ACI Worldwide, Inc. — Q1 2011 Form 10-Q Summary
Business Context and Reporting Period
ACI Worldwide develops, markets, installs and supports electronic-payment software and services for financial institutions, retailers and payment processors. The unaudited filing covers the three months ended March 31, 2011, compared with the three months ended March 31, 2010. The company reports through the Americas, EMEA and Asia/Pacific regions.
Financial Performance and Position
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $104.5 million | $87.7 million | Up 19.1% |
| Software license revenue | $43.7 million | $29.3 million | Up 49.1% |
| Maintenance revenue | $35.1 million | $33.4 million | Up 4.9% |
| Services revenue | $15.4 million | $14.6 million | Up 5.2% |
| Software hosting revenue | $10.4 million | $10.4 million | Approximately flat |
| Operating income | $7.5 million | $(0.9) million | Improved by $8.4 million |
| Operating margin | 7.2% | (1.0%) | Improved 8.2 percentage points |
| Net income | $1.6 million | $(2.1) million | Improved by $3.7 million |
| Diluted earnings per share | $0.05 | $(0.06) | Improved |
| Cash flow from operations | $17.9 million | $13.6 million | Up $4.4 million |
Net income represented a 1.6% net margin, compared with a negative 2.4% margin in the prior-year quarter. The effective tax rate was unusually high at 76.1%, driven by limitations on recognizing tax benefits in certain jurisdictions and tax expense related to intellectual-property transfers.
At March 31, 2011, cash and cash equivalents were $168.9 million, including $89.2 million held by foreign subsidiaries intended to remain permanently reinvested outside the United States. Total assets were $615.5 million and stockholders’ equity was $265.7 million.
Debt included $75.0 million outstanding under the revolving credit facility, with up to $75.0 million of additional borrowing capacity reported as available. The facility carried an interest rate of 1.01%, matured on September 29, 2011, and was classified as current. Management stated that the company was in compliance with its debt covenants and expected to secure a replacement facility before maturity.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by software license fees, particularly monthly license fees, which increased 59.2% to $31.2 million. The company attributed this partly to more initial license fees being recognized ratably as monthly license revenue as certain retail payment products matured.
- Americas revenue increased to $52.3 million from $46.3 million, while EMEA revenue increased to $42.1 million from $31.9 million. Asia/Pacific revenue increased modestly to $10.1 million from $9.5 million.
- Operating income improved substantially despite higher research and development expense, selling and marketing expense, and service delivery costs. General and administrative expense declined by 6.3%.
- Research and development expense increased 25.7% to $23.1 million, and selling and marketing expense increased 14.5% to $19.3 million.
- Operating cash flow increased to $17.9 million, but investing cash usage increased to $24.0 million, primarily because of the ISD acquisition.
- Cash declined by $2.4 million during the quarter to $168.9 million, after $16.7 million of net cash paid for the ISD acquisition, capital expenditures and other investments.
- The company adopted amended revenue-recognition guidance for multiple-deliverable arrangements prospectively on January 1, 2011. Management stated that the adoption had no material impact.
Acquisition, Outlook, Risks and Unusual Items
On March 18, 2011, ACI acquired ISD Holdings, Inc. and its subsidiary ISD Corporation for an aggregate purchase price of $19.1 million, including $2.4 million of cash acquired. The acquisition added point-of-sale transaction management, security and routing products. The preliminary allocation included $11.6 million of goodwill and $6.6 million of identifiable intangible assets. Pro forma results were not presented because management considered them immaterial.
Reported 60-month backlog increased to $1.613 billion at March 31, 2011, from $1.566 billion at December 31, 2010. Committed backlog was $890 million and renewal backlog was $723 million. Twelve-month backlog increased to $391 million from $381 million. These are operating estimates based partly on assumed renewals, stable pricing and foreign-exchange rates and are not GAAP measures.
The filing does not provide formal full-year revenue or earnings guidance. Management expected existing cash, operating cash flow and available borrowing capacity to satisfy liquidity needs for at least the next twelve months, including if the existing facility matured before a replacement was completed. However, failure to obtain replacement financing could cause outstanding borrowings to become due.
- Key business risks include economic weakness, customer solvency, financial-services consolidation, competition, product maturity and migration to next-generation products.
- Revenue timing is exposed to contract terms, customer acceptance, project delays, capacity overages, renewal assumptions and complex software revenue-recognition rules.
- International operations create foreign-currency, tax and geopolitical exposure. The quarter included a $0.2 million net foreign-currency loss.
- The IBM alliance liability was $22.3 million at March 31, 2011, including $20.7 million classified as noncurrent. Amounts are refundable unless specified future milestones are achieved.
- Unrecognized tax benefits were $8.4 million, plus $2.3 million of related interest and penalties. Management believed approximately $5.9 million could decrease within twelve months through audit settlements and statute expirations.
- No legal proceeding was identified that management believed would likely have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether the replacement credit facility was completed before the September 29, 2011 maturity date and on what terms.
- Whether the sharp increase in monthly license revenue represents sustainable recurring growth or primarily reflects revenue-recognition shifts from initial license fees.
- The integration, revenue contribution and profitability of the ISD acquisition.
- The actual conversion of the reported backlog, particularly the $723 million renewal component, into recognized revenue and cash flow.
- The sustainability of operating-margin improvement while research and development and selling costs remain elevated.
- The resolution of the $8.4 million of unrecognized tax benefits and the company’s high quarterly effective tax rate.
- The status and potential repayment requirements of the $22.3 million IBM alliance liability.