ACI Worldwide, Inc. (ACIW) Q1 2012 Earnings Report, Transcript and Summary

Good morning. My name is Ryan, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Financial Results First Quarter ending March 31, 2012.[Operator Instructions] I would now like to turn the call over to Tamar Gerber, Vice President, Investor Relations.

Thanks, Ryan. Good morning everybody and thanks for joining our first quarter call. Today’s call, like all of our earnings 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 both our website as well as filed with the SEC this morning. Our management speakers are Phil Heasley, our CEO; Ralph Dangelmaier, our President, Global Markets; and Scott Behrens, our CFO. All speakers will be available for Q&A following our prepared remarks, and are also being joined by members of the executive management team. Before I turn the call over to Phil, I did want to remind you that ACI will be participating in several upcoming conferences in coming weeks, specifically the Davidson Financial Services Conference on May 10, The Craig Hallum Institutional Investor Conference on May 30; and the Stephens Spring Conference on June 5. If you are interested in one-on-one meetings, please contact the conference organizers or me directly. Thanks. And I’ll now pass the phone over to Phil.

Good morning and thanks for joining our call. This morning I’ll spend some time on summary, opening remarks before turning the call over to Ralph and Scott to discuss the quarter in more detail. We had an important first quarter this year with strong organic financial performance and the completion of the S1 acquisition. I would like to report the integration of S1 into ACI is on track. Our year end call, we integrated that we would achieve $30 million in annual cost savings by quarter end. We actually outperformed on those objectives. The team removed $33 million in combined annual expenses by quarter end, of which $24 million will be realized in the 2012. The cost headcount is $3 million better than we modeled and nearly $2 million higher positive impact on challenging year 2012. In addition, and perhaps most important, we incremented our five-year backlog by $700 million. We regard this as our most critical operating metric and as a leading indicator of future business growth. Acquisition aside, we had strong organic revenue growth in excess of 10%, particularly in our maintenance and on demand segments. The organic business also delivered attractive operating income and adjusted EBITDA figures. For purposes of making the operating business performance totally transparent, we have presented both GAAP and non-GAAP numbers this quarter to differentiate the onetime acquisition-related items in our financial discussions. As the key component of our integration plan, we also announced our combined ACI S1 product strategy update for our customers and our people on April 25. Furthermore, we are listening to our new customers from S1 by conducting significant one-on-one visits as well as a quantitative feedback to surveys. A few key items for our combined product strategy update includes, consistent with our longstanding product lifecycle management policy, we planned to continue supporting existing and acquired products. Our growth portfolio now delivers enhanced functionality, scale, and support for financial institutions, processors, and retailers around the world. We have doubled our expert support staff of R&D and services. Health 24 now serves customers out of 20 locations in Americas, EMEA, and Asia-Pacific. We are expanding and investing in our data centers to deliver increased levels of reliability and performance to our hosted customers. We are extending our Reference Architecture to include the newly expanded product portfolio from S1. As the key component of ACI’s actual payment strategy, the Reference Architecture defines the common technologies platforms and best practices that deliver increased agility without compromising the reliability, performance, scalability, which are synonymous with the ACI brands. In summary, we are extremely pleased with this quarter’s performance. And I would like to thank our new and now combined team for working diligently on this integration. I will now turn the call over to Ralph to provide a business overview. Ralph, please go ahead.

Thanks, Phil. I am happy to provide an overview of our markets, our key wins, and customer feedback that I’ve recently got on my visits across the channels: the Americas, EMEA, and Asia-Pacific. In the Americas, I think most people know the earnings are recovering. The regulatory environment is putting tremendous cost pressure and driving more investments within our customers. Latin America economies are recovering and we are seeing regulatory pressures as well as payment system consolidations across the regions. So, we are really happy we have 10 BASE24 EPS projects at our various stages across Latin America. Retailers are also looking for efficiencies across our payment systems and mobile is assisting customers by leveraging their current systems, and some of those are provided by ACI. So we’ve had a number of key wins in the Americas, one I'd like to point out is a multinational global bank, who bought one of our solutions, wholesale banking and our PRM was a joint effort between our Asia team and our Americas team. And speaking about Asia, the Asian institutions are continuing to invest to stay ahead of the rapid payments growth in that market. Japanese banks and retailers are also looking for growth outside of the respective areas and making the appropriate IT investments. Australian banks are strengthening risk systems and evaluating impacts are mobile. A number of key deals happened in the Asia market, and one I would like to point out is a large processor in Singapore who made a large recommitment to ACI this quarter. Over in EMEA, customers are really focusing on strategic suppliers who have proven solutions and track records. Bank and card processors are continuing to merge, we recently saw that in Italy and Spain, and this will create more opportunity for ACI. And South African retailers and banks are focusing on expansion of electronic payments, which will drive opportunities for ACI. So, in EMEA, we had 2 large BASE24 opportunities that closed as well as 2 more migrations in the Middle East. So, they travel through different geographies. I wanted to provide some feedback that we got from the S1 acquisition. So, from the customer’s point of view, in the Americas, we are viewed as a more strategic partner with an expanded presence and deeper position within our broader customer base. I was recently in London and Germany, where S1's Postilion International wholesale offerings gives us a Greenfield approach to a new markets for us in retailers and wholesale. They also see us as a substantial presence now in Africa, with over 100 customers. I spent the last 2 weeks in Asia, Australia, Singapore, and Thailand. I heard a consistent theme from our large customers. They are going through major transformation projects and we are viewed as a strategic partner and we have great relationships with many of these customers. So, in summary, with our new product assets, our expanding offering, we are even more important to customers, we’re a much bigger part of the customer’s long-term strategy and their wallet, and we are leading and participating in many of the payment transformation projects with our customers across the world. Thank you. And I'd like to turn it over to Scott give you more information.

Thanks, Ralph, and good morning everyone. I’ll be staring my comments on Slide 9 with key takeaways from the quarter. Overall, we had a strong quarterly performance. We saw a solid sales performance and in particular with growth in add-on sales compared to the prior year quarter. 60-month backlog grew $700 million and 12-month backlog grew $160 million. We saw strong revenue quarter starting really with solid growth in our organic business, growing more than 10% or in excess of $10 million over the prior year quarter. The S1 acquisition contributed $22 million of revenue to the quarter and again, that was just for the period February 13 through March 31, so not a full quarter contribution yet. A key item to point out here, and we’ll continue to do this in the future to help normalize your revenue in your financial models, is that our revenue was impacted this quarter by $4.3 million of deferred revenue haircut. And again that is revenue that would have been recognized in the normal course of business by S1, but was not recognized due to GAAP purchase accounting requirements, so really $4.3 million of pure margin of revenue that we weren't able to recognize. And the final point on this slide is that our monthly recurring revenue represented 66% of the quarter's revenue. Continuing on Slide 10 with key takeaways from the quarter, the operating expense growth compared to the prior year quarter was almost entirely related to the S1 acquisition as operating expense for our organic business was essentially flat with the prior year. The S1 acquisition contributed about $26 million of operating expenses to the quarter. We also incurred $15 million of acquisition-related onetime expenses. Those costs including severance, change in control, investment bank fees, and other professional fees related to the deal. So, excluding the impact of this $15 million in acquisition related one times, we saw strong growth in operating income and adjusted EBITDA over the prior year quarter, up 79% and 67% respectively. So overall a solid quarterly performance. And finally on this slide, we ended the quarter with $200 million in cash, we used part of this cash to repurchase stock, about 186,000 shares for around $7 million here to date, and used $3 million of cash for scheduled pay down on our term loan. And we finished the quarter with $367 million of total debt. Turning now to Slide 11, this is our normal depiction of the ratio of revenue derived from backlog versus that portion of revenue that is derived from current period sales. As you can see, the mix is consistent compared to last year, and just overall, we are very pleased with the recurring revenue coming out of backlog, which is providing us a stable, predictable, and solid base of our revenue stream. And turning lastly to Slide 12 is still already mentioned, we have achieved $33 million in synergy cost reductions, which is 10% more than our original plan that we laid out in our February earnings call. We still expect to achieve further cost synergies beyond this $33 million of those additional savings coming from both data center and facilities consolidation. At this time, though, we are still assessing those plans and expect to be able to provide the timing and financial impact of those actions at our next earnings call. We also have a couple of updates here for your financial models on the effects of purchase accounting on our 2012 financial outlook. We had originally expected the deferred revenue haircut to be about $12 million in 2012 with the remaining $8 million of haircut rolling into 2013. We are now expecting the full amount of the haircut to roll into 2012. So, the full $20 million to be dealt in 2012, really the margin effect of this higher deferred revenue haircut in 2012 will be offset by lower expected expenses from other valuation adjustments, including intangible amortization as well as the benefits of the higher cost synergies that we have achieved. That being said, based on our performance year-to-date and our outlook for the rest of the year, we are comfortable reaffirming the full year guidance that we lay down in our February earnings call, with revenue expected to be in the range of $696 million to $706 million, operating income to be in the range of $99 million to $104 million, and adjusted EBITDA in the range of $165 million to $170 million. And again, both of the earnings metrics exclude the impact of onetime transaction-related expenses. So that concludes my prepared remarks. Operator, we are ready to open the line for questions at this time.

[Operator Instructions] Your first question comes from the line of John Kraft from D.A. Davidson.

Scott, I guess just a couple of kind of housekeeping for you. The onetime cost, deal related cost, severance etcetera in Q1, is that done or will we see some more of that in Q2 and Q3?

Yes, we originally said $16 million we've incurred $15, there will be some carryover, primarily severance, but we’re still comfortable with the $16 million in total.

And then one I guess for Phil here, you specifically said that you plan to support all the acquired products, does that mean that you dismiss the idea of selling some divisions.

No. We’re still evaluating -- one of the problems in not being able to close for the middle of February was we really didn’t have access to a piece of the business to the middle of February and so, we're still doing the adequate due diligence on that piece of the business and we’re working hard to figure out how it would or would not fit strategically as part of -- what we’re referencing there was that we have a long -- our competitors try to market against us by saying that we are going to do nefarious kinds of things and we just want to make sure that we signal and signal and signal that we are sticking to our timeline or policy of supporting key payment systems until they no longer make any sense in the marketplace, right. So, really we are referring to a different situation.

Your next question comes from the line of George Sutton from Craig- Hallum.

Ralph, given your recent visits to customers, I was curious if you’d give us a little bit more detail on your takeaways, and particularly you mentioned a consistent theme of major transformational projects. Is that being driven by the macro challenges that have in effect concerned a lot of people?

When you say the macro challenges, what’s driving the transformation?

Well, obviously in Europe. The European macro challenges, in particular.

Well, what's driving the transformation George, is really the rise of electronic payments and the need for heavy regulatory pressure as well as the need for cost reduction. When you put those 3 things together and the banks are merging and processors are merging, they’re looking to pick systems that are going to be more strategic and they can do and they can handle more of these changes and that’s the transformation that’s happening. That’s happening in the core systems and happening in the payment systems. And so my point is as those transformations are happening, we are at the table with the executives at those banks with our assets and our technology, helping them achieve those goals.

George, let me weigh in a little bit, too. In Europe, they still haven’t enacted electronic -- they have a single currency from a physical standpoint, but they are still working like that to have the single currency from electronic standpoint as well as the regulation is just behind that. Also with the weakness in the financial markets, then Europe has lot of consolidation going on, which means that the smaller banks are becoming much larger banks and those larger banks have to find efficiencies. Both of those work very well for us. The Middle East is doing very well for us because Middle East is just doing very well right, and they’re building a big banking infrastructure and, thank god, we are a good player in terms of that. In Asia-Pacific, Asia-Pacific is growing very, very nicely and Atheon [ph], which the Singapore, Thailand, they are really participants both in China's success, but also in the competitive success to China coming from Vietnam, Cambodia, the rest of that part of the world. We don’t talk much about it in the United States, but Latin and South America are on fire. They are probably doing better than most places in the world, partially due to their national resources and partially due to Brazil finally emerging after 50 years of hard work into real economy, which is impacting the whole piece. In the U.S., the U.S. banks are absolutely, some of them are still working on integrating acquisitions from 20 years ago. And then on the other side, you’ve got the new set of middle market banks that are doing very, very well and you are watching the consolidating of a lot of the new community banks and there is a lot of consolidation of the larger community banks and you are watching these new $10 billion, $15 billion, $20 billion to $50 billion kinds of banks being created around the country and they are going -- they are using technology as they -- as an advantage. So, there is a bunch of stuff. We are not saying that the macro piece is moving, but there is maybe 7 different macro pieces moving all around the world and they were all slightly different, but we've had the opportunity to play for consistent kinds of reasons.

Just as a follow up, you obviously talked about a handful of global deals that you've been working on and I'm wondering if you could just give us a sense of how the discussions on that basis are going.

They are going well, I mean, when you say global deals there is a lot of action that’s going on between I call geographies and I just spoke a one that they have between the U.S. and Asia. And we see just the lot of coordination between Europe and the Americas, between Americas and Asia, between Asia and the Pacific. So, I think we are really well coordinated with the customers on that.

Your next question comes from the line Gil Luria from Wedbush Securities.

You mentioned mobile as a driver a couple of times. Can you give us an example of how mobile and the use of mobile and some of the emerging mobile payment technologies are impacting your customers in terms of looking at the product?

Sure, one of the assets that we are most interested in when we are in dialogs with S1 was their mobile technology. We've been enabling large customers in mobile for probably too long. I think we did a Telefonica 12 or 13 years ago, but mobile’s coming to critical mass right now and the combination of our assets, the -- how do you say Fundamo, Fundamo asset with the ACI assets. We now are able to provide a really nice mobility topic on our payment product array and there is a lot of dialog going on around the world just that whether it's sparsely populated parts of Africa or densely populated, low cost opportunities in other parts of the world. So, mobile’s going to be very fundamental part of our business going forward.

Got it, and then one for Scott, the piece is maybe there, but would you mind giving us what your guidance implies for GAAP operating income for the year?

Really, the only difference between the operating income that we provided on all 4 is the projected $16 million of onetime expenses. So, we’ve taking that in our guidance, but we are also now, but we have not taken out of our guidance as we are not adjusting our guidance for the $20 million of deferred revenue haircut. So, we are basically saying, we’re saying we are increasing the amount of deferred haircut this year by $8 million, we’re essentially saying we are absorbing that in our business. So we are making up for that $8 million in our business.

Got it. So, GAAP operating income guidance is 83 to 98 - to 88?

Correct.

Your next question comes from the line Brett Huff from Stephens Inc.

My 2 questions are related to sales and backlog and correct me if my math is wrong, but it look like sales were down a little bit year-over-year and backlog organically that is and that backlog was down organically sequentially. Is that a timing issue or is there something else going on there that we should be looking for, first of all, are my numbers right?

Well, 2 things, one on the sales number. If you look back, last year was -- is a record comp for Q1 for us. If you recall back in all the prior years, Q1 is typically normally a seasonal low for us in our quarters. So, from a seasonality I would say this quarter looks more or like a normal seasonal quarter. And in terms of backlog, you also -- what you have to look at too is that we brought a $132 million out of backlog in the quarter and into revenues. The first thing you have to do is essentially replenish that piece be a sales and so that you’re working with some of those optics when you only pull bringing 4% of revenue from sales, the rest of its coming out of backlog. So, you have to refill that first. And then the residual portion, $700 million increase, is coming from S1.

Okay. The second thing is when we look at the S1 revenue, can we just take the reported revenue plus the revenue haircut for this quarter and feel is that a reasonably good run rate looking forward quarterly, or how should we think about that S1 revenue line item?

Yes, I mean generally speaking because of the -- especially the recurring nature of the revenue stream is a hosting revenue to maintenance and in some ways, even the services that are driven under POC, their revenue model, at least for us for this year, is going to be a lot more even and again, you have to adjust it for the revised deferred haircut. We took $4 million of the haircut that we took $4 million of the haircut in 6 weeks. We’ll take a remainder of the 16 here over the rest of the year.

Your next question comes from the line of Wayne Johnson from Raymond James. Your line is open.

It sounds like the S1 integration to date has progressed smoothly. Could you call out any surprises, anything that’s been better or worse than expected?

Well, I mean, obviously we've overachieved on our cost takeout plan by 10%. So, we certainly look at that as a positive. Our backlog is $20 million higher than we told you it was 6 weeks ago that’s another process. And cash is better, we’re probably $13 million, $14 million -- about $13 million better in cash then we modeled, and that includes having spent $6 million buying stock.

Okay, that’s helpful. And how should we think about or conceptualized kind of like the product pipeline out of S1. Can you give us a sense of anything that is new and is finished and ready for sale, and what might be coming down the pipeline?

I just spoke to you about that the mobile really changed - changes our online power -- the products we have on the online side trade in branch and corporate as well as community, we have a much broader offering there. Our ability to be -- to provide a multi-product solution is probably the biggest ever that we have because as we could talk 60%, 65%, 70% of this issue before we'll probably consult 80%, 85%, 90% of the opportunity now. Ralph?

Yes, I'd say the wholesale payments so mentioned online in Asia and in Europe is a great asset. The ability to do mobile banking, which is very popular, that’s a great asset. And the retailers being able to go into the retailers now globally with the product is a big access to it so, some of the strengths that we have as we go in and talk to our customers right now so.

And just one last question, can you remind us did S1 complete, or have you guys completed the migration to the small banking platform for the IDR.

Yes, yes the -- not the migration, the new system is up and running and to the best of my knowledge, I don't want to be incorrect on this, but I think there is about 60% of the revenue is converted at this point. Right, we are just going deep dive into that right now, but I think 67% of the revenue is converted.

Your next question comes from the line of John Kraft from D.A. Davidson.

Hopefully I'd like to ask a follow-up here, regarding that the bookings, I know that recognizing that obviously this is a very, very tough comp. Can you point to any deals that might have been delayed given just the uncertainties surrounding the acquisition and/or was there any contribution or hit from currency?

Yes, answer your first question, I mean let's be really frank, the first 6 weeks of the year, everyone was waiting -- what direction these products were going and whatnot and then everyone was waiting to see whether or not we were going to do the nefarious things that our competitors have all said we were going to do and whatnot. So, in certain regards, that doesn't make the first quarter a good comp, forget how good last year's first quarter was, that doesn’t make it a great comp. Second one is that we try to be very transparent and a very concise in terms of how we talk about what sales are and whatnot. Sale is not a gap number and everyone claimed to have a different definition of sales. Our definition of sales in S1 were certainly not exactly the same and we don’t really want to overly talk about it, so we don't have to backtrack in terms of so, we're giving you the best possible, which is probably also the lowest possible sales number that there can be because we have -- we want to give you something, but we want to be positive. From a foreign currency standpoint, there wasn't a lot -- we are kind of naturally hedged from the mix at the operating income side. So, we may move between revenue and expense, but we don’t tend to get a benefit or big downturn on FX.

[Operator Instructions] We do have one more question from the line of Wayne Johnson from Raymond James. Your line is open.

Just a quick follow-up so on BASE24 EPS, can you guys give us an update in terms of your thinking of converting legacy BASE24 classic users to EPS. What's the internal plan for rate of conversion on an annual basis going forward?

We are really interested in going at the speed -- and first of all, we are interested in going at very high quality process. And we are not forcing any of our customers for conversion, there is no gun to their head, there is no anything, we've really up charged maintenance we are staying on -- we are staying on classic. They understand that and we will go at the speed our customers want to go at. I think a year ago or year and a half ago, I said 5 years into it, that we would probably have 50% of the classic still up and running based on our other systems. Now, with 3.5 more years to go since I said that, I think that's still a very safe -- I think that’s very safe. What's going to get different is that many, many of our BASE24 installations are now partially BASE24 EPS and partially classic. This is not that just guess it, you put in and out, there is up to 2000 pieces modules and whatnot and many, many of our customers now have a fair percentage of EPS in terms of what's in those systems and a fair percentage of classic. So, it gets harder at the product level and we don't want to have starts going down to the module level to kind of explain what is -- what is what, at this point.

Right.

We have no further questions on the line at this time.

Thank you for joining us and we'll look forward to seeing you at our conferences over next quarter. Bye-bye.

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