ACI Worldwide(ACIW) - 2021 Q4 - Annual Report

Part I Item 1. Business ACI Worldwide develops and markets real-time digital payment software and solutions globally for banks, merchants, and billers - ACI's core business is providing software and solutions for real-time digital payments to a global customer base[15] - The company targets three key markets: Banks (large and mid-size globally), Merchants (Tier 1 & 2, online), and Billers (consumer finance, insurance, healthcare, etc.)[19][20][21] - ACI offers solutions through on-premise term licenses or on-demand cloud arrangements (SaaS/PaaS), typically with minimum contract terms of three to five years[28] - As of December 31, 2021, ACI served over 6,000 organizations, including 19 of the top 20 banks worldwide, with no single customer accounting for more than 10% of consolidated revenues[50] Employee Distribution by Region (as of Dec 31, 2021) | Region | Number of Employees | | :--- | :--- | | Americas | 1,618 | | EMEA | 1,008 | | Asia Pacific | 984 | | Total | 3,610 | Item 1A. Risk Factors The company faces risks from intense competition, cybersecurity threats, debt covenants, and the COVID-19 pandemic - The company faces intense competition from larger firms with greater resources and from the in-house IT departments of potential customers[75][41] - Security breaches or system failures could significantly harm the business by disrupting services, damaging its reputation, and leading to loss of customers[77][79] - A significant portion of revenue comes from the Issuing and Acquiring solutions (including BASE24), making the company susceptible to reduced demand or increased competition in this area[123] - The company's debt contains restrictive covenants that limit operational flexibility, and failure to comply could trigger an event of default[131][132] - The transition away from LIBOR to alternative reference rates like SOFR presents uncertainty and potential impact on the company's Credit Agreement, which is currently indexed to U.S.-dollar-LIBOR[134][135] - The effects of the COVID-19 pandemic, including remote work arrangements and potential economic downturns affecting customers, remain a significant uncertainty for future financial performance[136][137] Item 2. Properties ACI leases its Florida headquarters and manages 721,000 square feet of global office and data center space - ACI leases its principal executive headquarters in Coral Gables, Florida[143] Total Office and Data Center Space (as of end of 2021) | Location | Square Feet | | :--- | :--- | | United States (Owned & Leased) | ~323,000 | | International (Leased) | ~398,000 | Item 3. Legal Proceedings Material pending legal proceedings are detailed in Note 13 of the Consolidated Financial Statements - Details on material legal proceedings are located in Note 13, Commitments and Contingencies, within the financial statements section of the report[145] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities ACI's common stock trades on NASDAQ, with no dividends and an active $250 million stock repurchase program - The company's common stock (ACIW) is traded on The NASDAQ Global Select Market[147] - ACI has never declared or paid cash dividends and does not anticipate paying them in the future[149] - On December 1, 2021, the board approved a new stock repurchase authorization of up to $250.0 million, with approximately $216.3 million remaining available as of December 31, 2021[150] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2021 | 0 | N/A | | Nov 2021 | 1,000,000 | $34.28 | | Dec 2021 | 1,000,000 | $33.69 | | Total Q4 | 2,000,000 | $33.98 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, revenue grew 6% to $1.37 billion, net income rose 76% to $127.8 million, with strong liquidity Overview and Key Trends ACI's strategy is shaped by digital payment growth, real-time payment adoption, cloud shifts, and fraud management needs - Key trends driving ACI's business include the growth in digital payment volumes, adoption of real-time payments, shift to cloud technology, increased digital fraud, demand for omni-commerce solutions, and the emergence of Request for Payment (RfP)[160][161][162] Backlog The 60-month backlog totaled $6.11 billion as of December 31, 2021, comprising committed revenue and assumed renewals 60-Month Backlog by Segment (in millions) | Segment | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Banks | $2,272 | $2,167 | | Merchants | $754 | $808 | | Billers | $3,084 | $3,064 | | Total | $6,110 | $6,039 | 60-Month Backlog Composition (in millions) | Type | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Committed | $2,095 | $2,447 | | Renewal | $4,015 | $3,592 | | Total | $6,110 | $6,039 | Results of Operations In 2021, total revenue grew 6% to $1.37 billion, operating income increased 45%, and net income rose 76% Consolidated Results of Operations (in thousands) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,370,598 | $1,294,322 | 6% | | Operating Income | $209,897 | $144,744 | 45% | | Net Income | $127,791 | $72,660 | 76% | Revenue by Type (in thousands) | Revenue Type | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | SaaS and PaaS | $774,342 | $769,180 | 1% | | License | $319,867 | $246,896 | 30% | | Maintenance | $210,499 | $211,697 | (1)% | | Services | $65,890 | $66,549 | (1)% | - The increase in total revenue was primarily driven by the timing and size of license and capacity renewals during 2021 compared to 2020[185] - General and administrative expenses decreased by 19% ($28.7 million), largely due to lower significant transaction-related expenses in 2021 ($11.0 million) compared to 2020 ($39.3 million)[200] Segment Results ACI realigned into Banks, Merchants, and Billers segments, with Banks leading in revenue and Adjusted EBITDA growth - In January 2021, the company changed its organizational and reporting structure to three new segments: Banks, Merchants, and Billers[208] Segment Financial Data (in thousands) | Metric | Segment | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | Banks | $625,125 | $558,498 | | | Merchants | $152,988 | $149,342 | | | Billers | $592,485 | $586,482 | | Segment Adjusted EBITDA | Banks | $372,949 | $331,445 | | | Merchants | $54,266 | $53,383 | | | Billers | $129,048 | $135,144 | - The Banks segment's Adjusted EBITDA increased by $41.5 million, driven by a $66.6 million revenue increase[216] - The Billers segment's Adjusted EBITDA decreased by $6.1 million, primarily due to a $12.1 million increase in cash operating expenses that outpaced revenue growth[219] Liquidity and Capital Resources Total liquidity was $620.6 million as of December 31, 2021, with operating cash flow at $220.5 million Available Liquidity (in thousands) | Component | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $122,059 | $165,374 | | Availability under revolving credit facility | $498,500 | $443,500 | | Total liquidity | $620,559 | $608,874 | Summary of Cash Flows (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from Operating | $220,473 | $314,895 | | Net cash used in Investing | ($45,368) | ($30,699) | | Net cash used in Financing | ($256,878) | ($159,889) | - During 2021, the company repurchased 3.0 million shares for $107.4 million under its stock repurchase program[227] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgments in revenue recognition, goodwill impairment, and stock-based compensation - For revenue recognition, significant judgment is required to determine the stand-alone selling price (SSP) for each performance obligation, using the residual approach for software licenses due to their highly variable pricing[241] - Goodwill is assessed for impairment annually at the reporting unit level (Banks, Merchants, Billers) using a discounted cash flow model, with calculated fair value substantially exceeding carrying value in the last test[250][251] - The fair value of Total Shareholder Return (TSR) awards is determined using a Monte Carlo simulation model, which requires assumptions about stock price volatility and risk-free interest rates[256] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency exchange rates and interest rate fluctuations on its floating-rate debt - The company is exposed to foreign currency exchange rate risk due to its global operations but has not entered into any hedging transactions[263] - The company has interest rate risk on its $678.2 million floating-rate Credit Facility, where a hypothetical 10% change in effective interest rates would impact annual interest expense by approximately $1.4 million[265] Item 9A. Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[269] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, an assessment audited and confirmed by Deloitte & Touche, LLP[271][272][276] Part III Items 10-14 Information on directors, executive compensation, and security ownership is incorporated by reference from the 2022 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accounting Fees is incorporated by reference from the company's 2022 Proxy Statement[284][285][286] Part IV Item 15. Exhibits, Financial Statement Schedules This section presents consolidated financial statements and notes on revenue, debt, segments, and legal contingencies Consolidated Financial Statements As of December 31, 2021, total assets were $3.16 billion, liabilities $1.91 billion, with $1.37 billion revenue and $127.8 million net income Key Balance Sheet Figures (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $937,434 | $1,154,914 | | Goodwill | $1,280,226 | $1,280,226 | | Total Assets | $3,158,741 | $3,386,903 | | Total Current Liabilities | $754,155 | $905,605 | | Long-term Debt | $1,019,872 | $1,120,742 | | Total Liabilities | $1,913,964 | $2,180,306 | Key Income Statement Figures (in thousands) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total Revenues | $1,370,598 | $1,294,322 | $1,258,294 | | Operating Income | $209,897 | $144,744 | $123,756 | | Net Income | $127,791 | $72,660 | $67,062 | | Diluted EPS | $1.08 | $0.62 | $0.57 | Notes to Consolidated Financial Statements Notes detail revenue recognition, $1.08 billion debt, segment performance, income taxes, and legal proceedings including an ACH incident - The company's revenue recognition policy involves significant judgments, especially for multi-element arrangements including software licenses, maintenance, and services[353][367] - As of Dec 31, 2021, total debt outstanding was approximately $1.08 billion, comprising $678.2 million in Term Loans and a $400.0 million in 5.750% Senior Notes due 2026[390][405] - In April 2021, an inadvertent ACH file transmission during a system test led to investigations by the U.S. Consumer Finance Protection Bureau and state agencies, as well as seven class action lawsuits, with potential for material fines or penalties[480][481] - The company's effective tax rate was 27% in 2021, compared to 26% in 2020, with significant impacts from operations in Colombia, Ireland, and Singapore[205][457]