ACI Worldwide, Inc. (ACIW) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the ACI Q1 earnings announcement. I would now like to hand the conference over to your speaker today, Mr. John Kraft. Please go ahead, sir.
John Kraft: 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. The copy of which is available on our website as well as with the SEC. On this morning's call is Odilon Almeida, our President and CEO; and Scott Behrens our CFO. With that, I'd like to turn the call over to Odilon.
Odilon Almeida:
Scott Behrens: Thanks Odilon 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 booking symmetric that we hope will be easier for investors to interpret, and be more helpful in allowing you all to compare our results on an apples 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 contract signed in the quarter. In Q1 2021, AR 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, comparison should ease up going forward. Recurring revenue is 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 on adjusted EBITDA in the quarter, which increased 19%, $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 year-over-year benefits of our cost reduction initiatives, as we continue to focus on profitability and drive toward 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%.
Odilon Almeida: Thanks, Scott. In closing, we are pleased with the company's performance in the first quarter, as ACI's focus on dedication 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.
Operator: Your first question comes from the line of Mayank Tandon from Needham.
Unidentified Analyst: This is actually Kyle Peterson on for Mayank. Thanks for taking the questions. So let's 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 and adoption should start to show up in the P&L, and how we should think about that moving forward?
Scott Behrens: Yes. Kyle, this is Scott. Well, 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.
Odilon Almeida: And kind of just to compliment, we have a strong pipeline. Our agreement with MasterCard continue to evolve after the win in Peru. So we are very positive about real-time payments.
Unidentified Analyst: 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 prune off, to better position you guys for long-term growth. Is there any update on either of those initiatives, right now?
Odilon Almeida: It's a continuous exercise, Kyle, it's part of our third pillar, right? A step-change value-creation through M&A and it includes the divestitures and investments. So we are always considering those and more to come during the year, right?
Operator: Your next question comes from the line of Peter Heckmann from Davidson.
Peter Heckmann: Morning, everyone. I had a few questions. Number one, just on the new reporting methodology for the three vertical industry segments. Do you anticipate reporting those on both a license versus subscription basis to help the analysis? Or is it just going to be one number that includes everything?
Scott Behrens: Yes, we'll, disclose that on a, by a fee type.
Peter Heckmann: Okay, great. And do you anticipate putting out an AK or something with the historical numbers for these new breakdowns?
Scott Behrens: Yes, we will.
Peter Heckmann: Okay, great. And then just, in biller, looking at it, your ex interchange looks like revenue is down about 3% year-over-year. 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?
Odilon Almeida: 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 part to the positive side.
Peter Heckmann: Okay great.
Scott Behrens: Yes. Maybe I, just to add to that, I think that's where, if we look at our Q1 overachievement versus what we're expecting, when we went out with Q1 guidance. That's really where we saw the uptick, pleasantly surprised with the uptick and transaction volumes that came in the biller segment, in late March. And so that -- And 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 year. I think that ultimately gives us more certainty and more confidence, about the recovery and about our outlook for the year.
Operator: Your next question comes from the line of George Sutton from Craig-Hallum.
Unidentified Analyst: This is James on for George. 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?
Scott Behrens: Yes. Again, we're this would be the first year that we introduce that new construct. And so far we haven't had any of those conversions, most did the renewal of business, and that's really where it's targeting the renewal book, is in the second half of the year. And we'll also target Net new customers that we are in conversations with, 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.
Odilon Almeida: Yes. I think, if you look at the pipeline again, we see more deals, they prefers subscription than, one time license. So that is the trend that we are seeing, and we are managing some way that we can keep our guidance and keep growing this company, while we make that conversion. That is our commitment, right?
Unidentified Analyst: That'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, those markets, or what are you seeing in terms of productivity of those that are up so far?
Odilon Almeida: 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 them handling 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.
Unidentified Analyst: Great. One more from 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?
Scott Behrens: Well, yes. 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 end of the pandemic. Obviously, it's continued here in Q1 and we don't see it slowing down. But yes, 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.
Odilon Almeida: I think, just to answer that. That would be fair to say, Scott, that also, we have some more savings planned for next year.
Scott Behrens: Right. Oh, yes. Looking back at just the savings that goes back to the growth and EBITDA year-over-year, the growth in cashflow a 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 of cost savings. Those actions were affected early in the year. There's an incremental, there's certain initiatives that will roll off this yes, 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 emerging markets, or that'll drop the profitability. But those initiatives are all still on track.
Operator: Your next question is from the line of Peter Heckmann from Davidson.
Peter Heckmann: Hey, just a couple of follow-ups. So on the new ARR metric, that that won't include renewals. But do you anticipate providing a more regular update, like on retention, to give us a feel for Net new business?
Scott Behrens: Yes, we can, if there's any significant changes in retention rates. But I will say on that metric, it's really a sub-component 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, us start to see a run rate of that into our recurring revenue in probably 12 months or so depending again on the mix.
Peter Heckmann: 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?
Odilon Almeida: Yes. No, we are very involved Peter, thanks for the question. We are very involved. We are very involved though around the globe, in every and each real-time payment initiative and the United States is no different. As you know, I mean, 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. So -- 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.
Peter Heckmann: Okay, great. We'll look forward to additional commentary there. I mean, is that something that appears that it's on relative track for late 2023, early 2024 type roll-outs?
Odilon Almeida: It is. I think, look, real-time payments is irreversible, right? I mean, this is something that com -- That's where -- That's the rail that's going to be growing, a good like, more than 45% next year. So you can expect the real-time payments growing around the globe, 40 plus for the next years. And again, United States is no different. The United States understands that you have already initiatives like cell, but I think the more, this is taking more time, as I said than the rest of the countries. But when it comes, it will come really strong. So I'm very positive about that. I think we're going to see a revolution in real-time payments in the next five years in United States.
Operator: There are no further questions at this time. Speakers, you may proceed.
John Kraft: 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.
Operator: And this concludes today’s conference call. Thank you all for participating. You may now disconnect.
