ACI Worldwide Inc (ACIW) 2011 Q4 法說會逐字稿

Good morning. My name is Tanya, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Q4 earnings 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) Thank you.

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

Thank you, Tanya. Good morning, everyone, and thanks for joining our year-end call. Today's call, like all of our earnings events, is subject to both Safe Harbor and forward-looking cautionary statements. You can find the full text of both Safe Harbor and forward-looking statements on the first and final pages of our presentation deck today, a copy of which is available on our website, as well as filed with the SEC this morning. Our management speakers today will be Phil Heasley, our CEO, and Scott Behrens, our CFO. Both speakers will be available for Q&A following our remarks, and will be joined by members of the executive management team.

Before I turn the call over to Phil, I did have a few housekeeping items. ACI will be participating in several upcoming conferences in the coming weeks, specifically -- Raymond James Institutional Investors Conference on March 6; the Wedbush Securities TMT Conference on March 8; and the Credit Suisse Global Services Conference on March 13. If you are interested in one-on-one meetings, please contact the conference organizers or me directly.

Phil, please go ahead.

Good morning. Happy Valentine's Day, and thanks for joining us today. We have lots of good news to discuss related to our organic business, as well as to the completion of our acquisition of S1. With respect to ACI's organic business, we had an excellent year. As shown on slide 4, we exceeded all our guideline metrics. For 2011, we had another record year for sales bookings with $556 million. The strong performance in sales is a testament to the mission-critical nature of our solutions for our customers. We also feel good about our sales prospects across all geographies in 2012. Backlog was clearly up, as we booked more add-on business around the world, and also demonstrated real strength in online banking in particular, as compared to 2010.

I always like to return to my core operating principles of control, profitability, and growth. Over the past five years, we have put in the controls and the processes to operate the business, and have significantly increased the profitability of ACI. We are now firmly positioned in the growth space. In 2011, we delivered $465 million in revenue, an 11% increase over 2010. We also demonstrated strong free cash flow generation from our underlying business units. We remain committed to a 20%-plus operating income margin, as well as a 30%-plus adjusted EBITDA margin targets. In 2011, we incrementally improved our margins, achieving an operating income margin of 16%, and an adjusted EBITDA margin of 24%.

Since I began reorganizing ACI towards a backlog-driven business, it has made our annual revenue attainment more consistent and more predictable. This gives us a lot more comfort that we have transparency into the forward pipeline from a contracted and booked basis, as well as enhanced understanding of our sales-to-revenue processes. I am very pleased with our organic financial performance in 2011, and I would like to thank the team for their hard work and effort in making these good results happen.

On slide 5 -- if we turn to slide 5, yesterday we announced that we completed the acquisition of S1. The acquisition of S1 uniquely positions ACI as an industry leader in financial and payment software solutions, with the ability to deliver the broadest suite of payment offerings worldwide. S1's products and capabilities are an excellent fit with our existing offerings, and will help us create an even larger, more diversified Company, supported by a broader base of revenues. The combined Company will have approximately $700 million in revenue and $165 million in adjusted EBITDA. Importantly, we can reiterate that we will achieve at least $30 million in annual cost synergies by combining our operations and infrastructure.

S1 brings to ACI a highly complementary set of products, strong global capabilities, and success with a range of financial institutions, processors, and retailers globally. Together, the combined Company will provide a rich set of capabilities across the wholesale banking, retail banking, processors, and merchants in developed and developing countries.

In closing, I would like to thank Johann and his team. This is an exciting transaction, where both companies are coming together from a position of strength. The enhanced size, scope, and reach of ACI will offer even greater opportunities to our customers, employees, and our shareholders.

We also announced that S1 executive Jan Kruger has joined the ACI team, and will report directly to me. At ACI, Jan will head our growing application On Demand business unit. I expect that he will bring great management expertise and discipline to our combined application On Demand and hosted business operations.

Finally, I would also like to welcome the S1 Associates to our one ACI family. We look forward to working with you. I will now turn the call over to Scott to continue on both his review of our organic business results, as well as further discussions on the acquisition of S1.

Scott?

Thanks, Phil, and good morning, everyone. I do have quite a bit of information to go through here this morning. But first, I plan to go through the highlights of our fourth-quarter and full-year 2011 financial results, then provide an update on the S1 transaction, as well as our outlook for 2012. So, I will be starting my comments on slide 7, with key take-aways from the quarter.

Overall, we had a strong quarterly performance, coming in better than the expectations we communicated in our October earnings call. We saw solid add-on sales performance in all geographic regions. We saw a strong revenue quarter, coming in at $135 million, down slightly compared to last year's fourth quarter. And that was primarily the result of the timing of go-live events, and some of the nonrecurring revenue that comes in that occurred earlier this year compared to all landing in the fourth quarter last year.

Expenses were impacted this quarter by professional fees related to the S1 acquisition of $3.2 million. So, excluding these deal-related expenses, our expenses would have come in at just under $95 million for the quarter, which is a decrease of nearly $4 million, or 4% compared to the prior-year quarter. The quarter also delivered strong operating income in EBITDA; and is as typical of a fourth quarter of ours, we also saw strong free cash flow.

Turning now to slide 8, with key take-aways from the full year, starting first with sales -- as Phil already mentioned, we had a record sales year with more than $550 million in sales bookings, representing a $31 million increase over last year. Next, 60-month backlog, which, as we have said many times in the past, is really the key barometer of how we measure the economic health and value of the business. 60-month backlog grew in excess of $60 million, driven obviously by the year's strong sales. We saw strong revenue growth, up nearly $47 million, or 11%, over last year's, with recurring revenue growing $26 million, or 9%, and comprising 67% of our annual revenue. And really, overall, we saw broad growth across all revenue categories and all geographic regions.

Expenses for the full year were also impacted by the professional fees related to the S1 acquisition of $6.7 million. The other growth in expenses over the prior year were primarily in two areas -- one being higher selling and marketing expenses, which is really reflective of the higher sales activity; and higher R&D expenses, which reflects our continued investment in accelerating product development, and that really to meet higher customer sales demand.

Continuing on slide 9, with further take-aways from the year -- we saw strong free cash flow, up more than $4 million over last year. We saw strong growth in operating income and adjusted EBITDA, growing 36% and 28%, respectively; and both of those figures excluding the S1-related pro fees I previously mentioned. And lastly, on the slide, we saw a much lower effective tax rate during 2011, benefiting from the release of certain tax reserves during the year. And on slide 10 -- here we summarize our full-year results, with all key metrics exceeding guidance for the full year.

Turning now to slide 11 -- this shows our expectations for 2012 in our organic business, that being before the incremental impact of S1. As you can see, we expect organic revenue growth in the mid- to high-single digits, in a range of $490 million to $500 million. We are starting 2012 with $424 million of our revenue in our 12-month backlog, so we have about 85% of what we are expecting for 2012 organic revenue already in our beginning contracted book of business.

Turning to our other guidance metrics -- we expect organic operating income to be in a range of $84 million to $89 million, which represents a growth rate 3 times that of our revenue growth. And we expect organic adjusted EBITDA to be in a range of $124 million to $129 million, representing a growth rate of 2 times our revenue growth. And again, this really continues a multi-year trend of layering on the incremental revenue of go-live events, as well as the incremental benefit of renewing our existing customer contracts with better economics, as well as our cross-selling opportunities -- all while continuing to maintain our strong expense disciplines. And just as a note here, all these guidance metrics are based on the foreign currency exchange rates as of December 31.

Next, I will turn to slide 13, with an update on the S1 acquisition. As you are all aware, here over the last few days we closed the S1 acquisition; but really, from an integration planning perspective, that has been underway now for a number of months. We have already identified the specific actions necessary to achieve the $30 million in synergy cost reductions, and expect these actions to be completed by the end of the first quarter. Additionally, you will see we note here that we do expect to achieve further cost synergies beyond the $30 million that we have identified already; those additional savings coming from both data center and facilities consolidation. We are still in the process of assessing those additional cost synergies, but expect to be able to provide the timing and the financial impact of those actions in future quarters.

From an operational integration perspective, the Large Financial Institution segment and the Payments segment of S1 will be integrated into our operations, effective immediately. The Community Banking segment, which is obviously a new market for us, will continue to be managed as a separate business unit for the near term, as we continue to assess its fit within the overall ACI business strategy. And the final point on this slide is to emphasize, again, as we have said in the past, that the combined business will have a strong financial profile, with more than $180 million of cash post-closing, and we'll have a conservative capital structure at a little more than 2 times levered.

Turning to slide 14 -- here we show the pro forma combined business for the full-year 2011. For ACI, we are using our actual results; for S1, we are using the midpoint of their full-year guidance range. In both sets of these numbers, we are excluding the one-time costs associated with the transaction that were incurred in 2011, which I have noted here at the bottom. So, on a pro forma basis, the combined Business has a little more than $700 million in revenue, and a blended adjusted EBITDA of 20%. You can also see here that we have developed their -- or computed their 12 -- or 60-month backlog, I'm sorry, consistent with the way we calculate our 60-month backlog. And we estimate here that it's $685 million, which, when combined with our $1.6 billion 60-month backlog as of December 31, creates a backlog in excess of $2.3 billion. So, obviously, a solid combined five-year book of business.

Turning next to slide 15 -- here we provide our combined outlook for 2012. We started the model with the midpoint of the guidance that I previously provided for the ACI business on a standalone basis. So, on a combined basis, we expect revenue to be in a range of $696 million to $706 million.

And there are several key items to point out that we considered, and you should be considering as you build your financial models for 2012. One is that S1 will begin to contribute to our operations here with the mid-February closing of the transaction, so we have modeled in 10.5 months of revenue contribution from S1. The second factor, for those of you who are not as familiar with the S1 business, is that in December of 2011, S1 concluded a multi-year wind-down of a large customer contract -- that being the State Farm business. State Farm had contributed $17 million of revenue to the 2011 results; so 2012 really starts off with the loss of that State Farm business.

And third, the third item impacting the financial model is -- for the incremental revenue, is that the impact of acquisition accounting. As most of you know, the acquisition accounting for software companies results in a deferred revenue haircut that essentially reduces a portion of the revenue that carries over from the target. We have estimated the impact on 2012 revenue from that haircut to be about $12 million. And we provided a bit more detailed walk on how we built the guidance in our appendix, so make sure to take a look at that.

Moving to the other guidance metrics -- we expect adjusted EBITDA to be in a range of $165 million to $170 million, and operating income to be in a range of $99 million to $104 million. And as I previously mentioned, we expect to be able to achieve the $30 million in annualized cost take-outs by the end of our first quarter -- so, by the end of March. So, we expect in 2012 to get a full three quarters benefit of that annualized cost take-out; so, about $23 million of cost savings for the year. And both of these guidance ranges exclude the impact of any one-time, transaction-related expenses -- that being the investment banking fees, legal fees, other professional fees, as well as change in control and severance. And we expect those expenses to be around $16 million. And one other item to point out here is that if you exclude the deferred haircut -- deferred revenue haircut of $12 million, the 2012 adjusted EBITDA margins, on a combined basis, are actually in line with our healthier organic EBITDA margins.

Turning lastly to slide 16 -- here we illustrate the expected combined cash and debt statistics at closing, with combined cash of more than $180 million, and total debt of $370 million. And based on the pro forma combined 2011 EBITDA, that leaves us conservatively levered at a little more than 2 times on a gross basis, and a little more than 1 times on a net-of-cash basis.

And the final note here -- just to point out, our Board has increased our share buyback authorization up to $75 million, which really provides us with enhanced flexibility to deploy the strong cash flow we are expecting from the combined Business, post-close. So, that concludes my prepared remarks.

Operator, we are ready to open the line to questions at this time.

Certainly. (Operator Instructions) Gil Luria, Wedbush Securities.

Thank you for the very helpful breakdown of the synergies and the guidance. First, on the core business -- it continues to be doing very well. It doesn't appear that there is any region that has been weak or affected. Could you go through the overall environment, and -- in terms of the region by region, there has been a lot of fears that there would be weakness in Europe. I don't know if we have necessarily seen that. Have you seen some of the big things pull back? Is it in specific countries, specific regions? That would be very helpful.

Well, Gil, I think the easiest way to answer it is -- it's not region by region, but to tell you that we have not seen pull back in any of the regions around the world, that pipelines are still strong, decision making is still strong. We may have created a little bit of -- this going through the DOJ thing for 120 days, I don't think made it optimal for some of our customers to pull the trigger. But that clearly was a hiatus that we created, not the marketplace creating

Great. And then, my second question is about the synergies -- the $30 million. Where are those going to be sourced from? What are the places where you see that happening, and -- in the next 1.5 months?

Yes. Well, and as we have indicated in the past, really, those are going to be in overlapping public company costs, overlapping SG&A -- those are going to be the primary, is here in the next 1.5 months. We have also indicated that we expect to be able to announce at a later time in an incremental cost synergies, those primarily related to the facilities and data center consolidation. Obviously, those take a bit more time, and we will be prepared to announce later in the year what the financial impact and timing of those will be.

Yes, Gil -- real quickly, is that we happen to be at our annual kickoff. We have our entire Company of distribution, and we have actually -- have several dozen of our newest additions here, in terms of the -- from the S1 family. We know exactly what we need to do, and we are going to communicate that to our people next week, as a matter of fact. We are going to get through our kickoff this week. And we understand it right down to the 0.5%, in terms of what we said we were going to do. We are just not going to be doing a lot of delineation of that until we talk in detail to our own people about it.

Okay. Thank you.

George Sutton, Craig-Hallum,

My first question, Phil, is for you. During this process, I think you felt the market was a bit too focused specifically on -- and obviously, the DOJ was very focused on the US payments business at S1. But there was quite a bit of the other parts of the business that you were very excited about. And I wondered if you could just give us a quick sense of where your enthusiasm specifically was coming from, as you put these two businesses together?

Well, yes. We have tremendous respect for what S1 has done globally. It gives us the continent of Africa in payments, in a way that we could never recreate ourselves. And that is a very valuable, very profitable asset and whatnot. As it relates to it being overlapping or horribly redundant with our US financial markets -- that, quite honestly, is a misnomer, and I'm not going to perpetuate that as a misnomer. They really -- we and they weren't even in the same markets, as it related to that.

It certainly augments our ability and enhances our capabilities as it relates to the retailer side -- not the financial institutions, but the retailer side of it. And we view that as very positive. That being said, the two major asset opportunities that are acquired by the combination of the two companies is our online capabilities, and which -- the combination of ACI's approach from a nonfunctional standpoint, in terms of scalability, reliability, and whatnot. And a lot of good internationalization at S1 was well ahead of us, in terms of that. And then, combined from a future function standpoint, we really are going to have the premier offerings in the online categories.

And it adds branch and it makes trade, it adds significant -- our trade offerings were anemic compared to what they have. And so, combined, we are very, very strong. And then, probably the most exciting piece -- it's not less exciting as the whole business thing -- but what it does for us from a mobile standpoint and our ability to execute mobile across our entire array of payment opportunities, I think, is probably the largest intangible asset that -- we didn't buy a lot of revenue from it, but we bought a huge amount of capability and expertise, as it relates to that. So, that is how I would answer that question, George.

That is great. And as you look at -- you mentioned the retailer piece of this. MasterCard and Visa are now talking about finally bringing some form of chip and PIN technology to the US. What would that do for your combined business, particularly on the retail side?

Well, I think they are bringing chip and PIN to the large financial institutions -- I think we would have been able to satisfy that; to be honest, we would have been able to satisfy that capability in a very straightforward fashion. We have done it for Europe and the rest of the world, so that would have been an extension of our business. So, that is a organic -- I think that is a great organic opportunity. That is probably not a S1-oriented opportunity, as it relates to the US market.

Thank you, guys.

John Kraft, D.A. Davidson.

Congratulations on getting this done.

Thanks, John.

The first question I wanted to ask was -- you have suggested and suggested again that you are evaluating the Community Bank segment of S1. And I was curious what the puts and takes are. Is there a suite of products that you would be able to cross-sell into that customer base? And from a financial perspective, the revenues are recurring -- that seems like that would be fairly attractive.

Well, John, first of all, what was in their Community Banking piece -- there is one we should make really clear. They had a branch capability, and we have already made the decision that we are 100% committed to the branch capability. And we actually moved it to the online; so when we talk about online, the branch piece will now move over in terms of that. They have two other segments that are not yet integrated -- one more on the credit union side that represents an acquisition they made a couple of years ago; and the other one being what they call [CFIN] -- or we call CFIN, I shouldn't talk -- I apologize.

And the CFIN is very interesting, because it has been -- I think Johann and his team has doing a great job of rebuilding it on the Postilion technology, and it fully integrates a payment capability with the online capability. Because of the DOJ activities and whatnot, we haven't really had the opportunity to do a deep dive into Postilion, because it basically was technologically -- it would have been inappropriate to look at it before the -- what, February 6. So, we are not going to pretend to be geniuses at this point, but we really have to evaluate what that means; and we also believe that that has international capabilities, and marrying that with our distribution network might be something in Asia and Latin America and other places, South America, that could be a very powerful offering. We just -- we would be getting ahead of ourselves and being overly boastful to project anything other than -- we are still in analysis of that, at this point.

Okay, that is fair. And then, another one, if I may -- does the acquisition at all change your plan to gradually upgrade your customer base to the EPS platform, as -- theoretically, EPS could be updated with some of the functionalities from S1?

Well, those are -- I'm going to take those two questions. The questions are -- do we intend to continually update EPS? The answer is absolutely, positively yes. It is -- we are as committed to EPS as we ever were, and you know we spend a lot of money against that. Now, having said that, there are certain things, especially outside the United States, where they have built certain connectivity and whatnot, that will be reusable -- at least 50% of the asset is reusable, certainly the market piece in is a very -- have crossed value to it and whatnot

So, we are committed to the Postilion technology; but at this point, we are probably more committed to it as it relates to much less complex markets than the United States and some of the Western economies. And in particular, we are very committed to it from a merchant retailer standpoint. And as I just said in the previous question, we are looking at it very seriously in terms of its capabilities from a CFIN standpoint. And I think it has some -- it has begun to at least think through tightly linking mobile capabilities within itself, and they have done some really exciting things in Africa with that. So, yes, there is an awful lot of technological value that comes from Postilion. Whether it's translatable directly to EPS, probably less so than it is translatable to other business opportunities around the world.

Great. Thanks, Phil, and congratulations again.

Thanks.

Wayne Johnson, Raymond James.

Two questions, first on S1 -- could you comment at all on how complete the Small Bank Technology conversion -- this is their IVR business, to the new platform -- how complete was that? Or is it now that you own S1? This has been a project that was ongoing at S1, I believe, for almost two years; and just wondering if they finally were able to button that up.

Well, not button it up -- you mean complete the conversion?

Yes.

Right. There is still some conversions left to do, but they have made good progress. Again, we have not technically been able to -- but I can tell you this with confidence, it's much more complete than it is incomplete. The majority, whether it's the vast majority or the majority, I can't -- but it is more complete than not complete. They put a lot of energy into that.

Okay. And separately, back to BASE24 -- now that BASE24 Classic has been sunset, which I believe was in November, what is the annual goal for converting those clients to EPS? Should we look for 15 to 20 a year? How should we think about that?

We have this like for like program, so that we will renew Classic; and then, any time during the period that that Classic renewal takes place, if they decide that they want to convert, if they want to begin with the networks, if they want to do it in phases and what not, we will do that. So, I don't think it's prudent for us to give numbers out. We have quite a few migrations beginning around the world. The only way we are going to declare them done is when we have actually converted over and they kind of go out of category -- category Classic to the other category.

Sunset, again -- we keep reemphasizing this -- to us, sunset is not end of life. We support the three generations prior to BASE24 Classic. Believe it or not, some still running around the rest of the world, as well as every acquired platform we have ever purchased. So, the migration will be very much a function of us syncing up our plans with our customers. It's more a function of customer road map than it is ACI's road map.

Thank you.

(Operator Instructions) Thomas McCrohan, Janney.

Congrats on a good quarter and the closing of S1. That is great.

Thanks, Tom.

Question on bookings -- is there any thoughts on bookings trajectory for 2012? Last year you provided some type of bookings guidance for '11, I think, in the high [400] range? It appears that today's guidance is somewhat silent on bookings.

Right, there are certain metrics that we are not prepared, at this point, to go out with. Obviously, we just recently got a hold of some of the sales pipeline, granular sales pipeline detail from S1. They, obviously, historically have not competed sales value consistent with what we have; so it will take some time to go through the mechanics of that math. But we will provide further information on that in future quarters -- as other metrics that we haven't provided at this point. But certainly, wanted to get out the key revenue and income metrics that we provided.

That is fair. And Scott, on recurring revenues, that has been a metric that has been trending nicely for ACI. Can you give us a feel for, on a combined basis, what the recurring revenue profile will look like?

Well, we are coming -- so, this year, we had a -- 2011, we were at around 60%, high 60% range. They have inherently less recurring revenue. Theirs will have -- theirs will be maintenance and their hosting; but a lot of their historical business has had to rely less on recurring revenue. So, I don't have a blended percentage rate yet on what the combined is for 2012, but I would say it looks like probably for 2012 -- obviously, it would be a weighted average, less than our 67% for now. But over time, we would expect that percentage to come back up, more in line with our organic.

If I could squeeze in one last question -- does the acquisition change at all the relationship at IBM? Thank you.

Oh, I will answer that. Well, it could potentially change the relationship with IBM, in that we now have a much broader expanse of items to discuss with them. I think you know that we are in the last year of this phase, and we and they have to decide whether we are going to renew or not renew the deal. And we have a great relationship with IBM, and as we and they said, we are going to have a lot of good dialogue about this. But at the end of the day, each company has to do what is best for their shareholders and their prospects.

Brett Huff, Stephens.

Congrats on a nice quarter, and great to hear the S1 deal got done. My next question is about pipelines -- so, you mentioned that the pipeline activity at S1 -- obviously, it was impacted at some level, while the -- because the DOJ took a long time to go through its process. Could you comment on what kind of conservatism you guys have built into the guidance as a result of that, if any? And then, related, can you give us a quick update on the 10 or 12 global deals that you all have been pursuing? And what we can expect, and whether or not that is in the guidance or not?

All right. I will answer it, and then I will actually let Ralph talk to the pipeline piece, also. I apologize if I misquoted before -- I wasn't really complaining about the pipeline; the pipeline is probably better than it has ever been. What I was saying was -- pipeline to closing, people being at that 99%, may have been what has been impacted in the last 120 days, because everyone is saying -- okay, what direction? Tell us your plan. And so, that has been more the situation than the pipeline decreasing. The pipelines are actually very good. So, that being said, I can't say that we built any conservatism into a more robust pipeline. Ralph?

I agree -- our pipeline has really never been stronger. And we just recently sat down with S1 management to compare pipelines, to make sure that we are putting our resources on the right opportunities. And I think Phil is exactly right, is we just had probably a little delay because of the DOJ -- in the US, primarily. So, I don't see any concerns, going forward.

And any comment on the global deals you all have identified and already had some success with? Any update on those, and anything you can tell us?

Well, we have the same to larger size inventory than we did last time we talked. And per our normal policy, we don't project when very large complicated deals get done. It takes -- every time they need another board meeting, it could be as much as a quarter of a year apart. So, we are not going to be overpopulating our forecasts with elephant hunting.

Great, that is what I needed. Congrats again on the deal, and appreciate the color.

Thanks, Brett.

There are no further questions. At this time, I will turn the call back over to the presenters.

Thank you very much. And just again, we will be in three conferences in the upcoming weeks. Look forward to seeing many of you there, and don't hesitate to call. Thanks a lot.

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