Q3 2022 ACI Worldwide Inc Earnings Call
Good morning, My name is Abby and I will be your conference operator today.
At this time I would like to welcome everyone to the ACI worldwide quarter three earnings 2022 conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press the star followed by the number one on your telephone keypad.
Thank you.
Mr. John Kraft.
<unk> Vice President of Finance and strategy you may begin your conference.
Thank you and good morning, everyone on today's call, we will discuss the company's third quarter 2022 results and financial outlook for the rest of the year, we will take your questions at the end.
Slides accompanying this call and webcast can be found at ACI worldwide Dot com under the Investor Relations tab and will remain available after the call.
Today's call are 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 Adriano Meda, our president and CEO and Scott Behrens, our CFO before I turn it over I'd like to say that ACI will attend the Citi 2022, Fintech Conference in New York City on November 15.
And to Stephen's annual investment conference in Nashville on November 17, and with that I'd like to turn the call over to Edwin.
Thank you John .
Hello, everyone and thank you for joining our third quarter to 22 earnings conference call.
We are pleased to have delivered another quarter of revenue in line with guidance.
We have demonstrated the resilience of Aci's business in a micro environment pressured by foreign exchange and inflation.
Despite the macro environment had wins it is significant that we can maintain our full year 222 constant currency revenue growth in the mid single digits. After factoring in the corporate online banking Divesture Rev.
Revenue for the quarter was up 1% adjusted for FX and the divestiture adjusted EBITDA was down 36% adjusted by FX and the divestiture.
It is important to add color to the near term pressure well now adjusted to be two die from FX and inflation.
Two critical points to share about this.
First the impact from inflation is restricted to the interchange component of our biller business.
We have been able to manage the inflationary pressures effectively across all the P&L lines and <unk> segments.
Second we have a dedicated team leading multiple initiatives to minimize this impact. These efforts are paying off at this point, we are being able to offset a third of the effect of inflation on billing to change. This year, we're anticipating our efforts as we move into next year. These efforts include initiatives with.
<unk> credit cards and consumers.
I'll turn now to some other highlights from the quarter.
Our new overall, our bookings were up 35% versus Q3 221 were up 40% on a year to date basis.
Specifically merchants new way, our bookings grew by nearly 50% in the quarter <unk>, New air bookings grew by 132%.
This volatile macro environment. These wins increased visibility into future revenue, if you gave us greater confidence in our accelerating growth journey.
I'm also pleased to announce that we successfully closed the sale of our corporate online banking solutions. We are glad that the new company Dragonfly is serving our corporate online banking customers and employees, while taking the business to the next level.
We are on track to launch our next generation real time payments technology platform in 223, driving new growth across our business segments. We.
We will give you more to say about the opportunity this creates for HCI and our customers and at our Investor Day next year.
Turning to our share buyback program, we repurchased three 2 million shares for $91 million year to date.
As of September 30, 12, 22, we still got about $125 million remaining when our share repurchase authorization.
Now, let me turn to some recent wins.
Last quarter I flagged the vital role of central governments in championing real time payments.
We continue to gain traction in the middle East.
We won another important St <unk> infrastructure deal in the region.
Qatar Central Bank, we use aci's real time central infrastructure software, including fraud management.
Other bank wins include Abu Dhabi commercial banks, Malaysia.
<unk> Bank.
Europe's next to group a pay tax provider with presence in 25 countries.
Italian branch of worldwide financial services from.
Mexico's largest processor in clearing house with presence of product in America.
IBM, Canada, and the U S branch of a leading bank headquartered in Kuala Lumpur.
In our merchants segment, our wins include a major middle eastern airline cyber.
Cypress solid gate.
Italy's acts surf and U S Fintech core PE.
Oh, Yes theater segment had record bookings.
<unk> pay will be used by two new fortune 500 companies.
And connect quoting a fiber optic company offering Internet services in 20 states.
I'm happy to see that the disciplined execution of our three pillar strategy continues to work with our accelerating growth and value creation journey now I'll turn it to Scott Scott.
Thanks, social on and good morning, everyone.
I first plan to review our financial results for Q3, and then provide our outlook for the rest of 2022.
We will then open the line for questions.
Third quarter revenue was $307 million up 1% adjusted for FX and the corporate online banking divestiture, which we completed on September <unk> of this year.
Adjusted EBITDA for the quarter was $46 million down, 36% again adjusted for FX and the divestiture.
New bookings in Q3 were $30 million up 35% versus Q3, 2021 and are up 40% year to date.
And here in October we signed a new logo, representing one of the largest pillar customers.
Turning to our segment results banks segment revenue was $117 million down 4% after adjusting for FX and the divestiture.
And segment adjusted EBITDA decreased 23% adjusted for FX and the divestiture.
<unk> Q3 2021.
And as a reminder of the banks segment, we saw more renewal and license deals in the first half of this year compared to 2021. So if you look at the banks segment year to date revenue and EBITDA, both up around 20% over last year.
Merchants segment revenue was $36 million down 3% adjusted for FX, While segment adjusted EBITDA was down 26% adjusted for FX for Q3 last year.
Biller segment revenue grew 5% and the segment adjusted EBITDA decreased 18% versus Q3 2021.
And as a reminder, the biller segment is all U S based customers so as minimal FX impact.
We ended the quarter with $135 million in cash on hand, and a debt balance of $1 billion.
It represents a net debt leverage ratio of two three times, which is just below our two five times target.
Finally, I'll turn to our outlook for 2022, we are reiterating our full year revenue expectations to grow revenue in the mid single digits on a constant currency basis, which we previously provided in September following the divestiture close.
We are updating our revenue range only for the impact of FX fluctuations.
Our updated full year revenue guidance moves to a range of one point 309 to $1 405 billion.
Regarding EBITDA guidance FX and inflation are pressuring our results in the near term the inflationary pressures really isolated to the interchange fees in our biller segment.
Where our price per transaction is fixed but the interchange fluctuates with the average ticket size.
This is expected to impact us in the near term, we have several initiatives underway, including price adjustments to mitigate the impact in the medium term.
As a result, we expect full year 2022, adjusted EBITDA to be in the range of $365 million to $380 million.
In terms of capital allocation, we continued to deploy approximately half of our cash flow toward share repurchases. We have repurchased just over 1 million shares during Q3 and year to date through the end of September we have repurchased just over 3 million shares.
We have $125 million remaining on our current repurchase authorization.
With that I will pass it back to <unk> for some closing comments.
Yeah.
Thank you Scott.
In summary, we delivered another quarter of revenue in line with guidance demonstrating the resilience of Aci's business.
Despite of the economic macro environment, we are maintaining our 222 guidance in constant currency revenue growth in the mid single digits, while we're experiencing near term pressure on our adjusted EBITDA from FX and inflation.
<unk> inflation is limited to the interchange component of our biller business.
Our actions to address the impact is working.
Ken.
Despite these near term headwinds the strong momentum in our new business wins, and our solid bookings across our segments continue to validate our three pillar strategy.
Our industry, leading real time payment solutions are critical to the modernization agenda of customers, including leading corporations financial institutions, Fintech merchants and dealers.
In an environment, where many companies are facing reduced it visibility, our Q3 wins and bookings differentiate ACI.
Reinforce our confidence in our accelerating growth journey.
I think our <unk> employees for their dedication and our partners and customers for their trust.
Thank you all for joining us today and now we will open the line for Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the question and answer roster.
Your first question comes from the line of Neil.
<unk> Tandon from Needham and company your line is open.
Thank you good morning.
And Scott could you maybe delve into the impact of interchange a little bit more in detail, how that sort of flow through the P&L I didn't quite grasp that and then in terms of the efforts you're.
Taking on to address that challenge you, maybe again provide a little bit more detail on how that works and when we should be seeing the benefits of that.
Yes. Thanks.
The interchanges.
Interchanges and maybe to clarify its specific to or where were seeing the inflationary pressure is specific to our utility.
Within biller.
We're still seeing a lessor and other ones, but it's in the utility vertical really spiked here in the summer months.
The mechanism for which we price those contracts generally based on upon our payment mix.
What this isn't really a mix issue this is a.
Average ticket size, so the energy prices spike.
In the summer months, and we're expecting that level of average ticket size to continue on to the rest of the year that interchange costs, where it flows through if youre looking at it from our financial statements is in the cost of revenue.
And then in terms of the things we're doing really is.
In order to react to this you can't this is not something you can do within say 30, 60, 90 days is really foregoing contract by contract.
And including things such as price adjustment working with the customers. So that's why we can't affect those things in what I call short term.
Meaning that's why we're adjusting our guidance for the year because we've done the we have taken actions. We think we've been able to solve for about a third of the impact of that inflation in the year.
And we've also taken other cost actions so non interchange cost savings to minimize the effect this year.
And then they will get a full year benefit of that next year, but we're continuing to work customer by customer to make those adjustments and Matt just to add more color.
This matter with interchange and all of this task force has my full attention.
We are meeting on a weekly basis, we are very proud of the team because we are able to I would say six months ashworth of leather that three months effort really find like in one third already of benefit on the whole impact and I'm much more positive about next year. It is not something.
Easy to fix because it's contract by contract.
The other thing important to clarify is this is not only increasing prices to our customers is really about generating a win win solution when our customers make more sense and we make more sense we met.
They make more money and we make more money because consumers migrate from.
Cost payment methods to lower cost statement matches for example from expensive credit cards too.
And that's the effort that is working and and again, we're very positive about that next year.
Okay. This is a very helpful color and then let me ask you one broader question in terms of your transaction.
<unk> growth on the merchant and the better side, how does the global slowdown.
Yes.
Okay.
We will maintain that.
Yes.
Go ahead Bob.
Alright.
A fire alarm here the beauty hopefully is not in our Florida Goodbye.
Yes.
Asking more in terms of the transaction driven business.
You are seeing right now in terms of trends clearly the air growth is positive, but as you're going to potentially slow down in a recession, how does that affect the transaction driven segments, especially the bill around the merchant services side.
Yes, that's a good question.
Yes.
At this moment, we don't have a top line problem and you can see by our guidance.
Guidance, we're going to continue to grow by mid June .
This year as we said before in constant currency and I think we're going to continue to accelerate going forward.
That's the idea so I don't see a gross revenue problem. The problem is very isolated in inkjet change our dealers.
Again, we see signs of recession, and some continent, but at this point nothing that Kenny.
That could impact our topline.
Yes, the only other thing I'd add to that is scale.
Especially the merchant area, because I think thats, where you probably see it we actually see.
Transaction volumes picking up as well as we're entering the fourth quarter and exiting the year. So that's one.
So I don't think at this point we're seeing.
We're seeing a lot of weakness in the merchants transaction.
Okay. Thank you so much for taking my questions.
Okay. Thank you.
Your next question comes from the line of Peter Heckmann from Davidson. Your line is open.
Hey, good morning, everyone. Thanks for taking the question I was just curious.
In terms of the bookings year to date by segment.
Certainly bill are really stood out this quarter.
Cant remember if you've given that disclosure in the past, but do you have that at your fingertips.
I don't yes quarter had biller was strong merchant was strong I think if.
If you look at it across the whole year I think you can pull in in banks banks had stronger in Q1 and Q2.
Because thats, where we saw a lot of the renewal activity.
Net new and that's where we get a lot of the new IRR and the banks side.
So I think it was pretty if you look at it over the course of the nine months, it's pretty broad based across the three segments. In Q3, it was very specific to merchant and billet.
Yeah.
It is very important because.
We expect this year to have a record and they are.
This segments.
When we when we close Q4 and Thats very important for next year.
Let me just give more color when you talk about the air booking here talking about the expectation of revenue that we had after launching in the first year.
And so when you talk about for example, $2 million of our contract bookings.
Bookings, what Youre, saying is that we're up to launch for example, and merchants and dealers is around three to six months in banks is around one year.
After launching we expect to have that $2 million of revenue going forward. So when we talk about increasing this by.
By this amount they are signing.
That gives us a lot of visibility into the next year.
Okay. That's helpful. And then you mentioned you signed the billing customer that will wind up being one of your largest.
But just a little bit more color there was that.
Totally new to ACI or something where were.
The customer consolidated services and then when would you expect that particular customer to go live.
Totally neutral ACI and again there was.
There was like a lot of competition on that and we are very happy that we're able to to win.
We will be.
This is a very complex launch.
So probably is going to be a rollout.
But I would expect that most of the result of the delay will be into 'twenty four but we're going to have a good part of it already in June 23, So it's really two years launch because its a very complex.
And huge business right very very important business.
Okay, Great and then just maybe one last housekeeping item, but just in terms of isolating the divestiture and FX was divested revenue approximately $4 million to $5 million and then FX was approximately 400 basis points headwind.
Yes, that's a good figure, yes, because the divestiture.
Rollie only pulled out a month's worth of activity within the September month.
Right right, Okay, Alright, I will get back in the queue I appreciate it.
Thank you.
Your next question comes from the line of Joseph <unk> from Canaccord Genuity. Your line is open.
Hey, guys good morning, nice to see.
Our book loans remaining strong just one more on the biller.
You said that I think you recovered maybe.
Got that.
That lost EBITDA there.
I know you can't really provide guidance on it but do you think.
You'll be able to recapture the majority of it or is there a goal or a number we should be thinking about on those renegotiations.
Those some of those contracts are structured.
Thank you for the question Joe.
When you say that we are recovering one third we are talking about the whole year.
So the impact that we are expecting the whole year, we are projecting that we are doing that.
Cover one third most of it we have already recovered, but some more recovery to happen in the next.
Two months now in November and December .
So one third is related to the whole year. This year. When you talk about next year. If inflation continues I think the pressures will continue.
But as we had already started working on that I'm much more positive about next year as you know.
And basically.
Four or five months two to four months that we put together this task force with Reg able to find one third so and <unk> not only for this year, but also for next year. So I'm much more positive about next year.
Got it. Thanks. Thanks, Thanks, a lot and then another area it's been.
Strong has there been.
As part of that I mean, clearly you've got a more focused sales force.
Focused product set now.
Have you seen some conversion of some of the more of the license business to kind of a cloud and is that part of the strength in <unk> or is that maybe an update on license sales versus cloud sales in general would be great too. Thanks.
Yes, no. Thank you Joe in reality, we have not seen a lot of migration from licenses.
Q2, SaaS in our base I mean, what is licensed continues to be a license and slides, it's all about new logos.
The size of business that we are generating in adult all about new logos and banks. So it is really incremental to the licensee business. When you talk about the banks when you talk about emotions. Most of the most of the revenue is already below the 100% of their business is SaaS and we are expecting to have record.
Record EBITDA in the three segments.
For SaaS deals for AAR bookings right. So it is it is a very positive story and it's helping us in our journey to <unk>.
More.
Recurring revenue.
Great. Thanks, guys.
Thank you Jeff.
Your next question comes from the line of Mark Palmer from BP I see your line is open.
Yes, Thank you and good morning.
Last year at this time.
You had given.
<unk>.
Helpful guidance with regard to the percentage of.
The company's annual revenue guidance that was.
Already in the woods, so to speak in terms of signed contracts.
I believe 99% at that point.
Can you provide a comparable statistic for this year.
Terms of where you are in that regard.
Yes, good question Mark.
If we look back at last year, we had so much of our revenue and.
And the EBITDA because it was all coming from license fee that was that was back end loaded. It was all today in the fourth quarter.
And so the reason we put out that statistic was really to provide comfort that that it was there and there was under contract. We don't have a similar one for this quarter with Europe for this year, yet we had a lot more license revenue come in in Q1 and Q2.
So we have a lot better phasing of that this year, but we're we're comfortable with the path. We've got left in the rest of the year, we're comfortable with this revenue range.
Thank you and just one follow up question with regard to.
The inflation impact on the pillar <unk>.
And the actions that you've been taking to mitigate that.
And so far as instead of a third of the impact of that.
Already been addressed was that reflected in the third quarter results.
Or is that something the third.
Going to be reflected to a greater extent in the fourth quarter.
Yes.
Part of it was in the third part of it is going to be in the fourth.
Can expect that the benefit is going to grow with the time, causing more actions that we generate for example, when you go to a big contract and Youre able to readjust the mix, we adjust the price for consumers that in fact, you have the whole effect of that going forward that three months so the more.
That we do the more it accumulates. So you should expect that it is accumulated month after month, but we already have as part of that impact in Q3.
Thank you.
Just one more question with regard to the Biller segment.
Of course, you're processing.
<unk> payments.
Other types of consumer payments.
Has there been any indication of any credit related issues among those for whom you are processing payments that.
That could potentially impact volumes.
When you say credit Youre seeing credit issues, we haven't seen any repayment came into a utility bills things of that nature with higher inflation in.
Economic.
Challenges.
We're hearing about folks who are struggling to pay their bills.
No and we don't see what we get obviously as we get the payments that go through not the ones that.
We're not seeing it necessarily in volumes now.
And we're in areas. If you look at it like utilities government payments.
For consumer finance, and we're not seeing it really in any any volume trends that would indicate.
Trouble within that consumer base.
Just to add to add some color.
All of that.
Next year as you know.
I mean, we're going to have the fed now and we're going to launch the request request request for bank with dealers with real time payments as soon as its available probably are talking about that by the end of Q2.
When that happens we are talking to our dealers and we're going to push that payment method significantly I think as you can expect has a very low interchange rates.
The amount of payment then we can even linked to debt our buy now pay later feature why do we have like 70 companies linkage of that already in the merchant business. We can use that also in the bill payment business.
To help consumers pay if a recession comes or something comes out. So I look at what we are doing today, the real time linked to dealers and to this huge.
Bill that we have every year of interchange and I see a lot of opportunity. We could say that interchange is the problem today I really see it as an opportunity for value creation in the next years.
Thank you.
Your next question comes from the line of George Sutton from Craig Hallum Capital. Your line is open.
Thank you first Scott.
Clarifying question, you mentioned that you felt merchant volumes were picking up currently and I just wanted.
Wanted to make sure that is obviously seasonally that happens, but we're I'm just curious if that's a year over year statement that would be.
Quite a bit different than some others like Amazon have side. So curious if thats what you meant yes.
Our volumes are picking up.
Year over year. So if you look at our year over year growth Q3 over Q3 last year compared to Q2.
And.
We think that will uptick again here in Q4.
It's very also Joe Rafik basis right Scott.
And ours is predominantly E.
E comm versus say in store and things like that.
Our trends showing a pickup in Q3 year over year.
Understood. Okay. Thank you and <unk>.
<unk> just a curiosity you called out.
<unk> set of new RTP customers it sounds like both some infrastructure and some connectivity I'm wondering if you could break <unk>.
SaaS with those customers into those two pieces and then.
As we're looking out to 'twenty three for the Nexgen platform can you just talk about how that's influencing your your sales cycles today given the length of sales cycles is that is that being used fairly aggressively in your sales cycles that next gen functionality.
Yes, no thats great question, so starting with the last point I want to talk about real time payments is next generation that we expect for the first half of next year to be available for U S.
We're going to be launching it very strong we're ready to talk into clients, but theyre going to be launching it in the media with clients in the first quarter of next year and we are going to be really announcing details of it during our investor day that probably is going to happen in Q1 next year right John .
And.
So we would expect there is a lot of excitement within the client's ws today of all of that we have talked with the most important ones already and some new logos. So.
So I expect a lot of demand.
On that.
On our offering basically the way. It works is we the deals that youre going to assign it takes around six to nine months to launch in this case. So we are talking about revenue really in June 24.
But yes. The idea is we would be able to in fact true 24 already.
With this new technology.
And any sense on these real time payment deals you announced relative to like the Qatar sounded to me like an infrastructure deal in some of the other sounded potentially more like connectivity is that.
Yes.
Yes. Those are licensed deals. So you already saw the revenue back because most of them are licensed deals sure.
Okay got you, okay, well it sounds like you had success with a fire drill congratulations.
Yes.
Thank you.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Next question comes from the line of Charles Nabhan.
And from Stephens incorporated your line is open.
Good morning, and thank you for taking my question I noticed one of your larger verticals, but could you comment on how large utilities is as a percentage of bill pay and secondly in the past you had alluded to higher education and consumer finance is a couple of your growth verticals. So I was wondering if you could dive into that a little further and.
Because some of the traction you're getting in that in those two areas.
Yes.
Utilities is about 30% of the biller business.
Yeah.
And going back to say higher education.
Yes.
Pretty decent traction there pretty good.
Actually double digit transaction growth year over year in the higher education space and then obviously government is a big.
A big segment for us and that is that's.
Pretty good growth for every call it mid single digit growth over last year.
Got it got it and just as a follow up some of your peers on the banks technology space had alluded to elongated sales cycles in Europe , and just pauses in decision, making and I wanted to see if youre seeing anything along those lines and then secondly, if we could bring it back to Dave.
Mastic as we think about the next Gen platform for next year.
It sounds like the niche that will enable you to go a little down market within.
Within the banks space. So I was I was.
Hoping you could comment on those two areas in terms of what Youre seeing and what your expectations are.
Definitely.
When you talk about that.
<unk> I would say, we don't see that much because we are in the center of this modernization.
With banks and finance additions, but definitely it's different by geography. So yes, Europe is different than the rest of the world in decades.
Yes.
It feels like Europe is suffering a little bit more.
And then the rest, but we see like Asia Flying Africa doing quite well, let's America doing quite well, we don't see it in United States. So it's more like in Europe , Europe phenomenon, not that strong for us, but definitely we can see that.
Europe is reacting differently than the rest of the world.
When you talk about this new platform I think you've got it very right. This is also the possibility of us going a little bit down to.
To all the tier two and tier three banks in the United States.
Which is a market that we don't cover today with.
With the real time payment platform.
This new technology. So it is it is refreshing for our clients and we are talking about tier one when we are ready to discuss in detail that technology with them in their modernization journey.
They're going to go hybrid in the future with that technology, but for these tier two and tier three and fintech companies in the United States.
A real it's a new market for us.
Market that we can expand on that.
Got it and if I could sneak in one final follow up.
On the cost side I know, it's not necessarily a new dynamic, but could you speak to what youre seeing from a labor cost or a vendor cost inflation standpoint and.
As well as your ability to offset offset higher costs by reducing discretionary costs discretionary spend or any any other flexibility you might have in your cost base.
Yes, I'm going to summarize that as Scott to give you the detail but.
We are very investor friendly and we can manage inflation and we are managing inflation not that they don't have inflation inflationary pressures and every line, but we have been able to manage every line with except with the exception of the interchange in this case that is that that takes time. So I feel confident that we can continue.
To manage inflation.
In every other line interchange it will take more time, but so Scott yes. It's a good question I mean from a if you look at it.
Pure software and SaaS provider, we don't have call those impacts of those supply chain type inflationary pressures in terms of input costs. So we really don't see it on our supply chain, we're not a heavy user of energy obviously were seeing were indirectly impacted.
By the utility segment that we have in the biller business. So we don't really have a burden there in terms of energy consumption and we arent seeing a lot of real broad based wage pressure in the markets that we're in around the world. So the inflationary impact when we say it's isolated it.
It's pretty isolated to this pillar utility.
Segment, and everything else is pretty manageable.
Got it thank you very much.
There are no further questions at this time I would like to turn the call back over to the presenters.
Well, thank you everybody for dialing in and your questions.
We look forward to following up in the coming weeks have a great day, and we are fine with the fire alarm.
Yeah.
This concludes today's conference call you may now disconnect.
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