ACI Worldwide, Inc. — Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payment, bill payment, fraud, digital channel, and real-time payment solutions to banks, merchants, corporates, and billers globally. The filing covers the unaudited three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
ACI completed the $754.1 million cash acquisition of Speedpay on May 9, 2019, materially expanding its bill-payment and on-demand platform business. Walletron was also acquired, but its results were not material.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Total revenue | $354.9 million | $245.5 million | +45% |
| Operating income | $55.3 million | $28.4 million | +95% |
| Operating margin | 15.6% | 11.5% | +4.1 pts |
| Net income | $31.8 million | $15.2 million | +109% |
| Diluted EPS | $0.27 | $0.13 | + $0.14 |
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|
| Total revenue | $858.4 million | $689.8 million | +24% |
| Operating income | $21.3 million | $9.5 million | +125% |
| Operating margin | 2.5% | 1.4% | +1.1 pts |
| Net income (loss) | $11.6 million | $(18.8) million | Improved by $30.3 million |
| Diluted EPS | $0.10 | $(0.16) | Improved by $0.26 |
- Q3 revenue growth was driven primarily by Speedpay, which contributed $87.7 million. Excluding Speedpay and foreign exchange, revenue increased approximately 10%.
- Nine-month revenue included $137.1 million from Speedpay. Excluding Speedpay and foreign exchange, revenue increased approximately 6%.
- Q3 SaaS and PaaS revenue increased 85% to $193.0 million; nine-month SaaS and PaaS revenue increased 47% to $474.0 million. License revenue increased 33% in Q3 and 16% year to date, while maintenance revenue declined 3% and 4%, respectively.
- Segment Adjusted EBITDA was $118.1 million in Q3 and $220.5 million year to date, compared with $81.1 million and $167.2 million in the prior-year periods. ACI On Demand improved substantially, including the contribution from Speedpay.
- Net cash provided by operating activities was $88.9 million for the first nine months, versus $100.5 million in 2018. Investing cash flow was $(813.0) million, primarily reflecting the Speedpay acquisition; financing cash flow was $695.7 million.
- Cash and cash equivalents were $121.6 million at September 30, 2019, including $44.0 million held by foreign subsidiaries. Total reported liquidity was $356.6 million, consisting of cash plus $235.0 million of unused revolving capacity. A separate $140.0 million overdraft facility was fully available and undrawn.
- Total debt was $1.408 billion, consisting of $765.8 million of term loans, $265.0 million drawn on the revolving facility, and $400.0 million of 5.750% senior notes due 2026, net of debt issuance costs. The Credit Facility interest rate was 4.29% at quarter-end.
Material changes versus the prior comparable periods
- The Speedpay acquisition increased on-demand revenue, goodwill, intangible assets, debt, and operating expenses. Speedpay contributed $7.5 million of operating income in Q3 and $15.2 million for the nine months.
- Goodwill increased to $1.278 billion from $909.7 million at December 31, 2018, principally from Speedpay. The purchase price allocation remained preliminary and may change during the measurement period.
- Interest expense increased 51% in Q3 and 45% year to date, primarily because of higher debt balances used to fund the acquisition.
- Q3 cost of revenue increased 70%, partly due to Speedpay and higher payment-card interchange and processing fees. Depreciation and amortization increased 49% in Q3 and 26% year to date, reflecting acquired assets and intangibles.
- The company repurchased 1.23 million shares for $35.6 million during the first nine months, with approximately $141.0 million remaining under the authorization.
- ASC 842 lease accounting was adopted on January 1, 2019, resulting in recognition of $63.3 million of right-of-use assets and $68.6 million of operating lease liabilities at adoption.
Outlook, commentary, risks, and unusual items
Management stated that available cash, operating cash flow, and revolving-credit capacity are expected to satisfy projected working-capital and debt-service requirements for the next twelve months and the foreseeable future. The filing does not provide a specific numerical revenue or earnings guidance range.
- Reported nine-month net income benefited from an approximately $18.5 million non-cash tax benefit from releasing most of the valuation allowance on U.S. foreign tax credit deferred tax assets following the Speedpay acquisition. The nine-month effective tax rate was 163% because of the tax benefit on a pretax loss.
- Speedpay generated $22.2 million of transaction and integration expenses during the first nine months, included primarily in general and administrative expense. The acquisition’s purchase-price allocation remained preliminary.
- Remaining performance obligations were $618.5 million at September 30, 2019; approximately 46% was expected to be recognized over the following twelve months. The 60-month backlog estimate was $5.681 billion, including approximately $1.5 billion attributable to Speedpay, but renewal assumptions and other estimates are not guaranteed.
- Key risks include competition, customer renewals and project delays, payment and cybersecurity risks, money-transmitter and privacy regulation, foreign currency exposure, integration of Speedpay, impairment of goodwill and intangibles, debt covenants and servicing requirements, tax uncertainties, and revenue seasonality.
- The Credit Facility is floating-rate and indexed to LIBOR; the company is evaluating the expected transition from LIBOR to alternative benchmarks. A hypothetical 10% change in applicable rates would affect annual Credit Facility interest expense by approximately $4.4 million.
- Management concluded that disclosure controls and procedures were effective at September 30, 2019. Speedpay’s controls were being integrated and had a material effect on internal control over financial reporting.
- The company reported no legal proceedings expected to have a material adverse effect and stated that there were no material changes to previously disclosed risk factors other than the Speedpay integration risk.
Important facts for investors to verify
- Whether Speedpay integration produces the anticipated revenue synergies and operating efficiencies without sustained transaction, infrastructure, or control costs.
- The final purchase-price allocation, including acquired software, customer relationships, goodwill, deferred taxes, and related amortization.
- Debt reduction capacity, covenant headroom, floating-rate exposure, and the effect of approximately $1.4 billion of debt on future cash flow.
- Underlying organic growth after separating Speedpay contributions, foreign exchange effects, license-event timing, and the unusual tax benefit.
- The sustainability of backlog and remaining performance obligations, particularly the renewal component of the 60-month backlog.
- Whether maintenance revenue declines, payment-processing costs, and increasing amortization pressure future margins.
- The effect of cybersecurity, payment-funding, money-transmitter, privacy, foreign exchange, and LIBOR-transition risks on operations and liquidity.