ACI Worldwide, Inc.

Welcome to ACI Worldwide Inc. Second Quarter 2021 Financial Results Conference Call. My name is Sylvia and I'll be your operator for today's call. At this time, all participants in a listen-only mode. Later, we'll conduct a question and answer session. During the question and answer session, if you have a question, please press star, then 1 on your touchtone phone. I will now turn the call over to John Kraft. Mr. Kraft, you may begin.

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 back today, a copy of which is available on our website as well as with the SEC. On this morning's call is Ojelon Almeida, our President and CEO, and Scott Behrens, our CFO. Before I hand it over, please note ACI will be attending the Wells Fargo FinTech and Technology Services Forum and the Canaccord Annual Growth Conference, August 11 and 12, as well as the Needham Virtual FinTech and Digital Transformation Conference, August 18. With that, I'd like to turn the call over to Ojan.

Thank you, John. Hello, everyone, and thank you for joining our second quarter 2021 earnings conference call. When we last spoke in May, we discussed our strong first quarter performance and shared updates on our progress, executing on our three-pillar strategy. Today, I'm happy to report another solid quarter. In Q2, we delivered results at the higher end of our expectations, with revenue of $302 million and adjustability of 60 million. Importantly, our recurring revenue was $250 million in Q2, an increase of 7% year-over-year with positive recurring revenue growth in all three segments. I'm pleased to report increasing strength in our global sales organization. In the quarter, we recorded key wins in all three segments. These wins included an impressive list of new logos. Let me share some highlights. In our banking segment, we expanded our relationship with a major Canadian bank. We will consolidate their global wire processing and to ACI's real-time payment solutions in the cloud, creating a single, functionally rich ecosystem. We also contracted with a well-known US-based financial technology disruptor with plans to move their issuing business to the cloud. In addition, we secured the real-time payments win with the Central Bank of Indonesia. This comes after nearly two years of work and is an important win for ACI that cements our growing lead in the real-time market in Asia. In our merchant segment, we secured important wins, including a deal with a leasing fuel and travel operator to upgrade their point-of-sale operations to ACI's Omnicommerce software. Finally, in our builder segment, We signed several very large contracts, including one significant competitive win. This customer plans to use our alternative payment channels and benefit from our solution's ability to offer least-cost routing. Moving to another topic, I'm excited to announce that ACI expanded our collaboration with Microsoft, forming a global alliance to deliver best-in-class payment solutions in the cloud. The agreement will expand and accelerate ACI's cloud offerings, and will allow both companies to capitalize on growing global demand from financial institutions driving towards digital modernization. The alliance strengthens how ACI and Microsoft cooperate in key areas, including go-to-market and customer onboarding. It also creates pathways to power innovation. Our growing pipeline combined with an improving broader economy, provide us with increasing confidence that we are well positioned to drive growth and deliver strong and accelerating performance in the second half of 2021 and beyond. We remain laser-focused on continuing to build a robust pipeline that will support our long-term growth objectives. Importantly, we expect to achieve the Rule 40 in 2021 for the first year ever. We remain actively engaged in the review of our business portfolio and M&A opportunities to ensure we are maximizing short and long-term value creation to our shareholders. With that, I will turn it over to Scott to discuss the financials. Scott?

Thanks, Ocalan, and good morning, everyone. I first plan to go through our financial results for Q2 and then provide some additional commentary regarding our outlook for the rest of the year. We'll then open the line for questions. As Ojalon mentioned, we've delivered results at the higher end of our expectations. Recurring revenue grew 7% to $250 million in Q2 and was 83% of our total revenue, up from 78% in Q2 last year. And importantly, recurring revenue was up in all three of our segments compared to Q2 last year. Total revenue was $302 million and a quarter, which was up 1% over last year. Adjusted EBITDA in the quarter of $60 million was down from $78 million in Q2 last year. The one thing to point out here, more of our license fee revenue from in-year renewals will come in the second half of this year compared to 2020, and that's just based on the timing of the contract expirations for those contracts that renew this year. And as a reminder, those license fees come with very high flow through EBITDA as well. So looking at our three segments in our banking segment, which has been the most impacted by COVID-19-related purchasing delays, we saw recurring revenue growth of 2%, with recurring revenue representing 56% of its segment revenue compared to 50% for Q2 last year. Adjusted EBITDA on our banking segment was down in Q2 due to the decline in non-recurring license revenue. And again, that will pick up here in the second half. In our merchant segment, we saw recurring revenue growth of 5%, with recurring revenue representing 95% of its segment revenue compared to 91% in Q2 last year. Adjusted EBITDA in our merchant segment improved 2% compared to Q2 last year. And finally, in our biller segment, which is entirely recurring revenue, we saw recurring revenue increase 9% from Q2 last year, and adjusted EBITDA increased 1% compared to Q2 last year. As we've been discussing, this year we introduced a new bookings metric, annual recurring revenue from new contracts signed in the quarter, or ARR. This quarter, new ARR was $18 million, down from $22 million in Q2 last year. We actually saw new ARR rebound in North America in Q2, delivering 6% growth over Q2 last year, offset by declines in our international markets. As Ocalan mentioned, as we begin to see the international COVID-related headwinds dissipate and we see the overall improving business environment, we're confident that new ARR and revenue growth will accelerate in the second half of this year. ACI ended the quarter with $146 million in cash on hand and $474 million available on our credit facility after paying down $25 million in debt in the quarter. We ended the quarter with $1.1 billion of debt, representing a net debt leverage ratio of 2.8 times. And I'll just say here we are very pleased with the pace we've been able to delever following the SpeedPay acquisition and expect to be back at or below our targeted 2.5 times leverage exiting 2021. And also of note here, we've repurchased 1 million shares of our stock during the quarter. And finally, as we look ahead to the outlook for the rest of 2021, we are increasingly confident that we'll see new ARR and revenue growth accelerate in the second half of the year with particular strong results in Q4 as we end the year. So with that, we are introducing revenue guidance for the full year 2021 with expectations to generate full year revenue in a range of $1.335 to $1.345 billion. We are reiterating our adjusted EBITDA expectations of a range of 375 million to 385 million. And for Q3, we expect revenue to be in a range of 310 million to 320 million and EBITDA to be in a range of 70 to 80 million. With that, I will now pass it back over to Ocalan for some closing comments. Ocalan.

Thanks, Scott. I'd like to reiterate that Q2 was another strong quarter with results coming in at the high end of our expectations. We expect considerable growth acceleration in the second half and especially in Q4 this year. We are extremely happy with the prospect of delivering the Rule 40 for the first year ever in 2021. In closing, we would like to leave you with three takeaways. Number one, with the implementation of our two strategic pillars, fit for growth and focus on growth, we are starting to generate and will continue to generate healthy and predictable organic profitable growth. Number two, with our third pillar, transformational growth through M&A, we remain actively engaged in the review of our business portfolio and M&A opportunities. Number three, our ultimate objective remains quite clear. HCI worldwide will create transformational, short, and long-term value to its shareholders. We will now open the call for questions. Operator?

Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touch-tone phone. If you wish to be removed in the queue, please press the pound sign or the hash key. If using a speakerphone, you may need to pick up the handset first before pressing the numbers. We also ask that you please limit yourself to one question and one follow-up. Once again, if you have a question, please press star then 1 on your touch-tone phone. And the first question comes from Peter Heckman from DA Davidson.

Hey, good morning, everyone. Thanks for taking my question. I was wondering, could you go through some of the things that maybe may not be evident in the press release that You talk about increasing your confidence in revenue acceleration in the back half. You don't really see it in the ARR bookings number. So can you talk about maybe some contracts that you've signed since the quarter closed or some larger software deals that have either closed or you think are imminent that are giving you that confidence?

Yeah. Thank you. Thank you for the question, Pete. I'd like to start saying what I've been talking to the CEOs of banks around the globe. There are those countries that are just getting back to the table finally. And I'm seeing those new logos. Lots of deals that we have been discussing for a good period of time that will definitely come to closure within Q3 and Q4. More in Q4 than Q3, I would say. That's what we're shooting for. So that's one part of the confidence I have. And the second part is we have a big Backlog of renewals in Q4, very considerable. So you put those two together, and I feel very confident about Q4. Hey, Pete, let me give you some insight. This is the fourth quarter that we deliver what we said we would deliver, and that's part of the culture here. So we have like plan A, B, and C for the numbers that you see in Q3 and Q4. So I'm very, very confident about those.

Yeah, I think Pete, I think the only thing I'd add to that is if you recall at our investor day last November, we said that we had taken some structural cost reductions, but we were reinvesting pretty heavily into the go-to-market, and particularly the sales organization. We started that ramp up late last year, early part of this year, spent the first half really not only hiring, but really building out that pipeline. And if you actually look with a little, you know, kind of peel back on the Q2 ARR growth, we actually started seeing it pick up in North America. North America was actually up 6% in Q2. That was offset by declines in the international markets, more impacted still by COVID, but started to see that spending pick up in Q2, had a new logo win in the quarter in the US, had a major wires transformation project sold to one of our customers in Canada. So the spending certainly picked up in North America, but based on our pipeline, you know, we're comfortable that what we're seeing is in the second half of this year is ARR growth that should come in in the high single digits growth over the second half 2020. And that combined with, as Ojalon said, the renewal book that we have. And again, those are contracts that renew this year pretty heavily. Some of them have already signed. It's just that you have to wait until the new term period begins to recognize it. that's why we were comfortable putting out the revenue range for the year. And that, if you do the implied growth there, second half revenue growth over the second half of 2020 is projected to be somewhere between 6% and 8%. So I think it goes back really to the investments we're making in go-to-market. That's driving the pipeline that started to drive AR bookings in the second quarter. And we're comfortable with what we're seeing here in the second half from both that pipeline that's been developed, as well as the renewal book in the second half to get to that 68% second half growth.

Okay, that's helpful. And just maybe a housekeeping question, but it looked like Interchange took a big jump in the quarter year over year.

Yeah.

I think it was related to the anniversary of the fee-pay deal. Just curious why that happened.

No, actually it was the movement in the tax filing deadline from Q3 to Q2. And so that's the federal and state taxes that moved into the second quarter. That's generally a pretty high interchange business for us. I would say at the net revenue level and at the EBITDA level, that tax business is essentially break-even. So it brings in gross revenue, it brings in interchange, but doesn't really impact as much as the net revenue or EBITDA level.

Got it. All right, thank you.

Our next question comes from George Sutton from Craig Halem.

Hey, guys. Good quarter. Thanks for taking my questions. This is James on for George. So obviously the renewal activity sounds like you have a lot of confidence in sort of the stronger Q4 compared to what you normally see. I'm just kind of curious on your thoughts on some of the other segments as well and how those might contribute to strength into the back half?

Well, yeah, and I would say I wouldn't look at necessarily Q4's renewal. I think it's, yes, I think if you look back at our history, a lot of it sits in the fourth quarter on the license side of the business, and so that drives, you know, license fee, and that comes in at pretty high margin. There's not a whole lot of incremental fulfillment cost that comes with that license fee on a renewal But on the rest of the business, again, it's in terms of the pipeline health that we're seeing as we, you know, hit the midpoint of the year. And so I'd say it's the confidence in the full year revenue and in particular the fourth quarter is the combination of that size of that renewal book as well as the progress in the pipeline.

Got it. And then on the expansion of your relationship with Microsoft, I guess, could you go into some detail there, sort of, What does that allow you to do that you couldn't have done before or what's changed there?

Sure, George. It's good to talk to you. So I think I could start about the fundamentals of our offering in the cloud. We, today, I would say to you that we are cloud-enabled. So we have a very competitive service in the cloud, which has been, you know, with a high win rate, as you can see for the examples that we we gave around the globe. But I think we can do much better. I think this is evolving very fast. Technology is evolving very fast. So this conversation and this agreement with Microsoft, first of all, is about innovation. It's about bringing to the market what the market doesn't have. And that's why it's so successful. That's what we did with Base24 a long period of time ago. and with lots of other softwares. And we want to continue that trajectory. I mean, we are not here just to fulfill the legacy needs of our clients. We are here to innovate and really bring to the table things that are not there. So I think that's number one. Number one is it's a hub of innovation. It's a hub of creating offerings that don't exist in the market today. So that's number one. Number two is go-to-market. It's a very strong go-to-market, like talking to clients together. and really selling together to the most important banks and facilitating those banks. I have been talking to the CEO of big banks around the globe, and everybody talks about digital transformation. Everybody talks about moving to the cloud. But I'm not saying that they are lost, but I will say they need help. They need direction. And I think, you know, HCI and Microsoft is better than HCI alone. So I think that's the second part of it. And the third part is we are co-investing in all of this. So we are co-investing in the market. We are co-investing on the development of those softwares and so forth. So I think those are the three pillars. And we are very, very enthusiastic about that. I think this is one of the most important alliances that you're going to hear from us in the next years. And I can tell you that because the future is cloud. And I think Microsoft will be a wonderful partner.

Got it. And then just one more if I could. So in that press release, I mean, you talked about a win with a leading digital bank, banking as a service player in Latin America. You sort of just go into, I guess, what pain points you're helping them solve with these competitive deals and I guess any feedback that you've gotten from them so far around why ACI?

Yeah, I think number one, because they know we know how to scale. So you talk, for example, to those new companies, those startups, I mean, they're very happy, they're very fast, and they're very nimble, but the question is can you scale to a big contract, without giving you the name, like we are helping a global bank, and we have launched like two or three countries already, going to the fourth country now in the cloud, in Latin America. And we keep doing that, and they are not concerned about our possibility of scaling. And so I think that's what we bring to the table. Number one, it's our brand, our, we know how to do, how to, how to, to move big, big amount of transactions, big amount of money. And, and, and, and, and our clients know that. I think that's not number one. I think number two is also our presence. Let me give an insight here. Why I'm so confident about our Salesforce. We brought the head of the international markets, new head of the international market in the beginning of the year. And we have a whole new team in Latin America, for example, the head of Latin America, the head of Brazil, the head of other countries also. So it's not only about the structure and increasing sales. We are now qualifying sales. We are bringing the best executives of the market. And we are starting to see the result of this. So I think you put all of those things together, and that's why we're so positive about the second half. Perfect. Thanks, guys. Sure.

Our next question comes from a Yank team then from Needham and Company.

Hey, good morning, guys. This is actually Kyle Peterson for Myonk. Thanks for taking the questions. So just wanted to touch on the SG&A leverage. It's been really impressive here, and you guys have been able to keep driving those higher and get more kind of lean and mean. Is there any more room or efficiencies here? left to extract, or is this like a run rate that you guys think you need really to drive, like, new product growth and stronger, like, ARR moving forward?

Well, I think if you look across the various cost line items, you'll see that the selling and marketing expense in particular is up over last year. I think a lot of the other areas is a part of the cost-reducing exercise we did last year. Those are areas where we took cost out, but we reinvested pretty heavily in the selling and marketing area. So I would say that, yeah, I think we've invested heavily in starting this year. I would say we'd probably get a little bit higher run rate on selling and marketing expense going forward, but I think what you're seeing in terms of the R&D, selling and marketing, and G&A is a pretty good run rate of cost structure. But I'd say if you look at it year over year, you're seeing the dynamics of where we zero-based our cost structure and where we're reinvesting in sales and growth.

I think, Scott, it would be fair to say that we, last year, we improved margin by 600 base points. And now what we're saying is that we're going to continue to increase margin, but it's going to be more cost. like 50 base points a year, right?

I mean, something that's more of a function at this point, really, of layering on that incremental revenue on top of that cost base. So I think we've got a pretty good cost structure that we can scale.

Okay. That's good color. And then maybe if you could just remind us on some of the priorities around capital allocation. I know it seems like you guys nibbled at the buyback and paid down some debt, but how would you guys kind of rank order, whether it's buybacks, M&A, or like reducing leverage? Like, how do you guys think about kind of those different priorities here?

Yeah, I don't know if I'd rank order them per se. Obviously, in the quarter, you know, we got in and bought a million shares. I think historically, we've been pretty disciplined with you know, kind of a third of our cash flow on debt service, a third on share buybacks, and a third on tuck-in type acquisitions. Obviously, as we exit this year, and we've said for a long time, our targeted leverage is 2.5 times. Mid-year, we're at 2.8. We probably exit the year somewhere around 2, 3, 2, 4. So obviously, deploying that cash is going to, you know, those... we're getting more flexible in terms of the deployment of that cash. Obviously, over the last 18 months, it was really focused on de-levering, but we're certainly getting more flexible in terms of how we deploy that cash going forward. But obviously, in the quarter, we were in a bottom million shares.

Okay. That's helpful. Thanks, guys.

Thanks, Kyle.

Our next question comes from Mike Del Grosso from Compass Pointe.

Good morning. Thanks for taking my question. Most have been asked and answered, but I wanted to ask a higher level one on your third pillar, Odilon, step change value creation through M&A. Can you provide any progress on this pillar specifically? And then I guess you talk about accretive M&A. what are some of the criteria, and specifically when you talk about accretion, are you talking to EPS or to revenue growth or EBITDA? I guess just a refresh there would be helpful.

Sure, Mike, sure. I think this third pillar is about our communication to investors, how friendly we are about value creation and how it prioritizes value creation to our investors. So we are very open. Again, I'm talking about seven. I'm talking about buy also, parts of our portfolio. And we are actively looking into that. I don't have anything to announce today, but I can tell you that I do have lots of things on my table. And I have them. It's part of my day-to-day. And I can tell you that we are going to be very active in this third pillar going forward. We have not been able to announce anything yet, but there is a lot of work And I want to communicate that very clear to our investors so there are no surprises, right, when that happens. But what you can expect is I don't believe in buy and promise. I believe in buying and showing. So what you're going to see is if we buy when we buy, if we sell when we sell, it will be highly accurate to our shareholders in the first moment. And that's what we are working for.

Okay, thanks. And then when you say accretive, I guess just do you mean to growth or what are some of the specific items you're looking at when you define accretion?

I would say value creation. So it could be EBITDA right away, could be top-line growth, but should create value right away.

Okay, understood. Thank you. Sure.

Thank you, Michael.

Our next question comes from Joseph Vafi from Kennecourt Genuity.

Hey, guys. Good morning. Nice results. Can we get just, I guess, a real-time update on real-time payments in the U.S. and then globally? And then secondly, I was intrigued with the fintech win, and clearly, historically, ACI has done a lot of work with established businesses, and how you see the broader fintech opportunities for the company moving forward as a growth driver. Thanks.

Oh, thank you so much, Joe, for the question. You really give me the line here to talk to you about the big change that we are seeing. I would say that in banks and intermediaries, if you look backwards, we were positioned in the past. We have this very solid offering, like PACE24, the ACI, issuing, acquiring, very solid offering to our current customers, big banks around the globe and so forth. What we have been changing, and Microsoft to accelerate that now big, big time, we're positioning ourselves for this new generation of fintechs. And I can talk about you about the banks in Brazil, digital banks in Brazil, they're like four years old. I can talk to you about other fintechs that are just starting and scaling like crazy in real-time payments. And we are being very competitive, and our winning rate is pretty good on those offers in the cloud in Azure. So I think that growth going forward, if you think about our cash flow, our cash flow will continue to be with the big banks. We don't have a lot of attrition. They will continue with us. But growth will come from the fintechs. Growth will come from the modernization of the banks. And in that case, we need to offer the products of the future, not the products of the past. And that's why the Microsoft alliance is so important, and that's what you're starting to see now. The Microsoft alliance went one step further now. Like we went to the, I would say, endgame with our alliance now. We are very much together. But we have been working with Microsoft for the last two or three years, and you're seeing the result of it now, whether it's fintech, whether the real-time payments in Indonesia, and so forth, right? So I'd like to repeat that, Joe. It's all about... And it's all about AFCI now positioning itself on the future instead of in the past, right? So Scott?

Yeah, I think the only thing I'd add to that is yeah, I think Q2 is an example of a key win in the central infrastructure in Indonesia. And I look at that one as very similar to Malaysia where we power the central infrastructure there and also the bank connectivity there. I mean, those are not big revenue producers in the quarter, but really it's critical to be a part of that infrastructure as it's being implemented in these markets. And then once it's implemented, it's really waiting for the transaction volume growth. But it's absolutely critical. That's why we highlighted that when being a part of both the central infrastructure as well as the connectivity of the banks is critical. It's really laying the infrastructure for that future growth in real time. So I think Q2 is a prime example and the highlight of the Central Bank of Indonesia as a key win for us.

That's great. Thanks, guys.

Thank you, Joe. Thanks, Joe.

And we have no further questions at this time. I will now turn the call back over to John Kratz for closing remarks.

Well, thanks, everybody, for joining us. We look forward to catching up with folks in the coming weeks and at the upcoming conferences. Have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.