ACI Worldwide, Inc. — Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payment software and services, including software-as-a-service (SaaS), platform-as-a-service (Platform), on-premise software, payment processing, fraud detection, and electronic bill payment solutions. The filing covers the unaudited three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Beginning in 2017, the Company reports two operating segments: ACI On Premise and ACI On Demand. Management cited increasing electronic payment volumes, real-time payments, cloud adoption, fraud and compliance needs, mobile payments, and industry consolidation as key market trends.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $240.6 million | $219.9 million | $472.1 million | $446.0 million |
| Operating income (loss) | $(38.4) million | $(26.6) million | $(34.8) million | $110.1 million |
| Net income (loss) | $(29.8) million | $(16.5) million | $(31.4) million | $72.7 million |
| Diluted EPS | $(0.25) | $(0.14) | $(0.27) | $0.61 |
| Operating cash flow | Not separately provided | Not separately provided | $99.1 million | $57.6 million |
- Q2 revenue increased 9%, driven by license revenue growth of 62% and SaaS and Platform growth of 11%. Maintenance revenue declined 7% and services revenue declined 29%.
- Six-month revenue increased 6%; excluding the CFS divestiture and foreign-exchange effects, management reported approximately 10% growth.
- Q2 operating margin was approximately negative 16%; the six-month operating margin was approximately negative 7%. Q2 cost of revenue was 50% of revenue, implying an approximately 50% gross margin before depreciation and amortization. The corresponding six-month gross margin was approximately 51.5%.
- Q2 results included $46.7 million of general and administrative expense related to the BHMI judgment and $1.4 million of related interest expense. Excluding the judgment and foreign currency effects, operating expenses decreased year over year.
- Six-month results benefited from lower research and development expense, down 20%, and lower selling and marketing expense, down 5%. General and administrative expense increased 73% primarily because of the BHMI judgment.
- ACI On Premise generated Q2 operating income of $57.3 million and six-month operating income of $121.2 million. ACI On Demand recorded operating losses of $11.4 million and $28.1 million, respectively. Corporate and other recorded operating losses of $84.3 million and $128.0 million, including the BHMI judgment.
Cash flow, debt and liquidity
- Cash and cash equivalents were $95.4 million at June 30, 2017, compared with $75.8 million at December 31, 2016. Approximately $56.0 million was held by foreign subsidiaries and was intended to remain permanently invested outside the United States.
- Six-month operating cash flow was $99.1 million. Investing cash outflow was $26.2 million, including $11.8 million for property and equipment and $14.4 million for software and distribution rights. Financing cash outflow was $55.4 million.
- Total debt, net of debt issuance costs, was $692.6 million, consisting primarily of $404.6 million under the Term Credit Facility and $300.0 million of 6.375% Senior Notes due August 2020. Gross debt outstanding was approximately $704.6 million.
- The revolving facility provided up to $495.0 million of unused borrowing capacity at June 30, 2017, reduced by a $5.0 million standby letter of credit. Total reported liquidity was $590.4 million, including cash and available revolver capacity.
- The Credit Facility had an interest rate of 3.23% at June 30, 2017. The Company was in compliance with its financial debt covenants throughout the period.
- Debt maturities include $20.8 million of term-loan principal due within one year and substantial maturities in 2020, including the Senior Notes. The Company stated that cash, operating cash flow, and available borrowings should satisfy projected liquidity needs for the next twelve months and foreseeable future.
Material changes, outlook and unusual items
- The Nebraska Supreme Court affirmed the BHMI judgment on June 9, 2017. The Company recorded $48.1 million of total expense and expects to pay the judgment within twelve months. The credit agreement was amended to exclude up to $50 million of the judgment and related costs from Consolidated EBITDA for covenant purposes.
- The 2016 sale of Community Financial Services assets to Fiserv for $200.0 million produced a $152.0 million pretax gain and a $93.7 million after-tax gain in the first half of 2016. This divestiture creates a significant unfavorable comparison in 2017.
- Six-month backlog was estimated at $4.067 billion at June 30, 2017, up from $4.016 billion at December 31, 2016. Approximately $1.908 billion was committed backlog and $2.159 billion was renewal backlog. Twelve-month backlog was estimated at $838 million, compared with $816 million at December 31, 2016.
- The Company provided no specific numerical revenue or earnings guidance in the filing. Backlog estimates depend on assumed renewals, stable pricing and foreign-exchange rates, and may not convert into revenue within the expected periods.
- The Company expects to adopt ASC 606, Revenue from Contracts with Customers, on January 1, 2018 using the modified retrospective method. Management expects the principal effects to involve the timing of software license revenue, capitalization and amortization of sales commissions, and expanded disclosures; the impact was not yet quantified.
- Management identified risks involving competition, customer migrations to next-generation and SaaS/Platform products, project delays, contract renewals, cybersecurity, regulatory compliance, international operations, foreign currency, financial covenants, debt service, litigation, tax matters, goodwill impairment, and the cyclical timing of revenue.
- The Company did not repurchase shares under its repurchase program during the first six months of 2017. Approximately $78.2 million remained authorized at June 30, 2017. Shares withheld for employee tax obligations are separate from program repurchases.
Most important facts for investors to verify
- Whether the $48.1 million BHMI judgment payment materially reduces cash and affects leverage or covenant calculations.
- The sustainability and quality of the large increase in initial license revenue versus the recurring growth of SaaS and Platform revenue.
- Whether ACI On Demand can move from operating losses to profitability while ACI On Premise remains a major earnings contributor.
- The ultimate accounting and retained-earnings impact of ASC 606 adoption, particularly for license revenue and sales commissions.
- Whether backlog renewal assumptions convert into revenue and how much of backlog is committed versus estimated renewals.
- Debt maturities, floating-rate exposure, and the Company’s ability to fund operations, judgment payments, capital expenditures, acquisitions, and future debt service.
- Potential changes in maintenance and services revenue as customers migrate from on-premise solutions to SaaS and Platform offerings.