ACI Worldwide, Inc. — Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payments, banking, fraud prevention, bill payment, and hosted payment solutions to more than 5,600 financial institutions, retailers, billers, and processors. The filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Results are unaudited. The 2015 results include the August 2014 acquisition of Retail Decisions (ReD).
Key financial metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $265.8 million | $254.8 million | $498.6 million | $476.3 million |
| Operating income | $23.7 million | $26.7 million | $30.1 million | $27.0 million |
| Operating margin | 8.9% | 10.5% | 6.0% | 5.7% |
| Net income | $27.1 million | $11.2 million | $26.9 million | $5.5 million |
| Diluted EPS | $0.23 | $0.10 | $0.23 | $0.05 |
| Net margin | 10.2% | 4.4% | 5.4% | 1.1% |
| Operating cash flow | Not separately provided | Not separately provided | $49.9 million | $48.3 million |
Revenue mix for the first six months was license $106.7 million, maintenance $119.6 million, services $46.6 million, and hosting $225.7 million. Hosting represented 45% of revenue and increased 9%; license revenue increased 10%, while maintenance declined 4% and services declined 2%.
At June 30, 2015, cash and cash equivalents were $50.4 million, down from $77.3 million at December 31, 2014. Total debt was $808.2 million, consisting of $508.2 million under the term credit facility and $300.0 million of 6.375% senior notes due 2020. Up to $250.0 million was available under the revolving facility, subject to borrowing conditions. The company was in compliance with its debt covenants.
Current assets were $381.5 million versus current liabilities of $368.3 million. Off-balance-sheet client settlement funds totaled $223.4 million. The company reported $49.9 million of operating cash flow, $6.4 million of investing cash flow, and $(81.3) million of financing cash flow during the first six months.
Material changes versus the prior comparable period
- Three-month revenue increased 4%, while six-month revenue increased 5%.
- Hosting growth was primarily attributable to ReD, which contributed $9.8 million of second-quarter revenue and $20.1 million of first-half revenue.
- Initial license revenue increased 26% in the second quarter and 38% in the first half, mainly due to the timing and size of capacity-related events.
- Monthly license revenue declined 19% in the quarter and 20% in the first half, partly because certain large projects had generated cumulative or ratable revenue in 2014 that did not recur.
- Operating income declined in the quarter despite higher revenue because operating expenses increased 6%, including higher ReD costs, interchange fees, selling and marketing expense, and amortization. First-half operating income increased modestly.
- Net income benefited from a $24.5 million realized gain on the sale of all Yodlee stock holdings. This nonrecurring gain materially increased pretax income and net income compared with 2014.
- Interest expense increased $1.2 million in the quarter and $2.9 million in the first half because of additional debt used to fund the ReD acquisition.
- The company repaid $44.0 million net under the revolving facility and $39.7 million of term debt during the first six months. No shares were repurchased under the stock repurchase program, which had approximately $138.3 million remaining authorization at June 30, 2015.
- Foreign-currency movements reduced reported first-half revenue by approximately $14.2 million, according to management.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear quantitative revenue, earnings, or cash-flow guidance range. Management cited continued growth in electronic payment volumes, real-time payments, cloud adoption, fraud prevention, regulatory compliance, mobile payments, and payment-system convergence as market opportunities.
Management expects existing cash, operating cash flow, and available revolver capacity to satisfy projected liquidity needs for the next twelve months and the foreseeable future. However, $41.2 million of cash was held by foreign subsidiaries and management intends to permanently reinvest those funds outside the United States.
ReD’s purchase-price allocation remained preliminary and may change during the permitted allocation period. ReD generated an estimated operating loss of $2.1 million in the second quarter and $3.8 million in the first half, including severance related to integration activities. The company recorded approximately $1.3 million of termination costs during the first half as part of acquisition integration.
Reported earnings were affected by the $24.5 million Yodlee gain, foreign-currency losses, higher debt service costs, acquisition-related expenses, and increased amortization. Backlog was estimated at $4.15 billion over 60 months, including $1.71 billion of committed backlog and $2.44 billion of assumed renewal backlog; management cautioned that backlog is based on assumptions and is not a GAAP measure.
Principal risks include competition, customer project delays or cancellations, contract renewals, customer consolidation, migration to next-generation products, ReD integration, debt service and covenant restrictions, goodwill and intangible-asset impairment, foreign-currency exposure, cybersecurity and system interruptions, regulatory compliance, tax uncertainties, litigation, and the cyclical timing of license revenue. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- How much of earnings growth remains after excluding the $24.5 million Yodlee gain.
- Whether initial license and capacity-related revenue remains sustainable given the timing-sensitive nature of these transactions.
- ReD’s ongoing revenue contribution, operating losses, integration costs, and final purchase-price allocation.
- Cash generation relative to scheduled debt maturities, interest expense, and the $95.3 million current portion of term debt.
- The proportion of the $4.15 billion backlog dependent on assumed renewals rather than committed contracts.
- Exposure to foreign-currency movements, particularly in EMEA, and the absence of foreign-currency hedging transactions.
- Potential changes in unrecognized tax benefits, reported at $24.3 million at June 30, 2015, and related audit outcomes.