What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-02 · 120 added, 232 removed, 237 unchanged (60% 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, 2022, and with our financial statements and related notes contained in this Form 10-Q.

Results for the three and nine months ended September 30, 2022, are not necessarily indicative of results that may be attained in the future.

Results for the three months ended March 31, 2023, are not necessarily indicative of results that may be attained in the future.

Global Economy and Inflation

During the nine months ended September 30, 2022, the global economy has experienced high inflation, increased interest rates, and pressures on gross domestic product.

While we believe our business is resilient and can generally weather unusually high levels of inflation, inflationary pressures have had some impact on our expected 2022 financial performance.

Since 2022, the global economy has experienced high inflation, increased interest rates, and pressures on gross domestic product.

While we believe our business is resilient and can generally weather unusually high levels of inflation, inflationary pressures have had some impact on our financial performance.

Specifically, inflation has impacted our interchange costs associated with the Biller segment.

Since early 2020, the world has been, and continues to be impacted by the COVID-19 pandemic.

The COVID-19 pandemic, and the measures imposed by the governments of various countries, states, cities and other geographic regions to prevent its spread, have negatively impacted, and may continue to negatively impact, global economic and market conditions, including levels of consumer and business spending.

The environment surrounding COVID-19 and countermeasures taken to reduce its spread have impacted our business operations and financial results, although some of the effects have lessened over time.

It may continue to impact our business operations and financial operating results, and there is uncertainty in the nature and degree of its continued effects.

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

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Our products and solutions are used globally by banks and 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.

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.

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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, proliferation of cryptocurrencies, 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.

COVID-19 further accelerated this growth as more people, governments, and businesses embraced digital payments - a change likely to continue.

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.

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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.

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

We are seeing global players with existing schemes working to expand capacity in anticipation of volume growth 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 launched in November 2020.

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

Mature markets, including India, the United Kingdom, Australia, Malaysia, Singapore, Thailand, and the Nordics, 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.

We are seeing success with real-time payments in the Middle East as well, as they have started to renovate their payment systems from legacy payment types to the modern digital and real-time world.

ACI's broad software portfolio, experience, and strategic partnerships with Mastercard, Microsoft, and Mindgate Solutions continue to position us as a leader 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, accelerate time to market, accelerate innovation, and ensure scalability and resiliency, banks and 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.

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.

ACI has recognized the industry's technical inflection point in the transition from traditional on-premise infrastructure to the public cloud, and we are supporting our customers' cloud strategies.

Public and private cloud technology innovations allow the financial services ecosystem to accelerate innovation and ensure scalability and resiliency while improving operating economics over time.

As banks and intermediaries, merchants, and billers seek 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 those cloud technology benefits today and for the future while preserving ACI's fundamental base of performance, resiliency, and scalability.

Payments intelligence.

fraud, and compliance.

The accelerated adoption of real-time payments increases the urgency for industry-wide collaboration against fraud.

As the threat of scams becomes a greater concern for emitting and receiving institutions, consumers are challenged with increased friction to prevent account take-over and criminals successfully persuading consumers to push transactions themselves, inadvertently, to mule accounts they have full control of, created with fake or synthetic identity, or simply "borrowed" with or without consent of the legit account holders.

Regulators are beginning to litigate between consumers and financial institutions on the losses, and between emitting and receiving banks on the accountability for reimbursement.

Banks and intermediaries, merchants, and billers are pursuing solutions to mitigate their risks while improving their customer experience, protecting their margins, and securing their revenue streams, especially with their new products and offerings.

We continue to see opportunity for our advanced machine learning and network intelligence capabilities to stop criminals and enable frictionless legitimate business.

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.

COVID-19 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).

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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.

On June 7, 2022, we announced a definitive agreement to divest our corporate online banking solutions related assets and liabilities to One Equity Partners ("OEP") for $100.1 million.

The sale included employees and customer contracts as well as technology assets and intellectual property and closed on September 1, 2022 (the "divestiture").

For the three and nine months ended September 30, 2022, we recognized a gain of $38.5 million on the sale, which is recorded in other, net in the accompanying condensed consolidated statements of operations.

This gain is preliminary subject to finalization of post-closing adjustments pursuant to the definitive transaction agreement.

On September 1, 2022, we sold our corporate online banking solutions related assets and liabilities to One Equity Partners ("OEP") for $100.1 million, including a preliminary net working capital adjustment.

The sale included employees and customer contracts as well as technology assets and intellectual property.

During the year ended December 31, 2022, we recognized a gain of $38.5 million on the sale, which is preliminary subject to finalization of post-closing adjustments pursuant to the definitive transaction agreement.

The Company and OEP have also entered into a Transition Services Agreement ("TSA"), whereby the Company will continue to perform certain functions on OEP's behalf during a migration period not expected to exceed 18 months.

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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, 2022, and December 31, 2021 (in millions).

As a result of the divestiture, 60-month backlog decreased $170.1 million.

The following table sets forth our 60-month backlog estimate, by reportable segment, as of March 31, 2023, and December 31, 2022 (in millions).

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

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We believe this measure provides useful information to investors and others in understanding and evaluating our financial performance.

September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Banks $ 2,154 $ 2,095

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Total $ 6,370 $ 6,295

September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Committed $ 2,266 $ 2,338

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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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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, 2022 Compared to the Three Month Period Ended September 30, 2021

Three Months Ended September 30,

Three Month Period Ended March 31, 2023 Compared to the Three Month Period Ended March 31, 2022

Three Months Ended March 31,

Amount % of Total

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Total operating expenses 314,028 109 % 18,614 6 % 295,414 92 %

Operating income 3,489 1 % (24,490) (88) % 27,979 9 %

Operating income (loss) (24,352) (9) % (52,018) (188) % 27,666 8 %

Other income (expense):

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Total other income (expense) (18,782) (7) % (13,297) 242 % (5,485) (1) %

Income before income taxes 33,693 11 % 15,176 82 % 18,517 6 %

Income tax expense 10,576 3 % 5,823 123 % 4,753 1 %

Net income $ 23,117 8 % $ 9,353 68 % $ 13,764 5 %

Total revenue for the three months ended September 30, 2022, decreased $10.3 million, or 3%, as compared to the same period in 2021.

• The divestiture resulted in a $5.6 million decrease in total revenue for the three months ended September 30, 2022.

Income (loss) before income taxes (43,134) (16) % (65,315) (294) % 22,181 7 %

Income tax expense (benefit) (10,826) (4) % (17,517) (262) % 6,691 2 %

Net income (loss) $ (32,308) (12) % $ (47,798) (309) % $ 15,490 5 %

Total revenue for the three months ended March 31, 2023, decreased $33.4 million, or 10%, as compared to the same period in 2022.

• The divestiture resulted in a $12.4 million decrease in total revenue for the three months ended March 31, 2023.

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

dollar resulted in a $5.6 million decrease in total revenue during the three months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture and foreign currency, total revenue for the three months ended September 30, 2022, increased $0.9 million as compared to the same period in 2021.

dollar resulted in a $4.9 million decrease in total revenue during the three months ended March 31, 2023, as compared to the same period in 2022.

• Adjusted for the impact of the divestiture and foreign currency, total revenue for the three months ended March 31, 2023, decreased $16.2 million, or 5%, as compared to the same period in 2022.

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 increased $4.1 million, or 2%, during the three months ended September 30, 2022, as compared to the same period in 2021.

• The divestiture resulted in a $3.0 million decrease in SaaS and PaaS revenue for the three months ended September 30, 2022.

SaaS and PaaS revenue increased $10.4 million, or 5%, during the three months ended March 31, 2023, as compared to the same period in 2022.

• The divestiture resulted in a $7.3 million decrease in SaaS and PaaS revenue for the three months ended March 31, 2023.

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

dollar resulted in a $2.1 million decrease in SaaS and PaaS revenue during the three months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture and foreign currency, SaaS and PaaS revenue for the three months ended September 30, 2022, increased $9.2 million, or 5%, as compared to the same period in 2021.

• The increase was primarily driven by new customer go-lives and higher transaction volumes during the three months ended September 30, 2022, as compared to the same period in 2021.

dollar resulted in a $1.1 million decrease in SaaS and PaaS revenue during the three months ended March 31, 2023, as compared to the same period in 2022.

• Adjusted for the impact of the divestiture and foreign currency, SaaS and PaaS revenue for the three months ended March 31, 2023, increased $18.8 million, or 10%, as compared to the same period in 2022.

• The increase was primarily driven by new customer go-lives and higher transaction volumes during the three months ended March 31, 2023, as compared to 2022.

License Revenue

Customers purchase the right to use ACI software under multi-year, time-based software license arrangements that vary in length but are generally five years.

Customers purchase the right to license ACI software under multi-year, time-based software license arrangements that vary in length but are generally five years.

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

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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 $10.8 million, or 20%, during the three months ended September 30, 2022, as compared to the same period in 2021.

License revenue decreased $42.0 million, or 70%, during the three months ended March 31, 2023, as compared to the same period in 2022.

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

dollar resulted in a $0.5 million decrease in license revenue during the three months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of foreign currency, license revenue for the three months ended September 30, 2022, decreased $10.3 million, or 19%, as compared to the same period in 2021.

• The decrease was primarily driven by the renewal timing and relative size of license and capacity events during the three months ended September 30, 2022, as compared to the same period in 2021.

dollar resulted in a $2.0 million decrease in license revenue during the three months ended March 31, 2023, as compared to the same period in 2022.

• Adjusted for the impact of foreign currency, license revenue for the three months ended March 31, 2023, decreased $39.9 million, or 68%, as compared to the same period in 2022.

• The decrease was driven by license renewal timing as well as the relative size of new license and capacity events during the three months ended March 31, 2023, as compared to the same period in 2022.

Maintenance Revenue

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

Maintenance revenue decreased $4.4 million, or 8%, during the three months ended September 30, 2022, as compared to the same period in 2021.

• The divestiture resulted in a $1.0 million decrease in maintenance revenue for the three months ended September 30, 2022.

Maintenance revenue decreased $1.3 million, or 3%, during the three months ended March 31, 2023, as compared to the same period in 2022.

• The divestiture resulted in a $2.9 million decrease in maintenance revenue for the three months ended March 31, 2023.

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

dollar resulted in a $2.4 million decrease in maintenance revenue during the three months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture and foreign currency, maintenance revenue for the three months ended September 30, 2022, decreased $1.0 million or 2%, as compared to the same period in 2021.

dollar resulted in a $1.3 million decrease in maintenance revenue during the three months ended March 31, 2023, as compared to the same period in 2022.

• Adjusted for the impact of the divestiture and foreign currency, maintenance revenue for the three months ended March 31, 2023, increased $3.0 million, or 6%, as compared to the same period in 2022.

• The increase was primarily driven by annual inflationary increases in product support fees during the three months ended March 31, 2023, as compared to the same period in 2022.

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 $0.7 million, or 4%, during the three months ended September 30, 2022, as compared to the same period in 2021.

• The divestiture resulted in a $1.6 million decrease in services revenue for the three months ended September 30, 2022.

Services revenue decreased $0.5 million, or 3%, during the three months ended March 31, 2023, as compared to the same period in 2022.

• The divestiture resulted in a $2.0 million decrease in services revenue for the three months ended March 31, 2023.

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

dollar resulted in a $0.7 million decrease in services revenue during the three months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture and foreign currency, services revenue for the three months ended September 30, 2022, increased $3.0 million, or 17%, as compared to the same period in 2021.

• The increase was primarily driven by the timing and magnitude of project-related work during the three months ended September 30, 2022, as compared to the same period in 2021.

dollar resulted in a $0.4 million decrease in services revenue during the three months ended March 31, 2023, as compared to the same period in 2022.

• Adjusted for the impact of the divestiture and foreign currency, services revenue for the three months ended March 31, 2023, increased $1.9 million, or 13%, as compared to the same period in 2022.

• The increase was primarily driven by the timing and magnitude of project-related work during the three months ended March 31, 2023, as compared to the same period in 2022.

Operating Expenses

Total operating expenses for the three months ended September 30, 2022, increased $14.2 million, or 5%, as compared to the same period in 2021.

• During the three months ended September 30, 2022, there was a $2.6 million reduction in operating expenses related to the divestiture.

• Total operating expenses for the three months ended September 30, 2022, included $1.7 million of European data center migration expenses and $1.2 million of divestiture transaction-related expenses during the period compared to $6.0 million of significant transaction-related and cost reduction strategies implemented for the same period in 2021.

Total operating expenses for the three months ended March 31, 2023, increased $18.6 million, or 6%, as compared to the same period in 2022.

• During the three months ended March 31, 2023, there was a $7.2 million reduction in operating expenses related to the divestiture.

• Total operating expenses for the three months ended March 31, 2023, included $8.3 million for cost reduction strategies, $2.0 million of significant transaction-related expenses, $1.1 million for CEO transition, and $1.0 million of European data center migration expenses, expenses during the period compared to $0.5 million of significant transaction-related expenses for the same period in 2022.

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

dollar resulted in a $5.8 million decrease in total operating expenses during the three months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture, significant transaction-related expenses, and foreign currency, total operating expenses for the three months ended September 30, 2022, increased $25.5 million, or 9%, as compared to the same period in 2021.

dollar resulted in a $3.8 million decrease in total operating expenses during the three months ended March 31, 2023, compared to the same period in 2022.

• Adjusted for the impact of the divestiture, significant transaction-related expenses, and foreign currency, total operating expenses for the three months ended March 31, 2023, increased $17.7 million, or 6%, compared to the same period in 2022.

Cost of Revenue

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

Cost of revenue increased $13.0 million, or 8%, during the three months ended September 30, 2022, as compared to the same period in 2021.

• During the three months ended September 30, 2022, there was a $2.4 million reduction in cost of revenue related to the divestiture.

Cost of revenue increased $12.3 million, or 7%, during the three months ended March 31, 2023, compared to the same period in 2022.

• During the three months ended March 31, 2023, there was a $6.7 million reduction in cost of revenue related to the divestiture.

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

dollar resulted in a $2.2 million decrease in cost of revenue during the three months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture and foreign currency, cost of revenue increased $17.7 million, or 11%, for the three months ended September 30, 2022, as compared to the same period in 2021.

• The increase was primarily due to higher personnel and related expenses and payment card interchange and processing fees of $8.6 million and $10.6 million, respectively, partially offset by a decrease in software amortization expense of $1.5 million.

dollar resulted in a $1.6 million decrease in cost of revenue during the three months ended March 31, 2023, as compared to the same period in 2022.

• Adjusted for the impact of the divestiture and foreign currency, cost of revenue increased $20.7 million, or 13%, for the three months ended March 31, 2023, as compared to the same period in 2022.

• The increase was primarily due to higher payment card interchange and processing fees, personnel and related expenses, and cloud computing fees of $13.0 million, $5.4 million, and $2.9 million, respectively.

Research and Development

Research and development (“R&D”) expenses are primarily human resource costs related to the creation of new products, improvements made to existing products as well as compatibility with new operating system releases and generations of hardware.

R&D expense increased $0.7 million, or 2%, during the three months ended September 30, 2022, as compared to the same period in 2021.

• During the three months ended September 30, 2022, there was a $0.2 million reduction in R&D expense related to the divestiture.

• Total R&D expenses for the three months ended September 30, 2021, included $0.9 million of expense related to significant transactions and cost reduction strategies implemented during the period.

R&D expense decreased $0.7 million, or 2%, during the three months ended March 31, 2023, as compared to the same period in 2022.

• During the three months ended March 31, 2023, there was a $0.5 million reduction in R&D expense related to the divestiture.

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

dollar resulted in a $1.1 million decrease in R&D expense during the three months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture, significant transaction-related expenses, and foreign currency, R&D expense increased $2.8 million, or 9%, for the three months ended September 30, 2022, as compared to the same period in 2021.

• The increase was primarily due to higher personnel and related expenses and professional fees of $1.0 million and $1.8 million, respectively.

dollar resulted in a $0.7 million decrease in R&D expense during the three months ended March 31, 2023, as compared to the same period in 2022.

• Adjusted for the impact of the divestiture and foreign currency, R&D expense increased $0.5 million, or 1%, for the three months ended March 31, 2023, as compared to the same period in 2022.

• The increase was primarily due to higher personnel and related expenses of $1.9 million, partially offset by a decrease in professional fees of $1.4 million.

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 $0.6 million, or 2%, during the three months ended September 30, 2022, as compared to the same period in 2021.

Selling and marketing expense increased $0.8 million, or 2%, during the three months ended March 31, 2023, as compared to the same period in 2022.

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

dollar resulted in a $1.3 million decrease in selling and marketing expense during the three months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of foreign currency, selling and marketing expense increased $0.7 million, or 2%, for the three months ended September 30, 2022, as compared to the same period in 2021.

dollar resulted in a $0.7 million decrease in selling and marketing expense during the three months ended March 31, 2023, as compared to the same period in 2022.

• Adjusted for the impact of foreign currency, selling and marketing expense increased $1.5 million, or 5%, for the three months ended March 31, 2023, as compared to the same period in 2022.

• The increase was primarily due to higher advertising and professional fees and travel and entertainment expenses of $2.4 million and $0.7 million, respectively, partially offset by lower personnel and related expenses of $1.6 million.

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 $0.8 million, or 3%, during the three months ended September 30, 2022, as compared to the same period in 2021.

• General and administrative expenses for the three months ended September 30, 2022, included $1.2 million of divestiture transaction-related expenses and $1.7 million of European data center migration expenses compared to $5.0 million of significant transaction-related and cost reduction strategies implemented in the same period in 2021.

General and administrative expense increased $5.5 million, or 21%, during the three months ended March 31, 2023, as compared to the same period in 2022.

• General and administrative expenses for the three months ended March 31, 2023, included $8.3 million for cost reduction strategies, $2.0 million of significant transaction-related expenses, $1.1 million for CEO transitions, and $1.0 million of European data center migration expenses, compared to $0.5 million of significant transaction-related expenses in the same period in 2022.

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

dollar resulted in a $0.7 million decrease in general and administrative expense during the three months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of significant transaction-related expenses and foreign currency, general and administrative expense increased $3.6 million, or 15%, for the three months ended September 30, 2022, as compared to the same period in 2021.

• The increase is primarily due to higher personnel and related expenses and professional fees of $2.5 million and $1.1 million, respectively.

dollar resulted in a $0.5 million decrease in general and administrative expense during the three months ended March 31, 2023, as compared to the same period in 2022.

• Adjusted for the impact of significant transaction-related expenses and foreign currency, general and administrative expense decreased $5.9 million, or 24%, for the three months ended March 31, 2023, as compared to the same period in 2022.

• The decrease was primarily due to lower personnel and related expenses and professional and other legal fees of $5.2 million and $0.7 million, respectively.

Depreciation and Amortization

Depreciation and amortization increased $0.3 million, or 1%, during the three months ended September 30, 2022, as compared to the same period in 2021.

Depreciation and amortization increased $0.7 million, or 2%, during the three months ended March 31, 2023, as compared to the same period in 2022.

Other Income and Expense

Interest expense for the three months ended September 30, 2022, increased $3.1 million, or 28%, as compared to the same period in 2021, primarily due to higher interest rates.

Interest expense for the three months ended March 31, 2023, increased $8.0 million, or 73%, as compared to the same period in 2022, primarily due to higher interest rates.

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

Interest income for the three months ended September 30, 2022, increased $0.2 million, or 6%, as compared to the same period in 2021.

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

During the three months ended September 30, 2022, other, net also included a $38.5 million gain from the divestiture.

Other, net was $41.5 million of income and $1.1 million of expense for the three months ended September 30, 2022 and 2021, 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, 2022 Compared to the Nine Month Period Ended September 30, 2021

Nine Months Ended September 30,

Amount % of Total

Revenue $ Change

vs 2021 % Change

vs 2021 Amount % of Total

Software as a service and platform as a service $ 597,080 62 % $ 13,550 2 % $ 583,530 65 %

License 168,260 16 % 57,877 52 % 110,383 11 %

Maintenance 151,143 16 % (7,894) (5) % 159,037 18 %

Services 53,613 6 % 2,794 5 % 50,819 6 %

Total revenues 970,096 100 % 66,327 7 % 903,769 100 %

Operating expenses:

Cost of revenue 517,372 53 % 40,561 9 % 476,811 53 %

Research and development 114,348 12 % 9,557 9 % 104,791 12 %

Selling and marketing 102,793 11 % 12,582 14 % 90,211 10 %

General and administrative 84,753 9 % (4,676) (5) % 89,429 10 %

Depreciation and amortization 95,218 10 % (216) — % 95,434 11 %

Total operating expenses 914,484 95 % 57,808 7 % 856,676 96 %

Operating income 55,612 5 % 8,519 18 % 47,093 4 %

Other income (expense):

Interest expense (37,014) (4) % (3,071) 9 % (33,943) (4) %

Interest income 9,205 1 % 652 8 % 8,553 1 %

Other, net 45,801 5 % 46,837 (4,521) % (1,036) — %

Total other income (expense) 17,992 2 % 44,418 (168) % (26,426) (3) %

Income before income taxes 73,604 7 % 52,937 256 % 20,667 1 %

Income tax expense 21,655 2 % 19,308 823 % 2,347 — %

Net income $ 51,949 5 % $ 33,629 184 % $ 18,320 1 %

Total revenue for the nine months ended September 30, 2022, increased $66.3 million, or 7%, as compared to the same period in 2021.

• The divestiture resulted in a $5.6 million decrease in total revenue for the nine months ended September 30, 2022.

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

dollar resulted in a $11.8 million decrease in total revenue during the nine months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture and foreign currency, total revenue for the nine months ended September 30, 2022, increased $83.8 million, or 9%, as compared to the same period in 2021.

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

SaaS and PaaS revenue increased $13.6 million, or 2%, during the nine months ended September 30, 2022, as compared to the same period in 2021.

• The divestiture resulted in a $3.0 million decrease in SaaS and PaaS revenue for the nine months ended September 30, 2022.

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

dollar resulted in $4.7 million decrease in SaaS and PaaS revenue during the nine months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture and foreign currency, SaaS and PaaS revenue for the nine months ended September 30, 2022, increased $21.2 million, or 4%, as compared to the same period in 2021.

• The increase was primarily due to new customer go-lives and higher transaction volumes during the nine months ended September 30, 2022, as compared to the same period in 2021.

License Revenue

License revenue increased $57.9 million, or 52%, during the nine months ended September 30, 2022, as compared to the same period in 2021.

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

dollar resulted in a $1.2 million decrease in license revenue during the nine months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of foreign currency, license revenue for the nine months ended September 30, 2022, increased $59.1 million, or 54%, as compared to the same period in 2021.

• The increase was primarily driven by renewal timing and relative size of license and capacity events during the nine months ended September 30, 2022, as compared to the same period in 2021.

Maintenance Revenue

Maintenance revenue decreased $7.9 million or 5% during the nine months ended September 30, 2022, as compared to the same period in 2021.

• The divestiture resulted in a $1.0 million decrease in maintenance revenue for the nine months ended September 30, 2022.

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

dollar resulted in a $4.8 million decrease in maintenance revenue during the nine months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture and foreign currency, maintenance revenue for the nine months ended September 30, 2022, decreased $2.2 million, or 1%, as compared to the same period in 2021.

Services Revenue

Services revenue increased $2.8 million, or 5%, during the nine months ended September 30, 2022, as compared to the same period in 2021.

• The divestiture resulted in a $1.6 million decrease in services revenue for the nine months ended September 30, 2022.

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

dollar resulted in a $1.2 million decrease in services revenue during the nine months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture and foreign currency, services revenue for the nine months ended September 30, 2022, increased $5.6 million, or 11%, as compared to the same period in 2021.

• The increase was primarily driven by the timing and magnitude of project-related work during the nine months ended September 30, 2022, as compared to the same period in 2021.

Operating Expenses

Total operating expenses for the nine months ended September 30, 2022, increased $57.8 million, or 7%, as compared to the same period in 2021.

• During the nine months ended September 30, 2022, there was a $2.6 million reduction in operating expenses related to the divestiture.

• Total operating expenses for the nine months ended September 30, 2022, included $3.4 million of European data center migration expenses and $2.6 million of divestiture transaction-related expenses during the period.

Total operating expenses for the nine months ended September 30, 2021, included $10.5 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 $12.4 million decrease in total operating expenses for the nine months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture, significant transaction-related expenses, and foreign currency, total operating expenses for the nine months ended September 30, 2022, increased $77.3 million, or 9%, as compared to the same period in 2021.

Cost of Revenue

Cost of revenue increased $40.6 million, or 9%, during the nine months ended September 30, 2022, as compared to the same period in 2021.

• During the nine months ended September 30, 2022, there was a $2.4 million reduction in cost of revenue related to the divestiture

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

dollar resulted in a $4.8 million decrease in cost of revenue during the nine months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture and foreign currency, cost of revenue increased $47.8 million, or 10%, for the nine months ended September 30, 2022, as compared to the same period in 2021.

• The increase was primarily due to higher personnel and related expenses and payment card interchange and processing fees of $19.2 million and $32.8 million, respectively, partially offset by a decrease in software amortization expense of $4.2 million.

Research and Development

R&D expense increased $9.6 million, or 9%, during the nine months ended September 30, 2022, as compared to the same period in 2021.

• During the nine months ended September 30, 2022, there was a $0.2 million reduction in R&D expense related to the divestiture.

• Total R&D expenses for the nine months ended September 30, 2021 included $1.9 million of significant transaction-related expenses.

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

dollar resulted in a $2.5 million decrease in R&D expense during the nine months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of the divestiture, foreign currency, and significant transaction-related expenses, R&D expense increased $14.1 million, or 14%, for the nine months ended September 30, 2022, as compared to the same period in 2021.

• The increase was primarily due to higher personnel and related expenses and professional fees of $7.3 million and $6.8 million, respectively.

Selling and Marketing

Selling and marketing expense increased $12.6 million, or 14%, during the nine months ended September 30, 2022, as compared to the same period in 2021.

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

dollar resulted in a $2.5 million decrease in selling and marketing expense for the nine months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of foreign currency, selling and marketing expense increased $15.1 million, or 17%, for the nine months ended September 30, 2022, as compared to the same period in 2021.

• The increase was primarily due to higher personnel and related expenses and travel and entertainment expenses of $12.1 million and $3.0 million, respectively.

General and Administrative

General and administrative expense decreased $4.7 million, or 5%, during the nine months ended September 30, 2022, as compared to the same period in 2021.

• General and administrative expenses for the nine months ended September 30, 2022 included $3.4 million of European data center migration expenses and $2.6 million of divestiture transaction-related expenses during the period.

General and administrative expense for the nine months ended September 30, 2021, included $8.7 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 $1.7 million decrease in general and administrative expenses during the nine months ended September 30, 2022, as compared to the same period in 2021.

• Adjusted for the impact of significant transaction-related expenses and foreign currency, general and administrative expense decreased $0.4 million for the nine months ended September 30, 2022, as compared to the same period in 2021.

Depreciation and Amortization

Depreciation and amortization decreased $0.2 million during the nine months ended September 30, 2022, as compared to the same period in 2021.

Other Income and Expense

Interest expense for the nine months ended September 30, 2022, increased $3.1 million, or 9%, as compared to the same period in 2021, primarily due to higher interest rates.

Interest income for the nine months ended September 30, 2022, increased $0.7 million, or 8%, as compared to the same period in 2021.

Interest income for the three months ended March 31, 2023, increased $0.3 million, or 11%, as compared to the same period in 2022.

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

During the nine months ended September 30, 2022, other, net also included a $38.5 million gain from the divestiture.

Other, net was $45.8 million of income and $1.0 million of expense for the nine months ended September 30, 2022 and 2021, respectively.

Other, net was $3.4 million of expense and $2.3 million of income for the three months ended March 31, 2023 and 2022, respectively.

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

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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,

2022 2021 2022 2021

Three Months Ended March 31,

Banks $ 88,040 $ 132,198

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Income (loss) before income taxes $ (43,134) $ 22,181

The Banks Segment Adjusted EBITDA decreased $3.1 million due to the divestiture.

Excluding the divestiture, Banks Segment Adjusted EBITDA decreased $14.8 million for the three months ended September 30, 2022, compared to the same period in 2021, due to a $8.7 million decrease in revenue primarily related to a decrease in license revenues and a $6.1 million increase in cash operating expense.

Merchants Segment Adjusted EBITDA decreased $4.4 million for the three months ended September 30, 2022, compared to the same period in 2021, due to a $3.4 million decrease in revenue and a $1.0 million increase in cash operating expense.

Billers Segment Adjusted EBITDA decreased $5.6 million for the three months ended September 30, 2022, compared to the same period in 2021, due to a $13.0 million increase in cash operating expense primarily for payment card interchange and other processing fees, partially offset by a $7.4 million increase in revenue.

The Banks Segment Adjusted EBITDA decreased $3.1 million due to the divestiture.

Excluding the divestiture, Banks Segment Adjusted EBITDA increased $28.5 million for the nine months ended September 30, 2022, compared to the same period in 2021, due to a $55.5 million increase in revenue primarily related to an increase in license revenues, partially offset by a $27.0 million increase in cash operating expense.

Merchants Segment Adjusted EBITDA decreased $9.7 million for the nine months ended September 30, 2022, compared to the same period in 2021, due to a $1.9 million decrease in revenue and a $7.8 million increase in cash operating expense.

Billers Segment Adjusted EBITDA decreased $19.6 million for the nine months ended September 30, 2022, compared to the same period in 2021, due to a $38.0 million increase in cash operating expense, primarily for payment card interchange and other processing fees, partially offset by an $18.4 million increase in revenue.

Banks Segment Adjusted EBITDA decreased $5.1 million due to the divestiture.

Excluding the divestiture, Banks Segment Adjusted EBITDA decreased $34.9 million for the three months ended March 31, 2023, compared to the same period in 2022, due to a $31.8 million decrease in revenue primarily related to a decrease in license revenues, and a $3.1 million increase in cash operating expense.

Merchants Segment Adjusted EBITDA decreased $8.2 million for the three months ended March 31, 2023, compared to the same period in 2022, due to a $6.2 million decrease in revenue, and a $2.0 million increase in cash operating expense.

Billers Segment Adjusted EBITDA increased $3.3 million for the three months ended March 31, 2023, compared to the same period in 2022, due to a $17.0 million increase in revenue partially offset by a $13.7 million increase in cash operating expense, primarily payment card interchange and processing fees.

Liquidity and Capital Resources

5 unchanged sentences

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

As of September 30, 2022, we had $134.8 million of cash and cash equivalents, of which $32.4 million was held by our foreign subsidiaries.

As of March 31, 2023, we had $142.4 million of cash and cash equivalents, of which $43.9 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, 2022, only the earnings in our Indian foreign subsidiaries are indefinitely reinvested.

As of March 31, 2023, 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, 2022.

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, 2023.

Available Liquidity

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Cash and cash equivalents $ 142,412 $ 124,981

1 unchanged sentence

Total liquidity $ 530,852 $ 518,481

The increase in total liquidity is primarily attributable to net proceeds of $100.1 million from the divestiture, partially offset by $90.9 million paid for stock repurchases.

The increase in total liquidity is primarily attributable to positive operating cash flows of $40.1 million, partially offset by $8.7 million of payments to purchase property and equipment and software and distribution rights and $14.6 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, 2022, the full $75.0 million was available.

As of March 31, 2023, the full $75.0 million was available.

Stock Repurchase Program

Our board approved a stock repurchase program authorizing the Company, as market and business conditions warrant, to acquire its common stock and periodically authorizes additional funds for the program.

In December 2021, the board approved the repurchase of the Company's common stock of up to $250.0 million in place of the remaining purchase amounts previously authorized.

We repurchased 3,210,313 shares for $90.9 million under the program during the nine months ended September 30, 2022.

On February 24, 2023, the board approved the repurchase of the Company's common stock of up to $200.0 million in place of the remaining purchase amounts previously authorized.

We did not repurchase any shares under the program during the three months ended March 31, 2023.

Under the program to date, we have repurchased 57,981,733 shares for approximately $926.2 million.

As of September 30, 2022, the maximum remaining amount authorized for purchase under the stock repurchase program was approximately $125.4 million.

As of March 31, 2023, the maximum remaining amount authorized for purchase under the stock repurchase program was approximately $200.0 million.

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

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):

4 unchanged sentences

The primary source of operating cash flows is cash collections from our customers for purchase and renewal of licensed software products and various services including software and platform as a service, maintenance, and other professional services.

Our primary uses of operating cash flows includes employee expenditures, taxes, interest payments, and leased facilities.

Cash flows provided by operating activities were $42.5 million lower for the nine months ended September 30, 2022, compared to the same period in 2021, primarily due to timing of cash receipts on accounts receivable.

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

Our primary uses of operating cash flows include employee expenditures, taxes, interest payments, and leased facilities.

Cash flows provided by operating activities of $40.1 million were $11.2 million higher for the three months ended March 31, 2023, compared to $28.9 million for the same period in 2022.

Our operating cash flows for the current quarter increased primarily due to $79.3 million more in customer receipt collections on higher prior year-end receivable balances, partially offset by $8.9 million more in income tax payments due to higher pre-tax income in the previous year, $7.9 million more in interest payments due to increase in interest rates, and the net loss for the three months ended March 31, 2023, compared to net income for the same period in 2022.

Our cash flow from operating activities can fluctuate from period to period due to several factors, including:

the timing of billings, which are typically higher in the third and fourth quarters in conjunction with sales timing and are variable based upon license renewal timing;

collections, which will lag the quarters with higher billings;

the timing and amounts of interest due to interest rate fluctuations and semi-annual Senior Notes interest payments;

income tax and other payments;

and our operating results.

Cash Flows from Investing Activities

The changes in cash flows from investing activities primarily relate to the timing of our purchases and investments in capital and other assets, including strategic acquisitions, that support our growth.

During the first nine months of 2022, we received net proceeds of $100.1 million from the divestiture.

In addition, we used cash of $26.5 million to purchase software, property, and equipment, as compared to $33.0 million during the same period in 2021.

During the first three months of 2023, we used cash of $8.7 million to purchase software, property, and equipment, as compared to $8.5 million during the same period in 2022.

Cash Flows from Financing Activities

The changes in cash flows from financing activities primarily relate to borrowings and repayments related to our debt instruments and other debt, stock repurchases, and net proceeds related to employee stock programs.

During the first nine months of 2022, we used the proceeds from the divestiture to partially fund repayments of $70.8 million on the Term Loans and $10.1 million of other debt payments.

In addition, we used $90.9 million to repurchase common stock and $5.8 million for the repurchase of stock-based compensation awards for tax withholdings.

We received net proceeds of $10.0 million on the Revolving Credit Facility, proceeds of $4.6 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended, and $20.1 million from settlement assets and liabilities due to processing timing.

During the first nine months of 2021, we repaid $55.0 million on the Revolving Credit Facility, $29.2 million on the Term Loans, and $10.2 million on other debt.

During the first three months of 2023, we repaid $14.6 million on the Term Loans and $5.7 million of other debt payments.

In addition, we used $3.0 million for the repurchase of stock-based compensation awards for tax withholdings, and $2.8 million for settlement assets and liabilities due to processing timing.

We received net proceeds of $5.0 million on the Revolving Credit Facility, and proceeds of $0.8 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 2022, we repaid $9.7 million on the Term Loans and $4.2 million of other debt payments.

In addition, we used $37.9 million to repurchase common stock, $5.5 million for the repurchase of stock-based compensation awards for tax withholdings, and $0.6 million for settlement assets and liabilities due to processing timing.

We received proceeds of $9.8 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended.

We received net proceeds of $30.0 million on the Revolving Credit Facility, and proceeds of $1.9 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended.

Contractual Obligations and Commercial Commitments

For the nine months ended September 30, 2022, 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, 2021.

For the three months ended March 31, 2023, 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, 2022.

Critical Accounting Estimates

9 unchanged sentences

• Accounting for Income Taxes

During the nine months ended September 30, 2022, there were no significant changes to our critical accounting policies and estimates.

During the three months ended March 31, 2023, 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, 2022, 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