ACI Worldwide, Inc. (NASDAQ:ACIW)
Q2 2016 Earnings Conference Call
July 28, 2016 08:30 AM ET
John Kraft - VP, Investor Relations
Phil Heasley - Chief Executive Officer
Scott Behrens - Chief Financial Officer
Peter Heckmann - Avondale Partners
George Sutton - Craig Hallum
Blake Anderson - Stephens
Alex Veytsman - Monness, Crespi & Hardt
Good morning. My name is Megan, and I will be your conference operator today. At this time, I’d like to welcome everyone to the ACI Worldwide Incorporated Q2 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] Thank you.
Mr. John Kraft, Vice President of Investor Relations, you may begin your conference sir.
Thanks, Megan, and good morning, everybody. Today's call, like all of our events are subject to both Safe Harbor and forward-looking statements. You can find the full text of both documents 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 is Phil Heasley, our CEO and Scott Behrens, our CFO.
With that, I'll turn the call over to Phil.
Good morning and I thank you for the time to address you this morning. I have 3 topics I would like to cover. The first is the second quarter results from a full year perspective and the second is our acquisitions, consolidations especially the SaaS and cloud infrastructure build-outs and third Brexit and then short and longer term impact on ACI.
Let’s begin by stating that our Q2 revenue results were in line with our expectations in the guidance we’ve provided you last quarter. It’s our top priority to grow our recurring revenue and we continue to trend in quarter 2. Quarterly recurring revenue grew 5% for the last year, the large non-recurring revenue was driven by renewal receipts in quarter 2, 2015 did not re-occur in quarter 2 this year. However we do expect a similar set of renewals in quarter 3 this year which will normalize our year-to-date revenues by quarter 3 and then importantly our full year 2016 guidance remains unchanged with organic revenue growth in the 4% to 7% range.
Turning to bookings in quarter 2, we continue to see strong demands for our SaaS offerings which grew 16% in the quarter and 23% year-to-date. Notably in the quarter, we signed one of our largest SaaS cash management contracts ever. Bookings in our platform business included Red, PAY.ON, EBPT are all doing very well and we’re seeing significant backlog growth. We’re continuing to build our ability to onboard and ramp these customers at the accelerated rate we’re closing these deals.
Our traction is showing significant improvement with our universal payments solutions signing two important contracts in the EMEA region during the quarter, both involved in increasing customer transactions, volumes, including the consolidation of their existing platforms. We now believe we’ve entered the threshold for signing truly transformational deals in the coming quarters. The size of these deals will make them eligible for our RPS subscription program.
In addition, we expect to have our first significant direct connect customer up and running in a few months with others in the pipeline. The acquisitions of S1or SEC both in Red and PAY.ON have given us almost two dozen fairly ineffective data centers. We will close out the year that’s 2016 with two major U.S. and two major European data centers which are scalable and addressed to cyber world we operate. This is a major accomplishment.
I am pleased to announce that the build out of our new European data centre is on schedule and expect to be operational within weeks. The timing of the new data centre is good, the market interest in ACI SaaS delivery model as well as our platform solutions now make up more than 50% of mix of more than half of our 60 month backlog. To support this growth, we’ve engaged in large infrastructure projects, while transforming our business to embrace the SaaS and subscription models, at the same time staying ahead of the growth in e-commerce. It’s been a strenuous task one to which we now can see light at the end of the tunnel. These onetime long-term investments have laid the foundation for truly scalable growth.
Lastly, I want to say a few words on Brexit. Most importantly there was no net impact from the disruptions surrounding the vote. Our loss of pound revenue have been offset by efficiency in pound expense costs, that is our FX revenue expense hedging strategy has worked well. From a standpoint of the vote taking place at the end of the month and the end of the quarter we did experience a bit of disruption, temporarily delays in some signings and while we have some revenue impact on quarter two, it is all been booked in quarter three already. In fact our booking and revenues actually have been better by 24 million and 5 million respectively.
As I look out today, one month into the current quarter we have high confidence in our guidance. We've had a strong start in the quarter 3, for example we've signed another large e-commerce customer in South America showcasing our continued success in that region. It is an exciting time for ACI and we continue to work hard with high confidence to make our vision a reality. I will now hand the call over to Scott, Scott with the financials in more detail.
Thanks Phil and good morning everyone. I first plan to go to the highlights for the second quarter and then provide our outlook for 2016, we’ll then open the line for questions.
I’ll be starting my comments on Slide 6 with a few takeaways from the quarter starting with bookings. Our staff bookings grew nicely in the quarter at 16% from last year while also some declines in our premise bookings which were an overall decrease 26% for the quarter, that’s coming off of a very strong Q1 which leased new bookings to grow slightly higher year-to-date in the prior year. As Phil said, we started a strong in Q3 and we continue to expect full year in bookings growth to be in the upper single digits.
Our 60 month backlog grew nicely during the quarter of 45 million to 4 billion in our 12 month backlog at 5 million to 851 million with all these adjusted for changes in foreign currency. Revenue came in line with our expectations and is building at and is coming from last year the quarter with the timing of non-recurring revenues this year is exaggerated year-over-year comparisons excluding CNS in both periods recurring revenue grew 5% in the quarter, this growth was offset by a decline in non-recurring revenue which resulted in an overall revenue decline of 8%.
As I mentioned on our last quarter call, non-recurring revenue which represents that revenue from other events and initial license fees from sales in the quarter will be more solid and half weighted this year on comparison with 2015, we will start seeing revenue growth accelerate here in Q3 as we start to see that non-recurring revenue deliver in Q3 this year. And at the midpoint of our Q3 guidance represents growth of 15% over prior year’s Q3, much of this growth coming from non-recurring revenue on top of our continued strength in our growth in recurring revenues.
Excluding the CFS and indirect costs associated with the TSA period of adjusted EBITDA was 21 million down from 55 million generating Q2 2015, again this is primarily driven by the refining of non-recurring revenues that I mentioned. As you recall, non-recurring revenues very high margins as it has very minimal incremental filling costs. So when we get that revenue in the second half, it will also come with its very high margin.
Operating free cash flow was 13 million of 20 million from a negative cash flow of 7 million in Q2 last year. We ended the quarter with 52 million in cash, our debt balance of 735 million which is down 204 million year-to-date. Also during the quarter we purchased 8 million worth ACI shares and the 78 million remaining in our share buyback authorization.
Turning next to Slide 7 with our full year outlook, we are reaffirming our full year guidance. For the full year 2016 we continue to expect revenue to be in the range of 990 million to 1.02 billion, which excludes any contribution from CFS during the first quarter. And we continue to expect adjusted EBITDA to be in the range of 265 million to 275 million and we expect new bookings growth in the high single-digits. As I mentioned we will start seeing our revenue growth accelerate in Q3 with growth expected to be 15% over the prior year’s Q3 which will potentially represent a 3% growth year-to-date through three to fourth quarters and tracking closer to our expected 4% to 7% growth for the full year. In Q3 we expect revenue to be in the range of 240 million to 250 million.
So in summary the Q2 revenues came in line with our expectations. As we get into Q3, we expect to see our revenue growth accelerate and we remain confident in our full year financial targets. That concludes my prepared remarks. Operator we’re ready to open up the line for questions at this time.
[Operator Instructions] Your first question comes from the line of Peter Heckmann of Avondale Partners. Your line is open.
Good morning everyone. I wanted to follow-up on Phil’s comment about bookings, net bookings that may have pushed due to Brexit, could you go over those commentaries and again I missed the key figures.
What I said was 24 million and 5 million, we would have booked 24 million more in booking and we would have $5 million more in revenue from those bookings. We're very, very strict upon the rules -- this is June 30th, so we did have a little bit of disruption but it really was not, it was a little bit of a belch, it wasn’t in any way dysfunctional.
Okay, and if I heard you correctly that 24 million is now contracted in July?
Yes, that is 5 million booked price, so in effect they both happened. It certainly helped us increase our confidence in our third quarter.
Got it, that’s very helpful. And then the two important deals in EMEA, could you talk a little bit about those, were those multi-country banks and then as a follow-on could you talk about a little bit about what you’re seeing on the merchant side?
The answer is yes, they were multi-country deals and actually they were involved, I can’t tell you customer names but there is also multi-country deals that they are also some like involved in terms of our inter-country activities that are taking place. So that was actually positive on two different levels. Our emerging business is doing exceedingly well. The more we bring in big merchants from big parts of the world, they first create challenge of incorporating all the new payment endpoints and what not but, we’re on schedule and we’re on schedule with our major projects and the more straightforward projects are coming on at a good clip. And it’s actually putting very nice, very positive pressure on the up adoption on the financial intermediary and financial institution sides. As the merchants are having more and more options with how demand the payments we’re beginning to see that being matched on the other side.
Great, last question before I get in the queue with the announced acquisition of vocal length by MasterCard, do you view that has any particular opportunity or risk that’s worth calling out at his point?
It’s more an opportunity than it is a risk because we are not unlike MasterCard, we’re not a branded player in the market, we’re a connectivity player and that actually enhances our connectivity potential especially with newer and better payments, immediate payments and what not going on. So we have no ambition in that breakout, a revenue participant -- we're a facilitation participant and that actually helps us.
Your next question comes from the line of George Sutton with Craig Hallum. Your line is open.
Thank you, Phil. You mentioned a couple of very interesting things relative to A, the threshold, you've reached the threshold for transformational deals. I wondered if you could discuss that relative to -- is that an operational maturation, is that a maturation of the pipeline. And then you also mentioned you should be signing your first direct connection soon, and I was wondering if you could just give us a sense of the significance of that from your perspective?
Okay, to answer your first question, they’re actually two answers. One I brought everyone through the infrastructure work because it has been taking 24 data centers down into four functional operating centers has been a really huge task and we're coming to the end by probably sometime early next year, we'll be done with that, next year we will be totally and we’ve done with that. And if you think about it, we have 24 touch points by which you will do business with. We basically have now two active touch points and which each of business, so our ability to provide global connectivity is actually very much enhanced by that capability, probably even the bigger deal by the time these centers are totally up and running which I was telling is just months away. We'll also have our matchmaking switch capability and [Technical Difficulty] interconnectivity which allows more options not you have to put the way you’re doing business today but it adds a lot more options on both sides of the isle for them to do more efficient point-to-point transaction.
In terms of what I said I talked about deals in the next coming quarters, I think it’s important for us to talk about that a little bit because we kind of have a trade-off, we’ve got some really big up deals coming down the line and they’re going to be significantly larger than the business that we’re doing today and as subscription deals, we have to make trade-off between how much growth we want in backlog versus how much do we want to give away from an ISL revenue standpoint in terms of signing the deals. So we both want to try to manage this with our 4% revenue growth and we do as many of these deals we thought we can, means we’ll probably do it some of them next year and in terms of doing that balance but the good news is, is that we’re on track doing this and that’s little hard and now we’re [indiscernible] I think that probably answers your questions.
I think you did. One other relative to the e-commerce disruption conference you had a month or two ago. Can you just give us a postscript on what you think coming out of that relative to the opportunity that gets created on that side?
You know we do the signing we can in June in London and New York and that really went tremendously well, a lot of it were in connection with the direct things that are taking place, either from the financial institution side saving all night, we have a competitive offer to JPay, right, or from the merchant side saying [indiscernible] volumes and what not, we have direct connection opportunities that spun really well. I think the vast validation of those meanings were I think like we’ve done about 4 or 5 additional ones around the world, Australia, India and I'm not even positive on the South America and I’m really positive of all the events but the other parts of the world keep asking for it and to me that’s the best validation.
What I didn’t’ answer with your direct connect conversation, I cannot tell you the direct, I can't tell you what Direct Connect we're doing and you've only turned it on, I may be able to tell you we’ve turned it on but I don’t think these things are going to be overly public as their views is strategic. But I think the banks are beginning to realize the positive impact of their balance sheet of having not exporting the money for a period of times to reinforce them back for a debit and I think certainly the merchants are beginning to understand how to manage their costs of goods sold.
So there is some really good conversations taking place between financial institutions and their merchant retailer, customers, and we’ve been playing a facilitator role in terms of that and the conversations are just extremely constructive and quite obviously some of them come in an area that there is not traditional credit cards, they are more debit or there are more direct payment areas. So it’s not like it’s usually hugely controversial that one impacts the other, it just makes the payment system more affordable and makes processes clear and so, this is coming to a good fruition. And part of it is you got to be able to do it at the high quality and much lower cost, otherwise it’s not worth the risk of moving over, moving for the volume over.
Thanks for the color, appreciate it.
Your next question comes from the line of Brett Huff with Stephens. Your line is open.
Hey good morning this is Blake on for Brett. Just given the negative bookings growth for the 2Q and I reiterated full year bookings growth guidance that implies pretty nice growth in the second half, can you just give us some color on what you think will be the drivers for that?
I think the symmetrical booking growth one time, that is the SaaS and the platforms and what not. Renewals by definition are lumpy because they address themselves back to what the previous contracts were sold and we told you about the third quarter 2015 matches the quarter 3 '16 and that answers, that quite honestly answers your question. So year-to-date '16 both -- not from the revenues standpoint but from a bookings standpoint and the full year, we are very confident in the booking numbers. We’re not trying to be confident, we’re very confident in the booking numbers we gave you.
Okay, great. And then as you mentioned we’ve already talked about Brexit has a slight disruption in your bookings at the end of the 2Q, can you just give us a little more detail on why they waited, was it just kneejerk reaction, I mean and since like you got them all booked now in the 3Q, does this imply you aren’t really concerned about any feature bookings getting delayed as well?
No, we’re really, if Brexit goes through for Great Britain just that you understand, that creates more endpoints in the global financial world, that creates more business for ACI. Now, we’re not political so we don’t sit on one side or the other but longer-term this plays right into our expertise, right. So we don’t have an issue with that, England now is going to have to make if they go Brexit they're going to have to make financial decisions with the EU and everyone else that’s different than the EU making decisions with related to the world. So that works very well for us. I would expect longer term and I’m not going to put anything this year or even try to forecast it, longer term this will give us more business not less business.
The concerns that we had, that people have to work their way through, I think the conservative that we are prepared for the way the vote came therefore they do their homework, if you want my honest opinion, once they did their homework they realized that the world hasn’t come to an end and it is just one on the plan.
Okay, and then lastly you mentioned you saw in one of your largest cash management contracts ever, congrats on that, was that something you changed in your strategy or you think it’s maybe in a function of the strong industry demand?
No, I mean we’ve been, when we bought S1 and brought we made a decision to invest a lot of time and money in their cash management and infrastructure. And the fruits of that labor are coming really good high quality big banks software is a multi-year endeavor. We’re to the point where that is becoming very marketable and this is the first demonstration of that.
Great, thank you.
Your next question comes from the line of Alex Veytsman with Monness, Crespi & Hardt. Your line is open.
Just a quick question on the EBITDA to for cash flow conversion, what kind of rate should we expect for the second quarter of 2016 as far as adjusted EBITDA to free cash flow conversion is concerned.
Well, our EBITDA guidance was 265 to 275 and the major cash reductions from that to get to our cash flow would be CapEx which we said is in a range of 50 and 60 interest of 36 and then taxes of 25 to 30. So it gets you down to free cash flow contribution of around, call it 150 range.
So, it's in the vicinity of what we saw over the last couple of quarters. Okay. And then, as far as the buyback traction, what should we be expecting? I think you did 3 million shares in Q1. What could we be expecting in the second half of 2016?
Well, you know I say to that is [indiscernible] purchasing we have 78 million remaining on the share buyback[indiscernible] Well we want to do it in share buyback right upfront but we wanted to remove the EPS impact of not having to CFS business. And so it’s important to note that we’ve done that, right. So from an EPS standpoint, we’ve in fact paid back to just use the rest of the money part of $200 million pay down of the loans. So we kind of do our own math right in terms of how to create value and drive power.
There are no further questions at this time, I’ll turn the call back to the presenters.
Well thanks everybody for joining us and we look forward to catching up further in the coming weeks, good day.
This concludes today’s conference call, you may now disconnect.
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