When a company reports earning nearly one-tenth its own market cap in a single quarter, what's the appropriate reaction to that kind of news?
How about: [Yawn.]
The good news
That, at least, was the reaction on Wall Street to Friday's news that financial software provider S1 (Nasdaq: SONE ) had earned a whopping $0.43 per share in its third quarter 2006 -- not bad for a $5 stock, eh? Well, yes and no. It was an impressive sum, and it's not the end of the good news, either. Management reiterated its intention to conduct a share buyback and appointed a new CEO by promoting Postilion head Johann Dreyer to the top spot. The company claimed 22% sales growth year over year for its continuing operations (actual revenues were down 10%, because S1 has sold off a few divisions that it owned last year) and turned a profit on those continuing operations to boot. And while $0.03 per share may not sound like much, that profit returned S1 to breakeven year to date.
The bad news
On the other hand, the difference between the $0.03 in profits S1 earned from continuing operations and the $0.43 "net" profit was owed to the firm's continued selling off of its parts, piecemeal. This quarter, as we foreshadowed back in August, it was the FRS "risk and compliance" business that went on the block to yield S1 its supersized quarterly profit.
And speaking of profits, the company remains unprofitable on a cash basis. In contrast to the $3.9 million in operating cash flow it generated through Q3 of last year, operating cash flow remains negative this year -- negative $3.5 million, to be exact. Free cash flow can't be calculated exactly, because although the firm provided a cash flow statement with its earnings release, it does not break out capital expenditures, rather lumping all "net cash provided by (used in) investing activities" together in a single line item. That said, if we refer back to the second quarter 10-Q, filing, we can see that through the first six months of this year, S1 had already spent more than $4.6 million on capital expenditures -- virtually eliminating the possibility that the firm can reach free cash flow-breakeven by year end.
The rest of the good news
So with things still looking bleak for this software company, is there hope for S1 investors? Actually, I think the answer is yes -- if your investing timeline is long enough. Because while it's almost certain the company won't generate any cash profits this year, the restructuring has blessed it with a cash-heavy balance sheet, sufficient to keep this business afloat until its new leadership figures out how to generate sustained positive cash flow. With roughly $120 million in net (of long-term debt) cash and short-term investments, it can afford to burn cash at its current rate for nearly a decade. Plenty of time to either figure out a workable business plan, or failing that, find a well-heeled buyer who can.
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Fool contributor Rich Smith does not own shares of any company mentioned in this article.