Q2 2020 ACI Worldwide Inc Earnings Call
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Ladies and gentlemen, this is the operator case competition should begin momentarily.
My time Airlines will again be placed somebody to cold. Thank you for your patience.
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At this time, all participants' lines journal listen only mode.
After the figures presentation, there will be a question answer session.
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I would not seen a college or what your speaker Mr., John Graff, Vice President Investor Relations and strategy. Thank you. Please go ahead Sir.
Deck today, a copy of which is available on our website as well as what the FCC.
On this morning's call is odierno made to our CEO Scott Burns, our CFO before I turn it over I'd like to share the company management will be attending the wells Fargo virtual fifth annual technology services for him on August 11.
Canaccord 40 annual growth Conference August 12.
And the second annual Needham virtual Fintech and digital transformation one on one conference on August 19, with that I'd like turn the call overdose <unk>.
Thank you John and good morning, everyone.
Thank you for joining us for a second quarter tool 20, Arty's conference call.
Well in all locked on his call, we may well be 19, and its unprecedented global impact on people and economies was top of mind and the central focus of our discussion.
While we know what do we find ourselves in a slightly different circumstances.
But with many of the same challenge.
I Hope you and your family starts things safe and well as we at a c. I remain committed to doing everything we can pretty sure they health safety and well be OVARA employees as we seamlessly support our customers.
On today's call I will begin with our second quarter financial results.
Importantly, I'd also like to share more that so you'll my vision for profitable revenue growth and long term value creation.
We are living in a different world compared to even three or four months ago.
Why different parts of the global are experiencing different stages of levels of severity of the pandemic undoubtedly there are ways in which all won't has changed permanently.
As it relates to HCR. The condemning has heightened awareness index to the rate that widespread acceptance of the essential role digital payment systems late in our modern economy.
Starting with the second quarter, new sales bookings were $136 million up 6% from Q2 last year.
We saw particular strength in our merchant business signing two larger BSP Congress artists to in Europe, and hyper base in Middle East that we all love This partners to wall for merchant acquiring a new comber services to their customers new geography.
Another area of continues to trend in the quarter was real time.
We signed a long time support agreement with our customer Rabobank was looking to expand its existing real time payment offered by supporting batch payments.
Another existing customer one of the largest interbank switches in Indonesia has selected H. guy to orchestrate older alternative payments, including Q or Alipay and all the real time offers.
Despite the revenue is being impacted by coffee 19 already be to die increase it by 42% compared to Q2, two Nike with margin expansion, increasing to 35% up from 25% last year.
Our efforts to improve operational discipline are working and we continue to focus on maximizing profitability, while advancing our pipeline of deals to position they see I for future continuous profitable growth.
As I mentioned last quarter, we are fortunate to have a resilient business model with significant recovery revenue reliable cash flows and high customer retention all of which are helping us whether they compete 19 related uncertainty.
And our first quarter call I shared with you my background and experience you realigning operations toward revenue gross margin expansion and value creation.
I also spoke about time I devoted to speaking where they see I've customers employees and leaders is that time I have also been getting feedback from our investors. These conversations have made clear to me that <unk> has a strong portfolio of customers and software led the payment solutions and importantly.
The human capital and talent to 16.
Well the last earnings call I have also communicated my initial one high level perspectives on H.T.I.s growth potential and the three pillars of our strategy, which will position the company for continued profitable growth.
Today I'm pleased to share additional details on our crops.
Over the last few months, we have engaged with our best think charnaux experts and industry, leading consultants to help US review, our business and indentify opportunities where efficiency gains and growth optimization.
There's a small consultant teams have worked with me on several similar efforts over many years, we have a playbook with a proven track record.
Although all work is not complete we have identified key initiatives to support the three pillars of our strategy that will drive value creation opportunities for Ace Ya.
Our first spieler Pittsburgh role is our refining a realignment of our organizational structure and the Brady mother to better position the company organic growth.
This involves reviewing the organization a milder winter graphic spring and designing a die when nimble organization that is better at creating and sustaining continuous profitable organic growth.
We also designing a best in class Global sales organization and culture. This initiative focus is on education, and we've strengthened accountability he has transparency and reduced good duplicative costs throughout the comp.
We're very close to hernia, chief revenue officer, and a teeth human resources opposite to complete the leadership team.
Our second feel it's called focus on girl.
We will decide on an organic growth and strategy. That's what's a disciplined focus on areas, where we can optimize ross.
We are reviewing our turnkey solutions to the inside the best opportunity three best operating and capital expenditures going forward.
We will focus on a smaller set of growth reached software led solutions supported by differentiated innovation in specific geographies end market segments.
We were sure all of our priority solutions, our cloud for us in terms of architecture deployment and operations.
We were probably ties investments that have the bad to market. The percentages generated the highest revenue growth and cash flows and would you know the highest or why does it would become a core discipline here, but HM.
Importantly did investment do come from cost discipline and relocation not incremental spend.
Our third pillar is step change value creation to M&A.
We've also continued its you pursued expertise M&A to drive step change value creation for our shareholders and further expedite our goal.
Is it getting along with three pillars brought the D., we winkle pass cost rationalization, which is already well under way.
As we previously discussed we action approximately $20 million in enroll cash cost reductions in not only tool to white.
During Q2, we further increases the amount of by approximately $30 million in cost reductions related to copy lighting by reducing the use of contractors. He any expenses and all that don't HR expenses for the rest of 220.
In addition, as part of our new strategy work when did you find additional cash cost savings by flatten the organizational structure, eliminating duplicative costs across our new organization and reducing our global facilities from <unk>.
Hi, good part of these savings will be reinvested behind growth and we were sure value maximization to all of our shareholders I.
Additionally, we are reviewing our capital location.
Our short term priority is to continue to Delever. The business in Q2, we paid down $40 million an hour and that that ratio has declined to 3.3 times as off Q2 total 20.
In the medium term, we've also relocate free cash flow to invest in our business.
Dundee capital to our shareholders through share buybacks and undertake equities M&A.
We plan to provide an update on our progress implementing these initiatives on our Q3 on his call.
We also expect a food some discussion three on Investor day, we're targeting for November tool 20 I.
Louis Yeah, it's underway and there will be fully launches by January 221.
We understand there was much work to do.
But I have said before I strongly believe who have the right team to succeed.
There was a sense of urgency as well as optimism to all the management team as we execute our news drop into repositioning the business or long term value creation.
To conclude driving revenue growth is the my DNA and we'll be in the new age the idea and they too.
We have a clear vision.
Yeah, I used well position to capitalize on the mortgaging trends in digital payments and specifically real time payments.
But to have plenty of room to improving operational and go to market discipline and execution.
I have no doubt there by security on our Threed dealers dropping.
Leveraging our go to market experience and benefiting from a new getting AD sales proceeds and culture, we would generate continues profitable growth and significant value creation.
I'll now hand, the call to Scott to discuss the company Q2 results Scott.
Thanks, social on and good morning, everyone.
My first plan to go through our results for the second quarter and it provides some high level commentary regarding our expense reduction initiative and outlook for the rest of 2020.
Well then open the line for question.
I'll be starting my comments on slide seven with key takeaways from the quarter.
New bookings were 136 million up 6% from Q2 last year as we continue to see strong growth in real time payments as well as our bill pay solution.
We ended the quarter with a 12 month backlog of 1.1 billion in 60 month backlog of 5.8 billion.
Q2 revenue came in at 300 million up 2% from Q2 last year on a constant currency basis.
The growth was driven primarily by having a full quarter its feet pay revenue in 2020 versus a partial quarter in 2019.
Excluding the impact that the incremental speed pay revenue revenue declined on a constant currency basis by roughly 10%, primarily driven by the impact of call. It 90.
Looking at around demand business, which saw a 15% decline excluding speed pay the largest portion of the decline it's related to the shift in tax payments for Q2 to Q3 as result of the IRS and many of the state tax deadlines looking out 90 days this year.
Aside from the government tax payments, we had seen year over year declines in other pillar segments. As a result to cope with 19, but those transaction declines have been offset by higher transaction from our secure ecommerce solution.
We saw less of an impact from Cowen 19 in Q2 and are on premise business, which declined 2% compared to Q2 last year.
Declines and non recurring license and service revenues were partially offset by higher recurring maintenance revenue.
We saw total recurring revenue grew 4% compared to Q2 last year and now comprises 78% of total revenue versus 75% of total revenue in Q2 last year.
Despite the challenges related to cope with 19, we continue to focus on maximizing profitability.
Our efforts to improve our operational discipline helped generate significant profitability growth in the quarter with adjusted EBITDA of 78 million up 42% for Q2 last year.
Consolidated net adjusted EBITDA margin expanded to 35%.
25% last year, which represents nearly 1000 basis points of improvement.
Oh, it's important to note that this growth is not just resulted in incremental sleepiq contribution.
But also grew on an organic basis, improving 25% compared to Q2 last year, we saw profitability improvement in Boulder on demand and are on premise business is on an organic.
Turning next to slide eight starting with that liquidity saw with growth in EBITDA delivered strong cash flow from operating activities at 68 million in the quarter.
More than 370% from Q2 last year.
And we have significant liquidity as we ended the quarter with 129 million, a cash and 300 million available on our revolver.
We also paid down 40 million of debt during the quarter.
Our current debt balance is 1.3 billion, which represents a net debt leverage ratio a 3.3 times.
Turning next to our outlook for the rest of 2020 as previously announced given the uncertainties around 19, we temporarily suspended or financial guidance for the rest of the year. So I won't give you full financial ranges, but I will say again that while revenues have been impacted by cobot 19, we're very focused on maximizing profitability and cash flow.
It's also one mentioned, we've actually approximately 30 million and cost reductions in response to cope with 19 by reducing the use of contractors see any expenses and other non HR expenses for the rest to 20 twond.
This is an addition to the approximately 20 million an annual and ongoing cash cost reductions that we implemented as we enter 2023 code.
Further as part of our new strategy work. The team here is identifying additional cash cost savings by flattening our organizational structure.
Emanating duplicative cost across our new organization and reducing our coal facilities footprint.
We anticipate that a good portion of the savings will be reinvested behind growth initiatives.
Oh, you want an eye in the rest of the management team are heavily engaged in this review when we plan to provide more details at our November at Investor Day.
That concludes my prepared remarks, operator, we're ready to open the line to questions at this time.
Thank you at this time to asking audio question. Please press star one on your telephone keypad.
Canada Star once you have seen audio question.
Your first question comes the line of Peter Heckmann of Davidson.
One I'm just.
A little more color.
Hey, I missed the comment there did you actually talked about.
They did it.
But oh.
Fourth quarter.
Border.
Yeah, what I mentioned was that we had the biggest driver.
Driver up but ultimately the decrease in bill pay year over year was the shift in the tax payments and so they necessarily mentioned transaction volume, but the year over year Q2 decline related to government tax payments was about 16 million.
<unk>.
Yeah.
And have you seen that volumes then.
Good uptick in July.
A good portion of that came back in July, but not all of it I mean, obviously, we're going have to see how the rest of the quarter goes and all the way through the extension.
Timing to see if we get that all back but a good portion came back in July.
Great and then just one question on I know capitalized software it looks like it's about 47 year to date.
What are you thinking about that for for the full year and.
The projects that are.
Yeah.
Well before.
Really the only place we do that and it's in our imports of around demand business. So do the platforms and so we're going through right now platform consolidation.
We're going through especially in the bill pay side of the business and the up the front end under.
What we bought under speed pay was the Nexgen front end and we're continuing to develop that so I wouldn't look at Q2 is is.
Right.
A trend by quarter going forward I'm. Obviously, there was there were certain worked it could certainly be progressed more in the last 90 days then a than others because that's more internal piece of work.
Got it thank you.
Your next question comes line of man tandem of Needham.
Hey, good morning, guys, that's actually a cow Peterson on Matt. Thanks for taking my questions I'm, just trying to sort out on a gross margins looks like they were definitely one of the big drivers of the profitability upside this quarter I'm just want to see how much of that was organic improvement first be pay full.
The lapping and then try to get any flavor as to how much of that might be sustainable to keep.
Expanding on that gross margin ties in the back half beer.
Yeah.
Well I look we just look at the pure organic business, we had 25% increases in EBITDA year over year and that contribution came across pretty much all of our cost line. So would have benefited at the gross margin line and we saw.
A margin improvement in both.
The on premise business and the AOMT business. So again I like it gets into the scale the business scale up the up or the cost structure up really I would say there was too there was two major cost reductions. We did this year. If you recall when we came into the year, we took out about 20 million annually.
In terms of Ah Ah Ah operational efficiencies those are at what I'd call more permanent in nature. Those are permanent parts of our cost structure. They so they survived this year they will survive coated.
What we Actioned really in late late first quarter early second quarter was an additional 30 million of cost really specifically rig in reaction to coated I would generally consider those more more temporary in nature, you know things like travel travel expenses.
You know some of our trade shows and things that Didnt happen.
We reduced contractors and obviously those cost as things normalize things come back obviously, we'll get to traveling again, we'll get the trade shows and and the contractor cost will come back is as the growth come back as well so but there is an element of Oh. It again, if I look at just purely the organic business.
There's there's an element of of the improved profitability, there again, 25% quarter and part of that's coming from the 20 million we took out early in here.
Okay, that's helpful and and I guess, just continuing on the 30 million in costs in extra kind of cobot related cost savings.
How much of that was in the run rate in the Twoq numbers and how much of that well kinda start to flow through into Threeq was about 50 50 or is it mostly kind of baked in the run rate right now.
I think Q twos, probably a pretty good indicator again it has the full amount that we took out early in the year and we action the 30 million pretty quickly.
And if we look at you know the course of the years Q2, probably has the biggest impact because a lot of things really kind of I want to say they can't do hope certainly things like travel up trade shows and things just really sockets. So.
That does the benefit of that in our piano.
We saw a lot of that benefit in Q2, obviously, we saw in Q3 in Q4, we started to see travel pick up those costs will start to come back a bit, but I think Q twos, a good indicator of the full amount of cost benefit for upper 90 day period and the only other thing I'd go back to on you'd mentioned, you're you're focused more on that.
Gross margin in your question remember on the on the builder side of the business. There's there's interchange off of with that revenue. So when I said the revenue declined in Q2 on the tax side of 16 million.
There's a pretty sizable interchange costs that goes with that the cost is that that's in the cost of goods sold up. So we really have less of an impact of the company as the net revenue level in the EBITDA level as a result of that up that had those tax payments moving out.
Okay.
That's helpful and I guess last one from me and then I'll ask attack from the Q, but just wanted to get the services revenue.
Came in a bit later than our expectation is there anything noisy going along there or is it just a little less demand gearing Jose just one I've tried to get there. So when we might see signs of stabilization there.
I wouldn't say anything in particularly noisy I mean, we were able to continue projects.
During during the last 90 days you know if you look at our if you look at our our new bookings, we get more new bookings in the quarter in and on demand and I, we actually saw a decline in on premise on premise is where we see the sales related to services work. So there is obviously.
Drop off in and of the on premise business in terms of services sales.
That'll that'll impact you too they impacts a little more in the second half, but but nothing other nothing other than that it's not there has been a change in terms of what we're doing a in terms of our services portfolio I would say part of its coated and part of its just the a the lower sales quarter.
All right. Thanks for the color on next quarter. Thanks, guys.
As a reminder, chassis question you need to press star one on your telephone keypad.
Withdraw your question now he and the interest of time will you. Please limit yourself to one question one follow up question.
Your next question no sign of George Sutton of Craig Hallum.
Morning, Oh do on Scott's.
So we attended a a interesting webinars you guys hosted by real time payments, but one of the key theme is really being the real time, it's been accelerated.
When does this become a revenue driver in your view in the U.S., it's or.
During the European centric factor and how would you quantify the near term addressable market.
Maybe I'll take that and then always on cats and color obviously, the biggest growth we've seen in real time outside the U.S., but and that's both on you know new logos up as well as add ons to selling our real time capability to our existing customer base and.
We mentioned a.
Asian customer that purchase real time this quarter now that was revenue in quarter that was an on premise a sale so that converts up pretty quickly, but most of the growth. We've seen it has come from overseas. Obviously, our U.S. banks are we're selling that in addition, we especially when we got one with renewals but in terms.
A real tipping point and the U.S. I'm not sure when that will be but certainly over a lot of our growth in the 20 plus percent growth that we've seen over the last few years is a lot of that's really coming from overseas.
I think just to compliment I think also we saw bookings I growing 60% flags right. So that's still do did that trend. We are very much focus behind a real time payments and that's what would be one of our people are side. We continue to be one of our pillars of growth. It's already represents more than 10% of already just sorry can you.
Okay.
And and also do you all their place that you can expect a lot of growth is emerging markets outside of U.S. in Europe. So I think I'm very much realtimes around the globe and specifically.
Emerging markets.
Just to clarify <unk> bookings.
For some.
Yes, it's a placebo yeah, yeah quarterly ethics yeah.
And on quick follow ups I picked up on visa Mastercard and some others expanding I'd like to pay 80 new countries.
Can you talk about data that sort of how are you involved and could that be meaningful.
Opportunity.
[noise] why we wouldn't speak to anything in particular with any you know any of our customers are any of our partners in terms of obviously were heavily involved.
Going direct.
In in real time initiatives and also working via our partnership with a with Mastercard already on the Vocalink partnership that we have.
Yes. Thank you you can expect a lot of activity Oh, my God behind real time payments and that will be compatible alliances that we wouldn't go up as I bet is going by ourselves, but it will be a a clear area of focus for us.
Great. Thanks, guys congrats on a quarter. Thanks. Thank you.
I can't you asking audio question. Please press Star one your next question comes from Brett Huff with Stephens, Inc.
Good afternoon, guys and good morning, guys will be doing well.
Thanks, Brett. Thank your preference for me I'll ask them, both and then I'll get off one is really good bookings quarter surprisingly to us just given that we see some bank kinda paused spending.
I think you said you had a couple of merchant deals in there, but wondering if you could give us an update on what things are looking at buying in kind of their tenor of them, how they're thinking about spending and then number two.
I think you highlighted a little bit some of your initiatives that you're going start working on I think sales the fusion and maybe sales organization was one of them can you just tell us a little bit more about that and kind of when we should maybe starting with some of the fruit of that.
Thanks.
Maybe I'll take the first one obviously that the the new bookings growth in the quarter up up 6% year over year and a in a co record that is probably pretty good up Q twos, not typically our strongest a bookings quarter in fairness, but.
Like I said, we had a lot more growth, we had a high growth and and the on demand business. We actually saw a decline in the on premise business, but the the growth. We saw was actually most of it really wasn't from banks. Our two biggest net new logos, one with a bill or customer and the other was our secure ecommerce.
Solution, So merchant solution and then our biggest add ons was in real time. So a lot of the growth. We saw in the quarter was from Billers merchants and then as those one mentioned the real time up 65%.
Yes.
Not necessarily I wouldn't necessarily say that that's an indicator that banks aren't spending, but I'm, just saying for the quarter, that's where we really saw our our growth.
Yeah, I think I think but we did see a as Scott said sometime impact on premise Oh no bookings. So clearly there are some some clients I thought the lean to the season, yet so thats consistent to what have you heard before just our own them and business did wonderful and that's what offsets on the total bookings part so we.
And we would expect that that trend on the on premise. We will continue at whereas it's a timing issue only because all our products are as you know mission critical. So it's a question of time, when they're going to be able to sign those those clients, but but yes. There was something back on that that that's consistent to what you have been in so I think.
The first question do the second one on on that it gets I'm just gonna give you some data.
We are working with our consultants and and trying to Tim today.
In sales for example into sales organization, we're going to centralize the sales organization, we're hiring a chief revenue officer, I think Greg Gonna have announcement that Sunwest next week about the name of that Chief revenue officer, and and by centralizing that I.
Just to give an idea how a giant anymore. We're going to be you can expect three levels of management between the CEO and the sales wrapped around the globe.
So that gives an idea.
About the kind of change that they're going to be doing how much I, we're going to be and together. We that we are revising the everything were revising how we'd be able to compensation or how we manage the pipeline how we evaluate the pipeline that they'll buy did they all that.
So you can expect again, a very nimble watch I organization with the season power a you know really in the field.
And we as I was strong process behind that.
Great. Thank you.
Your next question is a falling in line of Peter Heckmann of Davidson.
Hi, Thanks for taking the follow up I just wanted to see if you could provide us any insight into the ongoing process of some of the contra larger contract expansions in the pipeline it.
You have any thoughts on timing there.
Yeah, I mean, we.
I think we said earlier this year that we were just to be clear, we weren't expecting any of those or forecast any those in this year's guy.
But obviously, we continue to have a conversation with.
Summers and even net new logos on ER on large large new opportunity so.
Nothing that I would say, we're we're expecting a here before the end of the here.
Okay I guess.
One of my understanding for that.
Okay go through a large burger they need to renegotiate.
Before they can consolidate their payment operations. It is not is it is that not the case.
Well no yeah, I'd say, it's generally the case because the license is very specific to the contracting user and there it's very specific to the use usage. So if they were to actually expand that use to other parts of their operation acquired operation.
Yeah, I would have to be re contract at I. I will point out that and we mentioned this earlier in the year to one of the large mergers and they actually executed their or their renewal early if you recall it was a renewal from next year, they actually renewed it up back in the first half of this year. So.
We committed to the next five years now that its with specifically what there whether using today. So it's not an expanded deal, but it's up but it's a re commitment to our technology for the next five years and that that was exposed to renew matched.
Okay, Alright, Thanks, and then.
Or July this question for you I mean, do you see kind of the mix the customer mix shifting.
At all in your outlook in terms of where the opportunities.
From from U.S., saying.
Global bank emerging market, increasing importance to the emerging channels you talk a little bit about how you see that you maybe.
Nothing more the sales coming from which it though.
Yeah were to those vertical.
Pretty good.
Yeah no. Thank for the question.
Are you can expect a more much more focused organization going for it. So we will have some.
Some feeling.
We will accelerate significantly one of the pillars would be real time payments that that will.
Continued to be accelerate the data part of it is already this 60% plus growth in bookings.
That that we have referred to.
And we're going to be continue to push that the big time I think the other areas I'll talk first definitely that you're going to be I'm seeing is emerging markets.
Defining a concept called fighting units.
Which is the intersection between geography, rather than segments and you're going to have around 20 fighting units around the globe, that's you're gonna be investing heavily behind it.
If you put all that together I can anticipate to you.
The real time payments overall, it's going to be a narrow focus and emerging markets. Specifically, we will be also I never focus.
Helpful. Thank.
Your next question comes line of Justin Buffy of Canaccord.
Hey, guys. Good morning, I'm, just up just a follow up on on the real time deals in the quarter. The engines in banking and Rabo just to get us feel for how competitive are these are these types of the waste in store for you know I guess for new customers I guess, especially on the real time front and then secondly.
Do you think we see M&A, a little below our during or or I guess I know you're going through some organizational changes is M&A come after the organizational changes or dawn or could we see M&A, while things are still being optimized here. Thanks.
A lot.
I will start yeah, no start with the last one if that's okay. The first went to Scott I think.
We're always looking at M&A right, you're always like if I have I have to appeals on my table that comes all the time and we're always looking to that Oh my.
My focus now is really organic growth I think we will need to start them show this organic growth and M&A could happen. A you know why are we are doing this we if we got like us but definitely equities.
Option.
But but at this point my focus and organizational focus is to assure that we've positioned the company for continuous profitable growth.
Scott.
Yeah, I think when it comes to the real time, you know we have relationships with the largest.
Thanks in the world and have for a long time with our with our retail payment engine. So in a lot of cases wouldn't ask where you know where natural.
To provide the real time capability. So I you know, it's a lot of our success coming from just selling into that existing base or whether it's a new application or expanding on somebody that's on the real time capabilities at the already have so.
On the net new logo, you know, that's probably going to be more in what I owe more the central infrastructure.
Where you know week, they can either procure it adds a license software, which is really our model where they want somebody that operated that's typically going to be provided by somebody else. So I would say probably more competitive central infrastructures, but in terms of the connectivity to those central infrastructures.
Just a natural fit with a with our existing large bank customer base for us.
Great. Thanks very helpful.
And there are no further questions at this time I'll now turn the floor back over to John for any closing or additional comments.
Well, thanks, everybody for dialing in and your interest we look forward to catching up in the following week.
Good day.
Thank you that does conclude today's conference call you may now disconnect.
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Ladies and gentlemen, thank you for standing by and welcome to the <unk> second quarter earnings Conference call.
At this time, all participants' lines are in listen only mode.
For this year's presentation, there will be a question answer session.
During this session you'll need to press star one on your telephone keypad.
I would like to college or what your Speaker Mr., John Graff, Vice President Investor Relations and strategy. Thank you. Please go ahead Sir.
Deck today, a copy of which is available on our website as well as what the FCC.
On this morning's call is odierno made our CEO Scott parents, our CFO before I turn it over I'd like to share the company management will be attending the wells Fargo virtual fifth annual technology services for him on August 11, Canaccord 40 annual growth Conference August 12.
And the second annual Needham virtual Fintech and digital transformation one on one conference on August 19, with that I'd like turn the call over <unk>.
Thank you John and good morning, everyone.
Thank you for joining us for our second quarter, two all 20 Arty's conference call.
Well not a lot on his call, we may well be 19, and its unprecedented global impact on people and economies was top of mind and the central focus of our discussion.
Now in August we find ourselves in a slightly different sequence faster.
But with many of the same challenges.
I Hope you and your family starts things safe and well and we eddies JPY remain committed to doing everything we can pretty sure that health safety and well being of all our employees as we seamlessly support our customers.
Today's call I will begin with our second quarter financial results.
Fourthly I'd also like to share more that so you'll my vision.
<unk> revenue growth and long term value creation.
We're living in a different walt compared to even three or four months ago.
Why do you put parts of the globe are experiencing different stages of levels offset verity of depend demick undoubtedly there are ways in which all wall has changed.
And then.
As it relates to a <unk> depend Democrats heightened awareness as extender rated widespread acceptance of the essential role digital payment systems play in our modern it caught up.
Starting with the second quarter missed sales bookings were $136 million up 6% from Q2 last year, we saw particular strength in our motion business signing two larger DSP Congress or two in Europe, and hyper pay in middle East that will allow this partners to offer merchant.
Acquiring a neat commerce services to their customers new geography.
Another area of concern or spread in the quarter was real time.
We signed a long time support agreement with our customer Rabobank, who was looking to expand its existing real time payments offered by supporting batch payments.
Another existing customer one of the largest interbank switches in Indonesia has selected Asiatic to orchestrate older alternative payments, including Q are actually pay and all the real time offers.
Despite the revenue is being impacted by coffee 19 are a bit to die increasing by 42% compared to Q2, two overnight team with margin expansion, increasing to 35% up from 25% last year.
Our efforts to improve operational discipline are working and we continue to focus on maximizing profitability, while advancing our pipeline of deals to position they see I for future continuous profitable growth.
As I mentioned last quarter, we are fortunate to have a resilient business model with significant recurring revenue reliable cash flows and high customer retention all of which are helping us whether they go visit 19 related uncertainty.
On our first quarter call I shared with you my background and experience realigning operations toward revenue gross margin expansion and value creation.
Also spoke about timeline that both at two speaking where they got customers employees and leaders since that time I have also been getting feedback from our investors.
This conversations have made clear to me that eight <unk> has a strong portfolio of customers and software Atlanta payment solutions, and importantly, the human capital and talent to succeed.
On the last earnings call I have also communicated my initial one high level perspectives on H.T.I.s growth potential and the three pillars of our strategy with group position the company Portland genius profitable growth.
Today, I'm pleased that to share additional details on our girls.
Over the last few months, we have engages our best think charnaux experts and industry, leading consultants to help us we view, our business and indentify opportunities where efficiency gains and growth optimization.
There's a small consultant teams have worked with me on several similar efforts over many years, we have a playbook with a proven track record.
Although work is not complete we have identified key initiatives to support the three pillars of our strategy that we would drive value creation opportunities for ace yet.
Our first pillar.
Our goal is our refining a realignment of organizational structure and the Brady mother to better position the company organic growth.
This involves reviewing their organization a mother went geographic footprint and designing a die and nimble organization that is better at creating and sustaining continuous profitable organic growth.
We also designing a best in class Global sales organization and culture. This initiative Caucasus on education, and we will strengthen accountability he has transparency and reduced good duplicative costs throughout the call them.
We're very close to hernia, Chief revenue officer, and that team you learn resources opposite to complete the leadership team.
Our second feel it's called focus on growth.
The timing of organic growth and strategy that what's a disciplined focus on areas, where we can optimize ross.
We are reviewing our parents solutions to then supply the best opportunity, it's really bad operating and capital expenditures going corn.
We will focus on a smaller set of growth reach software led solutions supported by differentiated innovation in specific geography as end market segments.
We were sure all of our prerogative solutions, our cloud for us in terms of architecture deployment and operations.
We're very pies investments that have the best market. The percentages generated the highest revenue growth and cash flows and would you know the highest ROI. This will become a core discipline here, but its yacht.
Importantly, these investment do come from cost discipline in the relocation not incremental spend.
Our third pillar is a step change of value creation to M&A.
We've also continues to pursue accurate to M&A to drive step change of value creation for our shareholders and further expedite our girls.
As it could even our threepl ascribe the D., we winkle pass cost rationalization, which is already well under way.
As we previously discussed we action approximately $20 million in enroll cash cost reductions in not only to widen.
During Q2, we further increases a mountain by approximately $30 million in cost reductions relate that to go green lighting by reducing the use of contractors. He any expenses and all their don't HR expenses for the rest of 220.
In addition, as part of our new strive to do work, where indentifying additional cash cost savings by flattening organizational structure, eliminating duplicative costs across our entire organization and reducing our global facilities for <unk>.
Hi, good part of these savings will be reinvested behind his role and we were sure value maximization to our shareholders I.
Additionally, we are reviewing our capital location.
Our short term priority is to continue to the leverage the business in Q2, we paid down $40 million an hour and that that ratio has declined to 3.3 times as off Q2, two and 20.
In the medium term, we've also relocates free cash flow through investing or business return capital to our shareholders through share buybacks and undertake accurate to M&A.
We plan to provide an update on our progress implementing this and these are two of our Q3 on his call.
We also expect a full some discussion three on the Investor day, we are targeting for November to Atlanta I.
And the way that is underway and we will be fully launched by January tool to anyone.
We understand there was much work to do.
But I have said before I strongly believe who have the right team to succeed.
It was a sense of urgency as well as optimism to all the management team has with acute our newest strat than to reposition the business or long term value creation.
To conclude driving revenue growth is being my DNA and we'll be in the new it's the idea Nate too.
We have a clear vision.
Yes, well position to capitalize on the emerging trends and you just don't payments and the specifically real time payments.
But we have plenty of room to improving operational and go to market discipline and execution.
I have no doubt that by executing on our three pillars try that.
Leveraging our go to market the experience and benefiting from a new getting AD sales proceeds that culture, we would generate continues to profitable growth and significant value creation.
I will now have the culture, Scott to just because the company Q2 results Scott.
Thanks, social on and good morning, everyone.
My first plan to go through our results for the second quarter, and then provide some high level commentary regarding our expense reduction initiatives and outlook for the rest of 2020.
Well then open the line for question.
I'll be starting my comments on slide seven with key takeaways from the quarter.
New bookings were 136 million up 6% from Q2 last year as we continue to see strong growth in real time payments as well as our bill pay solution.
We ended the quarter with a 12 month backlog of 1.1 billion in 60 month backlog of 5.8 billion.
Q2 revenue came in at 300 million up 2% through Q2 last year on a constant currency basis.
The growth was driven primarily by having a full quarter speed pay revenue in 2020 versus a partial quarter in 2019.
Excluding the impact at the incremental speed pay revenue revenue declined on a constant currency basis by roughly 10%, primarily driven by the impact of coated 19th.
Looking at around demand business, which saw a 15% decline excluding speak pay the largest portion of the decline is related to the shift in tax payments from Q2 to Q3 as result of the IRS than many of the state tax deadlines moving out 90 days this year.
Aside from the government tax payments, we have seen year over year declines in other builders segments. As a result of code at 19 that those transaction declines have been offset by higher transaction from our secure ecommerce solution.
We saw less of an impact from cobot 19 in Q2 in our on premise business, which declined 2% compared to Q2 last year.
Declined the nonrecurring license and service revenues were partially offset by higher recurring maintenance revenue.
We saw total recurring revenue grew 4% compared to Q2 last year and now comprises 78% of total revenue versus 75% total revenue in Q2 last year.
Despite the challenges related to cope with 19, we continue to focus on maximizing profitability.
Our efforts to improve our operational discipline help generate significant profitability growth in the quarter with adjusted EBITDA of 78 million up 42% for Q2 last year.
Consolidated net adjusted EBITDA margin expanded to 35% up from 25% last year, which represents nearly 1000 basis points of improvement.
It's important to note. This growth is not just result for the incremental contribution.
It also grew on an organic basis, improving 25% compared to Q2 last year.
We saw profitability improvement in Boulder on demand and our on premise business is on an organic base.
Turning next to slide eight starting with debt liquidity solid growth in EBITDA delivered strong cash flow from operating activities that 68 million in the quarter up more than 370% from Q2 last year.
We have significant liquidity as we ended the quarter with 129 million in cash and 300 million available on our revolver.
We also paid down 40 million of debt during the quarter.
Our current debt balance is 1.3 billion, which represents a net debt leverage ratio of 3.3 times.
Turning next to our outlook for the rest of 2020 as previously announced given the uncertainties around 19 temporarily suspended or financial guidance for the rest of the year.
So I won't give you full financial ranges, but I will say again that while revenues have been impacted by cobot 19, we're very focused on maximizing profitability and cash flow.
It's also one mentioned Weve action, approximately 30 million and cost reductions in response to cope with 19.
Reducing the use of contractors t. any expenses and other non HR expenses for the rest of 20 Twond.
This is an addition to the approximately 20 million an annual and ongoing cash cost reductions that we implemented as we enter 2020 pretty cold.
Further as part of our new strategy work. The team here is identifying additional cash cost savings by flattening our organizational structure.
Eliminating duplicative cost across our new organization and reducing our coal facilities footprint.
We anticipate that a good portion of the savings will be reinvested behind growth initiatives.
Oh, you want an eye in the rest of the management team are heavily engaged in this review and we plan to provide more details at our November Investor day.
That concludes my prepared remarks, operator, we're ready to open the line to questions at this time.
Thank you at this time to ask an audio question. Please press star one on your telephone keypad.
Again that a star want to ask an audio question.
Your first question comes the line of Peter Heckmann of Davidson.
One I'm just.
A little bit more color on built a I missed a comment there did you actually talk about.
Bill pay did it.
But oh.
Type of volume but of course.
Order.
Yeah, what I mentioned was that we had the biggest.
Driver up ultimately the decrease in bill pay year over year was the shift in the tax payments and so.
Necessarily mentioned transaction volume, but the year over year Q2 decline related to government tax payments was about 16 million.
Yeah.
Helpful and and or have you seen that volume than ever.
In July.
A good portion of that came back in July, but not all of it I mean, obviously, we're gonna have to see how the rest of the quarter goes and all the way through the extension.
Timing to see if we get that all back but a good portion came back in July.
Great and then just one question on Dinos capitalized software looks like it's up about 47 year to date.
What are you thinking about that for for the full year and water.
Projects that are.
Yes.
Well before.
Really the only place we do that and is in our in parts of our on demand business. So do the platforms and so we're going through right now platform consolidation.
We're going through especially in the bill pay side of the business and the the front end under.
What we bought under speed pay was the next Gen front end and we're continuing to develop that so.
I wouldn't look at Q2 is is.
Okay.
A trend by quarter going forward. Obviously, there was there were certain work there certainly be progressed more in the last 90 days then than others, because thats more internal basic work.
Got it thank you.
Your next question comes line of man tandem of Needham.
Hey, good morning, guys actually cow Peterson on an from out thanks for taking my questions.
Just wanted to start out on a gross margin as.
It looks like they were definitely one of the drivers of profitability upside this quarter.
I wanted to see how much of that was organic improvement first be pay fully lap paying and then try to get any flavor as to how much of that might be sustainable to keep.
Expanding on the gross margin side.
Peter.
Yeah.
Well I look we just looked at the pure organic business, we had 25% increase in EBITDA year over year.
And that contribution came across pretty much all of our cost line. So would have benefited at the gross margin line and we saw a.
The margin improvement in both.
The on premise business on the of the business. So again it gets into the scale of the business scale up the up.
The cost structure.
Really I would say there was too there was two major cost reductions we do this year. If you recall when we came into the year.
We took out about 20 million annually in terms of of operational efficiencies those are what I'd call more permanent in nature. Those are permanent parts of our cost structure. They so they survive this year will survive coven.
What we actioned.
Really in late late first quarter early second quarter was an additional 30 million a cost really specifically in reaction to coated.
I would generally consider those more more temporary in nature things like travel travel expenses some of our trade shows and things that didnt happen.
We reduced contractors.
And obviously those cost as things normalize things come back obviously, we'll gets traveling again, we'll get the trade shows and in the contractor cost will come back is as the growth come back as well so.
But there is an element of it again, if I look at just purely the organic business.
There's there's an element of have improved profitability, there again, 25% quarter and part of that's coming from the 20 million. We took out early in the here.
Okay, that's helpful and and I guess, just continuing on the 30 million in costs in extra kind of cobot related cost savings how much of that was in the run rate in the twoq numbers and how much of that well kind of start to flip during threeq was about 50 50 or is it mostly kind of baked in the run rate.
Okay.
I think Q twos, probably a pretty good indicator again it has the full amount that we took out early in the year end reaction to the 30 million pretty quick.
And if we look at the course of the year Q2, probably had the biggest impact because a lot of things really kind of I don't want to say that came to hold and certainly things like traveling a lot of trade shows and things is really comp so.
That does the benefit of that in RPL.
You know.
We saw a lot of that benefit in Q2, obviously, we saw in Q3 in Q4, we started to see travel pick up those costs will start to come back a bit, but I think Q twos, a good indicator of the full amount of cost benefit for upper 90 day period and the only other thing I'd go back to on you'd mentioned, you're you're focused more on the.
Option in your question remember on a on the builder side of the business Theres, there's interchange costs.
With that revenue so when I said the revenue declined in Q2 on the tax side of 16 million.
It's a pretty sizable interchange costs that goes with that cost if thats in the cost of goods sold.
So we really have less of an impact as a company as the net revenue level in the EBITDA level as a result of that.
That had those tax payments moving out.
Okay.
That's helpful and I guess last one from me and then on tax cut back from the two.
But just wanted to get the services revenue.
Came in a bit lighter.
And then our expectation is there anything noisy going along there.
Or is that just a little less demand during Jose just want to try to get this.
When we might see signs of stabilization there.
I wouldn't say anything in particularly noisy I mean, we were able to continue projects.
During.
During the last 90 days.
You look at our if you look at our our new bookings, we get more new bookings in the quarter in.
On demand and we actually saw a decline in on premise on premise is where we see.
The sales related to services work. So there is obviously a drop off.
In the on premise business in terms of services sales.
That'll that'll impact you too may impact a little more in the second half.
But but nothing other.
Nothing other than that it's not there has been a change in terms of what we're doing in terms of our services portfolio I would say part of its covidien and part of its just the lower sales quarter.
All right.
The color on next quarter. Thanks, guys.
As a reminder, Jesse question you need to press Star one on your telephone keypad.
With all your question.
And the interest this time, we ask that you. Please limit yourself to one question one follow up question.
Your next question comes line of George Sutton of Craig Hallum.
Morning.
And Scott.
So we attended a interesting Webinars you guys hosted by real time payments, but one of the key theme is really being the real time has been accelerated.
When does this become a revenue driver in your view in the U.S., it's or does it remains sort of a European centric factor and how would you quantify the near term addressable market.
Maybe I'll take that I know John could add some color.
Obviously, the biggest growth we've seen in real time is outside the us.
But.
And that's both on.
New logos as well as.
Add ons to selling our real time capability to our existing customer base and we.
We mentioned.
And Asian customer that purchase real time this quarter that that was revenue in quarter that was an on premise sale. So that converts pretty quickly, but most of the growth. We've seen it has come from overseas.
Obviously, our us banks are we're selling that in addition, when we especially when we go on with renewals.
But in terms of a real tipping point of the U.S. I'm not sure when that will be but certainly over a lot of our growth in the 20 plus percent growth that we've seen over the last few years as a lot of thats really coming pharmacy.
Hi, Thanks to compliment Todd Thanks.
Also we saw bookings are growing 60% flags right. So that shows you did that trend we are very much focus behind.
Thanks payment and Thats it will be one of our builders I will continue to be one of our views on growth. It's already represents more than 10% of all regulatory significant.
And and also the other place that you can expect a lot of growth is emerging markets outside of you guys in Europe. So I, thank very much realtimes around the globe and specifically.
Budget market.
Just to clarify bookings for real time.
For some.
Yes, it's a placebo, yes, yes quarterly ethics, yes.
And on quick follow ups and picked up on visa Mastercard and some others expanding I'd like to pay.
The new countries.
Can you talk about that event sort of how are you involved and could that be meaningful volume and revenue opportunity.
Why we wouldn't speak to anything in particular with any.
Any of our customers are any of our partners in terms of obviously were heavily involved.
Going direct.
In real time initiatives and also.
Working via our partnership with with Mastercard already on the Vocalink partnership that we have.
Yes, I think you can expect a lot of activity.
The high real time payments and that we will encompass alliances that we wouldn't go up as I have about going by ourselves, but the to be clear area of focus for us.
Great. Thanks, guys congrats on the quarter. Thanks. Thank you.
Again to ask in audio question. Please press Star One. Your next question comes from Brett Huff with Stephens, Inc.
Good afternoon, guys. Good morning, guys, if you're doing well.
Thanks, Brett. Thanks, Brent. This is for me I'll ask them, both and then I'll get off one is really good bookings quarter.
Surprisingly to us just given that we see some bank kind of paused spending.
I think you said you had a couple of merchant yields in there, but wondering if you could give us an update on what things are looking at buying in kind of their tenor of how they're thinking about spending and then number two.
I think you highlighted a little bit some of your initiatives that you're going start working on I think sales the fusion and maybe sales organization was one of them can you just tell us a little bit more about that in kind of when we should maybe start seeing some of the fruit of that.
Thanks.
Maybe I'll take the first one.
The the new bookings growth in the quarter up 6% year over year.
And in a co recorded thats probably pretty good.
You choose not typically our strongest.
Bookings quarter in fairness, but.
Like I said, we had a lot more growth we had a high growth in and that the on demand business. We actually saw a decline in the on premise business, but the growth. We saw was actually most of it really wasn't from banks, our two biggest net new logos.
One was a bill or customer and the other was our security commerce.
Solution, So merchant solution and then our biggest add on which was in real time. So a lot of the growth. We saw in the quarter was from Billers merchants and then.
As those one mentioned the real time up 65%.
Yes.
I'm not necessarily I wouldn't necessarily say that that's an indicator that banks aren't spending, but I'm, just saying for the quarter, that's where we really saw our our growth.
Yes, I think I think.
We did this as Scott said some impact on premise I'll know bookings. So clearly there is some some clients that delay into the season, yet so thats consistent to what have you heard before just our own them EMD business did wonderful and that's what offsets on the total bookings part so we and we would expect.
That trend on the on premise, we will continue at whereas it's a timing issue only because our products are as you know mission critical. So it's a question of time, when they're going to be able to sign those those clients.
But yes, there were some impact on that that thats consistent to what you have been in so I think thats. The first question the second one.
Just going to give you some data.
That we are working with our consultants and.
And kind of Tim today.
In sales for example into sales organization, we're going to centralize the sales organization, we're hiring a chief revenue officer, I think Greg going to have announcement that Sunwest next week about the name of that Chief revenue officer, and and by centralizing debt.
Mr. Given idea, how a giant anymore, we're going to be.
You can expect three levels of management, when the CEO and the sales wrapped around the globe.
Thats gives an idea about the kind of change that they're going to be doing how anti we're going to be and together. We that we are revising the everything were revising how we'd be able to compensation, how we manage that pipeline, how we evaluate the pipeline that they have I did they all that so so you can expect again, a very nimbo anti organization.
With the season power you know really in the field.
And we as I was strong process behind it.
Great. Thank you.
Your next question is upon your line of Peter Heckmann of Davidson.
Hi, Thanks for taking the follow up I just wanted to see if you could provide us any insight.
Through the ongoing process.
Entre larger contract expansions in the pipeline.
Have any thoughts on timing there.
Yes, I mean, we I think we said earlier this year that we were.
Just to be clear, we weren't expecting any of those or forecasted any those in this year's guide.
But obviously, we continue to have conversations with.
With our customers any than net new logos on on large.
George new opportunities so.
Nothing that I would say, we're expecting here before the end of the here.
Okay I guess.
One of my understanding for that.
Customer go through a large merger they need to renegotiate contracts before they can consolidate their payment operations.
That is that nothing date.
Well no yeah, I'd say, it's generally the case because the license is very specific to the contracting user and there it's very specific to the use usage. So if they were to actually expand that use.
The other parts of their operation acquired operation.
Yes, I would have to be re contract at I. I will point out that and we mentioned this earlier in the here too one of the large mergers.
They actually executed there.
Their renewal early if you recall it was a renewal from next year, they actually renewed it up back in the first half of this year. So they re committed to the next five years now that its Twitter, specifically, what there whether using today. So it's not an expanded.
Deal, but it but it's a re commitment to our technology for the next five years and that that was exposed to renew next year.
Okay, all right. Thanks, and then.
Or July this question for you I mean, do you see kind of the mix the customer mix shifting.
At all in your outlook in terms of where the opportunities.
From from USA.
Global Bank emerging market.
Increasing importance of the merchant channel.
You talk a little bit about how you see that.
Maybe helping more the sales coming from which of those.
Which of those verticals.
[music].
Yes, no. Thanks for the question.
You can expect them more much more focused organization going forward. So we will have some.
Some people.
We will accelerate you need to company one of that because we'd be real time payments that that will.
Continue to be accelerate that Doug a part of it is already this 60% plus growth in bookings.
That we have referred to.
And we are going to be continue to push that big time, I think the other aerial photo books definitely that you're going to be.
Seeing is emerging markets.
Defining a concept called fighting units.
Which is the intersection between geography, rather than segments and Youre going to have around 25 units around the globe that you're going to be investing heavily behind it.
If you put all that together I can anticipate to you.
The real time payments overall, it's going to be a narrow focus and emerging markets specifically will be also on narrow focus.
Helpful. Thanks.
Your next question comes land, Justin Bobby of Canaccord.
Hey, guys. Good morning, just just a follow up on the real time deals in the quarter, the Indonesian bank and Rabo just to get us feel for how competitive are these are these types of durations for for I guess for new customers I guess, especially on the real time and.
And then secondly.
Do you think we see M&A.
For our during or or I guess, I know you're going through some organizational changes.
They come after the organizational changes or Don or could we see M&A, while things are still being optimized here. Thanks a lot.
I will start yes, I would start to the last one then.
First one just got I think.
We're always looking at M&A right, we always like if I have I have to appeals on my table that comes all the time, yes, we're always looking to that.
My very my focus now is really organic growth I think we need to start them show these organic growth and M&A could happen. You know why are we are doing this we if we get like us that equity.
Option.
But at this point my focus and organizational focus is to assure that we positioned the company for continuous profitable growth.
Scott.
Yes, I think when it comes to the real time, we have relationships with the largest.
Thanks in the world and have for a long time with our.
With our retail payment engine. So in a lot of cases were in that we're in natural.
To provide the real time capability so.
A lot of our success coming from just selling into that existing base, whether as a new application or expanding on some of the some of the real time capabilities that they already have so.
On the net new logo.
That's probably going to be more in what I'd call more the central infrastructure.
Were weak they can either procure it adds a licensed software, which is really our model where if they want somebody that operated.
Typically going to be provided by somebody else so I.
I would say probably more competitive set central infrastructures, but in terms of the connectivity to those central infrastructures.
We're just a natural fit with with our existing large bank customer base for us.
Great. Thanks very helpful.
And there are no further questions at this time I'll now turn the floor back over to John for any closing or additional comments.
Well, thanks, everybody for dialing in and your interest we look forward to catching up in the following week good day.
Thank you that does conclude today's conference call you may now disconnect.