ACI Worldwide Inc (ACIW) 2013 Q2 法說會逐字稿

Good morning, my name is Chrissy, and I will be your conference operator for today. At this time, I would like to welcome everyone to the ACI Worldwide report second-quarter 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 call over to Mr. John Kraft, Vice President of Investor Relations. You may begin.

Good morning, everybody. Today's call, like all of our events, are subject to both 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 our website as well as at the SEC.

Starting this morning's call is Phil Heasley, our CEO, followed by Scott Behrens, our CFO. We will then open the call for questions. Phil?

Good morning. Thank you, John.

While our quarterly results are within guideline range we provided, they were diversity impacted by certain implementations requiring more resources and time than expected. Not only doe the slowdown in these implementations delay revenue-triggering events, but resources consumed by these projects have not been available for other revenue-generating projects. We completed a deep and detailed review of these projects, and we are providing investors with incremental and updated guidance that account for these delays, as well as the timing of our expected bookings. It is important to remember that these implementation issues are only delays, with the majority of impact confined to 2013 and no significant impact in 2014 and beyond.

The affected large customers recognize the amount of work we are undertaking to honor our assumed commitments. And we believe that we are gaining credibility and engendering customer loyalty by giving the highest priority to solving these implementation issues quickly.

Regarding online resources, the acquisition is performing at or slightly above expectations. The integration is proceeding as planned, and we are well into our second phase. Most importantly, our organic sales booking pipeline, excluding ORCC, is looking stronger than originally anticipated, and we now expect total net new bookings growth as a percent for the full-year to be in the mid-teens. This is due in part to the prospects from our recently-delivered universal payments platform, UPP 3.0, that powers the industry's only end-to-end, highly-differentiated payment solution. We expect to be discussing at least one large UPP contract later this year.

What's more, our payments business has never been healthier and attrition has never been lower. Our universal online banker platform is also a major reason for the net new bookings growth, as we now have the industry's most robust online offering, bolstered by recent acquisitions and made even more versatile with the future UPP enablement.

I want to take a moment to update the execution of our high-level growth strategy and the effect it is having on our growth. About three years ago, we identified and thoroughly examined an important market trends that we felt were major category disruptors. Examples, among many, include the long-term and sustained impact of regulatory actions taken by global governments, the rapid adoption of online payment options, giving consumers and commercial customers truly ubiquity in terms of both access and realtime actions and decisions for their finances. And the need for financial institutions to more aggressively upgrade legacy payment systems in order to scale these developments.

We felt this disruption would open many opportunities for growth for ACI, and we set out on a course to quickly prepare ourselves to leverage them. We made acquisitions to improve our scale and scope and to obtain needed IT for key product solutions. We recruited and retained top executive talent that's best in class of areas in their expertise to ensure we properly manage our growth to achieve quality earnings and profits with few, if any, disruptions. We realigned our Company structure for improved performance and response time, and we built a strong balance sheet to sustain our competitive advantage and growth initiatives.

2013 has proven to be the watershed year we predicted, and we are now beginning to not only see the validation of the strategic decisions we made in terms of those industry trends. But also in the acceptance of key new product solutions like UPP and universal online banker that literally redefines how institutions and merchants can use payment systems and EBPP to dramatically reduce their expenses while increasing revenue opportunities.

For example, DDS, a leading financial services group in Asia, with 200 branches in 15 markets, partnered with ACI to deliver a first-of-its-kind online banking platform for corporate practitioners. Their award-winning ideal 3.0 platform, powered by ACI online, mobile and trade banking solutions, is processing 40 million corporate transactions annually for the Asian business. We see substantial long-term growth in these and other categories in which we participate, and we believe we are best-prepared to benefit from them. UPP is an example of that, and in quarter four, you will see product solutions announced that concretely demonstrate the power and impact of this technology for years to come.

Next, I want to share a metric that will demonstrate the strength and value of our five-year backlog. This duration metric summarizes the dollar weighted average duration remaining in our term license contracts, and runs hand-in-hand with our growing backlog. Mathematically, a perfectly shaped bell curve of five-year term licenses, which own average duration of 2.5 years.

Importantly, it's necessary to understand what impacts this metric, that is dollar weighted our revenue growth as well as lower attrition, renewals for increased price, and higher volumes sold all push this metric higher. In addition, we do see fluctuations due to the seasonal nature of our model. As shown in our Company slide deck, our Q2 2013 average remaining duration was 2.6 years, while last year it was 2.5 years. It is slightly higher than this in Q4 2012, giving our good booking results, and we expect the same behavior in the second half of this year.

Finally, I would like to discuss our examination of ways to capitalize on historically low interest rate environment to provide financial flexibility and improve our capital structure. We do not have an acquisition in mind, and currently have no plans to make larger transformation deals. Absent a more accretive risk-adjusted transaction, we will continue our strategy to buy back our stock.

Given our belief and our enthusiasm for our long-term opportunities, repurchasing our shares remains an attractive use of cash. With the $100 million increase to our share repurchase authorization, we have approximately $165 million of remaining capacity. We have proven that when we repurchase our shares, we do so wisely. As since inception, we have repurchased nearly 10 million shares at about half our current share price.

In summary, 2013 is a watershed year from which we will emerge more profitable, faster growing, and stronger in our competitive position. So far the market conditions we forecasted three years ago have proven to be correct, and our long-term strategy to leverage these trends for extended growth and profitability remain on-target and unshaken. Our aggressive stock repurchasing to-date, and expectation to do so is evidence of belief in our future.

I will now hand the call over to Scott to discuss our financial results for the quarter, as well as our 2013 guidance. Thank you.

Thanks, Phil, and good morning everyone. I first plan to go through highlights of the second quarter, and then provide an update on our outlook for 2013. I will be starting my comments on slide 6 with key take-aways from the quarter.

As Phil mentioned, the integration of online resources is proceeding at or above our expectations. We have completed phase one, and are now starting phase two, which will result in incremental $7 million in annualized cost savings, starting in the full-year 2015. And that coming from facilities and data center consolidations.

As part of phase two, we're also planning to rationalize a small number of low-margin contracts, resulting in the slight reduction in revenue but virtually no impact to operating income. And with these cost synergies added to the previous nearly $20 million in phase one, generates roughly $27 million in total cost synergies from the online resources acquisition.

New sales bookings net of term extensions were $129 million in the quarter. That's up 15% on a consolidated basis, excluding the contribution for ORCC. Organics net was flat and below our internal expectations for the quarter. That said, however, as Phil has already touched on, looking at the rest of the year, we now expect organic new sales bookings growth to be in the mid-teens, up from our prior expectation with high single, low double digit forecast.

And we can definitively say that several large financial institutions are seriously evaluating our newer universal payments platform and the interest in our universal banker product is also high. And we are seeing dividends from the investments we continue to make in that product line. All this is contributing to a pipeline that is even stronger than what we saw last quarter.

Turning next to backlog, our 12-month backlog increased $6 million, after adjusting for foreign currency, while our 60-month backlog increased $37 million after adjusting for foreign currency. That now standing at $3.08 billion, which is a new mid-record for ACI. Our operating free cash flow saw strong growth of $26 million over last year's second quarter, and year-to-date ACI has generated $56 million of free cash flow, up from essentially zero at this time last year.

Turning next to slide 7, our non-GAAP revenue increased 5% organically, or 30%, including the $38 million contribution from online resources. Recurring revenue also grew 5% organically, and is now sitting at $148 million. Overall, recurring revenue represents 72% of our total revenue. In the last bullet here, Q2 was impacted by $2 million of deferred revenue haircut on the ORC acquisition.

Operating expense increased $37 million from last year's Q2, that primarily coming from the inclusion of online resources. Non-GAAP operating income in Q2 with $17 million versus $9 million last year, and adjusted EBITDA was $38 million, up $12 million compared to last year.

Moving next to liquidity, we ended the quarter with $108 million in cash and $661 million in overall debt. And in Q2, we resumed our share buyback activity. And as of today, we have repurchased approximately 400,000 shares for roughly $18 million. And as Phil mentioned, we have received a Board authorization to increase our buyback by $100 million, and we now have $165 million remaining on our buyback authorization.

Turning next to slide 8, as Phil discussed, we are sharing a new metric this quarter, intended to boost transparency. This chart represents the dollar weighted average remaining contract life for our term software license contracts. So this excludes our book of business that was sold under potential licenses, which by its nature does not have a stated term renewal event. So this would primarily be customer contracts acquired via acquisition that we have not yet converted to term structure. And also it excludes our hosted book of business, which has both cash and revenue recognized ratably over the contract term.

So as you can see, the average remaining contract life generally moves within a narrow band, with seasonality impacted by strong sales quarters like our Q4's that add more weighted average, a dollar value with a five-year life. And just -- we will continue to provide this metric on a quarterly basis going forward so you can follow this trending.

Lastly, let me discuss our revised outlook for 2013. As Phil mentioned, several large online banking implementations are requiring more resources than we originally expected. While this is contributing to our reduction in full-year revenue expectations, we do not expect a significant impact in 2014 or beyond. And even though we are expecting higher new sales bookings for the full-year, the timing of these sales bookings expected to occur later in the year, which will impact the sales to revenue conversion for 2013, which is also a contributing factor for our lower revenue forecast.

We now expect 2013 revenue to be in the range of between $865 million to $885 million, which is down approximately 3% from our prior guidance range. This reduction in revenue, offset by disciplined expense management, has lowered our non-GAAP operating income to be in a range of $165 million to $175 million, down $5 million from our prior year guidance. And our adjusted EBITDA expectations about $256 million to $266 million, down $10 million from our prior guidance. And this guidance excludes acquisition- and integration-related one-time expenses, now expected to be approximately $16 million and roughly $5 million in deferred revenue haircut.

We expect D&A to be approximately $70 million to $75 million, and we expect roughly $16 million in non-cash stock compensation. Our diluted share count should be in the $40 million range, and that is absent our share buyback activity. Our outlook for Q3 is for revenue to be approximately 25% to 26% of our new full-year total. And finally, on this slide, as I've already mentioned, we are expecting full-year new sales bookings growth, excluding ORCC, to be in the mid-teens.

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

(Operator Instructions)

Gil Luria, Wedbush Securities.

On that sales metric, the overall sales metric, including capacity and term extensions, what do you expect the overall bookings to be up this year?

Yes, we have not provided a total new -- total sales bookings number. We are just guiding to the net new sales bookings, which really, as you know, is the incremental -- is really what drives incremental backlog and incremental revenue. Whether that converts this year or in the future, it is the incremental revenue to our existing book of business.

And Gil, if I could say, if I could say a little thing, to dice it a little bit. Capacity by definition is net new -- that doesn't add to backlog. So capacity is in that mid-teens number. As I stated, our attrition is at a historic low, especially in our payments business. It is not in our best interest to rush renewals, especially with UPP coming on board. And it being a cross sell to that renewal. We now, -- we have been through the puff period. We have very good margins in our payment business. And it's in our best interest to be patient as it relates to that. We said we had the 2.6 -- for us to be patient there is the right thing. Where we're going to put more attention is where we have perpetual licenses. We don't renew perpetual for perpetual -- but there is -- by definition, there is no renewal.

So the next phase in our relationship with our perpetual customers is to move them to our model, which on one hand, takes the revenue out -- we land up with, if we booked it January 1, we'd have 20% of the revenue that year that the perpetual -- from the perpetual side. And if we book it in December, we have zero, right? So perpetual to subscription is the -- is what we are working on right now. We are not rushing to renew our profitable contracts.

Got it. And then in terms of the potential for the big deal. A really big deal for you in the past was a process where you could do a $40 million over five year deal. Is this something in an order of magnitude bigger than that, or is that in the same range?

Let me put it this way. The new deals -- where Universal Online Bankers sells an entire suite, and ability to go across, that could be somewhat -- depending on the size of the bank, that could be somewhat smaller to a little bit larger than historic. A payments use of UPP that incorporates a series of legacy assets could be significantly larger.

Got it. And then last one. Took down revenue guidance by $30 million, but EBITDA guidance only by $10 million. We said we got $7 million additional from synergy on online resources. Where is the other $23 million coming from?

The $7 million is not in this year. The $7 million comes in '15.

Gil, the $7 million is coming in 2015 on an annualized basis. But the cost -- really what we're looking at is our exit rate coming out of the second quarter. We had certain costs that were heavier in the first half of the year, and obviously we are going to start seeing the synergies -- the phase one synergies of ORCC kicking in here for the first -- their first full quarter will be Q3. But overall, it's based on our exit rate coming out of June, and I think it's pretty consistent. If you look organically, pretty consistent expense with what we saw in the comparable periods in 2012.

The only risk we have to that is that it if we blow through the mid-teens number, and we land up being even higher, we will end up with compensation and other -- we will land up with costs that will put additional pressures. But that would come from blowing through that mid-teens number.

To ask it differently, if you're taking the revenue guidance down by $30 million and the EBITDA only by $10 million, is the cost savings on the ACI side? Or are you just at a lower run rate of expenses going forward then?

I think it's really both. It's both on the ACI side and it's a lower run rate overall. One of the things that we're seeing is obviously, when we came into the year, we were expecting new sales bookings to be better phased. We didn't expect a flat Q2. Obviously, as we see the new sales bookings timing coming in in more of the second half of the year, that has allowed us to look at our resource planning, and that's the major cost that we have. As we have seen attrition, we haven't necessarily replaced it that quickly. And [Phil will time] that replacement with the timing of the new sales bookings. So that's a contributing factor. But again, I think what you're going to see is a cost base that was pretty consistent with where we were this time in 2012.

Got it.

George Sutton, Craig-Hallum Capital Group.

It's Jason on for George. You indicated a pretty big ramp in bookings for the back half the year, relative what we've seen in the first half. And I'm just wondering if you could walk through the thought process on that a little bit.

First of all we are actually disappointed with being flat, but we are not been disappointed because we lost any deals. We're disappointed because we lost the opportunity to get them closed by the middle of the year. So it is totally pipeline-driven in terms of what we're giving you. And unfortunately, and we are trying our best, and I personally consider it a success not achieved, that we would like to get more of our business closed earlier in the year. And of course, it's being viewed by a lot of our customers as a cause for better pricing. And we will not -- we will do the budget dance with them versus discount ourselves to early book our business. And clearly, it's the success of Universal Online Banker and it's the success of -- it's the huge interest in UPP. Quite honestly, with a very, very low attrition in our payments business and a relative -- it's not coming as much from that side. Our strength there is coming from a continuity of those forecasts and a lower attrition rate.

Okay. And then on the UPP side of the bookings, I'm just wondering if you actually have signed agreements there? Or if you have any UPP consideration was given into your guidance range?

The latter, not the former.

Okay. Perfect.

Brett Huff, Stephens Inc.

One question for you. And Scott, I think -- or Phil or Scott, you guys called this out in your press release last quarter, that you had some delays. I think it was $15 million of delays, some pipeline, some implementations. Or maybe it was go-live events. Do we have a status of those -- that $15 million or so as it stands, either in 2Q or maybe now?

Well really, what we were talking about on the $15 million was compared to the prior year, the timing of $15 million of -- about half of that, call it, was timing of capacity, which has started to come through here in the second quarter and will continue. Again, that's a timing issue. And then the other was the non-recurring revenue license and services that come from project go-live. So that was an issue relative to Q1 of 2012. That was not necessarily saying that there was this -- other than these LFIN project delays, these online banking projects that we have, there is -- all the other projects are on track.

Yes, but I don't -- by coincidence, I don't want to be hiding behind -- a very close number is the delay that we are expecting to go into '14 versus 13, Brett, and I don't want to hide behind -- I made two fundamental mistakes in converting the S-1 profit model into the ACI profit model was one, I underestimated the impact of implementing perpetual licenses that were sold at the very end of the negotiation period and whatnot, in terms of implementing them. And the drops landed up being much larger than we expected. And I take the fail on that, but that has -- we worked our way through a lot of that. We've had some great success with some that have gone live, and I think we've engendered a lot of positives from our customers in terms of doing it. I think we are long-term thinkers. We are not quick to screw the customer short-term and lose the long-term franchise. I clearly made a mistake on that.

The other mistake that I made was that when you -- in our model, we rely on making the money from the product. We tend to break even on the implementation. And we really did not add back in as much of that implementation effort that was still -- that on our model was required. So when we go and rework the deals with the guys, we don't rework it for another perpetual. We rework it for a subscription. So you'll end up with the expense obligation, the effort and the time and the expertise obligation. And then you're going to take the revenue ratably over time. So I screwed up in both of those categories, and so I am not hiding and pretending that this didn't happen. I made a mistake in both of those assumptions.

That's helpful. And my follow-up is -- and Scott, I may have -- I was trying to see if you answered this before, but I just want to be clear. The margins were lower than we expected, particularly on the gross margin line. Did you go through the thoughts on that? Or at least it was versus our model. Did you go through what the impacts might have been there already? Or was it some of these delayed implementations, et cetera?

Obviously, with the delayed implementations we're getting, we're -- as we do with many of our projects, we are taking all the -- substantially all the cost today. And the revenue is either incurred over time or we're getting the benefit at a go-live. But ultimately -- yes.

(multiple speakers) That's the answer. We expense in excess of 95% of implementation at time of cost. And if we're delayed, we don't get the one-time revenue pop that comes from having deferred or being -- and some of these projects we are going to be at 75% to 95% complete for fairly long time before we kick in to their next revenue stream. And that's what we said is the 2013 impact versus '14.

Okay. That's what I needed.

(Operator Instructions)

Tom McCrohan, Janney.

Clarification on organic revenue growth guidance in the low- to mid-single digits. Does organic revenue only exclude online resources and include S-1?

Organic excludes ORCC and includes S-1.

And includes S-1 as though S-1 was there100% last year. So it's apples-to-apples -- full year last year S-1 to apples-to apples, full-year S-1 this year. It excludes ORCC, because as you can see, ORCC over-delivered. They weren't flat for the quarter. They were up significantly year-to-year.

Okay. And in terms of what's baked into that guidance in terms of pricing in the past. You folks have been able to push through some pricing increases. What is in your assumption this year for organic revenue growth as far as pricing-related impacts?

I think the best way to say that is that we have been very diligent over the last five years of implementing a consistent ACI pricing policy, and we are extending that pricing policy to S-1 and ORCC. I don't -- for competitive reason, I'm not going to say anything more than that.

Okay, that's fair. And in terms of -- again, and what's assumed in your guidance, contribution from S-1 last year -- I think, if I remember correctly, S-1 contributed about $162 million of revenues, which was pretty materially below what the revenue run rate when you acquired the company. I know it is only 10.5 months, but normalized for full-year, was still below. So is your guidance assuming that S-1 revenue contribution this year is trending flat, above, or below what the run rate was last year?

Let me answer it this way. The go-forward S-1 products, which were most -- we've restructured which products we offer to what markets and to what parts of the world and whatnot. The sales of the S-1 products are doing well this year, as well as the historic ACI products are doing this year. Now, one thing that I don't think we are ever going to be able to explain to people, but -- if you sell a perpetual license, and then someone buys that company and starts selling subscription licenses, we can only give you the apples-to-apples on the [set] side. We can't give it to you on the sales to revenue conversion side. Because on a perpetual license, I can book something December 31 and take the perpetual fee that year. In our model, if I book something in the fourth quarter of the year, I'm going to see little to zero revenue as a result of that. So if we were to go back, which I -- and normalize S-1 against our revenue, it would not change the value of S-1. But it would absolutely change the year-to-year revenue numbers the way they book them versus we book them. So that's a little bit of, do you still beat your kids kind of thing. We are just not operating the business in the same way. We have a different revenue model.

That's helpful. So some of -- okay, understood. I didn't appreciate that part of it before. And can you just give us an update -- so on two things. And one, in the past, you talk about BASE24eps and getting people onto that platform. Any update on trends there? And secondly, the relationship with IBM, which I know is more of a significant factor that you talked about a lot a couple years ago. But I am just wondering what progress is being made there? If there's any update on that relationship? That's all I have.

Two things. So thank you for asking on EPS, because one of the things that has gotten lost in all our activities has been the great success of EPS, right? And EPS is doing very, very well. And EPS is going to have a release in the beginning of 2014 that is going to be -- we are going to be bragging about that and it's capabilities the way this year we're talking about UPP. And that we are bragging about UPP and our Universal Online Banker. Basically, the BASE24 switch, the EPS switch, is going to have the ability to move checks the same way -- OFAC transactions the same way it can move card transactions and whatnot. And where that's great, and it's already creating a lot of interest, it's not necessarily -- that's causing people to look back and look at a larger -- they are looking at larger sales. But they're more complicated, and that's pushed our business in the end of the year.

So thanks for asking on that, but that's a very profitable product for ACI at this point. And that was a decade in coming, so we feel very good about that. And our relationship with IBM, we view IBM as a strategic key partner. I would say we are doing deals with them on four continents right now. We are working elbow to elbow with them, and we're very happy with our relationship with IBM.

And there are no further questions at this time. I will turn the call back over to our presenters.

Thank you all for joining the call. We look forward to talking to you individually in the coming days.

And ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.