ACI Worldwide Inc (ACIW) 2010 Q4 法說會逐字稿

Good morning, my name is Michelle, and I will be your operator today. At this time, I would like to welcome everyone to the ACI Worldwide Financial Results for Q4 and Year Ending December 31, 2010. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions)Thank you, Ms. Gerber, you may begin your conference.

Thank you very much, Michelle. Good morning, everybody, and thanks for joining our fourth quarter and year-end earnings call. The substance of today's call is subject to both Safe Harbor and forward-looking cautionary statements, like all of our earnings events. You can find the full text of both statements on the first and final pages of our presentation deck today; a copy of which is available on both our website, as well as filed with the SEC this morning.Our Management speakers today will be Phil Heasley, our CEO, Ralph Dangelmaier, our President of Global Markets, and Scott Behrens, our CFO. All three Management members will be available for Q&A following their prepared remarks and will be joined by Louis Blatt, our Chief Product Officer, and Tony Scotto, our Senior Vice President for Application Development.

Before I turn the call over to Phil Heasley for his opening remarks, I wanted to remind all of you that ACI will be holding its annual Investor Day event in New York City on Tuesday, March 15. We will have customers speaking at the efficacy of our products and we will also address profitability drivers for the business, as they're represented by our business' four P&Ls.If you're interested in attending this event, please contact me directly. And now I'm going to turn the call to Phil. So, Phil, please go ahead.

Good morning and thanks for joining us today. I have a few remarks I'd like to share with you today before I turn the meeting over to the team who will take you through both the year and the quarter. A summary of my thoughts are on slide four. ACI achieved a stellar sales year punctuated by our first truly global account. In addition to that, we sold several significant other deals in geographies, both new and existing. We had sizable renewals and we were very successful in cross-selling products in 2010 with $35 million improvement in add-on sales bookings. The business has continued to demonstrate strong cash generation during 2010 and we ended the year with approximately $63 million in operating free cash flow from the business. Cash on hand stood at approximately $170 million at year end.

In terms of expense management, we continue to implement better business practices and run our business smarter than we have done in the past. I've spoken before about control profitability and growth as part of our outlook for business management and we have now closed a second fiscal year with very clear examples of good controls. Profitability is embedded within the ACI culture now.During 2010, we exhibited operating income improvements of 22% and a lot of that improvement was due to our stronger commitment to growing recurring revenue, as well as our 60-month backlog. And with sales exceeding revenue by over $100 million, the commitment to growth is very, very clear. We are pleased we met or exceeded our guidance metrics. We continue to create a more predictable, more sticky revenue model and move further along the business process improvements of scale. And this is demonstrated with good product implementation and becoming better and more accurate at anticipating the year's revenue model.

Lastly, we have clear visibility into our forward revenue attainment, project pipelines, and our customer environment. I'm now going to turn the call over to the team who will give you more insights into the marketplace and the achievements of the 2010 calendar year. Ralph, would you please go ahead?

Sure. Thanks, Phil, and good morning. Thanks for joining our call. I'm going to start my comments on slide six, if you'd like to follow along.So, globally the financial crisis over the past few years have drove banks to seek efficiency. The three major catalysts were regulatory changes, increased competition and the commoditization of payments, which puts pressure on margins. In the US, the Durbin act could add to these catalysts. Fortunately for us, our customers say there are not significant changes needed to their ACI systems in order to be compliant.

In fact, the Durbin has created new impetus to look at ACI's product suite from an ROI or business efficiency perspective. In emerging economies like Latin America, we are seeing more growth trends and in markets like Brazil, there's a general opening up of the payment [clear NSTs], which is similar to what we've seen in other places like Canada or France. Similarly, our Asia-Pacific channel are witnessing the continuing need to replace older systems that just can't cope with the increasing payment volumes due to macroeconomic growth and regulatory changes. We're happy we sold our first significant deal in Japan in a number of years to a major Japanese payment company and we hope to springboard from that to help other financial institutions in the market upgrade their legacy systems. Generally, the Japanese have fairly old underlying payment infrastructure and we believe our alliance with IBM will help us. In EMEA, the segment drivers are more similar to the Americas. The financial crisis led banks to consolidate throughout the European Union and added pressure on the banks to some of their bailout funds is an opportunity to rationalize costs and systems. Also, our new management team in services and sales in Europe is clearly executing better and using what I call best practices.

So, if you turn to page seven and you look at the chart, as we've explained throughout 2010, we've demonstrated good process for deal forecasting. This helped us achieve a more predictable sales forecast last year. We're thrilled that the sales this year were up nearly 24%.It was the first year of our global accounts program, we signed two major deals -- one with First Data, which you already know about, and the second with WorldPay in the fourth quarter.

The Americas had another solid year in 2010. In the face of difficult, but recovering, macroeconomic environment, we signed many multi-million dollar multi-year license renewals with strong add-on businesses. And we're seeing the standardization of pricing help us across this channel.

Also, with our strategy of adding new products into license renewals, our average deal size in this business increased year-over-year. On the retail side, our BASE24 strategy, we saw increasing number of commitments to EPS with full migrations and hybrid networks first across the channel, as well as a strong year in our merchant retail business. We ended the year very strong in Asia-Pacific where sales were up 36% to nearly $50 billion. In EMEA, we capitalized on the market opportunities and the sales were up 61% year-over-year. So, in summary, it was really busy -- a great year across all markets.

On slide eight is the quarter-specific details of sales. Our IBM alliance helped us a lot, as I mentioned earlier, in Japan, as well as with an Indian processor who signed up for EPS and PRM. As you can see from the sales examples, that migration's becoming a larger part of the business and overall, sales success was broad-based and across all regions. It was a really strong Q4, even against a tough comparable like 2009's great quarter.

So, turning to slide number nine, I'm looking at an illustration of sales by product type over the quarter and the year, more generally. For the quarter, our standout performers were the retail and wholesale segments, up 23%.Our tools products were also strong at 37%.We're seeing more solid sales activity in the Retail Commerce Server market and Enterprise Banker was less robust than last year, mainly due to the timing of 10 large renewals that happened in Q4 2009. So, it made the quarterly comparisons difficult. So, in a year-over-year basis, retail and risk were up about $90 million and our tools segment had a strong year with a 20% improvement in sales.

On slide 10, we tried to capture some of the key opportunities we see for 2011. A primary focus for us will be gaining market share on cross-selling to our current customers. As our large global and regional customers seek to consolidate their payment infrastructures and gain efficiencies, we are seeing intense interest in development of our payment hubs. This is great opportunity for ACI. I expect us to build on momentum that we had going into 2011 in terms of migrating our retail payment customers to BASE24 EPS and the hybrid networks. Our investments in our regional staff locations will also help us address the growing demand for resources.

We expect to see strong demand for our operate tool segment. These tools help customers integrate legacy infrastructures and create operational efficiencies. As we've discussed, the global account scene remains strong and we see some very interesting opportunities here. Of course, these fields can be complex and have longer sales cycles but we think the payoff will be huge.

And finally, we will continue to work hard to nurture, build our long-term relationship with our customers. This drives better overall customer satisfaction and long-term economic value for ACI. So, we're very pleased about 2010 and I'm feeling good about the pipeline in 2011. So with that, I'll pass over to Scott and will be available for Q&A after the remarks.

Thanks, Ralph, and good morning, everyone. I'll be starting my comments on slide number 12 with key takeaways from the quarter. Overall, we had a very strong quarterly performance. Generally in line with or better than the expectations that we had set out in our October earnings call. Starting with revenue, we saw a record revenue quarter coming in at just over $141 million, which represents a $15 million or 12% increase over the prior year fourth quarter. This was led by strong growth in recurring revenue which grew nearly $17 million or 26% over the prior year quarter.

As Ralph's already done a pretty good job of covering our sales performance for the quarter, I won't spend too much time on it here. Probably the biggest surprise, and it was an upside surprise, was the strong surge in cash flow in the fourth quarter, really coming on top of a strong Q3 cash flow coming in at $28 million. That's really been driven, obviously, by higher earnings, as well as continued strong cash collection efforts. So, we're obviously very happy with the strong cash flow finish to the year.

Turning to slide 13, we saw strong growth in operating income and operating EBITDA increasing $8 million and $9 million, respectively or about 22% over the prior year quarter. And below operating income, FX volatility moderated a bit in the fourth quarter, so we didn't see much in the way of foreign currency gains or losses. And finally on this page, just a reminder our interest rate swap expired in October, so we're no longer seeing any earnings effect from that.

Turning now to slide 14 with key takeaways from the full year, recurring revenue for the full year grew $40 million and now comprises 68% of our annual revenue. Overall revenue growth was driven by a combination of higher license fees, higher maintenance revenues, and higher revenues from our hosted on-demand business. From a sales perspective, as Ralph has already indicated, 2010 was a record sales year for us. The first year sales exceeded $500 million on an annual basis. We did see broad sales growth across all of our regions, including several significant UK renewals and capacity events, as well as the significant Japanese deal that Ralph mentioned, that was signed here in the fourth quarter. Again, as I mentioned previously, we saw significant growth in operating free cash flow increasing $30 million over the full year 2009 or essentially doubling of the cash flow number we saw last year. And lastly on this slide, really the key barometer of how we measure the long-term economic health and value of the business is in our 60-month backlog, which grew in excess of $50 million during the year, obviously driven by the year's strong sales.

So, overall, in summary, we saw strong recurring revenue. That, combined with continued cost management contributing to operating income growth at a multiple of our revenue growth. We saw significant growth in sales and backlog and significant growth in cash flows during 2010.

Turning just quickly to slide 15, this is our normal depiction of the ratio of revenue derived from backlog versus the revenue that is derived from current period sales. As you can see, the mix is relatively consistent compared to last year, with a bit more coming from our backlog. And overall, we're just very pleased with our recurring revenue coming out of backlog which is providing us with a stable, predictable, and solid base of recurring revenue.

On slide 16, here we summarize our full year results compared to our most recent guidance. Revenue came in, as expected, at $418 million. The impact of FX fluctuations relative to where we were when we started the year really had the impact of reducing our topline revenue by about $5 million. Really, excluding the impact of foreign currency volatility, we would have finished the year solidly within the range that we'd originally provided.

Both operating income and operating EBITDA exceeded our full-year guidance. Again, that driven primarily by our continued expense discipline. So, obviously we're very pleased with the performance of the business as we close down 2010.

So, that leads me to my final two slides of prepared remarks on slides 17 and 18 related to our outlook for 2011. You'll note that this is pretty much in line with what we told you in October about the year ahead. We do expect revenue growth to be in the mid to high single digits or in a range of $440 million to $450 million. Really, starting out 2011, we are starting with a 12 month backlog of $380 million, which is $25 million more than what we had when we were going into 2010. So, to put that in perspective, when we started 2010 we had about 84% of our expected revenue for the year already in our beginning contracted backlog. And now we're starting 2011 with a bit more, it's 86% of our expected midpoint range of revenue for the full year already in our beginning contracted backlog. So, relying a little bit less from our percentage of revenue that we need to get from 2011 new sales.

We expect operating income to grow in the 15% to 20% range for 2011 or be in a range of $62 million to $65 million. Again, this follows on top of a 30% operating income growth that we saw here in 2010. And finally, operating EBITDA growth should be in the mid-teens or range of $98 million to $101 million. Again, this really continues our trend of layering on incremental revenue from new customer go lives and the incremental benefit of renewing existing customer contracts with better economics, all the while really maintaining our strong expense disciplines. From an overall quarterly perspective, we expect margin and revenue phasing to continue to look much like it has over the last several years, with a spike as we approach the year end.

And then quickly, on slide 18, it has additional information that impacts our 2011 financial model. We expect sales to be in the high $400 million range. This is a bit lower than the 2010 figure, but just as we did when we guided for the 2010 sales, in our guidance numbers for 2011 we are not assuming any global accounts deals. So, those types of deals would certainly provide upside to the 2011 sales guidance. And finally, we expect operating free cash flow to grow consistent with our growth in operating EBITDA in the mid-teens.

So, overall, we finished 2010 very strong and are continuing to execute on our plan to achieve higher profitability and expect to continue that trajectory of operating improvements into 2011. That concludes my prepared remarks. Operator, we are ready to open the line for questions at this time.

(Operator Instructions)Your first question comes from George Sutton from Craig-Hallum. Your line is open.

Good morning. Great numbers, guys.

Thanks, George.

So, Ralph, you had mentioned the Durbin Amendment and that potentially being a catalyst. Can you just be fairly specific about what the catalyst is?What that's creating for your customers?

Sure. What's happening is the Durbin Amendment is forcing banks to look at becoming more efficient in how they process payments. And where ACI is really strong is that we can help the banks consolidate their payment systems. So, it's forcing them to look at that and we tend to be in a lot of these major institutions, so we're an obvious candidate for helping them solve that problem. So -- and Phil would like to add something.

Now, George, let me give you a marketplace perspective on it, too. What Durbin has basically said, one really simple way of thinking about Durbin is, Durbin has told the banks they can't pass on the cost of fraud as a cost of consult, right? And if you think about it just simply in that -- so, that means that instead of increasing interchange to cover increasing fraud costs, they now have to put a real effort into eradicating fraud. Either that or give up a huge amount of margin. We are uniquely well-positioned to help banks solve that issue in terms of the combination of our risk capabilities and our very, very high speed, very intelligent payment switches. And I won't say anymore than that, but that's begun a new set of dialogs that are very positive.

On your slide number 10, the market opportunities, you talk about multi-regional payment hubs and cross-selling apps to an integrated payment solutions portfolio. And that sounds a lot more mature of a product set and availability than you talked about at your Analyst Day last year. Could you just update us on what that progress has been?

I'm not really sure I understand the question.

If you're asking us if we magically got to some SOA point, no, we're not, but we've done a lot of work and I think we've very successfully showed customers how we can keep our systems congruent and up to date with each other. Therefore, buying a set of solutions from us and asking us to keep those solutions in parity is something that the customers have a lot of confidence in right now.

Yes. These are using our current products to help solve those business problems.

Got you. Okay. Just wanted to make sure I was clear there.

Yes.

Lastly, if I could?

Yes.

You mentioned up front, Phil, you had your first truly global account this year with First Data, how many others do you envision over the next several years you could potentially entertain?

Well, I'll let Ralph answer after me because Ralph is the local guy on the (inaudible).But, I don't think it would be difficult to get to, over a reasonable period of time, and that's years, not quarters, to get to a dozen. I don't know what Ralph would have to add.

Well, we started off with five and now we're at 10, so we're managing 10 customers this way and I think we can see us adding a couple more into that process. It's really hard to predict how many deals we're actually going to sign because one of the issues of global accounts is the customer needs to act globally and wants to do a global structure. So, even if we're looking at globally, doesn't mean that we might sign a global deal. It means that we actually might be more coordinated in how we do deals across APAC, Americas, and EMEA. So, you'll see the numbers strengthen in those regions even if we don't do a global deal. I don't know if that helps, George, but --

No. I think, well that's -- you're obviously saying that's where some of the upside could come from. So --

Yes. Yes.

I wanted to make sure we addressed it. Thanks, guys.

We saw that this year. Thanks.

Your next question comes from Tom McCrohan from Janney. Your line is open.

Hello, guys and congrats on a great quarter.

Thanks.

Thanks, Tom.

Two questions -- first, on operating leverage, I'm just looking at slide 17, just wanted to confirm that you're looking for about 100 to 200 basis points of margin improvement from operating leverage which seems to be the implied guidance from that table.

That's correct.

Great. And could you give us a little bit of an update on the competitive environment, like how is your product set right now?How -- it seems like you spent a lot of money on BASE24 EPS and it's starting to hit its stride and I wanted to understand a little more like how much of a lead head start do you have there and to give us an update on the competitive environment, that would be great.

The world is -- we're a world player in payments and the world has -- it's simple and complex here. If you've ever watched synchronized swimming, that's kind of the game that we're in. Payments look like the tops of these graceful bodies going on and whatnot, but underneath, there's an awful lot of frantic coordination and whatnot, which means that somebody's got to update and maintain 200 and some switches that run around the world and their interactions with Visa, MasterCard, Discover, AmEx, SWIFT, NICE, the different clearinghouses and whatnot. So, we will be spending a lot of money on R&D for a lot of years to comp. And I think you know we've spent a lot of money already. The world's also branching into new distribution forms like mobile. We don't predict and we don't see any reduction in our R&D spending as it relates to it. We believe that we've got a lot of critical mass, which is an advantage. But we respect all our competitors in the marketplace.

Maybe asked another way, can you break out the sales number, that record $525 million last year and the hardware platforms? And the $525 million, was it all on IBM, I'm sure it wasn't, but just maybe a little color on that? And that's all I have.

Well, you know that we both have renewal business and we have new business. The one number that we will share with you is our new business was a good two-thirds on the IBM platform. Does that answer your question?

Yes. Thank you very much.

Your next question comes from Gil Luria from Wedbush Securities. Your line is open.

Yes. Thank you. Good morning.

Hello, Gil.

So, you guys just closed another really good year and the guidance is very helpful and looks great. Looking a couple of years out, further than that, do you see a scenario where you could get back to double-digit topline growth, given the kind of sales growth you're seeing, the kind of activity in your market?

Well, Gil, we still have -- this is our last year of adjusting from a -- getting off of the ILS appetite into the initial license fee to the monthly license fee and you know we're big believers, we're at 68%, Scott?

Right.

-- recurring revenue. We'd like to be probably around the 80% recurring revenue. At some point, if we keep booking $50 million, $70 million, $100 million more in sales than we do in revenue, we -- our sales, we book our sales in -- our sales are economic value sales, so they're exactly equal to a revenue dollar. It's just a future revenue dollar. So, we do expect that within x- number of years, and we're not guiding to that, that revenues will equal sales.

That's great. Ralph, you mentioned the numbers from Europe are starting to look better and better and you mentioned some best practices in the new team. Can you talk a little bit more specifically about what some of those things that you guys are doing differently that the sales numbers are going up so high and the revenue numbers are now following them?

Sure. So, you might remember a few years ago we put in some processes, which we call best practice, into the Americas on how we handle our sales process -- how we handle sales and how we handle customers. And what we've done is we've added a new team in EMEA, we've got a new services team, we've got a new sales team and they quickly looked at the practices we did and said these make a lot of sense for EMEA and they've applied them. I think that, with the things going on in the economy, has really boosted our sales and our predictability over in EMEA. So, that was the point I was trying to get at.

Got it. And then, finally, operating expenses two years in a row now where you're averaging $90 million, $91 million of operating expenses a quarter even as the business has started to grow, your guidance implies $95 million a quarter, is that the new run rate we should think about?

It implies anywhere from probably a $93 million to $95 million range. Obviously, with our -- the bulk of our costs being personnel and related costs. Those increases are going to come from just merit increases and higher annual inflationary increases. It's not necessarily indicative of a higher headcount. It also is indicative of the projects that we expect to go live and recognize next year and the associated deferred cost that goes with them. We are making certain investments in accelerating product development for functionality to help meet our sales demand. So, there are a number of things that are factored into that uplift in expenses for next year.

There's one other wildcard, and maybe Scott will talk about it a little bit. We would've done close to $6 million more in revenue but also $1.5 million more a quarter or close to that in expense. And so, the fact that we're balanced is great, but when FX moves against us, we lose revenue and that looks like we're more efficient from an expense standpoint and that's a currency function. So, if currencies were to move, we would look like we were doing better in revenue but having an expense -- having expensive --

Yes. That's a good point. This year, as I said in the call, the revenue was impacted by $5 million, essentially expense was impacted by about as much. And then, when we forecast for next year, it's really priced out at the year-end FX rate. So, on a comparability basis, we'd be going in with a higher FX rate in some of our currencies relative to where they were for a good portion of this year.

Thank you very much.

Thanks, Gil.

Your next question comes from Brett Huff from Stephens. Your line is open.

Good morning and congrats on the nice quarter and finish to the year.

Thanks, Brett.

Thanks.

Just a couple quick questions. Congrats on the couple of nice wins. Can you give us any high-level details on the WorldPay deal and what that involved? I know you were able to provide us with some high-level thoughts on First Data when that deal happened. Can you give us any color on that?

Sure. WorldPay, I think you understand the institution, that's an institution that has gone independent and broken off from RBS and they were currently using components of BASE24 and we were able to secure a renewal with them and a long-term business plan with them for that product line over the next five years. I think other than that, that's really all I can say right now.

Just to add on to it a little bit, the new owners of WorldPay, which are Spain and Advent, right, or Advent Spain. I think they're smart owners. I think, for a lot of reasons, RBS wasn't able to invest in technology to the extent that they'd probably liked to against that wonderful market share that they have and I think that the new owners see great efficiencies that are capable. Efficiency timeshare is a wonderful outcome. So, I think they're very, very well-positioned as a company, and I think we're very well-positioned to be a real technology partner to them.

Okay. Thanks. And then, as we look forward on the pricing increases that you're expecting kind of late in 2011 and into 2012, can you give us an update on how you all are thinking about that? On BASE24?

Yes. On the maintenance. It's not you. We aren't anticipating a significant impact in 2011, obviously, because it starts really in December of 2011, so we're not going to get much of a full-year effect on that. Obviously, we'll see the first full year effect of it in 2012.

And have you started to tell us how big that chunk is going to be or what assumptions you're making on that?

No. We have not quantified yet how much that is.

I think you know, we're -- we told you earlier that anything we can convert into 60-month revenues -- our first choice is for it to be 60-month revenues and that causes us to play with a lot of our cards down as it relates to that. I don't think that's an overly masked answer.

Okay. And then, you're also having success, obviously, with the price claw backs and as you go through and re-do the deals that were dis-economic over the last few years and becoming more market, or a better pricing. Is it right to think that you have about another year of that left in the first round?And as you look prospectively, do you think that there is -- are you at market where you want to be or do you think you're still providing too low a price as you go forward and will there be talks about price increases going forward?

I think we're a very good partner to our customers around the world at this point. We had some screwy deals out there that were shame on us not shame on our customers in terms of the deal. I'm much more confident in growth and especially debit unit volumes and consolidation into our platform. The merger world -- the bank consolidation world, the processor consolidation world is moving very much in our direction not away from us. And I would be much more confident that our revenue growth is going to be more volume driven and consolidation driven than having to do large price increases.

Okay. And then, last question, of the -- I think you said the 86%, Scott, of renewal revenue is coming from 12-month backlog. So the other 14%, I don't know if this is the best question for Ralph, but give us a sense of how you view that new sales pipeline and any color you can give us to give us comfort that, that will come in as planned?

Yes. So, I think we've got a pretty good process for figuring out what our sales are quarter to quarter. I think we've been fairly accurate in how we've been forecasting that. We have a model that says if these types of sales come in new and renewals, how much does that drive to the revenue. And we work with Scott on that. So, I think we're very comfortable with the guidance that we've put forth and the sales process we've put forth. I don't know, Scott, if you want to add anything to that.

Yes, just to reaffirm what you said. Yes, 86% of what we're coming into for the full year is already in our contract and beginning backlog. So.

Are you asking whether Ralph has a larger or smaller pipeline that he had last year?

No. But that's a good question. Great. That's what I needed. Thank you.

I think my pipeline's very strong.

Great. Thanks.

Your next question comes from Wayne Johnson from Raymond James. Your line is open.

Hi. Yes. Good morning. Great job point to point here over the last couple of years of managing expenses. Just kind of curious longer-term, where do you think that the operating margins are going to be flattening out? And I have a follow-up to that.

We've been very clear once we started transforming this company that we weren't going to be happy until we had margins north of 20%We stick to that.

Okay. Can you talk a little bit about the profitability characteristics of your marquee flagship wins in the year -- the WorldPay and First Data?How should we think about those contracts in comparison to smaller contracts in terms of margins and contribution to profit?

We have a very rational business model that says that the more volume you push through our systems, the lower the unit cost it is for you to do that. It provides us a fairly equal profitability in terms of everybody that we support. The comfort I would get from the big deals that we've pushed through is that we basically take less than one-sixth to one-seventh of the revenue upon booking and there's still 80- some percent of the revenue in those guides are ready to be harvested over the next four or four and half years.

Okay. Terrific. Thanks. Nice job on the quarter.

Thanks.

(Operator Instructions)We have no further questions at this time. Ms. Gerber, I will turn the call back over to you.

Thank you, Michelle and thanks, everybody, for joining. Again, we'll be webcasting our Investor Day on Tuesday, March 15 and if you're interested in being in New York in person, give me a call. Thanks. Goodbye.

This concludes today's conference call. You may now disconnect.