ACI Worldwide, Inc. — FY2011 Form 10-K Summary
Business context and reporting period
ACI develops, licenses, implements, hosts and supports electronic-payment software for financial institutions, retailers and payment processors worldwide. Principal offerings include retail and wholesale payment processing, fraud detection, card and merchant management, online banking, and related infrastructure. The filing covers the fiscal year ended December 31, 2011; fourth-quarter data is also presented.
ACI operated through the Americas, EMEA and Asia/Pacific segments and had approximately 2,131 employees, 784 customers in 79 countries, and no customer representing more than 10% of annual revenue. The BASE24 product family accounted for approximately 43% of 2011 revenue, excluding BASE24-eps.
Financial performance and key metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Total revenue | $465.1 million | $418.4 million | +11.2% |
| Operating income | $66.2 million | $53.6 million | +23.5% |
| Operating margin | 14.2% | 12.8% | +140 bps |
| Net income | $45.9 million | $27.2 million | +68.6% |
| Net margin | 9.9% | 6.5% | +340 bps |
| Diluted EPS | $1.34 | $0.80 | +67.5% |
| Operating cash flow | $83.5 million | $81.3 million | +2.7% |
Revenue growth was broad-based: software license fees increased 15.4% to $189.8 million, maintenance fees increased 9.5% to $148.4 million, services increased 7.8% to $79.8 million, and hosting fees increased 6.3% to $47.1 million. Asia/Pacific grew fastest at 17.7%, followed by the Americas at 10.9% and EMEA at 9.5%.
Research and development expense rose 21.7% to $90.2 million, or 19.4% of revenue. Selling and marketing expense increased 14.7% to $80.9 million. Total expenses grew 9.3%, below revenue growth, supporting operating-margin expansion.
At December 31, 2011, cash and cash equivalents were $197.1 million, including $86.6 million held by foreign subsidiaries. Working capital was $114.8 million. Total assets were $664.6 million and stockholders’ equity was $317.3 million.
Debt consisted of $75.0 million outstanding under the new senior secured credit facility, with up to $175.0 million of unused revolving capacity and $200.0 million available under the term-loan facility at year-end. The stated interest rate at December 31, 2011 was 2.25%, and ACI was in compliance with its debt covenants.
Cash flow from investing activities was negative $47.7 million, including $16.9 million for the ISD acquisition, $19.0 million for software, property and equipment, and $10.0 million for available-for-sale securities. Financing cash flow was negative $8.7 million, including $11.8 million of debt issuance costs.
Fourth-quarter results
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Revenue | $135.0 million | $141.2 million |
| Operating income | $37.0 million | $42.8 million |
| Operating margin | 27.4% | 30.3% |
| Net income | $23.9 million | $27.1 million |
| Diluted EPS | $0.70 | $0.80 |
Fourth-quarter revenue and earnings declined year over year despite strong full-year growth. The filing attributes quarterly volatility partly to customer sales and budget cycles and the concentration of revenue-generating transactions in the final weeks of quarters.
Material changes versus the prior comparable period
- Revenue increased 11.2%, with growth in every geographic segment and across all major revenue categories.
- Operating margin expanded to 14.2% from 12.8%, primarily because revenue growth exceeded expense growth.
- Net income benefited from lower other expense and a lower effective tax rate. The 2011 effective tax rate was approximately 28.7%, compared with 44.2% in 2010.
- The tax rate benefited from a $3.1 million release related to an expired contractual obligation and a favorable $4.4 million adjustment to uncertain tax positions, partially offset by a $2.4 million reversal of related deferred tax assets.
- ACI acquired ISD for $19.2 million on March 18, 2011, adding retail point-of-sale transaction capabilities and approximately $11.4 million of goodwill.
- Five-year backlog increased to $1.617 billion at December 31, 2011 from $1.555 billion at December 31, 2010. Twelve-month backlog increased to $424 million from $381 million.
- The IBM strategic alliance was not extended beyond its initial term and is scheduled to expire on December 16, 2012. ACI recorded a $20.7 million current liability that may be refundable to IBM if specified sales targets are not achieved.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear quantified financial outlook or formal guidance. Management highlighted continued growth in electronic payments, real-time payments, fraud and compliance solutions, EMV and smartcard adoption, mobile banking, cloud technology, and global vendor sourcing as opportunities.
On February 10, 2012, after the reporting date, ACI completed its acquisition of S1 Corporation for approximately $565 million, funded with approximately $360 million of cash and 5.8 million ACI shares. The transaction used $65.0 million of ACI cash and $295.0 million of senior bank financing. The acquisition is expected to materially increase leverage and integration requirements in 2012.
- Key risks include financial-services industry consolidation, customer project delays or cancellations, intense competition, customer reluctance to migrate from legacy systems, and dependence on BASE24 and BASE24-eps.
- Revenue recognition is sensitive to customer acceptance, project completion estimates, contract structure, collectibility, product maturity and migration-related deferrals.
- Goodwill was $214.1 million and other intangible assets were $18.3 million at year-end. Management reported no goodwill impairment, but impairment testing depends on projected cash flows, growth rates and discount rates.
- Foreign-exchange exposure is significant; ACI had no foreign-currency hedging contracts.
- Two foreign subsidiaries were subject to tax examinations. Unrecognized tax benefits were $4.0 million, and the filing identified additional audits in Canada and India.
- The company faces cybersecurity, privacy, intellectual-property, business-continuity and regulatory-compliance risks, including potential software defects or service outages.
- The company has never paid cash dividends and did not repurchase shares under its public repurchase program during 2011, although 2,125 shares were withheld for employee tax obligations.
Management and Deloitte & Touche reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2011. Deloitte issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the post-year-end S1 acquisition financing, purchase accounting, goodwill and resulting leverage with 2012 financial statements.
- Assess whether the $20.7 million IBM alliance liability will require repayment and how the alliance expiration affects sales, technology enablement and customer relationships.
- Review the sustainability of revenue growth and margin expansion after the unusually favorable 2011 tax adjustments.
- Evaluate the quality and conversion risk of the $1.617 billion five-year backlog, particularly the $665 million renewal component.
- Monitor the shift from upfront initial license fees toward ratable monthly recognition and its effect on reported growth and cash conversion.
- Assess customer concentration, BASE24 dependence, legacy-product migration execution and adoption of BASE24-eps.
- Review covenant compliance and available liquidity after the S1-related borrowing, including the credit facility’s leverage limits and secured status.