ACI Worldwide, Inc. — Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payment and banking software and hosted services to approximately 2,600 financial institutions, retailers and processors globally. Reported segments are the Americas, EMEA and Asia/Pacific. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
Financial performance and condition
| Metric | Three months ended September 30, 2014 | Three months ended September 30, 2013 | Nine months ended September 30, 2014 | Nine months ended September 30, 2013 |
|---|---|---|---|---|
| Revenue | $249.6 million | $213.9 million | $725.9 million | $581.8 million |
| Operating income | $31.9 million | $29.6 million | $58.9 million | $37.1 million |
| Operating margin | 12.8% | 13.8% | 8.1% | 6.4% |
| Net income | $15.7 million | $13.8 million | $21.2 million | $13.5 million |
| Net margin | 6.3% | 6.4% | 2.9% | 2.3% |
| Diluted EPS | $0.14 | $0.12 | $0.18 | $0.11 |
| Operating cash flow | Not separately provided | Not separately provided | $72.0 million | $86.6 million |
Revenue mix for the nine-month period was hosting $306.8 million, maintenance $188.6 million, license $154.7 million and services $75.8 million. Hosting represented 42.3% of revenue, compared with 29.6% in the prior-year period.
At September 30, 2014, cash and cash equivalents were $60.1 million, including $44.2 million held by foreign subsidiaries. Total debt was $946.3 million, consisting of $567.8 million under the term facility, $78.5 million under the revolving facility and $300.0 million of 6.375% senior notes due 2020. Up to $171.5 million remained available under the revolving facility, subject to agreement terms. The company was in compliance with its debt covenants.
Cash flow was affected by $204.3 million spent on the ReD acquisition, $27.4 million for software, property and equipment and other investments, and $70.0 million for share repurchases. Cash declined from $95.1 million at December 31, 2013 to $60.1 million at September 30, 2014.
Material changes versus the prior comparable period
- Three-month revenue increased 16.7%; nine-month revenue increased 24.8%.
- Hosting revenue increased 49% in the quarter and 78% year to date, primarily due to OPAY, ORCC and ReD. Excluding acquired businesses, nine-month revenue increased approximately 1%.
- Three-month operating income increased 7.8%, while the operating margin declined to 12.8% from 13.8%, reflecting acquisition-related costs and higher operating expenses.
- Nine-month operating income increased 58.9% and operating margin improved to 8.1% from 6.4%, despite higher amortization and integration costs.
- Interest expense increased 40% in the quarter and 66% year to date because of higher debt balances.
- The effective tax rate increased to 37.5% from 28.0% in the quarter, but declined slightly to 27.1% from 27.8% for the nine-month period.
- Americas revenue increased 26% in the quarter and 37% year to date; EMEA increased 10% and 11%, respectively. Asia/Pacific revenue declined 22% in the quarter and 11% year to date.
Guidance, outlook, commentary and risks
The filing does not provide formal quantitative revenue or earnings guidance. Management identifies growth opportunities from increasing electronic payment volumes, cloud adoption, fraud prevention, EMV, mobile payments, real-time delivery and regulatory-driven demand. The 60-month backlog estimate was $4.114 billion at September 30, 2014, including approximately $205 million attributable to ReD; the 12-month backlog estimate was $898 million, including approximately $42 million from ReD. Backlog includes assumed renewals and is not a GAAP measure.
ACI completed the $205.1 million cash acquisition of Retail Decisions Limited on August 12, 2014. ReD contributed approximately $5.8 million of revenue and $0.1 million of operating income after acquisition. The purchase price allocation remained preliminary, and integration activities resulted in restructuring and transaction-related costs. The company recognized $6.0 million of termination costs during the first nine months and had $1.6 million of restructuring liabilities remaining at September 30, 2014.
Principal risks include acquisition integration, leverage and debt-service requirements, covenant restrictions, competition, customer renewals and project timing, revenue-recognition judgments, backlog assumptions, foreign-currency volatility, cybersecurity and system interruptions, regulatory and privacy compliance, money-transmitter requirements, intellectual-property claims, potential goodwill or intangible-asset impairment, international operations and uncertain tax liabilities. No material litigation exposure was identified by management. The filing states that disclosure controls were effective, while ReD's controls were still being integrated.
Important facts for investors to verify
- Whether ReD, OPAY and ORCC generate the expected growth and synergies after integration.
- The sustainability of hosting-led revenue growth and the decline in services revenue.
- Debt repayment capacity, interest-rate exposure and compliance with leverage and fixed-charge covenants.
- The quality and conversion of the $4.114 billion backlog, particularly the $2.454 billion renewal component.
- The impact of acquisition-related amortization, restructuring costs and transaction expenses on normalized margins.
- Foreign-currency movements, especially given the $15.4 million quarterly translation loss and the absence of currency hedges.
- Potential changes to the preliminary ReD purchase-price allocation, goodwill and acquired intangible valuations.
- Tax examinations and the $16.2 million balance of unrecognized tax benefits.