Business Context and Reporting Period
ACI Worldwide, Inc. provides electronic payment software and services through its ACI On Premise and ACI On Demand segments, serving financial institutions, merchants, corporates, and public-sector customers. This unaudited Form 10-Q covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $205.9 million | $209.3 million | Down 2% |
| Operating loss | $28.1 million | $16.7 million | Loss increased $11.4 million |
| Net loss | $26.0 million | $19.4 million | Loss increased $6.5 million |
| Loss per diluted share | $0.22 | $0.17 | Higher loss |
| Operating cash flow | $42.4 million | $45.1 million | Down $2.7 million |
| Capital expenditures and software purchases | $9.8 million | $12.6 million | Down $2.8 million |
| Cash and cash equivalents | $176.2 million | $74.3 million at March 31, 2018 | Higher year over year |
Revenue mix was $108.6 million from SaaS and PaaS, $21.1 million from services, $55.1 million from maintenance, and $21.1 million from licenses. SaaS and PaaS revenue increased 4%, while license revenue declined 25% and maintenance revenue declined 3%.
Operating margin was approximately negative 13.6%, compared with negative 8.0% in the prior-year quarter. Net margin was approximately negative 12.6%, compared with negative 9.3%. Cost of revenue was $114.9 million, or 56% of revenue, versus 51% in Q1 2018. The filing does not provide a consolidated GAAP gross margin measure.
ACI On Premise revenue declined to $96.0 million from $105.0 million, and Segment Adjusted EBITDA declined to $28.3 million from $38.9 million. ACI On Demand revenue increased to $109.8 million from $104.3 million, and Segment Adjusted EBITDA improved to a loss of $0.3 million from a loss of $4.2 million.
Liquidity, Debt, and Balance Sheet
- Cash increased to $176.2 million at March 31, 2019, from $148.5 million at December 31, 2018.
- Available liquidity was $676.2 million, consisting of cash and $500.0 million of unused revolving credit capacity.
- Principal debt outstanding consisted of $279.0 million under the term credit facility and $400.0 million of 5.750% senior notes due 2026. Reported debt, net of issuance costs, was $666.6 million.
- The term facility carried an interest rate of 4.25% at quarter-end. Management reported compliance with all financial debt covenants.
- Operating lease right-of-use assets and lease liabilities recognized upon adoption of ASC 842 were $61.0 million and $65.0 million, respectively, at March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue declined 2% on a reported basis but was flat excluding approximately $3.7 million of adverse foreign-currency impact.
- Higher payment-card interchange and processing fees, third-party royalties, personnel costs, and transaction-related expenses increased operating costs.
- Q1 2019 included approximately $4.7 million of costs related to the planned Speedpay acquisition. Q1 2018 included approximately $4.3 million of integration and divestiture-related costs.
- Interest expense increased 24% to $11.6 million, including $1.8 million related to royalty payments, and foreign-currency losses increased to $1.9 million from $0.1 million.
- Operating cash flow declined modestly despite a $94.5 million working-capital benefit from receivables, compared with $68.7 million in the prior-year period.
- The company adopted ASC 842 on January 1, 2019, bringing operating leases onto the balance sheet. The filing states that ASC 2018-02 had no material financial statement impact.
- Sixty-month backlog was $4.151 billion at March 31, 2019, down from $4.174 billion at December 31, 2018. Revenue allocated to remaining performance obligations was $628.3 million, with approximately 46% expected to be recognized over the next 12 months.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a clear quantitative revenue, earnings, or cash-flow guidance range. Management expects existing cash, operating cash flow, and revolving credit availability to fund working-capital needs and other projected liquidity requirements for the next twelve months and the foreseeable future.
After quarter-end, ACI acquired Western Union’s U.S. bill-pay business, Speedpay, on May 9, 2019, for $750.0 million in cash, subject to adjustments. The company expected the combination to expand its On Demand platform and serve more than 4,000 U.S. customers. On April 5, 2019, the credit agreement was amended to permit a new $500.0 million senior secured term loan, extend relevant maturities to April 5, 2024, increase the senior secured net leverage covenant from 3.50:1.00 to 3.75:1.00, and support the acquisition together with a $250.0 million revolving-credit draw.
Principal risks include intense competition, customer renewals and project timing, payment-system security and business interruptions, regulatory and money-transmitter compliance, privacy requirements, foreign-currency exposure, customer and financial-sector consolidation, acquisition integration, goodwill and intangible-asset impairment, debt covenants and service requirements, tax exposures, and volatility caused by revenue concentration near quarter-end. Settlement funds of $199.6 million were held in off-balance-sheet accounts for clients at March 31, 2019.
Unrecognized tax benefits were $28.3 million, excluding $1.2 million of related interest and penalties; management believed approximately $3.9 million could decrease within the following 12 months. No legal proceeding was identified as likely to have a material adverse effect, and management reported effective disclosure controls.
Important Facts for Investors to Verify
- Integration performance, financing impact, leverage, covenant compliance, and purchase-price allocation following the Speedpay acquisition.
- Whether On Demand growth and recurring SaaS and PaaS expansion offset weakness and timing volatility in On Premise license revenue.
- Drivers of the higher cost of revenue and whether elevated payment-processing fees pressure future margins.
- Cash conversion, receivables collection, deferred revenue trends, and the sustainability of operating cash flow after the acquisition.
- Foreign-currency sensitivity, floating-rate debt exposure, and the company’s ability to service approximately $679.0 million of principal debt.
- Actual customer renewals and revenue realization relative to the $4.151 billion backlog estimate, particularly its renewal component and other assumptions.
- Potential changes in tax liabilities, regulatory requirements, cybersecurity exposure, and impairment risk related to goodwill and intangible assets.