Continued
Reported revenue increased 5%, from $56.5 million to $59.6 million, for the three months ended December 31, 1997 and 1998, respectively, and by 7%, from $108.6 million to $116.4 million on a year over year basis. The increases in quarter to quarter and year over year revenue are due primarily to internal growth in the Electronic Commerce and Investment Services segments, offset by a reduction in the Software segment. Decreased Software segment revenue is primarily the result of divestitures of the Company's recovery management business in August 1997, its item processing business in March 1998, its wire and electronic banking business in April 1998, its leasing business in July 1998, its mortgage business in September 1998 and its imaging business in October 1998. On a pro forma basis, excluding the impact of the divested software businesses and the discontinuance of the Web Investor business in the Electronic Commerce segment in June 1998, revenue increased 23%, from $48.6 million to $59.6 million, for the three months ended December 31, 1997 and 1998, respectively, and by 24%, from $93.6 million to $116.4 million on a year over year basis. The quarter to quarter pro forma increase of 23% was driven by increases of 27% in the Electronic Commerce segment, 19% in the Investment Services segment and 8% in the Software segment. The year over year pro forma revenue increase of 24% was driven by increases of 27% in Electronic Commerce, 24% in Investment Services and 16% in Software. Growth in Electronic Commerce revenue is driven primarily by a 30% increase in subscribers from approximately 2.0 million at December 31, 1997 to over 2.6 million at December 31, 1998. In the Software Segment, the current year revenue of $19.7 million includes $1.7 million of revenue from businesses divested during the current year. Therefore, comparative revenue grew by 5% on a year over year basis. Although dampened by customers' focus on completing Year 2000 projects, the Software segment has seen growth, primarily in implementations of its ACH product line. Growth in Investment Services revenue is driven primarily by an increase in portfolios managed from over 400,000 at December 31, 1997 to over 573,000 at December 31, 1998.
Processing and servicing revenue increased by 26% from $38.4 million to $48.5 million for the three months ended December 31, 1997 and 1998, respectively, and by 28% from $72.9 million to $93.6 million on a year over year basis. Quarter to quarter and year over year growth is primarily the result of the previously mentioned increase in subscribers in the Electronic Commerce segment and portfolios managed in the Investment Services segment. In January 1999, the Company announced a material Internet distribution agreement. Although there are no guarantees in the timing or extent of its success, this agreement has the potential to provide significant increases in subscribers over the next year and beyond. Initial pricing has not been announced.
Reported license revenue declined by $4.1 million from $7.5 million to $3.4 million for the quarters ended December 31, 1997 and 1998, respectively, and by $6.9 million from $13.3 million to $6.4 million on a year over year
basis. This decline is due primarily to the previously mentioned software business divestitures. On a pro forma basis, license revenue decreased by $1.1 million from $4.5 million to $3.4 million for the quarters ended December 31, 1997 and 1998, respectively and decreased by $2.0 million from $8.4 million to $6.4 million on a year over year basis. The pro forma decline is due primarily to softness in software sales resulting from purchasing moratoriums imposed by potential customers preparing for Year 2000.
Reported maintenance revenue declined by $2.2 million from $6.4 million to $4.2 million for the quarters ended December 31, 1997 and 1998, respectively, and by $4.1 million from $13.3 million to $9.2 million on a year over year basis. This decline is due primarily to the previously mentioned software divestitures. On a pro forma basis, maintenance revenue increased by $0.5 million from $3.7 million to $4.2 million for the quarters ended December 31, 1997 and 1998, respectively, and increased by $1.7 million from $7.5 million to $9.2 million on a year over year basis. Increases in maintenance are due primarily to first year maintenance revenue related to new software sales generated in the second half of fiscal 1998 combined with high retention rates and moderate price increases related to renewal maintenance streams.
Reported other revenue, consisting mainly of consulting fees, declined by $0.8 million from $4.2 million to $3.4 million for the quarters ended December 31, 1997 and 1998, respectively, and by $1.9 million from $9.1 million to $7.2 million on a year over year basis. This decline is due primarily to the previously mentioned software divestitures. On a pro forma basis, other revenue increased by $1.2 million from $2.2 million to $3.4 million for the quarters ended December 31, 1997 and 1998, respectively, and by $1.8 million from $5.4 million to $7.2 million on a year over year basis. The increase is due to implementations related to new software sales in the second half of fiscal 1998 and implementations related to new business in the Investment Services segment.
The cost of processing, servicing and support was $30.8 million and $34.4 million or 54.5% and 57.7% of total revenue for the quarters ended December 31, 1997 and 1998, respectively. These same costs were $60.1 million and $71.5 million or 55.4% and 61.4% of total revenue for the six months ended December 31, 1997 and 1998, respectively. Cost of processing as a percentage of servicing only revenue (all revenue except license) was 62.8% and 61.2% for the three months ended December 31, 1997 and 1998, respectively, and 63.1% and 64.9% for the six months ended December 31, 1997 and 1998, respectively. Revenue growth in Electronic Commerce has slowed as financial institutions convert from a personal computer software-based front-end to a web-based offering for their customers. During this period, the Company is continuing to invest in customer care resources in anticipation of expected revenue growth when these web-based conversions are completed and the financial institutions reinstate related marketing efforts toward subscriber growth. Additionally, the Company is incurring the costs of electronic bill presentment or E-Bill implementations with inadequate current revenue to offset the cost. A strong three months of software implementation revenue in the quarter ended December 31, 1998 offset a portion of these added costs resulting in an apparent improvement in efficiency, but this should not be considered as recurring at this time. The previously mentioned Internet distribution agreement will result in increases in operating expenses estimated at approximately $4.0 million and an estimated $2.0 million of additional capital spending over the next six months to prepare the Company for possible subscriber growth from the rollout of this new program. The added costs from a processing and servicing perspective will consist of:
1. The development of a professional services staff and programs that can support the timely and effective deployment of electronic billing and payment offerings by billers;
2. Investments in the hardware, software and technical support staff we will need to deliver dial-tone quality to up to 1.0 million additional subscribers; and
3. Customer care staff additions and training.
There is no guarantee that the launch of this program will in fact result in the subscriber growth mentioned, but the Company feels it is prudent to prepare for this level of growth based on its potential.
Research and development costs were $8.7 million and $5.6 million or 15.4% and 9.4% of total revenue for the quarters ended December 31, 1997 and 1998, respectively. Research and development expenditures were $16.8 million and $12.2 million or 15.5% and 10.4% of total revenue for the six months ended December 31, 1997 and 1998,
respectively. The reduction in absolute dollars on a quarter to quarter and a year over year basis is due primarily to two factors. As a result of the previously mentioned software divestitures, there was approximately $2.0 million of development resources included in the three months ended December 31, 1997 and approximately $4.5 million of development resources in the six months ended December 31, 1997, that were not present on a comparable basis in the same respective periods in 1998. Additionally, as software development efforts have shifted from Year 2000 activities, which may not be capitalized under generally accepted accounting principles, and as Electronic Commerce efforts have been geared toward projects with added functionality, the Company capitalized approximately $1.6 million in the three months ended December 31, 1998 and approximately $2.8 million in the six months ended December 31, 1998. Net of the two items listed above, spending on research and development as a percentage of revenue is relatively equivalent on a year over year basis as the Company continues to focus significant resources on research and development activities in anticipation and support of revenue growth, quality improvement and efficiency enhancement opportunities. The Company could capitalize from $8 to $10 million of development costs in this fiscal year.
Sales and marketing costs were $7.9 million and $7.4 million or 13.9% and 12.4% of total revenue for the quarters ended December 31, 1997 and 1998, respectively. These same costs were $15.3 million and $15.2 million or 14.1% and 13.1% of total revenue for the six months ended December 31, 1997 and 1998, respectively. On an absolute dollar basis, sales and marketing expenses have remained fairly consistent year over year. Reductions in sales and marketing expenses resulting from the divested software businesses have been replaced by increased sales expenses related to activities in the Company's bill presentment area, as well as funding for the creation and launch of a new trade group, the Electronic Banking Association, which is intended to increase the general population's awareness and interest in the electronic banking industry. Marketing expenses are expected to increase in the second half of 1999 due to the announced agreement between the Company and a significant internet distribution company in support of efforts to launch a new combined product offering in the Electronic Commerce segment.
General and administrative expenses were $5.1 million and $7.6 million or 9.0% and 12.8% of total revenue for the quarters ended December 31, 1997 and 1998, respectively. General and administrative expenses were $10.5 million and $14.4 million or 9.7% and 12.3% of total revenue for the six months ended December 31, 1997 and 1998, respectively. In the three and six month periods ended December 31, 1998, the Company incurred one-time general and administrative expenses of approximately $0.6 million in real estate expenses related to the move of the Company's main Investment Services office to a facility better suited for its needs and another $0.6 million in the establishment of a benefits company intended to better manage future benefit expenses in anticipation of growth of Company headcount. Historical growth in infrastructure expenses has remained below the rate of revenue growth, as the Company has been able to leverage its existing infrastructure. The divestiture of the various software businesses has not resulted in a corresponding reduction in existing infrastructure as business specific systems and administrative functions must remain in place to support retained software businesses, as well as the growing Electronic Commerce and Investment Services segments. As anticipated revenue growth materializes, management expects general and administrative expenses to decline as a percentage of revenue from its current levels to be more in line with historical experience.
Depreciation and amortization expenses have remained consistent at $6.0 million for the three months ended December 31, 1997 and 1998. On a year over year basis depreciation has declined from $13.1 million to $12.0 million for the six months ended December 31, 1997 and 1998, respectively. Reductions in depreciation and amortization from the elimination of tangible and intangible assets resulting from the divested software businesses have been replaced by depreciation resulting from significant capital expenditures throughout fiscal 1998 primarily in support of the data center migration to Norcross, Georgia and the development of project Genesis.
The $0.7 million charge for in process research and development in the three month and six month periods ended December 31, 1997 resulted from the purchase of AMTI in October 1997.
Exclusivity amortization of $2.9 million in the six-month period ended December 31, 1997 was the final amortization expense related to the exclusivity arrangement the Company entered into with Intuit in conjunction with the purchase of ISC in January 1997.
The net gain on dispositions of assets is the result of various transactions in the six month periods ended December 31, 1997 and 1998. The gain of $3.9 million in the six months ended December 31, 1998 is the net result of the gain on the sale of the mortgage business of approximately $6.4 million and the loss on the sale of the imaging
business of approximately $2.5 million. The gain of $25.4 million in the six month period ended December 31, 1997 is the net result of the gain on the sale of the recovery management business of $28.4 million less charges of $3.0 million related to certain equipment to be disposed of and capitalized costs where management determined the book value of the related assets exceeded their net realizable value.
Net interest income decreased from $0.8 million to $0.4 million for the quarter ended December 31, 1997 and 1998, respectively. Net interest income increased from $1.1 million to $1.2 million for the six-month periods ended December 31, 1997 and 1998, respectively. In the quarter to quarter comparison, net interest income was lower in 1998 primarily due to the share repurchase that cost approximately $31.2 million at the opening of the quarter. On a year over year basis, the cash utilized for the share repurchase was offset by cash proceeds from divested software businesses in the six months ended December 31, 1998. Average invested assets net of average outstanding obligations were relatively consistent, as were net yields, therefore the net investment income was stable year to year.
The Company recorded an income tax benefit of $0.3 million in the three-month period ended December 31, 1997 versus an income tax benefit of $12.4 million in the three-month period ended December 31, 1998. In the quarter ended December 31, 1998 the Company recorded a one-time tax benefit of approximately $12.2 million arising out of the medical benefits management subsidiary. The remaining tax benefit in the quarter was the amount necessary to bring the year to date effective tax rate down to 38% from the previously recorded effective rate of 45%. This reduction in the 1998 effective rate was due primarily to state jobs credits and an expected increase in annual returns from tax-exempt securities. On a year over year basis, the effective rate (net of the previously mentioned one-time benefit of $12.2 million in 1998) was 48% for the six-month period ended December 31, 1997 and 38% for the same period in 1998. The reported rates differ from the blended statutory rate of 40% due to goodwill amortization and other non-deductible expenses in both periods and the previously mentioned jobs credits and tax-exempt interest income in the 1998 period.
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