Earnings Call Transcript - ACIW Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the ACI Worldwide, Inc. Fourth Quarter and Full Year ended 2022 Financial Results. I would now like to turn the call over to John Kraft, Senior Vice President of Strategy and Finance. Please go ahead.

John Kraft, Senior Vice President of Strategy and Finance

Thank you, and good morning, everyone. On today's call, we will discuss the company's fourth quarter and full year 2022 results and our 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.

Thomas W. Warsop, III, Interim President and CEO

Good morning. Thank you all for joining us this morning. As usual, we have a packed agenda today. I'm going to speak about several topics, including our recent CEO transition, my initial perspectives from my time in this role, and of course, our 2022 results, including sales performance and our outlook for 2023, including an update on the interchange challenges we talked about in the last call. It’s been about 3 months since we announced a change in our CEO, and I stepped in as the Interim leader of ACI. It’s been a fantastic 3 months and very interesting for me. What I can tell you is that we’ve entered a new phase for ACI, and we have some different needs from our leader. We are shifting our emphasis even further toward accelerating growth and capitalizing on our market position as three discontinuities take hold across our industry. First, payments continue to mature as a key differentiator for our customers. Second, the real-time payment revolution around the world is real and it’s accelerating. Finally, customers are becoming more open to new operating models for payments infrastructure and this often manifests itself as cloud opportunities, but it’s more than that, and I’ll talk more about that in a few minutes. ACI solutions underpin successful strategies to take advantage of all these market dynamics for customers around the world, and that is a great place to be. When I think about our next CEO, the ideal candidate will have significant financial services and payments experience, proven transformational leadership, large-scale sales acumen, and demonstrated service excellence expertise in highly complex regulated organizations. A balanced set of capabilities and experiences with an intense focus on growth provides the basis of our ideal profile. We’ve engaged a leading executive search firm, and they’ve identified several very promising candidates already. We expect to identify the next CEO in the coming months. I want to make one thing absolutely clear: You should not expect major shifts in strategy from ACI. The foundation of our business is strong. We are on the right track. We are intensifying our execution focus to drive results even faster than in the recent past. As you may know, I’m very familiar with ACI, having served on the Board since 2015 and as a customer of the company off and on for more than 20 years. When I was the non-Executive Chairman of the company, I was optimistic about ACI's future, and I can tell you that I'm even more optimistic after diving into a new level of detail as the CEO. Our products are mission-critical. They're market-leading, and they're extremely sticky. What we do is at the absolute core of our customers’ business. Our clients account for a substantial portion of the financial services market around the world, including leading financial institutions, merchants, and billers. We have a substantial market position, and the untapped opportunity is massive and growing fast. ACI is a consistent cash generator in a business that isn't extremely cyclical and isn't particularly impacted by economic swings, such as a potential recession. The strength of our business gives us a strong balance sheet with excellent financial flexibility, allowing us to take advantage of organic and inorganic growth opportunities as they arise, all aimed at delivering shareholder value. ACI is well-positioned to capitalize on the real-time revolution I already mentioned. With the addition of three central bank infrastructures in the Middle East, ACI now powers 25 domestic and pan-regional real-time payment schemes across six continents. We have more work to do to fully capitalize on the opportunities ahead, but we have a strong roadmap, and we are ready to execute. I will let Scott walk through the details, but I will make a couple of high-level comments about our 2022 results. Overall, we delivered results in line or better than the last guidance we provided. In 2022, we delivered mid-single-digit organic revenue growth, and that's 7% when adjusted for exchange rate fluctuations and our divestiture. Our EBITDA was nearly flat with 2021 levels despite significant pressure from the interchange issue we discussed on our last call. During 2022, we set an all-time new ARR bookings record, delivering more than $100 million in new annual recurring revenue, up 35%, creating a strong foundation for the future. Specifically, our new ARR bookings in Biller grew 93% over 2021 as we signed well over double the number of new levels. Our merchant segment new ARR bookings increased 87% coming from 37 new logos. This, combined with our visibility into our banking segment renewal calendar, provides us significant confidence in our revenue outlook that Scott will discuss. In the fourth quarter, we significantly increased our repurchase activity. In total last year, we repurchased 8.6 million shares for $207 million, which effectively completed our previous authorization. Today, we're also announcing that the Board has increased our repurchase authorization up to $200 million as we continue to actively pursue opportunities to enhance shareholder value. We expect to deliver revenue growth between 4% and 6% in 2023, building on the solid sales performance we had in 2022. Our EBITDA is expected to grow by between 6% and 10% to a range of $380 million to $395 million this year. Scott will walk through some more details, but this is in line with our prior statements about ACI's trajectory, positioning us to deliver on our target of upper single-digit organic growth in 2024. I also want to comment on interchange and the inflation-driven impact to our Biller business we talked about in the last call. As mentioned in November, we saw an increase in interchange costs primarily driven by larger average bill sizes in our Utility segment. We noted that we have a dedicated team focused on offsetting this impact, working contract by contract in that segment to reduce or eliminate our exposure, take full advantage of special programs, and leverage our volumes to lower interchange rates wherever possible and optimize our net revenue performance. We've completed our work on approximately 70% of our client accounts, and we are going to work through the remainder over the coming weeks and months. I considered starting with a discussion of market speculation, but I decided to save it for the end. It's not unusual for rumors to circulate during a leadership transition. We don't comment on rumors, as you know, but I can tell you that my team is fully aligned on doing what is best for the long-term interest of our shareholders. That isn't going to change no matter how many stories pop up. I've spoken to many clients and shareholders to make this point clear. Let me sum up: ACI is mission-critical for our customers. We've made good progress securing and accelerating organic revenue growth and expanding our annual recurring revenue. We are a strong and consistent cash generator and a disciplined capital allocator. We are driving payment modernization with many customers, including strengthening our real-time and payment cloud capabilities. We are investing to continue executing technology transformation and enhancing operational excellence to capitalize on the many opportunities in front of us. While I understand you may have some near-term uncertainty regarding ACI's leadership, you should not expect major shifts in strategy from ACI with the new CEO. Operationally and financially, ACI is focused and on track. Lastly, the bookings we signed last year, combined with our renewal calendar, provide me with a high degree of confidence in our future, and I intend to drive more visibility for our shareholders no matter which role I hold going forward. Thank you very much for your support, and I will turn it over to Scott to discuss financials and guidance.

Scott Behrens, CFO

Thanks, Tom, and good morning, everyone. First, I plan to review our financial results for 2022. I will then provide our forward outlook, including 2023 guidance. We will then open the line for questions. I will be starting my comments on Slide 4. Full year 2022 revenue was $1.422 billion, up 4% from 2021. Total adjusted EBITDA was $373 million compared to $384 million in 2021. Adjusting for foreign currency fluctuations and the divestiture of our corporate online banking product, full year 2022 revenue growth was 7%, and total adjusted EBITDA growth was 2%. As previously announced, we closed on the sale of our corporate online banking products on September 1, 2022, for approximately $100 million in cash. Total ARR bookings for 2022 grew 35% over 2021. Moving to the segment results, Bank segment revenue increased 9% and Bank segment adjusted EBITDA increased 4% versus 2021 adjusted for foreign currency and the divestiture of our corporate online banking product. Merchant segment revenue increased 5% and Merchant segment adjusted EBITDA decreased 4% versus 2021 on a constant currency basis. During 2022, we increased our investment in selling, marketing, and product initiatives, which we expect will improve growth in 2023 and beyond. Biller segment revenue increased 6%, while Biller segment adjusted EBITDA decreased 17% versus 2021. Throughout 2022, we operated in an inflationary environment in our utilities vertical, resulting in higher interchange fees in contracts where the price we received per transaction is fixed, but the interchange cost to us fluctuates with the average ticket size. In the second half of 2022, we implemented several initiatives, including price adjustments to mitigate the impact and improve profitability in 2023. ACI ended 2022 with $125 million in cash on hand and total debt outstanding of approximately $1 billion. Our net debt leverage ratio was 2.6x, which is within our long-term target of 2.5x. During the fourth quarter, we repurchased $116 million of our stock, bringing our total 2022 share repurchase amount to $207 million and $315 million over the last 24 months. During 2023, we expect to continue to deploy a significant portion of our cash flow to share buybacks. Finally, turning to Slide 5 with our outlook for 2023. Despite the uncertainties in the market, we expect to once again produce mid-single-digit organic revenue growth in 2023, with revenue in a range of $1.436 billion to $1.466 billion, representing 4% to 6% growth over 2022 on a constant currency basis and adjusting for the sale of our corporate online banking products. We expect 2023 adjusted EBITDA of $380 million to $395 million, which represents 6% to 10% growth on a constant currency basis and adjusting for the divestiture. For your modeling purposes here on Slide 5, we have shown 2022 on a pro forma basis for the sale of our corporate online banking products and reflected 2022 on a constant currency basis with 2023. This excludes one-time costs related to moving our European data centers to the public cloud and cost savings initiatives. For Q1 2023, we expect revenue to be in a range of $280 million to $290 million and adjusted EBITDA to be in a range of $20 million to $30 million. Our 2023 bank license renewals are more second half-weighted than in 2022, so we would expect our quarterly phasing of revenue and EBITDA in 2023 to look more like 2020 or 2021. Furthermore, with the strong bookings growth we achieved in 2022 and the expectation that those projects will go live here in 2023 and give us a full year benefit in 2024, this provides us confidence in our growth trajectory and we remain on track to deliver our long-term target of 7% to 9% organic revenue growth in 2024 that we highlighted at our 2021 Analyst Day. Our debt balances are near our leverage targets, and we expect to continue to use a significant portion of our cash flow for share repurchases. The Board has approved an increase in the share repurchase authorization up to $200 million. With that, we will now open the line for questions.

Operator, Operator

Our first question comes from Pallav Saini at Canaccord. Please go ahead.

Pallav Saini, Analyst

Good morning. Thanks for taking my questions. I have a couple here on your real-time payments business. Maybe you can remind us how big your RTP business is right now and how much it grew last year? And what type of growth are you expecting in 2023 and some of the drivers there? And I have a follow-up.

Scott Behrens, CFO

Yes. Let me clarify that when I say real-time payment is about 10% of our business when we look at real time from a product line perspective. But our overall strategy is really to productize within all of our product solutions, real-time payments capability. So whether you're a biller or a consumer of a biller and you want to pay with real time or your merchant wants to use real time, our strategy is really to implement real-time capabilities across all of our product sets. From a particular product set, it's 10% of the business, growing double digits. However, we are productizing it throughout our product suite.

Pallav Saini, Analyst

Got it. Thanks for that clarification, Scott. And I believe the Fed is now rolling out its FedNow program this year. Could you broadly frame what this means for your RTP opportunity in the U.S.? I think you are also participating in the pilot program. So anything you can share from that experience would be helpful. Thank you.

Scott Behrens, CFO

Yes. Thanks. So the FedNow program is indeed launching this year. We've been participating all along with the Fed and everyone is making progress, certainly, we are. Our clients are very interested in the program. If you step back, the U.S. has been behind the rest of the world in real-time payments. I often tell the story of my daughter going to university in China and how I had to learn about real-time payments firsthand because I didn't do anything about it until then. The U.S. is just starting to catch up, and the FedNow launch will be a big part of that. We are not in a position to make specific forecasts about how fast the real-time environment in the U.S. will grow once FedNow launches, but I am absolutely confident that it will grow much faster than it has in the past. I think Americans will become a lot more comfortable with the idea of real-time payments, which is great for us because we've been making investments for some time and we are prepared for that to start to take hold.

Pallav Saini, Analyst

Great. Thank you.

Operator, Operator

Our next question comes from the line of Peter Heckmann from D.A. Davidson. Please proceed.

Peter Heckmann, Analyst

Good morning. I want to follow up on that last piece. When you think about real-time payments in the U.S., what is ACI's primary opportunity? Connecting the banks to the switch, powering portions of the switch? How do you think about that? I put out a really interesting white paper last year on real-time payments penetration as a percent of electronic payments and there’s a wide range of adoption. How do you see the U.S. adoption of real-time payments unfolding?

Scott Behrens, CFO

Ultimately, our primary customer will be the banks and the connectivity to whatever that scheme is, in the case of what's rolling out near-term, FedNow. It’s really connecting the banks. I would say that’s the primary focus, and then it’s really how this real-time capability manifests itself in the U.S. So what are the use cases? What we look at in our portfolio of products and customers involves having the endpoints, whether it's the banks, billers, or merchants, really having those end points for electronic payments. Our software or our SaaS solutions are running those transactions, so the question is how it develops. We are positioning ourselves to ensure we provide these capabilities to our U.S. customers, regardless of where those use cases manifest.

Peter Heckmann, Analyst

Okay. How do you feel about the general pricing philosophy for real-time? You mentioned that you are working in 25 countries, powering government switches, yet the economic benefit to ACI doesn’t seem as significant as maybe it should be.

Scott Behrens, CFO

Yes. The pricing is fairly consistent with market standards. Our place in the market focuses on providing the software solution. What we do is very similar to the way we charge for credit transaction processing. Our pricing model remains volume-based, and most of the customers are currently buying at low volume, waiting for the critical mass to occur. What’s been important for us is selling the solution, getting it installed to that central infrastructure. As transaction volume increases, we will charge based on that capacity and what will effectively be all margin at that point. There are minimal incremental fulfillment costs to deliver that. So our pricing remains aligned with our other licensed products that drive high volume.

Thomas W. Warsop, III, Interim President and CEO

Yes. Just to add one thing, we are currently focused on inserting ourselves into as many of these schemes around the world as we can. That is important for us and will become a more meaningful part of the business as transaction volumes grow, along with the margin characteristics we mentioned. I believe we are off to a very good start.

Operator, Operator

Our next question comes from the line of George Sutton from Craig Hallum. Please proceed.

George Sutton, Analyst

Thank you. Nice to see the continued buyback emphasis, and Tom, welcome to the call. I’m curious about the way you described the business. You said we have a substantial opportunity, a large untapped opportunity, growing fast. The market has viewed this largely as a relatively mature business. Could you give us your perspective on that thought process?

Thomas W. Warsop, III, Interim President and CEO

Yes, sure. This is related to our previous discussion. The revolution in real-time payments—it’s palpable. As I mentioned, today it’s about 10% of our business; it should become a significantly larger portion. As real-time payments replace cash transactions globally, this becomes a different segment of the payment ecosystem for us, where we have very little involvement with cash transactions traditionally. That's exciting. Additionally, some geographies, like Africa, have huge opportunities that we have barely scratched the surface of. The real-time payments revolution and our offering of products as a Software-as-a-Service model, allows us to support smaller financial institutions that may lack the infrastructure to manage our software themselves. So we have a multitude of interesting opportunities, and our biggest challenge is to focus on those that will make the most difference without spreading ourselves too thin.

George Sutton, Analyst

One other question—we have been anticipating the NextGen platform to be launched this quarter. There wasn't any mention of that on the call. Could you address where that stands?

Scott Behrens, CFO

Yes, that’s ultimately going to be related to the FedNow offering, particularly for the U.S. The rest of the investment is focused on overseas hub capabilities. So in the U.S., it will be leading to the FedNow initiative, which is expected later this year.

Operator, Operator

Our next question comes from the line of Charles Nabhan from Stephens. Please proceed.

Charles Nabhan, Analyst

Good morning and thank you for taking my questions. I had a quick question on the Biller segment. If I heard you correctly, you said that you were 70% of the way through your contract negotiations. Do you expect to be complete by the end of 2023? Regarding some of the new wins in the segment over the past year, is there anything different about the normalized margin profile of the business?

Thomas W. Warsop, III, Interim President and CEO

We are roughly 70% through and as I think we've described before, this is not a situation where we can simply send out a letter saying your prices change; we need to go contract by contract. This is a long process, especially because utilities are highly regulated entities. We can reach agreements, but they must go through an approval process in local regulatory environments. I expect substantially all of that work to be completed this year. I hope it will be 100%, but I hedge that just to provide a little context. We've found that every client we’ve contacted understands the necessity for this discussion, even if they aren’t happy about the increases.

Scott Behrens, CFO

In relation to the margin profile in 2023, we expect to see two key benefits. One is the revenue growth we will see in 2023 from the Biller segment, stemming from deals we sold prior to 2022 that went live late in 2022. That revenue layered on top of a relatively fixed cost base will drive profitability in 2023. Second, there will be year-over-year benefits from interchange initiatives. If you look quarter by quarter, we expect lease interchange as a percentage of total Biller revenue to match Q1 last year, but you will see significant improvements in Q2, Q3, and Q4.

Charles Nabhan, Analyst

Got it. Thank you. As a follow-up, I want to touch on the Merchant segment. Revenue was up 8%, slightly below your double-digit target. Should we still expect the Merchant segment to be up double digits in '24? And could you discuss some growth drivers during the quarter?

Scott Behrens, CFO

Yes, in terms of 2024, you should still expect double-digit growth. The exit rate of recurring revenue growth in Q4 2022 in the Merchant segment was 9% year-over-year on a constant currency basis. Most of that represents recurring revenue, which is accelerating. We're not seeing much weakness concerning global economic issues. E-commerce trends are fueling growth for our merchant capabilities, particularly in alternative payment gateways and card-not-present fraud detection. We're pleased with where we are as we enter 2023.

Charles Nabhan, Analyst

Got it. Thanks for all the color.

Scott Behrens, CFO

Thank you.

Operator, Operator

I would now like to turn the call over to John Kraft for closing remarks.

John Kraft, Senior Vice President of Strategy and Finance

Thank you everyone for your time this morning. We look forward to catching up in the coming weeks. Have a great day.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today’s call. Thank you for your participation. You may now disconnect.