ACI Worldwide, Inc. — 2016 Q1 Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payment software and SaaS-based solutions to financial institutions, retailers, payment processors, and billers worldwide. The filing covers the unaudited three months ended March 31, 2016, compared with the three months ended March 31, 2015. ACI reported more than 5,000 customers and payment processing capabilities supporting approximately $14 trillion in daily payment activity.
During the quarter, ACI completed the sale of its Community Financial Services assets and liabilities to Fiserv for $200.0 million and continued integrating PAY.ON, acquired on November 4, 2015.
Key financial metrics
Amounts below are in thousands, except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $226,066 | $232,817 | Down 3% |
| Operating income | $136,931 | $6,425 | Up $130,506 |
| Operating margin | 60.6% | 2.8% | Primarily affected by CFS gain |
| Net income (loss) | $89,484 | $(162) | Improved $89,646 |
| Net margin | 39.6% | Negative | Primarily affected by CFS gain |
| Diluted EPS | $0.75 | $0.00 | Improved |
| Cash flow from operations | $38,433 | $49,167 | Down $10,734 |
| Cash flow from investing | $177,096 | $(14,497) | Includes $200,000 CFS proceeds |
| Cash flow from financing | $(224,524) | $(37,637) | Debt repayment and share repurchases |
- Revenue mix: hosting $111.7 million, maintenance $57.3 million, license $37.4 million, and services $19.6 million.
- Hosting revenue increased 1%; license revenue declined 5%, maintenance declined 4%, and services declined 17%.
- Cash and cash equivalents were $94.4 million at March 31, 2016, compared with $102.2 million at December 31, 2015. Approximately $61.6 million was held by foreign subsidiaries and intended to remain permanently reinvested outside the United States.
- Total debt was approximately $771.8 million, consisting of $436.8 million under the term facility, $35.0 million under the revolving facility, and $300.0 million of 6.375% senior notes due 2020, net of debt issuance costs.
- Up to $190.0 million of revolving credit capacity was unused, subject to the credit agreement, and a $25.0 million standby letter of credit reduced the maximum available revolver capacity to $225.0 million until expiration or closure.
- The company was in compliance with all financial debt covenants. The credit facility interest rate was 2.69% at March 31, 2016.
- ACI repurchased approximately 2.8 million shares for $56.4 million during the quarter; approximately $81.9 million remained available under the repurchase authorization.
- 60-month backlog was $4.03 billion, down from $4.30 billion at December 31, 2015, primarily because of the CFS divestiture. Twelve-month backlog was $862 million, down from $918 million.
Material changes versus the prior comparable period
- The CFS divestiture produced a $152.0 million pretax gain and a preliminary $93.7 million after-tax gain. The gain substantially distorted operating income, net income, margins, and cash flow comparisons.
- CFS reduced Q1 2016 revenue by approximately $8.2 million and reduced operating expenses by approximately $8.8 million compared with the prior-year period.
- PAY.ON contributed approximately $4.2 million of revenue and generated an operating loss of approximately $3.3 million in Q1 2016.
- Excluding PAY.ON, CFS, and foreign currency effects, revenue declined approximately 3%, while operating expenses increased approximately $20.5 million, primarily because of higher personnel, research and development, maintenance, hosting, and administrative costs.
- Foreign currency effects reduced revenue by approximately $3.2 million year over year. Other non-operating results also worsened, reflecting a foreign currency loss of $0.3 million in Q1 2016 versus a $3.7 million gain in Q1 2015.
- Operating cash flow decreased to $38.4 million from $49.2 million, primarily due to the timing of customer collections and payments.
- Debt decreased substantially after the company used CFS proceeds to repay $143.0 million on the revolver and $23.8 million of term debt.
- Research and development expense rose 17% to $43.5 million, general and administrative expense rose 20% to $25.9 million, and stock-based compensation increased to $9.5 million from $3.9 million.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide specific quantitative revenue, earnings, margin, or cash-flow guidance. Management expects existing cash, operating cash flow, and available revolver capacity to satisfy projected liquidity needs for the next twelve months and foreseeable future.
- Management identified growth opportunities from increasing electronic payment volumes, real-time payments, cloud adoption, fraud and compliance requirements, mobile payments, EMV, electronic bill payment, PSD2, and global vendor sourcing.
- Management cautioned that backlog is an operating estimate based partly on assumed renewals, constant foreign exchange rates, and other assumptions; actual revenue may differ materially.
- The sale of CFS includes an 18-month transition services arrangement. ACI may face claims under the transaction agreement, transition services agreement, representations and warranties, or retained liabilities.
- ACI Worldwide Corp. faces a $43.8 million jury award plus $2.7 million of attorney fees and costs in the BHMI litigation. The company appealed, has not accrued a loss, and stated that the loss is not currently probable or reasonably estimable.
- Unrecognized tax benefits were $22.5 million at March 31, 2016, excluding $2.1 million of related interest and penalties. The company expects approximately $1.6 million may decrease within twelve months because of audit settlements and statute expirations.
- Key risks include competition, customer renewals and project delays, migration to next-generation products, PAY.ON integration, debt-service and covenant requirements, foreign exchange, cybersecurity, regulatory compliance, payment-funding exposure, goodwill and intangible-asset impairment, litigation, and global economic conditions.
- Internal controls were assessed as effective as of March 31, 2016, although PAY.ON integration materially affected internal control over financial reporting and remained in process.
Most important facts for investors to verify
- Whether the preliminary $93.7 million after-tax CFS gain changes because of post-closing adjustments.
- The outcome and potential cash impact of the BHMI appeal and the company’s decision not to accrue the judgment.
- Underlying recurring revenue and margin trends after removing CFS, PAY.ON, foreign currency, and other unusual effects.
- PAY.ON’s integration progress, revenue contribution, operating losses, and expected acquisition benefits.
- Actual customer renewals and conversion of the $4.03 billion 60-month backlog, particularly the $2.29 billion renewal component.
- Liquidity after share repurchases, scheduled debt amortization, interest-rate changes, and any future acquisitions or divestitures.
- Potential claims and obligations arising from the CFS transaction and transition services arrangement.