ACI Worldwide, Inc. (ACIW) Q2 2021 Earnings Report, Transcript and Summary

Welcome to the ACI Worldwide, Inc. Second Quarter 2021 Financial Results Conference Call. My name is Sylvia, and I'll be 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. [Operator Instructions]. I will now turn the call over to John Kraft. Mr. Kraft, you may begin.

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.

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 share updates on our progress, executing on 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 to 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. In addition, 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 1 significant competitive win. This customer plans to use our alternative payment channels and benefit from our solutions ability to offer lease 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 to expand and accelerate ACI's cloud offerings, and we allow both companies to capitalize on growing global demand from financial institutions, driving towards digital modernization. The alliance strength 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, provide 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 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 to our shareholders. With that, I will turn it over to Scott to discuss the financials. Scott?

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. We'll then open the line for questions. 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. And 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, 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, those 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. And again, 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. And finally, in our Biller segment, which is entirely recurring revenue. We saw recurring revenue increased 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, 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, as we begin to see the international COVID-related headwinds dissipate and we see the overall improving business environment, we're 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. And I'll just say here, we are very pleased with the pace we've been able to delever following the Speedpay acquisition, and expect to be back at or below our targeted 2.5x leverage exiting 2021. And also of note here, we've repurchased 1 million shares of our stock during the quarter. And finally, as we look ahead to the outlook for 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 particular strong results in Q4 as we end the year. So with that, 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. And for Q3, we expect revenue to be in the range of $310 million to $320 million and EBITDA to be in a range of $70 million to $80 million. With that, I will now pass it back over to Odilon for some closing comments. Odilon?

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 to its shareholders. We will now open the call for questions. Operator?

[Operator Instructions]. And the first question comes from Peter Heckmann from D.A. Davidson.

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, don't really see it in like 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 you think are imminent that are giving you that confidence?

Yes. I think -- thank you for the question, Peter. I'd like to start saying what I've been talking to the CEOs of banks around the globe. There are those countries that are just getting back to the table finally. And I'm seeing those new logos, 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 what we're shooting for. So that's 1 part of the confidence I have. And the second point is we have a big backlog of renewals in Q4, very considerable. So you put those 2 together, and I feel very confident about Q4. Pete, let me give some insight. This is the fourth quarter that we delivered what we said we will deliver. And that's part of the culture here. So we have like Plan A, B and C for the numbers that you see in Q3 and Q4. So I'm very, very confident about those.

Yes. I think, Pete, I think the only thing I'd add to that is if you recall at our Investor Day last November, we said that we were -- we had taken some structural cost reductions, but we were reinvesting pretty heavily into the go-to-market and particularly, the sales organization. So we started that ramp-up late last year, early part of this year, spent the first half really not only hiring but really building out that pipeline. And if you actually look a little kind of peel back on the Q2 ARR growth, we actually started seeing a pickup in North America. North America was actually up 6% in Q2, that was offset by declines in the international markets more impacted still by COVID. But started to see that spending pick up in Q2, had a new logo win in the quarter in the U.S., had a major wires transformation projects sold to one of our customers in Canada. So the spending certainly picked up in North America. But based on our pipeline, we're comfortable that what we're seeing in the second half of this year is ARR growth that should come in, in the high single digits growth over the second half 2020. And that, combined with, as Odilon said, the renewal book that we have. And again, those are just -- those are contracts that renew this year pretty heavily. Some of them have already signed. It's just that you have to wait until the new term period begins to recognize it. That's going to -- that's why we were comfortable putting out the revenue range for the year. And that if you do the implied growth there, second half revenue growth over the second half of 2020 is projected to be somewhere between 6% and 8%. So I think it goes back really to the investments we're making in go-to-market. That's driving the pipeline that started to drive ARR bookings in the second quarter. And we're comfortable with what we're seeing here in the second half from both that pipeline that's been developed as well as the renewal book in the second half to get to that 6% to 8% second half growth.

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 anniversarying of the Speedpay deal. Just curious how that -- why that happened?

No. Actually, it was the movement in the tax filing deadline from Q3 to Q2. And so that's the federal and state taxes that moved into the second quarter. Most of the -- that's generally a pretty high interchange business for us. I would say, at the net revenue level and at the EBITDA level, that tax business is essentially breakeven. So it brings in gross revenue, it brings an interchange, but doesn't really impact us much the net revenue or EBITDA level.

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

This is James on for George. So obviously, the renewal activity sounds like you have a lot of confidence in sort of the stronger Q4 compared to what you normally see. Just kind of curious on your thoughts on some of the other segments as well? And how those might contribute to strength into the back half?

Well, yes, I would say, I wouldn't look at necessarily Q4's renewal. I think it's -- yes, I think if you look back at our history, a lot of it sits in the fourth quarter on the license side of the business. And so that drives license fee, and that comes in at pretty high margin. There's not a whole lot of incremental fulfillment costs that comes with that license fee on a renewal. But on the rest of the business, again, it's in terms of the pipeline health that we're seeing as we hit the midpoint of the year. And so I'd say, the confidence in the full year revenue and in particular, the fourth quarter is the combination of that size of that renewal book as well as the progress on the pipeline.

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

Sure, George. It's good to talk to you. So I think I could start about the fundamentals of our offering in the cloud. We -- today, I would say to you that we are cloud enabled. So we have a very competitive service in the cloud, which has been with a high win rate. And as you can see from the examples that we gave around the globe. But I think we can do much better. I think this is evolving very fast. Technology has evolving very fast. So this conversation and this agreement with Microsoft, first of all, is about innovation. It's about bringing to the market what the market doesn't have. And that's why [indiscernible] so successful. That's what we did with Base24, a long period of time ago and with lots of other softwares, and we want to continue that treasurtory. I mean we are not here just to fulfill the legacy needs of our clients, we are here to innovate, and really bring to the table things that are not there. So I think that's number one. Number one is, it's a hub of innovation. It's about hub of of creating offerings that don't exist in the market today. So that's number one. Number two is go to market. It's a very strong go-to-market like talking to clients together, and really selling together to the most important banks and facilitating those banks. I have been talking to the CEO of big banks around the globe and everybody talk about digital transformation, everybody talks about moving to the cloud. But I'm not saying that they are lost, but I would say they need help, they need direction. And I think ACI and Microsoft is better than Clone. So I think that's the second part of it. And the third part is we are co-investing in all of this. So we are co-investing in the market. We are co-investing on the development of those softwares and so forth. So I think those are the 3 pillars. And we are very, very enthusiastic about that. I think this is one of the most important alliances that we -- you're going to hear from us in the next years. And I can tell you that because the future is cloud. And I think Microsoft will be a wonderful partner.

Got it. And then just 1 more, if I could. So in that press release, I mean, you talked about a win with a leading digital bank, Banking-as-a-Service player in Latin America. Could you sort of just go into, I guess, what pain points you're helping them solve were these competitive deals? And I guess, any feedback that you've gotten from them so far around why ACI?

Yes. I think number one, because they know we know how to scale. So you'll talk, for example, to those companies, those startups. I mean they're very hyped, they're very fast there and they're very nimble. But the question is, can you scale to a big contract without giving you the name? Like we are helping a global bank, and we have a launch like 2 or 3 countries already, going to the fourth country now in the cloud in Latin America. And we keep doing that, and they are not concerned about our possibility of scale. And so I think that's what we bring to the table number one. It's our brand, our -- we know how to do -- how to move big amount of transactions, a big amount of money. And our clients know that. I think that's number one. I think number 2 is also our presence. Let me give an insight here, why I'm so confident about our sales force. We brought the Head of the International Markets, a new Head of the International Markets in the beginning of the year, and we have a whole new team in Latin America, for example, the Head of Latin America, the Head of Brazil, the head of other countries also. So it's not only about the structure and increasing sales, we are now qualifying sales. We are bringing the best executives of the market, and we are starting to see the results of this. So I think you put all of those things together, and that's why we're so positive about the second half.

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

This is actually Kyle Peterson on for Mayank. So I just wanted to touch on the SG&A leverage. It's been really impressive here. And you guys have been able to keep driving those higher and get more kind of lean and mean. Is there any more room or efficiencies left to extract? Or is this like a run rate that you guys think you need really to drive like new product growth and stronger like ARR moving forward?

Well, I think if you look at across the various cost line items, we -- you'll see that the selling and marketing expense, in particular, is up over last year. I think a lot of the other areas, we -- as a part of the cost exercise we did last year, those are areas where we where we took cost out and we reinvested pretty heavily in the selling and marketing area. So I would say that, yes, I think this is -- we've invested heavily in starting this year. We'll probably get even -- I would say, we probably get a little bit higher run rate on selling and marketing expense going forward. But I think what you're seeing in terms of the R&D selling and marketing and G&A, is a pretty good run rate of cost structure. But I'd say, if you look at it year-over-year, you're seeing the dynamics of where we 0 based our cost structure and where we're reinvesting in sales and growth.

Yes. I think Scott, that would be fair to say that we -- last year, we improved margin by 600 basis points. And now what we're saying is that we're going to continue to increase margin, but it's going to be more like 50 basis points a year, right? I mean something more...

More of a function at this point really of layering on that incremental revenue on top of that cost base. So I think we've got a pretty good cost structure that we can scale.

Okay. That's good color. And then maybe if you could just remind us on some of the priorities around capital allocation. I know it seems like you guys nibbled at the buyback and paid down some debt. But like -- how would you guys kind of rank order, whether it's buybacks, M&A or like reducing leverage? Like how do you guys think about kind of those different priorities here?

Yes. I don't know if I'd rank order them per se. Obviously, in the quarter, we got in and bought 1 million shares. I think historically, we've been pretty disciplined with kind of 1/3 of our cash flow on debt service, 1/3 on share buybacks and 1/3 on tuck-in type acquisitions. Obviously, as we exit this year, I know we've said for a long time, our targeted leverage is 2.5x. At midyear, we're at 2.8. We probably exit the year somewhere around 2.3, 2.4. So obviously, deploying that cash is going to those -- we're getting more flexible in terms of the deployment of that cash. Obviously, over the last 18 months, it was really focused on delevering. But we're certainly getting more flexible in terms of how we deploy that cash going forward. But obviously, in the quarter, we were in about 1 million shares.

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

Most have been asked and answered. But I wanted to ask a higher level one on your third pillar, Odilon, step change value creation through M&A. Can you provide any progress on this pillar specifically? And then I guess, you talk about accretive M&A. What are some of the criteria? And specifically, when you talk about accretion, are you talking to EPS or to revenue growth or EBITDA? I guess just a refresh there would be helpful.

Sure, Mike. Sure. I think this third pillar is about our -- it's about our communication to investors how friendly we are about value creation and how prioritize value creation to our investors. So we are very open. Again, I'm talking about [indiscernible], I'm talking about [bios] parts of our portfolio. And we are actively looking to that. I don't have anything to announce today. But I can tell you that I do have lots of things on my table, and I have them -- it's part of my day today. And I can tell you that we are going to be very active in this third pillar going forward. We have not been able to announce anything yet, but there is a lot of work. And I want to communicate that very clear to our investors, so there are no surprises, right, when that happens. But what you can expect is, I don't believe in buy and promise, I believe in buying and showing. So what you're going to see is if we buy -- when we buy, if we sell when we sell, it will be highly accretive to our shareholders in the first moment, and that's what we are working for.

Okay. And then when you say accretive, I guess, just do you mean to growth? Or what are some of the specific items you're looking at when you need to fine accretion?

I would say value creation. So could be EBITDA right away, could be top line growth, but should create value right away.

Our next question comes from Joseph Vafi from Canaccord Genuity.

Could you give just, I guess, a real-time update on real-time payments in the U.S. and then globally. And then secondly, it was intrigued with the fintech win and clearly, historically, ACI has done a lot of work with established businesses. And how you see the broader fintech opportunity for the company moving forward as a growth driver?

Thank you so much for the question. You really give me the line here to talk to you about the big change that we are seeing. We are not -- I would say that in [indiscernible] intermediate areas, if you look backwards, we were positioned in the past. We have this very solid offering, like BASE24, the ACI issuing and acquiring very solid offering to our current customers, big banks around the globe and so forth. What we have been changing and Microsoft to accelerate that now a big, big time. We are positioning ourselves for this new generation of fintechs. And I can talk about -- you about the banks in Brazil. Digital banks in Brazil, they're like 4 years old. I can talk to you about other fintechs that are just starting and scaling like raising real-time payments. And we are being very competitive, and now winning rate is pretty good on those offers in the cloud in Azure. So I think that growth going forward -- if you think about our cash flow, our cash flow will continue to be with the big banks. And we don't have a lot of attrition, they will continue with us. But growth will come from the fintechs, growth will come from the modernization of the banks. And in that case, we need to offer the products of the future, not the products of the past. And that's why the Microsoft alliance is so important, and that's what you're starting to see now. The Microsoft alliance went step further now. Like we went to the, I would say, end game with our alliance now, we are very much together. But we have been working with Microsoft for the last 2 or 3 years, and you're seeing the result of it. Now with this fintech, with the real-time payments in Indonesia and so forth, right? So I'd like to repeat that, Joe, it's all about cloud, and it's all about ACI now positioning itself on the future instead of in the past, right? So Scott?

Yes. I think the only thing I'd add to that is, yes, I think Q2 is an example of a key win in the central infrastructure in Indonesia. And I look at that one very similar to the Malaysia where we power the central infrastructure there and also the bank connectivity. I mean those are not big revenue producers in the quarter. But really, it's critical to be a part of that infrastructure as it's being implemented in these markets. And then once it's implemented, it's really waiting for the transaction volume growth. But it's absolutely critical. That's why we highlighted that win, being a part of both the central infrastructure as well as the connectivity of the banks. It's really laying the infrastructure for that future growth in real time. So I think Q2 is a prime example in the highlight of the Central Bank of Indonesia, is a key win for us.

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

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.

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