ACI Worldwide, Inc. (ACIW) Q3 2015 Earnings Report, Transcript and Summary

Good morning. My name is Hydee, and I will be your conference operator today. At this time, I’d like to welcome everyone to the ACI Worldwide Reports Third 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 Instructions] Thank you. John Kraft, Vice President of Investor Relations. You may begin your conference.

Thanks, Hydee. 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 our 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.

Thank you, John. Good morning and thank you for joining the call. Quarter three was a busy quarter. Overall our sales booking in the quarter grew 17% over last year. And we remain on track to achieve our full year target. Our Q3 revenue was $239 million and we also remain on track for full year for revenue also. We saw particularly strong cash flow with operating free cash flow in the quarter, up $61 million which is up $43 million from same quarter last year. During the quarter we went live with our first space 24 EPS universal payments customer, this was bank in Latin America is using the UP framework to offer some unique alternative payments and expect to gain share with its new payment flexibility. The addition of this reference support customer is an important step and capitalizing on the growing universal payment pipeline we continue to build. In addition and subsequent quarter end we completed several steps for this solidifying our position in the payment space. Last night we announced the signing of a lease for new datacenter facility in Europe. This is part of our previously discussed efforts consolidate our datacenter facilities and expand their capabilities. We are seeing accelerated demand for SaaS based delivery particularly in EMEA and this move will solidify our strong growing presence in the region, is particularly timely as the regulatory hurdle to serve the EU market place are increasing. This new data center will be able to merge several smaller facilities while increasing our capabilities and become fully compliant European Commission's latest directive. Last night we also announced the acquisition of PAY.ON, a leading payment solution provider based in Munich, Germany. PAY.ON's global reach in preeminent Card Not Present e-Commerce gateway connects to more than 300 payment networks with unique strength in cross border and internal payment metrics. Being able to provide this level of global connectivity to our multi national customers further enable ACI's any-to-any vision and provide us with even greater competitive differentiation. It is becoming apparent that point-to-point networks with PSP front end are playing an increasingly important role in both omni channel and instant payment. Acquiring PAY.ON is a strategic investment allowing us to save considerable development time at an attractive cost. PAY.ON was already an established partner with ACI and as such we recognized tremendous talent of the PAY.ON team and some of our technology has already been integrated. When fully integrated with ACI's up retailer payment offering and our leading foreign risk management tools, we will provide the industry the leading omni channel retailer and e-Commerce payment solution with a 100% ACI owned IT. While ACI already was well positioned to capitalize on the fast growing retail and e-Commerce payment segment, with the acquisition of PAY.ON and our growing investment in the sector, we are confident we will leverage potential even more. The ability to provide the retailer with an incredible breadth of payment choice will have been realized as well as enabling FIs to develop and execute direct brand/product relationships with their retail community of choice is now available from ACI. I will now hand the call over to Scott to discuss our financial results and updated 2015 expectations in more detail. Thank you.

Thanks, Phil. Good morning, everyone. I first plan to go through the highlights of the third quarter and then provide our outlook for the full-year 2015. We’ll then open the call for questions. I'll be starting my comments on Slide 6, with key takeaways from the quarter. Our overall sales bookings in Q3 including term extensions were up 17% over last year, and net new sales bookings were up 18% over last yea. And as Phi said we remain on track to deliver our full year target of high single digit growth. We ended the quarter with 12 month backlog of $882 million, up $6 million from last quarter after adjusting for foreign currency fluctuations and a 60 month backlog of $4.2 billion, up $32million from last quarter after adjusting for foreign currency. We saw revenue of $239 million in the quarter, down $11 million from Q3 last year, although half of which was the result of foreign currency fluctuations, our recurring revenue was $181 million representing 76% of the total and specifically our SaaS subscription and transactions revenue continue to grow up 3% from Q3 last year. And overall revenue within line with our expectations and the financial guidance we provide in our last quarterly earnings call. Moving to our profitability. Our adjusted EBITDA $50 million, decreased 25% from last year's Q3, primarily driven by the timing of non-recurring revenues year-over-year. We saw strong growth in operating free cash flow in Q3 of $61 million, up $43 million from Q3 last year and bringing our year-to-date total to $93 million, up 51% from last year. And lastly we ended the quarter with $81 million in cash and after paying down $108 million year-to-date, we ended the quarter with a debt balance of $784 million. Turning to Slide 7. As Phil mentioned we knock the acquisition of PAY.ON, PAY.ON is an e-Commerce Card Not Present payment solution provider, selling into the fast growing e-Commerce, retailing and PSP markets. The company has built an impressive level of industry leading connectivity with particular strength in cross border and alternative payment methods. And this connectivity can be utilized in all of our payment engines. And as Phil mentioned it was really through our existing partnership with PAY.ON that we picked up with the Retail Decisions acquisition that we've seen first hand how this new bickery will strengthen ACI's competitive positioning and bring us materially closer to our any-to-any vision. And when combined with our legacy retail payments capabilities and the risk in fraud management solutions we acquired from ReD, we have a truly omni channel offering we can deliver to our multinational merchants, banks and acquiring customers. The purchase price of EUR180 million or roughly US $198 million comprised of $183 million in cash and approximately 700,000 shares of ACI stock. The cash portion was financed utilizing the available portion of our existing line of credit. The transaction is structured to provide the PAN founders that 8% of the purchase price in ACIW shares, something they requested and we believe will align all of our interests. Having this connectivity in our products suite improves our economics on future deals when compared to building out these connections internally; buying PAY.ON saves us considerable time and execution risk. On an annualized basis for the full year 2015, PAY.ON is expected to generate roughly $15 million in revenue and while we only see a couple months contribution of that this year, company is growing an annual rate of greater than 35%. With the transaction based financial model and SaaS based delivery, the company fits very well into our existing ACI organization. Moving next to Slide 8 is our full year outlook. We are reaffirming our previously provided full year non-GAAP revenue guidance range of $1.04 billion to $1.07 billion. And we review and are comfortable with the first call estimates for our full year revenue. We now expect 2015 non-GAAP EBITDA to be in range of $265 million to $270 million, down from a previous range of $280 million to $290 million. The reason for the reduction relates to the timing and mix of current revenue forecast as well as incremental investments spending including those related to our retailer and e-commerce offering as well as our new European datacenter. And as I said earlier we continue to expect our sales net of term extension bookings to be in the high single digit for the full year. And lastly here our guidance excludes approximately $14 million and expect one time integration related expenses for our continued datacenter and facilities consolidation and bill payment platform rationalization. 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 from Wedbush. Your line is open.

Yes, good morning. On this, if you mind giving us an update on the status of your pipeline for big deal? How many of these deals you have? How big they are? When would you expect to start closing some of these universal payment driven deals?

I think our pipeline probably safely around somewhere between a dozen and half and two dozen deals and if an awful lot of the world didn't have 40% to 60% currency movements we probably would have closed several of the deals, several of the deals already. It is very -- in the next quarter or two we expect to close at least one and maybe two or three of these deals. Gil, it actually brings on a different point, we had -- we plan to have a choice and whether we want to maintain our pricing and our pricing structure going forward and we decided that the value of what we are doing requires us to keep our pricing but we've been realistic to say that the amount of ILF that we would typically take in terms of a new deal, that we have to rethink and take it over the five years versus this -- just pure discounting because of the currency situations in the rest of the world and that has made the deals very possible to do but it is also probably has three more levels of approval and in last year or two years ago currency equivalents with the U.S. products are suddenly lot more expensive as a result of, we think our is worth, is worth the expense so we've had to take less upfront but still maintaining the value of what we are doing.

Your next question comes from the line of Peter Heckmann from Avondale. Your line is open.

So on that last point just so I am clear here. So you are saying that the strengthening U.S. dollar is impacting that the price customers are looking to paying for the upgrade and you are sticking with price. I mean don't you see that there is value in the market place of getting some installed customers and proving the concept?

Well, yes, I do. Yes, I do and I just announced today that we have an installed and up and running one as of this quarter and that's going to really help us in terms of people actually seeing it take place. But we are far enough down the line with an awful lot of these that being open minded about structure I think is more important. I mean for 90-360 days view of the world, we probably could just do a price -- we could probably just do a price reduction but against the longer term and then basis for a long-term relationship, we are better off doing this than kind of confronting with price increases at the second subscription level.

Okay. With the acquisition of PAY.ON, if I understand correctly the customers here, the 100 customers that you referenced those are payment processors, some of those your existing clients and talk about kind of the competitive landscape among these e-commerce card net not present providers, it seems like there has been some other consolidation in the space.

Well, first of all, they are customers -- I'll answer the customer question first. Customers, some customers are our customers. As I said we've worked with them jointly to get a couple customers. But a lot of their customers are actually good size global retailers right. So think about it that way. Yes, there are certain number of processor that are partners and what not to just like we have processors that are partners right, partners in terms of what we are doing. And IT very quickly if you were to kind of read all stuff coming out of money 2020, a lot of banks are going to be getting into wanting point-to-point and direct relationships with retailers and with end points. So I actually see FIs -- I actually see all three of our traditional customer structures, the retailers, the processors and the FIs all being customers of this capability, it's going to be one more capability. Now one of the key things that we have is that the number of drivers and interfaces that we connect to around the world and credit and debit networks that are POS or ATM or online, this adds just a whole, this adds another 300 e-commerce oriented. So this builds out in the most modern way of thinking about payment, the same kinds of IOs and drivers that we are famous for over the last four decades.

Okay. And then as regard to competitive landscape. Am I correct in saying that there have been some other players that have been snapped up recently?

Well, a lot of the PSPs have actually been snapped up by merchant acquires and it is kind of interesting because it is kind of -- it both gives them connectivity but takes the customer back step because awful lot of the PSP connections don't really require that layer, think you have heard Chase's announcement week or so ago, lot of these set because of their e-commerce nature and how they are done, you don't really require that additional settlement three days basically three days settlement, additional settlement layer that the FI or the processor and the end point can actually do it with either independent or not independent so we haven't seen other capabilities providers buy up PSP or integrate PSPs into -- we've seen it more in terms of branded or revenue -- we are probably the first guy that are transaction cost providers versus revenue shares right that gotten substance to the -- into the world.

Okay. Last question and then I'll get back in the queue. Have you seen on the retail front, have you seen an uptick and interest in dynamic currency conversion? And, if so, how are you providing that capability?

Well, one of the great capabilities of this acquisition is actually cross border right. And so the answer would be yes and this along with other assets that we have really give us significantly more capability cross border and real and instant pay cross border.

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

Thank you. Phil, relative to PAY.ON I assume you -- this is kind of classic buy versus bills scenario and I am curious were you actually building some form of the payment gateway before? And did you have other partners in addition of PAY.ON in the space that ultimately you can consolidate?

We were building -- by definition we were building stuff in this category and if you think about it on the more wholesale side, we already have the lot of the capabilities and this really strengthen the retail side and actually allow us to make combined retail and wholesale kind of offering. We did and do have -- there is lot of unique offerings, 300 is great but there is more than 300. So there are and continue to be certain level of partnerships that exist along side this George. Did I answer your whole question?

Yes. I think you did. Different question on the investments that you are making in Q4. Just wondered if you could get little more granular and also I assume a lot of this is on the datacenter investment side. Can you talk about some of the -- go into little more detail on what you are seeing in -- on the SaaS deliver side and in Europe that gives you the need to do this?

Well, we are continuing to see more and more interest in -- especially when we present solutions for SaaS delivered solution versus hosting at -- being hosted internally. Everyone knows all the challenges of cyber security and it is regulation, everyone read about the Safe Harbor notices and what not and it just make sense -- it just make tremendous sense to us. We consolidated I believe the numbers 14 datacenters in to our current datacenter structure through the acquisitions. We still have seven datacenters out there and we said it made an awful lot of sense for us to place the European datacenter in the mix and point the consolidation and then a load balancing between the U.S. and EMEA at this point. And over time the interest in it and in Asia will require us to migrate our way there but for this buy - there is -- there are significant investments in cyber security and the datacenter and building out the datacenter. And they are more one time I think the number we gave you is $14 million remaining on the one time side and now there is going to be coincidental until we close those seven centers we are going to have coincidental cost of bringing up the Irish center and shutting down the other centers which will initially not reflect themselves as one time. They reflect themselves as continuity until we shutdown those seven centers.

Your next question comes from the line of Brett Huff from Stephens Incorporated. Your line is open.

Good morning, everybody. Just to be -- just to dig down into lower EBITDA guidance. I want to make sure I sort of get the puts and takes on that. So the guidance came down I think by about $18 million if my math is right using midpoint. EBITDA was a little late at least relatively to the street buy about $8 million, so that leaves about $10 million of the reduction that I think are a result of this datacenter investment. Scott, is that the right math approximately? Should we think about that lowered guidance?

Yes. But I wouldn't say their whole magnitude is not necessarily related to datacenter, there is as I mentioned in my prepared remarks. There are really three components of it. One is revenue -- as you see we reaffirmed our full year revenue guidance but as Phil mentioned we are seeing certain customers that would have normally paid an ILF due to currency they are willing to pay more over five years and hedge to bad debt their currency is at a low point, so they aren't going to either renew or buy where they would happen in as your license be component their high margin. But conversely we did accelerate couple large products they were planned to be in next year's revenue but with those came a build up to deferred cost. So we are seeing a mix change where we would bring -- bring in it revenue with deferred cost but we didn't have and our expectation last time, the investments not only include the datacenter that we are opening but it also include a lot of cyber security investments that we are making all of our datacenters. And to lesser extent PAY.ON for just a couple of months it is not going to be EBITDA positive. So there are several pieces to bring down of our low end buy up by the $50 million.

Okay and then Phil thanks for the color on the deal pipeline. Any update on the sizes? I know that I think in the past we said that those could be bigger than sort of other large deals just regular base 24 deals. Of those 18 to 24 or even the one that seem most ripe in the pipeline kind of what is the total contract value that we think we will see when we sign those contracts?

Well, I don't know if I can give you those exact numbers because they range but they will be larger because what they went up representing is the decision not to convert the classic and to bridge the classic and just migrated over time and therefore run to our switches can currently under the up structure and then adding a lot of new volumes, be they instant payment or e-commerce or -- there is lots of different schemes into the switching environment. And actually connecting third party switches as part of the -- so they are considerably larger. But the range could be from something that looks like one of our larger deals to something that's twice the size of our larger deal. And that's probably the way I would characterize it.

Yes. I'd add to that is as Phil mentioned in his speaking point we had a large Latin American bank just went live with our UP-eps capabilities in the second and third quarter. We didn't announce that necessarily as a large deal when we sold it but the encouraging part is now that they are live and they are using alternative payment types where we would get the benefit going forward as they increase their volume of alternative payment type. We will get incremental capacity when that volume comes. So I wouldn't necessarily look at its size has been an indicator the value that's an example of one that the value is going to come in incremental capacity sales over time. In the second quarter, we mentioned a large European bank that purchased capability particular for faster payment but again once it is live in their environment and they are -- they began to plug in alternative payment types that typically we haven't touched in our payment engine. They are going to have to come back final capacity. So having those live in the environment, having them beginning to plug in alternative we would get the benefit of the high margin incremental capacity sale and revenue going forward.

Okay, that's helpful. So when I think about your biggest base 24 deals over five years as I recall those are like $50 million, so it seems like $50 million to $100 million total contract value is the kind of range that I am thinking. But then Scott to your point we may not see -- if we sign those deals we may not see the deals be $50 million to $100 million on paper only because those will ramp over time and we don't know how quickly those institutions will migrate old payment volumes -- payment volumes on old switches to the new switch. Is that right?

That's what I reiterated. That will be the Latin American bank example, World European bank but once they are live the key there is to continue to market the various use cases and I think to the earlier comment the Peter had really having live example in the market place to be able to go sell those to other customers as well.

Okay, thanks. And then another question. Visa Europe, obviously is going to get folded into Visa now. And as I recall Visa Europe uses ACIW as its switch, how does that fall to you guys, is that change your relationship with Visa if I am remembering that right?

Well, I think if you kind of think about from today's standpoint, it is probably neutral. Longer-term I think that could land up being positive and we really can't do a lot of dialoguing about that but the Visa switch in Europe is a real asset to Visa and how they utilize that I think it would be worse case neutral potentially very positive to us.

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

Hi, good morning. So just to clarify on some of the prior questions. If I understand correctly Phil, 18-24 potential new contracts in the sales pipeline. What would be kind of the implementation pipeline you guys are looking at here over the next 12 months that you guys feel comfortable with? Has there been any change in the timing in your eyes on when those go live? Has there been any push back on the existing contracts that were signed kind of prior to FX volatility? And I have a follow up. Thank you.

Okay. Well answer to the last piece first, no. Because really -- like I said we haven't really changed the pricing, it was a structure so the answer is no. We had absolutely no push back. The second one is that, what's different about up is that its implementation time probably run about 50% to 70% the time of a traditional EPS conversion so the conversion cycle is actually -- there is actually not a conversion; it is the institution of a multiple set of capabilities and then migrating because the best ROI are customers. We spend enough time with our customers. Now their best ROI is using us for new volume and then are filling in ROI, their value is to move transaction by transaction off field, the older environment. Especially with the Linux as being the basis for most of the new switch and the connectivity to much more expensive hardware and middleware on the older switch. It is actually -- they are actually getting better ROIs by adding volume than converting volume. And that's very positive. That Linux being very positive to us because we don't make money in the services side of our business. And so it would actually change -- it continues to change the shape of product versus services in terms of what we do.

I appreciate that color. And can you give us an update on how BASE24 eps UP is tracking in the non-financial institutions market? I think you guys made a splash last quarter or so ago with the transpiration company. So that's -- any color there would be helpful?

Well, our transportation project is going very well. And the interest in the transportation sector is actually very -- is very strong. And we actually believe with the PSP as an integral part of that offering, we actually believe that's one of the area that's going to take great interest and being able to push their payments versus have their payment pulled.

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

Thanks, Hydee. And thanks everybody. We look forward to catching up in the coming week. Have a good day.