Restructuring And Next-Gen Payments Will Improve Future Competitiveness

Key Takeaways

• Restructuring into the Payment Software business and launching Kinetic Payments Hub aim to drive revenue growth and customer satisfaction through operational efficiencies.
  
• Strong sales execution and investment in next-gen payment solutions enhance competitiveness, potentially increasing revenue and sustaining high margins.
  
• Reliance on non-recurring margin benefits and few significant contracts coupled with integration and rollout risks could threaten ACI Worldwide's revenue and margins.
  

Catalysts

Develops, markets, installs, and supports various software products and solutions for facilitating digital payments in the United States and internationally.

• The organizational restructuring, merging the Bank and Merchant segments to form the new Payment Software business, is expected to streamline operations, reduce duplicative efforts, and enhance customer satisfaction, which could drive future revenue growth.
  
• The introduction of the Kinetic Payments Hub, with cloud-native capabilities and promised operational efficiencies, is expected to appeal to both banks and merchants, potentially leading to new customer acquisitions and increased revenue.
  
• Successful early signing of contracts, including a significant new logo win in the Asia Pacific region, demonstrates strong sales execution and could lead to higher initial revenue recognition, positively impacting earnings.
  
• Continued investment in next-generation payment solutions and the appointment of a new Chief Strategy and Growth Officer are expected to enhance the company's market competitiveness and contribute to long-term revenue and margin growth.
  
• The company's focus on sustaining high EBITDA margins, alongside its revenue initiatives, suggests potential for margin expansion and improved earnings, driven by operational leverage and efficiency gains.

ACI Worldwide Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ACI Worldwide's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.7% today to 14.7% in 3 years time.
• Analysts expect earnings to reach $285.3 million (and earnings per share of $2.7) by about March 2028, up from $203.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.0x on those 2028 earnings, up from 27.6x today. This future PE is lower than the current PE for the US Software industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

ACI Worldwide Future Earnings Per Share Growth

Risks

• The reliance on non-recurring margin benefits in the Biller segment suggests potential volatility in revenue and adjusted EBITDA, which could impact overall net margins negatively if similar benefits do not manifest in future periods.
  
• The success of ACI Worldwide's revenues is closely tied to the rollout and market acceptance of its next-generation Payments Hub (Kinetic), presenting execution and adoption risks that could affect long-term revenue and profitability.
  
• Potential increases in R&D and investment costs for the development and rollout of Kinetic could pressure near-term margins and profitability if these investments do not lead to expected revenue growth.
  
• ACI Worldwide’s strong reliance on a few significant contracts, such as the recent competitive takeaway in Asia Pacific, increases the risk that the cancellation or renegotiation of similar large deals could adversely affect revenue and earnings.
  
• The newly combined Payment Software segment, which includes both Bank and Merchant segments, carries integration risks that could disrupt operational synergies and detract from financial efficiencies, affecting net margins and earnings.

Valuation

• The analysts have a consensus price target of $65.0 for ACI Worldwide based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $285.3 million, and it would be trading on a PE ratio of 30.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $53.21, the analyst price target of $65.0 is 18.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.