ACI WORLDWIDE, INC. quarterly report, Q2 FY2023

ACI Worldwide, Inc. — Q2 2023 Form 10-Q Summary

Business Context and Reporting Period

ACI Worldwide provides payment software and services to banks, merchants, and billers globally, including digital, real-time, fraud-management, merchant, and electronic bill-payment solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.

The company completed the divestiture of its corporate online banking solutions in September 2022. The divested business reduced second-quarter 2023 revenue by $11.3 million and six-month revenue by $23.5 million compared with the prior-year periods.

Financial Performance and Key Metrics

Metric	Q2 2023	Q2 2022	Six Months 2023	Six Months 2022
Total revenue	$323.3 million	$340.4 million	$613.0 million	$663.5 million
Operating income (loss)	$10.5 million	$24.5 million	($13.8 million)	$52.1 million
Net income (loss)	($6.7 million)	$13.3 million	($39.0 million)	$28.8 million
Diluted EPS	($0.06)	$0.12	($0.36)	$0.25
Operating cash flow	Not separately provided	Not separately provided	$57.5 million	$67.8 million

Q2 revenue declined 5%; six-month revenue declined 8%. On a basis adjusted for divestiture and foreign currency, revenue declined 2% in Q2 and 3% for the six-month period.
SaaS and PaaS revenue increased 1% in Q2 and 3% year to date, supported by higher transaction volumes and new customer go-lives. License revenue declined 31% in Q2 and 49% year to date, primarily due to renewal timing and the size of new license agreements.
Q2 gross margin, based on revenue less cost of revenue, was approximately 44%, versus 47% in the prior-year quarter. The six-month gross margin was approximately 41%, versus 48% in the prior-year period.
Q2 operating margin was approximately 3%; the six-month operating margin was approximately negative 2%.
Interest expense increased 69% in Q2 and 71% year to date, primarily because of higher interest rates. Other net expense was $4.1 million in Q2 and $7.5 million year to date, compared with other income in the prior-year periods, largely reflecting foreign-currency effects.
Cash flow from operations was $57.5 million year to date. Investing cash outflow was $19.6 million, principally for software, property, and equipment. Financing cash outflow was $61.2 million.

Segments and Operating Drivers

Banks: Q2 revenue was $117.5 million, down from $141.9 million; six-month revenue was $205.5 million, down from $274.1 million. Six-month Segment Adjusted EBITDA fell to $76.3 million from $134.9 million, primarily because of lower license revenue and the divestiture.
Merchants: Q2 revenue was $36.5 million, essentially flat year over year; six-month revenue was $71.3 million, down from $77.5 million. Six-month Segment Adjusted EBITDA declined to $16.5 million from $22.5 million.
Billers: Q2 revenue increased to $169.3 million from $161.9 million; six-month revenue increased to $336.2 million from $311.8 million. Six-month Segment Adjusted EBITDA increased to $60.9 million from $54.7 million, although higher interchange and processing costs reduced the benefit of revenue growth.
Management reported $6.4 billion of estimated 60-month backlog at June 30, 2023, including $2.2 billion of committed backlog and $4.2 billion of renewal backlog. Approximately $684.0 million of remaining performance obligations was expected to be recognized in future periods, with approximately 50% expected over the next 12 months.

Balance Sheet, Debt, and Liquidity

Cash and cash equivalents were $132.4 million at June 30, 2023, compared with $125.0 million at December 31, 2022. Including settlement deposits, cash was $196.8 million.
Total debt was $1.066 billion, consisting of $558.6 million of term loans, $115.0 million drawn on the revolving facility, and $400.0 million of 5.750% senior notes due August 2026.
Total available liquidity was $515.9 million, comprising cash of $132.4 million and $383.5 million of revolving-facility availability. A separate $75.0 million overdraft facility was fully available and undrawn.
The credit facility was extended to April 5, 2025. Its interest rate was 7.20% at June 30, 2023; a hypothetical 10% change in effective rates would change annual interest expense on the Credit Facility by approximately $4.9 million.
The company stated that it complied with its financial debt covenants throughout the period and believes operating cash flow, cash, and available borrowings will satisfy liquidity needs over the next 12 months and beyond.

Material Changes, Outlook, Risks, and Unusual Items

Management did not provide specific quantitative revenue, earnings, or cash-flow guidance in the filing. It continues to identify digital-payment volume growth, real-time payments, cloud adoption, fraud and compliance, omni-commerce, and Request for Payment services as strategic opportunities.
Operating expenses included $15.9 million of cost-reduction strategy costs, $2.6 million of significant transaction-related expenses, $1.8 million of CEO-transition costs, and $2.2 million of European data-center migration costs during the first six months of 2023.
Inflation increased Biller-segment interchange costs. Higher interest rates increased financing costs, while foreign-currency movements affected revenue, expenses, and other income or expense.
The company recorded a $0.5 million loss in Q2 related to a final post-closing adjustment for the corporate online banking divestiture.
In connection with the inadvertent 2021 transmission of mortgage-related ACH files, the company settled a CFPB investigation for $25.0 million and was pursuing settlements with state regulators and attorneys general totaling $20.0 million. Insurance carriers were expected to fund substantially all settlement payments and costs, subject to policy terms. The company also established a $5.0 million class-action settlement fund, with up to an additional $1.5 million potentially required.
Goodwill totaled $1.2 billion. Management reported no indicators of impairment after the October 1, 2022 annual test.
The company’s disclosure controls and procedures were assessed as effective, and no material changes to internal control over financial reporting were reported. Management stated that risk factors were not materially different from those in the 2022 Form 10-K.

Important Facts for Investors to Verify

Whether the sharp decline in license revenue and Banks-segment profitability is temporary renewal timing or reflects a sustained change in demand and product mix.
The pace of SaaS, PaaS, Biller, and transaction-volume growth and whether it can offset lower license revenue and higher payment-processing costs.
Interest-rate exposure, refinancing requirements before the April 2025 credit-facility maturity, and the August 2026 senior-note maturity.
The ultimate cost, timing, and insurance recoveries associated with the ACH-related litigation and regulatory settlements.
The conversion of the $6.4 billion backlog and $684.0 million of remaining performance obligations into recognized revenue, particularly the renewal backlog component.
Whether cost-reduction initiatives and unusual expenses improve operating margins in subsequent quarters.