ACI WORLDWIDE, INC. annual report, FY2017

ACI Worldwide, Inc. 2017 Form 10-K Summary

Business context and reporting period

ACI Worldwide develops and supports software and services that facilitate real-time electronic payments for banks, financial intermediaries, merchants, and corporate customers. Its principal offerings are organized into ACI On Premise and ACI On Demand, including SaaS and Platform-as-a-Service solutions. The filing covers the fiscal year ended December 31, 2017; fourth-quarter revenue was $326.4 million and fourth-quarter net income was $33.2 million.

The Company served more than 5,100 customers in over 80 countries and had 3,979 employees at year-end.
ACI On Premise generated $598.6 million of 2017 revenue; ACI On Demand generated $425.6 million.
No customer represented more than 10% of consolidated revenue or accounts receivable.

Financial performance and key metrics

Metric	2017	2016	Change
Total revenue	$1,024.2 million	$1,005.7 million	+2%
Operating income	$84.6 million	$221.1 million	-62%
Net income	$5.1 million	$129.5 million	-96%
Diluted EPS	$0.04	$1.09	Down materially
Cash flow from operations	$146.2 million	$99.8 million	+$46.4 million
Total liquidity	$567.7 million	$230.3 million	+$337.5 million

Revenue mix included SaaS and Platform revenue of $425.6 million, license revenue of $293.1 million, maintenance revenue of $222.1 million, and services revenue of $83.4 million. SaaS and Platform revenue increased 3%, while license revenue increased 7%; maintenance and services revenue declined 5% each.

Operating margin was approximately 8.3% in 2017 versus 22.0% in 2016. Net margin was approximately 0.5% versus 12.9% in 2016. Research and development expense declined 19% to $136.9 million, selling and marketing expense declined 9% to $107.9 million, and cost of revenue increased 2% to $452.3 million. General and administrative expense increased 35% to $153.0 million.

ACI On Premise operating income increased 14% to $331.8 million. ACI On Demand remained loss-making, with an operating loss of $38.2 million, although the loss improved modestly from $38.9 million in 2016. Payment-card interchange fees increased ACI On Demand costs by approximately $19.8 million.

Liquidity, debt, and capital allocation

Year-end cash and cash equivalents were $69.7 million, including $46.5 million held by foreign subsidiaries.
Debt outstanding was approximately $696.3 million before debt issuance costs: $394.3 million under the term facility, $2.0 million under the revolver, and $300.0 million of 6.375% Senior Notes due 2020.
The Credit Facility provided up to $498.0 million of unused revolving capacity and matures in 2022. The interest rate was 3.07% at December 31, 2017.
The Company reported compliance with all debt covenants. Debt agreements restrict additional indebtedness, investments, acquisitions, dividends, share repurchases, and other corporate actions.
Investing cash outflow was $54.4 million, primarily for property, equipment, software, and distribution rights.
Financing cash outflow was $98.1 million, including $37.4 million of common-stock repurchases and net debt repayments.
The Company paid no cash dividends and does not presently anticipate paying dividends.

Material changes versus the prior comparable period

Revenue increased $18.5 million, led by license and SaaS and Platform growth. Excluding the CFS divestiture and foreign currency effects, revenue increased approximately $28.9 million, or 3%.
Profitability declined primarily because 2016 included a $151.5 million pretax gain from the sale of Community Financial Services assets to Fiserv, while 2017 included a $46.7 million general and administrative charge related to the BHMI judgment and $1.4 million of related interest expense.
The BHMI judgment, including interest, totaled approximately $48.1 million and was paid during 2017 after the Nebraska Supreme Court affirmed the judgment.
Cash flow from operations increased to $146.2 million, principally due to the timing of customer billings and collections.
Backlog increased to $4.104 billion at December 31, 2017 from $4.016 billion, with ACI On Demand backlog rising to $2.404 billion and ACI On Premise backlog declining slightly to $1.700 billion. Backlog includes assumptions about renewals and is not a GAAP measure.
Stock repurchases declined to $37.4 million from $60.1 million in 2016. Subsequent to year-end, the Company repurchased an additional 1,346,427 shares and, on February 19, 2018, authorized an additional $200 million for repurchases.

Guidance, outlook, risks, contingencies, and unusual items

The filing does not provide a clear numerical 2018 revenue or earnings guidance figure. Management highlighted growth opportunities from increasing electronic payment volumes, real-time payments, cloud adoption, fraud prevention, regulatory changes such as PSD2, mobile payments, and electronic bill payment. Management also emphasized continued migration from on-premise products to SaaS and Platform offerings.

The Company expects significant seasonality, with revenue and earnings generally strongest in the third and fourth quarters and lower, potentially loss-making results in the first and second quarters.
Key risks include intense competition, customer concentration in financial services, customer reluctance to change vendors, contract-renewal risk, delays or cancellations of complex projects, cybersecurity and service interruptions, privacy and money-transmitter regulation, foreign-currency exposure, employee retention, intellectual-property litigation, and goodwill or intangible-asset impairment.
The Company has substantial goodwill of $909.7 million and reported that its 2017 impairment testing showed fair value substantially above carrying value; no impairment was recorded.
The Tax Cuts and Jobs Act produced provisional 2017 tax charges of $15.0 million for deferred-tax remeasurement and $20.9 million for transition tax. The 2017 effective tax rate was approximately 88%, compared with 30% in 2016; final tax effects remained subject to further analysis and regulatory guidance.
The Company will adopt ASC 606 using the modified retrospective method on January 1, 2018. It estimated a pretax retained-earnings increase of approximately $273 million to $291 million, primarily from accrued receivables on software license arrangements with extended payment terms. The filing states that the effect on future revenue timing and sales-commission capitalization remains important to monitor.
Contractual obligations totaled $876.5 million, including debt principal, interest, operating leases, and financed software commitments. Unrecognized tax benefits totaled $27.2 million.
Off-balance-sheet settlement funds totaled $238.9 million at year-end and are held for clients rather than recorded as Company assets.

Most important facts for investors to verify

Reconcile 2017 profitability with and without the $48.1 million BHMI judgment and compare it with the nonrecurring $151.5 million CFS divestiture gain in 2016.
Assess whether ACI On Demand can achieve sustained profitability as SaaS and Platform revenue grows and interchange, development, and infrastructure costs remain elevated.
Review the impact of ASC 606 adoption, including the estimated $273 million to $291 million pretax retained-earnings adjustment and changes in license-revenue timing.
Evaluate debt maturities, especially the $300.0 million Senior Notes due in 2020, floating-rate exposure, covenant compliance, and available revolver capacity.
Test the quality of the $4.104 billion backlog, particularly the renewal assumptions, customer retention rates, foreign-exchange assumptions, and expected conversion into revenue.
Monitor tax uncertainties arising from the Tax Cuts and Jobs Act, foreign earnings, audits, and $27.2 million of unrecognized tax benefits.
Review cybersecurity, regulatory, intellectual-property, project-execution, and customer-migration risks identified in the risk factors.