ACI Worldwide is a large, legacy payments business based out of the Miami, United states of America. It has been a strong name in the payments industry for over 2 decades, they have had their fair share of impact on retail and corporate payments businesses across the entire value chain.
ACI’s enterprise solutions have formed the core of many card payments businesses specifically in the Americas, along with a reasonable presence in Middle East, Africa, and Asia Pacific. Financial institutions, banks form a major chunk of ACI’s customer base along with independent payment service providers, and large merchants.
Over the last few years, they have acquired companies worth more than a billion dollars, majorly in the retail payments and bill payments space, the result is their $1.4 billion annual revenue in 2021.
ACI is public company traded on NASDAQ, and is most likely considering a sale, part or of the whole business. Buyout by a Private equity or merger with a competitor, both seems to be on the table. ACI, as an asset is not performing to its full potential, and in the current macro-economic environment, they may be undervalued.
This paper study attempt to understand where ACI stands in the valuation game attempting to survive in the long term, and what path can it take to accelerate growth in short to medium term.
Facts, Risks and Opportunities
Current business, a snapshot
ACI commands a diversified set of product and services portfolio, as a result, of an aggressive M&A strategy over the last decade. It offers payment solutions to a wide range of customers with key customer segments being commercial and retail banks, ISVs, merchants, and central banks.
On a high level, the business has two major verticals, “retail payments business” where the end consumer is usually an individual and “corporate payments business”, where the end consumer is an SME or a corporation. Most of the product set falls into either one of these categories.
Retail payments business focuses majorly on offering card management solutions, around issuing, acquiring and payments switches, across banking customers and regional ISVs. Bill payments solution is a relatively new addition to the portfolio, offered to billers and corporates, and brings substantial revenue to the table.
ACI’s corporate payments business is focused on real time payments offered to banking customers of mid to small size which usually have less than $50 billion of asset under management. A relatively small segment of customers also uses a payment hub, a system which in theory, can process all types of account-based payments.
ACI also has a substantial list of central banks as their customers, which does give them an edge over competition. Real time solution for the central banks gives ACI an advantage in the country where the scheme is being launched.
ACI’s business is still substantially based on traditional license model, about 50% of its business follows a model where customers purchase the product license for some years and pay a substantial sum to deploy that product. The customer also then pays for maintenance of the deployed product over the next 5 to 10 years. Not a very relevant model in 2023 and unlikely that it can be scaled beyond a certain segment of customers.
Software as a service model is being adopted by ACI, but regulations will prevent the growth of this model across multiple geographies. Nevertheless, a version of SaaS is the only way the business can be scaled up beyond this point for ACI.
Key risks with a long term impact
Like most of the “software” businesses that gained prominence in the last 25 years, ACI, even though commands a stable cash flow and substantial annual revenue, the growth generated by the business is essentially stagnant, or negligible at best. According to ACI’s annual report of 2022, its overall revenue grew by 4%, which is considered lukewarm from every perspective.
ACI’s current business is facing some risks, which in the long term could have a major negative impact on the perception of ACI “as an asset”. On a high level, the firm has two major businesses, retail payments and corporate payments, and an array of product, solutions, and services around these verticals. The firm is experiencing major competition and slow growth in most of its market segments, all at once.
One of the major problems is that their retail payments business, cards payments, is a slow growth segment with a highly saturated market. Every aspect of the value chain has intense competition; card, issuing, acquiring and management. It will continue to generate stable revenue for them, but growth would be difficult to achieve.
Across corporate payments business, majorly real time payments, is getting crowded with large global players along with smaller regional and domestic organizations. Even though ACI does have a cost advantage over most of other global players, they were slow to adapt to a SaaS model of distribution and a cloud native tech stack.
Opportunities
ACI Worldwide is still considered a relatively big player in the payments industry, it commands credibility across its customer base, and has the potential to grow outside of its key markets.
Account based payments, powered by real time payments is still the biggest opportunity that ACI has, the distribution though must change. The traditional model of sales, targeting individual customers probably won’t work in the payments industry anymore.
Instead ACI should leverage its access to central banks and a wide network of independent payment software vendors across the world to sell. ACI should hunt for distribution via ISVs and not individual customers, and they should do it fast.
Expansion in new markets probably is the best bet for ACI to accelerate growth, but not just with traditional products, collaborative business models like BaaS would be essential for both brand and revenue growth. Majority of the world is still not as modern as say UK, US or India and China is payments infrastructure, and this presents a great opportunity for a firm like ACI.
Survival and growth, proposed strategy
Survival in this context refers to sustaining the current business model, which is difficult courtesy customer attrition, inflation, and intense competition.
Collaboration with a private equity, in part or whole, will provide the necessary push to the firm. It would bring potential access to new market, strict operational and financial perspective. In the current circumstances though, valuation may not be where ACI would want it to be.
At $1.4 billion current annual revenue, and a negligible 3 to 4% annual growth, a 4X multiple may be the best ACI can get, if not lower.
Considering this growth over the next 5 years, it is unlikely that ACI will grow beyond $1.7 billion in annual revenue by 2028, reaching a valuation of $8.5 billion at best with a 5X multiple, and inflation would probably make the returns far smaller, and much lower if the growth is not accelerated beyond the current growth rate.
Considering the perspective of a private equity firm, unless the corporate payments business, real time payments, sees major growth and in fact doubles in 5 years, it is difficult to get major returns from ACI if bought at a $5 billion valuation in 2023.
Breaking up the firm into smaller manageable organizations and focusing on fueling growth on the corporate payments side and sustaining the revenue from retail business, could also be a potential path ACI can take.
Conclusion
ACI has huge potential as an asset, it is very well positioned in the payments industry with a large customer base, going back to fundamentals would probably help.
Reinventing the distribution model and improving the growth potential would be key to ACI’s survival and growth, irrespective of whether they decide to sell to a private equity or continue as a public company.
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