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ACI Worldwide (NASDAQ:ACIW)

Q4 2012 Earnings Call

February 28, 2013 8:30 am ET

Executives

John Kraft

Philip G. Heasley - Chief Executive Officer, President and Director

Scott W. Behrens - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

Analysts

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Zachary H. Shafran - Waddell & Reed Investment Management Co.

Leonard A. DeProspo - Janney Montgomery Scott LLC, Research Division

Operator

Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Reports Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to John Kraft, Vice President of Investor Relations and Strategies. Please go ahead, sir.

John Kraft

Thank you, Steve, and good morning, everybody. Today's call, like all of our events, are subject to both Safe Harbor and forward-looking statements. You could 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 website, as well as with the SEC.

On this morning's call are Phil Heasley, our CEO; and Scott Behrens, our CFO. Before I turn the call over to Phil, I did want to mention that ACI will be participating in several upcoming conferences in the coming weeks, specifically the Raymond James 34th Annual Investor Conference on March 5; the Wedbush Transformational Technologies Conference on May (sic) [March] 6; and the Credit Suisse Global Services Conferences on May -- I'm sorry, March 13. If you are interested in the one-on-one meeting, please contact the conference organizers directly.

With that, I'd like to turn the call over to Phil Heasley, ACI's Chief Executive Officer. Phil?

Philip G. Heasley

Thanks, John. Good morning, and thank you for joining our call. I'll start out today with an overview of our fourth quarter and full year 2012 highlights. Scott will then give you a detailed review of our financial results, after which we'll open the call for your questions.

Starting on Slide 4. We closed out a watershed 2012 after the successful acquisitions of S1 and Distra. We achieved our promised $48 million in cost reductions, and the integration is substantially complete. Furthermore, Aite Group recognized our Universal Online Banker product as the leader in the U.S. large bank market for 2012.

With Distra, we acquired key intellectual property, which is being used to drive our innovative Universal Payments platform. I've mentioned over the past few years, we have been investing heavily to deliver the most complete end-to-end payment solutions for financial institutions, processors and retailers. UPP or Universal Payments Platform provides the unique orchestration-al layer of software that seamlessly and easily integrates all our products and solutions into our customers' own reference architectures. Since the acquisition of Distra, significant progress has been made in -- on this endeavor, and we will be launching our first release of UPP to the marketplace during the first half of 2013.

Meanwhile, we also repurchased 1.4 million shares or 3.5% of our shares outstanding for approximately $58 million over the course of 2012. From an operating perspective, we closed out the year with record sales bookings, revenues and operating income. Sales bookings grew 81% in the fourth quarter and 38% for the full year 2012. Revenues grew 66% in the fourth quarter and 43% for full year 2012, and most impressively, operating income grew 108% in the fourth quarter and 76% for the full year 2012.

With the integration of S1 substantially complete and the market disruptions during the first half of 2012 receding, I'm happy to report that we entered 2013 with a strong pipeline across all our products worldwide. We have a significant opportunity to cross-sell, and we remain focused on actively pursuing net new sales to new and existing customers across all our geographies.

Lastly, I would like to provide you with a quick update on the Online Resource acquisition. We initiated the tender offer to acquire Online Resources on February 8. We received an early termination of the HSR waiting period on February 15, and we have completed the loan syndication from our lender partners to fund the transaction on February 21. We still expect to close the transaction by the end of the first quarter 2013. Under ACI ownership, we expect to stabilize and grow Online Resources community banking business. We intend to invest in its biller direct business to continue its impressive growth. And importantly, this Online Resource business is approximately 90% recurring, which will add to our financial visibility and earnings stability.

In summary, we are very excited to move into 2013 with strong momentum. The continuous strength in our recurring revenue business has us well positioned to accelerate revenue growth while delivering strong profitability and earnings in 2013.

I will now hand the call over to Scott to discuss our financial results for the quarter and full year 2012, as well as our full year guidance for 2013.

Scott W. Behrens

Thanks, Phil, and good morning, everyone. I first plan to go through the highlights of the fourth quarter and full year 2012 financial results, and then I'll provide an outlook for 2013. And I'll also provide some brief comments on the Online Resources transaction.

So I'll be starting my comments on Slide 6, with key takeaways from the quarter, starting first with sales bookings. We finished the year with record sales, a record sales quarter with strong sales performance in all geographic regions. Total sales bookings exceeded $300 million in contract value, including almost $200 million of net new sales bookings. The strong sales represented an 80% growth over the prior year quarter and more than 60% growth sequentially over Q3 of this year. S1 contributed approximately $80 million of the sales for the quarter. In the historical ACI business, sales were up 33% in total and 9% in net new over the prior year quarter. And overall, sales net of term extensions increased $81 million or 69% over the prior year quarter.

The strong sales led to solid growth in both 60-month and 12-month backlog. We saw a record revenue quarter, coming in at $224 million, albeit coming in lower than the expectations we communicated on our November earnings call. This lower revenue, however, was offset by lower-than-expected expenses, allowing us to come in within our adjusted EBITDA range and come in higher than our expected operating income range for the fourth quarter and full year that we communicated in our November earnings call. Historical ACI saw revenue growth of $40 million or 30% over the prior year quarter, and S1 contributed $48 million to total revenue. So overall, we had a strong quarterly revenue performance to finish the year.

The operating expense growth compared to the prior year quarter was primarily related to the S1 acquisition, which contributed $43 million of the expense growth. The remainder of the expense growth was primarily related to deferred costs recognized from project go-lives in the quarter. We also incurred a little over $4 million of integration-related onetime expenses during the quarter. And finally on this slide, we saw strong growth in non-GAAP operating income and adjusted EBITDA, up 108% and 95%, respectively, over the prior year quarter.

Turning now to Slide 7, with key takeaways from the full year. We saw strong organic revenue growth, up nearly $40 million or 8.5% over 2011. S1 contributed nearly $162 million to GAAP revenues. And S1 -- the S1 contribution revenue, however, was impacted by a little over $22 million of deferred revenue haircut. Again, that's the revenue that would have been recognized in the normal course of business by S1, but was not recognized due to GAAP purchase accounting requirements, so really $22.5 million of pure margin revenue that we weren't able to recognize.

The operating expense growth compared to the prior year, similar to the quarter, was primarily related to the S1 acquisition, which contributed $159 million of the expense growth. And again, the remainder is primarily from deferred cost recognized from project go-lives during 2012. And for the full year, we saw $31.5 million of integration-related onetime expenses. We saw strong growth in non-GAAP operating income and adjusted EBITDA, up 76% and 70%, respectively, over the prior year.

And finally on this slide, we ended the quarter with $76 million in cash. Also during the quarter, we repaid a little over $20 million of the refundable IBM, Alliance liability upon the expiration of the 5-year alliance. From an OFCF perspective, our full year operating free cash flow was impacted by the back-end loading of sales and revenue during the year and the corresponding increase in accounts receivable. We ended the year with $176 million of accounts receivable, representing 75 days outstanding versus 62 days outstanding at the end of the prior year. My overall expectation is that we'll trend back towards our historical DSO as we get here through 2013. We finished the quarter with $374 million of total debt. And finally, the last comment here, we have remaining share authorization to repurchase up to 1.8 million shares of our stock.

Turning next to Slide 8. This shows our expectations for 2013 in our organic business, that being before the incremental impact of Online Resources. As you can see, we expect new sales growth to be in the high-single digits to low-double digits, our revenue growth in the mid- to high-single digits in a range of $765 million to $785 million. And an important item to note, from a modeling perspective, we do expect the quarterly phasing of revenue and margin in 2013 to be consistent with the quarterly phasing we saw in 2012.

We expect our operating income to be in a range of $150 million to $160 million, representing a 20% operating margin and a growth rate of 2x our revenue growth. We expect adjusted EBITDA to be in a range of $230 million to $240 million, representing a 30% EBITDA margin and a growth rate of 2x our revenue growth.

And finally, we expect our diluted share count to approximate 40 million shares in 2013, which excludes any future share buyback activity. And again, this really continues our trend of layering on incremental revenue from new customer go-live events and incremental benefit of renewing existing customer contracts with better economics, as well as cross-sell opportunities, all while maintaining very strong expense disciplines.

Next, I'll turn to Slide 9 and provide a brief update on the acquisition of Online Resources. In addition to what Phil has already provided, I would just like to add that the integration planning is well underway and has been for a number of months. We expect to achieve $19.5 million in synergy cost reductions and expect those actions -- we expect to action those cost reductions within 60 days of the close of the transaction.

And additionally, we note here that we do expect to achieve further cost synergies beyond the $19 million we've already identified, those coming from data center and facilities consolidations, and we are continuing to assess those additional costs and expect to be able to provide the timing and financial impact of those actions later on in the year. And finally, we plan to provide the incremental financial impact to our 2013 guidance metrics once we close the transaction.

That concludes my prepared remarks. So operator, we are ready to open the line to questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of George Sutton with Craig-Hallum.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

So I'm curious if you could just give us your feedback that you've received from your bank customers since you've announced the ORCC deal, just to kind of give us the tenor of their response.

Philip G. Heasley

Well, we can give you the response from ours, and we can give you the response from Online. We just hosted those guys the day before yesterday, I guess it was. It's been extremely positive. I think it's one of the reasons we went through HSR as easily as we did because usually HSR is a great barometer in terms of how people feel versus whether there's actually issues. We went through it very quickly and we've actually -- we've had very, very positive feedback, to be honest. I'm not going to go through why and what, but we've had very positive -- from our very large banks and from -- a certain community and a credit union saw this as a real commitment on our part to their category and to our investment in their category, so very positive feedback, George.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Okay, great. And relative to guidance and sort of how the results for Q4 came out, it looks like you are seeing higher margins than we previously expect or at least, you previously had expected.

Philip G. Heasley

Well, I'm glad you asked that question, George, because I want to make it really clear to everyone. We only give you guys revenue, right, as the guidance number because without it you can't really do the models, right? Our focus is on operating income and EBITDA and the margin -- and the associated margins. If we have a piece of business that we charge a $1 for and it costs us $0.85 to support and we could renew it to the customer in a different format, and we get $0.80 of revenue and costs us $0.50 to do it, we're going to go for the latter not for the former because I'd rather make the $0.30 on the $0.80 than to make the $0.15 on the $1. And so I'm not going to be held, and I don't say this in an arrogant fashion, I'm saying this as the 30th largest shareholder myself, to me, maintaining the business, improving the profitability for our customers and increasing our profitability at the same time is absolutely the model we've been operating on for years, and we're going to continue to operate on. So if we're going to miss positively, it's going to be on margins we produce. If we're going to slightly disappoint, it's going to be by a fixation on just the revenue line itself. It's not just how to win in the consolidating marketplace. You don't win by taking revenue at any cost or pulling things forward or all the gains that our -- software industry tends to flag. So yes, we're very committed. I told you 5 years ago, I wanted 20% operating margins or better and 30% EBITDA margins and better, and that's the Holy Grail for us.

Operator

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

Wayne Johnson - Raymond James & Associates, Inc., Research Division

So my question is related to S1. You guys have done a great job on the cost side, for the company as a whole and including S1 in particular. But if you could just remind me, compared to guidance that you guys provided on the top line for S1 revenues, has that been tracking above, below or in line with expectations? And I have a follow-up.

Philip G. Heasley

I would say that we had the situation -- we all had the situation in the first half of last year, where the market got frozen by indirection of the roadmap. So that's kind of gray territory. If you kind of go beyond that, I think things are tracking very well. I think we're far enough along that I can give you guys full disclosure. Not atypical from companies that are selling themselves, S1 really pushed on what they sold at the very last 6, 9 months of -- and a lot of it was hypothetical capabilities to a certain extent versus total capabilities. So I think a little bit of extra work that we have to do that's coming to fruition this year, next quarter and the quarter after, is we have to -- we have a lot of their projects that they would have thought -- you would have thought historically would have been finished a lot sooner than they were. But they promised capabilities and whatnot that, quite honestly, hadn't been started, nevertheless, delivered. Now the good news is all the guys had offered that are at our competitors probably making the same promises, but we are finishing up that activity. And that activity aside, I would say that in 2013, both on the Postilion side and on the Online side, I would say they would meet or exceed our expectations.

Scott W. Behrens

Yes. And then with -- Wayne, I would just add to that. I'd say -- compared to where we started the year, I would say that ACI organic business came in stronger than what we expected. S1 came in lower on the numbers than we expected. But again, as Phil said, the freezing of the market we saw in the first half of the year really became unplugged, and we saw the sales pick up in the latter half. The problem is, we just didn't have the time ultimately to deliver, convert that sale to revenue in 2012. So the sales are picking up, and we expect that to contribute more in 2013. And one other item is the further, obviously, we get from the transaction date, the harder it is to really discern the difference between what has been organic and S1 contribution because we made decisions to no longer market certain products, either in the world or certain parts of the world. So decisions we made at the time to select certain products over the other also drive that. So the further we get away from the acquisition date, the harder it is really to differentiate what's organic.

Philip G. Heasley

Yes, and it's a little bit unfair to say that ACI products did somewhat better and S1 products did a little bit worse. A lot of that had to do with the fact that offering both sets of products gave the customers different perspective in terms of how they made their decision versus -- so we did very well in ACI retail engines in situations where they probably should have been buying ACI's retail engines and not the smaller retail engines. So the combined -- I think you've got to give credit, some of the credit of the ACI historic product to the S1 acquisition. I think it's beyond fair to all the hard-working people not to give them some credit for that. Got to look at it in total.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Right. I appreciate that color very much. And so my follow-up is -- has kind of 2 parts to it. In the future, at some point, do you see any kind of seasonality flattening out here, maybe not in '13 but '14, '15 and beyond? And the same with -- that would be linked also to the receivables increasing, what do you expect on a receivables basis going forward?

Philip G. Heasley

Let me -- you can answer the receivables and function on the sales, but you can go through that. I would love to say I see it correcting itself or becoming a flatter curve, as quick as -- I think we have 2 phenomena taking place. One is the fact that we are back-ended in a lot of sales, which means we're going to be back-ended on a lot of deliveries, right? And it would be disingenuous for us to say that we're going to have magic in terms of that. The other thing, Wayne, is that we're doing much bigger projects, and the much bigger projects more than likely require the banks or the processors and the retailers to get budgets approved, which tends to be the fourth quarter in order for them to ink the papers. So I think for the next year or 2, until we can flatten out the recurring revenue more -- the recovering revenue more, we're still going to see a heavy sales and a heavy completion coming in the last 4 months of the year. And I just think it's -- it would be totally wishful thinking to think it's going to be different than that. Feels like moving Thanksgiving to August or something, right, in retail sales. I just don't think we're going to be able to do it in the near term.

Scott W. Behrens

Yes. And on the receivables, we exited the year at about 75 days of revenue outstanding. If you go back to the end of 2011, it was at 62. My expectation is for 2013, we'll trend back towards our historical norm. Really the level, the increase is primarily related to the integration activities of S1. But also, if we look at it at the end of this year, it was just really the timing of the sales and revenue in the fourth quarter that really drove that up at the end of the year. But I expect that rate to decline as we progress through 2013.

Operator

Your next question comes from the line of Zachary Shafran from Waddell & Reed.

Zachary H. Shafran - Waddell & Reed Investment Management Co.

Maybe, Scott, you could better characterize the comments you guys made 3, 4 months ago about your expectations for the quarter and how things seem to slip and maybe some more comments about the need through the sales cycle and why things seem to be slipping. Is it competitive or is it just a timing issue?

Scott W. Behrens

I'll start on that. From a revenue perspective, really, we had 2 components. One was backlog, which was -- represented about a $7 million movement out of 2012 into 2013. I mean, I think, ultimately, and we said it at the end of June, we had some slippage. What had been expected at that time ultimately was worked, and we got that work completed, and I think it just ultimately pushed the timeline out. The rest was revenue from sales, and it was mix of sales relative to expectations. But I would say, with respect to both the sales revenue conversion, as well as the backlog, there was nothing in there -- there was nothing of size, in particular, that we missed. It was not a competitive issue. The backlog, obviously, will come to fruition in 2013. And from a sales perspective, it was just -- we had a record sales quarter. We closed a lot of deals, and there was a handful of deals that slipped into the new year. But they're deals that will close, and our expectation is they will close in 2013. It's not a competitive issue it was a timing issue. And the amount of deals we did accomplish in the year, we just weren't able to close out as many as we thought.

Zachary H. Shafran - Waddell & Reed Investment Management Co.

And the sort of structure and nature of those deals and the sales cycle, is that changing?

Scott W. Behrens

No, no. I mean, it's just -- again, it was the volume. We had a record sales quarter. If you look at it from both a combined ACI and S1 and also, there was ACI standalone, the amount of sales bookings we had in the quarter was significant. So it was a -- we had very high expectations for the quarter coming in at $300-plus million in total sales bookings. Again, we tracked on total sales. It was really the mix between term extensions and net new sales that really drove -- the mix really drove the revenue side.

Philip G. Heasley

Zach, this is Phil. I would just amend only one thing Scott said, and that is that the deals are getting bigger. We sold one customer 7 of our products all at one time and all the complexity of integrating it and contracting for that and whatnot. So the bigger deals aren't going to have more -- are going to have more complexity. I'm not, in any way, shape or form -- you sounded as though I should have some level of disappointment. I have no level of disappointment. We've solved for operating income and margin, and we will not do a sale or create a revenue expectation that is suboptimal to what we're trying to get accomplished. We understand our requirements to deliver the operating income that we talk about and the margins that we talk about. But I consider sales and revenue itself dependent variables, not independent variables, to creating that. I couldn't be more pleased with the efforts, especially considering the market's freeze in the beginning of the year. I couldn't be more pleased with the efforts of the team to do sales, sales and the contracts this year.

Operator

[Operator Instructions] We have another question here from the line of George Sutton with Craig-Hallum.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

I found it interesting that the #2 bullet in your year-end review slide related to Distra, and I know how significant that opportunity us. I just want to make sure I had a real good sense and maybe more importantly, people on the call have a good sense of the history of Distra, and what does it mean you're going -- it sounds like you'll have the first live product this year. What does that mean for the totality of your business?

Philip G. Heasley

I guess it depends who you talk to in the industry a little bit. I have a personal belief, George, that online capabilities, whether you call them mobile, tablet or whatever they are, are the entire future, the way, when I was a kid, credit cards and debit cards were and whatnot. It was this miraculous way that you didn't have to use paper and pen and whatnot to do business, and now you don't need a piece or plastic and whatnot. Just like Google is going and trying to get a hold on the ability to analyze the data that goes through these ions and Microsoft has its approach and the Amazon guys have theirs. We believe that it's really, really important for us to rethink about reconsolidating payments on a platform basis versus there being all these multiple streams going in. And we spent 30-some years building, I think, the gold standard in a lot of -- whether it's wholesale or retail payments. And between ourselves and S1, I think we've built the best capabilities in terms of the online. What Distra and its Universal Payments Platform, which, by the way, have manifested itself -- I mean, an older version of it is up and running in Great Britain's FasterPay, and it's going to be an important element of Singapore's faster pay and some of the other ones. But what it does is it creates a horizontal -- we've got these parallel lines that now have a perpendicular intersection that's going to allow payments to come in regardless of what vertical they need to go through. But through common online, it's basically a new definition of middleware, right, in terms of being able to bring together different kinds of payments. And we believe that with the government lowering people's interchange and there being pressures for profitability and whatnot that there's going to be a natural confluence that says that, "Gee, I've got to make up for what I lost in the ability to price and my ability to purchase productivity." And we think that UPP is going to play a very, very major role in that. It's -- I think it's going to be an S curve, but we think it's going to play a major -- it's going to be a major component of the future.

Operator

Your next question comes from the line of Leonard DeProspo from Janney.

Leonard A. DeProspo - Janney Montgomery Scott LLC, Research Division

I just wanted to ask a question about the 60-month backlog, $2.4 billion. Could you possibly break out how much of that was organic versus S1's contribution? That's it.

Scott W. Behrens

Well, the S1 contribution approximated somewhere in the $600 million to $700 million range, and that has paid -- stayed pretty consistent since the acquisition date.

Operator

I'm showing there are no further questions at this time.

Scott W. Behrens

Okay. Well, thank you very much, everybody.

Philip G. Heasley

Thanks for joining the call.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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