ACI Worldwide, Inc. 2013 Form 10-K Summary
Business context and reporting period
ACI develops, markets, implements and supports electronic-payment and banking software and hosted services for financial institutions, retailers, billers and payment processors. The filing covers the fiscal year ended December 31, 2013; quarterly data is included, but this is an annual Form 10-K rather than a standalone fourth-quarter filing.
- Operations are reported across the Americas, EMEA and Asia/Pacific.
- ACI served 2,596 customers in 92 countries as of December 31, 2013, with approximately 4,329 employees.
- 2013 acquisitions included Online Resources Corporation, Official Payments Holdings and PTESA, expanding online banking and electronic bill presentment and payment capabilities.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $864.9 million | $666.6 million | 29.8% increase |
| Operating income | $123.0 million | $74.4 million | 65.4% increase |
| Net income | $63.9 million | $48.8 million | 30.8% increase |
| Diluted EPS | $1.60 | $1.22 | 31.1% increase |
| Operating margin | 14.2% | 11.2% | Improved |
| Net margin | 7.4% | 7.3% | Slightly improved |
| Cash flow from operations | $138.4 million | $(9.3) million | Improved by $147.7 million |
- Revenue mix was license $233.9 million, maintenance $246.0 million, services $122.1 million and hosting $263.0 million. Hosting revenue increased 132.0%, primarily from the ORCC and OPAY acquisitions.
- Research and development expense was $142.6 million, or 16.5% of revenue, compared with $133.8 million, or 20.1%, in 2012.
- Interest expense increased to $27.2 million from $10.4 million because of acquisition-related borrowing.
- Cash and cash equivalents were $95.1 million, including $49.9 million held by foreign subsidiaries intended to remain permanently reinvested outside the United States.
- Total debt was $755.4 million, consisting of $455.4 million under the term credit facility and $300.0 million of 6.375% senior notes due 2020. The credit facility had an interest rate of 2.42% at year-end and up to $250.0 million of revolving capacity was unused, subject to agreement limitations.
- Working capital was $90.8 million and stockholders’ equity was $543.7 million.
- Fourth-quarter revenue was $283.2 million and fourth-quarter net income was $50.4 million, compared with $224.1 million and $49.7 million, respectively, in the fourth quarter of 2012.
Material changes versus the prior comparable period
- ORCC contributed $120.8 million of 2013 revenue and OPAY contributed $23.3 million. Excluding these acquisitions, revenue increased $54.2 million, or 8.1%, primarily reflecting a full year of S1 operations and higher sales and project completions.
- Americas revenue increased 53.9% to $541.9 million; EMEA increased 4.9% to $228.7 million; Asia/Pacific decreased 2.1% to $94.4 million.
- Maintenance revenue rose 23.1%, while services revenue declined 7.2%. Hosting revenue became 30.4% of total revenue versus 17.0% in 2012.
- Operating expenses increased 25.3% to $741.9 million, slower than revenue growth. Cost of maintenance, services and hosting increased 57.6%, largely because of the acquired businesses.
- Significant transaction-related expenses were approximately $26.2 million in 2013 versus $31.5 million in 2012. The 2013 amount included $10.6 million of personnel-related charges and $15.6 million of professional and other acquisition expenses.
- Debt increased materially to fund acquisitions and was accompanied by $17.0 million of debt issuance costs. ACI repurchased 1.66 million shares for $80.9 million during 2013.
- Sixty-month backlog increased to $3.861 billion from $2.416 billion, while 12-month backlog increased to $870 million from $596 million. These figures include assumed renewals and are not GAAP measures.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear numerical revenue, earnings or cash-flow forecast. Management describes opportunities from increasing electronic-payment volumes, real-time payments, mobile and cloud adoption, fraud and compliance requirements, EMV migration, SEPA implementation and payment-platform convergence.
- Management expects liquidity needs to be met through operating cash flow, cash on hand and available credit. The company stated that it was in compliance with all debt covenants at year-end.
- Business results are highly seasonal, with revenue and earnings generally strongest in the third and fourth quarters and substantial contracting activity concentrated near quarter-end.
- Key risks include intense competition, dependence on the BASE24 product family and HP NonStop systems, successful adoption of BASE24-eps, customer renewals, project delays, backlog estimation, acquisition integration, cybersecurity and service interruptions, regulatory compliance, foreign exchange, tax audits, litigation, goodwill and intangible-asset impairment, and debt-service requirements.
- ACI recorded approximately $8.9 million of employee termination costs and $1.7 million of facility-closure expense in 2013 as part of acquisition integration. Headcount was reduced by 147 employees.
- Goodwill was $669.2 million and net acquired intangible assets were $237.7 million at year-end. Management reported that all reporting units substantially exceeded the carrying value in goodwill impairment testing; no impairment was recorded.
- Settlement funds of $284.0 million were held for clients and excluded from the balance sheet. Certain payment-funding methods expose ACI to potential credit or operating shortfalls involving clients.
- Income tax examinations were ongoing in the United States and India. Unrecognized tax benefits were $15.0 million, and the filing identifies additional risks from foreign and state tax authorities.
- Internal control over financial reporting was deemed effective, but management and the auditor excluded OPAY from the control assessment because it was acquired in November 2013. OPAY represented 14.5% of consolidated assets and 2.7% of 2013 revenue.
Most important facts for investors to verify
- Whether revenue and cash-flow growth remains strong after separating organic performance from ORCC, OPAY and other acquisition contributions.
- The sustainability and economics of the sharp increase in hosting and biller-related revenue, including payment-processing costs and margins.
- Debt amortization, covenant headroom, floating-rate exposure and the ability to refinance or repay the $455.4 million term facility and $300.0 million senior notes.
- Actual customer-renewal rates and conversion of the $3.861 billion 60-month backlog, particularly the $2.119 billion renewal component.
- Integration progress, synergies and control remediation for ORCC and OPAY, including completion of preliminary purchase-price allocations.
- Potential effects of legacy-product maturity, migration to BASE24-eps and changes in revenue-recognition timing.
- Exposure to cybersecurity incidents, payment settlement losses, regulatory requirements, tax assessments, litigation and goodwill or intangible-asset impairment.