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ACI Worldwide, Inc. (ACIW)

March 13, 2013 1:30 pm ET

Executives

John Kraft

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

Analysts

Georgios Mihalos - Crédit Suisse AG, Research Division

Georgios Mihalos - Crédit Suisse AG, Research Division

Hi, good morning. I'd like to welcome you guys to the final presentation of the day. We have Scott Behrens of ACI Worldwide here today. Scott? Oh, John, sorry.

John Kraft

Hi, good morning. I'm John Kraft, I'm Vice President of Investor Relations and Strategy. I'm going to start off here first with some background on the ACI story and then I'm going to let Scott Behrens, CFO, take over on the financials.

This is essentially a snapshot of our geographic and size and scope. About over 3,500 employees globally all over the world, we cater to large financial institutions, have now just over 2,500. We claim 67 of the top 100 world banks, including all of the top 20 in the U.S., with some particular strength in certain geographies in South America, Saudi Arabia, South Africa. And we also cater to large retailers, we have about 290 globally.

At a high level, our software facilitates electronic payments and transactions. Roughly half of our business is what we call retail payments, which is a consumer-based point-of-sale and ATM transaction driving. As most of you know, these payments at the point-of-sale and at ATMs have to be processed, have to be settled. They obviously have to be routed and authorized and cleared, and our software facilitates this. The remaining part of our business comes from Internet banking, which actually we cater to both large institutions as well as small institutions, wholesale products to large institutions, anti-fraud, analytics and other miscellaneous products.

Slide 6 here shows a representative list of some of our larger customers, obviously some very recognizable names here. On Slide 7, we highlight here some market share data from an industry group, IDC. In aggregate, of all of the segments that we target, we estimate, and this IDC estimates, that we're growing, or that the growth potential is pushing 10%. On the right side here is our market share. We believe we have the leading market share among the outsourced vendors, but still within the single digits.

A big chunk of the group that we're targeting, really, is using their own internal systems. Slide 8, drivers of growth and trends. First, we have a natural tailwind of electronic transaction growth. As you saw earlier, we think that growth is in the upper single digits, 9%. Next, we've got -- in the industry, getting more focused on efficiency and risk management. Banks are dealing with fraud and having a harder time doing it on their home-built systems. Maintaining these systems itself can be very difficult. It's another driver. Many of these systems were built years ago and simply finding the staff capable of coding in some of the languages that these systems were built in can be very difficult. The regulatory environment out there, with all the updates that are required, are also requiring these updates.

And lastly, consolidation has been a driver. Banks are finding it's easier to work with fewer vendors rather than more. It's that one-throat-to-choke mentality. And it's shifted from what we saw years ago with the best of suite -- I'm sorry best-of-breed sort of sales mentality, now it's more of best-of-suite. And our suite of products provides plenty of this to cross-sell.

And on the slide here, Slide 9. Earlier this quarter, we announced our intent to acquire Online Resources. That closed this past Monday. This is a company that, at its core, provides bill payment services both catering to banks and billers. There really aren't too many bank-focused bill-pay vendors out there. And you've probably heard of CheckFree and Metavante and iPay, and the multiples that have been paid for these companies have been quite steep, so we think that what we paid, as shown here, was very attractive.

Well, one underappreciated component of this technology, in this company, is their very large biller base. This is a biller relationship -- these direct biller relationships essentially allow us to make payments, directly without going through middle vendors and that lowers the cost. I think we can leverage that across our larger customer base. The business is recurring, almost all of their business is a SaaS model recurring revenue. And we expect it to be accretive to our earnings in 2013.

With that, I'm going to turn it over to Scott.

Scott W. Behrens

Good morning. I am going to first go through some of the -- really the economics, how we sell the structure of our deals, then talk to some of the key financial metrics that we look to, to measure the health of the business and the trends of those metrics here over the last few years, and then finish up with our 2013 guidance.

Starting first with how we sell. We, unlike many software companies, sell our software as a term license. So more can do a subscription, at generally 5-year fixed terms. So in addition to say the maintenance fees, there are the customer support fees being recurring, hosting fees being recurring, the license fees, in many cases, are also recurring, in that the customer has to renew the license fees every 5 years.

From a customer-facing perspective, our contracts are generally -- any new contract is generally 1/3 services, 1/3 license and 1/3 maintenance, and the services being the implementation services. Once installed, our products are very sticky. We have very low attrition. We have customers that we've had for decades. Our products are generally mission-critical payment systems within large banks, processors, retailers, and so that leads to itself to the stickiness. They're very complicated systems. They interface with the back-office infrastructure of our customers. Our attrition rate is in the low single-digits.

And once -- and so upon the 5-year renewal that the, what we call term extensions, and those are customers that renew for another 5 years, the economics of a term extension is essentially 1/2 license fee, 1/2 maintenance. So no service implementation required upon a renewal. One of the components of our license fee is a capacity component. Meaning that as our customers' electronic payment volumes grow, so does our revenue stream. And our contracts essentially limit -- or provides a -- it's a paper-right process in a certain number of transactions. So as the customer exceeds those transactions, they have to come back and purchase incremental transaction volume. There's nothing really we need to do to facilitate that. It's just it's a paper-right for our customers. But it does lend itself to a component of our revenue stream that grows over time with growth in electronic payment volumes. And as John showed on the slides, the electronic payment volumes worldwide grow in the high single-digits, generally the estimates are around 4x GDP. So depending on the market and the GDP growth, the electronic payments tend to grow about 4x GDP.

So one of the key -- 2 of the key metrics that we look to, to measure the long-term health of the business is number one, starting with our sales bookings. And that is different from revenue, in that the sales bookings is the full 5-year contract value. And we break our sales bookings up into 2 components. One is called term extensions and that is just the value of the customer contracts that renewed in the current period for a 5-year renewal. So essentially, the 5-year renewal of exactly what they have today. The incremental value, so for selling -- what we call our new sales bookings, is if we sell to a new customer, so a net new logo. If we cross-sell multiple products to an existing customer, or if we just charge more for existing products, that falls into our net new sales bookings value. And that is the category where we really look to measure for growth -- future growth. So our new sales bookings grows in the high to low single-digit. That really foreshadows what revenue is going to look like out, typically about 2 years. It takes about 2 years to install some of our major payment systems. And so what we sold, for example, here in the fourth quarter of 2012, will likely go live and will begin to generate revenue in late 2014. So new sales bookings really foreshadow future revenue growth.

And because of that lag period between sales bookings and revenue, one of the other components we look to, to measure the long-term health of the business is our backlog, which is our contracted book of business or install base. And we break backlog out of the 2 categories. One is 60-month backlog and the other is the 12-month view, the first 12 months that we call 12-month backlog. And both of those we look to grow over the long term. And because obviously, with the lag period in sales to revenue, really the way the flow works is new sales go into backlog first and then backlog converts to revenue in the future.

We go in to any given quarter with about 90% to 95% of our revenue already in backlog, so we rely very little on current period sales to drive current period revenue. That's why we focus on new sales bookings and backlog growth as leading indicators of future revenue.

From a revenue perspective, our revenue mix is a little more than 1/2 in the Americas. That's predominantly U.S., but we do have strong presence in Canada and Latin America as well. EMEA is about 1/3 of our revenue stream, with the remainder coming from Asia/Pacific. From a currency mix, we often get asked questions around the currencies in which we operate, as we've seen dollar volatility in the FX markets. The Americas is about 90% U.S. dollar. Globally, we're 70% to 80% U.S. dollar. The Americas, 90% U.S. dollar, with the other 10% Canadian dollar. Asia/Pacific is about 90% U.S. dollar, with the other 10% being Sing dollar and Australian dollar. And then EMEA is about 1/3 U.S. dollar, 1/3 pound and 1/3 euro.

The revenue mix is predominantly higher-margin maintenance license and hosting fees, services or implementation services make up about 20% of our revenue portfolio. And because of the nature of our contracts and the way we sell term licenses, if we're going to essentially discount something to close a deal, we're going to put a discount into services because license and maintenance are going to be recurring over the life of the customer. The service revenue stream we'll only get once, and we'll get it at the front end of the customer relationship. So we will generally have services be essentially a loss leader so that we have very low, low margin in services. But -- and the reason I point that out is the near-term backlog is a component of our -- if we look at our backlog, really the next -- the 12 months out is going to be burdened by this 20% that is low margin. But once you get out into years 2 and certainly, years 3, 4 and 5, what that opens up is a much higher margin backlog once you get through the implementation services.

Really the business model, turning to Slide 13. The business model is again focused on selling new, so selling in the new customers, new geographies. Once installed after a couple of years, beginning to get -- just layering on the incremental recurring maintenance licenses and hosting revenues on top of a relatively fixed cost base. And this strategy contributes to a business model that provides for margin growth at a multiple of revenue growth. And as you see over the last 5 years, incrementally growing not only here and showing in absolute dollars, but also as a margin as a percentage of revenue. And again, it's the -- it's driving incremental recurring revenues on top of our existing cost base.

And finally for 2013, we do expect net new sales bookings to be in the high single-digit to low double-digit. Revenue growth in the mid to high single-digits. We do expect revenues, sales in our margin, in terms of a quarterly phasing, to be consistent with what it was in 2012. Operating income and EBITDA, both are 20% and 30%, respectively. Both of those growing at 2x our revenue growth. We also provide a couple of other data points here for modeling purposes.

And that is all I have for our prepared remarks this morning. So now we'll open up for questions at this time.

Question-and-Answer Session

Georgios Mihalos - Crédit Suisse AG, Research Division

Thanks, Scott. ACI has been quite an acquisitor recently. Can you provide as an update on the integration and the thought process with the recent acquisitions, and then sort of how you see it building forward, any gaps you guys are looking to fill?

Scott W. Behrens

Yes, let's start with the S1 acquisition of which we closed a year ago this time. Prior to the S1 acquisition, we had generally had an organic growth strategy, if you look at the prior 5 years, and that strategy, being again, layering on incremental revenue on top of a pretty fixed cost base. What S1 provided was it provided an acceleration of the revenue growth or they accelerated the scale. Both had a similar international footprint. ACI was -- it operates in 80 countries. And at the time, a $450 million revenue base operating in 80 countries, you have pretty significant cost infrastructure that, over time, we were scaling through new sales and revenue growth organically. But -- and then S1, was a little over $200 million in revenue and operated in 50 countries. And so they were, we were both essentially subscale to the operating in the geographic footprint that we had. What the combination provided, probably number one, was significant scale and leverage on that cost structure. We were able to take out $50 million as a result of that acquisition, that represented almost 20% of the cash cost of S1. S1 also brought international functionality in certain of our product lines where we didn't have international functionality, brought incremental technologies, in particular mobile and branch banking that we did not have in our product suite. And it also brought up more than $200 million NOL, that we'll start getting the cash benefit of starting next year. The integration of S1 was essentially complete as we exited 2012. We had completed -- we took $48 million out with another $5 million coming out, as facilities and data centers were a lot here in 2013. Looking to the ORCC transaction, which we closed on Monday, that's going to bring -- in our online banking products, we have bill pay, a functionality. If you go on online banking and you pay bills, we have that functionality within our online banking products that historically, we had to go through resellers to provide that particular functionality. One of those resellers was ORCC, and so what they brought to us was a functionality in-house that we did not have in our product suite. We -- it also brings with it a biller-direct market that isn't that new to us, but has historically been growing at about 18% or 2x the market growth. And so that's an exciting new market for us. For -- with ORCC, we expect to be able to achieve $20 million in cost synergies within 60 days, and that's primarily the corporate G&A and public company-type costs that we expect to get out within the first 60 days. There will be a second phase of cost savings around facilities and data centers, but we'll come out later in the year with what that incremental savings will be. But we expect to be able to achieve the cost savings -- that second phase of cost savings, hopefully, by the end of this year.

Georgios Mihalos - Crédit Suisse AG, Research Division

And then I guess as a second part of that question was, what are you guys looking at, going forward, in terms of gaps that you would like to fill?

Scott W. Behrens

Oh, incremental, yes. Really, I don't think that -- I wouldn't say there is a gap in our product suite. The one thing about ORCC was it provided functionality that we had to go to a reseller. So now we essentially have the functionality in-house. The rest of our -- and so not having product gaps, we will be opportunistic to the extent that there are technologies that become available in the marketplace. But a lot of that becomes a buy-versus-build scenario. I mean, we have the domain expertise to build the technology in-house, to build the future functionality. But to the extent that maybe we have functionality in a particular region or on a particular product line, that we assess that it could either take us a certain amount of time and dollars to build or we can go out and purchase it in the marketplace, that really becomes a part of this. I wouldn't say there's a hole, though, in the product suite that we have.

Georgios Mihalos - Crédit Suisse AG, Research Division

That's good. And then I guess when we're looking at 2013 guidance, sort of, can you just walk us through what gives you sort of a confidence for that growth, at 11%, 14%, top line, given you do have strong visibility, you have backlog, everything else? So it's just the puts and takes for you guys on the top line?

Scott W. Behrens

Yes, well, the bottom line goes back -- it goes back into what's in our backlog when we enter the year, and we start with a 12-month backlog of nearly $600 million. And that represents north of 75% of the revenue that we expect to get for the year, which is consistent with our historical experience, both from an ACI perspective, as well as an S1 perspective. And the rest of it comes from new sales bookings. And 2/3 of our new sales come from our existing customer base, just selling them more functionality and/or price increases or incremental capacity. A certain percentage of our customers have to come back to us every year to acquire incremental capacity, and we have pretty good visibility into where they're at in their transaction volumes. And as our customers grow, as electronic payment transaction volumes grow, it just triggers a certain percentage of that customer base that has to come back and buy more capacity. So it's primarily what's in backlog to start the year, and also our visibility into the 12-months sales pipeline.

Okay. Well, thank you very much.

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Source: ACI Worldwide's Management Presents at Credit Suisse 15th Annual Global Services Conference (Transcript)
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