ACI Worldwide, Inc. — Form 10-Q Summary
Business context and reporting period
ACI develops, markets, installs and supports electronic-payment software and services for financial institutions, retailers and payment processors across the Americas, EMEA and Asia/Pacific. This unaudited filing covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods.
The results include S1 Corporation from its February 13, 2012 acquisition date and North Data Uruguay S.A. from May 24, 2012. The S1 acquisition materially increased the scale of the consolidated business, assets, debt and expenses.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $149.8 million, versus $113.4 million | $287.4 million, versus $217.9 million |
| Operating income (loss) | $(7.9) million, versus $10.4 million | $(9.5) million, versus $17.9 million |
| Operating margin | (5.2%), versus 9.2% | (3.3%), versus 8.2% |
| Net income (loss) | $(4.7) million, versus $9.8 million | $(6.5) million, versus $11.4 million |
| Basic loss per share | $(0.12), versus $0.29 | $(0.17), versus $0.34 |
| Net cash from operating activities | $(18.1) million, versus $25.5 million for the comparable six-month period |
Revenue growth was primarily driven by S1. Six-month maintenance revenue increased 28.8%, services revenue increased 66.7%, and software hosting revenue increased 129.6%; software license fees declined 2.5%. Revenue mix continued shifting toward maintenance, services and hosting, while monthly license fee revenue declined as certain mature products were recognized ratably over extended periods.
Six-month operating expenses increased 48.5% to $296.9 million. The filing attributes approximately $71.4 million of the increase to S1 operations and approximately $22.6 million to acquisition-related and other one-time expenses. Corporate operating loss increased to $72.0 million from $31.3 million, reflecting acquisition expenses and higher amortization.
Balance sheet, debt and liquidity
| Balance-sheet item | June 30, 2012 | December 31, 2011 |
|---|---|---|
| Cash and cash equivalents | $149.6 million | $197.1 million |
| Total assets | $1.203 billion | $664.6 million |
| Total liabilities | $707.4 million | $347.3 million |
| Total stockholders’ equity | $495.6 million | $317.3 million |
| Debt under credit facilities | $363.8 million principal, including $15.0 million current | $75.0 million principal |
The company used $270.9 million, net of cash acquired, for the S1 acquisition and $4.5 million, net of cash acquired, for North Data. Financing included $95.0 million of additional revolver borrowings and $200.0 million of term borrowings. The credit agreement provides a $250 million revolving facility and a $200 million term facility; approximately $80 million of revolver capacity was unused at June 30, 2012, subject to agreement restrictions. The stated interest rate at June 30 was 2.25%, and the company was in compliance with its debt covenants.
Cash declined $47.5 million during the first six months. Operating cash use and acquisition spending were partly offset by $254.6 million of financing cash inflows. Approximately $87.6 million of cash was held by foreign subsidiaries and was intended to remain permanently reinvested outside the United States.
Material changes versus the prior comparable period
- S1 added $65.6 million of revenue and $12.3 million of operating losses during the six months ended June 30, 2012, including non-recurring severance and accelerated share-based compensation costs.
- The S1 transaction had a total purchase price of approximately $587.3 million, funded with cash, stock and new bank financing. Preliminary purchase accounting added $271.3 million of goodwill, $87.5 million of software and $108.7 million of customer relationships.
- Headcount was reduced by 269 employees during the first six months as part of S1 integration. Restructuring charges were $9.6 million, with $3.6 million remaining accrued at June 30.
- The company recorded a $3.0 million IBM IT-outsourcing termination fee in the second quarter. The agreement terminates January 31, 2013, with additional transition costs expected.
- Interest expense increased to $4.8 million for the first six months from $1.0 million, primarily because of acquisition-related debt.
- The company repurchased 1.1 million shares for $44.1 million during the first six months. Approximately $31.0 million remained available under the repurchase authorization at June 30.
- Sixty-month backlog was $2.306 billion, including approximately $690 million attributable to S1, compared with $1.617 billion at December 31, 2011. Twelve-month backlog was $570 million versus $424 million at year-end.
Outlook, commentary, risks and unusual items
Management reported approximately $33 million of annual S1 cost synergies achieved and expects an additional $20 million from future IT, facilities and data-center consolidations. Management expects the increased scale and cost savings to support margin expansion, but the filing does not provide formal earnings or revenue guidance.
Management believes cash on hand, operating cash flow and available revolver borrowings will satisfy projected liquidity needs for the next twelve months and foreseeable future. However, operating cash flow was negative in the period, debt increased substantially, and the company remains exposed to acquisition integration, covenant and refinancing risks.
- Revenue recognition is affected by customer go-live timing, capacity events, product maturity, deferred revenue and the absence of vendor-specific objective evidence for certain maintenance arrangements.
- Backlog estimates depend on assumed renewals, constant foreign-exchange rates and other assumptions; actual revenue may differ materially.
- Key risks include global economic weakness, competition, financial-services consolidation, customer project delays or cancellations, product defects or security breaches, international operations, foreign-currency volatility, tax exposures, goodwill and intangible-asset impairment, and failure to realize expected S1 synergies.
- Unrecognized tax benefits were $22.5 million at June 30, 2012, including $18.4 million related to S1 tax positions.
- The company recognized a $1.6 million gain on S1 shares held before the acquisition and a $1.4 million release of a foreign valuation allowance.
- The filing states that no material legal proceedings were pending and that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Progress toward the additional $20 million of planned S1 cost synergies and the timing of expected margin improvement.
- Whether operating cash flow turns positive after acquisition-related payments and restructuring expenditures.
- Debt paydown, revolver availability, interest-rate exposure and continued compliance with financial covenants.
- Completion and potential adjustments to the preliminary S1 and North Data purchase-price allocations.
- Backlog conversion, renewal rates and the effect of deferred or ratable revenue recognition on reported license revenue.
- Integration of S1 financial controls and the transition from IBM’s outsourced IT environment, including the January 2013 termination date.
- Potential changes in uncertain tax positions, foreign-currency exposure and goodwill or intangible-asset impairment risk.