ACI Worldwide Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 5 speakers on the call.

Operator

You for standing by. My name is Belinda, and I will be your conference operator today. At this time, I'd like to welcome everyone to the ACI Worldwide Conference Call. All lines have been placed on mute to prevent any background noise. To the conference call.

Operator

After the speakers' remarks, there will be a question and answer session. To our shareholders. I now turn the call over to you. 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 Q2 2023 results the 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 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. You can find the full text of both statements in our presentation deck and earnings press release, both of which are available on our website and with the SEC.

Speaker 2

Our conference call.

Speaker 1

On this morning's call is Tom Warsaw, our President and CEO and Scott Behrens, our CFO. Before I hand it over, I wanted to share that ACI will be attending the upcoming Canaccord Genuity Annual Growth Conference on August 8, the Wells Fargo Annual FinTech Information and Business the Financial Services Forum on August 10 and the Needham Fintech and Digital Transformation Conference on August 17. Mr.

Speaker 2

Chairman. With that, I'll turn the call over to Tom. Good morning, and thank you all for joining our Q2 2023 earnings conference call. To I will start this morning with some brief comments on the quarter and then I'll hand it over to Scott to discuss the detailed financials the outlook for Q3 and the remainder of the year. We'll then open the line for questions as usual.

Speaker 2

First, I want to say how honored I am to have been appointed as the permanent CEO a few weeks ago. Many of you may know that I've been a I've become very familiar with our team, our mission and our software platforms. And in the months since assuming this role, I've traveled to many countries and visited with some of our largest, most innovative customers and business partners. And the feedback I've received has been incredible. The next few years.

Speaker 2

The opportunities we've discussed have been inspiring and energizing, and I'm confident we have the foundation in place to lead ACI through its next chapter of growth. I look forward to working alongside this team to continue accelerating growth, optimizing our portfolio and maximizing value for our shareholders. Now moving to the quarter. We delivered 2nd quarter results ahead of the guidance we provided you back in May. Our team did a great job of securing some new and expansionary wins the Q2 of fiscal 2019, and our biller business is continuing to see real traction from the initiatives we've been discussing with you.

Speaker 2

To the Q2 results is that signing these new contracts early has derisked the second half our Q1 results by reducing the number of new wins our team needs to secure. All of this gives us increasing confidence in achieving our guidance. To our shareholders. In terms of specific numbers, and Scott will dive deeper into these, total revenue was $323,000,000 to the Q1 of 2019. The recurring revenue was $261,000,000 up 5% the Q1 adjusted for foreign exchange impact and the divestiture of the corporate online banking business.

Speaker 2

In line with my previous comments and as we previously discussed, the quarterly timing of our renewals will be more weighted towards Q3 and Q4 this year relative to how the quarters phase last year. To just the way the prior renewals fell on the calendar. New ARR bookings for the quarter were $13,000,000 and new ARR bookings for the trailing 12 months were $91,000,000 which is up 2% from the trailing 12 months ending June 2022. It's important to note that our ARR bookings metric does not include new non recurring bookings such as new term licenses our Maassa region is showing strong results and strong pipeline, and I'm looking forward to continued growth there. I personally visited the region three times over the past few months to support the team in closing business.

Speaker 2

One more point on ARR bookings. It's notable that we signed another very large biller client immediately after closing the quarter, and I mean immediately. I think it was around 3 am on the 1st July, and that one will show up in our ARR bookings number in Q3. To On the topic of Biller, I was particularly pleased to see continued improvement in the segment, our Q1 results, which has had a 5% revenue increase and an adjusted EBITDA increase of 10% compared to the same period in 2022. This was driven by new customer onboarding and our interchange improvement efforts.

Speaker 2

For those who are also tracking our net revenue, It grew 9% in Q2 versus last year. We're nearly through our biller contract negotiations and we expect the interchange pricing adjustments to have lasting impacts on our profitability. We were encouraged that bank recurring revenue grew 13% to the next year as newer SaaS contracts ramp. Consolidated bank segment revenue and EBITDA should show growth again in the second half of this year following the renewal calendar that I just mentioned. Merchant segment revenue was flat and EBITDA increased 23% our Investor Relations team on a constant currency basis as a result of efficiency and revenue sharing initiatives that have begun to take hold in this segment.

Speaker 2

To we are continuing to make meaningful investments in our merchant segment, particularly in our go to market and new and innovative capabilities. Before I turn you over to Scott, let me discuss some industry trends that we believe provide ACI with significant opportunity. Our Q1 financial results. There are 2 obvious top of mind items, and I want to give you a little of my perspective on each. First, real time payments.

Speaker 2

To the SEC. Recently, the Federal Reserve went live with their much anticipated FedNow Instant Payments network. ACI was pleased to be one of 1st organizations to certify send, receive and request for pay services on the new network. This functionality adds more capacity to process real time payments in the U. S.

Speaker 2

Alongside the clearinghouse RTP network and early morning Zelle. We're currently working with many domestic banks on real time implementations as well as intermediaries who serve as smaller banks and credit unions. To the Q4. Starting from a small base, we believe the U. S.

Speaker 2

Will see a 4 fold increase in real time payments over the next 4 years to And of course, the real time payment revolution is happening globally. In some markets like India and Brazil, the growth has been dramatic. Adding more options in the U. S. Will accelerate the global ecosystem growth and this is just Phase 1 as we're exploring cross border functionality in certain markets.

Speaker 2

Imagine the power of enabling real time money movement at low cost between large trading partners, really beginning to get exciting. To Specifically with respect to FedNow, we're able to deliver services via license deployment for our on premise customers or via the cloud our SaaS based real time payments cloud offering. ACI is offering a differentiated service in the cloud by bundling our AI powered risk Scoring Solutions to provide additional layers of fraud protection that customers are seeking. I'm sure some of you are wondering how many transactions FedNow has the process. Well, no statistics have been published yet, but I think it's safe to say the early volumes will be quite small as the system beds in and more players connect.

Speaker 2

We don't expect a meaningful revenue impact this year, but over time, we expect FedNat to be an important part of the payments ecosystem in the U. S. Shasta and Beyond. The other industry driver I want to discuss is artificial intelligence or AI. To Looking at the newspapers in the stock market, we might be able to say this is a key driver of every industry right now.

Speaker 2

ACI has been using AI in several ways for years, most notably in our fraud prevention software. We were recently granted a patent our platform on a set of tools and processes we call incremental learning, and we incorporate that patented model into both our anti fraud solutions and the Real Time Payments cloud offering. I'm going to give you a pretty simplistic way to think about how our approach differs from others. To other learning models are updated periodically and offline. For example, you may have heard about OpenAI's models like GPT-three, which is transitioning to GPT-four.

Speaker 2

That's an example of this offline update process. Users have to move to a new model once in a while. This approach means the model's accuracy and performance can drop off quickly as new scenarios emerge. To ACI's proprietary incremental learning approach allows us to continually train our models in small bursts that eliminates a need for big bang model upgrades. Our models have the benefit of the data they've seen almost up to the current minute, making them more likely to detect and prevent fraudulent activity.

Speaker 2

We're also expanding the use of incremental learning into the interchange management efforts in our biller segment. We're seeing very encouraging results. We have pilot programs to use AI tools to make our code development, debugging and testing more efficient. To AI is seemingly everywhere and all encompassing, especially with the rapid advancements in generative AI and large language models. And we're finding that AI has the potential to improve our products, enhance our efficiency and reduce our costs.

Speaker 2

To Now, I'm sure some of you, many of you, maybe all of you have read some of the same doomsday scenarios I have about the risks of AI. To And there are of course some very real risks, but the potential benefits of using these tools in responsible prudent ways are far too large to ignore. KCI tends to be a leader in the responsible use of AI to improve our business and the value we provide our customers. We've made great progress this quarter, and I'm proud of our team's continued execution. I know there's more work to be done, and I believe we have the right strategy in place to continue navigating the near term challenges and delivering consistent results, while also positioning ACI to capitalize on the significant opportunities before us Real Time Payments and in Cloud Based Technologies.

Speaker 1

Before I turn it over to Scott,

Speaker 2

I want to reiterate my confidence in our team, our strategy and our growth potential. And I want to reiterate our commitment to achieve our revenue growth target of 7% to 9 percent 2024. But I also want to say, I know we can do more in the eyes of the investment community. While we're not quite ready to provide details, we're working on ways to better tell our story, as well as ways to improve our transparency, our shareholders, including the metrics we provide. Our share price simply does not reflect the value I believe ACI holds, and I am determined to address that.

Speaker 2

As I'm sure you know, I made a significant personal investment in ACI's stock, and I am absolutely confident. That was a great choice. Now I'm going to turn it over to Scott to discuss financials and our guidance. Scott?

Speaker 3

To Thanks, Tom, and good morning, everyone. I first plan to review our financial results for Q2 and then provide our outlook for the rest of 2023. Revenue in the quarter was $323,000,000 and adjusted EBITDA was $57,000,000 We continue to see solid growth in our recurring revenue, which is up 7% year to date compared to last year. That growth is coming from a combination of customer go lives that happened late last year our earnings release that will contribute a full year benefit this year, our pricing initiatives in our biller segment as well as our annual CPI uplifts in our bank segment. To overall a number of contributing factors that are leading the strength in recurring revenue growth.

Speaker 3

And as a reminder from our last earnings call that our non recurring license fee revenue and that's primarily coming from renewals will be more second half weighted this year. And when those license fees come in, the company's financial performance. We have little incremental fulfillment costs, so have very high flow through to EBITDA. Turning to our segment results. Bank segment revenue was $118,000,000 and adjusted EBITDA was $52,000,000 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.

Speaker 3

Merchant segment revenue was 37,000,000 EBITDA was $10,000,000 and our biller segment revenue was $169,000,000 which represents 5% growth over Q2 last year And adjusted EBITDA increased 10% compared to Q2 last year. The growth in both revenue and profitability in this segment is driven by customer go lives and we have made notable progress with our interchange improvement program. We ended the quarter with $132,000,000 in cash on hand, 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. To Turning next to our outlook with what we're seeing here in the first half of the year, in particular the strength of the recurring revenue growth, We are reiterating our full year guidance with revenue in the range of $1,436,000,000 to $1,466,000,000 and we continue to expect adjusted EBITDA to be in a range of $380,000,000 to $395,000,000 with net adjusted EBITDA margin expansion.

Speaker 3

To Q3, we expect revenue to be in the range of $335,000,000 to $345,000,000 and adjusted EBITDA to be in the range of $70,000,000 to 80,000,000 both ranges representing solid double digit growth compared to Q3 last year. So in summary, we're tracking on the year as expected. And I think with the particular strength that we're seeing in the underlying recurring revenue base of the business combined with additional go lives we expect here in 2023, our second half strength sets us up well for delivering our long term targets of 7% to 9% growth in 2024. To. So with that, I'll pass it back to Tom for some closing remarks.

Speaker 3

Tom?

Speaker 2

Thanks, Scott. In summary, We delivered results ahead of our expectations in the Q2. Our bookings and implementation progress provides us confidence to reiterate our forward outlook for this year and next. ACI has significant opportunity in the marketplace with AI and real time payments. It's certainly an exciting time to be at ACI.

Speaker 2

I am and always will be relentlessly focused on delivering shareholder value. And finally, as John mentioned, we're planning to attend several investor conferences coming up. To our shareholders. We look forward to increasing our level of investor engagement going forward, and I look forward to spending time with you. Thank you again for joining us today.

Speaker 2

We'll now open it up for Q and A.

Operator

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

Speaker 4

To Good morning. This is Ali talking for Pete Heckman. We had a question about, I know you touched on the merchant segment, but with revenue being kind of flattish, we wondered if you could go over, solutions and geographies where you're expecting to have success in this segment over the next 2 years and do you expect accelerating growth over the next 4 quarters? Thank you.

Speaker 3

To Yes, Ali, this is Scott. The short answer is accelerating growth. We kind of had signaled that when we came out of our Q1 call That we'd be about we were negative Q1, Q2 was about flat, slightly positive in terms of dollars and that we would to exit the year in kind of that mid to upper single digits growth. The merchant business It's actually pretty heavily weighted to international markets. And so I would expect that that growth is

Operator

Your next question comes from the line of Joseph Vafi from Canaccord. To Joseph Fassi. Your line is open.

Speaker 3

Hey, guys. Nice results. To And also Tom, nice to see the updated vision here for ACI moving forward. It's great to see. So I know you were Interim CEO for a while.

Speaker 3

Now you're permanent CEO. It sounds like you've got plenty of wood to chop, but just wondering if you're contemplating any other kind of major shifts or changes or updates to the business model. Thanks a lot.

Speaker 2

To Yes. Thanks, Joseph. I appreciate all those comments. It's so as I've said a few times and I I definitely want to reiterate that I think ACI's strategy is solid and I think the team is solid. I think the business model is solid.

Speaker 2

So, you shouldn't expect to see major shifts anytime soon, because we just don't need them. What I am focused on is making sure that we are concentrating our investments and efforts in areas that are going to deliver results as fast as possible. So, one example, of course, being the what we've been talking about in our biller segment. We had some challenges, but big opportunities and we have we've been laser focused. We We've brought in new leaders for that space and it's really performing well.

Speaker 2

So there's one example. But you're Getting back to your actual question, I do not anticipate major shifts. It will be more about focus to and ensuring that we are concentrating in areas that are going to deliver results fast.

Speaker 3

Thanks very much.

Speaker 2

To You're welcome. Thank you.

Operator

The next question comes from George Sutton from Craig Hallum. George, your line is open.

Speaker 3

Thank you. Tom, I appreciate the additional information on the segment. So to I wanted to focus specifically on Biller. Obviously, there's been a platform change. You had recent wins of some good size.

Speaker 3

You mentioned that you had another large win post quarter. So I wondered if you could just go through win rates and sort of opportunity sets that you're seeing in Biller relative to maybe several months ago.

Speaker 2

To Well,

Speaker 3

we haven't published this is Scott. We don't publish at least at this point what our win rates are, But you're right. I mean, we have had success. What we haven't seen yet this year is some of the impact, some of the bigger go lives that we're seeing here in the second half on deals we sold last year. So I think that the upside in Miller It's kind of yet to come in terms of the performance.

Speaker 3

And again, that stuff we sold last year is going live here in the second half. The one that Tom mentioned that signed here the first July will probably more likely impact us as we get into the second half of next year. But again, In terms of publishing win rates, we don't have those statistics to provide.

Speaker 2

We do think we're taking share though We're gaining share. We are winning deals that we needed to win. And as Scott mentioned, we've got to We really haven't seen the bulk of the impact from those larger deals quite yet. The really big one we've been talking about, it is live, But it is not completely cut over. So second half, you'll see more impact than we saw in this quarter.

Operator

To

Speaker 2

to to to our next

Operator

question. If there are no further questions at this time, I turn the call back over to you, John Kraft. To

Speaker 1

All right. Thanks, Linda. Thanks, everybody, for joining us. We look forward to catching up in the coming weeks. Have a great day.

Speaker 1

Thanks.

Operator

To

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Earnings Conference Call
ACI Worldwide Q2 2023
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