Good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Quarter 3 Earnings 2022 Conference Call. Thank you. Mr. John Kraft, Senior Vice President of Finance and Strategy, you may begin your conference.

Thank you, and good morning, everyone. On today's call, we will discuss the company's third quarter 2022 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. You can find the full text of both statements on the first and final pages of our presentation deck, a copy of which is available on our website and with the SEC. On this morning's call is Odilon Almeida, our President and CEO; and Scott Behrens, our CFO. Before I turn it over, I'd like to say that ACI will attend the Citi 2022 Fintech Conference in New York City on November 15 and the Stephens Annual Investment Conference in Nashville on November 17. With that, I'd like to turn the call over to Odilon.

Thank you, John. Hello, everyone, and thank you for joining our third quarter 2022 earnings conference call. We are pleased to have delivered another quarter of revenue in line with guidance. We have demonstrated the resilience of ACI's business in a macro environment pressured by foreign exchange and inflation. Despite the macro environment headwinds, it is significant that we can maintain our full year 2022 constant currency revenue growth in the mid-single digits after factoring in the corporate online banking divestiture. Revenue for the quarter was up 1% adjusted for foreign exchange and by divestiture adjusted EBITDA was down 36%, adjusted by foreign exchange and the divestiture. It is important to add color to the near-term pressure on our adjusted EBITDA from foreign exchange and inflation. I have two critical points to share about this: First, the impact of inflation is restricted to the interchange component of our Biller business. We have been able to manage the inflationary pressures effectively across all other P&L lines and business segments. Second, we have a dedicated team leading multiple initiatives to minimize this impact. These efforts are paying off. At this point, we have been able to offset one-third of the effect of inflation on Biller interchange this year. We intensify our efforts as we move into next year. These efforts include initiatives with customers, credit cards and consumers. I will turn now to some other highlights from the quarter. Our new overall ARR bookings were up 35% versus Q3 2021 or up 40% on a year-to-date basis, specifically, merchants, new ARR bookings grew by nearly 50% in the quarter. In Billers, new ARR bookings grew by 132%. In this volatile macro environment, these wins increased visibility into future revenue. It gives us greater confidence in our accelerating growth journey. I'm also pleased to announce that we successfully closed the sale of our corporate online banking solutions. We are glad that the new company Dragonfly is serving our corporate online banking customers and employees while taking the business to the next level. We are on track to launch our next-generation real-time payments technology platform in 2023, driving new growth across our business segments. We will give you more detail about the opportunities this creates for ACI and our customers at our Investor Day next year. Turning to our share buyback program, we repurchased 3.2 million shares for $91 million year-to-date. As of September 30, 2022, we still have $125 million remaining on our share repurchase authorization. Now let me turn to some recent wins. Last quarter, I flagged the vital role of central government in championing real-time payments. We continue to gain traction in the Middle East. We won another important central infrastructure deal in the region. Qatar's Central Bank is using ACI's real-time central infrastructure software, including fraud management. Other bank wins include Abu Dhabi Commercial Bank, Malaysia's CIMB Bank, Europe's Nexi Group, a paytech provider with presence in 25 countries; the Italian branch of Worldline Financial Services; Prosa, Mexico's largest processor and clearing house with presence in Latin America; IBM Canada; and the U.S. branch of a leading bank headquartered in Kuala Lumpur. In our Merchant segment, our wins include a major Middle Eastern airline, Cyprus, Italy's and U.S. fintech Corepay. Our U.S. Biller segment has record bookings. The ACI Speedpay will be used by two new Fortune 500 companies and Connect Holding, a fiber optic company offering Internet services in various states. I'm happy to see that the disciplined execution of our three-pillar strategy continues to work on our accelerating growth and value creation journey. Now I'll turn it to Scott.

Thanks, Odilon, and good morning, everyone. I first plan to review our financial results for Q3 and then provide our outlook for the rest of 2022. We'll then open the line for questions. Third quarter revenue was $307 million, up 1% adjusted for foreign exchange and the corporate online banking divestiture, which we completed on September 1 of this year. Adjusted EBITDA for the quarter was $46 million, down 36%, again, adjusted for foreign exchange and the divestiture. New ARR bookings in Q3 were $30 million, up 35% versus Q3 2021 and are up 40% year-to-date. And here in October, we signed a new logo representing one of the largest Biller customers. Turning to our segment results. Bank segment revenue was $117 million, down 4% after adjusting for foreign exchange and the divestiture, and segment adjusted EBITDA decreased 23% adjusted for foreign exchange in the divestiture versus Q3 2021. And as a reminder, in the bank segment, we saw more renewal in the license deals in the first half of this year compared to 2021. So if you look at the bank segment year-to-date, revenue and EBITDA are both up around 20% over last year. Merchant segment revenue was $36 million, down 3% adjusted for foreign exchange, while segment adjusted EBITDA was down 26% adjusted for foreign exchange versus Q3 last year. Biller segment revenue grew 5% and the segment adjusted EBITDA decreased 18% versus Q3 2021. And as a reminder, the Biller segment serves all U.S.-based customers, so it had minimal foreign exchange impact. We ended the quarter with $135 million in cash on hand and a debt balance of $1 billion. This represents a net debt leverage ratio of 2.3x, which is just below our 2.5x target. Finally, I'll turn to our outlook for 2022. We are reiterating our full year revenue expectations to grow revenue in the mid-single digits on a constant currency basis, which we previously provided in September following the divestiture close. We are updating our revenue range only for the impact of foreign exchange fluctuations. So our updated full year revenue guidance moves to a range of $1.39 billion to $1.405 billion. Regarding EBITDA guidance, foreign exchange and inflation are pressuring our results in the near term. The inflationary pressure is really isolated to the interchange fees in our Biller segment, where our price per transaction is fixed, but the interchange fluctuates with the average ticket size. Though this is expected to impact us in the near term, we have several initiatives underway, including price adjustments to mitigate the impact in the medium term. As a result, we expect full year 2022 adjusted EBITDA to be in the range of $365 million to $380 million. In terms of capital allocation, we continue to deploy approximately half of our cash flow towards share repurchases. We've repurchased just over 1 million shares during Q3, and year-to-date through the end of September, we have repurchased just over 3 million shares, and we have $125 million remaining on our current repurchase authorization. With that, I will pass it back to Odilon for some closing comments.

Thank you, Scott. In summary, we delivered another quarter of revenue in line with guidance, demonstrating the resilience of ACI's business. Despite the economic macro environment, we are maintaining our 2022 guidance in constant currency revenue growth in the mid-single digits. While we are experiencing near-term pressure on our adjusted EBITDA from foreign exchange and inflation, the impact of inflation is limited to the interchange component of our Biller business. Our actions to address the impact are working and scaling. Despite these near-term headwinds, the strong momentum in our new business wins and our solid ARR bookings across our segments continue to validate our three-pillar strategy. Our industry-leading real-time payment solutions are critical to the modernization agendas of customers, including leading corporations, financial institutions, fintechs, merchants, and billers. In an environment where many companies are facing reduced visibility, our Q3 wins and bookings differentiate ACI. They reinforce our confidence in our accelerating growth journey. I thank our ACI employees for their dedication and our partners and customers for their trust. Thank you all for joining us today. And now we will open the line for Q&A.

Your first question comes from Mayank Tandon from Needham & Company.

Odilon and Scott, could you maybe delve into the impact of interchange a little bit more in detail how that sort of flows through the P&L? I didn't quite grasp that. And then in terms of the efforts you're taking on to address that challenge, could you maybe, again, provide a little bit more detail on how that works and when we should be seeing the benefits of that?

Yes. To clarify, the specific area where we are experiencing inflationary pressure is within our utility vertical in Biller. Other areas are less affected, but the utility vertical saw a significant spike during the summer months. The pricing for these contracts is generally based on a payment mix, but this situation isn't merely about the mix; it concerns the average ticket size. Energy prices surged in the summer, and we expect this level of average ticket size to persist for the remainder of the year. The interchange cost is reflected in our financial statements as part of the cost of revenue. Regarding our efforts to address this issue, it’s not something we can resolve in a short timeframe of 30, 60, or 90 days. We are tackling it contract-by-contract, which includes price adjustments in collaboration with our customers. This is why we cannot make immediate changes, leading us to adjust our guidance for the year. We believe we have managed to mitigate about one-third of the inflation impact this year. Additionally, we have implemented other cost-saving measures unrelated to interchange fees to lessen the effect this year, and we will see the full benefit of those actions next year. We continue to work with customers individually to implement these adjustments.

Mayank, just to add more color. This matter with interchange and all these task force has my full attention. We are meeting on a weekly basis. We are very proud of the team because we were able to, I would say, in a six-month effort or even less than that, a three-month effort really find like a one-third already benefit on the whole impact. I'm much more positive about next year. It is not something easy to fix because it's contract-by-contract. The other important thing to clarify is this is not only about increasing prices for our customers; it's really about generating a win-win solution. When our customers make more sense for them and we make more sense for us, they make more money and we make more money because consumers migrate from higher-cost payment methods to lower-cost payment methods, for example, from expensive credit cards to ACH. That's the effort that is working. And again, we are very positive about that next year.

Okay. This is a very helpful color. And then let me ask you one broader question. In terms of your transaction-driven growth on the merchant and the Biller side, how does the global slowdown impact that?

Go ahead, Mayank. There's a fire alarm going off here. Hopefully, it's not on our floor. Please continue.

Okay. I was just asking more in terms of the transaction-driven business. What are you seeing right now in terms of trends? Clearly, the ARR growth is positive, but as you go into potentially a slowdown or a recession, how does that affect the transaction-driven segments, especially the Biller and the Merchant services side?

Yes, that's a good question. At this moment, we don't have a top line problem. You can see by our guidance that we're going to continue to grow by mid-digit this year, as we've said before, in constant currency. We think we're going to continue to accelerate going forward. That's the idea. So I don't see a gross revenue problem. The problem is very isolated to an interchange issue with Billers. Again, we see signs of recession in some continents, but at this point, nothing that could impact our top line.

Yes. The only other thing I'd add to that is, in the Merchant area, that's probably where you might see it. We actually see transaction volumes picking up as we're entering the fourth quarter and exiting the year. So I don't think at this point, we're seeing a lot of weakness in the merchant transaction.

Your next question comes from the line of Peter Heckmann from Davidson.

I was just curious in terms of the bookings year-to-date by segment, certainly, Biller really stood out this quarter. I can't remember if you've given that disclosure in the past, but do you have that at your fingertips?

The quarter showed strong performance from both Biller and Merchant. Looking at the entire year, Banks had better results in Q1 and Q2 due to significant renewal activity and new customer acquisitions, contributing to new ARR on the bank side. Overall, the performance has been quite broad across the three segments over the nine months. In Q3, however, the strength was mainly in Merchant and Biller.

Peter, your question is very important because we expect this year to have a record in ARR in the three segments when we close Q4. And that's very important for next year. So let me just give more color. When we talk about ARR bookings, we are referring to the expectation of revenue that we have after launching in the first year. So when you talk about, for example, $2 million on the contract of ARR bookings, what you're seeing is that after launch, for example, in Merchant and Biller, it's around 3 to 6 months and with banks it's around 1 year. After launching, we expect to have that $2 million of revenue going forward. So when we talk about increasing this amount, it gives us a lot of visibility into the next year.

Okay. That's helpful. And then you mentioned you signed a billing customer that will wind up being one of your largest, but just a little bit more color there. Was that a totally new to ACI or something or did the customer consolidate services? And when would you expect that particular customer to go live?

Totally new to ACI. There was a lot of competition for that, and we are very happy that we were able to win. This is a very complex launch, so it's likely going to be a rollout. I would expect that most of the results from that Biller will be in 2024, but we're going to have a good part of it already in 2023. So it's really a two-year launch because it's a complex, huge business.

Okay. Great. And just maybe one last housekeeping item. But just in terms of isolating the divestiture and foreign exchange, was the divested revenue approximately $4 million to $5 million and then foreign exchange was approximately like a 400 basis points headwind?

Yes, that's a good figure. Yes, because the divestiture really only pulled out a month's worth of activity in the September month.

Your next question comes from the line of Joseph Vafi from Canaccord Genuity.

Nice to see the ARR bookings remained strong. Just one more on the Biller. I think you recovered maybe one-third of that lost EBITDA there. And I know you can't really provide guidance on it, but do you think you can, would you be able to recapture the majority of it? Or is there a goal or a number we should be thinking about on those renegotiations and the way some of those contracts are structured?

When you say that we are recovering one-third, we are talking about the whole year. So the impact that we are expecting over the full year, we are projecting that we are going to recover one-third. Most of it we have already recovered, but some more recovery will happen in the next two months, November and December. So one-third relates to the whole year this year. When you talk about next year, if inflation continues, I think the pressures will continue. However, as we have already started working on that, I'm much more positive about next year because in basically four or five months, or three to four months that we put together this task force, we've really been able to find one-third. We are already working not only for this year but also for next year, so I'm much more positive about next year.

Got it. I understand that the ARR has been strong. With the more focused sales force and product set, have you noticed any conversion from the license business to cloud? Is that contributing to the strength in ARR? Could you also provide an update on license sales compared to cloud sales overall?

Yes. Thank you, Joe. In reality, we have not seen a lot of migrations from license to SaaS in our base. What is license continues to be licensed. SaaS is all about new logos. The SaaS business that we are generating is all about creating new logos in banks. It is really incremental to the license business when you talk about banks. When you talk about merchants, most of the revenues are already SaaS, and below the 100% of that business is SaaS. We're expecting to have a record year in all three segments for SaaS deals, for ARR bookings, right? So it is a very positive story and is helping us in our journey to have more recurring revenue.

Your next question comes from the line of Mark Palmer from BTIG.

Last year, at this time, you provided some helpful guidance regarding the percentage of the company's annual revenue guidance that was already under contract. It was, I believe, 99% at that point. Can you provide a comparable statistic for this year in terms of where you are in that regard?

Yes. Good question, Mark. If we look back at last year, we had so much of our revenue and EBITDA because a lot of it was all license fees that were back-end loaded, all sitting in the fourth quarter. The reason we put out that statistic was to provide comfort that it was there and that it was under contract. We don't have a similar statistic for this quarter this year. We had a lot more license revenue coming in Q1 and Q2. So we have a lot better phasing of that this year, but we're comfortable with the path we've got left in the rest of the year. We're comfortable with this revenue range.

And just one follow-up question regarding the inflation impact on the Biller segment and the actions that you've been taking to mitigate that. You said one-third of the impact has already been addressed. Was that reflected in the third quarter results, or is that something where the one-third is going to be reflected to a greater extent in the fourth quarter?

Part of it was in the third quarter, and part of it is going to be in the fourth. You can expect that the benefit is going to grow over time because the more actions we generate, for example, when you deal with a big complex, we can readjust, at the mix, we adjust the price for consumers. That impact has the whole effect going forward every month. So the more that we do, the more it accumulates. You should expect that it is accumulating month after month, but we already have part of that impact in Q3.

Very good. And just one more question regarding the Biller segment. You're processing utility payments and other types of consumer payments. Has there been any indication of any credit-related issues among those for whom you're processing payments that could potentially impact volumes?

When you say credit, are you referring to credit issues? We haven't seen any.

Meaning repayments—payments of utility bills and things of that nature, with higher inflation and economic challenges we're hearing about folks who are struggling to pay their bills.

No. We're not seeing any volume trends indicating trouble within that consumer base.

To add some color about that, next year, as you know, we're going to be launching the request for real-time payments with Billers as soon as it's available, probably talking about by the end of Q2. When that happens, we're going to work with our Billers and we're going to push that payment method significantly, as expected, which has a very low interchange rate. We can even link this to our 'Buy Now, Pay Later' feature, with 70 companies linked to that in the merchant business. We could use that in the bill payment sector to help consumers with paying if a recession occurs. I see the current need regarding interchange not just as a problem, but as an opportunity for education in the coming years.

Your next question comes from the line of George Sutton from Craig-Hallum Capital.

First, Scott, just a clarifying question. You mentioned that you felt merchant volumes were picking up currently. I just want to ensure that is obviously seasonally, that happens, but I'm just curious if that's a year-over-year statement that would be quite a bit different than some others, like Amazon is. So curious if that's what you mean?

Yes. Our volumes are picking up year-over-year. So if you compare our year-over-year growth Q3 over Q3 last year with Q2, we think that will uptick again here in Q4.

It's also very geographic-based, right, Scott?

Yes, ours is predominantly e-commerce versus, say, in-store transactions. Our trend is showing a pickup in Q3 year-over-year.

George, that's a great question. So, starting with the last point, when you talk about real-time payments, this next generation that we expect to be available in the first half of next year for the U.S. will be launched very strongly—we're already talking to clients, but we will be launching it in the media with clients in the first quarter of next year. We expect to see a lot of excitement within U.S. clients about that. We've talked with many important ones and some new logos. So I expect a lot of demand for our offering. The deals that we're going to sign take around 6 to 9 months to launch, so revenue really comes in 2024. But yes, we would be able to impact 2024 already with this new technology.

And any sense on these real-time payment deals you announced? It sounds like some were infrastructure and some were connectivity. Could you break your success with those customers into those two pieces?

Yes. Those are license deals, so you will already see the revenue impact because most of them are licensing deals.

Your next question comes from Charles Nabhan from Stephens Inc.

I know it's one of your larger verticals, but could you comment on how large utilities is as a percentage of bill pay? And secondly, in the past, you had alluded to higher education and consumer finances as a couple of your growth verticals. I was wondering if you could dive into that a little further and think of some of the traction you're getting in those two areas?

Yes. Utilities make up about 30% of the Biller business. Regarding higher education, we're getting pretty decent traction there, with actual double-digit transaction growth year-over-year in the higher education space. Government is a big segment for us too—it's seeing pretty good growth, I'd call it mid-single-digits growth over last year.

Got it. And just as a follow-up, some of your peers in the bank technology space had alluded to elongated sales cycles in Europe and just pauses in decision-making. I wanted to see if you're seeing anything along those lines. Secondly, if we could bring it back to domestic—thinking about the NextGen platform for next year. It sounds like it will enable you to go a little down market within the bank space, so I was hoping you could comment on those two areas in terms of what you're seeing and what your expectations are.

Definitely. When you talk about that agitation, our view is that we don't see that much because we are at the center of this modernization with banks and finance institutions. But definitely, it varies by geography. Yes, Europe is different than the rest of the world, and it feels like Europe is suffering a little more than the rest. However, we see Asia flying, Africa doing quite well, and Latin America doing excellent. In the United States, we don't see it. So it's more of a Europe phenomenon—not that strong for us. When you talk about this new platform, you got it right—it's not only refreshing for our clients but allows us to go down market to Tier 2 and Tier 3 banks in the U.S., which is a market we don't cover today with the real-time payment platform. This new technology provides significant expansion opportunities.

Got it. If I could sneak in one final follow-up. On the cost side, I know it's not necessarily a new dynamic, but could you speak to what you're seeing from a labor cost or vendor cost inflation standpoint as well as your ability to offset higher costs by reducing discretionary spend or any other flexibility in your cost base?

Yes. I will summarize, then Scott can give the detail, but we are very investor-friendly and able to manage inflation. We have been managing inflation across every line with the exception of the interchange, which takes time. I feel confident we can continue to manage inflation in every other line. Interchange will take more time.

Yes, it's a good question. From a software and SaaS provider standpoint, we don't have many of those supply chain type inflationary pressures in terms of input costs, so we really don't see it. On the supply chain, we're not a heavy user of energy. We're indirectly impacted by the utility segment we have in our Biller business. So we don't really face significant burdens in terms of energy consumption nor are we seeing a lot of real broad-based wage pressure in the markets that we're in around the world. So the inflationary impact, when we say it's isolated, is pretty much so to the Biller or Utility segment, and everything else is quite manageable.

There are no further questions at this time. I would like to turn the call back over to the presenters.

Well, thank you, everybody, for dialing in and for your questions. We look forward to following up in the coming weeks. Have a great day.

And we're fine with the fire alarm.

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