ACI Worldwide, Inc. — Fiscal 2016 Form 10-K Summary
Business context and reporting period
ACI Worldwide develops, licenses, hosts, implements and supports real-time electronic payment software and services for financial institutions, payment intermediaries, merchants and billers. Its Universal Payments portfolio includes retail and immediate payments, transaction banking, merchant and eCommerce payments, fraud management and electronic bill payment solutions.
The filing reports the fiscal year ended December 31, 2016, with comparative results for 2015 and 2014. The company operated across the Americas, EMEA and Asia/Pacific and served more than 5,100 customers in over 80 countries.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $1,005.7 million | $1,046.0 million | Down 4% |
| Operating income | $221.1 million | $127.9 million | Up 73% |
| Operating margin | 22.0% | 12.2% | Up 9.8 percentage points |
| Net income | $129.5 million | $85.4 million | Up 52% |
| Net margin | 12.9% | 8.2% | Up 4.7 percentage points |
| Diluted EPS | $1.09 | $0.72 | Up 51% |
| Operating cash flow | $99.8 million | $188.0 million | Down 47% |
| Cash and equivalents | $75.8 million | $102.2 million | Down $26.5 million |
- Revenue mix: license revenue was $273.5 million, maintenance $233.5 million, services $87.5 million and hosting $411.3 million.
- License revenue increased 9%, while maintenance declined 3%, services declined 18% and hosting declined 8%.
- Research and development expense increased 16% to $169.9 million, or 17% of revenue.
- General and administrative expense increased 30% to $113.6 million, substantially reflecting higher stock-based compensation, professional fees and transaction-related costs.
- Capital expenditures and purchases of software and distribution rights totaled $63.1 million.
- Working capital was $31.6 million at year-end, compared with negative working capital of $2.4 million in 2015.
- Total debt was approximately $753.3 million before debt issuance costs, consisting of $365.3 million under the term facility, $88.0 million under the revolver and $300.0 million of 6.375% senior notes due 2020.
- Debt outstanding declined by approximately $181.0 million from year-end 2015. The company had up to $154.5 million of unused revolver capacity, subject to agreement terms.
- The company repurchased 3.0 million shares for $60.1 million during 2016; approximately $78.2 million remained authorized for future repurchases.
Material changes versus the prior comparable period
- ACI completed the sale of its Community Financial Services assets and liabilities to Fiserv on March 3, 2016, for $200.0 million. The transaction reduced 2016 revenue by approximately $79.2 million and produced a pre-tax gain of $151.5 million, or a net after-tax gain of $93.4 million.
- Excluding the effects of the CFS divestiture, foreign currency movements and the PAY.ON acquisition, management stated that revenue increased approximately 4%.
- The Americas segment declined 9% in revenue, while EMEA increased 4% and Asia/Pacific increased 18%.
- PAY.ON contributed approximately $16.5 million of revenue in 2016 and an operating loss of $17.1 million. The acquisition contributed $13.6 million of incremental revenue versus 2015 on the company’s reported basis.
- Operating income benefited materially from the CFS divestiture gain. Excluding that gain, operating expenses increased 2% despite the reported revenue decline.
- Operating cash flow fell primarily because of the timing of customer billings and receipts and a $76.5 million increase in receivables.
- Stock-based compensation increased to $43.6 million from $18.4 million in 2015.
- The company early adopted ASU 2016-09, which changed the treatment of employee share-based payment tax effects and forfeitures. The filing states that the adoption had no material effect on retained earnings.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide a specific numerical revenue, earnings or cash-flow outlook. Management identified growth opportunities from increasing electronic payment volumes, real-time payments, cloud adoption, fraud prevention, regulatory changes, mobile payments and electronic bill payment outsourcing. The company also emphasized migration from on-premises products to hosted solutions and continued development of its Universal Payments platform.
- Backlog: 60-month backlog was estimated at $4.016 billion at December 31, 2016, down from $4.302 billion at December 31, 2015, primarily reflecting the CFS divestiture. Twelve-month backlog was $816 million, down from $918 million.
- Financing: the company obtained waivers relating to its fixed-charge coverage covenant for certain 2016 quarters and amended its leverage covenant. Management stated that it remained in compliance with all other financial covenants.
- Subsequent financing event: on February 24, 2017, ACI entered into an amended credit agreement increasing the term loan commitment to $415.0 million, the revolving commitment to $500.0 million and extending maturity to February 24, 2022.
- BHMI litigation: a subsidiary was subject to a judgment exceeding $46.5 million, including $43.8 million of damages and $2.7 million of fees and costs. The company appealed, determined that a loss was not probable and reasonably estimable, and recorded no accrual.
- Other unusual items included the $151.5 million pre-tax CFS divestiture gain, a $24.5 million Yodlee investment gain recognized in 2015 that did not recur, and $5.0 million of 2016 facility-closure expense.
- Key operating risks include intense competition, customer consolidation, dependence on large financial institutions, migration to next-generation and hosted products, project execution, cybersecurity and service interruptions, privacy and payments regulation, foreign currency exposure, intellectual property claims, goodwill impairment, variable-rate debt and uncertain tax positions.
- The company held $270.0 million of client settlement funds off balance sheet at year-end. These funds were maintained for clients and were not company-owned assets.
- Unrecognized tax benefits totaled $24.3 million at December 31, 2016. The company also disclosed tax examinations in the United States and foreign jurisdictions.
Most important facts for investors to verify
- Separate recurring operating performance from the substantial one-time gain on the CFS divestiture.
- Assess whether hosting, maintenance and services trends stabilize as customers migrate to hosted solutions.
- Review the decline in operating cash flow, the increase in receivables and the timing of customer collections.
- Evaluate debt maturities, covenant headroom, floating-rate exposure and the effects of the February 2017 refinancing.
- Monitor PAY.ON integration, profitability and contribution to the Universal Payments strategy.
- Track the outcome and potential financial exposure of the BHMI litigation and any claims related to the CFS transition.
- Reconcile backlog assumptions, particularly the portion based on assumed renewals, with actual contract renewals and revenue conversion.
- Evaluate the sensitivity of goodwill and intangible assets, which totaled approximately $1.11 billion at year-end, to changes in forecast cash flows and discount rates.