ACI Worldwide Inc (ACIW) 2012 Q4 法說會逐字稿

Good morning, my name is Steve, and I will be your conference operator today. At this time, I would like to work with everyone to the ACI Worldwide reports fourth quarter 2012 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)

I would now like to turn the conference over to John Kraft, Vice President Investor Relations and Strategies. Please go ahead, sir.

Thank you, Steve, and good morning, everybody. Today's call, like all of our events, are subject to both Safe Harbor 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 our website, as well as with the SEC. On this morning is Phil Heasley, our CEO and Scott Behrens, our CFO.

Before I turn the call over to Phil, I did want to mention that ACI will participating in several upcoming conference in the coming weeks. Specifically, the Raymond James 34th Annual Investor Conference on March 5, the Wedbush Transformational Technologies Conference on May 6 and the Credit Suisse Global Services Conference on May -- I'm sorry, March 13. If you are interested in a one-on-one meeting, please contact the conference organizers directly. With that, I'd like to turn the call over to Phil Heasley, ACI's Chief Executive Officer. Phil?

Thanks, John. Good morning, and thank you for joining our call. I'll start out today by an overview of our fourth-quarter and full-year 2012 highlights. Scott will then give you a detailed review of our financial results, after which we will open the call for your questions.

Starting on slide 4, we closed out a watershed 2012 after the successful acquisitions of S1 and Distra. We achieved our promised $48 million in cost reductions, and the integration is substantially complete. Furthermore, Aite Group recognized our universal online banker product as the leader in the US large bank market for 2012. With Distra, we acquired key intellectual property which is being used to drive our innovative universal payments platform. As I've mentioned over the past two years, we've been investing heavily to deliver the most complete end-to-end payment solutions for financial institutions, processors and retailers. UPP, our universal payments platform, provides the unique orchestration layer of software that seamlessly and easily integrates all our products and solutions into our customers' own reference architectures. Since the acquisition of Distra, significant progress has been made on this endeavor and we will be launching our first release of UPP to the marketplace during the first half of 2013. Meanwhile, we also repurchased 1.4 million shares, or 3.5% of our outstanding for approximately $58 million over the course of 2012.

From an operating perspective, the closed out the year with record sales bookings, revenues, and operating income. Sales bookings grew 81% in the fourth quarter and 38% for the full year 2012. Revenues grew 66% in the fourth quarter and 43% for full year 2012. And most impressively, operating income grew 108% in the fourth quarter and 76% for the full year 2012. With the integration of S1 substantially complete and the market disruptions during the first half of 2012 receding, I'm happy to report that we enter 2013 with a strong pipeline across all of our products worldwide. We have a significant opportunity to cross-sell, and we remain focused on actively pursuing net new sales to new end existing customers across all our geographies.

Lastly, I would like to provide you with a quick update with the Online Resource acquisition. We initiated the tender offer to acquire Online Resources on February 8, we received an early termination of the HSR waiting period on February 15 and we've completed the loan syndication from our lender partners to fund the transaction on February 21. We still expect to close the transaction by the end of the first quarter 2013. Under ACI ownership, we expect to stabilize and grow Online Resources' community banking business, we intend to invest in this biller direct business to continue its impressive growth and importantly, this Online Resource business is approximately 90% recurring, which will add to our financial visibility and earnings stability.

In summary, we are very excited to move into 2013 with strong momentum to continue to strengthen our recurring revenue business has us well-positioned to accelerate revenue growth while delivering strong profitability and earnings in 2013. I will now hand the call over to Scott over to discuss our financial results for the quarter and full-year 2012, as well as our full-year guidance for 2013.

Thanks, Phil, and good morning, everyone. I first plan to go through the highlights of the fourth quarter and full year 2012 earnings results and then I will provide an outlook for 2013, and I will also provide some brief comments on the Online Resources transaction.

So, I will starting my comments on slide 6 with key takeaways from the quarter starting first with sales bookings. We finished the year with a record sales quarter with strong sales performance in all geographic regions, total sales bookings exceeded $300 million in contract value, including almost $200 million of net new sales bookings. The strong sales represented an 80% growth over the prior-year quarter and more than 60% growth sequentially over Q3 of this year. S1 contributed approximately $80 million of the sales for the quarter, and historical ACI business sales were up 33% in total and 9% in net new over the prior-year quarter, and overall sales net of term extensions increased $81 million, or 69% over the prior-year quarter. The strong sales led to solid growth in both 60 month and 12 month backlog.

We saw a record revenue quarter coming in it $224 million, albeit coming in lower than the expectations we communicated on or November earnings call. This lower revenue, however, was offset by lower than expected expenses, allowing us to come in within our adjusted EBITDA range and come in higher than our expected operating income range for the fourth quarter and full year that we communicated in our November earnings call. Historically, ACI saw revenue growth of $40 million, or 30% over the prior-year quarter, and S1 contributed $48 million to total revenue. Overall, we had a strong quarterly revenue performance to finish the year.

The operating expense growth compared to the prior-year quarter was primarily related to the S1 acquisition which contributed $43 million of expense growth. The remainder of the expense growth was primarily related to deferred costs recognized from project go lives in the quarter. We also incurred a little over $4 million of integration related one time expenses during the quarter. And finally, on this slide we saw strong growth in non-GAAP operating income and adjusted EBITDA of 108% and 95%, respectively, over the prior year quarter.

Turning now to slide 7 with key takeaways for the full year, we saw strong organic growth up nearly $40 million, or a 8.5% over 2011. S1 contributed nearly $162 million to GAAP revenues, and the S1 contribution to revenue, however, was impacted by a little over $22 million of deferred revenue haircut. Again, that's the revenue that would've been recognized in the normal course of business by S1, but was not recognized due to GAAP purchase accounting requirements. So really, $22.5 million of pure margin revenue that we were not able to recognize.

The operating expense growth compared to the prior year, similar to the quarter was primarily related to the S1 acquisition which contributed $159 million of the expense growth. And again, the remainder is primarily from deferred costs recognized from project go lives during 2012, and for the full year, we saw $31.5 million of integration related one-time expenses. We saw strong growth in non-GAAP operating income and adjusted EBITDA up 76% and 70%, respectively, over the prior year and finally on this slide, we ended the quarter with $76 million in cash. Also during the quarter we repaid a little over $20 million of the refundable IBM Alliance liability upon the expiration of the five-year alliance.

From an OFCF perspective, our full-year operating free cash flow was impacted by the backend loading of sales and revenue during the year and the corresponding increase in accounts receivable. We ended the year with $176 million of accounts receivable representing 75 days outstanding versus 62 days outstanding at the end of the prior year. My overall expectation is that we will trend back towards our historical DSO as we get here through 2013. We finished the quarter with $374 million of total debt and finally, the last comment here, we have remaining share authorization to repurchase up to 1.8 million shares of our stock.

Turning next to slide 8. This shows our expectations for 2013 in our organic business. That being before the incremental impact of Online Resources. As you can see, we expect new sales growth to be in high single-digits to low double-digits. Revenue growth in the mid- to high single digits in a range of $765 million to $785 million. An important item to note from a modeling perspective, we do expect the quarterly phasing of revenue and margin in 2013 to be consistent with the quarterly phasing we saw in 2012. We expect our operating income to be in a range of $150 million to $160 million, representing a 20% operating margin and a growth rate of two times our revenue growth. We expect adjusted EBITDA to be a range of $230 million to $240 million, representing a 30% EBITDA margin and a growth rate of two times our revenue growth. And finally, we expect our diluted share count to approximate 40 million shares in 2013, which excludes any future share buyback activity. And again, this really continues our trend of layering on incremental revenue from new customer go live events and incremental benefit of renewing existing customer contracts with better economics as well as cross-sell opportunities, all while maintaining very strong expense disciplines.

Next, I will turn to slide 9 and provided brief update on the acquisition of Online Resources. In addition to what Phil has already provided, I would just like to add that the integration planning is well underway and has been for a number of months. We expect to achieve $19.5 million in synergy cost reductions and expect those actions -- we expect to action those cost reductions within 60 days of the close of the transaction. Additionally, we note here that we do expect to achieve further cost synergies beyond the $19 million we've already identified, those coming from data center and facilities consolidations. And we are continuing to assess those additional costs and expect to be able to provide the timing and financial impact of those actions later on in the year. And finally, we plan to provide the incremental financial impact to our 2013 guidance metrics once we close the transaction. That concludes my prepared remarks. So operator, we are ready to open the line to questions at this time.

(Operator Instructions)

George Sutton with Craig-Hallum Capital Group

Good morning, thank you. Hi, guys. I am curious if you could just give us your feedback that you have received from your bank customers since you have announced the ORCC deal, just to kind of give us the tenor of their response.

Well, we can't give you the response from ours and we can give you the response from online. We just hosted those guys the day before yesterday, I guess it was. It has been extremely positive. I think it's one of the reasons we went through HSR as easily as we did because usually HSR is a great barometer in terms of how people feel versus whether there is actually issues. We went through it very quickly, and we have actually -- we've had very, very positive feedback, to be honest. I'm not going to go through why and what, but we've had very positive from our very large banks. And from -- and certainly the community and credit unions we saw this as a real commitment on our part to their category and to our investment in their category. Very positive feedback, George.

Okay, great, and relative to guidance and how the results for Q4 came out, it looks like you're seeing higher margins than we previously expected -- or at least you previously had expected.

I'm glad you asked that question, George, because I want to make it really clear to everyone. We only give you guys revenue, right, as a guidance number because without it, you can't really do the models, right? Our focus is on operating income and EBITDA and the associated margins. If we have a piece of business that we charge a $1 for, and it cost us $0.85 to support, and we can renew it to the customer in a different format and we get $0.80 of revenue at a cost of $0.60 to do it, we are going to go for the latter, not for the former because I would rather make the $0.30 on the $0.80 than to make the $0.15 on the $1. And so I'm not going to be held -- and I don't say this in an arrogant fashion, I'm saying it as the 30th largest shareholder myself. To me, maintaining the business, improving the profitability for our customers and increasing our profitability at the same time is absolutely the model we've been operating on for years and we're going to continue to operate on. If we are going to miss positively, it's going to be on margins we produce.

If we are going to slightly disappoint, it's going to be by fixation on just the revenue line itself. It's just not how to win in the -- in a consolidating marketplace. You don't win by taking revenue at any cost or pulling things forward or all the games that are -- softer industry tends to play. So yes, we are very committed. I told you five years ago I wanted 20% operating margins or better and 30% EBITDA margins and better, and that's the Holy Grail for us.

Great. Thanks, guys.

Wayne Johnson with Raymond James

Hi, yes. Good morning.

My question is related to S1. You guys have done a great job on the cost side for the Company as a whole, including this one in particular, but if you could just remind me, compared to guidance that you guys provided on the top line for S1 revenue, has that been tracking above, below, or in line with expectations? And I have a follow-up. Thank you.

I would say that we have the situation -- we all have the situation the first half of last year were the market got frozen by indirection of the road map. So, that's kind of gray territory. If you go beyond that, I think things are tracking very, very well. I think we are far enough along that I can give you guys full disclosure, not atypical from companies that are selling themselves. S1 really pushed on what they sold at the very last six, nine months of -- and a lot of it was hypothetical capabilities, to a certain extent, versus total capabilities.

I think a little bit of extra work that we have to do that's coming to fruition this year, next quarter and the quarter after is we have to -- we have got a lot of their projects that you would've thought historically would've been finished a lot sooner than they were. But they promised capabilities and whatnot that, quite honestly, hadn't been started, nevertheless delivered. Now, the good news is all the guys that offered that are at our competitors probably making the same promises. But we are finishing up that activity and that activity aside, I would say that in 2013, both on the [Postilion] side and on the online side, I would say they would meet or exceed our expectations.

And Wayne, I would just add to that, that, I think compared where we started the year, I'd say the ACI organic business came in stronger than what we expected. S1 came in lower on the numbers than we expected but again, as Phil said, the freezing of the market we saw in the first half of the year really became unplugged and we saw the sales pick up in the latter half. The problem is, we just did not have the time to ultimately to deliver, convert that sale to revenue in 2012. The sales are picking up, and we expect that to contribute more in 2013. And one other item is, the further, obviously, we get from the transaction date, the harder it is to really discern the difference between what would have been organic and S1 contribution because we make decisions to no longer market certain products, either in the world or certain parts of the world. So, decisions we made at the time to select certain products of the other also drive that. So, the further we get away from the acquisition date, the harder it is, really, to differentiate what's organic.

And it's a little bit unfair to say that ACI products did somewhat better and S1 products did a little bit worse. A lot of that had to do with the fact that offering both sets of products gave customers a different perspective in terms of how they made their decisions versus -- so we did very well in ACI retail engines in situations where they probably should have been buying ACI's retail engines and not the smaller retail engines. So, the combined -- I think you've got to give credit -- some of the credit of the ACI historic product to the S1 acquisition. Right? I think it would be beyond unfair for all the hard-working people, not to give them some credit for that. You've got to look at it in total.

I appreciate that color very much, and so my follow-up is -- has two parts to it. In the future at some point, to see any kind of seasonality flattening out here? Maybe not in '13, but '14, '15 and beyond? And the same, that would be linked also to receivables increasing, what do you expect on a receivables basis going forward? Thank you.

You can answer the -- the receivables is a function of one of the sales, but you can go through that. I would love to say I see it correcting itself or becoming a flatter curve. I think we have two phenomena taking place. One is the fact that we are back-ended in a lot of sales, which means we're going to be back-ended on a lot of deliveries, right? And it would be disingenuous for us to say that we're going to have magic in terms of that. The other thing, Wayne, is that we are doing much bigger projects, and the much bigger projects more than likely require the banks or the processors and then the retailers to get budgets approved, which tends to be the fourth quarter, in order for them to ink the papers. So, I think for the next year or two until we can flatten out the recurring revenue more, we're still going to see a heavy sales and a heavy completion coming in the last four months of the year. I just think it would be totally wishful thinking to think it's going to be different than that. It would be like moving to Thanksgiving to August or something, right, in retail sales. I just don't think we're going to be able to do it in the near-term.

Yes, and on the receivables, we exited the year about 75 days of revenue outstanding. If you go back to the end of 2011, it was 62 days. My expectation is, for 2013, we'll trend back towards our historical norm. Really the level -- the increase is primarily related to the integration activities of S1, but also, if we look at the end of this year, it was just really the timing of the sales and revenue in the fourth quarter that really drove that up at the end of the year. But I expect that rate to decline as we progress through 2013.

Thank you.

Zachary Shafran, Waddell & Reed, your line is now open.

Good morning. Maybe, Scott, you could got better characterize the comments you guys made three, four months ago about your expectations for the quarter and how things seem to have slipped? And maybe some more comments about the nature of the sales cycle and why things seem to be slipping. Is it competitive or is it just a timing issue?

I will start on that from a -- from a revenue perspective, really, we had two components. One was a backlog, which was -- represented about a $7 million movement out of 2012 into 2013. I think ultimately, and we said it at the end of June, we had some slippage. What had been expected at that time ultimately was worked, and we got that work completed. I think it just ultimately pushed the timeline out. The rest was revenue from sales, and it was mix of sales relative to expectations. But I would say with respect to both the sales revenue conversion as well as the backlog, there was nothing in there -- there was nothing of size in particular that we missed. It was not a competitive issue.

The backlog obviously will come to fruition in 2013 and from a sales perspective, it was just -- we had a record sales quarter. We closed a lot of deals, and there was a handful of deals that slipped into the new year. But they're deals that will close, and our expectation is they will close in 2013. It's not a competitive issue. It was a timing issue in the amount of deals we did accomplish in the year. We just weren't able to close out as many as we thought.

And the structure and the nature of those deals in the sales cycle, is that changing?

No, it's just -- again, it was the volume. We had a record sales quarter, if you look at it from both a combined ACI and S1 and also if it was ACI standalone, the amount of sales bookings we had in the quarter as significant. So, it was a -- we had very high expectations for the quarter coming in at $300 million plus in total sales bookings. Again, we tracked on total sales, it was really the mix between term extensions and net new sales that really drove the -- the mix really drove the revenue side

Zach, this is Phil. I would just amend only one thing Scott said, and that is that the deals are getting bigger. We sold one customer seven of our products all at one time and all the complexities of integrating it and contracting for that and whatnot. So, the bigger deals are going to have more complexity. I am not in any way, shape or form, you sound as though I should have some level of disappointment. I have no level of disappointment. We solve for operating income and margin, and we will not do a sale or create a revenue expectation that is suboptimal to what we are trying to get accomplished. We understand our requirement is to deliver the operating income that we talk about in the margins that we talk about. But I consider sales and revenue itself dependent variables, not independent variables, to creating that. I couldn't be more pleased with the effort, especially considering the market's freeze in the beginning of the year. I could not be more pleased with the effort of the team to do sales in, in the contracts this year.

That's helpful,. Thank you very much.

(Operator Instructions)

You have another question here from the line of George Sutton with Craig Hallum, your line is open.

I thought it interesting that the number two bullet it in your year end review slide related to Distra, and I know how significant that opportunity is. I just want to make sure I had a real good sense and maybe even more importantly, the people on the call have a good sense of the history of Distra. And what does it mean that you're going -- it sounds like you'll have the first live product this year. What does that mean for the totality of your business?

I guess it depends who you talk to in the industry a little bit. I have a personal belief, George, that online capabilities, whether you call them mobile, tablet or whatever they are, are the entire future of the way when I was a kid credit cards and debit cards were and whatnot. It was this miraculous way that you did not have to use paper and pen and what not to do business, and now you don't need a piece of plastic and whatnot. Just like Google is going and trying to get a hold on the ability to analyze the data that goes through these ions and Microsoft has its approach and the Amazon guys have theirs. We believe that it is really, really important for us to think about reconsolidation payments on a platform basis versus there being all these multiple streams going in. And we spent 30-some years building I think the gold standard in a lot of, whether it's wholesale or retail payments. And between ourselves and S1, I think we've build the best capabilities in terms of the online.

What Distra and its universal payments platform which, by the way, has manifested itself. An older version of it is up and running in Great Britain's faster pay and its going to be an important element for Singapore's faster pay and some of the other ones. But what it does is it creates a horizontal -- we've got these parallel lines that now have a perpendicular intersection that's going to allow payments to come in regardless of what vertical they need to go through but through a common online, and it is basically a new definition of middleware, right? In terms of being able to bring together different kinds of payments. We believe that with the government lowering people's interchange and there being pressures for profitability and whatnot, that there's going to be a natural confluence that says that gee, I've got to make up from what I lost in the ability to price and my ability to produce productivity. And we think that UPP is going to play a very, very major role in that. I think it's going to be an S-curve, but we think it's going to play a major -- it's going to be a major component of the future.

Perfect, thanks for that help.

Your next question comes from the line of Leonard DeProspo from Janney. Your line is open.

Hi, good morning, and thank you for taking my question. I just wanted to ask a question about the 60-month backlog, $2.4 billion, could you possibly break out how much of that was organic versus S1's contribution? That's it, thank you.

Well, the S1 contribution approximated somewhere in the $600 million to $700 million range, and that has paid -- stayed pretty consistent since the acquisition date.

I'm showing there are no further questions at this time.

Okay. Well, thank you very much, everybody.

Thanks for joining the call.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.