Form 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
Commission File Number 0-25346
 
ACI WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  47-0772104
(I.R.S. Employer
Identification No.)
     
120 Broadway, Suite 3350
New York, New York 10271

(Address of principal executive offices,
including zip code)
   
(646) 348-6700

(Registrant’s telephone number,
including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of April 27, 2011, there were 33,416,569 shares of the registrant’s common stock outstanding.
 
 

 

 


 

TABLE OF CONTENTS
         
    Page  
 
       
 
       
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    16  
 
       
    28  
 
       
    28  
 
       
 
       
    29  
 
       
    29  
 
       
    29  
 
       
    30  
 
       
    30  
 
       
    30  
 
       
    31  
 
       
    32  
 
       
 Exhibit 31.01
 Exhibit 31.02
 Exhibit 32.01
 Exhibit 32.02
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

2


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands, except share and per share amounts)
                 
    March 31,     December 31,  
    2011     2010  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 168,882     $ 171,310  
Billed receivables, net of allowances of $5,533 and $5,738, respectively
    71,260       77,773  
Accrued receivables
    8,043       9,578  
Deferred income taxes, net
    10,087       12,317  
Prepaid expenses
    15,587       13,369  
Other current assets
    11,741       10,462  
 
           
Total current assets
    285,600       294,809  
 
           
 
               
Property and equipment, net
    22,112       18,539  
Software, net
    26,271       25,366  
Goodwill
    218,403       203,935  
Other intangible assets, net
    23,428       20,448  
Deferred income taxes, net
    30,932       28,143  
Other noncurrent assets
    8,707       10,289  
 
           
TOTAL ASSETS
  $ 615,453     $ 601,529  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Accounts payable
  $ 14,506     $ 15,263  
Accrued employee compensation
    16,626       26,174  
Deferred revenue
    141,433       121,936  
Income taxes payable
    2,482       6,181  
Alliance agreement liability
    1,600       1,917  
Note payable under credit facility
    75,000       75,000  
Accrued and other current liabilities
    21,730       24,293  
 
           
Total current liabilities
    273,377       270,764  
 
           
 
               
Deferred revenue
    33,239       31,045  
Alliance agreement noncurrent liability
    20,667       20,667  
Other noncurrent liabilities
    22,512       23,430  
 
           
Total liabilities
    349,795       345,906  
 
           
 
               
Commitments and contingencies (Note 11)
               
 
               
Stockholders’ equity
               
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding at March 31, 2011 and December 31, 2010
           
Common stock, $0.005 par value; 70,000,000 shares authorized; 40,821,516 shares issued at March 31, 2011 and December 31, 2010
    204       204  
Common stock warrants
    24,003       24,003  
Treasury stock, at cost, 7,399,387 and 7,548,752 shares outstanding at March 31, 2011 and December 31, 2010, respectively
    (168,343 )     (171,676 )
Additional paid-in capital
    314,576       312,947  
Retained earnings
    106,911       105,289  
Accumulated other comprehensive loss
    (11,693 )     (15,144 )
 
           
Total stockholders’ equity
    265,658       255,623  
 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 615,453     $ 601,529  
 
           
The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
                 
    Three Months Ended March 31,  
    2011     2010  
 
               
Revenues:
               
Software license fees
  $ 43,724     $ 29,317  
Maintenance fees
    35,070       33,422  
Services
    15,371       14,618  
Software hosting fees
    10,378       10,386  
 
           
Total revenues
    104,543       87,743  
 
           
 
               
Expenses:
               
Cost of software license fees (1)
    3,442       3,074  
Cost of maintenance, services, and hosting fees (1)
    29,607       27,892  
Research and development
    23,130       18,396  
Selling and marketing
    19,294       16,845  
General and administrative
    16,362       17,462  
Depreciation and amortization
    5,210       4,979  
 
           
Total expenses
    97,045       88,648  
 
           
 
               
Operating income (loss)
    7,498       (905 )
 
               
Other income (expense):
               
Interest income
    238       124  
Interest expense
    (643 )     (523 )
Other, net
    (302 )     (214 )
 
           
Total other income (expense)
    (707 )     (613 )
 
           
 
               
Income (loss) before income taxes
    6,791       (1,518 )
Income tax expense
    5,169       571  
 
           
Net income (loss)
  $ 1,622     $ (2,089 )
 
           
 
               
Income (loss) per share information
               
Weighted average shares outstanding
               
Basic
    33,318       33,725  
Diluted
    33,983       33,725  
 
               
Income (loss) per share
               
Basic
  $ 0.05     $ (0.06 )
Diluted
  $ 0.05     $ (0.06 )
     
(1)  
The cost of software license fees excludes charges for depreciation but includes amortization of purchased and developed software for resale. The cost of maintenance, services, and hosting fees excludes charges for depreciation.
The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)
                                                         
                                            Accumulated        
            Common             Additional             Other        
    Common     Stock     Treasury     Paid-in     Retained     Comprehensive        
    Stock     Warrants     Stock     Capital     Earnings     Income (Loss)     Total  
Balance at December 31, 2010
  $ 204     $ 24,003     $ (171,676 )   $ 312,947     $ 105,289     $ (15,144 )   $ 255,623  
Comprehensive income information:
                                                       
Net income
                            1,622             1,622  
Other comprehensive income:
                                                       
Foreign currency translation adjustments
                                  3,451       3,451  
 
                                                     
Comprehensive income
                                                    5,073  
Stock-based compensation
                      2,369                   2,369  
Shares issued and forfeited, net, under stock plans including income tax benefits
                3,679       (740 )                 2,939  
Repurchase of restricted stock for tax withholdings
                (346 )                       (346 )
 
                                         
Balance as of March 31, 2011
  $ 204     $ 24,003     $ (168,343 )   $ 314,576     $ 106,911     $ (11,693 )   $ 265,658  
 
                                         
The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
                 
    For the Three Months Ended  
    March 31,  
    2011     2010  
Cash flows from operating activities:
               
Net income (loss)
  $ 1,622     $ (2,089 )
Adjustments to reconcile net income (loss) to net cash flows from operating activities
               
Depreciation
    1,683       1,617  
Amortization
    5,136       4,874  
Tax expense of intellectual property shift
    550       549  
Deferred income taxes
    2,318       4,589  
Stock-based compensation expense
    2,369       1,806  
Excess tax benefit of stock options exercised
    (895 )     146  
Other
    72       262  
Changes in operating assets and liabilities, net of impact of acquisitions:
               
Billed and accrued receivables, net
    9,422       28,821  
Other current and noncurrent assets
    (2,420 )     (3,053 )
Accounts payable
    (2,921 )     (3,315 )
Accrued employee compensation
    (10,564 )     (8,920 )
Accrued liabilities
    (2,995 )     (4,432 )
Current income taxes
    (2,746 )     (14,837 )
Deferred revenue
    17,894       8,058  
Other current and noncurrent liabilities
    (582 )     (498 )
 
           
Net cash flows from operating activities
    17,943       13,578  
 
           
 
               
Cash flows from investing activities:
               
Purchases of property and equipment
    (5,188 )     (1,179 )
Purchases of software and distribution rights
    (1,844 )     (2,763 )
Alliance technical enablement expenditures
    (256 )     (1,707 )
Acquisition of business, net of cash acquired
    (16,729 )      
 
           
Net cash flows from investing activities
    (24,017 )     (5,649 )
 
           
 
               
Cash flows from financing activities:
               
Proceeds from issuance of common stock
    300       257  
Proceeds from exercises of stock options
    1,782       1,356  
Excess tax benefit of stock options exercised
    895       73  
Repurchases of common stock
          (2,998 )
Repurchase of restricted stock for tax withholdings
    (346 )     (255 )
Payments on debt and capital leases
    (524 )     (325 )
 
           
Net cash flows from financing activities
    2,107       (1,892 )
 
           
 
               
Effect of exchange rate fluctuations on cash
    1,539       (1,408 )
 
           
Net increase (decrease) in cash and cash equivalents
    (2,428 )     4,629  
Cash and cash equivalents, beginning of period
    171,310       125,917  
 
           
Cash and cash equivalents, end of period
  $ 168,882     $ 130,546  
 
           
 
               
Supplemental cash flow information
               
Income taxes paid, net
  $ 7,845     $ 13,460  
Interest paid
  $ 562     $ 442  
The accompanying notes are an integral part of the condensed consolidated financial statements.

 

6


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Condensed Consolidated Financial Statements
The unaudited condensed consolidated financial statements include the accounts of ACI Worldwide, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). All intercompany balances and transactions have been eliminated. The condensed consolidated financial statements as of March 31, 2011, and for the three months ended March 31, 2011 and 2010, are unaudited and reflect all adjustments of a normal recurring nature, except as otherwise disclosed herein, which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position and operating results for the interim periods. The condensed consolidated balance sheet as of December 31, 2010 is derived from the audited financial statements.
The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2010, filed on February 18, 2011. Results for the three months ended March 31, 2011, are not necessarily indicative of results that may be attained in the future.
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Comprehensive Income (loss)
The Company’s comprehensive income for the three months ended March 31, 2011 was $5.1 million compared to a $5.8 million loss for the same period in 2010. The two components of comprehensive income (loss) are net income (loss) and foreign currency translation adjustments. The foreign currency translation adjustments for the three months ended March 31, 2011 and March 31, 2010 were $3.5 million and $(3.7) million, respectively. Accumulated other comprehensive loss included in the Company’s condensed consolidated balance sheet represents the accumulated foreign currency translation adjustment. Since the undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested, the components of accumulated other comprehensive loss have not been tax effected.
Note Payable Under Credit Facility
On September 29, 2006, the Company entered into a five year revolving credit facility with a syndicate of financial institutions, as lenders, providing for revolving loans and letters of credit in an aggregate principal amount not to exceed $150 million. The facility has a maturity date of September 29, 2011, at which time any principal amounts outstanding are due. Obligations under the facility are unsecured and uncollateralized, but are jointly and severally guaranteed by certain domestic subsidiaries of the Company. As of March 31, 2011, the revolving credit facility is classified as current due to the maturity date being within 12 months. The Company is currently in discussions with various lenders, including its current lenders, for a new credit facility and anticipates closing on the new facility prior to the maturation of the current facility.
Revenue
Update to Revenue Accounting Policies. With the exception of the adoption of the new accounting pronouncements related to revenue recognition, which are discussed below, there have been no material changes to the Company’s significant accounting policies, as compared to the significant accounting policies described in its annual report on Form 10-K for the fiscal year ended December 31, 2010.
Revenue Recognition for Arrangements with Multiple Deliverables.
Effective January 1, 2011 the Company adopted on a prospective basis for all new or materially modified arrangements entered into on or after that date, the amended accounting guidance for multiple-deliverable revenue arrangements and the amended guidance related to the scope of existing software revenue recognition guidance. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements for the three months ended March 31, 2011, nor does the Company expect it to have a material impact on its future financial statements.

 

7


Table of Contents

A multiple-deliverable arrangement is separated into more than one unit of accounting if the delivered item(s) has value to the customer on a stand-alone basis; if the arrangement includes a general right of return relative to the delivered item(s); and if delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. If these criteria are not met, the arrangement is accounted for as a single unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price. The selling price for each element is based upon the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available.
The Company enters into hosting-related arrangements that may consist of multiple service deliverables including initial implementation and setup services; on-going support services; and other services. The Company’s hosted products operate in a highly regulated and controlled environment which requires a highly specialized and unique set of initial implementation and setup services prior to the commencement of hosting-related services. Due to the essential and specialized nature of the implementation and setup services, these services do not qualify as separate units of accounting separate from the hosting service as the delivered services do not have value to the client on a stand-alone basis. The on-going support and other services are considered as separate units of accounting. The total arrangement consideration is allocated to each of the separate units of accounting based on their relative selling price and revenue is recognized over their respective service periods. As the support and other services periods are the same as the hosting service period, the recognition pattern is similar to what was experienced prior to adopting the amended accounting guidance for multiple-deliverable revenue arrangements.
Vendor-Specific Objective Evidence
Certain of the Company’s software license arrangements include post contract customer support (maintenance or “PCS”) terms that fail to achieve VSOE of fair value due to non-substantive renewal periods, or contain a range of possible non-substantive PCS renewal amounts. As a result of the maturation of certain retail payment engine products, including BASE24, a higher number of software license arrangements fail to achieve VSOE of fair value for PCS due to non-substantive renewal periods, or contain a range of possible PCS renewal amounts. For these arrangements, VSOE of fair value of PCS does not exist and revenues for the software license, PCS and services, if applicable, are considered to be one accounting unit and are therefore recognized ratably over the longer of the contractual service term or the initial PCS term once the delivery of both services has commenced. The Company typically classifies revenues associated with these arrangements in accordance with the contractually specified amounts, which approximate fair value assigned to the various elements, including software license fees, maintenance fees and services, if applicable.
This allocation methodology has been applied to the following amounts included in revenues in the consolidated statements of operations from arrangements for which VSOE of fair value does not exist for each undelivered element (in thousands):
                 
    Three Months Ended  
    March 31,  
    2011     2010  
Software license fees
  $ 22,918     $ 5,165  
Maintenance fees
    5,265       1,143  
Services
    123       1,380  
 
           
Total
  $ 28,306     $ 7,688  
 
           
2. Acquisitions
ISD Holdings, Inc.
On March 18, 2011, the Company closed the acquisition of ISD Holdings, Inc. and its 100% owned subsidiary ISD Corporation (collectively “ISD”). ISD’s suite of products enables retailers to consolidate, manage, secure and route all electronic transactions from their point-of-sale systems to third party processors for authorization and settlement.

 

8


Table of Contents

The aggregate purchase price of ISD was $19.1 million, after working capital adjustments in accordance with the terms of the purchase agreement, which included cash acquired of $2.4 million. The allocation of the purchase price to specific assets and liabilities was based on the relative fair value of all assets and liabilities.
In connection with the acquisition, the Company recorded the following amounts based upon its preliminary purchase price allocation during the three months ended March 31, 2011 (in thousands, except weighted-average useful lives):
                 
            Weighted-  
            Average Useful  
    Amount     Lives  
 
               
Cash
  $ 2,375          
Accounts Receivable
    2,030          
Other current assets
    175          
 
             
Total current assets acquired
    4,580          
 
             
 
               
Noncurrent assets:
               
Property and equipment
    519          
Goodwill
    11,569          
Intellectual property rights
    2,338     5 years
Customer relationships
    4,059     9 years
Trade name
    247     5 years
Other non-current assets
    375          
 
             
Total assets acquired
    23,687          
 
             
 
               
Current liabilities acquired
    (4,583 )        
 
             
 
               
Net assets acquired
  $ 19,104          
 
             
Factors contributing to the purchase price which resulted in the goodwill (which is not tax deductible) include the acquisition of management, sales, and technology personnel with the skills to market new and existing products of the Company. Pro forma results are not presented because they are not material.
3. Stock-Based Compensation Plans
Employee Stock Purchase Plan
Under the Company’s 1999 Employee Stock Purchase Plan, as amended (the “ESPP”), a total of 1,500,000 shares of the Company’s common stock have been reserved for issuance to eligible employees. Participating employees are permitted to designate up to the lesser of $25,000 or 10% of their annual base compensation for the purchase of common stock under the ESPP. Purchases under the ESPP are made one calendar month after the end of each fiscal quarter. The price for shares of common stock purchased under the ESPP is 85% of the stock’s fair market value on the last business day of the three-month participation period. Shares issued under the ESPP during the three months ended March 31, 2011 and 2010 totaled 11,373 and 16,709, respectively.

 

9


Table of Contents

Stock-Based Payments
A summary of stock options issued pursuant to the Company’s stock incentive plans is as follows:
                                 
                    Weighted-        
                    Average        
            Weighted-     Remaining     Aggregate  
            Average     Contractual     Intrinsic Value of  
    Number of     Exercise     Term     In-the-Money  
    Shares     Price     (Years)     Options  
Outstanding as of December 31, 2010
    3,510,538     $ 21.55                  
Exercised
    (150,353 )     11.85                  
Forfeited
    (2,134 )     16.52                  
 
                           
Outstanding as of March 31, 2011
    3,358,051     $ 21.98       5.49     $ 37,154,335  
 
                       
 
                               
Exercisable as of March 31, 2011
    2,168,534     $ 21.99       4.72     $ 24,225,702  
 
                       
As of March 31, 2011, the Company expects that 94.8% of the options will vest over the vesting period.
No options were granted during the three months ended March 31, 2011. The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2010 was $10.77. The Company issued treasury shares for the exercise of stock options during the three months ended March 31, 2011 and 2010. The total intrinsic value of stock options exercised during the three months ended March 31, 2011 and 2010 was $2.8 million and $0.6 million, respectively.
The fair value of options granted during the three months ended March 31, 2010 was estimated on the date of grant using the Black-Scholes option-pricing model, a pricing model acceptable under U.S. GAAP, with the following weighted-average assumptions:
         
    Three Months Ended  
    March 31, 2010  
 
       
Expected life (years)
    6.00  
Interest rate
    3.1 %
Volatility
    51.4 %
Dividend yield
     
Expected volatilities are based on the Company’s historical common stock volatility derived from historical stock price data for historical periods commensurate with the options’ expected life. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The Company used the simplified method for determining the expected life. The simplified method was used as the historical data did not provide a reasonable basis upon which to estimate the expected term due to the extended period during which individuals were unable to exercise options while the Company was not current with its filings with the Securities and Exchange Commission (“SEC”). The risk-free interest rate is based on the implied yield currently available on United States Treasury zero coupon issues with a term equal to the expected term at the date of grant of the options. The expected dividend yield is zero as the Company has historically paid no dividends and does not anticipate dividends to be paid in the future.

 

10


Table of Contents

A summary of nonvested long-term incentive program performance share awards (“LTIP performance shares”) outstanding as of March 31, 2011 and changes during the period are as follows:
                 
    Number of     Weighted-  
    Shares at     Average  
    Expected     Grant Date  
Nonvested LTIP Performance Shares   Attainment     Fair Value  
Nonvested as of December 31, 2010
    499,035     $ 20.57  
Forfeited
    (3,840 )     16.52  
 
           
Nonvested as of March 31, 2011
    495,195     $ 20.61  
 
           
A summary of nonvested restricted share awards (“RSAs”) as of March 31, 2011 and changes during the period are as follows:
                 
    Number of        
    Restricted     Weighted-Average Grant  
Nonvested Restricted Share Awards   Share Awards     Date Fair Value  
Nonvested as of December 31, 2010
    192,298     $ 18.42  
Vested
    (40,834 )     16.54  
 
           
Nonvested as of March 31, 2011
    151,464     $ 18.93  
 
           
During the three months ended March 31, 2011, 40,834 of the RSAs vested. The Company withheld 12,361 of those shares to pay the employees’ portion of the minimum payroll withholding taxes.
As of March 31, 2011, there were unrecognized compensation costs of $5.7 million related to nonvested stock options, $2.1 million related to the nonvested RSAs, and $7.0 million related to the LTIP performance shares, which the Company expects to recognize over weighted-average periods of 2.1 years, 1.6 years and 2.3 years, respectively.
The Company recorded stock-based compensation expenses for the three months ended March 31, 2011 and 2010 related to stock options, LTIP performance shares, RSAs, and the ESPP of $2.4 million and $1.8 million, respectively, with corresponding tax benefits of $0.9 million and $0.7 million, respectively. Tax benefits in excess of the option’s grant date fair value are classified as financing cash flows. No stock-based compensation costs were capitalized during the three months ended March 31, 2011 and 2010. Estimated forfeiture rates, stratified by employee classification, have been included as part of the Company’s calculations of compensation costs. The Company recognizes compensation costs for stock option awards, which vest with the passage of time with only service conditions on a straight-line basis over the requisite service period.
Cash received from option exercises for the three months ended March 31, 2011 and 2010 was $1.8 million and $1.4 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $1.1 million and $0.2 million for the three months ended March 31, 2011 and 2010, respectively.
4. Goodwill
Changes in the carrying amount of goodwill during the three months ended March 31, 2011, were as follows (in thousands):
                                 
    Americas     EMEA     Asia/Pacific     Total  
Gross Balance prior to December 31, 2010
  $ 187,362     $ 44,250     $ 19,755     $ 251,367  
Total impairment prior to December 31, 2010
    (47,432 )                 (47,432 )
 
                       
Balance as of December 31, 2010
    139,930       44,250       19,755       203,935  
Addition — acquisition of ISD (1)
    11,569                   11,569  
Foreign currency translation adjustments
    61       2,423       415       2,899  
 
                       
Balance as of March 31, 2011
  $ 151,560     $ 46,673     $ 20,170     $ 218,403  
 
                       
     
(1)  
Addition relates to the goodwill acquired in the acquisition of ISD as discussed in Note 2.

 

11


Table of Contents

5. Software and Other Intangible Assets
At March 31, 2011, software net book value totaling $26.3 million, net of $51.2 million of accumulated amortization, includes the net book value of software marketed for external sale of $14.3 million. The remaining software net book value of $12.0 million is comprised of various software that has been acquired or developed for internal use.
Quarterly amortization of software marketed for external sale is computed using the greater of the ratio of current revenues to total estimated revenues expected to be derived from the software or the straight-line method over an estimated useful life of three to six years. Software for resale amortization expense recorded in the three months ended March 31, 2011 and 2010 totaled $1.6 million and $1.5 million, respectively. These software amortization expense amounts are reflected in cost of software license fees in the condensed consolidated statements of operations. Amortization of software for internal use of $1.9 million and $1.8 million for the three months ended March 31, 2011 and 2010, respectively, is included in depreciation and amortization in the condensed consolidated statements of operations.
The carrying amount and accumulated amortization of the Company’s other intangible assets that were subject to amortization at each balance sheet date are as follows (in thousands):
                                                 
    March 31, 2011     December 31, 2010  
    Gross                     Gross              
    Carrying     Accumulated           Carrying     Accumulated        
    Amount     Amortization     Net Balance     Amount     Amortization     Net Balance  
Customer relationships
  $ 40,988     $ (20,253 )   $ 20,735     $ 36,393     $ (18,855 )   $ 17,538  
Purchased contracts
    10,814       (9,015 )     1,799       10,753       (8,504 )     2,249  
Trademarks and tradenames
    1,359       (482 )     877       1,062       (422 )     640  
Covenant not to compete
    85       (68 )     17       83       (62 )     21  
 
                                   
 
  $ 53,246     $ (29,818 )   $ 23,428     $ 48,291     $ (27,843 )   $ 20,448  
 
                                   
Other intangible assets amortization expense totaled $1.6 million for the three months ended March 31, 2011 and 2010.
Based on capitalized software and other intangible assets at March 31, 2011, estimated amortization expense for future fiscal years is as follows (in thousands):
                 
            Other  
            Intangible  
    Software     Assets  
Fiscal Year Ending December 31,   Amortization     Amortization  
Remainder of 2011
  $ 10,005     $ 4,862  
2012
    9,992       5,527  
2013
    3,895       5,269  
2014
    2,054       3,450  
2015
    325       1,534  
Thereafter
          2,786  
 
           
Total
  $ 26,271     $ 23,428  
 
           
6. Derivative Instruments and Hedging Activities
The Company had two interest rate swaps that terminated on October 4, 2010. Neither swap qualified for hedge accounting. Accordingly, the loss resulting from the change in the fair value of the interest rate swaps of $0.2 million for the three months ended March 31, 2010, was reflected as expense in other income (expense), net in the accompanying condensed consolidated statements of operations.
As both interest rate swaps terminated on October 4, 2010, there was no liability reported in the accompanying condensed consolidated balance sheet as of March 31, 2011 and December 31, 2010.

 

12


Table of Contents

7. Common Stock, Treasury Stock and Earnings (Loss) Per Share
The Company’s board of directors has approved a stock repurchase program authorizing the Company, from time to time as market and business conditions warrant, to acquire up to $210 million of its common stock. Under the program to date, the Company has purchased approximately 8,082,180 shares for approximately $187.1 million. The Company did not repurchase shares under this program during the three months ended March 31, 2011. The maximum remaining dollar value of shares authorized for purchase under the stock repurchase program was approximately $22.9 million as of March 31, 2011.
Earnings (loss) per share is computed in accordance with the U.S. GAAP. Basic earnings (loss) per share is computed on the basis of weighted average outstanding common shares. Diluted earnings (loss) per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options and other outstanding dilutive securities.
The following table reconciles the average share amounts used to compute both basic and diluted loss per share (in thousands):
                 
    Three Months Ended  
    March 31,  
    2011     2010  
 
               
Weighted average share outstanding:
               
Basic weighted average shares outstanding
    33,318       33,725  
Add: Dilutive effect of stock options, restricted stock awards and common stock warrants
    665        
 
           
Diluted weighted average shares outstanding
    33,983       33,725  
 
           
For the three months ended March 31, 2011 and 2010, 3.2 million and 6.8 million, respectively, options to purchase shares, restricted share awards, common stock warrants and contingently issuable shares were excluded from the diluted earnings per share computation as their effect would be anti-dilutive.
8. Other Income (Expense), net
Other, net is comprised of the following items (in thousands):
                 
    Three Months Ended  
    March 31,  
    2011     2010  
 
               
Foreign currency transaction gain (losses)
  $ (239 )   $ 56  
Loss on interest rate swap
          (158 )
Other
    (63 )     (112 )
 
           
Total
  $ (302 )   $ (214 )
 
           
9. Segment Information
The Company’s chief operating decision maker, together with other senior management personnel, currently focus their review of consolidated financial information and the allocation of resources based on reporting of operating results, including revenues and operating income, for the geographic regions of the Americas, Europe/Middle East/Africa (“EMEA”) and Asia/Pacific. The Company’s products are sold and supported through distribution networks covering these three geographic regions, with each distribution network having its own sales force. The Company supplements its distribution networks with independent reseller and/or distributor arrangements. As such, the Company has concluded that its three geographic regions are its operating segments.
The Company’s chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues and operating income (loss) by geographical region.

 

13


Table of Contents

The Company allocated segment support expenses such as global product delivery and development, global customer operations and global product management based upon percentage of revenue per segment. Corporate overhead costs are allocated as a percentage of the headcount by segment. The following is selected segment financial data for the periods indicated (in thousands):
                 
    Three Months Ended  
    March 31,  
    2011     2010  
Revenues:
               
Americas
  $ 52,330     $ 46,316  
EMEA
    42,141       31,913  
Asia/Pacific
    10,072       9,514  
 
           
 
  $ 104,543     $ 87,743  
 
           
 
               
Operating income (loss):
               
Americas
  $ 5,963     $ 3,059  
EMEA
    6,260       (141 )
Asia/Pacific
    (4,725 )     (3,823 )
 
           
 
  $ 7,498     $ (905 )
 
           
                 
    March 31,     December 31,  
    2011     2010  
Total assets:
               
Americas — United States
  $ 344,735     $ 335,457  
Americas — Other
    29,909       21,254  
EMEA
    184,500       186,209  
Asia/Pacific
    56,309       58,609  
 
           
 
  $ 615,453     $ 601,529  
 
           
No single customer accounted for more than 10% of the Company’s consolidated revenues during the three months ended March 31, 2011 and 2010. Aggregate revenues attributable to customers in the United Kingdom accounted for 14.9% of the Company’s consolidated revenues during the three months ended March 31, 2011. No country outside the United States accounted for more than 10% of the Company’s consolidated revenues during the three months ended March 31, 2010.
10. Income Taxes
The effective tax rate for the three months ended March 31, 2011 was 76.1%. The Company reported tax expense for the three months ended March 31, 2010 while reporting a pretax loss for the same period. The resulting effective tax rate is negative. The effective tax rate in both periods is negatively impacted by the Company’s inability to recognize income tax benefits during the period on losses sustained in certain tax jurisdictions where the future utilization of the losses are uncertain, and by the recognition of tax expense associated with the transfer of certain intellectual property rights from U.S. to non-U.S. entities.
The Company’s effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower in the countries in which it operates that have a lower statutory rate or higher in the countries in which it operates that have a higher statutory rate or the extent it has losses sustained in countries where the future utilization of losses are uncertain. The Company’s effective tax rate could also fluctuate due to changes in the valuation of its deferred tax assets or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, the Company is occasionally subject to examination of its income tax returns by tax authorities in the jurisdictions it operates. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.

 

14


Table of Contents

The amount of unrecognized tax benefits for uncertain tax positions was $8.4 million as of March 31, 2011 and $8.4 million as of December 31, 2010, excluding related liabilities for interest and penalties of $2.3 million as of March 31, 2011 and $2.2 million as of December 31, 2010.
The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next 12 months by approximately $5.9 million, due to the settlement of various audits and the expiration of statutes of limitation.
11. Commitments and Contingencies
Legal Proceedings
From time to time, the Company is involved in various litigation matters arising in the ordinary course of its business. The Company is not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, the Company believes would be likely to have a material adverse effect on the Company’s financial condition or results of operations.
12. International Business Machines Corporation Alliance
During the three months ended March 31, 2011 and 2010, the Company incurred $0.3 million and $2.9 million of costs, respectively, related to fulfillment of the technical enablement milestones under the International Business Machines Corporation (“IBM”) Master Alliance Agreement, as amended (the “Alliance”). The reimbursement of these costs was recorded as a reduction of the Alliance agreement liability and a reduction in capitalizable costs under U.S. GAAP, in the accompanying condensed consolidated balance sheets and a reduction of operating expenses in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010. As of March 31, 2011 and December 31, 2010, $20.7 million was refundable unless certain future milestones are achieved.
Changes in the Alliance agreement liability were as follows (in thousands):
         
    Alliance  
    Agreement  
    Liability  
Balance as of December 31, 2010
  $ 22,584  
Costs related to fulfillment of technical enablement milestones
    (317 )
 
     
Balance as of March 31, 2011
  $ 22,267  
 
     
Of the $22.3 million Alliance agreement liability, $1.6 million is current and $20.7 million is non-current in the accompanying condensed consolidated balance sheet as of March 31, 2011.
Of the $22.6 million Alliance agreement liability, $1.9 million is current and $20.7 million is non-current in the accompanying condensed consolidated balance sheet as of December 31, 2010.

 

15


Table of Contents

Item 2.  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and may include words or phrases such as “believes,” “will,” “expects,” “anticipates,” “intends,” and words and phrases of similar impact. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.
Forward-looking statements in this report include, but are not limited to, statements regarding future operations, business strategy, business environment and key trends, as well as statements related to expected financial and other benefits from our organizational restructuring activities. Many of these factors will be important in determining our actual future results. Any or all of the forward-looking statements in this report may turn out to be incorrect. They may be based on inaccurate assumptions or may not account for known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those expressed or implied in any forward-looking statements, and our business, financial condition and results of operations could be materially and adversely affected. In addition, we disclaim any obligation to update any forward-looking statements after the date of this report, except as required by law.
All of the forward-looking statements in this report are expressly qualified by the risk factors discussed in our filings with the Securities and Exchange Commission. Such factors include, but are not limited to, risks related to the global financial crisis and the continuing decline in the global economy, restrictions and other financial covenants in our credit facility, volatility and disruption of the capital and credit markets and adverse changes in the global economy, the maturation of our current credit facility, the restatement of our financial statements, consolidations and failures in the financial services industry, the accuracy of management’s backlog estimates, the cyclical nature of our revenue and earnings and the accuracy of forecasts due to the concentration of revenue generating activity during the final weeks of each quarter, impairment of our goodwill or intangible assets, exposure to unknown tax liabilities, volatility in our stock price, risks from operating internationally, including fluctuations in currency exchange rates, increased competition, our offshore software development activities, customer reluctance to switch to a new vendor, the performance of our strategic product, BASE24-eps, the maturity of certain products, our strategy to migrate customers to our next generation products, ratable or deferred recognition of certain revenue associated with customer migrations and the maturity of certain of our products, demand for our products, failure to obtain renewals of customer contracts or to obtain such renewals on favorable terms, delay or cancellation of customer projects or inaccurate project completion estimates, business interruptions or failure of our information technology and communication systems, our alliance with International Business Machines Corporation (“IBM”), our outsourcing agreement with IBM, the complexity of our products and services and the risk that they may contain hidden defects or be subjected to security breaches or viruses, compliance of our products with applicable legislation, governmental regulations and industry standards, our compliance with privacy regulations, the protection of our intellectual property in intellectual property litigation, future acquisitions, strategic partnerships and investments and litigation. The cautionary statements in this report expressly qualify all of our forward-looking statements.
The following discussion should be read together with our financial statements and related notes contained in this report and with the financial statements and related notes and Management’s Discussion & Analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed February 18, 2011. Results for the three months ended March 31, 2011, are not necessarily indicative of results that may be attained in the future.
Overview
We develop, market, install and support a broad line of software products and services primarily focused on facilitating electronic payments. In addition to our own products, we distribute, or act as a sales agent for, software developed by third parties. Our products are sold and supported through distribution networks covering three geographic regions — the Americas, EMEA and Asia/Pacific. Each distribution network has its own sales force and supplements its sales force with independent reseller and/or distributor networks. Our products and services are used principally by financial institutions, retailers and electronic payment processors, both in domestic and international markets. Accordingly, our business and operating results are influenced by trends such as information technology spending levels, the growth rate of the electronic payments industry, mandated regulatory changes, and changes in the number and type of customers in the financial services industry. Our products are marketed under the ACI Worldwide and ACI Payment Systems brands.

 

16


Table of Contents

We derive a majority of our revenues from non-domestic operations and believe our greatest opportunities for growth exist largely in international markets. Refining our global infrastructure is a critical component of driving our growth. We have launched a globalization strategy which includes elements intended to streamline our supply chain and provide low-cost centers of expertise to support a growing international customer base. We utilize our Irish subsidiaries to manage certain of our intellectual property rights and to oversee and manage certain international product development and commercialization efforts. We also continue to grow low-cost centers of expertise in Timisoara, Romania and Bangalore, India.
Key trends that currently impact our strategies and operations include:
   
Global Financial Markets Uncertainty. The continuing uncertainty in the global financial markets has negatively impacted general business conditions. It is possible that a weakening economy could adversely affect our customers, their purchasing plans, or even their solvency, but we cannot predict whether or to what extent this will occur. We have diversified counterparties and customers, but we continue to monitor our counterparty and customer risks closely. While the effects of the economic conditions in the future are not predictable, we believe our global presence, the breadth and diversity of our service offerings and our enhanced expense management capabilities position us well in a slower economic climate. Market analysts, such as Boston Consulting Group, indicate that banks now recognize the importance of payments to their business, so providing services for that aspect of the business is of less risk than for other aspects of their business.
   
Availability of Credit. There have been significant disruptions in the capital and credit markets during the past two years and many lenders and financial institutions have reduced or ceased to provide funding to borrowers. The availability of credit, confidence in the entire financial sector, and volatility in financial markets have been adversely affected. These disruptions are likely to have some impact on all institutions in the U.S. banking and financial industries, including our lenders and the lenders of our customers. While the Federal Reserve Bank and other Central Banks have provided liquidity into the banking system there is still uncertainty over the strength of short-term borrowing markets and other capital markets. Reduced liquidity in the markets could increase financing costs or reduce the availability of funds to finance our existing operations as well as those of our customers. We are not currently dependent upon short-term funding, and the limited availability of credit in the market has not affected our revolving credit facility or our liquidity or materially impacted our funding costs.
   
Increasing electronic payment transaction volumes. Electronic payment volumes continue to increase around the world, taking market share from traditional cash and check transactions. In May 2010, Tower Group noted that global noncash payment transactions are expected to grow in volume at 4.95% per year through 2012 to a total of 299 billion items, with varying growth rates based on the type of payment and part of the world. We leverage the growth in transaction volumes through the licensing of new systems to customers whose older systems cannot handle increased volume and through the licensing of capacity upgrades to existing customers.
   
Increasing competition. The electronic payments market is highly competitive and subject to rapid change. Our competition comes from in-house information technology departments, third-party electronic payment processors and third-party software companies located both within and outside of the United States. Many of these companies are significantly larger than us and have significantly greater financial, technical and marketing resources. As electronic payment transaction volumes increase, third-party processors tend to provide competition to our solutions, particularly among customers that do not seek to differentiate their electronic payment offerings. As consolidation in the financial services industry continues, we anticipate that competition for those customers will intensify.
   
Adoption of open systems technology. In an effort to leverage lower-cost computing technologies and current technology staffing and resources, many financial institutions, retailers and electronic payment processors are seeking to transition their systems from proprietary technologies to open technologies. Our continued investment in open systems technologies is, in part, designed to address this demand.
   
Electronic payments fraud and compliance. As electronic payment transaction volumes increase, criminal elements continue to find ways to commit a growing volume of fraudulent transactions using a wide range of techniques. Financial institutions, retailers and electronic payment processors continue to seek ways to leverage new technologies to identify and prevent fraudulent transactions. Due to concerns with international terrorism and money laundering, financial institutions in particular are being faced with increasing scrutiny and regulatory pressures. We continue to see opportunity to offer our fraud detection solutions to help customers manage the growing levels of electronic payment fraud and compliance activity.

 

17


Table of Contents

   
Adoption of smartcard technology. In many markets, card issuers are being required to issue new cards with embedded chip technology. Chip-based cards are more secure, harder to copy and offer the opportunity for multiple functions on one card (e.g. debit, credit, electronic purse, identification, health records, etc.). The EMV standard for issuing and processing debit and credit card transactions has emerged as the global standard, with many regions throughout the world working on EMV rollouts. The primary benefit of EMV deployment is a reduction in electronic payment fraud, with the additional benefit that the core infrastructure necessary for multi-function chip cards is being put in place (e.g., chip card readers in ATM’s and POS devices) allowing the deployment of other technologies like contactless. We are working with many customers around the world to facilitate EMV deployments, leveraging several of our solutions.
   
Single Euro Payments Area (“SEPA”). The SEPA, primarily focused on the European Economic Community and the United Kingdom, is designed to facilitate lower costs for cross-border payments and reduce timeframes for settling electronic payment transactions. Our retail and wholesale banking solutions facilitate key functions that help financial institutions address these mandated regulations.
   
Financial institution consolidation. Consolidation continues on a national and international basis, as financial institutions seek to add market share and increase overall efficiency. Such consolidations have increased, and may continue to increase, in their number, size and market impact as a result of the global economic crisis and the financial crisis affecting the banking and financial industries. There are several potential negative effects of increased consolidation activity. Continuing consolidation of financial institutions may result in a smaller number of existing and potential customers for our products and services. Consolidation of two of our customers could result in reduced revenues if the combined entity were to negotiate greater volume discounts or discontinue use of certain of our products. Additionally, if a non-customer and a customer combine and the combined entity in turn decides to forego future use of our products, our revenue would decline. Conversely, we could benefit from the combination of a non-customer and a customer when the combined entity continues use of our products and, as a larger combined entity, increases its demand for our products and services. We tend to focus on larger financial institutions as customers, often resulting in our solutions being the solutions that survive in the consolidated entity.
   
Electronic payments convergence. As electronic payment volumes grow and pressures to lower overall cost per transaction increase, financial institutions are seeking methods to consolidate their payment processing across the enterprise. We believe that the strategy of using service-oriented-architectures to allow for re-use of common electronic payment functions such as authentication, authorization, routing and settlement will become more common. Using these techniques, financial institutions will be able to reduce costs, increase overall service levels, enable one-to-one marketing in multiple bank channels, leverage volumes for improved pricing and liquidity, and manage enterprise risk. Our product development strategy is, in part, focused on this trend, by creating integrated payment functions that can be re-used by multiple bank channels, across both the consumer and wholesale bank. While this trend presents an opportunity for us, it may also expand the competition from third-party electronic payment technology and service providers specializing in other forms of electronic payments. Many of these providers are larger than us and have significantly greater financial, technical and marketing resources.
The banking, financial services and payments industries have come under increased scrutiny from federal, state and foreign lawmakers and regulators in response to the crises in the financial markets and the global recession. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law July 21, 2010, represents a comprehensive overhaul of the U.S. financial services industry and requires the implementation of many new regulations that will have a direct impact on our customers and potential customers. These regulatory changes may create both opportunities and challenges for us. The application of the new regulations on our customers could create an opportunity for us to market our product capabilities and the flexibility of our solutions to assist our customers in addressing these regulations. At the same time, these regulatory changes may have an adverse impact on our operations and our financial results as we adjust our activities in light of increased compliance costs and customer requirements. It is currently too difficult to predict the actual extent to which the Dodd-Frank Act or the resulting regulations will impact our business and the businesses of our current and potential customers.
Several other factors related to our business may have a significant impact on our operating results from year to year. For example, the accounting rules governing the timing of revenue recognition in the software industry are complex and it can be difficult to estimate when we will recognize revenue generated by a given transaction. Factors such as maturity of the software product licensed, payment terms, creditworthiness of the customer, and timing of delivery or acceptance of our products often cause revenues related to sales generated in one period to be deferred and recognized in later periods. For arrangements in which services revenue is deferred, related direct and incremental costs may also be deferred. Additionally, while the majority of our contracts are denominated in the United States dollar, a substantial portion of our sales are made, and some of our expenses are incurred, in the local currency of countries other than the United States. Fluctuations in currency exchange rates in a given period may result in the recognition of gains or losses for that period.

 

18


Table of Contents

We continue to seek ways to grow, through organic sources, partnerships, alliances, and acquisitions. We continually look for potential acquisitions designed to improve our solutions’ breadth or provide access to new markets. As part of our acquisition strategy, we seek acquisition candidates that are strategic, capable of being integrated into our operating environment, and financially accretive to our financial performance.
Acquisition
On March 18, 2011, we closed the acquisition of ISD Holdings, Inc. and its 100% owned subsidiary ISD Corporation (collectively “ISD”). ISD’s suite of products enables retailers to consolidate, manage, secure and route all electronic transactions from their point-of-sale systems to third party processors for authorization and settlement.
The aggregate purchase price of ISD was $19.1 million, after working capital adjustments in accordance with the terms of the purchase agreement, including $2.4 million in cash acquired. The preliminary allocation of the purchase price to specific assets and liabilities was based on the relative fair value of all assets and liabilities.
Backlog
Included in backlog estimates are all software license fees, maintenance fees and services fees 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.
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 and facilities management 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.
In computing our 60-month backlog estimate, the following items are specifically not taken into account:
   
Anticipated increases in transaction volumes in customer systems.
   
Optional annual uplifts or inflationary increases in recurring fees.
   
Services engagements, other than facilities management, are not assumed to renew over the 60-month backlog period.
   
The potential impact of merger activity within our markets and/or customers.
We review our customer renewal experience on an annual basis. The impact of this review and subsequent update may result in a revision to the renewal assumptions used in computing the 60-month and 12-month backlog estimates. In the event a revision to renewal assumptions is determined to be necessary, prior periods will be adjusted for comparability purposes. Based on our annual review of customer renewal experience completed during the three months ended December 31, 2010, backlog results for all reported periods have been updated to reflect our most current customer renewal experience.

 

19


Table of Contents

The following table sets forth our 60-month backlog estimate, by geographic region, as of March 31, 2011 and December 31, 2010 (in millions). Dollar amounts reflect foreign currency exchange rates as of each period end.
                 
    March 31,     December 31,  
    2011     2010  
 
               
Americas
  $ 895     $ 871  
EMEA
    526       506  
Asia/Pacific
    192       189  
 
           
Total
  $ 1,613     $ 1,566  
 
           
Included in our 60-month backlog estimates are amounts expected to be recognized during the initial license term of customer contracts (“Committed Backlog”) and amounts expected to be recognized from assumed renewals of existing customer contracts (“Renewal Backlog”). Amounts expected to be recognized from assumed contract renewals are based on our historical renewal experience.
The following table sets forth our 60-month Committed Backlog and Renewal Backlog estimates as of March 31, 2011 and December 31, 2010 (in millions). Dollar amounts reflect foreign currency exchange rates as of each period end.
                 
    March 31,     December 31,  
    2011     2010  
 
               
Committed
  $ 890     $ 857  
Renewal
    723       709  
 
           
Total
  $ 1,613     $ 1,566  
 
           
We also estimate 12-month backlog, segregated between monthly recurring and non-recurring revenues, using a methodology consistent with the 60-month backlog estimate. Monthly recurring revenues include all monthly license fees, maintenance fees and processing services fees. Non-recurring revenues include other software license fees and services fees. Amounts included in our 12-month backlog estimate assume renewal of one-time license fees on a monthly fee basis if such renewal is expected to occur in the next 12 months. The following table sets forth our 12-month backlog estimate, by geographic region, as of March 31, 2011 and December 31, 2010 (in millions). Dollar amounts reflect foreign currency exchange rates as of each period end.
                                                 
    March 31, 2011     December 31, 2010  
    Monthly     Non-             Monthly     Non-        
    Recurring     Recurring     Total     Recurring     Recurring     Total  
 
                                               
Americas
  $ 166     $ 39     $ 205     $ 164     $ 43     $ 207  
EMEA
    101       34       135       103       27       130  
Asia/Pacific
    37       14       51       34       10       44  
 
                                   
Total
  $ 304     $ 87     $ 391     $ 301     $ 80     $ 381  
 
                                   
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 amounts included in backlog estimates will actually generate the specified revenues or that the actual revenues will be generated within the corresponding 12-month or 60-month period. Additionally, because backlog estimates are operating metrics, the estimates are not required to be subject to the same level of internal review or controls as a GAAP financial measure.

 

20


Table of Contents

RESULTS OF OPERATIONS
The following table presents the condensed consolidated statements of operations as well as the percentage relationship to total revenues of items included in our condensed consolidated statements of operations (amounts in thousands):
                                 
    Three Months Ended March 31,  
    2011     2010  
            % of             % of  
            Total             Total  
    Amount     Revenue     Amount     Revenue  
 
                               
Revenues:
                               
Initial license fees (ILFs)
  $ 12,565       12.0 %   $ 9,743       11.1 %
Monthly license fees (MLFs)
    31,159       29.8 %     19,574       22.3 %
 
                       
Software license fees
    43,724       41.8 %     29,317       33.4 %
Maintenance fees
    35,070       33.5 %     33,422       38.1 %
Services
    15,371       14.7 %     14,618       16.7 %
Software hosting fees
    10,378       9.9 %     10,386       11.8 %
 
                       
Total revenues
    104,543       100.0 %     87,743       100.0 %
 
                       
 
                               
Expenses:
                               
Cost of software licenses fees
    3,442       3.3 %     3,074       3.5 %
Cost of maintenance, services, and hosting fees
    29,607       28.3 %     27,892       31.8 %
Research and development
    23,130       22.1 %     18,396       21.0 %
Selling and marketing
    19,294       18.5 %     16,845       19.2 %
General and administrative
    16,362       15.7 %     17,462       19.9 %
Depreciation and amortization
    5,210       5.0 %     4,979       5.7 %
 
                       
Total expenses
    97,045       92.8 %     88,648       101.0 %
 
                       
 
                               
Operating income (loss)
    7,498       7.2 %     (905 )     -1.0 %
 
                               
Other income (expense):
                               
Interest income
    238       0.2 %     124       0.1 %
Interest expense
    (643 )     -0.6 %     (523 )     -0.6 %
Other, net
    (302 )     -0.3 %     (214 )     -0.2 %
 
                       
Total other income (expense)
    (707 )     -0.7 %     (613 )     -0.7 %
 
                       
 
                               
Income (loss) before income taxes
    6,791       6.5 %     (1,518 )     -1.7 %
Income tax expense
    5,169       4.9 %     571       0.7 %
 
                       
Net income (loss)
  $ 1,622       1.6 %   $ (2,089 )     -2.4 %
 
                       
Three-Month Period Ended March 31, 2011 Compared to Three-Month Period Ended March 31, 2010
Revenues
Total revenues for the three months ended March 31, 2011 increased $16.8 million, or 19.1%, as compared to the same period in 2010. Total revenues increased as a result of a $14.4 million, or 49.1%, increase in software license fee revenues, a $1.6 million, or 4.9%, increase in maintenance fee revenue, and a $0.8 million, or 5.2%, increase in services revenues.
The increase in total revenues was driven by increases in the Americas, EMEA and Asia/Pacific reportable operating segments of $6.0 million, $10.2 million and $0.6 million, respectively.
Software License Fees Revenue
Customers purchase the right to license ACI software for the term of their agreement which term is generally 60 months. Within these agreements are specified capacity limits typically based on customer transaction volumes. ACI employs measurement tools that monitor the number of transactions processed by customers and if contractually specified limits are exceeded, additional fees are charged for the overage. Capacity overages may occur at varying times throughout the term of the agreement depending on the product, the size of the customer, and the significance of customer transaction volume growth. Depending on specific circumstances, multiple overages or no overages may occur during the term of the agreement.

 

21


Table of Contents

As a result of the maturation of certain retail payment engine products, a higher percentage of our initial license fees are being recognized ratably over an extended period. Initial license and capacity fees that are recognized as revenue ratably over an extended period are included in our monthly license fee revenues. Due to the compounding effect of this, our MLF revenues have increased significantly during the three months ended March 31, 2011 as compared to the same period in 2010. This shift of software license fees from ILF revenues to MLF revenues is expected to continue in future periods.
Initial License Fees (ILF) Revenue
ILF revenue includes license and capacity revenues that do not recur on a monthly or quarterly basis. Included in ILF revenues are license and capacity fees that are recognizable at the inception of the agreement and license and capacity fees that are recognizable at interim points during the term of the agreement, including those that are recognizable annually due to negotiated customer payment terms. ILF revenues during the three months ended March 31, 2011 compared to the same period in 2010, increased by $2.8 million, or 29.0%. ILF revenue in the Americas and EMEA reportable operating segments increased by $1.3 million and $1.5 million, respectively. Included in the above are capacity related revenue increases of $0.7 million in the EMEA reportable operating segment offset by a decline of $0.3 million in the Americas reportable operating segment within the three months ended March 31, 2011 as compared to the same period in 2010.
Monthly License Fees (MLF) Revenue
MLF revenues are license and capacity revenues that are paid monthly or quarterly due to negotiated customer payment terms as well as initial license and capacity fees that are recognized as revenue ratably over an extended period as MLF revenue. MLF revenues increased $11.6 million, or 59.2%, during the three months ended March 31, 2011, as compared to the same period in 2010 with the Americas and EMEA reportable operating segments increasing by $3.2 million and $8.4 million, respectively. The increase in MLF revenues is primarily due to the cumulative effect of ILF revenue that is being recognized ratably over an extended period as a result of the maturation of certain retail payment engine products.
Maintenance Fees Revenue
Maintenance fee revenue includes standard and enhanced maintenance or any post contract support fees received from customers for the provision of product support services. Maintenance fee revenues increased $1.6 million, or 4.9%, during the three months ended March 31, 2011, as compared to the same period in 2010. Maintenance fee revenue increased in the Americas and EMEA reportable segments by $0.5 million and $1.3 million, respectively, while the Asia/Pacific reportable segment declined by $0.2 million. Increases in maintenance fee revenues are primarily driven by an increase in the customer installation base as well as expanded product usage.
Services Revenue
Services revenue includes fees earned through implementation services, professional services and facilities management services. Implementation services include product installations, product configurations, and retrofit custom software modifications (“CSM’s”). Professional services include business consultancy, technical consultancy, on-site support services, CSM’s, product education, and testing services. These services include new customer implementations as well as existing customer migrations to new products or new releases of existing products. During the period in which non-essential services revenue is being deferred, direct and incremental costs related to the performance of these services are also being deferred. During the period in which essential services revenue is being deferred, direct and indirect costs related to the performance of these services are also being deferred.
Services revenue increased $0.8 million, or 5.2%, for the three months ended March 31, 2011, primarily as a result of an increase in implementation and professional services revenue in the Americas and Asia/Pacific reportable operating segments of $1.1 million and $0.8 million, respectively, partially offset by a decline in the EMEA reportable operating segment of $1.1 million.
Software Hosting Fees Revenue
Software hosting fee revenue includes fees earned through hosting and on-demand arrangements. All revenues from hosting and on-demand arrangements that do not qualify for treatment as separate units of accounting, which may include set-up fees, implementation or customization services, and product support services, are included in software hosting fee revenue.
Software hosting fees revenue was flat, for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.

 

22


Table of Contents

Expenses
Total operating expenses for the three months ended March 31, 2011 increased $8.4 million, or 9.5%, as compared to the same period of 2010. Total expenses increased primarily as a result of a $4.7 million, or 25.7%, increase in research and development expenses, a $2.5 million, or 14.5%, increase in selling and marketing expenses, a $1.7 million, or 6.1%, increase in the cost of maintenance, services, and hosting fees, a $0.4 million, or 12.0%, increase in the cost of software license fees and a $0.2 million, or 4.6%, increase in depreciation and amortization, partially offset by a $1.1 million, or 6.3%, decrease in general and administrative expenses.
Cost of Software License Fees
The cost of software licenses for our products sold includes third-party software royalties as well as the amortization of purchased and developed software for resale. In general, the cost of software licenses for our products is minimal because we internally develop most of the software components, the cost of which is reflected in research and development expense as it is incurred as technological feasibility coincides with general availability of the software components.
Cost of software licenses fees increased $0.4 million, or 12.0%, in the three months ended March 31, 2011 compared to the same period in 2010. Third-party software royalty expense increased $0.3 million as a result of an increase in license revenue associated with certain products that include a corresponding royalty expense. Purchased or developed technology for resale amortization increased $0.1 million.
Cost of Maintenance, Services, and Hosting fees
Cost of maintenance, services and hosting fees includes costs to provide hosting services and both the costs of maintaining our software products as well as the service costs required to deliver, install and support software at customer sites. Maintenance costs include the efforts associated with providing the customer with upgrades, 24-hour help desk, post go-live (remote) support and production-type support for software that was previously installed at a customer location. Service costs include human resource costs and other incidental costs such as travel and training required for both pre go-live and post go-live support. Such efforts include project management, delivery, product customization and implementation, installation support, consulting, configuration, and on-site support.
Cost of maintenance, services, and hosting fees for the three months ended March 31, 2011, increased $1.7 million, or 6.1%, compared to the same period in 2010 primarily due to $1.2 million higher personnel and related costs and a $0.8 million decrease in net deferred expenses associated with project implementations, partially offset by a $0.3 million decrease in third-party maintenance and services related fees.
Research and Development
Research and development (“R&D”) expenses are primarily human resource costs related to the creation of new products, improvements made to existing products and the costs related to regulatory requirements and processing mandates as well as compatibility with new operating system releases and generations of hardware.
R&D expense for the three months ended March 31, 2011 increased $4.7 million, or 25.7%, compared to the same period in 2010 primarily due to a $2.6 million decrease in net deferred expenses associated with various product development efforts, $1.1 million higher personnel and related costs, $0.7 million higher third-party contractor costs, and $0.3 million higher professional fees.
Selling and Marketing
Selling and marketing includes both the costs related to selling our products to current and prospective customers as well as the costs related to promoting the Company, its products and the research efforts required to measure customers’ future needs and satisfaction levels. Selling costs are primarily the human resource and travel costs related to the effort expended to license our products and services to current and potential customers within defined territories and/or industries as well as the management of the overall relationship with customer accounts. Selling costs also include the costs associated with assisting distributors in their efforts to sell our products and services in their respective local markets. Marketing costs include costs needed to promote the Company and its products as well as perform or acquire market research to help us better understand what products our customers are looking for in the future. Marketing costs also include the costs associated with measuring customers’ opinions toward the Company, our products and personnel.

 

23


Table of Contents

Selling and marketing expense for the three months ended March 31, 2011 increased $2.5 million, or 14.5%, compared to the same period in 2010 due to $2.2 million higher personnel and related expenses and $0.4 million higher advertising and professional expenses, partially offset by $0.1 million lower internal IT costs.
General and Administrative
General and administrative expenses are primarily human resource costs including executive salaries and benefits, personnel administration costs, and the costs of corporate support functions such as legal, administrative, human resources and finance and accounting.
General and administrative expense for the three months ended March 31, 2011 decreased $1.1 million, or 6.3%, compared to the same period in 2010 due to a $0.8 million decrease in bad debt expense and $0.6 million lower personnel and related costs partially offset by $0.2 million higher professional and advertising fees.
Depreciation and Amortization
Depreciation and amortization expense includes charges for depreciation of property and equipment and amortization of acquired intangibles excluding amortization of purchased or developed technology for resale. Amortization of acquired intangibles include customer relationships, trade names, non-competes and other intangible assets.
Depreciation and amortization expense for the three months ended March 31, 2011 increased $0.2 million, or 4.6%, compared to the same period in 2010 as a result of higher capital expenditures.
Other Income and Expense
Other income and expense includes interest income and expense, foreign currency gains and losses, and other non-operating items. Fluctuating currency rates impacted the three months ended March 31, 2011 by $0.2 million in net foreign currency losses, as compared with $0.1 million in net gains during the same period in 2010. The fair value of interest rate swaps resulted in a $0.2 million loss during the three months ended March 31, 2010. Interest income and interest expense were flat for the three months ended March 31, 2011 as compared to the corresponding period of 2010.
Income Taxes
The effective tax rate for the three months ended March 31, 2011 was 76.1%. We reported tax expense for the three months ended March 31, 2010 while reporting a pretax loss for the same period. The resulting effective tax rate is negative. The effective tax rate in both periods is negatively impacted by our inability to recognize income tax benefits during the period on losses sustained in certain tax jurisdictions where the future utilization of the losses are uncertain, and by the recognition of tax expense associated with the transfer of certain intellectual property rights from U.S. to non-U.S. entities.
Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower in the countries in which we operate that have a lower statutory rate or higher in the countries in which we operate that have a higher statutory rate or the extent we have losses sustained in countries where the future utilization of losses are uncertain. Our effective tax rate could also fluctuate due to changes in the valuation of our deferred tax assets or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are occasionally subject to examination of our income tax returns by tax authorities in the jurisdictions we operate. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

 

24


Table of Contents

Segment Results
The following table presents revenues and operating income (loss) for the periods indicated by geographic region (in thousands):
                 
    Three Months Ended  
    March 31,  
    2011     2010  
Revenues:
               
Americas
  $ 52,330     $ 46,316  
EMEA
    42,141       31,913  
Asia/Pacific
    10,072       9,514  
 
           
 
  $ 104,543     $ 87,743  
 
           
 
               
Operating income (loss):
               
Americas
  $ 5,963     $ 3,059  
EMEA
    6,260       (141 )
Asia/Pacific
    (4,725 )     (3,823 )
 
           
 
  $ 7,498     $ (905 )
 
           
Reportable segment results are impacted by both direct expenses and allocated shared function costs such as global product delivery and development, global customer operations, global product management and corporate overhead costs. Shared function costs are allocated to the reportable segments as a percentage of revenue or as a percentage of headcount.
Operating income in the Americas and EMEA reportable segments increased for the three months ended March 31, 2011 as compared to the same period in 2010 primarily due to increased revenues. Operating income in the Asia/Pacific reportable segment declined for the three months ended March 31, 2011 as compared to the same period in 2010 primarily due to increased allocated costs as a result of the headcount growth relative to the other reportable segments.
Liquidity and Capital Resources
As of March 31, 2011, we had $168.9 million in cash and cash equivalents. Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less.
As of March 31, 2011, $89.2 million of the $168.9 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds were needed for our operations in the U.S. we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
As of March 31, 2011, we had up to $75.0 million of unused borrowings under our revolving credit facility. The amount of unused borrowings actually available under the revolving credit facility varies in accordance with the terms of the agreement. We believe that the amount currently available along with our current cash balance provides sufficient liquidity for at least the next twelve month period. The current credit facility will mature on September 29, 2011, at which time any principal amounts outstanding are due. We are currently in discussions with various lenders, including our current lenders, for a new credit facility and anticipate closing on the new facility prior to the maturation of the current facility. The revolving credit facility contains certain affirmative and negative covenants, including limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. The revolving credit facility also contains financial covenants relating to maximum permitted leverage ratio and the minimum interest coverage ratio. The facility does not contain any subjective acceleration features and does not have any required payment or principal reduction schedule and is included as a current liability in our consolidated balance sheet. At March 31, 2011 and December 31, 2010, (and at all times during these periods) we were in compliance with our debt covenants. The interest rate in effect at March 31, 2011 was 1.01%.

 

25


Table of Contents

We are not currently dependent upon short-term funding, and the limited availability of credit in the market has not affected our revolving credit facility, our liquidity or materially impacted our funding costs. However, due to the existing uncertainty in the capital and credit markets and the impact of the current economic crisis on our operating results and financial conditions, the amount of available unused borrowings under our existing credit facility may be insufficient to meet our needs and/or our access to capital outside of our existing credit facility may not be available on terms acceptable to us or at all. Additionally, if one or more of the financial institutions in our syndicate were to default on its obligation to fund its commitment, the portion of the committed facility provided by such defaulting financial institution would not be available to us. We cannot assure you that alternative financing on acceptable terms would be available to replace any defaulted commitments. The existing uncertainty in the capital and credit markets and the current economic crisis may also impact our ability to successfully negotiate a new credit facility with our existing lenders or alternative lenders. We cannot guarantee that a new credit facility will be available to us or that we will be able to negotiate terms and conditions acceptable to us. In the event we are unable to successfully negotiate a new credit facility, all outstanding amounts under the existing credit facility will become due and payable.
We believe that our existing sources of liquidity, including cash on hand and cash provided by operating activities, will satisfy our projected liquidity requirements, which primarily consists of working capital requirements, for the next twelve months, even in the unlikely event that we are unable to successfully negotiate a new credit facility and all outstanding amounts under the existing credit facility become due and payable.
In fiscal 2005, we announced that our board of directors approved a stock repurchase program authorizing us, from time to time as market and business conditions warrant, to acquire up to $80 million of our common stock. In May 2006, our board of directors approved an increase of $30 million to the stock repurchase program, bringing the total of the approved program to $110 million. In March 2007, our board of directors approved an increase of $100 million to its current repurchase authorization, bringing the total authorization to $210 million, of which approximately $22.9 million remains available at March 31, 2011. In June 2007, we implemented this previously announced increase to our share repurchase program. There is no guarantee as to the exact number of shares that will be repurchased by us. Repurchased shares are returned to the status of authorized but unissued shares of common stock. In March 2005, our board of directors approved a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of shares of common stock under the existing stock repurchase program. Under our Rule 10b5-1 plan, we have delegated authority over the timing and amount of repurchases to an independent broker who does not have access to inside information about the Company. Rule 10b5-1 allows us, through the independent broker, to purchase shares at times when we ordinarily would not be in the market because of self-imposed trading blackout periods, such as the time immediately preceding the end of the fiscal quarter through a period three business days following our quarterly earnings release. We did not purchase any shares under the repurchase plan during the three months ended March 31, 2011.
We may also decide to use cash to acquire new products and services or enhance existing products and services through acquisitions of other companies, product lines, technologies and personnel, or through investments in other companies.
Cash Flows
The following table sets forth summary cash flow data for the periods indicated. Please refer to this summary as you read our discussion of the sources and uses of cash in each period.
                 
    Three Months Ended  
    March 31,  
    2011     2010  
    (amounts in thousands)  
Net cash provided by (used by):
               
Operating activities
  $ 17,943     $ 13,578  
Investing activities
    (24,017 )     (5,649 )
Financing activities
    2,107       (1,892 )
Net cash flows provided by operating activities for the three months ended March 31, 2011 amounted to $17.9 million as compared to $13.6 million during the same period in 2010. The comparative period increase in net cash flows from operating activities of $4.4 million was principally the result of an increase in net income of $3.7 million and a decrease in cash paid for taxes and cash paid to vendors of $5.6 million and $1.8 million, respectively. These increases were partially offset by a decrease in cash receipts from customers of $9.6 million during the three months ended March 31, 2011 compared to same period in 2010.

 

26


Table of Contents

Net cash flows used by investing activities totaled $24.0 million in the three months ended March 31, 2011 as compared to $5.6 million used by investing activities during the same period in 2010. This increase was largely driven by the $16.7 million of cash paid, net of $2.4 million in cash acquired, to acquire ISD during the three months ended March 31, 2011. In addition, during the three months ended March 31, 2011, we used cash of $7.0 million to purchase software, property and equipment and $0.3 million for costs related to fulfillment of the technical enablement milestones under the Alliance. During the three months ended March 31, 2010, we used cash of $3.9 million to purchase software, property and equipment and $1.7 million for costs related to fulfillment of the technical enablement milestones under the Alliance.
Net cash flows provided by financing activities totaled $2.1 million in the three months ended March 31, 2011 as compared to net cash flows used by financing activities of $1.9 million during the same period in 2010. We made payments to third-party financial institutions, primarily related to debt and capital leases, totaling $0.5 million and $0.3 million during the three months ended March 31, 2011 and 2010, respectively. During the three months ended March 31, 2011 and 2010, we received proceeds of $2.7 million and $1.4 million, respectively, including corresponding excess tax benefits, from the exercises of stock options and $0.3 million for the issuance of common stock under our 1999 Employee Stock Purchase Plan, as amended. During the three months ended March 31, 2010, we used $3.0 million to repurchase shares of our common stock under our stock repurchase plan.
We also realized a $1.5 million increase in cash during the three months ended March 31, 2011 related to foreign exchange rate variances compared to a $1.4 million decrease during the same period in 2010.
We believe that our existing sources of liquidity, including cash on hand and cash provided by operating activities, will satisfy our projected liquidity requirements to meet our working capital needs for at least the next twelve months.
Contractual Obligations and Commercial Commitments
There have been no material changes to the contractual obligations and commercial commitments disclosed in Item 7 of our Form 10-K for the fiscal year ended December 31, 2010.
Critical Accounting Estimates
The preparation of the condensed consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be proper and reasonable under the circumstances. We continually evaluate the appropriateness of estimates and assumptions used in the preparation of our condensed consolidated financial statements. Actual results could differ from those estimates.
The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
   
Revenue Recognition
   
Allowance for Doubtful Accounts
   
Intangible Assets and Goodwill
   
Stock-Based Compensation
   
Accounting for Income Taxes
During the three months ended March 31, 2011, there were no significant changes to our critical accounting policies and estimates other than as discussed below. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2010, filed on February 18, 2011, for a more complete discussion of our critical accounting policies and estimates.
Revenue Recognition for Arrangements with Multiple Deliverables
Effective January 1, 2011 we adopted on a prospective basis for all new or materially modified arrangements entered into on or after that date, the amended accounting guidance for multiple-deliverable revenue arrangements and the amended guidance related to the scope of existing software revenue recognition guidance. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements for the three months ended March 31, 2011, nor do we expect it to have a material impact on our future financial statements.

 

27


Table of Contents

A multiple-deliverable arrangement is separated into more than one unit of accounting if the delivered item(s) has value to the customer on a stand-alone basis; if the arrangement includes a general right of return relative to the delivered item(s); and if delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. If these criteria are not met, the arrangement is accounted for as a single unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price. The selling price for each element is based upon the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available.
We enter into hosting-related arrangements that may consist of multiple service deliverables including initial implementation and setup services; on-going support services; and other services. Our hosted products operate in a highly regulated and controlled environment which requires a highly specialized and unique set of initial implementation and setup services prior to the commencement of hosting-related services. Due to the essential and specialized nature of the implementation and setup services, these services do not qualify as separate units of accounting separate from the hosting service as the delivered services do not have value to the client on a stand-alone basis. The on-going support and other services are considered as separate units of accounting. The total arrangement consideration is allocated to each of the separate units of accounting based on their relative selling price and revenue is recognized over their respective service periods. As the support and other services periods are the same as the hosting service period, the recognition pattern is similar to what was experienced prior to adopting the amended accounting guidance for multiple-deliverable revenue arrangements.
Item 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Excluding the impact of changes in interest rates, there have been no material changes to our market risk for the three months ended March 31, 2011. We conduct business in all parts of the world and are thereby exposed to market risks related to fluctuations in foreign currency exchange rates. The U.S. dollar is the single largest currency in which our revenue contracts are denominated. Thus, any decline in the value of local foreign currencies against the U.S. dollar results in our products and services being more expensive to a potential foreign customer, and in those instances where our goods and services have already been sold, may result in the receivables being more difficult to collect. Additionally, any decline in the value of the U.S. dollar in jurisdictions where the revenue contracts are denominated in U.S. dollars and operating expenses are incurred in local currency will have an unfavorable impact to operating margins. We at times enter into revenue contracts that are denominated in the country’s local currency, principally in Australia, Canada, the United Kingdom and other European countries. This practice serves as a natural hedge to finance the local currency expenses incurred in those locations. We have not entered into any foreign currency hedging transactions. We do not purchase or hold any derivative financial instruments for the purpose of speculation or arbitrage.
The primary objective of our cash investment policy is to preserve principal without significantly increasing risk. Based on our cash investments and interest rates on these investments at March 31, 2011, and if we maintained this level of similar cash investments for a period of one year, a hypothetical 10 percent increase or decrease in effective interest rates would increase or decrease interest income by less than $0.1 million annually.
Item 4.  
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report, March 31, 2011. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of March 31, 2011.
Changes in Internal Control over Financial Reporting
Our management, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer evaluated any change in the Company’s internal control over financial reporting that occurred during the quarter covered by this report and determined that there was no change in the Company’s internal control over financial reporting during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

28


Table of Contents

PART II — OTHER INFORMATION
Item 1.  
LEGAL PROCEEDINGS
From time to time, we are involved in various litigation matters arising in the ordinary course of our business. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, we believe would be likely to have a material adverse effect on our financial condition or results of operations.
Item 1A.  
RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A of our Form 10-K for the fiscal year ended December 31, 2010. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.
Item 2.  
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding the Company’s repurchases of its common stock during the three months ended March 31, 2011:
                                 
                            Approximate  
                    Total Number of     Dollar Value of  
                    Shares     Shares that May  
                    Purchased as     Yet Be  
    Total Number of             Part of Publicly     Purchased  
    Shares     Average Price     Announced     Under the  
Period   Purchased     Paid per Share     Program     Program  
January 1 through January 31, 2011
        $           $ 22,920,000  
February 1 through February 28, 2011
    11,303 (1)     27.69           $ 22,920,000  
March 1 through March 31, 2011
    1,058 (1)     30.59           $ 22,920,000  
 
                         
Total
    12,361     $ 27.94                
 
                         
     
(1)  
Pursuant to our 2005 Incentive Plan, we granted restricted share awards (“RSAs”). These awards have requisite service periods of either three or four years and vest in increments of either 33% or 25% on the anniversary dates of the grants. Under each arrangement, stock is issued without direct cost to the employee. During the three months ended March 31, 2011, 40,834 shares of the RSAs vested. We withheld 12,361 of those shares to pay the employees’ portion of applicable payroll taxes.
In fiscal 2005, we announced that our board of directors approved a stock repurchase program authorizing us, from time to time as market and business conditions warrant, to acquire up to $80 million of our common stock, and that we intend to use existing cash and cash equivalents to fund these repurchases. In May 2006, our board of directors approved an increase of $30 million to the stock repurchase program, bringing the total of the approved program to $110 million. In March 2007, our board of directors approved an increase of $100 million to its current repurchase authorization, bringing the total authorization to $210 million, of which approximately $22.9 million remains available. In June 2007, we implemented this previously announced increase to our share repurchase program. There is no guarantee as to the exact number of shares that will be repurchased by us. Repurchased shares are returned to the status of authorized but unissued shares of common stock. In March 2005, our board of directors approved a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of shares of common stock under the existing stock repurchase program. Under our Rule 10b5-1 plan, we have delegated authority over the timing and amount of repurchases to an independent broker who does not have access to inside information about the Company. Rule 10b5-1 allows us, through the independent broker, to purchase shares at times when we ordinarily would not be in the market because of self-imposed trading blackout periods, such as the time immediately preceding the end of the fiscal quarter through a period three business days following our quarterly earnings release. We did not repurchase any shares under this program during the three months ended March 31, 2011.

 

29


Table of Contents

Item 3.  
DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 5.  
OTHER INFORMATION
Not applicable.
Item 6.  
EXHIBITS
The following lists exhibits filed as part of this quarterly report on Form 10-Q:
         
Exhibit      
No.     Description
  3.01 (1)  
Amended and Restated Certificate of Incorporation of the Company, and amendments thereto
  3.02 (2)  
Amended and Restated Bylaws of the Company
  4.01 (3)  
Form of Common Stock Certificate
  31.01    
Certification of Principal Executive Officer pursuant to SEC Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.02    
Certification of Principal Financial Officer pursuant to SEC Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.01 *  
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.02 *  
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS **  
XBRL Instance Document
101.SCH **  
XBRL Taxonomy Extension Schema
101.CAL **  
XBRL Taxonomy Extension Calculation Linkbase
101.LAB **  
XBRL Taxonomy Extension Label Linkbase
101.PRE **  
XBRL Taxonomy Extension Presentation Linkbase
101.DEF **  
XBRL Taxonomy Extension Definition Linkbase
 
     
*  
This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.
 
**  
Furnished, not filed
 
(1)  
Incorporated herein by reference to registrant’s current report on Form 8-K filed July 30, 2007.
 
(2)  
Incorporated herein by reference to Exhibit 3.2 to the registrant’s current report on Form 8-K filed December 18, 2008.
 
(3)  
Incorporated herein by reference to Exhibit 4.01 to the registrant’s Registration Statement No. 33-88292 on Form S-1.

 

30


Table of Contents

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
             
    ACI WORLDWIDE, INC.    
    (Registrant)    
 
           
Date: April 29, 2011
  By:   /s/ Scott W. Behrens
 
Scott W. Behrens
   
 
      Senior Vice President, Chief Financial Officer and    
 
      Chief Accounting Officer    
 
      (Principal Financial Officer)    

 

31


Table of Contents

EXHIBIT INDEX
         
Exhibit      
No.     Description
  3.01 (1)  
Amended and Restated Certificate of Incorporation of the Company, and amendments thereto
  3.02 (2)  
Amended and Restated Bylaws of the Company
  4.01 (3)  
Form of Common Stock Certificate
  31.01    
Certification of Principal Executive Officer pursuant to SEC Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.02    
Certification of Principal Financial Officer pursuant to SEC Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.01 *  
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.02 *  
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS **  
XBRL Instance Document
101.SCH **  
XBRL Taxonomy Extension Schema
101.CAL **  
XBRL Taxonomy Extension Calculation Linkbase
101.LAB **  
XBRL Taxonomy Extension Label Linkbase
101.PRE **  
XBRL Taxonomy Extension Presentation Linkbase
101.DEF **  
XBRL Taxonomy Extension Definition Linkbase
 
     
*  
This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.
 
**  
Furnished, not filed
 
(1)  
Incorporated herein by reference to registrant’s current report on Form 8-K filed July 30, 2007.
 
(2)  
Incorporated herein by reference to Exhibit 3.2 to the registrant’s current report on Form 8-K filed December 18, 2008.
 
(3)  
Incorporated herein by reference to Exhibit 4.01 to the registrant’s Registration Statement No. 33-88292 on Form S-1.

 

32

Exhibit 31.01
Exhibit 31.01
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Philip G. Heasley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ACI Worldwide, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
Date: April 29, 2011
  /s/ PHILIP G. HEASLEY
 
   
 
  Philip G. Heasley
 
  President, Chief Executive Officer
 
  and Director
 
  (Principal Executive Officer)

 

 

Exhibit 31.02
Exhibit 31.02
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Scott W. Behrens, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ACI Worldwide, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: April 29, 2011
  /s/ Scott W. Behrens
 
Scott W. Behrens
   
 
  Senior Vice President, Chief Financial Officer and    
 
  Chief Accounting Officer    
 
  (Principal Financial Officer)    

 

 

Exhibit 32.01
Exhibit 32.01
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of ACI Worldwide, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip G. Heasley, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1)  
The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2)  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
Date: April 29, 2011
  /s/ PHILIP G. HEASLEY
 
Philip G. Heasley
   
 
  President, Chief Executive Officer    
 
  and Director    
 
  (Principal Executive Officer)    

 

 

Exhibit 32.02
Exhibit 32.02
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of ACI Worldwide, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott W. Behrens, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1)  
The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2)  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
Date: April 29, 2011
  /s/ Scott W. Behrens
 
Scott W. Behrens
   
 
  Senior Vice President, Chief Financial Officer and    
 
  Chief Accounting Officer    
 
  (Principal Financial Officer)