ACI Worldwide Inc (ACIW) 2016 Q2 法說會逐字稿

Good morning. My name is Megan, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Reports Q2 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) Thank you. John Kraft, Vice President of Investor Relations, you may begin your conference.

Thanks, Megan, 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 documents 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, and I thank you for the time to address you this morning. I have three topics I would like to cover. The first is the second quarter results and full-year perspective; the second is our acquisition and consolidation, especially the SaaS and cloud infrastructure build-outs; and third, Brexit and its short and longer term impact on ACI.

Let's begin by stating that Q2 revenue results were in line with our expectations and the guidance we provided you last quarter. It's our top priority to grow our recurring revenue and we continued the trend in quarter two. Quarterly recurring revenue grew 5% over last year. The large non-recurrent revenue, which is driven by renewals received in quarter two of 2015 did not reoccur in quarter two this year. However, we do expect a similar set of renewals in quarter three this year, which will normalize our year-to-date revenues by quarter three and importantly our full year 2016 guidance remains unchanged with organic revenue growth in the 4% to 7% range.

Turning to bookings in quarter two, we continue to see strong demand for our SaaS offerings, which grew 16% in the quarter and 23% year-to-date. Notably in the quarter, we signed one of our largest SaaS cash management contracts ever. Bookings in our platform business included ReD, PAY.ON, EBPP are all doing very well and we're seeing significant backlog growth. We're continuing to build our ability to onboard and ramp these customers at the accelerated rate we are closing these deals.

Our [traction] is showing significant improvement with our Universal Payment Solutions, signed two important contracts in the EMEA region during the quarter both involved increase in customer transaction volumes including the consolidation of their existing platforms. We now believe we've entered the threshold for signing truly transformational UP deals in the coming quarters. The size of these deals will make them eligible for our RPS subscription program. In addition, we expect to have our first significant Direct Connect customer up and running in a few months with others in the pipeline. The acquisitions of S1, ORCC, OPAY, ReD and PAY.ON have given us almost two dozen fairly ineffective data centers. We will close out the year, that's 2016, with two major US and two major European data centers, which are scalable and address the size of the world we operate. This is a major accomplishment.

I'm pleased to announce that the build-out of our new European data center in Ireland is on schedule and is set to be operational within weeks. The timing of the new data centers is good. The market interest in ACI's SaaS delivery model, as well as our platform solutions now make up more than 50% of the mix, of more than half of our 60-month backlog. To support this growth, we've been engaged in large infrastructure projects while transforming our business to embrace the SaaS and subscription models, but at the same time staying ahead of the growth in e-commerce. It's been a strenuous task, [wonder] if we now can see light at the end of the tunnel. These one-time long-term investments have laid the foundation for truly scalable growth.

Lastly, I want to say a few words on Brexit. Most importantly, there was no negative impact from the disruption surrounding the vote. Our loss of pound revenue have been offset by efficiency and our pound expense costs. That is our FX, revenue to expense hedging strategy has worked well.

From the standpoint of the vote taking place at the end of the month and the end of the quarter, we did experience a bit of disruption, temporary delays in some signings, and while that has some revenue impact on quarter two, it has all been booked in quarter three already. In fact, our bookings and revenue would actually have been better by $24 million and $5 million respectively. As I look out today one month into the current quarter, we have high confidence in our guidance. We've had a strong start in quarter three. For example, we signed another large e-commerce customer in South America showcasing our continued success in that region.

In closing, it is an exciting time for ACI and we continue to work hard with high confidence to make our vision a reality. I will now hand the call over to Scott to discuss the financials in more detail.

Thanks, Phil, and good morning, everyone. I first plan to go through the highlights of the second quarter and then provide our outlook for 2016. We'll then open the line for questions.

I will be starting my comments on slide 6 with key takeaways from the quarter, starting with bookings. Our SaaS bookings grew nicely in the quarter up 16% from last year, offset by declines in on-premise bookings, which resulted in an overall bookings decrease of 26% for the quarter. That was coming off of a very strong Q1, which leaves new bookings growth slightly higher year-to-date than the prior year. As Phil said, we've started strong here in Q3 and we continue to expect full year new bookings growth to be in the upper single digits.

Our 60-month backlog grew nicely during the quarter up $45 million to $4 billion and our 12-month backlog dipped $5 million to $851 million. Both of these adjusted for changes in foreign currency. Revenue came in line with our expectations. As Phil mentioned, when compared to last year, the quarterly timing of non-recurring revenues this year has exaggerated year-over-year comparisons. Excluding CFS in both periods, recurring revenue grew 5% in the quarter. This growth was offset by a decline in non-recurring revenue, which resulted in an overall revenue decline of 8%.

As I mentioned on our last quarter call, non-recurring revenue, which represents that revenue from go-live events and initial license fees from sales in the quarter will be more second-half weighted this year compared to 2015. We will start seeing revenue growth accelerate here in Q3, as we start to see that non-recurring revenue deliver in Q3 this year. And at the midpoint of our Q3 guidance represents growth of 15% over the prior year's Q3, much of this growth coming from non-recurring revenue on top of continued strength in our growth in recurring revenues.

Excluding the CFS and the indirect costs associated with the TSA period, adjusted EBITDA was $21 million, down from $55 million generated in Q2 2015 again that is primarily driven by the timing of non-recurring revenues that I mentioned. As you recall, non-recurring revenue is very high margin as it has very minimal incremental fulfilling costs. So, when we get that revenue in the second half, it will also come with very high margin.

Operating free cash flow was $13 million, up $20 million from a negative cash flow of $7 million in Q2 last year. We ended the quarter with $52 million in cash, a debt balance of $735 million, which is down $204 million year-to-date. Also during the quarter, we purchased $8 million worth of ACI shares 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. For the full-year 2016, we continue to expect revenue to be in a range of $990 million to $1.02 billion, which excludes any contribution from CFS during the first quarter, and we continue to expect adjusted EBITDA to be in a range of $265 million to $275 million. And we expect new bookings growth in the high-single digits.

As I mentioned, we both started seeing our revenue growth accelerate in Q3 with growth expected to be 15% over prior year's Q3, which will essentially represent a 3% growth year-to-date through three quarters and tracking closer to our expected 4% to 7% growth for the full year. In Q3, we expect revenue to be in a range of $240 million to $250 million.

So, in summary, Q2 revenue came in in line with our expectations. As we get into Q3, we expect to see our revenue growth accelerate, and we remain confident in our full year financial target.

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

(Operator Instructions) Peter Heckmann, Avondale Partners.

I wanted to follow-up on Phil's comment about bookings, SNET bookings that may have pushed due to Brexit. Could you go over those commentaries again. I missed the key figures?

What I said was $24 million and $5 million. We would have booked $24 million more in bookings and we would have $5 million more in revenue from those bookings, right, if it wasn't. We're very, very strict on the rules, July 1 business isn't June 30. So, we did have a little bit of disruption, but it really did -- it really was not -- it was a little bit of a belch, it wasn't -- it wasn't in any way dysfunctional.

Okay. And if I heard you correctly, that $24 million is now contracted in July?

Yes, as is the $5 million booked, right. So, in effect, they both happened, it certainly helps us increase our confidence in our third quarter (multiple speakers).

That's very helpful. And then, the two important UP deals in EMEA, could you talk a little bit about those, were those multi-country banks? And then as a follow-on, could you talk about -- a little bit about what you're seeing on the merchant side?

The answer is yes. They were multi-country deals, and actually they were -- I can't tell you customer names -- but they both were (inaudible) country deals, but they were also somewhat involved in terms of how intra-country activities were taking place. So, that was actually positive on two different levels. Our merchant business is doing exceedingly well. The more we bring in big merchants from big parts of the world, they of course create the challenge of incorporating all of the new payment endpoints and whatnot. But we are on schedule with our major projects and the more straight-forward projects are coming on at a good clip. And it's actually putting very nice, very positive pressure on the UP adoption, on the financial intermediary and financial institutions sides, because as the merchants are having more and more options with how they manage their payments, we are beginning to see that being matched on the other side.

Great. Okay. Last question before I get in the queue with the announced acquisition of VocaLink by MasterCard, do you view that as any particular opportunity or risk that's worth calling out at this point?

It is more of an opportunity than it is a risk, because we are not -- unlike MasterCard, we're not a branded player in the market. We're a connectivity player and that actually enhances our connectivity potential, especially with the new and faster payments, immediate payments and whatnot going on. So, we have no ambition of being a revenue participant. We're a facilitation participant and that actually helps us.

Helpful. Thank you.

George Sutton, Craig-Hallum.

Thank you, Phil. You mentioned a couple of very interesting things relative to A, the threshold, you've reached the threshold for transformational deals. I wondered if you could discuss that relative to -- is that an operational maturation, is that a maturation of the pipeline. And then you also mentioned you should be signing your first direct connection soon, and I was wondering if you could just give us a sense of the significance of that from your perspective?

Okay. To answer your first question, there's actually two answers. One, I brought everyone through the infrastructure work, because it has been into four functional operating centers -- has been a really huge task, and we're finally coming to the end by the -- probably sometime early next year, we'll be done with that -- very early next year we will be totally done with that. And if you think about it, we had 24 touch points by which you would do business with us. We basically we have now two active touch points and which -- the business with us, so our ability to provide global connectivity is actually very much enhanced by that capability. Probably even bigger deal, by the time these centers are totally up and running (inaudible) just months away, we will also have large capability in place. So, all these retailers that we're sitting with from our SaaS base and some of our financial institutions that we're sitting with, as well as our connectivity to the rest of the financial institutions, it really allows us to do direct connections, and it allows us to do an array of interconnectivity, which allows more options, not that you have to quit the way you are doing business today, but it adds a lot more options on both sides of the aisle for them to do more efficient point-to-point transactions.

In terms of, where I said -- I talked about deals in the next -- upcoming quarters, I think it's important for us to talk about that a little bit, because we kind of have a trade-off. We got some really big UP deals coming down the line, and they're going to be significantly larger than the business that we're doing today, and in subscription deals we have to make a trade-off between how much growth we want in backlog versus how much do we want to give away from an ILF revenue standpoint in terms of signing the deals.

So, we both want to try to manage to our 4% revenue growth, and do as many of these deals as we possible we can, which means we probably do some of them this year, and we'll probably do some of them next year, in terms of doing that balance, but the good news is, is that we're on a brink of doing them. And that's a little hard, and now we're (inaudible). I think I answered your questions.

I think you did. One other relative to the e-commerce disruption conference you had a month or two ago. Can you just give us a postscript on what you think coming out of that relative to the opportunity that gets created on that side?

We did the final (inaudible) in June in London and New York, and that really went tremendously well. A lot of the direct connection dialog are either from the financial institution side, saying alright, we have a competitive offer to JPay, right or from the merchant side saying gee, with our kinds of volumes and whatnot, we have direct connection opportunities, that's gone really well. I think that vast validation of those meetings, I think, Scott, four or five additional ones around the world; we have done in Australia, India -- (inaudible) one is America, I am [not even] positive of the all events, but the other parts of the world keep asking for it and to me that's the best validation of that. What I didn't answer was your Direct Connect conversation, I cannot tell you the Direct -- I can't tell you what Direction Connect we're doing and even when we turn it on, I may be able to tell you we've turned it on, but I don't think these things going to be overly public as they'd view it as strategic. But I think the banks are beginning to realize the positive impact of their balance sheet of having not exporting their money for periods of time to re-import them back for a debit and I think certainly the merchants are beginning to understand how to manage their cost of goods sold.

So, there are some really good conversations taking place between financial institutions and their merchant retailer customers and we we've been playing the facilitator role in terms of that. And conversations are just extremely constructive and quite honestly some of them coming in areas that are not traditional credit card. They're more debit or they're more direct payment areas, so it's not like it's usually controversial, one impacts the other. It just makes the payment system more affordable and makes processes cleaner. This is coming to a good fruition. And part of it is you got to be able to do it at a high quality and much lower cost. Otherwise, it's not worth the risk of moving over -- moving part of your volume over.

Brett Huff, Stephens.

This is Blake on for Brett. Just given the negative bookings growth for the 2Q and you reiterated for your bookings growth guidance that implies a pretty nice growth in the second half. Can you just give us some color on what you think will be the drivers for that?

I think that the magical bookings growth [one find] that is the SaaS and the platforms and whatnot. Renewals by definition were lumpy because they address themselves back to when the previous contracts were sold and what we told you was that quarter two 2015 matches to quarter-three 2016, and that answers -- that quite honestly answers your question. So, year-to-date 2016, both -- not only from the revenue standpoint but from a bookings standpoint and full year, we are very confident in the booking numbers. We're not kind of confident. We're very confident in the booking numbers we gave you.

And then as you mentioned, we've already talked about Brexit had some slight disruption in your bookings at the end of the 2Q. Could you just give little more detail on why they waited? Was it just a knee jerk reaction? I mean and since you -- seems like you got them all booked now in the 3Q, does this imply you aren't really concerned about any future bookings, getting delayed as well?

No, well -- if Brexit goes through for Great Britain, just so you understand, that creates more endpoints in the global financial world, that creates more business for ACI. Now, we're not political, so we don't sit on one side or the other, but longer term, this plays right into our expertise, right. So, we don't have an -- we don't have an issue with that. England is now going to have to make -- if they go that way they're going to have to make financial decisions with the EU and everyone else. That's different than the EU making decisions with the rest of the world. So, that works very well for us. I would expect longer term -- I'm not going to book anything this year or even try to forecast them, longer-term this will give us more business, not less business. The concerns that we had that people had to work their way through -- I think the concerns are because people weren't prepared for the way the vote came. Therefore, they didn't their homework. If you want my honest opinion, once they did their homework, they realized that the world hadn't come to an end and the business, just went on as planned.

Okay and then lastly, you mentioned you signed one of your largest cash management contracts ever. Congrats on that. Was that something you changed in your strategy or you think it's again a function of the strong industry demand?

No, I mean, we have been -- when we bought S1 and brought -- we made a decision to invest a lot of time and money in their cash management infrastructure and the fruits of that labor are only coming -- really good high quality, big bang software is a multi-year endeavor. We're to the point where that's becoming very, very marketable, and this is the first demonstration of that.

Alex Veytsman, Monness, Crespi & Hardt

Just a quick question on the EBITDA to free cash flow conversion. What kind of rate should we expect for the second half of 2016 as far as adjusted EBITDA to free cash flow conversion?

Well, when we put our EBITDA guidance of $265 million to $275 million and the major, major cash reductions from that to get to our cash flow would be CapEx, which we said is in a range of $50 million to $60 million, interest above $36 million and then taxes of $25 million to $30 million, so it gets you down to free cash flow contribution of around, call it, $150 million range.

So, it's in the vicinity of what we saw over the last couple of quarters. Okay. And then, as far as the buyback traction, what should we be expecting? I think you did 3 million shares in Q1. What could we be expecting in the second half of 2016?

Well, I'd say that year-to-date we've spent $60 million repurchasing and we have $78 million remaining on the share buyback authorization.

So, I'm just thinking --

We want to do share buyback right up front, but we wanted to remove the EPS impact of not having the CFS business and so it's important to note that we've done that. So, from an EPS standpoint, while we've in effect paid back and we've just used the rest of the money; that was part of that $200 million pay-down of the loan. So, we kind of do our own math, right, in terms of how to create value (inaudible).

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

Well, thanks, everybody, for joining us. We look forward to catching up further in the coming weeks. Good day.

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