ACI Worldwide, Inc.

Good day and thank you for standing by. Welcome to the ACI Q1 earnings announcement. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your speaker today, Mr. John Kraft. Please go ahead, sir.

Thank you and good morning, everyone. Today's call, like all of our events, is subject to both safe harbor and forward-looking statements. You can find the full text of both statements on the first and final pages of our presentation deck today, a copy of which is available on our website as well as with the SEC. On this morning's call is Ojalon El-Meda, our president and CEO, and Scott Barrens, our CFO. With that, I'd like to turn the call over to Ojalon.

Thank you, John. Hello, everyone, and thank you for joining our first quarter 2021 earnings conference call. When we last spoke in February, we discussed our strong Q4 results and that our three-pillar strategy was progressing and already making the difference. Today, I'm happy to report another strong quarter with results coming in above our expectations. Let me start by providing some color on our financial results. As expected, and unlike Q1 last year, Q1 this year was impacted by COVID-19 related headwinds. Despite of these headwinds, we were very pleased with our results and execution against our three-pillar strategic plan. Our Q1 revenue of 285 million was down slightly versus previous year, but came in above our forecasted guidance range. Importantly, our recurring revenue grew 1%. Adjustability in the quarter was 45 million, up 19%, which was also above the high end of our guidance. Our net adjustability margin was 23%, which despite the revenue reduction was up 400 base points from last year as we remain focused on cost management and profitability. For the full year, we are reaffirming our guidance and as previously discussed, we expect to reach the rule of 40 this year for the first time ever. We had some exciting wins in the quarter across all segments. Of note, we are pleased to sign a new speed pay deal with Cascade Financial, a home loan finance company, which will allow Cascade customers to benefit from more ways to pay their mortgage, including via mobile wallet using our Walletron application. We are also increasing our focus on securing wins with large, sophisticated and global merchants. In the quarter, we signed a new deal with Red Lobster to consolidate their payment infrastructure to one vendor for both their in-store and e-commerce businesses, creating a seamless payment experience across all channels. We also signed a notable contract with a Middle Eastern payments facilitator for our Omni-Channel Commerce Solution. In Europe, we signed an Acquire Agnostic e-commerce contract with a new UK-based payment service provider. In the banking sector, we signed a new real-time contract with Stat, the largest ACH processor in France, as well as an expansionary contract with Union Bank of India. Importantly, we are hearing positive feedback from our customers that we affirm the benefit of our new -for-growth organizational structure, which has allowed for faster decision-making and increased responsiveness. While we anticipate headwinds resulting from COVID-related delays to continue through Q2, our strong first quarter results reaffirm my confidence in our business. As we progress on our strategy amid an improving economic outlook, we anticipate a strong second half performance. In addition to organic value creation, we continue to make progress on a complete strategic review of our business portfolio to enhance HCI's growth profile and maximize long-term value to our shareholders. With that, I will turn it over to Scott to discuss the financials. Scott?

Thanks, Ojalon, and good morning, everyone. I first plan to go through our financial results for Q1 and then provide some additional commentary regarding our outlook for the rest of 2021. We'll then open the line for questions. As we discussed at our analyst day last November, we are introducing a new bookings metric that we hope will be easier for investors to interpret and be more helpful in allowing you all to compare our results on an -to-apples basis and model the financial impact going forward. The metric also more closely aligns us with industry standards and peer practices, and importantly, the metric better aligns with our focus on growing recurring revenue. As you know, driving recurring revenue is one of our strategic priorities. The bookings metric is called annual recurring revenue, or ARR, from new sales, and it's defined as the annual revenue expected to be generated from new bookings in the quarter. So new accounts, new applications, and add-on sale contracts signed in the quarter. In Q1 2021, ARR was 10 million, which is down compared to Q1 last year, as last year's ARR bookings were unaffected by COVID-19. The COVID-19 related headwinds really started hitting us in Q2 last year, so while Q1 was a tough comparison this year, comparisons should ease up going forward. Recurring revenue was up 1% to 246 million, while total revenue came in at 285 million, which was down 2% from Q1 in 2020, again due to the tougher COVID-related comparisons. We saw strong growth in adjusted EBITDA in the quarter, which increased 19% to 45 million, compared to 38 million in Q1 2020. Our net adjusted EBITDA margin increased to 23% in the quarter, compared to 19% in Q1 2020, as you see the -over-year benefits of our cost reduction initiatives as we continue to focus on profitability and drive towards achieving the rule of 40. Also new going forward will be the reporting of our operating segments, which we believe provides increased transparency to our analysts and investors. We are going to report revenue and adjusted EBITDA separately for each of our three target markets of merchants, billers, and banks. This aligns us closer to how we manage our operations and differs from the previous delivery-based reporting segments of on-premise and on-demand. In Q1, our merchant segment revenue grew 22% to 39 million, and merchant segment adjusted EBITDA more than doubled, increasing 129%. In our biller segment, revenue declined 2% to 151 million, while biller segment adjusted EBITDA actually increased 13%. Our bank segment, which continues to be hardest hit by the COVID pandemic, revenue decreased 9% to 96 million, while bank segment adjusted EBITDA decreased 12%. We also saw a strong cash flow from operations, which were up 22% to 70 million. ACI ended the quarter with 185 million in cash on hand and 459 million available on our credit facility. We paid down 25 million in debt in the quarter, and we ended the quarter with 1.1 billion debt, representing a net debt leverage ratio of 2.6 times. Turning to our outlook for the rest of 2021, we expect -19-related headwinds to persist through the first half of the year and for growth to accelerate to the mid-single digits in the second half of the year. For the full year 2021, we continue to expect adjusted EBITDA to be in a range of 375 million to 385 million. I will add here that we are comfortable with where full year street consensus for revenue and EBITDA are lining up. And finally, for Q2, we expect revenue to be in a range of 295 to 305 million and adjusted EBITDA in a range of 50 to 60 million. With that, I will now pass it over to Ojalong for some closing comments. Ojalong?

Thanks, Scott. In closing, we are pleased with the company's performance in the first quarter as HCI's focus on execution continues to pay off. We look forward to accelerating our momentum during the second half of 2021 as we continue ramping our strategy and as the economic outlook improves. This will enable us to achieve the rule of 40 for the first year ever. We remain confident that we will deliver transformational long-term value to our shareholders. With that, operator, we are ready to open the line for questions.

Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone. And to make sure that we accommodate all participants asking questions, please limit yourself to one question and one follow-up. Again, to ask a question, please press star 1 on your telephone. We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Mayank Tadon from Needham. Your line is open.

Hey, good morning. This is actually Kyle Feetersen from Mayank. Thanks for taking the questions. Just want to see if I can get an update on real-time payments. It seems that there's been some pretty healthy growth in the market during the pandemic. How should we think about when some of that increased interest in adoption should start to show up in the P&L and how we should think about that moving forward?

Yeah, hey Kyle, this is Scott. Well, yeah, a lot of the implementations that we've sold over the last call at 18 months or so are still in the implementation process. We've sold them with what I call kind of a low capacity commitment. So the key is, I guess the question you're asking is when do we start to see critical mass in terms of adoption of those volumes? I don't think we can predict when that critical mass is going to happen, but when it does, it will ultimately show up as license fee revenue and really come in at a pure margin. Once installed, those real-time networks really do not have any incremental fulfillment cost with them. But ultimately when that volume does come, it will come through as license revenue. I would say that we don't necessarily anticipate say a tipping point in critical mass say over the next, you know, over the rest of this year. At least we're not expecting it, but obviously monitoring it in many markets throughout the world.

Yeah, just to compliment, we have a strong pipeline. Our agreement with MasterCard continues to evolve after the win in Peru. So we are very positive about real-time payments.

Got it. That's helpful. And then I guess just if you guys could provide an update, you guys have been looking at potential M&A opportunities or kind of evaluating whether there's any businesses that might make sense to kind of prune off, to kind of better position you guys for long-term growth. Is there any update on either of those initiatives right now?

It's a continuous exercise, Caio. It's part of our third pillar, right? Step change, value creation through M&A, and it includes divestitures and investments. So we are always considering those and more to come during the year.

All right. Great. Thanks, guys.

Your next question comes from the line of Peter Heckman from Davidson. Your line is open.

Good morning, everyone. I have a few questions. Number one, just on the new reporting methodology for the three vertical industry segments, do you anticipate reporting those on both kind of a license versus subscription basis to help the analysis or is it just going to be one number that includes everything?

Yeah, we'll disclose it on

a biopsy type. Okay. Okay. Great. And do you anticipate putting out an AK or something with the historical numbers for these new breakdowns?

Yeah, we will.

Okay, great. And then just in biller, looking at it, X interchange looks like revenue is down about 3% year over year. You just wanted to see if there were some other factors, potentially maybe tougher comps with the pandemic. But what's your best guess in terms of when we can see billers start to move into the positive mid-single digit growth range?

Hi, Pete. I'm very positive about billers. What happened is we saw a volume upside by the end of the quarter with the stimulus checks, and that continues. So I'm very positive about that. And soon enough, I think we're going to see billers going to the positive side.

Okay, great. Yeah, maybe I just add to that. I think that's where if we look at our Q1 overachievement versus what we are expecting when we went out with Q1 guidance, that's really where we saw the uptick. It's pleasantly surprised with the uptick in transaction volumes that came in the biller segment late in March. And so that, you know, in that biller business is all US-based, so not sure if that uptick was from stimulus, if it was from just the increase in economic activity. But obviously, kind of that, the results for Q1 and what that means for the rest of the year, I think that ultimately gives us more certainty and more confidence about the recovery and about our outlook for the year.

Got it. Okay, I'll get back in the queue for now.

Thanks. Again, if you would like to ask questions, please press star one on your telephone. Your next question comes from the line of George Slutton from Craig's Hallum. Your line is open.

Hey, guys, this is James on for George. Thanks for taking my questions. Can you give any incremental color on the progress you've made in converting licensed customers to more of a subscription model or just sort of how those conversations are progressing?

Yeah, again, you know, this will be the first year that we introduce that new construct. And so far, we haven't had any of those conversions, most of the renewal business, and that's really where it's targeting the renewal book is in the second half of the year, and will also target net new customers that we are in conversations with, it deals that we expect to close even as early as Q2. So right now, we're in conversation with both existing and new customers, but a lot of the renewal business sits out in the second half of the year.

Yeah, I think if you look at the pipeline, again, we see more deals that, you know, prefers subscription than one time license. So that is a trend that we're seeing and we are managing in some way that we can, you know, keep our guidance and keep growing this company while we make that conversion. That is our commitment.

Right. It's great to hear. And then in terms of some of the international growth markets you've mentioned, sort of trying to put more boots on the ground there. Are you at a level where you think you need to be at in terms of adding reps in those markets? Or what are you seeing in terms of productivity of those reps so far?

James, that's a great question. I just had a meeting last week, and we were talking about that with the teams. The place that I'm not going to save money is boots on the ground. So I'm going to find the money in the company in any place that we can. So if I need to continue doubling the sales force, I will, without impacting the bottom line. I see tremendous opportunity to further increase the sales force in Asia, Pacific, for example, and in Latin America. And I think that the efficiency of those increases will be very high and will pay back very fast. So we will continue to invest without affecting the bottom line.

Great. One more for me, if I could, then I'll hop back in the queue. It's good to see the 22% growth in the merchant segment. Do you think that's a sustainable growth rate going forward? And is there anything you're doing strategically that could possibly cause that to accelerate?

Well, yeah, we've got a number of initiatives we're working to accelerate. I'd say that's obviously been the bright spot going back into the pandemic. Obviously, it's continued here in Q1, and we don't see it slowing down. But yeah, there's a number of initiatives going back to last year when we kind of did our zero base planning process to really take dollars from lower growth parts of our portfolio and reinvest. This was the e-commerce merchant, Omni-commerce was an area that we're reinvesting in. So we expect that to pay dividends.

I think just to add to that, that would be fair to say, Scott, that also we have some more savings planned for next year, right?

Correct. Oh, yeah. Looking back at just the savings, that goes back to the growth and EBITDA year over year, the growth in cash flow year over year. Really, a lot of the work we did last year in terms of restructuring the cost base really sets us up well as we exit the pandemic and we can layer on that incremental revenue on top of that cost base. But we said, going into this year, we had about 60 million in cost savings. Those actions were affected early in the year. There's an incremental, there's certain initiatives that will roll off this year and we'll get an incremental full year run rate benefit next year of an additional 15 million. So we'll either redeploy that in investing in areas such as e-commerce or into the sales force and markets or that'll drop the profitability. But those initiatives are all still on track.

Great. Thanks, guys.

Your next question is from the line of Peter Heckman from DavidSign. Your line is open.

Hey, just a couple of follow-ups. So on the new ARR metric, that won't include renewals, but do you anticipate providing a more regular update like on retention to give us a feel for kind of net new business?

Yeah, we can if there's any significant changes in retention rates. But I will say on that metric, it's really a subcomponent of what was previously our new bookings. But it's just focused on the recurring revenue. And so if you look out and say, when would this annual recurring revenue expect to, when would we expect it to start to show up in the P&L? Our products can go from anywhere to six-month implementation to an 18-month, depending on whether it's cloud deployed on premise. So you could probably look at on average, start to see a run rate of that into our recurring revenue in probably 12 months or so, depending again on the mix.

Got it. Got it. Okay. And then any thoughts on the ongoing process of the Federal Reserve here in the US looking to build their own platform for FedNow for real-time payments? Can you talk a little bit about how ACI is working with the Fed on that?

Yeah, no, we are very involved, Peter. Thanks for the question. We are very involved. We are very involved all around the globe in every and each real-time payment initiative. And the United States is no different. As you know, the United States is lagging behind the rest of the other markets around the globe, or the main markets like India, Malaysia, UK, even Brazil now. But we are very positive about that. We are working very close to the Fed about that, on the FedNow initiative. We have even people from our company sitting on the board of the initiative today, and we are very part of it. So our plan is to be very, very engaged.

Okay, great. We will look forward to additional commentary there. I mean, is that something that appears that is on relative track for late 2023, early 2024 type rollouts?

It is. It is. I think, look, real-time payments is irreversible, right? I mean, this is something that comes, that is where, that is the rail that is going to be growing. It grew like more than 45% next year. So you can expect the real-time payments growing around the globe, you know, 40 plus for the next years. And again, the United States is no different. The United States understands that. You have already initiatives like Zelle, but I think more, the United States is taking more time, as I said, than the rest of the countries. But when it comes, it will come really strong. So I am very positive about that. I think we are going to see a revolution in real-time payments in the next five years in the United States.

Got it. Got it. All right. Thanks much.

Sure. And again, if you have any questions, please press star one on your telephone. There are no further questions at this time. Speakers, you may proceed.

Thank you. Well, thank you everybody for dialing in and being interested in ACI. We look forward to catching up in the coming weeks. Have a good day.

And this concludes today's conference call. Thank you all for participating.