ACI Worldwide, Inc. (NASDAQ:ACIW) Q1 2023 Earnings Call Transcript May 6, 2023

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

John Kraft: 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.

Tom Warsop: 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 the growth in Biller and Bank segments, while consolidated revenue was $290 million, down 5% year-over-year, and that was due mainly 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 months 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 is 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 the 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, and that 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, speaking of real-time payments, and I discussed with them the possibilities the real-time payments creates, including how their overall economy can benefit from the many use cases inherent with real-time payments. It was only a first dialogue that that conversation further cemented my position about the future potential for real-time payments in the 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. Scott?

Scott Behrens: 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 as well as 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.

And as a reminder from our last earnings call that our nonrecurring license fee revenue that 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 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.

And 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 a full year growth this year, and we have made notable progress with our interchange improvement program. Cash flows from operations was 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, in particular, 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. And 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 when 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. And 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.

So with that, I’ll pass it back to Tom for some closing remarks. Tom?

Tom Warsop: 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 and 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.

Q&A Session

Operator: Thank you. [Operator Instructions] We’ll take our first question from Peter Heckmann at D.A. Davidson.

Operator: And we’ll move next to Joseph Vafi at Canaccord Genuity.

Operator: We’ll take our next question from George Sutton at Craig-Hallum.

Operator: We’ll take our next question from Mayank Tandon at Needham & Company.

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

Tom Warsop: 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. Lot of things going on in the world, but we feel great about what we’re doing. And we look forward to continuing to have great dialogues with you. And thank you, and enjoy the rest of your day.

Scott Behrens: Thanks, everyone.

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