ACI Worldwide Inc (ACIW) 2014 Q4 法說會逐字稿

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

(Operator Instructions)

Thank you. John Kraft, you may begin your conference.

Thanks Leanne, and good morning, everybody. Today's call, like all of 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 I hand it over though, I wanted to remind everybody that ACI will be attending the 36th annual Raymond James Institutional Investor Conference in Orlando next Wednesday, March 4.

With that, I will turn the call over to Phil.

Good morning, and thank you for joining our call. What a year.

2014 was a significant year for ACI. We are very encouraged by the [R-SNET] results, which grew a better-than-expected 17% for the year. We are seeing significant customer demand for our hosted solutions and our SaaS bookings grew in excess of 61% in 2014.

We are also seeing material interest in our UP-enabled BASE24 EPS solution. Adding RED to our fraud and risk solutions gives us a front row seat in this arena, where we belong.

While the sales booking results, driven by SaaS, UP, and EPTP, were above expectations and driving our backlog above $4 billion, we under-appreciated the complexity of these deals and their impact on capacity sales and ILF renewals. With the exception of the near-term revenue timing caused by GAAP impact, these results are an economic win for ACI, and clearly in the best interest of our long-term shareholders by providing ACI with larger contract, greater opportunity to cross-sell, and ultimately more efficient and profitable customer. Our record 50 month contract backlog validates this.

We're particularly optimistic about the extent of interest in the market for our universal payment solution, both in terms of the number of potential customers as well as the breadth of the application within our customers' environment. The UP framework is extremely powerful and is motivating many of our customers to reevaluate their technology roadmap.

While I am disappointed we didn't announce a large UP contract in 2014, the delay is not a function of lack of interest. To the contrary, we underestimated the scope and complexity of the interest.

I am confident we will have a major UP deal to announce. We did, though, sign several mid-size UP contracts, and our overall new account and application bookings nearly doubled over last year.

Let me provide you with a few details. In EMEA, we signed a contract to migrate one of the largest [Polish] banks from BASE24 classic to our latest Up-enabled BASE24 EPS to support the bank's ambitious innovation and growth plans. Also in EMEA, a leading Dutch bank signed a large contract, expanding our base 24 EPS product across the bank's retail card business. Once implemented, the bank will see lower cost per transaction, improved time-to-market, reduced risk, and improved infrastructure for real-time payments.

In Asia, we completed significant UP-BASE24 EPS upgrade for an existing customer operating a national switch. In the Americas, our largest segment, we saw particular strength in Latin America market, which grew 28% over last year.

We are also seeing better-than-expected bookings in our EBPP segment, which [with groche] anchored by several significant wins. This demand clearly validates our universal payment strategy, providing significant long-term economic value.

Looking forward, the market opportunity for UP solutions is fast, highly diverse in customer appeal, and is growing as banks, billers, and retailers face dozens of payments types, pervasive and more sophisticated fraud, ever-increasing and onerous regulatory burdens, not to mention stiffening competition. It will require a different technological approach to achieve these goals and improve margin, say nothing of maintaining their existing margins.

In the retail segment the addition of ReD this year expands our offering and materially improves our market opportunity. ACI stands alone with our industry leading ability to provide an omni-channel payment experience that also effectively deals with card-not-present transaction security, as this method of payment skyrockets in the burgeoning eco-commerce sector. This will become especially important in North America with the new EMC requirements. It matches, in fraud, our expansive payment view introduced by UP of EPS 2.0.

Our pipeline is at a record level, and introduces several large in-dialogue deals. We continue to move these opportunities forward.

For the year we saw a non-GAAP revenue growth of 17% and adjusted EBITDA growth of 9%. We also repurchased 3.6 million shares during the year for $70 million.

Considering our record backlog and the early success with universal payments, we are optimistic about 2015 and our five-year planning horizon. Growth of UP and Omnisolution, including ReD, remains our primary goal.

I will hand over the call to Scott to discuss our financial results and 2015 guidance in detail. Thank you.

Thanks, Phil. Good morning, everyone.

I first plan to go through the highlights of the fourth quarter and full year 2014, then provide our outlook for 2015. We will then open the line for questions.

I'll be starting on the comments on slide 6, with key takeaways from the quarter. Our new sales bookings were up 10% in the quarter, and as Phil has already mentioned, we saw particular strength in our new account, new application sales.

These sales bookings contributed to strong growth in backlog with our 60 month backlog growing nearly $80 million during the quarter to a record $4.2 billion and 12 month backlog growing $13 million to $903 million. We saw revenue growth of $6 million, or 2%, compared to the prior year, driven primarily by the acquisition of Retail Decisions, full quarter contribution of official payments.

On an organic basis, we continued our trend in growth in recurring revenues, offset by a decline in our non-recurring revenues, as we transition to a higher mix of hosted sales and its related ratable revenue model. Our recurring revenue grew 16% to $203 million, representing 70% of total revenue in the quarter, compared to 62% of total revenue in the prior-year quarter.

Additionally, our mix of sales also impacted current quarter revenues as we saw higher new account and new application sales, which require implementation prior to revenue recognition, versus incremental capacity sales and initial license fees on renewals, both of which have more immediate conversion to revenue. And given our largest fixed cost base, this revenue timing also impacts our near-term profitability, resulting in our adjusted EBITDA in the quarter of $107 million, declining 9% from Q4 last year.

Our operating free cash flow was $72 million in the quarter, up $10 million or 16% from Q4 last year. We ended the quarter with $77 million in cash, up $17 million from Q3, and a debt balance of $892 million, down $54 million from Q3.

Turning next to slide 7, with key takeaways from the full year. Net new bookings in 2014 grew 17%, or 10% excluding official payments in ReD. We saw total sales bookings grow 18% over last year, and exceeded $1 billion for the first time.

We continue to see a growing preference by our customers opting for our SaaS-based solutions, which resulted in our hosted subscription and transaction sales growing 61% over last year. While these contracts are generally larger, their revenue is recognized ratably and has been a near-term optical headwind to our reported results.

For the year our non-GAAP revenue grew 17%, or negative 2% organically. Our SaaS subscription and transaction revenues grew 59% over last year, and represented 41% of total revenue for 2014. As we transition to higher levels of hosted contracts, we will continue the trend of growth in recurring revenue offset by declines in nonrecurring revenues.

For the year, our adjusted EBITDA grew 9% to $261 million, operating free cash flow was $134 million, down from $151 million last year, and as Phil mentioned, during the year we purchased 3.6 million shares and $138 million remaining on our share buyback authorization.

Finally, turning to slide 8 with our outlook for 2015, for your financial modeling purposes, here we provided a pro forma view of 2014 to normalize for the acquisition of ReD, as well as to reflect 2014 revenues at our end-of-year foreign currency exchange rates. An item of note here, with our mix of foreign currency, denominated revenues and expenses, FX is generally a top line revenue and expense phenomenon, but has minimal impact at the margin level.

For 2015, we expect non-GAAP revenue to be in a range of $1.05 billion to $1.08 billion, which represents organic growth of approximately 3% to 6% over pro forma 2014, and as we discussed previously, we expect organic growth to be at the lower end of our mid- to upper-single-digit guidance range that we provided for our five-year planning horizon, this given the impact of the business model shift.

We expect 2015 non-GAAP EBITDA to be in the range of $280 million and $290 million. We expect sales net-of-term extensions to be in the high single digits for the full year 2015.

We expect our revenue phasing by quarter to follow our historical seasonality, with Q1 revenue expected to be in the range of $225 million to $235 million. And also here below, we have also provided additional data for your 2015 financial models.

We expect interest expense to approximate $42 million, with cash interest of $36 million. Capital expenditures are expected to be in a range of $40 million to $50 million. We expect depreciation and amortization in the range of $95 million to $100 million, and non-cash compensation expense expected to approximate $20 million for the year.

With an expected pass-through interchange revenue of around $115 million, this model delivers a net EBITDA margin of 30% for 2015, up from 29% in 2014. We expect our GAAP tax rate to be 35% for the year, with cash taxes in a range of $25 million to $30 million.

Our diluted share count should approximate 117 million, which excludes any future share buyback activity. And lastly here, our guidance excludes about $8 million to $10 million of expected one-time integration related expenses for our continued data center and facilities consolidation and bill payment platform rationalization.

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

(Operator Instructions)

Gil Luria, Wedbush.

In terms of the business model transition, this year you're going to get 10% net growth, translating into 3% to 5% revenue growth, and this year you're talking about having SNET in the high single digits.

Does that still translate to the lower end of the range for next year? How many more years do you foresee the business model transition to more of the recurring revenue?

Well, when you're referring to next year, I assume you're talking about 2016? We will -- we said over the five-year planning horizon, we are going to be mid-to-upper single digits. At the early years, we will be at the low-end, and we will essentially grow out of that low-end over the five-year planning horizon.

Just to be clear, with respect to the 10% SNET growth, the hosted SNET sales bookings growth of 60%, which was our biggest growth area, that is going to have a different revenue recognition model over its five years. Take the value and spread it over five years, versus a licensed software model, where you see a good third-to-half of that revenue in about the first 18 months.

So, there is not a disconnect between the sales growth and the revenue growth. The sales growth, a bigger portion of that, is going into the five year backlog and being recognized ratably.

I would expect 2016 to be a step up, as we go across our five-year planning horizon.

But, to the extent that we are more and more successful -- Say we over perform from a sales standpoint, and the over-performance comes from UP and we do more and more UP. It is very possible that UP performance will cause us to have -- it will have a deleterious effect, and negative effect on capacity sales, and it will have a negative impact on ILF that renewal.

I will tell you that right up front because we still have 300, almost 300 or 250 plus classic systems that are now -- many, many of them are interested in buying UP, and not converting but putting UP on top of both systems. What that does is that converts it to a combined solution complex, and two of the three deals that we discussed -- that I gave you as an example, that actually took current period, that took what would have been current period capacity or ILF and pushed it out over 60 months.

We didn't lose value, but it is changing that 80/20 mix. We think we have it right against the sales that we have projected, if we'll end up over performing from a sales standpoint we could very well have pressure on our -- we could very well have pressure on our revenue.

Correct, Scott?

Yes. That's right.

Got it. Then, as a follow-up, as you point out, you have a very fixed expense. You had the 3% to 5% revenues only translating to 5% to 8% EBITDA growth. What is the incremental investment that you're making this year?

Part of that is in the hosting side of the business. That value is getting spread out over five years, although we're setting up the cost structure initially.

The outer years, and certainly the renewals of hosted arrangements, once they are on a subscription rate and they have been set up on a recurring basis, the outer-years and renewal value of a hosted contract is much richer than a licensed software deal, but the early periods do have the setup headwind.

Got it. Thank you.

Peter Heckmann, Avondale

I wanted to ask just a broader question on the recent -- the recently released Federal Reserve report on faster payments. Can you talk about how ACI is trying to influence and guide that process, and in terms of timing, do you believe that will be a catalyst for banks and merchants to look at upgrading or updating their payment infrastructure within the next three years?

The answer to that is yes. But, there are 31 countries around the world that are actively involved in activities that have to do with faster payments. The US is probably the lagger versus a leader in terms of those efforts.

One of the things that is very promising to us is that BASE24, our UP, our Universal Payments framework gets most countries -- most environments a long way towards where they need to go. We are actively working with parties in many countries, including at least three of the parties in the US, more the regulatory or advisory ones that we're working with here, and I think that is actually spurring some of the interest that we have here.

You may know but the one schema of faster payments that takes place -- that has already taken place in Great Britain, we largely supply the bank's solution to that today, and we supply a good portion of the government's solution also. We are very much involved in that, already. They are now looking at round two. That was about six, seven years ago.

Okay. For my follow-up question, one for Scott. We have seen the foreign currency basket. We have seen the dollar strengthen since year end.

Can you talk about what type of FX factor is built into your guidance? I know you're pro forma 2014 for the FX that occurred in 2014, but given some additional deterioration in the basket, what kind of number is in that guidance, so we can kind of gauge if we see future foreign currency movements?

That is a good question. We have actually built the model based on the exit rates of 2014. We built the 2015 numbers on the 12/31/2014 FX rate.

We have seen some continued deterioration. Again, that should impact the top-line revenue, top-line expense, but with our mix of various revenues and expenses so far, [it's been essentially marginal]. It is 12/31 FX rates are what we have used.

George Sutton, Craig-Hallum.

Phil, could you provide a little more qualitative detail on the UP deals in your pipeline? I'm wanting to better understand, sort of on the one hand the customer enthusiasm, with the other hand of the challenges of getting these larger deals to a conclusion?

Well, 2014 was a really, really monumental year for us, George. We got an awful lot accomplished. I wouldn't say it was an easy year, but we've got an awful lot done. My one disappointment was, we didn't get a really big of UP deal across the goal line.

I really don't want to do with a lot of medium-size deals and use up my capacity. I want to get a really big deal across. There are strategic reasons for that.

The reason we didn't get the really, really major deal across was that, we thought that the opportunity was some factor, 1.5 or whatever times the size of business we were doing with the customer and our impact on how they do business, and the truth of the matter is that it was way bigger than that. They ended up opening their [Kimono] completely to us, and their vision of how we could fit there -- we tried to get them to fit our strategy, and they went and said -- actually, you could fit our strategy, which was a bigger piece.

We had -- there is no way we can bring number two and number three in place of number one, so we're still working on number one. There is no lack of interest. The interest is totally there.

It is just a much bigger, much more complex deal. And right, wrong, or indifferent, I'm 100% committed to that, because that validates our -- that validates all of the work we have done over a long period of time in investment and integration and whatnot. And to me, it's worth another quarter or two quarters or whatever it takes to absolutely validate what we're doing.

I can't say anything more than that, George, but the amount of interest in really good-sized institutions is clear and present. We don't -- we no longer have to say we think we have something that works, we know we have something that works.

It is now, how do you go and get something like that integrated? Because we are going to be able to change the way our customers do business and change their cost and time structure.

We are going to be able to allow customers to do real-time payments. And in a pervasive, multi-product kind of way. Is just not, you just don't pull one plug out and put another plug in to do that.

We didn't think they would be as ambitious. We thought they would be much more iterative, and they may end up being iterative in the implementation, but they are not going to be iterative in the planning.

So, planning is taking a lot more time than we have expected. It is good, because we are lining up the other train cars behind it.

Got you. Okay. (multiple speakers)

I'm not in any way, shape or form -- I'm bad, we didn't sign it, but I don't feel bad about it in the least bit.

My other question related to implementation of EMV in the US, I'm just curious how that should impact your business or influence your business once that begins? As I'm thinking about it, I'm wondering, from Scott, if any of your guidance assumes these large UP deals? Thanks.

To answer the -- I will let Scott answer the big part of the question, but we are EMV enabled both ways. We were really -- we didn't do that much EMV business last year. We spent all of the money to get everyone ready, we're SaaS enabled and whatnot, and we thought people come running in to try to go and protect themselves as quickly as possible.

We didn't see that much. We're doing a lot more on the retailer side than on the other side. That surprises us a little bit.

I think people are buying 40% solutions, check a box, and then when they start having losses, I think we will get to sell them 100% solutions. Scott can answer.

Our expectation is that we will sign a big UP deal this year. I would also say sales guidance is not necessarily contingent upon delivering a large UP deal.

If we close one of the large UP deals that Phil's talking about, it is likely going to push us over our SNET guidance range. We will provide that update at that time.

Thanks, guys.

(Operator Instructions)

Brett Huff, Stephens Incorporated.

Hope you are all doing well.

Good morning.

Just a follow-up on the question that was asked before, about what's kind of built into the 3% to 6% guidance? We're happy that it was -- the midpoint about 4.5%, but just given the headwinds or I should say the revenue rec delays that we're seeing based on the shift to hosted and on the fact that UP is taking a little bit longer to get some sales across the finish line, can you tell us what is driving that 3% to 6% at this point? Just give us a little more detail on that?

In part, we had a strong sales in 2014. So we will begin to get benefits of those sales in 2015. Projects, for example, that we sold in 2013 that were hosted are beginning to come online in 2015 as well.

It's really, if you look back, 2013 had 7% organic SNET growth, 2014 had 10% organic SNET growth. That's starting to come online in 2015.

And also, the second question I had was on the free cash flow, or at least the operating cash flow. I think it was down pretty substantially. And cash for you all is something we pay a lot of attention to, just given the revenue recognition, this complexity.

Can you give us commentary on why the cash was down year-over-year, and what you are looking for roughly in 2015?

Yet, if you look at -- if you recall, in 2012 actually, we have to go back, we had the hiccup on the conversion of S1 billing. So, 2012 was actually a significant decline in cash flow.

We had a catch-up in that cash flow in 2013. So, if you normalize for that balance, yes, we are down optically, but we had a catch-up year in 2013.

In terms of modeling for free cash flow, to be consistent with what we have -- how we have modeled in the past, and that is, if you look at our EBITDA, our EBITDA is a range of $280 million to $290 million. Cash taxes would be deducted from that, so $25 million to $30 million, cash interest $36 million, CapEx in the $40 million to $50 million range.

The expectation would be that cash flow would be in that, call it, mid-to-high $170 million range. I don't expect the balance sheet to be a headwind in 2015. I would expect the balance sheet to be a tailwind.

Okay. Have you ever given -- can you give us the 2014 either operating cash flow or free cash flow, normalized for that sort of 2013 bolus catch-up? Can you give us a rough number for that, whatever cash flows you can tell us for 2014?

Yes, it was in the $40 million to $50 million range with the impact to 2013.

(multiple speakers)

That's what I needed. Thank you.

Peter Heckman, Avondale.

I just wanted to follow-up and talk a little bit about the UP pipeline and just confirming, I've been doing a little bit of additional research around the edges. It seems like there's some very small competitors that are claiming to have some of the capabilities of ACI.

Are you seeing any real competitive, competitive solution, credible competitive solution emerge, that is causing a slowdown in decision-making? Or this is primarily a question of timing? It's either the ACI solution, or we continue to do what we're doing today.

I'll be honest with you. What we're doing, we are in very big institutions, and what happens is that we're showing -- in our latest meeting we had 100 technical people from the mortgage company, the retail bank, the credit card -- these guys, they're looking at this thing as the payments -- the universal payments. They are actually looking at it to be the universal payment.

We are having to deal with a lot of what they affably call stakeholders, and so it is more internal. It's not really an external selling activity that we are -- that is where we underestimated the complexity and the scope, was on the internal selling. We kind of had them sold and we were chosen, and they said -- well gee, now it's going to take us four months to sell it internally.

It's not an issue of whether we are chosen or not, it's how to deal with the internal complexity of dealing with it. And that is not true in one, that's probably true in four or five.

Another one we're dealing with is global, and we're helping them go through the ROI, because they understand at the corporate level how much it's worth to them, which is huge. And now, where they start it and how they roll it around the world becomes -- how do you start contracting it?

Quite honestly, we were never used to dealing in this -- we were not equipped to deal in this complexity. We always dealt with the really large institutions, but never at this level of complexity.

Okay. That' s helpful. Then, as a follow-up, there's been some increasing discussion about caps on interchange in EU countries. Did that play into the decision with the large Polish institution, where you had an upgrade to EPS?

We never talk about strategy, but the point I was making in my -- we are providing an opportunity for people to do things at really the sub-sub-sub-cent per transaction level, and where they're paying pennies per transaction, they can't afford to pay pennies per transaction and stay in business. So, they have to think about different infrastructures that get them to a different cost basis to stay competitive, stay in business. And, a lot of them have one system per one payment type, and now we are up to 20 or 30 payment types at point-of-sale.

You just can't do it. You just can't do it that way. That is why we have both approached the retail -- that we are both enabling the retailers and enabling the banks, because we don't believe that either one of them can capture what is going on and maintain or improve their margins without really changing the entire cost structure.

Without talking to the Polish or the Dutch or whichever, whatever their motivation is, that is the overarching motivation. There's no way in the world that the regulators are going to let 40% to 60% of the population be un-banked and then have the solution for the un-bank be more expensive than the solution for the banked.

So, they're going to bring pricing down. Which is going to force them to have different technologies. No more -- it's a lot more complicated than that to implement, but that is the scheme.

They've got the front end in terms of everyone has the online. Right? So, everyone has got the device that can initiate it. Right? The web is there. So, now they've got to get the back-ends to work.

Got it. Helpful. Thank you.

[Anish Morales], Sidoti and Company.

Thank you for taking my question. My first question is, what percentage of new accounts and new application sales are coming from existing customers? And if you can shed some light on the uptick in cross-selling opportunities? That would be great. Thank you.

The first question, the new accounts, the new accounts are all new customers. The new applications are where we are cross-selling to existing customers, where maybe they have a retail payment engine and we sell them a fraud solution. But we have some pretty significant sized new accounts in 2014.

Okay.

I'm sorry, can you repeat the second question?

My second question was, are you seeing an uptick in cross-selling opportunities or cross sales over the last year? Compared to 2013.

The way I would best articulate our cross sell opportunity is to say that we're providing $600 million or $400 million of transactions against two payment types for a bank or for a processor or a network or whatever. They are now asking us to come in, and it could very potentially be against our same technology, and asking us to take on four or five or six more payment types, that double or triples the volume that we do.

So, it's a cross sale in that we have to give them -- we have to enable them against those payment types, but what we are actually doing is leveraging our core technology, or migrating them to our EPS technology, so they are using both our new technology and our old technology under the umbrella of our universal payments.

Does that answer your question?

Yes it does.

We do have other customers like the Dutch deal, where they are buying whole solutions that include the fraud as well as the payments engine and integrating them for [our net]. We have other customers that have as many as nine of our products. I think that is the largest that we have.

And in they use them -- we become a preferred user, and we get used across the different parts. I think the largest cross sell in 2014 was against the UP category, and more uses against existing technology that we had and their -- we had there. In their business.

Okay. Thank you. That really helps. My next question was, there is a mention of a few deals being pushed from fourth quarter to 2015. So are some of these deals baked into your guidance for the first quarter?

Yes. This goes back to when we went out with Q3. Yes, we had pushed out several deals and our expectation is those deals will close in 2015. Some will close in Q2, and some will close later.

Okay.

I'm sorry, Q1, and some will be later.

This concludes our Q&A session today. I will now turn the call back over for closing remarks.

Thanks, everybody, for dialing in. We look forward to talking to you all in the next coming weeks.

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