Earnings Call Transcript - ACIW Q3 2024

Operator, Operator

Thank you for standing by. My name is Jose, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide, Incorporated Third Quarter 2024 Financial Results. Thank you. I would now like to turn the call over to John Kraft. Please go ahead.

John Kraft, CIO

Thank you, and good morning, everyone. On today's call, we will discuss the company's third quarter 2024 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 both safe harbor and forward-looking statements like all of our events. You can find the full text of both statements in our presentation deck and earnings release, both of which are available on our website and with the SEC. On this morning's call is Tom Warsop, our President and CEO; and Scott Behrens, our CFO. With that, I'll turn the call over to Tom.

Thomas Warsop, President and CEO

Thanks, John, and good morning, everyone. I appreciate you joining our third quarter 2024 earnings conference call. I'm going to start this morning with some comments on the quarter and then I’m going to hand it over to Scott to discuss detailed financial results and our increased expectations for the remainder of 2024. Q3 results were ahead of expectations and of the guidance we provided, with total revenue up 24% year-over-year. As we've discussed on recent calls, we are making a conscious effort to accelerate the signing of contracts, both renewal and new, and bring those in earlier in the year. As you know, revenue from a renewal contract cannot be recognized earlier than the renewal date. But getting those renewals out of the way allows us to focus on new customer wins. And net new contracts are recognized as they're signed. I had very high expectations of the team with respect to this initiative, and they have significantly exceeded those expectations. And that continues to allow us to outperform our guidance. Further, signing these new contracts earlier in the year helps reduce the heavy seasonality we've historically seen, and it simply derisks attaining our full year financial guidance. I'm pleased to let you know we have more than 99% of our full year 2024 revenue forecast either already signed and contracted or covered by a fourth quarter renewal that is well into the final approval process on the customer side. Our pipeline momentum is notably higher than we typically recorded by November, and that allows us to raise our outlook for 2024 again. Probably most important to me, that allows us to turn our attention to 2025 and beyond. Speaking of 2025, the large sales pipeline and momentum we have as we exit the year sets us up well for continued strength in revenue and EBITDA growth as we go into 2025, even considering the significant outperformance this year. We'll provide further guidance details regarding 2025 when we host our fourth quarter 2024 call in February, but I did want to make sure you heard our preliminary view. Let me give you a little more color on each segment. In the Bank segment, revenue was up 43% and EBITDA was up 69% compared to Q3 last year. We saw strength in real-time payments with revenue growth of 72%. While our real-time product revenues can be lumpy, we're clearly seeing good momentum in the space, including another central infrastructure win in Mexico and some industry-leading offerings in South Africa. Our real-time solutions are a great business for ACI, and they're also a win for the world. Hopefully, you saw our recent press release highlighting how real-time payment adoption is expected to boost global economic growth by speeding the movement of money and increasing financial inclusion, helping millions emerge from poverty via access to lower-cost financial services. I really encourage you to take a look at that press release and the report that we refer to in it. There's some powerful data in that report. It certainly generated lots of attention while I was in Beijing a few weeks ago, attending Sibos; and that's, for those of you who haven't been, Sibos is, I believe, the world's largest payments conference in financial services this year, as I said, in China. In other areas of our banking segment, our issuing and acquiring solution revenues were also up nicely, growing 40% from last year's level. During Q3, we renewed and expanded relationships with leaders such as Worldpay and a very large payment facilitator in South America. Speaking of next-generation solutions, our payments hub technology investments are continuing. Development is on track and we remain extremely focused. As discussed throughout the year, we expect to have tangible solutions for customers to review by year-end. Our offering will be cloud-native, increasing flexibility in terms of how customers utilize the tools and in terms of the breadth of customer segments we can target. It's not just our traditional very large bank segment. Conversations with customers continue to be encouraging. I met with a very large South American financial institution CEO recently and explained the advantages of our approach. And it is often the case when I do this, he asked if he could be an early adopter. Unfortunately, I had to tell him our beta client list is already full. No earnings call in technology would be complete without a mention of artificial intelligence. So let me reiterate, we're using AI in multiple ways, driving productivity in software development, testing, customer service, and fraud detection. As I mentioned before, we're taking a co-work approach with AI. Essentially pairing our team members with an AI colleague to give the benefits of AI tools and the human expertise we are well-known for. I'll move on to the Biller segment where revenue was up 5%. Recall that we discussed last quarter's record revenue growth would not continue at the double-digit rates, due mainly to higher-than-expected volumes with the IRS. Last year's third quarter was a very tough compare that included high-margin revenue from certain customers that won't recur. Those were one-off items. In Q3, we signed many important renewal and expansion contracts, including with one of the largest utilities in the United States. Overall, the Biller segment is performing well. Moving to the Merchant segment, revenue grew 38% and EBITDA grew 159% compared to Q3 last year. This growth was partially driven by licensed software renewals, and encouragingly, our transaction-based recurring revenue continued to climb, growing 5% in the quarter. It's not quite at our target yet, but we're going in the right direction with improvements each quarter this year as we projected. I also want to highlight a couple of items that occurred subsequent to quarter end. First, I hope you saw our press release announcing the hire of Erich Litch as our new Head of Merchant Solutions. I've known Erich for years, dating back to our days at Pfizer, and I'm convinced he's the right leader for this very important business. Second, a few days ago, ACI signed a very significant contract with QuikTrip. QuikTrip is one of the largest convenience store and fuel store retailers in the United States. QuikTrip chose ACI's hosted omni-channel solutions because of our class-leading scalability, reliability, and our reputation for exceeding service-level commitments. I'm excited about our opportunity in the merchant space into 2025 and beyond. Overall, I'm quite pleased with our progress and I remain excited about our opportunity. We're focused on sales execution and the development of our next-generation payments hub platform, both of which position the company for long-term profitable growth and significant incremental shareholder value. I'll turn it over to Scott to discuss financials and our guidance.

Scott Behrens, CFO

Thanks, Tom, and good morning, everyone. I first plan to review our financial results for Q3 and then provide our outlook for the rest of 2024. We'll then open the line for questions. Revenue in the quarter was $452 million, up 24% compared to Q3 2023, and adjusted EBITDA was $167 million, up 61% from Q3 2023. As Tom mentioned, we had particular strength in the bank segment and more specifically with real-time payments, which was up 72% from last year. In the Bank segment, revenue of $222 million was up 43% compared to Q3 last year. Bank segment adjusted EBITDA of $154 million was up 69% compared to Q3 last year. And Bank SaaS, while a smaller portion of the total, grew 15% in the quarter. Our Merchant segment revenue was $50 million, up 38% compared to Q3 last year. And adjusted EBITDA was $27 million, up 159% compared to Q3 last year. While we did benefit from license-based customer renewals in the quarter, our recurring revenue in the segment has continued to steadily improve throughout this year. Lastly, our Biller segment revenue was $180 million, up 5% compared to Q3 last year. Adjusted EBITDA was $31 million, down compared to Q3 last year, due to a particularly strong quarter last year, which included certain one-time non-recurring margin benefits that did not recur here in Q3 2024. And we continue to see strong cash flow generation with cash flow from operations of $54 million, more than double Q3 last year. We ended the quarter with $178 million in cash on hand, a debt balance of $1 billion, and a net debt leverage ratio of 1.6x and approximately $650 million in liquidity. With our strong cash flow growth and our lowest leverage in well over a decade, combined with our improved outlook for 2024 and our expectations of continued strength in 2025, enable us to reduce our long-term stated leverage target from 2.5x down to 2x. We'll continue to maintain a disciplined, long-term focused capital allocation strategy that balances reinvestment in the business, accretive M&A and share repurchases while maintaining a strong balance sheet with ample liquidity and financial flexibility. During the quarter, we repurchased approximately 200,000 shares for $8 million in capital, which brings our year-to-date total to approximately 4 million shares for $128 million in capital. And at the end of the quarter, we had approximately $372 million remaining available on the share repurchase authorization. So turning next to our outlook, having made significant progress in advancing our full-year bookings pipeline with more than 99% of our full-year 2024 revenue outlook already signed and contracted or representing licensed contracts renewing here before the end of the year, we are raising our guidance range for both revenue and adjusted EBITDA. We now expect revenue to be in the range of $1.567 billion to $1.601 billion and adjusted EBITDA to be in a range of $433 million to $448 million. And notably, we are currently tracking the high-end of both the revenue and EBITDA ranges. Our improved outlook for 2024 combined with a strong sales pipeline we are seeing exiting the year gives us confidence of continued strength in revenue and EBITDA growth in 2025. We'll provide further guidance details regarding 2025 when we host our Q4 2024 call later in February. So in summary, a really strong quarter of revenue EBITDA and cash flow growth allowing us to raise our outlook for this year, and we really have a lot of momentum as we exit 2024 that gives us confidence of continued strength as we look into 2025. So with that, I'll pass it back to Tom for some closing remarks.

Thomas Warsop, President and CEO

Thanks, Scott. In summary, we are pleased to continue delivering results that are in line with or above expectations. Looking forward, our pipeline is strong, and we're focused and optimistic regarding both our growth and our ability to deliver significant shareholder value. We look forward to catching up with you in the coming weeks. Thank you for joining our call. Operator, we can now take questions.

Operator, Operator

Your first question comes from Trevor Williams with Jefferies. Please go ahead.

Trevor Williams, Analyst

Hey guys. Good morning. Thanks. Yes, I wanted to ask a bigger picture question on the medium-term outlook for growth in banks. Tom, maybe if you could help us distill down the main drivers behind this segment staying as an upper single-digit grower over the medium-term, what's structurally changed here over the last few years, whether that's product set, changes to go-to-market, end-market health, any more detail there on kind of what underpins your confidence in the medium-term outlook for banks would be great. Thanks.

Thomas Warsop, President and CEO

Yes, Trevor. There are several factors at play, particularly regarding market strength. Our conversations with customers have evolved significantly. Firstly, our customers are recognizing that their businesses are strong, and they are investing greatly in new products while seeking partnerships that can enhance their efficiency and speed to market through technology. ACI, with our established history and long-standing relationships with many financial institutions, is a natural choice for them. In the past, we predominantly focused on renewals, discussing agreements for the future at set intervals, but now our engagement is more continuous throughout the license period, focusing on strategic future goals. A recent conversation with a major Asia Pacific customer reinforced this shift; they remarked that ACI is engaging differently and that our discussions are centered on helping them meet their objectives. Our products remain essential to their operations and our role as a partner is increasingly recognized. While we exercise our pricing power, it’s crucial to note that customers view us as integral to their success. They may not be enthusiastic about the prospect of increased costs, but they are accepting of it because they see us as part of their solution moving forward.

Trevor Williams, Analyst

Thank you for that insight. I appreciate it. When you mention that nearly all of this year's renewals are either contracted or signed and that you're now focusing on 2025, could you elaborate on any strategic advantages this creates? Besides providing clearer visibility into revenue for the upcoming years, how does completing renewal activities earlier in the year benefit your sales efforts in terms of cross-selling and upselling? I'm interested in understanding the strategic impact and how this might influence the outlook for banks. Thank you.

Thomas Warsop, President and CEO

Yes, I'll share my perspective and Scott might want to add his thoughts as well. There are two main advantages. First, as you mentioned, Scott and I do not anticipate having any discussions about renewals for the rest of this year. Our focus is solely on supporting our sales and account management teams in structuring new business for 2025 and beyond. Unlike before, when we spent a lot of time addressing customer inquiries and getting renewals finalized, we are now concentrated on the pipeline and preparing for each quarter next year. This shift is probably the most significant benefit. The second advantage relates to the payments hub, where we've made significant strides. We are nearing the point where we can start demonstrating a solution to our customers. Currently, I am spending most of my time engaging with customers and prospective clients to provide them with deeper insights into what the payments hub entails and the benefits they'll receive. Our beta client has attracted many customers eager to be early adopters, and while we can't accommodate everyone, we need to be selective. This focus not only helps us concentrate on next year but also enables me and our sales team to help customers understand our direction and how they can take advantage of the investments we're making.

Scott Behrens, CFO

Yes, Trevor, the only thing I'd add to that, I've been around a long time, and ACI has a history of, well, first of all, the bank, especially on the bank side, it's a long sales cycle. And we had a history of that sales cycle coming to fruition in the fourth quarter, and late in the fourth quarter. And I think what you see here is two things. One is we have substantially completed this year's new business really at the end of September. I mean, it's not now in November. It was really earlier in the year. And that allows us to turn the focus to accelerate that pipeline. Again, a pipeline that otherwise may have come to fruition in the fourth quarter of next year is now maybe pushed to the third quarter of next year and potentially earlier. So what it really frees us up to do, like Tom said, is listen, we can accelerate it, spend time accelerating next year's pipeline. And what that allows us to do, not just for '25 and '26, that allows us to continue on the path towards our long-term stated growth goals.

Trevor Williams, Analyst

Perfect. All right. Thanks, guys. Appreciate it.

Scott Behrens, CFO

Thanks, Trevor.

Peter Heckmann, Analyst

Thanks for taking my question.

Thomas Warsop, President and CEO

Hey, Pete.

Peter Heckmann, Analyst

Good morning. I apologize for missing the start of the call due to some online connectivity issues. Could you please repeat your comments about 2025? I had planned to ask about that, especially considering that it appears software licenses could increase by 20% this year. It seems that maintaining strong overall growth rates, at least in some quarters next year, will be quite challenging. So, I would appreciate it if you could go over that again quickly.

Scott Behrens, CFO

Yes. In response to the last question, what we can do now is really concentrate on advancing our pipeline. We anticipate a strong pipeline for 2025 as we finish this year, likely as robust as any we've experienced going into a new year. Tom mentioned in the introductory report that even though we are exceeding expectations this year, our pipeline for next year remains healthy enough to keep us on our projected growth path.

Thomas Warsop, President and CEO

Yes, and I mean, specifically, we didn't give any specific numbers, Pete, but what I said was that we are well-positioned to continue to see strength in 2025 and beyond, even with the outperformance.

Peter Heckmann, Analyst

Okay, that's helpful. I apologize if I missed it due to connection issues, but I heard you mention that the payments hub is on track and you hope to have a product to show customers by the end of the year. When do you anticipate starting the pilots and when will the hub be available to the general public?

Thomas Warsop, President and CEO

I anticipate that we will start the initial pilot implementations at the beginning of the second quarter next year. However, I'm not certain about the exact timeline for the full-scale general availability. We want to ensure that everything is functioning as intended and that the initial pilots are solid. Therefore, I'm not committing to a specific date, but we are optimistic about this progress. It's also worth noting that the requirements for this are not critical to our expectations for next year.

Peter Heckmann, Analyst

Okay, good, good. All right, I'll get back in the queue. I appreciate it.

Thomas Warsop, President and CEO

Thanks, Pete.

Scott Behrens, CFO

Thanks, Pete.

Jeff Cantwell, Analyst

Hi. Thanks for taking my question. Hi, good morning. Thank you. I want to ask you post-election, can you talk about the current administration change here in the U.S. and give us some of your early thoughts in terms of how you think that might impact your business as far as next year, the following year? When you provided the medium-term guidance back in March, that was under different leadership here in the U.S. Maybe tell us what some of your initial reactions are here. It seems like perhaps regulation, taxation, and other things could potentially be shifting a little more positively, and many of us saw the banking sector was up a lot in the market yesterday, shifting many of the larger GSIBs, and clearly, that's an important customer segment for you guys. So could you help frame this perhaps to might increase the pipeline or could see more transaction growth, things like that? We'd love to get your initial thoughts in areas where there could potentially be some impact down the road? Thanks.

Thomas Warsop, President and CEO

Jeff, you mentioned an election. Was there an election? No, sorry. Just trying to be funny. But yes, I don’t have a solid view on it, but I think there’s definitely potential good news as the market thinks given what happened yesterday with the banking segment. We certainly hope for a little less regulation in the U.S. Hopefully, we see more transaction growth, as you noted. That would be beneficial for us, but we haven’t included any of that in our forecast because it’s so new, and we don’t have a clear understanding yet. I want to emphasize that we’re a global company, and while the U.S. is a significant part of our business, it’s not the majority. Even if regulatory conditions seem to improve slightly in the U.S., I don't expect much change elsewhere. Europe typically leads in regulation, and there are ongoing requirements there that won't be affected by the U.S. election. I remain cautiously optimistic, but I don’t have much quantitative information to share.

Scott Behrens, CFO

Yes, Jeff, I would like to add that if you examine the results from the last few years, banks have become significant spenders and purchasers of technology as they undergo modernization efforts. Recent developments show that banks are experiencing numerous positive factors, whether they are regulatory, economic, or related to the overall marketplace. We anticipate that this will lead to increased spending by banks, and I am quite optimistic about the opportunities we have with this customer base.

Jeff Cantwell, Analyst

Got it. Okay, great. To follow up on an earlier question, I wanted to ask about the guidance you've provided for the medium term. Have there been any changes within the segments themselves? Could you walk us through it? It seems like banks are performing very strongly, so I'm curious if you can help us understand how the revenue outlook for each segment may be shifting. Thank you.

Scott Behrens, CFO

Yes, on banks, banks have been strong. Banks, the expectation is going to continue to be strong. Billers, it has some seasonality in that business. If you recall from the second quarter, we had a strong tax order in terms of the tax transactions. We got a favorable award in terms of the go-forward business that we have with the IRS going forward. That should begin to contribute here next year. The exit rate for the Biller business should accelerate a bit on a sequential basis quarter-over-quarter. And then the Merchant business has been, if you recall, last year early part of the year we are seeing a bit of decline in that business. It flipped positive in the second half, and we've been incrementally more positive each quarter this year. So I think going back to our comments, without providing a 2025 outlook by segment, I think all will nicely contribute to growth next year.

Thomas Warsop, President and CEO

Yes, and you were asking about if there's anything under the hood that's changed. I really don't think so. I think the businesses are performing generally in line with where we thought. Banks has been extremely strong and that's been one of the primary drivers of our overall performance this year, and we expect it to continue to be strong.

Jeff Cantwell, Analyst

Okay, great. Thanks so much.

Thomas Warsop, President and CEO

Thanks, Jeff.

Operator, Operator

Your next question comes from George Sutton from Craig-Hallum Capital. Please go ahead.

Thomas Warsop, President and CEO

Hey, George.

Logan Lillehaug, Analyst

Good morning, guys. This is actually Logan on for George. Thanks for taking the question.

Thomas Warsop, President and CEO

Hey, Logan.

Logan Lillehaug, Analyst

First of all, I wanted to kind of stay on the topic of the banks there. You guys have talked about those mid-sized banks being kind of an incremental opportunity for you guys. I'm just wondering if you can give us any more color on sort of how much are those now if any, contributing to the segment, and where do you think that could go in the future?

Thomas Warsop, President and CEO

We haven't been heavily involved in the sales process with the payments hub, which is where the main opportunity lies. I've mentioned this before. I want to make sure we don’t rush things or end up presenting concepts before they are ready, as some companies do, and ACI may have done previously. We're communicating our direction, the benefits that will come, and the timeline we have in place, and we will present it when it's ready. There is significant interest, but so far, the contribution from that segment is minimal. While we have some business with mid-tier banks, our flagship products aren't seeing much take-up. Historically, we've directed our focus through Fintech partners, so right now, that segment isn't contributing much, although interest remains high.

Scott Behrens, CFO

Yes, I believe that the current strength we are observing in banks does not stem from our efforts to engage with mid-tier banks. Instead, it is primarily driven by our large bank segment. Even as we approach the mid-tier market, I anticipate that our SaaS offerings will play a more significant role than our licensed software. The strength we are witnessing in banks is largely due to their purchasing of on-premises, licensed software, which primarily involves the larger banks. However, we expect the mid-tier segment to begin contributing next year, especially through our SaaS delivery model.

Logan Lillehaug, Analyst

Got it. Thank you. And then just one follow-up. Can you maybe just touch a little bit on sort of the competitive environment you see in the real-time payment space? I mean, is more of that business coming from kind of upselling with current customers, or are you looking at new customers, and then maybe kind of with those new customers, are you seeing any change in the competition out there for winning those?

Thomas Warsop, President and CEO

Yes, most of the new business we're acquiring is not typically expansion in the area of real-time payments. As I mentioned earlier, we have additional central infrastructures. By central infrastructure, we mean our software powers the entire country's instant payments or real-time payment scheme. We signed another one in Mexico in the third quarter, bringing our total to 11 central infrastructures, and all are brand new. Many of these locations had no central infrastructure before. We primarily assist the central bank, or sometimes an agent of the central bank, in setting up the program when we establish a central infrastructure deal. We also focus on individual country's payment schemes since each country may have one or more. Our software often powers these schemes, which includes our efforts for banks and ultimately for merchants to connect to those real-time payment systems. We approach this from three angles, all of which are performing well. The vast majority of this business is new for us, rather than expansion. Occasionally, we may cross-sell real-time payments to existing banking relationships, but most of this business is entirely new. Additionally, we have other aspects aside from real-time payments, such as wire transfers, which we sometimes expand. However, when discussing instant payments, particularly in the U.S., we refer to FedNow and the TCH rails, which are almost entirely new for us.

Scott Behrens, CFO

Yes, I think the only thing I'd add to that is that really, from a competitive environment standpoint, nothing's really changed. And I think if you look at the results of the real-time segment, even in Q3, up 70% plus over last year. Big part of that, there's just tremendous growth there. There's a lot of land grab. We've got the technology, we have the relationships. So it's definitely delivering results. And again, the competitive environment really hasn't changed much.

Thomas Warsop, President and CEO

I apologize for missing that part of your question. Thank you, Scott. Recently, there was an announcement in South Africa regarding real-time payments, where MasterCard is encouraging the adoption of these payments using our software, and they recognized our partnership. Even when it seems like there's new competition or that we didn't secure something, we often remain part of the solution, and this is a prime example. We have a strong partnership with MasterCard in various regions around the world.

Logan Lillehaug, Analyst

Got it. Thanks for all the color.

Thomas Warsop, President and CEO

Yes, thanks, Logan.

Scott Behrens, CFO

Thanks, Logan.

Peter Heckmann, Analyst

Okay. I just had a follow-up on that last one. It reminded me, Tom, you were talking about kind of the current seat at the table that kind of gives you a right to bid on these payment hubs opportunities. But it's something that we talk a lot about with ACI, but can you remind us, I think, on like wires, I think ACI powers some high percentage, 25% to 30% of wires, and then also attachments to SWIFT systems. Can you talk a little bit about those systems and how you talk about, many of these institutions that you already have a relationship with, you either do that through real-time or through the core around payment switch.

Thomas Warsop, President and CEO

Yes, Pete. Let me provide some figures for context. Our wires platform is used by banks globally to process trillions of dollars every day. It is highly reliable and incredibly scalable. I often mention that ACI plays a crucial role in the world's payments ecosystem, and this platform is a significant part of that. Similarly, our issuing and acquiring platforms also manage trillions of dollars in payments daily. We partner with all of the 20 largest banks globally, as well as the majority of the top 100 and even down to 200 largest banks. Our systems are integral to the payments infrastructure of these major financial institutions. Recently, I met with the CEO of one of the largest banks, and we had a great discussion about the future and how ACI can support them. He noted that not having spoken in nine months was a positive sign because if we were in regular contact, it would indicate issues. He appreciated our discussion about future possibilities and mentioned that he doesn’t need to think about ACI because our products work seamlessly. His team isn't losing sleep over it. This demonstrates that we have long-standing relationships with our clients, and they trust our platforms as essential parts of their infrastructure. When they need assistance or are considering future changes, they typically turn to us. Regarding real-time payments, while this area is relatively new, our continued success in securing deals indicates that clients look to us as a reliable partner for emerging solutions, given our strong track record in other payment areas.

Peter Heckmann, Analyst

Okay. I believe this makes the idea of developing a payment sub-platform easier to approach because ACI already has systems in place for wires, cross-border transactions, real-time payments, debit, and ETH. By just adding a few more payment options, you essentially have a comprehensive package.

Thomas Warsop, President and CEO

That's exactly right, Pete. And on the payment hub, that's why these conversations are so straightforward for me, because no customer or respected customer ever has said to me or even hinted to me that it doesn't make sense to have the conversation with ACI. It's obviously we should have that conversation, given our history and our presence in the market.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.