ACI Worldwide, Inc. — Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payment software and services to banks, financial intermediaries, merchants, corporates and public-sector organizations. Its principal segments are ACI On Premise and ACI On Demand, with offerings including SaaS, PaaS, software licenses, maintenance and professional services. This unaudited filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $235.0 million | $240.6 million | $444.3 million | $472.1 million |
| Operating loss | $(2.2) million | $(38.4) million | $(18.9) million | $(34.8) million |
| Net loss | $(14.6) million | $(29.8) million | $(34.0) million | $(31.4) million |
| Loss per diluted share | $(0.13) | $(0.25) | $(0.29) | $(0.27) |
| Operating margin | (0.9%) | (16.0%) | (4.2%) | (7.4%) |
| Net margin | (6.2%) | (12.4%) | (7.7%) | (6.7%) |
| Operating cash flow | Not separately provided | Not separately provided | $71.1 million | $99.1 million |
- Q2 revenue consisted of SaaS/PaaS of $113.6 million, license revenue of $45.6 million, maintenance revenue of $55.0 million and services revenue of $20.8 million.
- Six-month revenue consisted of SaaS/PaaS of $217.9 million, license revenue of $73.6 million, maintenance revenue of $111.7 million and services revenue of $41.1 million.
- At June 30, 2018, cash and cash equivalents were $59.0 million, compared with $69.7 million at December 31, 2017. Total reported liquidity was $556.0 million, including $497.0 million of unused revolving-credit availability.
- Six-month investing cash outflows were $29.4 million, primarily for $11.1 million of property and equipment and $16.8 million of software and distribution rights. Financing cash outflows were $51.6 million, including $54.5 million of common-stock repurchases.
- Total debt was $677.8 million net of debt issuance costs, comprising $383.9 million under the term facility, $3.0 million under the revolving facility and $300.0 million of senior notes. The company reported compliance with all financial covenants.
- Stockholders’ equity increased to $940.7 million from $764.6 million at year-end, primarily reflecting the cumulative adoption impact of ASC 606 and current-period equity activity.
Material changes versus the prior comparable periods
- Q2 revenue declined 2%; six-month revenue declined 6%. Management attributed part of the decline to ASC 606, which reduced reported revenue by approximately $5.7 million in Q2 and $21.3 million in the first six months, primarily through the timing of license revenue recognition.
- Excluding ASC 606 and foreign-currency effects, management estimated Q2 revenue declined 1% and six-month revenue declined 3%.
- License revenue fell 16% in Q2 and 35% year to date, reflecting ASC 606 effects and the timing and size of license and capacity events. SaaS/PaaS revenue was flat in Q2 and increased 2% year to date; services revenue increased 23% in Q2 and 17% year to date.
- Operating expenses fell 15% in Q2 and 9% year to date. Comparisons benefited from the absence of a $46.7 million expense recorded in 2017 related to the Baldwin Hackett & Meeks judgment.
- ACI On Premise revenue declined to $121.4 million in Q2 and $226.4 million year to date, while ACI On Demand revenue was $113.6 million in Q2 and $217.9 million year to date. On Premise Segment Adjusted EBITDA declined to $54.8 million in Q2 and $93.7 million year to date; On Demand Segment Adjusted EBITDA was $(3.4) million and $(7.6) million, respectively.
- ASC 606 adoption on January 1, 2018 increased retained earnings by $244.0 million. It also created $180.2 million of noncurrent accrued receivables at June 30, 2018 and increased reported total receivables to $453.4 million.
- Six-month operating cash flow declined $28.0 million from 2017, which management attributed primarily to the timing of customer payments and collections.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear numerical revenue, earnings or cash-flow guidance range. Management stated that existing cash, operating cash flow and revolving-credit availability are expected to satisfy projected liquidity needs for the next twelve months and foreseeable future.
- Revenue allocated to remaining performance obligations was $586.1 million at June 30, 2018; approximately 47% was expected to be recognized over the following twelve months. The company’s 60-month backlog estimate was $4.302 billion, including $1.769 billion of committed backlog and $2.533 billion of renewal backlog.
- Management identified growth opportunities from rising electronic-payment volumes, real-time payments, cloud adoption, fraud and compliance requirements, mobile payments and electronic bill payment. Key risks include competition, customer consolidation and renewals, migration to SaaS/PaaS, project execution, cybersecurity, regulatory compliance, foreign currency exposure, intellectual-property matters, debt covenants and the accuracy of backlog estimates.
- The company continued assessing the Tax Cuts and Jobs Act. It recorded $3.8 million of GILTI tax expense in the six months and had $27.6 million of unrecognized tax benefits at June 30, 2018. The six-month effective tax rate was approximately 1%.
- ASC 842 lease accounting was not yet effective. The company expected adoption to materially affect its balance sheet by recognizing operating-lease assets and liabilities; undiscounted operating-lease commitments were approximately $78 million.
- The company had a $5.0 million facility-closure liability at June 30, 2018. It reported no legal proceeding expected to have a material effect on financial condition or results of operations and no material changes to previously disclosed risk factors.
- Foreign currency translation produced a $7.2 million year-to-date reduction in accumulated other comprehensive income. The company does not use foreign-currency hedging transactions.
Most important facts for investors to verify
- Assess the underlying revenue trend separately from the significant ASC 606 timing effects, particularly the sharp decline in license revenue.
- Evaluate the quality and collectability of the $453.4 million net receivables balance, including $287.9 million of accrued receivables.
- Monitor debt maturities, including the $300.0 million senior notes due in August 2020, floating-rate exposure and compliance with leverage and interest-coverage covenants.
- Reconcile operating cash flow with reported earnings and determine whether the decline in collections is timing-related or reflects worsening working-capital performance.
- Review the assumptions supporting the $4.302 billion backlog estimate, especially renewal rates, customer retention, foreign exchange and revenue timing.
- Track the remaining $176.6 million stock-repurchase authorization against liquidity, debt reduction and investment needs.
- Follow final Tax Act accounting, uncertain tax positions and the expected balance-sheet impact of ASC 842.