ACI Worldwide Inc (ACIW) 2012 Q1 法說會逐字稿

Good morning. My name is Ryan, and I will be your conference operator today. At this time I would like to welcome everyone to the ACI financial results for first quarter ending March 31st, 2012. (Operator Instructions)

I would now like to turn the call over to Tamar Gerber, Vice President, Investor Relations.

Thanks, Ryan. Good morning, everybody, and thanks for joining our first quarter call. Today's call, like all of our earnings events, is subject to both the Safe Harbor and forward-looking statements. 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 are Phil Heasley, our CEO, Ralph Dangelmaier, our President, Global Markets, and Scott Behrens, our CFO. All speakers will be available for Q&A following our prepared remarks, and are also being joined by members of the Executive Management Team.

Before I turn the call over to Phil, I did want to remind you that ACI will be participating in several upcoming conferences in the coming weeks, specifically, the [Data Fin Financial Services Conference] on May 10th, the Craig-Hallum Intuitional Investor Conference on May 30th, and the Stephens Spring Conference on June 5th. If you are interested in a one-on-one meeting, please contact the conference organizers or me directly.

Thanks, and I'll now pass the phone over to Phil.

Good morning, and thanks for joining our call. This morning I'll spend some time on summary opening remarks before turning the call over to Ralph and Scott to discuss the quarter in more detail

We had an important first quarter this year, with strong organic financial performance and the completion of the S1 acquisition. I would like to report the integration of S1 into ACI is on track.

Our yearend call we indicated that we would achieve $30 million in annual cost savings by quarter end. We actually outperformed on this objective. The team removed $33 million in combined annual expenses by quarter end, of which $24 million will be realized in 2012. The cost takeout is $3 million better than we modeled and nearly $2 million higher, a positive impact on calendar year 2012.

In addition, and perhaps most important, we implemented our five-year backlog by $700 million. We regard this as our most critical operating metric and as a leading indicator of future business growth.

Acquisition aside, we had strong organic revenue growth in excess of 10%, particularly in our maintenance and ondemand segments. The organic business also delivered attractive operating income and adjusted EBITDA figures.

For purposes of making the operating business performance totally transparent, we have presented both GAAP and non-GAAP numbers this quarter to differentiate the onetime acquisition related items in our financial discussions.

As a key component of our integration plan, we also announced our combined ACI S1 product strategy update to our customers and our people on April 25th. Furthermore, we are listening to our new customers from S1 by conducting significant one-on-one visits, as well as a quantitative feedback through survey.

A few key items for our combined product strategy update include consistent with our longstanding product lifecycle management policies, we plan to continue supporting existing and acquired products.

Our broader portfolio now delivers enhanced functionality, scale, and support for financial institutions, processors, and retailers around the world. We have doubled our expert support staff, both R&D and services, HELP24 now serves customers out of 20 locations in Americas, EMEA, and Asia-Pacific.

We are expanding and investing in our data centers to deliver increased levels of reliability and performance to our hosted customers. We are expanding our reference architecture to include the newly expanded product portfolio from S1, as a key component of ACI's agile payment strategy, the reference architecture defines the common technologies, platforms, and best practices that deliver increased agility without compromising the reliability, performance, scalability, which are synonymous with the ACI brand.

In summary, we are extremely pleased with this quarter's performance, and I would like to thank our new and now combined team for working diligently on this integration. I will now turn the call over to Ralph to provide a business overview. Ralph, please go ahead?

Thanks, Phil. I'm happy to provide an overview of our markets, our key wins, and customer feedback that I recently got on my visits across the channels -- the Americas, EMEA, and Asia-Pacific.

In the Americas I think most people know the earnings are recovering. The regulatory environment is putting tremendous cost pressure and driving more investments within our customers.

Latin America economies are recovering, and we're seeing regulatory pressures, as well as payment system consolidations across the regions. So we're really happy, we have 10 BASE24-eps projects at various stages across Latin America.

Retailers are also looking for efficiencies across their payment systems, and mobile is assisting customers by leveraging their current systems. And some of those are provided by ACI. So we had a number of key wins in the Americas. One I'd like to point out is a multinational global bank who bought one of our solutions, Wholesale Banking and our PRM, and was a joint effort between our Asia team and our Americas team.

And speaking about Asia, the [Asian] institutions are continuing to invest to stay ahead of the rapid payments growth in that market. Japanese banks and retailers are also looking for growth outside the respective areas and making the appropriate IT investments.

Australian banks are strengthening risk systems and evaluating the impacts of mobile. A number of key deals happened in the Asia market. And one I'd like to point out is a large processor in Singapore, who made a large recommitment to ACI this quarter.

Over in EMEA, customers are really focusing on strategic suppliers who have proven solutions and track records. Bank and card processors are continuing to emerge. We recently saw that in Italy and Spain, and this will create more opportunity for ACI. In South Africa retailers and banks are focusing on expansion of electronic payments, which will drive opportunities for ACI. So in EMEA we had two large BASE24 opportunities that closed, as well as two more migrations in the Middle East.

So as I travel through the different geographies, I wanted to provide some feedback that we got from the S1 acquisition. So from the customers' point of view, in the Americas we're viewed as a more strategic partner with an expanded presence and deeper position within our broader customer base. I was recently in London and Germany where S1's [inaudible] and international wholesale offerings gives to us a greenfield approach to new markets for us in retailers and wholesale. They also see us as a substantial presence now in Africa, with over 100 customers.

I spent the last two weeks in Asia, Australia, Singapore, and Thailand. I heard a consistent theme from our large customers. They're going through major transformation projects, and we are viewed as a strategic partner and we have great relationships with many of these customers.

So, in summary, with our new product assets, our expanding offering, we're even more important to customers. We're a much bigger part of the customers' long-term strategy and their wallet, and we are leading and participating in many of the payment transformation products with our customers across the world.

Thank you, and I'd like to turn it over to Scott to give you more information.

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

Overall, we had a strong quarterly performance. We saw solid sales performance and, in particular, with growth in add-on sales compared to the prior year quarter. 60-month backlog grew $700 million, and 12-month backlog grew $160 million.

We saw a strong revenue quarter, starting really with solid growth in our organic business, growing more than 10% or in excess of $10 million over the prior year quarter. The S1 acquisition contributed $22 million of revenue to the quarter and, again, that was just for the period of February 13th through March 31st, so not a full quarter of contribution yet.

A key item to point out here, and we'll continue to do this in the future to help normalize your revenue in your financial models, is that our revenue was impacted this quarter by $4.3 million of deferred revenue haircut. And, again, that is revenue that would have been recognized in the normal course of business by S1, but was not recognized due to GAAP purchase accounting requirements. So really $4.3 million of pure margin revenue that we weren't able to recognize.

And the final point on this slide is that our monthly recurring revenue represented 66% of the quarter's revenue.

Continuing on slide 10 with key takeaways from the quarter, the operating expense growth compared to the prior year quarter was almost entirely related to the S1 acquisition, as operating expense for our organic business was essentially flat with the prior year. The S1 acquisition contributed about $26 million of operating expenses to the quarter. We also incurred $15 million of acquisition related onetime expenses. Those costs, including severance, change in control, investment bank fees, and other professional fees related to the deal.

So excluding the impact of this $15 million in acquisition related one times we saw strong growth in operating income and adjusted EBITDA over the prior year quarter, up 79% and 67%, respectively. So overall a solid quarterly performance.

And, finally, on this slide we ended the quarter with $200 million in cash. We used a part of our cash to repurchase stock, about 186,000 shares for around $7 million year-to-date, and used $3 million of cash for our scheduled pay down on our term loan. And we finished the quarter with $367 million in total debt.

Turning now to slide 11, this is our normal depiction of a ratio of revenue derived from backlog versus that portion of revenue that is derived from current period sales. As you can see, the mix is consistent compared to last year and just overall we're very pleased with the recurring revenue coming out of backlog, which is providing us a stable, predictable, and solid base of our revenue stream.

And turning, lastly, to slide 12, as Phil already mentioned, we have achieved $33 million in synergy cost reductions, which is 10% more than our original plan that we laid out in our February earnings call. We still expect to achieve further cost synergies beyond this $33 million. Those additional savings coming from both data center and facilities consolidation. At this time, though, we're still assessing those plans and expect to be able to provide the timing and financial impact of those actions at our next earnings call.

We also have a couple updates here for your financial models. The affects of purchase accounting on our 2012 financial outlook. We had originally expected the deferred revenue haircut to be about $12 million in 2012, with the remaining $8 million of haircut rolling into 2013. We are now expecting the full amount of the haircut to roll into 2012, so the full $20 million to be felt in 2012. Really, though, the margin affect of this higher deferred revenue haircut in 2012 will be offset by lower expected expenses from other valuation adjustments, including intangible amortization, as well as the benefits of the higher cost synergies that we've achieved.

That being said, based on our performance year-to-date and our outlook for the rest of the year, we are comfortable reaffirming the full year guidance that we laid out in our February earnings call, with revenue expected to be in a range of $696 million to $706 million, operating income to be in a range of $99 million to $104 million, and adjusted EBITDA in a range of $165 million to $170 million. And, again, both of the earnings metrics exclude the impact of onetime transaction related expenses.

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

(Operator Instructions)

Your first question from the line of John Kraft from D.A. Davidson. Your line is open.

Good morning, guys, and, Phil, congratulations to you and your team.

Thanks, John.

Scott, I guess just a couple kind of housekeeping for you, the onetime costs, deal related costs, severance, et cetera, in Q1 is that done or will we see some more of that in Q2 and 3?

Yes, well, we originally said $16 million, we've incurred $15 million. There will be some carryover, primarily severance, but we're still comfortable with the $16 million total.

And then one I guess for Phil here, you know, you specifically said that you planned to support all the acquired products, does that mean that you've dismissed the idea of selling some Divisions?

No, but we're still evaluating. One of the problems in not being able to close for the middle of February was we really didn't have access to a piece of the business to the middle of February, and so we still are -- we're still doing the adequate due diligence on that piece of the business. And we're working hard to figure out how it would or would not fit strategically as part -- what we were referencing there was that we have a long, you know, our competitors try to market against us by saying that we're going to nefarious kinds of things, and we just want to make sure that we signal and signal and signal that we're sticking to our timeline or policy of supporting key payment systems until they no longer make any sense in the marketplace, right? So really we were referring to a different situation.

Understood. Thanks, guys.

Your next question comes from the line of George Sutton from Craig-Hallum. Your line is open.

Thank you very much. Ralph, given your recent visits to customers I was curious if you could give us a little bit more detail on your takeaways? And, in particular, you mentioned a consistent theme of major transformational projects, is that being driven by the macro challenges that has, in effect, concerned a lot of people?

When you say the macro challenges, what's driving the transformation --

Well, obviously, in Europe, European macro challenges, in particular?

Well, what's driving the transformation, George, is really the rise of electronic payments and the need for heavy regulatory pressure, as well as a need for cost reduction. And when you put those three things together and the banks emerging and processes emerging, they're looking to pick systems that are going to be more strategic and that can do, and that can handle more of these changes. And that's the transformation that's happening. That's happening in the core systems, it's happening in the payment systems. And so my point is as those transformations are happening we are at the table with the executives at those banks with our assets and our technology, helping them achieve those goals.

George, let me weigh in a little bit, too. In Europe they still haven't enacted electronic, you know, they have a single currency from a physical standpoint, but they're still working there to have a single currency from an electronic standpoint and fraud regulation that sits behind that. Also, with the weakness in the financial markets in Europe there's a lot of consolidation going on, which means that smaller banks are becoming much larger banks, and those larger banks have to find efficiencies. Both of those work very well for us.

The Middle East is doing very well for us because the Middle East is just doing very well, right? And they're building a big banking infrastructure and bank, we're a good player in terms of that.

In Asia-Pacific, Asia-Pacific is growing very, very nicely, and [Atheon], which you know the Singapore, Thailand, what-not, they are really participants, both in China's success, but also in the competitive success to China coming from Vietnam, Cambodia, the rest of that part of the world.

We don't talk much about it in the United States, but Latin and South America are on fire. They're probably doing better than most places in the world, partially due to their natural resources, and partially due to Brazil finally emerging after 50 years of hard work into a real economy, which is impacting the whole piece.

In the U.S. the U.S. banks are absolutely, you know, some of them are still working on integrating acquisitions from 20 years ago. And then there's on the other side we've got the new set of middle market banks that are doing very, very well, and you're watching the consolidating of a lot of the new community banks, and there's a lot of consolidation of the larger community banks, and you're watching these new $10 billion, $15 billion, $20 billion to $50 billion kinds of banks being created around the country. And they're going, they're using technology as an advantage.

So there's a bunch of stuff. Ralph is saying this macro piece is moving, but there's maybe seven different macro pieces moving all around the world, and they're all slightly different, but we've had the opportunity to play for consistent kinds of reasons.

That's a great perspective. Just as a follow-up, you've obviously talked about a handful of global deals that you've been working on, and I'm wondering if you could just give us a sense of how the discussions on that basis are going?

Well, they're going well. I mean when you say global deals, there's a lot of action that's going on between I call it geographies, and I just spoke of one that happened between the U.S. and Asia. And we see just a lot of coordination between Europe and the Americas, between Americas and Asia, between Asia and the Pacific. So I think we're really well coordinated with the customers on that.

Thanks, guys.

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

Yes, good morning. Thank you. You mentioned mobile as a driver a couple of times, can you give us an example of how mobile and the use of mobile and some of the emerging mobile payment technologies are impacting your customers in terms of looking at the product?

Sure. Well, one of the assets that we were most interested in when we were in dialogues with S1 was their mobile technology. We've been enabling large customers in mobile for probably too long. I think we did Telefonica 12 or 13 years ago. But mobile is coming to critical mass right now, and the combination of our assets, the -- how do you say that -- fundamental asset with the ACI assets, we now are able to provide a really nice mobility topping on our payment product array. And there's a lot of dialogue going on around the world just on whether it's sparsely populated parts of Africa or densely populated low-cost opportunities in other parts of the world. So mobile is going to be a very fundamental part of our business going forward.

Got it. And then one for Scott. The pieces may be there, but would you mind giving us what your guidance implies for GAAP operating income for the year?

Really, the only difference between the operating income that we've provided, the $99 million to $104 million, is the projected $16 million of onetime expenses. So we've taken -- that's in our guidance. But we're also now, what we have not taken out of our guidance is we're not adjusting our guidance for the $20 million of deferred revenue haircut. So we're basically saying, by saying we're increasing the amount of the deferred haircut this year by $8 million, we're essentially saying we're absorbing that in our business. So we are making up for that $8 million in our business.

Got it. So GAAP operating income guidance is $83 million to $98 million -- to $88 million?

Correct.

Got it. Thank you.

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

So, Ralph, Scott, and Tamar, good morning.

Good morning.

Good morning.

Good morning.

Congrats on closing the deal, again. I want to add my congratulations to that, and congrats on a nice quarter. Well, my few questions are related to sales and backlog. And correct me if my math is wrong, but it looked like sales were down a little bit year-over-year and backlog, organically that is, and that backlog was down organically sequentially. So is that a timing issue or is there something else going on there that we should be looking for, if my numbers right?

Well, two things. One on the sales number, if you look back last year is a record comp for Q1 for us. If you recall back in all the prior year's Q1 is typically normally a seasonal low for us in our quarters, so from a seasonality I would say this quarter looks more like a normal seasonal quarter.

And in terms of backlog you also -- what you have to look at, too, is that we brought $132 million out of backlog in the quarter and into revenue. So the first thing you have to do is essentially replenish that piece via sales. And so that's -- you're working with some of those optics when you only pull -- bring in 4% of revenue from sales, the rest of it is coming out of backlog. So you have to refill that first. And then the residual portion, $700 million increase is coming from S1.

Okay, thanks for that clarification. That's what I figured. And the second thing is when we look at the S1 revenue, can we just take the reported revenue plus the revenue haircut for this quarter and feel -- is that a reasonably good run rate looking forward quarterly or how should we think about that S1 revenue line item?

Yes, I mean generally speaking because of the -- especially the recurring nature of the revenue stream, the hosting revenue, the maintenance, and in some ways even the services that are driven under POC, their revenue model at least for us for this year is going to be a lot more even. And, again, yes, adjusted for the revised, for the haircut. We took $4 million of the haircut in six weeks. We'll take the remainder of the $16 million here over the rest of the year.

Thanks. Congrats, again, a nice quarter. Appreciate it.

Thanks.

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

Hi. Yes, good morning. It sounds like the S1 integration to date has progressed smoothly. Could you call out any surprises, anything that's been better or worse than expected?

Well, I mean obviously we've overachieved on our cost takeout plan by 10%, so we certainly look at that as a positive.

Backlog is $20 million higher than we told you it was six weeks ago, that's another positive. And cash, cash is better. We're probably $13 million, $14 million -- we're about $13 million better in cash than we modeled, and that includes having spent $6 million buying stock back.

Okay, that's helpful. And how should we think about or conceptualize kind of like the product pipeline out of S1? Can you give us a sense of anything that is new and is finished and ready for sale? And what might be coming down the pipeline?

Well, I just spoke to you about that mobile really changed, changes our online palette. The products we have on the online side of trade and branch and corporate, as well as community, we have a much broader offering there.

Our ability to be -- to provide multiproduct solutions is probably the bigger -- biggest lever that we have because we could sell 60%, 55%, 70% of the issue before, we probably can sell 805, 85%, 90% of the opportunity now. Ralph?

Yes. No, I'd say the wholesale payments, as Phil mentioned, online in Asia and in Europe is a great asset. The ability to do mobile banking, which is very popular, that's a great asset. And the retailers, being able to go into the retailers now globally with a product is a big asset to us. So really just some of the strengths that we have as we go in and talk to our customers right now, so.

I appreciate that, and some of that was well telegraphed and discussed, and I thank you for that additional color. And just one last question, can you remind us, did S1 complete or have you guys completed the migration to the small banking platform for their IDR?

Yes, yes, the -- not the migration, the new system is up and running. And to the best of my knowledge, and I don't want to be incorrect on this, but I think they're about 60% of the revenue is converted at this point, right? We're just going deep dive into that right now, but I think it's 60 some percent of the revenue is converted.

All right. Terrific. Thank you, nice quarter.

Thank you.

Your next question comes from the line of [Ben Oberson] from D.A. Davidson. Your line is open.

Hey, guys, it's John, again. Hopefully, I can ask a follow-up here. Regarding the bookings, I know that recognizing that obviously this is a very, very tough comp, can you point to any deals that might have been delayed given just the uncertainties surrounding the acquisition and, or was there any contribution or hit from currency?

Yes, to answer your first question, I mean let's be really frank, the first six weeks of the year everyone was waiting to see what direction these products were going and what-not. And then everyone was waiting to see whether or not we were going to the nefarious things that our competitors have all said we were going to do and what-not. So in a certain regard that doesn't make the first quarter a good comp. Forget how good last year's first quarter was, that doesn't make it a great comp.

The second one is that we try to be very transparent and very concise in terms of how we talk about what sales are and what-not. Sales is not a GAAP number, and everyone kind of has a different definition for sales. Our definition of sales in S1 were certainly not exactly the same. And we don't really want to overly talk about it till we or where we don't have to backtrack in terms of -- so we're giving you the best possible, which is probably also the lowest possible around sales number that there can be because we want to give you something but we want to be positive.

From a foreign currency standpoint, there wasn't a lot -- we're kind of naturally hedged from that at the operating income side, so we may move between revenue and expense, but we don't tend to get a big benefit or a big downturn on FX.

Great, thanks, guys.

(Operator Instructions)

We do have one more question from the line of Wayne Johnson from Raymond James. Your line is open.

Hi, yes, just a quick follow-up. So on BASE24-eps can you guys give us an update in terms of your thinking of converting legacy BASE24 classic users to eps? What's the internal plan for rate of conversion on an annual basis going forward?

We're really interested in going at the speed -- first of all, we're interested in going at a very high quality of process, and we're not forcing any of our customers in the conversion. There's no gun to their head, there's no anything. One, we've already up charged maintenance. We're staying on classic. They understand that, and we will go at the speed our customers want to go at.

I think a year ago or a year-and-a-half ago I said five years into it that we probably would have 50% of classic still up and running based on other systems. Now with three-and-a-half more years to go since I said that I think that's still a very safe --

Yes.

And what's going to get different is that many, many of our BASE24 installations are now partially BASE24-eps, and partially classic. This is not a diskette that you put in and out. There's up to 2,000 pieces, modules, and what-not, and many, many of our customers now have a fair percentage of eps in terms of what's in their system, and a fair percentage of classic. So it gets harder at the product level and we almost have to start going down to the module level to kind of explain what is what at this point.

Right.

Terrific. Thank you.

We have no further questions on the line at this time.

Thank you for joining us, and we'll look forward to see you at conferences in the next quarter. Bye-bye.

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