ACI Worldwide, Inc. (NASDAQ:ACIW) Q4 2016 Earnings Conference Call March 2, 2017 8:30 AM ET
John Kraft - VP, IR
Phil Heasley - CEO
Scott Behrens - CFO
Brett Huff - Stephens
David Eller - Wells Fargo Securities
George Sutton - Craig Hallum
Wayne Johnson - Raymond James
Shane Svenpladsen - Avondale Partners
Good morning. My name is Scott, and I will be your conference operator today. At this time, I’d 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]
Thank you. John Kraf, Vice President of Investor Relations, you may begin your conference.
Thanks Scott, 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 to 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 is Phil Heasley, our CEO and Scott Behrens, our CFO. Before I hand it over though I wanted to remind everybody that ACI will be attending the 38th Annual Raymond James Institutional Investor Conference in Orlando on March 7. And we will also be hosting an Analyst Day here in Naples on March 9.
With that, I'll turn the call over to Phil.
Thanks John, and good morning, everyone. I am pleased to report our fourth quarter and full year results for a very strong ending an exceptional year for ACI. We saw increasing demand across all our UP solutions segment and delivered new bookings growth of 6% and total bookings growth of 16% for the year. We also continue to see strength for our SaaS and platform offerings with new bookings growth of 19% in 2016. In quarter four, we signed three new customers that will use our UP Retail Payment Solution. In the US we signed a new top 10 bank for our UP Retail Payments on Linux. In EMEA, we signed a new customer that will utilize UP Retail Payments to replace a regional competitor. Lastly, we signed an important strategic alliance with AGS Transact in India that will bring our UP Retail Payments capabilities to the Indian market by our comprehensive cloud based services offering that integrates cross-channel payment, fraud prevention and transaction management capabilities. We are excited about the future prospects of this partnership in India.
We also saw significant success with our existing customer base. In conjunction with the fourth quarter renewal, we upgraded one of our largest customers to UP Retail Payment Solution. This agreement has a material increase in annual transaction volume and represents the largest contract in ACI history. In quarter four, our largest Australian bank went live using our post sale as a pure hub to transform their payments infrastructure. We expect this capability to result in several multiyear projects in the future.
In our UP Immediate Payment Solution segment we signed an important contract with a long time customer Rabobank, who will initially utilize our technology to connect to the new Netherlands Immediate Payment Network. While Rabobank appreciate the reliability of our payment solution, Universal Payment multi scheme support and connectivity ensures that they will have the flexibility to connect to new schemes in the future. In quarter four, we also delivered strong results in our UP eCommerce including a contract with another leading payment processor in Brazil. This now brings us to over 60% required volume in Brazil market, using our PAY.ON and ReD offerings.
We plan to provide more detail on background regarding these customers wins as well as our growing pipeline at our annual Analyst Day next week. Lastly, we accomplished several strategic milestones in 2016. We divested our Community Financial Services for $200 million in cash, with which we repurchased $60 million in stock more than offsetting EPS dilution of the divesture. Over the course of the year we reduced our debt balance by $185 million and in response to significant demand for our solutions in a hosted environment we built and went live with a new European data center able to support both our SaaS and platform on demand solution.
As we look forward to the rest of 2017 and beyond, we feel confident in our financial guidance and excited about ACI's positioning within this evolving global payment space.
With that let me turn the call over to Scott to provide details on our fourth quarter and full year financial results and for 2017 guidance. Thank you.
Thanks Phil, and good morning, everyone. I first plan to go through the highlights for the fourth quarter and full year 2016 and then provide outlook for 2017. We'll then open the line for questions.
I’ll be starting my comments on slide 6 with key takeaways from the quarter. Overall, Phil said we had a very strong finished to the year. Our total bookings grew 50% from last year's Q4 after adjusting for foreign currency and the CFS divesture. We saw particular strength with our renewal bookings which doubled from last year, clearly rebounding and some of the timing delays we experienced earlier in 2016 as customers are moving renewals close to their expiration. Headlining our successful bookings quarter we signed a transformational universal payment contract with one of our largest customer. This customer significantly expanded their transaction volume commitment with ACI and the deal with an estimated $80 million five year guarantees total contract value represents the largest deal ACI has ever signed. Also, very notable were the three new logos we signed in our BASE24 switching business. As Phil mentioned one in Americas, one in EMEA and one in our Asia-Pacific region. Also of note is a large up media payment contract we signed with our long time customer Rabobank. These bookings as well as the go -live contributed to a very strong growth in revenue with organic revenue up 21% compared to Q4 last year. And given our relatively fixed cost structure, this revenue growth delivered adjusted EBITDA growth of 46% compared to Q4 last year.
We ended the year with $76 million in cash and $753 million in debt. This debt balance is down $185 million from $939 million at the end of 2015. We exited the year with the total net leverage ratio of approximately 2.8x. Also earlier this week we announced the refinancing of our existing credit facilities which provides us with additional flexibility as we execute on our long-term plan. Under the terms the credit facility the LIBOR spread declined, the size of our revolver increased to $500 million and the maturity date was extended to February 2022. And lastly, we have $78 million remaining on our share repurchase authorization.
Turning to slide 7, with key takeaways from the year. For the year, new bookings and total bookings set new all time highs for ACI with new bookings up 6% over last year and total bookings up 16%. Our 60-month backlog ended the year at $4 billion, up $126 million or 3% after adjusting for foreign currency and CFS divestures.
For the year, organic revenue was up 4% over 2015 after adjusting for foreign currency which represents an acceleration from the organic growth of 3% we saw in 2015. Adjusted EBITDA of $241 million was down slightly from last year.
Operating free cash flow of $72 million was down from $143 million we generated last year, mainly due to late timing of Q4 bookings. This timing increased our year end accounts receivable balance by $61 million compared to the end of 2015. However, those cash receipts have come in subsequent to year end with overall accounts receivable down $77 million in the first two months of this year.
As we discussed before during 2016, we sold our CFS assets to FiServ which generated $200 million in cash proceed, with this and cash generated from operations we repurchased $60 million in ACI shares more than offsetting the EPS dilution from the divesture. We also paid down $185 million in debt. And recall that this sale generated an after tax gain of $93 million.
Finally, turning to slide 8 is our outlook for 2017. For your financial modeling purpose we provided a pro forma view of 2016 to normalize for the divesture of CFS and to reflect 2016 revenues at year end foreign currency rate. With our mix of foreign currency denominated revenues and expenses, FX is generally a top line phenomenon but has minimal impact on margin level.
So for the full year 2017, we expect revenue to be in a range of $1 billion to $1.025 billion representing organic growth in 2% to 5% range. We expect adjusted EBITDA to be in the range of $250 million to $255 million, representing approximately 100 basis points improvement over 2016. We expect our revenue phasing by quarter to follow our historical seasonality with Q1 revenue expected to be in the range of $215 million to $220 million, which represents 3% to 5% organic growth over the comparable period in Q1 of 2016.
On Slide 9, you also find we provided additional data for 2017 financial model. We expect GAAP interest expense to be approximately $36 million with cash interest payment of $33 million. Capital expenditures are expected to be in the range of $55 million to $60 million which is down from 2016 level. We expect depreciation and amortization in the range of $105 million to $110 million and non-cash compensation expense expected to approximately $36 million for the year, with this too is down significantly from 2016. Pass through interchange revenues should approximate $155 million. And we expect our cash taxes to be in the range of $25 million to $30 million. And our diluted share count should approximate 119 million which excludes any future shares buy-back activity. And lastly our guidance excludes approximately $14 million in expected one-time integration and divestiture related expenses for PAY.ON, CFS and our continued data center and facilities consolidation.
So, overall, we had a very strong finished this 2016 and look forward to continuing that momentum in 2017. That concludes my prepared remarks. Operator, we are ready to open the line for questions at this time.
Your first question comes from the line of Brett Huff with Stephens. Your line is open.
Good morning, guys. And congrats on that big UP win. On that, just first question is you had talked about some of those renewals kind of coming more down to the wire. I think the signature UP win that you are talking about with the bank that was one of those I think. And if that's the case, as it got closer and closer to the deadline, I know the banks kind of internally were deciding whether or not they should go after or take this deal with the more favorable pricing and offer you guys made. How did those conversations then go and what kind of finally got them over the hump if you have any insight into that?
I think the UP offering, the RPS offering, which allows these companies to bridge the technology from classic close system to the UP retailers are very, very compelling. It's a very compelling offering and I think at the end of the day I think it's the same thing that created the three new sales on the other side of the equation. It's a very powerful ability to be able to get the -- about the use of fully orchestrated payment engine capable very, very, very high efficiency and very high functional requirements. And to be able to run it on Linux and you can just keep going on, on and on. And it is also a very large capital decision on these guys's part, and so I think it's only natural that these conversations are going to along, we repositioned ourselves last year to renew our renewal and I think that makes tremendous sense. One thing I will tell you is in case you are concerned, if there is any concern is that terms are actually growing they are not shrinking, right .So it's not once you are getting the renewal and they want the same or shorter term, they are actually looking for longer term not shorter term.
That's helpful. And then in terms of revenue recognition as we start to see this, I think we and many expect that these will take a little time to spool up given the complexity and given that this is maybe one of the first really large ones. Just give us some insight into how we should think about that going forward so we can model it correctly.
Two different swim lanes, right. These new guys are going to take as much -- we like to say that they are going to be 18 to 21 months and they often go 24 months, 27 months to get implemented. They are picking of their big deal. The renewals however, these renewals have no -- these renewals are not about conversions of any shape or form, therefore the increased volumes, increased contract check will end up kicking right in over the term.
And will the -- is the -- the way the contract structured is the key part for you all I think is that they have hopefully move volumes from older payments which is on yours, is that really worthy incremental revenue should come that we should look for?
Well, what we are doing is we are selling people the ability to do transaction; capacity is a large portion of what we do. People are buying more capacity as they are trying to make their switching more efficient. Perhaps the biggest issue we may have is that really company has five switches and one of them now is our eps, one of them are classic and three are others switches, the chance that classics going to get converted as number one is very -- is fairly low. So it will more -- it's more likely than not come from -- it will come from other switch and other transaction that could use -- people realize the efficiency of this transactions vis-à-vis other kinds of less traditional now that you have open a real time mechanism, the kinds of transaction that can flow through, this mechanism is much, much broader, it's not limited to the traditional classic transactions you would think of. So it really opens the vector.
That's helpful. And then just last question from me. When you guys changed your guidance after 3Q because of the delays and the renewals happening a little bit closer to the renewal date, it looks like you got a lot of the revenue back that seemed to maybe have been delayed, but the EBITDA didn't come back quite as much and I want to make sure is that right, am I understanding that right? And if so, what was the change that happened? Were there additional costs that we had to incur as we think about installing these [Multiple Speakers]?
I think that's going to be an interesting challenge. Scott can be able to answer to this lot better over time, but that's an interesting channel, if we keep booking at the percentage where booking and we keep doing as much platform and SaaS as we are doing, you realize we are absorbing the change in accounting and that change in accounting were shows up, first shows up on EBITDA side, also shows up on the revenue side. Now I think the trick on saying with ACI is that look at the cash.
Your next question comes from the line of David Eller with Wells Fargo. Your line is open.
Good morning. Thanks for taking my questions. Scott, you mentioned organic revenue up 21% and that's working very well with your fixed cost structure. I wondered if you could take a second to just talk about how you feel about your overall cost structure. Obviously, over the last couple years, R&D expenses kind of floated up towards the 17% of sales range. G&A expense is up a good bit this year. If you could just talk about how you feel about your overall cost structure.
Well, it maybe two things. One is with respect to our R&D, we are always going to have pretty significant investment in R&D and so it aged up a little bit but that's reflective of heavy investment in new feature functionality innovation. Its part of listing our competitive moat and barriers to entry in the competitive space. With respect to the rest of cost structure, I think the biggest driver of cost increase over last several years has been building out the infrastructure to support the cloud, the SaaS and platform business. That requires both physical investment that being in datacenters, both consolidations at datacenters, building out a new datacenters but also virtual types of investment and cyber security, scalability and product enhancement and so the cost structure there is in any respect is kind of fully loaded and now we just need to build the scale into the cloud business. So there is a heavy investment upfront into that transition and the growth in the layer on of the incremental recurring revenue into that cost structure will come with the pretty high margin. So I am comfortable, yes, so I am comfortable overall that the cost structure we have is highly scalable.
Okay. And then second question from us, you obviously announced the refinancing for revolver and term loan. You talked about that adding additional flexibility. Would that be flexibility for M&A, for share repurchases or maybe increased R&D? And then as follow-on to that, should we assume you will look to refinance your bonds soon as well?
Well, a couple of things. In terms of the increased flexibility, we are coming up on the end of a seven year deal, we signed -- it is prior existing facility back when we were a much smaller business. So when we say expanding our flexibility, it's going to be the flexibility over the next five years. So I wouldn't read anything into that other than it's facility that will grow into over the next five years. In terms of the bond, obviously those are expire in 2020, this facility gets us out to 2022, I guess I would expect the result the refinancing as well as our fourth quarter result to ultimately improve our bond reading, but at this point I wouldn't project any timing on refinancing of those.
Your next question comes from the line of George Sutton with Craig-Hallum. Your line is open.
Thank you. I wondered if you could walk through now that you have started to see UP deals go live, can you talk about what that might do to your pipeline. I know there were a lot of potential customers that wanted to see that happen. So is it happening, or is it performing well as it has gone live and what might that do to change the trajectory of the pipeline?
George, just come to our Analyst meeting next week.
I will be there as long as you don't have the cold you have right now
Okay, sorry. Actually we are going to have one of the live customers there right. So you can almost talk to -- I think we've never had pipeline activity like we have right now. And pipelines not booking so I mean we are really, really happy about the interest and the kind of interest that we have is probably more important to me than the interest and I think we are going to go through that in fair amount of detail next week.
Okay. I know you will probably handle something like this next week, but I'm curious as we look at 2017's implied growth rate of 2% to 5% on the top line, if we look out five years and we think, okay, the UP platform will have -- we will have seen the impact of a lot of UP platform opportunities, we will see the impact of Immediate Payments, we will also have anniversaried any of that kind of SaaS potential impact. What kind of growth rates are we looking at as we look kind of out over that next five-year period?
George, maybe let me answer this way. If we look back several years when we really started to see that shift in customer behavior call it 2013-2014 time period where we were -- our organic growth was kind of bouncing around zero and customers were shifting to a demand for cloud delivery, we saw the early days of the shift in retailers to eCommerce and the demand for solutions to support eCommerce. So that's really I call it 2012-13 time period to 2013-14 time period when we started to see that shift. That fast revenue comes back but it comes back in incremental layer on every year in terms of recurring revenue. So 2015 we had call it 3% organic growth, 2016 was 4%, 2017 we are projecting upwards to 5%. So you are going to see that trend continue layering on that incremental recurring revenue over the five year term. So I would say I would look out over the five years and I'd see that trend continuing of that incremental growth, the layers on each year over the next five years.
[Operator Instructions] Your next question comes from the line of Wayne Johnson with Raymond James. Your line is open.
Yes, good morning. A couple of questions. So first question is what is the potential, what is the likelihood of the existing BASE24 classic user base converting to UP and eps now that we've got UP, up and running so to speak?
A very, very large percentage of the renewals are UP RPS which move that they are taking the combined, they are renewing into the combined environment. How quickly they actually transfer part or all their classic volume over to it, I think it's going to be a function of where it lands up sitting on a priority list. One hand, it's great to have a system that never goes down, two but the bad news is puts you in kind of bottom of the list of project. But I think if you see what's going on at the point of sale and what's going on being motivated by the retailers' side of the equation and the FinTech of the equation. I think what you are going to see is less rush to conversion and a more rush to cooperation where they are running both eps and classic coincidently because they are using eps side to meet the needs and opportunities of the new payment type that they are making into marketplace.
Okay, that's great. And I think you mentioned that -- as a follow-up -- I think you mentioned earlier that the average installation time, if I'm understanding this, is 18 to 21 months. Should we apply that to all the new business? Is that how we should kind of think about the timeline, or could it be shorter, could it be longer? How do we think about that over the next few years?
Yes, and I think Phil addressed that in an earlier question. I think there are two scenarios. One is where you have a net new customer, in this quarter we sold three new BASE24 installation and new logos. Those will take upwards to a couple of year to get installed. Many of the UP deals are in conjunction with renewal and customers are buying it in addition to their existing one. Those are going to essentially start to deliver revenue right away because there is really no installation period. So there is as Phil described it's a kind of two different swim lanes. But the net new installation are still going to be a couple years.
Your next question comes from the line of Shane Svenpladsen with Avondale Partners. Your line is open.
Good morning. Could you discuss the sunset of certain legacy products discussed in the 10-K and specifically what products and just some color around timing and how you expect customers to react?
I wouldn't say there was anything necessarily new in the quarter in terms of product, it is a typical what I call typical software or product lifecycle manage meaning older releases of strategic products and/or products that we no longer build out net new functionality. But in terms of customer reaction I mean in many cases because these are mission critical systems, what that means is that customers are generally going to pay higher product support fees. These are not end of life decisions. These are situations where we would charge them more to support those products over time. But I wouldn't read anything into this K or the disclosures that we have here, nothing significant has changed during the year.
We have a policy that says that because our systems are mission critical, we will sunset them but we will not end the life though as long as there is no technical reason why they can't be supported. They are not roadmaps, I mean they are no longer roadmap products and over time those customers tend to convert to either newer releases or other products of us.
Okay. That makes sense. And then the announcement last night regarding the MasterCard settlement and license sale did that hit fourth quarter bookings or revenue, or is that going to hit in the first quarter?
Well, it is 2017 event. So it's a license sale in 2017.
There are no further questions at this time. I'll turn the call back over to the presenters.
Thanks everybody for joining us. We look forward to catching up in the coming weeks. Have a good day.
This concludes today's conference call. You may now disconnect.
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