Business Context and Reporting Period
ACI Worldwide, Inc. provides electronic payments, banking, bill payment, fraud detection, and related software and hosted services to more than 5,600 financial institutions, retailers, billers, and processors globally. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Financial Results and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $238.7 million | $249.6 million | $737.3 million | $725.9 million |
| Operating income | $23.9 million | $31.9 million | $54.0 million | $58.9 million |
| Operating margin | 10.0% | 12.8% | 7.3% | 8.1% |
| Net income | $14.8 million | $15.7 million | $41.7 million | $21.2 million |
| Diluted EPS | $0.12 | $0.14 | $0.35 | $0.18 |
| Net margin | 6.2% | 6.3% | 5.7% | 2.9% |
| Cash flow from operations | Not separately provided | Not separately provided | $119.0 million | $72.0 million |
- Q3 revenue was $238.7 million, down 4% year over year. Hosting revenue increased 3% to $103.4 million, while license, maintenance, and services revenue declined.
- Nine-month revenue increased 2%, primarily from a 7% increase in hosting revenue and a 17% increase in initial license fees, partly offset by lower monthly license, maintenance, and services revenue.
- Nine-month net income benefited materially from a $24.5 million realized gain on the sale of Yodlee common stock and a lower effective tax rate. The effective tax rate was 20.4% in Q3 and 17.9% for the nine-month period, compared with 37.5% and 27.1%, respectively, in the prior-year periods.
- Cash and cash equivalents were $80.9 million at September 30, 2015, including $52.9 million held by foreign subsidiaries that management intended to permanently reinvest outside the United States.
- Total debt was $784.4 million, consisting of $484.4 million under the term credit facility and $300.0 million of 6.375% senior notes due 2020. The company reported up to $250.0 million of unused revolving credit capacity, subject to borrowing conditions.
- The company was in compliance with its debt covenants. The credit facility carried a 2.45% interest rate at September 30, 2015.
- Off-balance-sheet client settlement funds totaled $216.2 million and were not included in the company’s balance sheet because ACI did not own the funds.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined $10.9 million, or 4%, driven by lower license revenue of $7.4 million, maintenance revenue of $4.5 million, and services revenue of $2.4 million. Hosting revenue increased $3.3 million.
- Q3 operating income declined $8.0 million, and operating margin decreased to 10.0% from 12.8%, despite a 1% reduction in operating expenses. Higher depreciation and amortization and selling and marketing expense partly offset lower general and administrative costs.
- Nine-month revenue increased $11.4 million, or 2%. The increase included $24.5 million of incremental revenue from the 2014 Retail Decisions acquisition, partly offset by $19.6 million of unfavorable foreign-currency effects.
- Retail Decisions contributed $30.3 million of nine-month revenue but an estimated $5.6 million operating loss, including severance related to integration activities.
- Nine-month operating income declined $4.9 million despite higher revenue, primarily because operating expenses increased 2%, including $29.3 million of incremental Retail Decisions costs and higher interchange, selling and marketing, and depreciation and amortization expenses.
- Operating cash flow increased $47.0 million year over year, supported by higher earnings and improved receivable collections. Investing cash outflow was only $3.3 million compared with $231.8 million in 2014, when the company funded the Retail Decisions acquisition.
- The company repaid $44.0 million net under the revolving facility and $63.5 million under the term credit facility during the first nine months of 2015. No shares were repurchased under the stock repurchase program during the period.
- Foreign currency translation losses increased accumulated other comprehensive loss to $68.2 million at September 30, 2015.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide specific quantitative earnings or revenue guidance. Management stated that existing cash, operating cash flow, and available revolver capacity were expected to satisfy projected liquidity needs for the next twelve months and foreseeable future.
- Management cited growth opportunities from increasing electronic payment volumes, real-time payments, cloud adoption, fraud prevention, EMV migration, regulatory change, mobile payments, and global vendor sourcing.
- The 60-month backlog estimate was $4.15 billion at September 30, 2015, consisting of $1.74 billion of committed backlog and $2.42 billion of assumed renewal backlog. The filing cautions that backlog is judgmental, includes renewal assumptions, and is not a GAAP measure.
- On November 4, 2015, after the reporting period, ACI completed the acquisition of PAY.ON AG for approximately €180 million, or approximately $200 million, using about $181.5 million from the revolving credit facility. Purchase accounting had not been finalized as of the filing date.
- A Nebraska jury returned a $43.8 million verdict against an ACI subsidiary in September 2015 in litigation with BHM, Inc. The court had not entered the verdict or ruled on post-verdict motions as of the filing date. ACI intended to appeal and had not accrued a loss because management determined that a loss was not probable and could not reasonably be estimated.
- The company recognized approximately $1.3 million of restructuring termination costs during the first nine months of 2015 and had $1.3 million of restructuring liabilities outstanding at September 30, 2015.
- Unrecognized tax benefits were $22.1 million, excluding $2.3 million of related interest and penalties. Management expected approximately $3.3 million of unrecognized benefits could decrease within the following twelve months.
- Key risks include competition, customer and project delays, contract renewals, international operations and foreign exchange, cybersecurity and system interruptions, regulatory compliance, debt service and covenants, acquisition integration, goodwill impairment, litigation, tax uncertainty, and the reliability of backlog assumptions.
- The company was evaluating the effects of new revenue-recognition and cloud-computing accounting standards; the filing does not provide a clear quantified impact.
Most Important Facts to Verify
- Whether the $43.8 million BHMI litigation verdict was entered, modified, settled, or overturned and whether any related liability was ultimately recorded.
- The final purchase-price allocation, financing, leverage impact, and operating contribution of the PAY.ON acquisition.
- Whether the company’s debt covenants and liquidity remained satisfactory after drawing approximately $181.5 million for PAY.ON.
- The sustainability of revenue growth given the decline in Q3 license, maintenance, and services revenue and the reliance on hosting and capacity-related license activity.
- The extent to which the $24.5 million Yodlee gain and lower tax rate inflated nine-month net income and are not recurring.
- Actual conversion of the $4.15 billion backlog, particularly the $2.42 billion renewal component, and the effects of foreign exchange and customer project timing.
- Progress integrating Retail Decisions and PAY.ON, including whether acquisition-related losses and restructuring costs decline as expected.