarter, we are providing the following guidance: we estimate that third quarter revenues will be between $41.5 million and $42.5 million; but GAAP net income per diluted share will be between $0.19 and $0.22; and that non-GAAP net income per diluted share, before all amortization expenses, stock-based compensation expenses, and costs incurred in connection with the S1 merger agreement and deferred taxes, will be between $0.27 and $0.30.

We estimate that financial income would be $200,000 in the third quarter and the current tax expenses will be approximately $600,000. We estimate that quarterly amortization expenses for the third quarter will be approximately $350,000 million and stock-based compensation expenses approximately $900,000 million. And we estimate that the number of shares to be used in the calculation of quarterly net income per share will be approximately 16 million.

Our guidance for the remainder of 2011 does not include the impact of the S1 merger for the third and fourth quarter including cost which will be incurred by Fundtech and the impact of the closing of the merger, if such closing will occur prior to December 31. Deferred tax is also excluded as well as one-time charges and also it does not include the impact of any future impairment of intangible assets.

Before handing over to the operator, I want to apologize in advance that we’re prohibited from answering any questions about the merger or the process of the merger. We also cannot discuss any forward-looking information be on the guidance which we provided this morning.

Now I will turn over to the operator to begin the question-and-answer portion of the call. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from George Sutton from Craig-Hallum Capital. Your line is open.

George Sutton – Craig-Hallum Capital

Thank you. Hello, gentlemen, nice results.

Reuven Ben Menachem

Thank you.

George Sutton – Craig-Hallum Capital

Sound like a broken record on that, so I apologize. So with respect to Michael's comments on the solid pipeline and with respect to your guidance, I’m just curious if you can give a little more of a granular sense as to what’s in that pipeline, particularly from a geographic perspective?

Michael Sgroe

Hey, George, it’s Mike. So we're seeing, we’re certainly seeing strength at the high-end of the market across geographies. So we’re in quite a few conversations with banks that are looking at the latest version of Global PAYplus, GPP-SP, as I said that’s across geographies. As I mentioned, we’ve gotten, we’ve seen a good amount of activity with Global CASHplus. We talked about the recent winds and the upgrades and the pipeline for deals across Europe and Asia is looking very good for Global CASHplus. And in North America that’s kind of traditionally for us in North American we’re in lots of opportunities, and the pipeline in North America remains strong. I think with kind of what’s happened recently, I guess with the overhang and kind of the macroeconomic conditions, banks seem a little reticence kind of in the low and mid-tier of the market. But the larger banks, the larger regional banks are out and we’re in conversations with them as well. So I would say that the pipeline is diverse, it’s strong across geographies and it's also strong across our product lines. And that also includes by the way, we’ve made reference to the strength on the GPP side. And those guys are doing great and we're seeing a tremendous amount of activity both throughout Europe and increasingly in the U.S. as well.

George Sutton – Craig-Hallum Capital

I just want to placate some concerns I’ve had that I have expressed relative to HSBC and Barclays, as they go through pretty significant cost-cutting programs. That doesn't affect anything you’re doing with them?

Michael Sgroe

No, we haven't had any indication that any of the activities that they are kind of working their way through have an affect on what they’re doing with us. In some cases they are kind of reducing staff in some geographies and adding staff in other geographies to build up their businesses and places at, they haven't been as active in. But no indication of any impact on the work they're doing with us.

George Sutton – Craig-Hallum Capital

Okay.

Reuven Ben Menachem

I would like to add a couple of things, one is; with Barclays and HSBC, we’re active on the growing part of their business, and the amount of business that we have with Barclays and HSBC is relatively small to the IT spend of these organizations have. So I don't expect any effect on our mutual business with these two large banks.

In addition, I want to also mention that so far we have signed five or six contracts for next-generation payment SOA platform, three of them is already in production and other bank will be in production by the end of the year, and we are working on another three contracts that we're delivering. So I think that our SOA platform has received very well by the market and we are close to more deals using this technology. So I am very excited about it.

George Sutton – Craig-Hallum Capital

That's great. Thank you. One other thing relative to, you’re in the midst of M&A, so it does have some impact on your pipeline. Have you seen any real impact from a customer perspective on that process?

Reuven Ben Menachem

I don't know if we can comment on that, but we see a lot of excitement in the market.

George Sutton – Craig-Hallum Capital

Okay. Thanks, guys.

Reuven Ben Menachem

Thanks, Goerge.

Michael Sgroe

Thank you.

Operator

Our next question comes from John Kraft from DA Davidson. Your line is open.

John Kraft – DA Davidson & Co.

Good morning, gentlemen.

Reuven Ben Menachem

Hey, John.

Michael Sgroe

Hi, John.

John Kraft – DA Davidson & Co.

My first question, I know the guidance does not include any sort of costs around the proposed merger with S1, but you did suggest that you’re starting to plan on how to integrate it. And I guess would you be able to break out what sort of cash cost that might be through the next couple of quarters, you did say what it was in the Q2?

Yoram Bibring

No, we can’t really comment on it. Sorry.

John Kraft – DA Davidson & Co.

Okay. And as far as the JPMorgan aspects treasury partnership that you just announced, can you elaborate a little bit on how that might work with your ability to share that product with other customers and how the economics might work? That seems like an interesting opportunity.

Michael Sgroe

Sure, it is based upon the use of our PAYplus USA product amongst our North American client base. And in effect it’s giving JPMorgan access to our client base. JPMorgan Chase is not the first bank we’ve signed for this offering. We are in relationships with a number of other banks as well, but we’ve commented on (inaudible) in New York and Wells is an example.

And in essence once again it’s also providing access to these larger financial institutions to our client base. We make some money in providing that access; we make some money in enabling our clients to connect more effectively with these larger banks. And then of course, if the larger banks are successful selling into our clients, selling FX payments into our clients that in turn generates additional volume, which ultimately also potentially triggers these clients moving into the next tier or the next band of volume licensing.

So, it’s a very nice set up. We’ve been doing it for a while, we had good success with it. And I think the interesting thing is that the larger financial institutions that might have confirmed, out of the mid-tier, the lower and mid-tier, the financial DFI market in North America in prior years are finding it very, very attractive just like we find attractive. So it’s a very nice piece of business for us.

John Kraft – DA Davidson & Co.

Thanks Mike, that’s helpful. And then just lastly for you, my apologies if you’ve mentioned this, I didn’t hear any sort of, I know you’re very balanced on FX as far as costs and revenues, but was there any material impact FX in the quarter?

Michael Sgroe

At the end of the day, no. I mean, we showed financial income about 100,000, so not that material. Interest rates are very, very low, so it mostly FX.

John Kraft – DA Davidson & Co.

Got you. Thanks, guys.

Michael Sgroe

Thanks.

Operator

(Operator Instructions) Our next question comes from Raghavan Sarathy from Dougherty & Company. Your line is open.

Raghavan Sarathy – Dougherty & Company LLC

Hi, good morning. Thanks for taking my questions. I was wondering, if you could give us some color on the Global PAYplus product, demand here in the U.S. and Europe?

Michael Sgroe

Sure, Reuven?

Reuven Ben Menachem

Yes. We see a growing demand for our global payment systems; the demand is generated in all geographies. We are bidding very closely in Asia and some decisions will be taken by the large banks in Asia and China. We hope that it will happen by the end of this year.

In Europe, we see some decrease in demand that is related on the fact that SEPA, the banks has taken decisions on the set of strategy, but we see a lot of demand from the (inaudible) new functionalities, and some larger banks are looking to replace those systems. So we hope that at least one of the decisions will be taken by end of the year, one of them might be a large project.

As we mentioned before, we (inaudible) in second quarter. And we see growing demand at the high end of the market in the U.S., banks in the U.S. We are not very active on the payment side in the last few years, and we see a potential for deals derived from – they need to renovate the payment and changing payment requirements, and also from the fact that some technology that is in the market is not current and we believe that replacement cycle at the high end of the market in the U.S. will start by the end of this year going into next year. So we are very excited about this market. It’s a growing market for us. We have great offerings for this market probably the best offering for this market. And we believe that we will be doing very well in the global payment market.

Raghavan Sarathy – Dougherty & Company LLC

And then just a quick follow-up, Yoram, I understand the license revenue tends to move around, but I was wondering it was little bit lighter than what I expected also live on a year-on-year basis. Can you comment on what we should expect?

Yoram Bibring

As you said, license is very lumpy with us and that’s a one time that moves up and down. We don’t, our guidance in specific revenue items. So, unfortunately, I can’t really give you a guidance on the license revenue.

Michael Sgroe

Raghav, if I can – this is Mike, if I can also maybe just amplify one aspect on Reuven’s comments. Last year, when we were talking about the new GPP technology, GPP, what we refer to as GPP-SP, we’re dealing with early-adopter banks. With everyone of these banks now move to production and the nets impact with 2011, we are moving these banks to production. We are building a strong base of referenceable kind of accounts here. And that’s setting the stage for us to move into those financial institutions that we are looking to make – that we are looking to make a move, but we are waiting – to be early adopters. So I think we are kind of moving into some interesting territory now and that’s what’s in large part of accounting for the growth in the pipeline and the number of deals we’re in at this point.

Raghavan Sarathy – Dougherty & Company LLC

Okay. Thank you.

Operator

I'm showing no further questions at this time. I would like to turn the call back over to management for closing remarks.

Reuven Ben Menachem

I want to thank everyone for joining us today. Bye-bye.

Operator

Ladies and gentlemen that does conclude today's conference. You may all disconnect and have a wonderful day.

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