ACI Worldwide, Inc. (ACIW) Q1 2014 Earnings Report, Transcript and Summary

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Reports First Quarter Earnings Conference Call. [Operator Instructions] John Kraft, you may begin your conference.

Thank you, Tiffany, 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 of these statements on the first and final pages of our presentation deck today, a copy of which is available on our website, as well as with the SEC. On this morning's call is Phil Heasley, our CEO; and Scott Behrens, our CFO. Before we start, I did want to mention that ACI will be attending several investor conferences in May, including events hosted by Susquehanna on May 6, Wedbush on May 13 and Craig-Hallum, May 28. With that, I'd like to turn the call over to Phil Heasley. Phil?

Good morning, and thank you for joining our call. I would like to title today's comments as Hard Work Well Rewarded and would begin with a heartfelt thanks to our people who have delivered us to this threshold. As you know, 2013 was a strategically important and transitional year for ACI and a year, we believe, that sets the stage for accelerated growth. We spent a great deal of effort accomplishing several key initiatives, including the integration of acquired functionality and the buildout and the launch of our Universal Payments offering. We did this to serve a highly stressed industry pressured by increased regulatory burdens, growing transactional volumes and emerging payment technologies. It is a crucial point in payments and our end-to-end solutions arm our customers as they face these disruptive forces by providing them with control, flexibility and security in a highly differentiated, cost-effective and real-time set of offerings. Our efforts are starting to pay off, and we're seeing validation in the market. With that, I'm happy to report our Q1 results. In the quarter, our revenues grew 37%, of which 84% was recurring, setting a new record. Driving this increase is growth in our SaaS subscription and transaction revenue, which was 45% of total revenue in quarter 1, also a new high. With an increasing number of customers opting to utilize ACI's hosting solutions, we expect our SaaS revenues to continue trending higher. Moving to sales bookings, we were very proud of our execution in the quarter, with Q1's net growth of 59% over last year's Q1. Market interest in our UP-enabled payment solutions is very high across the globe, and we have had early success with our recently launched Universal Payments solutions and our next-generation UP-enabled BASE24-eps 2.0. Integrating the Universal Payments orchestration layer into our flagship, BASE24-eps retail payments engine, increases interoperability with other payment systems, enhances usability and lowers our customers' costs, further enabling our newest version of BASE24-eps to utilize any form of account formatting, such as email address or phone number, rather than simply internal account numbers, provides important flexibilities as our customers roll out next-generation services. Let me elaborate on a few recent contract wins and go-lives that involve these technologies. In Europe, a leading Dutch bank signed a large contract expanding our BASE24-eps product across the bank's retail business. Once implemented, the bank will see lower cost per transaction, improved time to market, reduced risk and an improved infrastructure for real-time payments. Also in Europe, and subsequent to quarter end, we signed Universal Payments subcontract with one of the largest global banks, already an ACI customer. This bank committed their future payment strategy to ACI. Our UP solution will allow the bank to consolidate multiple legacy payment systems at their own pace with increased opportunity and reduced risk. In the Americas, we signed a large BASE24-eps contract to a leading South American bank. This existing customer was seeking leading-edge technology from a vendor with global presence and a long-term track record. And in Asia, a leading financial services provider in Malaysia went live with real-time interface to the G3 common payment gateway using the UP technology. Clearly, we're starting to see our development efforts rewarded with mixed significant sales booking and SNET dollars as potential customers move from evaluation to decision phase. Looking ahead, our worldwide pipeline remains very strong across all regions. As we mentioned in our last call, we have a number of potential opportunities that could be amongst the largest we have ever signed. While the timing of these deals is difficult to predict, we are very excited about the opportunities before us. As further evidence, we repurchased roughly 1.2 million shares of ACI stock in the quarter. In summary, ACI is uniquely well positioned to benefit from the changing landscape, growing volumes and increasing complexity in the electronic payments industry. I will now hand the call over to Scott to discuss our financial results in further detail. Thank you.

Thanks, Phil, and good morning, everyone. I first plan to go through our highlights of the first quarter and then provide an update on our outlook for 2014. We will then open the line for questions at that time. I'll be starting my comments on Slide 6 with key takeaways from the quarter. As Phil has already mentioned, we started the year with strong sales bookings, with our sales net of term extensions up 59% on a consolidated basis and 51% excluding Official Payments. And we are clearly seeing traction in market response for our Universal Payments strategy. But since Phil has already mentioned a few of our large Universal Payments wins, I won't spend too much time on those here. But I also wanted to highlight a few other large wins. We signed an online banking contract with a large U.S. bank. This multiproduct sale also includes our mobile and fraud detection applications, and the customer has asked us to host the system within our ACI On Demand environment. Additionally, we signed another large online banking contract to a large global bank for use in their U.S. operations. This customer will operate the technology on their premise. Both of these wins involved institutions that were replacing homebuilt systems. Turning next to Slide 7. The strong new sales bookings helped boost our backlog to new records. Our 12-month backlog increased $13 million to $883 million, and our 60-month backlog increased $49 million to $3.91 billion. We had a solid revenue quarter, growing 37% over the prior year quarter, driven by the acquisition of Official Payments and a full quarter of Online Resources. And notably, our SaaS subscription and transaction revenue more than doubled in the quarter and represented 46% of our total revenue. And excluding the impact of Official Payments and the incremental impact of Online Resources, we saw continued growth in our recurring revenue streams, offset by a decline in nonrecurring revenue streams. And overall, recurring revenue grew $186 million and represented 84% of total revenue in the quarter. Non-GAAP operating income was up 78%, and adjusted EBITDA was up 46% over the prior year quarter. And excluding the impact of pass-through interchange, net EBITDA margin was 16% in the quarter, up 200 basis points compared to the prior year quarter. Moving to debt and liquidity. We ended the quarter with $59 million in cash and $779 million in debt. And during the quarter, we purchased 1.2 million of our shares and have $138 million remaining on our current authorization. Turning next to Slide 8. We are reiterating our full year guidance. We continue to expect 2014 revenue to be in a range of $1.06 billion to $1.08 billion and adjusted EBITDA between $290 million and $300 million. And looking ahead, at Q2, we expect to generate non-GAAP revenue in the range of $240 million to $250 million. And just as a reminder, this guidance excludes -- this full year guidance excludes approximately $13 million to $15 million in onetime integration-related expenses that we expect to incur in 2014, $2 million in deferred revenue adjustments related to the acquisitions and represents our current estimates for purchase accounting adjustments. So in summary, we had a solid start to the year and in particular, with strong new sales bookings that will help us deliver on our full year guidance expectations. That concludes my prepared remarks. Operator, we are ready to open the line to questions at this time.

[Operator Instructions] Your first question comes from the line of Gil Luria with Wedbush Securities.

Yes. Let's talk about the -- these new wins. When we say it's UP-enabled, do we mean that the bank is committed to the UP framework and is going to install it that way? Or is it that they're purchasing BASE24-eps, the version that could plug into UP and facilitate the UP transformation for that bank?

The former, all right, not the latter, that -- there's a commitment to the UP framework.

And then so what's the level of uplift when we sell a bank on the framework versus just BASE24-eps? Is there an immediate incremental revenue that we get from that? Is the value of the BASE24-eps itself higher? Do we get an uplift from them coming into the framework?

No, no, Gil, it's the opposite. We don't charge for UP, right? UP is the -- it's the vitamin. It's what ties everything together. The only thing that we charge is for volume, not our own, that flows through UP.

So how is UP then going to help -- what's the model then for UP contributing to revenue growth going forward once the bank adopts that as their framework?

Well, we have banks that are looking at putting their entire volume stream: wholesale, retail, branch, online call center. The way people are looking at UP is more broad than all real-time -- the way people looking at UP is the way UP was really designed was being the universal broker for the real-time -- for real-time transactions to flow...

Yes. And, Gil...

And being able to have a single fraud hub so that you're not trying to figure out whether you're getting defrauded on mobile 1 minute versus getting defrauded through your call center on another minute. And so it really just changes the physics of how we deal with the customers for -- or makes it much more broad.

Yes, the only thing I would add to that is really the revenue driver, as Phil said, is the transaction volume that they're running through the -- essentially what would be the Universal Payments hub. So they're -- but it also allows for a more easy -- essentially, a better cross-sell opportunity for us to replace more of their existing homegrown systems and increase our footprint for the customer. So we get a go-through cross-sale of our existing products, as well as the transaction volume that they're running through the system.

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

Just looking back to Q4, you obviously had some impact in terms of potential deals in that quarter because of the breaches and the resultant need for people to look at larger transactions and sort of broader things that they might do with you. Can you give us a sense of how much the SNET benefited in Q1 from those pushouts and how much further might we see from those pushouts that you did see in Q4 and just the broader sales concept?

Well, let me paraphrase what you said. Did we capture -- did we recover the deals that didn't sign in quarter 4? Did we largely get them signed in quarter 1?

Yes.

The answer to that is yes. They virtually all signed in quarter 1. There's 1 or 2 that didn't -- there's 1 or 2 that -- on the renewable side, I think, more than the SNET side that did not -- have not yet signed, right? We're not worried about them signing. And if you take them out, it was still a good -- it was still a very good quarter, George.

Got you. And as I look at your messaging around direct connections, I'm wondering what kind of feedback, pushback you've been getting from others in the industry. Obviously, it's a big idea and curious as to sort of the feedback you've gotten from that. And separately, if I could ask relative to Visa talking about challenging debit volumes that they saw post the breach but then a real pickup at Easter. And if you just give us a sense to how that might have impacted some of your numbers, that'd be great.

Okay. I don't -- we sell transactions by minimum baskets. So volumes -- dips in volumes don't impact us, and so we're not going to hide behind any of that or use that as a variant. We sell baskets of transactions with minimums, and so that had no impact on us whatsoever. In terms of the direct connections question, there is massive interest in direct connections. So the top 10 banks in the United States have 54% of the debit transactions and growing in the -- and the category itself is growing. Debit's significantly larger than credit. Direct connection is not Durbin-controlled. It's more like an AMEX transaction. It loses 2 to 3 touch points. It allows the bank to directly brand its transaction with whoever they're doing business with, and there is some very logical co-branding going on right now that is 3- or 4-party co-branding that doesn't have to be a 2-party co-branding. And so there's a tremendous amount of interest there. It doesn't show up in our numbers at this point, and it doesn't show up in our volumes sold at this point. But it's a very, very logical next step in the industry. And the fact that we now have the technology for them to be able to do it, whether it's based on SMS or telephone number or account number or -- is just an advantage that we have right now. What's going to be the tipping point? Tipping point is where somebody lands up with an advantage by having first or second mover in terms of doing a big direct connection that changes the -- now direct connections are not a credit card opportunity. They're a debit card or charge card opportunity. The Visa, MasterCard rules would not allow for direct connections on the credit card side. Where they are allowed is on the -- by structure is on the debit and on the charge card side.

[Operator Instructions] Your next question comes from the line of Brett Huff with Stephens Inc.

This is James [indiscernible] in for Brett. So first, just on -- congratulations on the new UP contract wins. And I don't know how much detail you can give here, but I was hoping to get some color on when those might go live and what kind of revenue contribution those might have.

Well, yes, generally, the larger projects can take anywhere up to 18 to 24 months. But that's no different than our historical large project installations. So especially, when we're looking at an UP sale with multi-products, that's adding to the size of the -- it's adding to the size of the new sales booking, and it's adding a bit to the complexity. But I would still say in a lot of those, we'll begin to see revenue starting in 2015.

Okay, great. And then just thinking about full year revenue growth, it looks like organic revenue growth this quarter was maybe down a couple of percent or so. So I'm just kind of curious, what is going to accelerate revenues through the year to get us to sort of the mid-single-digit range?

Yes, if you look at the underlying composition of that revenue change where -- and we actually have about a 4% organic recurring revenue growth offset by the nonrecurring decline. And as you know, the license fee -- nonrecurring license fees and services can be lumpy. So underlying that is a healthy composition and growth in the organic side, and the nonrecurring as is typical will have its seasonality. But obviously, to start the year with as strong a sales bookings as we have, that allows some portion of those sales bookings to begin to drive revenue starting as early as Q2. So it's a great position to be in to start the year with such strong sales bookings.

We told you guys last year at the analyst meeting that the first half of the year, you're going to see stress on ILF and service revenues as we have more and more hosted customers. You're not going to see the ILF -- you're not going to see the signing ILF revenues, and you're not going to see the service revenues, too. They don't come with the hosted, all right? And then secondly, so the first half of the year is the answer to your question.

Your next question comes from the line of Wayne Johnson with Raymond James. Wayne Johnson - Raymond James & Associates, Inc., Research Division: A couple of questions. Given the early success of UPP, do you think that product is going to stimulate conversions of legacy BASE24 Classic users?

Great question. I actually think that it's going to create a whole different mentality around Classic. I think that UP is going to land up bridging both Classic and eps. So whereas -- we were talking about -- in the past, we were talking about converting Classic users to eps. We now think that a lot of the new business will go on eps, and the only business that will be moved off of Classic will be the business that needs the open systems of eps to do it and that UP will allow it to operate both systems concurrently against the common customer base. Wayne Johnson - Raymond James & Associates, Inc., Research Division: Got it, got it. That's helpful. And then on the -- regarding, I should say, the online banking wins, so this is early success of Online Resources, if I'm reading that correctly, upselling to larger customers. Is that...

No, most of it is Universal Online. It's almost all Universal Online Banker.

Yes, this our corporate banking cash management product.

We -- these are big deals.

There are no further questions in queue at this time. I turn the conference back over to our presenters.

Well, thanks, everybody, for joining us. We look forward to catching up in the coming days.