What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-05 · 174 added, 336 removed, 208 unchanged (71% of the section changed)

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The following discussion should be read together with our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and with our financial statements and related notes contained in this Form 10-Q.

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

Results for the three months ended March 31, 2021, 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.

These measures may remain in place for a significant period of time, or may be reinstituted after being temporarily lifted, and could 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).

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

We have $472.3 million of available liquidity as of September 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 through the third quarter of 2020, primarily within our Merchants and Billers customer base of our ACI On Demand segment.

We have $642.9 million of available liquidity as of March 31, 2021, consisting of cash on hand and availability under our revolving credit facility.

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 our business.

We began to see the impacts of COVID-19 on certain customer transaction volumes in late March 2020 and continued to see changes into 2021, primarily within the Merchants and Billers 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.

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

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

ACI 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.

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

We have also experienced atypical fluctuations 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, we cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on our 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 us to address the adverse impacts of COVID-19, there can be no assurance that any of the foregoing activities will be successful in mitigating or preventing significant adverse effects on the Company.

ACI 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;

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;

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.

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 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 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 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.

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 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.

Increasing digital payment transaction volumes.

The adoption of digital payments continues to accelerate, propelled by the digitization of cash, 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.

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.

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 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.

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.

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 was also appointed to serve as a member of ACI’s board of directors.

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 is comprised of:

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

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

The following table sets forth our 60-month backlog estimate, by reportable segment, as of March 31, 2021, and December 31, 2020 (in millions).

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

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

ACI On Demand $ 3,868 $ 3,863 $ 3,781 $ 3,855

ACI On Premise 2,041 1,976 1,933 1,977

March 31, 2021 December 31, 2020

Banks $ 2,117 $ 2,167

Merchants 811 808

Billers 3,016 3,064

Total $ 5,944 $ 6,039

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

March 31, 2021 December 31, 2020

Committed $ 2,308 $ 2,447

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

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

Three Months Ended September 30,

Three Month Period Ended March 31, 2021, Compared to the Three Month Period Ended March 31, 2020

Three Months Ended March 31,

Amount % of Total

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Total operating expenses 281,496 99 % (21,272) (7) % 302,768 103 %

Operating income 31,182 9 % (24,136) (44) % 55,318 15 %

Operating income (loss) 3,690 1 % 14,973 (133) % (11,283) (3) %

Other income (expense):

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Total other income (expense) (10,003) (3) % 14,026 (58) % (24,029) (8) %

Income before income taxes 22,540 6 % (14,410) (39) % 36,950 10 %

Income tax expense 6,674 2 % 1,538 30 % 5,136 1 %

Net income $ 15,866 4 % $ (15,948) (50) % $ 31,814 9 %

Total revenue for the three months ended September 30, 2020, decreased $39.0 million, or 11%, as compared to the same period in 2019.

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

dollar resulted in a $0.8 million increase in total revenue during the three months ended September 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, total revenue for the three months ended September 30, 2020, decreased $39.8 million, or 11%, compared to the same period in 2019.

Loss before income taxes (6,313) (2) % 28,999 (82) % (35,312) (11) %

Income tax benefit (4,368) (2) % 6,517 (60) % (10,885) (4) %

Net loss $ (1,945) — % $ 22,482 (92) % $ (24,427) (7) %

Total revenue for the three months ended March 31, 2021, decreased $6.3 million, or 2%, as compared to the same period in 2020.

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

dollar resulted in a $3.1 million increase in total revenue during the three months ended March 31, 2021, as compared to the same period in 2020.

• Adjusted for the impact of foreign currency, total revenue for the three months ended March 31, 2021, decreased $9.4 million, or 3%, as compared to the same period in 2020.

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

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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 decreased $2.6 million, or 1%, during the three months ended September 30, 2020, as compared to the same period in 2019.

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

dollar resulted in a $0.5 million increase in SaaS and PaaS revenue during the three months ended September 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, SaaS and PaaS revenue for the three months ended September 30, 2020, decreased $3.1 million, or 2%, compared to the same period in 2019.

• The decrease was primarily due to a modest decline in transaction volumes within the Company's Biller customer base as a result of the impact of COVID-19.

SaaS and PaaS revenue increased $2.8 million, or 1%, during the three months ended March 31, 2021, as compared to the same period in 2020.

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

dollar resulted in a $1.1 million increase in SaaS and PaaS revenue during the three months ended March 31, 2021, as compared to the same period in 2020.

• Adjusted for the impact of foreign currency, SaaS and PaaS revenue for the three months ended March 31, 2021, increased $1.7 million, or 1%, as compared to the same period in 2020.

License Revenue

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

License revenue decreased $35.3 million, or 38%, during the three months ended September 30, 2020, as compared to the same period in 2019.

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

dollar resulted in a $0.4 million increase in license revenue during the three months ended September 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, license revenue for the three months ended September 30, 2020, decreased $35.7 million, or 39%, compared to the same period in 2019.

• The decrease was primarily driven the timing and relative size of license and capacity events during the three months ended September 30, 2020, as compared to the same period in 2019.

License revenue decreased $6.9 million, or 25%, during the three months ended March 31, 2021, as compared to the same period in 2020.

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

dollar resulted in a $0.4 million increase in license revenue during the three months ended March 31, 2021, as compared to the same period in 2020.

• Adjusted for the impact of foreign currency, license revenue for the three months ended March 31, 2021, decreased $7.4 million, or 26%, as compared to the same period in 2020.

• The decrease was primarily driven by the timing and relative size of license and capacity events during the three months ended March 31, 2021, as compared to the same period in 2020.

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 $0.4 million, or 1%, during the three months ended September 30, 2020, as compared to the same period in 2019.

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

dollar resulted in a $0.2 million decrease in maintenance revenue during the three months ended September 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, maintenance revenue for the three months ended September 30, 2020, increased $0.6 million, or 1%, compared to the same period in 2019.

Maintenance revenue decreased $0.9 million, or 2%, during the three months ended March 31, 2021, as compared to the same period in 2020.

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

dollar resulted in a $1.2 million increase in maintenance revenue during the three months ended March 31, 2021, as compared to the same period in 2020.

• Adjusted for the impact of foreign currency, maintenance revenue for the three months ended March 31, 2021, decreased $2.1 million, or 4%, as compared to the same period in 2020.

Services Revenue

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

Services revenue decreased $1.6 million, or 9%, during the three months ended September 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies was insignificant for services revenue during the three months ended September 30, 2020, as 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 September 30, 2020, as compared to the same period in 2019.

Services revenue decreased $1.3 million, or 7%, during the three months ended March 31, 2021, as compared to the same period in 2020.

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

dollar resulted in a $0.4 million increase in services revenue during the three months ended March 31, 2021, as compared to the same period in 2020.

• Adjusted for the impact of foreign currency, services revenue for the three months ended March 31, 2021, decreased $1.6 million, or 9%, as compared to the same period in 2020.

Operating Expenses

Total operating expenses for the three months ended September 30, 2020, decreased $14.9 million, or 5%, as compared to the same period in 2019.

• Total operating expenses for the three months ended September 30, 2020, included $12.3 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

Total operating expenses for the three months ended September 30, 2019, included $0.9 million of significant transaction-related expenses associated with the acquisition of Speedpay.

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

dollar resulted in a $0.3 million decrease in total operating expenses during the three months ended September 30, 2020, compared to the same period in 2019.

• Adjusted for the impact of significant transaction-related expenses and foreign currency, total operating expenses for the three months ended September 30, 2020, decreased $25.9 million, or 9%, compared to the same period in 2019.

Total operating expenses for the three months ended March 31, 2021, decreased $21.3 million, or 7%, as compared to the same period in 2020.

• Total operating expenses for the three months ended March 31, 2021, included $1.2 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

Total operating expenses for the three months ended March 31, 2020, included $8.5 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

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

dollar resulted in a $3.4 million increase in total operating expenses during the three months ended March 31, 2021, compared to the same period in 2020.

• Adjusted for the impact of significant transaction-related expenses and foreign currency, total operating expenses for the three months ended March 31, 2021, decreased $17.3 million, or 6%, compared to the same period in 2020.

Cost of Revenue

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

Cost of revenue decreased $15.6 million, or 9%, during the three months ended September 30, 2020, compared to the same period in 2019.

• Cost of revenue for the three months ended September 30, 2020, included $1.2 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

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

dollar resulted in a $0.2 million decrease in cost of revenue during the three months ended September 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of significant transaction-related expenses and foreign currency, cost of revenue decreased $16.6 million, or 10%, for the three months ended September 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 travel and entertainment expenses of $10.7 million, $4.1 million, and $1.2 million, respectively.

Cost of revenue decreased $6.4 million, or 4%, during the three months ended March 31, 2021, compared to the same period in 2020.

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

dollar resulted in a $1.3 million increase in cost of revenue during the three months ended March 31, 2021, as compared to the same period in 2020.

• Adjusted for the impact of foreign currency, cost of revenue decreased $7.7 million, or 5%, for the three months ended March 31, 2021, as compared to the same period in 2020.

• The decrease was primarily due to lower personnel and related expenses, payment card interchange and processing fees, and travel and entertainment expenses of $4.4 million, $1.5 million, and $1.0 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 decreased $3.0 million, or 8%, during the three months ended September 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies was insignificant for R&D expense during the three months ended September 30, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower personnel and related expenses of $3.0 million.

R&D expense decreased $4.5 million, or 12%, during the three months ended March 31, 2021, as compared to the same period in 2020.

• R&D expense for the three months ended March 31, 2021, included $0.4 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

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

dollar resulted in a $0.6 million increase in R&D expense during the three months ended March 31, 2021, as compared to the same period in 2020.

• Adjusted for the impact of significant transaction-related expenses and foreign currency, R&D expense decreased $5.5 million, or 14%, for the three months ended March 31, 2021, as compared to the same period in 2020.

• The decrease was primarily due to lower personnel and related expenses and professional fees of $3.6 million and $1.3 million, respectively.

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 decreased $8.3 million, or 27%, during the three months ended September 30, 2020, as compared to the same period in 2019.

• The impact of foreign currencies was insignificant for selling and marketing expense during the three months ended September 30, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower commissions, professional fees, and travel and entertainment expenses of $3.4 million, $2.3 million, and $1.8 million, respectively.

Selling and marketing expense decreased $1.9 million, or 6%, during the three months ended March 31, 2021, as compared to the same period in 2020.

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

dollar resulted in a $0.6 million increase in selling and marketing expense during the three months ended March 31, 2021, as compared to the same period in 2020.

• Adjusted for the impact of foreign currency, selling and marketing expense decreased $2.5 million, or 8%, for the three months ended March 31, 2021, as compared to the same period in 2020.

• The decrease was primarily due to lower travel and entertainment expenses and personnel and related expenses of $1.7 million and $0.5 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 $9.7 million, or 36%, during the three months ended September 30, 2020, as compared to the same period in 2019.

• General and administrative expenses for the three months ended September 30, 2020, included $10.8 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

General and administrative expenses for the three months ended September 30, 2019, included $0.7 million of significant transaction-related expenses associated with the acquisition of Speedpay.

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

dollar resulted in a $0.2 million decrease in general and administrative expense during the three months ended September 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of significant transaction-related expenses and foreign currency, general and administrative expense decreased $0.2 million, or 1%, for the three months ended September 30, 2020, as compared to the same period in 2019, primarily due to a decrease in travel and entertainment expenses.

General and administrative expense decreased $8.2 million, or 23%, during the three months ended March 31, 2021, as compared to the same period in 2020.

• General and administrative expenses for the three months ended March 31, 2021, included $0.8 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

General and administrative expenses for the three months ended March 31, 2020, included $8.5 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

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

dollar resulted in a $0.5 million increase in general and administrative expense during the three months ended March 31, 2021, as compared to the same period in 2020.

• Adjusted for the impact of significant transaction-related expenses and foreign currency, general and administrative expense decreased $0.9 million, or 3%, for the three months ended March 31, 2021, as compared to the same period in 2020, primarily due to a decrease in personnel and related expenses of $3.6 million, partially offset by an increase in professional fees of $2.7 million.

Depreciation and Amortization

Depreciation and amortization increased $2.2 million, or 7%, during the three months ended September 30, 2020, as compared to the same period in 2019.

Depreciation and amortization decreased $0.3 million, or 1%, during the three months ended March 31, 2021, as compared to the same period in 2020.

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

dollar resulted in a $0.1 million increase in depreciation and amortization during the three months ended September 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, depreciation and amortization increased $2.1 million, or 7%, for the three months ended September 30, 2020, as compared to the same period in 2019, primarily due to additional amortization of internal-use software in our On Demand business.

dollar resulted in a $0.4 million increase in depreciation and amortization during the three months ended March 31, 2021, as compared to the same period in 2020.

• Adjusted for the impact of foreign currency, depreciation and amortization decreased $0.7 million, or 2%, for the three months ended March 31, 2021, as compared to the same period in 2020.

Other Income and Expense

Interest expense for the three months ended September 30, 2020, decreased $6.1 million, or 32%, as compared to the same period in 2019, primarily due to lower comparative debt balances and lower interest rates.

Interest expense for the three months ended March 31, 2021, decreased $5.7 million, or 33%, as compared to the same period in 2020, primarily due to lower 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 three months ended September 30, 2020 decreased $0.1 million, or 2%, as compared to the same period in 2019.

Interest income for the three months ended March 31, 2021 was flat compared to the same period in 2020.

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

Other, net was $1.4 million of income and $2.4 million of expense for the three months ended September 30, 2020 and 2019, respectively.

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

RESULTS OF OPERATIONS

Nine Month Period Ended September 30, 2020, Compared to the Nine Month Period Ended September 30, 2019

Nine Months Ended September 30,

Amount % of Total

Revenue $ Change

vs 2019 % Change

vs 2019 Amount % of Total

Software as a service and platform as a service $ 563,892 62 % $ 89,884 19 % $ 474,008 55 %

License 135,038 15 % (30,639) (18) % 165,677 19 %

Maintenance 159,078 18 % (593) — % 159,671 19 %

Services 49,270 5 % (9,748) (17) % 59,018 7 %

Total revenues 907,278 100 % 48,904 6 % 858,374 100 %

Operating expenses:

Cost of revenue 471,762 52 % 27,413 6 % 444,349 52 %

Research and development 108,175 12 % (3,797) (3) % 111,972 13 %

Selling and marketing 76,692 8 % (16,117) (17) % 92,809 11 %

General and administrative 102,684 11 % (5,438) (5) % 108,122 13 %

Depreciation and amortization 98,928 11 % 19,149 24 % 79,779 9 %

Total operating expenses 858,241 94 % 21,210 3 % 837,031 98 %

Operating income 49,037 6 % 27,694 130 % 21,343 2 %

Other income (expense):

Interest expense (44,238) (5) % 1,686 (4) % (45,924) (5) %

Interest income 8,781 1 % (237) (3) % 9,018 1 %

Other, net (6,361) (1) % (3,482) 121 % (2,879) — %

Total other income (expense) (41,818) (5) % (2,033) 5 % (39,785) (4) %

Income (loss) before income taxes 7,219 1 % 25,661 (139) % (18,442) (2) %

Income tax expense (benefit) 1,705 — % 31,723 (106) % (30,018) (3) %

Net income $ 5,514 1 % $ (6,062) (52) % $ 11,576 1 %

Total revenue for the nine months ended September 30, 2020, increased $48.9 million, or 6%, as compared to the same period in 2019.

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

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

dollar resulted in a $4.4 million decrease in total revenue during the nine months ended September 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 nine months ended September 30, 2020, decreased $70.0 million, or 8%, compared to the same period in 2019.

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

SaaS and PaaS revenue increased $89.9 million, or 19%, during the nine months ended September 30, 2020, as compared to the same period in 2019.

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

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

dollar resulted in $0.2 million decrease in SaaS and PaaS revenue during the nine months ended September 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 nine months ended September 30, 2020, decreased $33.3 million, or 7%, compared to the same period in 2019.

• The decrease was primarily due to declines in transaction volumes within the Company's Biller customer base as a result of the impact of COVID-19 and declines in Digital Channels associated with customer attrition.

License Revenue

License revenue decreased $30.6 million, or 18%, during the nine months ended September 30, 2020, as compared to the same period in 2019.

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

dollar resulted in a $1.4 million decrease in license revenue during the nine months ended September 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, license revenue for the nine months ended September 30, 2020, decreased $29.2 million, or 18%, compared to the same period in 2019.

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

Maintenance Revenue

Maintenance revenue decreased $0.6 million during the nine months ended September 30, 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 maintenance revenue during the nine months ended September 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, maintenance revenue for the nine months ended September 30, 2020, increased $1.5 million, or 1%, compared to the same period in 2019.

Services Revenue

Services revenue decreased $9.7 million, or 17%, during the nine months ended September 30, 2020, as compared to the same period in 2019.

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

dollar resulted in a $0.7 million decrease in services revenue during the nine months ended September 30, 2020, as compared to the same period in 2019.

• Adjusted for the impact of foreign currency, services revenue for the nine months ended September 30, 2020, decreased $9.0 million, or 15%, compared to the same period in 2019.

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

Operating Expenses

Total operating expenses for the nine months ended September 30, 2020, increased $21.2 million, or 3%, as compared to the same period in 2019.

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

• Total operating expenses for the nine months ended September 30, 2020, included $25.8 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 nine months ended September 30, 2019, included $22.2 million of significant transaction-related expenses associated with the acquisition of Speedpay.

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

dollar resulted in a $6.1 million decrease in total operating expenses for the nine months ended September 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 nine months ended September 30, 2020, decreased $81.7 million, or 10%, compared to the same period in 2019.

Cost of Revenue

Cost of revenue increased $27.4 million, or 6%, during the nine months ended September 30, 2020, compared to the same period in 2019.

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

• Cost of revenue for the nine months ended September 30, 2020, included $3.4 million of significant transaction-related expenses associated with the acquisition of Speedpay and cost reduction strategies implemented during the period.

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

dollar resulted in a $2.4 million decrease in cost of revenue during the nine months ended September 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 $58.6 million, or 13%, for the nine months ended September 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, amortization of acquired software, and travel and entertainment expenses of $37.6 million, $15.6 million,$2.6 million, and $2.5 million, respectively.

Research and Development

R&D expense decreased $3.8 million, or 3%, during the nine months ended September 30, 2020, as compared to the same period in 2019.

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

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

dollar resulted in a $1.7 million decrease in R&D expense during the nine months ended September 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 $6.3 million, or 6%, for the nine months ended September 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 $16.1 million, or 17%, during the nine months ended September 30, 2020, as compared to the same period in 2019.

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

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

dollar resulted in a $1.2 million decrease in selling and marketing expense for the nine months ended September 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 $18.9 million, or 21%, for the nine months ended September 30, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower personnel and related expenses, commissions, professional fees, and travel and entertainment expenses of $6.6 million, $6.0 million, $4.4 million, and $1.9 million respectively.

General and Administrative

General and administrative expense decreased $5.4 million, or 5%, during the nine months ended September 30, 2020, as compared to the same period in 2019.

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

• General and administrative expenses for the nine months ended September 30, 2020 included $21.8 million of significant transaction-related expenses associated with cost reduction strategies implemented during the period.

General and administrative expense for the nine months ended September 30, 2019, included $21.8 million of significant transaction-related expenses associated with the acquisition of Speedpay.

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

dollar resulted in a $0.6 million decrease in general and administrative expenses during the nine months ended September 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 $5.5 million, or 6%, for the nine months ended September 30, 2020, as compared to the same period in 2019.

• The decrease was primarily due to lower personnel and related expenses and travel and entertainment expenses of $4.2 million and $1.3 million, respectively.

Depreciation and Amortization

Depreciation and amortization increased $19.1 million, or 24%, during the nine months ended September 30, 2020, as compared to the same period in 2019.

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

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

dollar resulted in a $0.2 million decrease in depreciation and amortization expense during the nine months ended September 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 $7.5 million, or 9%, for the nine months ended September 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 nine months ended September 30, 2020, decreased $1.7 million, or 4%, as compared to the same period in 2019, primarily due to lower interest rates, partially offset by higher comparative debt balances.

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

Other, net was $6.4 million and $2.9 million of expense for the nine months ended September 30, 2020 and 2019, respectively.

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

Other, net was $1.4 million and $9.8 million of expense for the three months ended March 31, 2021 and 2020, respectively.

See Note 10, 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”).

In January 2021, we made a change in organizational structure to align with our strategic direction.

As a result of this change, the Company reassessed its segment reporting structure due to changes in how the Company's chief operating decision maker ("CODM") assesses the Company's performance and allocates resources.

Beginning in the first quarter of 2021, we report financial performance based on our new segments, Banks, Merchants, and Billers, and analyze Segment Adjusted EBITDA as a measure of segment profitability.

Our Chief Executive Officer is also our 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.

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.

No operating segments have been aggregated to form the reportable segments.

ACI provides payment solutions to large and mid-size banks globally for retail banking, real time, digital, and other payment services.

These solutions transform banks’ complex payment environments to speed time to market, reduce costs, and deliver a consistent experience to customers across channels while enabling them to prevent and rapidly react to fraudulent activity.

In addition, they enable banks to meet the requirements of different real-time payments schemes and to quickly create differentiated products to meet consumer, business, and merchant demands.

ACI’s support of merchants globally includes Tier 1 and Tier 2 merchants, online-only merchants and the payment service providers, independent selling organizations, value-added resellers, and acquirers who service them.

These customers operate in a variety of verticals, including general merchandise, grocery, hospitality, dining, transportation, and others.

Our solutions provide merchants with a secure, omni-channel payments platform that gives them independence from third-party payment providers.

They also offer secure solutions to online-only merchants that provide consumers with a convenient and seamless way to shop.

Within the biller segment, ACI provides electronic bill presentment and payment (“EBPP”) services to companies operating in the consumer finance, insurance, healthcare, higher education, utility, government, and mortgage categories.

The solutions enable these customers to support a wide range of payment options and provide a convenient consumer payments experience that drives consumer loyalty and increases revenue.

Revenue is attributed to the reportable segments based upon the customer.

Allocated costs are generally marketing and sales related activities.

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.

Corporate and unallocated expenses includes global facilities and information technology costs and long-term product roadmap expenses in addition to corporate overhead costs that are not allocated to reportable segments.

The overhead costs relate to human resources, finance, legal, accounting, and merger and acquisition activity.

These costs along with depreciation and amortization and stock-based compensation 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 September 30, Nine Months Ended September 30,

2020 2019 2020 2019

ACI On Demand $ 190,369 $ 192,952 $ 563,892 $ 475,299

ACI On Premise 125,514 161,949 343,386 383,075

Three Months Ended March 31,

Banks $ 95,917 $ 105,821

Merchants 38,670 31,795

Billers 150,599 153,869

Total revenue $ 285,186 $ 291,485

Segment Adjusted EBITDA

ACI On Demand $ 33,204 $ 18,561 $ 89,396 $ 35,639

ACI On Premise 69,553 99,553 159,555 184,890

Banks $ 37,195 $ 42,436

Merchants 14,725 6,418

Billers 34,021 30,234

Depreciation and amortization (33,583) (33,822)

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Other, net (1,382) (9,758)

Income (loss) before income taxes $ 22,540 $ 36,950 $ 7,219 $ (18,442)

Depreciation and amortization

ACI On Demand $ 10,227 $ 9,059 $ 30,411 $ 25,110

ACI On Premise 3,312 2,963 9,849 9,012

Corporate 21,951 21,891 64,744 54,421

Total depreciation and amortization $ 35,490 $ 33,913 $ 105,004 $ 88,543

Stock-based compensation expense

ACI On Demand $ 2,255 $ 2,389 $ 6,554 $ 6,554

ACI On Premise 2,259 2,227 6,568 6,234

Corporate 3,547 4,755 9,821 17,540

Total stock-based compensation expense $ 8,061 $ 9,371 $ 22,943 $ 30,328

ACI On Demand Segment Adjusted EBITDA increased $14.6 million for the three months ended September 30, 2020, compared to the same period in 2019.

The increase was primarily due to a $17.2 million decrease in cash operating expense, partially offset by a $2.6 million decrease in revenue.

ACI On Demand Segment Adjusted EBITDA increased $53.8 million for the nine months ended September 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 $23.8 million, primarily due to a $58.5 million decrease in cash operating expense, partially offset by a $34.7 million decrease in revenue.

ACI On Premise Segment Adjusted EBITDA decreased $30.0 million for the three months ended September 30, 2020, compared to the same period in 2019, primarily due to a $6.4 million decrease in cash operating expense, partially offset by a $36.4 million decrease in revenue.

ACI On Premise Segment Adjusted EBITDA decreased $25.3 million for the nine months ended September 30, 2020, compared to the same period in 2019, primarily due to a $14.4 million decrease in cash operating expense, partially offset by a $39.7 million decrease in revenue.

Loss before income taxes $ (6,313) $ (35,312)

Banks Segment Adjusted EBITDA decreased $5.2 million for the three months ended March 31, 2021, compared to the same period in 2020, due to a $9.9 million decrease in revenue primarily related to a decrease in license revenues, partially offset by a $4.7 million decrease in cash operating expense primarily related to personnel and related expenses and travel and entertainment expenses.

Merchants Segment Adjusted EBITDA increased $8.3 million for the three months ended March 31, 2021, compared to the same period in 2020, due to a $6.9 million increase in revenue primarily in SaaS and PaaS revenues and a $1.4 million decrease cash operating expense primarily related to personnel and related expenses and travel and entertainment expenses.

Billers Segment Adjusted EBITDA increased $3.8 million for the three months ended March 31, 2021, compared to the same period in 2020, due to a $7.1 million decrease in cash operating expense for personnel and related expenses and payment card interchange and other processing fees, partially offset by a $3.3 million decrease in SaaS and PaaS revenues.

Liquidity and Capital Resources

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Cash and cash equivalents $ 184,364 $ 165,374

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Total liquidity $ 642,864 $ 608,874

The increase in total liquidity is primarily attributable to positive operating cash flows of $192.1 million, partially offset by $35.6 million of payments to purchase property and equipment and software and distribution rights, $29.2 million of repayments on the Term Loans and $28.9 million of payments related to stock repurchases.

We also repaid a net $79.0 million on the Revolving Credit Facility.

The increase in total liquidity is primarily attributable to positive operating cash flows of $70.1 million, partially offset by $12.4 million of payments to purchase property and equipment and software and distribution rights, $15.0 million of repayments on the Revolving Credit Facility, and $9.7 million of repayments on the Term Loans

The Company and ACI Payments, Inc., a wholly owned subsidiary, maintain a $75.0 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 September 30, 2020, the full $140.0 million was available.

As of March 31, 2021, the full $75.0 million was available.

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

As of September 30, 2020, we had $133.8 million of cash and cash equivalents, of which $59.9 million was held by our foreign subsidiaries.

As of March 31, 2021, we had $184.4 million of cash and cash equivalents, of which $90.7 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 September 30, 2020, only the earnings in our Indian foreign subsidiaries are indefinitely reinvested.

As of March 31, 2021, 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 September 30, 2020.

These outside basis differences could reverse through sales of the foreign subsidiaries, as well as various other events, none of which are considered probable as of March 31, 2021.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash provided by (used by):

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Cash Flows from Operating Activities

Net cash flows provided by operating activities during the nine months ended September 30, 2020, were $192.1 million as compared to $88.9 million during the same period in 2019.

Net cash flows provided by operating activities during the three months ended March 31, 2021, were $70.1 million as compared to $57.5 million during the same period in 2020.

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 $103.1 million higher for the nine months ended September 30, 2020, compared to the same period in 2019, primarily due to the incremental impact of Speedpay 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 provided by operating activities were $12.6 million higher for the three months ended March 31, 2021, compared to the same period in 2020, primarily due to higher cash earnings.

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

Cash Flows from Investing Activities

During the first nine months of 2020, we used cash of $35.6 million to purchase software, property, and equipment, as compared to $37.3 million during the same period in 2019.

During the first nine months of 2019, we paid $753.9 million, net of $0.1 million in cash acquired, to acquire Speedpay and used cash of $18.5 million to invest in a payment technology and services company in India.

During the first three months of 2021, we used cash of $12.4 million to purchase software, property, and equipment, as compared to $10.1 million during the same period in 2020.

Cash Flows from Financing Activities

Net cash flows used by financing activities for the nine months ended September 30, 2020, were $148.9 million as compared to net cash flows provided by financing activities of $695.7 million during the same period in 2019.

During the first nine months of 2020, we repaid a net $79.0 million on the Revolving Credit Facility and $29.2 million on the Term Loans.

Net cash flows used by financing activities for the three months ended March 31, 2021, were $38.7 million as compared to $60.8 million during the same period in 2020.

During the first three months of 2021, we repaid $15.0 million on the Revolving Credit Facility and $9.7 million on the Term Loans.

In addition, we used $14.2 million for the repurchase of stock-based compensation awards for tax withholdings.

We also received proceeds of $3.9 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended.

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

In addition, we used $28.9 million to repurchase common stock and $11.0 million for the repurchase of stock-based compensation awards for tax withholdings.

We also received proceeds of $1.3 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 nine months of 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 $19.2 million on the Initial Term Loan and $15.0 million on the Revolving Credit Facility.

In addition, we received proceeds of $9.3 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 $35.6 million to repurchase common stock and $2.8 million for the repurchase of stock-based compensation awards for tax withholdings.

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.

As of September 30, 2020, we had $160.0 million and $726.8 million outstanding under our Revolving Credit Facility and Term Loans, respectively, with up to $338.5 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.

The interest rate in effect for the Credit Facility as of September 30, 2020, was 2.40%.

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

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 March 31, 2021, we had $40.0 million and $707.4 million outstanding under our Revolving Credit Facility and Term Loans, respectively, with up to $458.5 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.

The interest rate in effect for the Credit Facility as of March 31, 2021, was 2.11%.

As of March 31, 2021, we also had $400.0 million outstanding for the 2026 Notes.

See Note 3, 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 nine months ended September 30, 2020.

There were no shares repurchased under the program during the three months ended March 31, 2021.

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

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

As of March 31, 2021, the maximum remaining amount authorized for purchase under the stock repurchase program was approximately $112.1 million.

See Note 6, 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 nine months ended September 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 September 30, 2020, is $30.1 million.

For the three months ended March 31, 2021, 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, 2020, other than as noted below.

Miami Facility Lease

During the three months ended March 31, 2021, we entered into a 10-year facility lease for our new headquarters in Miami, Florida.

Critical Accounting Estimates

9 unchanged sentences

• Accounting for Income Taxes

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

During the three months ended March 31, 2021, 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, 2020, for a more complete discussion of our critical accounting policies and estimates.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis