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ACI Worldwide Inc (ACIW) Q1 2019 Earnings Call Transcript

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ACI Worldwide Inc (NASDAQ: ACIW)
Q1 2019 Earnings Call
May. 9, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Ladies and gentlemen, my name is Jerome and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Reports First Quarter 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)

Now it's my pleasure to hand the call over to your host Mr. John Kraft, the floor is yours.

John Kraft -- Vice President, Investor Relations & Strategic Analysis

Thank you, Jerome and good morning everybody. Today's call like all of our events is subject to both Safe Harbor and forward-looking statements. You can find the full text of both statements on the first and final pages of 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'd like to turn the call over to Phil.

Philip G. Heasley -- President and Chief Executive Officer

Thank you John and thank you everyone for joining today's call. I'm pleased to start off by saying that this morning we announced the completion of the acquisition of Speedpay from Western Union.

I will spend the next few minutes covering both the immediate as well as longer-term strategic opportunities for ACI, made available as a result of the Speedpay acquisition. Next, I'll share a sampling of the Q1 wins and demonstrate momentum across our key bank intermediary merchant and corporate customer segments. I will then turn the call over to Scott to cover our Q1 financial results and updated 2019 guidance.

Let me start by saying that the acquisition of Speedpay is exciting and significant to ACI on several levels. First, it brings immediate financial strength and scale to our ACI On Demand platform business. With our investment phase largely behind us, ACI On Demand has turned the corner to profitability and deliver its first full-year of positive EBITDA in 2018. The acquisition brings together two market leading US bill payment portfolios with the combined revenue of over $600 million in 2018.

The acquisition brings tremendous scale to our ACI On Demand business, it enhances our profitability, boosts recurring revenues, drives efficiencies and enable's increased investments in R&D and platform infrastructure, that will benefit our entire portfolio. We plan to combine the Speedpay and ACI bill payment solutions into a unified platform capable of supporting billions of transactions and driving next generation bill pay capabilities. We will also expand our reach into existing and complementary segments such as consumer finance, insurance, healthcare, higher education, utilities, government and mortgage.

The combination of Speedpay and ACI is also exciting, as this brings together the industry's top talent under one roof. As we joined forces, we will drive innovation and revolutionize payments for thousands of customers. I want to take this opportunity to welcome our Speedpay colleagues and clients into the one ACI family, we are honored to be working with you.

Strategically moving forward, this acquisition also accelerates the delivery of ACI's Any Payment, Every Possibility vision to serve a broader opportunity, real-time digital payment experience of merchants, corporates and billers. The lines are blurring as the needs of these segments are rapidly converging, driven by the adoption of digital and mobile channels. The move to real-time, non-card payments and the growth of digital subscriptions and recurring payments, were all likely familiar with the explosion of choices and the increasing number of recurring services that are now an integral part of the typical consumers daily experience, from streaming media and digital marketplace, the subscription based home delivery, providing a real-time, frictionless and secure digital payment experience is critical to vendors that want to capitalize on this market opportunity.

ACI anticipates this trend will continue to accelerate across the consumer and B2B markets. And we've architected our UP solution portfolio to be ready to help our customers, serve these digital payment business model. Our investment in R&D continues to outpace the competition and we've built important new digital payment capabilities for e-commerce, merchant omni-channel, real-time payments and payments intelligence over the last 12 months.

In conjunction with our Speedpay acquisition we acquired Walletron. Walletron provides innovative mobile wallet payment and loyalty capabilities. Now as part of ACI's UP portfolio as consumers can bill -- can view bills and make quicker payments right from their Apple Wallet or Google Pay on their smartphones. Said a little differently, we now can connect iOS or Android to a wallet experience.

We have a lot more to share about this real-time digital payment experience vision and are UP solutions portfolio and we will be hosting a special analysts webcast briefing on Tuesday, May 21 at 2:00 PM Eastern Time for those who want to learn more. We will present our strategy for addressing and capitalizing on the rapidly growing and fast evolving real-time digital payments opportunity. We'll share how ACI's is differentiated, not only for our Universal Payments software leadership, but also for our agnostic support of multiple payment methods and channels.

I'll now turn to the highlights from quarter one from new customer wins and renewals. Starting with our corporate segment serving billing customers. The first MTFX (ph) is a foreign exchange and payment solution provider that serves clients ranging from individuals to large multinational corporations. MTFX selected API, our bill payment solution to handle transactions in the United States for its higher education client.

In related news, this quarter we also (inaudible) the new ACI's Student Payment Portal, the new campus commerce solution simplifies payments while improving security for higher-education institutions.

Turning now to wins in the merchant and intermediary segments. I'm pleased to announce that we have expanded our relationship with WorldPay, a provider of secure payment services to merchants across 164 countries globally, and in 15 different currencies. As Worldpay expands its services, the Company has selected UP e-commerce payments to help manage an extensive alternate payment merchant network.

Acapture, a leading payment service provider and longtime ACI customer-based in the Netherlands, also selected UP e-commerce payments as the company expands its reach across key vertical segments. Ronghan International HK Limited, a financial services company in Hongkong, selected UP e-commerce payments for online payments and fraud control. Global Tel Link, a leading telecommunications company, has selected ACI's ReD Shield for fraud screening across the government and other contracted facilities.

Shifting to the banking segment. ACI continues to see strong momentum for our UP retail payments and UP real-time payment solutions. Wells Fargo, one of the country's largest financial services company has expanded its relationship with ACI. ACI powers Wells Fargo's domestic and global wire operations. In addition, ALTO, a leading interbank switch in Indonesia, is expanding its payment capabilities using UP retail payment solution. As digital payment adoption accelerates in Indonesia, ACI's UP payment solution empowers ALTO to capture growing market opportunity.

One of the big four banks in the People's Republic of China, has selected ACI's UP real-time payment solution to improve operational efficiency, and lower total cost of ownership for its New York branch operations. The bank will upgrade the Linux version of money transfer system and will move to commodity hardware.

Finally, I'm pleased to share that ACI continues to win industry accolades. Earlier this quarter, ACI was recognized as the Best Payment Solutions Provider in Europe, at the 2018 Global Banking and Finance Awards, UP e-commerce payments was also awarded technical flexibility and cross-border capabilities.

Before I hand it off to Scott, I want to reiterate that ACI is well positioned for growth in 2019 and beyond. With a strong new bookings pipeline and the strategic acquisition of Speedpay is poised to capture even more quickly on the growing number of payment transactions occurring around the world each day. We're on track financially for the year and we are updating our guidance for 2019.

I'll now turn it over to Scott to provide additional financial detail. Thank you.

Scott Behrens -- Senior Executive Vice President, Chief Financial Officer

Thanks Phil and good morning everyone. I first plan to go through our results for Q1 and then provide an update for the full-year 2019 given the acquisition of Speedpay, that we completed today. We'll then open the line for questions.

I'll be starting my comments on Slide 7, with key takeaways from the quarter. New bookings were $70 million in total bookings were $112 million. Recall that Q1 saw particularly tough comparison, given our record bookings in Q1 last year. We continue to expect full-year new bookings to increase in the upper-single to low-double digits with our quarterly phasing of bookings for this year following our more traditional pattern with Q3 and Q4 being the highest bookings for the year.

We ended Q1 with a 12-month backlog of $811 million in a 60-month backlog of $4.2 billion. Q1 revenue came in within our guidance expectations at $206 million, with our On Demand business growing 5% over Q1 last year, offset by lower revenue in our On Premise business. The decline in the On Premise business was due to the timing and size of renewal in capacity events in Q1 2019 compared to Q1 2018.

The timing of our non-recurring license fee revenue will follow the expected timing of our bookings this year, as I mentioned which will be heaviest in Q3 and Q4 this year. Revenue growth in our On Demand business, contributed to strong improvement in net EBITDA margins. As we've been saying for some time now, margin expansion will come with scale as we grow into the infrastructure that we've built out here over the last several years. As you recall in 2018 was really the turning point when we started to see that margin expansion in our On Demand segment.

And we see continued margin expansion here in Q1 with net EBITDA margins increasing 600 basis points over Q1 of 2018. That driven by a combination of both revenue growth and lower expenses. And the contribution of Speedpay will allow us to accelerate that scale by layering on revenue and EBITDA on top of that leverageable infrastructure.

ACI's On Premise segment revenue was $96 million versus $105 million last year, which again was due to the timing of non-recurring license fees. On Premise segment adjusted EBITDA margin was 29% versus 37% last year, as these non-recurring revenues generally have very high incremental margin.

Adjusted operating free cash flow was $35 million, essentially flat with Q1 2018. We ended the quarter with $176 million in cash and $679 million of debt. With the acquisition of Speedpay, we do expect the pro forma net debt-to-EBITDA ratio to step up to just under 4 times and then the significant free cash flow generation of the combined business should allow us to delever quickly.

We expect within 24 months, our debt-to-EBITDA ratio to generally be in line with our targeted leverage ratio of 2.5 times. And lastly, here we have $176 million remaining on our share repurchase authorization.

Turning next Slide 8, with our updated 2019 guidance. I mean in addition to announcing the completion of the Speedpay acquisition, we do remain on track for delivering our financial guidance for the year. We are updating our outlook for the full-year 2019 given the contribution from Speedpay. We expect Speedpay to contribute between $215 million and $220 million in revenue. And between $50 million and $55 million in adjusted EBITDA for the remainder of 2019.

We now expect 2019, total revenue to be in a range of $1.315 billion to $1.345 billion, and adjusted EBITDA to be in a range of $360 million to $380 million. Which excludes between $30 million and $35 million in one-time transaction and integration-related expenses.

Also important to note here is that Speedpay is a 100% recurring revenue model, it will improve our combined recurring revenue from approximately 65% of total revenue today to near 75% on a pro forma basis. So this higher base of recurring revenue and it's correlating recurring EBITDA should help reduce some of the quarterly volatility, we see driven by the timing of our non-recurring license fees.

We continue to expect bookings growth to be in the upper-single to low-double digit. Operating free cash flow in 2019 is expected to be in a range of $190 million to $200 million. We are also updating here our 2020 EBITDA outlook for the impact of Speedpay, so we are increasing our targeted EBITDA range to $425 million to $445 million, up from our prior expectation of $335 million to $350 million.

And finally, we expect to generate between $280 million or $290 million of revenue in the second quarter. And note that this range does not include the impact of carryover deals from 2018. We expect a most likely time of these in Q3, but if they do sign in Q2, it will be upside to this range.

And to help with your modeling, you'll find additional guidance assumptions on Slide 9, I don't plan to review those in detail, but now as they've all been updated for the impact of Speedpay. And lastly, as a reminder, the acquisition of Speedpay was structured as a asset purchase for US tax purposes, pursuant to the 338 H10 election, as a result ACI will be able to amortize any goodwill and intangibles associated with the acquisition, which we estimate the net present value of this tax benefit to approximately a $100 million.

So that concludes my prepared remarks. Operator, we are ready to open the line for questions at this time.

Questions and Answers:

Operator

(Operator Instructions). Your first question comes from the line of George Sutton from Craig-Hallum. George, you're now live.

George Sutton -- Craig-Hallum Capital -- Analyst

Thank you. Congrats on getting the Speedpay acquisition closed, honestly don't remember such an attractive acquisition. I wanted to focus, if I could on the slide that you had on Page 5 or the chart yet on Page 5 relative to the bill-pay market and the portions that you're going to begin to focus on. Just to be clear, are you talking about those upper two areas of opportunity, which are the faster growing parts of the market? And are those completely new to you with this acquisition?

Scott Behrens -- Senior Executive Vice President, Chief Financial Officer

Yes, no, I mean, ultimately the digital subscription services and the digital subscription of physical goods with both -- those are areas where we will be able to expand additional R&D resources. Remember we're combining two set of R&D spend and on top of that we're actually investing more in R&D to be able to go and tackle and build out capabilities for some of these higher growth bill payment markets.

Philip G. Heasley -- President and Chief Executive Officer

So George, it's a great question because what this does is subscriptions is a wonderful example of explaining what the UP strategy is all about. So PAY.ON's ability to have this diverse global network of endpoint, our real-time business intelligence broad capabilities and the ability to set behind the corporate -- so now they have the ability to it's not bill pay, kind of in a traditional way where people think about it, it is in effect providing a set of rails both to the endpoint and to the intermediate tests that have to take place and if the former subscription has a low unit cost or something it cannot afford to be an interchange kind of payment or whatever, or if immediate payments really starts taking off as a pushed credit and whatnot, it provides a another channel for people to -- and a lot of the merchant acquirers are beginning to see this need. And we are actually having more conversations with merchant acquirers and corporations about this, than we are having with banks, with our more traditional banking segment, in a way it makes sense, because a lot of these alternate payments, don't come from the bank -- directly from banking community or they're coming in from overseas.

George Sutton -- Craig-Hallum Capital -- Analyst

I understand. Obviously a lot of things driving the business right now. So Scott, can you just give us the composition of Speedpay in the Q2 numbers that you discussed, the $280 million to $290 million? And I'm asking that really to get a better sense of the progress you've seen thus far in Q2.

Scott Behrens -- Senior Executive Vice President, Chief Financial Officer

Yes, when we close today, so we'll be picking up their financial results effective today going forward. I wouldn't really pro rate what we're putting out for the full year, just take it pretty equally between today and the end of the year. There, the Speedpay business portfolio is not as lumpy as in some cases ours, our business has a certain bit of seasonality in it because of the heavy portion that's in government tax payments. So Q2 in our sight can be, actually can be one of the higher quarters of the year. But, this portfolio with Speedpay is actually pretty normalized throughout the year. So I think our total, just spread it over the rest of the year.

George Sutton -- Craig-Hallum Capital -- Analyst

Thank you.

Operator

Your next question comes from the line of Brett Huff from Stephens. Brett, you're now live.

Brett Huff -- Stephens Inc -- Analyst

Good morning, and congrats on getting the deal done also echo seems like a really nice deal. Two questions from me. Number one, can you give us more detail on sort of the tenure and the timing of bookings, I know the renewals, there is big renewals, they got pushed from 4Q, I think as you mentioned from sort of capital markets activity, sounds like that's still supposed to -- those are expected to close in 3Q. But the bookings this quarter were a little lighter than we expected. I know there's -- those can naturally be lumpy, but just wanted to get some insight into that. How is the pipeline looking? Do we kind of -- can you just give us some color on kind of how we get to the high-single or low-double digit growth for the year?

Scott Behrens -- Senior Executive Vice President, Chief Financial Officer

Yes, I would say that you've got a couple dynamics. Number one, again and I mentioned in my prepared remarks that, if you look at it from a comp perspective, Q1 of last year was a record Q1 quarter for us. So certainly on a comp basis, I think this year will look more traditional in terms of the timing of our bookings with a lot of it in, sitting out there in Q3 and Q4. So and I think, just there is a natural give back a little bit after coming off a year where we had over 20% growth in new bookings. We have a little bit of a slowdown here in the first quarter, but the pipeline is strong. And so we're comfortable with that high-single or low-double digit for the full year.

Brett Huff -- Stephens Inc -- Analyst

Okay, great. And my second is, so I think you mentioned combining platforms between your existing bill pay business and Speedpay. Can you give us some more sense on that, is it -- whose platform is going to remain or is going to be kind of best of both and what's the timing of that and how do we think about any financial benefits? Is that included in the guidance you've given, or is that on top of? Thanks.

Philip G. Heasley -- President and Chief Executive Officer

That's a great question. Actually, it's kind of a great marriage, Western Union Speedpay has done a lot of very good work on the front-end of their system -- of the their product, which is they're calling next-gen. And it really included their customer base and the marketplace in terms of what next-gen should look like and what not. And we are going to embrace the vast majority of what next-gen has to offer. We have things like our Student Portal that we mentioned today. So we have more vertically specific pieces. But as there will be a one overarching UI that will be specific to the individual verticals in terms of what they need and what not, but a good piece of encompassing technology that we're -- it's going to take us -- the first round of it is being implemented throughout the entire Speedpay population and there is Phase II, Phase III, there is going to be a fair amount of work. We've been doing exactly the opposite, and we've been building a powerful back-end of the system and Speedpay has not been working on that piece, that's also a multi-year effort. And all of these expenses are modeled into the guidance and whatnot, that we gave in terms of those.

The upside of that is that, it could change our growth rates once this functionality becomes clear roadmap to the prospective customers. One of things, you got to think about, Brett, you watch Uber, you watch the Lyft, you watch the these guys. These guys are saying, oh jeez, how are you going to get past the profitability and everyone is kind of scratching their head, as 5% to 6% cost of sales. Right, really expensive, we think that we sit in the sweet spot, right in terms of, if we can get -- we get people depends on your form of payment. If we can get them to a much more efficient, cost of sales, and all these different subscription-based guys or were guys in the fact we've already preset, how you going to pay, they may have to go into models that there you pay one way, cost you one thing for Uber, you pay another way, it costs you another thing. We think that this creates a real solution that, right for some of these syntax that are coming out, that the difference between not having a game plan to profitability and profitability could largely be impacted by what they're currently spending for the cost of sales.

Brett Huff -- Stephens Inc -- Analyst

That's helpful. Thank you, guys.

Operator

Your next question comes from the line of David Eller from Wells Fargo. David, you're now live.

David Eller -- Wells Fargo -- Analyst

Hey, good morning and thank you for taking the questions. Could you talk, start by talking about any financials on the Walletron acquisition. So couple of questions there, was that a cash acquisition? And then you already had a partnership there, so will there be additional revenue from that or will that be netted against anything?

Scott Behrens -- Senior Executive Vice President, Chief Financial Officer

Yes, we haven't disclosed what the financials are, for Walletron that came to us as a part of the Speedpay acquisition.

David Eller -- Wells Fargo -- Analyst

Okay. So that is, -- that's included in the price or you're saying that's a separate deal?

Scott Behrens -- Senior Executive Vice President, Chief Financial Officer

It's going to be included in the ultimate purchase price for Speedpay.

David Eller -- Wells Fargo -- Analyst

Got it. And then I know historically you've had a focus going on the larger number of smaller billers and Speedpay has had a much larger focus on a smaller set of larger billers. So can you talk about any of your initial conversations with some of the larger clients on the Speedpay side? So any push back from accounts, either on pricing concessions or anything like that or whether they plan to stay or go?

Philip G. Heasley -- President and Chief Executive Officer

We had one of the preeminent consulting companies operate, what you call a White Room for us, because we're not allowed to interfere with their business until -- till their closed.

But one of the contractual agreements we went through, was that we wanted to perform very heavy interaction between ourselves and the customer base than whatnot. And the feedback has been positive and it's been good. And we are not changing Speedpay's business model. Mind the fact, we're embracing their model as it relates to significant -- these significant relationships and whatnot.

And having said that, we actually believe that there's a back flow of value. We have some very, very, very large Bill Pay customers, and we believe that their model is going to be very helpful in terms of us even improving our large customer model. So in effect, we're going to embrace their customer-centric method of dealing with their larger customers. So the answer is yes, we have been in a contract.

David Eller -- Wells Fargo -- Analyst

Got it. And then, talking a little bit about your underlying existing On Demand business. There's -- it's been a time since we've been waiting for to see that kind of big step change in the number of wins and volume there. So can you talk about any progress you're seeing an accelerating demand toward maybe that high-single-digit growth range?

Scott Behrens -- Senior Executive Vice President, Chief Financial Officer

I think you are starting to see the results. Q1 year-over-year growth was 5%, margin expansion of 600 basis points. I think what you'll see obviously starting in Q2 going forward is, layering on a significant amount of EBITDA on top of that cost structure. So you're going to see a very different profitability profile going forward. But we expect the On Demand business to come in probably close to our higher end of the revenue growth expectations for the year. So we're talking upper single digits on the On Demand side for the year.

David Eller -- Wells Fargo -- Analyst

That's great. And then last question from me, just on the large capital markets deals that have pushed. Do you have any additional color there in terms of conversations you've had with those respective parties about continuing service with ACI and just the level of confidence that you'll continue to have that business after close?

Philip G. Heasley -- President and Chief Executive Officer

Well, the only way I can answer that is that we have had no discussions with any of these customers about discontinuing, or things and as we went through the wins today and I cannot discuss any individual accounts, but as we go through the wins, you can see that, we are clearly increasing business with some of the affected parties.

David Eller -- Wells Fargo -- Analyst

Got it. Thank you for taking the questions.

Operator

(Operator Instructions) Next question comes from the line of Peter Heckmann from Davidson. Peter, your line is now open.

Peter Heckmann -- D.A. Davidson Companies -- Analyst

Thank you. Good morning, everyone. Wanted to just review if you could, a little bit more detail, some of the major milestones we should be thinking about for the integration of Speedpay as we go over the next four quarters. And then as well that $35 million in significant transaction costs, how that may go through the year, as big chunk of that will be in the second quarter, but how do you envision it in back half?

Scott Behrens -- Senior Executive Vice President, Chief Financial Officer

Yes, we're operating under a TSA, in terms of the operations. I don't know necessarily, if there are, I would say there is key -- there we obviously have milestones. But I don't think from the market facing perspective, the point is that we make that transition from Speedpay to us as smoothly as possible. So as it relates to that, we will be operating under a TSA as we migrate those customers from their data centers to our data centers. And so that's going to take time, and it will take -- the amount of time it takes, not be disruptive to the customer base.

Philip G. Heasley -- President and Chief Executive Officer

Yes, one thing I would add to that is, we are not doing any math, we're not doing any math conversions. We're moving these customers one by one around their specific -- around their specific needs. And so one of the reasons that we put the energy into the TSA, is that we did.

Scott Behrens -- Senior Executive Vice President, Chief Financial Officer

Yes, and then in terms of the one times, yes Q2 will be heavy, obviously a lot of the professional fees associated with the transaction we did here in Q2 and then the phasing, I think for the rest should be pretty consistent in Q3 and Q4.

Peter Heckmann -- D.A. Davidson Companies -- Analyst

All right, thank you very much.

Operator

(Operator Instructions) At this time, there no further questions on queue. Presenters, you may continue.

Philip G. Heasley -- President and Chief Executive Officer

Well, thanks everybody for dialing in. And we look forward to catching up in the coming weeks. Have a great day.

Operator

Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.

Duration: 34 minutes

Call participants:

John Kraft -- Vice President, Investor Relations & Strategic Analysis

Philip G. Heasley -- President and Chief Executive Officer

Scott Behrens -- Senior Executive Vice President, Chief Financial Officer

George Sutton -- Craig-Hallum Capital -- Analyst

Brett Huff -- Stephens Inc -- Analyst

David Eller -- Wells Fargo -- Analyst

Peter Heckmann -- D.A. Davidson Companies -- Analyst

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