ACI Worldwide, Inc. — 2019 Q2 Form 10-Q Summary
Business Context and Reporting Period
ACI Worldwide provides electronic payment, bill payment, real-time payment, fraud detection, and related software and services to banks, merchants, corporates, and other financial institutions. The filing covers the three and six months ended June 30, 2019, with comparative periods ended June 30, 2018. Results include Speedpay from its May 9, 2019 acquisition date.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Total revenue | $297.6 million | $235.0 million | $503.5 million | $444.3 million |
| Operating income (loss) | $(5.9) million | $(2.2) million | $(34.0) million | $(18.9) million |
| Net income (loss) | $5.7 million | $(14.6) million | $(20.2) million | $(34.0) million |
| Diluted earnings (loss) per share | $0.05 | $(0.13) | $(0.17) | $(0.29) |
| Operating margin | (2.0%) | (0.9%) | (6.7%) | (4.2%) |
| Net margin | 1.9% | (6.2%) | (4.0%) | (7.7%) |
| Net cash from operating activities | Not separately provided | Not separately provided | $56.9 million | $71.1 million |
- Second-quarter revenue increased 27%, driven principally by $49.3 million of Speedpay revenue and higher SaaS and PaaS revenue. Excluding Speedpay and foreign-currency effects, revenue increased 8%.
- Six-month revenue increased 13%; excluding Speedpay and foreign-currency effects, revenue increased 4%.
- SaaS and PaaS revenue increased 52% in the quarter and 29% year to date. Maintenance revenue declined 6% in the quarter and 4% year to date.
- Second-quarter Segment Adjusted EBITDA was $74.4 million, compared with $51.4 million in the prior-year quarter. Six-month Segment Adjusted EBITDA was $102.4 million, compared with $86.1 million.
- ACI On Demand revenue increased to $172.5 million in the quarter from $113.6 million, while On Demand Segment Adjusted EBITDA improved to $17.3 million from a $3.4 million loss. ACI On Premise Segment Adjusted EBITDA rose in the quarter but declined year to date.
- Operating expenses increased 28% in the quarter and 16% year to date. Increases included Speedpay expenses, acquisition and integration costs, higher amortization, and higher stock-based compensation.
- Cash from operations declined to $56.9 million year to date from $71.1 million. Investing cash flow was $(779.8) million, including approximately $755.2 million for Speedpay and $21.2 million for software, property, and equipment. Financing cash flow was $714.7 million, primarily from new borrowings used to fund the acquisition.
- Cash and cash equivalents were $139.4 million at June 30, 2019, including $71.3 million held by foreign subsidiaries. Total reported liquidity was $404.4 million, consisting of cash and $265.0 million of unused revolver capacity.
- Total debt was $1.386 billion, consisting of $775.5 million of term loans, $235.0 million drawn on the revolving facility, and $400.0 million of 5.750% senior notes due 2026. The Credit Facility interest rate was 4.65% at June 30, 2019.
Material Changes Versus the Prior Comparable Period
- ACI acquired Speedpay for $755.3 million in cash and also acquired Walletron, whose financial results were not material. Speedpay contributed approximately $49.3 million of revenue and $7.6 million of operating income for the period included in the filing.
- The Speedpay acquisition increased goodwill by approximately $369.8 million and materially increased software and intangible assets. The purchase price allocation remained preliminary.
- Debt increased from $671.8 million at December 31, 2018 to $1.386 billion at June 30, 2019, while cash declined from $148.5 million to $139.4 million.
- General and administrative expense increased 71% in the quarter and 41% year to date, substantially reflecting Speedpay transaction and integration costs. Six-month acquisition-related costs were approximately $21.3 million.
- The Company adopted ASC 842 leases on January 1, 2019, recognizing $63.3 million of operating lease right-of-use assets and $68.6 million of operating lease liabilities at adoption.
- The effective tax rate was unusually favorable: 134% for the quarter and 63% for the six months. A non-cash tax benefit of approximately $18.5 million resulted from releasing most of a valuation allowance against U.S. foreign tax credit deferred tax assets.
- Sixty-month backlog increased to $5.693 billion from $4.151 billion at March 31, 2019 and $4.174 billion at December 31, 2018, including approximately $1.5 billion attributable to Speedpay. Backlog includes substantial renewal estimates and is not equivalent to contracted revenue.
Outlook, Commentary, Risks, and Unusual Items
Management stated that cash on hand, operating cash flow, and available revolver capacity are expected to satisfy projected liquidity needs for the next twelve months and foreseeable future. The filing does not provide a specific revenue, earnings, or cash-flow guidance range.
- Management identified growth opportunities from increasing electronic payment volumes, adoption of real-time payments and cloud technology, electronic bill payment, fraud and compliance solutions, mobile payments, and global vendor sourcing.
- Key risks include competition, customer consolidation and contract renewals, project delays, product defects, cybersecurity and business interruptions, regulatory and money-transmitter compliance, foreign currency exposure, international operations, acquisition integration, goodwill and intangible-asset impairment, debt covenants, debt service requirements, tax liabilities, and revenue seasonality.
- The Company was in compliance with its financial debt covenants at June 30, 2019. The Credit Agreement includes leverage and interest-coverage requirements and restricts certain indebtedness, liens, acquisitions, investments, dividends, repurchases, and asset sales.
- The Company had $28.3 million of unrecognized tax benefits, excluding related interest and penalties. It expected approximately $3.9 million could decrease within twelve months through audit settlements and expiration of statutes of limitation.
- No legal proceeding was identified as likely to have a material adverse effect individually or in the aggregate. Management reported effective disclosure controls as of June 30, 2019, while Speedpay internal controls were still being integrated.
- After quarter-end, on July 23, 2019, the Company invested $18.3 million for a 30% non-controlling interest in an Indian payment technology and services company.
Important Facts for Investors to Verify
- Whether Speedpay integration produces the anticipated revenue growth, cost synergies, and operating improvements without disrupting existing operations.
- The sustainability of On Demand growth and whether On Premise revenue and profitability stabilize after the year-to-date decline.
- Debt reduction capacity, floating-rate exposure, leverage covenant headroom, and the effect of higher interest expense on future earnings and cash flow.
- The extent to which the $5.693 billion backlog consists of enforceable committed revenue versus estimated renewals, and the timing of conversion into revenue.
- The sustainability of the reported tax benefit and the Company’s ability to use foreign tax credits and other deferred tax assets.
- Final purchase price allocations for Speedpay and the resulting goodwill, intangible assets, amortization, and potential impairment exposure.
- Working-capital trends, settlement-account timing, foreign-currency effects, and the decline in operating cash flow compared with the prior year.