ACI Worldwide, Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
ACI Worldwide develops and provides electronic-payment software and services for banks, financial intermediaries, merchants, and billers. Its offerings include on-premise software and cloud-based SaaS/PaaS solutions across retail payments, real-time payments, merchant payments, payments intelligence, digital channels, and bill payments.
The filing covers the fiscal year ended December 31, 2019, with quarterly information for the quarter ended December 31, 2019. ACI served more than 5,100 customers in over 90 countries and employed 4,018 people at year-end. The company acquired Speedpay on May 9, 2019.
Financial Performance and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1,258.3 million | $1,009.8 million | +25% |
| SaaS/PaaS revenue | $677.7 million | $433.0 million | +56% |
| License revenue | $288.3 million | $280.6 million | +3% |
| Maintenance revenue | $213.4 million | $219.1 million | -3% |
| Services revenue | $79.0 million | $77.1 million | +2% |
| Operating income | $123.8 million | $125.9 million | -2% |
| Net income | $67.1 million | $68.9 million | -3% |
| Diluted EPS | $0.57 | $0.59 | -3% |
| Operating cash flow | $137.6 million | $183.9 million | -25% |
- Operating margin was approximately 9.8%, compared with 12.5% in 2018; net margin was approximately 5.3%, compared with 6.8%.
- Revenue growth was substantially acquisition-driven: Speedpay contributed approximately $227.7 million of 2019 revenue and $24.9 million of operating income. Excluding Speedpay and foreign-currency effects, revenue increased approximately 3%.
- ACI On Premise revenue was $579.3 million, compared with $576.8 million, while Segment Adjusted EBITDA declined to $321.3 million from $323.9 million.
- ACI On Demand revenue increased to $679.0 million from $433.0 million, and Segment Adjusted EBITDA increased to $66.5 million from $12.0 million, primarily due to Speedpay.
- Cash flow from investing activities was negative $830.5 million, including approximately $753.9 million for Speedpay, $18.5 million for an Indian payment-technology investment, $7.0 million for technology assets, and $48.0 million for property, equipment, software, and distribution rights.
- Cash and cash equivalents were $121.4 million at year-end, compared with $148.5 million in 2018. Total reported liquidity was $382.4 million, consisting of cash and $261.0 million of unused revolver capacity.
Debt, Liquidity, and Capital Allocation
- Total debt was approximately $1.4 billion before debt issuance costs, including $756.1 million of term loans, $239.0 million drawn on the revolving facility, and $400.0 million of 5.750% senior notes due 2026.
- The Credit Facility matures April 5, 2024; the senior notes mature August 15, 2026. The Credit Facility interest rate was 4.04% at December 31, 2019.
- Management stated that the company was in compliance with its debt covenants at year-end and throughout 2019. The company remains exposed to floating-rate risk and the transition away from LIBOR.
- ACI repurchased 1.23 million shares for $35.6 million during 2019 and had approximately $141.0 million remaining under its authorization. The company has never paid cash dividends and does not currently anticipate doing so.
Material Changes Versus the Prior Comparable Period
- The Speedpay acquisition materially increased ACI On Demand scale, bill-payment exposure, revenue, assets, goodwill, intangible assets, and leverage. The purchase price was $754.1 million in cash, funded with new term debt, revolver borrowings, and cash on hand.
- Cost of revenue increased 43%, including higher payment-card interchange and processing fees. General and administrative expense increased 26%, including approximately $24.4 million of Speedpay transaction and integration expenses.
- Interest expense increased 54% to $64.0 million because of higher debt balances.
- The effective tax rate declined to approximately 7% from 25%, primarily reflecting the release of a $15.5 million valuation allowance on U.S. foreign tax credits following the Speedpay acquisition and increased expected taxable income.
- Goodwill increased to $1.28 billion from $909.7 million, and net intangible assets increased to $357.0 million from $168.1 million. Management reported that all reporting units substantially exceeded their goodwill carrying values in impairment testing.
- ACI adopted ASC 842 leases in 2019, recognizing approximately $63.3 million of right-of-use assets and $68.6 million of operating lease liabilities at adoption.
- Management concluded that disclosure controls and internal control over financial reporting were effective. However, the assessment excluded Speedpay, which represented approximately 18% of consolidated revenue and 16% of consolidated net income for 2019 while integration was ongoing.
- On February 18, 2020, ACI announced Odilon Almeida as its new President and Chief Executive Officer, effective March 9, 2020.
Quarterly Fourth-Quarter Results
| Metric | Q4 2019 | Q4 2018 |
|---|---|---|
| Revenue | $399.9 million | $319.9 million |
| Operating income | $102.4 million | $116.4 million |
| Net income | $55.5 million | $87.7 million |
| Diluted EPS | $0.47 | $0.74 |
Results remain seasonally concentrated in the third and fourth quarters. The filing does not provide a clear 2020 revenue or earnings guidance range.
Outlook, Management Commentary, Risks, and Unusual Items
- Management identified growth opportunities from increasing electronic-payment volumes, real-time payments, cloud adoption, fraud prevention, digital channels, electronic bill payment, and regulatory initiatives such as PSD2 and SEPA.
- The company reported a 60-month backlog estimate of $5.83 billion at December 31, 2019, including $3.66 billion of renewal backlog. This is a non-GAAP operating measure containing assumptions about renewals, foreign exchange, pricing, and contract performance; it is not a guarantee of future revenue.
- Revenue allocated to remaining performance obligations was $678.0 million, with approximately 48% expected to be recognized over the next 12 months.
- Principal risks include intense competition, rapid technology change, dependence on financial-services customers, customer consolidation and renewal risk, project delays, cybersecurity and service outages, privacy and regulatory compliance, foreign-exchange exposure, intellectual-property claims, acquisition integration, debt covenants, interest rates, LIBOR replacement, and potential goodwill or intangible-asset impairment.
- Settlement processing exposes the company to timing, client-credit, and operating risks. Settlement assets and liabilities on the balance sheet were $391.0 million and $368.7 million, respectively; additional off-balance-sheet client settlement funds were $274.0 million.
- The company reported no legal proceeding that management believed was likely to have a material adverse effect. A prior $48.1 million BHMI judgment was paid in 2017 and is not a current-period charge.
- Unrecognized tax benefits were $29.0 million at year-end, and U.S. and foreign tax examinations remain ongoing.
Most Important Facts for Investors to Verify
- Whether Speedpay integration produces sustainable organic growth and margin improvement after excluding acquisition-related revenue and expenses.
- The company’s ability to reduce leverage and maintain compliance with Credit Facility and senior-note covenants, particularly through the April 2024 Credit Facility maturity.
- Whether the large renewal component of the $5.83 billion backlog converts into revenue at expected rates and timing.
- The durability of On Demand profitability after inclusion of payment-processing costs, amortization, and integration spending.
- Potential effects of cybersecurity incidents, regulatory or privacy changes, foreign-exchange movements, and the transition from LIBOR.
- Whether management’s goodwill and intangible-asset valuation assumptions remain supported by operating performance.
- The effect of the CEO transition announced for March 2020 and the company’s ability to integrate Speedpay’s internal controls and operations.