What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-07 · 230 added, 118 removed, 325 unchanged (52% of the section changed)

15 unchanged sentences

The following discussion should be read together with our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and with our financial statements and related notes contained in this Form 10-Q.

Results for the three months ended March 31, 2020, are not necessarily indicative of results that may be attained in the future.

Results for the three and six months ended June 30, 2020, are not necessarily indicative of results that may be attained in the future.

COVID-19 Pandemic

In December 2019, an outbreak of COVID-19 was identified in China and was subsequently recognized as a global pandemic by the World Health Organization (“WHO”) on March 11, 2020.

Since that time, COVID-19 has spread around the world and throughout the United States, including in the regions and countries in which we operate.

Federal, state and local governments in the U.S and around the world have imposed restrictions on travel and business operations and are advising or requiring individuals to limit or eliminate time outside of their homes.

Temporary closures of businesses have also been ordered in certain jurisdictions, and other businesses have temporarily closed voluntarily.

These actions expanded significantly in March and April of 2020 throughout the U.S.

Consequently, the COVID-19 outbreak has severely restricted the level of economic activity in the U.S.

and around the world.

The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as quarantines and shelter in place orders.

The COVID-19 pandemic resulted in authorities implementing numerous measures to try to contain the virus.

These measures may remain in place for a significant period of time and adversely affect our business, operations and financial condition as well as the business, operations and financial conditions of our customers and business partners.

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There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities.

ACI Worldwide, Inc.

("ACI") created a dedicated Crisis Management Team that proactively oversaw and executed our business continuity plans and has taken a variety of measures to ensure the ongoing availability of our products, solutions and services for our customers around the world, while taking health and safety measures for our employees.

We monitor information on

COVID-19 from the U.S.

Centers for Disease Control ("CDC") and the WHO and believe we are adhering to their recommendations regarding the health and safety of our employees.

To address the potential human impact of the virus, most of our staff, with the exception of essential personnel (e.g.

certain data center personnel), are telecommuting.

For those essential personnel not telecommuting, we have implemented appropriate social distancing policies and have stepped-up facility cleaning at each location.

Non-essential domestic and international travel for our employees has ceased.

Essential travel for mission critical functions is allowed only on an exception basis with a 14-day self-quarantine period required upon an employee’s return before they may enter an ACI office.

Travel is restricted without exception for China, Hong Kong, Italy, and South Korea.

ACI believes it has sufficient liquidity to continue business operations during this volatile and uncertain period.

We have $389 million of available liquidity as of March 31, 2020, consisting of cash on hand and availability under our revolving credit facility.

We created a dedicated Crisis Management Team to oversee and execute our business continuity plans and a variety of measures designed to ensure the ongoing availability of our products, solutions and services for our customers, while taking health and safety measures for our employees, including telecommuting, travel restrictions, social distancing policies, and stepped-up facility cleaning practices.

We believe we have sufficient liquidity to continue business operations during this volatile and uncertain period.

We have $429 million of available liquidity as of June 30, 2020, consisting of cash on hand and availability under our revolving credit facility.

To begin to address the potential long-term financial impacts of the virus, we have delayed non-essential capital spending and operating expenses.

The pandemic presents potential new risks to the Company’s business.

Although there have been logistical and other challenges to date, there has been no material adverse impact on the Company’s first quarter 2020 results of operations, excluding the impacts of foreign exchange losses as a result of foreign currency volatility.

The Company began to see the impacts of COVID-19 on certain customer transaction volumes in late March and continues to see changes in the second quarter of 2020, primarily within the M erchants and B illers customer-base of the Company's ACI On Demand segment.

The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the stock price, business prospects, financial condition, and results of operations of the Company, including as a result of quarantines, market volatility, market downturns, changes in consumer behavior, business closures, or the inability of our customers to satisfy their obligations to the Company.

More specifically, f or those M erchant and B iller customers under consumption-based contracts, continued declines in transaction volumes could negatively impact the Company's financial position, results of operations and cash flows.

We began to see the impacts of COVID-19 on certain customer transaction volumes in late March and continued to see changes in the second quarter of 2020, primarily within our M erchants and B illers customer base of our ACI On Demand segment.

The effect of COVID-19 and related events, including those described above, could have an ongoing negative effect on our stock price, business prospects, financial condition, and results of operations.

More specifically, f or those customer s under consumption-based contracts, continued declines in transaction volumes could negatively impact the Company's financial position, results of operations, and cash flows.

The Company has also experienced declines in Biller volumes as a result of the change in timing of assessments and due dates for federal, state, and local taxes.

For the reasons discussed above, ACI cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and liquidity.

Notwithstanding any actions by national, state, and local governments to mitigate the impact of COVID-19 or by the Company to address the adverse impacts of COVID-19, there can be no assurance that any of the foregoing activities will be successful in mitigating or preventing significant adverse effects on the Company.

ACI, the Universal Payments (“UP”) company, powers electronic payments for more than 5,100 organizations around the world.

More than 1,000 of the largest banks and intermediaries, as well as thousands of leading global merchants, rely on ACI to execute $14 trillion each day in payments and securities.

ACI Worldwide powers electronic payments for more than 6,000 organizations around the world.

More than 1,000 of the largest financial institutions and intermediaries, as well as thousands of global merchants, rely on ACI to execute $14 trillion each day in payments and securities.

In addition, myriad organizations utilize our electronic bill presentment and payment services.

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Customer expectations, from both consumers and billers, are driving the payments world to more real-time delivery.

In the U.K., payments sent through the traditional ACH multi-day batch service can now be sent through the Faster Payments service giving almost immediate access to the funds, and this is being considered and implemented in several countries including Malaysia, Thailand, Singapore, Australia, the United States, and various countries in Europe.

In the U.K., payments sent through the traditional ACH multi-day batch service can now be sent through the Faster Payments service giving almost immediate access to the funds, and this is being considered and implemented in several countries including Australia, Brazil, Malaysia, Singapore, Thailand, the United States, and various countries in Europe.

In Europe, the ECB TIPS and EBA RT1 schemes are driving real-time payments adoption, while in the U.S.

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Regulators expect banks to be monitoring key measures like liquidity in real time.

ACI’s focus has always been on the real-time execution of transactions and delivery of information through real-time tools, such as dashboards, so our experience will be valuable in addressing this trend.

ACI’s focus on and experience with the real-time execution of transactions and delivery of information through real-time tools, such as dashboards, will be valuable in addressing this trend.

Increasing competition.

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In the event a significant revision to renewal assumptions is determined to be necessary, prior periods will be adjusted for comparability purposes.

The following table sets forth our 60-month backlog estimate, by reportable segment, as of March 31, 2020, and December 31, 2019 (in millions).

The following table sets forth our 60-month backlog estimate, by reportable segment, as of June 30, 2020, March 31, 2020, and December 31, 2019 (in millions).

Dollar amounts reflect foreign currency exchange rates as of each period end.

March 31, 2020 December 31, 2019

June 30, 2020 March 31, 2020 December 31, 2019

ACI On Demand $ 3,863 $ 3,781 $ 3,855

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Total $ 5,839 $ 5,714 $ 5,832

March 31, 2020 December 31, 2019

June 30, 2020 March 31, 2020 December 31, 2019

Committed $ 2,140 $ 2,095 $ 2,168

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The following table presents the condensed consolidated statements of operations, as well as the percentage relationship to total revenues for items included in our condensed consolidated statements of operations (in thousands):

Three Month Period Ended March 31, 2020, Compared to the Three Month Period Ended March 31, 2019

Three Months Ended March 31,

Three Month Period Ended June 30, 2020, Compared to the Three Month Period Ended June 30, 2019

Three Months Ended June 30,

Amount % of Total

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Total operating expenses 270,772 90 % (32,728) (11) % 303,500 102 %

Operating loss (11,283) (3) % 16,810 (60) % (28,093) (14) %

Operating income (loss) 29,138 10 % 35,020 (595) % (5,882) (2) %

Other income (expense):

3 unchanged sentences

Total other income (expense) (9,147) (3) % 1,777 (16) % (10,924) (4) %

Loss before income taxes (35,312) (11) % 3,274 (8) % (38,586) (20) %

Income tax benefit (10,885) (4) % 1,738 (14) % (12,623) (6) %

Net loss $ (24,427) (7) % $ 1,536 (6) % $ (25,963) (14) %

Total revenue for the three months ended March 31, 2020, increased $85.6 million, or 42%, as compared to the same period in 2019.

The acquisition of Speedpay contributed $88.7 million to total revenue during the three months ended March 31, 2020.

Total revenue was $1.5 million lower for the three months ended March 31, 2020, compared to the same period in 2019, due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of the acquisition of Speedpay and foreign currency, total revenue for the three months ended March 31, 2020, decreased $1.6 million, or 1%, compared to the same period in 2019.

Income (loss) before income taxes 19,991 7 % 36,797 (219) % (16,806) (6) %

Income tax expense (benefit) 5,916 2 % 28,447 (126) % (22,531) (8) %

Net income $ 14,075 5 % $ 8,350 146 % $ 5,725 2 %

Total revenue for the three months ended June 30, 2020, increased $2.3 million, or 1%, as compared to the same period in 2019.

• Speedpay contributed an incremental $34.7 million in total revenue during the three months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $3.7 million decrease in total revenue during the three months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental revenue from Speedpay and foreign currency, total revenue for the three months ended June 30, 2020, decreased $28.7 million, or 10%, compared to the same period in 2019.

Software as a Service (“SaaS”) and Platform as a Service (“PaaS”) Revenue

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SaaS and PaaS costs include payment card interchange fees, the amounts payable to banks and payment card processing fees, which are included in cost of revenue in the condensed consolidated statements of operations.

All fees from SaaS and PaaS arrangements that do not qualify for

treatment as a distinct performance obligation, which includes set-up fees, implementation or customization services, and product support services, are included in SaaS and PaaS revenue.

SaaS and PaaS revenue increased $84.4 million, or 78%, during the three months ended March 31, 2020, as compared to the same period in 2019.

The acquisition of Speedpay contributed $88.7 million to SaaS and PaaS revenue during the three months ended March 31, 2020.

SaaS and PaaS revenue was $0.3 million lower for the three months ended March 31, 2020, compared to the same period in 2019 due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of the acquisition of Speedpay and foreign currency, SaaS and PaaS revenue for the three months ended March 31, 2020, decreased $4.0 million, or 4%, compared to the same period in 2019, primarily due to changes in the timing and magnitude of transaction volumes for Biller customers.

All fees from SaaS and PaaS arrangements that do not qualify for treatment as a distinct performance obligation, which includes set-up fees, implementation or customization services, and product support services, are included in SaaS and PaaS revenue.

SaaS and PaaS revenue increased $8.1 million, or 5%, during the three months ended June 30, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $34.7 million in SaaS and PaaS revenue during the three months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $0.4 million decrease in SaaS and PaaS revenue during the three months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay revenue and foreign currency, SaaS and PaaS revenue for the three months ended June 30, 2020, decreased $26.3 million, or 15%, compared to the same period in 2019.

• The decrease was primarily due to changes in the timing of assessments and due dates by Billers that use the Company's technology to enable customer payments of federal, state and local taxes and declines in Digital Channels associated with customer attrition.

License Revenue

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The Company recognizes revenue in advance of billings for software license arrangements with extended payment terms and adjusts for the effects of the financing component, if significant.

License revenue increased $7.1 million, or 33%, during the three months ended March 31, 2020, as compared to the same period in 2019.

License revenue was $0.1 million lower for the three months ended March 31, 2020, compared to the same period in 2019 due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of foreign currency, license revenue for the three months ended March 31, 2020, increased $7.1 million, or 34%, compared to the same period in 2019.

The increase in total license revenue was primarily driven by the timing and relative size of license and capacity events during the three months ended March 31, 2020, as compared to the same period in 2019.

License revenue decreased $2.4 million, or 5%, during the three months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $1.7 million decrease in license revenue during the three months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, license revenue for the three months ended June 30, 2020, decreased $0.7 million, or 1%, compared to the same period in 2019.

Maintenance Revenue

Maintenance revenue includes standard and premium maintenance and any post contract support fees received from customers for the provision of product support services.

Maintenance revenue decreased $1.8 million, or 3%, during the three months ended March 31, 2020, as compared to the same period in 2019.

Maintenance revenue was $0.7 million lower for the three months ended March 31, 2020, as compared to the same period in 2019 due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of foreign currency, maintenance revenue for the three months ended March 31, 2020, decreased $1.1 million, or 2%, compared to the same period in 2019.

Maintenance revenue increased $0.8 million, or 2%, during the three months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $1.2 million decrease in maintenance revenue during the three months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, maintenance revenue for the three months ended June 30, 2020, increased $2.0 million, or 4%, compared to the same period in 2019.

Services Revenue

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These services include new customer implementations as well as existing customer migrations to new products or new releases of existing products.

Services revenue decreased $4.0 million, or 19%, during the three months ended March 31, 2020, as compared to the same period in 2019.

Services revenue was $0.4 million lower for the three months ended March 31, 2020, as compared to the same period in 2019 due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of foreign currency, services revenue for the three months ended March 31, 2020, decreased $3.6 million, or 17%, compared to the same period in 2019.

The decrease in services revenue was primarily driven by the timing and magnitude of project-related work during the three months ended March 31, 2020, as compared to the same period in 2019.

Services revenue decreased $4.2 million, or 20%, during the three months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $0.4 million decrease in services revenue during the three months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, services revenue for the three months ended June 30, 2020, decreased $3.8 million, or 18%, compared to the same period in 2019.

• The decrease was primarily driven by the timing and magnitude of project-related work during the three months ended June 30, 2020, as compared to the same period in 2019.

Operating Expenses

Total operating expenses for the three months ended March 31, 2020, increased $68.8 million, or 29%, as compared to the same period in 2019.

The acquisition of Speedpay contributed $76.4 million to total operating expenses during the three months ended March 31, 2020.

Total operating expenses also included $8.5 million of significant transaction-related expenses, associated with cost reduction strategies implemented during the period.

Total operating expenses for the three months ended March 31, 2019, included $4.7 million of significant transaction-related expenses associated with the acquisition of Speedpay.

Total operating expenses were $2.1 million lower for the three months ended March 31, 2020, compared to the same period in 2019, due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of the acquisition of Speedpay, significant transaction-related expenses, and foreign currency, total operating expenses for the three months ended March 31, 2020, decreased $9.2 million, or 4%, compared to the same period in 2019, primarily due to lower cost of revenue and selling and marketing expense, partially offset by higher depreciation and amortization, general and administrative expense, and research and development expense.

Total operating expenses for the three months ended June 30, 2020, decreased $32.7 million, or 11%, as compared to the same period in 2019.

• Speedpay contributed an incremental $29.1 million to total operating expenses during the three months ended June 30, 2020, as compared to the same period in 2019.

• Total operating expenses for three months ended June 30, 2020, included $5.0 million of significant transaction-related expenses associated with the acquisition of Speedpay and cost reduction strategies implemented during the period.

Total operating expenses for the three months ended June 30, 2019, included $16.6 million of significant transaction-related expenses associated with the acquisition of Speedpay.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $3.7 million decrease in total operating expenses during the three months ended June 30, 2020, compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay operating expenses, significant transaction-related expenses, and foreign currency, total operating expenses during the three months ended June 30, 2020, decreased $46.6 million, or 16%, compared to the same period in 2019.

Cost of Revenue

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Such efforts include project management, delivery, product customization and implementation, installation support, consulting, configuration, and on-site support.

Cost of revenue increased $50.9 million, or 44%, during the three months ended March 31, 2020, compared to the same period in 2019.

The acquisition of Speedpay contributed $62.0 million to cost of revenue during the three months ended March 31, 2020.

Cost of revenue was $0.7 million lower for the three months ended March 31, 2020, as compared to the same period in 2019, due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of the acquisition of Speedpay and foreign currency, cost of revenue decreased $10.4 million, or 9%, for the three months ended March 31, 2020, as compared to the same period in 2019, primarily due to a $5.2 million decrease in payment card interchange and processing fees, a $2.1 million decrease in third-party product royalty expenses, and a $1.4 million decrease in amortization of acquired software.

Cost of revenue decreased $7.9 million, or 5%, during the three months ended June 30, 2020, compared to the same period in 2019.

• Speedpay contributed an incremental $22.9 million to cost of revenue during the three months ended June 30, 2020, as compared to the same period in 2019.

• Cost of revenue for the three months ended June 30, 2020 included $2.3 million of significant transaction-related expenses associated with the acquisition of Speedpay.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $1.4 million decrease in cost of revenue during the three months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense, significant transaction-related expenses, and foreign currency, cost of revenue decreased $31.6 million, or 21%, for the three months ended June 30, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower payment card interchange and processing fees, personnel and related expenses, and amortization of acquired software of $21.7 million, $9.0 million, and $0.9 million, respectively.

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 as well as compatibility with new operating system releases and generations of hardware.

R&D expense increased $2.8 million, or 8%, during the three months ended March 31, 2020, as compared to the same period in 2019.

The acquisition of Speedpay contributed $2.8 million to R&D expense during the three months ended March 31, 2020.

R&D expense was $0.6 million lower for the three months ended March 31, 2020, as compared to the same period in 2019, due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of the acquisition of Speedpay and foreign currency, R&D expense increased $0.7 million, or 2%, for the three months ended March 31, 2020, as compared to the same period in 2019, due to an increase in professional fees and personnel and related expenses.

R&D expense decreased $3.7 million, or 9%, during the three months ended June 30, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $1.3 million to R&D expense during the three months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $1.0 million decrease in R&D expense during the three months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense and foreign currency, R&D expense decreased $4.1 million, or 11%, for the three months ended June 30, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower personnel and related expenses and professional fees of $3.2 million and $0.9 million, respectively.

Selling and Marketing

3 unchanged sentences

Marketing costs include costs incurred to promote the Company and its products, perform or acquire market research to help the Company better understand impending changes in customer demand for and of our products, and the costs associated with measuring customers’ opinions toward the Company, our products and personnel.

Selling and marketing expense increased $0.7 million, or 2%, during the three months ended March 31, 2020, as compared to the same period in 2019.

The acquisition of Speedpay contributed $2.8 million to selling and marketing expense during the three months ended March 31, 2020.

Selling and marketing expense was $0.3 million lower for the three months ended March 31, 2020, as compared to the same period in 2019, due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of the acquisition of Speedpay and foreign currency, selling and marketing expense decreased $1.8 million, or 6%, for the three months ended March 31, 2020, as compared to the same period in 2019, due to a decrease in professional fees and personnel and related expenses.

Selling and marketing expense decreased $8.5 million, or 26%, during the three months ended June 30, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $1.1 million to selling and marketing expense during the three months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $0.8 million decrease in selling and marketing expense during the three months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense and foreign currency, selling and marketing expense decreased $8.8 million, or 27%, for the three months ended June 30, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower personnel and related expenses, commissions, and professional fees of $5.5 million, $1.9 million, and $1.4 million, respectively.

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 increased $4.4 million, or 14%, during the three months ended March 31, 2020, as compared to the same period in 2019.

Significant transaction-related expenses contributed $8.5 million to general and administrative expense during the three months ended March 31, 2020, primarily related to cost reduction strategies implemented during the period.

The acquisition of Speedpay also contributed $0.4 million during the three months ended March 31, 2020.

General and administrative expense for the three months ended March 31, 2019, included $4.7 million of significant transaction-related expenses associated with the acquisition of Speedpay.

General and administrative expense was $0.3 million lower for the three months ended March 31, 2020, as compared to the same period in 2019, due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of the acquisition of Speedpay, significant transaction-related expenses, and foreign currency, general and administrative expense increased $0.5 million, or 2%, for the three months ended March 31, 2020, as compared to the same period in 2019, primarily due to an increase in professional fees.

General and administrative expense decreased $19.6 million, or 40%, during the three months ended June 30, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $0.3 million to general and administrative expense during the three months ended June 30, 2020, as compared to the same period in 2019.

• General and administrative expenses for the three months ended June 30, 2020, included $2.5 million of significant transaction-related expenses associated with the acquisition of Speedpay and cost reduction strategies implemented during the period.

General and administrative expense for the three months ended June 30, 2019, included $16.4 million of significant transaction-related expenses associated with the acquisition of Speedpay.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $0.3 million decrease in general and administrative expense during the three months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense, significant transaction-related expenses, and foreign currency, general and administrative expense decreased $5.6 million, or 17%, for the three months ended June 30, 2020, as compared to the same period in 2019, primarily due to a decrease in personnel and related expenses.

Depreciation and Amortization

Depreciation and amortization increased $10.0 million, or 46%, during the three months ended March 31, 2020, as compared to the same period in 2019, of which $8.3 million, or 38%, was due to the acquisition of Speedpay.

Depreciation and amortization was $0.2 million lower for the three months ended March 31, 2020, as compared to the same period in 2019, due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of the acquisition of Speedpay and foreign currency, depreciation and amortization increased $1.9 million, or 9%, for the three months ended March 31, 2020, as compared to the same period in 2019, due to higher amortization of capitalized software.

Depreciation and amortization increased $6.9 million, or 26%, during the three months ended June 30, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $3.6 million, of depreciation and amortization expense during the three months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $0.2 million decrease in depreciation and amortization during the three months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense and foreign currency, depreciation and amortization increased $3.6 million, or 13%, for the three months ended June 30, 2020, as compared to the same period in 2019, primarily due to additional amortization of internal-use software in our On Demand business.

Other Income and Expense

Interest expense for the three months ended March 31, 2020, increased $5.6 million, or 48%, as compared to the same period in 2019, primarily due to higher comparative debt balances, partially offset by lower interest rates.

Interest expense for the three months ended June 30, 2020, decreased $1.2 million, or 8%, as compared to the same period in 2019, primarily due to lower comparative interest rates.

Interest income includes the portion of software license fees paid by customers under extended payment terms that is attributed to the significant financing component.

Interest income for the three months ended March 31, 2020, decreased $0.1 million, or 4%, as compared to the same period in 2019.

Other, net consists of foreign currency gain or loss.

Foreign currency loss for the three months ended March 31, 2020 and 2019, was $9.8 million and $1.9 million, respectively.

Interest income for the three months ended June 30, 2020 remained flat as compared to the same period in 2019.

Other, net primarily consists of foreign currency gains.

Foreign currency gains for the three months ended June 30, 2020 and 2019 was $1.9 million and $1.4 million, respectively.

See Note 11, Income Taxes, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information.

RESULTS OF OPERATIONS

Six Month Period Ended June 30, 2020, Compared to the Six Month Period Ended June 30, 2019

Six Months Ended June 30,

Amount % of Total

Revenue $ Change

vs 2019 % Change

vs 2019 Amount % of Total

Software as a service and platform as a service $ 373,523 63 % $ 92,467 33 % $ 281,056 56 %

License 78,265 13 % 4,646 6 % 73,619 15 %

Maintenance 106,029 18 % (1,004) (1) % 107,033 21 %

Services 33,578 6 % (8,187) (20) % 41,765 8 %

Total revenues 591,395 100 % 87,922 17 % 503,473 100 %

Operating expenses:

Cost of revenue 313,183 53 % 43,002 16 % 270,181 54 %

Research and development 74,602 13 % (827) (1) % 75,429 15 %

Selling and marketing 54,538 9 % (7,854) (13) % 62,392 12 %

General and administrative 65,684 11 % (15,152) (19) % 80,836 16 %

Depreciation and amortization 65,533 11 % 16,923 35 % 48,610 10 %

Total operating expenses 573,540 97 % 36,092 7 % 537,448 107 %

Operating income (loss) 17,855 3 % 51,830 (153) % (33,975) (7) %

Other income (expense):

Interest expense (31,313) (5) % (4,376) 16 % (26,937) (5) %

Interest income 5,854 1 % (176) (3) % 6,030 1 %

Other, net (7,717) -1 % (7,207) 1,413 % (510) — %

Total other income (expense) (33,176) (5) % (11,759) 55 % (21,417) (4) %

Loss before income taxes (15,321) (2) % 40,071 (72) % (55,392) (11) %

Income tax benefit (4,969) (1) % 30,185 (86) % (35,154) (7) %

Net loss $ (10,352) (1) % $ 9,886 (49) % $ (20,238) (4) %

Total revenue for the six months ended June 30, 2020, increased $87.9 million, or 17%, as compared to the same period in 2019.

• Speedpay contributed an incremental $123.3 million in total revenue during the six months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $5.2 million decrease in total revenue during the six months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay revenue and foreign currency, total revenue for the six months ended June 30, 2020, decreased $30.2 million, or 6%, compared to the same period in 2019.

Software as a Service (“SaaS”) and Platform as a Service (“PaaS”) Revenue

SaaS and PaaS revenue increased $92.5 million, or 33%, during the six months ended June 30, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $123.3 million in SaaS and PaaS revenue during the six months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in $0.7 million decrease in SaaS and PaaS revenue during the six months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental revenue from Speedpay and foreign currency, SaaS and PaaS revenue for the six months ended June 30, 2020, decreased $30.2 million, or 11%, compared to the same period in 2019.

• The decrease was primarily due to changes in the timing of assessments and due dates by Billers that use the Company's technology to enable customer payments of federal, state, and local taxes and declines in Digital Channels associated with customer attrition.

License Revenue

License revenue increased $4.6 million, or 6%, during the six months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $1.8 million decrease in license revenue during the six months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, license revenue for the six months ended June 30, 2020, increased $6.4 million, or 9%, compared to the same period in 2019.

• The increase in license revenue was primarily driven by the timing and relative size of license and capacity events during the six months ended June 30, 2020, as compared to the same period in 2019.

Maintenance Revenue

Maintenance revenue decreased $1.0 million, or 1%, during the six months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $2.0 million decrease in maintenance revenue during the six months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, maintenance revenue for the six months ended June 30, 2020, increased $1.0 million, or 1%, compared to the same period in 2019.

Services Revenue

Services revenue decreased $8.2 million, or 20%, during the six months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $0.8 million decrease in services revenue during the six months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, services revenue for the six months ended June 30, 2020, decreased $7.4 million, or 18%, compared to the same period in 2019.

• The decrease in services revenue was primarily driven by the timing and magnitude of project-related work during the six months ended June 30, 2020, as compared to the same period in 2019.

Operating Expenses

Total operating expenses for the six months ended June 30, 2020, increased $36.1 million, or 7%, as compared to the same period in 2019.

• Speedpay contributed an incremental $105.5 million to total operating expenses during the six months ended June 30, 2020, as compared to the same period in 2019.

• Total operating expenses for the six months ended June 30, 2020, included $13.5 million of significant transaction-related expenses associated with the acquisition of Speedpay and cost reduction strategies implemented during the period.

Total operating expenses for the six months ended June 30, 2019, included $21.3 million of significant transaction-related expenses associated with the acquisition of Speedpay.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $5.8 million decrease in total operating expenses for the six months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay operating expenses, significant transaction-related expenses, and foreign currency, total operating expenses for the six months ended June 30, 2020, decreased $55.8 million, or 11%, compared to the same period in 2019.

Cost of Revenue

Cost of revenue increased $43.0 million, or 16%, during the six months ended June 30, 2020, compared to the same period in 2019.

• Speedpay contributed an incremental $84.9 million to cost of revenue during the six months ended June 30, 2020, as compared to the same period in 2019.

• Cost of revenue for the six months ended June 30, 2020, included $2.3 million of significant transaction-related expenses associated with the acquisition of Speedpay.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $2.2 million decrease in cost of revenue during the six months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense, significant transaction-related expenses, and foreign currency, cost of revenue decreased $41.9 million, or 16%, for the six months ended June 30, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower payment card interchange and processing fees, personnel and related expenses, and amortization of acquired of software of $26.9 million, $11.5 million, and $2.0 million, respectively.

Research and Development

R&D expense decreased $0.8 million, or 1%, during the six months ended June 30, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $4.1 million to R&D expense during the six months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $1.7 million decrease in R&D expense during the six months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense and foreign currency, R&D expense decreased $3.4 million, or 5%, for the six months ended June 30, 2020, as compared to the same period in 2019, primarily due to lower personnel and related expenses.

Selling and Marketing

Selling and marketing expense decreased $7.9 million, or 13%, during the six months ended June 30, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $3.9 million to selling and marketing expense during the six months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $1.1 million decrease in selling and marketing expense for the six months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense and foreign currency, selling and marketing expense decreased $10.6 million, or 17%, for the six months ended June 30, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower personnel and related expenses, commissions, and professional fees of $5.9 million, $2.6 million, and $2.1 million, respectively.

General and Administrative

General and administrative expense decreased $15.2 million, or 19%, during the six months ended June 30, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $0.7 million to general and administrative expense during the six months ended June 30, 2020, as compared to the same period in 2019.

• General and administrative expenses for the six months ended June 30, 2020, included $11.0 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

General and administrative expense for the six months ended June 30, 2019, included $21.2 million of significant transaction-related expenses associated with the acquisition of Speedpay.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $0.4 million decrease in general and administrative expenses during the six months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense, significant transaction-related expenses, and foreign currency, general and administrative expense decreased $5.3 million, or 9%, for the six months ended June 30, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower personnel and related expenses of $6.7 million, partially offset by higher professional fees of $1.4 million.

Depreciation and Amortization

Depreciation and amortization increased $16.9 million, or 35%, during the six months ended June 30, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $11.9 million of depreciation and amortization expense during the six months ended June 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies weakening against the U.S.

dollar resulted in a $0.4 million decrease in depreciation and amortization expense during the six months ended June 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense and foreign currency, depreciation and amortization increased $5.5 million, or 11%, for the six months ended June 30, 2020, as compared to the same period in 2019, primarily due to additional amortization of internal-use software in our On Demand business.

Other Income and Expense

Interest expense for the six months ended June 30, 2020, increased $4.4 million, or 16%, as compared to the same period in 2019, primarily due to higher comparative debt balances, partially offset by lower interest rates.

Interest income for the six months ended June 30, 2020, decreased $0.2 million, or 3%, as compared to the same period in 2019.

Other, net primarily consists of foreign currency gain or loss.

Foreign currency loss for the six months ended June 30, 2020 and 2019, was $7.9 million and $0.5 million, respectively.

The higher foreign currency loss in 2020 was due to the market volatility in the wake of the COVID-19 pandemic.

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These on-demand solutions are maintained and delivered through the cloud via our global data centers and are available in either a single-tenant environment for SaaS offerings, or in a multi-tenant environment for PaaS offerings.

ACI On Premise serves customers who manage their software on site or through a third-party cloud services provider.

ACI On Premise serves customers who manage their software on site or through a third-party public cloud environment.

These on-premise customers use the Company’s software to develop sophisticated solutions, which are often part of a larger system located and managed at the customer specified site.

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The following is selected financial data for our reportable segments for the periods indicated (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

ACI On Demand $ 180,573 $ 172,499 $ 373,523 $ 282,347

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Other, net 2,041 1,402 (7,717) (510)

Loss before income taxes $ (35,312) $ (38,586)

Income (loss) before income taxes $ 19,991 $ (16,806) $ (15,321) $ (55,392)

Depreciation and amortization

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Total stock-based compensation expense $ 7,932 $ 14,372 $ 14,882 $ 20,957

ACI On Demand Segment Adjusted EBITDA increased $23.4 million for the three months ended March 31, 2020, compared to the same period in 2019, of which $20.8 million was due to the acquisition of Speedpay.

Excluding the impact of the acquisition of Speedpay, ACI On Demand Segment Adjusted EBITDA increased $2.6 million, primarily due to a decrease in cash operating expense, partially offset by a decrease in revenue within the Company's Biller business.

ACI On Premise Segment Adjusted EBITDA increased $2.6 million for the three months ended March 31, 2020, compared to the same period in 2019, primarily due to a $2.5 million increase in revenue and a $0.1 million decrease in cash operating expense.

ACI On Demand Segment Adjusted EBITDA increased $15.7 million for the three months ended June 30, 2020, compared to the same period in 2019, of which $9.2 million was due to the acquisition of Speedpay.

Excluding the impact of the acquisition of Speedpay, ACI On Demand Segment Adjusted EBITDA increased $6.5 million, primarily due to a $33.1 million decrease in cash operating expense, partially offset by a $26.7 million decrease in revenue, primarily within the Company's Biller business due to changes in the timing of assessments and due dates for federal, state, and local taxes.

ACI On Demand Segment Adjusted EBITDA increased $39.1 million for the six months ended June 30, 2020, compared to the same period in 2019, of which $30.0 million was due to the acquisition of Speedpay.

Excluding the impact of the acquisition of Speedpay, ACI On Demand Segment Adjusted EBITDA increased $9.1 million, primarily due to a $41.3 million decrease in cash operating expense, partially offset by a $32.2 million decrease in revenue, primarily within the Company's Biller business due to changes in the timing of assessments and due dates for federal, state, and local taxes.

ACI On Premise Segment Adjusted EBITDA increased $2.0 million for the three months ended June 30, 2020, compared to the same period in 2019, primarily due to a $7.7 million decrease in cash operating expense, partially offset by a $5.7 million decrease in revenue.

ACI On Premise Segment Adjusted EBITDA increased $4.7 million for the six months ended June 30, 2020, compared to the same period in 2019, primarily due to a $7.8 million decrease in cash operating expense, partially offset by a $3.2 million decrease in revenue.

Liquidity and Capital Resources

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The following table sets forth our available liquidity for the periods indicated (in thousands):

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Cash and cash equivalents $ 129,223 $ 121,398

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Total liquidity $ 429,223 $ 382,398

The increase in total liquidity is primarily attributable to positive operating cash flows of $57.5 million, partially offset by $28.9 million of payments related to stock repurchases and $10.1 million of payments to purchase property and equipment and software and distribution rights.

The increase in total liquidity is primarily attributable to positive operating cash flows of $125.5 million, partially offset by $28.9 million of payments related to stock repurchases, $25.7 million of payments to purchase property and equipment and software and distribution rights, and $19.5 million of repayments on the Term Loans.

We also repaid a net $39.0 million on the Revolving Credit Facility.

The Company and ACI Payments, Inc., a wholly owned subsidiary, maintain a $140.0 million uncommitted overdraft facility with Bank of America, N.A.

The overdraft facility acts as a secured loan under the terms of the Credit Agreement to provide an additional funding mechanism for timing differences that can occur in the bill payment settlement process.

As of March 31, 2020, the full $140.0 million was available.

As of June 30, 2020, the full $140.0 million was available.

Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less.

As of March 31, 2020, we had $119.1 million of cash and cash equivalents, of which $52.0 million was held by our foreign subsidiaries.

As of June 30, 2020, we had $129.2 million of cash and cash equivalents, of which $46.0 million was held by our foreign subsidiaries.

If these funds were needed for our operations in the U.S., we may potentially be required to accrue and pay foreign and U.S.

state income taxes to repatriate these funds.

As of March 31, 2020, only the earnings in our Indian foreign subsidiaries are indefinitely reinvested.

As of June 30, 2020, only the earnings in our Indian foreign subsidiaries are indefinitely reinvested.

The earnings of all other foreign entities are no longer indefinitely reinvested.

We are also permanently reinvested for outside book/tax basis difference related to foreign subsidiaries.

These outside basis differences could reverse through sales of the foreign subsidiaries, as well as various other events, none of which are considered probable as of March 31, 2020.

These outside basis differences could reverse through sales of the foreign subsidiaries, as well as various other events, none of which are considered probable as of June 30, 2020.

The following table sets forth summarized cash flow data for the periods indicated (in thousands):

Three Months Ended March 31,

Six Months Ended June 30,

Net cash provided by (used by):

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Cash Flows from Operating Activities

Net cash flows provided by operating activities during the three months ended March 31, 2020, were $57.5 million as compared to $42.4 million during the same period in 2019.

Net cash flows provided by operating activities during the six months ended June 30, 2020, were $125.5 million as compared to $56.9 million during the same period in 2019.

Net cash provided by operating activities primarily consists of net loss adjusted to add back depreciation, amortization, and stock-based compensation.

Cash flows provided by operating activities were $15.1 million higher for the three months ended March 31, 2020, compared to the same period in 2019, due to the timing of working capital.

Cash flows provided by operating activities were $68.7 million higher for the six months ended June 30, 2020, compared to the same period in 2019, due to higher cash earnings and improvements in the timing of working capital.

Our current policy is to use our operating cash flow primarily for funding capital expenditures, lease payments, stock repurchases, and acquisitions.

Cash Flows from Investing Activities

During the first three months of 2020, we used cash of $10.1 million to purchase software, property, and equipment, as compared to $9.8 million during the same period in 2019.

During the first six months of 2020, we used cash of $25.7 million to purchase software, property, and equipment, as compared to $21.2 million during the same period in 2019.

During the first six months of 2019, we paid $755.2 million, net of $0.1 million in cash acquired, to acquire Speedpay.

Cash Flows from Financing Activities

Net cash flows used by financing activities for the three months ended March 31, 2020, were $60.8 million as compared to net cash flows used by financing activities of $5.4 million during the same period in 2019.

During the first three months of 2020, we repaid $39.0 million on the Revolving Credit Facility and $9.7 million on the Initial Term Credit Loan, partially offset by proceeds of $30.0 million on the Revolving Credit Facility.

Net cash flows used by financing activities for the six months ended June 30, 2020, were $100.2 million as compared to net cash flows provided by financing activities of $714.7 million during the same period in 2019.

During the first six months of 2020, we repaid a net $39.0 million on the Revolving Credit Facility and $19.5 million on the Term Loans.

In addition, we used $28.9 million to repurchase common stock and $11.1 million for the repurchase of stock-based compensation awards for tax withholdings.

We also received proceeds of $3.0 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended.

During the first three months of 2019, we repaid $5.9 million on the Initial Term Loan.

During the first six months of 2019, we received proceeds of $500.0 million from our Delayed Draw Term Loan and $250.0 million from our Revolving Credit Facility to fund our purchase of Speedpay, and we repaid $9.4 million on the Initial Term Loan and $15.0 million on the Revolving Credit Facility.

In addition, we received proceeds of $7.6 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended, and used $2.8 million for the repurchase of stock-based compensation awards for tax withholdings.

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We believe 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 and debt service requirements, for the next twelve months and foreseeable future.

As of March 31, 2020, we had $230.0 million and $746.3 million outstanding under our Revolving Credit Facility and Term Loans, respectively, with up to $270.0 million of unused borrowings under the Revolving Credit Facility.

The interest rate in effect for the Credit Facility as of March 31, 2020, was 3.17%.

As of March 31, 2020, we also had $400.0 million outstanding of the 2026 Notes.

As of June 30, 2020, we had $200.0 million and $736.6 million outstanding under our Revolving Credit Facility and Term Loans, respectively, with up to $300.0 million of unused borrowings under the Revolving Credit Facility.

The interest rate in effect for the Credit Facility as of June 30, 2020, was 2.43%.

As of June 30, 2020, we also had $400.0 million outstanding of the 2026 Notes.

See Note 4, Debt, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information.

Stock Repurchase Program

We repurchased 1,000,000 shares for $28.9 million under the program during the three months ended March 31, 2020.

We repurchased 1,000,000 shares for $28.9 million under the program during the six months ended June 30, 2020.

Under the program to date, we have repurchased 46,357,495 shares for approximately $612.3 million.

As of March 31, 2020, the maximum remaining amount authorized for purchase under the stock repurchase program was approximately $112.1 million.

As of June 30, 2020, the maximum remaining amount authorized for purchase under the stock repurchase program was approximately $112.1 million.

See Note 7, Common Stock and Treasury Stock, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information.

Contractual Obligations and Commercial Commitments

For the three months ended March 31, 2020, 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, 2019.

For the six months ended June 30, 2020, 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, 2019.

We are unable to reasonably estimate the ultimate amount or timing of settlement of our reserves for income taxes under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Tax .

The liability for unrecognized tax benefits as of March 31, 2020, is $30.0 million.

The liability for unrecognized tax benefits as of June 30, 2020, is $30.0 million.

Critical Accounting Estimates

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• Accounting for Income Taxes

During the three months ended March 31, 2020, there were no significant changes to our critical accounting policies and estimates.

During the six months ended June 30, 2020, there were no significant changes to our critical accounting policies and estimates.

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, 2019, for a more complete discussion of our critical accounting policies and estimates.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis