ACI Worldwide, Inc. — 2014 Q2 Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payment, banking, fraud prevention, bill payment, software licensing, maintenance, professional services and hosted solutions to approximately 2,600 financial institutions, retailers and processors globally. The filing covers the three and six months ended June 30, 2014, with comparative periods ended June 30, 2013. Results include the acquired operations of Online Resources Corporation (ORCC) and Official Payments Holdings, Inc. (OPAY).
Key financial metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $254.8 million | $205.8 million | $476.3 million | $367.8 million |
| Operating income | $26.7 million | $11.5 million | $27.0 million | $7.5 million |
| Operating margin | 10.5% | 5.6% | 5.7% | 2.0% |
| Net income (loss) | $11.2 million | $1.9 million | $5.5 million | $(0.3) million |
| Diluted EPS | $0.10 | $0.02 | $0.05 | $(0.00) |
| Cash flow from operations | Not separately provided | Not separately provided | $48.3 million | $57.6 million |
Revenue growth was driven primarily by hosting, which increased 58% to $106.1 million in the quarter and 96% to $206.8 million for the six-month period. Six-month license revenue increased 2%, maintenance increased 7%, and services declined 7%.
As of June 30, 2014, cash and cash equivalents were $55.0 million, down from $95.1 million at December 31, 2013. Receivables were $206.9 million and deferred revenue was $189.6 million, including current and noncurrent amounts. Total debt was $752.6 million, consisting of $437.6 million under the term facility, $15.0 million under the revolving facility and $300.0 million of 6.375% senior notes due 2020. The credit facility interest rate was 2.40%, and up to $235.0 million of revolving capacity was unused, subject to covenant and availability conditions.
Operating cash flow was $48.3 million. Investing cash outflow was $16.8 million, primarily for property and equipment, software and distribution rights. Financing cash outflow was $75.7 million, including $70.0 million of share repurchases and debt repayments. The company paid $15.6 million of interest and $13.2 million of income taxes during the first six months.
Material changes versus the prior comparable period
- Quarterly revenue increased 23.8%; six-month revenue increased 29.5%.
- Quarterly operating income more than doubled, while six-month operating income increased from $7.5 million to $27.0 million.
- OPAY contributed approximately $39.4 million of quarterly revenue and $72.9 million of six-month revenue growth. ORCC contributed approximately $27.3 million of six-month revenue growth.
- Excluding incremental ORCC and OPAY revenue, management reported underlying revenue growth of approximately 5% for the quarter and 2% for the six-month period.
- Operating expenses rose 17% in the quarter and 25% for the six-month period, principally because of the acquired businesses. Depreciation and amortization increased 26% for the quarter and 39% for the six-month period due largely to acquisition-related assets and higher capital expenditures.
- Interest expense increased 54% for the quarter and 86% for the six-month period because of higher debt balances incurred for acquisitions.
- Foreign currency results deteriorated: other expense included a $3.8 million currency loss in the quarter and a $4.8 million loss for the six-month period, compared with a $2.1 million currency gain in the prior-year six-month period.
- The company repurchased 3.6 million shares for $70.0 million during the first six months, leaving approximately $138.3 million available under the repurchase authorization.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management cited growth opportunities from increasing electronic payment volumes, cloud and hosted services, fraud prevention, mobile payments, EMV adoption, SEPA requirements and global vendor sourcing. The 60-month backlog estimate increased to $3.924 billion from $3.861 billion at December 31, 2013; approximately $2.287 billion represented assumed renewals. The company cautioned that backlog depends on renewal, foreign exchange, pricing, customer and execution assumptions and is not a GAAP measure.
Integration of ORCC and OPAY generated significant transaction and restructuring costs. Transaction-related expenses were approximately $3.5 million in the quarter and $9.2 million for the six-month period. Acquisition-related headcount reductions generated $2.8 million of termination costs for the six-month period, with the remaining liability expected to be paid within 12 months. OPAY purchase accounting remained preliminary.
On July 21, 2014, after quarter-end, ACI agreed to acquire Retail Decisions (ReD) for $205 million in cash, financed through the existing revolving facility and an incremental term loan. The transaction was expected to close in the third quarter, subject to customary conditions; lenders committed up to $150 million of financing.
Principal risks include acquisition integration, leverage and debt covenant restrictions, interest-rate and foreign-currency exposure, competition, customer renewals and project delays, software defects and cybersecurity breaches, payment-industry regulation, money-transmitter compliance, litigation, goodwill and intangible-asset impairment, tax uncertainty and the reliability of backlog estimates. The company reported no material legal proceedings and compliance with its debt covenants. Disclosure controls were considered effective as of June 30, 2014.
Important facts for investors to verify
- Whether hosting growth, particularly from OPAY and ORCC, is sustainable and generates acceptable margins after payment processing costs.
- The pace and cost of integrating ORCC, OPAY and the announced ReD acquisition, including final purchase-price allocations and potential additional restructuring costs.
- Debt capacity, leverage covenant headroom, interest expense and financing required for the ReD transaction.
- Cash availability, including the $37.6 million held by foreign subsidiaries and the potential tax cost of repatriation.
- The quality of backlog, especially the $2.287 billion renewal component and the assumptions supporting expected renewals.
- Foreign-currency losses, customer concentration and exposure to payment settlement, credit, operational and cybersecurity risks.
- The impact of future amortization: estimated remaining-2014 software and other intangible amortization was $30.7 million combined, based on June 30 balances.