ACIW - ACI Worldwide: No Significant Upside Potential In The Near Future

2023-03-23 07:49:59 ET

Summary

• ACIW reported weak Q4 FY22 results with 3.2% y-o-y decline in the revenues.
• The operating and net profit margins witnessed a decline from 35% and 24% in Q4 FY21 to 32.8% and 20% in Q4 FY22.
• ACIW estimates FY23 revenues to be in the range of $1.43-$1.46 billion and EBITDA in the range of $380-$395 million.
• I assign a hold rating for ACIW stock.

Investment Thesis

ACI Worldwide, Inc. ( ACIW ) is an American software company headquartered in Coral Gables, Florida. My thesis is mainly based on ACIW's performance in Q4 FY22 and its future growth prospects. I will also be analyzing its valuation at current price levels. I believe the declining revenues and contracting profit margins make ACIW a hold for now, and I recommend that investors not initiate any buying position at current price levels.

Company Overview

ACIW provides digital payments software and services to companies worldwide. The company also provides maintenance services to complement its software products. The software products provided by ACIW help companies effectively manage their digital payments gateway and maximize margins. The company focuses on providing innovative real-time payment solutions to its clients for the smooth functioning of payments globally.

Q4 FY2022 Results

ACIW recently reported fourth quarte r FY22 results which failed to impress me on multiple parameters. The company experienced a y-o-y revenue decline along with contracted profit margins. The SaaS segment was the outperformer for the company in Q4 FY22 with 8% y-o-y revenue growth. However, other business segments witnessed a considerable fall in revenues.

The fourth quarter FY22 revenues stood at $451.8 million, down 3.2% compared to $466.8 million in the same quarter last year. As per my analysis, this fall in revenue can be attributed to a fall in the license fees experienced during the quarter, primarily due to weak demand. If we break down the revenues, we realize that the SaaS business segment proved to be the outperformer, with revenues of $205.8 million , up 8% compared to $190.8 million in the corresponding quarter last year. I believe the increased focus of the company on product innovation for SaaS services resulted in this increase. The revenue from license fees was reported at $179.8 million, down a considerable 14% decline compared to $209.5 million in the same quarter last year. The revenues from the maintenance fees also experienced a decline of 5% from $51.5 million in Q4 FY21 to $48.9 million. I believe a weak demand coupled with challenging economic conditions resulted in this fall. The operating expenses remained flat at $303.5 million compared to $304 million in the same quarter last year. This represents an operating profit margin of 32.8% compared to 35% in the year-old period. The fall in revenues and consistently higher operating expenses resulted in the operating margin contraction. ACIW reported a net income of $90 million, down a significant 17.5% compared to $109.5 million in the same quarter last year. The net profit margin for the quarter was reported at 20% compared to 24% in the same quarter last year. I expect the operating and net profit margins to remain stressed even during FY23, given the inflationary environment in which the firm is operating. ACIW reported diluted EPS of $0.81, down $0.12 compared to $0.93 in the same quarter last year.

Now let's have a look at the company’s balance sheet. As of 31st December 2022, ACIW reported cash and cash equivalent of $125 million against the long-term debt of $1024 million . ACIW has a significant debt obligation taking the company’s net debt ratio to 2.6x. High debt obligation puts stress on the company’s balance sheet, which could restrict further fundraising to drive future growth. I believe the management should come up with a strategy to reduce its debt obligation, especially in this high-interest rate environment.

Overall, the fourth quarter results were disappointing, with a fall in revenues and declining profit margins. ACIW has provided optimistic guidance for FY23, with revenues expected to be in the range of $1.43-$1.46 billion, representing a y-o-y increase of 5% at the midpoint. FY23 EBITDA is estimated to be in the range of $380-$395 million, an increase of 7.5% at the mid-point. I believe that they will face significant difficulty in achieving these targets given the weak revenue growth trajectory experienced by the company in the last few quarters on the backdrop of weak demand.

Key Risk Factor

High interest obligation: As we discussed earlier, ACWI has a high debt of $1.02 billion which has resulted in a significant interest obligation for the company. ACWI incurred interest expenses of $16.2 million in Q4 FY22 compared to $11 million in Q4 FY21, a massive increase of 47%. This increase was a result of higher interest experienced by the company throughout FY22. High interest expenses are putting a dent in the company’s profit margins. I do not expect the interest rates to go down anytime soon, which means that the interest expenses will continue to affect the profitability in the coming quarters.

Quant Ratings and Valuation

ACIW has a Quant rating of Hold by Seeking Alpha. As we can see above, it has a C+ grade in valuation, which has deteriorated significantly in the past six months. It has a D+ grade for growth, which I believe accurately represents its revenue and earnings growth in the past six months. ACIW has a B grade in both profitability and momentum. However, I believe these grades could deteriorate in the coming months, given the contracting profit margins experienced by the company. ACIW is ranked 124th out of 214 companies in the application software industry, reflecting better investment opportunities in the market.

ACIW is trading at a share price of $26, down 22% since last year. It has a market cap of $2.8 billion. ACIW is currently trading at a forward GAAP P/E multiple of 24x against the industry standard of 23.5x. I believe that it is fairly valued at current price levels with respect to earnings. However, I do not see a significant upside for the stock from current price levels, given the company's weak financial performance. In the past week, there has been speculation around the acquisition of ACIW by a private equity firm, Motive Partners, which has resulted in a hike in the share price. However, there has been no comment on the validity of the possible deal from either party. Therefore, I would recommend investors to not take any buying position in the stock as of now.

Conclusion

The contracting operating and net profit margin are a real cause of concern for the company. In addition to the weak financial performance, high debt putting stress on the company’s balance sheet also cannot be ignored. ACIW is fairly valued at the current price level, and I believe there is no significant upside for the stock price in the near future. Considering all these factors, I assign a hold rating for ACIW.

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