ACI Worldwide Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 8 speakers on the call.

Operator

Good morning. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Inc. 3rd Quarter 2020 3 Financial Results. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer Star 1. Also one question and one follow-up per person only. Thank you. Mr. John Kraft, you may begin your conference.

Speaker 1

Thank you and good morning everyone. On today's call, we will discuss the company's Q3 2023 results and financial outlook for the rest of the year. We will take your questions at the end. The slides accompanying this call and webcast can be found at aciworldwide.com under the Investor Relations tab and will remain available after the call. Today's call is subject to Safe Harbor and forward looking statements like all of our events.

Speaker 1

You can find the full text of both statements in our presentation deck and earnings release, both of which are available on our website and with the SEC. 2. On this morning's call is Tom Horsop, our President and CEO and Scott Behrens, our CFO. With that, I'll turn the call over to Tom.

Speaker 2

Good morning, and thank you all for joining our Q3 2023 earnings conference call. I'll start this morning with some brief comments on the quarter, and then I'll hand it over to Scott to discuss the detailed financials and outlook for the remainder of 2023. He's also going to discuss revenue growth expectations for full year 2024, including a little more color on the building blocks of how we generate next year's forecast. Of course, then we as usual, we'll open the line for questions. Our results in Q3 were strong.

Speaker 2

They were ahead of our expectations. Total revenue was $363,000,000 that was up 21% year over year. And recurring revenue was $263,000,000 up 10% when we adjust for foreign exchange impact and the divestiture of the corporate online banking business. As we previously discussed, the quarterly timing of our renewals is weighted towards 2nd half this year relative to how the quarter's phased last year. But good news, we saw those renewals come in, in Q3 as expected, and we were Also able to sign a few new deals in our pipeline a little earlier than we expected, which helped us come in above our guidance range, which Certainly helps derisk hitting our full year guidance.

Speaker 2

New ARR bookings for the quarter were $21,000,000 and new ARR bookings 2 for the trailing 12 months were $85,000,000 We faced some pretty tough comparisons in ARR bookings, but total bookings were up 20% in the quarter And our new non recurring bookings such as new term licenses signed in the quarter were $54,000,000 and that was up 50% from last year's Q3. This was driven by continued strength in the banking sector with several international banks purchasing additional capacity 2 to support their growing transaction volume. In addition to continued strength in banking, we're also continuing to see encouraging recurring revenue growth in the Banking segment, which grew 13% year over year. I would point to a couple of drivers here. Newer SaaS contracts are ramping their volumes, and we have, as you know, inflationary price increases written into our license contracts, which we've executed.

Speaker 2

Staying on the topic of banking segment demand, as we continue to invest in modernizing our core solutions and to make public cloud delivery options available, We're seeing accelerating SaaS demand, not only with some of our traditional and long time customers, but also with new banking customers 2 that may be somewhat smaller than our historic focus area, and that tends to be mega banks or Tier 1 banks. These institutions are the highest levels of scalability and reliability that ACI is so well known for, and they're often more interested in taking advantage of SaaS delivery options. To be clear, I'm talking about a newer and incremental market for us, with a segment of financial institutions aspiring to challenge the largest banks 2 with next generation intelligence payments orchestration and real time payments hubs. This is an exciting opportunity for us, and we continue to allocate resources Moving on to Biller. I was particularly pleased to see continued acceleration in the results.

Speaker 2

Gross revenue grew 11% in the quarter, Net revenue grew 24%, EBITDA grew 48%. This strength was driven by the onboarding of newly signed customers in the utility and customer finance vertical, including the customer we've previously mentioned that is expected to be our largest biller client when it's fully onboarded. We also benefited from the interchange improvement efforts that I've talked about before, and those have clearly taken hold. These interchange pricing adjustments will have lasting impacts on our profitability. Merchant segment revenue and EBITDA were flat.

Speaker 2

The The segment has stabilized, and we continue to expect to see growth in Q4 and into 2024. It's notable that our anti fraud solutions continue to perform well. We saw 12% growth in that portion of the business during the quarter. The AI enhanced fraud prevention solution that I mentioned on the last call 2 is something we continue to be very excited about and that is gaining traction in the market. Overall, we're executing well.

Speaker 2

2. We're delivering on our promises to the investment community. We're keeping our eye on the ball operationally, and we're seeing strong, even increasing demand for our solutions. We're working to position the company to take an even greater share of opportunities in our space, 2, including real time payments and cloud based technologies. I'm also happy to say that we've hired a new CTO, Abe Kuravila.

Speaker 2

2. Abe has an established track record in spearheading transformational technology initiatives, and he's going to be invaluable as we focus on advancing our leadership 2 in real time payments, SaaS enabled delivery and intelligent payments orchestration solutions. I'm confident in the team and in our ability to continue to achieve our goals. I'm now going to turn it over to Scott to discuss financials and our guidance. Scott?

Speaker 3

Thanks, Tom, and good morning, everyone. I first plan to review our financial results for Q3 and then provide our outlook for the rest of 2023. Revenue in the quarter was $363,000,000 up 21% compared to Q3 last year, and that is after adjusting for the effects of foreign currency and the corporate online banking divestiture we made in September of last year. The revenue growth was driven by strong growth in license fee revenue. We've been saying the license renewals would be more second half weighted this year, so that's part of it.

Speaker 3

But we also saw higher new license revenue in the bank segment than we were expecting. And we continue to see solid growth in our recurring revenue, which was up 10% compared to Q3 last year. So overall, a number of contributing factors that are leading to the strength in revenue growth compared to Q3 last year. We saw strong growth in adjusted EBITDA, which was $103,000,000 or more than double what we generated in Q3 last year. Again, here the higher license fee revenue, which has little incremental fulfillment cost has very high flow through to EBITDA, but also layering on higher recurring revenue on top of a relatively fixed cost base also contributed to the EBITDA growth.

Speaker 3

Turning to our segment results. Bank segment revenue was $156,000,000 up 42% and adjusted EBITDA was $91,000,000 up 100% compared to Q3 last year. The bank segment is predominantly on premise license software, so this will be the most impacted by this year's timing of the renewal license fees. But we also saw strong growth in recurring revenue in the bank segment, which was up 13%, driven by higher maintenance and SaaS revenue. Merchant segment revenue and EBITDA were essentially flat with Q3 last year, And we expect that to flip to growth in Q4 as we exit the year and contribute further growth next year as new business begins to come online and ramp.

Speaker 3

And finally, our biller segment revenue was $171,000,000 up 11% compared to Q3 last year and adjusted EBITDA of $39,000,000 up 48 percent compared to Q3 last year. The growth in revenue and profitability in this segment is driven by both new customer go lives and notable progress with our interchange improvement program. We ended the quarter with $140,000,000 in cash on hand, Notably, we're now down below our targeted leverage of 2.5 times. So, I would expect a more balanced capital allocation going forward between debt And we do have $200,000,000 remaining on our share repurchase authorization. Turning next to our outlook, we are reiterating our full year guidance with revenue in the range of $1,436,000,000 to $1,466,000,000 and we continue to expect adjusted EBITDA to be in the range of $380,000,000 to $395,000,000 with net adjusted EBITDA margin expansion.

Speaker 3

So in summary, we saw strong results here in Q3. We're tracking on the year as expected. And as we exit this year And look into 2024. And I think in particular, the strength we're seeing in the underlying recurring revenue base of the business, which is up 10% in Q3 and up 8% year to date provides us with that stable reliable base of revenue as we go into next year. 2.

Speaker 3

And that combined with the visibility and predictability of the license renewals next year and the maturity of the sales and implementation pipeline 2. It sets us up well to deliver our 7% to 9% growth in 2024. So with that, I'll pass it back to Tom for some closing remarks. Tom?

Speaker 2

Thanks, Scott. Just to sum up, we continue to deliver results in line or above expectations. We continue to have significant opportunity in the marketplace. We're focused on delivering shareholder value, including working on ways to fine tune our investments 2 to further accelerate our growth as well as working on ways to better tell our investment story. We're focusing our attention, resources and investments on the areas of the business that generate the greatest value to our customers and the best growth opportunities for our shareholders.

Speaker 2

This focus is yielding results already, and I look Thank you for joining us today and we'll now open it up for Q and A.

Operator

Your first question comes from the line of Pete Heckmann from D. A. Davidson. Pete, your line is now open.

Speaker 4

Good morning. This is Ally speaking for Pete. Thanks for taking our question. First question, can you point more to some of the dynamics That gives you confidence in 70% to 9% growth in 2024 given that, there have been A little bit relatively soft ARR bookings year to date.

Speaker 3

Yes. I would turn back to the comments I made In my prepared remarks, really, if you look at the underlying recurring revenue of the business, that's going to be The base layer of next year's revenue that is up 8% year to date, Getting stronger here in the second half, 10% in Q3. So that's really the base rate of revenue growth we'd have going into next year. And then Just the overall visibility, especially on the bank side, the renewal book for next year. And then the 3rd layer would be net new business.

Speaker 3

So what's the maturity of the pipeline? So on the bank side and a part of the merchant business, it's really less about the ARR bookings and more about the license And services sales. So but again, it's the install base, the recurring revenue growth that we're seeing that really carries us and gives us confidence in next year.

Speaker 2

Yes. And just I'll just add one thing, Ali, and Scott alluded to it, but The ARR bookings that we've had over the last 12 to 18 months is what is going to drive the increase in revenue next 2. And those we have very good visibility to the ramp pattern and the implementations for those.

Speaker 4

Great. Thank you for giving me some more color on that. And then one follow-up. We saw a big step up in billers revenue net of interchange this quarter. Were there any dynamics in the period that you might consider one time or do you see this level of growth as sustainable in the near term future?

Speaker 3

Yes. No, I think it's especially if you look at the comp, last year Q3 was the quarter where we really saw the issues with the interchange impacted 2. By some of the inflation in the utility segment, jump to this year, and we've gone through about 12 plus months of improvement programs, various initiatives, whether it's repricing or overall cost to get the interchange down. So I think what you're seeing in that, the net revenue growing faster than gross revenue in biller is a function of all those initiatives that we've had. And so We continue to have more initiatives.

Speaker 3

We continue to monitor that. But I think what that's showing in the actual results is the success of what we've done here over the last 12 months.

Speaker 4

Okay, great. Thank you very much.

Speaker 2

Thanks, Alex.

Operator

Your next question comes from the line of Joseph Baffi from Canaccord Genuity. Joseph, your line is now open.

Speaker 5

Good morning. This is Falafeni on for Joe. Thanks for taking our questions. First off, Tom, you touched on the incremental market in the bank segment that you're going after. Maybe touch on some of the more immediate opportunities there.

Speaker 5

What are some of the areas of investments? And when can we expect to see the impact on the P and L? And I have a follow-up.

Speaker 2

Yes, sure. So I was talking about the we tend to call it the mid peer financial institutions and that's probably not quite the right terminology because historically ACI has had tremendous success and we enjoy a strong market presence in the mega banks, 6. Very, very, very large banks over US250 $1,000,000,000 in assets around the world and we continue to have that. We continue to grow there. But what I was talking about is the just slightly smaller.

Speaker 2

So I'm not talking about small financial institutions by any means. I'm talking about the tier that goes from roughly $50,000,000,000 to $250,000,000,000 These are still massive institutions. But what we're seeing is that 2. Those institutions are equally interested in what we can provide. They want the very high reliability.

Speaker 2

They want the Proven capabilities, the ability to scale, they want all that. But those institutions tend to be More open to or interested in a SaaS delivery model and or a cloud delivery model. And so that's where we're seeing even more demand that we believe we can do an even better job of fulfilling over the coming years. And so it's not it's the same types of offerings. We've already made a lot of investments there.

Speaker 2

We can deliver virtually all of our products in a using cloud tools and technologies and infrastructures today And we continue to make investments to make them work even better and to make them work a little bit better for that next tier down. We're going to continue to do that. It's part of the modernization journey that we've talked about for a long time. But we're just seeing the point I was trying to make was that those investments they're already yielding results because that is one of the places That the recurring revenue strength is coming from is that tier we've already sold business, it's ramping up and it's performing.

Speaker 5

That's very helpful. Thank you. And any comment on the performance of your real time payment business in Q3 and anything to add on the outlook for next year there? Thank you.

Speaker 2

Sure. Sure. I mean we're continuing to see growth in every region in real time payments. It's volumes are strong. I know that a lot of people are interested and I'm interested frankly in FedNow volumes because Obviously, there's been a lot of marketing done.

Speaker 2

And at the recent Sibos conference in Toronto, there was Tons of discussion that was shortly after the launch of FedNow. The Fed has done an excellent job of marketing. But as expected, I think I said this on the last call, As expected volumes in FedNow are very low and that is not a surprise. No one expected them to ramp real quickly. So no surprise at all.

Speaker 2

But we what we are seeing is a significant pipeline of financial institutions that are coming on board to be ready to handle FedNow transactions. So We have over 100 financial institutions that already are able to participate in the FedNow through using our tools And there are 100 more that are in the pipeline through directly with us and with partners that use our technology. So that's the U. S. Side volumes on FedNow relatively low.

Speaker 2

We have seen an increase in the clearinghouse RTP utilizations. And I think that's largely due to the attention that's been drawn to real time payments generally because of the Fed marketing. And that's great, but still relatively small volumes in the U. S. But other parts of the world We're seeing much more significant growth and we expect that to continue.

Operator

Your next question comes from the line of Charles Napan from Stephens. Charles, your line is now open.

Speaker 6

Hi, good morning and thank you for taking my question. As we think about the go forward run rate for Biller, Could you talk about the degree to which the outperformance relative to the 7% and 9% target this quarter was driven by Easier comps versus the layering on of new deals and incremental recurring revenue and if Maybe an accelerated pace of onboarding could lead to either outperformance or performance towards the higher end of that 7% to 9% target going forward?

Speaker 3

I don't think when I referred to the comps on the earlier question, it really wasn't about the top line growth 2. The biller business that came in at 11% in the quarter. It was more around the interchange improvement. So if you look at it net of interchange, it accelerated and that was off of a tough comp last year because we had a lot higher Interchange impact. So I would say it's not the business isn't going to continue to grow at an 11% rate.

Speaker 3

I would look at it more in the upper single digits 2 going forward. So we did have a large customer go live here in 2023, but that customer is not Fully ramped. That should fully ramp in early 2024. So that's really when we look at 2024, that's Part of our comfort in the 7% to 9% in total is business that we've already sold and it's either live and ramping or will go live 2 in relatively short order. So when we look at the and then that's not just biller, it's across the whole business is It's really business that's already sold in live or business that's sold in ramping.

Speaker 3

So Very little reliance next year on business that has to be kind of sold in year and converted in year. So that's where we're getting our comfort in the 7% to 9% for next year.

Speaker 6

Got it. And just as a follow-up, you had alluded to some investments you're making in order to pursue Some new revenue initiatives. Could you maybe double click on that a little bit and provide some specifics on areas where you are investing as well as any potential impact on the P and L?

Speaker 3

Yes, I would say that maybe I'll ask the second question first It's not what I call incremental to our run rate of spend. It's a reprioritization of what we are spending. And It's going to be targeted predominantly towards the bank segment, kind of the tier that Tom is talking about in developing payment hub capabilities, where we're seeing a lot of demand, not just in that next tier of banks, but also our global installed base Is looking for hub capabilities. And so it's going to be predominantly in the bank segment hub capabilities and it's not you're not going to see 2. A significant increase in expense versus our current run rate.

Speaker 3

It's going to be a reprioritization of what we're spending today on R and D.

Speaker 2

Yes. We call that Charles, we call that intelligent payments orchestration. You probably heard me say those words a couple of times. And it's the industry tends to talk about it as a payments hub and how do we help our clients manage All varieties of payments ensure that they are handled with scalability, reliability That they have the ability to route them correctly, process them very efficiently, offer new services. And ACI is of course Extremely well positioned to take advantage of that across the industry because of the installed base we have, the reputation that we have and The absolutely proven nature of our software product.

Speaker 2

So we're clearly, we're well positioned. But that is by our estimation the fastest growing portion of the banking business banking payment software business worldwide. And so that's true across all sized segments of the market and all geographies. But then when you layer on the opportunity with that next tier down of banks, What you find is that's the fastest growing segment from a size perspective. So that's why we're so Excited about the opportunity and focus there.

Speaker 2

And as Scott said, I mean, we are making investments there for sure, But it is not we're not talking about net new investment. We're just making sure we're investing where the opportunities are the ripest, so to speak. Mark, are there any other questions?

Operator

Your next question comes from the line from George Sutton from Craig Hallum. George, your line is now open.

Speaker 7

Thank you. Tom, now that you've had a more detailed peek under the tent, I'm curious from an allocation of capital perspective. When you look across the segments, I think we all agree banking has done relatively well, biller has really improved, merchant has struggled. Where do you think of these incremental growth opportunities? At one point, is merchant something you're not putting more focus on, I'm just curious how you're thinking across the segments?

Speaker 2

Sure. No, we continue to believe in the opportunity in all three segments. Emergent has been obviously a little bit of a laggard from a performance perspective this year, but we still have great business. As Scott said, we expect that to flip the growth beginning in the Q4. So we're continuing to invest there.

Speaker 2

It's There's no don't take anything that we're saying as it's not important. I think there is a very large growth opportunity in the banking space, which I was just talking about. And We intend to focus significant resources and a higher portion of our investment on taking advantage of that opportunity in the short run. But we will continue to invest in merchant. We'll continue to invest in Biller and obviously Biller is performing very well.

Speaker 2

So I don't there's no fundamental change in our investment allocation strategy, but it will be in the short and medium term a little more heavily weighted towards banking. Now I don't you may also have wondered about the capital allocation strategy from a what do we do with our cash and that hasn't changed. Scott was saying that, that hasn't changed. We focused for the last couple of quarters on delevering a little bit Given where the market is and the higher relative cost of debt, so we're now below our target and feel great about that and We'll continue with our longstanding capital allocation strategy of share buybacks, delevering and investment in the business.

Speaker 7

Just one follow-up on Biller. Our third party work has continued to Suggest you are seeing competitive takeaways there with what you've done with the newer platform. And I'm just curious if you can give To sense of is that a growing pipeline that you're seeing? And then also on the real time payment side, when do we start to see the benefits of real time payments in the biller business?

Speaker 2

Yes, on the pipeline question. We're very, very pleased with the pipeline as it continues to mature. Yes. That it takes a while to ramp a new sale. So as Scott was saying before, As we look into next year, most of that business already sold in the biller business, but we are seeing the pipeline continue to improve.

Speaker 2

We've made some leadership changes which are really, really positive for us and that is also having an impact And driving more pipeline and performance. On the real time payments side, We never expected that impact to happen quickly because of partly because of what I said before about that. It's just There aren't that many transactions at this point. But as we see more transactions, we do expect that to be A very viable option for billers and we've started to and we've been doing this for a while, We've painted a number of use case pictures for billers and they're very excited about them. We're working with the biller to To figure out the best way to bring that into the equation, give their customers the option to use real time payments.

Speaker 2

So it's there's a lot of pieces. It's a very big opportunity. We've talked a little bit about that before. It has benefits for all the participants in the biller ecosystem, but it does require adoption. And that is going to take I don't know exactly, but it's going to be a multiyear journey to get that really meaningful.

Operator

There are no further questions at this time. Mr. John Graf, I turn the call back over to you.

Speaker 1

Well, thanks everybody for joining the call this morning. We look forward to catching up and following up in the coming weeks. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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ACI Worldwide Q3 2023
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