John Kraft - Vice President of Investor Relations & Strategic Analysis Philip G. Heasley - Chief Executive Officer, President, Director and Member of Strategy, Technology & Process Committee Scott W. Behrens - Chief Financial Officer, Chief Accounting Officer and Senior Executive Vice President.

Gil B. Luria - Wedbush Securities Inc., Research Division Peter J. Heckmann - Avondale Partners, LLC, Research Division George F. Sutton - Craig-Hallum Capital Group LLC, Research Division Brett Huff - Stephens Inc., Research Division Vignesh Murali - Sidoti & Company, Inc..

Good morning. My name is Leanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Reports Fourth Quarter Earnings Call. [Operator Instructions] John Kraft, you may begin your conference..

Thanks, Leanne, 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. Before I hand it over, though, I wanted to remind everybody that ACI will be attending the 36th Annual Raymond James Institutional Investors Conference in Orlando next Wednesday, March 4. With that, I'll turn the call over to Phil..

Good morning, and thank you for joining our call. What a year. 2014 was a significant year for ACI. We are very encouraged by the -- our SNET results, which grew a better-than-expected 17% for the year. We're seeing significant customer demand for our hosted solutions and our SaaS bookings grew in excess of 61% in 2014.

We're also seeing material interest at our UP-enabled BASE24-eps solution. Adding ReD to our fraud and risk solutions gives us a front-row seat in this arena where we belong.

While the sales booking results driven by SaaS, UP and EBPP were above expectations and driving our backlog above $4 billion, we underappreciated the complexity of these deals and their impact on capacity sales and ILF renewals.

With the exception of the near-term revenue timing caused by GAAP impact, these results were an economic win for ACI and clearly in the best interest of our long-term shareholders by providing ACI with larger contracts, greater opportunities to cross-sell and, ultimately, more efficient and profitable customers.

Our record 60-month contract backlog validates this. We are particularly optimistic about the extensive interest in the market for our Universal Payments solution, both in terms of the number of potential customers as well as the breadth of the application within our customers' environment.

The UP framework is extremely powerful and is motivating many of our customers to reevaluate their technology road map. While I am disappointed we didn't announce a large UP contract in 2014, the delay is not a function of lack of interest. To the contrary, we underestimated the scope and complexity of the interest.

I am confident we will have a major UP deal to announce. We did co-sign several mid-sized UP contracts, and our overall new account and application bookings nearly doubled over last year. Let me provide you with a few details.

In EMEA, we signed a contract to migrate one of the largest Polish banks from BASE24 Classic to our latest UP-enabled BASE24-eps to support the bank's ambitious innovation and growth plans. Also in EMEA, a leading Dutch bank signed a large contract, expanding our BASE24-eps product across the bank's retail card business.

Once implemented, the bank will see lower cost per transaction, improved time-to-market, reduced risk and an improved infrastructure for real-time payments. In Asia, we completed a significant UP base BASE24-eps upgrade for an existing customer operating a national switch.

In Americas, our largest segment, we saw particular strength in Latin American markets, which grew 28% over last year. We're also seeing better-than-expected bookings in our EBPP segment which -- with growth anchored by several significant wins.

This demand clearly validates our Universal Payments strategy, providing significant long-term economic value.

Looking forward, the market opportunity for UP solutions is vast, highly diverse in customer appeal and is growing as banks, billers and retailers face dozens of payment types, pervasive and more sophisticated fraud, ever-increasing and onerous regulatory burdens, not to mention stiffening competition.

It will require a different technological approach to achieve these goals and improve margin, to say nothing of maintaining their existing margins. In the retail segment, the addition of ReD this year expands our offering and materially improves our market opportunity.

ACI stands alone with our industry-leading ability to provide an omni-channel payment experience that also effectively deals with quartile presence, transaction security as this method of payment skyrockets in the burgeoning eco-commerce sector. This will become especially important in North America with the new EMV requirement.

It matches our -- it matches in fraud our expansive payment view introduced by UP of eps 2.0. Our pipeline is at a record level and introduces several large in-dialogue deals. We continue to move these opportunities forward. For the year, we saw a non-GAAP revenue growth of 17% and adjusted EBITDA growth of 9%.

We also repurchased 3.6 million shares during the year for $70 million. Considering our record backlog and the early success with Universal Payments, we are optimistic about 2015 and our 5-year planning horizon. Growth of UP and omni solutions, including ReD, remains our primary goal.

I will hand over the call to Scott to discuss our financial results and 2015 guidance in detail. Thank you..

Thanks, Phil. Good morning, everyone. I first plan to go through the highlights of the fourth quarter and full year 2014, and then provide our outlook for 2015. We will then open the line for questions. I'll be starting my comments on Slide 6 with key takeaways from the quarter. Our new sales bookings were up 10% in the quarter.

And as Phil has already mentioned, we saw particular strength in our new account, new application sales. These sales bookings contributed to strong growth in backlog with our 60-month backlog growing nearly $80 million during the quarter to a record $4.2 billion and 12-month backlog growing $13 million to $903 million.

We saw revenue growth of $6 million or 2% compared to the prior year driven primarily by the acquisition of Retail Decisions and the full quarter contribution of Official Payments.

On an organic basis, we continued our trend in growth in recurring revenues, offset by a decline in our nonrecurring revenues as we transitioned to a higher mix of hosted sales and its related ratable revenue model.

Our recurring revenue grew 16% to $203 million, representing 70% of total revenue in the quarter compared to 62% of total revenue in the prior year quarter.

Additionally, our mix of sales also impacted current quarter revenues as we saw higher new account and new applications sales, which require implementation prior to revenue recognition, versus incremental capacity sales and initial license fees on renewals, both of which have more immediate conversion to revenue.

And given our largely fixed cost base, this revenue timing also impacts our near-term profitability, resulting in our adjusted EBITDA in the quarter of $107 million declining 9% from Q4 last year. Our operating free cash flow was $72 million in the quarter, up $10 million or 16% from Q4 last year.

We ended the quarter with $77 million in cash, up $17 million from Q3, and a debt balance of $892 million, down $54 million from Q3. Turning next to Slide 7 with key takeaways from the full year. Net new bookings in 2014 grew 17% or 10% excluding Official Payments and ReD.

We saw total sales bookings grow 18% over last year and exceeded $1 billion for the first time. We continue to see a growing preference by our customers opting for our SaaS-based solutions, which resulted in our hosted subscription and transaction sales growing 61% over last year.

While these contracts are generally larger, their revenue is recognized ratably, and there's been a near-term optical headwind to our reported results. For the year, our non-GAAP revenue grew 17% or negative 2% organically. Our SaaS subscription and transaction revenues grew 59% over last year and represented 41% of total revenue for 2014.

And as we transition to higher levels of hosted contracts, we will continue the trend of growth in recurring revenue, offset by declines in nonrecurring revenues. For the year, our adjusted EBITDA grew 9% to $261 million. Operating free cash flow was $134 million, down from $151 million last year.

And as Phil mentioned, during the year, we purchased 3.6 million shares and have $138 million remaining on our share buyback authorization. And finally, turning to Slide 8 with our outlook for 2015.

For your financial modeling purposes here, we provided a pro forma view of 2014 to normalize for the acquisition of ReD as well as to reflect 2014 revenues at our end-of-year foreign currency exchange rates. And an item of note here.

With our mix of foreign currency-denominated revenues and expenses, FX is generally a top line revenue and expense phenomena but has minimal impact to the margin level. For 2015, we expect non-GAAP revenue to be in a range of $1.05 billion to $1.08 billion, which represents organic growth of approximately 3% to 6% over pro forma 2014.

And as we've discussed previously, we expect organic growth to be at the lower end of our mid-upper single-digit guidance range that we provided for our 5-year planning horizon, this given the impact of the business model shift. We expect 2015 non-GAAP EBITDA to be in a range of $280 million and $290 million.

And we expect our sales, net of term extensions, to be in the high single digits for the full year 2015. We expect our revenue phasing by quarter to follow our historical seasonality with Q1 revenue expected to be in a range of $225 million to $235 million. And also here below, we've also provided additional data for your 2015 financial models.

We expect interest expense to approximate $42 million with cash interest of $36 million. Capital expenditures are expected to be in a range of $40 million to $50 million. We expect depreciation and amortization in a range of $95 million to $100 million and noncash compensation expense expected to approximate $20 million for the year.

With an expected pass-through interchange revenue of around $115 million, this model delivers a net EBITDA margin of 30% for 2015, up from 29% in 2014. We expect our GAAP tax rate to be 35% for the year with cash taxes in a range of $25 million to $30 million.

Our diluted share count should approximate 117 million, which excludes any future share buyback activity. And lastly here, our guidance excludes about $8 million to $10 million of expected onetime integration-related expenses for our continued data center and facilities consolidation and bill payment platform rationalization.

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

[Operator Instructions] Our first question comes from the line of Gil Luria from Wedbush..

In terms of the business model transition, so this year you're going to get that 10% net growth translating into 3% to 5% revenue growth. And this year, you're talking about having SNET in the high single digits.

Does that still translate to the lower end of the range for next year? How many more years that the -- do you foresee the business model transition to more of the recurring revenue?.

Well, when you're referring to next year, I assume you're talking about 2016. I mean, we will -- basically we've said over the 5-year planning horizon we're going to be mid to upper single digits. At the low -- at the the early years, we'll be at the low end, and we will be essentially grow out of that low end over the 5-year planning horizon.

And just to be clear, with respect to the 10% SNET growth, the hosted SNET sales booking growth of 60%, which was our biggest growth area, that is going to have a different revenue recognition model over 5 years.

You take that value and spread it over 5 years versus a licensed software model where you see a good third to half of that revenue in about the first 18 months. So there's not a disconnect between the sales growth and the revenue growth. The sales growth, a bigger portion of that, is going into the 5-year backlog and being recognized ratably.

So I would expect '16 to be a step-up as we go across our 5-year planning horizon..

Well, to the extent that we are more and more successful, say we overperform from a sales standpoint and the overperformance comes from UP and we do more and more UP, it's very possible that, that UP performance will cause us to have -- it'll have a deleterious effect. It'll have a negative effect on capacity sales.

And it'll have a negative impact on ILF renewal.

And we tell you that right up front because we still have 300 -- or almost 300 or 250-plus Classic systems that are now -- many, many of them are very interested in buying UP and not converting but putting UP on top of both systems, and what that does is that converts it to a combined solution complex in 2 of the 3 deals that we discussed in the -- that I gave you as an example.

That actually took current period -- that took what would have been current period capacity of ILF and pushed it out over 60 months. We didn't lose value, but it's changing that 80-20 mix. And we think we have it right against the sales that we projected.

If we end up overperforming from a sales standpoint, we could very well have pressure on our revenue.

Correct, Scott?.

Yes, that's right..

Got it. And then as a follow-up, you're putting out you have a very fixed expense, and yet the 3% to 5% revenue is only translating to 5% to 8% EBITDA growth.

What's the incremental investment that you're making this year?.

Well, a part of that is in the hosting side of the business. That value is getting spread out over 5 years, although we're setting up the cost structure initially.

The outer years and certainly the renewals of hosted arrangements, once they're on a subscription rate and they've been set up in our -- on a recurring basis, the outer years and renewal value of a hosted contract is much richer than a licensed software deal. But the early periods do have the setup headwind..

Our next question comes from the line of Peter Heckmann from Avondale..

I wanted to ask just a broader question on the recently released Federal Reserve report on Faster Payments.

Can you talk about how ACI is trying to influence and guide that process? And in terms of timing, do you believe that will be a catalyst for banks and merchants to look at upgrading or updating their payment infrastructure within the next 3 years?.

Well, the answer to that is yes. I mean -- but there are 31 countries around the world that are actively involved in activities that have to do with Faster Payments. The U.S. is probably a laggard versus a leader in terms of those efforts.

One of the things that's very promising to us is that BASE24 -- our UP -- our Universal Payments framework gets most countries, most environments an awful -- a long way towards the where they need to go. We're actively working with parties in many countries, including at least 3 of the parties in the U.S.

that are more of the regulatory or advisory ones that are working it here, and I think that's actually spurring some of the interest that we have here. You may know about the one schema of Faster Payments that takes place -- that's already taking place in Great Britain.

We largely supply the bank solution to that today, and we supply a good portion of the government solution also. So we're very much involved in that already. But we're at -- they're now looking Round 2. That was about 6, 7 years ago..

Okay. And then for my follow-up question, one for Scott, we've seen the foreign currency basket. We've seen the dollar strengthen since year end. Can you talk about what type of FX factor is built into your guidance? I know you've -- I know you pro forma-ed '14 for the FX that occurred in '14.

But given some additional deterioration in the basket, what kind of number is in that guidance just so we can kind of gauge if we see future foreign currency movements?.

Yes, that's a good question. We've actually built the model based on the exit rate in 2014. So we built the 2015 numbers on the 12/31/14 FX rates. So yes, we have seen continued deterioration. Again, that should impact top line revenue, top line expense.

But with our mix of the various revenues and expenses, so far it's been essentially neutral [indiscernible] in the [indiscernible]. But it's 12/31 FX rates are what we use..

Our next question comes from the line of George Sutton from Craig-Hallum..

Phil, could you provide a little more qualitative detail on the UP deals in your pipeline? I'm wanting to better understand sort of on the one hand the customer enthusiasm with the other hand of the challenges of getting these larger deals to a conclusion..

Well, there's not -- I -- 2014 was a really, really monumental year for us, George, and we got an awful lot accomplished. And I wouldn't say it was an easy year, but we've done an awful lot done. And my one disappointment was we didn't get a really big UP deal across the goal line.

And I really don't want to do a lot of medium-sized deals and use up my capacity. I want to get a really big deal across, and there are strategic reasons for that.

The reason we didn't get -- I mean, we -- the reason we didn't get the really, really major deal across was that we thought that the opportunity was some factor, 1.5 or whatever times the size of business we were doing with a customer and our impact on how they do business.

And the truth of the matter is, is that it was way bigger than that and that they ended up opening their kimono completely to us and their vision of how we could sit there -- or we try to get them to fit our strategy and they went and said, actually, you could fit our strategy, which was a bigger piece.

So -- and we had #2 -- there's no way of bringing #2 or #3 in place of #1. And so we're still working on #1. And so there's no lack of interest there. The interest is totally there. It's just a much bigger, a much more complex deal.

And right, wrong or different, I'm 100% committed to that because that validates our -- that validates all the work we've done over a long period of time and the investment in integration and whatnot. And to me, it's worth another quarter or 2 quarters or whatever it takes to absolutely validate what we're doing.

And I can't say anything more than that, George, but the amount of interest in really good size institutions is -- it's clear and present. I mean, we don't -- we no longer have to say we think we have something that works, but we know we have something that works.

It's now how do you go and get something like that integrated because we are going to be able to change the way our customers do business and change their cost and time structure. We're going to be able to allow customers to do real-time payments and -- in a pervasive, multiproduct kind of way.

And it's just not -- you just don't pull one plug out and put another plug in to do that. And -- but we didn't think they'd be as ambitious. We thought they'd be much more iterative. And they may well end up being iterative in the implementation, but they're not going to be iterative in the planning.

And so planning has taken a lot more time than we have expected. And it's good because it's -- we're lining up the other train cars behind it. I'm not in any way, shape or form -- I'm -- and I'm sad we didn't sign it, but I don't feel bad about it at least..

My other question related to implementation of EMV in the U.S. I'm just curious how that should impact your business or influence your business once that; begins. And as I'm thinking about it, I'm wondering from Scott, if any of your guidance assumes these large UP deals..

And so I....

Well, to the answer to the EMV, I'll let's ask Scott answer the big part of the question. But we're EMV enabled both ways, right? We were really kind of -- we didn't do that much EMV business last year. We spent all the money to get everyone ready.

We -- we're SaaS enabled and whatnot, and we thought people would come running in to try to go and protect themselves as quickly as possible. We didn't see that much work. We're doing a lot more on the retailers' side than we're doing on the other side and that surprises us a little bit.

And people are buying 40% solutions, check a box, and then when they start having losses, I think we'll get to sell them 100% solutions. But Scott can answer..

Yes, I mean, our expectation is that we will sign a big UP deal this year. I would also say that our sales guidance is not necessarily contingent upon delivering a large UP deal. So if we close one of the large UP deals that Phil is talking about, it's likely going to push us over our SNET guidance range. But we'll provide that update at that time..

[Operator Instructions] Our next question comes from the line of Brett Huff from Stephens Incorporated..

Just to follow up on the question that was asked before, kind of what's built into the 3% to 6% guidance, we were happy that it was -- the midpoint was about 4.5%.

But just given the headwinds or, I should say, the revenue rec delays that we're seeing based on the shift to hosted and on the fact that UP is taking a little bit longer to get some sales across the finish line, can you tell us what's driving that 3% to 6% at this point? Just give us some more detail on that..

Well, in part, it's -- we had strong sales in 2014. So we'll begin to get benefits of those sales in 2015. Projects, for example, that were sold in 2013 that were hosted are beginning to come online in 2015 as well. So it's really -- if you look back 2013, we had 7% organic SNET growth, 2014 we had 10% organic SNET growth.

I mean, that's starting to come online in 2015..

Okay. And then also, the second question I had was on the free cash flow or at least the operating cash flow. I think it was down pretty substantially. And cash for you all is something we pay a lot of attention to just given the revenue recognition just complexity.

Can you give us commentary on why the cash was down year-over-year and what you're looking for roughly in '15?.

Yes, if you look at -- if you recall, in 2012 actually, you got to go back, we had the hiccup on the conversion of S1 billings. So 2012 was actually a significant decline in cash flow. We had a catch-up in that cash flow in 2013. So if you normalize for that balance, yes, we're down optically, but we had a catch-up year in 2013.

In terms of modeling for free cash flow, it would be consistent with what we've -- how we've modeled in the past. And that is, if you look at our EBITDA, our EBITDA is in a range of $280 million to $290 million.

Cash taxes would be deducted from that, so $25 million to $30 million; cash interest, $36 million; CapEx, in the $40 million to $50 million range. So the expectation would be that cash flow would be in that, call it, $170 million, high -- mid- to high-$170 million range. And I don't expect the balance sheet to be a headwind in 2015.

I would expect the balance sheet to be a tailwind..

Okay.

You didn't -- and have you ever given us -- can you give us the '14 either operating cash flow or free cash flow normalized for that sort of '13 bonus catch-up? I mean, can you give us a rough number for that -- whatever cash growth you can tell us for '14?.

Yes, we've -- it was in the $40 million to $50 million range was the impact to 2013. And therefore,....

Okay, so we've got to do the math on that?.

Yes..

Our next question comes from the line of Peter Heckmann from Avondale..

I just wanted to follow up and talk a little bit about the UP pipeline. And just confirming -- I mean, I've been doing a little bit additional research around the edges, and it seems like there's some very small competitors that are claiming to have some of the capabilities of ACI.

But are you seeing any real competitive, competitive solution -- a credible competitive solution emerge that is causing a slowdown in decision making? Or is this primarily a question of timing? It's either the ACI solution or we continue to do what we're doing today?.

Well, I'd be honest with you. We're -- what we're doing, we're in very big institutions. And what happens is that we're showing we -- in our latest meeting, we had 100 technical people from the mortgage companies, the retail banks, the credit card because these guys, they're looking at this thing, at the payments -- the Universal Payments.

So they are actually looking at it to be the Universal Payment. So we're having to deal with a lot of what they affably call stakeholders, and we're -- yes, so it's more internal. It's not really an external selling activity that we're -- that's where we underestimated the complexity and the scope, was on the internal selling.

We thought we kind of had them sold and that we were chosen. And they said, well, gee, now it's going to take us 4 months to sell it internal. And it's not an issue of whether we're chosen or not, it's how to deal with the internal complexity of dealing with it. And that's not true in one. That's probably true in 4 or 5.

Another one that we're dealing with is global, and we're helping them go through the ROI because they understand at the corporate level how much it's worth to them, which is huge.

And now how -- where they started and how they roll it around the world becomes a -- so then how do you start contracting it? Quite honestly, we were never used to dealing in this -- we were not equipped to deal in this complexity. We always dealt with the really large institutions but never at this level of complexity..

Okay, that's helpful. And then just as a follow-up, the -- there has been some increasing discussion about caps on interchange in EU countries.

Did that play into the decision with the large Polish institution where you had an upgraded eps?.

Well, we never talk about strategy. But the point I was making in my -- you can't -- we're providing an opportunity for people to do things at really the sub, sub, subset per transaction level and where there are paying pennies per transaction. They can't afford to pay pennies per transaction and stay in business.

So they have to think about different infrastructures that get them through different cost bases to stay competitive, stay in business. And a lot of them have 1 system per 1 payment type. And now we're up to 20, 30 payment types at points of sale.

And you just can't do it that way, and that's why we both approached the retail points of -- that we're both enabling the retail and enabling the banks because we don't believe that either one of them can capture what's going on and maintain or improve their margins without really changing the entire -- without changing the entire cost structure.

So Scott will talk to you to the Polish or the Dutch or whichever -- whatever their motivation is. That is the overarching motivation, is. There's no way in the world that the regulators are going to let 40% to 60% of the population be unbanked and then have the solutions for the unbanked to be more expensive than the solution for the banked.

And so they're going to bring prices down, which is going to force them to have different technologies. It's about -- no more complicated -- a lot more complicated than that to implement, but that is the scheme.

And if that's the front end in terms of everyone has to be online, right, so everyone has got the device that's going to initiate it, right, because the web is there. So now they've got to get the back ends to work..

Your next question comes from the line of Vignesh Murali from Sidoti & Company..

My first question is, what percentage of new accounts and new application sales are coming from existing customers? And if you can shed some light on the uptake in cross-selling opportunities, that would be great..

Yes. So the first question, the new accounts are all new customers. Now new applications are where we're cross-selling to existing customers where maybe they have a retail payment engine and we sell them a fraud solution. But we have some pretty significant sized new accounts in 2014..

Okay. And....

I'm sorry, can you repeat the second question?.

Yes, my second question was are you seeing an uptick in cross-selling opportunities or cross-sales over the last year compared to 2013?.

Yes. But the way I would best articulate our cross-sell opportunity is say that we're providing 600 million or 400 million of transactions against 2 payment types for a bank or for a processor or a network, whatever.

They're now asking us to come in, and it could very potentially be against our same technology and asking us to take us on 4 or 5 or 6 more payment types that double or triples the volume that we do. So it's a cross-selling that we have to give them -- we have to enable them against those payment types.

But what we're actually doing is leveraging our core technology or migrating them to our eps technology. So they're using both our new technology and our old technology under the umbrella of our Universal Payments.

Does that answer your question?.

Yes, it does..

Yes, we do have other customers like the Dutch deal where they're buying whole solutions that include the fraud as well as the payments engine and integrating them for -- and then we have other customers that have as many as 9 of our products.

I think that's the largest that we have, right? Then they use them for -- we become a preferred user and we get used across the different parts. But I think the largest cross-sell in 2014 was against the UP category and more uses against existing technology than we had in -- than we had there in their business..

Okay. Yes, that really helps. And my second question was, there are some -- there was a mention of a few deals being pushed from fourth quarter to the -- to 2015.

So are some of these deals baked into your guidance for the first quarter?.

Yes. I mean, this goes back to when we went out with Q3. Yes, we had pushed out several deals and our expectation is those deals will close in 2015. Some will close in Q2, some will close later. I'm sorry, Q1. Some on Q1. Some are later..

And this concludes our Q&A session today. I'll now turn the call back over for closing remarks..

Well, thanks, everybody, for dialing in. We look forward to talking to you all in the next coming weeks..

And this concludes today's conference call. You may now disconnect..