ACI Worldwide, Inc. (ACIW) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Reports Q4 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] We ask that you please limit yourselves to one question and one follow-up to allow others time for their questions, and if you have further questions you may queue up again. Thank you. John Kraft, you may begin your conference.

Thanks, Heidi, 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 the 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 get started, I want to take -- make sure everybody knows that ACI will be attending the Raymond James 39th Annual Institutional Investor Conference in Orlando on March 6th and the Craig-Hallum FinTech Innovators Conference in Boston on March 15th. With that, I turn it all over to Phil.

Thanks, John, and good morning, everyone. 2017 was the pivotal year for ACI on several levels. We achieved our revenue and profitability goals, security wins and celebrated numerous strategic customer goal lives. It was also a pivotal year internally for our company. We reorganized and introduced the new two P&L structure to better manage the growth and profitability of the business. I’m pleased to report that our 2017 results have validated best of this organizational approach. I’m going to spend the next few minutes providing deeper insight into 2017 and will focus my comments on three areas. First, I’ll share the progress in our ongoing journey to become the undisputed leader in global payment software. Second, I will go deeper into our new P&L, two P&L structure and why it’s fundamental to our go forward plans. And third, I’ll highlight the key wins in 2017 and opportunities for 2018 and beyond. First, our journey, ACI has worked for the better part of 10 years to build the non-rival end-to-end software portfolio that meets the real time any to any payment needs of our core custom -- core customer segments, banks, financial intermediaries, merchants and corporations. While providing a look back of 10 years maybe unusual on an earnings call, I believe in showing how ACI plans and executes on a long-term horizon. In my view, building values is always rewarded over time as was the case in 2017. We have acquired and integrated nine companies since 2011, as well as managed divestiture, asset sales, the loan service projects and wind down of non-core revenue. To meet increasing demand for cloud delivery, we built out four core data centers in the U.S. and Europe, investing heavily in cybersecurity and state-of-the-art infrastructure, in the process we’ve migrated and closed more than 25 smaller locations, most of which were inherited via acquisition. These were very significant tasks, which taxed our people and impacted our customers and I sincerely thank our 1 ACI staff and our patient customers for their support during this journey. As we entered 2017, we saw several of these efforts rewarded. First and foremost the UP strategy was validated. We saw 100% adoption rate for our UP Retail Payment Solution program which bridges customers to our powerful UP technology. RPS enables our customer to lever their investment in existing systems and migrate transaction volumes to the ACI’s next-generation solutions at their own pace. We initiated 13 projects last year that were directly related to the RPS renewals. In 2017, customers continue to activate the UP components of RPS, driving 25% to 30% total contract value uplift for these renewals. The UP strategy produced a quarter of last year’s revenue and a fifth of the 60-month backlog. We expect these numbers to increase steadily as we progress through the renewal cycle. Continuing with the theme of our journey, one of our strategic technology initiatives over the last several years has been to port our solutions Linux, starting with UP Retail Payments two years ago. Running on Linux enables our customers to save 75% to 90% on hardware and middleware investments. Across our portfolio, four of our six UP Solutions now run on Linux. While year-end Linux solution releases may have slowed some bookings during the year, they increased the pipeline for ‘18. These improvements were worth the wait for our customers. Another milestone in our journey was delivery of the next-generation of Universal Online Banker, ACI’s cloud-based multitenant digital banking solution. This enhanced offering has already won several awards and we expect strong bookings to follow. We also continued developing our UP Merchant Payments platform, offering which encompasses omni-channel, risk management, card present and card not present offerings. These new releases may also have slowdown 2017 bookings, but they’re adding significantly to our pipeline and improving implementation times. Moving to my second topic, I’d now like to discuss the two P&L structure that we rolled out in 2017. This structure allows us to better manage costs and profit margins related to operating our solutions, acquiring new customers and building new solutions for our On Premise and On Demand cloud delivery models. Throughout the year, we also fine tune the operations and teams within the P&Ls, and restructured and re-enhanced our global sales capabilities. Revenue in ACI is more mature On Premise P&L, where our software is operated on a customer’s premise for a six-year term grew 1% and represents 58% total revenue. While many customers prefer utilizing our ACI cloud, our On Premise business also continues to grow particularly given the value we’re recreating with our RPS and real-time payment solution, RTPS. Within ACI’s On Demand P&L, which ACI’s cloud business, revenue grew 7% and now represents 42% of total revenue. This is up from 17% five years ago. Excluding corporate overhead, ACI’s On Premise segment generated 58% EBITDA margin, up from 53% in 2016. ACI’s On Demand segment with all its recent investments generated negative 1% EBITDA margin related to the journey I discussed a few minutes ago, ACI On Demand was clearly impacted the most by the acquisition integration and data center consolidations that we have now completed. That said, it’s key to focus on the opportunity in our On Demand segment. At our recent Analyst Day, we discussed our goal of achieving the Rule of 40s in ACI’s On Demand business. In other words, a revenue growth rate and EBITDA margin that when added together equate to 40% or better. With our three-tier profit model, we can optimize the margin to operate, the margin to acquire, and the margin to build, thus effectively manage to the Rule of 40. This provides three additional drivers outside the box of pure revenue growth. On the margin side, the investments to deliver major product update in late 2017 are complete. Our extensive data center build-out and cybersecurity investments are largely finished, and the fixed cost structure of these data centers can absorb many years of transaction volume growth. Further, our Linux environment reduces the step function cost to future service, storage and communications. We will show significant margin improvements over the next few years while continuing to stay at the cutting edge of payments technology, including efforts and block chain in Linux. We have a lot of work to do and the Rule of 40 goal is very much within our reach. Lastly, let me now discuss some of the more significant contracts signed in quarter four. These examples are representative of strategic payment opportunities we’re seeing across our four core customer segments, banks, financial intermediaries, merchants and corporations, and all involved notable increases in total contract value. In North America, our largest bank customer and our second largest financial intermediary customer both signed RPS renewals. With these renewals means that two of the top five bank customers, as well as our two largest financial intermediary customers have all selected RPS, providing a powerful validation of the RPS program and the value it provides to our customers. Also in quarter four another longstanding customer signed an RPS renewal and also added anti-fraud and data management solutions. In Latin America, key e-commerce customer renewed and added several anti-fraud modules. In Asia, three large domestic banks and one large domestic financial intermediary all renewed with significant RPS contracts. Well the renewals were notable for incremental transaction value and contract value we also signed a significant net new business, including our largest Bill Payment contract ever with the domestic based specialty finance company. Other notable wins include an existing North American customer that signed a significant new contract with ACI to power real-time payments and secure person-to-person payments. Specifically, this large bank will use ACI’s technology as a strategic payment hub, which will include access to The Clearing House’s real-time payment network. Given global momentum and new regulations mandating real-time payments schemes, the interest in our real-time payment solutions is high. Our investments over the last several years in immediate and real-time payment type uniquely positioned ACI to capitalize on this high growth opportunity. Leveraging this momentum, we’re already off to a fast start in 2018. Half way through quarter one Q1, we have basically generated the same bookings as we did in all of quarter one 2017. In Asia, this month, we celebrated a major system go live of our UP Immediate Payment Solutions at DBS Bank, the largest bank in Southeast Asia. And we signed a new contract with the international subsidiary of China UnionPay, one of the world’s largest and fastest growing payment providers. In Europe, we’ve been officially selected to provide the payment platform for one of the world’s largest merchants. In summary, 2017 was a breakout year with revenue acceleration already underway in 2018. In closing, we believe our desire to deleverage and keep our share count constant will be well rewarded. We have virtually the same number of outstanding shares today as we did 10 years ago. Financially strong and position to accelerate margin improvement, ACI is entering a period of profitability and cash flow growth. EBITDA and cash flow will provide -- will prove to be the key drivers of value in 2018 and 2020 timeframe. We continue to plan for strong EBITDA and cash flow this year and beyond, and are excited about our ability to drive shareholder value. Scott will now give details on 2017, our guidance for 2018 and our EBITDA outlook for 2019 and 2020. With that, I’ll pass the baton to him for his financial comments.

Thanks, Phil, and good morning, everyone. I first plan to go through our results for 2017 and then provide guidance for 2018, as well as our longer range outlook for EBITDA in 2019 and 2020. We’ll then open the line for questions. I’ll be starting my comments on slide six with key takeaways from the year. Our full year new bookings were $619 million and total bookings were $1.1 billion. While we saw some customers delayed signings in the early 2018, we did get a lot done during the quarter achieving our second highest ever quarterly bookings number, second only to Q4 2016. And as Bill said, we have started 2018 with strong bookings and expect our first quarter to show strong growth over Q1 of last year. Our 60-month backlog grew $16 million and represents $4.1 billion and our 12-month backlog stands at $825 million. Full year revenue was $1.024 billion up 3% over last year after adjusting for foreign currency and the CFS divestiture. This was at the high end of the guidance range we provided at the beginning of the year and looking at our two P&Ls, our SaaS and platform business saw revenue growth of 7% and now represents 42% of total revenue, while our On Premise business grew 1% and represents 58% of total revenue. This revenue growth contributed to strong EBITDA growth which was up 9% from last year and exceeded our guidance range. In 2017 our net EBITDA margin was 30%, up roughly 200 basis points from last year’s, as we’re starting to see the margin generation capability to both scale and the heavy investments that we’ve made in new products and infrastructure in recent years. From a segment perspective excluding corporate overhead, ACI’s On Premise generated 58% EBITDA margin and ACI’s On Demand segment generated a negative 1% EBITDA margin for the year. 2017 was a strong year for cash flow growth, cash flow from operating activities was $146 million, up 46% for the year and our operating free cash flow, after adjusting for CapEx was up 80% over last year. We ended the year with $70 million in cash and a debt balance of $696 million, which is down $57 million this year and as we exit 2017, we’re at the lowest leverage ratio we’ve had over the past five years. During Q4 and in the early part here of 2018, we repurchased 3 million shares of ACI stock or roughly $68 million, and today announced that we have reloaded our share repurchase authorization to $200 million. Turning next to slide seven, let me take a few moments to discuss how ACI has impacted by the recent tax and accounting changes. First, regarding the U.S. Tax Cuts and Jobs Act. In Q4 2017, ACI took a non-cash charge, the revaluation and write-down of our net deferred tax assets, given the reduction in the U.S. corporate tax rate. In addition, we reported to charge for the new tax on unremitted foreign earnings. We expect to utilize available foreign tax credits to offset any cash obligation. Therefore, we do not expect any impact to 2018 free cash flow as a result of the act. In 2018, we expect an effective GAAP tax rate of roughly 20% as the U.S. tax rate falls closer in line with the tax rate and the foreign jurisdictions in which we operate. Our cash taxes will remain low as we continue to utilize our acquired U.S. NOLs for which we have $100 million remain. Moving next to the new accounting rules, effective January 1, 2018, we adopted the new revenue recognition standard ASC 606, which replaces ASC 605. As previously disclosed, we have adopted the modified retrospective approach and will present our key financial results on both the new and old basis for 2018. The bulk of these changes will impact two specific areas. First, as it relates to revenue, our On Premise license fees paid monthly and yearly will now be recognized all upfront rather than it’s paid on a monthly or yearly basis over time. While this will not impact our cash flows, it will impact the timing and amount of revenue recognized. The quarterly phasing will also be impacted as we’ll recognize all of our license fees in the quarter the deal are signed, which is obviously heavily weighted towards the second half year. On the cost side, we’ll now be required to recognize sales commissions ratably versus expense upfront as we have done previously. We will not see any impact to our bookings or cash flow metrics under the new rules and generally speaking we will not see an impact for our On Demand segment as those SaaS and platform revenues and cash flows will continue to be ratable as they have in the past, and again, for 2018, we’ll report our key financial results on both the new and old basis. Turning next to slide eight, with our 2018 guidance, in addition to reporting actual results under both the new and old GAAP, we’ll also provide our forward guidance under both as well, starting with our guidance under historical accounting or ASC 605. For the full year 2018, we expect revenue to be in a range of $1.05 billion to $1.075 billion, which represents 3% to 5% growth over 2017. Adjusted EBITDA is expected to be in a range of $270 million to $285 million, which excludes approximately $5 million to $7 million in significant transaction-related expense and we expect to generate between $210 million and $220 million of revenue in the first quarter under ASC 605. Under the new accounting standards, we expect revenue in 2018 to be between $1.03 billion and $1.055 billion and adjusted EBITDA to be in a range of $255 million to $270 million. And we expect to generate between $200 million and $210 million of revenue in the first quarter under ASC 606. And to help with your modeling, you’ll find additional guidance assumptions on slide nine, new bookings are expected to grow in the low-double digits for the full year 2018, which is above our trend line, but we expect 2018 to compensate for the anomaly we saw in 2017 bookings. We expect GAAP interest expense of $37 million and cash interest of $34 million. Capital expenditures are expected to approximately $50 million, continuing the downward trend of the last couple of years. Depreciation and amortization is expected to approximate $100 million, non-cash compensation to approximate $30 million and cash taxes should approximate $40 million. Pass-through interchange should be in a range of $170 million to $175 million, and lastly, our diluted share count should approximate $160 million, which excludes any future share buyback activity. And finally, turning to page 10, we’re providing you our long range outlook for adjusted EBITDA targets beyond 2018. We expect a leverage in the business model that’s beginning to show up in our EBITDA growth are driven by both scale, as well as our focus on the Rule of 40s for our SaaS and platform business to continue to drive EBITDA expansion. We see that trend continuing beyond 2018 and are targeting EBITDA on 2019 to be in a range of $300 million to $350 million and in 2020 to be in the range of $335 million to $350 million. So, in summary, we generated revenue at the high end of our guidance, EBITDA in excess of our guidance. That strong EBITDA growth and resulting strong cash flow generation was used in part that continue to pay down debt, resulting in our lowest leverage ratio in five years. We also purchased 3 million shares of our stock and are well-positioned with our reloaded 200 million share repurchase authorization. And finally, we believe we are well-positioned for EBITDA growth and strong cash flow generation in 2018 and beyond. So 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 George Sutton with Craig-Hallum. Please go ahead.

Hey gentlemen. Good morning. It’s Jason on for George.

Hi, Jason.

So you’ve mentioned in your prepared remarks, you’d said that the bookings pipeline is larger than ever. And just wondering if you can give some specifics on you know where you see that composition. I know you ran through some things in your script, but what are the drivers of that bookings pipeline?

Well, yeah, I have to get back into ‘17 to answer that. I actually have to get all the way back to ‘16 a little bit to answer that question. The fact that our bookings are in a strong as they could and should be on a -- on our trend line is largely impacted by four things that ACI did to itself. We announced -- we told you in the last year at this time that we had deliberately strategically closed the gap on our renewals and said that we’re only going to do renewals in the year of renewals and that the RPS program was driving that and it was a major -- and in fact instead of working on two years of renewals, we doubled down and working on one-year renewals, because bridging everyone to the new technology was a task number one, objective number one. So, that in itself slowed down bookings, because we in fact cut even though our pipe -- our renewals were there and we’re running it close to 100% renewal. We shut -- we basically shut half of the amount of renewals we’d against. Second one was that we made it very clear that the marketplace that we’re coming out with significant new GAs in 2017 and we did the two analyst meetings since -- without trying to signal to all of our competitors and what not that we were out of the market on digital and we were -- we had slowed down our efforts on the other platform GAs. We did that because we wanted to have the Linux offering and the values that came from the Linux offerings. So that slowed down our bookings also. The third area which shouldn’t be underestimated is we reorganized into the two P&L structure. We went from one salesforce to three salesforce. Now we separated renewals from cross-sell and we separated both of those from our business development. There’s significant interest in our UP technology and we weren’t organized in a way to directly confront that and so we went through trying to use the Olympic analogy we were in the hockey game and we did try to score a point, because we’re changing lines, right, and so I wouldn’t underestimate that. And then the last one was coming into the fourth quarter, we did not -- we have -- we are a way too in my opinion, we’re a way too dependent on the fourth quarter and when we’re satisfied with the revenue from sales, we had no reason to be making less than optimum -- optimal deals closing out the year and that’s why I stick on to you that’s the --that the first quarter is already at last year’s first quarter level and what not. And so those four reasons or all reasons why -- so on a go forward basis, if you don’t -- it slow down -- all those reasons had nothing whatsoever to do with bookings or pipeline. We’ve been winning awards for our new technology and in fact one just crossed the wire this morning. We think that that the R&D was the right move. We think the reorganization was the right move. The focus on the two pieces of business was the right move. We -- RPS is validating itself as being the right move. And the fourth quarter where I’d really like to spread more the business in the other three quarters of the year than just wait for everyone’s budgets to get approved and have a rare mad dash to signing contracts.

Great color on that. Thank you. Just one more question for me the decision to provide the long-term guidance for 2019 and 2020, that’s not something we’ve seen from you guys in the past. So it would appear that’s coming from more confidence in the pipeline going forward, but just give me your thoughts on why you chose to provide that level of guidance?

Well, I think, it doesn’t -- everything, it supports everything we said, right. So I’m not going to reiterate a bunch of what we said. I think there is another way to look at it. We just bought back 3% of our stock and we put out the authority to buy back another 7% of our stock. We think that -- we do a very disciplined discounted cash flow in terms of when we buy earnings per share, right. Think about it that way or EBITDA per share. And we can’t -- we’re having a real hard time finding anything that’s more attractive than our own EBITDA per share and I don’t want to get into a lawsuit or whatever that says that we’re being overly huge in terms of how we’re going after that.

Yeah. Jason, the only other thing I’d add is, I think, providing this is a natural progression of what we’ve been talking about now for essentially about the last year. It was last year about this time that we introduced our two P&L segments for the On Premise and our SaaS and platform business. When we met in November in -- at Analyst Day, we talked about the Rule of 40s and our commitments to getting the cloud business to the Rule of 40. And I said at that time over the course of the five years, we have EBITDA growth targets out there of 100 basis points, but the quicker we can get traction on the Rule of 40, we’re going to move that needle probably a little higher than 100 basis points. And so that’s a part of the reason to put it out there for 2019 and 2020 was to kind of get some direction to where we think our ability to execute on the Rule of 40s and how it will drive in particular the profitability of our cloud business.

And you see the cash that the company is generating and we have to be holistic -- we have to be clear with all the options we have for that cash.

Great. Thanks a lot guys.

And your next question comes from the line of Peter Heckmann with Davidson. Please go ahead.

Hey. Good morning, everyone. Thanks for providing that longer term guidance. I think that’s a bold move, it’s something that the market will welcome. But as we try and model towards those numbers, can you help us a little bit thinking about what type of revenue growth might be contemplated at the lower and higher ends of those longer term EBITDA guidance ranges?

Yeah. Well, for -- certainly for 2018, we’ve obviously guided to 3% to 5% revenue growth. We said over the five years that we’re talking mid-to-upper single digits. So I think what you’ll see in ‘19 and ‘20 is a progression, 2018 is the baseline towards that mid-to-upper single-digit revenue growth.

Okay. And…

But I -- it is really, but there’s two dynamics to, I guess, our ability to deliver on those EBITDA targets. One is going to be revenue growth, but the other is going to be the efficiency and the optimization of our cloud business. So, again, we put a lot of investment in the past into product development, as well as infrastructure costs and we’re at -- we’re now going into the three-year period or so that we’re going to be able to see the dividends in that set. So I really see it as a combination of both the revenue growth and cost optimization that will help us on delivering on those targets.

Okay. Okay. And then is there a minimum level of bookings in 2018 that you need to get to achieve those 2019 numbers, I mean, if let’s say we have a year of flat bookings in 2018 on a relatively easy comp, how much will that effect to you guys.

Well, when you -- going forward even so ‘17 was a leap year, from a 60-month backlog standpoint, we still replenished -- we still replenished the backlog and it grew a little tiny bit. So that would be the baseline that you want to start with. We’ve been stocking away into backlog more than revenue growth for the three years before that, so you think that. The AOD business, the historic On Premise business of ours very much follows the bookings backlog, revenue, revenue generation and out, and that’s going to stay very predictable in that way. The AOD business is going to have full organic revenue growth and bookings response as drivers of its increased revenue. So we’re expecting very good bookings growth right and like we said, if you add ‘18 and ‘17 together and divided by two, we feel very confident we’re going to be on trajectory. AOD has another mechanism by which its -- they are in the transaction business and it’s not a fixed multiyear contract. It’s a floor right and the whole idea is to beat that floor and to get as much share in the digital transformation as possible and then roll off of that chair. And the growth in real time payment has not been disappointing anybody in terms of forecast versus actual in terms of organic growth should be a bigger piece. And yeah, we should be comfortable that take ‘17 and ‘18, divide them by two and we feel comfortably on that trajectory.

Okay. And then just last question, I didn’t totally understand your comment on the renewals piece, I see it in the bookings numbers, term extensions, and perhaps, the upgrade were both lower. But what was the comment on was it less focused on renewals and more focused on the deployment?

No, no, no. I apologize. What I said was we traditionally go out and we aggressively renew contracts in their third year and fourth year. We in the end of ‘16 changed that and said that with the complexity of RPS and bring -- combining the old and the new technology isn’t we want to come out of this cycle with everybody operating on UP. We -- in effect said, we’re only going to work on current year. And of course, when you only work a lot of our new business our core new business comes from the add-on of renewal business. So when you, say, well, gee, I’m only going to renew half of it that not only impacts renewals, it also impacts the add-on and additional capacity that is purchased. Does that make sense?

It does. It does. So…

Yeah.

… as in prior quarters or prior period is that that business is still locked in, there hasn’t been an increase in cancellations, we will just…

No. Our attrition rate is virtually zero.

Yeah. So we have a high-level of confidence, we will see those come through in ‘18 or ‘19?

Yeah.

Okay. Thank you.

Yeah.

And your next question comes from the line of Brett Huff with Stephens. Please go ahead.

Good morning, guys. One question on the success you had in the 4Q, I think, you mentioned Phil, it seems to us it’s a very big deal that you closed. I think you said your largest North American bank and your second largest financial intermediary, which I think, you also ultimately referred to as a bank. Is that my understanding on that right?

No. We now have two of the top five bank customers around the world, that are up-enabled RPS and we have both the number one and the number two financial intermediaries, which they very much support banks, right. But they are financial intermediaries. They’re across the line as up-enabled.

Okay. So the -- our big focus has been on the second big bank that we thought you would close. It sounds like you did that in the fourth quarter here in the U.S. And I don’t understand why the backlog in bookings number or specifically why the bookings number wouldn’t have been much better given at least our understanding of how big those contracts are and you were talking about 25% to 30% lift on those contracts. I don’t understand how that math doesn’t flow through to that bookings number. I’m just confused on that lack of flow through?

Well, a little bit of that has to do with yoking back the number, the number of renewals. Now, we’re definitely not going to talk about individual contracts. We’ve got our customers would be upset. But we also did you know, so basically what we’ve done is we look for 25% to 30% and I don’t think there’s any, no, no real secret. The number we’ve achieved is 28% and that’s a combination of, it’s almost all buying incremental volume. Now that that lands up and what we’ve done is, we actually take a slightly -- we’ve taken a slightly lower ILF, so there’s less revenue impact on the current year. But it gives us a nice 5% plus growth rate over the duration of the contract, because if you think about 28% provided by five-year contract, you’re going to get 5% in change. By giving them the new technology on top of the old technology, I said that, we had 13 contracts that followed, most of which are from fourth quarter ‘16, first quarter ‘17 bookings. As they start adding more volumes into it, they then contract us or they do it themselves or they contract us to work on them on projects to bring more volume in, right. I guess the best way -- you want to add on?

Yeah. Brett, the only thing I’d add to that is that when you’re looking at comparable to Q4 2016, remember that Q4 2016 we actually signed our largest deal ever, which came with a renewal, but it was substantial term extension event, as well as the substantial new bookings event. So we had one of those customers that Phil talks about being RPS was signed in Q4 ‘16. So, there is a fairly large comparable amount in the comp period.

Okay. And second question is -- that’s helpful. Thanks for that insight. Second question is we had guided to high single-digit net new bookings for this year. By my math it came in down mid-teens and even though you’re guiding for low double-digit growth for next year on that lower base. By my math, we’re still $125 million to $150 million lower in absolute booking dollars in ‘18 than would have been had you kind of kept on your existing trend line. That’s also confusing to me and is there just a general delay or are we being conservative on the low double next year for ‘18. Where does that $150 million go?

Yeah. Two things, well, first of all, low double, probably, a wider range than maybe what you’re computing. But in terms of -- and it still goes back to what we’re seeing in Q1. Q1, we are seeing, as Phil said, I mean, we’re nearly at the level of bookings we have for all of the first quarter last year. So we’re going to see strong comps here early in the year and I think that that makes it different. I think, historically where we had deal slipped from year-to-year, they slipped, they took with them revenue and margin. That wasn’t the case this year. So deals -- these deals slipped were deals that likely would have driven just it would have gone straight in the backlog and would have likely gone into projects status delivered revenue for each year. So the fact that we’re signing those now in the first six weeks of the year, really doesn’t knock this off path, because again a lot -- most of that would have gone to backlog and into a project status delivered at some point in the future.

Okay. And then last question from us, despite a little bit lower license mix than usual, Phil, I think, you mentioned, you guys had a lot of success in one -- quarter one through quarter three in getting some of the renewals done or the higher margin stuff done. The license mix wasn’t as favorable yet, you guys really had great not particularly COGS leverage but OpEx leverage. What was driving that and I don’t know if that’s for Phil or for Scott, but on all three lines or four lines of OpEx, much lower than we expected in. What drove that -- should we think about that going forward and maybe is that implied in sort of your longer term EBITDA guidance?

Well, yeah, I think, if you look at and just say relative to the midpoint of our guidance or relative [ph] 3% (42:30) it’s a lot of that excess revenue that we achieved did deliver bottomline EBITDA. But I think it gets into the scale in the leverage of the model. And again a lot of that investment that we’ve made in the past is not only coming to a natural ends, but it’s also -- those investments were also into driving high amount of incremental dollar will drop to the bottomline. So, it’s really the scale and the leverage of those investments we start to see.

Brett, I also want to answer it, because it’s one of the reason I put you guys through a long set of comments this morning. When you buy 11 companies and what you’re really trying to buy is his capabilities and whatnot, and you’ve got a real vision for what it is you want to build. What you’ll end up having to do is you’ll end up having to divest, you’ll end up having to do one-time kinds of tests and whatnot to make those 11 companies and your core company one company. And one thing that we’ve not done a great job of explaining to the street is that we’ve actually -- our gross revenue -- gross is a bad term, I think. But the amount of revenue growth that we’ve had for the last three years, four years has been offset by revenue that we’ve driven out of the business, because we discontinued one of S1’s major online business lines, but we weren’t going to put a flag out in front of the building and we weren’t going to -- we have to work it logically out with our customers, a lot of whom we continue with other products and whatnot. So if we are driving out revenue that has little to no margin and then we’re growing good business that has margin, it looks like you don’t have that much of a revenue growth rate, because on a net day basis you don’t. But what it does to your EBITDA, so once it’s gone its expenses go away and its revenue went away, but the marginal effect becomes a multiplier and that’s what you’re beginning to see. And the other one was is that closing those 25 data centers and building out the four. We went through a bunch of cost that we expect efficiency. We’re also expecting leverage against that fixed cost investment in those. We have years of growth before we have to readdress those centers in the way we did just now.

Okay. That’s helpful. And last one for me. What are the kind of the upsides, downsides that might drive better or worse than the, I think, what you guys are seeing is a low double-digit range, and Scott, I don’t know if you want to comment, you mentioned that maybe it’s -- I don’t know you implied it was more mid-teens in your prior comment. But what would drive upside and downside to that? We’ve gotten some questions, just how conservative is that outlook now, because folks are trying to get a handle on what is the right kind of bookings run rate? Thank you.

Well, I’ll give you a couple of things and then I will let Scott as our CFO give you a couple of things. We have no -- merchants and banks are probably two of the biggest recipients of the tax reductions. And whereas merchants have been investing, they’ve been investing in what they can afford and it’s possible that they’ll invest more, right. Banks really under this regulatory regime of the last eight years have invested little to nothing that they didn’t have to invest against the regulatory scheme. And that has not been positive. We have a lot of customers that need to do transformational kinds of projects and they have just been below the regulatory regime in terms of things that they can do and whatnot, that’s potentially a positive. And the best way I can say that is that after a couple of years of saying, well, gee, we’ve got this great technology, people are just going to come and do huge deals with us and forecast that as part of our business going forward. In 16 week we quit doing that. So when we talk about our growth rates and whatnot, they are not dependent on any elephant or well-sized initiatives that are out there and those would be -- on the negative side is that something happens to severely injure, the banks get in trouble again or something, but I can’t really forecast that one.

Yeah. The only thing I’d add to that is that, I agree on the downside it would be something macroeconomic. On the upside though, we’re -- there’s a lot of drivers of upside. We’re entering the year three of our RPS program, where we’re getting the 25%, 30% price uplift. So that’s -- and that’s been very high, nearly 100% adoption rate. So that’s really subject to the pool of renewals we have each year. And so, again, in year three of that, we just introduced our real time payment solutions. So not on the retail side, but more on the wholesale side of payments, that’s structured very similar to the RPS program. And that’s -- this will be the first full year of that program. And then, just overall the new product release. So the Linux capabilities, as well as the new digital banking solution are really what will drive the upside.

Okay. Thanks for your time. I appreciate it.

And your next question comes from the line of David Eller with Wells Fargo. Please go ahead.

Good morning. And, Phil, thank you for all the commentary and the slides to start the call. Scott, on the share repo, typically you’ve held 75% to 80% of your cash offshore and I wondered if you could give us some context related to Tax Reform on how efficiently or quickly you might be able to bring that cash back and then if there’s any timeline related to the new $200 million authorization?

Well, we historically had a generally pretty efficient tax structure, meaning the ability to get cash back from overseas. So I don’t necessarily look at that cash is being trapped for any particular reason. Obviously, we’re going to be in a more flexible position going forward, because now it’s already is a part of the unremitting earnings tax. So there’s still working capital requirement for where we operate in 50 countries. So there’s certainly an element of working capital required to be overseas and then certain jurisdictions have, it’s not that we tax that when it comes in to the U.S. They tax it when it leaves the country. So there’s those kind of dynamics. So I don’t think in and of itself the tax law will impact that again, so efficient structure certainly more flexibility going forward because essentially it’s already been taxed. And in terms of the $200 million authorization, the only thing I’d say to that is, of course, of the last, call it 90 days we’ve purchased 3 million shares. Yes, we have 200 million as of today available and I would just reiterate what, Phil said, we look at our stock and what we’re seeing in our future is a very compelling use of our cash. So, I think, that’s as much as I’d say about any timing of use of that…

I’ll give you a little add-on to that. If you take a backwards look at us, we’ve purchased about 40 million of our shares and this is actually a pattern to how we buy back our shares. So, if you take backwards look you could might make a forward interpolation in terms of this and that might be the best way to answer the question.

Okay. Thank you for that color. And then you also mentioned that you continue to have $100 million of net operating losses that you can use after Tax Reform, can you give us any kind of estimate of when you might exhaust those or kind of what -- how long you might be able to use those going forward?

Well, there -- there’s no limit, right. There’s no risk at this point in terms of our future earnings that we would lose any of the availability of that. We have really a couple more years of pretty heavy utilization on those. Before that -- some of those limitations drop off and get out to 2020, but what we’ve got a couple more years of pretty heavy utilization.

Okay. And then, last question for me about housekeeping. I think in prior years you’ve provided a specific free cash flow number in your guidance and I think you’ve given us a lot of the kind of assumptions that we can drive to that, but did you provide a free cash flow number for this year?

Same -- it’s very similar to what we’ve done in the past. All the components, I think are on slide nine. If you -- but if you do what we call kind of the sanity check math, where we start with EBITDA, which is again we’ve guided to range to $270 million to $285 million, and then you reduce it really to three major cash components being the cash taxes of $40 million and interest of $34 million and CapEx around $50 million, you get in that high $150 million range, so the growth is -- should be commensurate with our EBITDA growth.

Okay. Thank you so much for taking my questions.

And your final question comes from the line of Wayne Johnson with Raymond James. Please go ahead.

Hi. Yes. Thank you for all these data points. Very helpful. Just in case I missed it in the beginning part of the call, did you give any guidance in terms of how we should think about research and development, sales and marketing as a percentage of sales going forward in 2018?

We are not contemplating reducing our R&D spending. I mean, I wish we were three times our size, because there’s so much going on out there, right. We are not reducing R&D commitment.

Okay. Should I take that just to say we can map out a 2017 percentage of sales overlay and ‘18 and we’re going to be within the ballpark. What you guys are thinking in terms of operating expenses?

I had a hard time hearing that question. Are you still typically talking about the R&D?

Just operating expenses in general, so sales and marketing and R&D together, if -- should we just take ‘17 and overlay that on to ‘18, as a percentage of sales and use that as a guideline or starting point for modeling?

Yeah. I think, well, two things. I think R&D as a percentage of revenue should be essentially consistent with 2017. I would expect selling and marketing spend should go up, commensurate with the higher booking. So just all else being equal, I think, sales expense should go up commensurate with higher bookings numbers.

I appreciate that. And what was the recurring revenue and I apologize I’m offsite, but what was the recurring revenue for 2017, when you look at the whole year?

I’m sorry. I still didn’t hear.

Recurring revenue. What was ‘17’s recurring revenue?

The recurring revenue?

Yeah. The percent of total?

70 some.

Yeah. We can get that. It was, yeah, so it was $725 million, $726 million out of the $1.24 billion, so 70%-ish.

Yeah. It’s really a...

And so -- and we should expect that percentage to creep up over time, is that correct?

Well, yeah, I think, all else being equal. It will, I think, you look at 2017, where you saw a lot of the recurring growth was in the -- in our SaaS platform business up 7%, that’s all recurring revenue. So generally speaking over time as we sell net new we grow volumes, those will all drive to whether it’s cloud or it’s On Premise, those will drive incremental recurring revenue stream.

Okay. I appreciate that. I’ll follow-up offline. Thank you.

And there are no further questions in the queue.

Well, thanks everybody for calling in. We look forward to catching up and seeing everybody in upcoming events. Have a good day.