ACI WORLDWIDE, INC. annual report, FY2010

ACI Worldwide, Inc. 2010 Form 10-K Summary

Business context and reporting period

ACI develops, markets, installs and supports electronic-payments software and related services for financial institutions, retailers and payment processors. Its principal product areas include retail and wholesale payment processing, fraud and risk management, back-office services, online banking and hosted or on-demand solutions. The company reports through the Americas, EMEA and Asia/Pacific segments and had approximately 2,134 employees and 709 customers in 81 countries at December 31, 2010.

This Form 10-K covers the fiscal year ended December 31, 2010. The filing also provides unaudited quarterly data, including the quarter ended December 31, 2010.

Financial performance and key metrics

Metric	2010	2009	Change
Revenue	$418.4 million	$405.8 million	Up 3.1%
Operating income	$53.6 million	$41.6 million	Up 29.1%
Operating margin	12.8%	10.2%	Up 2.6 percentage points
Net income	$27.2 million	$19.6 million	Up 38.6%
Net margin	6.5%	4.8%	Up 1.7 percentage points
Diluted EPS	$0.80	$0.57	Up $0.23
Cash flow from operations	$81.3 million	$44.2 million	Up $37.1 million

Revenue mix consisted of software license fees of $164.6 million, maintenance fees of $135.5 million, services of $74.0 million and software hosting fees of $44.4 million.
Monthly license fees increased 44.2% to $102.8 million, while initial license fees declined 25.8% to $61.7 million, reflecting increased ratable recognition as certain legacy products matured.
EMEA revenue increased 9.8% to $150.5 million; Americas revenue declined 0.6% to $221.6 million; and Asia/Pacific revenue increased 1.3% to $46.3 million.
Segment operating income was $49.2 million in the Americas, $21.3 million in EMEA and a loss of $16.9 million in Asia/Pacific.
Research and development expense was $74.1 million, or 17.7% of revenue, compared with $77.5 million, or 19.1%, in 2009.
Approximately 46% of revenue continued to derive from the BASE24 product line, excluding BASE24-eps.

Balance sheet, debt and liquidity

Cash and cash equivalents were $171.3 million at December 31, 2010, compared with $125.9 million at December 31, 2009.
Total assets were $601.5 million and stockholders’ equity was $255.6 million.
The company had $75.0 million outstanding under its revolving credit facility, classified as current because it matured on September 29, 2011. Up to $75.0 million of unused borrowing capacity was reported, subject to facility terms.
The credit facility carried an interest rate of 1.02% at year-end. ACI was in compliance with its debt covenants at December 31, 2010 and throughout 2009 and 2010.
Management stated that cash on hand, operating cash flow and available borrowings provided sufficient liquidity for at least the following 12 months, but replacement financing was required or expected before the facility maturity.
Contractual obligations totaled $190.1 million, including $78.3 million of operating leases, $75.0 million of credit-facility principal and $33.0 million of minimum IBM outsourcing commitments.
The company repurchased approximately 1.0 million shares for $18.6 million during 2010. Approximately $22.9 million remained authorized under the $210 million repurchase program.

Material changes versus the prior comparable period

Operating profitability improved substantially as revenue increased and general and administrative expense declined 11.5%, although selling and marketing expense increased 14.2%.
Cash flow from operations rose to $81.3 million, primarily due to stronger receivables collections and higher net income.
Services revenue declined 7.7%, mainly because of fewer and smaller EMEA service engagements after implementation projects were completed.
Software hosting revenue increased 10.4%, supported by adoption of hosted and on-demand offerings.
The company separately disclosed software hosting fees in 2010 and reclassified prior-period amounts for comparability; the change did not affect total revenue or net income.
Deferred revenue increased to $153.0 million, including current and noncurrent amounts, from $137.9 million at year-end 2009.
The allowance for doubtful accounts increased to $5.7 million from $2.7 million, including $3.1 million of 2010 provision expense.
Goodwill remained significant at $203.9 million, and no goodwill impairment was recorded. Other intangible assets declined to $20.4 million from $26.9 million.
Interest-rate swaps terminated in October 2010; no derivative liability remained at year-end.

Guidance, outlook, commentary and risks

No formal quantitative revenue or earnings guidance is provided in the filing. Management described electronic-payment volume growth, open-systems adoption, fraud and compliance requirements, smartcard adoption, SEPA initiatives and payment convergence as growth opportunities.
Management expects the shift from initial license fees to monthly license fees and ratable recognition to continue as legacy retail payment products mature and customers migrate toward BASE24-eps and other newer products.
The 60-month backlog estimate was $1.566 billion at December 31, 2010, up from $1.512 billion at December 31, 2009. It included $857 million of committed backlog and $709 million based on assumed renewals. Backlog is a non-GAAP operating estimate dependent on renewals, foreign exchange, customer behavior and other assumptions.
The IBM alliance included $22.6 million of remaining alliance agreement liability at year-end, of which $20.7 million was refundable subject to future milestones. ACI incurred $9.9 million of technical-enablement costs during 2010.
The seven-year IBM IT outsourcing agreement is expected to require approximately $116 million of service fees and project costs over its initial term. Management estimated total operating-cost savings of $25 million to $30 million over the contract term, but actual savings may differ.
Key risks include the September 2011 credit-facility maturity and refinancing availability, financial-sector consolidation and customer failures, cyclical and back-end-loaded revenue patterns, foreign-currency exposure without hedging, competitive pressure, product migration and acceptance risk, project delays, cybersecurity and system outages, intellectual-property claims, goodwill impairment, tax examinations and uncertain tax positions.
The company previously restated certain 2008 quarterly financial statements for $1.9 million of improperly recognized revenue. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2010, and Deloitte issued unqualified audit opinions.
Two foreign subsidiaries were subject to tax examinations; the company reported $8.4 million of unrecognized tax benefits and $2.2 million of accrued interest and penalties at year-end.

Important facts for investors to verify

Confirm refinancing or repayment of the $75.0 million credit facility that matured on September 29, 2011, including resulting interest costs and covenant terms.
Assess whether the Asia/Pacific operating loss of $16.9 million represents a temporary investment phase or a continuing profitability issue.
Monitor the conversion of initial license revenue into recurring monthly license revenue and its effect on reported growth, cash generation and deferred revenue.
Evaluate the sustainability of the $81.3 million operating cash flow, particularly receivables collections and the increased doubtful-account allowance.
Validate backlog assumptions, especially renewal rates, customer migrations, foreign-exchange assumptions and the distinction between committed and renewal backlog.
Review the $20.7 million refundable IBM alliance balance, technical-enablement milestones and the economics of the IBM outsourcing agreement.
Consider concentration in BASE24 and the dependence on legacy-product renewals, HP NonStop infrastructure and successful adoption of BASE24-eps.
Review tax examinations, unrecognized tax benefits, goodwill and intangible-asset balances, and potential impairment or additional tax charges.