ACI Worldwide, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic-payment software and services, including on-premise solutions and software-as-a-service and platform-as-a-service offerings, to financial institutions, merchants, billers and payment intermediaries worldwide. The filing covers the unaudited three months ended March 31, 2017, compared with the same period in 2016.
Beginning in 2017, the Company reports two operating segments: ACI On Premise and ACI On Demand. ACI serves more than 5,100 organizations and states that its customers process approximately $14 trillion in payments and securities each day.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $231.5 million | $226.1 million | Up 2% |
| Operating income | $3.6 million | $136.7 million | Down $133.1 million |
| Operating margin | 1.6% | 60.5% | Down sharply |
| Net income (loss) | $(1.6) million | $89.1 million | Down $90.8 million |
| Diluted EPS | $(0.01) | $0.74 | Down $0.75 |
| Net cash from operating activities | $85.7 million | $38.5 million | Up $47.2 million |
| Operating free cash flow | $76.3 million | $29.7 million | Up $46.6 million |
Cost of revenue was $108.5 million, or 47% of revenue, versus $118.4 million, or 52%, in the prior-year quarter. Total operating expenses were $227.8 million, or 98% of revenue, compared with $89.4 million, or 40%, primarily because Q1 2016 included a $152.0 million pretax gain on the sale of Community Financial Services assets to Fiserv.
Revenue mix included SaaS and Platform revenue of $99.4 million, license revenue of $59.4 million, maintenance revenue of $54.5 million and services revenue of $18.2 million. Cash and cash equivalents were $99.7 million at March 31, 2017, compared with $75.8 million at December 31, 2016. Total assets were $1.83 billion and stockholders’ equity was $770.3 million.
Material changes versus the prior comparable period
- License revenue increased $22.0 million, or 59%, to $59.4 million, driven by a $20.2 million increase in initial license fees and a $1.7 million increase in monthly license fees.
- SaaS and Platform revenue decreased $12.3 million, or 11%, largely because the CFS divestiture reduced comparable revenue by $13.5 million. Excluding CFS and currency effects, SaaS and Platform revenue increased approximately 2%.
- Maintenance revenue decreased $2.9 million, or 5%, and services revenue decreased $1.4 million, or 7%.
- Excluding the 2016 CFS gain, operating expenses decreased $13.5 million, or 6%. Research and development decreased 14% and selling and marketing decreased 10%, while general and administrative expense increased 25%.
- Foreign currency movements reduced Q1 2017 revenue by approximately $1.2 million and reduced operating expenses by approximately $1.6 million.
- ACI On Premise revenue increased to $131.9 million from $112.0 million, and operating income increased to $63.9 million from $35.6 million. ACI On Demand revenue increased modestly to $99.6 million from $98.6 million, while its operating loss widened to $16.6 million from $8.8 million.
- The effective tax rate was 72% in Q1 2017 versus 29% in Q1 2016. The prior-year rate benefited from a $10.1 million valuation-allowance release related to foreign tax credits.
Cash flow, debt and liquidity
Operating cash flow benefited substantially from the timing of customer collections and payments, including an $84.0 million decrease in receivables. Investing activities used $12.4 million, primarily for property, equipment, software and distribution rights. Financing activities used $48.9 million, including debt refinancing and repayment activity.
On February 24, 2017, ACI entered into an amended credit agreement consisting of a $500.0 million revolving facility and a $415.0 million term facility. At March 31, 2017, the Company had $409.8 million outstanding under the term facility, no revolving borrowings, and $300.0 million of 6.375% Senior Notes due in 2020. Total debt before debt issuance costs was approximately $709.8 million. The credit facility interest rate was 2.95%.
Available liquidity was $592.2 million, consisting of $99.7 million of cash and $492.5 million of available revolving capacity. Approximately $57.4 million of cash was held by foreign subsidiaries and was intended to remain permanently reinvested outside the United States. The Company stated that it was in compliance with all financial debt covenants.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal quarterly or full-year revenue or earnings guidance. Management expects existing cash, operating cash flow and revolving-credit availability to satisfy projected liquidity needs for the next twelve months and foreseeable future.
- Management highlighted growth opportunities from increasing electronic-payment volumes, real-time payments, cloud adoption, fraud and compliance needs, mobile payments, regulatory change and electronic bill payment.
- Management is pursuing migration of customers to next-generation, SaaS and Platform offerings and has reorganized reporting around ACI On Premise and ACI On Demand.
- Reported Q1 2017 earnings were affected by the absence of the $152.0 million CFS sale gain recorded in Q1 2016 and by higher general and administrative expenses, including transaction-related expenditures, professional fees and bad-debt expense.
- The Company is evaluating adoption of ASC 606, effective January 1, 2018. It has not selected a transition method and cannot yet estimate the quantitative impact. Expected significant effects include the timing of software-license revenue recognition and possible capitalization and deferral of sales commissions.
- A subsidiary is appealing a BHMI judgment exceeding $46.5 million, including damages, attorney fees and costs. Management determined that a loss was not probable and could not be reasonably estimated; consequently, no accrual was recorded.
- Key risks include competition, customer concentration and consolidation, delays or cancellations of projects, customer renewals, migration execution, cybersecurity and system interruptions, regulatory and money-transmitter compliance, foreign currency exposure, debt covenants and refinancing, goodwill impairment, tax examinations, litigation and the cyclical timing of revenue.
- The 60-month backlog estimate was $4.012 billion at March 31, 2017, compared with $4.016 billion at December 31, 2016. Approximately $2.098 billion represented assumed renewals, so actual revenue realization is subject to renewal, execution and foreign-currency assumptions.
Important facts for investors to verify
- Whether the sharp increase in initial license revenue is sustainable or reflects timing and capacity events.
- Progress in stabilizing and growing ACI On Demand and SaaS/Platform revenue, particularly after adjusting for the CFS divestiture and currency effects.
- Cash conversion quality, including the extent to which Q1 operating cash flow benefited from temporary working-capital timing.
- Debt amortization, floating-rate exposure, covenant headroom and the 2020 Senior Notes maturity.
- The outcome and potential financial impact of the BHMI appeal and any related indemnification or litigation matters.
- The eventual quantitative impact and transition method selected for ASC 606.
- Whether backlog renewals and other backlog assumptions translate into recognized revenue within the stated periods.
- Potential tax-rate volatility and the $24.5 million of unrecognized tax benefits at March 31, 2017.