S1's Still Stuck

The last of our gang of online-banking software providers straggled in with its earnings report on Tuesday, and I must say that the earnings looked a bit -- what rhymes with "straggled?" -- ah, bedraggled.

S1's (Nasdaq: SONE  ) Q2 2006 earnings report starts out respectably enough, with a claim of 8% revenue growth. However, it's important to note that this growth number is sequential, rather than year over year. When compared with last year's second quarter, the $47.5 million in sales that S1 booked equates to a 2% decline.

Hold up a sec
Those who have been following the S1 story only periodically over the quarters may be confused at this point, because according to historical filings, S1 actually booked $62 million in sales last year, suggesting a more drastic 23% drop in sales year over year. The reason for the disparity is that in November of last year, management sold its Edify subsidiary to Intervoice (Nasdaq: INTV  ) , a name that Motley Fool Hidden Gems subscribers may recognize as a competitor to Nuance Communications (Nasdaq: NUAN  ) , one of the newsletter service's recommendations. In making the year-over-year sales comparison, therefore, S1 excised the Edify revenues from last year's tally so as to generate an apples-to-apples comparison.

And now we return to our previously scheduled programming
Returning to present day, and turning to earnings, S1 had none, of either the accounting or cash profits (free cash flow) varieties. The firm replaced last year's $0.03-per-share profit with a $0.03-per-share loss this quarter. (Year-to-date results show a $0.04-per-share loss in the first half of 2006, versus a $0.04-per-share profit in the same period last year.) To round out the tale of woe, it has racked up negative operating cash flow of $3.7 million year to date. Management didn't break out its capital expenditures in the report, but it seems safe to assume that free cash flow was negative as well.

Looking forward, S1 is sticking by its already-announced decision not to provide forward guidance anymore -- or, at least, not until it expects to have something good to say. But reading between the lines, we can see that restructuring costs should continue to weigh on profitability for a while longer. The firm has already split its old "Financial Institution" segment into two parts: "Enterprise," which will focus on North American banking operations, and "Postilion," which will focus primarily on international operations. But it's also begun classifying the losses from its "Risk and Compliance" unit as belonging to "discontinued operations." That suggests that this division will soon be closed down or sold off.

Parting thoughts
I haven't exactly been showering S1 with compliments for a long time now. And for good reason: Over the past year, the firm has managed to destroy half the value of the investor dollars entrusted to it. But I'll give credit in one of the few places where it's due -- management is finally taking the steps needed to reshape its business and remain relevant in the fast-growing world of online banking. It's not a pretty process, and turnarounds rarely are, but it is a necessary one if the company is to survive.

Related companies:

  • Corillian (Nasdaq: CORI  )
  • Digital Insight (Nasdaq: DGIN  )
  • Online Resources (Nasdaq: ORCC  )
  • Sybase (NYSE: SY  )

Curious to learn why S1 no longer gives Wall Street its quarterly earnings guidance "fix"? Read "Bankers Are Bummed" and "S1's Earnings Snafu," and the reason will become clear.

Fool contributorRich Smithowns shares of Corillian. The Motley Fool has a disclosure policy.


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