ACI Worldwide, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2015, compared with the three months ended March 31, 2014. The interim financial statements are unaudited. ACI provides electronic payments, banking, fraud prevention, bill payment, software licensing, services, and hosted solutions to more than 5,600 customers globally.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $232.8 million | $221.5 million | Up 5% |
| Operating income | $6.4 million | $0.3 million | Improved $6.1 million |
| Operating margin | 2.8% | 0.1% | Improved |
| Net loss | $0.2 million | $5.8 million | Improved $5.6 million |
| Loss per diluted share | $0.00 | $(0.05) | Improved |
| Cash flow from operations | $49.2 million | $15.3 million | Up $33.9 million |
| Cash and equivalents | $68.5 million | $58.9 million at March 31, 2014 | Down $8.8 million from Dec. 31, 2014 |
- Revenue mix: License revenue was $39.6 million, maintenance $59.5 million, services $23.5 million, and hosting $110.3 million. Hosting represented approximately 47% of revenue.
- Gross-cost profile: Cost of maintenance, services, and hosting was $113.0 million, or approximately 49% of revenue. Total operating expenses were $226.4 million, or approximately 97% of revenue.
- Cash flow: Operating cash flow benefited from the smaller net loss and a $42.4 million positive change in receivables. Investing cash outflows were $14.5 million, including $9.1 million for property and equipment and $3.4 million for software and distribution rights.
- Debt: Total debt was $850.1 million at March 31, 2015, consisting of $528.1 million under the term facility, $22.0 million under the revolver, and $300.0 million of 6.375% senior notes due 2020. Current debt was $91.3 million and long-term debt was $758.8 million.
- Liquidity: The revolver had up to $228.0 million of unused borrowing capacity, subject to agreement terms. Management stated that cash, operating cash flow, and available borrowings should satisfy projected liquidity needs for the next 12 months and foreseeable future.
- Balance sheet: Total assets were $1.77 billion and stockholders’ equity was $577.2 million. Receivables declined to $176.0 million from $227.1 million at December 31, 2014.
Material Changes Versus the Prior Comparable Period
- Total revenue increased $11.3 million, led by a $9.6 million increase in hosting revenue and a $3.9 million increase in license revenue. Maintenance revenue declined $3.0 million.
- Initial license revenue increased 75% to $20.3 million, while monthly license revenue declined 20% to $19.2 million, primarily because certain large project-related revenues recognized in 2014 did not recur in 2015.
- The 2014 Retail Decisions acquisition contributed approximately $10.3 million of revenue and an estimated $1.7 million operating loss, including severance and integration costs. Excluding ReD, revenue increased approximately $1.0 million.
- Operating expenses increased 2% to $226.4 million. Incremental ReD costs, integration costs, and higher interchange processing fees were partly offset by lower transaction-related expenses and favorable foreign currency expense effects.
- Interest expense increased 19% to $10.9 million because of additional debt used to finance the ReD acquisition. A $3.7 million foreign currency gain also improved other income compared with a $1.1 million loss in the prior period.
- Operating cash flow increased substantially, while financing cash outflows declined to $37.6 million from $44.3 million. The company repaid $22.0 million net on the revolver and $19.9 million of term debt; it made no open-market share repurchases during the quarter.
- The 60-month backlog estimate declined to $4.14 billion from $4.16 billion at December 31, 2014. Twelve-month backlog declined to $889 million from $903 million.
Outlook, Risks, Contingencies, and Unusual Items
- No specific quantitative earnings or revenue guidance is provided in the filing. Management identified growth opportunities from increasing electronic payment volumes, real-time payments, cloud adoption, fraud prevention, EMV adoption, regulatory change, mobile payments, and global vendor sourcing.
- Management cautioned that backlog estimates depend on renewal assumptions, customer contracts, project timing, foreign exchange rates, pricing, and other factors and may not convert into actual revenue.
- ACI recorded approximately $1.3 million of acquisition-integration termination costs in the quarter. The unpaid restructuring liability was $2.4 million at March 31, 2015, including $2.0 million of severance and $0.4 million for facility closures.
- The effective tax rate was a 76.6% benefit in Q1 2015 versus a 40.7% benefit in Q1 2014. Management stated that quarterly tax rates may fluctuate materially due to geographic earnings mix, deferred tax valuation changes, tax law changes, and uncertain tax positions.
- Unrecognized tax benefits were $14.9 million, excluding $2.3 million of related interest and penalties. Approximately $3.0 million may decrease within the following 12 months due to audit settlements and expiring statutes of limitation.
- Off-balance-sheet settlement funds held for clients totaled approximately $223.0 million at March 31, 2015 and are excluded from the company’s balance sheet.
- The company was in compliance with its financial debt covenants throughout the quarter. Key risks include leverage and debt service, floating-rate exposure, foreign currency volatility, competition, customer renewals, project delays, acquisition integration, cybersecurity, regulatory compliance, litigation, goodwill impairment, and payment-processing operating or credit risks.
- No legal proceeding was identified whose adverse outcome was considered likely to have a material effect on financial condition, results of operations, or cash flows. Disclosure controls were assessed as effective, with no material changes in internal control over financial reporting.
Key Facts for Investors to Verify
- Whether ReD integration produces the expected revenue growth and operating synergies while reducing the disclosed operating loss and restructuring costs.
- The sustainability of revenue growth given the decline in maintenance and monthly license revenue and the reliance on large project releases and renewals.
- Debt repayment capacity, covenant headroom, revolver availability, and sensitivity to higher interest rates on the floating-rate credit facilities.
- Conversion of the $4.14 billion 60-month backlog and $889 million 12-month backlog into recognized revenue, particularly the renewal component.
- Foreign exchange effects on revenue, margins, comprehensive loss, and international operating results.
- Future tax-rate volatility, utilization of deferred tax assets, and resolution of the $14.9 million of unrecognized tax benefits.