ACI Worldwide, Inc. is a payment systems company, based in the United States. ACIW develops software that facilitates electronic payments and many products/services within the payments ecosystem. ACIW distributes or acts as a sales agent for software developed by third parties. Its products and services are used by various players in the financial services industry, such as billers, processors, and even retailers. ACIW is a truly global company, with distribution networks, across the Americas, Europe, and Asia-Pacific.
By announcing a strategic collaboration with Microsoft via the Microsoft Partner Network, ACIW became one of Microsoft's 10 global ISV partners in the financial services industry. ACI Worldwide will now expand its Universal Payments Portfolio via Azure and make cloud the go-to platform for numerous clients. This collaboration will enable ACI Universal Payments technology to be licensed by customers for implementation that is powered by Azure. ACI On-Premises customers will benefit from enhanced security, as well as a reduction in capex.
In light of this announcement, we would like to highlight several more important points, as we consider ACIW's positioning for 2020:
Speedpay Acquisition Continues to Deliver: There are continued solid tailwinds from Speedpay that are benefiting the core business. We see them as accelerating the company’s top line growth for at least two more years, particularly as the scale improves around mobile wallet.
Bill Pay Remains Firmly On Track: The higher revenue growth of the bill pay segment should help deliver at least 60-80 bps of incremental revenue growth in 2020, although with the recurring digital segment we may see as much as 130-160 bps; we will continue to update these segments from quarter to quarter, since ACIW frequently beats its earlier estimates.
ACI On Premise Grew 15% Y/Y in 3Q, though we should be careful not to extrapolate this traction to 2020, since there was one particular customer / contract that was a key contributor to top-line growth and it remains to be seen how this contact will be broken down between now and 2021-22. However, did like the fact that ACI On Premise had a meaningful margin expansion during the third quarter, growing from 55% to 62%.
Core Business Relationships Remain Intact: Despite some lumpiness in ACIW revenue recognition, it is important to note that core clients remain intact, with very few defections or even reductions of business. This stability makes ACIW's top-line fairly straightforward to model.
Likely Guidance Beat for 2019: While about a month and a half are still remaining for the year, we believe that ACIW has positioned itself well for a guidance beat this year. We expect the revenue to come in around $1.348 billion and EBITDA at $382 MM, which are both slightly above the upper tiers for the company's guidance.
When valuing ACIW shares, we believe that the traditional EV/revenue metric works best, given that investors are primarily focused on the top-line. Relevant comps group includes GPN, ADS, V, MA, and FLT, among other payments companies. When we apply the multiple of 7.5x to our 2020 revenue estimate of $1.47 billion, we get the target price of $43.
We see the following core risks to our thesis.
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