ACI Worldwide, Inc.

Thank you, John. Good afternoon, everybody.

Thank you for joining the call. As many of you know, I am filling in temporarily while Tamar Gerber is out on leave.

She will return in mid-December. Until then, please use me as your IR contact for ACI.

As a reminder, today's call is subject to Safe Harbor and forward-looking cautionary statements. You can find the full text of both statements on the first and last pages of the presentation deck today, a copy of which is available on the ACI website.

You can also find this text as filed with the SEC this afternoon.

Our management speakers today are Phil Heasley, ACI's CEO; and Scott Behrens, ACI's CFO. All speakers will be available for Q&A following the prepared remarks.

Thanks again for joining us. I'll pass the phone to Phil for his remarks.

Good afternoon, and thank you for joining our call. I'll start out today with an overview of our third quarter highlights, and then we'll hand the call over to Scott for a review of our financial results.

We are very pleased with our sales bookings and sales net of terms or net results for the quarter across all our geographies. For the quarter, we delivered $192 million in sales bookings, up 67% over the prior year and up 23% over the second quarter.

More importantly, our team delivered net results of $126 million in the quarter, which was an increase of 69% over the prior year and 13% over the prior quarter.

I'm particularly pleased with this result, as it's a confirmation that our integration is tracking and an indication that our fourth quarter will be stronger yet. Also, our backlog grew a healthy $61 million in the quarter.

We're happy to report that our healthy low attrition trended down even further this quarter.

During the S1 acquisition process and in our own planning for 2012, we identified cross-selling and relationship management as key elements in our strategy for the business. My recent trips across the globe have further reinforced this and ACI's role in global payments.

ACI now offers 26 strategic products with roadmaps and approximately 30 products managed for continuity. Today, we have over 1,000 payment engines in production.

On average, our larger customers use less than 4 of our strategic products. Active cross-selling, as well as net new sales are an enormous opportunity for us globally.

Our approach and focus on relationship management is paramount in being a true strategic partner with our customers.

With the sales bookings results in quarter 3, we are starting to see this bear out across all our geographies, and I believe we are well positioned for the fourth quarter 2013 and beyond.

In EMEA, Paul Thomalla is progressing this approach nicely. For this quarter, EMEA delivered sales growth of 51% over the prior year.

We are seeing similar results in Asia-Pacific under Jeremy Wilmot. Asia-Pacific delivered a fivefold increase in sales over the prior year and 131% over the previous quarter.

The Americas also performed well with sales bookings increasing 35% over the prior year and 33% over the second quarter.

In the quarter, we also announced the promotion of Jeremy Wilmot to lead our global markets for the Americas. This promotion is well deserved based on his 6-year performance in Asia-Pacific.

Jeremy has been with us for 13 years.

In addition, Dan Frate joined our executive team here at ACI. Dan will lead global markets and strategic products.

During the quarter, I spent time with our people, as well as visited our larger customers in the United States, Africa, Europe and the Middle East. I also attended executive level meetings with Sibos in Japan.

These trips confirmed ACI's importance in global pavements. Our pipelines are robust and well positioned to achieve our expectations in 2012.

Over time, ACI has had the opportunity to develop deeper relationships with our customers, which will in turn drive larger share of their strategic spend.

On the corporate finance side, we announced in September that we repurchased from IBM warrants exercisable for 2.5 million shares of our common stock. Thereby, resolving a significant overhang for potential future dilution.

We also repurchased roughly 312,000 shares from the open market during the quarter, bringing our total year-to-date repurchase activity to 1.4 million shares for a total cash consideration of $57.8 million.

We continue to make progress on our facilities and data center consolidation. These actions, as well as the IT in-sourcing program we announced last quarter remain on track, and we still anticipate 75% of these actions will be completed by the end of year 2012, with the remainder in 2013.

This quarter, we also completed the acquisition of Distra. We're excited about the technology and capabilities that Distra brings to ACI's business architecture and product portfolio.

Distra's technology gives ACI the orchestrational layer which we intend to pull enterprise payments that sits above our products.

This technology accelerates our innovation around the payment service hub by 3 to 5 years, allowing us to more quickly bring to market a set of solutions that are more flexible and more integrated. We can bring together our retail, wholesale, mobile and fraud products, all at the orchestration layers.

This technology also provides us an accelerated installation capability due to the configuration nature of the technology which, over time, translates to a quicker go-live event for our customers and a reduction in the amount of time revenue gets hung up as deferred item on our balance sheet.

Finally, Distra's technology has brought us a renewed focus on innovation as we continue to lead the marketplace with a broad, highly scalable and now highly orchestrated set of solutions for the payment industry. This enhances cross-sell capabilities and provides a competitive advantage over those that neither have the breadth of the product functionality nor the orchestration capabilities that ACI now has through the strategic investment.

Lastly we are reaffirming our 2012 guidance, which Scott will discuss in more detail in a moment. Historically, we've had a high degree of visibility into both revenue and profitability attainment in the fourth quarter, with revenue from backlog typically comprising 90% of the total revenue in the quarter.

We expect quarter 4 of this year to be in line with that. Our goal is to deliver operating income metrics for 2012 and be well positioned entering 2013.

As for 2013, we believe that our strong quarter 3 sales bookings combined with our healthy sales pipeline globally have us poised for a strong momentum going into the new year.

All in all, it's been a very busy quarter, and we continue our integration efforts and gear up for what's historically been our busiest and strongest quarter of the year. We remain focused on actively pursuing new sales and add on growth to new and existing customers across our geographies.

I will now hand the call over to Scott to discuss our financial results for the quarter.

Thanks, Phil, and good afternoon, everyone. I'll be starting my comments on Slide 6 with key takeaways from the quarter.

As Phil has already mentioned, we saw strong growth in sales across all of our geographies, up $77 million or 67% over the prior-year quarter and up 23% sequentially compared to Q2 of this year. The S1 business contributed nearly $45 million to the increase, and new sales bookings were up $51 million or 69% over the prior year.

The base historical ACI business saw total sales bookings and new sale bookings up 29% and 18%, respectively. So overall, we're very happy with the momentum we're seeing in sales activity.

The strong new sales bookings contributed growth -- to growth in both 60-month and 12-month backlog, up $61 million and $14 million, respectively. We saw a solid revenue quarter with S1 contributing $48 million of revenue.

The S1 contribution to revenue was impacted by $4.9 million of deferred revenue haircut. And again that is the revenue that would have been recognized in the normal course of business by S1 but was not recognized due to GAAP purchase accounting requirements, so really $4.9 million of pure margin revenue that we weren't able to recognize.

Our monthly recurring revenue stream coming out of our backlog represented nearly 70% of our total revenue in the quarter, which continues to provide a stable, reliable and predictable base of our revenue stream. Also, foreign currency movements compared to the prior-year quarter reduced this year's revenue by about $2 million.

And turning lastly here to operating expenses, the operating expenses growth compared to the prior-year quarter was almost entirely related to the S1 acquisition as the operating expenses for our base historical business was essentially flat compared to the prior year. And we also incurred $4.5 million of integration-related onetime expenses in the quarter, and again primarily related to the continued consolidation of our facilities in our data center operations.

Continuing on Slide 7, with key takeaways from the quarter. Excluding the impact of the $4.5 million of integration-limited onetime expenses and the impact of the $4.9 million of deferred revenue haircut, we saw solid operating income of nearly $18 million and adjusted EBITDA of $34 million.

From a debt and liquidity perspective, we ended the quarter with nearly $88 million in cash. Also during the quarter, as Phil said, we settled the outstanding warrants with IBM for just under $30 million, and we repurchased stock about 312,000 shares for a total of around $14 million.

We used $3 million during the quarter for our scheduled paydown on our term loan and finished the quarter with $385 million of total debt. And as Phil already mentioned, we closed the acquisition of Distra during the quarter for $50 million.

And lastly on this slide, we continue on plan with the integration of our IT infrastructure and our facilities consolidation. And again just overall, we're very happy with the integration efforts so far this year.

Next, turning to Slide 8 for comments on our full year outlook. Based on some of the feedback we received during the last earnings call, we acknowledge that we may have caused some confusion in how we presented our guidance expectations, again in prior quarters, by showing a GAAP revenue expectation but non-GAAP margin numbers.

In prior quarters our guidance added back for the onetime expenses associated with the acquisition, but did not add back to the deferred revenue haircut.

So to clarify here, we presented the guidance below on a non-GAAP basis for all 3 metrics, adding back for both the onetime expenses as well as the impact of the deferred revenue haircut.

That being said, based on what we're seeing in the business today, we are comfortable reaffirming our full year guidance expectations for non-GAAP revenue in a range of $706 million to $716 million. Non-GAAP operating income in a range of $122 million to $127 million and adjusted EBITDA in a range of $188 million to $193 million.

Again these metrics adjusted to reflect the add-back of the $31 million of expected onetime integration-related expenses, as well as adding back for the $23 million of expected deferred revenue haircut.

Looking at Q4, roughly 90% of our fourth quarter revenue is expected to come from our backlog. So again, that's our existing contracted book of business, which is consistent with our historical fourth quarter experience.

And the remainder of the revenue for the fourth quarter will come from fourth quarter sales bookings.

We are -- in the fourth quarter, we're expecting to continue the momentum in sales bookings that we began here in Q3, with fourth quarter sales bookings expected to exceed $300 million, with new sales net of term extensions expected to be around $230 million. So for the fourth quarter, we expect GAAP revenue in a range of $245 million to $255 million, non-GAAP operating income in a range of $77 million to $82 million and adjusted EBITDA in a range of $98 million to $103 million.

With that, let me turn to Slide 9 with preliminary views on what we're seeing for 2013. And really to build the outlook for 2013, you first have to start by normalizing 2012 or essentially annualizing the impact of the S1 acquisition as if it closed at the beginning of the year.

So this table summarizes what 2012 would have looked like with 6 more weeks of revenue from the S1 operations, around $27 million of revenue and one more quarter of phase 1 cost takeouts. Remember we had executed $33 million of cost takeouts as of March 31 of this year, so this walk adds one more quarter of cost savings or about $8 million.

So our normalized full year basis and what essentially represents our launch point going into 2013, our launch point would have a revenue in a range of $733 million to $743 million, operating income in a range of $130 million to $135 million, and adjusted EBITDA in a range of $196 million to $201 million.

So with that as our baseline, we expect sales net of term extensions to be in the high single digits to low double digits, which when combined with a strong second half of the year sales bookings we're seeing here in 2012 should contribute to revenue growth in the mid to high single digits for 2013. Also we expect the operating margins to be in a range of 19% to 20%, adjusted EBITDA margins in a range of 28% to 29%.

And just as a reminder, these margin numbers will benefit from the facilities and data center consolidation activities that are continuing here on plan through the rest of the year. Those activities will deliver $15 million of cost savings next year.

And finally, here we expect diluted shares outstanding to approximate 40 million shares, and that excludes any future buyback activity.

So in conclusion, we had a solid third quarter. Our sales bookings had regained momentum, which we expect to contribute to finishing with a strong fourth quarter and set us up for healthy growth and profitability as we look into 2013.

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

Wanted to ask about the guidance, the revenue guidance. So last quarter based on the currency changes from the first quarter, you reduced guidance by $10 million.

The euro has gone up as much from the second quarter as it probably went down from the first quarter. Does that mean you're absorbing a $10 million benefit to the year from higher currency?

No, we're really moving within the range.

Okay, got it. And then in terms of your 2013 guidance, I think last quarter you talked about $48 million of annualized interest for 2013.

Is that still the number you're shooting for?

Yes, that's right. Yes, because we had expect -- we'd really executed on the $33 million as of the end of March.

And so next year we'll obviously get a full year benefit of that plus the $15 million of the facilities and data center consolidation that we were still tracking to plan. And we expect by the end of this year to have $15 million of the total $20 million savings executed on.

So we'll get the $15 million benefit next year. So combined, $48 million next year.

Great, and then just finally, because the EPS.

[Technical Difficulty]

We lost Gil.

Yes.

Yes, a big question that I would look at in the Q4 guidance is the bookings number of $310 million. It's just a big number certainly relative to last year, even adding in S1.

Can you just give a picture into that bookings number, and is that dependent on anything particularly large in the quarter?

Well, to answer your first -- last question first, no, we're not looking at any extraordinary-sized item. Although I would say, George, that we're selling much more solution-based deals right now.

So whereas we may have been selling 1.5, 2 products, we're selling a larger array of products. It is going to be a large quarter.

We told you that we kind of got frozen in that second quarter in terms of people wanting to understand what our roadmaps were. And we said we hadn't lost any deals, but we certainly delayed the closing of deals and whatnot.

And so that represents the decisions people want to make by this year end going into next year. We are a capital spending item.

So we tend -- unless they've delayed already budgeted decision from the previous year, we tend to do an awful lot of our sales once the budget is approved for the next year.

Right. I got you there.

Now, Phil...

I think you noticed, George, just to say one last thing that, that is very -- that is not very dependent on renewals. That is extremely high from a year-to-year basis based on new -- most of this is sales.

Another term, most of this is just pure growth that's coming in the fourth quarter.

Right, right. Okay.

So I know you're very excited about the Distra acquisition, and I'm wondering when would we expect to see that part of your overall equation or overall solution set? When do you go to customers with this?

I just came back from -- I was at Sibos last week, and I was in the Middle East this week. And I would say that at least in our customers' mind, this is top of the first page kind of item because they understand the implications and whatnot of having the ability to both integrate, as well as migrate EPS in a faster fashion.

But perhaps even more importantly, start seeing our products tightly linked underneath the orchestration layer and then their product development operating on the top level. I think you'll see impacts of Distra as early as the third quarter of next year.

We will have the ability to present EPS, as well as several of our other products on a -- at services by the third quarter of next year.

Got you. Okay, good.

Lastly, Scott, just so I have some cover with this. The DSOs keep clicking up.

Is there anything that you would want us to understand there?

Yes, no, there is. We have started this in this third quarter, we were consolidating the back-office functions of S1 and ACI, and it's had some delays in the billings.

And so you saw a ramp up this quarter in receivables of about $16 million. So I expect us to work through those integration-related delays here between now and the end of the year and get back on track.

Just a couple of quick questions. One on numbers, and Scott, you may have gone through this or I may have missed it on the slides.

Can you just run us through the sales [indiscernible] term trend again. And I don't know if you had it sort of organically or whatever ACI legacy over the last couple of quarters and in this quarter and/or the combined entity as well because it seems like that's the major driver of growth in '13?

I just wanted to get some comfort on that as we look to that high single-digit growth rate.

Well yes, if you look at it just, I mean because of the combination obviously, both sales and sales end of term are higher over last year. But if you look at just the ACI historical business, Q3 sales net of term was up 18% over the same time last year.

So and you'll see it up again in Q4 as we -- as really the sales engine begins to regain momentum. So that's really the momentum that we're going into that help us deliver both on this year, as well as next year's outlook.

And as we stated in the deck, our next year's sales net of term extensions are expected to grow in kind of in a range of the high single digits, low double digits.

Okay, and then can you also talk about just -- and so I mean this is a question for you, just the sales management. I know that Ralph last -- I think it happened at the U.S.

Head of Sales there was some movement there. I knew you've hired, obviously, somebody with a lot of experience to manage the new group.

Can you just give us a sense of if he's changing things, how the sales integration head is going, if that's -- how it's impacted pipeline, if any. Obviously, you had a strong quarter bookings wise and your outlook sounds good.

Can you just give us some more sense of how that's coming together and what your sort of philosophy is?

Sure. Now I'll do it this way.

I'll tell you about the good positive moves we made. We don't want to be in any way negative and whatnot.

What you should understand, what everyone should understand is that the decision to bring Jeremy to the U.S. and the decision to put Dan into this role were not occasioned by anybody leaving.

That was occasioned by changes that we had decided to make moving to a much more relationship orientation. And that cross-sell is a lot more important to us than incremental sell.

And not to say that we're not interested in incremental, but with 1,000 payment engines out there and the ability to sell 2 dozen-plus -- 2 dozen products additional to the existing customers we had, we've got a lot of feedback both from our customers and during the integration process that this was a very large opportunity for us. And when I had moved Jeremy out of Spain into Singapore 6 years ago, and we had planned -- we had always planned to move Jeremy.

Jeremy has already bought a house and is well moved into the U.S., so it's about a change. It's a little bit of a change in focus.

We really needed on our strategic products. We are a software company and especially after Distra and S1 and integrating it, we are a software company, and we really have to operate as a software company.

And we had to better align our strategic products and our sales and service channel, not just our sales but our sales and service channel. I think you've noticed we haven't had a lot of problem selling our product.

We want to get more and more effective in terms of implementing and sustaining our product. And Dan was the perfect person to bring in for that role.

So we are -- we have been all year going through some changes as it relates to our organization in all facets. And yes, it's had impact on America's sales, and it's had a -- we put Dan in his new role.

We know that there's lot of rumors out there and whatnot, but anytime you're the lead dog in an industry, you always get people selling against change.

That's helpful. And then Scott, one last question for you.

Just want to make sure I'm doing the math in the guidance right. If I take the normalized full year of $733 million to $743 million, so call it $740 million, and I think you said maybe mid to high single digits revenue growth.

So maybe call it 7%, I can see about $790 million and then just taking the midpoint of the adjusted EBITDA guidance between about [ph] $225 million of pro forma. Is that how you guys are thinking about it?

I mean, I think yes, that's pretty consistent with our kind of our modeling.

Okay. And is your sense that -- I know I think you guys have started to take more of a conservative view on your outlooks.

Would you say that's still the case in this particular discussion?

I mean, I would say we're obviously comfortable with it. We put a range out there of growth and of margin percentages that we're comfortable with.

I was going to ask about cash flow. We're now probably close to negative $40 million, if not more for the year.

How much free cash flow are you going to generate for the year? And how do you reconcile guiding to normalized EBITDA of in the 180s with this level of negative cash flow?

Well I mean, you've got several things that are impacting this year's cash flow. One is going to be the onetime cash expenses, not only the operating expenses, the $31 million of operating expenses that are associated with the integration but also the CapEx buildout that we're seeing with respect to the consolidation of the IT and the data centers.

And then third piece is really from this quarter's perspective is we started the integration of the back-office functions. We saw a -- we're seeing a buildup in the receivables this quarter.

Again we expect that to call back here before the end of the year. But obviously, cash flow is going to trend towards the EBITDA and the EBITDA growth in the next year as well.

Just I wanted to follow up on the bookings, George's bookings question. Obviously, it's impressive growth.

And at the risk of stating the obvious, I guess it certainly seems to me like any S1-related bookings disruption is past due. Is that fair to say?

Or are there still banks that are wanting to take a wait-and-see approach?

No, I think that's very fair to say. We stated during the acquisition process that we were going to sort out the roadmaps between the products.

And of course, the Justice Department didn't let us talk to each other for 6 months at the tail of that. So we were unable to jump out the next day to the marketplace.

We didn't get out there to the end of April in terms of giving them the roadmaps and whatnot. Since then, we've had some really good conversations.

And I think you realized that on the online side, we've now migrated. There's a heavy emphasis on S1 products, and we're getting very good bookings as it relates to that.

And as it relates to other products, it's more ACI bound. I think what you're going to find at the end of this year is that assuming that you accounted for everything the way ACI accounts, not the way that S1 used to account, which means that we're interested in subscription licenses and not perpetual licenses, that from a sales standpoint this will probably be the record year for ACI and probably the record year for S1 also.

All encouraging there. And Phil, while I've got you, you obviously called out Asia-Pacific as being strong.

I assume that part of that is related to that recently signed deal in Japan. How is that going?

And are you able to leverage that deal into Japan or I guess otherwise kind of make Asia-Pacific a little more meaningful contributor?

Well, 2 things. One is we're doing very well in Japan, but Japan has no significant signings in this quarter.

You have to wait until next quarter to look for Japan signs, but we're doing very well in our partnerships in Japan. But this quarter really represents the rest of -- there's a fairly large, which we announced, Indian deal in there, right?

So in India we had a large deal, but Japan not this quarter.

Well, I guess I was just looking at the revenue by channel, step that a bit. And wasn't there a recently signed Japan deal?

Yes, well actually, we were into phase 5 of a very large Japanese deal that I think we have visibility up to 8 phases or whatever on that, and that's going very well.

Just one quick one. In '11, you had less seasonality and thought that might go into the future, but we're kind of back to a very, very back-end loaded year.

Do you expect '13 -- the bridge of '13 is helpful but, I mean, is that something we're not going to find out if that's right or not until February of 2014? Is it the same seasonality?

Last year in '11, we had done a lot of work on the heritage ACI business, and we had started smoothing it out. The 2 things that pushed it out this year were the delay in terms of getting the -- but first of all, we thought we have the S1 acquisition done before the year began, and it took us a couple of quarters to get rolling on that.

And then the other one had to do with the road map for both sides. So with an awful lot of signings coming in the third and fourth quarter, at least on the revenue side, you should suspect that next year's going to be heavily weighted to the third and fourth quarter also.

Thank you, everyone.