FINX - ACI Worldwide Revenue Slows On Timing Of Renewals

2023-06-02 13:30:12 ET

Summary

• ACI Worldwide, Inc. reported its Q1 2023 financial results on May 4, 2023.
• The firm provides an array of payment technologies to organizations worldwide.
• While ACI Worldwide targets 8% topline growth starting in 2024, my more conservative approach indicates the stock may be fully valued here.
• My outlook in the near term is Neutral (Hold).

A Quick Take On ACI Worldwide

ACI Worldwide, Inc. ( ACIW ) reported its Q1 2023 financial results on May 4, 2023, beating expected revenue but missing EPS estimates.

The company provides a range of payment processing services for clients worldwide.

I previously wrote about ACI with a Hold rating here .

Given current conditions and management's guidance, my near-term outlook on ACIW remains Neutral (Hold).

ACI Worldwide Overview

Coral Gables, Florida-based ACI Worldwide, Inc. was founded in 1975 to provide software and digital payment services to banks, billers, and merchants globally.

The firm is headed by President and Chief Executive Officer, Tom Warsop, who has been with the firm since 2015 and was Group President at Fiserv.

The company's primary offerings include:

• Merchant acquiring

• Digital payments issuing

• Enterprise payments

• Real-time low value & high-value payments

• SWIFT messaging

• Omni-channel payment processing

• Fraud management

• Third-party software

The firm acquires customers through various channel partners and through its direct sales team.

ACI counts more than 80,000 clients of its various service offerings, from large enterprises to middle market and smaller companies.

ACI Worldwide's Market & Competition

According to a 2019 market research report , the market for payment processing services is expected to reach $62.3 billion by 2024.

This represents a forecast CAGR of 9.9% from 2019 to 2024.

The main drivers for this expected growth are continued growth in the number of merchants seeking integrated payment processing solutions and the entrance of new market participants with new technology offerings.

Major competitive vendors include:

• PayPal

• Global Payments

• Block

• Visa

• Jack Henry & Associates

• Paysafe Group

• Naspers Limited

• Others

ACI's Recent Financial Trends

• Total revenue by quarter has trended unevenly lower in recent quarters:

• Gross profit margin by quarter has also been trending lower more recently:

• Selling, G&A expenses as a percentage of total revenue by quarter have increased YoY in some recent quarters:

• Operating income by quarter turned negative in the most recent quarter:

• Operating leverage by quarter has remained positive in most of the last eight quarters:

• Earnings per share (Diluted) turned into negative territory in Q1 2023:

(All data in the above charts is GAAP)

In the past 12 months, ACIW's stock price has dropped 15.28% vs. that of the Global X FinTech ETF's ( FINX ) fall of 15.78%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $142.4 million in cash and equivalents and $1.1 billion in total debt, of which $83.4 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $141.5 million, of which capital expenditures accounted for $13.1 million. The company paid $27.1 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For ACIW

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:

Assuming generous DCF parameters, the firm's shares would be valued at approximately $22.95 versus the current price of $23.02, indicating they are potentially currently fully valued, with the given earnings, growth, and discount rate assumptions of the DCF.

Commentary On ACI Worldwide

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023's results, management highlighted the growth in recurring revenue of 9%, "driven by the growth in Biller and Bank segments."

The drop in total revenue was primarily due to the previously discussed timing of license-based renewals, which tend to be very high margin, so they impact the gross margin figures as well.

CEO Warsop reiterated its full-year 2023 previous guidance and said it was on track to generate a long-term revenue growth target of 8% at the midpoint of the range, starting in 2024.

Management did not disclose any company or customer retention rate metrics.

Total revenue for Q1 2023 fell 10.3% year-over-year, and gross profit margin dropped a hefty 10.2 percentage points.

Selling, G&A expenses as a percentage of revenue increased by 1.1 percentage points, a negative sign of declining efficiency and operating income turned materially negative.

Looking ahead, management guided full-year 2023 adjusted EBITDA of $388 million at the midpoint of the range.

The company's financial position is moderate, with plenty of liquidity, $1.1 billion in total debt, and generating strong free cash flow; its net debt-to-EBITDA multiple is 4.3, which is on the high side.

Regarding valuation, my discounted cash flow calculation indicates that the shares are currently fully valued at around $23.00 per share.

From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I'm most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" once, "Challeng(es)(ing)" once, "Macro" once and "Drop" also once.

The negative terms refer to general references by management to the unfavorable macroeconomic environment the firm and its customers and prospects are facing.

While ACI Worldwide, Inc. management expects to improve revenue growth in 2024, that's a ways off, and my discounted cash flow calculation indicates that the shares are currently fully valued using a 6% growth rate.

Given current conditions, my near-term outlook on ACI Worldwide, Inc. remains Neutral (Hold).

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