ACI Worldwide Inc (ACIW) 2006 Q2 法說會逐字稿

Good afternoon, my name is [Miles], and I will be your conference operator today.

At this time, I would like to welcome everyone to the Transaction Systems Architect, Inc. 2006 second quarter financial results conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer session.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Bill Hoelting, Vice-President of Investor Relations.

Bill, you may begin your conference.

Thank you, and good afternoon.

The participants for TSA's second quarter fiscal 2006 conference call are Phil Heasley,CEO, Dave Bankhead, CFO, Mark Vipond, Senior Vice President, ACI Worldwide product group, and Jeff Hale, Chief Marketing Officer.

As a reminder, some of the comments made on this call made by the Company, including any guidance about future periods and any responses to your questions may contain forward-looking information. Such statements are subject to risks and uncertainties as described in the Safe Harbor language contained in the Company's press releases and filings with the SEC. Please refer to the Safe Harbor language contained therein. The Company disclaims any duty to update such forward-looking statements.

The agenda for the call will be as follows -- Mark Vipond will talk about product initiatives and product strategies; Dave Bankhead will provide the financial results; Phil Heasley will close with his prepared remarks, at which time, we will open the call to your questions.

I will turn the call over to Mark Vipond.

Mark?

Thanks, Bill.

Good afternoon, everyone -- or should I say, good evening.

I'm speaking to you from Lisbon, Portugal, where our European user group is meeting to discuss a range of topics related to the electronic payments industry and the use of ACI Solutions to help them address their needs. We have a couple hundred users, partners, industry speakers, and ACI staff in attendance. With the single European payment area, or SEPA, initiative and its associated impacts on this market, the commerce promises to provide some lively interaction.

As we mentioned in our press release, two industry themes continue to be at the forefront of our customers minds -- payments convergence and payments productivity. You could argue that we've been helping our customers converge their payments systems and increase productivity for over 30 years, but the dynamics in the market have increased the urgency with which customers are looking to make changes to their payment systems.

Some of the drivers in the market include the continued adoption of EMV standards for card authentication throughout the world, the mandate for converged payments in Europe, as specified by SEPA, the need to improve enterprise risk management controls, the move towards utilization of more efficient single-message based authorizations across a variety of payment processing systems, the continued increase in electronic payment volumes across the globe, the overwhelming desire to consolidate payment systems, and the need to eliminate redundant costs and streamline operations. These market catalysts are driving banks, retailers, and payment processors to seek solutions and partners that help them address these needs.

Our strategy of offering an end-to-end payments architecture, called the ACI payments framework, is designed to help customers improve their overall payments efficiency by consolidating payments processing in management. With ACI's breadth of intellectual property and products, we are uniquely positioned to respond to and lead the convergence electronic payment processing. With the participation of our customers, we are doing this very thing.

As head of ACI's product group, I'd like to give you a brief update on some of our key initiatives designed to help our customers meet these needs.

Our recent announcement of SEPA support within our wholesale payment system is a major milestone in the progression of our solutions. By working with key customers and IBM, ACI implemented a proof of concept for SEPA support that demonstrated function and performance that meets the needs of the market. We have incorporated these new capabilities into our product line and are sharing our experiences with customers as they gear up for SEPA deployments across Europe. ACI's product investment positions us well to respond to SEPA mandates and the convergence that it will drive.

ACI's continued investment in our BASE24 ES product and architecture is centered on the idea of consolidating payments across enterprise for our customers. By design, this system supports multiple server platforms, supports industry-leading database and middle-ware technology, provides a service-oriented architecture that is accessible from Legacy and new systems, provides high availability, and is an enterprise-class application system that provides the fundamental characteristics our customers need for the long-term.

The BASE24 ES technology provides the services ACI needs to facilitate electronic payments convergence. Convergence of payments systems will happen in stages over a number of years. ACI's is positioned to provide a payments hub solution to our customers, realizing that it will take time for our clients to migrate to this type of solution. The BASE24 ES architecture investment is serving us well on positioning for that eventuality.

In addition, ACI continues to invest vigorously in solutions that compliment our core payment engines. This includes our fraud detection system, ACI Proactive Risk Manager. With over 140 PRM systems deployed worldwide, we are providing real value to our clients and are expanding our services even further into the enterprise risk area for our customers.

Investment in back office solutions that support settlement, smart card management, and account services is also strategic to ACI and our clients. We are seeing increased interest in consolidation of these back office systems as our clients rationalize multiple systems acquired through merger and acquisition activity.

Finally, we also continue to invest in infrastructure and tools that are needed to support connectivity, data redundancy, operational efficiency, and associated services within the payments area. All of these investments are critical to helping our clients address their payments convergence plans.

Convergence of our retail and hotel payments solutions to meet the market needs is the number one focus area of our product group today. Our intellectual property in these areas uniquely positions ACI to respond to this market challenge. When coupled with our knowledge and assets in back office and high-volume infrastructure solutions, we have the essential elements needed to respond to the dynamics of the convergence payments marketplace.

Thanks for taking the time to learn a bit more about what we're doing with our products, and now, I'll turn it over to Dave Bankhead.

Dave?

Thanks very much, Mark, and good afternoon, everybody.

Today, I'll be discussing our second quarter financial results. I'll start by highlighting some key milestones that we achieved during the quarter.

Total revenues were 89.8 million, representing a 19% increase from the second quarter of 2005.

Revenues for each of the geographic channels were as follows -- United States, 29.7 million; Americas international, 13.9 million; Europe, Middle East, and Africa, 37.3 million; and Asia-Pacific, $8.9 million.

Revenue growth was driven by another strong contribution from our EMEA channel. That revenue increased 49% year-over-year and 11% sequentially. Asia-Pacific's revenue also increased 14% year-over-year and 19% sequentially. United States revenues increased 1% year-over-year and 5% sequentially, and Americas international revenue increased 5% year-over-year, but was down 11% from a strong first quarter.

The 89.8 million of revenue is comprised of the following -- software license fees of 47.7 million; maintenance fees of 24.7 million; and services at $17.4 million. The license fee revenue of 47.7 million was comprised of 30.8 million in initial fees and 16.9 million of monthly license fees.

A large portion of the year-over-year increase was in services revenue. The current quarter services revenue includes contributions from some large projects, which were started during the last 12 months, as well as amounts related to customer acceptance during the quarter on a number of other implementations. Services and maintenance revenues were also positively effected by contributions from S2.

Operating expenses for the quarter were $68.6 million, down from $70.6 million in the first quarter. Further, synergies from the integration of S2 were realized during the quarter, contributing to the decrease in expenses.

Also reflected in operating expenses for the second quarter were net releases of deferred project implementation costs of approximately $200,000. This is composed of approximately 500,000 of expenses deferred and 700,000 in expenses recognized. In the first quarter, the Company reflected a net release of -- in other words, expensed -- $800,000 of similar costs. Also included in the second quarter was $800,000 in additional sales commission expense associated, once again, with a stronger than forecasted sales quarter.

Our operating income was 21.2 million with an operating margin of 23.6%, compared to the second quarter of fiscal 2005 of 16 million with an operating margin of 21.2% and 14.5 million, or 17.1% operating -- percent for Q1 of '06. Operating income includes a net contribution from S2 of approximately 1.2 million, which is beginning to show the accretion that we have expected.

The effective tax rate for the quarter was 35%.

Net income was $15 million, or $0.39 per diluted share, compared to 11.2 million, or $0.29 per diluted share, last year, an increase of 34%.

Operating cash flow was 29.7 million, compared to operating cash flow of 15.5 million for the same period last year. Reflected in operating cash flow was the receipt from the IRS of $10.9 million as a result of a previously disclosed expected tax refund.

We paid approximately $300,000 during the quarter for the repurchase of 10,723 shares of our common stock. Through March 31, 2006, the Company has now repurchased a total of 1,955,086 shares for approximately $47 million.

Our combined balance of cash, cash equivalents, and marketable securities at quarter-end was $189.7 million.

Our ending 12-month backlog was 257.5 million. This compares with 254.4 million for last quarter. The monthly recurring portion of backlog amounted to 186.9 million. The non-recurring portion totaled $70.6 million.

The monthly recurring components of our 12-month backlog are -- monthly license fees of 70.2 million; maintenance fees of 104 million; and facilities management fees of $12.7 million. Non-recurring components of backlog are license fees of 34.4 million and services of $36.2 million.

As of Q2 '06, the estimated 60-month backlog was $1 billion 50 million, compared with $1 billion 35 million for Q1, reflecting a $15 million increase for the quarter.

We are updating our revenue and earnings per diluted share guidance for fiscal 2006. The assumptions we have used for our guidance are as follows -- an effective tax rate of 35% for the remainder of the year; no significant change in foreign exchange rates; no projections as to the reduction and the number of outstanding shares as a result of our share repurchase program; the expensing of equity-based compensation under FAS 123R, which began effective with the first quarter of this fiscal year.

Our revised revenue guidance range for fiscal 2006 is 348 million to $360 million, and our revised earnings per diluted share range is $1.51 to $1.63.

Thank you for your time this afternoon.

I'd now like to turn the call over to Phil Heasley.

Thanks, Dave.

As you can tell, we are pleased with our results this quarter. We have a strong revenue and earnings growth. Our international business is doing quite well. Our US business isn't -- is still -- isn't growing quite the way we'd like, but we're seeing signs of more opportunity and a strengthening pipeline. We're essentially complete with our business re-organization, and we've rebranded our complete range of consumer wholesale and infrastructure solutions under the ACI Worldwide brand, and as we've noted in the press release -- the S2 acquisition -- we are seeing accretion from that acquisition, which we had -- which we had expected.

TSA is extremely well-positioned. Electronic payment volumes are growing around the world, and customers are demanding that their suppliers support their needs for efficiency, flexibility, and productivity.

TSA is uniquely capable with its convergence positioning to offer the widest range of solutions to support these needs on a global basis. We believe we have the right product strategy. Our strong balance sheet will allow us to continue to look for opportunities in the market to broaden our solutions portfolio and our geographic reach. Our global sales installation and support capabilities will be even more important in the future as global players seek partners with which to create more homogenous payments systems and to improve overall efficiency.

We're looking forward to the continued success in the market, and we appreciate your interest and commitment to TSA.

And with that, let's turn it over for your questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question comes from George Sutton with Craig Hallum.

Hi, guys. Congratulations on the nice quarter.

Can we talk a little bit about your renewed relationship with IBM, and if you could just give us any updates on how you're going to market with them and their relative importance in the market? I think that would be helpful.

I also wanted to understand, in Europe, with the strength that you're seeing there, how much do you feel that is being driven currently by the EMVE mandates, and can you talk about the sustainability of the strength you're seeing in Europe?

This is Phil Heasley.

Let me answer first, and then, I'll hand it over for a second to Jeff and Mark -- if Mark wants to chime in.

Number one, our renewed relationship with IBM is, for 30 years, we've been a competitor of IBM, and for three months, we are now a partner with IBM. So, it's a pretty dramatic -- that's pretty dramatic change.

I was just as -- as recent as -- as recent as today, I was in conversations with their Chief Technical Officer in terms of how we were going to continue working together. I'll let Jeff explain it more, but our reach is really -- our reach is really global, and our planning is global as it relates to -- as it relates to IBM, but why don't you fill-in some of the activities that we've done on a partnership basis, Jeff.

Sure.

A couple things I'd add to that -- firstly, as we mentioned last quarter, we did a lot of benchmarking and performance work with IBM during the fall of last year, and that has really done a good job of not only getting our solutions tuned to fit in the environment we think large clients will be interested in -- primarily, the Z-series environment -- but it also resulted in a thing IBM called a red book, which will actually put some specifics to that so that partners and IBM people, as well as clients, can see not only what that performance looks like, but how they can take advantage of that in their system.

The second thing that has come from that is, as you can guess, is we're actually now sharing pipeline information, and that is something itself that's pretty new for us and IBM to be doing.

The [thesis] around the IBM Z-series availability of our product and technology actually starts in a lot of the major markets outside the US, in particular, Europe. It actually dovetails with one of the other comments you asked about, George, but, in addition to that, we're seeing some interest from some clients who are looking to leverage that Z-series infrastructure and consolidate their servers around the BASE24 ES-related technologies.

The only thing I'd add to that -- the second thing you mentioned is EMD. EMD has really been a theme in Europe for a long time. I think the new thing we're seeing is that EMD is actually starting to crack markets like North America and Latin America. We're starting to see some interest in Canada, in particular, for some of our solutions around Smart Card processing, and if you go back to Europe for a second, I guess I'd say that SEPA is probably even a bigger driver as it's got a little bit more immediate time frames for compliance, and it actually, if you've seen the analysts' estimates, it's going to be a bigger spend, and it will take four or five years for the banks to actually comply with that requirement.

Could I ask one more thing?

Really addressing this to David -- you had mentioned there was an additional sales expense of 800,000, which relates specifically to strong sales where you booked the sales expense this quarter. I don't know that you've given specific numbers in the past. Can you just give us a sense of how that might relate to the prior quarters that were also strong from a sales expense perspective?

Yes, George, I think we had a similar overage -- overage is probably a bad choice of words -- a similar expense in Q1 of about 8 to $900,000, and again, that reflects commissions paid on sales over and above our original budget.

So, we've had several good sales quarters in a row, and we've reflected those commission expenses in each of those quarters.

Okay. Super.

Thanks, guys.

If you'd like to ask a question at this time, feel free to press star and the number one on your touch-tone telephone keypad.

Star one, if you would like to ask a question at this time.

Your next question comes from FrancoTurrinelli with William Blair & Co.

Gentlemen, good afternoon.

Good afternoon.

The -- my questions are just in terms of the backlog numbers and helping me and others understand better how we should think of these increases that we've seen in the backlog, both in terms of the absolute number and in terms of a relative number.

As you've pointed out many times in the past, there's lots of different factors affecting the actual backlog number, and I'm just trying to wrap my mind around how I should think of an increase of -- what is it -- 15 million in the 60-month backlog and a few million in the 12-month backlog, and how those relate to the absolute numbers that we're looking at?

That's a -- that's a tough one to explain also, Franco.

I guess I'll start with -- with -- I guess -- stating the obvious. We view backlog as -- as really a state of both short term and long-term health of the business, and you've seen in -- when we've disclosed 12-month backlog figures in prior quarters, you've seen those numbers move actually both directions depending upon where we are in certain projects, what comes out of backlog, what goes into backlog.

I think a good indicator in this long-term backlog is the amount that -- that went in, and that's a direct reflection of -- of our sales activity during the quarter and assumed renewals on -- on the client base that we have.

Franco, this is Phil.

I will say a couple of other things. One is behavior for revenue and backlog to both go the same way -- you guys can interpret your models, but that has -- that has something fairly clear to say about the business, and historically, that's been a very predictable thing. A 12-month backlog is a -- is a very predictable thing. 60 months backlog -- and we define that pretty rigorously in our papers, so you guys can go through that -- and what's important about that is that that assumes no volume increases, no price increases, and so, when you think about that, what you're talking about is really throwing out a fairly short-term volume and pricing view on a much longer-term basis.

It -- I think that is more directly related to the fundamental value of the business than even the short-term -- than even the short-term backlog is, and and when you start looking at historical -- the assumptions for attrition going forward are no different than the attrition going back 60 months, so when you talk about the -- the surety of that, I think that 60 month is a -- it's an important -- I believe it, and, of course, I put it in, of course I would -- but I believe that's a very important barometer.

Fellows, since the 60-month backlog is up, I want to congratulate you on your brilliance in starting to report it.

Yes, one other thing I would add, Franco -- and it's really just the math -- in any given period, you want -- you want your revenues to go up and your backlog to go up.

When you have high revenue quarters and your backlog is static or going down, you haven't really built future business as well as you'd like to, and if -- if -- and the reverse isn't always the greatest thing in the world. So we strive to show revenue growth, sales growth -- we don't disclose those numbers -- and backlog growth, and we feel very good about all three this quarter.

And David -- I'm sorry -- and that's what I'm getting at, right.

In the past, you know, because of a limitation -- the inherent limitations -- of the 12-month backlog, we have not been able to look at the change in backlog, look at the recognized revenue in the quarter, and do the math on what the sales activity was. What I guess I'm asking is the 60-month backlog should be less affected by near-term or by the timing of particular projects. I mean, is it a reasonable conclusion to say the Company recognized $90 million of revenue in the quarter. The 60-month backlog went up by 15 million, therefore, sales in the quarter were approximately 90 plus 15, 105 million, or am I still making some assumptions in that math that are not reflective of a reality?

There's other ins and outs. There are other ins and outs going in there. It would be great if it was that simple, but there's just other ins and outs.

There's some revenue that comes directly into the quarter. Right? That's one, and that -- and then, there is, because of the way we recognize and don't recognize uncontracted service-related revenues, it's -- we just have a more complicated model. We're not trying to hide anything. We're just trying not to get lost in the absolute complexity of our -- of our three-way model.

What 60-months should give you comfort is that taking a long view, our complexity actually smooths out. It doesn't get more complicated. It gets more -- it gets more simplex, and one of the reasons I think it's really important to have that 60-month backlog out there is I expect we're going to do very well -- and I'm not giving a number -- but I expect we'll do very well on the wholesale side of the business in the several years -- in the next year or two -- and those projects are percent-completion projects, and they're multi-year projects and whatnot, and we need a way of articulating that without getting ourselves into -- getting caught in our own shorts in terms of what's going on there.

So we need a really clear way to show that we're building up a revenue stream, but it is based on our ability and our partners' ability to get those projects completed, and they're multi-year projects.

Great.

Thank you, guys.

Once again, ladies and gentlemen, star one on your telephone keypad if you would like to ask a question.

At this ,we'll go to the line of Michael Christodolou with Inwood Capital.

Good afternoon, gentlemen.

Three months ago, you had indicated -- I just wanted to get a rundown on where the BASE24 ES rollout stands. Three months ago, I think you had indicated it had 17 customers, five were up and live, and there were four platforms, including one mainframe, and I was wondering if you could give us a comparable update now?

This is Mark. I can give you a brief update on that.

The number of live customers has not changed from the three months ago. We have nine customers that we expect to go live between now and the end of this fiscal year.

Then, a project where the most notable, which would be the Visa system, is intended to go live here in the next month over in Europe to run the VDPS system for all of Europe. That's going to be a major milestone that's been four years in the making to actually tailor that system to their specific needs and have them finish off all their internal testing.

The enhanced authorization systems -- we have ten of those live, five in project mode, and the backlog, or the pipeline of deals that is coming down is pretty sizable and pretty significant relative to some of the people that we're talking to. Other organizations are looking to utilize the BASE24 ES in some cases, on a global scale, and also, for regional -- other specific organization needs, but actually, the pipeline looks very good, and the deployments are going pretty well.

Very nice.

Any declaration of the A classification yet for the product commercialization as it relates to revenue recognition, or is that still a work-in-progress?

Well, it's a very complex situation relative to how you do -- create category A status. The internal processes are created four categorizations of utilization of the BASE24 ES system -- that we are tracking each one. I will not -- I would not even begin to predict that we'll get all four of those by the end of the year, in terms of getting category A status, but I would expect that we would achieve one or two of those before the end of this fiscal year.

There are four tests that a product would need to be deemed category A, commercializable, and revenue recognition up-front?

Let me clarify that -- it's the use of the ES product. If we're using it for ATM driving, that's one. If you're using it for switching capabilities, that's a different categorization. If you're using it just for the infrastructure.

So there's four different ways our customers use it, and we're tracking each way because you have to have a body of proof of successful deployments with concession-free and all these various rules and regulations in terms of when we can actually feel comfortable calling it a category A. So, we're tracking each one of those individually.

Is it fair to look at this almost like a three-dimensional cube? So, you have these four usage categorizations, then you have another axis, which is these four or more pieces of hardware, and there may be some other tests along the Z-axis that would also need to be fulfilled? Is that a fair way to look at it?

The only -- no, I'd say it's two-dimensional. One is the four areas, and then, it's just the tests across each of them.

We've already proven out the multi-platform capabilities.

Okay.

We have the utmost confidence that the same systems -- or the same software -- runs on any of the servers that we support. So, we do not have that concern, and we've gone past that acid test already.

It's really back to deploying it in that type of use and making sure you have the -- the evidence -- the body of proof -- that we feel comfortable calling it a category A.

Right.

And my last question -- and some -- in future quarters, you're right, I'll never have to ask this again, when they all get declared class A -- but do you envision making an announcement that this permutation of usage and hardware is now deemed category A? I mean, in theory, you may have 16 different announcements of that -- if you were to do it at all.

I don't think -- someone can talk about it -- but I don't think we have any plans to disclose that when we do it. It will just -- it will just be happening internally. We'll just use that for in terms of how we determine to recognize revenue relative to new licenses sold in those uses.

I think we actually -- I think we actually will -- if it becomes a significant change in our accounting, I think we actually will because we -- we, in effect, are producing different -- I think there would be financial reasons, but my guess is driving will come sooner -- driving and switching may come -- they may not come at the same time, but if they make a fundamental change to how we're having to use the balance sheet right now, we will announce -- we will announce that, yes.

And I guess the manifestation of that, right, would be we've been seeing this cash build up faster than the revenue, and we're starting to see, clearly, some very nice revenue growth even when you back out the S2 acquisition. So, in theory, I guess it should be manifested in higher declared revenues for a given quarter, right, as it happens over time?

It will really happen over time.

One thing I want to make sure everybody understands is that when that point in time comes -- that we determine that BASE24 ES is a category A product and not a category C -- we will not release revenue immediately on those projects that are currently in-process. Those projects will continue under the accounting rules that -- that defer the revenue until completion.

On future deals, then, assuming that there aren't other accounting implications we have to worry about, we would recognize that revenue upon shipment of the software.

And just to be real clear, for a very practical situation, if we have category A for the gateway and switching capabilities, if a customer license is BASE24 ES and it is category A, but we have to deliver a network interface that we have yet to develop, the revenue would still be -- we'd have to wait until we finish that development and deliver that software before you could take that revenue. So, you also have a natural operational delay built into some of these projects.

Very good.

Well, sounds like a lot more chapters to write, and I can't speak for all the shareholders, but I wouldn't want you to give it all to us at once anyway.

Thank you, gentlemen.

Your next question comes from Nik Fisken with Stephens, Inc.

Hi.

Good afternoon, everybody.

Good afternoon.

I unfortunately came in the call a little bit late. Did you guys give out any specific numbers on IMTS and PRM sales in the quarter?

No, we didn't.

Can you give us any details on that, or -- and/or -- give us an idea of the pipeline?

We haven't disclosed a sales -- a sales, at all, including in detail by product mix.

Can you give us an idea of how--?

We did say we had 147 -- we did say we had 147 PRM licenses out there. We did disclose that. We can't certainly get ourselves into a disclosure.

What I just did say before was that -- what we didn't say before is PRM is going well, and -- over 147, so see, you got me in trouble already. Now, you're going to think it's actually 147. At least, we didn't say almost 150.

We are very, very -- we don't quote IMTS anymore. It's ACI wholesale, and that is progressing extremely -- extremely well, although it is not showing up in this quarter in any extraordinary way in our financials.

That's all I -- that's all I can say. As -- from a year-to-date basis, it is going -- our marketplace activities are going extremely well, but there's nothing unusual in our financials as it relates to that product line.

Should we expect some traction as it relates to that product?

Yes, I expect -- yes, I was talking about that -- you must have just got on the phone.

I mean for fiscal year '06.

Right.

Yes, I think -- I expect, but I also expect for them to be very large multi-year contracts as I said before, and so, I think they're going to have as much impact on 7, 8 and 9 -- or more impact on 7, 8 and 9 than they are going to have on 6 -- '06. I'm talking about years '06, '07, '08, '09, and that's one of the reasons we have great comfort in that 60-month backlog.

Okay.

Thanks so much.

Again, if you would like to ask a question, press star and the number one on your telephone keypad.

We now go back to the line of George Sutton with Craig-Hallum.

If I'm doing my math right, it's about 10:45 in Lisbon, which I would guess at a user conference, is prime-time to hit the streets, so sorry to keep Mark on the phone, but I did want to make sure I addressed a statement you made, which is somewhat unusual for you guys, and that is that you're seeing increased urgency on the customers' part to convert systems. Can you be a little more specific with respect to that statement?

Sure. I'll give you my color and commentary.

What you're seeing is -- as we talked about, the convergence and the productivity drive from our customers, they're looking to moving their systems together. Now, I wouldn't say, sitting here today, that you see a commonality across every different institution to exactly what they want -- what the biggest benefit is.

Some are focused on their back office systems in terms of converging settlement solutions. Some are looking to use their payment engines to consolidate channels and have more transactions go through those up to their authorization system in one common fashion. Some are interested in their interfaces to their various payment systems on the back-end of consolidating those down to one. So, the drive differs in each institution and various institutions as to what they see as the immediate benefit, but it's really driving toward the overall concept of reducing the number of payment systems and bringing them into some common services they can provide different channels and across different payment mechanisms.

It's not going to be overnight as I said before in my prepared comments. It's an eventual thing, but it will happen. It is happening, and it's happening at different speeds at different places. Some institutions aren't even talking about it, but the progressive ones are, and those are the ones that we're working with on it.

George, let me answer that -- this is Phil -- let me answer that question real quickly in two ways.

Number one, the large banks in the US and other parts of the world have gotten to the point that they're far enough along in their integrations that what they're really working on now is productivity. There is not a lot of argument, and we told you guys last quarter about the global insight study that says that payments are growing faster than almost any category of GDP in the financial services industry. So, that's a fact.

Number 2, the banks, by their own admission, have all thrown up their payments czars and whatnot, and have stated that their biggest margin -- their biggest opportunity right now -- is payments. We tend to impact the margin of payments. So, if you have a marginal improvement on your fastest growing category, you've got a double -- you've got a double-accelerator, and certainly, the smart banks understand that. So, we've become a -- we become a very quick -- we're expensive, but we become a very quick payback, and we get paid back both on margin and volume. That's one.

Two, everyone -- a lot of people look at SEPA as the final regionalization of Europe. What the global banks see in SEPA is the globalization of payments, whereas they -- they kind of could make their stuff work between US, Britain, Switzerland, Amsterdam, Tokyo, and whatnot. They really couldn't move their money -- they couldn't chase the clock or chase the sun -- whatever you want to call it in terms of that.

All the multi -- all -- of course, the best and the brightest are leading the pack, but all the multinationals are -- are now rebuilding their global infrastructures to not only get -- not only to get margin -- localized margin -- not only to get acceleration in the volumes, but they're also going to get the leverage that comes from having a single -- a single -- a single piece of logic going around the world where the big guys may have as many as 10, 12 different kinds of ways of doing the same thing in different geographies as a -- as a function of having acquired or different rules and whatnot.

Suddenly the rules are beginning to become very globalized on payments, and -- and that's what's -- those are the twin sets of accelerators that are out there right now, and it's not a year or two thing, it's going to be a three to five to six-year kind of event for them to rebuild this stuff.

Okay. That's very helpful.

One other thing, Phil, with respect to acquisitions -- you've talked in the past about the logic of acquiring distribution versus the concept of acquiring other product or complimentary product companies. Can you just give us a sense on your thoughts on one versus the other, or both at this point?

We're extremely interested in both, to be honest.

There are certain -- us having a -- us going from a very heterogenous solution, or very machine-specific solution, to us, being able to being very agnostic from a hardware standpoint and fairly open from a software -- in terms of -- that has created some real holes around the world for us. So, from a distribution standpoint, we want to fill those holes in.

Growth in certain markets around the world like India, China, they have caused -- that's cause for us to grow geographically also. From a products standpoint, we very much believe that in convergence. It's my main reason for being here. I believe that the BASE24 ES platform, over time, will be the payments -- be the payments engine, but it makes an awful lot of sense as we buy both geography and as we buy product fill-in, to -- to you bring on-board pieces of the markets that aren't -- we aren't currently supporting today and converge them versus try to do a PAC-man and just build ES to converge them ourselves.

Now, a lot of people call us up every day and tell us how we could spend our $190 million, and it's usually in their favor, and we're going to do the right thing for our shareholders in terms of what we spend our money on.

Great. Thanks.

And Mark, send us a postcard.

Okay.

And if anyone else would like to ask a question, feel free to press star and the number one on your telephone keypad.

Star one, if you have a question or comment at this time.

I guess that's it.

Gentlemen, there are no further questions.

Do you have any closing remarks?

We just want to thank everyone for their time and attention. I really want to thank them for their commitment to our company.

Bye.

And ladies and gentlemen, we do appreciate your joining us this evening.

This does conclude our Transaction Systems Architect, Inc. 2006 second quarter financial results conference call.