ACI Worldwide, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides digital-payment software and services to banks, merchants, and billers globally. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022. ACI reported approximately 6,000 customers and payment processing activity of approximately $14 trillion per day.
The company operates through Banks, Merchants, and Billers segments. It completed the divestiture of its corporate online banking solutions business to One Equity Partners on September 1, 2022, and continues to provide transition services during a migration period expected not to exceed 18 months.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $289.7 million | $323.1 million | Down 10% |
| SaaS and PaaS revenue | $204.9 million | $194.6 million | Up 5% |
| License revenue | $18.3 million | $60.3 million | Down 70% |
| Maintenance revenue | $50.1 million | $51.4 million | Down 3% |
| Services revenue | $16.3 million | $16.8 million | Down 3% |
| Operating income (loss) | $(24.4) million | $27.7 million | Declined $52.0 million |
| Net income (loss) | $(32.3) million | $15.5 million | Declined $47.8 million |
| Diluted earnings (loss) per share | $(0.30) | $0.13 | Declined $0.43 |
| Operating cash flow | $40.1 million | $28.9 million | Up $11.2 million |
Total revenue represented 71% SaaS and PaaS, 6% license, 17% maintenance, and 6% services. Operating expenses were $314.0 million, or 109% of revenue, compared with 92% in the prior-year quarter. The resulting operating margin was negative 8.4%, compared with positive 8.6% in Q1 2022. Net loss margin was approximately negative 11.2%, compared with positive 4.8%.
Cost of revenue increased 7% to $178.6 million despite the divestiture and foreign-currency effects. Higher payment-card interchange and processing fees, personnel costs, and cloud-computing fees were the principal drivers. Interest expense increased 73% to $18.9 million, primarily because of higher interest rates. Other, net changed from $2.3 million of income to $3.4 million of expense, primarily reflecting foreign-currency transaction effects.
Segment performance
| Segment | Q1 2023 revenue | Q1 2022 revenue | Q1 2023 Segment Adjusted EBITDA | Q1 2022 Segment Adjusted EBITDA |
|---|---|---|---|---|
| Banks | $88.0 million | $132.2 million | $24.7 million | $64.7 million |
| Merchants | $34.8 million | $41.0 million | $6.5 million | $14.7 million |
| Billers | $166.9 million | $149.9 million | $29.6 million | $26.4 million |
Banks revenue and profitability were substantially affected by the divestiture and lower license revenue. Merchants declined because of lower revenue and higher cash operating expenses. Billers grew revenue and Segment Adjusted EBITDA, although higher payment-card interchange and processing costs offset part of the benefit.
Cash flow, debt, and liquidity
- Cash and cash equivalents were $142.4 million at March 31, 2023, compared with $125.0 million at December 31, 2022. Including settlement deposits, cash was $228.2 million.
- Operating activities provided $40.1 million; investing activities used $8.7 million, including $2.3 million for property and equipment and $6.5 million for software and distribution rights; financing activities used $20.3 million.
- Total debt was $1.081 billion, consisting of $578.1 million of term loans, $110.0 million drawn under the revolving facility, and $400.0 million of 5.750% senior notes due 2026.
- The Credit Facility carried an interest rate of 6.90% at March 31, 2023. The company had approximately $388.4 million of unused revolving capacity and $75.0 million available under an uncommitted overdraft facility.
- Total stated liquidity was $530.9 million, comprising cash of $142.4 million and revolving-facility availability of $388.4 million.
- Debt maturities include $55.3 million during the remainder of 2023, $632.8 million in 2024, and $400.0 million in 2026. The company reported compliance with all financial debt covenants.
Material changes versus the prior comparable period
- Revenue decreased $33.4 million, or 10%. Management attributed $12.4 million of the decline to the divestiture and $4.9 million to foreign-currency movements. Excluding those effects, revenue declined approximately 5%.
- SaaS and PaaS revenue increased 5%, or approximately 10% excluding the divestiture and foreign-currency effects, driven by customer go-lives and higher transaction volumes.
- License revenue fell 70%, primarily because of license-renewal timing and the relative size of new license and capacity events.
- Operating expenses increased $18.6 million, or 6%, and included $8.3 million of cost-reduction strategy expenses, $2.0 million of transaction-related expenses, $1.1 million related to the CEO transition, and $1.0 million of European data-center migration costs.
- Interest expense rose $8.0 million because of higher rates, increasing pressure on earnings and cash flow.
- Operating cash flow improved despite the net loss, primarily because of stronger customer collections on higher prior-year-end receivables.
- The company did not repurchase shares under its public repurchase program during the quarter. The board authorized up to $200.0 million of remaining repurchases.
Guidance, outlook, commentary, and risks
The filing does not provide specific quantitative full-year revenue, earnings, or cash-flow guidance. Management stated that it expects operating needs, debt service, capital expenditures, acquisitions, and lease payments to be funded by operating cash flow, cash, and available revolver capacity over the next 12 months and beyond.
Management identified growth opportunities from increasing digital-payment volumes, real-time payments, cloud adoption, fraud and compliance solutions, omni-commerce, and Request for Payment services. The filing also reports $6.370 billion of estimated 60-month backlog as of March 31, 2023, including $2.266 billion of committed backlog and $4.104 billion of renewal backlog. Approximately $651.4 million of revenue allocated to remaining performance obligations was disclosed, with approximately 50% expected to be recognized within 12 months.
- Inflation has affected Biller-segment interchange costs.
- Floating-rate debt exposes the company to higher interest expense; management estimated that a hypothetical 10% change in effective rates would change annual interest expense on Credit Facility borrowings by approximately $4.7 million.
- Foreign-currency movements reduced reported revenue and expenses, and the company does not use foreign-currency hedging transactions.
- The company faces class-action and regulatory matters arising from the inadvertent transmission of mortgage-related ACH files in 2021. A proposed settlement includes a $5.0 million fund, attorneys’ fees and administrative costs, plus up to an additional $1.5 million under certain circumstances, subject to court approval and other conditions.
- Investigations by the CFPB, state attorneys general, and money-transmission regulators could result in litigation, penalties, damages, or costly remedies. The company has asserted related insurance claims, but the available coverage is uncertain.
- Goodwill totaled $1.2 billion. Management reported no impairment indicators after the October 1, 2022 annual impairment test.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2023, and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the sharp decline in license revenue was primarily timing-related and whether license activity normalizes in subsequent quarters.
- Progress in restoring Banks and Merchants segment growth while sustaining Billers growth amid higher interchange costs.
- Effects of higher interest rates on cash flow, debt-service costs, and covenant headroom, particularly ahead of the 2024 maturities.
- Actual conversion, timing, and renewal rates associated with the $6.370 billion backlog and $651.4 million of remaining performance obligations.
- Final resolution, insurance recovery, and potential financial or regulatory exposure from the ACH transmission matter.
- Cash-flow performance excluding favorable working-capital collection timing and the company’s future use of the $200.0 million share-repurchase authorization.