ACI Worldwide, Inc. — Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
ACI Worldwide provides electronic payment, transaction banking, fraud detection, mobile, branch and voice banking, and related hosted services to approximately 1,650 financial institutions, retailers and processors globally. The filing covers the unaudited three months ended March 31, 2013, compared with the three months ended March 31, 2012.
The quarter includes results from the March 11, 2013 acquisition of Online Resources Corporation (ORCC) and the first-quarter acquisitions of PTESA entities and assets in Venezuela, Ecuador and Colombia.
Financial Performance and Key Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $162.0 million | $137.6 million | Up 17.7% |
| Operating loss | $4.0 million | $1.6 million | Operating margin declined to -2.5% from -1.2% |
| Loss before taxes | $4.6 million | $2.4 million | Higher loss |
| Income tax benefit | $2.4 million | $0.6 million | Effective benefit rate of 53.0% versus 23.3% |
| Net loss | $2.2 million | $1.8 million | Net margin remained approximately -1.3% |
| Basic and diluted loss per share | $0.05 loss | $0.05 loss | No change |
| Net cash from operating activities | $34.9 million | $(12.6) million | Improved by $47.5 million |
- Revenue mix shifted toward recurring and hosted offerings: maintenance revenue was $58.6 million, or 36.2% of revenue, and software hosting revenue was $38.1 million, or 23.5%.
- Software license revenue declined to $41.4 million from $50.9 million, while maintenance revenue increased 34.1% and hosting revenue increased 89.2%.
- Total expenses were $166.0 million, or 102.5% of revenue, versus $139.2 million, or 101.2%, in the prior-year quarter.
- Cash and cash equivalents were $112.5 million at March 31, 2013, compared with $76.3 million at December 31, 2012. Approximately $66.4 million was held by foreign subsidiaries and is intended to remain permanently reinvested outside the United States.
- Total assets were $1.56 billion and stockholders’ equity was $525.7 million at March 31, 2013. Goodwill was $603.7 million and other intangible assets were $232.1 million.
- Investing cash flow was $(273.2) million, including $264.2 million for acquisitions and $9.0 million for property, equipment, software and distribution rights.
- Financing cash flow was $278.8 million, primarily reflecting $300.0 million of new term borrowings used to fund the ORCC acquisition.
Debt and Liquidity
- Term Credit Facility borrowings were $482.5 million and revolving credit borrowings were $188.0 million, for total outstanding credit-facility debt of $670.5 million.
- Up to $62.0 million remained available under the $250.0 million revolving facility. The facilities mature on November 10, 2016 and bear floating-rate interest; the rate in effect at March 31, 2013 was 2.46%.
- The Company was in compliance with its leverage, fixed-charge coverage and other debt covenants during the quarter.
- Contractual obligations presented in the filing totaled $528.9 million, including term debt, estimated term-loan interest and operating leases. The filing does not provide a comparable total debt balance as of March 31, 2012 in the summarized balance-sheet data.
- Management stated that cash on hand, operating cash flow and available revolving borrowings should satisfy projected liquidity requirements for the next twelve months and the foreseeable future.
Material Changes Versus the Prior Comparable Period
- ORCC contributed approximately $8.8 million of revenue and $1.1 million of operating loss during the post-acquisition period. ORCC increased Americas backlog by approximately $660 million over five years and contributed approximately $138 million to twelve-month backlog.
- ORCC was acquired for $260.1 million, funded primarily with new term debt. PTESA was acquired for $14.2 million in cash. Purchase-price allocations for both transactions remained preliminary and may change during the applicable one-year allocation periods.
- Reported revenue growth was partly acquisition-related and also reflected the full-quarter inclusion of S1, acquired in February 2012. Management attributed revenue growth principally to maintenance and hosting services, while initial license and capacity-related revenue declined.
- Operating costs increased faster than revenue, driven by the full-quarter inclusion of S1, ORCC costs, higher hosting costs, research and development, selling and marketing, and acquisition-related amortization.
- General and administrative expense declined 27.1% to $25.0 million, partly because prior-year S1 acquisition costs were higher. Q1 2013 included approximately $6.6 million of acquisition-related one-time expenses, including $4.7 million of ORCC professional and transaction costs and approximately $1.9 million of personnel-related charges.
- Restructuring and termination costs were approximately $1.6 million in Q1 2013, compared with approximately $6.2 million in Q1 2012. The remaining restructuring liability at March 31, 2013 was $2.9 million.
- Sixty-month backlog increased to $3.06 billion from $2.42 billion, and twelve-month backlog increased to $743 million from $596 million. These estimates include assumed renewals and are not GAAP measures.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide specific quantitative revenue, earnings or cash-flow guidance. Management highlighted opportunities from increasing electronic payment volumes, real-time delivery, hosted and cloud services, fraud and compliance requirements, EMV adoption, SEPA-related changes, mobile payments and financial-institution consolidation.
- Management expects corporate costs to decrease as acquisition-related synergies are realized, but integration of ORCC and other acquisitions remains a significant execution matter.
- Key risks include competition, customer reluctance to change vendors, product migration and implementation delays, contract renewals, backlog estimation errors, economic and credit-market conditions, debt-service requirements, goodwill and intangible-asset impairment, foreign currency exposure, cybersecurity and privacy risks, regulatory compliance, tax uncertainties and international operations.
- Settlement funds of approximately $181.1 million were held for clients in separate accounts and were not included on the Company’s balance sheet. Timing differences in settlement transactions may expose the Company to client credit and operating risk.
- The effective tax benefit was affected by lower foreign tax rates, a $1.4 million benefit related to the American Taxpayer Relief Act, nondeductible acquisition expenses and an increased valuation allowance against foreign tax credits.
- Accumulated other comprehensive loss increased to $24.5 million, primarily due to a $10.5 million foreign-currency translation loss during the quarter.
- No legal proceeding was identified as likely to have a material adverse effect. The Company disclosed customer indemnification obligations, including certain intellectual-property claims, but did not expect material payments beyond accrued amounts.
- Management concluded that disclosure controls were effective as of March 31, 2013. ORCC’s controls were being integrated and could materially affect internal control over financial reporting during the integration period.
Important Facts for Investors to Verify
- Whether ORCC integration delivers expected revenue, cost synergies and strategic benefits, given its preliminary purchase-price allocation and first-quarter operating loss.
- The sustainability and quality of backlog, particularly the $1.58 billion renewal component of the $3.06 billion sixty-month estimate.
- Debt reduction capacity, covenant headroom, floating-rate exposure and the scheduled term-loan payments through 2016.
- Whether recurring maintenance and hosting growth can offset weaker initial license-fee revenue and support improved operating margins.
- Potential future adjustments to ORCC and PTESA goodwill, software, customer-relationship intangibles, deferred taxes and other purchase-price allocation items.
- Foreign currency, tax, settlement-account, cybersecurity, customer indemnification and payment-processing exposures.
- The filing’s statement that first-quarter results are not necessarily indicative of future results and that no specific forward guidance was provided.