ACI Worldwide Inc (ACIW) 2016 Q1 法說會逐字稿

Good morning, my name is Kim and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings 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 instruction) Thank you. Mr. John Kraft, Vice President of Investor Relations, you may begin your conference sir.

Thanks, Kim 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. With that, I'll turn the call over to Phil.

Good morning everyone and thanks for joining our call. Quarter one represented a very busy start to the year. Our results were in line with our expectations and the guidance we provided. Strategically, we completed the sale of our CFS operations and effectively deployed the cash proceeds. Using the $200 million we received, we purchased 60 million in ACI stock or 3 million shares.

This offset the EPS solution on an EPS basis for the divestiture. With the remaining $140 million as well as cash generated during the quarter, we paid $167 million down in debt. Moving to our operating results. Our sales team had an excellent start to the year, we grew total bookings by 15% and our new bookings improved by 47% while experiencing the same strength and momentum in our global merchant retailer business that we've seen for the last several quarters.

For example, we signed a significant e-commerce contract with one of the largest South American networks. This customer expects to dramatically improve its competitive differentiation with our industry-leading e-commerce and card-not-present or prevention tools. Overall, our ReD and PAY. ON acquisitions are both tracking ahead of expectations and we've seen accelerated success due to their integration into our existing merchant retailer focus solutions.

We will be hosting a merchant retailer focused event in both New York and London on June 2, with industry speakers discussing the innovation and disruption in the payments in e-commerce space. In quarter one, we saw strong results with our banking sector customers also and signed several large contracts with financial institutions. Two of our largest contracts are renewals that included significant add-on business. This demonstrates the value of our broad suite of solutions as well as our success in our efforts to be truly strategic partner of choice for these customers.

We achieved another major milestone with the go-live of our first Linux-based UP BASE24-eps customer. Not only is this large European financial institution seeing a dramatic reduction in hardware maintenance cost, but witnessing increased speed as well as flexibility to scale and respond rapidly to fast-changing customer needs; our pipelines continue to increase. The sales booking success this quarter helped grow our backlog sharply, our 60-month backlog grew $73 million after adjusting for CFS and currency with a five-year backlog of over $4 billion and high coverage relative to our full-year forecast. We are comfortable reiterating our guidance for this year and beyond.

With that, I will hand it over to Scott, who will discuss our financial results in more detail. Thank you.

Hey, thanks Phil. Good morning, everyone. I first plan to go through the highlights of the first quarter and then provide our outlook for 2016. We'll then open the line for questions. I'll be starting my comments on slide 6, with key takeaways from the quarter. As previously announced, we completed the divestiture of our CFS operations on March 3. We received $200 million in cash proceeds and recognized the GAAP after-tax gain of $94 million.

We used the proceeds to repurchase $60 million in ACI's stock year-to-date or approximately 3 million shares, with the remaining proceeds used to pay down our revolving credit facility. We'll continue to operate under a Transition Services Agreement, whereby Fiserv will reimburse us for the direct cost of operating the CFS platforms for a period of time, and we will continue to incur approximately $7 million of indirect costs during 2016 in support of these transition services, and are committed to eliminate these costs by the end of the year.

We started the year strong with overall sales bookings up 15% in the quarter and our net new sales bookings up 47% over the prior year quarter, both of these amounts adjusted for the CFS divestiture. We continue to see strong sales growth in our merchant retailer solutions including our global e-commerce payments and card-not-present fraud, as well as our bill payment solutions.

These bookings contributed to a very strong backlog growth during the quarter with our 12-month and 60-month backlog up $21 million and $73 million, respectively, and both of these numbers excluding the impact of the CFS divestiture and changes in foreign currency. Excluding CFS in both periods, revenue was $211 million or up 2% over the prior year quarter and on a constant currency basis. Underlying this change in revenue was an $8 million increase in recurring revenue or nearly 5% growth compared to the prior year quarter, offset by a decline in non-recurring revenue of $4 million. So, overall healthy growth from our stable, predictable recurring revenue streams.

Excluding CFS in both periods, adjusted EBITDA was $25 million, down $11 million from the prior year quarter, primarily from the timing of non-recurring revenue of $4 million, timing of project-related expenses of $3 million, and higher selling and marketing expenses of $1 million, as a result of the higher sales bookings.

And as you know from our historical pattern, our non-recurring revenue recognized from licensed software sales and revenue release from deferred revenue and project go-live is very high margin. Based on our expectations around sales mix and timing of project go-lives, we expect non-recurring revenue and its associated margin to be more second half weighted this year compared to the same period in 2015.

Operating free cash flow excluding our previously announced one-time capital investments in our European datacenter and cyber security was $30 million, down $9 million compared to the prior year quarter and similar to our EBITDA results. The decline was driven by the timing of the non-recurring revenue, timing of project related expenses as well as the higher selling and marketing expenses.

We ended the quarter with $94 million in cash and after paying down $167 million in debt, we ended the quarter with a debt balance of $772 million. We repurchased $3 million shares or stock year-to-date and have $78 million remaining on our share buyback authorization. Turning next to slide 7. With our full-year outlook, we are reaffirming our full-year guidance.

Our guidance excludes the impact of the CFS operations, including the $7 million of indirect costs required to continue to operate the CFS platforms during the transition. For the full-year 2016, we continue to expect revenue to be in a range of $990 million to $1.02 billion. We continue to expect adjusted EBITDA to be in a range of $265 million to $275 million, and we expect net new sales growth in the high single digits.

Our guidance excludes approximately $15 million and expected one-time integration and divestiture-related expenses for PAY. ON, CFS, and our continued datacenter and facilities consolidation. In Q2, we expect revenue to be in a range of $215 million to $225 million. Q2 revenue and margin will also be impacted by the timing of non-recurring revenues, as I mentioned previously that we are expecting to see come in the second half of the year. So overall, a strong start to the year and one that positions us well to achieve our financial targets in 2016. That concludes my prepared remarks. Operator, we are ready to open the line for questions at this time.

(Operator instructions) Brett Huff, Stephens.

Can you give us, Phil, a little bit more color on just how the pipeline looks and what's really -- any change in the underlying trends driving the strength in the merchant related sales, and maybe be a little more granular. Are these -- the payment system based on UP or is it more of the ReD and the PAY. ON pieces of the pie that are driving some of those good sales?

Well optimally, there are merchants that take all three, right. So, when we talk about our support of the omni-channel with UP, right, that means that they've taken an array of what we have, and that's probably our strongest category. Our second strongest category is cross-selling, we're doing some good cross-selling of ReD to PAY. ON and PAY. ON to ReD, in terms of existing. And then there is a fair amount of cross-sell, this EMV, the merchants really waited probably too long and the association didn't give them a tremendous amount of time. I think we put out a press release that says that 75% of the merchants are still trying to figure out -- this is the US merchants who get the EMV stuff, right.

So, I would say that the balance is more towards support of omni-channel and [gateway] of doing payments and the ability to have more control and not have to be relying on single merchant acquirer and I think it's the broader demand, if not a piece demand, Brett.

Okay, that's helpful. And the follow-up is, can you give us an update on where we stand on the pipeline, the potential closing for one of the marquee UP deals kind of in a larger bank side. I know you guys have had some in different regions, but I think folks were, you've been talking about a couple of dozen deals in the financial institution UP pipeline?

They are working their way through. I mean, we have some -- we don't have -- what's not making them as explosively large and I think I told you this time is that, certainly the guys oversees the ability for us to go and the ability for them to go pay a big ILF in the phase of their currencies being down 30%, 40%, just doesn't exist. So, we signed some pretty large deals that are going to pay us ratably over the 5 years for us making discount in order to get an upfront revenue payment, that's kind like a double negative, right.

And it was a pressing realistic demand, so that's going really well, (inaudible) on that Linux deal is, I think that's actually very seminal because all of a sudden, a lot of the other players in the market are looking at the efficiencies that have come out. We are now showing up with other customers and some larger, although that was a large European bank. They're showing up and they are understanding the efficiency that Linux brings to the equation. Also, we have several large deals that I expect are going to close this year. To answer your question directly, (inaudible) to our full-year guidance, because we're not approaching it to make an upfront bonanza that we wouldn't necessarily repeat next year.

Paul Condra, Credit Suisse.

Hey, good morning everybody. I had a couple of questions just on the guidance because it seems like at least from a revenue perspective and a sales perspective, you're starting out really strong, but you're maintaining the revenue outlook in the kind of upper single digit sales growth outlook. So, can you just talk about why is there conservatism or is there something that was just more front-end loaded?

I'll answer and then Scott will answer it. Goes back to what I just said before, we've done, I think, a pretty good job of navigating the switch from selling mostly installed software with its upfront revenues. So, a much larger percentage of SaaS, that continues. Now the good news is, we are beginning to see the SaaS revenue -- we're beginning to see SaaS revenues growing very, very nicely as everything -- we're getting -- things are getting installed. But, we still want the agility, we're sticking to our full-year forecast, but we still want the agility to sign bigger deals that are more ratable than they are. So, they're more ILF, the initial license fee-oriented. So, we feel really confident on our sales and we're working really hard on our revenue. And I think we're doing really good against current -- the value is clear, but there are current period headwinds, and I think we're working well against the current, and we wouldn't want to get over our fees in terms of over committing.

The only other thing I'd add to that, Paul, is that the strength we saw in Q1 year-over-year in terms of sales bookings was that a lot of that came from significant growth in the SaaS side. So, that's not necessarily going to convert a high percentage of that revenue in the current year, but will go into the installed and once go-live, we'll to start to contribute even as early as later this year, but a lot of that came from the SaaS side. We did start strong, which obviously is very good Q1 on a year-over-year basis. Q1 has a tendency to be a slow start to the year. This year we actually started pretty strong. So, we're confident in our guidance and hopeful that if we continue down this trend, maybe we're looking at some higher sales bookings later in the year, but for right now, we're comfortable with the guidance we've provided.

Thanks for that and Scott, can you give us any clarity just on EBITDA on the second quarter, you told us on revenues but just because it's still lumpy, just for the sake of our models?

Yes, so a lot of that, if you look at the year-over-year comp, you look at Q2, last year has been pretty sizable non-recurring revenue. A lot of that comes from timing of project go-lives. Last year's second quarter had a significant amount of capacity sales on the license software side and the capacity sales typically converted very quickly. That pattern is not expected to recur this year, so the non-recurring revenue would be down in Q2. And with that will be -- will come up, a lot of that's very high margin. So, it will have a direct impact on the EBITDA as well, but what we're seeing, it's not inconsistent with our historical pattern, there's a lot of second-half go-lives in second half license software sales, which have a tendency to convert more at near-term to revenues in the SaaS side. So, about the revenue, the revenue difference in Q2 versus last year -- a lot of that will have an EBITDA effect.

And then just really quick, Phil, I think you mentioned the significant e-commerce contract, but then the line kind of cut out, right? When you mentioned, I don't know if you said who it was (inaudible) region or something, can you just give any more detail?

I said that in South America, I referenced that we signed one of the largest of the South American networks and we are going to be supporting -- be a primary support in their card-not-present fraud activities.

And this is like a card network?

Yes, it's a -- I can't be more specific, but yes, it represents one of the larger networks and I'm not taking about Visa, MasterCard in terms of network, I'm talking about regional payment scheme.

Okay, thanks. And then just one lastly, just a little help on some of the cost lines that look like R&D use up sequentially quite a bit. And so, kind of some other seasonality in there, but is that going to come back down through the year or just any kind of thoughts around that? And also where do you think most of your leverage on costs will come from this year?

Yes. Well, on the cost side, you'll see the cost of services is up. Again, part of that is timing. As I mentioned that had an impact this quarter and part of that is just overall deferred project cost year-over-year, whereas last year we had more of going into deferral than coming out, and this year it was the opposite.

The other part is in the hosting costs or the data center costs, obviously, those are -- our overall SaaS revenues year-over-year are up 10%. So that cost structure is also going up, not just to support this growth, but it will support the continued growth as we go. So, I see it is getting a lot of leverage out of that cost structure as we continue to layer on and go-live with new business and layer on that incremental revenue on top of that fixed cost structure. Those are probably the two key areas.

And then the R&D, is that coming up a lot this year?

I don't think over the course of the year you'll see that significant increase. We continue to invest pretty heavily in R&D, but I don't see a significant increase in that, if once you get across the full year.

George Sutton, Craig-Hallum.

Hey, good morning guys, this is Jason on for George. Just wondering if you can talk about the UP deals that you've announced over the last couple of quarters, how those are progressing through the pipeline and kind of the implementation cycles?

Well, the one I'm most proud of is that we announced Linux going GA in December. And now the next quarter, we're announcing that Linux is live. These projects are actually going very -- they're actually going very well. This new RPS program of ours, which we are adjoining and allowing cooperation between classic and EPS 2.0 or 2.1, if it's Linux, it's actually taken a lot of the stress and it's taken the entire Big Bang out of bringing them up to the next level of technology.

Thanks, Scott, I think you mentioned this already, but I didn't catch it. The 60-month backlog, I think that reflects a decrease year-over-year, but I know there was some of the CFS that was removed from that line item. Can you just, once again, go over the year-over-year change in the 60-month backlog?

Yes, I mean, a lot of it's going to be the CFS removal. But if you look at the change from December 31 to March 31 on an organic basis, on excluding the CFS removal, the 12-month was up over $20 million and the 60-month backlog was up over $70 million.

And there are no further questions at this time, I'd like to turn the call back over to the presenter.

Well, thanks everybody for joining us and we look forward to catching up individually over the next coming weeks. Have a good day.

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