ACI WORLDWIDE, INC. quarterly report, Q3 FY2010

ACI Worldwide, Inc. Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2010; comparable periods ended September 30, 2009. Financial statements are unaudited and amounts are in thousands unless otherwise stated.

Business context

ACI develops, markets, installs and supports electronic-payments software and services for financial institutions, retailers and payment processors. Operations are reported across the Americas, Europe/Middle East/Africa (EMEA), and Asia/Pacific. In September 2010, the company launched the ACI Payment Systems brand and continued migrating customers from mature products toward newer platforms, including BASE24-eps.

Financial performance and liquidity

Metric	Q3 2010	Q3 2009	9M 2010	9M 2009
Total revenue	$97.0 million	$104.5 million	$277.2 million	$279.8 million
Operating income	$7.4 million	$11.9 million	$10.8 million	$6.6 million
Operating margin	7.6%	11.4%	3.9%	2.4%
Net income	$2.3 million	$7.8 million	$0.1 million	$0.1 million
Net margin	2.4%	7.4%	Approximately 0.0%	Approximately 0.0%
Operating cash flow	Not separately provided	Not separately provided	$49.1 million	$11.4 million

Q3 revenue consisted of software licenses of $37.8 million, maintenance of $32.5 million, services of $15.4 million and hosting of $11.3 million. Nine-month revenue consisted of software licenses of $98.5 million, maintenance of $100.1 million, services of $47.2 million and hosting of $31.3 million.
Q3 operating income declined despite lower total expenses, primarily because revenue fell faster than costs. Nine-month operating income improved as general and administrative and research and development expenses declined.
The effective tax rate was 58.3% in Q3 and 98.5% for the nine-month period, reflecting limitations on recognizing tax benefits in certain jurisdictions and tax expense associated with an intellectual-property transfer.
Cash and cash equivalents were $143.9 million at September 30, 2010, compared with $125.9 million at December 31, 2009. Total assets were $581.4 million and stockholders’ equity was $226.7 million.
The company had $75.0 million outstanding under a $150.0 million revolving credit facility. The facility matures September 29, 2011, and was classified as current. Management stated that cash and available borrowings were sufficient for at least the next twelve months and that the company was negotiating a replacement facility.
Deferred revenue increased to $167.2 million, including current and noncurrent amounts, from $137.9 million at December 31, 2009.
Capital expenditures and software purchases totaled $10.5 million during the first nine months. The company repurchased approximately $18.6 million of common stock and had approximately $22.9 million remaining under its $210 million authorization.

Material changes versus the prior comparable period

Q3 revenue decreased 7.1%; nine-month revenue decreased 1.0%. The Q3 decline was driven by lower software license, maintenance and services revenue, partially offset by higher hosting revenue.
Initial license fee revenue declined 59.2% in Q3 and 33.4% for the nine-month period. Monthly license fee revenue increased 51.8% in Q3 and 29.4% for nine months as more upfront license revenue was recognized ratably.
Services revenue decreased 25.8% in Q3 and 16.3% for nine months, principally because of fewer or smaller project go-live events and increased revenue deferrals.
Q3 general and administrative expense fell 22.4%, partly because the prior-year period included $2.0 million of severance expense. Nine-month general and administrative expense fell 19.4%, including the absence of prior-year restatement and consulting costs.
Q3 selling and marketing expense increased 20.3%, while research and development expense decreased 9.5%. Nine-month selling and marketing expense increased 11.5%, while research and development decreased 6.1%.
Americas revenue declined to $50.0 million in Q3 and $146.5 million for nine months. EMEA revenue was broadly stable in Q3 and increased for nine months; Asia/Pacific revenue increased in both comparisons.
EMEA reported operating income of $3.9 million in Q3 versus $2.3 million in the prior year and $4.1 million for nine months versus a $6.1 million loss. Asia/Pacific remained loss-making, with a nine-month operating loss of $10.8 million.
Cash flow from operations increased by $37.7 million for the nine-month period, primarily due to higher cash collections and a $28.7 million increase from deferred revenue.
Revenue-category presentation was revised to separately disclose hosting revenue. Prior periods were reclassified; total revenue and net income were unchanged.

Guidance, outlook, risks and unusual items

No specific numerical revenue or earnings guidance is provided in the filing. Management expects the shift from initial license fees to monthly and ratable revenue recognition to continue, with higher deferred revenue during customer migrations and newer-product implementations.
Reported 60-month backlog was $1.597 billion at September 30, 2010, including $831 million of committed backlog and $766 million of renewal backlog. Twelve-month backlog was $397 million, including $307 million of monthly recurring revenue and $90 million of non-recurring revenue. These are operating estimates dependent on renewals, customer performance, foreign exchange and other assumptions.
The credit facility contains leverage and interest-coverage covenants; the company was in compliance at September 30, 2010. Refinancing risk is material because the $75 million outstanding balance was due within twelve months.
Interest-rate swaps with $75 million and $50 million notional amounts expired October 4, 2010. A $0.8 million derivative liability remained at September 30 and was paid after quarter-end.
Foreign-currency losses were $1.5 million in Q3 and $3.1 million for nine months. The company does not hedge foreign-currency exposure and remains exposed to international operating and translation risk.
The IBM alliance liability was $24.9 million at September 30, 2010, of which $20.7 million was noncurrent. The company incurred $7.6 million of technical-enablement costs during the first nine months, with reimbursement subject to future milestones.
Unrecognized tax benefits were $11.2 million, excluding $2.2 million of related interest and penalties. Management believed approximately $6.5 million could decrease within twelve months due to audit settlements and expiring statutes of limitation.
Management reported no legal proceeding expected to have a material adverse effect and no material changes to previously disclosed risk factors. Key risks include customer project delays, revenue-recognition judgments, product migrations, competition, customer consolidation, currency volatility, credit-market conditions, cybersecurity, tax exposures and the IBM relationship.
New revenue-recognition guidance under ASUs 2009-13, 2009-14 and 2010-17 was scheduled to become effective or relevant in 2011; the company was still assessing the effect on its financial statements.

Most important facts for investors to verify

Progress and terms of refinancing before the September 29, 2011 maturity of the current credit facility.
Whether the anticipated shift from initial license fees to monthly and ratable revenue produces sustainable recurring growth or primarily reflects timing of recognition.
Conversion of the $1.597 billion 60-month backlog into recognized revenue, particularly the $766 million renewal component.
Execution of BASE24-eps and other customer migrations, including the amount of revenue and implementation costs being deferred.
Sustainability of operating cash flow, including the contribution from deferred revenue and receivables collections.
Tax audits, potential realization of unrecognized tax benefits, and the unusually high effective tax rate.
Performance and required funding under the IBM alliance and the remaining $20.7 million noncurrent alliance receivable/liability-related balance.
Asia/Pacific operating losses, international currency exposure, and the company’s ability to maintain margins while selling and marketing expenses increase.