ACI Worldwide, Inc. (ACIW) Q3 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the ACI Quarter Three Earnings Announcement [Operator Instructions]. Please be advised that today's conference is being recorded [Operator Instructions]. I would now like to hand the conference over to your speaker today, John Kraft. Thank you, and please go ahead.

Thank you, and good morning, everyone. Like all of our events, today's call is subject to both safe harbor and forward-looking statements. You can find the full text to both statements on the first and final pages of our presentation deck, 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, I want to remind everybody that we are hosting an Analyst Day on November 17 and look forward to seeing you in New York City. Please register your attendance via our Investor Relations website. With that, I'd like to turn the call over to Odilon.

Thank you, John. Hello, everyone, and thank you for joining our third quarter 2021 earnings conference call. I will summarize by saying that we are pleased with our progress to date, the results we are seeing and confident in delivering our full year financial commitments. We now expect organic revenue growth of 5% and EBITDA growth of 6% to 7% in 2021. This organic revenue growth is well above the past trends. As a result, we are raising our 2021 guidance. And importantly, we are on track to deliver the Rule of 40 this year for the first time. I would like to share more details on how we have been moving our 3-pillar strategy from design and implementation to delivery of the results. Starting with our first pillar, Fit for Growth. In 2020, we launched a new strategy to transform the ACI organization. We call it Fit for Growth. That work was all about rethinking how we approach our business, streamlining our structure, sharpening our go-to-market strategy and getting us ready to take the next steps in our evolution. In an environment of pressures from the COVID pandemic, we focused on cost discipline and profitability improvement. By year-end 2020, we implemented a new and optimized organizational structure to streamline internal processes, making the company leaner and more efficient. In doing so, we achieved $60 million in annual savings. These actions helped us grow adjusted EBITDA by 17% and increased our net adjusted EBITDA margin by more than 450 basis points in 2020. We're encouraged by this growth in 2020. This growth has occurred in a challenging year where most of our customers were contending with the COVID pandemic. But Fit for Growth is also about our customers. We have worked to ensure customers remain at the center of what we do at ACI. We streamlined our organization to enable those closest to the action to make decisions, which was the goal of our new structure. Customers are telling us our efforts to simplify have sped up decision making. In establishing a new commercial function, we significantly increased our sales force, feet on the street presence. This group represents most of our customer-facing roles and is already generating success. For example, roughly 1/3 of our bill payment segment pipeline originates from recently hired salespeople. Our robust and energized sales force now has more urgency to deepen relationships and build continuity with customers. With a more empowered workforce that can work more directly with customers, the result is a faster time to market while elevating our customer experience. We increased our sales and market investments significantly. Along with these investments, we also implemented a disciplined and analytic approach to deploy our capital strategically. It means our product strategy aligns with high-return areas. As we near the end of 2021, these efforts are showing results, and we're increasingly optimistic about our future growth prospects. Moving to our second pillar, Focused on Growth. We have continued investing in our customers' digital transformation as they modernize their payment systems. Our priorities such as cloud, real-time and last mile technologies are also priorities of our customers. We also converged our merchant platforms, allowing customers to leverage the combination of e-commerce and point of sale. Our integrated solutions bring together online gateway, fraud management and omni-commerce capabilities into an integrated solution. At the highest level, our 3 focus on growth initiatives are: real-time payments covering both low and high value real time as well as investments in last mile, sophisticated global merchants with focus on innovation in omni and e-commerce. Emerging growth markets, specifically across Latin America, the Middle East, Africa, Asia and South Pacific. When you take all these efforts together, you begin to see what we are doing differently. We have a targeted strategy, and we also have the organizational structure and culture alignment to win. We are firing on all cylinders and are now seeing the results. Our sales efforts produced consolidated net new ARR bookings up 50% from the third quarter of 2020. As we mentioned last quarter, COVID pressures dissipated earlier in the North American market and third quarter ARR in the Americas nearly doubled from last year. We are seeing improvements in international markets, although these areas are still soft. Our Q3 revenue and EBITDA were both once again within the range we provide you. To date, in 2021, we have signed 96% of our expected revenue for the fourth quarter or 99% of the guided revenue for the full year. This progress to date is considerably above previous years. We are confident in our expectation for accelerated organic and recurring revenue growth this year. And to repeat, we expect to achieve the Rule of 40 for the first time in 2021. I want to highlight some of our critical wins in the third quarter, a testament to the strength of our global sales organization and our strategic focus. Many of these wins are from established global, regional and national organizations across the spectrum from corporations to central governments. We also see increasing demand for our services from fintech companies, including cryptocurrency and Buy Now, Pay Later firms. We recorded wins across all 3 business segments in North America, Asia, Middle East, Europe, Africa and Latin America. In North America, we renewed and struck a new deal with a longtime ACI customer. They will utilize the ACI enterprise payments platform to create a growth and modernization path. A top U.S. bank selected ACI for domestic and international wires and pave the path to converge more payment types on the same platform. We made a significant win back with a major bank, one of the top 15 banks in the U.S., utilizing ACI high-value real-time payments to address both U.S. and non-U.S. payments need for the critical [Indiscernible] mandate. We are partnering with a major information technology firm to provide support and services to a leading bank in Canada to implement their payments modernization strategy. In Asia, CIMB Bank Berhad, a large Malaysian based bank with a footprint spanning the region will utilize ACI high-value real-time payments. This win was a competitive takeaway. CIMB and other wins recognized our ongoing focus on high-value real-time payments modernization. We had 2 important wins in India with one of the country's largest banks and the leading White Label ATM service provider, both signed on to use ACI issuing and acquiring. These wins, with established and new ACI customers, are built on our ability to provide global solutions as customers focus on this critical area of issuing and acquiring. JCB, a major global payment scheme, has selected ACI as its next-generation digital payment partner. Turning to the Middle East, one of our key focus on growth geographies. We had a renewal and the new deal with 2 major financial institutions in Saudi Arabia. They will utilize the ACI enterprise payment platform with platform extensibility and the path to modernize as part of Saudi Arabia's Vision 2030 program. In Europe, a leading richest payment service provider renewed ACI issuing and acquiring. In Latin America, one of the largest processors and acquirers will leverage ACI issuing and acquiring to replace several in-house platforms they use for chargebacks. In Africa, a leading Zimbabwe based payment service provider that enables banks to provide their customers with innovative and agile technology platforms, renewed the agreement for ACI issuing and acquiring. In our Merchant segment, we saw continued progress in our grocery vertical, while we're also cementing several new e-commerce deals. Albertsons, one of the U.S. top 10 supermarkets, has selected ACI omni-commerce to help simplify its payments processes, and manage its service in our cloud, supporting our multi-acquiring offer. One of the U.K.'s largest grocers renewed and extended their in-store payments, e-commerce and fraud solutions relationship with ACI. These wins grew out of our continued focus on the grocery segment around the world and the ability of our payments orchestration technology and cloud services to meet the digital transformation needs of these customers. I also want to mention a new deal with the European merchant that will facilitate access to new acquirers and provide new services with ACI secure e-commerce and fraud management. Some of our wins in the Biller segment include a new deal with a leading higher education ERP system as their preferred partner. This deal will replace payment processing for 150-plus institutions and universities currently utilizing PayPal Payments Pro. This win grew out of ACI's focus on the higher education segment and our continued innovation, including areas like student portal. A new deal with BCU, a top U.S. regional credit union, which will upgrade their current systems to ACI Speedpay. Roadrunner Account Services, a leading finance company for recreation of vehicles, has chosen ACI Speedpay to modernize its payment systems and offer mobile technology to customers. Leading global industry research firms also recognized ACI solutions leadership. We achieved the best-in-class ranking in the 2021 IT Metrics leading U.S. cash management vendors, landscape report. We are named a leader in corporate digital banking platforms by Celent, which highlighted our solid customer base and support. We won several awards from Juniper, including Payments Innovation of the Year for ACI secure e-commerce. Additionally, we received full patent approval for our incremental learning technology and an innovative industry-first approach to machine learning. Before handing the call over to Scott, I want to say that I'm incredibly proud of the ACI team and what we have achieved for our customers and our business so far. I am enthusiastic about what the future will bring. With that, I will turn it over to Scott to discuss financials. Scott?

Thanks, Odilon, and good morning, everyone. I first plan to go through our financial results for Q3 and then provide some additional commentary regarding our increased outlook for the rest of the year. We'll then open the line for questions. We had a solid third quarter and once again delivered results within our guidance range. We have now delivered a string of quarterly financial results in line with or above our guidance. Recurring revenue in Q3 reached $245 million representing 70% of our total revenue for the quarter and up 1% compared to Q3 last year. As Odilon mentioned, we also made significant progress in advancing our full year bookings pipeline and have now signed contracts representing more than 99% of our full year 2021 revenue outlook. Our pipeline momentum is notably higher than we've typically recorded by November, which allows us to raise our forecast for the year and reinforces our confidence in delivering on this increased full year guidance. Total revenue for the quarter was $317 million, up slightly from Q3 last year. Adjusted EBITDA in the quarter was $74 million, down from Q3 last year, primarily due to the timing and mix of higher-margin license contracts. Turning to our three business segments. In our Banking segment, recurring revenue increased 2% and total revenue increased 5% as financial institutions started to revisit projects previously delayed by COVID. In our Merchant segment, recurring revenue increased 11% as we continue to see double-digit transaction growth in our e-commerce solution. And finally, in our Biller segment, recurring revenue and total revenue declined 2% versus Q3 last year. If you recall, last year, our Biller segment had significant tax payment related volumes as the tax deadline for federal and state tax filings was pushed into Q3 last year. We ended the quarter with $141 million in cash on hand and nearly $500 million available on our credit facility after paying down $35 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 expect to be at or below our targeted 2.5x net leverage ratio as we exit 2021. Looking ahead, we are increasing our revenue guidance and now expect full year 2021 revenue to be in the range of $1.355 billion to $1.36 billion, up from previous expectations of $1.335 billion to $1.345 billion. We now expect adjusted EBITDA to come in at the high end of our range. So we're now expecting EBITDA to be in the range of $380 million to $385 million. And it is worth repeating that we have 99% of the year's top line revenue already signed and under contract, and are simply waiting on the calendar to recognize the revenue. This traction is notably higher than in past years, which gives us high confidence in our increased guidance targets. In the higher revenue growth as we exit 2021, combined with the strength of our ARR bookings we're seeing here in the second half of the year, are setting us up well for accelerating growth as we enter 2022. With that, I will pass it back to Odilon for some closing comments. Odilon?

Thanks, Scott. I want to say again how pleased we are with the execution of our strategy and the performance and results we are seeing. I want to thank the ACI team for their hard work and our customers for trusting us with their most critical software needs. As the world's premier provider of payment software, we are in a prime position to modernize the world's payments ecosystem. We are the first choice for large commercial and central government entities globally, including fintechs, to modernize and build their digital payment platforms holistically. In 2020, we launched a new strategy and delivered on our first pillar, Fit for Growth. This year, we are delivering on our second pillar, Focused on Growth. And we remain laser-focused on continuing to build a robust pipeline that will support our long-term growth objectives. I want to enforce that our efforts on our third and important strategic pillar, step-change value creation through M&A continue. We continue to review our business portfolio and M&A opportunities to ensure we maximize short- and long-term value creation for our shareholders. We have delivered on our financial promises and are raising our financial guidance for the year, achieving organic growth and accomplishing the Rule of 40 is evidence that our strategy and execution are working. Thank you. We will now open the call for questions.

[Operator Instructions] We have our first question comes from the line of Pallav Saini from Canaccord Genuity.

Odilon, you're clearly getting some good results from your recent sales hires. How do you feel about your go-to-market infrastructure now? Is there more to be done here? Or all the pieces are in place from your perspective? And how do you feel about your pipeline going into 2022. And I have a follow-up.

There's still a lot to be done, let me start there. But we have done a lot already. So we have changed the leadership. We have brought new leadership to the company. Also, for example, the head of the international markets, we have a very high talented executive called Mandy, also that is now managing the U.S. and Canada. We have changed the whole team in Latin America, some leaders across the globe. And that continues. I think that refinement continues. What I can tell you is that I'm very satisfied with the results so far. We have never had this amount of pipeline. And for example, in bill payments, seeing like 30% of our pipeline, which is a record, already coming from the new hires shows that, that is working. So I'm very happy to what I see now. But there is still a lot to be done.

And congratulations on your partnership with Affirm. Can you give some additional color on this partnership, maybe the timing of implementation? And when should we expect to see some contribution from this deal?

So you're referring to the educational vertical, right?

Deposits with Affirm, I believe?

Buy Now, Pay Later.

The, Buy Now, Pay Later, yes.

No, I think we are very happy about this partnership. I think that it put us in the middle of the revolution, right, of get now and pay later. And basically, we're going to be the software enabling their payment system. And that shows -- and that's -- and thank you again for the question. That shows that we are the solution, yes, for those very important and big banks around the globe, but we are also the solution for this new fintech and new payment system is coming around the globe. So we are very linked to the innovation overall. I think that's why we are mentioning this deal, right?

Our next question comes from the line of Mayank Tandon from Needham & Company.

This is actually Sam Salvas on for Mayank today. So my first question is -- I was just curious if you guys could provide a little bit more color on having 99% of the '21 guided revenue signed? Is everything signed and committed to be delivered before year-end? Or are there any deals that could potentially slip to the first few weeks of January?

I think the answer to that is the reason we put out the confidence, Sam, is because most of that is under contract. It's going to be license fee. Q4 is traditionally a very large quarter for us in terms of sales and renewals. But what we really saw, I'd say, in the third quarter has set us up well for fourth quarter revenue. And I say that because if you look back at Q2, we started to see the sales really pick up in North America. I haven't seen it yet in the rest of the world, sales picked up in North America, particularly North American banks. In Q3, we saw a much broader strength in our sales. North America continued to be strong, doubled over last year, but much broader in banks, merchants and billers, but also saw a doubling of sales in our MEASA region. So I would say that success in sales in Q3 has really set us up here early in the fourth quarter to deliver that revenue. I would say we're pretty comfortable at that 96% for Q4, 99% on the year. What's left, there's a number of paths in terms of whether it's renewals and/or new business, a number of paths to get to that. So not particularly concerned about deal slippage. That's why we put out the high percentage of -- really to demonstrate our confidence in delivering...

Sam, just to add to what Scott is saying. I heard a comment from a sales leader that really gives a lot of color to it. The sales leader came to me and said, this is the first time in my career at ACI that we start to work in the next year during Q4 of the year. And that shows the change and how different this company is, right?

And then just a quick follow-up. I was wondering if we could just get an update on growth within the real-time payments? And were there any notable wins in that segment this quarter?

Yes, we did. We actually had a call a win back. It's an existing customer but had moved some of their modernization upgrades to a competitor and brought them back on a win back here this quarter, and that was one that Odilon mentioned. So we saw pretty good strength in real-time revenue in the quarter. And a lot of that is -- comes from a license fee. So you'll see that we'll disclose in our 10-Q here later today that you'll see real-time revenues up pretty strong over the last year.

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

Odilon, that was a very Larry-Ellison-like list of wins in the quarter, so congratulations on that. I wondered if you could talk about a couple of things you said in the prepared comments. You mentioned that you're seeing a speeding up of decision-making from customers. That, of course, was one of the big questions when you said you were going to meaningfully expand the sales force. So I just wondered if you could identify that sped up process a little bit? And then also relative to your this disciplined approach to deploying capital, can you just talk about the product road map, the R&D process, sort of what has changed there? Is it just a more focused process? Are you developing product and upgrading product differently? I just wanted to get clarity on that. And that's it for me.

Yes, I think we spent a good amount of time talking about deals, and I'm very proud of it. I'd love to do that. So to your first question about speed up in the decision-making, I think I can give you an example. I was talking to a CEO of top 4 bank in U.S. And I was explaining to the CEO that before this change, I had like 5 levels between myself and the account representative. Now I have only 2 levels. And that's how the change happens. So I'm involved, and I know in my position what is happening with the most important clients, which never happened also before. And that expedites decision because when you have much fewer layers, the layers, the front layers get much more empowered. And the clients have been telling us that, like we are coming with new conversations like long-term value like we want to be together for the next 10 years. It's not about the revenue of this quarter. And all of that conversation is happening today. And I think a good reason and an important reason because it is happening is because we don't have that amount of layers anymore. So I think that's for the first question. Scott, do you want to get the second one?

I think kind of 2 parts on that, George. One was our R&D and the other is on our capital deployment. On R&D, last year, on the focus on growth initiatives that we went through, we really zero-based our R&D spend. And so we didn't -- we aren't spending less or more per se, but we're redeploying that to where we can get the most optimized return on that R&D over the next 1 to 3 years. So I'd say that was a different approach. The focus on the R&D is really modernization. And that's one thing we're going to be talking about here in a couple of weeks at our Analyst Day to provide what those modernization strategies are by each of our segments. And then second of all, on the capital deployment, I don't know if that's the same as the R&D question, but our capital deployment model really hasn't changed. It's consistent with what we've done in the past. But again, we'll have some further updates on that here in a couple of weeks at our Analyst Day.

[Operator Instructions] Our next question comes from the line of Mark Palmer from BTIG.

I had a question on your -- kind of regard to the step-change in value creation via M&A and the fact that you're reviewing your portfolio, can you give a little bit more color along those lines? And would that involve selling parts of the portfolio, buying parts of the portfolio are both on the table?

Yes, I'd like to start to say that the value creation through M&A is not an extrinsic part of our strategy, right? It's not something that happens by the side. That is intrinsic part of our strategy, is our third pillar. So we are doing that all the time. I've been spending a significant amount of my time looking at possibilities of [divestiture and investor]. We are talking about anything that builds and maximize shareholder value in the short and long term. So we are open to anything that when you put the math together, maximize shareholder value; can be sell, can be buy, can be part of the portfolio, can be by part of the portfolio, and we are analyzing that all the time, right?

And there are no more further questions at this time. John, please continue.

Well, thanks, everybody, for joining us today. We look forward to talking to you again on the 17th at our Analyst Day. Have a good day.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day.