Executives
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 and Senior Executive Vice President
Analysts
Gil B. Luria - Wedbush Securities Inc., Research Division
George F. Sutton - Craig-Hallum Capital Group LLC, Research Division
Brett Huff - Stephens Inc., Research Division
Eugene Fox - Cardinal Capital Management, L.L.C.
ACI Worldwide (ACIW) Q4 2013 Earnings Call February 27, 2014 8:30 AM ET
Operator
Good morning, everyone. My name is Sarah, and I'll be your conference operator today. At this time, I'd like to welcome you all to the ACI Worldwide Reports Fourth Quarter Earnings Conference Call. [Operator Instructions] Thank you. I'd now like to turn the call over to our host, Mr. John Kraft. You may begin your conference.
John Kraft
Thanks, Sarah, 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 packs of both statements on the first and final pages of our presentation deck today, a copy of which is on our website as well as with the SEC.
On this morning's call is Phil Heasley, our CEO; and Scott Behrens, our CFO.
Now before I start, I want to make sure to remind you that ACI will be attending several investor conferences in the coming weeks, including Raymond James' 35th Annual Investor Conference on March 5 and the Crédit Suisse 16th Annual Global Services conference on March 10.
With that, I'd like to turn the call over to Phil Heasley. Phil?
Philip G. Heasley
Good morning, and thank you, everyone, for joining us. 2013 was a strategically important year for ACI with the integration of S1 and the acquisitions of Online Resources and Official Payments. We extended our market position in the fast-growing EBPP space and enhanced our solution offering. Also significant, we officially launched Universal Payments, which represented the culmination of several years of building our orchestration layer to realize our actual payments vision. In August, we completed an oversubscribed $300 million bond offering. We were able to capitalize on a historically low interest rate environment and now have more financial flexibility and an improved capital structure.
During 2013, we repurchased 4% of our outstanding shares. Our conviction remains strong, and we continue to repurchase aggressively year-to-date in 2014. Today, we announced that our Board has increased our share repurchase authorization by $100 million, which reflects our confidence and commitment to increasing shareholder value.
Turning to our operating results. Our overall net sales bookings in 2013 grew 20% over last year. Notably, our merchant retail payment bookings nearly doubled from last year, and our outlook in this segment remains exciting. Our SaaS revenues for the year more than doubled and now represent over 40% of our total revenue. Our operating income and adjusted EBITDA both grew over 20% in 2013.
As we informed you earlier this month, December turned out to be a very turbulent month, and several contracts we had hope to sign in 2013 were not completed. We are disappointed with the sales execution.
On a product basis however, we executed with excellence and delivered on an array of product releases. In particular, BASE24-eps release 2.0 represents perhaps the most significant release in retail payments in the -- in perhaps the last 30 years and operating under our UP strategy will be the most transformational offering in payments in a very long time. Additionally, we built out an integrated Postilion switch within our hosted SaaS environment to support our retail endeavors as well as our electronic bill payment business. The purpose of this switch is to maximize Durbin efficiencies and minimize risk postures to those retail clients that we have and will be obtaining. This leads us to be very optimistic for 2014. We believe we're extremely well positioned to benefit from the changing landscape, growing volumes and increasing complexity in the industry.
The Durbin Amendment, just one of many disruptive regulatory actions, has set new caps on interchange fees. This is forcing financial institutions to reduce infrastructure costs. The amendment is also requiring increased routing options at the point of sale, which provides retailers an increasing incentive to take ownership of their own payment systems. In the future, we envision some of the largest retailers building proprietary routing structures of their own. The recent highly publicized security breaches only add to the industry's pressure to upgrade the antiquated systems in place today. As the industry evolves, we believe our solutions, such as EMV enablement and Universal Payments, position ACI extremely well.
As we move into 2014, our worldwide pipeline and backlog have never been larger. In fact, we have a number of potential opportunities that could be amongst the largest we've ever signed. While the timing of these deals is difficult to predict, we do believe the next few years could be very fruitful for ACI.
I will now hand the call over to Scott to discuss our financial results and 2014 guidance in further detail. Scott?
Scott W. Behrens
Okay, thanks, Phil, and good morning, everyone. I first plan to go through our highlights of the fourth quarter and full year 2013 results and then discuss our outlook for 2014. I'll be starting my comments on Slide 6 with key takeaways in the quarter.
We closed the Official Payments transaction in early November, and the previously discussed cost synergies of $8 million are substantially complete. New sales bookings were up 25% on a consolidated basis and up 13% on an organic basis.
Turning to backlog, our 60-month backlog increased to $748 million -- I'm sorry, increased $748 million during the quarter to $3.9 billion. Of this increase, Official Payments contributed $696 million while the remaining $52 million came from current quarter sales. Our 12-month backlog grew to $870 million, up $130 million during the quarter, driven primarily by the acquisition of Official Payments.
On a consolidated basis, we saw strong revenue growth over Q4 2012 with our non-GAAP revenue increasing 25%. Adjusting for the ORCC and OPAY's contribution of $61 million, organic revenues declined approximately $5 million. However, underlying this change in revenue was a $6 million increase in recurring revenue or 5% growth compared to the prior year Q4, offset by a decline in nonrecurring revenue of $11 million. So healthy growth from our stable and predictable recurring revenues from the organic business.
Non-GAAP operating income in Q4 was $94 million, up $10 million, or 12%, from last year. Adjusted EBITDA of $117 million was up $15 million, or 15%, from last year, and we incurred roughly $7 million of transaction and integration-related costs during the quarter, representing primarily severance, site closure costs and third-party professional fees.
And the final takeaway from the quarter, we saw strong free cash flow compared to the prior year with operating free cash flow of $62 million up significantly from $24 million in last year's Q4.
Turning next to Slide 7 with key takeaways for the full year 2013. Our overall SNET bookings for the year grew 20% or 7% organically. Consolidated non-GAAP revenue grew 26% to $871 million. On an organic basis, revenue grew up 1%, which was driven by an increase of $28 million, or 6%, in recurring revenues, offset by a $21 million decline in nonrecurring revenues. Our monthly recurring revenue now represents 70% of total revenue, up from just 60% in 2012.
For the full year 2013, our non-GAAP operating income grew $27 million, or 21%, to $155 million, while our adjusted EBITDA grew $47 million, or 25%, to $239 million. We also saw strong a operating free cash flow of $151 million, up $128 million compared to last year. And contributing to the strong cash flow was a reduction in accounts receivable with our DSO at a 2-year low and returning to pre-2012 levels.
Moving to debt and liquidity, we ended the quarter with $95 million in cash. Our debt balance at the year end was $755 million, down from $764 million in Q3. Also during the year, we purchased 1.7 million shares or 4% of those outstanding for a total of $81 million. And we've continued our aggressive repurchase activity here in 2014. And as of yesterday, February 26, we have repurchased 930,000 shares year-to-date here in 2014 for a total purchase price of $54 million. And with the addition of the incremental $100 million of board authorization announced today, our total remaining share repurchase authorization currently stands at $156 million.
Lastly, turning to Slide 8, is our outlook for 2014. And consistent with our 5-year targets announced in November at our Investor Day, we expect 2014 revenue to be in a range of $1.06 billion to $1.08 billion and adjusted EBITDA of between $290 million and $300 million. We've also provided here additional assumptions regarding our 2004 (sic) [2014] outlook. We expect new sales growth to be in the upper single digits. And an important item to note from a modeling perspective is that our quarterly revenue phasing will continue to be seasonal, as is typical, and we expect to generate non-GAAP revenue in a range of $220 million to $230 million in Q1, which is in line with our historical experience.
Our GAAP interest expense is expected to be $35 million, while on a cash basis we expect $30 million of cash interest.
We expect capital expenditures to be in a range of $35 million to $40 million, consolidated depreciation and amortization expense to be in a range of $88 million to $92 million and noncash stock compensation expense to be in a range of $18 million to $20 million.
Our pass-through interchange revenue, which we adjust for our net EBITDA margin, is expected to be in a range of $120 million to $125 million in 2014, that representing a full year impact from Online Resources and Official Payments, compared with 2/3 of the 2013 amount of $38 million.
We expect a GAAP effective tax rate of 35%, however expect to pay only $30 million to $35 million in cash taxes given the continued utilization of our acquired NOLs.
We expect our diluted share count to approximate 40 million shares in 2014, which excludes any future share buyback activity.
And these metrics exclude approximately $13 million to $15 million in continued onetime integration-related expenses that we expect to incur in 2014, $2 million of deferred revenue haircut that's flowing over into 2014, and represents our current estimates for purchase accounting adjustments.
So that concludes my prepared remarks. Operator, we are ready to open the line for questions at this time.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Gil Luria of Wedbush Securities.
Gil B. Luria - Wedbush Securities Inc., Research Division
Scott, at the Analyst Day, you gave us a really helpful bridge for what pro forma numbers are for 2013 for revenue and EBITDA based on how you exited the year with your acquisition and synergies. What are the updated pro forma numbers now that you reported 2013?
Scott W. Behrens
Yes, from a revenue perspective, it would be $1,023,000,000. And from a pro forma EBITDA perspective, $273 million.
Gil B. Luria - Wedbush Securities Inc., Research Division
$273 million? Okay. So in terms of the revenue -- and my follow-up, in terms of the revenue, does that imply mid-single digit revenue growth? You exited the year with very little organic revenue growth, and backlog was fairly flat on an organic basis. And we've talked about the fact that, that's a trade-off between recurring and non-recurring revenue, but the 2014 guidance implies an acceleration of organic revenue growth. So what's going to drive that acceleration?
Scott W. Behrens
Well, I don't necessarily say I would -- it's an acceleration. I would say this year's 2013, again the uptick [ph] was a combination of a healthy recurring revenue growth offset by a decline in non-recurring revenue growth. So I think that our mid-single-digit revenue growth for next year is in line with our historical experience. And from a guidance perspective, I would say we actually view our guidance as fairly conservative.
Operator
Your next question comes of George Sutton of Craig-Hummel (sic) [Hallum].
George F. Sutton - Craig-Hallum Capital Group LLC, Research Division
Well, that wasn't close. I think represent everybody on the call when I say thank you for providing the forward quarter guidance. Phil, you mentioned that you in your pipeline have some of the largest opportunities that you've ever had. And I'm curious if those would be current customer renewals that you're referring to. Or would that be a traditional bank that had built things in-house that are now contemplating using you for a broad range of services?
Philip G. Heasley
I think you have 3 different -- I think you have current customers that are looking to use us for massively more than they've historically used us for. So it's probably more than just significantly growing the amount that we're -- that they're using us in going from older to newer technology in terms of doing it. So basically, accepting the power of UP and using UP in a much more broad fashion. I think some of them are the new players in the payments market that aren't necessarily financial institutions that understand the importance they have in controlling their own payments and the risks around their payments. And some of them are financial intermediaries that -- they're neither banks nor retailers that are trying to figure out what their roles are going forward.
George F. Sutton - Craig-Hallum Capital Group LLC, Research Division
Interesting, okay. Well, as my follow-up, December, you had mentioned the disruption that occurred there. I think a fair amount of that did relate to the breaches that occurred. Can you talk about the customer dynamics when Target and others started to have the breach issues, what that did for your near-term but also longer-term outlook?
Philip G. Heasley
Well, we have 3 things that happened in December. And as CEO, I'm responsible for everything that happens, so I have to take responsibility. On one level, we were somewhat sloppy. And we could have booked stuff in December that we didn't book and we ended up booking in January. So shame on me, right? So that was one level. Another level was -- is that this 2.0 that's coming out that has the ability to not only handle cards but to handle basically any financial accounts, right, so giving banks the power back, right, to their account level in terms of what they want to move and switch around, that caused some customers to say, hey, wait a second, instead of renewing, instead of doing whatever, we need to go back. And we like UP, but we're now thinking about it in bigger and broader terms. And we did ourselves in, in terms of that. And then a combination of what the breach really did was have everyone jump to their lawyers and start saying, let's see whatever we bought. Let's try to get as much indemnity in terms of what we're buying as we possibly can. And as much as we all love bonuses and whatnot, I was not going to go and have our owners indemnify a series of contracts so that our guys -- let our competitors do that, right? We're not going to indemnify sales. We can't take on 20x the risk of the economic value of what we're selling, so we let that stuff roll into -- we let that roll into January and February and that stuff is working itself out [indiscernible] logically. Net-net, the breaches are creating much more opportunity long term than there are risks. It made December ugly, but it opened up more doors of opportunity than -- and quite honestly, we have some very smart retailers, well, I can't say who they are, who had already thought of ways of protecting how they were doing business, and that other retailers now who used to think it was an unaffordable luxury, why would you do something like that, who now think it's a basic cost of protecting their brand, that it's becoming a business opportunity for us, George.
Operator
[Operator Instructions] The next question comes from Brett Huff of Stephens Incorporated.
Brett Huff - Stephens Inc., Research Division
A couple. The first one is, I just want to make sure that I understand the kind of flow of the bookings. I know that the pre-announcement indicated that some of these -- or some of the bookings were going to slip. And so you mentioned that things are going well post the year end on working on some of those potential deals, but can you -- I just want to make sure I understand. Have any of those closed? Or are those going to sort of maybe spread out later through the year? Can you just give us a sense of that more clearly?
Scott W. Behrens
Yes, I mean, if you -- there was a number of reasons for slippage. Certain of the deals where Phil indicated that ultimately could have been signed in December and slipped and were our bad, those have signed here in the new year. Some of the deals that we're looking at that are of size, I wouldn't necessarily say were closed in Q1 but we do expect to close in 2014.
Brett Huff - Stephens Inc., Research Division
Okay. And then in terms of how you guys are doing the sales process now, I mean, you've got a lot more arrows in your quiver. Cross-sale potential is obviously a lot higher not just for UP but with Bill Pay (sic) [Bill Payment], et cetera. I mean, even -- you announced recently a nice Internet banking win. When you go in, how are you pricing and bundling the new services as well as the older services? I mean, are there price discounts that you guys are giving if people bundle? Or how does that conversation go? And what are the pricing parameters and approach that you all are taking to that?
Philip G. Heasley
We've always -- we're in a transaction -- we've always priced by transaction, Brett. So the more transactions people do with us, the -- they tend to get a better price for the bundles of transactions. So the more business you do with us, the better it lands up being. So what our very biggest customers that buy billions of our transactions across -- we have customers that do as many as almost 10 products from us, right, they pay much, much less than customers that have much lower volumes and fewer products.
Brett Huff - Stephens Inc., Research Division
I guess just I was -- just to be clear, I was trying to understand -- I understand that you guys, that there's volume discounts. I think that makes all the sense in the world. But how does -- do you guys discount or bundle price when the -- when you sell multiple products to that person? So if they buy not just the debit switch but the Internet banking and the EBPP or the Bill Pay and the -- et cetera, how does that...
Philip G. Heasley
Well, I think, the better way to answer that is, is that we are selling many more solutions right now than we are -- multiple -- I think if you want to talk to our product guys, they wouldn't say, here's 5 products and here's a -- 5 products-plus. I think what they will say is here's an integrated solution and here's the cost of the integrated solution. So you -- I guess by definition, calling it a solution set, it's bundled, right?
Operator
I have no further questions queued up at this time. We did have one more further question pop in the queue. Your next question comes from Eugene Fox of Cardinal Capital.
Eugene Fox - Cardinal Capital Management, L.L.C.
Phil, a while back, you mentioned the possibility of doing some very big contracts that you guys never put in your forecast. And it's been -- since the first day, we really haven't heard about the evolution of your larger customers. Can you give us a sense for what they've been doing and how you see the -- their evolution in terms of using your products, both over the last few years and going forward?
Philip G. Heasley
Well, yes, and I think if you're a real student of our company, you'll see that a lot of our -- we have not been in a great rush to renew. There was a lot of noise about we're -- that we were out in a rush to renew our customers, and the reality is we haven't been in a rush to renew our customers at all because a lot of them have been waiting for the UP strategy to come along. And the reason you haven't necessarily seen a lot of big deals is that a lot of our biggest customers are waiting to see you what the implications of UP are, and our comment's saying that there are some very big deals in the pipeline right now. Some of those are current are customers that are contemplating much bigger relationships with us than they've historically had, and it's a combination of renewing their older technology and also progressing to new technology, which is much more fluid under UP than -- and required a conversion from -- in the old days, it doesn't require the same kind of conversion in the agile -- in the UP -- in our UP strategy, Eugene. So there are still the -- the net of it is, is that the very big deals are still sitting -- they're still sitting out there. I think you know our attrition rate is almost 0, right, so we're not losing any of those big customers. We're just not pushing them to renew until we have the optimal product set for them to renew.
Eugene Fox - Cardinal Capital Management, L.L.C.
I guess my -- just sort of the question is, the math associated with the incremental investments has always been very high. So the question really is, is what pushes them to pull the trigger.
Philip G. Heasley
Well, under UP, there isn't the old math of having to convert. It's a matter of adding on. And if there's more functionality, how do they add on to the more -- how do they add on the more functionality. So under 2.0, you could potentially use our technology for all aspects of your business. It's not limited to cards, right, and with that capability and some other direct connections that we're not prepared to talk about at this point. Our financial institutions can get a lot more leverage out of our technology than they ever would before. Even so, they would be paying us -- they would be having significantly larger relationships that they have today. Is that the question you're asking?
Eugene Fox - Cardinal Capital Management, L.L.C.
Yes, it really is. So it sounds still like the math's may be even more compelling to date, but it's also easier for them to execute. So now, it's just they have to create the inertia in their organization to move forward. But there isn't...
Philip G. Heasley
Well, yes. But the other thing, Gene, that this thing has been a labor of love for quite a few years. We went from no hosting capability -- it became really clear to us that in order for us to migrate it, we were going to have to help move a good number of them along. So we went from having no hosting capability to 2 years ago we had $100 million of hosting capability. We're coming into this year with $400 million of hosting capability. So our ability to actually have SaaS support for what we're doing is there. And now that we have 2.0 and now we have UP, the pieces are coming together. And so where it was a strategy before, it's now assets on the tables.
Eugene Fox - Cardinal Capital Management, L.L.C.
That's exactly...
Philip G. Heasley
Let's [indiscernible]. Okay.
Operator
At this time, I'll turn the call back over to the presenters for closing remarks.
Scott W. Behrens
Thank you all for joining us. I look forward to talking to you in this -- in the coming weeks.
Operator
And this concludes today's conference call. You may now disconnect.
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