Foolish Forecast: S1 of Two

So long, Corillian (Nasdaq: CORI  ) . Auf wiedersehen, Digital Insight. Au revoir, Open Solutions.

Just two sizable, publicly traded providers of online-banking and bill-payment technology remain independent today. One of them, Online Resources (Nasdaq: ORCC  ) , reported last week. The other, S1 (Nasdaq: SONE  ) , reports its Q4 and full-year 2006 earnings results Thursday afternoon.

What analysts say:

  • Buy, sell, or waffle? Four analysts follow S1, which gets one buy rating and three holds.
  • Revenues. On average, they're looking for 8% quarterly sales growth tomorrow, to $49.6 million.
  • Earnings. Even better, a return to profitability (with $0.03 per share) is predicted.

What management says:
The news at S1 this quarter involved plenty of comings and goings at all levels of the company. Starting from the bottom up, 120 layoffs were announced in November, entailing $3 million to $4 million in severance costs. A few rungs higher, President of North America Retail Banking, Global Wholesale Banking, and Insurance Markets Matt Hale resigned in December. And CFO John Stone got a one-year's-salary golden parachute inflatable in the event that he, too, is let go without cause.

At the very top, in October, outgoing CEO Chip Mahan retired with an $800,000 severance payment, plus an agreement by S1 to buy back all shares of stock he then owned -- as well as all of his stock options -- at no less than $4.75 per share. In December, new CEO Johann Dreyer got an employment contract valued at $600,000 in annual salary, plus bonus. Finally, also in December, the company announced a one-time charge of between $8 million and $9 million to "consolidate" facilities; the charge will count against Q4 results.

What management does:
Much clearer (thank goodness) is what's happening to the firm's profitability. Specifically, gross margins have reversed their lengthy slide. Operating margins are starting to creep back toward the black. And the net margin can be ignored, because one-time charges and benefits related to the restructuring have it jumping around like a cricket on a hot griddle.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

56.0%

53.0%

51.3%

50.1%

49.3%

50.5%

Operating

3.2%

(1.6%)

(6.3%)

(6.6%)

(6.2%)

(2.3%)

Net

9.3%

4.0%

(0.5%)

(1.1%)

(3.4%)

16.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
I suggested last quarter that it was unlikely S1 would emerge from free cash flow negativity by the end of this year. The restructuring and severance charges listed above make negative free cash flow a lock, even though only part of the GAAP charges will take the form of cash outlays in the fourth quarter.

Even so, what I said about the firm's sizeable cash hoard also remains true. Using even the most liberal interpretation of "long-term debt," S1 carries on its balance sheet net cash (cash and equivalents minus long-term debt) of nearly $128 million -- enough to finance its current rate of cash burn for a decade. Indeed, nearly one-third of this firm's market cap is made up of cold, hard cash. In this Fool's view, whatever Thursday's GAAP numbers show, that makes this look like a fairly low-risk investment in the near term. Which is fortunate, because as muddied as the restructuring will make the GAAP picture over the next few quarters, we're going to have to take a lot of things on faith until the picture clears.

Need more 411 on S1? Find it in:

Got an opinion on S1? Bring it to CAPS!

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.


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