ACI posts second quarter results

"ACI's Q2 results were within our guidance range," commented Phil Heasley, ACI President and CEO. "Regarding Online Resources, the acquisition is performing as, or better than, expected and we are well into our second phase of integration.

Most importantly, our organic sales bookings pipeline (excluding ORCC) is looking stronger than originally anticipated and we now expect total net new bookings growth for the full year 2013 to be in the mid-teens percentage range. This is due in part to the prospects from our recently delivered Universal Payments Platform (UPP) version 3.0 that delivers the industry's only complete end-to-end, highly differentiated payments solution. Lastly, we are contemplating the issuance of long-term debt to improve our financial flexibility and capital structure. In anticipation of that, we are announcing a $100 million increase to our stock repurchase authorization. 2013 remains a watershed year, from which we will emerge more profitable, faster growing and stronger in our competitive position."

FINANCIAL SUMMARY

Financial Results for Q2

Q2 non-GAAP revenue of $208 million grew 30%, or $48 million, from last year's quarter. After adjusting for Online Resources' $38 million contribution, organic revenue grew 5% in the quarter. Monthly recurring revenue grew to $148 million, up $43 million, and represented 72% of total revenue in the quarter. Excluding Online Resources, recurring revenue grew 5% from Q2 2012.

New sales bookings, net of term extensions (SNET), excluding the contribution from Online Resources, were flat compared to last year's Q2. Online Resources' SNET grew $6 million, or 55% in the second quarter from Q2 2012. Our 12 month backlog increased to $746 million, up $6 million, while our 60 month backlog increased to $3.08 billion, up $37 million, during the quarter (both adjusted for foreign currency fluctuations).

Q2 non-GAAP operating income was $17 million versus $9 million last year. Consolidated GAAP operating income was $12 million for the quarter, versus a loss of $8 million last year. Adjusted EBITDA of $38 million was $12 million above last year's $26 million. Non-GAAP net income was $6 million, or $0.14 per diluted share, in Q2 2013, versus non-GAAP net income of $7 million, or $0.16 per diluted share last year. GAAP net income was $2 million, or $0.05 per diluted share, versus a GAAP net loss of $5 million, or $(0.12) per diluted share in Q2 2012.

We ended the second quarter with $108 million in cash on hand. Operating free cash flow ("OFCF") for the quarter was $22 million, up from a negative $4 million in Q2 of last year. The quarter finished with a debt balance of $661 million, down $9 million from last quarter. Furthermore, as of August 7th, we have repurchased approximately $18 million of our stock.

ORCC Acquisition Update

With regards to the Online Resources transaction, the newly acquired company is growing as planned and our integration is now into Phase 2. As part of that plan, we are consolidating facilities and datacenters, as well as rationalizing certain low margin community financial online banking contracts. While Phase 2 will not be complete until early 2015, we expect to achieve an incremental $7 million in cost savings, representing total acquisition cost synergies of $27 million.

Long-term Financing and Increasing Share Repurchase Authorization

In an effort to improve our long-term financial flexibility and capital structure in a historically low interest rate environment, ACI is planning a potential issuance of long-term debt. The terms, timing, and ability to complete such an offering depend on many factors, including market conditions. If pursued, proceeds from this offering could be used to pay outstanding amounts under our existing credit facility and to strengthen our balance sheet.

In addition, ACI's Board of Directors has authorized an increase to its Share Repurchase Program of $100 million. Including this increase, ACI has approximately $165 million of remaining share repurchase authority. Year-to-date as of August 7, 2013, ACI has repurchased 394,000 shares, for a total of $18 million.

Updated Outlook

We are lowering our full year FY 2013 non-GAAP revenue guidance by 3% to a new range of $865 to $885 million due in part to certain online banking implementations that are requiring more resources and time than initially planned. We have completed a thorough review of these projects and expect the impact to be largely confined to 2013, with no significant impact in 2014 and beyond. Additionally, while we expect full year 2013 new sales bookings to increase organically (excluding ORCC) in the mid teens from last year's results, an increase from our prior expectations, the timing of these bookings is expected to occur later in the year, which will impact sales-to-revenue conversion, also negatively impacting 2013 revenues. Given the reduction in revenue, offset by expense management, we are revising our non-GAAP operating income and adjusted EBITDA ranges downward by $5 million and $10 million, respectively. Our updated non-GAAP operating income range is $165 to $175 million compared to prior guidance of $170 to $180 million and our adjusted EBITDA range is $256 to $266 million compared with $266 to $276 million previously.

To supplement our financial results presented on a GAAP basis, we use the non-GAAP measures indicated in the tables, which exclude certain business combination accounting entries and expenses related to the acquisition of S1 and Online Resources, as well as other significant non-cash expenses such as depreciation, amortization and share-based compensation, that we believe are helpful in understanding our past financial performance and our future results. The presentation of these non-GAAP financial measures should be considered in addition to our GAAP results and are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Management generally compensates for limitations in the use of non-GAAP financial measures by relying on comparable GAAP financial measures and providing investors with a reconciliation of non-GAAP financial measures only in addition to and in conjunction with results presented in accordance with GAAP. We believe that these non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. Certain non-GAAP measures include:

• Non-GAAP revenue: revenue plus deferred revenue that would have been recognized in the normal course of business by S1 and Online Resources if not for GAAP purchase accounting requirements. Non-GAAP revenue should be considered in addition to, rather than as a substitute for, revenue.
• Non-GAAP operating income: operating income (loss) plus deferred revenue that would have been recognized in the normal course of business by S1 and Online Resources if not for GAAP purchase accounting requirements and acquisition related expenses. Non-GAAP operating income should be considered in addition to, rather than as a substitute for, operating income.
• Adjusted EBITDA: net income (loss) plus income tax expense, net interest income (expense), net other income (expense), depreciation, amortization and non-cash compensation, as well as deferred revenue that would have been recognized in the normal course of business by S1 and Online Resources if not for GAAP purchase accounting requirements and acquisition related expenses. Adjusted EBITDA should be considered in addition to, rather than as a substitute for, operating income.

ACI is also presenting operating free cash flow, which is defined as net cash provided by operating activities, plus net after-tax payments associated with employee-related actions and facility disclosures, net after-tax payments associated with acquisition related transaction costs, net after-tax payments associated with IBM IT outsourcing transition and termination, and less capital expenditures. Operating free cash flow is considered a non-GAAP financial measure as defined by SEC Regulation G. We utilize this non-GAAP financial measure, and believe it is useful to investors, as an indicator of cash flow available for debt repayment and other investing activities, such as capital investments and acquisitions. We utilize operating free cash flow as a further indicator of operating performance and for planning investing activities. Operating free cash flow should be considered in addition to, rather than as a substitute for, net cash provided by operating activities. A limitation of operating free cash flow is that it does not represent the total increase or decrease in the cash balance for the period. This measure also does not exclude mandatory debt service obligations and, therefore, does not represent the residual cash flow available for discretionary expenditures. We believe that operating free cash flow is useful to investors to provide disclosures of our operating results on the same basis as that used by our management.

ACI also includes backlog estimates, which include all software license fees, maintenance fees and services specified in executed contracts, as well as revenues from assumed contract renewals to the extent that we believe recognition of the related revenue will occur within the corresponding backlog period. We have historically included assumed renewals in backlog estimates based upon automatic renewal provisions in the executed contract and our historic experience with customer renewal rates.

Backlog is considered a non-GAAP financial measure as defined by SEC Regulation G. Our 60-month backlog estimate represents expected revenues from existing customers using the following key assumptions:

• Maintenance fees are assumed to exist for the duration of the license term for those contracts in which the committed maintenance term is less than the committed license term.
• License, facilities management, and software hosting arrangements are assumed to renew at the end of their committed term at a rate consistent with our historical experiences.
• Non-recurring license arrangements are assumed to renew as recurring revenue streams.
• Foreign currency exchange rates are assumed to remain constant over the 60-month backlog period for those contracts stated in currencies other than the U.S. dollar.
• Our pricing policies and practices are assumed to remain constant over the 60-month backlog period.

Estimates of future financial results are inherently unreliable. Our backlog estimates require substantial judgment and are based on a number of assumptions as described above. These assumptions may turn out to be inaccurate or wrong, including for reasons outside of management's control. For example, our customers may attempt to renegotiate or terminate their contracts for a number of reasons, including mergers, changes in their financial condition, or general changes in economic conditions in the customer's industry or geographic location, or we may experience delays in the development or delivery of products or services specified in customer contracts which may cause the actual renewal rates and amounts to differ from historical experiences. Changes in foreign currency exchange rates may also impact the amount of revenue actually recognized in future periods. Accordingly, there can be no assurance that contracts included in backlog estimates will actually generate the specified revenues or that the actual revenues will be generated within the corresponding 60-month period.

Backlog should be considered in addition to, rather than as a substitute for, reported revenue and deferred revenue.

The full report can be viewed here.