ACI Worldwide, Inc. — Form 10-Q Summary
Business Context and Reporting Period
ACI Worldwide provides electronic payment software and services to more than 5,100 organizations globally, including banks, financial intermediaries, merchants and corporates. Its reportable segments are ACI On Premise and ACI On Demand, which includes SaaS and PaaS offerings. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the same periods in 2017.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $245.5 million | $225.7 million | $689.8 million | $697.8 million |
| Operating income (loss) | $28.4 million | $11.4 million | $9.5 million | $(23.4) million |
| Net income (loss) | $15.2 million | $3.4 million | $(18.8) million | $(28.0) million |
| Diluted EPS | $0.13 | $0.03 | $(0.16) | $(0.24) |
| Operating margin | 11.5% | 5.1% | 1.4% | (3.4)% |
| Net margin | 6.2% | 1.5% | (2.7)% | (4.0)% |
| Operating cash flow | Not separately provided | Not separately provided | $100.5 million | $85.1 million |
Q3 revenue growth was driven primarily by license revenue of $69.0 million, up 38%, and SaaS/PaaS revenue of $104.5 million, up 5%. Maintenance revenue declined 4% to $54.4 million and services revenue declined 10% to $17.7 million. For the first nine months, SaaS/PaaS revenue increased 3% and services revenue increased 7%, while license revenue declined 13% and total revenue declined 1%.
Q3 operating income improved substantially despite a 1% increase in total operating expenses, primarily because cost of revenue declined 5%. The nine-month operating improvement also reflects the absence of the $46.7 million Baldwin Hackett & Meeks judgment expense recorded in 2017.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $76.3 million at September 30, 2018, compared with $69.7 million at December 31, 2017. Approximately $51.0 million was held by foreign subsidiaries.
- Nine-month operating cash flow was $100.5 million. Investing cash outflows were $39.8 million, including $16.4 million for property and equipment and $21.9 million for software and distribution rights.
- Financing cash outflows were $53.3 million, including $54.5 million of common-stock repurchases.
- Total liquidity was $576.3 million, consisting of cash of $76.3 million and $500.0 million of available revolving credit capacity.
- Debt outstanding was approximately $688.9 million before debt issuance costs, comprising $288.9 million under the term facility and $400.0 million of 5.750% senior notes due 2026. The revolving facility was undrawn.
- The company issued the 2026 notes in August 2018, redeemed its $300.0 million of 6.375% senior notes due 2020 and repaid $105.3 million of term debt. The term facility carried an interest rate of 3.99% at September 30, 2018.
- The company reported compliance with its financial debt covenants at September 30, 2018 and throughout the period.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 9%, operating income increased from $11.4 million to $28.4 million, and net income increased from $3.4 million to $15.2 million.
- Nine-month revenue decreased 1%, but the operating loss narrowed to $9.5 million of operating income from a $23.4 million operating loss, and the net loss narrowed by $9.3 million.
- ACI On Premise Q3 revenue increased to $141.0 million from $126.0 million and Segment Adjusted EBITDA increased to $77.8 million from $65.1 million, primarily due to the timing of license and capacity events.
- ACI On Demand Q3 revenue increased to $104.5 million from $99.7 million, and Segment Adjusted EBITDA improved to $3.3 million from a $1.2 million loss. For the nine-month period, On Demand Segment Adjusted EBITDA improved to a $4.3 million loss from an $8.8 million loss.
- Stockholders’ equity increased to $962.9 million from $764.6 million, substantially reflecting the cumulative $244.0 million increase to retained earnings from adopting ASC 606, partly offset by treasury-stock repurchases and foreign-currency losses.
Accounting, Outlook, Risks and Unusual Items
The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The adoption increased retained earnings by $244.0 million and materially changed the timing of license revenue recognition, creating $181.8 million of noncurrent accrued receivables and increasing nine-month reported revenue by approximately $21.5 million less than it would have been without ASC 606. Reported nine-month license revenue was $21.2 million lower than it would have been under the prior standard. The company also capitalized certain sales commissions.
Revenue allocated to remaining performance obligations was $599.9 million at September 30, 2018, with approximately 48% expected to be recognized over the following 12 months. The filing does not provide formal quantitative earnings or revenue guidance.
The company identifies risks related to competition, demand and customer renewals, migration to SaaS/PaaS, project delays, cybersecurity and system interruptions, regulatory and privacy compliance, payment-funding exposure, international operations and foreign exchange, acquisitions, goodwill and intangible-asset impairment, debt covenants and debt service, tax liabilities, backlog assumptions, and revenue seasonality. Settlement funds of $185.4 million were held off balance sheet for clients as of September 30, 2018.
The company had $27.8 million of unrecognized tax benefits and continued to refine its accounting for the Tax Cuts and Jobs Act. It recorded $5.0 million of GILTI tax expense during the nine months. The company expects adoption of ASC 842 leases to materially affect the balance sheet; undiscounted operating-lease commitments were approximately $79.4 million.
No legal proceeding was identified as likely to have a material effect on financial condition or results of operations. The filing states that there were no material changes to the risk factors in the 2017 Form 10-K.
Important Facts for Investors to Verify
- Assess the underlying economics of reported growth after separating ASC 606 effects, foreign-currency movements and timing of license or capacity events.
- Review the collectability and timing of the $461.5 million net receivables balance, including $292.7 million of accrued receivables.
- Monitor leverage, floating-rate exposure, covenant compliance and required amortization of the term facility.
- Evaluate the sustainability of operating cash flow relative to debt service, capital expenditures, stock repurchases and potential acquisitions.
- Verify renewal assumptions underlying the $4.176 billion 60-month backlog estimate, including $2.416 billion of renewal backlog.
- Track the Tax Act measurement process, GILTI and BEAT charges, uncertain tax positions and potential repatriation taxes on foreign cash.
- Consider the future balance-sheet effect of ASC 842 and the company’s large goodwill and intangible-asset balances.