ACI Worldwide, Inc. (NASDAQ:ACIW) Q4 2023 Earnings Call Transcript February 29, 2024
ACI Worldwide, Inc. beats earnings expectations. Reported EPS is $1.12, expectations were $0.97. ACIW isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. My name is Kat, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Inc. Fourth Quarter and Full Year Ended 2023 Financial Results. All lines have been placed in mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to John Kraft. Please go ahead.
John Kraft: Thank you, and good morning, everyone. On today’s call, we will discuss the company’s fourth quarter and full year 2023 results. We will also discuss our financial outlook for the rest of 2024, and we’ll 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 in our presentation deck and earnings press release, both of which are available on our website and with the SEC. On this morning’s call is Tom Warsop, our President and CEO, and Scott Behrens, our CFO.
Before we begin, we wanted to make sure that everyone was aware of our upcoming Analyst Day, which will be held in New York City on March 12. Please reach out if you haven’t received an invitation. With that, I’ll turn the call over to Tom.
Tom Warsop: Good morning, and thank you for joining our call. I’m going to start with some high-level thoughts on my first year as CEO, and I’ll provide some comments about our 2023 performance. I’ll finish by reiterating my confidence in our ability to take advantage of strong market opportunities in 2024 and beyond. As then as usual, I’ll hand it over to Scott, and he’ll discuss financial results in more detail and our outlook for 2024 and we’ll open the line for questions after that. As you probably know, I’ve been the CEO first on an interim basis, and then since June of last year, on a longer-term basis. And during that time, I’ve made it a point to personally visit as many customers, partners and fellow ACI team members as possible.
In that year, I’ve met in person more than 70% of our employees and all of our top 10 customers in more than 15 countries across five continents. And following those visits, I’m even more convinced that ACI is a company with world-class solutions, talented employees and a customer base unmatched in the industry. Our market position, combined with the substantial opportunities for expansion and growth in industry with a near continual change puts us in a position to accelerate our growth and help customers achieve and exceed their strategic objectives. More on the future in a moment. I’m going to start with 2023. We had a solid performance. We exited the year strong, and that has set us up to accelerate our growth this year. We delivered results in line with or above our expectations and with the guidance we provided to you this time last year.
We saw strength in our Biller segment with revenue growth of 9% and EBITDA growth of 32% in 2023. We went live with the first two of several phases of the implementation of a large new Biller customer that we signed in 2022. More phases of that program go live in 2024, and they’re on track. We also signed a large new utility customer that is on track to go live and begin ramping in the middle of 2024, and we continue to make incremental progress with our interchange improvement program. Our banking segment saw a notable strength in cross-sales of our anti-fraud and real-time payment solutions, and those saw a revenue growth of 35% and 24%, respectively, in 2023. Our anti-fraud solution utilizes artificial intelligence and proprietary access to ACI generated big data to truly lead in the category.
So we continue to be excited about our opportunities in real-time payments. To illustrate our continued success in this area around the world, we signed up three new central infrastructures in the quarter including, El Banco de la Republica de Colombia, and the Nepal Clearing House. We’re now supporting nine central infrastructures globally along with more than 25 national and regional real-time payment schemes. And lastly, in our Merchant segment, though we had a bit of a slow start to 2023, we exited the year with a strong Q4 rate of growth, and we expect growth to accelerate in 2024. We remain excited about leveraging our best-in-class payments expertise to help our clients offer the optimal payment choices to their consumers while providing a safe, secure payment processing environment.
Our proprietary AI-driven fraud management tools are helping to protect our billers and merchants from fraudulent transactions. Perhaps most importantly, our sales pipeline is strong and growing. And we expect to see particularly strong demand in our banking segment. As I mentioned on our last call, the maturation of real-time payments around the world is driving an intense analysis of payments technology infrastructures by banks everywhere. When these institutions think about which firms to work with, to address this critical need, ACI is virtually always on the list and near the top. Because of our history, market presence and proven expertise, we are a usual suspect. The fact that many of the largest financial institutions in the world already rely on our proven software means we’re the only choice for a lower risk, high reliability modernization.
ACI’s reliability and scalability are unquestioned, and we are seeing significant demand for our solutions, including our payments hub across the globe. Speaking of our payments hub, we’re engineering it to support on-premise cloud and SaaS delivery models making us a great choice for large and mid-tier financial institutions alike. Mid-tier or super regional sized customers in the past that often did not have the established infrastructure to take advantage of ACI’s highly reliable and scalable software, our newer solutions, cloud enablement and SaaS offerings have made this possible. You’ll hear more about this at Analyst Day, but I want to reiterate, this is a net new opportunity for us. It substantially increases the size of our historic addressable market.
And it presents an opportunity to bolster our already accelerating growth rate. Our Biller segment, which saw a significant turnaround in 2023, will see further growth in 2024 and as we get a full year benefit of customer go-lives we saw in 2023 as well as the go-lives of additional large customers sold during last year. This revenue growth, combined with continued success in our interchange improvement program, will continue to deliver margin improvement. In our Merchant segment, our investments are paying off. We saw Q4 deliver the strongest rate of quarterly growth of the year, and we expect that momentum to carry into 2024. In fact, we signed a significant new customer in the fuel store segment in the first week of the year, a great way to start.
Overall, I’m pleased with where we are as a company. We have a strong balance sheet, we have leverage below our long-term target, and we’re accelerating our top line as we’ve long promised. We’re managing our expenses well. We have a strong team. We have a strategy in place that positions us well to accelerate growth in 2024 and beyond. I’m also happy to announce that today, we’ve appointed two new members to our already strong Board of Directors. Katrinka McCallum, who spent many years at SaaS software company, Red Hat, most recently as Vice President of Customer and Product Experience, and Juan Benitez, the former President of GoFundMe and General Manager of Braintree, which is now part of PayPal. Katrinka and Juan will provide great support as we expand our SaaS businesses and drive accelerated productivity through more use of Generative AI, large learning models and machine learning, things both of them have overseen before.
Before I turn it over to Scott, I want to remind you of our upcoming Analyst Day. As John mentioned, we’re hosting an event in New York City on March 12. We invite you to attend in person or online as we discuss our business segments and exciting global opportunities. With that, I’m going to turn it over to Scott to discuss financials and guidance. Scott?
Scott Behrens: Thanks, Tom, and good morning, everyone. I first plan to go over our financial results for 2023. I’ll then provide our outlook for 2024. We’ll then open the line for questions. I’ll be starting my comments on Slide 4 with key takeaways from the fourth quarter. Q4 2023 revenue was $477 million, up 5% from Q4 2022. And we continue to see solid growth in our underlying recurring revenue, which was up 7% compared to Q4 2022. Adjusted EBITDA was $210 million, up 8% from Q4 2022. Our EBITDA growth contributed to strong cash flow growth in Q4 2023 with cash flow from operating activities of $86 million, more than double Q4 2022. As we look at the segment results, our Bank segment revenue increased 3% and Bank segment adjusted EBITDA was up 1% compared to Q4 2022.
Our Merchant segment revenue increased 4% and segment adjusted EBITDA increased 2% versus Q4 2022. And during the year, we saw improvement in the segment as expected with revenue growth accelerating as we exited the year. Our Biller segment saw the biggest improvement year-over-year with revenue increasing 9% and segment adjusted EBITDA increasing 60% versus Q4 2022. The growth in revenue and profitability in this segment is driven by both new customer go-lives as well as notable progress with our interchange improvement program. Turning next to Slide 5 with key takeaways for the full year 2023. Revenue for the full year was $1.45 billion, up 5% from 2022, adjusted EBITDA was $395 million, up 10% from 2022 and cash flow from operating activities was $169 million, up 19% from 2022.
We ended 2023 with $164 million in cash on hand and total debt outstanding of approximately $1 billion. Our net debt leverage ratio was 2.2 times, that is down from 2.6 times at the beginning of the year and is below our long-term target of 2.5 times. Also of note here in February, we completed the refinancing of our credit facility that was set to expire in April of 2025, with a new five-year credit facility on substantially the same economic terms as our existing facility. We repurchased approximately 1 million shares for $28 million in Q4 of 2023 and have further purchased an additional 2 million shares for $62 million so far here in 2024, which in total represents approximately 2.8% of our shares outstanding. And we currently have $110 million remaining on our repurchase authorization.
During 2024, we expect to continue to deploy a significant portion of our cash flow to share buybacks. And finally, turning to Slide 6 with our outlook for 2024, we expect to accelerate revenue growth to 7% to 9% in 2024 with revenue in the range of $1.547 billion to $1.576 billion. We expect 2024 adjusted EBITDA to be in the range of $418 million to $428 million. And to help with your modeling, you’ll find a few additional guidance assumptions on Slide 7. Net interest expense is expected to approximate $50 million to $65 million. Depreciation and amortization is expected to approximate $115 million to $120 million. Non-cash share-based compensation expense is expected to approximate $30 million to $35 million. Our effective tax rate should approximate 25%.
And lastly, our diluted share count should be around $108 million, which excludes future share buyback activity. We expect our revenue phasing by quarter to follow our historical seasonality with Q1 2024 revenue to be in a range of $300 million to $310 million, and EBITDA to be in a range of $25 million to $35 million. So in summary, we’re very pleased with the 2023 results, which delivered revenue and EBITDA in the mid to high end of our guidance ranges that we provided to you at this time last year. That strong EBITDA growth and the resulting strong cash flow generation was used in part to pay down debt, resulting in our lowest leverage ratio in five years. And finally, we exited the year strong and see that momentum carrying into 2024. And in particular, the strength we’re seeing in the underlying recurring revenue base of the business, which was up 7% in 2023, combined with the visibility and predictability of the license renewals next year and the maturity of the sales and implementation pipeline, sets us up well to deliver our 7% to 9% growth in 2020.
We are pleased that this growth rate is in line with the long-range outlook we provided at our last Analyst Day in 2021 and demonstrates our ability to deliver results and look forward to sharing more about our new long-term outlook at our Investor Day in a couple of weeks. With that, we’ll now open up the line for questions. Operator?
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