ACI Worldwide, Inc. — Form 10-Q Summary
Business Context and Reporting Period
ACI develops, markets, installs and supports electronic-payments software and services for financial institutions, retailers and payment processors across the Americas, EMEA and Asia/Pacific. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the same periods in 2011.
The results include S1 Corporation from its February 13, 2012 acquisition date. ACI also acquired North Data Uruguay S.A. on May 24, 2012 and Distra Pty Ltd on September 18, 2012. Purchase-price allocations remained preliminary.
Financial Performance and Key Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $155.1 million | $112.1 million | $442.5 million | $330.1 million |
| Operating income (loss) | $8.3 million | $11.3 million | $(1.2) million | $29.2 million |
| Operating margin | 5.4% | 10.0% | (0.3)% | 8.8% |
| Net income (loss) | $5.7 million | $10.5 million | $(0.8) million | $22.0 million |
| Diluted EPS | $0.14 | $0.31 | $(0.02) | $0.64 |
| Operating cash flow | Not provided | Not provided | $(12.7) million | $52.2 million |
- Q3 revenue increased 38.3%; nine-month revenue increased 34.1%. S1 contributed an estimated $47.8 million in Q3 revenue and $113.4 million for the nine-month period.
- Revenue growth was led by maintenance fees, services and software hosting fees. Nine-month software hosting revenue rose 140.6% to $81.8 million, while software license revenue declined 1.5% to $127.1 million.
- Operating expenses increased 45.5% in Q3 and 47.5% for nine months. Management identified approximately $4.5 million and $27.1 million of acquisition-related and other one-time expenses in those periods, respectively.
- Interest expense rose to $2.6 million in Q3 and $7.4 million for nine months, primarily because of acquisition-related debt. Foreign-currency losses were $1.4 million in Q3 and $2.4 million for nine months.
- The nine-month effective tax rate was 90.6%, reflecting a pretax loss, foreign and domestic earnings mix, a $1.4 million valuation-allowance release, a $1.6 million tax-liability release and a $1.0 million favorable uncertain-tax-position adjustment.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $87.7 million at September 30, 2012, down from $197.1 million at December 31, 2011. Approximately $77.0 million was held by foreign subsidiaries and intended to remain permanently reinvested outside the United States.
- Cash used in investing activities was $339.9 million, including $325.2 million for acquisitions. Financing activities provided $243.7 million, including $200.0 million of term borrowings and $119.0 million of revolver borrowings, partly offset by repayments and equity repurchases.
- Debt consisted of approximately $190.6 million under the term facility and $194.0 million under the revolving facility. Up to $56 million of revolver capacity was unused, subject to agreement terms. The interest rate at quarter-end was 2.22%; the company was in compliance with its debt covenants.
- Total assets increased to $1.22 billion from $664.6 million, primarily from acquisitions. Goodwill increased to $505.8 million from $214.1 million, and other intangible assets increased to $125.6 million from $18.3 million.
- ACI repurchased 1.44 million common shares for $57.8 million during the nine months and repurchased IBM warrants for $29.6 million. No IBM warrants remained outstanding at September 30, 2012. Approximately $76.3 million remained available under the share-repurchase program.
Material Changes Versus the Prior Comparable Period
- The S1 acquisition materially expanded revenue, assets, debt, goodwill, intangible assets and employee-related costs. S1 contributed estimated nine-month operating income of $(11.4) million, including nonrecurring severance and accelerated stock compensation costs.
- Management reported approximately $33 million of annual S1 cost synergies achieved and expected an additional $20 million from IT, facilities and data-center consolidation. Management expected corporate costs to decline into 2013 as synergies were realized.
- ACI reduced headcount by 272 employees and recorded $9.6 million of termination costs. Facility closures generated approximately $3.4 million of termination charges, with $4.5 million of restructuring liabilities remaining at quarter-end.
- The company terminated its IBM IT outsourcing agreement effective January 31, 2013, recorded a $3.0 million termination fee and expected additional transition costs.
- Six-month? No: the filing reports 60-month backlog of $2.37 billion at September 30, 2012, up from $1.62 billion at December 31, 2011, including approximately $709 million attributable to S1. Twelve-month backlog was $584 million, versus $424 million at December 31, 2011.
Outlook, Risks, Contingencies and Unusual Items
- No formal earnings or revenue guidance is provided in the filing. Management expects growth from increasing electronic-payment volumes, mobile payments, real-time delivery, fraud and compliance solutions, cloud capabilities, EMV adoption and regulatory-driven demand.
- Backlog estimates include assumed renewals and are not GAAP measures. Actual results may differ because of customer cancellations or renegotiations, project delays, foreign-exchange movements, mergers and changes in renewal rates.
- Key risks include acquisition integration and realization of expected synergies, elevated leverage and debt covenants, goodwill and intangible-asset impairment, uncertain tax liabilities, foreign-exchange exposure, intense competition, cybersecurity and product defects, customer concentration and contract renewals, and cyclical quarter-end revenue timing.
- Unrecognized tax benefits totaled $14.0 million at September 30, 2012, plus $1.8 million of related interest and penalties. The company expected approximately $0.5 million of unrecognized tax benefits could decrease within 12 months.
- The company reported no material pending legal proceeding and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective, while S1 integration and the IBM outsourcing transition remained ongoing internal-control considerations.
Investor Verification Items
- Verify the final purchase-price allocations and acquired intangible valuations for S1, North Data and Distra, including any resulting goodwill or amortization changes.
- Assess whether reported revenue growth and backlog convert into sustainable organic growth after separating S1 contributions and assumed renewals.
- Monitor operating cash flow, receivables collection, integration costs, restructuring payments and the company’s ability to realize the stated $20 million of additional synergies.
- Review leverage, required term-loan amortization, revolver availability and compliance with maximum-leverage and fixed-charge-coverage covenants.
- Evaluate the sustainability of the unusually high effective tax rate and the status of uncertain tax positions.
- Track goodwill, acquired software and customer-relationship balances for impairment risk and the effect of materially higher amortization on future margins.