Business Context and Reporting Period
ACI Worldwide, Inc. develops and supports software and cloud solutions for real-time electronic payments, serving banks, financial intermediaries, merchants, and corporates. The filing is a Form 10-K for the fiscal year ended December 31, 2018, with quarterly data for the quarter ended December 31, 2018. ACI reported more than 5,100 customers in over 90 countries and approximately 3,807 employees at year-end.
Key Financial Metrics
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $1,009.8 million | $1,024.2 million | Down 1% |
| Operating income | $125.9 million | $84.6 million | Up 49% |
| Operating margin | 12.5% | 8.3% | Improved |
| Net income | $68.9 million | $5.1 million | Up $63.8 million |
| Net margin | 6.8% | 0.5% | Improved |
| Diluted EPS | $0.59 | $0.04 | Up $0.55 |
| Operating cash flow | $183.9 million | $146.2 million | Up 26% |
| Capital expenditures and software purchases | $43.9 million | $54.4 million | Down 19% |
- Revenue mix: SaaS and PaaS revenue was $433.0 million, up 2%; license revenue was $280.6 million, down 4%; maintenance revenue was $219.1 million, down 1%; and services revenue was $77.1 million, down 8%.
- Segments: ACI On Premise revenue was $576.8 million, down from $598.6 million, with Segment Adjusted EBITDA of $323.9 million. ACI On Demand revenue was $433.0 million, up from $425.6 million, and Segment Adjusted EBITDA improved to $12.0 million from a loss of $1.8 million.
- Liquidity: Cash and cash equivalents were $148.5 million, and availability under the revolving credit facility was $500.0 million, for total reported liquidity of $648.5 million.
- Debt: Gross debt was approximately $685.0 million, consisting principally of $285.0 million under the term facility and $400.0 million of 5.750% senior notes due 2026. The revolving facility had no borrowings at year-end. The term facility carried a 4.27% interest rate at December 31, 2018.
- Balance sheet: Working capital was $269.9 million, total assets were $2.12 billion, and stockholders’ equity was $1.05 billion.
- Fourth quarter: Revenue was $320.0 million, operating income was $116.4 million, and net income was $87.7 million, compared with FY 2018 quarterly losses in the first and second quarters. The filing notes that revenue and earnings are seasonally concentrated in the third and fourth quarters.
Material Changes Versus Prior Comparable Period
- Revenue declined modestly despite growth in SaaS and PaaS, primarily because of lower license, maintenance, and services revenue. Management attributed the license decline mainly to the timing and size of license and capacity events.
- Operating income improved substantially as operating expenses declined 6%. The comparison benefited from the absence of the $46.7 million general and administrative expense related to the 2017 Baldwin Hackett & Meeks judgment.
- Net income also benefited from a lower effective tax rate of approximately 25% in 2018 versus 88% in 2017. The 2017 tax rate was elevated by the Tax Cuts and Jobs Act.
- Operating cash flow increased $37.7 million, primarily because the 2017 payment of the BHMI judgment did not recur and because of the timing of customer billings and collections.
- ACI adopted ASC 606 using the modified retrospective method on January 1, 2018, increasing retained earnings by approximately $244.0 million. The standard accelerated recognition of certain license revenue, created significant accrued receivables, and changed the timing of sales commission expense.
- In August 2018, ACI issued $400.0 million of 5.750% senior notes due 2026, redeemed its $300.0 million senior notes due 2020, and repaid approximately $109.3 million of term debt.
- ACI repurchased 2.35 million shares for $54.5 million during 2018. Approximately $176.6 million remained authorized under the repurchase program at year-end.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide a clear numerical FY 2019 revenue or earnings guidance figure.
- Management highlighted growth opportunities from increasing electronic payment volumes, real-time payments, cloud adoption, fraud prevention, regulatory requirements, mobile payments, and electronic bill payment.
- On February 28, 2019, after year-end, ACI announced an agreement to acquire Western Union’s Speedpay U.S. domestic bill-pay business for approximately $750.0 million in cash. The proposed financing included a $500.0 million senior secured term loan and use of the existing revolver; closing remained subject to customary conditions, including antitrust clearance.
- Principal risks include intense competition, customer consolidation and renewal risk, delays or cancellations of complex implementations, cybersecurity and service interruptions, privacy and money-transmitter regulation, foreign currency exposure, international operations, intellectual property claims, goodwill impairment, tax examinations, and debt covenant or refinancing risk.
- ACI reported $666.4 million of revenue allocated to remaining performance obligations at December 31, 2018, with approximately 48% expected to be recognized over the next 12 months. Backlog estimates include renewal assumptions and are not equivalent to contracted revenue.
- Unrecognized tax benefits were $28.4 million, and the company disclosed ongoing tax examinations in multiple jurisdictions. The filing states that no currently pending legal proceeding was expected to have a material adverse effect, while contractual indemnification, warranty, and litigation exposures remain possible.
- Goodwill was $909.7 million, or a substantial portion of the asset base. Management reported that estimated fair values substantially exceeded carrying values in the 2018 impairment testing.
- Management and Deloitte & Touche concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018. The company upgraded its financial ERP system during 2018 and modified certain billing and revenue-recognition controls.
Important Facts for Investors to Verify
- Assess the sustainability of improved profitability after excluding the 2017 BHMI judgment and other accounting effects, particularly the ASC 606 adoption impact.
- Monitor whether ACI On Demand growth and profitability offset continued weakness in ACI On Premise, license, maintenance, and services revenue.
- Verify the financing, leverage, covenant compliance, and integration economics associated with the proposed $750.0 million Speedpay acquisition.
- Review cash conversion and the substantial increase in accrued receivables following ASC 606 adoption.
- Evaluate exposure to the $400.0 million 2026 notes, the floating-rate term facility, and scheduled term-debt amortization through 2022.
- Reconcile backlog and remaining performance obligations with actual bookings, renewals, customer concentration, foreign exchange movements, and revenue recognized in subsequent periods.