ACI Worldwide Inc (ACIW) 2011 Q3 法說會逐字稿

Good morning. My name is Katie and I will be your operator today. At this time, I would like to welcome everyone to the ACI Worldwide Financial Results for Q3 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions.) Please note that we will be taking one question and one follow-up question per participant during the question and answer session. Thank you.

Tamar Gerber, Vice President, Investor Relations, you may begin your call.

Thank you very much, Katie. Good morning, everybody, and thanks for joining our first-quarter earnings -- I mean our fourth-quarter earnings call. Excuse me. I'll say that again, our third-quarter earnings call.

Today's call, like all of our earnings events, is subject to both Safe Harbor and forward-looking statements. You can find the full text of both the Safe Harbor and the forward-looking statements on the first and final pages of our presentation deck today, a copy of which you can also find on 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 our prepared remarks, and they are joined here by Louis Blatt, our Chief Product Officer, and Tony Scotto, our Senior Vice President of Global Application Development. I'm now going to turn the call over to Phil Heasley, our CEO.

Good morning and thanks for joining our call today. We are very pleased with our third-quarter performances. The strong revenue was a result of our success in managing project implementations.

I have told you in the past that we have instituted a rigorous sales to revenue process, including management of subsequent implementation projects. This quarter's results are really validation of that process.

We had a number of large go-live events mature, which drove our quarter. And I think these events have de-risked our full-year results as we worked very hard to achieve project completions in quarter three rather than maintain a heavy exposure to projects going live in the fourth quarter.

Given ACI's revenue model where we incur the preponderance of our expenses real-time and defer very little to project completion, we see higher revenue this quarter that is not accompanied with running higher expenses. Consequently, the quarter showed much stronger operating income and adjusted EBITDA than prior year as we brought project implementation revenues associated with installs into our current-period revenue.

During the third quarter, we entered into an agreement to acquire S1 Corporation. The timing of the close of that transaction depends upon the conclusion of the Hart-Scott-Rodino antitrust review. We have not yet received a Notice of Early Termination of the HSR waiting period, and we have also not received a Request for Additional Information that would extend the waiting period, a so-called second request.

If we receive a second request, we intend to respond promptly to that request and work with the Department of Justice to meet its additional information needs. The timing of the close will necessarily depend on the scope of any such second request.

We expect to issue a press release upon termination of our waiting period or the receipt of a second request. We do not believe that this transaction poses any competitive issues under HSR, and we are working as hard as we can to complete this review process.

And lastly, before I hand the call over to the team, I want to remind you that we continue to have very good transparency into our business model and our sales pipeline across our global footprint. It is this visibility that has led us to reaffirm our guidance, remain confident -- we remain confident that our products are more relevant than ever in the marketplace as we help to facilitate institutions to remain compliant in both difficult regulatory environments as well as in robust and growing secular electronic payment growth conditions.

With that, I will hand it over to Ralph to take you through more detail of the quarter.

Thanks, Phil, and good morning, everyone. I'll be starting my remarks on page six.

So, as Phil said, we had a good quarter in sales and global implementations. As you know, after a record year in sales in 2010, our year-to-date growth is still higher in 2011. And we had some key wins and successes in each geography.

So, turning to the Americas, we had a strong sales quarter in online banking. And the last six months has also been strong in our merchant retail business. Cross-selling continues to be boosted with our solution offerings.

For example, we have now integrated our fraud detection product, PRM, into our online banking product, and that has been a successful cross-sell opportunity. New sales, combined with excellent execution, has resulted in a 20% increase in revenue.

Moving to page eight and EMEA, the bank consolidation focus on payment efficiencies continues to be a strong trend and a good one for us in EMEA. As everyone's watching the European financial matters closely, we have not seen an impact to the work our payments have had with our customers. They're very focused on payments integration.

So, we have had strong sales throughout the region in retail and our solution offerings have helped us cross-sell in EMEA with things like our EMV or tokens products. We have had our second MTS sale in the Middle East, and with add-ons to retail and PRM.

So, we're happy about the revenue growth in EMEA. And we've just completed a multiyear project with a large customer in France.

So, moving over to Asia-Pacific, I just came back from two weeks in Asia meeting with our customers and our teams. The sales continue to be spread well throughout the region. This quarter we had strong wins in Thailand, and our backlog is strong and our project execution is going really well.

So, I'd like to turn it over to Scott for more details on the financials.

Thanks, Ralph, and good morning, everyone. I'll be starting my comments on slide 11 with key takeaways from the quarter, starting first with sales bookings.

Ralph's already done a pretty good job of covering sales so I won't spend too much time on it here, just to say that we had another strong sales quarter. Of particular note compared to last year is that we have more than doubled our sales of new accounts and new applications year-to-date compared to last year, which, as you know, contributes to our growth in backlog and is really the key driver of revenues growth in future years.

And we are expecting a strong fourth quarter to round out the full year. And really, we're tracking to a record year for sales bookings here in 2011. So, obviously we're very pleased with that.

We also saw a strong revenue quarter coming in at just over $112 million, which represents an increase of nearly $15 million or 16% over the prior-year third quarter. And as Phil has said, this was really led by strong growth in revenue from project go-live events of much greater magnitude than last year.

And overall, 95% of our current quarter revenue came out of backlog with the remaining 5% of revenue coming from current quarter sales. So, I'll go into that in a bit more detail in a couple slides.

Operating expenses were impacted this quarter by S1 acquisition-related professional fees of $3.4 million. So, excluding these deal-related expenses, our expenses would have been just around $97 million for the quarter. The other growth in expenses over the prior year is primarily in two areas.

One is our selling and marketing expenses, which is really reflective of our higher sales activity this year. And two, the higher R&D expenses, which are really reflective of our investment in accelerating product development really to meet the higher customer sales demand.

Turning to slide 12, we continue to see strong growth in both operating income and adjusted EBITDA with operating income increasing nearly $4 million, or 53%, year-over-year and adjusted EBITDA increasing $5 million, or 29%, year-over-year. And again, excluding the impact of the $3.4 million of S1-related acquisition fees, the growth in operating income and adjusted EBITDA would have been even stronger.

And finally here, we saw a much lower effective tax rate this quarter, coming in at approximately 4% as we benefited from the release of liabilities related to our transfer of IP from our US to our non-US subsidiaries.

Turning to slide 13, this is our normal depiction of the ratio of revenue derived from backlog versus that portion of revenue that's derived from current period sales. Revenue from project completions are really the key drivers here.

We are seeing a better balance of revenue from project go-lives coming in the third quarter of this year as opposed to last year when we had a high volume of project completions all in the fourth quarter. This year it just happens that a lot of go-live activity happened in the third quarter rather than all being concentrated at year-end.

And lastly, on slide 14, at this point in time based on the strength of our year-to-date performance and our visibility to the rest of the year, we are reaffirming the revised full-year guidance that we laid out in our July earnings call for the full year 2011, with revenue in a range of $450 million to $460 million, operating income in a range of $65 million to $69 million, and adjusted EBITDA in a range of $101 million to $104 million.

So, obviously this implies Q4 revenue in a range of $120 million to $130 million, operating income in a range of $36 million to $40 million for the fourth quarter, and adjusted EBITDA in a range of $44 million to $47 million for the fourth quarter.

And again, just as a reminder, the guidance excludes any one-time fees associated with the S1 acquisition.

So, in summary, on a comparative basis to Q3 of last year, we saw solid growth in revenue which contributed to both strong growth in operating income and adjusted EBITDA. And finally, we are tracking to our full-year guidance expectations. So, overall we're very pleased with our strong performance so far in 2011 and our expectations for rounding out the full year.

So, that concludes my prepared remarks. Operator, we are ready to open the line to questions at this time.

(Operator instructions.) As a reminder, we will be taking one question and one follow-up question per participant during this Q&A session. We'll pause for just a moment to compile the roster.

George Sutton from Craig-Hallum.

Thank you and congrats on the good results.

Thank you, George.

Phil, during your prepared comments, you mentioned transparency into the pipeline. And I wonder if you can take that transparency and just give us a general thesis on your 2012 outlook.

Well, you know, George, we don't give guidance for the next year. But, I will say this, which, if you think about in terms of pipeline as the same way we think in terms of the five-year backlog, our pipelines have never been stronger than they are right now. And so, I think that should give you as good guidance as we can as it relates to that, is that we're sitting on the strongest pipelines we have seen to date.

Okay. As a follow up, which has nothing to do with my first question, can you discuss -- the scenario we're in right now is we're running up into the sunset of BASE24. What kind of discussions are you having with customers that may be different than when that migration -- or when that sunset was further out? Is that starting to accelerate the discussions of migrations?

We're having a lot of discussions on migration. But, let me back up a step.

We are entering what we call the sunset period. And sunset means that -- you're talking about BASE24 sunset. And we're entering a period in which we're saying that BASE24 Classic, written in Tandem Assembler language initiated almost 30 years ago, updated 18 years ago, is no longer our front shelf authorization product.

We are completely, we're 100% committed indefinitely to the support of BASE24 Classic. And we have no end of life dating and no end of life interest as it relates to that. And, of course, that's true of how we've managed OCM24, TRANS24 onto open -- we do not end of life mission critical systems. It does mean that about 20% of our cost structure is subject to a higher maintenance fee.

We have had conversations for the last three years, actually, as it relates to the sunsetting on this project. We have a large body of customers who have re-contracted with that sunset in mind. We have some that are contracting with that sunset in mind. And we have future dialogs going on in terms of that.

Additionally, our sunset is accompanied with a like-for-like offer to our customers. So, all the functionality that is inherent and embedded in Classic, as long as that's all that's purchased as it relates to EPS and nothing more, the license is totally transferrable and free from Classic to EPS.

The mission criticality of the system, the size of the system, the complexity, and the modifications that people have made has not made that a turn one switch off, another switch on. And we're going through a migratory process. As our customers partially make it to EPS, they'll end up paying a partial license based on the Classic terms. And they'd pay a partial license based on the go-forward terms.

I hate to spend a lot of time on this, but there's a lot of confusion in the marketplace that there is some tripwire event. The only tripwire event is -- or two. One is it goes from being the top shelf offering to not our most current offering. And two, because of the hundreds of millions of dollars we've spent on EPS and must continue to spend, the cost -- the incremental cost of maintaining this as a one generation back offering is higher than the current would be.

Is that a rigorous answer to your question?

I think so. Thank you.

John Kraft from D.A. Davidson.

Good morning, gentlemen.

Morning, John.

Just wanted to first look at the sales bookings and the pipeline. And obviously it sounds like the pipeline is very strong. But, specifically the bookings in the quarter were a little bit looking -- a little bit below what we were looking for. And I know you don't guide to that on a quarterly basis, but I guess my question is about the impact of the S1 pending acquisition. Have you noticed any customers putting the decision on hold because of -- or somehow delaying because of the uncertainty surrounding whether or not you're going to actually acquire some of the S1 products and/or potentially might sunset something of your own?

Yes, this is Ralph. So, two answers. One, as we said, our sales year-to-date are pretty strong, number one. And number two, I have not seen any customers delaying any projects or any buy decisions based on the upcoming S1 acquisition.

And John, I would tell you what we tell all our customers is that S1 represents much more of a broadening of our market offering than it does an overlap. And we have been fairly clear that we don't envision -- we're not going to announce the close one day and sunsetting of products the next.

So, that's something that your competitors talk about in the marketplace. That's not something that we've been talking about in the marketplace. And no, we have not really seen any impact. I think our customers are, at the end of the day, much smarter than that.

Okay. And Scott, as far as the financial modeling and seasonality, this year certainly doesn't look like it's going to be quite as hockey stick-like. Any reason to believe that 2012 will kind of move back to more of the hockey stick, or are we going to be flattening the year?

Yes. And we'll provide some color on that when we come out in February with the guidance. What we'll have to do is look at the expectation of when our projects are expected to go live.

So, if you look at 2011 compared to 2010, the hockey stick was driven primarily by the size and magnitude and volume, really, of projects that all went live in the fourth quarter. This year we're seeing a more healthy balance between the third and fourth quarter.

And if you recall from kind of our business model is that we have heavy sales typically late in the year, third and particularly fourth quarter of the year. And when we have a kind of standard implementation cycle that's 18 to 24 months, you're going to see those go-lives happen in the second half of the year, typically about two years out.

So, it's not surprising that we have that volume of project go-lives in Q3. Really, last year more of them were pushed out to Q4. But, the short answer is when we get to February and we come out with our full year guidance, we'll give some color in terms of phasing.

We could also answer it this way is that it is certainly not in our planning to be -- we want to be less and less dependent on any given quarter and more and more predictable. We're not going to get it done in a -- last year we said we were going to try to improve it. We've improved it. We are at least, from a planning standpoint, going to plan to smooth it out more. We can't be specific to February, right?

Right.

Got you. Thanks, guys. That's all I've got. Congrats on your progress so far here.

Great. Thanks, John.

Brett Huff from Stephens.

Good morning and congratulation on a nice result.

Thanks, Brett.

Thanks.

One quick question on -- just going back to the EMEA bookings, because it's something I know a lot of people have asked about and you commented on. You reiterated your guidance and I presume that also means you're reiterating the sales guidance that you had talked about in the mid $500 millions. Is that still right?

That's correct, yes. I apologize. I didn't give much color on that on my commentary. But, yes, we're still looking at the mid $500 million range. So, that obviously implies a very strong fourth quarter and really a record year for us.

Okay. And then, so just to -- you didn't see any slowdown in Europe, because I think that's one of the main concerns that folks are looking at right now.

So, Brett, let's answer it this way. And we're not going to give you any numbers. If we were to have given you guidance for EMEA, right, we would not have changed our guidance for EMEA.

Great. That's exactly what I needed. And then, one follow up, and this is just a guidance math question. Scott, I think you guys put up $11 million -- or $11.3 million of EBIT. We need the -- in order to get sort of an operating number, we need to add the $3.4 million of deal costs back to that? Is that correct, to get a --?

That's correct. So, when we gave the operating income and adjusted EBITDA numbers both in the earnings and the slide deck, that is burdened by the $3.4 million. So, to get to a normalized earnings and EBITDA, you have to add back the $3.4 million.

And then, the guidance, the full year guidance is still the same. So, we should assume the operating number when we do the math to get to the 4Q guidance. We should subtract -- we should use the $11.3 million plus $3.4 million.

Correct. Yes. So, our full-year guidance excludes any of the one-time costs related to S1.

Ok. That's what I needed. Thank you for your time.

Sure.

(Operator instructions.) Gil Luria from Wedbush Securities.

Gil Luria from Wedbush. Thank you. Your guidance is now for mid $500 million bookings. That's not only over last year but far above your revenue. And it sounds like that doesn't include any global deals this year. And we now know that First Data was a $45 million deal last year. Are there any other global deals that you have in the pipeline? First Data is a unique animal, but are there any other ones that could be of a similar magnitude down the road?

Not of that size right now, no.

Not in this year.

Right.

So, yes, there are things of that size in the pipeline, but --.

Pipeline, but not in this year.

Or in the $550 million guidance.

Right.

Now, given the last couple of year of bookings and where you are now, how comfortable are you with your long-term guidance for top-line growth? How do you see long-term guidance for top-line growth going forward over the next few years?

I mean, obviously, and we've said this maybe, our model is -- and if you watch sales, that's really the precursor of future revenue. So, obviously the sales growth has been tracking at a higher percentage than revenue growth. But, revenue growth as a percentage year-over-year will migrate to the high single digits as we merge the sales growth with the revenue growth in the future.

So, I guess the answer is we're very comfortable.

With high single digit long-term growth or double-digit long-term growth?

What we said was -- we said very high digit single growth approaching double-digit is what we've always said. Right.

Got it. Thank you.

Yes, we want to comfortably make our -- we don't want to get out in front of ourselves.

Sounds good.

Wayne Johnson from Raymond James.

Hi. Yes, good morning. Just a couple housekeeping items. On the proposed S1 acquisition, for the sake of conversation, assuming that you receive HSR approval early, how long would it take to close, just out of curiosity?

Well, once we get clearance, we'll be able to close the exchange offer shortly thereafter.

So, like within 30 or 60 days or so?

Absolutely.

This is all hypothetical.

Yes, absolutely. It'll be in pretty short order once we get clearance.

Right, right. Good, good. I appreciate that. And then, just moving forward on the BASE24, EPS now the front shelf, and it's been the front shelf, it seems like, for several years even though you were still selling it. Could you remind me again, and maybe I missed it when you were -- in your earlier comments to some of your responses to some earlier questions, who pays for that migration from Classic to EPS?

The customer.

So, there is a fee for the migration in addition to the license fee and all that.

Correct. Yes, I mean, they would have to pay for --.

Hold on. Let's put it this way. If they had had a vanilla copy and they hadn't done customizations and whatnot, there would be very little involved in moving it over. To the extent that they have customized their environment, which would be true on any mission critical application, we have to work with them in terms of how to do that.

The reality is is that a lot of customizations that were built into Classic are actually available in terms of how you construct EPS. So, a lot of what takes place is that they actually will end up undoing a lot of customization and going to a more vanilla version of EPS which has -- that also has a return on investment for most of our customers, because they are maintaining all those --.

That's right.

Pieces, right?

Yes. So, maybe I could add, in the projects that we've done where we've moved people from BASE24 over to EPS, we've seen between 60% and 80% reduction in customizations, which has been a cost benefit for the institution. We've also -- in some of the tools we put with EPS, there is a lot more languages or a lot more options that don't -- or a lot more flexibility that doesn't include programming, which has been an advantage for the institution. So, it really is an individual situation we work out with every one of the customers.

That's very helpful. And how should I think about number of conversions going forward since we're going to be in that phase going forward? Should I think is 10 customers a year roughly, 15 customers? Is that unreasonable, going from Classic to EPS?

I don't think that's unreasonable at all. And actually, the only modification I'd make to it is that it will rarely go in one fell swoop. It'll probably be one or two or three phases for them to make the move.

Lots of them will end up having multiple authorization infrastructures which they'll collapse into the one EPS going forward. And what we've seen -- we've sold -- how many EPS's have we --?

About 80 have been sold.

Right. So, we're up to 80. Of those 80, I'd think 74, 73 are net new, right, are net new. So, what's happening with some of our customers is that they're actually buying the EPS system as a net new system to replace something other than BASE24 Classic, and then the movement -- the conversion of BASE24 Classic hasn't even happened. We've actually replaced third party, and then they'll move over.

So, it's kind of moving from a midsize or near -- a large environment to a very large environment onto the EPS structure. So, 10 to 15, but potentially in as many as two to three phases for it to actually happen.

And two to three phases spread over a year, spread over 18 months?

Probably 18 to 24 months.

Yes. Yes.

That's great. And just one quick follow up. So, have you guys domestically or internationally seen any slowdown in demand, any pause because of macro forces?

We honestly haven't. I mean, a lot of the projects that we're supporting around the world are -- they're positive ROI and they're coming from the one area. I think Visa reported last night a 14% increase in volume, which is a great bellwether for debit/credit volume growth around the world.

So, it's really clear that these guys would benefit from productivity investments in these categories and, quite honestly, help their more debt-oriented kinds of challenges they have. We're actually more part of the solution around the world than we are around the -- than we are part of the problem.

Terrific. Thank you.

Leonard DeProspo from Janney.

Hi. Good morning. Just for modeling purposes, where does that $3.4 million in costs from S1 reside? And are you expecting any kind of follow through similar costs to occur in the fourth quarter?

Yes, Len, this is Scott. The $3.4 million is entirely in our G&A line item. So, that's really the -- excluding that, year-over-year our G&A would actually have been down.

And ultimately, those types of costs will go into G&A in the future. But, right now, we're not forecasting what that will be in the fourth quarter.

Okay. And my second question is a longer-term question. I mean, in the past I believe you all have mentioned a goal of 20%-plus operating margins. And taking on S1, you'll take an initial hit until you get their margins up to yours. Is that still the goal, the longer-term goal?

Yes, absolutely.

Absolutely.

Okay. Thanks.

(Operator instructions.) Brett Huff from Stephens.

Good morning. Thanks again for taking my follow up. This is just a question on the backlog. It was down a little bit sequentially and it sounds like that was all ForEx driven. Scott, can you just run us through the logic on that?

No, it is. It is FX. Obviously we had net new sales this quarter that would have added to it. But, the FX headwind that we saw really in September drove down -- because we revalue that backlog at September 30th date. And I think we were at a 1.33 euro or something like that, which has now clawed back to like a 1.40 today. So, it really was the -- it really was an FX driver.

Ex the ForEx -- do you have a sense or can you give us a sense, ex the ForEx, what the backlog would have done? Is that a knowable number?

Well, I mean, if you look at our -- well, a couple things. Really the walk when you think about over a quarter period, we brought out a significant amount of backlog into current period revenue. 95% of the current revenue came from backlog. So, the first thing you have to do is really replace that with selling new. And so, you've got to kind of overcome that that you've pulled out and replace it with net new.

So, the bottom line is we would have gone up ex FX because we sold net new. FX really was the primary driver of the optic variance in the quarter.

Great. That's very helpful. I appreciate the detail. I'm sorry.

It's actually a double-edged sword. And we brought forward some projects into revenue out of backlog at a lower FX rate than they had been sitting in backlog, right, previously, right? So, that -- we would have actually had even a better quarter if those guys had come out of backlog at the -- before we took the FX haircut on their way out.

It's just part of being an international business. We can control a lot of things. We can control FX at the bottom line pretty well, but we can't control it at the -- at backlog or the revenue. We make up for it on the expense side pretty much 100%. But, it does fluctuate the model.

That's really helpful. Thank you. I appreciate it.

And this concludes today's conference call. You may now disconnect.

Thank you.