Q4 2022 ACI Worldwide Inc Earnings Call
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Ladies and gentlemen, and thank you Stan for standing by the ACI worldwide, Inc. Fourth quarter and full year ended 20 twenty-two financial results will begin momentarily. Thank you.
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Ladies and gentlemen, thank you for standing by and welcome to the ACI worldwide, Inc. Fourth quarter and full year ended 2022 five.
Financial results I would now like to turn the call over to John Kraft Senior Vice President of strategy and finance.
Please go ahead.
Thank you and good morning, everyone.
On today's call, we will discuss the company's fourth quarter and full year 2022 results and our financial outlook for the rest of the year, we'll take your questions at the end.
The slides accompanying this call and webcast can be found in ACI worldwide Dot 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 Warsaw, our interim president and CEO and Scott Behrens our CFO .
With that I'd like to turn the call over to Tom Tom.
Good morning.
Thank you all for joining us this morning and as usual.
We have a pretty packed agenda today.
I'm going to speak about several topics, including our fairly recent CEO transition.
My initial perspectives from my time in this role and of course, our 2022 results, including sales performance.
And our outlook for 2023, including an update on the interchange challenges we talked about on the last call.
At that point I'll turn the call over to Scott and he is going to provide more details on our results and our outlook.
It's been about three months since we announced the change in our CEO and I stepped in as the interim leader of ACI.
And it's been a fantastic three months and very interesting for me.
I can tell you is it very clearly we've entered a new phase for ACI and we have some different needs from our leader.
We're shifting our emphasis even further toward accelerating growth.
Capitalizing on our market position as three discontinuities take hold across our industry.
One payments continue to mature as a key differentiator for our customers.
Second the real time payment revolution around the world is real and it's accelerating.
Finally customers are becoming more open to new operating models for payments infrastructure that often manifests itself as a cloud opportunity.
It's more than that and I'll talk more about that in a few months.
ACI solutions underpin successful strategies to take advantage of all those market dynamics for customers around the world and that's a great place to be.
When I think about our next C E O.
The next CEO will have significant financial services and payments experience.
Reuben transformational leadership.
Large scale sales acumen demonstrated service excellence expertise in highly complex regulated organizations.
A balanced set of capabilities.
And experiences with intense focus on growth provides the basis of our ideal profile.
We've engaged a leading executive search firm and they've identified several very promising candidates already we expect to identify the next CEO in the coming months.
I want to make one thing absolutely clear you should not expect major shifts in strategy for base, yes.
The foundation of our business is strong we're on the right track.
We're intensifying our execution focus to drive results even faster than in the recent past.
As you May know I'm very familiar with Acs having served on the board since 2015, and as a customer of the company off and on for more than 20 years.
When I was the non executive chairman of the company I was optimistic about aci's future I can tell you that I'm, even more optimistic after guiding into a new level of detail as the CEO .
Our products are mission critical they are market, leading and they are extremely sticky.
What we do is that the absolute core of our customers' business.
And of course, our clients account for a substantial portion of the financial services market around the world, including leading financial institutions merchants and pillars.
We have a substantial market position in the untapped opportunity is massive and growing fast.
ACI has a consistent cash generator and a business that is an extremely cyclical and it's not particularly impacted by economic swings such as a potential recession.
The strength of our business gives us a strong balance sheet with excellent financial flexibility and that allows us to take advantage of organic and inorganic growth opportunities as they arise.
All aimed at delivering shareholder value.
ACI is well positioned to capitalize on the real time Revolution I already mentioned.
With the additions of three Central Bank infrastructures in the Middle East ACI now powers 25, domestic and Pan regional real time payment schemes across six continents.
We have more work to do to fully capitalize on the opportunities ahead.
And we have a strong roadmap.
And we're ready to execute.
I will let Scott walk through the details, but I'll make a couple of high level comments about our 2022 results.
Overall, we delivered results in line or better than the last guidance we provided.
Again in 2022, we delivered mid single digit organic revenue growth at 7% when adjusted for exchange rate fluctuations in our divestiture.
Our EBITDA was nearly flat with 2021 levels. Despite significant pressure from the interchange issue we discussed on our last call.
During 2022, we set an all time, new ASR bookings record delivering.
Delivering more than $100 million.
New annual recurring revenue up 35%, creating a strong foundation for the future.
Typically our new air bookings and Biller grew 93% over 2021, as we signed well over double the number of new logos.
Our merchant segment, new <unk> bookings increased 87% coming from 37, new logos.
This combined with our visibility into our banking segment renewal calendar provides us significant confidence in our revenue outlook that Scott will discuss.
And fourth quarter, we significantly increased our repurchase activity and in total last year, we repurchased eight 6 million shares.
For $207 million, which effectively completed our previous authorization.
We're also announcing that the board has increased our repurchase authorization up to $200 million as we continue to actively pursue opportunities to enhance shareholder value.
We expect to deliver revenue growth between four and 6% in 2023.
Building on the solid sales performance, we had in 2022.
Our EBITDA is expected to grow by between six and 10% to a range of $380 million to $395 million. This year.
Scott will walk through some more details, but this is in line with our prior statements about aci's trajectory and it positions us to deliver on our target of upper single digit organic growth in 2024.
I wanted to make a couple of comments about interchange the inflation driven impact to our biller business, we talked about in the last call as.
As mentioned in November we saw an increase in interchange costs, primarily driven by larger average bill size in our utility segment.
We noted that we have a dedicated team focused on offsetting this impact working contract by contract in that segment to reduce or eliminate our exposure and to take full advantage of special programs and our volumes to lower interchange rates wherever possible and to optimize our net revenue performance.
We've completed our work on approximately 70% of our client accounts and we're going to work through the remainder over the coming weeks and months.
I considered starting with a discussion of market speculation, but I decided to save two yet it's.
It's not unusual for rumors circulated during the leadership transition.
We don't comment on rumors as you know, but I can tell you is that my team is fully aligned on doing what is best for the long term interests of our shareholders that isn't going to change no matter, how many stories pop up.
As spoken to many clients and shareholders to make this point clear.
Let me sum up.
ACI is mission critical for our customers.
We are a strong and consistent cash generator and a disciplined capital allocator.
We are driving payment modernization with many customers, including strengthening our real time and payment cloud capabilities.
We are investing to continue executing technology transformation and enhancing operational excellence to capitalize on the many opportunities in front of us.
Well I understand you may have some near term uncertainty regarding Aci's leadership, you should not expect major shifts in strategy from ACI as the new CEO opt.
Operationally and financially.
<unk> is focused and on track.
Lastly, the bookings we signed last year combined with our renewal calendar provide me with a high degree of confidence in our future and I intend to drive more visibility for our shareholders no matter, which role I hold going forward.
Thank you very much for your support and I'll turn it over to Scott to discuss financials and guidance Scott.
Thanks, Tom and good morning, everyone.
First I plan to review our financial results for 2022, I'll, then provide our forward outlook, including 2023 guidance.
Then open the line for questions.
I'll be starting my comments on slide four.
Full year 2022 revenue was 1.422 billion up 4% from 2021.
In total adjusted EBITDA was $373 million compared to $384 million in 2021.
Adjusting for foreign currency fluctuations and the divestiture of our corporate online banking product full year 2022 revenue growth was 7%.
And total adjusted EBITDA growth was 2%.
As previously announced we closed on the sale of our corporate online banking products on September one 2022 for approximately $100 million in cash.
And totally our bookings for 2022 grew 35% over 2021.
Moving to the segment results.
<unk> segment revenue increased 9%.
<unk> segment, adjusted EBITDA increased 4% versus 2021 adjusted for foreign currency and the divestiture of our corporate online banking product.
Merchant segment revenue increased 5% and merchant segment, adjusted EBITDA decreased 4% versus 2021 on a constant currency basis.
During 2022, we increased our investment in selling and marketing and product initiatives, which we expect to improve growth in 2023 and beyond.
<unk> segment revenue increased 6%, while biller segment, adjusted EBITDA decreased 17% versus 2021.
Throughout 2022, we operated in an inflationary environment and our utilities vertical which resulted in higher interchange fees and contracts, where the price we receive per transaction is fixed but the interchange cost towards fluctuates with the average ticket size.
In the second half of 2022, we implemented several initiatives, including price adjustments to mitigate the impact and improved profitability in 2023.
ACI ended 2022 was $125 million in cash on hand, and total debt outstanding of approximately $1 billion.
Our net debt leverage ratio was two six times, which is within our long term target of two five times.
During the fourth quarter, we repurchased $116 million of our stock, bringing our total 2022 share repurchase amount to $207 million.
And $315 million over the last 24 months.
During 2023, we expect to continue to deploy a significant portion of our cash flow to share buybacks.
And finally, turning to slide five with our outlook for 2023.
Despite the uncertainties in the market, we expect to once again produce mid single digit organic revenue growth in 2023 with revenue in a range of $1 436 to $1 46, 6 billion, representing 4% to 6% growth over 2022 on a constant currency basis and adjusting for the sale of.
Our corporate online banking products.
We expect 2023, adjusted EBITDA of $380 to 395 million, which represents 6% to 10% growth on a constant currency basis and adjusting for the divestiture.
For your modeling purposes here on slide five we have shown 2022 on a pro forma basis for the sale of our corporate online banking products and it reflected 2022 on a constant currency basis with 2023.
This excludes one time costs related to the move of our European data centers to the public cloud and cost savings initiatives.
For Q1, 2023, we expect revenue to be in a range of $280 million to $290 million in it.
Adjusted EBIT to be in a range of $20 million to $30 million.
Our 2023 bank license renewals are more second half weighted than in 2022. So we would expect our quarterly phasing of revenue and EBITDA in 2023 to look more like 2020 or 2021.
Further with the strong bookings growth, we achieved in 2022 and the expectation that those projects will go wide here in 2023 and give us a full year benefit in 2024 provides us confidence in our growth trajectory and we remain on track to deliver our long term target of 7% to 9% organic revenue growth in 2024.
Sure.
As highlighted at our 2021 analyst day.
Our debt balances are near our leverage targets and we expect to continue to use a significant portion of our cash flow for share repurchases.
And the board has approved an increase in the share repurchase authorization up to $200 million.
With that we will now open the line for questions.
Greater.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad.
Any point you'd like to withdraw from the queue. Please press star one again.
You will be provided with the opportunity for ask one question and one further follow up question, we will take a moment to render our roster.
Our first question comes from the line of Paul loved Sami from Canaccord. Please proceed.
Good morning, Thanks for taking my questions I have.
Couple here on getting our.
Payments business.
Maybe you can remind us how big your RTP.
ITT basis is right now and how much it grew.
Last year and what type of growth are you expecting in 2023 and some of the REIT was there and I have a follow up.
Yes.
Let me clarify when I say it's.
Real time payments is about 10% of our business. When you look at real time from a product line perspective.
But overall strategy is really.
Product types within all of our product solutions real time payments capability, so whether youre biller.
Yes, great consumer Miller.
I want to pay with real time.
Sure.
Hi.
Our strategy is really to implement real time capabilities across all of our products. So it's from a particular product.
10% of the business growing double digits.
Again, where product pricing throughout products.
Got it thanks, Thanks for that clarification, Scott and.
And I believe the fed is now rolling out.
Now program. This year. So maybe you can broadly frame what this means for your RV.
RVP opportunity in the U S and I think they are also participating in the pilot program. So anything you can share from from that experience would be helpful. Thank you.
Yes, Thanks, Joe.
The fed now program is indeed launching this year we've been participating.
All in all with the fed.
Making everyone's making making progress.
Certainly we are our clients are very interested in the program.
I think if you step way back.
I talked earlier about the real time payments Revolution, the United States is way behind the rest of the world and I often tell the story of my daughter, who went to University in China.
I have learned about real time payments.
Real time on the Street.
Because I didn't know anything about it.
Many years ago in the U S just starting to catch up and as the fed not.
Watch will be a big part of that so.
Yeah, we're not in a position to make specific forecasts about how fast that the real time environment in the U S grows one spend now watches.
What I am absolutely confident.
We're going to grow much faster than it has in the past in America.
Americans generally are going to get a lot more comfortable with the idea of real time payments, which is great for us because we've been making investments for some time and we are prepared for.
Is that to start to take hold.
Great. Thank you.
Our next question comes from the line of Peter Heckmann from D. A Davidson. Please proceed.
Good morning, I want to follow up on that last piece. So when you think about real time payments in the U S. What is what is aci's primary opportunity connecting the base to the switch.
Powering portions of the switch how do you think about that in.
Best guess easy I put out a really interesting white paper last year on a real.
Real time payments penetration as a percent of electronic payments.
Wide wide variety of a wide range of penetration from them.
Some countries have had real time payments for decades and are at 1% somewhere at 50% I guess, how do you see the U S adoption of real time team Thats unfolding.
Ultimately our.
Our primary customer there with the banks and the connectivity to.
Whatever that is.
In the case of what's rolling out in the near term that now.
But it's really connecting the banks I would say that would be the primary and then in there.
It's really how does real time manifest itself in the U S. So what are the use cases.
So how does that develop what we look at our portfolio of products and customers is really happening.
Whether it's the bank.
Pillars for merchants really having those endpoints of electronic payments relationships. We are we are.
Our software for our SaaS solutions are running those transactions. So the question is how does it manifest itself.
We're positioning ourselves to be used no matter, where those use cases develop and what payment types.
We will have the capability to provide that to our U S customers.
Okay, and then how do you feel about just the general.
Pricing.
Lots of fee for real time, you mentioned that you're working in 25 countries powering.
Government switches.
And we're looking at roughly $100 million revenue business.
I guess.
When you think about that.
I mean.
<unk> largest provider of real time payments software did governance, which is perhaps there's one country.
Do you feel like the pricing is appropriate there it seems like youre actually.
Playing a bigger role in many of these countries.
The economic benefit to ACI doesn't seem as significant as maybe it should be.
Yes, I mean, the pricing is pretty consistent with.
Our.
Placed in the market is really providing the software.
What we are doing is very similar to savings from Macquarie.
The credit transaction, so our pricing model is still volume based priced very similar to ours.
Product.
And obviously, it's still going to be volume based most of the customers are buying at a low volume today.
And waiting for that critical mass of volume comp.
For us now and what has been for years.
Selling the solution getting it installed.
Central infrastructure.
And then when the transaction volume does come.
We'll be able to.
Charles the capacity component of our license fee.
Yes.
Pretty much.
March is excellent.
The only cost to deliver that so price very seven one or two other license products that drive high volume.
And the issuing and acquiring and so volume basis, Yes, I'll just add one thing.
It is right now we're very focused on planting the flags that's why I highlighted the two five.
Schemes and central infrastructures that we support today.
It's really important to us it will become a much more meaningful part of the business as volumes grow as Scott just highlighted.
And obviously the margin characteristics that you just highlighted are very important as well, but we're trying to make sure that we get ourselves inserted into as many of these schemes around the world as we can and I think we're I think we're off to a very good start.
Our next question comes from the line of George Sutton from Craig Hallum. Please proceed.
Thank you nice to see the.
Continued buyback emphasis and Tom welcome to the call. So Tom I'm curious the way you described the business I liked it you said, we've got a substantial opportunity a large untapped opportunity growing fast.
The market I think.
<unk> has viewed this largely as a relatively mature business without necessarily the open ended sounding growth that youre talking about I wondered if you could just give us your perspective on that thought process.
Yes, sure and I think it's related to the last topic in many ways.
And I know I keep using the same work.
The revolution in real time payments.
You can feel it but as we've highlighted today, 10% ish of our of our business it should become a significantly larger portion and as real time payments.
So assume.
Primarily cash transactions around the world that's an entirely different.
Part of the payment ecosystem for us to participate in which we really have very little to do cash transactions around the world, which in many many countries account for the bulk of our payments so that is really exciting.
And I think when I look at some of the some of the geographies, where we have played a lesser role.
I would think about Africa in particular I spent.
Got a lot of time with our team that's that's.
Racing after in supporting the business in Africa recently, and there is a huge set of opportunities there that we've barely scratched the surface.
So there are some there are some geographic opportunities that we that we really havent pursued as strongly as we will there is the real time payments.
Revolution, and then the final point I would make is that I think we've talked about before that we now offer most of our products in a SaaS or software as a service.
Model, which we have not done.
Honestly until quite recently and we have.
A couple of those clients that are live today, a couple of others that are coming live soon and that again opens up a whole new segment of the market. So smaller financial institutions around the world that don't have the infrastructure to manage our soft.
For themselves. So they don't have the data center that they need they don't have the expertise.
Now, we have created offerings, which will allow us to support.
Even.
Different set of financial institution. So that's a bunch of stuff I just throw at you, but when you put it all together it creates a lot of really interesting opportunities in our biggest challenge I think is making sure. We focus on the ones that are going to make the biggest difference.
Don't spread ourselves too thin.
One other question, we have I believe been anticipating the nexgen platform to be launched this quarter there wasn't.
And you sort of mention of that on the call could you just address where that stands.
Yes, that's really that's ultimately going to be the fed now offering at least as it relates to the U S.
The rest of the investment is really being made.
In overseas.
Capabilities, so in the U S at least with the fed now.
Yes, which is a bit later this year.
As we said.
Okay. Thanks, guys.
Sure.
Our next question comes from the line of Charles Nabhan from Stephens. Please proceed.
Good morning, and thank you for taking my question.
Had a quick one on the pillar segment. If I heard you correctly, you said that you were 70% of the way through your contact contract negotiations. So with that said I was wondering if you expect to be complete by year end 'twenty three and then secondly, given some of the new wins in the segment over the past year or so.
Is there anything different about the normalized margin profile of the business given some of the new verticals that are growing and some of the new wins that are that have come on recently.
Let me ill touch on the 70% question.
I will let Scott respond to the second part of your question. So.
We are roughly 70% through and as I think we've described before this is a.
I wish it were a situation where you could send out a letter and say if prices change, but that actually is and how it works.
We literally need to go contract by contract. So that is what we're doing.
Would expect.
Substantially all of that of that work to be completed this year.
I don't know if it will be 100% I hope it is but it'll be close if not 100% and the reason I'm hedging that just a little tiny bit of color on it.
When you are talking about clients in the utility space utilities as we know are highly regulated entities and to the point, where they're they're rate and fees have to be approved in multiple places in the regulatory environment.
And particularly when they tend to be called the public utilities commission or something similar to that in their local jurisdiction and they have absolute authority to approve or not through raising fees and so.
We can come to an agreement with a utility provider.
It still has to go through an approval process a comment period all of those things that that you have to do in a highly regulated environment. So.
We are working through these things with our clients.
Honestly I haven't found we haven't found a single client that doesn't understand why we're having the discussion and what.
What what needs to happen I'm, not saying, they're happy about it because at the end of the day.
It's an increase that they are they're going to pay but they do understand and.
We're just we're just slogging through it one at a time as I said, but but the quick answer. Your question is yes, we expect essentially all of it to be complete this year.
Yes.
In relation to the margin profile in 2023 in particular youre going to see to benefit to the margin profile of this one.
Is the go lot of revenue that we're going to see in 2000 $23 million segment from the deals we sold prior to 2022 that went live late in 2022, we'll get a full benefit of that revenue in 2023.
That.
Revenue layered on top of a relatively fixed cost base. So that business has scale. So that's going to drive profitability in 2023.
It will be this year over year benefit of these interchange initiatives. So number one would be the revenue growth from the go lives here late in 2022 full benefit next year.
Second will be the interchange initiatives. So if you look every quarter this year Q1.
Elyse interchange percentage of the total billed revenue will be about on par with Q1 last year, but Q2, three or four youll see youll see a significant year over year.
Got it okay and as a follow up I wanted to touch on the merchant segment I know it doesn't get a lot of air time, but.
Revenue was up 8% slightly below your double digit target. So my question is number one is it when you think about getting back to a normalized hitting your target in 'twenty. Four is it still should we still expect the merchant segment to be up double digits and then secondly could you talk a little about some of the growth drivers of the business drive.
The quarter.
Yes, I mean also the short answer on 2020 for Jeff in terms of double digits. If you look at merchant.
Exit rate of recurring revenue.
Yes, Q4, 'twenty two is 9% year over year on a constant currency basis. So that's really.
They are a little bit of a licensed software business, but most of that is going to be recurring revenue that that trajectory of growth continues here in 2023. So in.
Licensed software business, becoming a smaller portion of that business again recurring revenue exited last year at 9%.
This year will be our fastest growing segments.
Double digit growth and further further growth in 2024, but what is driving the growth in that business is really a lot of secular trends in that particular e-commerce electronic transaction.
Because it's not although we have an omni commerce in store presence capability the bulk of our merchant capabilities are very geared towards.
Towards ecommerce whether thats.
Alternative payment gateways.
Card not present fraud detection, which is really ecommerce merchant transaction. So it's really the secular growth.
In E Commerce, and I think it came up in the last call. What are we seeing in terms of transaction volume there and merchant. We did see is we thought we'd ended the year strong and transaction volume, who actually came in a little bit higher rate transaction volumes in our merchant segment. So we're not seeing a lot of weakness there as it relates to global economic concerns. So we're pretty happy with where we're at.
That's great.
Got it thanks for all the color.
Thank you.
I would now like to turn the call over to John Kraus for closing remarks.
Well. Thank you everybody for your time. This morning, we look forward to catching up in the coming weeks have a great day.
Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.
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