Q2 2023 ACI Worldwide Inc Earnings Call

Thank you for standing by my name is Belinda and that will be your conference operator today.

This time I'd like to welcome everyone to the ACI worldwide Conference call.

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After the speaker's remarks, there will be a question and answer session.

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Thank you.

I now turn the call over to you.

John craft.

Begin your conference.

Thank you and good morning, everyone.

Today's call, we will discuss the company's second quarter of 2023 results in financial outlook for the rest of the year, we will take your questions at the end.

The slides accompanying this call him up guests can be found ACI worldwide Dot com under the Investor Relations tab and will remain available after the call.

Call is subject to safe Harbor and forward looking statements like all of our events you can find the full text of both statements in our presentation deck and earnings press release, both of which are of.

Bailable on our website and with the S. P C.

On this morning's calls Tom worse up our president and CEO , Scott Baron's Garcia.

Before I handed over I wanted to share the a C I will be attending.

Coming in Canaccord Genuity annual growth conference on August 8th.

<unk> annual fin Tech information and business services Forum on August 10.

The permanent C E O a few weeks ago.

Many of you may know that I've been a fan of Asia.

Long time, even as in ACI customer before joining the board.

2015.

Over the years.

Very familiar with our team our mission and our software platform.

In the months since assuming this role I've travelled to many countries and visited with some of our largest most innovative customers and business partners.

The feedback I've received has been incredible the opportunities we've discussed it been inspiring and energizing and I'm confident we have the foundation in place.

See I threw it's next chapter of growth.

I look forward to working alongside this team to continue accelerating growth optimizing our portfolio and maximizing value for our shareholders.

I'm moving to the quarter.

We deliver second quarter results ahead of the guidance. We provided you back and May our team did a great job of securing some new an expansionary wins.

Originally expected.

And our biller business is continuing to see real traction from the initiatives, we've been discussing with Ya.

Great News about two T's results is that finding these new contracts early has derisked the second half by reducing the number of new wins, our team needs to secure.

All of this gives us increasing confidence achieving our guidance.

In terms of specific numbers and Scott will dive deeper into these total revenue was $323 million.

[noise] down 2% year over year.

The recurring revenue was $261 million up 5% when adjusted for foreign exchange impact and the divestiture of the corporate online banking business.

In line with my previous comment as soon as we previously discussed the quarterly timing of our renewals will be more weighted towards Q3 and Q4 this year.

Just out of the corner space last year.

That's just the way the prior renewal spell on the account.

New a our bookings for the quarter were $13 million, a new a our bookings for the trailing 12 months for $91 million, which is up 2% from the 12 months ending June 2022.

It's important to note that our bookings metric does not include new non-recurring poking such as new turned licenses.

Carrying every five years not annually.

New license booking sign in the quarter were up more than 100 per cent from last year's second quarter.

This was driven in part by two new contracts within text in the Middle East Africa, and South Asia or reject.

How may I ask the region is showing strong results in strong pipeline.

I'm looking forward to continued growth their.

Personally visited the region three times over the past few months to support the team and closing business.

One more point on a R. R proteins. It's notable that we sign another very large bill or client immediately after closing the quarter and I mean immediately I think it is.

Around three am on the first of July and that one will show up in our air bookings number in Q3.

On the topic of Biller I was particularly pleased to see continued improvement in this segment.

Which has had a 5% revenue increase and an adjusted EBITDA increase of 10% compared to the same period in 2022.

Driven by new customer Onboarding in our interchange improvement efforts for.

Those who are also tracking our net revenue grew 9% in Q2 versus last year.

Nearly through our biller contract negotiations and we expect the interchange pricing adjustments to have a lasting impacts on our profitability.

We were encouraged that bank recurring revenue grew 13% year over year as newer SAS contracts ramp.

Bank segment revenue and EBITDA.

<unk> growth again in the second half of this year following the renewal calendar that I just mentioned.

Merchant segment revenue was flat and EBITDA increased 23% on a constant currency basis as a result of efficiency and revenue sharing initiatives that it began to take hold in a segment.

We are continuing to make meaningful investments that are merchant segment, particularly in our go to market.

New and innovative capabilities.

Before I turn you over to Scott, Let me discuss some industry trends that we believe provide a C I a significant opportunity.

Too obvious top of mind items that I wanted to give you a little of my perspective.

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First real Thai payments.

Recently, the Federal Reserve went live with their much anticipated fed now instant payments network.

I was pleased to be one of the first organizations to certify send receive and request for pay services on the new network.

This functionality adds more capacity to process real time payments in the U S. Alongside the clearinghouse R. T. P network in early morning Zelle.

We're currently working with many domestic banks on real time implementations as well as the intermediary service smaller banks and credit unions.

The starting from a small base, we believe the U S will see a four fold increase in real time payments over the next four years and it will include additional use cases, such as credit line access request for pay now or pay.

Pay later and many others.

And of course, the real time payment Revolution is happening globally in some markets in Brazil, the growth has been dramatic.

Adding more options in the U S will accelerate the global ecosystem growth and this is just phase one is we're exploring cross border functionality in certain markets.

And the power of enabling real time money movement at low cost between large trading partners.

Really beginning to get excited.

Specifically with respect to fed now, we're able to deliver services b a licensed appointment for on premise customers or be the cloud with our SAS based real tied payments cloud offering.

She is offering a differentiated servicing the cloud by bundling or a high powered risk scoring solutions to provide additional layers of fraud protection.

Customers are seeking.

I'm sure some of your wondering how many transactions that now is processed.

No statistics have been published yet, but I think it's safe to say the early volumes will be quite small as the system beds in more players connect.

We don't expect a meaningful revenue impact this year, but over time, we expect fed now to be an important part of the payments ecosystem in the U S and beyond.

You have any other industry driver I want to discuss is artificial intelligence or AI.

Looking at the newspapers in the stock market, we might be able to say this is a key driver every industry right now.

<unk> has been using a I am several ways for years, most notably in our fraud prevention software.

We were recently granted a patent on a set of tools and processes, we call incremental learning.

Can we incorporate that patent and model into both are anti fraud solutions and the real time payments cloud offers.

I'm Gonna give you a pretty simplistic way to think about how our approach differs from others.

Other learning models are updated periodically and offline.

For example, you may have heard about opening my eyes models like G. P. T three which is transitioning to G. P. T. Four that's an example of this offline update process.

Users have to move to a new model once in awhile.

This approach means the models accuracy and performance can drop off quickly as new scenarios emerge.

Aci's proprietary incremental learning approach allows us to continually train our models.

Small burst.

Eliminate the need for Big Bang model upgrades.

Our models have the benefit of the data they've seen almost up to the current minutes make.

The more likely to detect and prevent fraudulent activity.

We're also expanding the use of incremental learning it to the interchange management efforts in our bill or segment and we're seeing very encouraging results.

We have pilot programs to use AI tools to make her coat development debugging and testing more efficient.

I've, even used a I enhanced tools to help me create internal team messaging.

<unk> please.

Please don't tell my board.

A I S seemingly everywhere and all encompassing especially with the rapid advances and generated a large language models.

And we're finding that.

<unk> to improve our products enhance our efficiency and reduce our costs.

Oh I'm sure. Some of you. Many of you maybe all of you read some of the same doomsday scenarios I have about the risks of a.

And there are of course, some very real risks with the potential benefits of using these tools and responsible prudent ways are far too large to ignore.

P C I tends to be a leader and the responsible use of <unk> to improve our business and the value you provide our customers.

We've made great progress this quarter.

Proud of our teams continued execution.

I know, there's more work to be done and I believe we have the right strategy in place to continue navigating the near term challenges and delivering consistent results.

Also positioning ACI to capitalize on the significant opportunities before us in real time payments and a cloud based technologies.

Before I turn it over to Scott.

Reiterate my confidence in our team our strategy growth potential.

And I want to reiterate our commitment to achieve our revenue growth target of 79% 2024.

But I also wanted to say I know, we can do more in the eyes of the investment community.

Not quite ready to provide details were working on ways to better tell our story as well as ways to improve our transparency, including the metrics we provide.

Our share price simply does not reflect the value I believe ACI Holt.

I am determined to address that.

And I'm sure you know I made a significant personal investment naci's stock apps.

Absolutely confident that was a great choice.

Now I'm going to turn it over to Scott to discuss financials and our guidance.

Thanks, Tom and good morning, everyone.

My first plan to review our financial results for Q2, and then provide our outlook for the rest of 2023.

Revenue in the quarter was 323 million and adjusted EBITDA was 57 million.

You need to see someone with growth in a recurring revenue, which is a 7% year to date or to last year.

Growth is coming from a combination of customer go wives that happens late last year that will contribute a four year this year.

Our pricing initiatives filler segment as well as our annual CVI uplifts on your bank statement.

The overall number of contributing factors that are leaving the strength and recurring revenue growth.

And as a reminder from her last earnings call that are non-recurring license fee revenue.

Primarily coming from renewables will be more second have waited this year.

Since these come in.

Incremental fulfill the costs are very high flow <unk>.

Turning to our segment resolve bank segment revenue was 118 million and adjusted EBITDA was 52 million.

Bank statement is predominantly from his license software. So those will be the most impacted by the sheer signing up the renewal license fees.

Merchant segment revenue was three 7 million and adjusted EBITDA was 10 billion.

Filler segment revenue was 169 million, which represents 5% growth over last year.

EBITDA increased 10% compared to last year.

The growth both revenue and profitability in this segment is driven by customer go lives.

Notable progress with our interchange improvement appropriate.

We ended up with $132 million in cash on hand.

Balance of just over 1 billion Internet that.

Leverage ratio of 2.9 times.

We have $200 million remaining on our share repurchase authorization.

Turning next door outlook with what we're seeing here in the first half of the year.

The strength.

Revenue growth, we are reiterating or for your guidance with revenue in the range of 1.436 billion to 1.466 billion.

And we continue to expect adjusted EBITDA to being a range of 380 million to $395 million.

Justin EBITDA margin experience.

Two three we expect revenue to be in the range of 335 to 345 million and adjusted EBITDA to being a range of $70 million to $80 million, both ranges, representing solar with double digit growth compared to Q3 last year.

So in summary retract.

The year is expected.

With a particular strength that we're seeing any underlying recurring revenue base the business.

Bind with additional go lives, we expect here in 2023.

Second half strength set this up well for delivering our long term targets of 79% growth.

24.

So with that I'll pass it back to town for some closing remarks.

Thanks Scott.

In summary.

We delivered results ahead of our expectations in the second quarter.

Our bookings and implementation progress provides us confidence to reiterate our four at outlook for this year and next.

A C I a significant opportunity in the marketplace with AI and real time payments, it's certainly an exciting time to be in Asia.

I am and always will be relentlessly focused on delivering shareholder value.

Finally, as John mentioned, we're planning to attend several investor confidence is coming up.

Look forward to increasing our level of investor engagement going forward and I look forward to spending time with you.

Thank you again for joining us today will now open it up for Q&A.

At this time I'd like to remind everyone in order to ask a question.

<unk> then the number one on your telephone keypad.

Will pass for just a moment to complete the Q and a roster.

As a reminder, please limit your questions to one.

Your first question comes from the line is heckman from D. A Davidson.

Heckman Your line is open.

Good morning, this is alley.

We have a question about.

<unk> <unk> <unk> <unk>.

Me being kind of flattish we wondered if you could go over foundations and geography for a year.

Expecting to have successfully a segment.

For the next two years and do you expect to accelerating growth over the next four quarters.

Thank you.

Yes.

Scott.

Answer is accelerating growth and we kind of signal that when we can.

Came out of our first quarter call that we'd be about.

We were negative first quarter second quarter was about flat slightly positive in terms of dollars and that we would exit the year in Canada.

Single digits.

The the merchant business is is actually.

Pretty heavily weighted to international markets and so I expected that that growth is predominantly gonna come from international mortgage over the next couple of years.

Thank you.

Your next question comes from the line of Joseph Joseph Vassey from Canaccord.

Change.

Your line is open.

Hey, guys nice results and also Thomas.

Anytime soon because we just don't need them, what what I, what I am focused on is making sure that we are concentrating our investments and efforts in areas that are gonna deliver results as as fast as possible. So <unk>. One example of course being the what we've been talking about it in our bill or <unk>.

<unk>, we had some challenges, but big opportunities and we have we've been laser focused we brought in new leaders for that space and it's it's really performing well. So there's one example, but yeah, you're you're getting back to your actual question I I do not anticipate major shifts.

It'll be more about focus and ensuring that we are concentrating in areas that are gonna deliver results fast.

Thanks very much.

You're welcome thank you.

The next question comes from George certain from Craig Hallum.

Your line is open.

Thank you Tom I appreciate the additional information on the segment so.

I wanted to focus specifically on biller, obviously, there's been a platform change you had.

Wins of of some good size you mentioned that you had another large wind post quarter. So I'm wondering if you could just go through when rates and sort of opportunity sets that you're seeing in bill or relative to maybe several months ago.

Mmm.

Well, we haven't published to this is Scott.

Publish or at least at this point you know whatever when rates are.

You're right I mean, we have here.

Success.

What we haven't seen yet this year has some of the the impact of some of the bigger real lives.

Here in a second half on deals we sold last year. So you know I think David.

The upside and bill or is this kind of you to come in terms of the performance and again that stuff. We sold last year with one line here a second half the one that Tom mentioned sign here. The first of July will probably more likely impact as we get into the second half of next year, but.

In terms of publishing win win right. We don't we don't have those statistics to provide we do we do think we're taking sure that we're gaining share. We're we are we are winning deals that we needed to win and as Scott mentioned, we got where.

We really haven't seen the bulk of the impact from those larger deals quite yet the the the really big when we've been talking about it is live but it is not completely cut over so second half you'll see more more impact than than we saw in this quarter.

Again.

Okay I'm sorry.

Do we have any more questions.

Mmm question Linda.

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Yes, I'm here.

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If there are no further questions at this time I turn the call back over to you John craft.

Alright, Thanks, Linda Thanks, everybody for joining us we look forward to catching up in the coming weeks have a great day.

Thanks.

This concludes today's conference you.

You may now disconnect.

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