ACI Worldwide Inc (ACIW) 2013 Q3 法說會逐字稿

Good morning. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide reports quarter earnings conference call.

(Operator Instructions)

Thank you. I will now turn the call over to John Kraft, Vice President of Investor Relations. Mr. Craft, you may begin.

Thanks Adam, and good morning everybody. Today's call, like all our events, is 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 with the SEC.

On this morning's call is Phil Heasley, our CEO, and Scott Behrens, our CFO. Before we start, I did want to remind you that ACI will be hosting our 2013 Investor Day next Thursday, on November 14 in Naples, Florida. We look forward to seeing many of you there. With that, I'd like to turn the call over to Phil Heasley. Phil?

Thank you, John. Good morning, and thank you for joining our call. I am happy to share with you that ACI had a busy and productive quarter.

We completed the acquisition of Official Payments earlier this week. The transaction will further extend our leadership in the fast-growing EBPP space, expanding our portfolio across key verticals, including federal, state, and local governments, municipal utilities, higher education institutions, and charitable giving organizations. Official Payments has a strong brand, loyal user base, vertical expertise, and a talented organization makes them an ideal match for ACI.

In August we completed a oversubscribed $300 million bond offering. We were able to capitalize on the historically low interest rate environment, and now have more financial flexibility and an improve capital structure.

Turning to the quarterly operating results. Quarter three was solid and in line with our expectations. Our revenues increased 35% in the quarter, and up 11% organically. Sales net of term in the quarter grew 17%, and we are tracking to our full-year plan.

Our sales booking pipeline is at record levels, with strength across all regions. We have had notable success with our new universal payments strategy, and expect a strong fourth quarter. As the industry's only, and highly differentiated payment solution, the market's interest in our up-offering is extremely high from both existing customers, as well as with new prospects.

Our adjusted EBITDA margin expanded 8 percentage points in the quarter to 29%. This strong performance was driven by high-quality recurring revenue, operational effectiveness, and ORCC course synergy attainment.

In quarter three we also repurchased 1.3 million, or $65 million, of our outstanding shares, bringing our total repurchases year to date to roughly 1.7 million shares, or $81 million. Currently we have about $108 million remaining in our share repurchase authorization.

Regarding our outlook for the remainder of the year, we're raising our guidance to account for the acquisition of Official Payments.

Lastly, we hope to see you next week in Naples, Florida at our Investor Day. We are looking forward to introducing you to our executive team, as well as to provide additional details regarding our strategic plan and our growth opportunities. I will now hand the call over to Scott to discuss our financial results and updated guidance in further detail. Thank you.

Thanks Phil, and good morning everyone. I first plan to go through the highlights of the third quarter and then provide an update on our outlook for the full year 2013. We will then open the line for questions.

I'll be starting my comments on Slide 6 with key takeaways from the quarter. We have closed the official -- we closed the Official Payments transaction earlier this week. The acquisition should add $18 million to $20 million to our full-year revenue, that being for the period November 5 through December 31, so about a seven-week period. We expect to achieve roughly $8 million in annualized cost synergies by the end of this year, which brings the net multiple we paid for the company to roughly 6.5 times 2013 adjusted EBITDA.

New sales bookings were $148 million in the quarter, up 17% on a consolidated basis. As Phil mentioned, we remain very optimist regarding our pipeline for last two months of the year. We continue to expect our organic new sales bookings growth to be in the mid-teens for the full year 2013.

Turning to backlog. Our 12 month backlog decreased $6 million, or $11 million after adjusting for foreign currency fluctuations, to $740 million, while our to 60 month backlog increased $28 million, or $8 million after adjusting for foreign currency fluctuations, that coming to $3.1 billion. We saw strong revenue growth over Q3 2012 with our non-GAAP revenue increasing 11% organically, or 35% when including the $37 million contribution from Online Resources.

Notably our software hosting fees more than doubled to $68 million in the quarter, and again this essentially the recurring subscription and transaction-based fee revenue. In addition to the ORCC contribution, recurring revenue grew 9% organically and now represents 71% of our consolidated total revenue.

We also saw solid growth in operating free cash flow, which came in at $27 million for the quarter, up nicely from year's negative $1 million. And year to date we've generated $83 million of free cash flow, up from essentially $0.00 this time last year.

Turning next to Slide 7, our operating expense increased $33 million from last year's Q3, primarily from the inclusion of Online Resources, while organic operating expenses were essentially flat with last year. And lastly here, we incurred roughly $9 million of transaction- and integration-related cost during the quarter, representing primarily severance, site closure costs, and third-party professional fees.

Non-GAAP operating income in Q3 more than doubled to $40 million from $18 million last year, while adjusted EBITDA $62 million was up 85% up from $34 million last year. EBITDA margin was 29% in the quarter, up from 21% in Q3 last year.

Moving next to debt and liquidity. We ended the quarter with $167 million in cash. During the quarter we completed an oversubscribed $300 million bond offering, which is providing us with additional financial flexibility. We used $188 million of the proceeds to pay off our revolving credit facility.

Our overall debt level at the end of the quarter was $764 million. In Q3, as Phil mentioned, we increase our buyback activity. As of today we have repurchased approximately 1.7 million shares for roughly $81 million year to date. This representing roughly 4% of our outstanding share count.

And lastly, let me discuss our outlook for 2013 on Slide 8, which we are adjusting for the acquisition of Official Payments. As I previously stated, we assume the transactional will add $18 million to $20 million in revenue, which increases our expected 2013 revenue to be between $883 million and $905 million.

We expect minimal non-GAAP operating income, and are not changing our $165 million to $175 million range. Official Payments should add roughly $1 million in adjusted EBITDA for the seven weeks, which increases our expectations to a range of $257 million to $267 million the full year. As of today, we are currently tracking to the low end of these combined ranges.

Again, this guidance excludes acquisition- and integrated-related expenses that we are expecting to be approximately $27 million, and roughly $6 million in deferred revenue [per cut]. This revenue represents organic growth in the low- to mid-single digits.

We continue to expect depreciation and amortization to be approximately $70 million to $75 million, and also expect roughly $16 million of non-cash stock-based compensation. And lastly here, we do expect to finish the year strong with full-year organic new sales bookings increasing in the mid-teens as a percentage over last year.

So overall, we had a strong quarter with solid growth in revenue, margins, and cash flow over last year, and are expecting to finish the year strong. That concludes my prepared remarks, Operator, we are ready to open the line to questions at this time.

(Operator Instructions)

George Sutton, Craig Hallum.

Thank you. I am wondering if you could give us just some more comfort around your -- or your comfort relative to the organic bookings number in Q4. So, obviously you've got, as you had said, a very large pipeline to work from. Is that dependent on anything particularly large to achieve your expectations? And then I will have a follow-up.

George, no -- you mean is it dependent on any particular big huge deal or whatever? No, it is not. I mean, there is a lot of deals coming through -- this is our Christmas shopping season. But no, there is no one -- there's no elephant in the room.

Now, Phil, you had mentioned that UPP -- that would be part of the reason for the strength in Q4. I am just curious if you can give us a thought process around how the banks are responding to that part of your offering relative to you becoming broader as a vendor to them?

I think what UP has done -- UP has done is it's really -- it's delivered on the promise that we are firmly committed to solutions in the payment area, and enabling our customer bases to embrace the opportunities that are coming from change. And whether the change is needing to be more productive, or the change has to do with the ubiquity and strength of online commerce and whatnot.

So, I think that is where it is coming from. And we are beginning -- I think the easiest way for us to describe the change is that our conversations are becoming much more business and c-level. And of course, we are not ignoring the technology and operations levels, but the focus on the win/wins are moving their way up the Organization.

It makes for a more complex sale because it's a more inclusive sale, but I think that is the best way to -- I think on the ORCC side, I think there was -- which somewhat answers a different aspect of your question, is that we are doing fantastically. If you were to look at ORCC as though it was an independent company, the last two quarters we would be up 22% or 55% from a SNET basis. And that is coming from the strength of the ACI relationships. It's not coming from stuff that is outside that circle.

And as they see -- and I think the analysts -- the industry analysts are in agreement with what we are trying to do pretty strongly. So, we are beginning to get validation of that back from the people that write checks in our companies.

In one particular case, which is not a third-quarter result, and it may not be a fourth-quarter result, we are actually getting contacted by some of our good customers saying -- do you think you can do this for us here? So, I think we are taking on the role that we've been working for a lot of years now, George, to take on and validate with our customers.

Perfect. See you next week.

Yes, looking forward to it.

Wayne Johnson, Raymond James.

Hi, good morning. Could you guys give a little bit of color on what the top-line performance has been for S1 and Online Resources? How has that unfolded? S1 -- you've obviously had in the portfolio for over a year. ORCC is newer.

It just seems like there is -- the top line seems to be laboring here. So, I was wondering if you could give any color on those topics? And I have a follow-up. Thank you.

I will say two things. Starting with ORCC, you can see what that contribution has been on the year. We are tracking consistently with what we said in our February call in terms of what the ORCC contribution would be for the year -- roughly tracking to the $162 million to $163 million. It is tracking to what we told you earlier in the year.

From an S1 perspective, the one thing we can't do, from the date that we acquired S1 going forward, the further you get from that date, it's harder to discern what is S1 and what's ACI, because we made product decisions to stop selling certain products on both sides related to that. Where we are seeing a significant amount of success in the S1 side is on the online banking, which was one of the rationales for the purchase, was selling online banking, especially overseas where we did not have a product before. From an overall contribution, again, it is more difficult to see as you get further away from the acquisition date.

Let me answer it in another way, too. We clearly -- the combination of the two onlines are clearly creating this opportunity, which was the main reason we bought S1, and we are very happy with that. That is one point.

Point number two is that we do not sell perpetual licenses. We sell subscriptions. So, every quarter I'm going to tell you that, on an apples-to-apples basis, what they called revenue and we called revenue is not the same thing. That it is a backlog-to-backlog basis that is the relevant. Maybe we're nuts not to take our revenue all upfront, but we are in this for the long haul.

The other one that I would think would be extremely obvious to everybody is that we were 5 or 6 times their size on the payment side. Their only growth was coming from our attrition rate sitting at a 3% or 4%. And now their attrition rates are sitting at 3%. So, if our attrition rate -- if we even improved 1% on attrition, and we were 5 times their size, that meant that what was 5% of their growth is sitting in less attrition on our side.

Quite honestly, guys, you can beat me up forever on keeping good business and not having to resell it, right, than to say -- well, where is the apples to apples? It's not perpetual, right? I'd rather have it in reduced attrition than going out and reselling what we have there and whatnot.

And it has been very -- S1 -- it's never easy to put something that size and that global together and whatnot. Our guys have worked really, really hard, and the results have been really, really good. If you think of it in its totality, not just one line -- gee, it is coming into backlog; that means the revenue is going to come. Gee, if it is coming from reduced attrition instead of them -- rather disintermediating ourselves, we feel pretty good about that, too.

Okay, great, I appreciate that. Good color on quality of revenues here.

And just to take that one step further, the organic revenue growth -- kind of low- to mid-single digits. As we are now in November, and we're looking into next year, and I know that I'm going to see you guys next week, and everyone's going to hear about what you have to say at that time. But just to give a broad range, low- to mid-single digits, how should we -- in revenue growth for this year -- how should we think about next year?

Well, I think generally we've told you, and it will be consistent, that our revenue growth outlook over time is mid- to high-single digit. The one thing we have to make sure we do, and we are going to do it here next week, is establish -- what does 2013 look like? What's the baseline? What's the exit rate going into next year?

And that is -- we did not have ORCC in there for a full year. We obviously do not have Official Payments in there full year. We're going to kind of walk that, and build up what our baseline is for 2013. But I would say our gross projections over time are in the mid- to high-single digit on the top line.

Terrific, thank you.

Brett Huff, Stephens Incorporated.

Good morning, guys, and congrats on a nice quarter.

Thanks, Brett.

Two questions -- both on bookings. One is -- on the bookings that we think are going to come in, in the 4Q, can you give us a sense of, qualitatively or quantitatively, how those bookings will turn into revenue over time? Are they faster to turn into revenue, slower to turn into revenue? Can you give us a sense, because that high-teens or mid-teens bookings is a compelling number, but I'm just trying to figure out when that rolls in and we see it in the P&L?

Well, as I say, I do not think the Q4 sales are any different than our historical mix. There will be obviously a low conversion in the fourth quarter. We do not bank on a whole lot of sales-to-revenue conversion in any given quarter.

We go in with 90%-plus already in backlog. So, the conversion to revenue from new sales will be consistent with the past. And obviously, the larger, the more complex deals that we do, multi-product, now with Universal Payments, it is going to be -- it could deliver in a couple of years. But nothing real big that would have to contribute to revenue this year.

It is a great question, though, because we're getting a lot of opportunity, and UP is driving a lot. And UP is not reducing the implementation cycle, right, because we are selling more complexity and whatnot.

The other change, Brett, that is taking place, and that is why I think it's a good question, is we are doing a lot more SaaS -- software as a service business than we're doing on-site business. So, a lot of the growth in sales are going to land up being installed in our own center.

Whereas that's going to give us, once installed, a better revenue stream. That actually, in the beginning launch from sale -- month of booking to actual revenue earning is actually a little slower because you do not have your percent completion and whatnot. You got to get them up and running.

Then once it is up and running, we'll end up getting it pro rata'd. It is better revenue, and we will probably be at the same run rate at the same time, or even maybe a little better run rate at the same time. But the curve will be a little bit slower. It will actually be a little bit slower coming up. And that's -- so, the good news is -- the amount that's being sold, if there is a short-term offset, is that a lot of that's going to become SaaS -- very sticky SaaS volume, which will end up booking itself into revenue a little bit slower.

Did I make that totally confusing?

No, that makes sense.

You kind of addressed what my second question, which is specific on UPP. I think, Phil, it was either last quarter or the quarter before that you talked about UPP having potentially very large deals, maybe deals all-in contract value that are bigger than the -- even the large BASE24 deals.

Assuming sort of an equivalent large deal, BASE24 to UPP, can you compare/contrast how that curve looks like? Is it a two-year implementation, a five-year? UPP seems like you are hooking together so many different disparate systems, that it could be extremely long.

I do not think it's going to be extremely long. I think -- well, one thing we have been working really hard on is being better at implementations, right? And this may -- so, I think the improvements in our implementation are going to be somewhat consumed by the breadth of these implementations. So, I think there is a fairness to that. But we are not looking for that to push itself out.

Even in these very large UP deals -- these UP deals -- we're seeing more and more interest in us probably initially hosting the solution -- the build, operate and transfer, or the build, operate and maintain. I think some of these deals will end up being very large, and you can't really compare them to the retail deals because I think a lot of the big UP deals will be retail. And they'll be the means in which people go from classic to EPS with co-habitation and whatnot.

And so, by definition, I think they will be larger, because I think it will become the bridging activity. We all know about hubbing, and the value of hubbing and whatnot, but bridging technology -- and this orchestration brings an ability to bridge the old and the new in a way that will -- that a lot of people have not been thinking about.

The analysts are doing a good job of laying it out -- the industry analysts. I do think they will end up being large. I think they will be large multi-phase deals, which means that the net will be much bigger, but they'll end up having two or three or four completions to them, because they are taking up more breadth within our customer.

Or to think a different way -- where they're collapsing multiple pieces into a more singular payment infrastructure is probably the better way of thinking about it. So that you would be bringing it in by pieces, not building out in pieces, I think is probably the better way to explain it.

Great, that's helpful. Thank you.

(Operator Instructions)

Thomas McCrohan, Janney.

Hello, guys. Thanks for taking the question. What contributed to the sequential decline -- I'm looking on a GAAP basis -- sequential decline in R&D and SG&A? And by my calculations, it's almost like a $10-million sequential decline?

You're looking at just quarter over quarter?

Yes, Q2 to Q3.

I would not look at it quarter over quarter. I would look at it on a trailing basis. Our investments in both R&D, and selling and marketing, are tracking pretty consistently with what we have had in the past. But you'd have to look at it more -- it is more timing in the year.

So, as a percentage of revenue this quarter, is that kind of the way to be thinking about R&D going into next year?

No, I wouldn't -- the R&D, and selling and marketing, dollars are generally pretty consistent. They will grow -- we will invest more next year in both of those. But obviously, as we get revenue growth, we will get leverage on that.

Over time, I would see the percentage spent on R&D decline. But it will be -- we'll still be investing more dollars every year, just as a smaller percentage of revenue growth.

But we'll be significantly over industry average in R&D investment for the next five years and whatnot.

Okay. If I can just squeeze in one more? If I missed it, I apologize. Did you folks disclose the potential synergies from Official Payments?

Yes, we expect to achieve $8 million of cost takeout by December 31 of this year.

Thank you.

There are no further questions at this time. I turn the call back to the presenters.

Great. Thanks, everybody, for joining us. We will see you -- some of you next week.

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