ACI Worldwide, Inc. — Fiscal 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual Form 10-K rather than a quarterly filing; fourth-quarter results are included in the annual and unaudited quarterly disclosures.
Business Context
ACI develops, markets, installs and supports software and hosted services for electronic payments, online banking, bill payment, payment processing, fraud management and related infrastructure. Customers include financial institutions, retailers, billers and payment processors in more than 80 countries. ACI reported more than 5,000 customers and approximately 4,576 employees at year-end.
ACI completed the $186.4 million acquisition of PAY.ON on November 4, 2015, adding eCommerce payment gateway and SaaS capabilities. PAY.ON contributed $2.9 million of 2015 revenue and a $2.1 million operating loss. The purchase price allocation remained preliminary at year-end.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $1,046.0 million | $1,016.1 million | +3% |
| Operating income | $127.9 million | $138.2 million | -7% |
| Operating margin | 12.2% | 13.6% | Down 1.4 percentage points |
| Net income | $85.4 million | $67.6 million | +26% |
| Net margin | 8.2% | 6.6% | Up 1.5 percentage points |
| Diluted EPS | $0.72 | $0.58 | +24% |
| Cash flow from operations | $183.1 million | $149.0 million | +23% |
| Cash and cash equivalents | $102.2 million | $77.3 million | +$24.9 million |
| Total debt | $938.6 million | $891.9 million | +$46.6 million |
Revenue mix: Hosting revenue was $446.1 million, or 43% of revenue; license revenue was $251.2 million; maintenance was $241.9 million; and services were $106.8 million. Initial license fees increased 22%, while monthly license fees declined 16% and maintenance revenue declined 6%.
Expenses: Total operating expenses increased 5% to $918.0 million. Cost of maintenance, services and hosting increased 4%; selling and marketing increased 15%; research and development increased 1%; and depreciation and amortization increased 15%. R&D expense was $145.9 million, or 14% of revenue.
Other items: Other, net included a $24.5 million gain from the sale of Yodlee shares. Interest expense increased to $41.4 million from $39.7 million. The effective tax rate declined to approximately 25% from 32%, partly due to foreign tax rate differences and a $8.6 million tax benefit related to the Yodlee investment and valuation allowance changes.
Cash Flow, Liquidity and Debt
- Operating cash flow was $183.1 million. Investing cash flow was negative $200.0 million, including $179.4 million spent on PAY.ON and $55.9 million for software, property, equipment and other investments, partly offset by $35.3 million of proceeds from available-for-sale securities.
- Financing cash flow was positive $49.6 million. ACI drew $298.0 million under the revolving facility and repaid $164.0 million; it repaid $87.4 million under the term facility.
- Debt consisted of $460.6 million under the term facility, $178.0 million under the revolving facility and $300.0 million of 6.375% senior notes due 2020. The credit facility carried a 2.68% interest rate at year-end and had up to $72.0 million of unused borrowings, subject to covenant availability.
- The term facility matures in 2018, while the credit agreement and senior notes are secured and contain leverage, fixed-charge coverage and other restrictive covenants. ACI stated that it was in compliance with its debt covenants throughout the period.
- Working capital was negative $2.4 million at year-end. Contractual obligations totaled approximately $1.18 billion, including debt, interest, operating leases and financed internally used software.
- Settlement accounts of $260.2 million were maintained for clients and excluded from ACI’s balance sheet. Management stated that existing cash, operating cash flow and available borrowings should meet expected liquidity needs for the next twelve months and foreseeable future.
Material Changes Versus 2014
- Revenue grew 3%, driven by higher initial license, services and hosting revenue, partially offset by lower monthly license and maintenance revenue.
- Foreign currency movements reduced reported 2015 revenue by approximately $25.0 million and reduced operating expenses by approximately $27.1 million.
- PAY.ON and the full-year contribution from ReD added approximately $27.6 million of revenue and $34.2 million of operating expenses.
- Operating income declined despite revenue growth because of acquisition-related costs, higher interchange processing fees, selling and marketing spending, and increased amortization.
- Net income and EPS increased substantially, primarily reflecting the $24.5 million Yodlee gain, lower effective taxes and higher operating cash flow.
- Goodwill increased to $913.3 million from $781.2 million, principally due to PAY.ON. Management reported that all reporting units substantially exceeded their goodwill carrying values in impairment testing.
- The 60-month backlog estimate rose to $4.302 billion from $4.160 billion, including $57.1 million attributable to PAY.ON. The 12-month backlog estimate increased to $918 million from $903 million, including $12.0 million from PAY.ON.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear numerical revenue, earnings or cash-flow forecast. Management highlighted growth opportunities from increasing electronic payment volumes, real-time payments, mobile and cloud adoption, fraud prevention, EMV migration, regulatory changes, electronic bill payment and global vendor sourcing.
- ACI’s strategy depends on successfully migrating customers from legacy retail payment products to Universal Payments and BASE24-eps. Product maturity announcements may delay purchases, defer revenue recognition or lead to unfavorable contract renegotiations.
- Revenue and earnings are highly cyclical, with activity concentrated in the third and fourth quarters. Complex contracts, customer acceptance, project completion estimates and renewal assumptions can materially affect timing of revenue recognition.
- Key risks include intense competition, customer consolidation, reluctance to change vendors, loss of renewals, project delays, inaccurate backlog estimates, foreign currency exposure, variable-rate debt, covenant compliance, cybersecurity incidents, system outages, regulatory and privacy requirements, intellectual-property claims, tax examinations and goodwill or intangible-asset impairment.
- ACI reduced headcount by 30 employees during 2015 and recorded approximately $1.3 million of termination costs. Unpaid restructuring liabilities were approximately $1.0 million at year-end.
- A Nebraska jury awarded $43.8 million against an ACI subsidiary in litigation brought by Baldwin Hackett & Meeks; the court later entered judgment for $43.8 million plus $2.7 million of fees and costs. ACI filed post-judgment motions and intended to appeal, determined that a loss was not probable or reasonably estimable, and recorded no accrual.
- On January 20, 2016, ACI agreed to sell its Community Financial Services products to Fiserv for $200.0 million, subject to working-capital adjustments and customary closing conditions. The transaction had not closed as of the filing date and could be terminated under specified circumstances.
- Management and Deloitte concluded that disclosure controls and internal control over financial reporting were effective. The assessment and audit excluded PAY.ON, which represented approximately 10% of consolidated assets and less than 1% of 2015 revenue, because it had been acquired late in the year.
Most Important Facts to Verify
- Whether PAY.ON integration produces the expected strategic benefits and whether its preliminary purchase accounting is subsequently revised.
- Completion, timing and net proceeds of the planned $200.0 million Community Financial Services sale to Fiserv.
- Debt refinancing and repayment capacity, particularly the 2018 credit facility maturity, 2020 senior notes maturity and floating-rate exposure.
- Actual customer renewals, backlog conversion and the effect of legacy-product migrations on revenue recognition.
- Outcome of the BHMI litigation and any resulting cash, earnings or covenant impact.
- Sustainability of reported earnings excluding the $24.5 million Yodlee gain and the favorable tax effects.
- Foreign-currency trends, cybersecurity and service-continuity performance, regulatory compliance, tax examinations and potential goodwill or intangible impairments.