Investing.com -- ACI Worldwide Inc. (NASDAQ:ACIW), a payment systems company, has received an upgrade in its issuer credit rating to 'BB+' from 'BB' at S&P Global (NYSE:SPGI) due to lower leverage and promising growth prospects. This change comes in the wake of accelerated revenue growth through the first three quarters of fiscal 2024. The company has also revised its long-term leverage target to 2.0x from 2.5x.
The credit rating of the company's senior unsecured notes was also raised to 'BB' from 'BB-', while the '5' recovery rating on the notes remains unchanged. The stable outlook reflects expectations that ACIW will maintain S&P Global Ratings-adjusted leverage in the low-2x area while demonstrating healthy topline growth and margin expansion.
ACIW has managed to keep leverage below the 3x upside threshold since fiscal 2021, with recent earnings growth driving rapid deleveraging. As of the third quarter of 2024, ACIW reported leverage of 1.6x, partially due to accelerated new contract signings. It's expected that fiscal 2024 leverage will be about 2.0x and that ACIW will maintain this level over the next several years.
Despite ACIW's scale being small relative to most other 'BB+' rated issuers, the company's conservative 2x leverage target and the expansive scope of its products offset some of the credit risks that are typical of issuers with smaller scale. ACIW's products support trillions of dollars in daily transaction activity for its clients, which include the largest global financial institutions, as well as global merchants and billers. The company also supports 26 instant payment schemes and ten central infrastructures.
In terms of business momentum, ACIW reported healthy growth in all three segments (Banks, Merchants, Billers) during the first nine months of 2024. In its strongest performing segment, Banks, the company reported 30% growth relative to the first nine months of 2023. Full-year 2024 revenue growth is anticipated to be 9.6%, a significant increase from 2.2% in 2023 and 3.7% in 2022.
ACIW's Payments Hub platform aims to broaden the company's reach to mid-tier financial institutions ($50 billion-$250 billion in assets), with pilot programs expected to begin this year. The company's primary bank clients are mega-tier institutions (over $250 billion in assets), who typically have more robust infrastructure and resources for implementing ACIW's solutions.
Despite substantial ongoing business investments, ACIW is expected to expand margins and strengthen cash flow over the longer term. The company is anticipated to maintain ongoing research and development expenses and growth-related capital expenditures to support product innovation. Investments will likely be weighted toward its real-time payments solution and the Payments Hub.
The company is expected to report over $200 million of free operating cash flow (FOCF) in 2024 and this is expected to grow to more than $250 million by 2026. The stable outlook reflects expectations that ACIW's stable customer base and their efforts to modernize their payments infrastructure will support mid- to high- single-digit percent revenue growth. This, combined with modest EBITDA margin expansion will likely lead to healthy cash generation that supports the company's capital allocation priorities, including business reinvestment and share repurchases.
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