This Payments Business Is Gaining Bank Customers as Its Margins Expand

Most of what moves money between banks is invisible to everyone except the people who built it, and that invisibility is exactly why the market keeps mispricing it.

A payments infrastructure software company just landed two bank wins in eight days, raised its full-year guidance, and is buying back its own stock at what it clearly believes are discounted prices.

The stock is still sitting roughly 18% below its 52-week high with earnings five weeks away.

A Q2 beat that set the tone for the rest of the year

ACI Worldwide (NASDAQ: ACIW) reported Q2 adjusted EPS of $0.54, beating consensus by a penny, on revenue of $430 million, up 7% year over year. The more important number was the recurring revenue line, which grew 5% and now represents the majority of the business.

Adjusted EBITDA grew 12%, and margins expanded meaningfully from the prior-year period. The business is getting more profitable as it gets bigger, which is the combination you want to see in a software company moving customers to a new platform.

Management raised full-year 2026 revenue guidance to a range around $1.9 billion and lifted the adjusted EBITDA outlook to $545 to $560 million.

That is not a company managing expectations downward. That is a company that sees what is coming in the back half and is comfortable telling you about it.

The revenue structure you need to understand before you buy

Here is the one structural quirk that catches new holders off guard. ACI’s revenue is not evenly distributed. The company expects roughly 40% of second-half revenue to land in Q3 and 60% in Q4, because large license renewals cluster in the fourth quarter.

That means Q3 will look softer. Guidance calls for Q3 revenue of roughly $420 million and adjusted EBITDA of $90 to $95 million. If you read that print without context, you might think the story is slowing. It is not.

The back half is always weighted to Q4, and the license renewals are what make this model generate the kind of cash flow that funds the buyback.

November earnings will show you Q3, and the real signal will be whether full-year guidance holds and what management says about Q4 visibility.

Two bank wins in eight days tell you the pipeline is working

In late September, Solaris, a German bank and embedded finance platform, went live on ACI Connetic for SEPA Instant payments.

That same week, the Federal Home Loan Bank of Cincinnati announced it is moving its member funding payment processing to Connetic, connecting to the Fedwire Funds Service. The Federal Home Loan Bank of Atlanta made a similar move weeks before that.

Three bank deployments in a matter of weeks is not a coincidence.

The real-time payments mandate in Europe, where the EU Instant Payments Regulation now requires banks to offer instant transfers at parity pricing with standard ones, and the growing adoption of FedNow and the Clearing House RTP network in the US are forcing institutions that have been running batch payment systems for decades to rebuild their infrastructure.

ACI built Connetic for exactly this moment.

When a bank rebuilds its payments core on your software, it does not switch again in year two. Every Connetic go-live is a multi-year recurring revenue stream, and the switching costs compound over time as the institution adds more payment networks through the same platform.

The platform keeps getting wider

ACI is adding capabilities to Connetic at a meaningful pace.

In September, the company extended the platform to support payments orchestrated through SWIFT’s blockchain-based ledger, which went live in July with 17 banks piloting tokenized deposit settlements across six continents.

That integration also makes Ripple’s XRP Ledger available as a settlement rail for banks that want it, placing ACI in the path of potential digital asset adoption inside the traditional banking system.

Separately, ACI tested its BASE24-eps card processing software on AWS with a technology partner and sustained more than double its target transaction load without a single failure across 4.6 million transactions.

And in September, the company agreed to acquire Cranium Ventures to bring microservices-based card switching into the Connetic platform.

Each of these moves does the same thing: it makes Connetic more capable and harder to displace.

The base that grows while you wait

The mix shift happening inside ACI’s revenue is what makes the thesis durable beyond any single quarter.

Recurring revenue, meaning the portion that renews automatically from existing customers, grew 5% in Q2 and now represents the dominant share of total revenue. Every new Connetic deployment adds to that base. Every license renewal extends it.

Recurring software revenue is valued differently than lumpy project revenue because you can see it coming. It gives management the confidence to raise guidance mid-year, and it gives the market a reason to pay a higher multiple.

Right now, the market is not fully pricing the shift because ACI still carries the reputation of a slow-growth legacy payments company. The business being built underneath that reputation is meaningfully different.

Margins are moving in the right direction

Adjusted EBITDA margins expanded from 32% a year ago to 34% in Q2. That might sound incremental, but in a software business at this revenue scale, two margin points is money.

And the directional trend is what you are buying. As Connetic scales and more revenue shifts toward subscription-style recurring streams, the margin profile improves structurally rather than through cost-cutting.

Combine margin expansion with revenue growth and the earnings power of this business over the next two to three years is meaningfully higher than what the current multiple suggests.

Management is buying the stock. That is worth paying attention to.

ACI bought back 2.5 million shares for approximately $107 million in the first half of the year. At current prices, that buyback is working at a discount to the company’s own stated fair value and well below the analyst consensus target.

Management does not run buybacks at the top of a cycle. They run them when they believe the stock is cheap.

The company carries moderate leverage with debt-to-equity around 58%, which is normal for an enterprise software company of this size and profile.

Trailing levered free cash flow of roughly $260 million gives the business room to fund the buyback, service debt, and pursue acquisitions like Cranium Ventures simultaneously.

The valuation gap is harder to ignore than the market pretends

At around $49 to $50 per share, ACIW trades at roughly 14 times forward earnings. The average analyst price target sits around $67, implying roughly 35% upside from current levels.

That gap exists because the business has a reputation for lumpy quarterly results driven by license timing, and the market is discounting the growing recurring revenue base that makes those lumps increasingly irrelevant to the underlying earnings trajectory.

Put a software peer multiple on the recurring revenue run-rate and the gap to analyst targets does not require heroic assumptions. It requires the market to update its picture of what ACI actually is.

The Q3 revenue guide of roughly $420 million looks soft relative to Q2’s $430 million. That is exactly what ACI said would happen.

Management guided for Q3 revenue roughly in line with or slightly below Q2 because the license renewal cadence concentrates in Q4.

A company reporting a sequential revenue step-down in Q3 would normally be a red flag. Here it is a feature of the business model that has been disclosed, repeated, and confirmed every year.

The number to watch in the Q3 print is not the revenue total. It is whether the recurring revenue line keeps growing and whether management reaffirms the full-year guide.

If both are true, Q3 will be a setup quarter for a strong Q4 print, which is when this stock historically moves. If recurring revenue growth decelerates or the full-year guide gets trimmed, that is the real signal to respond to.

Watching the headline Q3 revenue number without reading the recurring revenue trend is the mistake that keeps this stock mispriced quarter to quarter.

Bank IT spending is the biggest swing factor. ACI’s growth depends on financial institutions committing to payments infrastructure projects.

If rising interest rates pressure bank margins or a weakening economy causes institutions to defer technology spending, the Connetic sales cycle slows. Major bank earnings in mid-October will give you the first read on how banks are thinking about 2027 tech budgets.

Sales cycles are long and lumpy. A single large renewal slipping from one quarter to the next can knock the stock down sharply on the print, even if the full-year story is intact.

If you are buying at current levels, size accordingly for that volatility. This is not a stock where a single week of data changes the thesis, but the market sometimes acts as it does.

Competition is real and well-funded. Fiserv, FIS, and the card networks all want a larger share of real-time payments infrastructure.

If ACI loses a renewal or a competitive win to one of those names, it changes the competitive read-through for the Connetic pipeline. Two consecutive quarters of missed new customer announcements would be the signal to revisit the thesis.

The Cranium Ventures acquisition is a small integration risk. The deal adds card switching microservices to Connetic, which is strategically correct, but any acquisition introduces execution risk.

If the integration takes longer than expected or the capability lands differently than marketed, it delays the card payments opportunity the deal is meant to capture.

At roughly 14 times forward earnings, you are paying a legacy-software multiple for a business that is actively converting to a recurring revenue model, expanding margins, and landing bank customers at an accelerating pace.

That is a mismatch, and mismatch is where returns come from.

The risk you are taking is patience.

This is not a stock that re-rates in a week. It re-rates when Q4 license renewals confirm the full-year guide, when Connetic adds another cluster of go-lives, and when the market updates its picture of ACI from “old payments company” to “recurring revenue payments platform.”

The November earnings print is your first checkpoint.

If Q3 recurring revenue growth holds and management gives positive commentary on Q4 pipeline visibility, the stock has a clear path toward analyst targets in the mid-to-upper $60s. If the guide gets trimmed, exit and reassess.

Start building at current levels. The buyback tells you management sees the same setup you do.

Looking to buy? Current levels around $49 to $50 represent a meaningful discount to where analyst fair value sits and where management is implicitly valuing the business through buybacks.

Build a starter position before November earnings and add if the Q3 print confirms recurring revenue momentum.

Already own it? Watch the November print for two things only: whether recurring revenue growth continues and whether full-year guidance holds.

The Q3 headline revenue number will look soft by design. Do not let it spook you if the underlying trends are intact.

Main risk to respect: A deterioration in bank IT spending driven by macro pressure, or a competitive loss of a meaningful Connetic deal, would signal the adoption thesis is slower than the pipeline implies.

Either of those, combined with a trimmed full-year guide, is the exit trigger.

That's our coverage for today; thanks for reading! Reply to this email with feedback or any value stocks you want me to check out.

Best Regards,
—Noah Zelvis
Undervalued Edge