ACI Worldwide, Inc. — 2012 Q1 Form 10-Q Summary
Business context and reporting period
ACI develops, markets, installs and supports electronic-payment software and services for financial institutions, retailers and payment processors across the Americas, EMEA and Asia/Pacific. This unaudited filing covers the three months ended March 31, 2012, compared with the same period in 2011. The S1 Corporation acquisition closed on February 13, 2012 and materially affected the quarter.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $137.6 million | $104.5 million |
| Operating income (loss) | $(1.6) million | $7.5 million |
| Operating margin | (1.2%) | 7.2% |
| Income (loss) before taxes | $(2.4) million | $6.8 million |
| Net income (loss) | $(1.8) million | $1.6 million |
| Diluted EPS | $(0.05) | $0.05 |
| Cash flow from operations | $(12.6) million | $17.9 million |
| Cash and equivalents at period end | $201.1 million | $168.9 million |
- Revenue increased 31.6%, including $22.5 million contributed by S1. Software license fees rose 16.4%, maintenance 24.7%, services 48.7% and hosting 93.9%.
- Revenue mix was software licenses 37.0%, maintenance 31.8%, services 16.6% and hosting 14.6%.
- Expense growth exceeded revenue growth. Total expenses increased 43.5% to $139.2 million, including approximately $26.4 million of S1-related operating expenses and approximately $15.0 million of acquisition-related one-time costs.
- General and administrative expense increased 110.0% to $34.4 million, primarily from S1 transaction costs, severance and accelerated share-based compensation.
- Comprehensive income was $1.0 million, reflecting $2.8 million of other comprehensive income, primarily foreign currency translation.
- At March 31, 2012, total assets were $1.23 billion, including $487.5 million of goodwill and $129.8 million of other intangible assets. Total liabilities were $699.5 million.
Material changes versus the prior comparable period
- ACI acquired S1 for a preliminary purchase price of $587.3 million, funded with approximately $73.7 million of cash and $295.0 million of senior bank financing, together with equity issuance.
- The acquisition increased goodwill by approximately $271.3 million and substantially increased software, customer-relationship and other intangible assets.
- Debt increased to $375.0 million of principal at March 31, 2012, consisting of $170.0 million under the revolving facility and $196.9 million under the term facility, net of scheduled principal repayment. The March 31 fair value of total debt was $375.3 million.
- Operating cash flow declined to negative $12.6 million, principally due to acquisition-related payments, transaction fees and higher tax payments. Investing cash outflow increased to $273.0 million, primarily due to the S1 acquisition, while financing cash inflow increased to $288.8 million from acquisition-related borrowings.
- Corporate operating loss increased to $38.0 million from $14.9 million, reflecting acquisition costs and amortization of acquired intangibles. Segment operating income remained positive in the Americas, EMEA and Asia/Pacific.
- Sixty-month backlog increased to $2.317 billion from $1.617 billion, including approximately $705 million attributable to S1. Twelve-month backlog increased to $582 million from $424 million.
Guidance, outlook, risks and unusual items
- Management expects approximately $33 million of annual cost synergies from S1 and anticipates margin expansion from greater scale and cost savings; the filing provides no formal revenue or earnings guidance.
- ACI reduced headcount by 179 employees during the quarter and recorded approximately $6.2 million of termination costs; approximately $5.4 million remained accrued at March 31 and was expected to be paid over the following 12 months.
- On April 1, 2012, ACI notified IBM of termination of its master services agreement. The termination is effective January 31, 2013 and requires a $3.0 million termination fee plus transition-related costs.
- Liquidity consisted of $201.1 million of cash, including $104.4 million held by foreign subsidiaries, and up to $80.0 million of unused revolving capacity. ACI stated that it expected available liquidity and operating resources to satisfy requirements for the next 12 months and foreseeable future.
- The credit facility is secured, contains leverage and fixed-charge coverage covenants, and carried an interest rate of 2.25% at quarter-end. ACI reported compliance with all debt covenants.
- Key risks include S1 integration and realization of synergies, acquisition-related leverage, goodwill and intangible-asset impairment, revenue-recognition timing, backlog assumptions, foreign-currency exposure, competition, customer renewals, technology and security risks, regulatory changes, and economic weakness.
- Backlog is an operating estimate rather than a GAAP measure and includes assumed renewals; actual revenue may differ because of cancellations, renegotiations, project delays, customer consolidation and currency movements.
- Unrecognized tax benefits increased to $16.9 million, excluding related interest and penalties, largely due to S1 tax positions. The filing states that the effective tax rate may fluctuate materially by quarter.
- No material litigation was reported, and management stated that disclosure controls were effective as of March 31, 2012. Internal-control integration related to S1 remained in process.
Important facts for investors to verify
- Whether S1 integration delivers the stated approximately $33 million of annual cost synergies without additional restructuring or transition costs.
- The sustainability of revenue growth, particularly the shift between initial license fees and lower monthly license-fee recognition as certain products mature.
- Debt paydown capacity, covenant headroom, interest-rate exposure and the availability of the remaining revolving commitment.
- The valuation and eventual allocation of the preliminary S1 purchase price, including goodwill and acquired intangible assets.
- The accuracy and conversion of the $2.317 billion 60-month backlog, especially the $1.200 billion renewal component.
- Cash generation after acquisition-related payments, integration spending, stock repurchases and scheduled debt service.
- The $3.0 million IBM termination fee and additional transition costs expected in 2013.