Business Context and Reporting Period
ACI Worldwide, Inc. develops, markets, installs and supports electronic-payment software and services for financial institutions, retailers and payment processors. The Form 10-Q covers the three and six months ended June 30, 2010, compared with the corresponding 2009 periods. The company reports through the Americas, EMEA and Asia/Pacific geographic segments.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|---|---|
| Revenue | $92.4 million | $87.2 million | $180.2 million | $175.4 million |
| Operating income (loss) | $4.4 million | $(3.2) million | $3.5 million | $(5.3) million |
| Operating margin | 4.7% | (3.7)% | 1.9% | (3.0)% |
| Net loss | $(0.2) million | $(3.6) million | $(2.2) million | $(7.7) million |
| Net margin | (0.2)% | (4.1)% | (1.2)% | (4.4)% |
| Operating cash flow | Not separately provided | Not separately provided | $17.1 million | $19.5 million |
Revenue mix for the six months included software license fees of $60.7 million, maintenance fees of $67.6 million, services of $31.8 million and software hosting fees of $20.0 million.
- Cash and cash equivalents were $117.8 million at June 30, 2010, compared with $125.9 million at December 31, 2009.
- The company had $75.0 million outstanding under its $150.0 million revolving credit facility and reported $75.0 million of unused borrowing capacity, subject to facility terms.
- Total liabilities were $335.2 million and stockholders' equity was $217.3 million at June 30, 2010.
- Deferred revenue totaled $150.5 million, including $113.3 million current and $37.1 million noncurrent.
- Interest-rate swap liabilities were $2.4 million at June 30, 2010; the swaps did not qualify for hedge accounting.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 6.0%, while six-month revenue increased 2.7%.
- Software license revenue increased 18.8% in the quarter and 6.1% year to date. Monthly license fees increased 20.8% in the quarter and 16.7% year to date, while initial license fees declined 9.8% year to date.
- Maintenance revenue increased 7.1% in the quarter and 9.3% year to date.
- Services revenue declined 2.8% in the quarter and 10.7% year to date; hosting revenue declined 13.4% and 3.1%, respectively. Management attributed the declines primarily to revenue deferrals associated with customer projects, new functionality and migrations.
- Total operating expenses declined 2.6% in the quarter and 2.2% year to date, led by lower general and administrative and research and development costs. Selling and marketing and depreciation and amortization increased.
- Operating results improved from losses to income in both comparative periods. The improvement was partly offset by income tax expense of $2.4 million in the quarter and $3.0 million year to date, producing net losses despite positive operating income.
- Cash flow from operations decreased $2.4 million year to date, primarily due to higher vendor payments. Financing cash outflows included $15.7 million of share repurchases.
- Revenue categories were reclassified to separately present software hosting fees. Prior periods were conformed, with no impact on total revenue or net loss.
Guidance, Outlook, Commentary and Risks
- The filing does not provide specific numerical revenue or earnings guidance. Management stated that available cash, operating cash flow and current credit availability should satisfy liquidity needs for at least the next twelve months.
- Management expects the shift from initial license fees to monthly license fees to continue as certain retail payment products mature. Customer migrations to BASE24-eps and other newer products may defer license, maintenance and services revenue and increase deferred revenue.
- Sixty-month backlog was estimated at $1.515 billion at June 30, 2010, compared with $1.517 billion at December 31, 2009. Twelve-month backlog was $374 million, including $284 million of monthly recurring and $90 million of non-recurring revenue.
- Backlog estimates depend on assumed renewals, customer performance, project completion, pricing and foreign-exchange rates and are not subject to the same level of internal review as GAAP measures.
- Key risks include global economic and credit-market conditions, customer consolidation, competition, foreign-currency exposure, revenue-recognition judgments, customer project delays or cancellations, product migrations, cybersecurity and product defects, tax uncertainties, the IBM alliance and credit-facility covenants.
- Unrecognized tax benefits were $10.8 million, plus $2.1 million of related interest and penalties. Management believed approximately $6.5 million of unrecognized tax benefits could decrease within twelve months.
- The company repurchased 841,400 shares for approximately $15.7 million during the first six months and had approximately $26 million remaining under its repurchase authorization at June 30, 2010.
- Management reported no material litigation and no material changes to previously disclosed risk factors. Disclosure controls and procedures were concluded to be effective as of June 30, 2010.
Important Facts for Investors to Verify
- Reconcile the $75.0 million of reported unused credit capacity with the $75.0 million outstanding balance and review covenant headroom and the September 2011 facility maturity.
- Assess the sustainability of positive operating income despite continued net losses, unusually high effective tax rates and ongoing foreign-currency losses.
- Evaluate the quality and conversion risk of the $1.515 billion 60-month backlog, particularly its $760 million renewal component.
- Monitor the continuing shift from initial license fees to monthly and deferred revenue, including the timing of customer migrations and project acceptances.
- Review exposure to unrecognized tax benefits, interest-rate swap settlements, IBM alliance obligations and other commitments.
- Confirm the effect of the revenue reclassification and distinguish reported growth from changes in revenue timing and category presentation.