Q3 2023 ACI Worldwide Inc Earnings Call
Morning.
My name is mark and that would be your confidence operator today.
At this time I would like to welcome everyone to the a C. I a word white ink third quarter 2023 financial results.
Alright, so I've been placing it to prevent any background noise. After the speaker's remark there will be a question and answer session.
If you would like to ask a question. During this time secret Bright star followed by the number one on your telephone keypad.
If you would like to withdraw your question again <unk> also one question and one follow up or personality. Thank you Mister John Crap, you might be getting your conference.
Thank you and good morning, everyone.
Today's call, we will discuss the company's third quarter of 2023 results and financial outlook for the rest of the year, we will take your questions at the end.
The 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 is subject to safe Harbor and forward looking statements like all of our events.
You can find the full tax the both statements and our presentation deck and earnings release, both of which are available on our website and with the SEC.
On this morning's call as Tom horse up our president and CEO.
Barons rcs's off with that I'll turn the call over to salt.
Good morning, and thank you all for joining our third quarter of 2023 earnings Conference call.
I'll start this morning with some brief comments on the quarter and then I'll hand, it over to Scott to discuss the detailed financials and outlook for the remainder of 2023.
He's also going to discuss revenue growth expectations for full year of 2024, including a little more color on the building blocks of how we generate next year's forecast.
Course, then will as usual will open the lines for questions.
Ah results in Q3 were strong they were ahead of our expectations total revenue was $363 million that was up 21% year over year and recurring revenue was $263 million up 10% when we adjust for foreign exchange impact and the divestiture of the corporate online banking business.
As we previously discussed the quarterly timing of bear renewals is weighted towards the second half this year relative to other quarters phase last year.
But good news we saw those renewals come in in Q3 as expected and we were also able to sign a few new deals that are pipeline a little earlier than we expected, which helped us come in above our guidance range, which certainly helps derisk hitting our full year guidance.
New a R. R bookings for the quarter were $21 million, a new a R. R bookings for the trailing 12 months, where $85 billion, we face some pretty tough comparisons and they are our bookings, but total bookings were up 20 per cent and a quarter and our new non-recurring booking such as new term licences signed in the quarter were 54.
And that was up 50% from last year's Q3.
This was driven by continued strength in the banking sector with several international banks purchasing additional capacity to support their growing transaction volume.
In addition to continue to strengthen banking, we're also continuing to see encouraging recurring revenue growth in the banking segment, which grew 13% year over here.
Staying on the topic of banking segment demand as we continue to invest in Modernising, our core solutions and to make public cloud delivery options available.
Being accelerating SAS demand not only with some of our traditional and longtime customers, but also with new banking customers that may be somewhat smaller than our historic focus area and that's tends to be mega banks are tier one bags.
Situtions are seeking the highest levels of scalability and reliability that ACI is so well known for and they are often more interested in taking advantage of fast delivery options.
To be clear I'm talking about a newer and incremental market for us with a segment of financial institutions aspiring to challenge the largest banks with next generation intelligence payments orchestration in real time payments ups.
This is an exciting opportunity for us and we continue to allocate resources to it.
Moving on to Biller, I was particularly pleased to see continued acceleration in the results gross revenue grew 11% in the quarter net revenue grew 24% EBIT <unk>, 48%.
The strike was driven by the Onboarding of newly signed customers and the utility and customer finance vertical.
Including the customer we've previously mentioned that is expected to be our largest biller client when it's fully on board it.
We also benefited from the interchange improvement efforts that I've talked about before and those are clearly taken hold.
These interchange pricing adjustments will have lasting impacts on our profitability.
Merchant segment revenue and EBITDA were flat the segment has stabilized and we continue to expect to see growth in Q4 and into 2024.
It's notable that are anti fraud solutions continue to perform well, we saw 12% growth in that portion of the business during the quarter.
A I enhanced fraud prevention solution that I mentioned on the last call is something we continue to be very excited about and that is gaining traction in the market.
Overall, we're executing well, we're delivering on our promises to the investment community or keeping our eye on the ball operationally and we're seeing strong even increasing demand for our solutions.
We're working to position the company to take an even greater share of opportunities in our space, including real time payments and cloud based technologies.
I'm also happy to say that we've hired a new C T L. A <unk>.
Has an established track record in spearheading transformational technology initiatives and he's gonna be invaluable as we focus on advancing our leadership in real time payments SAS enabled delivery and intelligent payments orchestration solutions.
I'm confident in the team and in our ability to continue to achieve our goals.
Not gonna turn it over to Scott to discuss financial Center guidance Scott.
Thanks, Tom and good morning, everyone.
My first plan to review our financial results for Q3 women provider outlook for the rest of 2023.
Revenue in the quarter was 363 million up 21% compared to Q3 last year and that is after adjusting for the effects of foreign currency for the corporate online banking divestiture, we made in September of last year.
The revenue growth was driven by strong broken license fee revenue.
You've been saying the license renewal would be more second have waited this year. So that's part of it.
But we also saw hire new license revenue in the bank segments than we were expected.
And we continue to see solid growth in a recurring revenue, which was a 10% compared to Q3 last year.
Overall, the number of contributing factors that are leading to the spring and revenue growth compared to two three last year.
We saw strong growth and adjusted EBITDA, which was 103 million or more than double what we generated in two three last year.
Again here the higher license fee revenue, which has a little incremental fulfillment cost is very high flow through the dos.
But also layering on higher recurring revenue on top of a relatively fixed cost base also contributed to the <unk>.
According to our segment results Bank statement revenue was 156 million up 42% of adjusted EBITDA was $91 million or 100 per cent compared to Q3 last year.
The bank segment is predominantly on credit slice of software. So this will be the most impacted by this year's timing of the renewal license fees.
But we also saw strong growth in recurring revenue with the bank segment, which was up 13% driven by higher maintenance obsessed revenue.
Merchant segment revenue and EBITDA were essentially flat with Q3 last year.
<unk> flipped the growth in queue for as we exit the year.
Further growth next your new business begins to come online.
And finally, our Bill of segment revenue was 171 billion of 11 per cent compared to Q3 last year and adjusted EBITDA $39 million, 48% compared to Q3 last year.
The growth in revenue and profitability. This segment is driven by both new customer go wives and notable progress with our interchange improvement program.
So just over 1 billion.
Leverage ratio of 2.4 times, which is down from 2.9 times at the end of Q2.
Notably we're now down below are targeted leverage of 2.5 times. So what I would expect a more balanced capital allocation going forward between debt reduction in share repurchases.
And we do have $200 million remaining on our share repurchase authorization.
Turning next door outlook, we are reiterating or for your guidance with revenue in the range of 1.43621466 billion. So.
We continue to expect adjusted EBITDA to be in the range of $380 million to $395 million with net adjusted EBITDA margin experiencing.
So in summary, we saw a strong results here in Q3.
Tracking on a year is expected.
<unk> exit this year and look into 2024, you know I think in particular the strength, we're seeing any underlying recurring revenue base the business, which is of 10 per cent to three per cent of your day.
<unk> with that stable reliable base of revenue as we go into next year.
And that combined with the visibility and predictability of a license renewals next year.
Maturity of the sales and implementation pipeline sets us up well to deliver 479% growth in 2024.
So with that I'll pass it back to Tom for some closing remarks, Tom Thanks.
Thanks Scott.
Just to sum up.
We continue to deliver results in line or above expectations, and we continue to have significant opportunity in the marketplace.
We're focused on delivering shareholder value, including working on ways to fine tune our investments to further accelerate our growth as well as working on ways to better tell our investment story.
We're focusing our attention resources and investments on the areas of the business that generate the greatest value to our customers and the best growth opportunities for our shareholders.
This focus is yielding results already and I look forward to sharing more about this during our next analyst day in New York City on March 12th 2024.
Again, thank you for joining us today and will now open it up 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 also one question and one follow up our first and only thank you while plus for just a moment to compile a kid whenever roster.
Our first question comes from the line of beat the Heckman from da Devin Sir.
Airlines now open.
Good morning. This is Alice speaking to you. Thanks for taking our questions. First question can you point more to some of the dynamics that gives me confidence in scheduling to 9% growth in 20th 24 given that.
<unk> little bit relatively soft a our our bookings your date.
Yeah, I would turn back to the comments I made the in my prepared remarks really if you look at the underlying recurring revenue the business.
That's gonna be the the the the base layer of next year's revenue that is.
8% year to date getting getting stronger ear in the second half 10 per cent in Q3. So that's really the the base rate of of revenue growth, we'd have going into next year and then just the overall visibility, especially in the bank side. The renewal book for next year and then the third layer would be.
Net new business, so what's the maturity the pipeline so.
On the bank side in a part of the merchant business, it's really less about the air our bookings and more about the the license and and and services sales. So but again, it's the installed base. The recurring revenue growth that we're seeing that really curious as yeah and gives us confidence in next year.
I'll just add one thing alley.
Scott alluded to it but the the a R. R bookings that we've that we've had over the last 12 to 18 months is what is gonna drive.
The increase in revenue next year and those we have very good visibility to the ramp pattern and the and the implementations for those.
Great. Thank you for giving me some more color on that and then one followed that.
<unk> <unk> <unk> <unk> <unk> <unk> interchange this quarter.
Are there any Diana period that he might consider it one time or D. D. This level of growth add sustainable and then you can feature.
Yeah, No I think it, especially if you look at the top you know last year Q3 was the the quarter, where we really saw the issues with the interchange impacted by some of the inflation that utility segment jumped to this year and we've gone through you know about 12 plus months of of improvement.
Programs various initiatives, whether it's repricing or the overall cost to get the interchange down so I think what you're seeing in that the net revenue growing faster than gross revenue in bill or as a function of all of those initiatives that we've had and so we continue to have more initiatives, we continue to monitor that but I.
What that's showing in the actual results as the success of what we've done here over the last 12 months.
Okay, great. Thank you very much.
Exactly.
Your next question comes from the line after Joseph Buffy from Canaccord January.
You also have to your line is now open.
Good morning, this is spelled out to any on for Joe. Thanks for answering our questions first off Tom you touched on the incremental Mark it in the bank segment that you were going after maybe touch on some of the the more immediate opportunities there.
What are some of the areas investment and when can we expect to see the impact on the piano and I have a photo.
Yeah sure. So I was I was talking about the yeah, we we tend to call it in the mid tier Tiffany.
Angel institutions, and and that's probably not quite the right terminology because historically ACI has had tremendous success and we enjoy a strong market presence in the in the Mega banks.
Very very large banks over $250 billion in assets around the world and we continue to have that we continue to grow there, but what I was talking about is the just slightly smaller so I'm not talking about small financial institutions by any means I'm talking about the tier that goes from roughly 50 billion two two.
150 billion, there's still massive institutions, but what we're seeing is that they're those those institutions are equally interested in what we can provide they want they want the very high reliability. They wanted to prove and capabilities the ability to scale they want all of that.
But but those institutions tend to be more more open to or interested in a stash delivery model and or a cloud delivery model and so that's where we're seeing we're seeing even more demand that we believe we can do an even better job of fulfilling over the <unk>.
<unk> ears, and so it's not it's it's the same types of offerings. We've already made a lot of investments there we can deliver virtually all of our products and a and a.
Using cloud tools and technologies and infrastructures today, and we continued to make investments to make them work, even better and to make them work a little bit better for the for that next tier down, but we're gonna continue to do that it's part of it's part of the the modernization journey that we've talked about for a long time.
But we're <unk>, we're just seeing the the point I was trying to make was that those investments they're already yielding results because that that is one of the places that the recurring revenue strength is coming from is is that tier we've already sold business, it's ramping up and it's it's performance.
That's very helpful. Thank you.
And any comment on the performance off your real time pain in business in <unk> and and.
Anything to add on the on the <unk> for next year. There. Thank you sure sure I mean, we're continuing to see growth in in every region in real time payments. It. It's volumes are are strong.
I know that a lot of people are interested in I'm I'm interested frankly in in fed now [noise] volumes, because obviously, there's been a lot of marketing done and.
At the recent <unk> conference in Toronto, There was tons of discussion that was that was shortly after the launch of bed now sends out an excellent job of marketing, but as expected and I think I said this on the last call as expected volumes and that's in in fact now are very low and that that is.
Not a surprise no one expected them to ramp real quickly. So no surprise at all but we what we are seeing is a significant pipeline of financial institutions that are are coming on board to be ready to handle fed now transactions. So we have.
We have over 100 financial institutions that have already are able to participate in the fed now through you using our tools and there are hundreds more that are in the pipeline through directly with us and with partners that use our technology, so that the U S side volley.
Not bad now relatively low we have seen an increase in the in the clearinghouse R. T. P. Utilizations and I think that's largely due to the the the attention that's been drawn to real time payments generally because of the fed said marketing and and that's great.
Eight, but still relatively small volumes in the U S. But other parts of the world are things much more significant growth and we expect that to continue.
Your next.
Question comes from the line I was charged not banned from Steve <unk> charged or not per line is now open.
Hi, Good morning, and thank you for taking my question is do we think about the go forward run rate for Baylor could you talk about the degree to which the outperformance relative to the 79 per cent target. This quarter was driven by easier comps versus the layering on of new deals and incremental.
Recurring revenue and if.
You know, maybe an accelerated pace of onboarding could lead to either outperformance for performance towards the higher end that 79% target going forward.
I don't think when I when I referred to the cops on the earlier question. It really wasn't about the the top line growth.
The bill or business that came in at 11% in the quarter. It was more around the interchange improvement. So if you look at a net of interchange it accelerated and that was off of the top top last year, because we had a lot higher interchange impact. So I I would say, it's not as the business is going to continue to grow at 11 per cent rate.
You know I would look at it more in the upper single digits going forward. So we did have a large customer go live here in 2023, but that customer is not fully ramped that should fully ramped in early 2024. So.
That's that's really when we look at 2024 that is a part of our comfort in the 79% in total is business that we've already sold and it's either live in ramping or will go live in relatively short order. So when we look at it and and that's not just <unk> across the whole business is it's really business it's already.
Old and live or or business that sold and ramping so very big.
Very little reliance next year on business. It has to be kind of sold in the ear and converted into your so that that's where we're getting our comfort in the 79 for next year.
Got it and just as a follow up you had alluded to some investment you're making in order to pursue.
Revenue initiatives could you may be double click on that a little bit and provide specifics on areas, where you are investing as well as any potential impact on the piano out.
Yeah, I would say.
Maybe it was the second question first as we are it's not what I call incremental to our run rate of spent it's it's it's a re prioritization of what we are spending and it's going to be targeted predominantly towards the bank segment kind of the tier of the times talking about and developing payment.
<unk> capabilities, where we're seeing a lot of demand not just in that next your banks, but also our global installed base is looking for hop capabilities and so it's gonna be predominantly in the bank segment hop capabilities and it's not you're not going to see if a significant increase in expense versus our current run right. It's gonna be a <unk>.
Prioritization of what we're spending today R&D, yeah, we call that Charles would call that intelligent payments orchestration, you've probably heard me say those those words, a couple of times and it's.
The industry tends to talk about it as a payments have been how do how do we help our clients manage all varieties of payments to ensure that they are handled with with scalability reliability that they have the ability to to route them correctly <unk>.
Yes, I'm very efficiently offer new new services and and AC is of course extremely well positioned to take advantage of that are crossed the industry because of the installed base. We have the reputation that we have in the in the <unk>.
<unk> the absolutely proven nature of our of our software products. So we're clearly we're well positioned but that is by our estimation the fastest growing portion of the banking business banking payment software business worldwide and that's true across all.
All sized segments of the of the market and all geographies.
But then when you layer on the the opportunity with that next tier down of of banks. What you find is that the fastest growing segment from a size perspective. So that's why we're so excited about the opportunity and focus there and as Scott said I mean, we are making.
Investments there for sure but it is not we're not talking about net new investment, we're just making sure we're investing where the opportunities are the ripest.
To speak.
Thanks, John.
Mark are there any other questions.
Your next question comes from the <unk> from charge seven from Craig Hallum charge your lines now open.
Thank you Tom now that you've had a more detailed peek under the 10 I'm curious from an allocation of capital perspective, when you look across the segments. I think we all agree banking's done relatively well bill or has really improved merchant has struggled.
Where do you think of these incremental growth opportunities at one point is is merchant something you're not putting more focus on I'm, just curious how you're thinking across the segments.
Sure No. We continued to we can lead you to believe in the opportunity in all three segments Uhm emergent has been obviously a little bit of a of a laggard from a performance perspective. This year, but we stood still a great business as Scott said, we expect that to flip the growth beginning in the <unk>.
Fourth quarter.
So we are continuing to invest their it's it's you know there's no there's.
Don't take anything that that were saying as it's not it's not important.
There is a very large growth opportunity in the banking space, which I was just I was just talking about and we intend to we intend to focus significant resources and a higher portion of our investment on taking advantage of that opportunity in the short run, but we will continue to <unk>.
Best in merchant will continue to invest in biller, and obviously Villiers performing very well. So I don't there's no. There's no fundamental change in our in our investment allocation strategy, but it will be in the short and medium term a little more heavily weighted towards banking.
I don't I don't.
You May also have wondered about the capital allocation strategy from Ah what do we do with our cash and that hasn't changed Scott was was saying that that hasn't changed we focused for the last couple of quarters on Delevering, a little bit given given where the market is in the higher relative cost of debt. So.
Now below below our target feel great about that and we'll we'll continue with our with our long standing capital allocation strategy of of share buybacks Delevering, an an investment in the business.
Just wanted to follow up one bill or you know.
Our third party work has continued to suggest you are seeing competitive takeaways, there with with what you've done with the newer platform and I'm I'm. Just curious if you can give us a sense of is that a growing pipeline that you're seeing and then also on the real time payment side. When do we start to see the benefits of real time payments and the bill or business.
Yes on the pipeline question, we were very very pleased with with the pipeline as it continues to mature.
Yeah that it takes it takes a while to ramp a new sales. So is Scott was saying before.
As we look into next year, most of that business already sold and the bill or business, but we are seeing the pipeline continued to improve we've we've made some leadership changes, which are really really positive for us and that is also having an impact and driving more more pipeline and performance.
On the on the real time payment side, it's do.
We never expected that impact to happen quickly because of partly because of what I said before about the <unk>.
There aren't that many transactions at this point, but as as we see more transactions, we do expect that to be a a very viable option for for builders and we've we've started to and we've been doing this for awhile, but we've painted a number of use case picture.
Hours for builders and they're very excited about them.
Working with the builder to figure out the best way to bring that into the equation give give their their customers the option to use real time payment. So it's there's a lot of pieces.
It's a very big opportunity, we've talked a little bit about that before it's it has has benefits for all the participants and the bill or ecosystem, but it does require adoption and that's that is going to take you know.
I I I don't know exactly but it's it's gonna be a multiyear journey to get that.
Really meaningful.
There are no further questions at this time Mister I drank graph I turned to call back over to you.
Well, thanks, everybody for joining the call. This morning, we look forward to catching up and following up in the coming weeks.
Day.
This concludes today's conference call you may now disconnect.
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