ACI Worldwide Making Moves To Allay Investor Concerns

| About: ACI Worldwide, (ACIW)

Summary

The company is taking active steps to address the investor concerns, strategic as well as financial.

Divestiture of CFS business and acquisitions are positioning the business to monetize the high growth markets within the payment solutions space.

Reducing debt and improving EBITDA should improve liquidity as well as trading multiple.

Last year was rocky for ACI Worldwide (NASDAQ:ACIW) and reasons, some of which were covered in my previous bearish note on the name, have been varied, from acquisition-fueled growth to high debt. But now that the company has been taking active steps to change the course, while both stock and investor expectations have corrected a bit, this might be a good time to take another look.

If successful, the company should be able to position itself as a differentiated omni-channel payments company, not easy but well rewarding, financially as well as strategically. The demand for alternative payment solutions to MasterCard (NYSE:MA) and Visa (NYSE:V) in the international market is high, especially in the growing markets like India and China, since credit card adoption by consumers in these economies is still low and accepting the local payment methods opens up large and somewhat inaccessible markets. ACI's Universal Payments, which includes EBPP (electronic bill presentment and payment) and payments processing for any payment type, any channel, any currency and any network, fits perfectly to monetize the demand for this end-to-end enterprise payments capabilities.

Taking active steps to reposition for the changing marketplace

There have been two major themes playing out in the space - more and more integration of solutions and cross-border payment capabilities. Like always, one of the ways the payment solutions industry is playing these themes is via acquisitions and divestitures, as visible in Total System Services, Inc. or TSYS (NYSE:TSS) acquiring Transfirst, Global Payments (NYSE:GPN) acquiring Heartland Payment Systems or Amazon (NASDAQ:AMZN) acquiring Emvantage which should help Amazon's Indian operations compete effectively, considering other major online retailers in India - Flipkart and Snapdeal - have invested in their own payment gateways. The good thing is that ACI is also taking steps to position the portfolio accordingly.

Earlier this year, the company divested its CFS (Community Financial Services) business, which was serving the community bank and credit union markets, to Fiserv (NASDAQ:FISV) and used the proceeds, almost $200 million of cash, to pay off debt and buy back shares. Out of the 500 customers served by the Internet banking and bill pay solution vendor, almost 50-60% of them were credit unions. More importantly, the divestiture should strategically align the remaining business with faster growing markets like software products and SaaS-based solutions for real-time electronic and e-commerce payments.

Late last year, the company acquired Pay.On, German white-label SaaS-based e-commerce payment gateway services to PSPs and acquirers. With online as well as card-not-present payment capabilities and connectivity to more than 300 alternative payment methods and card acquirers in more than 160 countries, the solution should significantly improve the company's Universal Payments offering. These alternative payments and cross-border capabilities should also help with global expansion, significant considering the expected 17-18% growth rate in the global e-commerce volume over the next few years.

Both these deals actually tie into the Retail Decisions (ReD) acquisition done in mid-2014, which offered a decent boost to the company's fraud prevention capabilities. Integration of online, mobile and point-of-sale operations among retailers is still low and security of payment for online retail is still a concern, trends that fit well for the combined offerings.

Early signs of improvement are visible in performance

Now that the recent acquisitions are integrated, product portfolio seems complete and a clear merchant retailer focus is established, the business should start benefiting from cross-selling opportunities; and some early signs of improvement are already visible. During the latest quarter, total bookings grew by 15%, new bookings improved by 47% and a five-year backlog was over four billion dollars.

The net debt, after the recent repayment, has declined to less than $600 million, and considering the expected adjusted EBITDA of $265-275 million for the year, pretty manageable by any standard.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.