ACI Worldwide Q1 2023 Earnings Call Transcript

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May 4, 2023

Key Takeaways

  • ACI delivered Q1 results consistent with expectations: total recurring revenue grew year-over-year, consolidated revenue was $290 M (-5% YoY) primarily due to timing of license-based renewals, while adjusted EBITDA was $25 M (-59%) and trailing 12-month ARR rose 8% to $100 M.
  • The biller segment saw an 11% increase in revenue and 12% EBITDA growth, driven by new customer on-boarding and an interchange improvement plan that’s expected to fully roll out by next year.
  • Bank and Merchant segment revenues declined as anticipated from the renewal calendar shift, but ACI is investing in merchant go-to-market and SaaS capabilities to accelerate long-term growth.
  • ACI is positioned for the launch of FedNow in July with its Real Time Payments cloud on Microsoft Azure—complete with built-in fraud scoring—and is expanding real-time payments partnerships in Asia, the Middle East and Africa.
  • The company reiterated its full-year 2023 guidance of $1.436 B–$1.466 B in revenue and $380 M–$395 M in adjusted EBITDA, and remains on track for its long-term goal of 7%–9% revenue growth by 2024.
AI Generated. May Contain Errors.
Earnings Conference Call
ACI Worldwide Q1 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Inc. First Quarter 2023 Financial Results Conference Call. Today's conference is being recorded.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Call. At this time, I would like to turn the conference over to John Kraft. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Call. On today's call, we will discuss the company's Q1 2023 results and financial outlook for the rest of the year. We will take your questions at the end. Call.

Speaker 1

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. Call. Today's call is subject to Safe Harbor and forward looking statements like all of our events. You can find the full text of both statements Call on the first and final pages of our presentation deck, a copy of which is available on our website and with the SEC. Call.

Speaker 1

On this morning's call is Tom Warsaw, our Interim President and CEO and Scott Behrens, our CFO. Call. With that, I'd like to turn the call over to Tom.

Speaker 2

Thanks, John. Good morning, and thank you all for joining our Q1 2023 earnings 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 call and our outlook for Q2 and the remainder of the year. We'll then open the line for questions. We delivered 1st quarter results call that were consistent with our expectations and reflect our team's strong execution despite an uncertain economic environment.

Speaker 2

Total recurring revenue grew call, driven by the growth in biller and bank segments. While consolidated revenue was $290,000,000 down 5% year over year and that was due mainly to the timing of license based renewals as we discussed last call. Both growth rates are adjusted for foreign exchange impact and the corporate online banking business divestiture. Total adjusted EBITDA was $25,000,000 down 59%. As you may recall, these license renewals tend to be extremely high margin.

Speaker 2

New ARR bookings for the quarter were $11,000,000 When looking at the new ARR bookings on a trailing 12 months basis, which is how I like to look at it, This removes some of the quarterly fluctuations. Trailing 12 month ARR as of Q1 was $100,000,000 call, which is up 8% compared to the same metric from March 2022. Turning to our segment results. We're pleased with our performance this quarter in our biller segment, which saw an 11% revenue increase and adjusted EBITDA increase of 12%. Call.

Speaker 2

This growth was driven by customer on boarding and by the meaningful steps we've taken to address the call. Inflation driven interchange mainly impacting our utility subsector. We've now built an interchange improvement plan for all of our client accounts and we've made and substantial progress in recontracting across our book of business. The results of these efforts is coming through the P and L and I expect continued progress throughout the year. As I told you last time, this is an effort that may stretch into next year before reaching full completion.

Speaker 2

Our Bank and Merchant segment revenue declined versus last year as we expected, which as I said is driven mainly by the timing of our license based renewal calendar. Call. With the significant majority of this year's renewals expected to occur in the latter part of 2023, we remain confident in our full year guidance. Call. We're also continuing to make meaningful investments in our merchant segment, particularly in our go to market and new and innovative capabilities.

Speaker 2

We expect these investments to accelerate growth in this segment over the long term. Let me turn to some of our latest trends and some of our wins. Call. We expanded our SaaS business with a less traditional U. S.-based FinTech customer and that included call.

Speaker 2

We had wins with payments orchestration with important new European e commerce vendors. We had renewals and expansions with several merchant clients, including a call, top U. S.-based fast food chain and a top domestic grocer. We had a new anti fraud win with the Saudi Arabian national payments infrastructure, a new issuing and acquiring contract with 1 of the largest processors in Mexico. And finally, Call.

Speaker 2

In real time payments, we signed expansions with several customers, including a Middle Eastern real time payment system, as well as financial institutions and acquirers in Asia. In the U. S, the official launch of the real time payment system dubbed FedNow is expected in July of this year. ACI has been instrumental in the piloting and testing of that program and we just launched our ACI Real Time Payments cloud. This is a unique offering in the industry and will include built in fraud protection with transaction scoring, all offered in a Microsoft call.

Speaker 2

Just last week, I met with a central bank in Africa, speaking of real time payments, and I discussed with them the possibilities that real time payments creates, including how their overall economy can benefit from the many use cases inherent Call with real time payments. It was only a first dialogue, but that conversation further cemented my position about the future potential for real time payments in the developing markets and around the world. Overall, I'm pleased with the progress we made in the quarter and our team's to capitalize on the significant opportunities before us. Looking ahead, we're on track to achieve our full year 2023 guidance and our long term revenue growth target of 7% to 9% by 2024. We're energized by the opportunities in the pipeline that will help to achieve that goal, particularly within real time payments and cloud based technologies.

Speaker 2

Now I'll 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 Q1 and then provide our outlook for the rest of 2023. We'll then open the line for questions. Revenue in the quarter was $290,000,000 and adjusted EBITDA was $25,000,000 both in line with our expectations. It is important to note here that we saw 9% growth in our recurring revenue compared to Q1 last year and that growth is coming from a combination of call.

Speaker 3

Customer go lives that happened late last year that will contribute a full year benefit this year as well as some of our pricing initiatives in our biller segment call as well as annual CPI uplifts in our bank segment. So overall, a number of contributing factors that are leading to the strength in our recurring revenue growth. Call. And as a reminder from our last earnings call that our non recurring license fees revenue that primarily comes from renewals will be more second half weighted this year. And when those license fees come in, they have very little incremental fulfillment costs, so have very high flow through to EBITDA.

Speaker 3

Turning to our segment results, bank segment revenue was $88,000,000 and adjusted EBITDA was $25,000,000 The bank segment is predominantly licensed software, so this will be the most impacted by this year's timing of the renewal license fees. Call. Merchant segment revenue was $35,000,000 and adjusted EBITDA was $7,000,000 We are in the final stages of the transition from the non recurring license release to recurring SaaS revenues in this segment, which can clearly be seen in our results this quarter. Call. And our biller segment revenue was $167,000,000 which represents 11% growth over Q1 last year and adjusted EBITDA increased call 12% compared to Q1 last year.

Speaker 3

The growth in both revenue and profitability in this segment is driven by customer go lives late last year that will contribute to a full year growth this year and we have made notable progress with our interchange improvement program. Cash flows from operations was up nearly 40% over Q1 last year. We ended the quarter with $142,000,000 in cash on hand, call. A debt balance of just over $1,000,000,000 and a net debt leverage ratio of 2.9 times. And we have $200,000,000 remaining on our share repurchase authorization.

Speaker 3

Turning next to our outlook call. With what we're seeing to start the year, in particular the strength of the recurring revenue growth, we are reiterating our full year guidance with revenue in the range of 1.4 call $36,000,000,000 to 1,466,000,000 call. $380,000,000 to $395,000,000 with net adjusted EBITDA margin expansion. For Q2, we expect revenue to be in the range of $300,000,000 to $310,000,000 and adjusted EBITDA to be in the range of $35,000,000 to 45,000,000 call. Similar to what we saw here in Q1, Q2 will be impacted by lower license fee revenue when compared to Q2 last year as we expect to see the license fee come in the second half of the year.

Speaker 3

So in summary, we're tracking on the year as expected. Call. And I think with the particular strength that we're seeing in the recurring revenue base of the business combined with additional go lives we expect here in 2023 sets us up well for delivering our long term targets of 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. In summary, we delivered solid results in the Q1, particularly against a difficult backdrop, and I believe we're off to a strong start for the year. We know that ACI is mission critical to our customers and this quarter We continue to see the value that we provide to leading financial institutions, merchants and billers worldwide. We have a clear path ahead that reaffirms my confidence in our team and our strategy and our ability to deliver on our revenue growth goals in 2023 and beyond. Before I open it up for Q and A, Call.

Speaker 2

I'd like to briefly touch on our ongoing CEO search. After reviewing and meeting with a number of promising candidates, the Board is in the final stages of the collection process and expects to complete the search in the upcoming weeks. We look forward to this announcement soon. With that, Call. Thank you for joining us today.

Speaker 2

And we'll now open it up for Q and A.

Operator

Thank you. We'll take our first question from Peter Heckmann at D. A. Davidson. Hey, good morning everyone.

Operator

Thanks for taking the question. So it was good to see biller revenue net of interchange up about 7% year over year. Call. Based on some of the new customer wins that you've talked about, do you think that for the full year that you can achieve that High single digit growth goal within Biller net of interchange?

Speaker 3

Yes. Pete, this is Scott. Yes. No, we're really happy with the 2, I think, from a number of reasons. Call.

Speaker 3

One is, we're starting to see the benefit both at gross revenue and net revenue and profitability In the biller business, we're seeing the benefits of the interchange program initiatives that we've put in place. That combined with The go lives that we saw late from late last year. So we're going to get a full year benefit of those go lives this year. So we're real happy with we believe billers really kind of turned the corner in terms of both growth rate as well as we're starting to see the interchange initiatives that we put in place. So should start to see sequential benefit and Call.

Speaker 3

As well as comparable benefit on the interchange as a percentage of the gross revenue there. So definitely benefit both sides, both from go lives as as well as the interchange improvement initiatives taken hold.

Speaker 4

Yes. I'll just add one thing. We talked last time about The new customer that we had signed, it's our largest biller deal ever. That actually went live 2 days ago, 3 days ago. And we phased it in, we try to manage the risk.

Speaker 4

So it's in what we call the friends and family Phase right now, but it's going well and we should see that ramp up over the next few months And that will be even more helpful.

Operator

Good. That's good to hear. And then Call. Just curious that no repurchases in the quarter, was that something thinking more about working capital needs or was Potentially blacked out of repurchase in the quarter?

Speaker 3

Yes. Generally, yes, you're correct. We didn't have any in the quarter. We still have $200,000,000 remaining on the authorization and no real change in the ideas there on capital allocation.

Operator

All right. Thank you. Call. And we'll move next to Joseph Faffee at Canaccord Genuity. Call.

Speaker 5

Hey, good morning guys. This is Will Johnson on for Juno. Thanks for taking my question. I just wanted to ask about the Fed's real time payment system and kind of how ACI is thinking about the primary opportunity there and any other recent developments or updates you can highlight? Thanks.

Speaker 4

Call. Sure. So FedNow goes live in July and we are we've been involved with the Fed as they've been call. Plotting this launch for some time. We're in the final stages call of testing and we're in very good shape for the go live for our customers And we've got a pretty good pipeline as well of new opportunities driven by our position with FedNow.

Speaker 4

So that's where we are. We should obviously no volumes at this point because it hasn't launched, but We should start to see them immediately after the launch and I think we're in very good shape and We've been a leader in this process throughout.

Speaker 5

Great. Nice to hear. And then following the rate hike Call. Yesterday, how's ACI kind of thinking about the macro environment through the rest of the year? And is there any like trends or shifts in consumer behavior that we should be thinking about?

Operator

Call. Thanks.

Speaker 3

Yes. But generally, if you look at we have to remember in our products that are generally non discretionary call? Across all three segments. The only place that we really see kind of consumer behavior impacts directly would probably be in the biller and merchant segments. But again, the biller even our biller verticals are non discretionary payment types.

Speaker 3

And I would say at this point, we're not seeing any change. And on the merchant side, we're very heavily e commerce driven. And so just the secular growth is stronger in e commerce versus in store. So we're not seeing any trends now. As a matter of fact, if you look at our call.

Speaker 3

Q1 recurring revenue growth, which is a lot closer tied to in quarter transactions that was up 9% year over year. That's actually a little bit stronger than we were expecting at this point. So overall, we're not seeing anything in the recurring revenue growth year over year is a bit stronger than where we thought we'd be at this point in the year.

Operator

We'll take our next question from George Sutton at Craig Hallum.

Speaker 6

Thank you. Hey guys, this is James on for George. Thanks for taking my question. Can you talk about sort of conversations you're having with bank customers in the U. S.

Speaker 6

About SED NOW and real time payments, like how quickly are banks expecting to connect, given you've overseen a lot of these go lives across the world? What are your expectations for 1 adoption hits critical mass in the U. S. And then can you talk about the competitive landscape in the U. S.

Speaker 6

And what sort of gives you the right to

Operator

win? Call.

Speaker 4

Sure. So on the FedNow point, we expect adoption to begin immediately. I think the big question is how quickly will consumers really ramp up their use of it. I think it will take some time. We've seen this In other parts of the world, largely those will start to cannibalize cash transactions.

Speaker 4

Obviously, I don't know exactly how quickly, but it's a high value add Transaction type for certain consumers and I think we will see that adoption ramp up. I don't know exactly how fast, but We're ready for it and our customers will be ready for it in terms of connecting. That's sort of built into the implementation process. They'll have the ability Call to use it as soon as it's available. And then you were talking about, I think your other question was what gives us the right to win in our current environment.

Speaker 4

I think it's the products we have are rock solid, proven. We just we continually invest in our products and we really understand we are very focused call. And that is becoming a more and more important part of our customers' business. And I Probably talked about this last time, I don't remember specifically, but one of the things I talk about a lot is that payments historically tended to be A cost center. So people thought about the costs of facilitating the movement of money.

Speaker 4

Well, now it's quite different. Now Consumers and commercial customers see the ability to facilitate payments the way they want it to be an absolute must have. So they want flexibility, they want choice, they want reliability and speed and ACI is perfectly positioned for that. So when we go when I go and talk to customers and potential customers, there's never a question about whether ACI Call is a good choice for them. Whether ACI can do it, there's no doubt about that.

Speaker 4

We are the usual suspect, so to speak. The and what we do is we sit and talk to the customers about What we can do to expand their business, what we can do to help them meet their strategic objectives, which those are some great conversations. I think I mentioned a few minutes ago that I sat down with a central bank and even a central bank is looking for ways to increase the value that they add to the consumers in their country, in their economy. And call. That type of conversation is fantastic.

Speaker 4

And as I said, there was no discussion about whether we would be a good partner. It was how can we help them and we're very good at helping those helping customers and prospective customers understand how we can add value. Call.

Speaker 6

Perfect. And then can you talk about sort of real time payments and how that can impact the biller business? So as I understand it, Bill Pay is one of the first use cases. But does your experience in real time connectivity and sort of managing the structure translate into any advantage on the Bill Pay side? Like could you gain some sort of competitive advantage because of real time payment adoption in Bill Pay?

Speaker 4

Call? I think so, yes. It is clearly that is clearly a good use case for real time payments. I mean, think about someone who's For whatever reason needs to make an immediate payment to keep their electricity on or restore their gas or whatever it might be. Call.

Speaker 4

Today that can be a little bit cumbersome and it can be quite expensive. Real time payments makes that easier, quicker, Less expensive. So definitely a good use case, because we have the ability and we build it in To our products to be able to connect to all types of payment rails, I think it does give us an advantage and we do talk about that with our customers. Now It's not just us, of course. We have to help our customers be ready Absolutely.

Speaker 4

I think that's an advantage for us. I think we're very well positioned because of our presence around the world with real time payments.

Speaker 6

Call. Great. Last one for me. Can you sort of address the weakness in merchant this quarter and what gives you confidence that you can still get to low double digit growth in that segment? Like I get the one time recurring conversion, but the recurring segment was down as well.

Speaker 6

So just any detail there would be helpful.

Speaker 3

Yes. No, I think you hit it there. It's a lot of it is the decline is coming from the license fee. Call. In that segment, the customer segment of ours, a lot of that business has shifted towards more of a SaaS or recurring type payment.

Speaker 3

So most of that year over year decline is coming from that shift from license to recurring, but you should see that here starting in Q2 flip positive and then further positive in the second call for the year. So exited at a double digit rate of growth as we enter 2024.

Speaker 7

Okay. Thanks guys.

Speaker 6

Thank you.

Operator

We'll take our next question from Mayank Tandon at Needham and Company.

Speaker 7

Call. Hey, guys. This is actually Sam on for Mayank today. Thanks for taking the questions. Just wanted to first hit on the ARR bookings, which were soft call this quarter following 4Q's, I think a record quarter for bookings.

Speaker 7

So can you guys just talk a little bit more about What you guys are seeing in terms of new customer conversations and level of activity and then maybe parse out your expectations for the remainder of the year? Call. Thanks.

Speaker 3

Yes. And I wouldn't look at Q1 as Q1 is typically a pretty soft quarter call. From an overall bookings perspective, if you look at ARR and we have introduced this quarter trailing 4 quarter call. ARR bookings to kind of address some of that sequential volatility, but it's trailing 4 quarter ARR bookings are up 8% call over the comparable period. We would expect ARR bookings.

Speaker 3

I think we're looking long term kind of that 7% to 9 growth kicking in next year, ARR bookings should kind of grow consistent with that in order to deliver that level of revenue growth. So I wouldn't look at Q1 as being a pattern. I just think it's a slow quarter of the year.

Speaker 7

Call. Got it. Okay. That's helpful. And then just quickly on the 2Q guide, The revenue guide was a little lighter than expected.

Speaker 7

I was wondering if this was mostly a factor of A change in banking renewal timing that you guys are seeing or is it some of the merchant license stuff that you guys mentioned Or anything else in biller or anything?

Speaker 3

Yes. It's mostly banks and it's not really a function of a change in the timing of renewals is just that that's the group that renewed call it 5 years ago. Call? The cohort for 2023 is mostly second half weighted. So it's really a bank segment Kind of volatility in the license fee, but we're tracking as expected.

Speaker 3

So we were expecting that license fee to come in when those renewals happen here in the second half of the year.

Speaker 4

Yes. And I mean, I know this is obvious, but just to say it, when we have a renewal in the second half, we actually have A handful of the deals that renew in second half that have already signed. And but because of the way the accounting rules work, We don't recognize that until the second half. So, we're all over it. We don't we things are performing as expected.

Speaker 4

The renewal book coming in as expected and we don't see any issues with it, but it's just it's purely a timing issue and that's just how it works. Call. Got it.

Speaker 7

All right. Thanks guys.

Speaker 4

Thank you.

Operator

And at this time, we have no further questions. I'll turn the conference back over to management for any closing remarks.

Speaker 4

Okay. Well, thank you. We really appreciate your time today. As I said, we're pleased call. With the results in the Q1, we are on track for the year.

Speaker 4

A lot of things going on in the world, Call. We feel great about what we're doing and we look forward to continuing to have great dialogues with you. And call. Thank you and enjoy the rest of your day.

Speaker 1

Thanks everyone.

Operator

And that does conclude today's conference. Thank you for your participation. You may now disconnect.

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