ACI WORLDWIDE, INC. annual report, FY2012

ACI Worldwide, Inc. — FY2012 Form 10-K Summary

Business context and reporting period

ACI develops, licenses, implements, hosts and supports electronic-payment and banking software for financial institutions, retailers and payment processors. The filing covers the fiscal year ended December 31, 2012; the source does not provide a separate Q4 filing, although quarterly data are included. Operations are reported across the Americas, EMEA and Asia/Pacific.

Approximately 2,648 customers in 104 countries and approximately 3,530 employees at year-end.
Revenue remains exposed to the BASE24 product family, although BASE24-related revenue declined to approximately 32% of total revenue from 43% in 2011.
2012 included the acquisitions of S1 Corporation, North Data Uruguay and Distra. S1 was completed in February 2012 for a total purchase price of approximately $587.3 million.

Key financial metrics

Metric	FY2012	FY2011	Change
Total revenue	$666.6 million	$465.1 million	+43.3%
Operating income	$74.4 million	$66.2 million	+12.3%
Operating margin	11.2%	14.2%	Down 3.0 points
Net income	$48.8 million	$45.9 million	+6.5%
Net margin	7.3%	9.9%	Down 2.6 points
Diluted EPS	$1.22	$1.34	Down 9.0%
Cash flow from operations	$(9.3) million	$83.5 million	Declined $92.7 million
Cash and cash equivalents	$76.3 million	$197.1 million	Down $120.8 million

Revenue composition: software license fees $221.8 million, maintenance $199.9 million, services $131.5 million and software hosting $113.3 million.
Software hosting revenue increased 140.4%, services increased 64.9%, maintenance increased 34.7% and software license fees increased 16.9%.
S1 contributed approximately $161.9 million of 2012 revenue and an estimated $6.9 million operating loss, including integration-related severance and accelerated share-based compensation.
Research and development expense increased to $133.8 million, or 20.1% of revenue, from $90.2 million, or 19.4%, in 2011.
Interest expense increased to $10.4 million from $2.4 million because of acquisition-related debt.
Working capital was $89.5 million at December 31, 2012, compared with $114.8 million at December 31, 2011.
Goodwill increased to $501.1 million from $214.1 million, and other intangible assets increased to $127.9 million from $18.3 million, principally because of acquisitions.

Debt, liquidity and cash flow

Debt at year-end consisted principally of $188.0 million outstanding under the revolving facility and $186.3 million under the term facility, including $17.5 million classified as current. Total debt carrying value was approximately $374.3 million.
The five-year senior secured credit agreement provides a $250 million revolving facility and a $200 million term facility. Approximately $62 million of revolving capacity was unused at year-end, subject to covenant availability.
The applicable interest rate was 2.22% at December 31, 2012. The company was in compliance with its debt covenants.
Operating cash flow was negative primarily because of acquisition-related payments and liabilities, repayment of a $20.7 million IBM Alliance liability, restructuring and facility costs, higher tax payments and working-capital timing.
Investing cash flow was $(342.9) million, including $325.2 million of net cash used for acquisitions. Financing cash flow was $233.9 million, reflecting new borrowings partly offset by debt repayment and $57.8 million of share repurchases.
Of the $76.3 million cash balance, $67.7 million was held by foreign subsidiaries and was intended to remain permanently reinvested outside the United States.

Material changes versus the prior comparable period

The S1 acquisition substantially increased scale, revenue, assets, debt and acquisition-related amortization. Management reported approximately $48 million of annual S1 cost synergies achieved and anticipated an additional $5 million from future IT, facilities and data-center consolidation.
Revenue growth was substantially acquisition-driven: S1 contributed $161.9 million of the $201.5 million increase. Excluding S1, revenue increased approximately 8.5%.
Margins declined because operating costs, amortization, interest expense and integration costs grew faster than revenue. Reported 2012 operating expenses included approximately $31.5 million of one-time expenses, including severance and accelerated share-based compensation, investment banking fees, IT outsourcing termination and data-center relocation costs, facility termination charges and acquisition-related professional fees.
Monthly license-fee revenue decreased 16.8%, partly because certain legacy retail-payment-engine license fees are now recognized ratably over extended periods rather than upfront.
The company reduced headcount by 272 employees as part of acquisition integration and incurred approximately $9.2 million of termination costs.
The IBM Alliance terminated during 2012. A $20.7 million liability was paid, and the remaining IBM warrants were repurchased for $29.6 million; no warrants remained outstanding at year-end.
Sixty-month backlog increased to $2.416 billion from $1.617 billion, while 12-month backlog increased to $596 million from $424 million. These measures include assumed renewals and are not GAAP measures.

Outlook, commentary, risks and unusual items

No formal numerical revenue or earnings guidance is provided in the filing. Management stated that corporate costs were expected to decrease as S1 synergies were realized and believed available cash, operating cash flow and credit capacity would satisfy projected needs for at least the next twelve months.
On January 30, 2013, ACI announced a tender offer and preferred-stock transaction to acquire Online Resources Corporation for approximately $257.5 million in aggregate consideration, subject to conditions. Wells Fargo committed up to $750 million of financing to support the transaction, subject to conditions.
During the first quarter of 2013, ACI also acquired PTESA-related businesses and assets in Venezuela, Ecuador and Colombia for approximately $14.2 million in aggregate.
Key risks include integration of S1 and other acquisitions, execution of the BASE24-eps migration strategy, dependence on financial-services customers and legacy BASE24 products, intense competition, project delays or cancellations, contract renewals, backlog-estimate uncertainty, cybersecurity and service interruptions, intellectual-property claims, foreign-exchange exposure, tax examinations and debt covenant or refinancing risk.
Revenue and earnings are highly seasonal, with activity concentrated in the third and fourth quarters and significant transactions often occurring in the final weeks of a quarter.
Goodwill and acquired intangible assets represent a substantial portion of the balance sheet. The company reported no goodwill impairment, but impairment charges could materially affect future earnings.
Two foreign subsidiaries were subject to tax examinations. Unrecognized tax benefits were $13.1 million at year-end, and the company reported $13.1 million of income-tax reserves.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective at December 31, 2012.

Important facts for investors to verify

Whether S1 integration delivers the expected additional $5 million of cost synergies and supports margin recovery.
The cash flow conversion of reported earnings, particularly after acquisition spending and working-capital normalization.
Debt paydown, interest-rate exposure, covenant headroom and financing for the Online Resources transaction.
The sustainability of license-fee growth as revenue recognition shifts from upfront legacy licenses toward ratable and recurring arrangements.
The quality and renewal assumptions underlying the $2.416 billion 60-month backlog and $596 million 12-month backlog.
Potential impairment of the $501.1 million goodwill balance and $127.9 million of other intangible assets.
Results of pending tax examinations, unrecognized tax benefits and the treatment of permanently reinvested foreign earnings.