ACI Worldwide, Inc.

Good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Quarter 3 Earnings 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, Simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star followed by the number one on your telephone keypad. Thank you. Mr. John Krast, Senior Vice President of Finance and Strategy, you may begin your conference.

Thank you, and good morning, everyone.

On today's call, we will discuss the company's third quarter 2022 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 ACIWorldwide.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 text of both statements on the first and final pages of our presentation deck, a copy of which is available on our website and with the SEC. On this morning's call is Ocalan Almeida, our president and CEO, and Scott Behrens, our CFO. Before I turn it over, I'd like to say that ACI will attend the Citi 2022 FinTech Conference in New York City on November 15 and the Stevens Annual Investment Conference in Nashville on November 17. With that, I'd like to turn the call over to Ocalan. Thank you, John.

Hello, everyone, and thank you for joining our third quarter 2022 earnings conference call. We are pleased to have delivered another quarter of revenue in line with guidance. We have demonstrated the resilience of ACI's business in a microenvironment pressured by foreign exchange and inflation. Despite the macroenvironment headwinds, It is significant that we can maintain our full-year 2022 constant currency revenue growth in the mid-single digits after factoring in the corporate online banking divestiture. Revenue for the quarter was up 1% adjusted for FX and divestiture. Adjusted BTDA was down 36% adjusted by FX and divestiture. It is important to add color to the near-term pressures on our adjusted EBITDA from FX and inflation. I have two critical points to share about this. First, the impact of inflation is restricted to the interchange components of our biller business. We have been able to manage the inflationary pressures effectively across all other P&L lines and bid segments. Second, we have a dedicated team leading multiple initiatives to minimize this impact. These efforts are paying off. At this point, we have been able to offset a third of the effect of inflation on Biller Interchange this year. We're intensifying our efforts as we move into next year. These efforts include initiatives with customers, credit cards, and consumers. I'll turn now to some other highlights from the quarter. Our new overall AR bookings were up 35% versus Q3 2021. or up 40% on a year-to-date basis. Specifically in merchants, new AR bookings grew by nearly 50% in the quarter. In billers, new AR bookings grew by 132%. In this volatile macro environment, these wins increase visibility into future revenue. It gives us greater confidence in our accelerating growth journey. I'm also pleased to announce that we successfully closed the sale of our corporate online banking solutions. We are glad that the new company, Dragonfly, is serving our corporate online banking customers and employees while taking the business to the next level. We are on track to launch our next generation real-time payments technology platform in 2023, driving new growth across our business segments. We will give you more detail about the opportunities this creates for ACI and our customers at our investor day next year. Turning to our share-by-back program, we repurchased 3.2 million shares for $91 million year-to-date. As of September 30, 2022, we still have $125 million remaining on our share repurchase authorization. Now, let me turn to some recent wins. Last quarter, I flagged the vital role of central governments in championing real-time payments. We continue to gain traction in the Middle East. We won another important central infrastructure deal in the region. Qatar's central bank will use HCI's real-time central infrastructure software, including fraud management. Other bank wins include Abu Dhabi, Commercial Bank, Malaysia's CIMB Bank, Europe's Nexi Group, a pay tax provider with presence in 25 countries, the Italian branch of Worldline Financial Services, Proza, Mexico's largest processor and clearinghouse with presence at Proza America, IBM Canada, and the U.S. branch of a leading bank headquartered in Kuala Lumpur. In our merchant segment, our INs include a major Middle Eastern airline, Cyprus Solige, Italy's Axurf, and U.S. FinTech Corp. Our U.S. builder segment has record bookings. ACI SpeedPay will be used by two new Fortune 500 companies and Connect Holding, a fiber optic company offering Internet services in 20 states. I'm happy to see that the disciplined execution of our three-pillar strategy continues to work on our accelerating growth and value creation journey. Now we'll turn it to Scott. Scott?

Thanks, Ocalan, and good morning, everyone. I first plan to review our financial results for Q3 and then provide our outlook for the rest of 2022. We'll then open the line for questions. Third quarter revenue was $307 million, up 1%, adjusted for FX and the corporate online banking divestiture, which we completed on September 1st of this year. Adjusted EBITDA for the quarter was $46 million, down 36%, again adjusted for FX and the divestiture. New AR bookings in Q3 were $30 million, up 35% versus Q3 2021, and are up 40% year-to-date. And here in October, we signed a new logo representing one of the largest biller customers. Turning to our segment results, bank segment revenue was $117 million, down 4% after adjusting for FX in the divestiture. And segment adjusted EBITDA decreased 23% adjusted for FX in the divestiture versus Q3 2021. And as a reminder, in the bank segment, we saw more renewal year compared to 2021. So if you look at the bank segment year to date, revenue and EBITDA are both up around 20% over last year. Merchant segment revenue was $36 million, down 3% adjusted for FX, while segment adjusted EBITDA was down 26% adjusted for FX versus Q3 last year. Biller segment revenue grew 5%, and the segment adjusted EBITDA decreased 18% versus Q3 2021. And as a reminder, the biller segment is all US-based customers, so it has minimal FX impact. We ended the quarter with $135 million in cash on hand and a debt balance of $1 billion. It represents a net debt leverage ratio of 2.3 times, which is just below our 2.5 times target. Finally, I'll turn to our outlook for 2022. We are reiterating our full-year revenue expectations to grow revenue in the mid-single digits on a constant currency basis. which we previously provided in September following the divestiture close. We are updating our revenue range only for the impact of FX fluctuations, so our updated full-year revenue guidance moves to a range of $1.39 to $1.405 billion. Regarding EBITDA guidance, FX and inflation are pressuring our results in the near term. The inflationary pressure is really isolated to the interchange fees in our biller segment, where our price per transaction is fixed, but the interchange fluctuates with the average ticket size. Though this is expected to impact us in the near term, we have several initiatives underway, including price adjustment to mitigate the impact in the medium term. As a result, we expect full year 2022 adjusted EBITDA to be in the range of 365 to 380 million. In terms of capital allocation, we continue to deploy approximately half of our cash flow towards share repurchases We've repurchased just over 1 million shares during Q3, and year-to-date through the end of September, we have repurchased just over 3 million shares. And we have 125 million remaining on our current repurchase authorization.

With that, I will pass it back to Ocalan for some closing comments. Ocalan? Thank you, Scott.

In summary, we delivered another quarter of revenue in line with guidance. demonstrating the resilience of ACI's business. In spite of the economic microenvironment, we are maintaining our 2022 guidance in constant currency revenue growth in the mid-single digits. While we are experiencing near-term pressure on our adjusted EBITDA from effects and inflation, the impact of inflation is limited to the interchange component of our biller business. Our action to address the impact is working and scaling. Despite these near-term headwinds, the strong momentum in our new business winds and our solid AR bookings across our segments continue to validate our three-pillar strategy. Our industry-leading real-time payment solutions are critical to the modernization agendas of customers, including leading corporations, financial institutions, fintechs, merchants, and dealers. In an environment where many companies are facing reduced visibility, our Q3 wins and bookings differentiate HCI. They reinforce our confidence in our accelerating growth journey. I thank our HCI employees for their dedication and our partners and customers for their trust. Thank you all for joining us today.

And now we will open the line 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. We'll pause for just a moment to compile the question and answer roster. Your first question comes from the line of Mayank Tandem from Needham and Company. Your line is open.

Thank you. Good morning. Odilon and Scott, could you maybe delve into the impact of interchange a little bit more in detail, how that sort of flows through the P&L. I didn't quite grasp that. And then in terms of the efforts you're taking on to address that challenge, could you maybe again provide a little bit more detail on how that works and when we should be seeing the benefits of that?

Yeah, Meg, thanks. Interchange is, and maybe to clarify, it's specific to, or where we're seeing the inflationary pressure is specific to our utility vertical within Biller. We're seeing it less so in other ones, but it's in the utility vertical, really spiked here in the summer months. The mechanism for which we price those contracts is generally based on a payment mix, but this isn't really a mix issue. in the summer months, and we're expecting that level of average ticket size to continue on through the rest of the year. That interchange cost, where it flows through, if you're looking at it from our financial statements, is in the cost of revenue. And then in terms of the things we're doing, really, in order to react to this, you can't, it's not something you can do within, say, 30, 60, 90 days. It's really we're going contract by contract and including things such as price adjustment, working with the customers. So that's why we can't affect those things in what I'd call the short term, meaning that's why we're adjusting our guidance for the year, because we have taken actions. We think we've been able to solve for about a third of the impact of that inflation in-year, and we've also taken other cost actions, so non-interchange cost savings, to minimize the effect this year. And then we'll get a full year benefit of that next year. But we're continuing to work customer by customer to make those adjustments.

And I just read more caller. This matter with interchange and all this task force has my full attention. We are meeting on a weekly basis. We are very proud of the team because we were able to, I would say, in a six-month effort or less than that, three-month effort, really find like one-third already of benefit on the whole impact. And I'm much more positive about next year. It is not something easy to fix because it's contract by contract. The other thing important to clarify is this is not only increasing prices to our customers. It is really about generating a win-win solution. When our customers make more sense and we make more sense, they make more money and we make more money, because consumers migrate from higher cost payment methods to lower cost payment methods. For example, from expensive credit cards to ACH. And that's the effort that is working. And again, we are very positive about that next year.

Okay. This is a very helpful color. And then let me ask you one broader question in terms of your transaction-driven growth on the merchant and the bidder side. How does the global slowdown.

I was just asking more in terms of the transaction-driven business.

What are you seeing right now in terms of trends? Clearly, the ARR growth is positive, but

as you go into potentially a slowdown or recession, how does that affect the transaction-driven segments, especially the biller and the merchant services side?

Yeah, that's a good question. At this moment, we don't have a top-line problem, and you can see by our guidance. We're going to continue to grow by mid-digit this year, as we said before in constant currency, and I think we're going to continue to accelerate going forward, and that's the idea. So I don't see a gross revenue problem. The problem is very isolated in interchange of dealers. Again, we see signs of recession in some continents, but at this point, nothing that could impact our top line.

Yeah, the only other thing I'd add to that is especially the merchant area, because I think that's where you probably see it. we actually see transaction volumes picking up as we're entering the fourth quarter and exiting the year. So I don't think at this point we're seeing a lot of weakness in the merchant transaction.

Okay, thank you so much for taking my questions.

Pleasure, thank you.

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

Hey, good morning, everyone. Thanks for taking the question. I was just curious that in terms of the bookings year to date by segment, certainly Biller really stood out this quarter. I can't remember if you've given that disclosure in the past, but do you have that at your fingertips?

I don't – yeah, the quarter had – the biller was strong and merchant was strong. I think if you look at it across the whole year, I think you'd pull in banks. Banks had stronger in Q1 and Q2 because that's where we saw a lot of the renewal activity and net new, and that's where we get a lot of the new ARR on the bank side. So I think it was pretty – if you look at it over the course of the nine months, it's pretty broad-based across the three segments in Q3. It was very specific to Merchant & Billet.

Peter, your question is very important because we expect this year to have a record in AR in the three segments when we close Q4. And that's very important for next year. So let me just give more color. When we talk about AR bookings, we are talking about the expectation of revenue that we have after launching in the first year. And so when you talk about, for example, $2 million of a contract of AR bookings, what you're saying is that after launch, for example, in merchants and billers is around three to six months, in banks is around one year. After launching, we expect to have that $2 million of revenue going forward. So when we talk about increasing by this amount the AR signings, that gives us a lot of visibility into the next year, right?

Okay, that's helpful. And then you mentioned you signed a billing customer that will wind up being one of your largest. Just a little bit more color there. Was that totally new to ACI or something where the customer consolidated services? And then when would you expect that particular customer to go live?

Totally new to ACI. And, again, there was like a lot of competition on that, and we are very happy that we were able to win. It is a very complex launch, so probably it's going to be a rollout. But I would expect that most of the results of that bill will be in June 24, but we're going to have a good part of it already in June 23. So it's really a two-year launch because it's a very complex and huge business, right? Very, very important business.

Okay, great. And then just maybe one last housekeeping item, but just in terms of Isolating the divestiture and FX was divested revenue approximately $4 to $5 million, and then FX was approximately like 400 basis points headwind.

Yeah, that's a good figure. Yeah, because the divestiture really only pulled out a month's worth of activity within the September month. Right, right. Okay.

All right, I'll get back in the queue. Appreciate it. Thank you.

Your next question comes from the line of Joseph Vathy from Canaccord Genuity. Your line is open.

Hey, guys. Good morning. Nice to see the ARR bookings remaining strong. Just one more on the biller. You said that I think you've recovered maybe a third of that lost EBITDA there. And, you know, I know you can't really provide guidance on it, but do you think you can – you'll be able to recapture the majority of it, or is there a goal or a number we should be thinking about on those renegotiations and the way some of those contracts are structured?

Thank you for the question, Joe. When you say that we are recovering one-third, we are talking about the whole year. So the impact that we are expecting the whole year, we are projecting that we are going to recover one-third. Most of it we have already recovered, but some more recovery to happen in the next two months now, in November and December. So one-third is related to the whole year this year. When you talk about next year, if inflation continues, I think the pressures will continue. But as we have already started working on that, I'm much more positive about next year. Because, you know, in basically... four or five months, three to four months that we put together this task force, we're already able to find one-third. And we are working already not only for this year, but also for next year. So I'm much more positive about next year.

Got it. Thanks. Thanks, Rogelon. And then I know the ARR has been strong. Has there been... uh you know as part of i mean clearly you've got a more focused sales force and a more focused product set now have you seen some conversion of some of the more of the licensed business to kind of cloud and is that part of the strength in arr or you know has the um you know maybe an update on license sales versus uh cloud sales um in general would be good too thanks

Yeah, no, thank you, Joe. In reality, we have not seen a lot of migration from licensed to SaaS in our base. I mean, what is licensed continues to be licensed. And SaaS is all about new logos. The SaaS business that we are generating is all about new logos in banks. So it is really incremental to the licensed business when you talk about banks. When you talk about merchants, you know most of the revenue is already SaaS, and Bill is 100% of the business is SaaS. And we are expecting to have a record a year in the three segments for SaaS deals, for AR bookings, right? So it is a very positive story and is helping us in our journey to have more recurring revenue.

Great. Thanks, guys. Thank you, Joel.

Your next question comes from the line of Mark Palmer from BTIG. Your line is open.

Yes, thank you. Good morning. Last year at this time, you had given some helpful guidance with regard to the percentage of the company's annual revenue guidance that was already in the woods, so to speak, in terms of signed contracts. It was, I believe, 99% at that point. Can you provide a comparable statistic for this year in terms of where you are in that regard?

Yeah, good question, Mark. If we look back at last year, we had so much of our revenue and EBITDA, because it was all coming from license fee, that was back end loaded. It was all sitting in the fourth quarter. And so the reason we put out that statistic was really to provide comfort that it was there and that it was under contract. We don't have a similar one for this quarter. For this year, we had a lot more license revenue come in in Q1 and Q2. So we have a lot better phasing of that this year. But we're comfortable with the path we've got left, and the rest of the year we're comfortable with this revenue range.

Thank you. And just one follow-up question with regard to the inflation impact on the biller segment and the actions that you've been taking to mitigate that. Insofar as you said a third of the impact of that, has already been addressed. Was that reflected in the third quarter results or is that something that the third going to be reflected to a greater extent in the fourth quarter?

Part of it was in the third, part of it is going to be in the fourth. You can expect that the benefit is going to grow with the time. Because the more actions that we generate, for example, when you go to a big contract and you're able to readjust the mix, readjust the price for consumers, that impact, you have the whole effect of that going forward every month. So the more that we do, the more it accumulates. So you should expect that it is accumulating month after month, but we already have part of that impact in Q3. Very good.

Just one more question with regard to the biller segment. Of course, you're processing utility payments, other types of consumer payments. Has there been any indication of any credit-related issues among those for whom you are processing payments that could potentially impact volumes?

When you say credit, you're saying credit issues. We haven't seen any. Any repayment.

Payment of utility bills, things of that nature with higher inflation and economic challenges. We are hearing about folks who are struggling to pay their bills.

No, and we don't see what we get, obviously, is we get the payments that go through, not the ones that aren't. We're not seeing it necessarily in volumes, no. And we're in areas, if you look at it, like utilities, government payments, consumer finance, and we're not seeing it really in any volume trends that would indicate trouble within that consumer base.

Just to add some color about that, next year, as you know, we're going to have the Fed now, and we're going to launch the request for pay with billers, with real-time payments, as soon as it's available. Probably, we're talking about by the end of Q2, When that happens, we are talking to our billers, and we're going to push that payment method significantly. As you can expect, it has a very low interchange rate, that amount of payment. And we can even link to that our buy now, pay later feature, where we have like 70 companies linked to that already in the merchant business. We can use that also in the bill payment business to help consumers pay if recession comes or something comes up. I look at what we are doing today, the real-time link to billers and to this huge bill that we have every year of interchange, and I see a lot of opportunity. We could say that interchange is the problem today. I really see it as an opportunity of value creation in the next years.

Thank you.

Your next question comes from the line of George Sutton from Craig Hallam Capital. Your line is open.

Thank you. First, Scott, just a clarifying question. You mentioned that you felt merchant volumes were picking up currently, and I just want to make sure that is obviously seasonally that happens, but I'm just curious if that's a year-over-year statement, that would be quite a bit different than some others like Amazon have said. Curious if that's what you meant.

Yeah, our volumes are picking up year over year. So if you look at our year over year growth, Q3 over Q3 last year compared to Q2, and we think that'll uptick again here in Q4.

It's very also geographic basis, right, Scott?

Yeah, but ours is predominantly, you know, e-com versus, you know, say, in-store and things like that. So it's... it's our trend is showing a pickup in Q3 year over year.

I understand. Okay. Thank you. And, uh, Oh, Jelan, just a curiosity, you called out, uh, a nice set of new, uh, RTP customers. Uh, it sounds like both some infrastructure and some connectivity. I'm wondering if you could break your success with those customers into those two pieces. And then, um, As we're looking out to 23 for the next-gen platform, can you just talk about how that's influencing your sales cycles today, given the length of sales cycles? Is that being used fairly aggressively in your sales cycles, that next-gen functionality?

Yeah, no, George, that's a great question. So starting with the last point, when you talk about real-time payments, this next generation that we expect in the first half of next year to be available for U.S., We are going to be launching it very strong. We're already talking to clients, but we're going to be launching it in the media with clients in the first quarter of next year. And we are going to be really announcing details of it during our investor day that probably is going to happen in Q1 next year. Right, John? And so we would expect there's a lot of excitement within the clients of U.S. today about that. We have talked with the most important ones already and some new logos. So I expect a lot of demand on our offering. Basically, the way it works is the deals that you're going to sign, it takes around six to nine months to launch in this case. So we are talking about revenue really in tool 24. But yes, the idea is we would be able to impact tool 24 already. with this new technology.

In any sense on these real-time payment deals you announced relative to like the Qatar sounded to me like an infrastructure deal and some of the others sounded potentially more like connectivity. Is that right?

Yeah, those are licensed deals. So you already saw the revenue impact because most of them are licensed deals, right?

They are. Okay. Gotcha. Okay. Well, it sounds like you had success with the fire drill. Congratulations.

Yeah. Yeah. Thanks. Thank you.

Again, if you would like to ask a question, press star and the number one on your telephone keypad. Your next question comes from the line of Charles Napan from Stevens Incorporated. Your line is open.

Good morning, and thank you for taking my question. I know it's one of your larger verticals, but could you comment on how large utilities is as a percentage of bill pay? And secondly, in the past, you had alluded to higher education and consumer finances, so a couple of your growth verticals. And I was wondering if you could dive into that a little further and speak to some of the traction you're getting in those two areas.

Yeah, utilities is about 30% of the biller business. And going back to, say, higher education, we're getting pretty decent traction there, pretty good actually double-digit transaction growth year over year in the higher education space. And then obviously government is a big segment for us, and that's seeing pretty good growth, maybe call it mid-single-digit growth over the last year.

Got it, got it. And just as a follow-up, some of your peers in the bank technology space had alluded to elongated sales cycles in Europe and just pauses in decision-making. And I wanted to see if you're seeing anything along those lines. And then secondly, if we could bring it back to domestic, as we think about the next-gen platform for next year, it sounds like that will enable you to go a little down market within the bank space. So I was hoping you could comment on those two areas in terms of what you're seeing and what your expectations are. Definitely.

When you talk about that hesitation, I would say we don't see that much because we are in the center of this modernization with banks and financial institutions, but definitely it's different by geography. So yes, Europe is different than the rest of the world in that case. Feels like Europe is suffering a little bit more than the rest. But we see like Asia flying, Africa doing quite well, Latin America doing quite well. We don't see it in the United States. So it's more like a Europe phenomenon. Not that strong for us, but definitely we can see that Europe is reacting differently than the rest of the world. When you talk about this new platform, I think you got it very right. This is also the possibility of us going a little bit down to Tier 2 and Tier 3 banks in the United States, which is a market that we don't cover today with the real-time payment platform and this new technology. So it is refreshing for our clients, and we are talking about Tier 1, when we are ready to discuss in detail that technology with them in their modernization journey. Probably they're going to go hybrid in the future with that technology. But for these tier two and tier three and fintech companies in the United States, it's a new market for us and a market that we can expand on.

Got it. And if I could sneak in one final follow-up. On the cost side, I know it's not necessarily a new dynamic, but Could you speak to what you're seeing from a labor cost or a vendor cost inflation standpoint and as well as your ability to offset higher costs by reducing discretionary cost, discretionary spend or any other flexibility you might have in your cost base?

Yeah, you know, I'm going to summarize and then it's got to give the detail. But we are very investor friendly and we can manage inflation and we are managing inflation. It's not that we don't have inflationary pressures in every line. But we have been able to manage every line with the exception of the interchange in this case. That takes time. So I feel confident that we can continue to manage inflation in every other line. Interchange will take more time. Scott?

Yeah, it's a good question. If you look at it, we're in pure software and SaaS. provider, we don't have all those impacts of those supply chain type inflationary pressures in terms of input costs. So we really don't see it on the supply chain. We're not a heavy user of energy. Obviously, we're indirectly impacted by the utility segment that we have in the biller business, so we don't really have a burden there in terms of energy consumption. and we aren't seeing a lot of real broad-based wage pressure in the markets that we're in around the world. So the inflationary impact, when we say it's isolated, it's pretty isolated to this bill or utility segment, and everything else is pretty manageable.

Got it. Thank you very much.

There are no further questions at this time. I would like to turn the call back over to the presenters.

Well, thank you, everybody, for dialing in and your questions. We look forward to following up in the coming weeks. Have a great day. And we are fine with the fire alarm.

This concludes today's conference call.