ACI WORLDWIDE, INC. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This report contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and may include words or phrases such as “believes,” “will,” “expects,” “anticipates,” “intends,” and words and phrases of similar impact. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements in this report include, but are not limited to, statements regarding future operations, business strategy, business environment, key trends, and, in each case, statements related to expected financial and other benefits. Many of these factors will be important in determining our actual future results. Any or all of the forward-looking statements in this report may turn out to be incorrect. They may be based on inaccurate assumptions or may not account for known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those expressed or implied in any forward-looking statements, and our business, financial condition and results of operations could be materially and adversely affected. In addition, we disclaim any obligation to update any forward-looking statements after the date of this report, except as required by law. All forward-looking statements in this report are expressly qualified by the risk factors discussed in our filings with the Securities and Exchange Commission (“SEC”). The cautionary statements in this report expressly qualify all of our forward-looking statements. Factors that could cause actual results to differ from those expressed or implied in the forward-looking statements include, but are not limited to, those discussed in our Risk Factors in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, and in Part 2, Item 1A of this Form 10-Q. The following discussion should be read together with our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, and with our financial statements and related notes contained in this Form 10-Q. Results for the three and six months ended June 30, 2024, are not necessarily indicative of results that may be attained in the future. Global Economy and Inflation 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 impacted our interchange costs associated with the Biller segment. Overview 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 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 region has its own globally coordinated sales force, supplemented with local independent reseller and/or distributor networks. Our products and solutions are marketed under the ACI Worldwide brand and 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. 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. 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. 22 Table of contents 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. Key trends that currently impact our strategies and operations include: Increasing digital payment transaction volumes. The adoption of digital payments continues to accelerate, propelled by the digitization of cash, financial inclusion efforts of countries throughout the world, the Internet of Things, rapid growth of eCommerce and the adoption of real-time payments. COVID-19 further accelerated this growth as more people, governments, and businesses embraced digital payments - a change that has continued. We leverage the growth in transaction volumes through the licensing of new systems to customers whose older systems cannot handle increased volume, through the sale of capacity upgrades to existing customers, and through the scalability of our platform-based solutions. Adoption of real-time payments. 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 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, 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 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. 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 remitting 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 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 23 Table of contents 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. For example, the accounting rules governing the timing of revenue recognition are complex, and it can be difficult to estimate when we will recognize revenue generated by a given transaction. Factors such as creditworthiness of the customer and timing of transfer of control or acceptance of our products may cause revenues related to sales generated in one period to be deferred and recognized in later periods. For arrangements in which services revenue is deferred, related direct and incremental costs may also be deferred. Additionally, while the majority of our contracts are denominated in the U.S. dollar, a substantial portion of our sales are made, and some of our expenses are incurred, in the local currency of countries other than the United States. Fluctuations in currency exchange rates in a given period may result in the recognition of gains or losses for that period. We continue to seek ways to grow through organic sources, partnerships, alliances, and acquisitions. We continually look for potential acquisitions designed to improve our solutions’ breadth or provide access to new markets. As part of our acquisition strategy, we seek acquisition candidates that are strategic, capable of being integrated into our operating environment, and accretive to our financial performance. Backlog Backlog is comprised of: • Committed Backlog, which includes (1) contracted revenue that will be recognized in future periods (contracted but not recognized) from software license fees, maintenance fees, service fees, and SaaS and PaaS fees specified in executed contracts (including estimates of variable consideration if required under ASC 606, Revenue From Contracts With Customers ) and included in the transaction price for those contracts, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods and (2) estimated future revenues from software license fees, maintenance fees, services fees, and SaaS and PaaS fees specified in executed contracts. • Renewal Backlog, which includes estimated future revenues from assumed contract renewals to the extent we believe recognition of the related revenue will occur within the corresponding backlog period. We have historically included assumed renewals in backlog estimates based upon automatic renewal provisions in the executed contract and our historic experience with customer renewal rates. Our 60-month backlog estimates are derived using the following key assumptions: • License arrangements are assumed to renew at the end of their committed term or under the renewal option stated in the contract at a rate consistent with historical experience. If the license arrangement includes extended payment terms, the renewal estimate is adjusted for the effects of a significant financing component. • Maintenance fees are assumed to exist for the duration of the license term for those contracts in which the committed maintenance term is less than the committed license term. • SaaS and PaaS arrangements are assumed to renew at the end of their committed term at a rate consistent with our historical experiences. • Foreign currency exchange rates are assumed to remain constant over the 60-month backlog period for those contracts stated in currencies other than the U.S. dollar. • Our pricing policies and practices are assumed to remain constant over the 60-month backlog period. In computing our 60-month backlog estimate, the following items are specifically not taken into account: • Anticipated increases in transaction, account, or processing volumes by our customers. • Optional annual uplifts or inflationary increases in recurring fees. • Services engagements, other than SaaS and PaaS arrangements, are not assumed to renew over the 60-month backlog period. • The potential impact of consolidation activity within our markets and/or customers. 24 Table of contents We review our customer renewal experience on an annual basis. The impact of this review and subsequent updates may result in a revision to the renewal assumptions used in computing the 60-month backlog estimates. In the event a significant revision to renewal assumptions is determined to be necessary, prior periods will be adjusted for comparability purposes. The following table sets forth our 60-month backlog estimate, by reportable segment, as of June 30, 2024, March 31, 2024, and December 31, 2023 (in millions). Dollar amounts reflect foreign currency exchange rates as of each period end. This is a non-GAAP financial measure being presented to provide comparability across accounting periods. We believe this measure provides useful information to investors and others in understanding and evaluating our financial performance. June 30, 2024 March 31, 2024 December 31, 2023 Banks $ 2,230 $ 2,235 $ 2,261 Merchants 740 741 754 Billers 3,398 3,505 3,505 Total $ 6,368 $ 6,481 $ 6,520 June 30, 2024 March 31, 2024 December 31, 2023 Committed $ 2,362 $ 2,223 $ 2,178 Renewal 4,006 4,258 4,342 Total $ 6,368 $ 6,481 $ 6,520 Estimates of future financial results require substantial judgment and are based on several assumptions, as described above. These assumptions may turn out to be inaccurate or wrong for reasons outside of management’s control. For example, our customers may attempt to renegotiate or terminate their contracts for many reasons, including mergers, changes in their financial condition, or general changes in economic conditions in the customer’s industry or geographic location. We may also experience delays in the development or delivery of products or services specified in customer contracts, which may cause the actual renewal rates and amounts to differ from historical experiences. Changes in foreign currency exchange rates may also impact the amount of revenue recognized in future periods. Accordingly, there can be no assurance that amounts included in backlog estimates will generate the specified revenues or that the actual revenues will be generated within the corresponding 60-month period. Additionally, because certain components of Committed Backlog and all of Renewal Backlog estimates are operating metrics, the estimates are not required to be subject to the same level of internal review or controls as contracted but not recognized Committed Backlog. 25 Table of contents RESULTS OF OPERATIONS The following table presents the condensed consolidated statements of operations, as well as the percentage relationship to total revenues for items included in our condensed consolidated statements of operations (in thousands): Three Month Period Ended June 30, 2024 Compared to the Three Month Period Ended June 30, 2023 Three Months Ended June 30, 2024 2023 Amount % of Total Revenue $ Change vs 2023 % Change vs 2023 Amount % of Total Revenue Revenues: Software as a service and platform as a service $ 235,399 63 % $ 25,723 12 % $ 209,676 65 % License 65,582 18 % 20,911 47 % 44,671 14 % Maintenance 48,733 13 % (2,658) (5) % 51,391 16 % Services 23,765 6 % 6,178 35 % 17,587 5 % Total revenues 373,479 100 % 50,154 16 % 323,325 100 % Operating expenses: Cost of revenue 203,238 54 % 21,895 12 % 181,343 56 % Research and development 35,410 9 % 145 — % 35,265 11 % Selling and marketing 28,551 8 % (4,738) (14) % 33,289 10 % General and administrative 24,993 7 % (6,479) (21) % 31,472 10 % Depreciation and amortization 27,586 7 % (3,850) (12) % 31,436 10 % Total operating expenses 319,778 85 % 6,973 2 % 312,805 97 % Operating income 53,701 15 % 43,181 410 % 10,520 3 % Other income (expense): Interest expense (18,471) (5) % 1,438 (7) % (19,909) (6) % Interest income 3,953 1 % 495 14 % 3,458 1 % Other, net 1,156 — % 5,248 128 % (4,092) (1) % Total other income (expense) (13,362) (4) % 7,181 (35) % (20,543) (6) % Income (loss) before income taxes 40,339 11 % 50,362 502 % (10,023) (3) % Income tax expense (benefit) 9,452 3 % 12,765 (385) % (3,313) (1) % Net income (loss) $ 30,887 8 % $ 37,597 560 % $ (6,710) (2) % Revenues Total revenue for the three months ended June 30, 2024, increased $50.2 million, or 16%, as compared to the same period in 2023. • The impact of foreign currencies weakening against the U.S. dollar resulted in a $0.7 million decrease in total revenue during the three months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of foreign currency, total revenue for the three months ended June 30, 2024, increased $50.9 million, or 16%, as compared to the same period in 2023. 26 Table of contents Software as a Service (“SaaS”) and Platform as a Service (“PaaS”) Revenue The Company’s SaaS arrangements allow customers to use certain software solutions (without taking possession of the software) in a single-tenant cloud environment on a subscription basis. The Company’s PaaS arrangements allow customers to use certain software solutions (without taking possession of the software) in a multi-tenant cloud environment on a subscription or consumption basis. Included in SaaS and PaaS revenue are fees paid by our customers for use of our Biller solutions. Biller-related fees may be paid by our clients or directly by their customers and may be a percentage of the underlying transaction amount, a fixed fee per executed transaction, or a monthly fee for each customer enrolled. SaaS and PaaS costs include payment card interchange fees, the amounts payable to banks and payment card processing fees, which are included in cost of revenue in the condensed consolidated statements of operations. All fees from SaaS and PaaS arrangements that do not qualify for treatment as a distinct performance obligation, which includes set-up fees, implementation or customization services, and product support services, are included in SaaS and PaaS revenue. SaaS and PaaS revenue increased $25.7 million, or 12%, during the three months ended June 30, 2024, as compared to the same period in 2023. • The increase was primarily driven by new customer go-lives since June 30, 2023, and higher transaction volumes during the three months ended June 30, 2024, as compared to the same period in 2023. License Revenue Customers purchase the right to license ACI software under multi-year, time-based software license arrangements that vary in length but are generally five years. Under these arrangements the software is installed at the customer’s location (i.e. on-premise). Within these agreements are specified capacity limits typically based on customer transaction volume. ACI employs measurement tools that monitor the number of transactions processed by customers and if contractually specified limits are exceeded, additional fees are charged for the overage. Capacity overages may occur at varying times throughout the term of the agreement depending on the product, the size of the customer, and the significance of customer transaction volume growth. Depending on specific circumstances, multiple overages or no overages may occur during the term of the agreement. Included in license revenue are license and capacity fees that are payable at the inception of the agreement. License revenue also includes license and capacity fees payable annually, quarterly, or monthly due to negotiated customer payment terms. The Company recognizes revenue in advance of billings for software license arrangements with extended payment terms and adjusts for the effects of the financing component, if significant. License revenue increased $20.9 million, or 47%, during the three months ended June 30, 2024, as compared to the same period in 2023. • The impact of certain foreign currencies weakening against the U.S. dollar resulted in a $0.3 million decrease in license revenue during the three months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of foreign currency, license revenue for the three months ended June 30, 2024, increased $21.2 million, or 48%, as compared to the same period in 2023. • The increase was driven by license renewal timing as well as the relative size of new license and capacity events during the three months ended June 30, 2024, as compared to the same period in 2023. Maintenance Revenue Maintenance revenue includes standard, enhanced, and premium customer support and any post contract support fees received from customers for the provision of product support services. Maintenance revenue decreased $2.7 million, or 5%, during the three months ended June 30, 2024, as compared to the same period in 2023. • The impact of foreign currencies weakening against the U.S. dollar resulted in a $0.2 million decrease in maintenance revenue during the three months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of foreign currency, maintenance revenue for the three months ended June 30, 2024, decreased $2.5 million or 5%, as compared to the same period in 2023. • The decrease was primarily driven by customers reducing premium customer support and maintenance on non-strategic products during the three months ended June 30, 2024, as compared to the same period in 2023. 27 Table of contents Services Revenue Services revenue includes fees earned through implementation services and other professional services. Implementation services include product installations, product configurations, and custom software modifications (“CSMs”). Other professional services include business consultancy, technical consultancy, on-site support services, product education, and testing services. These services include new customer implementations as well as existing customer migrations to new products or new releases of existing products. Services revenue increased $6.2 million, or 35%, during the three months ended June 30, 2024, as compared to the same period in 2023. • The impact of foreign currencies weakening against the U.S. dollar resulted in a $0.2 million decrease in services revenue during the three months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of foreign currency, services revenue for the three months ended June 30, 2024, increased $6.4 million or 37%, as compared to the same period in 2023. • The increase was primarily driven by the timing and magnitude of project-related work during the three months ended June 30, 2024, as compared to the same period in 2023. Operating Expenses Total operating expenses for the three months ended June 30, 2024, increased $7.0 million, or 2%, as compared to the same period in 2023. • Total operating expenses for the three months ended June 30, 2024, included $0.4 million for cost reduction strategies and $0.4 million of other significant transaction-related expenses during the period, compared to $7.6 million for cost reduction strategies, $0.5 million of significant transaction-related expenses, $0.7 million for CEO transition, and $1.2 million of European data center migration expenses for the same period in 2023. • The impact of foreign currencies weakening against the U.S. dollar resulted in a $0.7 million decrease in total operating expenses during the three months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of significant transaction-related expenses and foreign currency, total operating expenses for the three months ended June 30, 2024, increased $16.9 million, or 6%, as compared to the same period in 2023. Cost of Revenue Cost of revenue includes costs to provide SaaS and PaaS, third-party royalties, amortization of purchased and developed software for resale, the costs of maintaining our software products, as well as the costs required to deliver, install, and support software at customer sites. SaaS and PaaS service costs include payment card interchange fees, amounts payable to banks, and payment card processing fees. Maintenance costs include the efforts associated with providing the customer with upgrades, 24-hour help desk, post go-live (remote) support, and production-type support for software that was previously installed at a customer location. Service costs include human resource costs and other incidental costs such as travel and training required for both pre go-live and post go-live support. Such efforts include project management, delivery, product customization and implementation, installation support, consulting, configuration, and on-site support. Cost of revenue increased $21.9 million, or 12%, during the three months ended June 30, 2024, as compared to the same period in 2023. • The impact of foreign currencies weakening against the U.S. dollar resulted in a $0.3 million decrease in cost of revenue during the three months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of foreign currency, cost of revenue increased $22.2 million, or 12%, for the three months ended June 30, 2024, as compared to the same period in 2023. • The increase was primarily due to higher payment card interchange and processing fees and cloud computing fees of $18.1 million and $0.7 million, respectively. The remaining increase was due to higher personnel and related expenses of $3.4 million, including a $1.0 million increase in stock-based compensation expense. 28 Table of contents Research and Development Research and development (“R&D”) expenses are primarily human resource costs related to the creation of new products, improvements made to existing products as well as compatibility with new operating system releases and generations of hardware. R&D expense increased $0.1 million during the three months ended June 30, 2024, as compared to the same period in 2023. Selling and Marketing Selling and marketing includes both the costs related to selling our products to current and prospective customers as well as the costs related to promoting the Company, its products and the research efforts required to measure customers’ future needs and satisfaction levels. Selling costs are primarily the human resource and travel costs related to the effort expended to license our products and services to current and potential clients within defined territories and/or industries as well as the management of the overall relationship with customer accounts. Selling costs also include the costs associated with assisting distributors in their efforts to sell our products and services in their respective local markets. Marketing costs include costs incurred to promote the Company and its products, perform or acquire market research to help the Company better understand impending changes in customer demand for and of our products, and the costs associated with measuring customers’ opinions toward the Company, our products and personnel. Selling and marketing expense decreased $4.7 million, or 14%, during the three months ended June 30, 2024, as compared to the same period in 2023. • The decrease was primarily due to lower personnel and related expenses and advertising and professional fees of $4.0 million and $0.7 million, respectively. General and Administrative General and administrative expenses are primarily human resource costs including executive salaries and benefits, personnel administration costs, and the costs of corporate support functions such as legal, administrative, human resources, and finance and accounting. General and administrative expense decreased $6.5 million, or 21%, during the three months ended June 30, 2024, as compared to the same period in 2023. • General and administrative expenses for the three months ended June 30, 2024, included $0.4 million for cost reduction strategies and $0.4 million of other significant transaction-related expenses during the period, compared to $7.6 million for cost reduction strategies, $0.5 million of significant transaction-related expenses, $0.7 million for CEO transition, and $1.2 million of European data center migration expenses in the same period in 2023. • The impact of 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 June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of significant transaction-related expenses and foreign currency, general and administrative expense increased $2.9 million, or 14%, for the three months ended June 30, 2024, as compared to the same period in 2023. • The increase was primarily due to higher personnel and related expenses of $4.7 million, including a $2.8 million increase in stock-based compensation expense, partially offset by a $1.8 million decrease in professional and other legal fees. Depreciation and Amortization Depreciation and amortization decreased $3.9 million, or 12%, during the three months ended June 30, 2024, as compared to the same period in 2023. • The decrease was primarily due to a $3.4 million decrease in depreciation due to prior facilities cost reduction activities, and a $0.5 million decrease in amortization for fully amortized software acquired through acquisitions. 29 Table of contents Other Income and Expense Interest expense for the three months ended June 30, 2024, decreased $1.4 million, or 7%, as compared to the same period in 2023, primarily due to repayments on the Term Loan. Interest income includes the portion of software license fees paid by customers under extended payment terms that is attributed to the significant financing component. Interest income for the three months ended June 30, 2024, increased $0.5 million, or 14%, as compared to the same period in 2023. Other, net is primarily comprised of foreign currency transaction gains and losses. Other, net was $1.2 million of income and $4.1 million of expense for the three months ended June 30, 2024 and 2023, respectively. Income Taxes See Note 10, Income Taxes, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information. 30 Table of contents RESULTS OF OPERATIONS The following table presents the condensed consolidated statements of operations, as well as the percentage relationship to total revenues for items included in our condensed consolidated statements of operations (in thousands): Six Month Period Ended June 30, 2024 Compared to the Six Month Period Ended June 30, 2023 Six Months Ended June 30, 2024 2023 Amount % of Total Revenue $ Change vs 2023 % Change vs 2023 Amount % of Total Revenue Revenues: Software as a service and platform as a service $ 451,131 65 % $ 36,525 9 % $ 414,606 67 % License 95,555 14 % 32,553 52 % 63,002 10 % Maintenance 96,487 14 % (5,007) (5) % 101,494 17 % Services 46,325 7 % 12,426 37 % 33,899 6 % Total revenues 689,498 100 % 76,497 12 % 613,001 100 % Operating expenses: Cost of revenue 394,345 57 % 34,448 10 % 359,897 59 % Research and development 70,403 10 % (1,980) (3) % 72,383 12 % Selling and marketing 55,301 8 % (13,423) (20) % 68,724 11 % General and administrative 50,993 7 % (11,861) (19) % 62,854 10 % Depreciation and amortization 55,195 8 % (7,780) (12) % 62,975 10 % Total operating expenses 626,237 90 % (596) — % 626,833 102 % Operating income (loss) 63,261 10 % 77,093 557 % (13,832) (2) % Other income (expense): Interest expense (37,481) (5) % 1,320 (3) % (38,801) (6) % Interest income 7,962 1 % 999 14 % 6,963 1 % Other, net (869) — % 6,618 (88) % (7,487) (1) % Total other income (expense) (30,388) (4) % 8,937 (23) % (39,325) (6) % Income (loss) before income taxes 32,873 6 % 86,030 162 % (53,157) (8) % Income tax expense (benefit) 9,737 1 % 23,876 (169) % (14,139) (2) % Net income (loss) $ 23,136 5 % $ 62,154 159 % $ (39,018) (6) % Revenues Total revenue for the six months ended June 30, 2024, increased $76.5 million, or 12%, as compared to the same period in 2023. • The impact of certain foreign currencies weakening against the U.S. dollar resulted in a $0.5 million decrease in total revenue during the six months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of foreign currency, total revenue for the six months ended June 30, 2024, increased $77.0 million, or 13%, as compared to the same period in 2023. 31 Table of contents Software as a Service (“SaaS”) and Platform as a Service (“PaaS”) Revenue SaaS and PaaS revenue increased $36.5 million, or 9%, during the six months ended June 30, 2024, as compared to the same period in 2023. • The impact of certain foreign currencies strengthening against the U.S. dollar resulted in $0.3 million increase in SaaS and PaaS revenue during the six months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of foreign currency, SaaS and PaaS revenue for the six months ended June 30, 2024, increased $36.2 million, or 9%, as compared to the same period in 2023. • The increase was primarily driven by new customer go-lives since June 30, 2023, and higher transaction volumes during the six months ended June 30, 2024, as compared to the same period in 2023. License Revenue License revenue increased $32.6 million, or 52%, during the six months ended June 30, 2024, as compared to the same period in 2023. • The impact of certain foreign currencies weakening against the U.S. dollar resulted in a $0.2 million decrease in license revenue during the six months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of foreign currency, license revenue for the six months ended June 30, 2024, increased $32.8 million, or 52%, as compared to the same period in 2023. • The increase was driven by license renewal timing as well as the relative size of new license and capacity events during the six months ended June 30, 2024, as compared to the same period in 2023. Maintenance Revenue Maintenance revenue decreased $5.0 million, or 5%, during the six months ended June 30, 2024, as compared to the same period in 2023. • The decrease was primarily driven by customers reducing premium customer support and maintenance on non-strategic products during the six months ended June 30, 2024, as compared to the same period in 2023. Services Revenue Services revenue increased $12.4 million, or 37%, during the six months ended June 30, 2024, as compared to the same period in 2023. • The impact of certain foreign currencies weakening against the U.S. dollar resulted in a $0.4 million decrease in services revenue during the six months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of foreign currency, services revenue for the six months ended June 30, 2024, increased $12.8 million, or 38%, as compared to the same period in 2023. • The increase was primarily driven by the timing and magnitude of project-related work during the six months ended June 30, 2024, as compared to the same period in 2023. Operating Expenses Total operating expenses for the six months ended June 30, 2024 decreased $0.6 million, as compared to the same period in 2023. • Total operating expenses for the six months ended June 30, 2024, included $3.0 million for cost reduction strategies and $0.7 million of other significant transaction-related expenses during the period, compared to $15.9 million for cost reduction strategies, $2.6 million of significant transaction-related expenses, $1.8 million for CEO transition, and $2.2 million of European data center migration expenses for the same period in 2023. • The impact of certain foreign currencies weakening against the U.S. dollar resulted in a $0.2 million decrease in total operating expenses for the six months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of significant transaction-related expenses and foreign currency, total operating expenses for the six months ended June 30, 2024, increased $18.4 million, or 3%, as compared to the same period in 2023. 32 Table of contents Cost of Revenue Cost of revenue increased $34.4 million, or 10%, during the six months ended June 30, 2024, as compared to the same period in 2023. • The impact of certain foreign currencies weakening against the U.S. dollar resulted in a $0.3 million decrease in cost of revenue during the six months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of foreign currency, cost of revenue increased $34.7 million, or 10%, for the six months ended June 30, 2024, as compared to the same period in 2023. • The increase was primarily due to higher payment card interchange and processing fees and cloud computing fees of $24.3 million and $4.7 million, respectively. The remaining increase was due to higher personnel and related expenses of $5.7 million, including a $1.9 million increase in stock-based compensation expense. Research and Development R&D expense decreased $2.0 million, or 3%, during the six months ended June 30, 2024, as compared to the same period in 2023. • The impact of certain foreign currencies weakening against the U.S. dollar resulted in a $0.2 million decrease in R&D expense during the six months ended June 30, 2024, as compared to the same period in 2023. • Adjusted for the impact of foreign currency, R&D expense decreased $1.8 million, or 2%, for the six months ended June 30, 2024, as compared to the same period in 2023. • The decrease was primarily due to lower professional fees and personnel and related expenses of $1.4 million and $0.4 million, respectively. Selling and Marketing Selling and marketing expense decreased $13.4 million, or 20%, during the six months ended June 30, 2024, as compared to the same period in 2023. • The decrease was primarily due to lower personnel and related expenses and advertising and professional fees of $11.4 million and $2.0 million, respectively. General and Administrative General and administrative expense decreased $11.9 million, or 19%, during the six months ended June 30, 2024, as compared to the same period in 2023. • General and administrative expenses for the six months ended June 30, 2024, included $3.0 million for cost reduction strategies and $0.7 million of other significant transaction-related expenses during the period, compared to $15.9 million for cost reduction strategies, $2.6 million of significant transaction-related expenses, $1.8 million for CEO transition, and $2.2 million of European data center migration expenses during the same period in 2023. • Adjusted for the impact of significant transaction-related expenses, general and administrative expense increased $6.9 million, or 17%, for the six months ended June 30, 2024, as compared to the same period in 2023. • The increase was primarily due to higher personnel and related expenses of $8.8 million, including a $4.0 million increase in stock-based compensation expense, partially offset by a $1.9 million decrease in professional and other legal fees. Depreciation and Amortization Depreciation and amortization decreased $7.8 million, or 12%, during the six months ended June 30, 2024, as compared to the same period in 2023. • The decrease was primarily due to a $5.9 million decrease in depreciation due to prior facilities cost reduction activities, and a $1.9 million decrease in amortization for fully amortized software acquired through acquisitions. Other Income and Expense Interest expense for the six months ended June 30, 2024, decreased $1.3 million, or 3%, as compared to the same period in 2023, primarily due to repayments on the Term Loan. Interest income for the six months ended June 30, 2024, increased $1.0 million, or 14%, as compared to the same period in 2023. 33 Table of contents Other, net is primarily comprised of foreign currency transaction gains and losses. Other, net was $0.9 million and $7.5 million of expense for the six months ended June 30, 2024 and 2023, respectively. Income Taxes 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 See Note 9, Segment Information , to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information regarding segments. The following is selected financial data for our reportable segments for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenue Banks $ 143,649 $ 117,507 $ 249,078 $ 205,547 Merchants 38,017 36,508 73,745 71,289 Billers 191,813 $ 169,310 366,675 336,165 Total revenue $ 373,479 $ 323,325 $ 689,498 $ 613,001 Segment Adjusted EBITDA Banks $ 79,212 $ 51,622 $ 120,850 $ 76,303 Merchants 15,375 9,911 26,026 16,455 Billers 37,435 31,229 68,172 60,870 Depreciation and amortization (27,586) (31,436) (55,195) (62,975) Stock-based compensation expense (10,720) (5,414) (18,819) (10,715) Corporate and unallocated expenses (40,015) (45,392) (77,773) (93,770) Interest, net (14,518) (16,451) (29,519) (31,838) Other, net 1,156 (4,092) (869) (7,487) Income (loss) before income taxes $ 40,339 $ (10,023) $ 32,873 $ (53,157) Banks Segment Adjusted EBITDA increased $27.6 million for the three months ended June 30, 2024, compared to the same period in 2023, due to a $26.1 million increase in revenue primarily related to an increase in license revenues, and a $1.5 million decrease in cash operating expense. Merchants Segment Adjusted EBITDA increased $5.5 million for the three months ended June 30, 2024, compared to the same period in 2023, due to a $4.0 million decrease in cash operating expense and a $1.5 million increase in revenue. Billers Segment Adjusted EBITDA increased $6.2 million for the three months ended June 30, 2024, compared to the same period in 2023, due to a $22.5 million increase in revenue, partially offset by a $16.3 million increase in cash operating expense, primarily for payment card interchange and other processing fees. Banks Segment Adjusted EBITDA increased $44.5 million for the six months ended June 30, 2024, compared to the same period in 2023, due to a $43.5 million increase in revenue primarily related to an increase in license revenue and a $1.0 million decrease in cash operating expense. Merchants Segment Adjusted EBITDA increased $9.6 million for the six months ended June 30, 2024, compared to the same period in 2023, due to a $7.1 million decrease in cash operating expense and a $2.5 million increase in revenue. Billers Segment Adjusted EBITDA increased $7.3 million for the six months ended June 30, 2024, compared to the same period in 2023, due to a $30.5 million increase in revenue, partially offset by a $23.2 million increase in cash operating expense, primarily for payment card interchange and other processing fees. 34 Table of contents Liquidity and Capital Resources General Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to meet the interest and principal requirements of our outstanding indebtedness; and (iii) to fund acquisitions, capital expenditures, and lease payments. We believe these needs will be satisfied using cash flow generated by our operations, our cash and cash equivalents, and available borrowings under our revolving credit facility over the next 12 months and beyond. Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. As of June 30, 2024, we had $157.0 million of cash and cash equivalents, of which $61.0 million was held by our foreign subsidiaries. If these funds were needed for our operations in the United States, we may potentially be required to accrue and pay foreign and U.S. state income taxes to repatriate these funds. As of June 30, 2024, only the earnings in our Indian foreign subsidiaries are indefinitely reinvested. We are also permanently reinvested for outside book/tax basis difference related to foreign subsidiaries. These outside basis differences could reverse through sales of the foreign subsidiaries, as well as various other events, none of which are considered probable as of June 30, 2024. Available Liquidity The following table sets forth our available liquidity for the dates indicated (in thousands): June 30, 2024 December 31, 2023 Cash and cash equivalents $ 156,983 $ 164,239 Availability under revolving credit facility 462,100 373,900 Total liquidity $ 619,083 $ 538,139 The increase in total liquidity is primarily attributable to the $100.0 million increase in the maximum amount available under the revolving credit facility. 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 June 30, 2024, the full $75.0 million was available. On February 26, 2024, we entered into a Refinance Amendment (the “Amendment”) to the Second Amended and Restated Credit Agreement, dated as of April 5, 2019 (as amended, restated, supplemented or otherwise modified from time to time, including by the Amendment, the “Credit Agreement”) with ACI Worldwide Corp and ACI Payments, Inc. as co-borrowers, the lenders, and Bank of America N.A, as administrative agent and lender. The Amendment, among other things, (i) provides a senior secured term loan facility in an aggregate principal amount of $500 million, (ii) provides a senior secured revolving credit facility in an aggregate principal amount of $600 million, and (iii) extends the maturity date of the Facilities to February 26, 2029. The proceeds of the borrowings under the Amendment, together with cash on hand, were used to refinance all outstanding borrowings and replace all existing revolving commitments under the Credit Agreement immediately prior to the date of the Amendment and will be used to provide ongoing working capital and for other general corporate purposes. 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 June 2024, the board approved the repurchase of the Company's common stock of up to $400.0 million in place of the remaining purchase amounts previously authorized. We repurchased 3,743,220 shares for $120.7 million under the program during the six months ended June 30, 2024. Under the program to date, we have repurchased 62,664,520 shares for approximately $1.1 billion. As of June 30, 2024, the maximum remaining amount authorized for purchase under the stock repurchase program was approximately $380.3 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. 35 Table of contents Cash Flows The following table sets forth summarized cash flow data for the periods indicated (in thousands): Six Months Ended June 30, 2024 2023 Net cash provided by (used by): Operating activities $ 178,258 $ 57,508 Investing activities (23,978) (19,597) Financing activities (170,273) (61,183) Cash Flows from Operating Activities 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 include employee expenditures, taxes, interest payments, and leased facilities. Cash flows provided by operating activities were $120.8 million higher for the six months ended June 30, 2024, compared to the same period in 2023. Our operating cash flows for the current quarter increased primarily due to $17.7 million more in customer receipt collections on higher prior year-end receivable balances, $19.2 million less in income tax payments, as well as cash flows generated from $23.1 million in net income for the six months ended June 30, 2024, as compared to a $39.0 million net loss for the same period in 2023. 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 six months of 2024, we used cash of $24.0 million to purchase software, property, and equipment, as compared to $19.6 million during the same period in 2023. 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 six months of 2024, we repaid a net $38.4 million on the Term Loan under the Amendment, $8.7 million of other debt payments, and $5.1 million of debt issuance costs. In addition, we used $119.7 million to repurchase common stock, $6.3 million for the repurchase of stock-based compensation awards for tax withholdings, and $6.2 million for settlement assets and liabilities due to processing timing. We received net proceeds of $12.0 million on the Revolving Credit Facility, and proceeds of $2.1 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended. During the first six months of 2023, we repaid $34.1 million on the Term Loan, $11.8 million of other debt payments, and $2.2 million of debt issuance costs. In addition, we used $3.3 million for the repurchase of stock-based compensation awards for tax withholdings, and $24.1 million for settlement assets and liabilities due to processing timing. We received net proceeds of $10.0 million on the Revolving Credit Facility, and proceeds of $4.3 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 six months ended June 30, 2024, 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, 2023. 36 Table of contents Critical Accounting Estimates The preparation of the condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions we believe to be proper and reasonable under the circumstances. We continually evaluate the appropriateness of estimates and assumptions used in the preparation of our condensed consolidated financial statements. Actual results could differ from those estimates. The accounting policies that reflect our more significant estimates, judgments, and assumptions, and that we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following: • Revenue Recognition • Intangible Assets and Goodwill • Business Combinations • Stock-Based Compensation • Accounting for Income Taxes During the six months ended June 30, 2024, 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, 2023, for a more complete discussion of our critical accounting policies and estimates.