Earnings Call Transcript - ACIW Q2 2021

Operator, Operator

Welcome to the ACI Worldwide, Inc. Second Quarter 2021 Financial Results Conference Call. My name is Sylvia, and I'll be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to John Kraft. Mr. Kraft, you may begin.

Operator, Operator

Thank you, and good morning, everyone. Today's call, like all of our events, is subject to both safe harbor and forward-looking statements. You can find the full text of both statements on the first and final pages of our presentation deck today, 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. Before I hand it over, please note, ACI will be attending the Wells Fargo Fintech and Technology Services Forum and the Canaccord Annual Growth Conference, August 11 and 12, as well as the Needham Virtual Fintech and Digital Transformation Conference, August 18. With that, I'd like to turn the call over to Odilon.

Odilon Almeida, President and CEO

Thank you, John. Hello, everyone, and thank you for joining our second quarter 2021 earnings conference call. When we last spoke in May, we discussed our strong first quarter performance and shared updates on our progress in executing our 3-pillar strategy. Today, I'm happy to report another solid quarter. In Q2, we delivered results at the high end of our expectations with revenue of $302 million and adjusted EBITDA of $60 million. Importantly, our recurring revenue was $250 million in Q2, an increase of 7% year-over-year with positive recurring revenue growth in all 3 segments. I'm pleased to report increasing strength in our global sales organization. In the quarter, we recorded key wins in all 3 segments. These wins included an impressive list of new logos. Let me share some highlights. In our banking segment, we expanded our relationship with a major Canadian bank. We will consolidate their global wire processing and utilize ACI's real-time payment solutions in the cloud, creating a single functionally rich ecosystem. We also contracted with a well-known U.S.-based financial technology disruptor with plans to move their issuing business to the cloud. Additionally, we secured a real-time payments win with the Central Bank of Indonesia. This comes up to nearly 2 years of work and is an important win for ACI that cements our growing lead in the real-time market in Asia. In our Merchant segment, we secured important wins, including a deal with a leading fuel and travel operator to upgrade their point-of-sale operations to ACI's omnicommerce software. Finally, in our Biller segment, we signed several very large contracts, including one significant competitive win. This customer plans to use our alternative payment channels and benefit from our solutions' ability to offer least-cost routing. Moving to another topic, I'm excited to announce that ACI expanded our collaboration with Microsoft, forming a global alliance to deliver best-in-class payment solutions in the cloud. The agreement will expand and accelerate ACI's cloud offerings, allowing both companies to capitalize on growing global demand from financial institutions driving towards digital modernization. The strength of the alliance is how ACI and Microsoft cooperate in key areas, including go-to-market and customer onboarding. It also creates pathways to power innovation. Our growing pipeline, combined with an improving broader economy, provides us with increasing confidence that we are well-positioned to drive growth and deliver strong and accelerating performance in the second half of 2021 and beyond. We remain laser-focused on continuing to build a robust pipeline that will support our long-term growth objectives. Importantly, we expect to achieve the Rule of 40 in 2021 for the first year ever. We remain actively engaged in the review of our business portfolio and M&A opportunities to ensure we are maximizing short- and long-term value creation for our shareholders. With that, I will turn it over to Scott to discuss the financials.

Scott Behrens, CFO

Thanks, Odilon, and good morning, everyone. I first plan to go through our financial results for Q2 and then provide some additional commentary regarding our outlook for the rest of the year. As Odilon mentioned, we've delivered results at the higher end of our expectations. Recurring revenue grew 7% to $250 million in Q2 and was 83% of our total revenue, up from 78% in Q2 last year. Importantly, recurring revenue was up in all 3 of our segments compared to Q2 last year. Total revenue was $302 million in the quarter, which was up 1% over last year. Adjusted EBITDA in the quarter of $60 million was down from $78 million in Q2 last year. The one thing to point out here is that more of our license fee revenue from in-year renewals will come in the second half of this year compared to 2020, and that's just based on the timing of the contract expirations for those contracts that renewed this year. And as a reminder, these license fees come with very high flow-through to EBITDA as well. So looking at our 3 segments, in our banking segment, which has been the most impacted by COVID-19-related purchasing delays, we saw recurring revenue growth of 2%, with recurring revenue representing 56% of its segment revenue compared to 50% for Q2 last year. Adjusted EBITDA in our Banking segment was down in Q2 due to the decline in nonrecurring license revenue. That will pick up here in the second half. In our Merchant segment, we saw recurring revenue growth of 5%, with recurring revenue representing 95% of its segment revenue compared to 91% in Q2 last year. Adjusted EBITDA in our Merchant segment improved 2% compared to Q2 last year. Finally, in our Biller segment, which is entirely recurring revenue, we saw recurring revenue increase 9% from Q2 last year, and adjusted EBITDA increased 1% compared to Q2 last year. As we've been discussing, this year, we introduced a new bookings metric, which is annual recurring revenue from new contracts signed in the quarter or ARR. This quarter, new ARR was $18 million, down from $22 million in Q2 last year. We actually saw a new ARR rebound in North America in Q2, delivering 6% growth over Q2 last year, offset by declines in our international markets. As Odilon mentioned, we are beginning to see international COVID-related headwinds dissipate, and we are confident that new ARR and revenue growth will accelerate in the second half of this year. ACI ended the quarter with $146 million in cash on hand and $474 million available on our credit facility after paying down $25 million in debt in the quarter. We ended the quarter with $1.1 billion of debt, representing a net debt leverage ratio of 2.8x. We are very pleased with the pace we've been able to deleverage following the Speedpay acquisition and expect to be back at or below our targeted 2.5x leverage exiting 2021. Additionally, we've repurchased 1 million shares of our stock during the quarter. Looking ahead to the rest of 2021, we are increasingly confident that we'll see new ARR and revenue growth accelerate in the second half of the year with particularly strong results in Q4 as we end the year. We are introducing revenue guidance for the full year 2021 with expectations to generate full-year revenue in the range of $1.335 billion to $1.345 billion. We are reiterating our adjusted EBITDA expectations of a range of $375 million to $385 million. For Q3, we expect revenue to be in the range of $310 million to $320 million and EBITDA to be in the range of $70 million to $80 million. With that, I will now pass it back over to Odilon for some closing comments.

Odilon Almeida, President and CEO

Thanks, Scott. I'd like to reiterate that Q2 was another strong quarter with results coming in at the high end of our expectations. We expect considerable growth acceleration in the second half and especially in Q4 this year. We are extremely happy with the prospect of delivering the Rule of 40 for the first year ever in 2021. In closing, we would like to leave you with 3 takeaways: number one, with the implementation of our 2 strategic pillars, fit for growth and focus on growth, we are starting to generate and will continue to generate healthy and predictable organic profitable growth; number two, with our third pillar, transformational growth through M&A, we remain actively engaged in the review of our business portfolio and M&A opportunities; number three, our ultimate objective remains quite clear, ACI Worldwide will create transformational short- and long-term value for its shareholders. We will now open the call for questions.

Operator, Operator

And the first question comes from Peter Heckmann from D.A. Davidson.

Peter Heckmann, Analyst

I was wondering, could you go through some of the things that may not be evident in the press release that you talked about increasing your confidence in revenue acceleration in the back half? I don't really see it in the ARR bookings number. So can you talk about maybe some contracts that you've signed since the quarter closed or some larger software deals that have either closed or are imminent that are giving you that confidence?

Odilon Almeida, President and CEO

Yes. Thank you for the question, Peter. I'd like to start by saying that I've been talking to the CEOs of banks around the globe. There are countries that are just getting back to the table finally. I'm seeing many new logos and lots of deals that we have been discussing for a good period of time that will definitely come to closure within Q3 and Q4. More in Q4 than Q3, I would say. That's one part of the confidence I have. The second point is we have a large backlog of renewals in Q4, very considerable. So you put those two together, and I feel very confident about Q4. Pete, let me give you some insight. This is the fourth quarter that we delivered on what we said we would deliver, and that's part of the culture here. We have Plan A, B, and C for the numbers that you see in Q3 and Q4. So I'm very, very confident about those.

Scott Behrens, CFO

Yes. Peter, I think the only thing I'd add is if you recall at our Investor Day last November, we mentioned that we were taking some structural cost reductions, but we were reinvesting heavily into the go-to-market, particularly the sales organization. We started that ramp-up late last year and early this year, spending the first half not only hiring but building out that pipeline. If you peel back on the Q2 ARR growth, we started seeing a pickup in North America. North America was up 6% in Q2, offset by declines in our international markets. Spending picked up in Q2, leading to a new logo win in the U.S. and a major wires transformation project sold to one of our customers in Canada. So we're comfortable that what we're seeing in the second half of this year is ARR growth that should come in the high single digits over the second half of 2020. That, combined with the renewal book we have and contracts that have already been signed, gives us confidence regarding the revenue range for the year. The implied growth in the second half is projected to be between 6% and 8%. It goes back to the investments we're making in go-to-market, driving the pipeline, which started to drive ARR bookings in Q2.

Peter Heckmann, Analyst

Okay. That's helpful. And just maybe a housekeeping question, but it looked like interchange took a big jump in the quarter year-over-year. I think that was related to the anniversary of the Speedpay deal. Just curious how that happened?

Scott Behrens, CFO

Actually, it was the movement in the tax filing deadline from Q3 to Q2. The federal and state taxes that moved into the second quarter generally bring high interchange business for us. At the net revenue level and EBITDA level, that tax business is essentially breakeven, so it brings in gross revenue, and interchange, but doesn't really impact us much at the net revenue or EBITDA level.

Operator, Operator

Our next question comes from George Sutton from Craig-Hallum.

James, Analyst

This is James on for George. The renewal activity sounds like you have a lot of confidence in a stronger Q4 compared to what you normally see. Just curious about your thoughts on some of the other segments as well and how those might contribute to strength in the back half.

Scott Behrens, CFO

I wouldn't look at necessarily Q4's renewal. A lot of our license side of the business drives a lot of it. License fees come in at pretty high margins, with not a lot of incremental fulfillment costs. But regarding the rest of the business, it's about the pipeline health we're seeing as we hit the midpoint of the year. So the confidence in the full-year revenue, particularly in the fourth quarter, is from the size of the renewal book and progress on the pipeline.

James, Analyst

Got it. And then on the expansion of your relationship with Microsoft, could you go into some detail there? What does that allow you to do that you couldn't have done before? What's changed?

Odilon Almeida, President and CEO

Sure, James. The fundamentals of our offering in the cloud are strong. We are cloud-enabled with a very competitive service that has been winning at a high rate, as you can see from the examples around the globe. However, I believe we can do much better as technology is evolving rapidly. This agreement with Microsoft is about innovation; it's about bringing to market what the market doesn't currently have. Additionally, it provides a very strong go-to-market strategy as we work together with clients. I've been talking to the CEOs of big banks around the globe, and everyone is talking about digital transformation and moving to the cloud. They need help and direction, and I believe ACI and Microsoft can provide that. Lastly, we are co-investing in the market and the development of new software. These three pillars highlight our excitement about this alliance. This is one of the most important alliances that you will hear from us in the upcoming years. The future is cloud, and partnering with Microsoft is a wonderful opportunity.

James, Analyst

Got it. And just one more, if I could. You mentioned a win with a leading digital bank and Banking-as-a-Service player in Latin America. Could you explain what pain points you're helping them solve? Were these competitive deals? Any feedback around why they chose ACI?

Odilon Almeida, President and CEO

Yes. First, because they understand our ability to scale. You can talk to those startups, which are very nimble and fast, but the question is whether they can scale to a big contract. We are helping a global bank launch in countries in Latin America and have already seen significant progression. Our clients value our brand and our ability to handle large transaction volumes. Secondly, the new leadership we brought to our International Markets has resulted in a renewed focus on sales. We're bringing the best executives into the market, and we're starting to see the results. These elements together make us confident about the second half.

Operator, Operator

Our next question comes from Mayank Tandon from Needham & Company.

Kyle Peterson, Analyst

This is actually Kyle Peterson on for Mayank. I wanted to touch on the SG&A leverage. It's been impressive here. Have you extracted all the efficiencies available, or is this a run rate needed to drive growth?

Scott Behrens, CFO

If you look across various cost line items, you'll see that our selling and marketing expense is up over last year. As part of the cost exercise we did last year, we took costs out and reinvested heavily in sales and marketing. We've continued to see strong margins and expect them to move up gradually. However, we’ll likely see a higher run rate on selling and marketing expense going forward.

Odilon Almeida, President and CEO

It’s fair to say that we improved margin by 600 basis points last year. Now, we will continue increasing margin, but it's more likely to be around 50 basis points a year, as we layer on that incremental revenue over our cost base.

Kyle Peterson, Analyst

That's good color. Could you remind us of your capital allocation priorities? You’ve been doing buybacks and paying down debt. How do you rank order those?

Scott Behrens, CFO

We historically moved towards disciplined capital allocation, typically dividing our cash flow into thirds: one-third for debt service, one-third for share buybacks, and one-third for tuck-in acquisitions. As we exit this year, our leverage target is 2.5x, while we are at 2.8 now. We may exit the year around 2.3 or 2.4, allowing us more flexibility in deploying cash going forward.

Operator, Operator

Our next question comes from Mike Del Grosso from Compass Point.

Mike Del Grosso, Analyst

Most have been asked, but I wanted to ask a higher-level question on your third pillar of step-change value creation through M&A. Can you provide any progress on this, and what are some criteria you look for in accretive M&A?

Odilon Almeida, President and CEO

Sure, Mike. This third pillar communicates to investors how focused we are on value creation. We are actively seeking opportunities and regularly considering various parts of our portfolio. Though I have nothing to announce today, there is considerable ongoing work. My goal is to ensure that any potential acquisition creates immediate value for shareholders.

Mike Del Grosso, Analyst

When you refer to accretion, do you mean to EPS, revenue growth, or EBITDA?

Odilon Almeida, President and CEO

I would say value creation, which could relate to EBITDA, top-line growth, or both – it should create value immediately.

Operator, Operator

Our next question comes from Joseph Vafi from Canaccord Genuity.

Joseph Vafi, Analyst

Could you provide an update on real-time payments in the U.S. and globally? Also, could you expand on the fintech win and how you see the fintech opportunity as a growth driver?

Odilon Almeida, President and CEO

Thank you for the question. We are witnessing a significant change. In the past, we were focused on offering solid solutions for existing banks. However, with our partnership with Microsoft, we are positioning ourselves for this new generation of fintechs. Digital banks in Brazil are seeing rapid growth, and we are competitive on offers in the cloud. Moving forward, while our cash flows will continue from big banks, growth will come from fintechs and the modernization of banks. Our alliance with Microsoft is crucial in positioning us for these emerging opportunities.

Scott Behrens, CFO

I would add that Q2 is a key highlight, with our win with the central infrastructure in Indonesia. Although this won't generate big revenue immediately, it's critical for building the foundation for future growth in real-time transactions.

Operator, Operator

And we have no further questions at this time. I will now turn the call back over to John Kraft for closing remarks.

Operator, Operator

Well, thanks, everybody, for joining us. We look forward to catching up with folks in the coming weeks and at the upcoming conferences. Have a good day.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.