ACI Worldwide, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2014; filed May 2, 2014. Results are unaudited and should be read with the 2013 Form 10-K. ACI provides electronic payments, banking, fraud, bill-payment, software licensing, maintenance, services and hosting solutions to approximately 2,600 customers globally.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $221.5 million | $162.0 million | Up 36.7% |
| Operating income (loss) | $0.3 million | $(4.0) million | Improved $4.3 million |
| Operating margin | 0.1% | (2.5%) | Improved |
| Loss before taxes | $(9.7) million | $(4.6) million | Loss increased |
| Net loss | $(5.8) million | $(2.2) million | Loss increased |
| Diluted loss per share | $(0.15) | $(0.05) | Higher loss per share |
| Operating cash flow | $15.3 million | $34.9 million | Down $19.7 million |
Revenue mix: Hosting revenue increased 164.4% to $100.7 million, maintenance increased 6.6% to $62.5 million, license revenue decreased 13.7% to $35.7 million, and services revenue decreased 5.6% to $22.6 million. Hosting represented 45.5% of revenue versus 23.5% in the prior-year quarter.
Regional performance: Americas revenue increased 64.1% to $154.8 million, while EMEA revenue declined 0.2% to $47.5 million and Asia/Pacific revenue declined 4.3% to $19.2 million. Segment income before taxes was $16.3 million in the Americas, $17.5 million in EMEA and $5.6 million in Asia/Pacific, offset by $(49.1) million of corporate costs.
Margins and expenses: Total operating expenses were $221.2 million, or 99.9% of revenue, compared with 102.5% in Q1 2013. Cost of maintenance, services and hosting rose 74.4%, primarily from the acquired businesses. Depreciation and amortization increased 55.9% to $17.1 million, principally from acquisition-related assets. Interest expense increased 135.4% to $9.2 million because of higher acquisition-related debt.
Balance sheet and liquidity: Cash and cash equivalents were $58.9 million at March 31, 2014, down from $95.1 million at December 31, 2013. Total assets were $1.64 billion and total liabilities were $1.16 billion. Receivables were $203.6 million and deferred revenue was $195.2 million, including current and noncurrent amounts. Management stated that cash, operating cash flow and available revolver capacity are expected to meet projected needs for the next 12 months and foreseeable future; $47.2 million of cash was held by foreign subsidiaries and intended to remain permanently reinvested overseas.
Debt: Total debt was $778.5 million, consisting of $446.5 million under the term facility, $32.0 million under the revolving facility and $300.0 million of 6.375% senior notes due 2020. Up to $218 million of revolving capacity was unused, subject to agreement terms. The credit facility interest rate was 2.41%. The company was in compliance with its financial covenants at March 31, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue growth was largely acquisition-driven: OPAY contributed approximately $33.5 million of incremental revenue and ORCC contributed approximately $29.5 million. Excluding these contributions, revenue declined approximately 2.3%.
- Hosting revenue growth reflected the acquired electronic bill-payment businesses and substantially changed the company’s revenue mix.
- Operating results improved to near break-even despite higher amortization, interest expense and transaction-related costs; however, net loss worsened because the increase in other expenses more than offset operating improvement.
- Operating cash flow declined to $15.3 million from $34.9 million, primarily because customer cash receipts decreased $22.8 million.
- The company repurchased 1.19 million shares for $70.0 million during the quarter. Approximately $138.3 million remained authorized for repurchases at March 31, 2014.
- Cash used in investing activities was $7.8 million, compared with $273.2 million in Q1 2013, when the company acquired ORCC and PTESA.
- The company incurred approximately $5.7 million of significant transaction-related expenses, including personnel charges, professional fees and data-center and platform consolidation costs. It also recognized approximately $1.8 million of termination costs related to acquisition integration.
Outlook, Risks, Contingencies and Unusual Items
Backlog: Estimated 60-month backlog increased to $3.91 billion from $3.86 billion at December 31, 2013. Estimated 12-month backlog increased to $883 million from $870 million. Approximately $2.28 billion of the 60-month amount represented assumed renewals rather than committed backlog. Management cautioned that backlog depends on renewal, pricing, foreign-exchange and customer-performance assumptions and is not a GAAP measure.
Business outlook: Management highlighted growth opportunities from increasing electronic-payment volumes, real-time payments, cloud hosting, fraud and compliance solutions, EMV adoption, SEPA requirements, mobile payments and payment-system consolidation. No specific numerical revenue or earnings guidance is provided in the filing text.
Principal risks: Key risks include competition, customer reluctance to change vendors, product migration and performance of BASE24-eps, project delays, contract renewals, acquisition integration, debt service and restrictive covenants, goodwill or intangible-asset impairment, cybersecurity and payment-fraud exposure, money-transmitter and privacy regulation, foreign-exchange volatility, international operations, tax uncertainty and quarterly revenue concentration.
Contingencies and subsequent event: The company reported no litigation expected to have a material adverse effect and no material indemnity exposure beyond accrued amounts. Unrecognized tax benefits were $14.8 million, plus $2.3 million of related interest and penalties. On April 10, 2014, the board approved a proposed three-for-one stock split, subject to shareholder approval of an increase in authorized common shares.
Controls: Management concluded that disclosure controls and procedures were effective as of March 31, 2014. OPAY’s internal controls were still being integrated and had a material effect on internal control over financial reporting during the period.
Investor Verification Checklist
- Confirm the sustainability of hosting growth and the incremental contribution and profitability of OPAY and ORCC.
- Reconcile reported operating improvement with continuing net losses, higher interest expense and acquisition-related amortization.
- Assess liquidity after the $70.0 million share repurchase, including foreign-held cash, debt maturities and revolver availability.
- Review debt covenant headroom, floating-rate exposure and the 2020 senior-note maturity.
- Evaluate whether the $3.91 billion backlog, particularly assumed renewals, converts into revenue as estimated.
- Monitor acquisition integration costs, restructuring liabilities and the completion of OPAY purchase-price accounting.
- Review the proposed three-for-one stock split and required shareholder approval.