Transaction Systems Architects, Inc. History

Address:

224 South 108th Avenue
Omaha, Nebraska 68154
U.S.A.

Telephone: (402) 334-5101
Fax: (402) 390-8077

Public Company
Incorporated: 1975 as Applied Communications Inc.
Employees: 1,372
Sales: $289.8 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: TSAI
NAIC: 51121 Software Publishers; 541511 Custom Computer Programming Services; 334113 Computer Terminal Manufacturing; 334111 Electronic Computer Manufacturing; 334119 Other Computer Peripheral Equipment Manufacturing

Company Perspectives:

At TSA we're a business just taking root--a business tied to the world's growing demand for anytime, anywhere access to money and information. In coming years electronic transactions are projected to grow at a faster pace than those made by cash and check, increasing the need for the proven, reliable products in the TSA portfolio. The TSA product set extends from ATM processing solutions to products that address emerging technologies like the Internet and smart cards, while operating on a variety of hardware platforms and offering Year 2000 compatibility. The employees of TSA stand behind their products with a simple philosophy--meet customers' needs on time, on budget, with no surprises. While simple, it provides a guiding set of principles that continue to earn TSA a high customer-retention rate, and additional business from existing customers. ACI Worldwide, TSA's distribution and support division, delivers product and services to customers in 70 countries. Opportunities await as the acceptance of technology fuels the spread of electronic payments around the globe. TSA "stores acorns" by basing our financial model on volume-sensitive pricing, monthly licensing fees and maintaining a healthy backlog of contracted, but not yet recognized revenue. The result is an organization that's just getting started--an organization designed to take long-term advantage of the shift to electronic payments and tap the potential in a vital and growing industry.

Company History:

A fast-growing company in an expanding market, Transaction Systems Architects, Inc. (TSA) develops software for processing card-based transactions. The company's customers included more than 100 of the world's 500 largest banks and 19 of the 100 largest retailers in the United States. TSA's electronic funds transfer software was used in transactions involving automated teller machines, point-of-sale terminals, wire transfers, home banking, and credit and debit cards. Roughly three-quarters of the company's revenue during the late 1990s was derived from software designed to run on Tandem computers, the popular hardware among financial institutions. For years, all of TSA's software was exclusively programmed for Tandem computers, but in the mid-1990s the company began to diversify its product line to lessen its dependence on Tandem's platform. Diversification was achieved through acquisitions, giving the company greater market reach and positioning it in burgeoning markets, such as home banking. Annual revenues swelled during the expansion, rising from approximately $70 million in 1992 to nearly $300 million six years later. TSA's customers processed 16 billion transactions a year during the late 1990s, a total that represented only two percent of the estimated transactions completed worldwide. More than half of the company's revenues was derived from outside the United States.

Origins

TSA's corporate roots stretched to the origins of one of its subsidiaries, Nebraska-born Applied Communications Inc. Applied Communications was founded in 1975 by computer programmer James Cody and two colleagues. The entrepreneurs had developed electronic funds transfer software for banks, marking their entry into a nascent yet soon-to-burgeon industry. Point-of-sale (POS) systems that enabled card-based, electronic payments were introduced in the early 1980s to accommodate consumer preferences for using credit and debit cards instead of cash or checks. Prior to the development of automated POS systems, card-based transactions generally were processed manually, using paper-based systems to obtain authorization from card-issuing banks. As the volume of credit and debit card transactions increased, however, a more sophisticated method of authorization was needed. Card-issuing banks, with the backing of VISA and MasterCard, offered financial incentives to promote the development and use of POS-related technologies, which spawned the creation of electronic payment systems that improved accuracy, reduced costs, increased efficiency, and reduced credit card abuse and fraud. Cody and his partners were early developers in this field, entering when the technology was raw and the use of such technology was a relatively novel alternative, rather than obligatory, as electronic-based systems later would be. Although Applied Communications was marketing a product whose time was yet to come, the company did well early on, with its software making enough of an impression on bankers to overcome the less than reassuring appearance of Cody, who on one sales visit sold the company's software while wearing mismatched shoes.

By the time electronic-based systems had started to become commonplace, Applied Communications was prepared to take advantage of a market that had caught up to its pioneering technology. The company went public in 1983 to gain the financial resources to expand and began doing so aggressively, particularly overseas. Until 1982, Applied Communications had never made an effort to cultivate international business and, consequently, collected only a fraction of its revenues from foreign sales. Although the company had not made itself known to the global marketplace, overseas businesses had heard of Applied Communications. The company's marketing staff began receiving a growing number of unsolicited inquiries about its software in 1982, prompting an organized pursuit of overseas business and the establishment of an international distribution unit, ACI Ltd. (ACIL). Much of Applied Communications' growth during the decade was derived from the concerted, international effort to market its software for automated teller machines (ATMs) and POS systems, contributing to a more than sixfold increase in the company's work force between 1982 and 1989. Applied Communications was awarded the President's "E" Award for excellence in exporting in 1987 and by 1989 was selling its software in 29 countries. By the end of the decade, international sales accounted for more than half of the company's revenue.

Ownership Changes During the 1980s and 1990s

Midway through the company's decade-long expansion overseas, Applied Communications became the target of a much larger suitor. The demand for the technology conceived and developed by Applied Communications had exponentially increased since the company's founding, repositioning the software developer from the fringe of the mainstream market to the center of attention. US West was interested in Applied Communications' expertise, and it purchased the company in 1986. Life as a subsidiary of a much larger parent gave the company voluminous financial support, but freedom was the expense. US West, not surprisingly, was pursuing its own objectives and enlisted the assistance of Applied Communications to achieve those objectives, directing the company to develop telephone company systems. The redirection of Applied Communications' focus ran counter to the company's original focus, an alteration that a third company, Tandem Computers Inc., found disturbing. The reason for Tandem's anxiety, and the company's eventual intervention into the relationship between US West and Applied Communications, hinged on one of the fundamental aspects of Applied Communications' success. Early in its corporate life, Applied Communications had allied itself to Tandem's technology, programming its software to run on the computer manufacturer's hardware, which was used by an overwhelming majority of banks. Under US West's ownership, however, Applied Communications' focus had strayed, provoking Tandem to respond. "We didn't see [Applied Communications] flourishing under US West ownership," explained a Tandem official, "so we decided to acquire them to protect our joint customer base." The acquisition, completed in 1991, gave Tandem control of Applied Communications and ACIL for slightly less than $60 million.

The change in ownership returned Applied Communications' focus to the banking industry. Virtually all of the company's software was designed to run exclusively on the computers made by its new parent company, but despite the strong synergy between the two companies, Tandem professed no desire to own Applied Communications on a long-term basis. By 1993, after two-and-a-half years of control, Tandem decided to sell Applied Communications, explaining that its subsidiary was sufficiently profitable to operate on its own. Under the terms of the agreement, Tandem sold Applied Communications and ACIL, which had moved to London in 1992, to the subsidiary's senior management.

Independence in 1993 Sparks Expansion

Leading the group of senior executives who purchased Applied Communications was William E. Fisher, the individual who guided the company during its new-found independence. Fisher, who received his MBA from the University of Nebraska, had joined Applied Communications in 1987 and held a number of different titles, including president of financial systems, senior vice-president of software and services, executive vice-president, and chief operating officer. When Tandem bought the company from US West in 1991, Fisher was named chairman and chief executive officer, the same offices to which he was appointed when a new company was formed to facilitate the management-led buyout from Tandem. Transaction Systems Architects, Inc. (TSA) was formed in November 1993 and the acquisition of Applied Communications and ACIL occurred the following month, completed on the last day of 1993.

During its last full year as a Tandem subsidiary, Applied Communications had generated more than $70 million in revenue, ranking it as the world's largest supplier of electronic funds transfer software programmed for Tandem computers. In the years ahead, however, the company's business would be far less dependent on the success of Tandem ATM and POS hardware. "As we look forward," Fisher said, "we know our future is open systems." Independence provided Fisher with the opportunity to develop software for other platforms, such as Microsoft Corp.'s NT operating system, as well as Unix and IBM operating systems. Although the company continued to regard its software partnership with Tandem as its mainstay business and continued to develop software for its long-time associate, the ability to diversify its product line to run on other vendors' computers opened numerable avenues for growth. It was Fisher's task to take advantage of these opportunities during the fast-paced growth of the middle and late 1990s.

After seven years of operating under the corporate umbrella of a parent company, TSA did not wait long to express its independence. Four days after the buyout from Tandem was completed, Fisher acquired U.S. Software Inc. (USSI), headquartered near Omaha, Nebraska, in Crater Lake, Iowa. Founded three years before TSA acquired it, USSI provided software solutions to the financial and payment card industries, developing its software products at a facility in Victoria, Texas. TSA's purchase of USSI signaled the beginning of an acquisition campaign that diversified TSA's product line and expertise beyond the capabilities of its core subsidiary, Applied Communications. The middle and late 1990s witnessed the rapid growth of electronic commerce around the globe, as card-based transactions proliferated and new areas of opportunities, such as home banking, emerged. To keep pace with technological advances surrounding it, TSA sought to accelerate its own technological development through the fastest means possible: by acquiring companies with expertise in emerging areas of growth. The company's motto was "it's an electronic world, we move the money," underscoring its intention to involve itself in as many as possible of the billions of card-based transactions that were completed annually.

Before TSA began to strategically position itself through acquisitions, the company filed for an initial public offering (IPO) in January 1995. The IPO of 2.75 million shares at $15 per share was completed the following month, giving the company the means to reduce its debt. Six months later, in August, TSA returned to Wall Street for additional cash from investors, completing a second sale of stock that netted the company $22 million. Fisher explained: "We had a strong IPO, and our underwriters thought we could have sold more shares. We decided to go back to the market in order to strengthen up our balance sheet a bit, as well as have some cash for acquisitions."

Financially invigorated after two stock offerings, the company turned its attention to the expanding markets and emerging industries in the "electronic world." Fisher was looking for acquisition candidates that could extend TSA's market reach and found one in late 1995. In October 1995 TSA acquired a German software firm named M.R. GmbH. Three more acquisitions--TXN Solution Integrators, Grapevine Systems, Inc., and Open Systems Solutions, Inc.--followed in 1996. By this point, more than 60 percent of the largest U.S. banks and nearly 25 percent of the 500 largest banks worldwide used software designed by TSA. Revenues had more than doubled from the total generated under the auspices of Tandem, yet the majority of the company's business was derived from its BASE24 product line, programmed for Tandem computers. Applied Communications, responsible for the BASE24 software, still represented TSA's mainstay business, but the acquisitions were giving the company expertise in complementary and promising areas. One of these new market niches centered on "smart" cards, or plastic cards programmed with a particular monetary value that could be used at ATMs and elsewhere like a debit card. TSA established a name for itself in the smart card market with two acquisitions, the August 1998 purchase of Smart Card Integrators Ltd., a London-based technology developer for systems such as Modex and Visa Cash, and the November 1998 acquisition of Media Integration BV, a Dutch smart card systems developer. Also in 1998, the company strengthened its presence in the market for home banking software, convinced that the practice of paying bills and transferring money from a consumer's home computer would develop into a widespread trend.

By the end of the 1990s, TSA stood as a strategically diversified, global company, marketing its products in 68 countries. For the immediate future, revenues were projected to increase 25 percent annually and earnings were expected to increase 35 percent. Based on this forecast, there was justifiable optimism for the company's success during the early 21st century, optimism expressed not only by TSA executives but also by stock analysts. "These guys don't get a lot of press," remarked one analyst in reference to TSA, "but they are a really well-positioned company." Despite rising revenues and earnings, however, the company's stock was not performing as well as some analysts believed it should, prompting several industry pundits to characterize TSA as a "sleeper" yet to be discovered by the investing public. "The company hasn't been given credit for the type of business it runs," explained an analyst at Lehman Brothers. Considering that the company was a direct beneficiary of lucrative trends in electronic commerce, the secrecy of its success appeared to be nearing its end.

Principal Subsidiaries: Applied Communications Inc.; Crystal Clear Technology; Grapevine Systems, Inc.; USSI Inc.

Transaction Systems Architects, Inc. History

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