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MarketScreener Homepage  >  Equities  >  Nasdaq  >  ACI Worldwide, Inc.    ACIW

ACI WORLDWIDE, INC.

(ACIW)
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ACI WORLDWIDE : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/05/2020 | 12:49pm EST
Forward-Looking Statements
This report contains forward-looking statements based on current expectations
that involve a number of risks and uncertainties. Generally, forward-looking
statements do not relate strictly to historical or current facts and may include
words or phrases such as "believes," "will," "expects," "anticipates,"
"intends," and words and phrases of similar impact. The forward-looking
statements are made pursuant to safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, as amended.

Forward-looking statements in this report include, but are not limited to,
statements regarding future operations, business strategy, business environment,
key trends, and, in each case, statements related to expected financial and
other benefits. Many of these factors will be important in determining our
actual future results. Any or all of the forward-looking statements in this
report may turn out to be incorrect. They may be based on inaccurate assumptions
or may not account for known or unknown risks and uncertainties. Consequently,
no forward-looking statement can be guaranteed. Actual future results may vary
materially from those expressed or implied in any forward-looking statements,
and our business, financial condition and results of operations could be
materially and adversely affected. In addition, we disclaim any obligation to
update any forward-looking statements after the date of this report, except as
required by law.

All forward-looking statements in this report are expressly qualified by the
risk factors discussed in our filings with the Securities and Exchange
Commission ("SEC"). The cautionary statements in this report expressly qualify
all of our forward-looking statements. Factors that could cause actual results
to differ from those expressed or implied in the forward-looking statements
include, but are not limited to, those discussed in our Risk Factors in Part 1,
Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31,
2019, and in Part 2, Item 1A of this Form 10-Q.

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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, 2019, and with our financial
statements and related notes contained in this Form 10-Q. Results for the three
and nine months ended September 30, 2020, are not necessarily indicative of
results that may be attained in the future.

COVID-19 Pandemic
The COVID-19 pandemic resulted in authorities implementing numerous measures to
try to contain the virus. These measures may remain in place for a significant
period of time and adversely affect our business, operations and financial
condition as well as the business, operations and financial conditions of our
customers and business partners. The spread of the virus has also caused us to
modify our business practices (including employee work locations and
cancellation of physical participation in meetings) in ways that may be
detrimental to our business (including working remotely and its attendant
cybersecurity risks). We may take further actions as may be required by
government authorities or that we determine are in the best interests of our
employees and customers. There is no certainty that such measures will be
sufficient to mitigate the risks posed by the virus or otherwise be satisfactory
to government authorities.

We created a dedicated Crisis Management Team to oversee and execute our
business continuity plans and a variety of measures designed to ensure the
ongoing availability of our products, solutions and services for our customers,
while taking health and safety measures for our employees, including
telecommuting, travel restrictions, social distancing policies, and stepped-up
facility cleaning practices.

We believe we have sufficient liquidity to continue business operations during
this volatile and uncertain period. We have $472.3 million of available
liquidity as of September 30, 2020, consisting of cash on hand and availability
under our revolving credit facility. To begin to address the potential long-term
financial impacts of the virus, we have delayed non-essential capital spending
and operating expenses.

The pandemic presents potential new risks to the Company's business. We began to
see the impacts of COVID-19 on certain customer transaction volumes in late
March and continued to see changes through the third quarter of 2020, primarily
within our Merchants and Billers customer base of our ACI On Demand segment. The
effect of COVID-19 and related events, including those described above, could
have an ongoing negative effect on our stock price, business prospects,
financial condition, and results of operations. More specifically, for those
customers under consumption-based contracts, continued declines in transaction
volumes could negatively impact the Company's financial position, results of
operations, and cash flows.

For the reasons discussed above, ACI cannot reasonably estimate with any degree
of certainty the future impact COVID-19 may have on the Company's results of
operations, financial position, and liquidity. Notwithstanding any actions by
national, state, and local governments to mitigate the impact of COVID-19 or by
the Company to address the adverse impacts of COVID-19, there can be no
assurance that any of the foregoing activities will be successful in mitigating
or preventing significant adverse effects on the Company.

Overview

ACI Worldwide powers electronic payments for more than 6,000 organizations
around the world. More than 1,000 of the largest financial institutions and
intermediaries, as well as thousands of global merchants, rely on ACI to execute
$14 trillion each day in payments and securities. In addition, myriad
organizations utilize our electronic bill presentment and payment services.
Through our comprehensive suite of software solutions delivered on customers'
premises, through a third-party public cloud environment or through ACI's
private cloud, we provide real-time, immediate payments capabilities and enable
the industry's most complete omni-channel payments experience.

Our products are sold and supported through distribution networks covering three
geographic regions - the Americas; Europe, Middle East, and Africa ("EMEA"); and
Asia/Pacific. Each distribution network has its own globally coordinated sales
force that it supplements with independent reseller and/or distributor networks.
Our products and solutions are used globally by banks, financial intermediaries,
merchants, and billers, such as third-party electronic payment processors,
payment associations, switch interchanges, and a wide range of
transaction-generating endpoints, including ATMs, merchant point-of-sale ("POS")
terminals, bank branches, mobile phones, tablets, corporations, and Internet
commerce sites. Accordingly, our business and operating results are influenced
by trends such as information technology spending levels, the growth rate of
electronic payments, mandated regulatory changes, and changes in the number and
type of customers in the financial services industry. Our products are marketed
under the ACI brand.

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We derive a majority of our revenues from domestic operations and believe we
have large opportunities for growth in international markets as well as
continued expansion domestically in the United States. Refining our global
infrastructure is a critical component of driving our growth. We also continue
to maintain centers of expertise in Timisoara, Romania and Pune and Bangalore in
India, as well as key operational centers such as Cape Town, South Africa and in
multiple locations in the United States.

Key trends that currently impact our strategies and operations include:
Increasing electronic payment transaction volumes. Electronic payment volumes
continue to increase around the world, taking market share from traditional cash
and check transactions. In their 2019 World Payments Report, Capgemini predicts
that non-cash transaction volumes will grow in volume at an annual rate of
14.0%, from 538.6 billion in 2017 to 1,045.5 billion in 2022, with varying
growth rates based on the type of payment and part of the world. We leverage the
growth in transaction volumes through the licensing of new systems to customers
whose older systems cannot handle increased volume, through the sale of capacity
upgrades to existing customers, and through the scalability of our
platform-based solutions. Furthermore, electronic payments have taken on greater
importance during the global COVID-19 crisis as consumers increasingly prefer
cashless payment options and shift to shopping and paying bills online.

Adoption of real-time payments. Customer expectations, from both consumers and
billers, are driving the payments world to more real-time delivery. In the U.K.,
payments sent through the traditional ACH multi-day batch service can now be
sent through the Faster Payments service giving almost immediate access to the
funds, and this is being considered and implemented in several countries
including Australia, Brazil, Malaysia, Singapore, Thailand, the United States,
and various countries in Europe. In Europe, the ECB TIPS and EBA RT1 schemes are
driving real-time payments adoption, while in the U.S. market, Zelle and TCH
Real-Time Payments are now driving adoption. Corporate customers expect
real-time information on the status of their payments instead of waiting for an
end-of-day report. Regulators expect banks to be monitoring key measures like
liquidity in real time. ACI's focus on and experience with the real-time
execution of transactions and delivery of information through real-time tools,
such as dashboards, will be valuable in addressing this trend.

Increasing competition. The electronic payments market is highly competitive and
subject to rapid change. Our competition comes from in-house information
technology departments, third-party electronic payment processors, and
third-party software companies located both within and outside of the U.S. Many
of these companies are significantly larger than ACI and have significantly
greater financial, technical, and marketing resources. As electronic payment
transaction volumes increase, third-party processors tend to provide competitive
solutions, particularly among customers that do not seek to differentiate their
electronic payment offerings or are eliminating banks from the payments service.
As consolidation in the financial services and financial technology industries
continues, we anticipate that competition for those customers will intensify.

Adoption of cloud technology. To leverage lower-cost computing technologies,
some banks, financial intermediaries, merchants, and billers are seeking to
transition their systems to make use of cloud technology. Our investments and
partnerships provide us the grounding to deliver cloud capabilities now and in
the future. Market sizing data from Ovum indicates that spend on SaaS and PaaS
payment systems is growing faster than spend on installed applications.

Electronic payments fraud and compliance. As electronic payment transaction
volumes increase, organized criminal organizations continue to find ways to
commit a growing volume of fraudulent transactions using a wide range of
techniques. Banks, financial intermediaries, merchants, and billers continue to
seek ways to leverage new technologies to identify and prevent fraudulent
transactions and other attacks such as denial of service attacks. Due to
concerns with international terrorism and money laundering, banks and financial
intermediaries in particular are being faced with increasing scrutiny and
regulatory pressures. We continue to see opportunity to offer our fraud
detection solutions with advanced machine learning capabilities to help
customers manage the growing levels of electronic payments fraud and compliance
activity.

Adoption of smartcard technology. In many markets, issuers are being required to
issue new cards with embedded chip technology, with the merchant liability shift
having gone into effect in 2015 in the U.S. (and the fuel dispenser liability
shift occurring later in 2020). Chip-based cards are more secure, harder to
copy, and offer the opportunity for multiple functions on one card (e.g., debit,
credit, electronic purse, identification, health records, etc.). While this
combats card-present fraud, it results in greater card-not-present fraud (e.g.,
fraud at eCommerce sites).

Single Euro Payments Area (SEPA). SEPA, primarily focused on the European
economic community and the U.K., is designed to facilitate lower costs for
cross-border payments and reduce timeframes for settling electronic payment
transactions. The transition to SEPA payment mechanisms will drive more volume
to these systems with the potential to cause banks to review the capabilities of
the systems supporting these payments. Our retail payments and real-time
payments solutions facilitate key functions that help banks and financial
intermediaries address these mandated regulations.
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European Payment Service Directive (PSD2). PSD2, which was ratified by the
European Parliament in 2015, required member states to implement new payment
regulations in 2018. The XS2A provision effectively creates a new market
opportunity where banks in European Union member countries must provide open API
standards to customer data, thus allowing authorized third-party providers to
enter the market.

Financial institution consolidation. Consolidation continues on a national and
international basis, as financial institutions seek to add market share and
increase overall efficiency. Such consolidations have increased, and may
continue to increase, in their number, size, and market impact as a result of
recent economic conditions affecting the banking and financial industries. There
are several potential negative effects of increased consolidation activity.
Continuing consolidation of financial institutions may result in a smaller
number of existing and potential customers for our products and services.
Consolidation of two of our customers could result in reduced revenues if the
combined entity were to negotiate greater volume discounts or discontinue use of
certain of our products. Additionally, if a non-customer and a customer combine
and the combined entity decides to forego future use of our products, our
revenue would decline. Conversely, we could benefit from the combination of a
non-customer and a customer when the combined entity continues use of our
products and, as a larger combined entity, increases its demand for our products
and services. We tend to focus on larger financial institutions as customers,
often resulting in our solutions being the ones that survive in the consolidated
entity.

Global vendor sourcing. Global and regional banks, financial intermediaries,
merchants, and billers are aiming to reduce the costs in supplier management by
picking suppliers that can service them across all their geographies instead of
allowing each country operation to choose suppliers independently. Our global
footprint from both a customer and a delivery perspective enables us to be
successful in this internationally-sourced market. However, projects in these
environments tend to be more complex and therefore of higher risk.

Electronic payments convergence. As electronic payment volumes grow and
pressures to lower overall cost per transaction increase, banks and financial
intermediaries are seeking methods to consolidate their payment processing
across the enterprise. We believe that the strategy of using service-oriented
architectures to allow for re-use of common electronic payment functions, such
as authentication, authorization, routing and settlement, will become more
common. Using these techniques, banks and financial intermediaries will be able
to reduce costs, increase overall service levels, enable one-to-one marketing in
multiple bank channels, leverage volumes for improved pricing and liquidity, and
manage enterprise risk. Our product strategy is, in part, focused on this trend,
by creating integrated payment functions that can be re-used by multiple bank
channels, across both the consumer and wholesale bank. While this trend presents
an opportunity for us, it may also expand the competition from third-party
electronic payment technology and service providers specializing in other forms
of electronic payments. Many of these providers are larger and have
significantly greater financial, technical and marketing resources.

Mobile banking and payments. There is a growing demand for the ability to carry
out banking services or make payments using a mobile phone. According to
analysis from the Deloitte Center for Financial Services in 2018, 84% of global
consumers use online banking and 72% use mobile banking applications.
Additionally, digital channels are used more frequently than bank branches and
ATMs across all generations and in all countries. Our customers have been making
use of existing products to deploy mobile banking, mobile payments, and mobile
commerce solutions for their customers in many countries. In addition, ACI has
invested in mobile products of our own and via partnerships to support mobile
functionality in the marketplace.

Electronic bill payment and presentment. EBPP encompasses all facets of bill
payment, including biller direct, where customers initiate payments on biller
websites, the consolidator model, where customers initiate payments on a
financial institution's website, and walk-in bill payment, as one might find in
a convenience store. The EBPP market continues to grow as consumers move away
from traditional forms of paper-based payments. Nearly three out of four (73%)
online payments are made at the billers' sites, rather than through banking
websites. The biller-direct solutions are seeing strong growth as billers
migrate these services to outsourcers, such as ACI, from legacy systems built
in-house. We believe that EBPP remains ripe for outsourcing, as a significant
amount of biller-direct transactions are still processed in-house. As billers
seek to manage costs and improve efficiency, we believe that they will continue
to look to third-party EBPP vendors that can offer a complete solution for their
billing needs. ACI is supporting Billers during the COVID-19 crisis with new,
automated tools that allow consumers to defer payments, set-up flexible payment
plans, and request virtual appointments to discuss payment options.

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Several other factors related to our business may have a significant impact on
our operating results from year to year. For example, the accounting rules
governing the timing of revenue recognition are complex and it can be difficult
to estimate when we will recognize revenue generated by a given transaction.
Factors such as creditworthiness of the customer and timing of transfer of
control or acceptance of our products may cause revenues related to sales
generated in one period to be deferred and recognized in later periods. For
arrangements in which services revenue is deferred, related direct and
incremental costs may also be deferred. Additionally, while the majority of our
contracts are denominated in the U.S. dollar, a substantial portion of our sales
are made, and some of our expenses are incurred, in the local currency of
countries other than the United States. Fluctuations in currency exchange rates
in a given period may result in the recognition of gains or losses for that
period.

We continue to seek ways to grow through organic sources, partnerships, alliances, and acquisitions. We continually look for potential acquisitions designed to improve our solutions' breadth or provide access to new markets. As part of our acquisition strategy, we seek acquisition candidates that are strategic, capable of being integrated into our operating environment, and accretive to our financial performance.

Chief Executive Officer On February 18, 2020, we announced the appointment of Odilon Almeida as the Company's new President and Chief Executive Officer, effective March 9, 2020. Mr. Almeida was also appointed to serve as a member of ACI's board of directors.

Acquisition

Speedpay

On May 9, 2019, we acquired E Commerce Group Products, Inc. ("ECG"), a
subsidiary of The Western Union Company, along with ECG's subsidiary, Speedpay,
Inc. (collectively referred to as "Speedpay") for $754.1 million in cash,
including working capital adjustments, pursuant to a Stock Purchase Agreement,
among the Company, The Western Union Company, and ACI Worldwide Corp., our
wholly owned subsidiary.

To fund the acquisition, we amended our existing Credit Agreement, dated
February 24, 2017, for an additional $500.0 million senior secured term loan, in
addition to drawing $250.0 million on the available Revolving Credit Facility.
See Note 4, Debt, to our unaudited condensed consolidated financial statements
in Part I of this Form 10-Q for terms of the Credit Agreement. The remaining
acquisition consideration was funded with cash on hand.

Backlog

Backlog is comprised of:
•Committed Backlog, which includes (1) contracted revenue that will be
recognized in future periods (contracted but not recognized) from software
license fees, maintenance fees, service fees, and SaaS and PaaS fees specified
in executed contracts (including estimates of variable consideration if required
under ASC 606) and included in the transaction price for those contracts, which
includes deferred revenue and amounts that will be invoiced and recognized as
revenue in future periods and (2) estimated future revenues from software
license fees, maintenance fees, services fees, and SaaS and PaaS fees specified
in executed contracts.
•Renewal Backlog, which includes estimated future revenues from assumed contract
renewals to the extent we believe recognition of the related revenue will occur
within the corresponding backlog period.

We have historically included assumed renewals in backlog estimates based upon automatic renewal provisions in the executed contract and our historic experience with customer renewal rates.

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Our 60-month backlog estimates are derived using the following key assumptions:
•License arrangements are assumed to renew at the end of their committed term or
under the renewal option stated in the contract at a rate consistent with
historical experience. If the license arrangement includes extended payment
terms, the renewal estimate is adjusted for the effects of a significant
financing component.
•Maintenance fees are assumed to exist for the duration of the license term for
those contracts in which the committed maintenance term is less than the
committed license term.
•SaaS and PaaS arrangements are assumed to renew at the end of their committed
term at a rate consistent with our historical experiences.
•Foreign currency exchange rates are assumed to remain constant over the
60-month backlog period for those contracts stated in currencies other than the
U.S. dollar.
•Our pricing policies and practices are assumed to remain constant over the
60-month backlog period.

In computing our 60-month backlog estimate, the following items are specifically
not taken into account:
•Anticipated increases in transaction, account, or processing volumes by our
customers.
•Optional annual uplifts or inflationary increases in recurring fees.
•Services engagements, other than SaaS and PaaS arrangements, are not assumed to
renew over the 60-month backlog period.
•The potential impact of consolidation activity within our markets and/or
customers.

We review our customer renewal experience on an annual basis. The impact of this
review and subsequent updates may result in a revision to the renewal
assumptions used in computing the 60-month backlog estimates. In the event a
significant revision to renewal assumptions is determined to be necessary, prior
periods will be adjusted for comparability purposes.

The following table sets forth our 60-month backlog estimate, by reportable segment, as of September 30, 2020, June 30, 2020, March 31, 2020, and December 31, 2019 (in millions). Dollar amounts reflect foreign currency exchange rates as of each period end.

                                                 September 30,                                                         December 31,
                                                      2020              June 30, 2020          March 31, 2020              2019
ACI On Demand                                    $     3,868$        3,863$        3,781$      3,855
ACI On Premise                                         2,041                   1,976                   1,933                 1,977
Total                                            $     5,909$        5,839$        5,714$      5,832

                                                 September 30,                                                         December 31,
                                                      2020              June 30, 2020          March 31, 2020              2019
Committed                                        $     2,189$        2,140$        2,095$      2,168
Renewal                                                3,720                   3,699                   3,619                 3,664
Total                                            $     5,909$        5,839$        5,714$      5,832



Estimates of future financial results require substantial judgment and are based
on several assumptions, as described above. These assumptions may turn out to be
inaccurate or wrong for reasons outside of management's control. For example,
our customers may attempt to renegotiate or terminate their contracts for many
reasons, including mergers, changes in their financial condition, or general
changes in economic conditions (e.g. economic declines resulting from COVID-19)
in the customer's industry or geographic location. We may also experience delays
in the development or delivery of products or services specified in customer
contracts, which may cause the actual renewal rates and amounts to differ from
historical experiences. Changes in foreign currency exchange rates may also
impact the amount of revenue recognized in future periods. Accordingly, there
can be no assurance that amounts included in backlog estimates will generate the
specified revenues or that the actual revenues will be generated within the
corresponding 60-month period. Additionally, because certain components of
Committed Backlog and all of Renewal Backlog estimates are operating metrics,
the estimates are not required to be subject to the same level of internal
review or controls as contracted but not recognized Committed Backlog.
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                             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 September 30, 2020, Compared to the Three Month Period
Ended September 30, 2019
                                                                              Three Months Ended September 30,
                                                                      2020                                                              2019
                                                        % of Total            $ Change              % Change                                   % of Total
                                   Amount                Revenue               vs 2019               vs 2019               Amount               Revenue
Revenues:
Software as a service and
platform as a service          $   190,369                       60  %       $  (2,583)                     (1) %       $ 192,952                       54  %
License                             56,773                       18  %         (35,285)                    (38) %          92,058                       26  %
Maintenance                         53,049                       17  %             411                       1  %          52,638                       15  %
Services                            15,692                        5  %          (1,561)                     (9) %          17,253                        5  %
Total revenues                     315,883                      100  %         (39,018)                    (11) %         354,901                      100  %
Operating expenses:
Cost of revenue                    158,579                       50  %         (15,589)                     (9) %         174,168                       49  %
Research and development            33,573                       11  %          (2,970)                     (8) %          36,543                       10  %
Selling and marketing               22,154                        7  %          (8,263)                    (27) %          30,417                        9  %
General and administrative          37,000                       12  %           9,714                      36  %          27,286                        8  %
Depreciation and amortization       33,395                       11  %           2,226                       7  %          31,169                        9  %
Total operating expenses           284,701                       91  %         (14,882)                     (5) %         299,583                       85  %
Operating income                    31,182                        9  %         (24,136)                    (44) %          55,318                       15  %
Other income (expense):
Interest expense                   (12,925)                      (4) %           6,062                     (32) %         (18,987)                      (5) %
Interest income                      2,927                        1  %             (61)                     (2) %           2,988                        1  %
Other, net                           1,356                        -  %           3,725                    (157) %          (2,369)                      (1) %
Total other income (expense)        (8,642)                      (3) %           9,726                     (53) %         (18,368)                      (5) %
Income before income taxes          22,540                        6  %         (14,410)                    (39) %          36,950                       10  %
Income tax expense                   6,674                        2  %           1,538                      30  %           5,136                        1  %
Net income                     $    15,866                        4  %       $ (15,948)                    (50) %       $  31,814                        9  %



Revenues
Total revenue for the three months ended September 30, 2020, decreased $39.0
million, or 11%, as compared to the same period in 2019.
•The impact of certain foreign currencies strengthening against the U.S. dollar
resulted in a $0.8 million increase in total revenue during the three months
ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of foreign currency, total revenue for the three months
ended September 30, 2020, decreased $39.8 million, or 11%, compared to the same
period in 2019.

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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 decreased $2.6 million, or 1%, during the three months
ended September 30, 2020, as compared to the same period in 2019.
•The impact of certain foreign currencies strengthening against the U.S. dollar
resulted in a $0.5 million increase in SaaS and PaaS revenue during the three
months ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of foreign currency, SaaS and PaaS revenue for the
three months ended September 30, 2020, decreased $3.1 million, or 2%, compared
to the same period in 2019.
•The decrease was primarily due to a modest decline in transaction volumes
within the Company's Biller customer base as a result of the impact of COVID-19.

License Revenue
Customers purchase the right to license ACI software under multi-year,
time-based software license arrangements that vary in length but are generally
five years. Under these arrangements the software is installed at the customer's
location (i.e. on-premise). Within these agreements are specified capacity
limits typically based on customer transaction volume. ACI employs measurement
tools that monitor the number of transactions processed by customers and if
contractually specified limits are exceeded, additional fees are charged for the
overage. Capacity overages may occur at varying times throughout the term of the
agreement depending on the product, the size of the customer, and the
significance of customer transaction volume growth. Depending on specific
circumstances, multiple overages or no overages may occur during the term of the
agreement.

Included in license revenue are license and capacity fees that are payable at
the inception of the agreement or annually (initial license fees). License
revenue also includes license and capacity fees payable quarterly or monthly due
to negotiated customer payment terms (monthly license fees). The Company
recognizes revenue in advance of billings for software license arrangements with
extended payment terms and adjusts for the effects of the financing component,
if significant.

License revenue decreased $35.3 million, or 38%, during the three months ended
September 30, 2020, as compared to the same period in 2019.
•The impact of certain foreign currencies strengthening against the U.S. dollar
resulted in a $0.4 million increase in license revenue during the three months
ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of foreign currency, license revenue for the three
months ended September 30, 2020, decreased $35.7 million, or 39%, compared to
the same period in 2019.
•The decrease was primarily driven the timing and relative size of license and
capacity events during the three months ended September 30, 2020, as compared to
the same period in 2019.

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


Maintenance revenue increased $0.4 million, or 1%, during the three months ended
September 30, 2020, as compared to the same period in 2019.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $0.2 million decrease in maintenance revenue during the three
months ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of foreign currency, maintenance revenue for the three
months ended September 30, 2020, increased $0.6 million, or 1%, compared to the
same period in 2019.

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Services Revenue
Services revenue includes fees earned through implementation services and other
professional services. Implementation services include product installations,
product configurations, and custom software modifications ("CSMs"). Other
professional services include business consultancy, technical consultancy,
on-site support services, CSMs, product education, and testing services. These
services include new customer implementations as well as existing customer
migrations to new products or new releases of existing products.

Services revenue decreased $1.6 million, or 9%, during the three months ended
September 30, 2020, as compared to the same period in 2019.
•The impact of foreign currencies was insignificant for services revenue during
the three months ended September 30, 2020, as compared to the same period in
2019.
•The decrease was primarily driven by the timing and magnitude of
project-related work during the three months ended September 30, 2020, as
compared to the same period in 2019.

Operating Expenses
Total operating expenses for the three months ended September 30, 2020,
decreased $14.9 million, or 5%, as compared to the same period in 2019.
•Total operating expenses for the three months ended September 30, 2020,
included $12.3 million of significant transaction-related expenses associated
with cost reduction strategies implemented during the period. Total operating
expenses for the three months ended September 30, 2019, included $0.9 million of
significant transaction-related expenses associated with the acquisition of
Speedpay.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $0.3 million decrease in total operating expenses during the three
months ended September 30, 2020, compared to the same period in 2019.
•Adjusted for the impact of significant transaction-related expenses and foreign
currency, total operating expenses for the three months ended September 30,
2020, decreased $25.9 million, or 9%, compared to the same period in 2019.

Cost of Revenue
Cost of revenue includes costs to provide SaaS and PaaS services, third-party
royalties, amortization of purchased and developed software for resale, the
costs of maintaining our software products, as well as the costs required to
deliver, install, and support software at customer sites. SaaS and PaaS service
costs include payment card interchange fees, amounts payable to banks, and
payment card processing fees. Maintenance costs include the efforts associated
with providing the customer with upgrades, 24-hour help desk, post go-live
(remote) support, and production-type support for software that was previously
installed at a customer location. Service costs include human resource costs and
other incidental costs such as travel and training required for both pre go-live
and post go-live support. Such efforts include project management, delivery,
product customization and implementation, installation support, consulting,
configuration, and on-site support.

Cost of revenue decreased $15.6 million, or 9%, during the three months ended
September 30, 2020, compared to the same period in 2019.
•Cost of revenue for the three months ended September 30, 2020, included $1.2
million of significant transaction-related expenses associated with cost
reduction strategies implemented during the period.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $0.2 million decrease in cost of revenue during the three months
ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of significant transaction-related expenses and foreign
currency, cost of revenue decreased $16.6 million, or 10%, for the three months
ended September 30, 2020, as compared to the same period in 2019.
•The decrease was primarily due to lower payment card interchange and processing
fees, personnel and related expenses, and travel and entertainment expenses of
$10.7 million, $4.1 million, and $1.2 million, respectively.

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

R&D expense decreased $3.0 million, or 8%, during the three months ended
September 30, 2020, as compared to the same period in 2019.
•The impact of foreign currencies was insignificant for R&D expense during the
three months ended September 30, 2020, as compared to the same period in 2019.
•The decrease was primarily due to lower personnel and related expenses of $3.0
million.

Selling and Marketing
Selling and marketing includes both the costs related to selling our products to
current and prospective customers as well as the costs related to promoting the
Company, its products and the research efforts required to measure customers'
future needs and satisfaction levels. Selling costs are primarily the human
resource and travel costs related to the effort expended to license our products
and services to current and potential clients within defined territories and/or
industries as well as the management of the overall relationship with customer
accounts. Selling costs also include the costs associated with assisting
distributors in their efforts to sell our products and services in their
respective local markets. Marketing costs include costs incurred to promote the
Company and its products, perform or acquire market research to help the Company
better understand impending changes in customer demand for and of our products,
and the costs associated with measuring customers' opinions toward the Company,
our products and personnel.

Selling and marketing expense decreased $8.3 million, or 27%, during the three
months ended September 30, 2020, as compared to the same period in 2019.
•The impact of foreign currencies was insignificant for selling and marketing
expense during the three months ended September 30, 2020, as compared to the
same period in 2019.
•The decrease was primarily due to lower commissions, professional fees, and
travel and entertainment expenses of $3.4 million, $2.3 million, and $1.8
million, respectively.

General and Administrative
General and administrative expenses are primarily human resource costs including
executive salaries and benefits, personnel administration costs, and the costs
of corporate support functions such as legal, administrative, human resources,
and finance and accounting.

General and administrative expense increased $9.7 million, or 36%, during the
three months ended September 30, 2020, as compared to the same period in 2019.
•General and administrative expenses for the three months ended September 30,
2020, included $10.8 million of significant transaction-related expenses
associated with cost reduction strategies implemented during the period. General
and administrative expenses for the three months ended September 30, 2019,
included $0.7 million of significant transaction-related expenses associated
with the acquisition of Speedpay.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $0.2 million decrease in general and administrative expense during
the three months ended September 30, 2020, as compared to the same period in
2019.
•Adjusted for the impact of significant transaction-related expenses and foreign
currency, general and administrative expense decreased $0.2 million, or 1%, for
the three months ended September 30, 2020, as compared to the same period in
2019, primarily due to a decrease in travel and entertainment expenses.

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Depreciation and Amortization
Depreciation and amortization increased $2.2 million, or 7%, during the three
months ended September 30, 2020, as compared to the same period in 2019.
•The impact of certain foreign currencies strengthening against the U.S. dollar
resulted in a $0.1 million increase in depreciation and amortization during the
three months ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of foreign currency, depreciation and amortization
increased $2.1 million, or 7%, for the three months ended September 30, 2020, as
compared to the same period in 2019, primarily due to additional amortization of
internal-use software in our On Demand business.

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

Interest income includes the portion of software license fees paid by customers
under extended payment terms that is attributed to the significant financing
component. Interest income for the three months ended September 30, 2020
decreased $0.1 million, or 2%, as compared to the same period in 2019.

Other, net is primarily comprised of foreign currency transaction gains and losses. Other, net was $1.4 million of income and $2.4 million of expense for the three months ended September 30, 2020 and 2019, respectively.


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

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                             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):

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

                                                                              Nine Months Ended September 30,
                                                                      2020                                                              2019
                                                        % of Total            $ Change              % Change                                   % of Total
                                   Amount                Revenue               vs 2019               vs 2019               Amount               Revenue
Revenues:
Software as a service and
platform as a service          $   563,892                       62  %       $  89,884                      19  %       $ 474,008                       55  %
License                            135,038                       15  %         (30,639)                    (18) %         165,677                       19  %
Maintenance                        159,078                       18  %            (593)                      -  %         159,671                       19  %
Services                            49,270                        5  %          (9,748)                    (17) %          59,018                        7  %
Total revenues                     907,278                      100  %          48,904                       6  %         858,374                      100  %
Operating expenses:
Cost of revenue                    471,762                       52  %          27,413                       6  %         444,349                       52  %
Research and development           108,175                       12  %          (3,797)                     (3) %         111,972                       13  %
Selling and marketing               76,692                        8  %         (16,117)                    (17) %          92,809                       11  %
General and administrative         102,684                       11  %          (5,438)                     (5) %         108,122                       13  %
Depreciation and amortization       98,928                       11  %          19,149                      24  %          79,779                        9  %
Total operating expenses           858,241                       94  %          21,210                       3  %         837,031                       98  %
Operating income                    49,037                        6  %          27,694                     130  %          21,343                        2  %
Other income (expense):
Interest expense                   (44,238)                      (5) %           1,686                      (4) %         (45,924)                      (5) %
Interest income                      8,781                        1  %            (237)                     (3) %           9,018                        1  %
Other, net                          (6,361)                      (1) %          (3,482)                    121  %          (2,879)                       -  %
Total other income (expense)       (41,818)                      (5) %          (2,033)                      5  %         (39,785)                      (4) %
Income (loss) before income
taxes                                7,219                        1  %          25,661                    (139) %         (18,442)                      (2) %
Income tax expense (benefit)         1,705                        -  %          31,723                    (106) %         (30,018)                      (3) %
Net income                     $     5,514                        1  %       $  (6,062)                    (52) %       $  11,576                        1  %



Revenues
Total revenue for the nine months ended September 30, 2020, increased $48.9
million, or 6%, as compared to the same period in 2019.
•Speedpay contributed an incremental $123.3 million in total revenue during the
nine months ended September 30, 2020, as compared to the same period in 2019.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $4.4 million decrease in total revenue during the nine months
ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of incremental Speedpay revenue and foreign currency,
total revenue for the nine months ended September 30, 2020, decreased $70.0
million, or 8%, compared to the same period in 2019.

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Software as a Service ("SaaS") and Platform as a Service ("PaaS") Revenue
SaaS and PaaS revenue increased $89.9 million, or 19%, during the nine months
ended September 30, 2020, as compared to the same period in 2019.
•Speedpay contributed an incremental $123.3 million in SaaS and PaaS revenue
during the nine months ended September 30, 2020, as compared to the same period
in 2019.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in $0.2 million decrease in SaaS and PaaS revenue during the nine
months ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of incremental revenue from Speedpay and foreign
currency, SaaS and PaaS revenue for the nine months ended September 30, 2020,
decreased $33.3 million, or 7%, compared to the same period in 2019.
•The decrease was primarily due to declines in transaction volumes within the
Company's Biller customer base as a result of the impact of COVID-19 and
declines in Digital Channels associated with customer attrition.

License Revenue
License revenue decreased $30.6 million, or 18%, during the nine months ended
September 30, 2020, as compared to the same period in 2019.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $1.4 million decrease in license revenue during the nine months
ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of foreign currency, license revenue for the nine
months ended September 30, 2020, decreased $29.2 million, or 18%, compared to
the same period in 2019.
•The decrease was primarily driven by the timing and relative size of license
and capacity events during the nine months ended September 30, 2020, as compared
to the same period in 2019.

Maintenance Revenue
Maintenance revenue decreased $0.6 million during the nine months ended
September 30, 2020, as compared to the same period in 2019.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $2.1 million decrease in maintenance revenue during the nine
months ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of foreign currency, maintenance revenue for the nine
months ended September 30, 2020, increased $1.5 million, or 1%, compared to the
same period in 2019.

Services Revenue
Services revenue decreased $9.7 million, or 17%, during the nine months ended
September 30, 2020, as compared to the same period in 2019.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $0.7 million decrease in services revenue during the nine months
ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of foreign currency, services revenue for the nine
months ended September 30, 2020, decreased $9.0 million, or 15%, compared to the
same period in 2019.
•The decrease was primarily driven by the timing and magnitude of
project-related work during the nine months ended September 30, 2020, as
compared to the same period in 2019.

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Operating Expenses
Total operating expenses for the nine months ended September 30, 2020, increased
$21.2 million, or 3%, as compared to the same period in 2019.
•Speedpay contributed an incremental $105.5 million to total operating expenses
during the nine months ended September 30, 2020, as compared to the same period
in 2019.
•Total operating expenses for the nine months ended September 30, 2020, included
$25.8 million of significant transaction-related expenses associated with the
acquisition of Speedpay and cost reduction strategies implemented during the
period. Total operating expenses for the nine months ended September 30, 2019,
included $22.2 million of significant transaction-related expenses associated
with the acquisition of Speedpay.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $6.1 million decrease in total operating expenses for the nine
months ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of incremental Speedpay operating expenses, significant
transaction-related expenses, and foreign currency, total operating expenses for
the nine months ended September 30, 2020, decreased $81.7 million, or 10%,
compared to the same period in 2019.

Cost of Revenue
Cost of revenue increased $27.4 million, or 6%, during the nine months ended
September 30, 2020, compared to the same period in 2019.
•Speedpay contributed an incremental $84.9 million to cost of revenue during the
nine months ended September 30, 2020, as compared to the same period in 2019.
•Cost of revenue for the nine months ended September 30, 2020, included $3.4
million of significant transaction-related expenses associated with the
acquisition of Speedpay and cost reduction strategies implemented during the
period.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $2.4 million decrease in cost of revenue during the nine months
ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of incremental Speedpay expense, significant
transaction-related expenses, and foreign currency, cost of revenue decreased
$58.6 million, or 13%, for the nine months ended September 30, 2020, as compared
to the same period in 2019.
•The decrease was primarily due to lower payment card interchange and processing
fees, personnel and related expenses, amortization of acquired software, and
travel and entertainment expenses of $37.6 million, $15.6 million,$2.6 million,
and $2.5 million, respectively.

Research and Development
R&D expense decreased $3.8 million, or 3%, during the nine months ended
September 30, 2020, as compared to the same period in 2019.
•Speedpay contributed an incremental $4.1 million to R&D expense during the nine
months ended September 30, 2020, as compared to the same period in 2019.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $1.7 million decrease in R&D expense during the nine months ended
September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of incremental Speedpay expense and foreign currency,
R&D expense decreased $6.3 million, or 6%, for the nine months ended
September 30, 2020, as compared to the same period in 2019, primarily due to
lower personnel and related expenses.

Selling and Marketing
Selling and marketing expense decreased $16.1 million, or 17%, during the nine
months ended September 30, 2020, as compared to the same period in 2019.
•Speedpay contributed an incremental $3.9 million to selling and marketing
expense during the nine months ended September 30, 2020, as compared to the same
period in 2019.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $1.2 million decrease in selling and marketing expense for the
nine months ended September 30, 2020, as compared to the same period in 2019.
•Adjusted for the impact of incremental Speedpay expense and foreign currency,
selling and marketing expense decreased $18.9 million, or 21%, for the nine
months ended September 30, 2020, as compared to the same period in 2019.
•The decrease was primarily due to lower personnel and related expenses,
commissions, professional fees, and travel and entertainment expenses of $6.6
million, $6.0 million, $4.4 million, and $1.9 million respectively.

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General and Administrative
General and administrative expense decreased $5.4 million, or 5%, during the
nine months ended September 30, 2020, as compared to the same period in 2019.
•Speedpay contributed an incremental $0.7 million to general and administrative
expense during the nine months ended September 30, 2020, as compared to the same
period in 2019.
•General and administrative expenses for the nine months ended September 30,
2020 included $21.8 million of significant transaction-related expenses
associated with cost reduction strategies implemented during the period. General
and administrative expense for the nine months ended September 30, 2019,
included $21.8 million of significant transaction-related expenses associated
with the acquisition of Speedpay.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $0.6 million decrease in general and administrative expenses
during the nine months ended September 30, 2020, as compared to the same period
in 2019.
•Adjusted for the impact of incremental Speedpay expense, significant
transaction-related expenses, and foreign currency, general and administrative
expense decreased $5.5 million, or 6%, for the nine months ended September 30,
2020, as compared to the same period in 2019.
•The decrease was primarily due to lower personnel and related expenses and
travel and entertainment expenses of $4.2 million and $1.3 million,
respectively.

Depreciation and Amortization
Depreciation and amortization increased $19.1 million, or 24%, during the nine
months ended September 30, 2020, as compared to the same period in 2019.
•Speedpay contributed an incremental $11.9 million of depreciation and
amortization expense during the nine months ended September 30, 2020, as
compared to the same period in 2019.
•The impact of certain foreign currencies weakening against the U.S. dollar
resulted in a $0.2 million decrease in depreciation and amortization expense
during the nine months ended September 30, 2020, as compared to the same period
in 2019.
•Adjusted for the impact of incremental Speedpay expense and foreign currency,
depreciation and amortization increased $7.5 million, or 9%, for the nine months
ended September 30, 2020, as compared to the same period in 2019, primarily due
to additional amortization of internal-use software in our On Demand business.

Other Income and Expense
Interest expense for the nine months ended September 30, 2020, decreased $1.7
million, or 4%, as compared to the same period in 2019, primarily due to lower
interest rates, partially offset by higher comparative debt balances.

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

Other, net was $6.4 million and $2.9 million of expense for the nine months ended September 30, 2020 and 2019, respectively. Foreign currency loss was higher in 2020 due to the market volatility in the wake of the COVID-19 pandemic.


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

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

Our Chief Executive Officer is also our chief operating decision maker ("CODM").
The CODM, together with other senior management personnel, focus their review on
consolidated financial information and the allocation of resources based on
operating results, including revenues and Segment Adjusted EBITDA, for each
segment, separate from the corporate operations.

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ACI On Demand serves the needs of banks, merchants, and billers who use payments
to facilitate their core business. These on-demand solutions are maintained and
delivered through the cloud via our global data centers and are available in
either a single-tenant environment for SaaS offerings, or in a multi-tenant
environment for PaaS offerings.
ACI On Premise serves customers who manage their software on site or through a
third-party public cloud environment. These on-premise customers use the
Company's software to develop sophisticated solutions, which are often part of a
larger system located and managed at the customer specified site. These
customers require a level of control and flexibility that ACI On Premise
solutions can offer, and they have the resources and expertise to take a lead
role in managing these solutions.

Revenue is attributed to the reportable segments based upon the product sold and
mechanism for delivery to the customer. Expenses are attributed to the
reportable segments in one of three methods, (1) direct costs of the segment,
(2) labor costs that can be attributed based upon time tracking for individual
products, or (3) costs that are allocated. Allocated costs are generally
marketing and sales related activities as well as information technology and
facilities related expense for which multiple segments benefit. We also allocate
certain depreciation costs to the segments.

Segment Adjusted EBITDA is the measure reported to the CODM for purposes of
making decisions on allocating resources and assessing the performance of our
segments and, therefore, Segment Adjusted EBITDA is presented in conformity with
ASC 280, Segment Reporting. Segment Adjusted EBITDA is defined as earnings
(loss) from operations before interest, income tax expense (benefit),
depreciation and amortization ("EBITDA") adjusted to exclude stock-based
compensation, and net other income (expense).

Corporate and unallocated expenses consist of the corporate overhead costs that
are not allocated to reportable segments. These overhead costs relate to human
resources, finance, legal, accounting, merger and acquisition activity, and
other costs that are not considered when management evaluates segment
performance.

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

                                            Three Months Ended September 30,        Nine Months Ended September 30,
                                                2020                2019               2020                2019
Revenue
ACI On Demand                               $  190,369$ 192,952$  563,892$  475,299
ACI On Premise                                 125,514            161,949             343,386             383,075
Total revenue                               $  315,883$ 354,901$  907,278$  858,374
Segment Adjusted EBITDA
ACI On Demand                               $   33,204$  18,561$   89,396$   35,639
ACI On Premise                                  69,553             99,553             159,555             184,890
Depreciation and amortization                  (35,490)           (33,913)           (105,004)            (88,543)
Stock-based compensation expense                (8,061)            (9,371)            (22,943)            (30,328)
Corporate and unallocated expenses             (28,024)           (19,512)            (71,967)            (80,315)
Interest, net                                   (9,998)           (15,999)            (35,457)            (36,906)
Other, net                                       1,356             (2,369)             (6,361)             (2,879)
Income (loss) before income taxes           $   22,540$  36,950$    7,219$  (18,442)
Depreciation and amortization
ACI On Demand                               $   10,227$   9,059$   30,411$   25,110
ACI On Premise                                   3,312              2,963               9,849               9,012
Corporate                                       21,951             21,891              64,744              54,421

Total depreciation and amortization $ 35,490$ 33,913

        $  105,004$   88,543
Stock-based compensation expense
ACI On Demand                               $    2,255$   2,389$    6,554$    6,554
ACI On Premise                                   2,259              2,227               6,568               6,234
Corporate                                        3,547              4,755               9,821              17,540

Total stock-based compensation expense $ 8,061$ 9,371

       $   22,943$   30,328



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Table of contents ACI On Demand Segment Adjusted EBITDA increased $14.6 million for the three months ended September 30, 2020, compared to the same period in 2019. The increase was primarily due to a $17.2 million decrease in cash operating expense, partially offset by a $2.6 million decrease in revenue.


ACI On Demand Segment Adjusted EBITDA increased $53.8 million for the nine
months ended September 30, 2020, compared to the same period in 2019, of which
$30.0 million was due to the acquisition of Speedpay. Excluding the impact of
the acquisition of Speedpay, ACI On Demand Segment Adjusted EBITDA increased
$23.8 million, primarily due to a $58.5 million decrease in cash operating
expense, partially offset by a $34.7 million decrease in revenue.

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

ACI On Premise Segment Adjusted EBITDA decreased $25.3 million for the nine
months ended September 30, 2020, compared to the same period in 2019, primarily
due to a $14.4 million decrease in cash operating expense, partially offset by a
$39.7 million decrease in revenue.
Liquidity and Capital Resources
General
Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to
meet the interest and principal requirements of our outstanding indebtedness;
and (iii) to fund acquisitions, capital expenditures, and lease payments. We
believe these needs will be satisfied using cash flow generated by our
operations, our cash and cash equivalents, and available borrowings under our
revolving credit facility.

Our cash requirements in the future may be financed through additional equity or
debt financings. However, the disruption in the capital markets caused by the
COVID-19 pandemic could make any new financing more challenging, and there can
be no assurance that such financings will be obtained on commercially reasonable
terms, or at all. We believe our liquidity will allow us to manage the
anticipated impact of COVID-19 on our business operations for the foreseeable
future, which could include reductions in revenue and delays in payments from
customers and partners. We are compliant with our debt covenants and do not
anticipate an inability to service our debt. As the challenges posed by COVID-19
on our business and the economy as a whole evolve rapidly, we will continue to
evaluate our liquidity and financial position in light of future developments,
particularly those relating to COVID-19.

Available Liquidity
The following table sets forth our available liquidity for the dates indicated
(in thousands):
                                                                September 30,         December 31,
                                                                     2020                 2019
Cash and cash equivalents                                       $   133,845$   121,398
Availability under revolving credit facility                        338,500              261,000
Total liquidity                                                 $   472,345$   382,398



The increase in total liquidity is primarily attributable to positive operating
cash flows of $192.1 million, partially offset by $35.6 million of payments to
purchase property and equipment and software and distribution rights, $29.2
million of repayments on the Term Loans and $28.9 million of payments related to
stock repurchases. We also repaid a net $79.0 million on the Revolving Credit
Facility.

The Company and ACI Payments, Inc., a wholly owned subsidiary, maintain a $140.0
million uncommitted overdraft facility with Bank of America, N.A. The overdraft
facility acts as a secured loan under the terms of the Credit Agreement to
provide an additional funding mechanism for timing differences that can occur in
the bill payment settlement process. As of September 30, 2020, the full $140.0
million was available.

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Cash and cash equivalents consist of highly liquid investments with original
maturities of three months or less. As of September 30, 2020, we had $133.8
million of cash and cash equivalents, of which $59.9 million was held by our
foreign subsidiaries. If these funds were needed for our operations in the U.S.,
we may potentially be required to accrue and pay foreign and U.S. state income
taxes to repatriate these funds. As of September 30, 2020, only the earnings in
our Indian foreign subsidiaries are indefinitely reinvested. The earnings of all
other foreign entities are no longer indefinitely reinvested. We are also
permanently reinvested for outside book/tax basis difference related to foreign
subsidiaries. These outside basis differences could reverse through sales of the
foreign subsidiaries, as well as various other events, none of which are
considered probable as of September 30, 2020.

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

                                            Nine Months Ended September 30,
                                                  2020

2019

Net cash provided by (used by):
Operating activities                $         192,058                    $  88,938
Investing activities                          (35,647)                    (813,046)
Financing activities                         (148,916)                     695,699



Cash Flows from Operating Activities
Net cash flows provided by operating activities during the nine months ended
September 30, 2020, were $192.1 million as compared to $88.9 million during the
same period in 2019. Net cash provided by operating activities primarily
consists of net income adjusted to add back depreciation, amortization, and
stock-based compensation. Cash flows provided by operating activities were
$103.1 million higher for the nine months ended September 30, 2020, compared to
the same period in 2019, primarily due to the incremental impact of Speedpay and
improvements in the timing of working capital. Our current policy is to use our
operating cash flow primarily for funding capital expenditures, lease payments,
stock repurchases, and acquisitions.

Cash Flows from Investing Activities
During the first nine months of 2020, we used cash of $35.6 million to purchase
software, property, and equipment, as compared to $37.3 million during the same
period in 2019. During the first nine months of 2019, we paid $753.9 million,
net of $0.1 million in cash acquired, to acquire Speedpay and used cash of $18.5
million to invest in a payment technology and services company in India.

Cash Flows from Financing Activities
Net cash flows used by financing activities for the nine months ended
September 30, 2020, were $148.9 million as compared to net cash flows provided
by financing activities of $695.7 million during the same period in 2019. During
the first nine months of 2020, we repaid a net $79.0 million on the Revolving
Credit Facility and $29.2 million on the Term Loans. In addition, we used $28.9
million to repurchase common stock and $11.2 million for the repurchase of
stock-based compensation awards for tax withholdings. We also received proceeds
of $9.4 million from the exercise of stock options and the issuance of common
stock under our 2017 Employee Stock Purchase Plan, as amended. During the first
nine months of 2019, we received proceeds of $500.0 million from our Delayed
Draw Term Loan and $280.0 million from our Revolving Credit Facility to fund our
purchase of Speedpay and stock repurchases, and we repaid $19.2 million on the
Initial Term Loan and $15.0 million on the Revolving Credit Facility. In
addition, we received proceeds of $9.3 million from the exercise of stock
options and the issuance of common stock under our 2017 Employee Stock Purchase
Plan, as amended. We also used $35.6 million to repurchase common stock and $2.8
million for the repurchase of stock-based compensation awards for tax
withholdings.

We may decide to use cash to acquire new products and services or enhance existing products and services through acquisitions of other companies, product lines, technologies, and personnel, or through investments in other companies.

We believe our existing sources of liquidity, including cash on hand and cash provided by operating activities, will satisfy our projected liquidity requirements, which primarily consists of working capital and debt service requirements, for the next twelve months and foreseeable future.

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Debt
As of September 30, 2020, we had $160.0 million and $726.8 million outstanding
under our Revolving Credit Facility and Term Loans, respectively, with up to
$338.5 million of unused borrowings under the Revolving Credit Facility, as
amended, and up to $1.5 million of unused borrowings under the Letter of Credit
agreement. The interest rate in effect for the Credit Facility as of
September 30, 2020, was 2.40%. As of September 30, 2020, we also had $400.0
million outstanding of the 2026 Notes.

On August 12, 2020, we entered a standby letter of credit agreement (the "Letter
of Credit"), under the terms of the Credit Agreement, for $1.5 million. The
Letter of Credit expires on July 31, 2021, with automatic renewal for twelve
month periods thereafter. The Letter of Credit reduces the maximum available
borrowings under our Revolving Credit Facility to $498.5 million. Upon
expiration of the Letter of Credit, maximum borrowings will return to $500.0
million.

See Note 4, Debt, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information.


Stock Repurchase Program
We repurchased 1,000,000 shares for $28.9 million under the program during the
nine months ended September 30, 2020. Under the program to date, we have
repurchased 46,357,495 shares for approximately $612.3 million. As of
September 30, 2020, the maximum remaining amount authorized for purchase under
the stock repurchase program was approximately $112.1 million. See Note 7,
Common Stock and Treasury Stock, to our unaudited condensed consolidated
financial statements in Part I of this Form 10-Q for additional information.
Contractual Obligations and Commercial Commitments
For the nine months ended September 30, 2020, there have been no material
changes to the contractual obligations and commercial commitments disclosed in
Item 7 of our Form 10-K for the fiscal year ended December 31, 2019.

We are unable to reasonably estimate the ultimate amount or timing of settlement
of our reserves for income taxes under Financial Accounting Standards Board
("FASB") Accounting Standards Codification ("ASC") 740, Income Tax. The
liability for unrecognized tax benefits as of September 30, 2020, is $30.1
million.
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 nine months ended September 30, 2020, there were no significant
changes to our critical accounting policies and estimates. Please refer to
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for
our fiscal year ended December 31, 2019, for a more complete discussion of our
critical accounting policies and estimates.
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