ACIW

ACI Worldwide, Inc. - 10-Q Summary (Period Ended June 30, 2007)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2007, and the nine months ended June 30, 2007. ACI Worldwide, Inc. (formerly Transaction Systems Architects, Inc.) develops and markets software products and services focused on electronic payments for financial institutions, retailers, and payment processors. The company operates in three geographic segments: Americas, Europe/Middle East/Africa (EMEA), and Asia/Pacific. During the period, the company was conducting an independent review of historical stock option grants and working to become current with SEC filings, which resulted in the suspension of stock option exercises.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 15.7% for the quarter and 8.3% for the nine months compared to the prior year periods. This growth was driven by increases in maintenance fees and services revenue, partially offset by a decline in software license fees.
• Profitability Decline: Operating income decreased significantly, dropping 68.5% for the quarter and 80.4% for the nine months. Net income turned to a loss for both periods, compared to net income of $22.5 million and $52.7 million in the prior year periods.
• Expense Increases: Total expenses rose 34.6% for the quarter and 30.2% for the nine months. A significant portion of this increase ($4.7 million for the quarter and $13.3 million for the nine months) was attributed to costs related to the historical stock option review, restatement of financial information, and efforts to become current with SEC filings.
• Acquisitions: The company acquired Visual Web Solutions, Inc. and Stratasoft Sdn Bhd in fiscal 2007, contributing to revenue and expense figures. Acquisitions of eps AG and P&H Solutions in the prior fiscal year also impacted comparative figures.
• Effective Tax Rate: The effective tax rate for the quarter was 195.3% and 108.3% for the nine months, significantly higher than the prior year due to losses in foreign jurisdictions where tax benefits could not be recognized and fixed tax charges related to intellectual property transfers.

Guidance, Outlook, Risks, and Unusual Items

• Backlog: The 60-month backlog estimate was $1.27 billion as of June 30, 2007, an increase from $1.23 billion at September 30, 2006. The 12-month backlog was $316 million.
• SEC Filings and Stock Options: The company was not current with its SEC filings during the period due to the stock option review. This led to the suspension of stock option exercises and the cash settlement of vested options that would otherwise have expired, incurring approximately $5.7 million in cash outlays subsequent to June 30, 2007.
• Legal Proceedings: A class action lawsuit regarding historical financial reporting was settled for $24.5 million (company contribution approx. $8.5 million net of insurance), approved by the court in March 2007, though an appeal was filed. A derivative lawsuit regarding stock option granting practices was filed in May 2007.
• Internal Controls: Management concluded that disclosure controls and procedures were not effective as of June 30, 2007, due to material weaknesses in accounting for non-routine transactions, financial reporting, revenue recognition, and income taxes that had not yet been remediated.
• Restructuring: Subsequent to June 30, 2007, the company committed to reducing headcount by approximately 50 employees, estimating severance costs of $3.3 million to $4.3 million.
• Debt Covenants: The company amended its credit agreement to exclude certain non-recurring items from the consolidated EBITDA calculation for debt covenants and changed its fiscal year end to a calendar year effective January 1, 2008.

Key Facts for Investor Verification

• Verify the status of the company's SEC filings and the completion of the historical stock option review.
• Assess the impact of the material weaknesses in internal controls over financial reporting and the progress of remediation efforts.
• Monitor the outcome of the pending appeal regarding the class action settlement and the derivative lawsuit.
• Review the company's ability to meet debt covenants under the amended credit agreement, particularly given the recent losses.
• Track the execution of the planned headcount reduction and associated severance costs.
• Evaluate the sustainability of revenue growth given the decline in software license fees and the reliance on maintenance and services revenue.