ACI Worldwide, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payment software, software as a service (SaaS), platform as a service (Platform), maintenance, and related services to financial institutions, retailers, billers, and payment intermediaries worldwide. The filing covers the unaudited three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Beginning in 2017, the Company reported two operating segments: ACI On Premise and ACI On Demand.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $225.7 million | $217.0 million | $697.8 million | $663.0 million |
| Operating income (loss) | $11.4 million | $(9.4) million | $(23.4) million | $100.8 million |
| Net income (loss) | $3.4 million | $(9.8) million | $(28.0) million | $62.8 million |
| Diluted EPS | $0.03 | $(0.08) | $(0.24) | $0.53 |
| Operating cash flow | Not separately provided | Not separately provided | $85.1 million | $64.9 million |
- Revenue mix: Q3 SaaS and Platform revenue was $99.8 million, license revenue was $50.0 million, maintenance revenue was $56.3 million, and services revenue was $19.6 million. For the first nine months, SaaS and Platform revenue was $312.7 million, license revenue was $163.6 million, maintenance revenue was $166.8 million, and services revenue was $54.7 million.
- Margins: Q3 gross margin, based on revenue less cost of revenue, was approximately 52.4%, compared with 53.8% in Q3 2016. Q3 operating margin was approximately 5.1%, compared with negative 4.3%, and net margin was approximately 1.5%, compared with negative 4.5%. Nine-month operating margin was approximately negative 3.4%, compared with 15.2%, and net margin was approximately negative 4.0%, compared with 9.5%.
- Balance sheet: Cash and cash equivalents were $67.9 million at September 30, 2017, compared with $75.8 million at December 31, 2016. Total assets were $1.815 billion and total stockholders’ equity was $771.3 million.
- Debt: Total debt, net of issuance costs, was $692.2 million, consisting primarily of $399.4 million under the term facility, $4.0 million under the revolving facility, and $300.0 million of 6.375% Senior Notes due August 2020. The Credit Facility interest rate was 2.99% at September 30, 2017.
- Liquidity: The Company reported $496.0 million of unused revolving credit availability, for total stated liquidity of $563.9 million including cash. Management stated that existing cash, operating cash flow, and available borrowings should satisfy projected requirements for the next twelve months and foreseeable future.
- Cash flow and investment: Nine-month operating cash flow increased 31% to $85.1 million. Investing activities used $39.9 million, including $18.6 million for property and equipment and $21.3 million for software and distribution rights. Financing activities used $57.3 million.
- Backlog: Estimated 60-month backlog was $4.075 billion at September 30, 2017, consisting of $1.908 billion of committed backlog and $2.167 billion of renewal backlog. Estimated 12-month backlog was $833 million, including $756 million of monthly recurring revenue and $77 million of non-recurring revenue.
Material changes versus the prior comparable period
- Q3 revenue increased 4%, driven primarily by a 16% increase in license revenue and a 4% increase in SaaS and Platform revenue. Maintenance declined 2% and services declined 1%.
- Nine-month revenue increased 5%; license revenue increased 43%, while SaaS and Platform revenue increased 1%. Maintenance declined 5% and services declined 13%.
- Q3 operating expenses decreased 5% excluding the prior-year CFS divestiture gain, reflecting lower research and development, selling and marketing, and general and administrative costs. Cost of revenue increased 7%, primarily due to higher payment card interchange fees and personnel costs.
- Nine-month results were materially affected by the absence of the $151.5 million pretax gain recognized in 2016 from the sale of Community Financial Services assets to Fiserv. The 2016 sale also contributed $199.5 million of investing cash inflows.
- The Company recorded $48.1 million of expense related to the BHMI legal judgment, including $46.7 million in general and administrative expense and $1.4 million in interest expense. The judgment was paid during Q3 2017, and the related appeal had been affirmed by the Nebraska Supreme Court.
- ACI On Premise remained profitable, with nine-month operating income of $181.2 million versus $120.7 million in 2016. ACI On Demand reported a nine-month operating loss of $39.7 million versus a $28.7 million loss in 2016. Corporate and other reported a $164.8 million loss, including the BHMI judgment.
- The effective tax rate was negative 193% in Q3 because the Company recorded a tax benefit despite pretax income, and 49% for the nine months. Tax rates may fluctuate substantially because of geographic mix, deferred tax valuation changes, tax examinations, and other factors.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide specific quantitative revenue, earnings, or cash flow guidance. Management highlighted continued growth in electronic payment volumes, real-time payments, cloud adoption, fraud and compliance requirements, mobile payments, and electronic bill payment as market opportunities. Management also described customer migration to SaaS and Platform offerings as a strategic focus.
- The Company expects to adopt ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method. Management expected the most significant effects to involve the timing and amount of software license revenue, capitalization and amortization of sales commissions, and expanded disclosures. The quantitative transition impact was not yet finalized.
- Management cautioned that backlog is an estimate incorporating assumed renewals and other assumptions; actual revenue may differ because of customer cancellations, renegotiations, project delays, foreign exchange movements, and changes in renewal rates.
- Principal risks include competition, customer and product migrations, contract renewals, project execution, cybersecurity and system interruptions, regulatory and privacy compliance, money transmitter requirements, foreign exchange, international operations, financial institution consolidation, litigation, goodwill or intangible asset impairment, debt covenants, debt service, tax liabilities, and the cyclical timing of revenue.
- The Company had $25.6 million of unrecognized tax benefits at September 30, 2017 and approximately $4.2 million of facility-closure liabilities.
- Goodwill was $909.7 million and no impairment was indicated based on the Company’s assessments through the reporting date. Settlement funds of $223.9 million were held for clients and excluded from the Company’s balance sheet.
- The Company remained in compliance with its debt covenants, and management reported effective disclosure controls as of September 30, 2017.
Important facts for investors to verify
- Reconcile reported nine-month profitability with the prior-year CFS gain and the 2017 BHMI judgment, including the cash and tax effects of those items.
- Assess whether growth in license revenue and SaaS and Platform revenue is recurring and sustainable, given declines in maintenance and services revenue.
- Monitor ACI On Demand losses, payment card interchange costs, and the Company’s ability to improve segment profitability.
- Review the ASC 606 adoption adjustment, including effects on license revenue timing, sales commission capitalization, deferred revenue, receivables, and retained earnings.
- Evaluate debt maturities, floating-rate exposure, covenant headroom, and refinancing requirements, particularly the 2020 Senior Notes maturity.
- Validate backlog assumptions, especially the $2.167 billion of renewal backlog, against actual renewal rates and customer retention.
- Consider liquidity concentration: approximately $50.6 million of cash was held by foreign subsidiaries and may incur U.S. tax if repatriated.
- Review outstanding litigation, indemnification exposures, tax examinations, foreign exchange sensitivity, cybersecurity risks, and potential impairment of the Company’s substantial goodwill and intangible assets.