Business Context and Reporting Period
ACI Worldwide, Inc. develops, markets, installs and supports software and services focused primarily on electronic payments for financial institutions, retailers and payment processors. The unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
The company operates through the Americas, EMEA and Asia/Pacific geographic segments and derives a majority of revenue from non-domestic operations. On March 18, 2011, ACI acquired ISD Holdings, Inc. for $19.2 million, including $2.4 million of cash acquired.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $113.4 million | $92.4 million | $217.9 million | $180.2 million |
| Operating income | $10.4 million | $4.4 million | $17.9 million | $3.5 million |
| Operating margin | 9.2% | 4.7% | 8.2% | 1.9% |
| Net income (loss) | $9.8 million | $(0.2) million | $11.4 million | $(2.2) million |
| Net margin | 8.6% | (0.2)% | 5.2% | (1.2)% |
| Diluted EPS | $0.29 | $(0.00) | $0.33 | $(0.07) |
| Operating cash flow | Not separately provided | Not separately provided | $25.5 million | $17.1 million |
Six-month revenue consisted of software license fees of $89.8 million, maintenance fees of $72.3 million, services of $34.0 million and software hosting fees of $21.8 million. Monthly license fee revenue increased substantially as certain initial license fees were recognized ratably over longer periods.
At June 30, 2011, cash and cash equivalents were $170.8 million, including $83.7 million held by foreign subsidiaries. The company had $75.0 million outstanding under its revolving credit facility and up to $75.0 million of unused borrowing capacity. Total liabilities were $334.1 million and stockholders’ equity was $279.5 million.
Investing cash outflows were $30.3 million for the six months, including $16.9 million for the ISD acquisition and $13.2 million for software, property and equipment. Financing cash flow was positive $2.8 million, compared with a $13.9 million use of cash in the prior-year period, largely because no share repurchases were made in 2011.
Material Changes Versus the Prior Comparable Period
- Three-month revenue increased $20.9 million, or 22.7%; six-month revenue increased $37.7 million, or 20.9%.
- Software license revenue increased 46.8% in the quarter and 47.9% for the six-month period. Monthly license fees rose 64.6% and 61.9%, respectively, primarily from ratable recognition of license fees.
- Operating income increased by $6.1 million in the quarter and $14.5 million for the six months. Higher revenue more than offset increased research and development, selling and marketing, and delivery costs.
- The company moved from a net loss to net income in both comparison periods. Results benefited from improved operating performance, favorable foreign-currency effects and a $3.9 million favorable adjustment to uncertain tax positions, partly offset by a $1.7 million reversal of related deferred tax assets.
- Americas and EMEA operating income improved, while Asia/Pacific remained loss-making. Asia/Pacific operating loss was $3.4 million in the quarter and $8.1 million for the six months.
- Cash from operations increased $8.4 million to $25.5 million, while investing outflows increased because of the ISD acquisition and higher capital expenditures.
Guidance, Outlook, Commentary, Risks and Unusual Items
No formal quantitative revenue or earnings guidance is provided in the filing. Management reported 60-month backlog of $1.64 billion at June 30, 2011, up from $1.61 billion at March 31, 2011 and $1.57 billion at December 31, 2010. The estimate includes $931 million of committed backlog and $709 million of renewal backlog. Twelve-month backlog was $400 million, including $302 million of monthly recurring revenue and $98 million of non-recurring revenue.
Management expects the shift from initial license fee revenue to monthly license fee revenue to continue as certain retail payment engine products mature. Key opportunities include rising electronic payment volumes, fraud and compliance requirements, smartcard and EMV deployments, regulatory changes, open-systems adoption and mobile payments.
The existing $150 million revolving credit facility matures September 29, 2011. The company was in compliance with its covenants and was negotiating a replacement facility, but stated that it could not guarantee availability or acceptable terms. Management believed existing cash and operating cash flow would meet projected liquidity needs for at least twelve months even if the facility were not successfully refinanced.
On July 26, 2011, ACI announced a proposal to acquire S1 Corporation in a stock and cash transaction. Financing commitments for a new senior secured revolving facility and term loan were obtained subject to reaching an agreement with S1. The filing does not state that the transaction had closed.
- Backlog is based partly on assumed renewals, stable pricing, constant foreign exchange rates and other estimates; actual revenue may differ materially.
- Revenue recognition is affected by customer acceptance, contract terms, product maturity, migrations and the availability of vendor-specific evidence for maintenance arrangements.
- Major risks include economic weakness, customer financial condition, financial-services consolidation, competition, product and project execution, cybersecurity, regulatory compliance, foreign-currency movements, tax uncertainties, goodwill and intangible-asset impairment, and refinancing risk.
- The company had no litigation that management believed was likely to have a material adverse effect.
- The company adopted amended multiple-deliverable revenue guidance prospectively on January 1, 2011; management reported no material impact.
Important Facts for Investors to Verify
- Whether the revolving credit facility was refinanced before its September 29, 2011 maturity and on what terms.
- The status, purchase price, financing and balance-sheet impact of the proposed S1 Corporation acquisition.
- How much of future revenue growth reflects recurring monthly license fees versus timing and ratable recognition of license revenue.
- The sustainability of the unusually low 6.7% quarterly effective tax rate and the $3.9 million uncertain-tax-position adjustment.
- Whether the Asia/Pacific operating losses improve and whether increased R&D and selling expenditures generate expected growth.
- The conversion of the $1.64 billion backlog into recognized revenue, particularly the $709 million renewal component.
- Foreign-currency exposure, the concentration of cash held offshore, and potential tax costs of repatriation.