ACI Worldwide, Inc. — Q3 2016 Form 10-Q Summary
Business context and reporting period
ACI Worldwide provides electronic payment software and SaaS-based solutions to financial institutions, retailers, payment processors and billers. The company reports across the Americas, EMEA and Asia/Pacific. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the same periods in 2015.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $217.0 million | $238.7 million | $663.0 million | $737.3 million |
| Operating income (loss) | $(9.4) million | $23.9 million | $100.8 million | $54.0 million |
| Net income (loss) | $(9.8) million | $14.8 million | $62.8 million | $41.7 million |
| Diluted EPS | $(0.08) | $0.12 | $0.53 | $0.35 |
| Operating margin | (4.3%) | 10.0% | 15.2% | 7.3% |
| Net margin | (4.5%) | 6.2% | 9.5% | 5.6% |
- Revenue mix: Q3 license revenue was $43.3 million, maintenance $57.7 million, services $19.8 million and hosting $96.2 million. For nine months, hosting remained the largest category at $310.2 million, or 47% of revenue.
- Cash flow: Nine-month operating cash flow was $64.9 million versus $123.8 million in 2015. Investing cash flow was $138.8 million, including $199.5 million of proceeds from the CFS asset sale. Financing cash flow was $(251.3) million.
- Liquidity: Cash and cash equivalents were $50.9 million at September 30, 2016, down from $102.2 million at December 31, 2015. Approximately $38.6 million was held by foreign subsidiaries and intended to remain permanently reinvested outside the United States.
- Debt: Total debt, net of issuance costs, was $742.7 million, consisting of $389.1 million under the term facility, $64.0 million under the revolver and $300.0 million of 6.375% senior notes due 2020. The credit facility interest rate was 3.03%. Up to $161.0 million of revolver capacity was unused, subject to covenant and agreement limitations.
- Backlog: Estimated 60-month backlog was $4.092 billion at September 30, 2016, including $1.750 billion of committed backlog and $2.342 billion of renewal backlog. Estimated 12-month backlog was $850 million, approximately 80% committed and 20% renewal.
Material changes versus the prior comparable period
- Q3 revenue declined 9%, and nine-month revenue declined 10%. The largest nine-month decline was license revenue, down 27%, principally due to lower capacity-related license events and timing.
- The March 2016 sale of Community Financial Services assets to Fiserv reduced nine-month revenue by approximately $55.1 million and Q3 revenue by approximately $23.3 million. A $151.5 million pretax gain and $93.4 million after-tax gain were recognized on the sale.
- Excluding CFS, foreign currency effects and PAY.ON, nine-month revenue decreased approximately 3%; Q3 revenue increased approximately 0.7% on the same basis. Hosting revenue excluding those items increased 6% for the nine months and 10% in Q3.
- PAY.ON, acquired in November 2015 for $186.4 million, contributed $12.2 million of nine-month revenue and $3.8 million of Q3 revenue, but generated operating losses of $12.2 million and $4.2 million, respectively.
- Despite the CFS-related cost reductions, reported operating expenses excluding the CFS gain increased 4% for the nine months and 5% in Q3. Research and development increased 17% in both periods, while general and administrative expense increased 38% for the nine months and 55% in Q3.
- Stock-based compensation increased materially to $33.8 million for the nine months, compared with $10.1 million in 2015, including $10.8 million in Q3 versus $0.8 million.
- Debt declined from $924.2 million at December 31, 2015 to $742.7 million at September 30, 2016, primarily from repayments funded partly by the CFS sale proceeds. The company repurchased 3.0 million shares for $60.1 million during the first nine months.
- The company early adopted ASU 2016-09 for stock-based compensation, including a $0.7 million net-of-tax reduction to retained earnings at January 1, 2016 and revised cash-flow presentation.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific quantitative revenue, earnings or cash-flow guidance. Management emphasizes opportunities from increasing electronic payment volumes, real-time payments, cloud adoption, fraud and compliance requirements, mobile payments, regulatory changes and international expansion. Management states that existing cash, operating cash flow and available revolver capacity are expected to satisfy projected liquidity needs for the next twelve months and the foreseeable future.
- The company obtained a waiver of the consolidated fixed charge coverage covenant for the quarters ended June 30, September 30 and December 31, 2016. On November 2, 2016, after quarter-end, the consolidated net leverage covenant was increased from 3.75 to 4.00 for the September 30 quarter. The company reported compliance with all other financial covenants.
- ACI faces a $43.8 million jury award plus $2.7 million of attorney fees and costs in the BHMI litigation. The judgment is under appeal; management determined that a loss was not probable and could not be reasonably estimated, so no accrual was recorded.
- Other unusual items include the CFS divestiture gain, the nonrecurring 2015 $24.5 million gain on the sale of Yodlee securities that did not recur in 2016, $5.0 million of facility-closure restructuring charges during the first nine months, and significant transaction-related expenses.
- Key operating risks include competition, customer and contract renewal risk, product migration and integration risk, cybersecurity and system outages, regulatory and money-transmitter compliance, foreign currency exposure, debt-service and covenant requirements, goodwill and intangible-asset impairment, international operations, tax uncertainty and litigation.
- The company had $23.4 million of unrecognized tax benefits at September 30, 2016, excluding $2.2 million of related interest and penalties.
Important facts for investors to verify
- Assess whether revenue growth excluding CFS, currency and PAY.ON adjustments is sufficient to offset lower initial license revenue and elevated operating expenses.
- Monitor PAY.ON integration, operating losses and realization of expected strategic benefits.
- Review debt maturities, leverage and fixed-charge covenant waivers, particularly the $334.0 million scheduled in 2018 and $300.0 million senior notes due in 2020.
- Evaluate liquidity after the substantial debt repayments and $60.1 million of share repurchases, including the location and repatriation constraints on foreign cash.
- Track the BHMI appeal and potential exposure for the unaccrued judgment exceeding $46.5 million.
- Validate backlog assumptions, especially renewal rates, foreign exchange assumptions and the distinction between committed and renewal backlog.
- Consider the sustainability of reported nine-month profitability given the $151.5 million pretax CFS divestiture gain and the absence of the prior-year Yodlee gain.