ACI WORLDWIDE, INC. 10-Q

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, key trends, and, in each case, statements related to expected financial and other benefits. 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 forward-looking statements in this report are expressly qualified by the risk factors discussed in our filings with the Securities and Exchange Commission (“SEC”). The cautionary statements in this report expressly qualify all of our forward-looking statements. Factors that could cause actual results to differ from those expressed or implied in the forward-looking statements include, but are not limited to, those discussed in our Risk Factors in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and in Part 2, Item 1A of this Form 10-Q. 25 Table of contents 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 and six months ended June 30, 2020, are not necessarily indicative of results that may be attained in the future. COVID-19 Pandemic 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. The spread of the virus has also caused us to modify our business practices (including employee work locations and cancellation of physical participation in meetings) in ways that may be detrimental to our business (including working remotely and its attendant cybersecurity risks). We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees and customers. 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. 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. 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. Overview 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. Through our comprehensive suite of software solutions delivered on customers' premises, through a third-party public cloud environment or through ACI's private cloud, we provide real-time, immediate payments capabilities and enable the industry's most complete omni-channel payments experience. Our products are sold and supported through distribution networks covering three geographic regions – the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia/Pacific. Each distribution network has its own globally coordinated sales force that it supplements with independent reseller and/or distributor networks. Our products and solutions are used globally by banks, financial intermediaries, merchants, and billers, such as third-party electronic payment processors, payment associations, switch interchanges, and a wide range of transaction-generating endpoints, including ATMs, merchant point-of-sale (“POS”) terminals, bank branches, mobile phones, tablets, corporations, and Internet commerce sites. Accordingly, our business and operating results are influenced by trends such as information technology spending levels, the growth rate of electronic payments, mandated regulatory changes, and changes in the number and type of customers in the financial services industry. Our products are marketed under the ACI brand. 26 Table of contents We derive a majority of our revenues from domestic operations and believe we have large opportunities for growth in international markets as well as continued expansion domestically in the United States. Refining our global infrastructure is a critical component of driving our growth. We also continue to maintain centers of expertise in Timisoara, Romania and Pune and Bangalore in India, as well as key operational centers such as Cape Town, South Africa and in multiple locations in the United States. Key trends that currently impact our strategies and operations include: Increasing electronic payment transaction volumes. Electronic payment volumes continue to increase around the world, taking market share from traditional cash and check transactions. In their 2019 World Payments Report, Capgemini predicts that non-cash transaction volumes will grow in volume at an annual rate of 14.0%, from 538.6 billion in 2017 to 1,045.5 billion in 2022, 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, through the sale of capacity upgrades to existing customers, and through the scalability of our platform-based solutions. Furthermore, electronic payments have taken on greater importance during the global COVID-19 crisis as consumers increasingly prefer cashless payment options and shift to shopping and paying bills online. Adoption of real-time payments. 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 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. market, Zelle and TCH Real-Time Payments are now driving adoption. Corporate customers expect real-time information on the status of their payments instead of waiting for an end-of-day report. Regulators expect banks to be monitoring key measures like liquidity in real time. 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. 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 U.S. Many of these companies are significantly larger than ACI and have significantly greater financial, technical, and marketing resources. As electronic payment transaction volumes increase, third-party processors tend to provide competitive solutions, particularly among customers that do not seek to differentiate their electronic payment offerings or are eliminating banks from the payments service. As consolidation in the financial services and financial technology industries continues, we anticipate that competition for those customers will intensify. Adoption of cloud technology. To leverage lower-cost computing technologies, some banks, financial intermediaries, merchants, and billers are seeking to transition their systems to make use of cloud technology. Our investments and partnerships provide us the grounding to deliver cloud capabilities now and in the future. Market sizing data from Ovum indicates that spend on SaaS and PaaS payment systems is growing faster than spend on installed applications. Electronic payments fraud and compliance . As electronic payment transaction volumes increase, organized criminal organizations continue to find ways to commit a growing volume of fraudulent transactions using a wide range of techniques. Banks, financial intermediaries, merchants, and billers continue to seek ways to leverage new technologies to identify and prevent fraudulent transactions and other attacks such as denial of service attacks. Due to concerns with international terrorism and money laundering, banks and financial intermediaries in particular are being faced with increasing scrutiny and regulatory pressures. We continue to see opportunity to offer our fraud detection solutions with advanced machine learning capabilities to help customers manage the growing levels of electronic payments fraud and compliance activity. Adoption of smartcard technology. In many markets, issuers are being required to issue new cards with embedded chip technology, with the merchant liability shift having gone into effect in 2015 in the U.S. (and the fuel dispenser liability shift occurring later in 2020). 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.). While this combats card-present fraud, it results in greater card-not-present fraud (e.g., fraud at eCommerce sites). Single Euro Payments Area (SEPA). SEPA, primarily focused on the European economic community and the U.K., is designed to facilitate lower costs for cross-border payments and reduce timeframes for settling electronic payment transactions. The transition to SEPA payment mechanisms will drive more volume to these systems with the potential to cause banks to review the capabilities of the systems supporting these payments. Our retail payments and real-time payments solutions facilitate key functions that help banks and financial intermediaries address these mandated regulations. 27 Table of contents European Payment Service Directive (PSD2). PSD2, which was ratified by the European Parliament in 2015, required member states to implement new payment regulations in 2018. The XS2A provision effectively creates a new market opportunity where banks in European Union member countries must provide open API standards to customer data, thus allowing authorized third-party providers to enter the market. 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 recent economic conditions 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 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 ones that survive in the consolidated entity. Global vendor sourcing. Global and regional banks, financial intermediaries, merchants, and billers are aiming to reduce the costs in supplier management by picking suppliers that can service them across all their geographies instead of allowing each country operation to choose suppliers independently. Our global footprint from both a customer and a delivery perspective enables us to be successful in this internationally-sourced market. However, projects in these environments tend to be more complex and therefore of higher risk. Electronic payments convergence. As electronic payment volumes grow and pressures to lower overall cost per transaction increase, banks and financial intermediaries 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, banks and financial intermediaries 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 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 and have significantly greater financial, technical and marketing resources. Mobile banking and payments. There is a growing demand for the ability to carry out banking services or make payments using a mobile phone. According to analysis from the Deloitte Center for Financial Services in 2018, 84% of global consumers use online banking and 72% use mobile banking applications. Additionally, digital channels are used more frequently than bank branches and ATMs across all generations and in all countries. Our customers have been making use of existing products to deploy mobile banking, mobile payments, and mobile commerce solutions for their customers in many countries. In addition, ACI has invested in mobile products of our own and via partnerships to support mobile functionality in the marketplace. Electronic bill payment and presentment. EBPP encompasses all facets of bill payment, including biller direct, where customers initiate payments on biller websites, the consolidator model, where customers initiate payments on a financial institution’s website, and walk-in bill payment, as one might find in a convenience store. The EBPP market continues to grow as consumers move away from traditional forms of paper-based payments. Nearly three out of four (73%) online payments are made at the billers’ sites, rather than through banking websites. The biller-direct solutions are seeing strong growth as billers migrate these services to outsourcers, such as ACI, from legacy systems built in-house. We believe that EBPP remains ripe for outsourcing, as a significant amount of biller-direct transactions are still processed in-house. As billers seek to manage costs and improve efficiency, we believe that they will continue to look to third-party EBPP vendors that can offer a complete solution for their billing needs. ACI is supporting Billers during the COVID-19 crisis with new, automated tools that allow consumers to defer payments, set-up flexible payment plans, and request virtual appointments to discuss payment options. 28 Table of contents 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 are complex and it can be difficult to estimate when we will recognize revenue generated by a given transaction. Factors such as creditworthiness of the customer and timing of transfer of control or acceptance of our products may 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 U.S. 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. 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 accretive to our financial performance. Chief Executive Officer On February 18, 2020, we announced the appointment of Odilon Almeida as the Company’s new President and Chief Executive Officer, effective March 9, 2020. Mr. Almeida was also appointed to serve as a member of ACI’s board of directors. Acquisition Speedpay On May 9, 2019, we acquired E Commerce Group Products, Inc. ("ECG"), a subsidiary of The Western Union Company, along with ECG's subsidiary, Speedpay, Inc. (collectively referred to as "Speedpay") for $754.1 million in cash, including working capital adjustments, pursuant to a Stock Purchase Agreement, among the Company, The Western Union Company, and ACI Worldwide Corp., our wholly owned subsidiary. To fund the acquisition, we amended our existing Credit Agreement, dated February 24, 2017, for an additional $500.0 million senior secured term loan, in addition to drawing $250.0 million on the available Revolving Credit Facility. See Note 4, Debt , to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for terms of the Credit Agreement. The remaining acquisition consideration was funded with cash on hand. Backlog Backlog is comprised of: • Committed Backlog, which includes (1) contracted revenue that will be recognized in future periods (contracted but not recognized) from software license fees, maintenance fees, service fees, and SaaS and PaaS fees specified in executed contracts (including estimates of variable consideration if required under ASC 606 and included in the transaction price for those contracts, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods and (2) estimated future revenues from software license fees, maintenance fees, services fees, and SaaS and PaaS fees specified in executed contracts. • Renewal Backlog, which includes estimated future revenues from assumed contract renewals to the extent 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. 29 Table of contents Our 60-month backlog estimates are derived using the following key assumptions: • License arrangements are assumed to renew at the end of their committed term or under the renewal option stated in the contract at a rate consistent with historical experience. If the license arrangement includes extended payment terms, the renewal estimate is adjusted for the effects of a significant financing component. • 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. • SaaS and PaaS arrangements are assumed to renew at the end of their committed term at a rate consistent with our historical experiences. • 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, account, or processing volumes by our customers. • Optional annual uplifts or inflationary increases in recurring fees. • Services engagements, other than SaaS and PaaS arrangements, are not assumed to renew over the 60-month backlog period. • The potential impact of consolidation activity within our markets and/or customers. We review our customer renewal experience on an annual basis. The impact of this review and subsequent updates may result in a revision to the renewal assumptions used in computing the 60-month backlog estimates. 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 June 30, 2020, March 31, 2020, and December 31, 2019 (in millions). Dollar amounts reflect foreign currency exchange rates as of each period end. June 30, 2020 March 31, 2020 December 31, 2019 ACI On Demand $ 3,863 $ 3,781 $ 3,855 ACI On Premise 1,976 1,933 1,977 Total $ 5,839 $ 5,714 $ 5,832 June 30, 2020 March 31, 2020 December 31, 2019 Committed $ 2,140 $ 2,095 $ 2,168 Renewal 3,699 3,619 3,664 Total $ 5,839 $ 5,714 $ 5,832 Estimates of future financial results require substantial judgment and are based on several assumptions, as described above. These assumptions may turn out to be inaccurate or wrong for reasons outside of management’s control. For example, our customers may attempt to renegotiate or terminate their contracts for many reasons, including mergers, changes in their financial condition, or general changes in economic conditions (e.g. economic declines resulting from COVID-19) in the customer’s industry or geographic location. We may also 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 recognized in future periods. Accordingly, there can be no assurance that amounts included in backlog estimates will generate the specified revenues or that the actual revenues will be generated within the corresponding 60-month period. Additionally, because certain components of Committed Backlog and all of Renewal Backlog estimates are operating metrics, the estimates are not required to be subject to the same level of internal review or controls as contracted but not recognized Committed Backlog. 30 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 for items included in our condensed consolidated statements of operations (in thousands): Three Month Period Ended June 30, 2020, Compared to the Three Month Period Ended June 30, 2019 Three Months Ended June 30, 2020 2019 Amount % of Total Revenue $ Change vs 2019 % Change vs 2019 Amount % of Total Revenue Revenues: Software as a service and platform as a service $ 180,573 60 % $ 8,074 5 % $ 172,499 58 % License 50,136 17 % (2,405) (5) % 52,541 18 % Maintenance 52,749 18 % 827 2 % 51,922 17 % Services 16,452 5 % (4,204) (20) % 20,656 7 % Total revenues 299,910 100 % 2,292 1 % 297,618 100 % Operating expenses: Cost of revenue 147,346 49 % (7,894) (5) % 155,240 52 % Research and development 35,578 12 % (3,657) (9) % 39,235 13 % Selling and marketing 24,455 8 % (8,507) (26) % 32,962 11 % General and administrative 29,758 10 % (19,561) (40) % 49,319 17 % Depreciation and amortization 33,635 11 % 6,891 26 % 26,744 9 % Total operating expenses 270,772 90 % (32,728) (11) % 303,500 102 % Operating income (loss) 29,138 10 % 35,020 (595) % (5,882) (2) % Other income (expense): Interest expense (14,142) (5) % 1,181 (8) % (15,323) (5) % Interest income 2,954 1 % (43) (1) % 2,997 1 % Other, net 2,041 1 % 639 46 % 1,402 — % Total other income (expense) (9,147) (3) % 1,777 (16) % (10,924) (4) % 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 % Revenues 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. 31 Table of contents Software as a Service (“SaaS”) and Platform as a Service (“PaaS”) Revenue The Company’s SaaS arrangements allow customers to use certain software solutions (without taking possession of the software) in a single-tenant cloud environment on a subscription basis. The Company’s PaaS arrangements allow customers to use certain software solutions (without taking possession of the software) in a multi-tenant cloud environment on a subscription or consumption basis. Included in SaaS and PaaS revenue are fees paid by our customers for use of our Biller solutions. Biller-related fees may be paid by our clients or directly by their customers and may be a percentage of the underlying transaction amount, a fixed fee per executed transaction or a monthly fee for each customer enrolled. 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 $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 Customers purchase the right to license ACI software under multi-year, time-based software license arrangements that vary in length but are generally five years. Under these arrangements the software is installed at the customer’s location (i.e. on-premise). Within these agreements are specified capacity limits typically based on customer transaction volume. 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. Included in license revenue are license and capacity fees that are payable at the inception of the agreement or annually (initial license fees). License revenue also includes license and capacity fees payable quarterly or monthly due to negotiated customer payment terms (monthly license fees). 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 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 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. 32 Table of contents Services Revenue Services revenue includes fees earned through implementation services and other professional services. Implementation services include product installations, product configurations, and custom software modifications (“CSMs”). Other professional services include business consultancy, technical consultancy, on-site support services, CSMs, 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. 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 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 Cost of revenue includes costs to provide SaaS and PaaS services, third-party royalties, amortization of purchased and developed software for resale, the costs of maintaining our software products, as well as the costs required to deliver, install, and support software at customer sites. SaaS and PaaS service costs include payment card interchange fees, amounts payable to banks, and payment card processing fees. 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 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. 33 Table of contents 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 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 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 clients 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 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 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 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. 34 Table of contents Depreciation and Amortization 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 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 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. Income Taxes See Note 11, Income Taxes, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information. 35 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 for items included in our condensed consolidated statements of operations (in thousands): Six Month Period Ended June 30, 2020, Compared to the Six Month Period Ended June 30, 2019 Six Months Ended June 30, 2020 2019 Amount % of Total Revenue $ Change vs 2019 % Change vs 2019 Amount % of Total Revenue Revenues: 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) % Revenues 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. 36 Table of contents 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. 37 Table of contents 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. 38 Table of contents 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. Income Taxes See Note 11, Income Taxes, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information. Segment Results We report financial performance based on our segments, ACI On Demand and ACI On Premise, and analyze Segment Adjusted EBITDA as a measure of segment profitability. Our Chief Executive Officer is also our chief operating decision maker (“CODM”). The CODM, together with other senior management personnel, focus their review on consolidated financial information and the allocation of resources based on operating results, including revenues and Segment Adjusted EBITDA, for each segment, separate from the corporate operations. ACI On Demand serves the needs of banks, merchants, and billers who use payments to facilitate their core business. 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. 39 Table of contents 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. These customers require a level of control and flexibility that ACI On Premise solutions can offer, and they have the resources and expertise to take a lead role in managing these solutions. Revenue is attributed to the reportable segments based upon the product sold and mechanism for delivery to the customer. Expenses are attributed to the reportable segments in one of three methods, (1) direct costs of the segment, (2) labor costs that can be attributed based upon time tracking for individual products, or (3) costs that are allocated. Allocated costs are generally marketing and sales related activities as well as information technology and facilities related expense for which multiple segments benefit. We also allocate certain depreciation costs to the segments. Segment Adjusted EBITDA is the measure reported to the CODM for purposes of making decisions on allocating resources and assessing the performance of our segments and, therefore, Segment Adjusted EBITDA is presented in conformity with ASC 280, Segment Reporting. Segment Adjusted EBITDA is defined as earnings (loss) from operations before interest, income tax expense (benefit), depreciation and amortization (“EBITDA”) adjusted to exclude stock-based compensation, and net other income (expense). Corporate and unallocated expenses consist of the corporate overhead costs that are not allocated to reportable segments. These overhead costs relate to human resources, finance, legal, accounting, merger and acquisition activity, and other costs that are not considered when management evaluates segment performance. The following is selected financial data for our reportable segments for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenue ACI On Demand $ 180,573 $ 172,499 $ 373,523 $ 282,347 ACI On Premise 119,337 125,119 217,872 221,126 Total revenue $ 299,910 $ 297,618 $ 591,395 $ 503,473 Segment Adjusted EBITDA ACI On Demand $ 33,071 $ 17,340 $ 56,192 $ 17,078 ACI On Premise 59,093 57,069 90,002 85,337 Depreciation and amortization (35,692) (29,778) (69,514) (54,630) Stock-based compensation expense (7,932) (14,372) (14,882) (20,957) Corporate and unallocated expenses (19,402) (36,141) (43,943) (60,803) Interest, net (11,188) (12,326) (25,459) (20,907) Other, net 2,041 1,402 (7,717) (510) Income (loss) before income taxes $ 19,991 $ (16,806) $ (15,321) $ (55,392) Depreciation and amortization ACI On Demand $ 10,852 $ 8,489 $ 20,184 $ 16,051 ACI On Premise 3,431 3,019 6,537 6,049 Corporate 21,409 18,270 42,793 32,530 Total depreciation and amortization $ 35,692 $ 29,778 $ 69,514 $ 54,630 Stock-based compensation expense ACI On Demand $ 2,273 $ 2,214 $ 4,299 $ 4,165 ACI On Premise 2,279 2,051 4,309 4,007 Corporate 3,380 10,107 6,274 12,785 Total stock-based compensation expense $ 7,932 $ 14,372 $ 14,882 $ 20,957 40 Table of contents 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 General Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to meet the interest and principal requirements of our outstanding indebtedness; and (iii) to fund acquisitions, capital expenditures, and lease payments. We believe these needs will be satisfied using cash flow generated by our operations, our cash and cash equivalents, and available borrowings under our revolving credit facility. Our cash requirements in the future may be financed through additional equity or debt financings. However, the disruption in the capital markets caused by the COVID-19 pandemic could make any new financing more challenging, and there can be no assurance that such financings will be obtained on commercially reasonable terms, or at all. We believe our liquidity will allow us to manage the anticipated impact of COVID-19 on our business operations for the foreseeable future, which could include reductions in revenue and delays in payments from customers and partners. We are compliant with our debt covenants and do not anticipate an inability to service our debt. As the challenges posed by COVID-19 on our business and the economy as a whole evolve rapidly, we will continue to evaluate our liquidity and financial position in light of future developments, particularly those relating to COVID-19. Available Liquidity The following table sets forth our available liquidity for the periods indicated (in thousands): June 30, 2020 December 31, 2019 Cash and cash equivalents $ 129,223 $ 121,398 Availability under revolving credit facility 300,000 261,000 Total liquidity $ 429,223 $ 382,398 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 June 30, 2020, the full $140.0 million was available. 41 Table of contents Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. 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 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 June 30, 2020. Cash Flows The following table sets forth summarized cash flow data for the periods indicated (in thousands): Six Months Ended June 30, 2020 2019 Net cash provided by (used by): Operating activities $ 125,529 $ 56,865 Investing activities (25,672) (779,761) Financing activities (100,150) 714,655 Cash Flows from Operating Activities 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 $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 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 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 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. We also used $0.6 million to repurchase common stock. We may 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. 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. 42 Table of contents Debt 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 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 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 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 June 30, 2020, is $30.0 million. Critical Accounting Estimates The preparation of the condensed consolidated financial statements requires 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 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 that we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following: • Revenue Recognition • Intangible Assets and Goodwill • Business Combinations • Stock-Based Compensation • Accounting for Income Taxes 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. 43 Table of contents