ACI Worldwide, Inc. 2014 Form 10-K Summary
Business context and reporting period
ACI Worldwide develops and supports software and hosted services for electronic payments, banking, bill payment, fraud management and payment infrastructure. Its customers include financial institutions, retailers, billers and payment processors in more than 80 countries. The filing covers the fiscal year ended December 31, 2014; fourth-quarter results are also presented.
ACI completed the $205.1 million cash acquisition of Retail Decisions (ReD) on August 12, 2014, expanding its fraud-prevention and payment-risk-management offerings. The company reported approximately 5,600 customers and 4,472 employees at year-end.
Key financial metrics
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $1,016.1 million | $864.9 million | 17% |
| Operating income | $138.2 million | $123.0 million | 12% |
| Operating margin | 13.6% | 14.2% | Down approximately 0.6 points |
| Income before taxes | $98.8 million | $93.2 million | 6% |
| Net income | $67.6 million | $63.9 million | 6% |
| Net margin | 6.6% | 7.4% | Down approximately 0.7 points |
| Diluted EPS | $0.58 | $0.53 | 9% |
| Operating cash flow | $149.0 million | $138.4 million | 8% |
FY 2014 revenue consisted of hosting revenue of $419.4 million, maintenance revenue of $256.0 million, license revenue of $235.2 million and services revenue of $105.6 million. Hosting revenue increased 59%, while services revenue declined 14%.
At December 31, 2014, cash and cash equivalents were $77.3 million, working capital was $39.5 million and total debt was $891.9 million, comprising $547.9 million of term debt, $44.0 million of revolving debt and $300.0 million of 6.375% Senior Notes due 2020. The company reported up to $206.0 million of unused revolving capacity and compliance with all debt covenants. Total contractual obligations were $1.149 billion, including debt, interest and operating leases.
Fourth-quarter 2014 revenue was $290.2 million, operating income was $79.3 million, net income was $46.4 million and diluted EPS was $0.40. Fourth-quarter 2013 revenue was $283.2 million, operating income was $86.0 million, net income was $50.4 million and diluted EPS was $0.43.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the 2013 acquisitions of Online Resources and Official Payments and the 2014 ReD acquisition. Excluding incremental revenue from these acquisitions, FY 2014 revenue declined approximately 1%.
- Hosting revenue increased by $156.5 million, including approximately $155.6 million from Online Resources and Official Payments and the addition of ReD.
- Maintenance revenue increased $10.0 million, while services revenue decreased $16.5 million because fewer large, complex projects were completed and more customers migrated from on-premise to hosted solutions.
- Operating expenses increased 18% to $878.0 million, principally because of acquired operations. Depreciation and amortization rose 28% to $71.9 million, primarily from acquisition-related intangible assets.
- Interest expense increased 46% to $39.7 million due largely to a full year of interest on the Senior Notes and higher acquisition-related borrowings.
- Goodwill increased to $781.2 million from $669.2 million, and net intangible assets increased to $261.4 million from $237.7 million. Management reported that fair value substantially exceeded carrying value for all reporting units in the annual goodwill impairment test.
- ACI repurchased 3.6 million shares for $70.0 million during 2014. Approximately $138.3 million remained available under the repurchase authorization at year-end.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide a clear quantitative 2015 revenue or earnings guidance figure. Management identified growth opportunities from increasing electronic-payment volumes, real-time payments, cloud adoption, mobile payments, fraud prevention, EMV migration and regulatory requirements.
Management expects existing cash, operating cash flow and available borrowings to satisfy projected liquidity needs for the next twelve months and foreseeable future. However, the business is seasonal, with stronger results typically in the third and fourth quarters and revenue-generating activity concentrated near quarter-end.
- Key risks include intense competition, customer reluctance to replace legacy systems, product and implementation execution, migration from mature retail payment engines to next-generation products, contract renewals and backlog assumptions.
- Debt-related risks include variable-rate exposure, required amortization, restrictive covenants, refinancing needs and potential acceleration following an event of default.
- International operations expose ACI to foreign-currency, tax, regulatory, political and intellectual-property risks. The company had no foreign-currency hedges.
- Security breaches, service interruptions, software defects, intellectual-property claims and payment settlement shortfalls could adversely affect operations and reputation.
- ACI recognized approximately $8.7 million of employee termination costs associated with acquisition integration and reduced headcount by 220 employees.
- ReD contributed approximately $17.9 million of revenue and $1.9 million of operating income in the period after acquisition. Its purchase-price allocation remained preliminary at year-end.
- ACI recorded a $23.0 million unrealized gain in other comprehensive income on its Yodlee investment after Yodlee became publicly traded; this gain did not increase reported net income.
- Management reported effective disclosure controls and effective internal control over financial reporting. The assessment excluded ReD, which represented $249.7 million, or 13%, of consolidated assets and $17.9 million, or 2%, of 2014 revenue.
Most important facts for an investor to verify
- Whether hosting growth from acquired bill-payment businesses is sustainable and whether the acquired operations deliver expected synergies.
- Progress integrating ReD and completing its preliminary purchase-price allocation.
- Underlying organic revenue trends, particularly services, monthly license fees and the BASE24 product line.
- Debt repayment capacity, covenant headroom, floating-rate exposure and the 2018 Credit Agreement maturity.
- Renewal rates and the quality of the $4.16 billion five-year backlog estimate, which includes substantial assumed renewals and approximately $205 million attributable to ReD.
- Potential impairment risk associated with $781.2 million of goodwill and $261.4 million of net intangible assets.
- Unrecognized tax benefits of $14.8 million, ongoing IRS and foreign tax examinations, and potential expiration of foreign tax credits.
- The impact of product migrations, cybersecurity incidents, regulatory changes, foreign-currency movements and payment settlement exposures.