Aci Worldwide, Inc. Q1 FY2023 Earnings Call

Good morning. My name is Audra, and I will be your conference operator today. I would like to welcome everyone to the ACI Worldwide, Inc. First Quarter 2023 Financial Results Conference Call. I will now turn the conference over to John Kraft. Please go ahead.

Thank you, and good morning, everyone. On today's call, we will discuss the company's first quarter 2023 results and financial outlook for the rest of the year. We will take your questions at the end. The slides accompanying this call and webcast can be found at aciworldwide.com under the Investor Relations tab and will remain available after the call. Today's call is subject to safe harbor and forward-looking statements, like all of our events. 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 Tom Warsop, our Interim President and CEO; and Scott Behrens, our CFO. With that, I'd like to turn the call over to Tom.

Thanks, John. Good morning, and thank you all for joining our first quarter 2023 earnings conference call. I'll start this morning with some brief comments on the quarter, and then I'll hand it over to Scott to discuss the detailed financials and our outlook for Q2 and the remainder of the year. We'll then open the line for questions. We delivered first quarter results that were consistent with our expectations and reflect our team's strong execution despite an uncertain economic environment. Total recurring revenue grew 9%, driven by growth in the Biller and Bank segments, while consolidated revenue was $290 million, down 5% year-over-year, mainly due 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 million, down 59%. As you may recall, these license renewals tend to be extremely high margin. New ARR bookings for the quarter were $11 million. When looking at the new ARR bookings on a trailing 12-month 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 million, 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%. This growth was driven by customer onboarding and by the meaningful steps we've taken to address the 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 substantial progress in recontracting across our book of business. The results of these efforts are coming through the P&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. 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. 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. We're also continuing to make meaningful investments in our Merchant segment, particularly in our go-to-market and new and innovative capabilities. 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. We expanded our SaaS business with a less traditional U.S.-based fintech customer, which included several new product implementations on their behalf. We had wins with payments orchestration with important new European e-commerce vendors. We had renewals and expansions with several merchant clients, including a 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 one of the largest processors in Mexico; and finally, 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 Azure cloud-based deployment. Just last week, I met with a central bank in Africa, and we discussed the possibilities real-time payments create, including how their overall economy can benefit from the many use cases inherent with real-time payments. It was only a first dialogue that further cemented my position about the future potential for real-time payments in developing markets and around the world. Overall, I'm pleased with the progress we made in the quarter and our team's execution amid the challenging market environment. While we recognize there's more internal work to be done, we’re confident we have the right overall strategy in place 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 us achieve that goal, particularly within real-time payments and cloud-based technologies. Now I'll turn it over to Scott to discuss financials and our guidance.

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 million and adjusted EBITDA was $25 million, 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 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 and 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. As a reminder from our last earnings call, our nonrecurring license fee revenue, which 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 they have very high flow-through to EBITDA. Turning to our segment results. Bank segment revenue was $88 million, and adjusted EBITDA was $25 million. The Bank segment is predominantly licensed software, so this will be the most impacted by this year's timing of the renewal license fees. Merchant segment revenue was $35 million, and adjusted EBITDA was $7 million. We are in the final stages of the transition from the nonrecurring license fees to recurring SaaS revenues in this segment, which can clearly be seen in our results this quarter. Our Biller segment revenue was $167 million, which represents 11% growth over Q1 last year, and adjusted EBITDA increased 12% compared to Q1 last year. The growth in both revenue and profitability in this segment is driven by customer go-lives late last year that will contribute to full-year growth this year, and we have made notable progress with our interchange improvement program. Cash flows from operations were up nearly 40% over Q1 last year. We ended the quarter with $142 million in cash on hand, a debt balance of just over $1 billion, and a net debt leverage ratio of 2.9 times, and we have $200 million remaining on our share repurchase authorization. Turning next to our outlook with what we're seeing to start the year, particularly the strength of the recurring revenue growth. We are reiterating our full year guidance with revenue in the range of $1.436 billion to $1.466 billion. We continue to expect adjusted EBITDA to be in the range of $380 million to $395 million with net adjusted EBITDA margin expansion. For Q2, we expect revenue to be in the range of $300 million to $310 million and adjusted EBITDA to be in the range of $35 million to $45 million. Similar to what we saw here in Q1, Q2 will be impacted by lower license fee revenue compared to Q2 last year, as we expect to see the license fee come in the second half of the year. So in summary, we're tracking on the year as expected. 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. With that, I'll pass it back to Tom for some closing remarks.

Thanks, Scott. In summary, we delivered solid results in the first quarter, 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. In 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, our strategy, and our ability to deliver on our revenue growth goals in 2023 and beyond. Before I open it up for Q&A, 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 selection process and expects to complete the search in the upcoming weeks. We look forward to this announcement soon. With that, thank you for joining us today, and we'll now open it up for Q&A.

Thank you. We'll take our first question from Peter Heckmann at D.A. Davidson.

Hi, good morning, everyone. Thanks for taking the question. So it was good to see Biller revenue, net of interchange, up about 7% year-over-year. 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?

Yes, Pete, this is Scott. We're really pleased with the progress for several reasons. One is that we're seeing positive results in both gross revenue and net revenue and profitability in the Biller business. The interchange program initiatives we've implemented are starting to show benefits, along with the go-lives from late last year. This year, we'll experience a full year's worth of benefits from those go-lives. We're confident that billers have made significant progress in terms of growth rate, and we're beginning to see the positive impact of the interchange initiatives. We expect to see both sequential benefits and comparable improvements in interchange as a percentage of gross revenue. Overall, we are benefiting from both the go-lives and the interchange improvement initiatives.

Yes, I would like to add that we discussed the new customer we signed, which is our largest billing deal to date. It went live a couple of days ago, and we implemented it gradually to manage risk. Currently, it is in the friends and family phase, and everything is going smoothly. We expect to see an increase in performance over the coming months, which will be advantageous for us.

Good. Good. That's good to hear. And then just curious, no repurchases in the quarter. Is that something thinking more about working capital needs, or were you potentially blacked out from repurchases in the quarter?

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

Right, thank you.

And we'll move next to Joseph Vafi at Canaccord Genuity.

Hi, good morning, guys. This is Will Johnston on for Joe. 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.

Sure. FedNow is set to launch in July, and we have been collaborating with the Federal Reserve on this initiative for some time. We are currently in the final testing phases and are well-prepared for the launch for our customers, with a strong pipeline of new opportunities stemming from our involvement with FedNow. Although there are no volumes to report yet as it hasn't gone live, we expect to see activity pick up immediately after the launch. Overall, we are in a great position and have been at the forefront of this process.

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

Yes. Generally, we need to remember that our products are mostly nondiscretionary across all three segments. The only area where we see direct impacts from consumer behavior would likely be in the Biller and Merchant segments. Our biller verticals consist of nondiscretionary payment types, and at this moment, we’re not observing any changes. On the Merchant side, we are predominantly e-commerce driven. The growth in e-commerce is outpacing in-store trends, so we aren’t noticing any shifts right now. In fact, our Q1 recurring revenue growth, which closely relates to transactions within the quarter, increased by 9% year-over-year; this is actually a bit stronger than we had anticipated. Overall, we’re not seeing any negative trends, and the year-over-year recurring revenue growth is exceeding our expectations at this point in the year.

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

Thank you. This is James on for George. Can you talk about sort of conversations you're having with bank customers in the U.S. about FedNow and real-time payments? How quickly are banks expecting to connect given you've overseen a lot of these go-lives across the world? What are your expectations from when adoption hits critical mass in the U.S.? And then can you talk about the competitive landscape in the U.S. and what gives you the right to win?

Sure. On the FedNow point, we expect adoption to begin immediately. 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. I don’t know exactly how quickly it will happen, but it's a high value-add transaction type for certain consumers. I think we will see that adoption ramp up. I don’t know 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 to use it as soon as it's available. You were asking what gives us the right to win in our current environment. The products we have are rock solid, proven. We continually invest in our products, and we really understand payments. That is becoming a more and more important part of our customers' business. Payments used to be a cost center, but now it’s an indispensable factor. Customers want flexibility, choice, reliability, and speed, and ACI is perfectly positioned for that. When I talk to customers and potential customers, there's never a question about whether ACI is a good choice for them or whether ACI can do it; there’s no doubt about that. We focus on how we can help them meet their strategic objectives, and those conversations are fantastic. Even central banks are looking for ways to enhance the value added to consumers and their economy. It’s crucial to help customers understand how we can add value.

Perfect. Can you talk about real-time payments and how that can impact the Biller business? Bill Pay is one of the first use cases, but does your experience in real-time connectivity and managing the infrastructure translate into any advantage on the Bill Pay side? Could you gain a competitive edge due to real-time payment adoption in Bill Pay?

I think so, yes. That is clearly a good use case for real-time payments. Someone who needs to make an immediate payment to keep their electricity on or restore their gas can find the current payment options cumbersome and expensive. Real-time payments make that easier, quicker, and less expensive. So definitely a good use case, and we have the ability to connect to all types of payment rails. It does give us an advantage, and we discuss that with our customers. It's essential that we help our customers be ready to facilitate those payments as well, which we are actively doing. Over the medium to long term, I believe this is an advantage for us, particularly because of our global presence in real-time payments.

Great. Last one for me. Can you sort of address the weakness in Merchant this quarter? What gives you confidence that you could 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. Any detail would be helpful.

Yes. A lot of the decline is coming from the license fee. In that customer segment, much of the business has shifted towards more of a SaaS or recurring type payment. The year-over-year decline is primarily from that shift from license to recurring. But you should see that start to flip positive in Q2 and continue to grow positively in the second half of the year. So we expect to exit at a double-digit rate of growth as we enter 2024.

Hi, guys. This is actually Sam on for Mayank today. Thanks for taking the question. Just wanted to first hit on the ARR bookings, which were soft this quarter following 4Q, I think, a record quarter for bookings. Can you guys discuss what you see in terms of new customer conversations and activity levels, and parse out your expectations for the remainder of the year? Thanks.

Yes. I wouldn't consider Q1 as typical since it is generally a weaker quarter for us regarding overall bookings. In terms of ARR, we introduced trailing four-quarter ARR bookings to help manage some of that sequential volatility. However, trailing four-quarter ARR bookings have increased by 8% compared to the same period last year. We anticipate that ARR bookings will grow in line with our long-term growth target of 7% to 9% next year. Therefore, I wouldn’t view Q1 as a trend; it is simply a slower quarter of the year.

Got it. That's helpful. And then just quickly on the Q2 guide, the revenue guide was a little lighter than expected. Was this mostly due to a change in banking renewal timing, or is it related to some of the merchant license stuff you mentioned, or anything else in Biller?

Yes, it's mostly banks, and it's not really a function of a change in the timing of renewals. The group that renewed five years ago, that cohort for 2023 is mostly second-half weighted. So it's really just the Bank segment's timing of the license fees, but we’re tracking as expected. We were expecting the license fee to come in when renewals happen in the second half of the year.

Yes. And 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 deals that renew in the second half that have already signed. But because of the accounting rules, we don't recognize that until the second half. So we're all over it. Things are performing as expected. The renewal book is coming in as expected, and we don't see any issues with it. It's purely a timing issue, and that's just how it works.

Alright. Thanks, guys.

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

Okay. Well, thank you. We really appreciate your time today. As I said, we're pleased with the results in the first quarter. We are on track for the year. There are a lot of things going on in the world, but we feel great about what we're doing. We look forward to continuing to have great dialogues with you. Thank you, and enjoy the rest of your day.

Thanks, everyone.

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