Business Context and Reporting Period
ACI Worldwide, Inc. provides payment software and services to banks, merchants, and billers globally. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $323.1 million | $285.2 million | Up 13% |
| Operating income | $27.7 million | $3.7 million | Up $24.0 million |
| Net income (loss) | $15.5 million | $(1.9) million | Improved $17.4 million |
| Diluted EPS | $0.13 | $(0.02) | Improved $0.15 |
| Operating margin | 8.6% | 1.3% | Improved |
| Net margin | 4.8% | (0.7)% | Improved |
| Cash flow from operations | $28.9 million | $69.8 million | Down $40.9 million |
| Capital expenditures and software purchases | $8.5 million | $12.4 million | Down $3.9 million |
Revenue consisted of SaaS and PaaS revenue of $194.6 million, license revenue of $60.3 million, maintenance revenue of $51.4 million, and services revenue of $16.8 million. License revenue increased 184%, primarily because of the timing and size of license and capacity events. SaaS and PaaS revenue decreased 1%, maintenance revenue decreased 2%, and services revenue increased 6%.
Cost of revenue was $166.3 million, implying a gross margin of approximately 48.5%, compared with approximately 44.1% in the prior-year quarter. Operating expenses were $295.4 million, or 91.4% of revenue, versus 98.7% previously. Selling and marketing expense increased 23%, research and development increased 10%, while general and administrative expense decreased 7%.
Segment revenue and Segment Adjusted EBITDA were: Banks revenue of $132.2 million and EBITDA of $64.7 million; Merchants revenue of $41.0 million and EBITDA of $14.7 million; and Billers revenue of $149.9 million and EBITDA of $26.4 million. Banks benefited from higher license revenue, while Billers EBITDA declined because of higher payment card interchange and processing costs.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $114.8 million at March 31, 2022, compared with $122.1 million at December 31, 2021.
- Total liquidity was $583.3 million, consisting of cash and $468.5 million of available revolving credit capacity, down from $620.6 million at year-end.
- Total debt was $1.087 billion, including $668.4 million of term loans, $30.0 million drawn on the revolving credit facility, and $400.0 million of 5.750% senior notes due 2026.
- The Credit Facility matures April 5, 2024; the 2026 Notes mature August 15, 2026. The Company was in compliance with its debt covenants.
- The Credit Facility carried an interest rate of 2.20% at March 31, 2022. Management identified floating-rate exposure and estimated that a hypothetical 10% change in effective rates would change related annual interest expense by approximately $1.5 million.
- Settlement assets and liabilities were approximately $531.8 million and $531.1 million, respectively. Separate off-balance-sheet settlement funds held for clients totaled $198.1 million.
Material Changes Versus the Prior Comparable Period
- Total revenue increased $37.9 million, or 13%; excluding foreign currency effects, management reported a 14% increase.
- Operating income improved substantially to $27.7 million from $3.7 million, primarily due to higher license revenue and lower operating expense as a percentage of revenue.
- Net income turned positive, reaching $15.5 million versus a $1.9 million loss. The effective tax rate was 30% versus 69% in the prior-year quarter, when the Company recorded a tax benefit on a pretax loss.
- Operating cash flow declined to $28.9 million from $69.8 million, primarily due to the timing of cash receipts from accounts receivable.
- The Company repurchased 1.131 million common shares for $37.9 million and had approximately $178.4 million remaining under its repurchase authorization.
- Debt increased from $1.066 billion at December 31, 2021, primarily because the Company drew $30.0 million on the revolving facility, partly offset by term-loan repayments.
- The Company revised prior-period cash flow presentation to include settlement deposits in cash and settlement asset and liability activity in financing cash flows. Management characterized the revision as immaterial.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a specific quantitative earnings or revenue guidance range. Management stated that liquidity is expected to satisfy operating expenses, debt service, acquisitions, capital expenditures, and lease payments over the next 12 months and beyond. The Company reported a 60-month backlog estimate of $6.182 billion at March 31, 2022, up from $6.110 billion at December 31, 2021; approximately $788.8 million of remaining performance obligations was expected to be recognized, with about 45% over the next 12 months.
- Management highlighted growth opportunities from digital payments, real-time payments, cloud adoption, fraud management, and omni-channel commerce.
- COVID-19 could reduce transaction volumes, delay customer payments, increase cybersecurity and operational risks, and adversely affect results; management stated that the future impact could not be estimated with certainty.
- The Company faces investigations by the Consumer Financial Protection Bureau and state agencies, plus seven consumer class-action lawsuits, relating to an April 2021 inadvertent transmission of mortgage-related ACH files. Potential fines, penalties, injunctive remedies, and damages could be material.
- The Russia-Ukraine crisis creates sanctions, operational, customer, and employee risks. ACI reported an office with 67 employees and one customer in Russia and had modified its services and support activities.
- The Company is evaluating the transition from U.S. dollar LIBOR to alternative reference rates, including SOFR, because its Credit Facility extends beyond the June 2023 LIBOR cessation date.
- Foreign currency weakness reduced Q1 revenue by approximately $2.0 million and operating expenses by approximately $2.4 million. The Company does not use foreign currency hedging transactions.
- Other net income was $2.3 million versus $1.4 million of other expense in the prior-year quarter, primarily reflecting foreign currency effects. Q1 2022 included $0.5 million of significant transaction-related expenses versus $1.2 million in Q1 2021.
Important Facts for Investors to Verify
- Whether the substantial increase in license revenue is repeatable or primarily reflects the timing of discrete license and capacity events.
- The sustainability of the improved operating margin and whether higher personnel, interchange, and processing costs pressure margins in subsequent quarters.
- Operating cash conversion, given the $40.9 million year-over-year decline in operating cash flow.
- Debt repayment capacity and refinancing requirements ahead of the April 2024 Credit Facility maturity and the August 2026 senior-note maturity.
- The potential financial and operational consequences of the ACH incident investigations and related class-action litigation.
- The impact of Russia-related sanctions, COVID-19 transaction-volume changes, foreign exchange movements, and the LIBOR transition.
- The assumptions underlying the $6.182 billion backlog estimate, particularly renewal rates, customer contract retention, transaction volumes, and foreign exchange rates.