2HRS2GO: Transaction Systems still needs core growth

5 min read

Transaction Systems Architects (Nasdaq: TSAI) stockholders should enjoy this spikes while it lasts, because it won't.

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Not that anyone should disparage the vendor of software and systems for electronic payments, but these rocket trips are usually brief for any stock. At least it's a breathtaking ride: TSAI opened more this morning than 12 9/16 above yesterday's close of 27 3/4 and climbed as high as 48 1/8. Already, you can see deflation setting in, with shares settling to 41 13/16 by early afternoon.

Yet a one-day gain of more than 50 percent is hardly anything to complain about. This screamer comes on the heels of yesterday's Transaction Systems annual shareowner meeting, when executives announced a few new strategies. Given the stock's lousy performance over the past 12 months -- TSAI lost 47.5 percent of its market value between February 1999 and last month -- it's easy to see why management is pondering a change in direction. A disappointing December quarter didn't help perceptions. Lingering concerns about the current quarter help even less.

But the past isn't worrying anyone today, now that the company has invoked that magic phrase, Unlocking Shareholder Value. Wall Street typically takes that to mean one thing: We're Spinning Off Something.

For tech-related companies nowadays, that usually means an Internet business. In the case of Transaction Systems, executives could be talking about any number of product lines, including the i24 Internet banking unit, hosting services for would-be online banks, smart card solutions and perhaps systems related to voice response systems and other remote access banking methods.

"There's a big disparity in the multiples between pure Internet plays and the legacy businesses that Transaction Systems has," says Steve Olson, analyst with Pacific Growth Equities. "So a spin-off makes sense from a shareholder value perspective. ... The Internet piece is really where you can unlock some value."

More than just some, according to CS First Boston's Mark Wolfenberger, who upgraded TSAI to "strong buy" from a "buy" rating this morning. In a research note written with associate Wayne Segal, Wolfenberger said an Internet spin-out could as much as quintuple shareholder value.

Wolfenberger points out another company he covers, HNC Software (Nasdaq: HNCS), gained as much as sevenfold from its 52-week low after taking its Retek (Nasdaq: RETK) subsidiary public. "We strongly recommend purchase of the shares ahead of announcements," write Wolfenberger and Segal.

I'm not sure that an electronic payments firm like Transaction Systems is entirely comparable to a vendor of forecasting applications like HNC, but Wolfenberger's main point is easy enough to understand: the market is hot for Internet software companies and will value them accordingly.

It also gets people excited, something that TSA shareholders haven't seen for quite awhile. Leaving aside from the recent let down on the bottom line, the company's core business of handling things like wire transfers, ATM and credit card transactions simply isn't sexy. And it's hard to parse TSA's business because of the way Transaction Systems built itself through acquisitions -- you've got several different units tied to a byzantine structure.

The company plans to reorganize along market lines, so at least things ought to be a little easier to understand. Executives are also searching for investment capital for some of the high growth units. It's a good plan.

CS First Boston's analysts believe if the disparate parts of Transaction Systems were valued at the same levels as their peers, the overall parent company would carry a market cap of $4.3 billion, or more than 220 percent above TSAI's current value. Again, I'm not sure the comparisons are always there -- does the TSA division described as "E-frastructure.com" by Wolfenberger really compare to BEA Systems (Nasdaq: BEAS)? -- but there's no doubt that Transaction Systems' Web offerings are dragged down by other businesses.

And those Internet businesses generate real money. CS First Boston estimates TSA's various dot-com businesses will collectively generate $123 million in revenue for this calendar year (not the same as TSAI's fiscal year, which ends September). I suspect that figure is rather optimistic, since some of the units (hosting and other services for Web banks) described as "dot-coms" by Wolfenberger are more dot-commy than others (corporate bank services, "e-frastructure").

But make no mistake about it, these are all real businesses, unlike some of the jokes passed as IPOs these days. Hopefully this irrational market recognizes that.

"TSA is a well-run business, a franchise player that dominates its market," Pacific Growth's Olson says. "Fundamentally, this is a solid company."

On the other hand, it's also a company that lost money last quarter as executives were surprised by the magnitude of Y2K's impact on sales. Financial institutions' reluctance to spend on new systems because of Y2K fears may have carried over into the first three months of this year as well. Olson, for one, believes Transaction Systems will miss First Call's consensus estimate of 23 cents per share for the fiscal second quarter.

"I have a hard time beating the table for Transaction Systems until we get some visibility on the March quarter," says Olson, whose 2Q estimate of 12 cents per share is the lowest among seven analysts polled by First Call.

He also points out today's rise in the stock price was probably exacerbated by short-sellers covering. Nearly a quarter of TSA's 25.9 million outstanding shares were being shorted at the end of January, and most of those calls probably came due last week and this, which would explain not only today's climb but also the sharp upward tick seen a week ago.

So these bursts were largely driven by one-time events, as opposed to sustained belief. Still, long-term shareholders will probably be happy to see the shorts leave. (At one time I would have been gleeful too, but I don't care about shorts one way or the other anymore. When you think about it, what's the difference between longs and shorts other than methodology? Greed is greed.)

But what's the catalyst after that? An Internet spin-off won't solve everything, and might not solve anything. After all, there are only two options, spinning out Internet stock as a dividend to TSAI shareholders, or holding onto a large stake of the operation.

In the first instance, Transaction Systems loses control of the Web business and thus loses its interest to Web investors. In the second case, the company angers everyone who bought into the company specifically to get a piece of the IPO.

The only permanent way to boost the stock price is consistently blowing out the numbers in a core electronic payments business that Olson expects to grow revenue at 20 percent a year. Company executives say their plans for injecting capital and reorganization will provide strong growth. Long-term investors can only hope so.

Other issues:

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