ACI Worldwide, Inc. (ACIW) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Kenn, and I will be your conference operator today. At this time, I’d like to welcome everyone to the First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. John Kraft, Vice President of Investor Relations, you may begin your conference sir.

Thanks, Kenn, and good morning, everybody. Today's call, like all of our events, is subject to both Safe Harbor and forward-looking statements. You can find the full text of both statements on the first and final pages of our presentation deck today, a copy of which is available on our Web site as well as with the SEC. On this morning's call is Phil Heasley, our CEO and Scott Behrens, our CFO. With that, I'll turn the call over to Phil.

Good morning everyone and thanks for joining our call. Quarter one represented a very busy start to the year. Our results were in line with our expectations and the guidance we provided. Strategically we completed the sale of our CFS operations and effectively deployed the cash proceeds. Using the $200 million we received, repurchased 60 million in ACI stock or 3 million shares. This offsets the EPS solution on an EPS basis for the divestiture. With the remaining $140 million as well as cash generated during the quarter, we paid $167 million down in debt. Moving to operating results, our sales team had an excellent start to the year. We grew total bookings by 15% and our new bookings improved by 47%, while experiencing the same strength and momentum in our global merchant retailer business that we’ve seen for the last several quarters. For example, we signed a significant e-commerce contract with one of the largest South American networks. This customer expects to dramatically improve its competitive differentiation with our industry leading e-commerce and card-not-present or prevention tools. Overall, our ReD and PAY.ON acquisitions are both tracking ahead of expectations and we’ve seen accelerated success due to their integration into our existing merchant retailer focus solutions. We will be hosting a merchant retailer focused events in both New York and London on June 2, with industry speakers discussing the innovation and disruption in the payments and e-commerce space. In quarter one, we saw strong results with our banking sector customers also and signed several large contracts with financial institutions, two of our largest contracts were renewals that included significant add-on business. This demonstrates the value of our broad suite of solutions, as well as our success in our efforts to be truly strategic partner of choice to these customers. We achieved another major milestone with the go-live of our first Linux based, UP BASE24 UPS customer. Not only this large European financial institution seeing a dramatic reduction in hardware maintenance costs, but witness an increased speed, as well as flexibility to scale and respond rapidly to fast-changing customer needs. Our pipelines continue to increase. The sales [indiscernible] this quarter help grow our backlog. Shortly our 60 month backlog grew $73 million after adjusting for CFS and currency. With a five-year backlog of over 4 billion and high coverage relative to our full-year broadcast, we’re comfortable reiterating our guidance for this year and beyond. With that, I’ll hand it over to Scott, who will discuss our financial results in more detail. Thank you.

Okay. Thanks, Bill. Good morning, everyone. I first plan to go through the highlights of the first quarter and then provide our outlook for 2016. We will then open the line for questions. I'll be starting my comments on Slide 6, with key takeaways from the quarter. As previously announced, we completed the divestiture of our CFS operations on March 3. We received $200 million in cash proceeds and recognize the GAAP after-tax gain of $94 million. We use the proceeds to repurchase 60 million in ACI stock year-to-date or approximately 3 million shares with the remaining proceeds used to pay down our revolving credit facility. We will continue to operate under a transition services agreement whereby Fiserv will reimburse us for the direct cost of operating the CFS platforms for a period of time. And we will continue to incur approximately $7 million of indirect costs during 2016 in support of these transition services, and are committed to eliminate these costs by the end of the year. We started the year strong with overall sales bookings up 15% in the quarter and our net new sales bookings up 47% over the prior year quarter. Both of these amounts adjusted for the CFS divestiture. We continue to see strong sales growth in our merchant retailer solutions including our global e-commerce payments and card-not-present fraud, as well as our bill payment solutions. These bookings contributed to a very strong backlog growth during the quarter with our 12 month and 60 month backlog up $21 million and $73 million, respectively and both of these numbers excluding the impact of the CFS divestiture and changes in foreign currency. Excluding CFS in both periods, revenue was $211 million or up 2% over the prior year quarter, and on a constant currency basis. Underlying this change in revenue was an $8 million increase in recurring revenue or nearly 5% growth compared to the prior year quarter, offset by a decline in non-recurring revenue of $4 million. So, overall healthy growth from our stable, predictable, recurring revenue streams. Excluding CFS in both periods, adjusted EBITDA was $25 million, down $11 million from the prior year quarter, primarily from the timing of non-recurring revenue of $4 million. Timing of project related expenses of $3 million and higher selling and marketing expenses of $1 million, as a result of the higher sales bookings. And as you know from our historical pattern, our non-recurring revenue recognized from licensed software sales and revenue release from deferred revenue of project go-live is very high margin. Based on our expectations around sales mix and timing of project go-lives, we expect non-recurring revenue and its associated margin to be more second half weighted this year compared to the same period in 2015. Operating free cash flow excluding our previously announced one-time capital investments in our European data center and cyber security was $30 million, down $9 million compared to the prior year quarter. And similar to our EBITDA results, the decline was driven by the timing of the non-recurring revenue, timing of project related expenses, as well as the higher selling and marketing expenses. We ended the quarter with $94 million in cash and after paying down a $167 million in debt, we ended the quarter with a debt balance of $772 million. We repurchase 3 million shares or stock year-to-date and have $78 million remaining on our share buyback authorization. Turning next to Slide 7, with our full-year outlook, we’re reaffirming our full-year guidance. Our guidance excludes the impact of the CFS operations, including the $7 million of indirect costs required to continue to operate the CFS platform during the transition. For the full year 2016, we continue to expect revenue to be in a range of $990 million to $1.02 billion. We continue to expect adjusted EBITDA to be in a range of $265 million to $275 million. And we expect net new sales growth in the high single-digits. Our guidance excludes approximately $15 million and expected one-time integration and divestiture related expenses for PAY.ON, CFS, and our continued data center facilities consolidation. In Q2, we expect revenue to be in a range of $215 million to $225 million. Q2 revenue margin will also be impacted by the timing of non-recurring revenues, as I mentioned previously that we’re expecting to see come in the second half of the year. So, overall, a strong start to the year and one that positions us well to achieve our financial targets in 2016. That concludes my prepared remarks. Operator, we are ready to open the line for questions at this time.

Thank you. [Operator Instructions] And your first question comes from the line of Brett Huff with Stephens. Your line is open.

Good afternoon, guys. Good morning, guys rather.

Good morning, Brett.

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

Well, optimally there are merchants that take all three, right. So when we talk about our support of the omnichannel with our UP, right, that means that they’ve taken in a array of what we’ve and that’s probably our strongest. Thus far we’re strongest category. Our second strongest category is, cross-selling; we’re doing some good cross-selling of ReD to PAY.ON on to Re D in terms of existing. And then there is a fair amount of cross-sell, this EMC, the merchants really waited probably too long in the association to give them a tremendous amount of time. I think we put out at press release, because 75% of the merchants are still trying to figure out this to U.S merchants together. So, the EMC stuff, so I would say that the balance is more towards support of omni-channel and eight way of doing payments and the ability to have more control and not have to relying on single merchant acquired. I think it’s the broader demand and it’s not a piece demand, right.

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

They are working their way through. I mean, we have some -- we don’t have -- what’s not making them as explosively large, and I think I told you this time is that, certainly the guys oversees the ability for us to go and the ability for them to go pay big [indiscernible] in the phase of their currencies being down 30%, 40% just doesn’t exist. So we signed some pretty large deals that are going to pay us ratably over the five years versus us making discounts in order to get an upfront revenue payment. That’s kind of like a double negative, right? So -- and with the pressing -- it was the pressing realistic demand. So that’s going really well. [Indiscernible] of that Linux deal is, I think that’s actually very seminal, because all of a sudden a lot of the other players in the market are looking at the efficiencies that have come out. So we’re now showing up at other customers and some larger although that was a large European bank. They’re showing up, and they’re understanding the efficiency that Linux brings to the equation. Also we have several large deals that I expect are going to flow this year. To answer your question directly, we’re sticking to our full year guidance because we’re not approaching it to make an upfront bonanza that we don’t -- that we wouldn’t necessarily repeat next year.

Great. Thank you.

Thank you. And your next question comes from the line of Paul Condra with Credit Suisse. Your line is open.

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

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

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

Thanks for that. And Scott, can you give us any clarity just on EBITDA on the second quarter. You told us on revenues, but just because it’s so lumpy just for the sake of our models.

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

Okay. That’s helpful. And then, just really quick, Phil, I think you mentioned the significant e-commerce contract, but then the line kind of cut our right when you mentioned. I don’t know if you said [indiscernible] region or something. Can you just give any more detail?

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

And this is like a card networks?

Yes, it’s a -- I can't be open, more specific. But yes, it’s like -- it represents one of the larger networks. And I’m referring about Visa, MasterCard in terms of network. I’m talking about regional payment scheme.

Okay, thanks. And then just, I just did one lastly -- just a little help on some of the cost lines. It looked like R&D was up sequentially quite a bit, and so, I know somewhere there’s seasonality in there, but what -- is that going to come back down through the year or just any kind of thoughts around that? Then also, where do you think most of leverage on cost will come from this year?

Yes. Well on the cost side you’ll see on the cost of services is up. Again part of that is timing. As I mentioned that had an impact this quarter, and part of that is just overall deferred project cost year-over-year, whereas last year we had more of going into deferrals and coming out, and this year it was the opposite. The other part is in the hosting costs or the datacenter costs, obviously those are -- our overall SaaS revenues year-over-year are up 10%. So that cost structure is also going up, not just to support this growth, but it will support the continued growth as we go. So I see its getting a lot of leverage out of that cost structure as we continue to layer on and go live with new business and layer on that incremental revenue on top of that fixed cost structure. Those are the two, probably the two key areas.

And then R&D is that coming up a lot this year on the [multiple speakers]?

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

Okay. Thank you.

[Operator Instructions] Your next question comes from the line of George Sutton with Craig-Hallum. Your line is open.

Hi, good morning, guys. It’s Jason on for George. Just wondering if you can talk about the UP deals that we’ve -- that you’ve announced over the last couple of quarters, how those are progressing through the pipeline and kind of the implementation cycles?

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

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

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

Okay. Thank you.

And there are no further questions at this time. I’d like to turn the call back over to the presenters.

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