FROM LEHMAN BROS:
Headline: Transaction Systems Arch.: MLFs Build Visibility; Asia Not an Issue
Author: P.Burton (212)526-4881/J.Donaldson x3111
Rating: 1
Company: TSAI
Country: OPR CUS
Industry: COMPUT
Ticker : TSAI Rank(Prev): 1-Buy Rank(Curr): 1-Buy
Price : $41 1/16 52wk Range: $45-23 Price Target: $49
Today's Date : 10/31/97
Fiscal Year : SEP
------------------------------------------------------------------------------
EPS 1996 1997 1998 1999
QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr.
1st: 0.13A 0.17A 0.17A 0.24E 0.24E - -E - -E
2nd: 0.14A 0.19A 0.19A 0.25E 0.26E - -E - -E
3rd: 0.15A 0.22A 0.22A 0.27E 0.28E - -E - -E
4th: 0.16A 0.23E 0.24A 0.28E 0.30E - -E - -E
------------------------------------------------------------------------------
Year:$ 0.58A $ 0.81E $ 0.82A $ 1.04E $ 1.08E $ 1.30E $ 1.35E
Street Est.: $ 0.80E $ 0.81E $ 1.04E $ 1.05E $ - -E $ 1.30E
------------------------------------------------------------------------------
Price (As of 10/30): $41 1/16 Revenue (1998): $262.9 Mil.
Return On Equity (97): 26.5% Proj. 5yr EPS Grth: 30%-35%
Shares Outstanding: 28.9 Mil. Dividend Yield: N/M
Mkt Capitalization: $1.2 Bil. P/E CY97; CY98: 46.1x; 35.7x
Current Book Value: $3.59/sh Convertible: None
Debt-to-Capital: 1.4% Disclosure(s): C
------------------------------------------------------------------------------
* Yesterday, TSA reported 4Q97 earnings of $0.24/share, $0.01 above street
consensus. Revenues of $57 mil. were approx. $500,000 short of our
expectations while operating margins of 18% were in line with our estimates.
The additional $0.01 in earnings was supported by a slightly lower tax rate.
* Although revenue growth (20%) was lower than in previous quarters, the
deceleration was due solely to the successful conversion of maturing contracts
to monthly licensing fees (MLF). In the long-run, the company benefits from
this revenue deferral producing a more visible and consistent revenue stream.
* Backlog increased 35% Y-o-Y and 10% sequentially. The recurring revenue
portion of backlog continues to accelerate, growing 33% Y-o-Y. DSO's improved
to 102 days (from 104 days at the end of 3Q97) and were down from 113 days Y-o-
Y.
* The unstable Asian market should not have a material impact on TSA. Asia
only represents approx. 6% of TSA's total revenues. Furthermore, by using
distributors in higher risk countries, and with contracts paid in U.S.
dollars, TSA should avoid any material exposure to currency devaluation.
* We are increasing our FY98 and FY99 estimates to $1.08 and $1.35,
respectively, and our price target to $49 (from $46). Our rating remains 1-
Buy.
-----------------------------------------------------------------------------
4Q97 Overview
Yesterday, TSA produced another strong quarter reporting 4Q97 earnings of
$0.24/share, $0.01 above street expectations. Revenues of $57 million were up
almost 20% Y-o-Y and were roughly in line with our estimate (approx. $500,000
shy). A lower tax rate - resulting from the company's year-end true-up -
was responsible for the company's $0.01 outperformance. The company's 18%
operating margin objective was met this quarter resulting in a full year 1997
operating margin of 17.4% (up from 16% in FY96). The company has established
a new operating margin objective of 20%, which at this pace, could be
achievable by the end of FY99.
Revenue GrowthAt first glance, we believe investors might be concerned over the deceleration
in revenue growth for the quarter -- don't be! Although 4Q revenues grew
approx. 20% - which was down from the company's 1Q, 2Q and 3Q97 revenue growth
performance of 36%, 36% and 29%, respectively - we believe the decline in
revenue growth resulted from the company converting a higher percentage of
their traditional one-time license fees to their monthly licensing fee. As
new customers are signed, and as existing customer contracts are upgraded, TSA
has been aggressively pushing their new MLF pricing model. Initially under
the MLF model, TSA defers a portion of its revenues (as compared to a one-time
fee under the traditional pricing model). However, over the long-run, the
company is creating a more consistent and predictable revenue stream which
creates a higher level of visibility for future quarters. In 4Q97, the
company experienced a particularly strong migration to the MLF model while
also signing 12 new customers. We would also point out that on a Y-o-Y basis,
TSA grew revenues almost 30% while the company's backlog (those revenues
expected to be realized within the next 12 months) and recurring revenues grew
35% and 33%, respectively.
Exposure to Asia
With the current instability in Asia, another concern of investors might be
TSA's exposure to these markets. We believe TSA has relatively little
exposure to these markets. First, Asia only represents approximately 6% of
TSA's total revenues. Secondly, almost all of TSA's contracts are paid in
U.S. dollars, thereby eliminating their risk to currency devaluation. We
would also point out that in higher risk countries (such as Malaysia and
Thailand), TSA typically utilizes distributors to sell their products.
Accordingly, they are not as exposed to currency devaluation as a result of
not having to support a dedicated sales force in these areas. Also, we might
expect the company's receivables to decline (strengthening their DSO's) as
customers pay foreign obligations prior to further devaluation. Finally, TSA
indicated that based on their experience during the Mexican peso devaluation,
they found that the Mexican banks remained committed to improving their
electronic payment methods. Management does not expect the Asian markets to
be any different.
Financial Position
The company continues to enjoy a strong financial position with cash of $46.6
million, equity of $104 million and virtually no debt. In the upcoming year,
we look for the company to continue capitalizing on its strong financial
position pursuing additional acquisitions. We believe management will
continue focusing on acquisitions which will broaden their reach
internationally while also diversifying their current platform. We do not
expect any large acquisitions in the near future.
Looking Ahead
Looking out into FY98, we have conservatively projected total revenue growth
of 22% ($262.9 million) with earnings growing 30% to $1.08/share. We believe
the company is capable of delivering approximately 25 basis points to margins
on a sequential basis and have projected full year 1998 operating margins of
18.6%, an increase of 120 basis points over FY97. Although software license
fees grew a healthy 44% in FY97, we are currently projecting software license
fees to grow 25% in FY98.
Valuation
In summary, a very strong quarter for TSA. We look for earnings to continue
growing at least 30% as the company converts additional contracts to MLFs and
as TSA's recurring revenue business model continues to accelerate. At $41
1/16, the company's shares are trading at 36 times our CY98 EPS estimate of
$1.15/share. Our new one-year price target is $49, or 34 times our CY99 EPS
forecast of $1.44/share. Shares of TSA remain rated 1-Buy.BUSINESS DESCRIPTION: TSA is the world's leading supplier of electronic funds
transfer (EFT) software for electronic payments and electronic commerce.
------------------------------------------------------------------------------
Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities. |
