ACI Worldwide, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides digital payment software and services to banks, merchants, and billers globally. The filing covers the unaudited three and nine months ended September 30, 2021, compared with the same periods in 2020. Beginning in 2021, the company reported three operating segments: Banks, Merchants, and Billers.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $316.9 million | $315.9 million | $903.8 million | $907.3 million |
| Operating income | $28.0 million | $31.2 million | $47.1 million | $49.0 million |
| Operating margin | 8.8% | 9.9% | 5.2% | 5.4% |
| Net income | $13.8 million | $15.9 million | $18.3 million | $5.5 million |
| Diluted EPS | $0.12 | $0.13 | $0.15 | $0.05 |
| Net margin | 4.3% | 5.0% | 2.0% | 0.6% |
| Operating cash flow | Not separately provided | Not separately provided | $147.9 million | $192.1 million |
Q3 revenue consisted of $191.5 million of SaaS and PaaS revenue, $54.5 million of license revenue, $53.5 million of maintenance revenue, and $17.5 million of services revenue. For the nine months, SaaS and PaaS revenue increased 3% to $583.5 million, while license revenue declined 18% to $110.4 million.
Cash and cash equivalents were $141.5 million at September 30, 2021, compared with $165.4 million at December 31, 2020. Total stated liquidity was approximately $640.0 million, comprising cash and $498.5 million of available revolving credit capacity. The company also had a fully available $75.0 million uncommitted overdraft facility for settlement-process timing differences.
Total debt was $1.074 billion, net of debt issuance costs, including $687.9 million of term loans and $400.0 million of 5.750% senior notes due 2026. The credit facility interest rate was 2.08% at September 30, 2021. The company stated that it was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Q3 revenue increased $1.0 million, or less than 1%; excluding favorable foreign currency effects, revenue decreased $1.2 million.
- Nine-month revenue decreased $3.5 million; excluding foreign currency effects, the decline was $13.1 million, or 1%.
- Q3 SaaS and PaaS revenue increased 1%, services revenue increased 11%, and license revenue decreased 4%. Nine-month SaaS and PaaS revenue rose 3%, services rose 3%, and license revenue fell 18%, primarily because of the timing and size of license and capacity events.
- Q3 operating income declined 10% and net income declined 13%, reflecting higher selling and marketing costs and unfavorable other income. Nine-month net income increased 232%, primarily because of lower interest expense and lower foreign currency losses in the prior-year period.
- Q3 selling and marketing expense increased 51%, primarily due to higher personnel-related expenses and professional fees. General and administrative expense decreased 20%, partly because prior-year results included higher Speedpay acquisition and cost-reduction expenses.
- Nine-month operating cash flow decreased $44.2 million, primarily because of working-capital timing.
- The Banks segment generated nine-month revenue of $341.7 million, down from $356.9 million, and Segment Adjusted EBITDA of $159.3 million, down from $182.5 million. Merchants revenue increased to $115.1 million and Billers revenue increased to $447.0 million.
- The company repurchased 1.0 million shares for $39.4 million during the first nine months, leaving approximately $72.7 million authorized for future repurchases.
Guidance, outlook, commentary, and risks
The filing does not provide a specific quantitative revenue, earnings, or cash-flow forecast. Management stated that digital payment volumes, real-time payments, cloud adoption, fraud prevention, omni-commerce, and Request for Payment services represent important market opportunities. The company reported 60-month backlog of $6.210 billion at September 30, 2021, including $2.240 billion of committed backlog and $3.970 billion of renewal backlog; approximately $871.2 million of revenue allocated to remaining performance obligations was expected to be recognized in future periods, with approximately 55% expected within 12 months.
Management stated that existing liquidity and operating cash flow should satisfy projected working-capital and debt-service requirements for the next 12 months and the foreseeable future. During the period, the company commenced a new Miami headquarters lease and entered into a five-year, $45 million Microsoft Azure cloud commitment.
- COVID-19 continued to create uncertainty around customer transaction volumes, payment timing, demand, and collections, particularly in the Merchants and Billers segments.
- In April 2021, ACH files associated with a mortgage-servicing customer were inadvertently transmitted during a system test. Regulatory agencies are investigating, and seven related class-action lawsuits have been filed. Potential fines, penalties, damages, and defense costs could be material, although the filing does not quantify an accrued liability or probable loss.
- The company is exposed to foreign currency fluctuations and has not entered into foreign currency hedging transactions.
- The credit facility is indexed to LIBOR, and the company was evaluating the transition to alternative reference rates, including SOFR.
- Goodwill totaled approximately $1.3 billion. The company planned to complete the allocation of goodwill to its new reporting units before year-end and stated that no additional quantitative impairment test was required based on its assessment.
- The company identified risks from software defects, service errors, cybersecurity risks associated with remote work, organizational realignment, personnel changes, customer concentration of payment activity, and the execution of its Fit for Growth strategy.
Important facts for investors to verify
- Whether license revenue timing normalizes and whether SaaS and PaaS growth offsets continued declines in on-premise license activity.
- The effect of elevated selling and marketing spending on future operating margins and Segment Adjusted EBITDA.
- Progress and potential financial exposure related to the ACH incident, regulatory inquiries, and seven class-action lawsuits.
- Debt repayment requirements, the April 2024 credit-facility maturity, floating-rate exposure, and the transition away from LIBOR.
- The quality and realization of the $6.210 billion backlog, particularly the $3.970 billion renewal component, which depends on assumptions about renewals, volumes, pricing, and foreign exchange.
- Working-capital trends and whether operating cash flow recovers from the nine-month decline to $147.9 million.
- COVID-19 effects on customer transaction volumes, payment collections, and liquidity, as well as execution of the new organizational structure and cloud strategy.