Aci Worldwide, Inc. Q4 FY2021 Earnings Call

Good morning everyone. Thank you for standing by and welcome to the ACI Worldwide Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation there will be a question and answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Mr. John Kraft.

Thank you and good morning everyone. On today’s call, we will discuss the company’s fourth quarter and full year 2021 results, our financial outlook for 2022 and then we will take your questions. The slides that accompany this call and webcast can be found at ACIworldwide.com under the Investor Relations tab and will remain available after the call. Additional operational statistics have been provided in the supplemental tables of our materials. 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 on the first and final pages of our presentation materials, a copy of which is available on our website, as well as with the SEC. On this morning’s call is Odilon Almeida, our President and CEO; and Scott Behrens, our CFO. With that, I’d like to turn the call over to Odilon.

Thank you, John. Hello, everyone. And thank you for joining our fourth quarter 2021 earnings conference call. I took over as CEO 22 months ago, and facing the reality of no organic growth, we committed to a disciplined approach to turning around our business. Until 2020 together with our leadership team, we created our three pillars strategy, which has already shown results. In 2021, we increased organic growth from flat to mid single digit. This growth is the highest we have seen in almost a decade. We have increased margin and have achieved the rule of 40 for the first year ever. We have deployed a rigorous, disciplined and systematic approach to M&A, focusing on creating value. And we have increased the allocation of our strong cash flow towards share repurchases in a sign of confidence in the company’s future. In summary, 2021 was a transformational year for ACI. We delivered on our commitment, generated financial results that exceeded our guidance and consensus, and achieved the rule of 40 coming in with a score of 43, all while building momentum for 2022. This year, we will cement our mid single-digit growth and prime ACI to accelerate growth to 7% to 9% by 2024. Scott will take you through our financial results in detail. But first, let me step back for a moment and update you about our three pillar strategy. As a reminder, in the fit for growth pillar, we focus on streamlining our structure, sharpening our go-to-market strategy and execution. We have a simpler and more efficient operating model with fewer layers, broader spans of control, smart talent development, and more robust governance. We are more agile and accountable. These factors contribute to our momentum today. Our weekly operating cadences give us a clear line of sight to make the business more predictable wherever we operate across the world. Every revenue, product and technology leader connects to facilitate critical decision making in real-time each week. Linking sales compensation closely to company revenue has also been an important lever. The benefit of local boots on the ground across international markets has increased our ability to seize commercial opportunities ahead of the competition, meet the different local demands with agility and global scale and accelerate innovation cycles. And it is worth repeating that with a simplified and more efficient organization, we captured $60 million in annual cost savings last year, out of which was reinvested in our focus on growth priorities. Moving to our second pillar, focus on growth. We have four investment areas; real-time payments, sophisticated global merchants, international markets, and the next generation real-time payments platform. Starting with real-time. We continue to invest in both low and high-value real-time solutions. Real-time transactions continue to grow in every region globally. Early insights from our annual global real-time analysis indicate a 60% year-over-year rise in real-time transactions in 2021. By 2026, more than 25% of electronic payments will be through real-time payments. In Asia, we want a real-time payments infrastructure for Indonesia, a global top five economy. We are driving the new bypass scheme for Indonesia’s central bank. It will become an integral part of Indonesia’s ongoing digital modernization initiative and central to its payment system blueprint. Multiple banks across Indonesia have already signed for ACI real-time solutions, which can scale to billions of transactions. Overall, we signed a total of 70 new real-time wins. Some examples of real-time modernization successes for the last quarter include a major bank in South Africa. It will be the first of many expansions in South Africa. A top commercial bank in Indonesia, part of a global banking network, a leading Germany-based FinTech offering banking as a service, a top US-based bank headquartered in Texas, and the largest financial institution in Kuwait. Moving to sophisticated global merchants, our priority on expanding innovative omni and e-commerce solutions has led us to increase our offerings and signed large sophisticated merchants and merchant intermediaries worldwide. Last week, we launched the innovative global Buy Now Pay Later solution, enabling access to over 70 BNPL lenders through a single integration. The innovative user interface ACI PayAfter enhances acceptance rates and serves a broader base of creditworthy customers, boosting merchant sales worldwide. BNPL has become a must-have for merchants. It offers new avenues to serve a broader base of customers by enabling them to stagger their repayments over time while driving revenue. Sophisticated global merchants value the range of our solutions. Last year, we signed 22 new logos. Some examples worth highlighting from the previous quarter include an established FinTech in Europe that will use our secure e-commerce payment gateway for rapid geographic expansion. In a significant evolution of our relationship with an independent US supermarket with 240 stores, we used our omni grocery focus solution. In the UK, a top grocery store will migrate to the multi-tenant platform while the largest travel center truck stop in North America uses multiple solutions to broaden card acceptance and integrate fraud management for their commercial fuel customers. Their largest acquired in Latin America chose our fraud solution to secure a base of over 10,000 gateway merchants. Now moving to our international markets, we continue to increase our presence across global growth markets with an unrelenting focus on improving our sales pipeline. Latin America, the Middle East, Africa, Asia and South Pacific are core to this expansion. Some examples of ACI wins from across the world for quarter four include our first SaaS deal in the Pacific region with a leading bank in New Zealand, a top bank in India, as they reinforce their market leadership. A National Bank in Sri Lanka expanded its remit to modernize its payments infrastructure. Two major banks in Saudi Arabia are embarking on their payment modernization, and a multinational commercial bank in Qatar is modernizing to capture growth driven by the upcoming World Cup and new events like the FIA Formula One Grand Prix. Our leading bank in Brazil sought our expertise to upgrade their payment services. One of Ireland’s top four commercial banks has kicked off its transformational journey with us. The world’s largest building society headquartered in the UK is now partnering to drive modernization strategies. Our fourth focus on growth investment is about building the new generation real-time payments platform to cement our global leadership in real-time payments. This designed to be a platform that delivers payment capabilities across all payment rails, with real-time at its center of gravity. It will bring a breadth of rich functionality unmatched by any other competitor in this space. It’s designed to be simple, secure, and flexible. And we will leverage the latest cloud-native principles with a faster time to market. Our efforts with our third strategic pillar, step change value creation through M&A, remain a high priority. We continue to spend significant time reviewing our business portfolio and M&A opportunities to ensure we maximize short and long-term value creation for our shareholders. We look at many investments and divestitures options, whether big or small, global or local. Turning to our cash flow and capital structure. Our consistent cash flow generation and solid balance sheet give us significant financial flexibility to make investments to support growth and return cash to shareholders. As a reminder, at our November Analyst Day, we announced our expectations to generate $900 million in cash flow over the next three years. In December, we increased our share repurchase authorization to $250 million. Before turning things over to Scott, I’d like to summarize my comments by reiterating that ACI had a transformational year in 2021. 2022 will be an inflection point for ACI. This year, we expect to cement our mid-single-digit growth and prepare the company to accelerate organic revenue growth to 7% to 9% in 2024. We also expect a gradual increase in net adjusted EBITDA margin over the same period. Combining this outlook with our capital allocation framework and the optionality associated with step change value creation through M&A, we believe we are well positioned to deliver sustainable shareholder value. With that, I will turn it over to Scott to discuss financials and forward guidance.

Thanks Odilon and good morning, everyone. I first plan to go through our financial results for Q4 and full year 2021, then provide some commentary regarding our outlook for 2022. We will then open the line for questions. As Odilon mentioned, 2021 was a transformational year, and 2022 will be an inflection point for ACI. Fourth quarter revenue was $467 million, up 21% from Q4 last year, and adjusted EBITDA for the quarter was $205 million, up 31% from Q4 last year. Full year 2021 revenue was $1.371 billion, up 6% from 2020, or 5% on a constant currency basis, and the highest level in many years. Total adjusted EBITDA in 2021 was $384 million, up 7% compared to $359 million in 2020, and net adjusted EBITDA margin was 38% in 2021 compared to 37% in 2020. Turning next to full year segment results, our bank segment revenue increased 12% and adjusted EBITDA increased 13% versus 2020. Our merchant segment revenue increased 2% in total, while the underlying recurring revenue increased 8%, and merchant segment adjusted EBITDA increased 2% versus 2020. Our biller segment revenue and recurring revenue increased 1%, and the biller segment adjusted EBITDA decreased 5% versus 2020. We ended the year with $122 million in cash on hand and a debt balance of $1 billion. We repaid $94 million in debt during the year, bringing us to a net debt leverage ratio of just under 2.5 times. We repurchased 3 million shares of our stock during 2021 for $107 million and further repurchased an additional 800,000 shares for $27 million so far here in 2022. We have approximately $190 million remaining on our current repurchase authorization. Finally, turning to our outlook for 2022. We expect to cement our constant currency mid-single-digit organic revenue growth in 2022, with reported revenue in a range of $1.415 billion to $1.435 billion, positioning us to accelerate growth into the upper single digits by 2024. We expect 2022 adjusted EBITDA of $400 million to $450 million. This excludes one-time costs related to the move of our European data centers to the public cloud, as communicated at our Analyst Day back in November. With our debt balances now at our leveraged targets, we are changing our capital allocation priorities in the near term, increasing the expected cash flow use for repurchases to approximately 50% of our cash flow. We announced a $250 million share repurchase authorization in December with plans to use a significant portion of this in the near term. Finally, for Q1 2022, we expect revenue to be in a range of $310 million to $330 million and adjusted EBITDA to be in a range of $60 million to $80 million. Just a modeling note here, from a quarterly phasing perspective, we do not expect our revenue and EBITDA to be as back-end loaded in 2022 as we experienced in 2021. So with that, I will pass it back to Odilon for closing comments.

Thank you, Scott. 2021 was a transformational year with solid results. I want to thank the ACI family for all the efforts and outcomes in 2021. In 2022, we will cement our mid single-digit growth and position the company to deliver 7% to 9% growth by 2024. Thank you.

And we will now open it up for questions. First question comes from the line of Mayank Tandon of Needham. Mayank your line is now open.

Yes. Good morning. Congrats on the progress. I wanted to start with a question on the seasonality. Scott, you mentioned that it would not be as back end weighted. But the Q1 guide does look pretty good relative to expectations. But could you share your thoughts around the Q1 guide versus your expectations for the full year and how to think about seasonality in general?

Yes, I think generally speaking, if you look at 2021 it was unusually back end loaded in Q4 both from a revenue and EBITDA perspective. If you compare it to previous years, that’s probably more indicative of the revenue base. But as you indicated, our Q1 guidance is strong. You just won’t have to wait till Q4 this year to see year-over-year growth.

Got it. And then just a quick follow up in terms of the growth between the three components, banks, merchants, and billers, how should we think about that progression over the course of the year? And then maybe like what’s embedded in your full year guide for the three components? Thank you.

Yes. I would say I wouldn’t look at it on a quarterly basis, I’d look at it year-over-year from 2021 to 2022. Obviously, the banks had a very strong 2021. That growth rate should pull back a little here in 2022. Billers growth should be around mid single digits year-over-year and then merchants should be a little bit higher. Again, I’m talking year-over-year not necessarily quarterly phasing. So our highest growth should be in merchants, followed by billers and then banks.

Next question comes from the line of George Sutton of Craig-Hallum. George your line is now open.

Hi, guys. This is James on for George. Congrats on a great quarter and great full year. I’d love to hear some color around some of the traction you’re seeing with the crypto or crypto partnership with Rocket Fuel thus far, and what inspired the decision to tap into Buy Now Pay Later the way you did by going agnostic and enabling access to over 70 Buy Now Pay Later providers?

I wouldn’t necessarily talk specifically in terms of the economics of the Rocket Fuel deal. Of course, that’s another endpoint or gateway that we offer to our merchants. A more exciting development is around the ACI Pay After capabilities. What’s driving the opportunity is that we’re addressing some pain points concerning access to a variety of Buy Now Pay Later providers. Our capability is going to provide merchants with a gateway to about 70 different BNPL lenders initially and over 200 by the end of this year. This will allow our merchants to provide choice, increase the overall acceptance rate of consumers, and ultimately, not only do we get the economics per transaction, but we earn revenue share on the dollar value of lending. We are really excited about that opportunity as we address a market pain point.

To complement, we have an agnostic solution for merchants. When you talk about crypto partnerships or BNPL, those are all payments methods for us. It is critical that we offer everything available to maximize revenues for our merchants.

It sounds like you identified existing pain points which indicates some existing demand at this point.

Yes, we’re receiving a lot of interest in ACI Pay After capabilities. Regarding crypto, we’re providing merchants another payment path and expanding their total addressable market.

In Latin America, the impact COVID drove a material decline in cash and an increase in digital payments. You identified Latin America as one of your growth markets. Could you talk about within Latin America, which specific markets you are targeting and what the growth strategy is?

We have three big markets in America: Brazil, Colombia, and Mexico. We are well developed in both markets and reaching another 10 or 11 countries. We have a good penetration with our bank solutions, including the switch, issuing, acquiring, and real-time payments, which are very popular. Now, the next frontier is merchants. Since last year, we started to expand our merchant services internationally to Latin America, and we are already seeing a strong pipeline in fraud prevention and omni-commerce. Latin America is firing on all cylinders now, and you can expect great results from this region. By the way, just for your knowledge, I’m currently in Brazil.

Next question comes from the line of Peter Heckman of DA Davidson. Peter, your line is now open.

Hi, good morning. Thanks for taking my questions. I wanted to talk about the biller business. The net revenue was down and was below our forecast, and again, has been down a couple of quarters in a row. But the extent of the drop in the fourth quarter made me think did the calendar fall in a way that pushed some bill pay into January?

No, Pete. Generally speaking, the bill pay came in low single digit growth year-over-year. The net revenue growth was lower than that. A lot of effort in 2021 focused on finishing the transition we had with Western Union and moving that business over to our data center. We have a significant backlog of onboarding new projects that we’ve signed, and we’re now turning our attention to getting these deals live early this year. So we expect growth in gross revenue but there is typically a delta in terms of interchange and mix.

Thinking about the revenue mix and your guidance, it’s clear software had a very strong year in 2021. To meet your guidance, I’m having difficulty without assuming that software will be at least flat. Is that how you’re thinking about it? Or do you anticipate another component, like subscription revenues, accelerating towards the high single digit?

Yes. Generally speaking, we expect recurring revenue to increase year-over-year. Our midpoint of our 2022 revenue guidance indicates a 5% constant currency growth. We expect the merchants segment to grow in excess of that, primarily driven by recurring revenue and transactions. The biller segment should come in around total company growth, while the predominant software segment, which includes banks, should come in kind of less than our midpoint growth rates due to a strong prior year. We see banks continuing to open their wallets in the early part of 2022, which is encouraging.

Next question comes from the line of Joseph Vafi of Canaccord. Joseph, your line is now open.

Hey, guys. Good morning. Great execution in 2021, looking forward to a good 2022. Just going back to the guidance, could you break down what you would see as the growth contributors from US domestic versus international?

Excluding our mature markets, US and Europe, the rest of our international markets drove about 15% to 16% year-over-year growth in 2021. We expect that to continue; emerging growth markets are driving higher growth than our mature markets. On the biller side, it’s predominantly US domestic, while the merchant business has more of an international footprint than the biller.

If you wanted to break down between banks and merchants internationally, which one would be ahead of the other? Or are they about equal?

Generally, merchants, whether international or domestic, will grow faster than banks. That follows the trends in overall transaction growth and e-commerce. The underlying recurring revenue for merchants grew 8% in 2021, which is a subset of what the transaction growth was. We expect that to continue.

In U.S. domestic banks, we’ve seen resurgence in demand from banks, and it seems like you’ve seen some of that too. Are we caught up at this point on delayed deals or are we now at a normal cadence of business? Does it feel like banks won’t delay as much as they did over the last couple of years?

The banks really opened up their wallets in the second half of 2021, and we’re continuing to see that. I don’t know if we’re quite at the end of the catch-up period, but there's definitely encouragement in the spending we’re observing from banks, both nationally and internationally.

I can add more color to that, Scott. I was in Dubai last week and I’m in Brazil today, traveling around the globe and talking to the CEOs of banks not only in the US and Europe, but all around the world. What I’m hearing is that we’re moving past COVID and banks are starting to focus even more on modernization. Conversations about our next generation payments platform and its roadmap for the year are very encouraging now compared to what wasn’t happening in 2021. So it's a very different environment.

That’s great color. Thanks, Odilon.

There are no further questions at this time. I’ll turn it back to the speakers for any closing remarks.

Thanks, everybody, for joining us today. We look forward to catching up in the coming weeks. Have a good day.

Thank you so much for presenters and to everyone who participated. This concludes today’s conference call. You may now disconnect.