ACI Worldwide, Inc. — Q3 2013 Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payments and banking software and hosted services to more than 2,600 financial institutions, retailers, and processors globally. The company reports through the Americas, EMEA, and Asia/Pacific segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Results include Online Resources Corporation (ORCC) from its March 11, 2013 acquisition and PTESA from the first quarter of 2013. On November 5, 2013, after the reporting date, ACI completed its approximately $139.8 million acquisition of Official Payments Holdings, Inc. (OPAY).
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $213.9 million | $155.1 million | $581.8 million | $442.5 million |
| Operating income | $29.6 million | $8.3 million | $37.1 million | $(1.2) million |
| Operating margin | 13.8% | 5.4% | 6.4% | (0.3)% |
| Net income (loss) | $13.8 million | $5.7 million | $13.5 million | $(0.8) million |
| Diluted EPS | $0.35 | $0.14 | $0.34 | $(0.02) |
| Operating cash flow | Not separately provided | Not separately provided | $86.6 million | $(12.7) million |
Q3 revenue increased 38.0%, while nine-month revenue increased 31.5%. Q3 revenue included $36.6 million from ORCC; nine-month revenue included $83.8 million from ORCC. Software hosting revenue was $67.0 million in Q3 and $172.4 million for nine months, increasing 110.9% and 110.8%, respectively. Maintenance revenue increased 26.2% in Q3 and 25.5% for nine months. Services revenue declined 15.6% in Q3 and 12.3% for nine months.
Q3 net income benefited from stronger operating results but was reduced by higher interest expense and foreign-currency losses. The effective tax rate was 28.0% for Q3 and 27.8% for the nine-month period.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $166.5 million at September 30, 2013, compared with $76.3 million at December 31, 2012. Approximately $93.4 million was held by foreign subsidiaries and was intended to remain permanently reinvested outside the United States.
- Net cash provided by operating activities was $86.6 million for the first nine months, versus $12.7 million of cash used in the prior-year period.
- Investing cash outflows were $282.6 million, including $264.2 million for acquisitions and $18.4 million for property, equipment, software, and distribution rights.
- Term credit facility borrowings totaled $464.3 million, with up to $250.0 million of unused revolving capacity, subject to the credit agreement. The facility interest rate was 2.43% at September 30, 2013.
- ACI issued $300.0 million of 6.375% senior notes due in 2020 and used proceeds in part to repay the $188.0 million revolving balance and fund other corporate activities.
- Total debt principal outstanding was approximately $764.3 million, consisting principally of the term credit facility and senior notes. The company was in compliance with its debt covenants.
- Settlement funds of $239.8 million were held in separate client-benefit accounts and were not included in ACI’s balance sheet.
Material changes versus the prior comparable period
- ORCC materially increased revenue, hosting activity, assets, goodwill, amortization, operating costs, and debt. ORCC contributed $36.6 million of Q3 revenue and $83.8 million of nine-month revenue.
- Revenue mix shifted toward software hosting and away from services and monthly license fees. Hosting revenue represented 31.3% of Q3 revenue versus 20.5% in Q3 2012.
- Operating profitability improved substantially despite acquisition-related costs, restructuring charges, and higher amortization. Nine-month operating income improved from a $1.2 million loss to $37.1 million of income.
- Interest expense increased to $7.5 million in Q3 and $17.4 million for nine months, compared with $2.6 million and $7.4 million, respectively, in the prior periods, primarily because of acquisition financing and the senior notes.
- ACI incurred approximately $8.7 million of transaction-related expenses in Q3 and $19.2 million for nine months, including personnel, facility closure, professional, and other acquisition-related costs.
- Restructuring and facility-closure actions produced $9.3 million of charges for the nine months, with $4.5 million remaining accrued at September 30, 2013 and expected to be paid over the following 12 months.
- Goodwill increased from $501.1 million at year-end 2012 to $630.7 million, primarily from ORCC and PTESA. Other intangible assets increased from $127.9 million to $190.6 million.
- ACI repurchased 1.65 million shares for $80.6 million during the first nine months. Approximately $108.3 million remained available under the repurchase authorization at September 30, 2013.
Guidance, outlook, commentary, and risks
The filing does not provide a clear numerical earnings or revenue guidance range. Management expects corporate costs to decrease as acquisition-related synergies are realized and believes cash on hand, operating cash flow, and available revolver capacity will satisfy projected liquidity needs for the next 12 months and the foreseeable future.
The reported 60-month backlog estimate was $3.112 billion at September 30, 2013, including $1.472 billion of committed backlog and $1.640 billion of renewal backlog. The estimate included approximately $699 million attributable to ORCC. The 12-month backlog estimate was $740 million, approximately 90% committed and 10% renewal. Management cautions that backlog depends on renewals, customer financial condition, project execution, foreign exchange rates, and other assumptions and is not a GAAP measure.
- Key risks include competition, customer reluctance to change vendors, project delays or cancellations, contract renewals, financial-services industry consolidation, global economic conditions, and the cyclical timing of software revenue.
- Integration of ORCC and future acquisitions could create execution risk, additional costs, and impairment risk.
- Debt service requirements and credit-facility covenants may constrain financial flexibility.
- Goodwill and intangible assets are significant and may be subject to impairment if operating performance or market conditions deteriorate.
- International operations expose ACI to foreign-currency movements, regulatory changes, tax uncertainty, and operational risks. ACI had no foreign-currency hedging transactions.
- Payment-processing activities expose the company to potential client credit and operating losses if settlement funds are advanced and cannot be recovered.
- The company reported no litigation expected to have a material adverse effect and stated that its disclosure controls were effective as of September 30, 2013.
Important facts for investors to verify
- Whether ORCC integration produces the expected revenue growth, cost synergies, and profitability improvements.
- The final purchase-price allocations and goodwill or intangible-asset valuation for ORCC and PTESA, which remained preliminary.
- The effect of the post-period OPAY acquisition, including financing, integration costs, and incremental debt or liquidity needs.
- Debt amortization, interest expense, covenant headroom, and the availability of the revolving facility.
- The sustainability and quality of the reported backlog, particularly the $1.640 billion of renewal backlog.
- The impact of the shift toward hosted revenue on gross margins, capital requirements, and recurring cash flow.
- Foreign-currency exposure, tax examinations, $15.5 million of unrecognized tax benefits, and potential settlement-account shortfalls.
- Future restructuring charges, acquisition-related expenses, amortization, and any impairment indicators affecting reported earnings.