ACI Worldwide, Inc. — Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payments software and SaaS-based solutions to financial institutions, retailers, payment processors and billers worldwide. The filing covers the unaudited three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
During the period, ACI completed the sale of its Community Financial Services assets and liabilities to Fiserv for $200.0 million and continued integrating PAY.ON, acquired in November 2015.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $219.9 million | $265.8 million | $446.0 million | $498.6 million |
| Operating income (loss) | $(26.3) million | $23.7 million | $110.6 million | $30.1 million |
| Net income (loss) | $(16.9) million | $27.1 million | $72.6 million | $26.9 million |
| Diluted EPS | $(0.15) | $0.23 | $0.61 | $0.23 |
| Operating margin | (12.0%) | 8.9% | 24.8% | 6.0% |
| Net margin | (7.7%) | 10.2% | 16.3% | 5.4% |
| Operating cash flow | Not separately provided | Not separately provided | $56.9 million | $49.9 million |
Six-month operating results included a $152.0 million pretax gain, or $93.7 million after tax, on the CFS divestiture. The 2015 comparison included a $24.5 million gain on the sale of Yodlee securities. These unusual items significantly affect period-over-period profitability and margins.
Revenue, expenses and material changes
- Second-quarter revenue declined 17% year over year, primarily from a 50% decrease in license revenue and an 11% decrease in hosting revenue. Maintenance revenue was essentially flat and services revenue increased 3%.
- Six-month revenue declined 11%, including a 34% decrease in license revenue, a 5% decrease in hosting revenue, a 2% decrease in maintenance revenue and a 7% decrease in services revenue.
- The company attributed much of the license decline to the timing and size of capacity-related license events, including a $25.2 million decrease in capacity-related license revenue.
- Excluding PAY.ON, the CFS divestiture and foreign currency effects, six-month revenue decreased approximately 4%.
- PAY.ON contributed $4.2 million of second-quarter revenue and $8.4 million of six-month revenue, but also contributed operating losses of $4.7 million and $8.0 million, respectively.
- Six-month research and development expense increased 17% to $89.9 million, general and administrative expense increased 29% to $60.3 million, and depreciation and amortization increased 12% to $44.6 million.
- Stock-based compensation increased to $22.6 million for the six months, compared with $9.3 million in the prior-year period.
Cash flow, debt and liquidity
- Cash and cash equivalents were $52.5 million at June 30, 2016, down from $102.2 million at December 31, 2015. Approximately $45.1 million was held by foreign subsidiaries and was intended to remain permanently reinvested outside the United States.
- Six-month investing cash flow was $159.9 million, primarily reflecting the $200.0 million CFS sale proceeds, partially offset by $33.1 million of property, equipment and software purchases.
- Financing cash flow was $(265.2) million, including $156.0 million of revolver repayments, $47.6 million of term debt repayments and $60.1 million of share repurchases.
- Principal debt outstanding was approximately $734.9 million, consisting of $412.9 million under the term facility, $22.0 million under the revolver and $300.0 million of 6.375% senior notes due 2020. Debt net of issuance costs was $723.4 million.
- The credit facility matures August 20, 2018. The company reported up to $203.0 million of unused revolving capacity, subject to applicable conditions, and a $25.0 million standby letter of credit reduced maximum revolver availability to $225.0 million.
- The credit facility interest rate was 2.72% at June 30, 2016. A waiver was obtained for the consolidated fixed charge coverage ratio covenant for the quarters ending June 30, September 30 and December 31, 2016. The company reported compliance with all other financial debt covenants.
- The company stated that existing cash, operating cash flow and available revolver capacity should satisfy projected liquidity needs for the next twelve months and foreseeable future.
Outlook, commentary, risks and unusual items
- No specific quantitative revenue or earnings guidance is provided in the filing.
- Management identified opportunities from increasing electronic payment volumes, real-time payments, cloud adoption, payment fraud and compliance requirements, mobile payments, regulatory changes and electronic bill payment outsourcing.
- Reported 60-month backlog was $4.047 billion at June 30, 2016, including $1.715 billion of committed backlog and $2.332 billion of assumed renewal backlog. The CFS sale reduced backlog by $355.5 million. Backlog estimates depend on renewal, pricing, foreign exchange and customer behavior assumptions and are not GAAP measures.
- The company faces substantial competition, customer consolidation, project delays, contract renewal risk, foreign currency exposure, cybersecurity and regulatory risks, and risks associated with migrating customers to next-generation products.
- ACI Worldwide Corp. is appealing a BHMI judgment exceeding $46.5 million, consisting of $43.8 million of damages and $2.7 million of attorney fees and costs. Management determined that a loss was not probable and reasonably estimable and recorded no accrual.
- The CFS transaction remains subject to post-closing adjustments and potential claims under the transaction and transition services agreements.
- Unrecognized tax benefits were $22.9 million at June 30, 2016, excluding $2.1 million of related interest and penalties.
- Management reported effective disclosure controls as of June 30, 2016, while PAY.ON internal controls continued to be integrated.
Important facts for investors to verify
- Whether license and capacity-related revenue rebounds after the timing-related weakness reported in the second quarter.
- The sustainability of hosting, maintenance and recurring monthly license growth excluding the divested CFS business.
- The final post-closing gain and any retained liabilities or claims related to the CFS divestiture.
- The outcome and potential cash impact of the BHMI appeal.
- Compliance with debt covenants after the temporary fixed-charge coverage waiver expires and the company’s ability to refinance or repay 2018 and 2020 maturities.
- Whether PAY.ON integration delivers expected strategic and financial benefits without further operating losses or elevated costs.
- The quality of the reported backlog, particularly the $2.332 billion renewal component, and the assumptions underlying future revenue recognition.