ACI Worldwide, Inc. — Form 10-Q Summary
Business Context and Reporting Period
ACI Worldwide develops, licenses, implements, hosts, and supports electronic-payment software used primarily by financial institutions, retailers, and payment processors. The filing covers the unaudited three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Revenue is reported across the Americas, Europe/Middle East/Africa (EMEA), and Asia/Pacific. The company completed the $19.2 million acquisition of ISD Holdings, Inc. on March 18, 2011.
Financial Performance and Key Metrics
| Metric | Three Months Ended Sept. 30, 2011 | Three Months Ended Sept. 30, 2010 | Nine Months Ended Sept. 30, 2011 | Nine Months Ended Sept. 30, 2010 |
|---|---|---|---|---|
| Total revenue | $112.1 million | $97.0 million | $330.1 million | $277.2 million |
| Operating income | $11.3 million | $7.4 million | $29.2 million | $10.8 million |
| Operating margin | 10.0% | 7.6% | 8.8% | 3.9% |
| Net income | $10.5 million | $2.3 million | $22.0 million | $0.1 million |
| Net margin | 9.4% | 2.4% | 6.7% | 0.0% |
| Diluted earnings per share | $0.31 | $0.07 | $0.64 | $0.00 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $52.2 million | $49.1 million |
Revenue for the nine-month period comprised software license fees of $129.1 million, maintenance fees of $109.2 million, services of $57.8 million, and software hosting fees of $34.0 million. Nine-month revenue growth was broad-based: Americas revenue increased to $170.1 million, EMEA revenue to $122.6 million, and Asia/Pacific revenue to $37.3 million.
- Cash and cash equivalents were $179.7 million at September 30, 2011, compared with $171.3 million at December 31, 2010.
- Total assets were $614.7 million and stockholders’ equity was $287.8 million at September 30, 2011.
- Total liabilities were $326.9 million, including $75.0 million outstanding under the new revolving credit facility.
- The company reported up to $25.0 million of unused borrowings under the $100.0 million senior secured revolving facility, subject to the agreement’s terms.
- The facility matures September 29, 2016, carried an interest rate of 1.74% at quarter-end, and had no required principal-reduction schedule. The company was in compliance with its debt covenants.
- Net cash used in investing activities was $43.0 million, including $16.9 million for the ISD acquisition, $15.9 million for property, equipment, software, and distribution rights, and $10.0 million for available-for-sale equity securities.
- Net cash provided by financing activities was $1.1 million. The company repaid $75.0 million under its former credit facility and drew $75.0 million under the new facility.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 15.6%; nine-month revenue increased 19.1%.
- Nine-month software license revenue increased 31.0%, maintenance revenue increased 9.1%, services revenue increased 22.4%, and hosting revenue increased 8.6%.
- Third-quarter services revenue increased 54.0%, while software license revenue increased 3.8%. Initial license fee revenue rose 74.3%, partly offset by a 17.1% decline in monthly license fee revenue.
- Management stated that maturation of certain retail payment engine products is shifting more initial license revenue to ratable recognition over longer periods, increasing monthly license fee revenue over the nine-month period but reducing it in the third quarter.
- Nine-month operating margin improved to 8.8% from 3.9%, reflecting revenue growth and lower relative expense levels. Research and development increased 25.4%, selling and marketing increased 20.0%, and general and administrative expense increased 3.4%.
- General and administrative expense included approximately $3.5 million of professional fees related to the proposed S1 acquisition during the nine-month period.
- The effective tax rate was 4.4% for the third quarter and 22.4% for the nine-month period, versus 58.3% and 98.5%, respectively, in 2010. The 2011 rates benefited from the release of a $3.1 million liability and a favorable $3.9 million adjustment to uncertain tax positions, partly offset by a $1.7 million deferred-tax-asset reversal.
- Foreign-currency losses were less than $0.1 million in both the third quarter and nine-month period of 2011, compared with $1.5 million and $3.1 million, respectively, in the comparable 2010 periods.
- The 60-month backlog estimate was $1.612 billion at September 30, 2011, down from $1.640 billion at June 30, 2011 but up from $1.566 billion at December 31, 2010. The 12-month backlog estimate was $398 million, compared with $400 million at June 30, 2011 and $381 million at December 31, 2010.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a formal quantitative earnings or revenue guidance range. Management stated that existing cash, operating cash flow, and available borrowings were expected to satisfy projected liquidity requirements for the next twelve months.
- On October 3, 2011, ACI announced a definitive agreement to acquire S1 Corporation for approximately $364 million in cash and 5.9 million ACI shares. ACI expected to use $90 million of cash and had financing commitments for up to $450 million consisting of a $200 million term loan and a $250 million revolving facility, with a potential additional $75 million subject to conditions.
- The S1 transaction remained subject to customary closing conditions, including antitrust clearance and, if applicable, S1 stockholder approval. The filing identifies risks involving failure to close, financing, integration, anticipated synergies, and possible regulatory remedies.
- Management highlighted exposure to global economic weakness, customer financial condition, credit-market disruption, financial-services consolidation, competition, foreign-currency movements, product maturation and migration, revenue-recognition timing, backlog assumptions, cybersecurity and system interruptions, intellectual-property matters, acquisitions, and tax examinations.
- Backlog includes assumed renewals and is not a GAAP measure. Actual revenue may differ because of contract renegotiations or cancellations, customer mergers, implementation delays, foreign-exchange movements, and changes in renewal rates.
- The company adopted amended revenue-recognition guidance for multiple-deliverable arrangements prospectively on January 1, 2011. Management reported no material impact on the 2011 interim financial statements.
- The IBM alliance liability was $22.3 million at September 30, 2011, of which $20.7 million was noncurrent. The liability is refundable unless certain future milestones are achieved.
- The company reported no legal proceedings expected to have a material adverse effect on financial condition or results of operations. Disclosure controls and procedures were concluded to be effective at September 30, 2011.
Most Important Facts for Investors to Verify
- Whether the S1 acquisition closed on the announced terms, including final cash, share issuance, financing, antitrust approvals, and integration costs.
- Whether the company’s improved earnings were sustainable after excluding tax benefits, lower foreign-currency losses, and S1-related or other unusual items.
- The conversion of backlog, particularly the $690 million renewal component of the $1.612 billion 60-month estimate, into recognized revenue and cash flow.
- The effect of product maturation and customer migration on initial versus monthly license-fee recognition.
- Compliance with leverage and fixed-charge covenants and the availability of borrowings under the existing and proposed facilities.
- The location and repatriation restrictions on cash, including the $90.6 million held by foreign subsidiaries.
- Potential volatility in effective tax rates, uncertain tax positions, deferred tax assets, and foreign operating results.
- Goodwill and intangible-asset valuation, particularly following the ISD acquisition and in light of product and market risks.