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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-27 · 242 added, 209 removed, 308 unchanged (59% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

More than 1,000 of the largest financial institutions 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 digital payments for more than 6,000 organizations around the world.

More than 1,000 of the largest banks 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, 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 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.

Through our comprehensive suite of software solutions delivered on customers’ premises, through the public cloud 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 directly and through distribution networks covering three geographic regions – the Americas, EMEA, and Asia Pacific.

Each region has its own globally coordinated sales force, supplemented with local independent reseller and/or distributor networks.

Our products and solutions are used globally by banks, 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 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 digital payments, mandated regulatory changes, and changes in the number and type of customers in the financial services industry, as well as economic growth and purchasing habits.

Our products are marketed under the ACI Worldwide brand.

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 have launched a globalization strategy which includes elements intended to streamline our supply chain

and concentrate expertise in several geographic locations to support a growing international customer base and competitive needs.

We utilize our Irish subsidiaries to manage certain of our intellectual property rights and to oversee and manage certain international product development and commercialization efforts.

We increased our SaaS and PaaS capabilities with a data center in Ireland allowing our SaaS and PaaS solutions to be more-broadly offered in the European market.

We also continue to grow 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.

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 in 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 World Payments Report, Capgemini predicts that non-cash transaction volumes will grow in volume at an annual rate of 14.2%, 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 and through the sale of capacity upgrades to existing customers.

Increasing digital payment transaction volumes .

The adoption of digital payments continues to accelerate, propelled by the digitization of cash, financial inclusion efforts of countries throughout the world, the Internet of Things, rapid growth of eCommerce and the adoption of real-time payments.

COVID-19 has further accelerated this growth as more people, governments, and businesses have embraced digital payments—a change likely to continue once the pandemic is over.

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.

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 Malaysia, Thailand, Singapore, Australia, 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 the 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 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.

Increasing competition.

The electronic payments market is highly competitive and subject to rapid change.

Our competition comes from in-house information technology departments, third-party electronic payment processors, and third-party software companies located both within and outside of the United States.

Many of these companies are significantly larger than us and have significantly greater financial, technical, and marketing resources.

As electronic payment transaction volumes increase, third-party processors tend to provide competition to our solutions, particularly among customers that do not seek to differentiate their electronic payment offerings or are eliminating banks from the payments service, reducing the need for our solutions.

As consolidation in the financial services and financial technology industries continues, we anticipate that competition for those customers will intensify.

Expectations from both consumers and businesses are continuing to drive the payments world to more real-time delivery.

This is bolstered by the new data-rich ISO 20022 messaging format, which promises to deliver greater value to banks and their customers.

We are seeing global players with existing schemes working to expand capacity in anticipation of volume growth (further driven by COVID-19) and new payment types.

Mature markets, including India, the United Kingdom, Australia, Malaysia, Singapore, Thailand, and the Nordics (P27), continue to accelerate innovation, especially in terms of overlay services and cross-border connectivity.

The United States is driving real-time payments adoption through Zelle, TCH Real-Time Payments, and the planned FedNow service, while Brazil's PIX was recently launched in November.

ACI's broad software portfolio, experience, and strategic partnerships with Mastercard, Microsoft, and Mindgate Solutions continue to position us as the leaders in real-time payments, helping to drive seamless connectivity, increased security, and end-to-end modernization for organizations throughout the world.

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 to help customers manage the growing levels of electronic payments fraud and compliance activity.

Adoption of smartcard technology.

In many markets, card issuers are being required to issue new cards with embedded chip technology, with the liability shift having gone into effect in 2015 in the United States.

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.).

This results in greater card-not-present fraud (e.g., fraud at eCommerce sites).

Single Euro Payments Area (SEPA).

The 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.

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 solutions 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 who 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 enable us to be successful in this globally 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 SOA 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 than us 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.

To leverage lower-cost computing technologies, increase time to market, accelerate innovation, and ensure scalability and resiliency, banks, intermediaries, merchants, and billers are seeking to transition their systems to make use of cloud technology.

Our investments and partnerships, as demonstrated by our product enablement and initial optimization onto Microsoft Azure, enable us to leverage the hybrid cloud technology benefits of automation and rapid deployment and delivery, while preserving the ACI fundamentals of resiliency and scalability, to deliver cloud capabilities now and in the future.

Market sizing data from Ovum (now Omdia) indicates that spend on SaaS and PaaS payment systems is growing faster than spend on installed applications.

Digital payments fraud and compliance.

The rise in digital payment transaction volumes and payment types has subsequently led to an increase in online fraud in many guises and across all channels.

Driven in part by COVID-19, we have seen an increase in phishing and friendly fraud, as well as remote banking fraud and authorized push payment scams.

Real-time payments bring a new level of urgency, as money cannot easily be retrieved once it has been sent.

Banks, intermediaries, merchants, and billers must find faster, smarter, more accurate and increasingly automated ways to secure customers and meet 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 digital payments fraud and compliance activity.

Omni-commerce.

Shoppers are increasingly browsing, buying, and returning items across channels, including in-store, online, and mobile.

COVID-19 has accelerated this trend, leading to an increase in contactless payments, click and collect, and curbside collection.

Merchants from all industries, including grocers, fuel and convenience stores, are being tasked with delivering seamless experiences that include pay-in-aisle, kiosks, mobile app payments, QR code payments, eCommerce, traditional and mobile POS, buy online pickup in-store (BOPIS) and buy online return in-store (BORIS).

We believe there is significant opportunity to provide merchants with the tools to deliver a seamless, secure, personalized experience that creates loyalty and satisfaction, and drives conversion rates while protecting consumer data and preventing fraud.

Request for Payment (RfP).

Markets across the world are introducing an innovative payments service called Request for Payment (RfP).

This technology is known by different names in different markets:

Collect payments in India, Request 2 Pay in Europe, Request To Pay (RTP) in the United Kingdom, or Request for Payment (RfP) in the United States.

RfP offers secure messaging between consumers and billers or merchants, wherein a biller or merchant can request a payment from a consumer through the use of a trusted app, most likely a banking app.

RfP is primarily being implemented on top of real-time payments, which are continuing to grow and flourish as countries around the world develop and launch their real-time schemes as noted above.

ACI is in a unique position to deliver this overlay service given our real-time payments software, our relationships with banks, merchants and billers, and global real-time connectivity.

Several other factors related to our business may have a significant impact on our operating results from year to year.

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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.

Almeida will also be appointed to serve as a member of ACI’s board of directors.

On May 9, 2019, we acquired Speedpay for $754.1 million in cash, including working capital adjustments, pursuant to a Stock Purchase Agreement, among the Company, Western Union, and ACI Worldwide Corp., our wholly owned subsidiary.

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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, services 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.

• 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.

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and December 31, 2019 (in millions).

The 60-month backlog estimate includes approximately $1.5 billion as a result of the acquisition of Speedpay, which occurred on May 9, 2019.

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

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2020 September 30,

ACI On Premise

2020 June 30,

2020 March 31,

2020 December 31,

ACI On Demand

$ 3,965 $ 3,868 $ 3,863 $ 3,781 $ 3,855

ACI On Premise

2,074 2,041 1,976 1,933 1,977

$ 6,039 $ 5,909 $ 5,839 $ 5,714 $ 5,832

2020 September 30,

2020 June 30,

2020 March 31,

2020 December 31,

$ 2,447 $ 2,189 $ 2,140 $ 2,095 $ 2,168

3,592 3,720 3,699 3,619 3,664

$ 6,039 $ 5,909 $ 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 in the customer’s industry or geographic location.

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.

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Year Ended December 31, 2020, Compared to Year Ended December 31, 2019

vs 2019 % Change

vs 2019 Amount

Software as a service and platform as a service

$ 769,180 60 % $ 91,511 14 % $ 677,669 54 %

246,896 19 % (41,365) (14) % 288,261 23 %

211,697 16 % (1,712) (1) % 213,409 17 %

66,549 5 % (12,406) (16) % 78,955 6 %

Total revenues

1,294,322 100 % 36,028 3 % 1,258,294 100 %

Operating expenses:

Cost of revenue

622,459 48 % 5,006 1 % 617,453 49 %

Research and development

139,293 11 % (7,280) (5) % 146,573 12 %

Selling and marketing

103,567 8 % (20,117) (16) % 123,684 10 %

General and administrative

152,468 12 % 17,172 13 % 135,296 11 %

Depreciation and amortization

131,791 10 % 20,259 18 % 111,532 9 %

Total operating expenses

1,149,578 89 % 15,040 1 % 1,134,538 91 %

Operating income 144,744 11 % 20,988 17 % 123,756 9 %

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Interest income 11,628 1 % (339) (3) % 11,967 1 %

Other, net (1,116) — % (1,636) (315) % 520 — %

Total other income (expense) (46,118) (3) % 5,428 (11) % (51,546) (4) %

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Income tax expense 25,966 2 % 20,818 404 % 5,148 — %

Total revenue for the year ended December 31, 2019 , increased $248.5 million , or 25% , as compared to the same period in 2018 , of which $227.7 million , or 23% , was due to the acquisition of Speedpay.

Total revenue was $13.1 million lower for the year ended December 31, 2019 , compared to the same period in 2018 , 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 year ended December 31, 2019 , increased $33.9 million , or 3% , compared to the same period in 2018 .

Net income $ 72,660 6 % $ 5,598 8 % $ 67,062 5 %

Total revenue for the year ended December 31, 2020, increased $36.0 million, or 3%, as compared to the same period in 2019.

• Speedpay contributed an incremental $123.3 million in total revenue during the year ended December 31, 2020, as compared to the same period in 2019.

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

dollar resulted in a $2.1 million decrease in total revenue during the year ended December 31, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay revenue and foreign currency, total revenue for the year ended December 31, 2020, decreased $85.2 million, or 7%, as compared to the same period in 2019.

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

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All revenue from SaaS and PaaS arrangements that does 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 $244.6 million , or 56% , during the year ended December 31, 2019 , as compared to the same period in 2018 , of which $227.7 million , or 53% , was due to the acquisition of Speedpay.

SaaS and PaaS revenue was $2.4 million lower for the year ended December 31, 2019 , compared to the same period in 2018 , 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 year ended December 31, 2019 , increased $19.4 million , or 4% , compared to the same period in 2018 , of which $11.7 million is related to new customers adopting our SaaS and PaaS offerings and existing customers adding new functionality or increasing transaction volumes and $7.7 million is attributable to acceleration of recurring revenue associated with customer-related consolidation activity.

SaaS and PaaS revenue increased $91.5 million, or 14%, during the year ended December 31, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $123.3 million in SaaS and PaaS revenue during the year ended December 31, 2020, as compared to the same period in 2019.

• The impact of certain foreign currencies strengthening against the U.S.

dollar resulted in a $0.6 million increase in SaaS and PaaS revenue during the year ended December 31, 2020, as compared to the same period in 2019.

• Adjusted for the impact of the incremental revenue from Speedpay and foreign currency, SaaS and PaaS revenue for the year ended December 31, 2020, decreased $32.4 million, or 5%, as compared to the same period in 2019.

• The decrease was primarily due to declines in transaction volumes within our Biller customer base as a result of the economic impact of COVID-19.

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 or in a third-party cloud environment through a provider that is managed by the cusomter (i.e.

Under these arrangements the software is installed at the customer’s location (i.e.

Within these agreements are specified capacity limits typically based on customer transaction volume.

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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 $7.7 million , or 3% , during the year ended December 31, 2019 , as compared to the same period in 2018 .

License revenue was $5.3 million lower for the year ended December 31, 2019 , compared to the same period in 2018 , due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of foreign currency, license revenue for the year ended December 31, 2019 , increased $13.0 million , or 5% , compared to the same period in 2018 .

The increase in license revenue was primarily driven by the timing and relative size of license and capacity events during the year ended December 31, 2019 , as compared to the same period in 2018 .

License revenue decreased $41.4 million, or 14%, during the year ended December 31, 2020, as compared to the same period in 2019.

• The impact of foreign currencies was not significant for license revenue during the year ended December 31, 2020, as compared to the same period in 2019.

• The decrease in license revenue was primarily driven by the timing and relative size of license and capacity events during the year ended December 31, 2020, as compared to the same period in 2019.

Maintenance Revenue

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Maintenance revenue decreased $1.7 million, or 1%, during the year ended December 31, 2020, as compared to the same period in 2019.

Maintenance revenue was $3.9 million lower for the year ended December 31, 2019 , as compared to the same period in 2018 , due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of foreign currency, maintenance revenue for the year ended December 31, 2019 , decreased $1.9 million , or 1% , compared to the same period in 2018 .

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

dollar resulted in a $1.8 million decrease in maintenance revenue during the year ended December 31, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, maintenance revenue for the year ended December 31, 2020, remained flat as 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 increased $1.9 million , or 2% , during the year ended December 31, 2019 , as compared to the same period in 2018 .

Services revenue was $1.5 million lower for the year ended December 31, 2019 , as compared to the same period in 2018 , due to the impact of certain foreign currencies weakening against the U.S.

Excluding the impact of foreign currency, services revenue for the year ended December 31, 2019 , increased $3.4 million , or 4% , compared to the same period in 2018 .

Services revenue decreased $12.4 million, or 16%, during the year ended December 31, 2020, as compared to the same period in 2019.

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

dollar resulted in a $0.7 million decrease in services revenue during the year ended December 31, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, services revenue for the year ended December 31, 2020, decreased $11.7 million, or 15%, as compared to the same period in 2019.

• The decrease was primarily driven by the timing and magnitude of project-related work during the year ended December 31, 2020, as compared to the same period in 2019.

Operating Expenses

Total operating expenses for the year ended December 31, 2019 , increased $250.7 million , or 28% , as compared to the same period in 2018 , of which $202.8 million , or 23% , was due to the acquisition of Speedpay and $24.9 million , or 3% , was due to significant transaction and integration-related expenses associated with the acquisition of Speedpay.

Total operating expenses for the year ended December 31, 2018, included $7.4 million of significant integration and divestiture-related expenses.

Total operating expenses were $11.9 million lower for the year ended December 31, 2019 , compared to the same period in 2018 , due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of the acquisition of Speedpay, significant acquisition and integration-related expenses, and foreign currency, total operating expenses for the year ended December 31, 2019 , increased $42.2 million , or 5% , compared to the same period in 2018 , primarily due to higher payment card interchange and processing fees of $18.0 million, stock-based compensation expense of $16.4 million, and depreciation and amortization expense of $7.2 million.

Total operating expenses for the year ended December 31, 2020, increased $15.0 million, or 1%, as compared to the same period in 2019.

• Speedpay contributed an incremental $105.5 million to total operating expenses during the year ended December 31, 2020, as compared to the same period in 2019.

• Total operating expenses for the year ended December 31, 2020, included $44.6 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period and ongoing integration of the acquisition of Speedpay.

Total operating expenses for the year ended December 31, 2019, included $24.9 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 $5.5 million decrease in total operating expenses for the year ended December 31, 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 year ended December 31, 2020, decreased $104.7 million, or 9%, as 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.

Cost of revenue includes costs to provide SaaS and PaaS, 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.

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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 $187.1 million , or 43% , during the year ended December 31, 2019 , compared to the same period in 2018 , of which $165.6 million , or 38% , was due to the acquisition of Speedpay.

Cost of revenue was $4.4 million lower for the year ended December 31, 2019 , as compared to the same period in 2018 , 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 increased $25.8 million , or 6% , for the year ended December 31, 2019 , as compared to the same period in 2018 , primarily due to an $18.0 million increase in payment card interchange and processing fees.

Cost of revenue increased $5.0 million, or 1%, during the year ended December 31, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $84.9 million to cost of revenue during the year ended December 31, 2020, as compared to the same period in 2019.

• Cost of revenue for the year ended December 31, 2020 included $4.3 million of significant transaction-related expenses associated with the acquisition of Speedpay and cost reduction strategies implemented during the period.

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

dollar resulted in a $2.2 million decrease in cost of revenue during the year ended December 31, 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 $81.9 million, or 13%, for the year ended December 31, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower payment card interchange and biller related expenses, personnel and related expenses, travel and entertainment expenses, and amortization of acquired software of $57.2 million, $18.6 million, $3.7 million, and $2.4 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 $2.9 million , or 2% , during the year ended December 31, 2019 , as compared to the same period in 2018 .

The acquisition of Speedpay contributed $7.6 million to R&D expense during the year ended December 31, 2019 .

R&D expense was $3.1 million lower for the year ended December 31, 2019 , as compared to the same period in 2018 , 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 decreased $1.5 million , or 1% , for the year ended December 31, 2019 , as compared to the same period in 2018 .

R&D expense decreased $7.3 million, or 5%, during the year ended December 31, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $4.1 million to R&D expense during the year ended December 31, 2020, as compared to the same period in 2019.

• R&D expense for the year ended December 31, 2020, included $1.0 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

R&D expense for the year ended December 31, 2019, included $0.4 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 $1.5 million decrease in R&D expense during the year ended December 31, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense, significant transaction-related expenses, and foreign currency, R&D expense decreased $10.4 million, or 7%, during the year ended December 31, 2020, as compared to the same period in 2019, primarily due to lower personnel and related expenses.

Selling and Marketing

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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 $5.8 million , or 5% , during the year ended December 31, 2019 , as compared to the same period in 2018 .

The acquisition of Speedpay contributed $7.2 million to selling and marketing expense for the year ended December 31, 2019 .

Selling and marketing expense was $2.4 million lower for the year ended December 31, 2019 , as compared to the same period in 2018 , 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 increased $1.0 million , or 1% , for the year ended December 31, 2019 , as compared to the same period in 2018 .

Selling and marketing expense decreased $20.1 million, or 16%, during the year ended December 31, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $3.9 million to selling and marketing expense during the year ended December 31, 2020, as compared to same period in 2019.

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

dollar resulted in a $1.0 million decrease in selling and marketing expense during the year ended December 31, 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 $23.0 million, or 19%, for the year ended December 31, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower advertising costs, personnel and related expenses, travel and entertainment, and commissions of $8.7 million, $6.6 million, $3.9 million, and $3.8 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 $27.9 million , or 26% , during the year ended December 31, 2019 , as compared to the same period in 2018 , of which $1.6 million , or 2% , and $24.4 million , or 23% , was due to the acquisition of Speedpay and significant transaction and integration-related expenses associated with the acquisition of Speedpay, respectively.

General and administrative expense for the year ended December 31, 2018 , included $6.4 million of significant transaction and divestiture-related expenses.

General and administrative expense was $1.0 million lower for the year ended December 31, 2019 , as compared to the same period in 2018 , due to the impact of foreign currencies weakening against the U.S.

Excluding the impact of the acquisition of Speedpay, significant transaction and integration-related expense, and foreign currency, general and administrative expense increased $9.3 million , or 9% , for the year ended December 31, 2019 , as compared to the same period in 2018 , primarily due to an increase in stock-based compensation expense.

General and administrative expense increased $17.2 million, or 13%, during the year ended December 31, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $0.7 million to general and administrative expense during the year ended December 31, 2020, as compared to the same period in 2019.

• General and administrative expenses for the year ended December 31, 2020, included $39.3 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

General and administrative expense for the year ended December 31, 2019, included $24.4 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 $0.7 million decrease in general and administrative expenses during the year ended December 31, 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 increased $2.2 million, or 2%, for the year ended December 31, 2020, as compared to the same period in 2019.

• The increase was primarily due to higher professional and other fees of $5.6 million, partially offset by lower travel and entertainment expenses and personnel and related expenses of $2.0 million and $1.4 million, respectively.

Depreciation and Amortization

Depreciation and amortization increased $26.9 million , or 32% , during the year ended December 31, 2019 , as compared to the same period in 2018 , of which $20.8 million , or 25% , was due to the acquisition of Speedpay.

Depreciation and amortization was $1.0 million lower for the year ended December 31, 2019 , as compared to the same period in 2018 , 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 $7.2 million , or 9% , for the year ended December 31, 2019 , as compared to the same period in 2018 , due to higher amortization of acquired intangible assets and internal-use software.

Depreciation and amortization increased $20.3 million, or 18%, during the year ended December 31, 2020, as compared to the same period in 2019.

• Speedpay contributed an incremental $11.9 million of depreciation and amortization expense during the year ended December 31, 2020, as compared to the same period in 2019.

• The impact of foreign currencies was not significant for depreciation and amortization expense during the year ended December 31, 2020, as compared to the same period in 2019.

• Adjusted for the impact of incremental Speedpay expense, depreciation and amortization increased $8.4 million, or 8%, for the year ended December 31, 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 year ended December 31, 2019 , increased $22.5 million , or 54% , as compared to the same period in 2018 , primarily due to higher comparative debt balances.

Interest expense for the year ended December 31, 2020, decreased $7.4 million, or 12%, as compared to the same period in 2019, primarily due to lower interest rates, partially offset by higher comparative debt balances.

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 year ended December 31, 2019 , increased $0.8 million , or 7% , as compared to the same period in 2018 .

Other, net consists of foreign currency gain or loss.

Foreign currency gain for the year ended December 31, 2019 , was $0.5 million and foreign currency loss for the year ended December 31, 2018 , was $3.7 million .

Interest income for the year ended December 31, 2020, decreased $0.3 million, or 3%, as compared to the same period in 2019.

Other, net is primarily comprised of foreign currency transaction gains and losses.

Other, net was $1.1 million of expense for the year ended December 31, 2020, and $0.5 million of income for the year ended December 31, 2019.

The effective tax rates for the years ended December 31, 2020 and 2019, were approximately 26% and 7%, respectively.

Our effective tax rates vary from our federal statutory rates due to operating in multiple foreign countries where we apply foreign tax laws and rates which differ from those we apply to the income generated from our domestic operations.

Of the foreign jurisdictions

in which we operate, our December 31, 2019 , effective rate was most impacted by our operations in Ireland, Luxembourg, and the United Kingdom, and our December 31, 2018 , effective tax rate was most impacted by our operations in Ireland and Luxembourg.

Of the foreign jurisdictions in which we operate, our December 31, 2020, effective rate was most impacted by our operations in Ireland, Mexico, Singapore, and the United Kingdom, and our December 31, 2019, effective tax rate was most impacted by our operations in Ireland, Luxembourg, and the United Kingdom.

Refer to Note 11, Income Taxes , to our Notes to Consolidated Financial Statements in Part IV, Item 15 of this Form 10-K for additional information.

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Segment Results

We report financial performance based on our segments, ACI On Premise and ACI On Demand, and analyze Segment Adjusted EBITDA as a measure of segment profitability.

Our interim Chief Executive Officer is also our chief operating decision maker ("CODM").

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 corporate operations.

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

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.

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.

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.

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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 (in thousands):

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

Years Ended December 31,

ACI On Premise

ACI On Demand

$ 769,180 $ 678,960

ACI On Premise

525,142 579,334

Total revenue

$ 1,294,322 $ 1,258,294

Segment Adjusted EBITDA

ACI On Premise

ACI On Demand

$ 149,610 $ 66,501

ACI On Premise

290,310 321,305

Depreciation and amortization

(140,316) (122,569)

Stock-based compensation expense

(29,602) (36,763)

Corporate and unallocated expenses

(125,258) (104,718)

Interest, net

(45,002) (52,066)

Income before income taxes $ 98,626 $ 72,210

Depreciation and amortization

ACI On Premise

ACI On Demand

$ 40,594 $ 34,395

ACI On Premise

13,207 11,992

86,515 76,182

Total depreciation and amortization

$ 140,316 $ 122,569

Stock-based compensation expense

ACI On Premise

ACI On Demand

$ 8,852 $ 7,995

ACI On Premise

Corporate and other

11,878 21,117

Total stock-based compensation expense

ACI On Premise Segment Adjusted EBITDA decreased $2.6 million for the year ended December 31, 2019 , compared to the same period in 2018 , primarily due to a $5.2 million increase in cash operating expense, partially offset by a $2.6 million increase in revenue.

$ 29,602 $ 36,763

ACI On Demand Segment Adjusted EBITDA increased $83.1 million for the year ended December 31, 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 $8.1 million, primarily due to a $18.3 million increase in revenue, partially offset by a $10.2 million increase in cash operating expense.

Excluding the impact of the acquisition of Speedpay, ACI On Demand Segment Adjusted EBITDA increased $53.1 million, primarily due to a $86.2 million decrease in cash operating expense, partially offset by a $33.1 million decrease in revenue.

ACI On Premise Segment Adjusted EBITDA decreased $31.0 million for the year ended December 31, 2020, compared to the same period in 2019, primarily due to a $54.2 million decrease in revenue, partially offset by $23.2 million decrease in cash operating expense.

Prior Year Results

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We believe these needs will be satisfied using cash flow generated by our operations, 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

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Cash and cash equivalents

$ 165,374 $ 121,398

Availability under revolving credit facility

443,500 261,000

Total liquidity

The decrease in total liquidity is primarily attributable to $239.0 million of outstanding revolving credit facility borrowings and $48.0 million of payments to purchase property and equipment and software and distribution rights, partially offset by positive operating cash flows.

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

$ 608,874 $ 382,398

The increase in total liquidity is primarily attributable to positive operating cash flows of $336.3 million, partially offset by $46.6 million of payments to purchase property and equipment and software and distribution rights, $39.0 million of repayments on the Term Loans and $28.9 million of payments related to stock repurchases.

We also repaid a net $184.0 million on the Revolving Credit Facility.

The Company and ACI Payments, Inc., a wholly owned subsidiary, maintain a $100.0 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 December 31, 2019 , $138.5 million was available.

As of December 31, 2020, the full $100.0 million was available.

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

As of December 31, 2019 , we had $121.4 million in cash and cash equivalents, of which $49.2 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 pay foreign and U.S.

As of December 31, 2020, we had $165.4 million of cash and cash equivalents, of which $69.9 million was held by our foreign subsidiaries.

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

state income taxes to repatriate these funds.

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Operating activities

$ 336,302 $ 137,649

Investing activities

(30,699) (830,481)

Financing activities

(261,570) 667,223

Cash Flow from Operating Activities

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

Cash flows provided by operating activities were $46.3 million lower for the year ended December 31, 2019 , compared to the same period in 2018 , due to the timing of working capital.

Cash flows provided by operating activities were $198.7 million higher for the year ended December 31, 2020, compared to the same period in 2019, due to higher net income and 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 Flow from Investing Activities

During the year ended December 31, 2020, we used $46.6 million to purchase software, property, and equipment, as compared to $48.0 million during the same period in 2019.

During the year ended December 31, 2019, we paid $753.9 million, net of $0.1 million in cash acquired, to acquire Speedpay.

We also used cash of $18.5 million to invest in a payment technology and services company in India and $7.0 million to acquire the technology assets of RevChip, LLC and TranSend Integrated Technologies Inc.

In addition, we used cash of $48.0 million to purchase software, property and equipment, as compared to $43.9 million during the same period in 2018 .

Cash Flow from Financing Activities

Net cash flows provided by financing activities for the year ended December 31, 2019 , were $667.2 million , as compared to net cash flows used by financing activities of $57.7 million during the same period in 2018 .

During 2019 , we received proceeds of $500.0 million from our Delayed Draw Term Loan and $280.0 million from our Revolving Credit Facility to fund our purchase

of Speedpay and stock repurchases, and we repaid $28.9 million on the Initial Term Loan and $41.0 million on the Revolving Credit Facility.

In addition, we received proceeds of $16.6 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended, and used $4.0 million for the repurchase of stock-based compensation awards for tax withholdings.

During 2019 , we also used $35.6 million to repurchase common stock.

During 2018 , we received proceeds of $400.0 million from the issuance of the 2026 Notes.

We used $300.0 million of the proceeds to redeem, in full, our outstanding 6.375% Senior Notes due 2020 and repaid $109.3 million on the Initial Term Loan.

In addition, during 2018, we received proceeds of $22.8 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended, and used $2.6 million for the repurchase of restricted share awards ("RSAs") for tax withholdings.

During 2018 , we also used $54.5 million to repurchase common stock.

Net cash flows used by financing activities for the year ended December 31, 2020, were $261.6 million, as compared to net cash flows provided by financing activities of $667.2 million during the same period in 2019.

During 2020, we repaid a net $184.0 million on the Revolving Credit Facility and $39.0 million on the Term Loans.

In addition, we used $28.9 million to repurchase common stock and we received proceeds of $15.7 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended.

We also used $11.6 million for the repurchase of stock-based compensation awards for tax withholdings.

During 2019, we received proceeds of $500.0 million from our Delayed Draw Term Loan and $280.0 million from our Revolving Credit Facility to fund our purchase of Speedpay and stock repurchases, and we repaid $41.0 million on the Revolving Credit Facility and $28.9 million on the Initial Term Loan.

In addition, we used $35.6 million to repurchase common stock, and we received proceeds of $16.6 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended.

We also used $4.0 million for the repurchase of stock-based compensation awards for tax withholdings.

Prior Year Results

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The Credit Agreement consists of (a) a five-year $500.0 million senior secured revolving credit facility (the “Revolving Credit Facility”), (b) a five-year $279.0 million senior secured term loan facility (the “Initial Term Loan”) and (c) a five-year $500.0 million senior secured term loan facility (the "Delayed Draw Term Loan", together with the Initial Term Loan, the "Term Loans", and together with the Initial Term Loan and the Revolving Credit Facility, the “Credit Facility”).

As of December 31, 2019 , we had $239.0 million and $756.1 million outstanding under our Revolving Credit Facility and Term Loans, respectively, with up to $261.0 million of unused borrowings under the Revolving Credit Facility.

On August 12, 2020, we entered a standby letter of credit agreement (the “Letter of Credit”), under the terms of the Credit Agreement, for $1.5 million.

The Letter of Credit expires on July 31, 2021, with automatic renewal for twelve month periods thereafter.

The Letter of Credit reduces the maximum available borrowings under our Revolving Credit Facility to $498.5 million.

Upon expiration of the Letter of Credit, maximum borrowings will return to $500.0 million.

As of December 31, 2020, we had $55.0 million and $717.1 million outstanding under our Revolving Credit Facility and Term Loans, respectively, with up to $443.5 million of unused borrowings under the Revolving Credit Facility, as amended, and up to $1.5 million of unused borrowings under the Letter of Credit agreement.

As of December 31, 2020, and at all times during the year, we were in compliance with our debt covenants.

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Operating lease obligations $ 59,677 $ 15,116 $ 23,427 $ 9,561 $ 11,573

Term loans 717,110 38,950 120,337 557,823 —

Term loans interest (1) 46,198 15,081 27,160 3,957 —

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Revolving credit facility interest (2) 3,840 1,182 2,363 295 —

Senior notes 400,000 — — — 400,000

Senior notes interest (3) 138,000 23,000 46,000 46,000 23,000

Financed internal-use software (4) 7,847 5,660 2,187 — —

$ 1,427,672 $ 98,989 $ 221,474 $ 672,636 $ 434,573

(1) Based on the Term Loans debt outstanding and interest rate in effect at December 31, 2020, of 2.15%.

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(3) Based on 2026 Notes issued of $400.0 million with an annual interest rate of 5.750%.

During the year ended December 31, 2019 , we financed certain multi-year license agreements for internal-use software for $10.4 million with annual payments through April 1, 2022 .

As of December 31, 2019 , $13.8 million is outstanding under these and other agreements previously entered into, of which $6.0 million and $7.8 million is included in other current liabilities and other noncurrent liabilities, respectively, in our Consolidated Balance Sheet in Part IV, Item 15 of this Form 10-K as of December 31, 2019 .

(4) As of December 31, 2020, $7.8 million is outstanding under certain multi-year license agreements for internal-use software, with $5.6 million and $2.2 million included in other current liabilities and other noncurrent liabilities, respectively, in our Consolidated Balance Sheet in Part IV, Item 15 of this Form 10-K as of December 31, 2020.

We are unable to reasonably estimate the ultimate amount or timing of settlement of our reserves for income taxes under ASC 740, Income Taxes .

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Revenue Recognition

In accordance with ASC 606, revenue is recognized upon transfer of control of promised products and/or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.

The Company’s software license arrangements provide the customer with the right to use functional intellectual property for the duration of the contract term.

Implementation, support, and other services are typically considered distinct performance obligations when sold with a software license unless these services are determined to significantly modify the software.

Significant judgment is required to determine the stand-alone selling price (“SSP”) for each performance obligation, the amount allocated to each performance obligation and whether it depicts the amount that the Company expects to receive in exchange for the related product and/or service.

As the selling prices of the Company’s software licenses are highly variable, the Company estimates SSP of its software licenses using the residual approach when the software license is sold with other services and observable SSPs exist for the other services.

The Company uses a range of amounts to estimate SSP for maintenance and services.

In accordance with ASC 606, Revenue From Contracts with Customers, revenue is recognized upon transfer of control of promised products and/or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those products and services.

Our software license arrangements provide the customer with the right to use functional intellectual property for the duration of the contract term.

Implementation, support, and other services are typically considered distinct performance obligations when sold with a software license.

Significant judgment is required to determine the stand-alone selling price (“SSP”) for each performance obligation, the amount allocated to each performance obligation and whether it depicts the amount that we expect to be entitled to receive in exchange for the related product and/or service.

As the selling prices of our software licenses are highly variable, we estimate SSP of our software licenses using the residual approach when the software license is sold with other services and observable SSPs exist for the other services.

We use a range of amounts to estimate SSP for maintenance and services.

These ranges are based on stand-alone sales and vary based on the type of service and geographic region.

If the SSP of a performance obligation is not directly observable, the Company will maximize observable inputs to determine its SSP.

If the SSP of a performance obligation is not directly observable, we will maximize observable inputs to determine its SSP.

When a software license arrangement contains payment terms that are extended beyond one year, a significant financing component may exist.

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(1) whether the financing component in a software license agreement is significant and, if so, (2) the discount rate used in calculating the significant financing component.

The Company assesses the significance of the financing component based on the ratio of license fees paid over time to total license fees.

We assess the significance of the financing component based on the ratio of license fees paid over time to total license fees.

If determined to be significant, the financing component is calculated using a rate that discounts the license fees to the cash selling price.

The Company’s SaaS-based and PaaS-based arrangements represent a single promise to provide continuous access to its software solutions and their processing capabilities in the form of a service through one of the Company’s data centers.

These arrangements may include fixed and/or variable consideration.

Fixed consideration is recognized over the term of the arrangement and variable consideration, which is a function of transaction volume or another usage-based measure, generally meets the direct allocation method and revenue is recognized as the usage occurs.

The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the creditworthiness of the customer, economic conditions in the customer’s industry and geographic location, and general economic conditions.

Our SaaS-based and PaaS-based arrangements represent a single promise to provide continuous access to its software solutions and their processing capabilities in the form of a service through one of our data centers.

These arrangements may include fixed

and/or variable consideration.

Fixed consideration is recognized over the term of the arrangement and variable consideration, which is a function of transaction volume or another usage-based measure, generally meets the allocation objective and revenue is recognized as the usage occurs.

We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the creditworthiness of the customer, economic conditions in the customer’s industry and geographic location, and general economic conditions.

Certain of our arrangements are through unrelated distributors or sales agents.

For software license arrangements in which the Company acts as a distributor of another company’s product, and in certain circumstances, modifies or enhances the product, revenues are recorded on a gross basis.

These include arrangements in which the Company takes control of the products and is responsible for providing the product or service.

For software license arrangements in which the Company acts as a sales agent for another company’s product, revenues are recorded on a net basis.

For software license arrangements in which we act as a distributor of another company’s product, and in certain circumstances, modify or enhance the product, revenues are recorded on a gross basis.

These include arrangements in which we take control of the products and are responsible for providing the product or service.

For software license arrangements in which we act as a sales agent for another company’s product, revenues are recorded on a net basis.

Judgment is required in evaluating the facts and circumstances of our relationship with the distributor or sales agent as well as our operating history and practices that can impact the timing of revenue recognition related to these arrangements.

For software license arrangements in which the Company utilizes a third-party distributor or sales agent, the Company recognizes revenue upon transfer of control of the software license(s) to the third-party distributor or sales agent.

We may execute more than one contract or agreement with a single customer.

For software license arrangements in which we utilize a third-party distributor or sales agent, we recognize revenue upon transfer of control of the software license(s) to the third-party distributor or sales agent.

We may execute more than one contract or agreement with a single customer at or near the same time.

The separate contracts or agreements may be viewed as one combined arrangement or separate agreements for revenue recognition purposes.

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Any resulting impairment loss could have an impact on our results of operations.

Other intangible assets are amortized using the straight-line method over periods ranging from three years to 20 years.

As of December 31, 2019 and 2018 , our goodwill was $1.3 billion and $0.9 billion , respectively.

Other intangible assets are amortized using the straight-line method over periods ranging from four to 20 years.

As of December 31, 2020 and 2019, our goodwill was $1.3 billion.

In accordance with ASC 350, Intangibles – Goodwill and Other, we assess goodwill for impairment annually during the fourth quarter of our fiscal year using October 1 balances, or when there is evidence that events or changes in circumstances indicate that the carrying amount of the asset may not be recovered.

We evaluate goodwill at the reporting unit level and have identified our reportable segments, ACI On Premise and ACI On Demand, as our reporting units.

Recoverability of goodwill is measured using a discounted cash flow model incorporating discount rates commensurate with the risks involved.

Use of a discounted cash flow model is common practice in impairment testing in the absence of available transactional market evidence to determine the fair value.

We evaluate goodwill at the reporting unit level and have identified our reportable segments, ACI On Demand and ACI On Premise, as our reporting units.

Recoverability of goodwill is measured using a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved.

Use of a discounted cash flow valuation model is common practice in impairment testing in the absence of available transactional market evidence to determine the fair value.

The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, cash flow projections, and terminal value rates.

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If the calculated fair value is less than the current carrying value, impairment of the reporting unit may exist.

The implied fair value of goodwill is determined in a manner similar to how goodwill is calculated in a business combination.

implied fair value of goodwill is determined in a manner similar to how goodwill is calculated in a business combination.

If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment.

If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded to write down the carrying value.

If the carrying value of goodwill assigned to the reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded to write down the carrying value.

The calculated fair value substantially exceeds the current carrying value for all reporting units.

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Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed.

While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.

While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, estimates are inherently uncertain and subject to refinement.

As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.

Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships, future customer attrition rates, covenants not to compete and acquired developed technologies;

Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships, covenants not to compete, and acquired developed technologies;

brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in our product portfolio;

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Stock-Based Compensation

On March 23, 2016, our board approved the 2016 Equity and Performance Incentive Plan (the “2016 Incentive Plan”).

The 2016 Incentive Plan is intended to meet our objective of balancing stockholder concerns about dilution with the need to provide appropriate incentives to achieve Company performance objectives.

On June 9, 2020, upon recommendation of our board, stockholders approved the ACI Worldwide, Inc.

2020 Equity and Incentive Compensation Plan (the “2020 Plan”).

The 2020 Plan authorizes the board to provide for equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents, and certain other awards, including those denominated or payable in, or otherwise based on, our common stock ("awards").

The purpose of the 2020 Plan is to provide incentives and rewards for service and/or performance by providing awards to non-employee directors, officers, other employees, and certain consultants and other service providers of us and our subsidiaries.

Following the approval of the 2020 Plan, the 2016 Incentive Plan was terminated.

Termination of the 2016 Incentive Plan did not affect any equity awards outstanding under the 2016 Incentive Plan.

On March 23, 2016, our board approved the 2016 Incentive Plan.

The 2016 Incentive Plan was intended to meet our objective of balancing stockholder concerns about dilution with the need to provide appropriate incentives to achieve Company performance objectives.

The 2016 Incentive Plan was adopted by the stockholders on June 14, 2016.

Following the adoption of the 2016 Incentive Plan, the 2005 Incentive Plan was terminated.

Following the adoption of the 2016 Incentive Plan, the 2005 Equity and Performance Incentive Plan, as amended (the “2005 Incentive Plan”) was terminated.

Termination of the 2005 Incentive Plan did not affect any equity awards outstanding under the 2005 Incentive Plan.

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If any assumptions used in the Black-Scholes option-pricing model change significantly, stock-based compensation expense may differ materially for future awards from that recorded for existing awards.

Supplemental stock options granted pursuant to the 2005 Incentive Plan were granted at an exercise price not less than the market value per share of our common stock on the date of grant.

These options vest, if at all, based upon (i) tranche one – any time after the third anniversary date if the stock has traded at 133% of the exercise price for at least 20 consecutive trading days, (ii) tranche two – any time after the fourth anniversary date if the stock has traded at 167% of the exercise price for at least 20 consecutive trading days, and (iii) tranche three – any time after the fifth anniversary date if the stock has traded at 200% of the exercise price for at least 20 consecutive trading days.

The employees must remain employed with us as of the anniversary date for supplemental stock options to vest.

The exercise price of these options is the closing market price on the date the awards were granted.

To determine the grant date fair value of the supplemental stock options, a Monte Carlo simulation model was used.

Long-term incentive program performance share awards (“LTIP performance shares”) are earned, if at all, based on the achievement over a specified period of performance goals related to certain performance metrics.

We estimate the fair value of LTIP performance shares based upon the market price of our stock on the date of grant.

On a quarterly basis, management evaluates the probability that the threshold performance goals will be achieved, if at all, and the anticipated level of attainment to determine the amount of compensation expense to record in the consolidated financial statements.

Restricted share awards (“RSAs”) generally have requisite service periods of three years and vest in increments of 33% on the anniversary of the grant dates.

Under each arrangement, shares are issued without direct cost to the employee.

We estimate the fair value of RSAs based upon the market price of our stock on the date of grant.

The RSA grants provide for the payment of dividends on our common stock, if any, to the participant during the requisite service period, and the participant has voting rights for each share of common stock.

Total shareholder return awards (“TSRs”) are performance shares that are earned, if at all, based upon our total shareholder return as compared to a group of peer companies over a three-year performance period.

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Restricted share unit awards (“RSUs”) generally have requisite service periods of three years and vest in increments of 33% on the anniversary of the grant dates.

Under each arrangement, RSUs are issued without direct cost to the employee on the vesting date.

Under each arrangement, RSUs are issued without direct cost to the employee on the vesting

We estimate the fair value of RSUs based upon the market price of our stock on the date of grant.

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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-K

Item 7. Management’s Discussion and Analysis