ACI Worldwide, Inc.

Good morning, everyone. Thank you for standing by, and welcome to the ACI Worldwide Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. And to ask a question during the session, you will need to press star 1 on your telephone. And please be advised that today's conference is being recorded. And if you require any further assistance, you may press star 0. I would now like to hand the conference over to your speaker today, Mr. John Kraft.

Thank you, and good morning, everyone.

On today's call, we will discuss the company's fourth quarter and full year 2021 results, our financial outlook for 2022, and then we will take your questions. The slides that accompany this call and webcast can be found at ACIWorldwide.com under the Investor Relations tab and will remain available after the call. Additional operational statistics have been provided in the supplemental tables of our materials. Today's call is subject to safe harbor and forward-looking statements like all of our events. You can find the full text of both statements on the first and final pages of our presentation materials, a copy of which is available on our website, as well as with the SEC. On this morning's call is Ocalan Almeida, our president and CEO, and Scott Behrens, our CFO. With that, I'd like to turn the call over to Ocalan.

Thank you, John. Hello, everyone. And thank you for joining our fourth quarter 2021 earnings conference call. Well, thank you over as CEO 22 months ago and facing the reality of no organic growth. We committed to a disciplined approach to turning around our business. In 2020, together with our leadership team, we created our three pillar strategy, which has already shown results. In 2021, we increased organic growth from flat to mid single digits. This growth is the highest we have seen in almost a decade. We have increased margin and have achieved the Rule of 40 for the first year ever. We have deployed a rigorous, disciplined, and systematic approach to M&A focusing on creating value. And we have increased the allocation of our strong cash flow towards share repurchases in a sign of confidence in the company's future. In summary, 2021 was a transformational year for ACI. We delivered on our commitments, generated financial results above our guidance and consensus, and achieved the Rule 40, coming in with a score of 43, all while building momentum for 2022. This year, We will cement our mid-single-digit growth and prime ACI to accelerate growth to 7% to 9% by 2024. Scott will take you through our financial results in detail. But first, let me step back for a moment and update you about our three-pillar strategy. As a reminder, in the Fit for Growth pillar, we focus on streamlining our structure, sharpening our go-to-market strategy and execution. We have a simpler and more efficient operating model with fewer layers, broader spans of control, smart talent development, and more robust governance. We are more agile and accountable. These factors contribute to our momentum today. A weekly operating cadence gives us a clear line of sight to make the business more predictable wherever we operate across the world. Every revenue, product, and technology leader connect to facilitate critical decision-making in real time each week. Linking sales compensation closely to company revenue has also been an important lever. The benefit of local boots on the ground across international markets has increased our ability to seize commercial opportunities ahead of the competition, meet different local demands with agility and global scale, and accelerate innovation cycles. And it is worth repeating that with a simplified and more efficient organization, we captured $60 million in annual cost savings last year, half of which was reinvested in our focus on growth priorities. Moving to our second pillar, focus on growth, we have four investment areas. Real-time payments, sophisticated global merchants, international markets, and the next generation real-time payments platform. Starting with real-time, we continue to invest in both low- and high-value real-time solutions. Real-time transactions continue to grow in every region globally. Early insights of our annual global real-time analysis indicate a 60% year-on-year rise in real-time transactions in 2021. By 2026, more than 25% of electronic payments will be through real-time payments. Last year in Asia, we won a real-time payments infrastructure for Indonesia, a global top-five economy. We are driving the new BIFAS scheme for Indonesia's central bank. It will become an integral part of Indonesia's ongoing digital modernization initiative and central to its payment system blueprint. Multiple banks across Indonesia have already signed for ACI real-time solutions, which can scale to billions of transactions. Overall, we signed a total of 70 new real-time wins. Some examples of real-time modernization successes for the last quarter include a major bank in South Africa. It will be the first of many expansions in South Africa. A top commercial bank in Indonesia and a part of a global banking network. A leading German-based fintech offering banking as a service. A top U.S. 100-bank headquarter in Texas. and the largest financial institution in Kuwait. Moving to sophisticated global merchants, our priority on expanding innovative Omni and e-commerce solutions has led us to increase our offerings and sign large sophisticated merchants and merchant intermediaries worldwide. Last week, we launched an innovative global buy now, pay later solution, enabling access to 70 plus BNPL lenders through a single integration. The innovative user interface ACI PayAfter enhances acceptance rates and serves a broader base of credit-worthy customers, boosting merchant sales worldwide. The NPL has become a must-have for merchants. It offers new avenues to serve a broader base of customers by enabling them to stagger their repayments over time while driving revenue. Sophisticated global merchants value the range of our solutions. last year we signed 22 new logos. Some examples worth highlighting from the previous quarter include an established FinTech in Europe will use our secure e-commerce payment gateway for rapid geographic expansion. In a significant evolution of our relationship, an independent US supermarket with 340 stores will use our Omni grocery focused solution. In the UK, A top grocery and fuel store will migrate to the multi-tenant platform in Azur. The largest travel center truck stop in North America will use multiple solutions to broaden card acceptance and integrate fraud management for their commercial fuel customers. The largest aquarium in Latin America chooses a fraud solution to secure its 10,000-plus gateway merchant base. Now moving to our international markets. we continue to increase our presence across global growth markets with an unrelenting focus on improving our sales pipeline. Latin America, the Middle East, Africa, Asia, and South Pacific are core to this expansion. Some examples of ACI wins from across the world for quarter four include our first SaaS deal in the Pacific region is with a leading bank in New Zealand, a top bank in India, as they reinforce their market leadership, a national bank in Sri Lanka, expanded its remit to modernize its payments infrastructure. Two major banks in Saudi Arabia embark on their payment modernization. A multinational commercial bank in Qatar has been modernized to capture growth driven by the upcoming World Cup and new events like the FIA Formula One Grand Prix. A leading bank in Brazil sought our expertise to upgrade their payment service. One of Ireland's top four commercial banks has kicked off its transformational journey with us. The world's largest building society headquartered in the UK is now partnering to drive modernization strategies. Our fourth focus on growth investment is about building the new generation real-time payments platform. It will cement our global leadership in real-time payments. This end-to-end platform will deliver payment capabilities across all payment rails with real-time as its center of gravity. It will bring a breadth of rich functionality unmatched by any other competitor in this space. It's designed to be simple, secure, and flexible, and will leverage the latest cloud-native principles with a faster time to market. Our efforts with our third strategic pillar, Step Change Value Creation through M&A, remain a high priority. We continue to spend significant time reviewing our business portfolio and M&A opportunities to ensure we maximize short- and long-term value creation for our shareholders. We look at many investments and investors' options, whether big, small, global, or local. Turning to our cash flow, and capital structure, our consistent cash flow generation and solid balance sheet give us significant financial flexibility to make investments to support growth and return cash to shareholders. As a reminder, at our November Analyst Day, we announced our expectations to generate $900 million in cash flow over the next three years. In December, we increased our share repurchase authorization to $250 million. Before turning things over to Scott, I'd like to summarize my comments by reiterating that ACI had a transformational year in 2021. 2022 will be an inflection point for ACI. This year, we expect to cement our mid-single-digit growth and prepare the company to accelerate organic revenue growth to 7% to 9% in 2024. We also expect a gradual increase in net adjusted EBITDA margin over the same period. Combining this outlook with our capital allocation framework and the optionality associated with step change value creation through M&A, we believe we are well-positioned to deliver sustainable shareholder value. With that, I will turn it over to Scott to discuss financials and forward guidance. Scott?

Thanks, Ocalan, and good morning, everyone. I first plan to go through our financial results for Q4 in full year 2021. then provide some commentary regarding our outlook for 2022. We'll then open the line for questions. As Ocalan mentioned, 2021 was a transformational year, and 2022 will be an inflection point for ACI. Fourth quarter revenue was $467 million, up 21% from Q4 last year, and adjusted EBITDA for the quarter was $205 million, up 31% from Q4 last year. Full year 2021 revenue was $1.371 billion, up 6% from 2020, or 5% on a constant currency basis, and the highest level in many years. Total adjusted EBITDA in 2021 was $384 million, up 7% compared to $359 million in 2020, and net adjusted EBITDA margin was 38% in 2021 compared to 37% in 2020. Turning next to full year segment results, our bank segment revenue increased 12% and adjusted EBITDA increased 13% versus 2020. Our merchant segment revenue increased 2% in total, while the underlying recurring revenue increased 8%. And merchant segment adjusted EBITDA increased 2% versus 2020. Our biller segment revenue and recurring revenue increased 1% and the biller segment adjusted EBITDA decreased 5% versus 2020. We ended the year with $122 million in cash on hand and a debt balance of $1 billion. We repaid $94 million in debt during the year, bringing us a net debt leverage ratio of just under 2.5 times. We repurchased 3 million shares of our stock during 2021 for $107 million, and it further repurchased an additional 800,000 shares for 27 million so far here in 2022. And we have approximately 190 million remaining on our current repurchase authorization. And finally, turning to our outlook for 2022, we expect to cement our constant currency mid single digit organic revenue growth in 2022 with reported revenue in a range of 1.415 to 1.435 billion positioning us to accelerate growth into the upper single digits by 2024. We expect 2022 adjusted EBITDA of $400 to $415 million, and this excludes one-time costs related to the move of our European data centers to the public cloud, as communicated at our analyst day back in November. With our debt balances now at our leverage targets, we are changing our capital allocation priorities in the near term, increasing the expected cash flow use for repurchases to approximately 50% of our cash flow. We announced a $250 million share repurchase authorization in December with plans to use a significant portion of this in the near term. And finally, for Q1 2022, we expect revenue to be in a range of $310 to $330 million and adjusted EBITDA to be in a range of $60 to $80 million. And just a modeling note here from a quarterly phasing perspective, we do not expect our revenue in EBITDA to be as back-end loaded here in 2022 as we experienced in 2021. So with that, I will pass it back to Ocalan for closing comments.

Thank you, Scott. 2021 was a transformational year with solid results. I want to thank the ACI family for all the efforts and outcomes in 2021. In 2022, we will cement our mid-single-digit growth and position the company to deliver 7% to 9% growth by 2024.

Thank you. We will now open it up for questions.

And as a reminder, to ask a question, you will need to press star one on your telephone. And to withdraw your question, you may press the pound key. And please limit your question to one. First question comes from the line of Mayank Tandon of Needham. Mayank, your line is now open.

Good morning. Congrats on the progress. I wanted to start with a question on the seasonality. Scott, you mentioned that it would not be as back-end weighted. but the one Q guide does look pretty good relative to expectations, but we're not seeing that flow through for the rest of the year. So I just wanted to get some thoughts around like the one Q guide versus your expectations for the full year and how should you think about seasonality in general?

Yeah, I think generally speaking, if you look at 2021, it was, it was unusually, uh, back end loaded, um, in the Q4, both from a revenue and an even top perspective. I think if you look at, uh, you know, kind of pre 2021, if you look at even 2020, um, for a comp, I think that's probably more indicative of the revenue phase, and we'll see kind of if you look at that, you know, first half versus second half. But yeah, as you indicated, our Q1 guidance is strong. You just won't have to wait until Q4 this year to see year-over-year strength.

Got it. And then just a quick follow-up. In terms of the growth between the three components, banks, merchants, and billers, how should we think about that progression over the course of the year and then maybe like what's embedded in your full year guide for the three components? Thank you.

Yeah, I would say I wouldn't look at it, say, on a quarterly basis. I'd look across year over year, 21 to 22. Obviously, the banks had a very strong 2021. That growth rate should pull back a little here in 2022. billers growth should be you know call it in that mid single digits year over year and then merchants should be a little bit higher and again I'm talking year over year not necessarily quarterly phasing so I'd look at it being our highest growth would be in merchants than billers and then again just because of the overall relative strength of banks in 2021 that growth rate should pull back a little bit in 2022.

Great. Thank you so much.

Next question comes from the line of George Sutton of Craig Halem. George, your line is now open.

Hey, guys. This is James on for George. Congrats on a great quarter and great full year. So first off, I'd love to just hear some color around some of the traction you're seeing with the crypto or crypto partnership with Rocket Fuel thus far. And then What inspired the decision to tap into Buy Now, Pay Later the way you did by sort of going agnostic and enabling access to the 70-plus Buy Now, Pay Later providers?

Yeah, okay. Well, I wouldn't necessarily talk specifically in terms of kind of the economics of the rocket fuel deal. Obviously, that's another call it endpoint or gateway that we offer to our merchants. I think maybe a little bit more exciting would be the ACI pay after capabilities. And what's really driving the opportunity there is I think what we're seeing with the merchants is some pain points in terms of access to a variety of buy now, pay later vendors. And what our capability is going to do is it'll provide our merchants with essentially a gateway initially to about 70 different buy now, pay later lenders And by the end of this year, over 200. And what it is doing is allowing our merchants to provide choice, increase the overall acceptance rate of those consumers. And ultimately, from our standpoint, it's not only do we get the economics of the per transaction, which we would get today in our e-commerce solution, but we get essentially revenue share on the dollar value of the lending. We are really excited about that opportunity. Again, I think we're addressing a pain point in the market as it relates to merchants being able to provide choice to their consumers.

James, just to complement, we have very real position for merchants. We have an acquired Gnostics solution. So when you talk about crypto partnership, BNPL, those are other methods of payment for us. And now our job here is to get sophisticated merchants. Why do we call them sophisticated? Because they want to run the show. They want to be responsible to direct the transaction to the different acquiring methods that we offer. So it is critical that we offer everything that is there. So when you go crypto or you go BNPL, it is going the same direction. which is if you are with ACI, you have multiple methods of payment, and it's all about maximizing revenues for our merchants, right?

Gotcha. So it sounds like you sort of identified existing pain points, which I guess sort of sounds like there could be some existing demand already at this point. Is that a fair amount?

Right, right. Yeah, we're getting a lot of, I would say, a lot of inbounds on the ACI pay after payment. And again, if we even go back to crypto, not to minimize the crypto, all we're doing there is giving our merchants another path to payment and expand their total addressable market.

Gotcha. And then just one more follow-up, if I could. So in Latin America, the impact of COVID drove a pretty material decline in cash, increase in digital payments. You identified Latin America as one of your growth markets. I mean, could you talk about within Latin America, sort of what specifically you're targeting, like which market and sort of what the growth strategy is within those markets?

We have three big markets in Latin America. We have Brazil, Colombia, and Mexico. We are very well developed in those markets, but we are reaching like another 10 or 11 countries. already with a good penetration. We have foot in the ground. And our bank solution, banks and intermediaries solutions, and could be the switch, the issuing, the acquiring, the real-time payments, they're very popular in most of the countries over there. Now, the next frontier is merchants. So since last year, we started to expand our merchant services internationally to Latin America. And we're already seeing a very strong pipeline and fraud prevention, Omnicommerce. So it's really working. So I would say that we have Latin America in all cylinders now, and you can expect great results from Latin America. By the way, Jim, just for you to know, I'm in Brazil today. So I'm calling to you. I'm holding this call from Brazil.

So your boots are literally on the ground. Sounds good.

Very much so.

Next question comes from the line of Peter Heckman of BA Davidson. Peter, your line is now open.

Hey, good morning. Thanks for taking my questions. I wanted to talk about the biller business. The net revenue was down and was below our forecast. It's been down a couple quarters in a row, but the extent of the down in the fourth quarter made me think, did the calendar fall in such a way that maybe the end of the month or the end of a key week, push some bill pay into January?

No, Pete, I would say, generally speaking, if you look at bill pay, it came in low single-digit growth year over year. The net revenue growth was lower than that. But I would look at 2021. We spent a lot of time in 2021 really focused on finishing up the TSA that we have a speed pay. And so a lot of that effort was really, or I'm sorry, with Western Union and moving that business over to our data center. So a lot of time was really on that migration. We have a significant backlog of onboarding of new projects that we've got. Now we've turned our attention to here starting in the fourth quarter to get those deals live here in the early part of this year. And so I don't think that we're still going to probably see the phenomenon of net revenue growing less than gross revenue because of interchange and mix. But I would say that really what's going to be the driver of growth here in 22 is getting those projects live that we've already sold. And you should see those coming online here early in the year. So that'll push gross revenue up, push net revenue up. You always have a bit of a delta, I think, in terms of the interchange mix.

Okay. Okay. And then just thinking about the mix of revenue and your guidance, um, the, the, you know, clearly a, a very strong software year in 2021. Um, and, uh, uh, in order to get, to get to your guidance, um, you know, I need, I'm having a difficult time, you know, uh, not, uh, basically saying that software is going to be at least flat, uh, to get to your numbers. And that seems like a relatively high hurdle, but is that how you're thinking about it, or is there another offset, like, for example, subscription revenues accelerating towards the high single digits?

Yeah, I think generally speaking, you'll see recurring revenue increase year over year. If you look at our midpoint of our 22 revenue guidance, call it constant currency, midpoint is 5%. Merchants should grow in excess of that. really powered by the recurring revenue in that business, transaction growth and recurring revenue. On the biller side, it should come in probably about in line with the total company. And then the software side, the predominant software side, which is the banks, again, that's where I was saying in my prepared remarks, that's going to be you know, we're coming off of a very strong year with banks. And so I'd see that coming in, you know, kind of less than our midpoint growth rates, mostly because we're really coming off of a strong year. But I would maybe even add to that, and I think you see it even in our Q1 guidance, that, you know, banks, we were really seeing banks, you know, open up the wallet in the second half of 2021, and we're continuing to see that strength here. in the early part of 2022. So it was very encouraging to see the bank spending.

Okay. Good to hear. Thank you.

Next question comes from the line of Joseph Vaffey of Canaccord. Joseph, your line is now open.

Hey, guys. Good morning. Great execution in 21. Looking forward to a good 22. Justin, Going back to the guide real quick, could you break down what you would see as the growth contributors from U.S. domestic versus international? And then I'll have a quick follow-up on that.

Maybe let me answer first by kind of providing some color on 2021. 2021 had, if you exclude what I call more of our mature markets, U.S. and Europe, the rest of our international markets drove about 15%, 16% year-over-year growth. We would expect that to continue. Emerging markets, growth markets are driving higher growth than I'd say in our kind of more mature markets. So I would expect that to continue in 2022. And then if you look at say part of our business, Biller is entirely U.S. domestic. Merchant and banks has more of an international footprint than Biller.

Sure, that's helpful. And then if you wanted to break down between banks and merchant internationally and the growth outlook in each of those segments, which one would be ahead of the other or are they about equal?

Generally speaking, merchants are going to grow, whether it's international or domestic, it's going to grow faster than banks. That's just following the trends in overall transaction growth in e-commerce. If you look at the underlying recurring revenue of merchants in 2021, that grew 8%. That's really a subset of what the transaction growth is, and so we'd expect that to continue. I don't, I'll be honest, don't have necessarily our mix on banks. and merchants split between international and domestic, but we can get that. They're pretty balanced. I mean, merchants are more international than banks.

Sure. That's helpful, Scott. And then just circling back to U.S. domestic banks, we've seen in a lot of the other names we follow a resurgence in demand from banks here, and I think clearly you saw some of that here exiting the year. Do you Do you think, you know, if you look into the pipeline and the business there, are we kind of fully caught up at this point on delayed deals at this point? Or would you say that, you know, and we're kind of now at a normal cadence of business and it does feel like the banks won't do as much delaying as perhaps they did over the last couple of years. And maybe that's also a positive for your business. So any comments on that would be helpful. Thanks a lot.

Yeah, there's no doubt the banks, like I was saying, the banks really opened up the wallet here in the second half of 2021. We're continuing to see that. I don't know if we're quite at the end of the catch-up period. Again, we're seeing particular strength in banks. And I wouldn't isolate it to just our U.S. bank market. We had a strong year in both U.S. and international markets with banks.

Yeah, I think I can add more color to that, Scott. I was in Dubai last week, right? And I'm in Brazil today, and I've been traveling around the globe and talking to the CEOs of banks, not only in U.S., Europe, but all around the globe. And what I'm listening is, I think that we are going after COVID now. It's coming from pandemic to pandemic, so everything that you have heard is happening. And the banks are starting to really talk about modernization even more than before. So when I talk to them, for example, about our next generation payments hub, payments platforms, And I tell them that we're going to have a roadmap, you know, of that like in the middle of the year. And I explain to them that it's going to be a journey. It's going to be one, two, three years. They get very excited. They get really excited. And they are calling us to sit on the table and map the modernization with them and tell them what it is not new technology about. I can tell you that that conversation was not happening in 2020 or in the first half of 2021. So it's a very different environment now.

That's great color. Thanks, Ocalan.

There are no further questions at this time. I'll turn it back to the speakers for any closing remarks.

Thanks, everybody, for joining us today. We look forward to catching up in the coming weeks. Have a good day.

Thank you so much to our presenters and to everyone who participated. This concludes today's conference call. You may now disconnect. And speakers, please stay on the line for the post-conference.