ACI Worldwide, Inc. — Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payment software and services to banks, financial intermediaries, merchants, corporates and public-sector clients. Its reportable segments are ACI On Premise and ACI On Demand, with offerings including SaaS/PaaS, software licenses, maintenance and professional services. This unaudited filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $209.3 million | $231.5 million | Down 10% |
| Operating income (loss) | $(16.7) million | $3.6 million | Declined $20.3 million |
| Net income (loss) | $(19.4) million | $(1.6) million | Loss increased $17.8 million |
| Diluted loss per share | $(0.17) | $(0.01) | Worsened |
| Cash flow from operations | $45.1 million | $85.7 million | Down $40.6 million |
| Capital expenditures and software purchases | $12.6 million | $12.4 million | Approximately flat |
| Cash and cash equivalents | $74.3 million | $99.7 million | Q1 2017 comparison |
Revenue mix shifted toward recurring offerings: SaaS/PaaS revenue was $104.3 million, or approximately 50% of revenue, up 5%; maintenance was $56.7 million, up 4%; services were $20.3 million, up 12%; and license revenue was $28.0 million, down 53%.
Cost of revenue was $107.3 million, implying an approximate gross margin of 48.7%, compared with approximately 53.1% in Q1 2017. Operating expenses were $226.0 million, or 108% of revenue, versus 98% in the prior-year period. The operating margin was approximately negative 8.0%, compared with positive 1.6%.
ACI On Premise revenue declined to $105.0 million from $131.9 million, while ACI On Demand revenue increased to $104.3 million from $99.6 million. Segment Adjusted EBITDA was $38.9 million for ACI On Premise and negative $4.2 million for ACI On Demand, compared with $68.4 million and negative $7.0 million, respectively, in Q1 2017.
Total debt was $679.2 million at March 31, 2018, consisting principally of $389.1 million under the term credit facility and $300.0 million of 6.375% Senior Notes due August 2020. The credit facility interest rate was 3.63%. The company reported compliance with its debt covenants and had up to $500.0 million of unused revolving credit availability. Total stated liquidity was $574.3 million, including cash and revolving availability.
Material changes versus the prior comparable period
- ACI adopted ASC 606 and ASC 340-40 on January 1, 2018 using the modified retrospective method, increasing retained earnings by $244.0 million.
- ASC 606 reduced reported Q1 2018 revenue by approximately $15.6 million versus the amount that would have been recognized under the previous revenue standard, primarily because of license revenue timing. It also increased operating expenses by approximately $1.5 million, primarily from sales-commission timing.
- License revenue fell $31.3 million year over year. Management attributed the underlying decline, excluding ASC 606 and foreign currency effects, to the timing and size of capacity events and several license arrangements executed in Q1 2017.
- Foreign currency strengthening increased reported revenue by approximately $6.0 million and operating expenses by approximately $5.9 million.
- Operating cash flow decreased primarily because of the timing of customer collections and payments.
- The company repurchased approximately 1.35 million shares for $31.1 million during the quarter and had $200.0 million remaining under its repurchase authorization at March 31, 2018.
- Revenue allocated to remaining performance obligations was $589.5 million, with approximately 50% expected to be recognized within 12 months; this measure excludes certain usage-based and practical-expedient amounts.
Outlook, commentary, risks and unusual items
The filing does not provide quantified financial guidance. Management expects operating needs, debt service, capital expenditures, lease payments, repurchases and potential acquisitions to be funded through operating cash flow, cash on hand and revolving-credit availability, and states that available sources should satisfy projected requirements for the next 12 months and the foreseeable future.
Management identifies growth opportunities from increasing electronic payment volumes, real-time payments, cloud adoption, fraud and compliance solutions, mobile payments, electronic bill payment and global vendor sourcing. Key operating risks include intense competition, customer consolidation, project delays or cancellations, renewal uncertainty, migration to SaaS/PaaS, cybersecurity and system interruptions, regulatory and privacy compliance, foreign currency exposure, acquisitions, goodwill and intangible-asset impairment, debt covenants and debt-service requirements, tax uncertainty, and the cyclical concentration of revenue near quarter-end.
The company had $27.5 million of unrecognized tax benefits and was still completing its accounting assessment of the Tax Cuts and Jobs Act. It recorded a $1.3 million GILTI tax expense in Q1 2018 and reported a 17% effective tax rate. A $5.6 million facility-closure liability remained at March 31, 2018. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Settlement funds of $216.1 million were held for clients in off-balance-sheet settlement accounts. Approximately $57.0 million of the company’s $74.3 million cash balance was held by foreign subsidiaries and could be subject to additional tax considerations if repatriated.
Important facts for investors to verify
- Assess the comparability of Q1 results after ASC 606, particularly the sharp decline in license revenue and the $244.0 million retained-earnings adoption adjustment.
- Monitor the shift from on-premise license revenue toward SaaS/PaaS and whether recurring growth offsets license timing and project volatility.
- Evaluate cash conversion, including the decline in operating cash flow and the substantial accrued-receivables balance created under ASC 606.
- Review approximately $689.1 million of gross debt, the August 2020 Senior Notes maturity, floating-rate exposure and covenant headroom.
- Validate the sustainability of the $4.387 billion 60-month backlog estimate, which includes significant renewal assumptions and is not assured of conversion to revenue.
- Follow completion of the Tax Act accounting analysis, foreign cash repatriation assessment and potential changes to tax balances.