ACI Worldwide Inc (ACIW) 2006 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the TSA 2006 Third Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

Thank you, Mr. Hoelting. You may begin your conference.

Thank you and good afternoon. The participants for TSA's third quarter fiscal 2006 conference call are Phil Heasley, CEO; Dave Bankhead, CFO; Mark Vipond, President-ACI Worldwide Product Group; and Jeff Hale, Chief Marketing Officer.

As a reminder, some of the comments made in the conference call 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 provide the highlights for the business this quarter, Dave Bankhead will then provide the financial results, and Phil Heasley will close our prepared remarks, at which time we will open up the call to your questions.

I'll now turn the call over to Mark Vipond.

Good afternoon everyone. Before we cover the financial results for the quarter, I'd like to spend a few minutes telling you about how the business operated in Q3. First, in the third quarter, we added seven new customers, licensed 20 new applications to existing customers, and signed 12 capacity upgrades of over $100,000.

Included were new sales of BASE24-es to the largest bank in the Philippines and a large bank in Malaysia, a license of our Smart Chip Manager product to a large Italian bank, and a license of our Payments Manager Settlement and Reconciliation System to a top-five US bank. In addition, we signed significant capacity deals with two top US banks, a major Canadian processor, and a large Italian payments processor. The mix of deals on this list shows the continued international diversity of our business.

During the quarter, we closed on the acquisition of Electronic Payment Systems in Germany. The integration of the strategic acquisition has commenced. This acquisition puts us in a leadership position in Germany, gives us a strong footprint with which to cross sell new solutions into the Germanic marketplace, provide some new products that we can drive through our international distribution channels, and serves as a kick start to our efforts to develop an offshore development and services capability in Romania. All these are key elements in our continued globalization of TSA's business.

We continue to see good interest in the market for our new online processing solution, BASE24-es. I am happy to report that the project in Europe to use BASE24-es to replace legacy switch at Visa has now gone live in pilot mode, and Visa is gradually converting more transaction volumes to the new system.

Thus far, the system has been operating very well, and the pace of the pilot conversion is ahead of Visa's original plans. This system is operating on the Sun Solaris platform, showing that we can indeed support very significant requirements for scale and reliability on an open systems platforms.

Early in July, another of our customers went live on BASE24-es, and we now have eight standalone customers in production on this system. And we continue to progress towards our goal of BASE24-es being considered a category A product.

Certainly, payments fraud continues to be a hot topic in our history. One of our customers, ABN AMRO in Brazil was given an award for the best fraud detection system in the country at a recent industry show.

ABN AMRO uses our Proactive Risk Management product to monitor fraud across the entire enterprise. And already this month, we have signed significant new PRM licenses with two top 20 US banks, as they seek to strengthen their fraud detection and prevention infrastructures.

As we have noted, we are also seeing strong activity in the wholesale banking space, particularly in Europe, as banks seek to replace aging payments infrastructure and address the SEPA incentive. This should be a good incremental growth driver for the Company and should dovetail nicely with our offshore development activities in Europe.

And finally, activity across our cross industry infrastructure tools remains robust, as we signed several major deals in the quarter for ACI Communication Services, GoldenGate and Network Express products.

The Company continues to be strongly positioned to address demands in the market for convergence and payments productivity. Our differentiated offerings and skill sets represent compelling value proposition and we continue to refine our global strategies for product development, customer support, and technical services to deliver this value to our clients.

With that, I'll turn it over to Dave Bankhead for a review of the third quarter financial results.

Thanks very much, Mark, and good afternoon everyone. Today, I will be discussing our third quarter financial results. I will start by highlighting some key milestones that we achieved during the quarter. Total revenues were 84.8 million, representing a 9% increase from the third quarter of fiscal 2005.

Revenues for each of the geographic regions were as follows: Americas 47 million, which consists of United States 29.3 million and Americas International 17.7 million; Europe, Middle East and Africa 29.7 million; and Asia-Pacific 8.1 million.

Revenue growth was driven by strong contributions from the Americas International channel, whose revenues increased 62% year-over-year. EMEA's revenues increased 7%. Asia/Pacific was up 2%. And US revenues decreased 7%.

The 84.8 million of revenue is composed of the following: software license fees of 42 million, maintenance fees of 26 million, and services of $16.8 million. The license fee revenue of 42 million was composed of 24.3 million in initial fees and 17.7 million of monthly license fees.

Operating expenses for the quarter was 69.2 million compared to 62.8 million last year, an increase of approximately 10%. The most recent quarter included approximately 1.5 million in equity-based compensation expense with no comparable basis in 2005.

The quarter also included approximately 3 million of expense related to S2 operations, which was down from 3.6 million in Q2, and in keeping with our plan to reduce these expenses to a run rate of approximately 2.5 million per quarter by yearend.

The third quarter also included approximately $1 million of expense related to EPS operations in Germany. In addition, we incurred special expenses of approximately 600,000 related to M&A activity and approximately 700,000 related to globalization initiatives.

Also reflected in operating expenses for the third quarter was a net deferral of deferred project implementation costs of approximately $700,000. This is composed of approximately $900,000 of expenses deferred and 200,000 in expenses recognized. In the second quarter, the Company reflected a net release of 200,000 in similar costs.

Our operating income was $15.5 million with an operating margin of 18.3% compared to the third quarter of fiscal 2005 of 15.2 million with an operating margin of 19.5%. Operating income was diluted by approximately $0.01 related to EPS integration expenses, offset by a small amount of revenue.

The tax benefit of $6.4 million comprised of tax provisions of approximately $6 million, offset by approximately 12.4 million representing the release of valuation allowances related to foreign tax credits during the third quarter. The release of these allowances was made as a result of an ongoing review of the Company's ability to use foreign tax assets carry-forwards.

It was supported by a number of factors, including our improved earnings streams from existing and foreign operations as well as from the acquisitions of S2 and EPS and the use of material components of foreign tax credit carryovers in our recently filed 2005 federal tax return.

Our review of deferred tax assets and associated valuation allowances is an ongoing process and from time to time we may adjust these as appropriate. During the quarter, we also moved certain intellectual property rights to our Irish subsidiary as part of the Company's globalization initiatives. We expect that overtime these actions will result in future reductions in our overall effective tax rate.

Net income was 23.3 million, or $0.61 per diluted share, compared to 10 million, or $0.26 per diluted share, during the same period last year. Diluted EPS was positively impacted by the release of valuation allowances of approximately $0.32 and was negatively impacted by approximately $0.04 from the acquisition of EPS and other special and transitional costs and $0.03 from equity-based compensation expense.

We finished the quarter with approximately $176.1 million in cash, cash equivalents, and marketable securities, down 13.6 million from March 31st 2006. This activity reflects the payment of 16.1 million in connection with the EPS acquisition and approximately 10.8 million for repurchase of the Company's stock.

These amounts were offset by approximately $3 million received as a result of the EPS acquisition and 4.6 million in proceeds from employee stock option exercises. Net operating cash flow for the quarter was $4.5 million.

During the quarter, we repurchased 280,645 shares of our common stock. So through June 30th 2006, the Company has now repurchased a total of 2,235,731 shares for approximately 57.8 million.

Our ending 12-month backlog was 252 -- $258.2 million. This compares with 257.5 million for last quarter. The monthly recurring portion of backlog amounted to 191.6 million, and the nonrecurring portion of backlog totaled 66.6 million.

The monthly recurring components of our 12-month backlog are monthly license fees of 67.7 million, maintenance fees of 109.4 million, and facilities management fees of $14.5 million. Nonrecurring components of backlog are license fees of 32.7 million and services of $33.9 million. As of Q3 '06, the estimated 60-month backlog was 1.092 billion compared with 1.050 billion for Q2, reflecting a $42 million increase for the quarter.

We're updating our earnings per diluted share guidance for the remainder of fiscal 2006 and are maintaining our revenue guidance. Our revenue guidance for fiscal 2006 remains at $348 million to $360 million. The Company's revised earnings per diluted share range is $1.78 to $1.90 per share.

The revised earnings per share estimate takes into account that $0.32 from the release of valuation allowances related to foreign tax credits, offset by $0.04 related to the EPS acquisition and other M&A activity, and $0.01 related to globalization initiatives in the third and fourth quarters.

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 in the number of outstanding shares as a result of our share repurchase program, and the continued expensing of equity-based compensation under FAS-123(R), which began effective with the first quarter of this fiscal year.

Thank you for your time this afternoon. I'd now like to turn the call over to Phil Heasley.

Thank you, Dave. Before we go into questions and answers, there is just a couple of summary points that I'd like to make. The business is in very good shape. We have multiple initiatives going on, right now. We have made a very strategic acquisition in Germany. We have initiated the holding company in Ireland for our offshore IT.

We have actually established two sites in Romania, Iasi (pronounced Yosh) and Timiºoara. We have just about finished moving our principal executive offices to New York City so we can better manage this global enterprise that we have. We have expanded our 60-month backlog and Dave took you through that.

We are confident in our full-year revenue guidance as well as EPS. And we have made substantial inroads in globalizing our wholesale product. And last but not least, all this tax work that we've been doing and you have seen show up in, I think, three or the last six or seven quarters is moving along.

It's mostly motivated by the acceleration of our earning power, both in the United States as well as offshore. And it will have very significant paybacks in the quarters to come. Mostly -- probably we won't see it in its full strength until '08 or '09.

And with that, I will open it up to questions.

[Operator Instructions].

Your first question comes from the line of Nik Fisken with Stephens Incorporated.

Good afternoon, everybody.

Good afternoon, Nik.

Can you give us some, maybe, some more details on the expected savings of moving the IT to Romania?

Well, a little bit of what you saw upfront -- I mean initially, we're going to have a certain amount of redundant cost actually. It takes probably 9 to 18 months to get these kinds of engineers up to the speed that we would like to go to, but to give you an idea -- I think your question is about the productivity gains that comes from above globalization, right?

Or the dollar savings by moving jobs over there?

Well, let's put it this way. Romania is better, as well, a better educated in terms of what we need than India. And it's somewhere between three and four, I guess, the best way to put this three and four -- somewhere between three and four to once we can employee between three and four engineers equally trained in Romania, than we could in terms of our base -- than our base expense.

And in terms of getting to a dollar amount, is it too early to do that right now?

Well, I think it's a little bit early. It's a little bit early because of what's anticipating the move is we expect a substantial business in both ES and WPS, both the retail and the wholesale sides, which would normally occasion us to have to expand our implementation staffs.

So step number one, is training these people to augment our ability to implement or to balance what we have globally, in terms of it -- so it's – so in terms of it's just being a pure, you are seeing pure save in one or two quarters, you're not going to see that. You're going to see margin improve over time but you're not going to see a big dollar amount.

This is Mark, Nik. So we have gone through an exercise estimating our staffing requirements through ES under the likelihood. And that the scenario says we're going to transition all of our clients over to that technology over some period of time. We believe the catalyst for that will be our next release of BASE24, which will be heavily skewed towards using the authorization system of the ES. We anticipate that will happen in about the ‘09 timeframe.

Once that happens, we believe we will have to be staffed up to the situation to convert probably half of our customers over to ES completely in the next year to two years following that release. And so in order to service that we're going to need to increase our staff and that's a big part of the Romania and offshore decision. So we need to start building that a cost base on a lower cost obviously, so that we can service that transition.

We're now going through a similar exercise with WPS, with the Wholesale Payment System, because of the market opportunity, specifically over in Europe, which is not where the predominant number of our employees are that know that software. And so we're looking to leverage remain operation again to build that staff up there in anticipation of the business that we can see in a next few years.

And how about on the tax savings side? I didn't catch the timing behind that.

The '08, '09 -- I mean, we're -- we can't give new guidance today for next year, but we will give guidance next quarter as to what it means for '07. And we should, maybe by then, maybe a quarter or two later give you a sense because it is substantial. We'll give you a sense then what it means for '08 and '09 because that's where it'll really kick in, is in that -- in those time periods right there.

So by keeping our revenue guidance the same, that's implying a pretty good ramp. In the September quarter what gives you the confidence to keep that revenue guidance the same?

Well, Nik, you have been -- you've gone around with me to a lot of folks. We do not give a quarterly guidance in this business. As I have told everybody, we sell five year -- we basically sell five-year contracts. And it is not appropriate for us to really believe that we can carve those into 90-day periods.

The truth of the matter is we could have -- you know, I know what the -- you know, I know what yours and other analysts’ projections were for the quarter. We could easily have made or beat those numbers, and we would have done it by severely discounting deals that were 7/8s complete versus 8/8s complete. And I will tell you the reasons that we are very comfortable with the full year is that we have booked several deals in July in the United States, and we have booked a couple of big deals in Europe that, you know, -- they are signed, sealed, delivered. They are sitting in-house. But we were not going to rush some or any of those to make quarters.

And that may have been the behavior in the past, and we may have trained our customers to think that, you know, the best time to do business with us is then. But we're not going to do that. We're going to give yearly guidance, and we are going to live with our yearly guidance. We're very comfortable. We've never had a better 60-month backlog. We've never had better prospects than we have right now as a business. But we are not going to force split them into 90-day cycles.

The last question I have got is on the US business. You know, that continues to be a flat-to-down business. When should that turn around?

I think I could very comfortably tell you that if -- that in the next couple of quarters, you are going to see -- first of all, Tony Parkinson who has been running that this year has done a fantastic job. You've certainly seen both Canada and Latin South America really do very well in the last couple of quarters. Probably half -- you know, we will probably have to rebuild half of the infrastructure in terms of the United States itself. That has been done for almost two quarters. I think in the next couple of quarters, you're going to see -- we're going to see very nice payback for those efforts.

Great. Thanks.

Your next question comes from the line of George Sutton with Craig-Hallum.

Hi, guys. Phil, you addressed I think the most obvious question, which was the meaning behind the Q3 weakness and the meaning of the Q4 guidance. So I appreciate that. The meaning behind the 60-month backlog, if you could just sort of reiterate why that is an important indicator and, you know, help us understand the significance of the gains that you had this quarter?

Well, if we are in -- if we are in -- we are basically in a five-year contract business, because we don't sell -- you know, we largely don't sell perpetual licenses, we sell term licenses. We are constantly renewing and upgrading and whatever these relationships. They tend -- you know, they tend to -- the vast majority of them are five years or so. Taking a five-year look in terms of what our business has to offer becomes the basis of what we have to do either in the next 12 months or in the next 48 months to either to stay flat or grow.

You get to see what the effort is. And the growth that we have had in this last quarter, less than half of it comes from the acquisition of EPS. And so that has -- so when you buy a company, hopefully you are buying -- you are hopefully buying backlogs. They do not have as much -- they have not had our model. And as we institute their model, we'll actually get a 60-month backlog with longer legs and what not. And like I said before, our backlogs could actually have grown more if we had forced some of these deals into the quarter that -- you know, I think today, you have to have -- you know, you can either operate from fear, you can operate from courage in terms of how you manage your business.

And I think to get some $0.90 some on the dollar versus $0.70 some on a dollar and one makes you look like a hero for 90 days, but it's the wrong five-year decision, it's just not the way we are going to run our business. So that's why we put the 12 and the 60-month backlogs out there to, you know, see. It's a pretty basic way to value the business at a no-growth -- on a no-growth basis or just a backlog basis.

Can you discuss your thoughts on the share repurchase program? Obviously, it was slower this quarter and ostensibly because the stock price was higher. Do you have a clear sensitivity to opportunistic buying? Is that how --?

No, George. George, actually let me interrupt you right away. This quarter, we actually purchased 280,000 shares. Last quarter, we purchased virtually nothing, right? What offsets this quarter is that we issued 330,000 shares in connection with the purchase of EPS in Germany. So we basically retired 280,000 shares and we put out 330,000. We put 330,000 shares.

We actually operate a blind program. We do not opportunistically buy shares. We have a third party that buys our stock on a -- on a blunt 10B5-1? Alright. On a 10B5-1 program, so we are not out in the market trying to shore up weak days or strong days, whatever. We've advocated that just as a constant diet aspect of our business.

We did announce last quarter that we had increased the buyback. And it's pretty clear that the increase from the buyback is related to the fact that we issued stock for the acquisition, but we really viewed it as a cash purchase, so we now have to buy the stock -- we are going buy the stock back in.

And last question. Can you just address two, fairly key initiatives, one, your program with IBM and secondly the move to software as a service?

Our relationship with IBM continues to do very well. Having said that, on the mainframe side we have two installations, one in Brazil and one in New York City Transit Authority. So we have not booked a bunch of money as it relates to that. We do a lot of IBM pSeries UNIX business.

We're -- I couldn't be more comfortable with the relationship. We met with some European prospective customers, one is going to proof of concept on the pSeries and things are going very well with that. Like I said, we don't sell boxes of candy, we sell heart surgery. So this stuff -- we have a 375 to 450 day sales cycle for a new customer -- new type customers in this regard.

And I would say, our relationship with IBM is fitting well into it. But it's going to take X number of quarters before you start seeing any ramp up in terms of that. And our Redbook, which is the proof of concept, which IBM does with not only us and IBM, but the customers and prospective customers that actually participate in that process. I think we're about 97% done with that process. We have people from China, Europe, the United States. It's been a very well received project.

Software as a service, we have again not booked a lot of incremental business in that regard. The EPS acquisition gets us -- they were doing some software service, so that gives us more arms and legs as it relates to EMEA. And we have several projects that are moving along, but we have not at this point, but substantial business. We think the opportunity is as large or larger than when we did our strategic plan in October. Does that answer your questions George?

Yes. Thanks.

Okay,

[Operator Instructions].

Your next question comes from the line of Franco Turrinelli with William Blair.

Good afternoon gentlemen. How are you?

Good.

I have a quick kind of housekeeping question if I may on the guidance just to make sure that I understand what is in there and what is not.

You mentioned that the guidance is impacted by $0.04 related to the EPS acquisition another M&A activity, and $0.01 related to globalization initiatives in the third and first quarter, and of course the quarter itself was impacted by $0.04 from the acquisition of EPS now the special and transitional cost and to some extent from the globalization initiatives. And you just -- if you could just clarify for me what special expenses you are figuring for the fourth quarter that we should figure in this guidance?

In this quarter we closed on May 31st on EPS. And we -- acquisition GAAP accounting is very interesting, how you bide revenues for the first year or so. It would be safe that we had an embarrassingly small amount of revenue that came. In most ways it would round to zero. We did have $1 million of expense directly related to EPS. We did have other acquisition related expense, which was partially EPS and it was partially other MNA oriented stuff.

We expect in the fourth quarter to have about $3 million of EPS expense, and where s we'll have about three times as much or may be even a little bit more revenue, the revenue is still not going to be significant enough to turn the dial. Now having said that, we are still committed to the accretion numbers, the integration that EPS is going to find. We do integrate -- one of these other related expenses is that when we purchased EPS we had an office in Wiesbaden. We on the eve of closing the deal closed down a good portion of the staff that we had in Wiesbaden because we were going with that you could say that's acquisition related or it's closely related to the acquisition.

We also closed a facility in Boulder, in Boulder, Colorado down. So part of the -- and as well as opening up the site in Romania and opening the site in Shannon. I think we eloquently like to say we're in Shannon, but I think we're actually in Limerick in Ireland. So in terms of setting that up. So for the fourth quarter we're talking about $0.03, $3 million rather of expense as it relates to -- but we will have some revenue. So from the EPS standpoint, that 3 million will be a pure -- will not be pure dilution. It will be about $0.02.

Okay. Good thank you. Question for you on -- I'm always fascinated by the sort of different geographical breakdown and there were some big sequential changes in this quarter relative to the prior quarter. I think you have already alluded to some of the reasons for that, but maybe you or Mark can just give us a little bit more color on what is happening on a geography by geography basis?

I think what you're probably speaking about is EMEA right, Europe, Middle East and where we had a good quarter this quarter, we had a very good quarter last quarter and we're expecting a very good quarter again in the fourth quarter. Probably that is the one part -- like I said we probably could have closed on one or two of the deals if we had pushed them there.

The other thing that slowed us down, which I would not even use as an excuse but it is just a fact of life, is that that part of the world was not wildly productive at the end of the quarter during the World Cup. That great little football match that has somewhat localized that part of the world. Even if our people who are working hard it would be pretty hard to find our customers. Now usually August is when that happens to you in Europe but that happened to us here. So there is no -- now to produce there is no blip in EMEA, EMEA is going as strong as ever.

The Latin/South America as well as Canada, the other Americas had a good quarter last quarter and they had a very good quarter again. I told you the US is clearly on the mend. In terms of these deals that we didn't book, we could have projected -- we could have come up with very different United States deals because four or five of the deals and seven or eight of the products were the US and it just wasn't worth trying to accelerate those couple of weeks.

Asia Pacific has massive opportunity and yet we're actually garnering less of it than we could at this point. But we're going to showcase our stuff in IBM's Beijing facility. We have got some good partnership work going on there. But Asia Pacific is not getting the acceleration that it should have.

So EMEA is doing very well, Canada, Latin and South America are doing very well. The US is actually in good position going forward. And we're going to be jumpstarting Asia Pacific in the upcoming quarters.

Yes let me ask you two follow-ups. Actually I was frankly less interested in EMEA by the pop in the Americas business. That seemed like a pretty encouraging sign. I'm wondering if that's just timing or if you're seeing something different happen to that market?

No I think the two big things that have happened is that one, we put Tony Parkinson in charge of the Americas and he is doing a very good job. Two, we hired a new General Manager for Latin and South America, a fellow by the name of Francisco Amarra who is doing an excellent job. We put a new team last year into Mexico, who is doing are really, really excellent job in Mexico. And Canada -- God bless them -- they are the market leaders there. They are considered a high-quality provider and they chug out double-digit growth through everything from service to product cross-sell and that continues.

And I would say that Canada has been a multi-year good story. Latin and South America is a newer excellent story. And if you look at the global insight study that we gave and we said where in the world is their massive transaction growth that fuels this kind of change, Latin and South America comes right up to the top of that list. We've hardly scratched the surface in Brazil for instance and Brazil is going to be one of the handful of major electronic payment countries in the world next five years.

Yes. Let me ask you two more if I may then and you're absolutely right to point out the opportunity -- I am kind of curious if you yourself have any sense of what percentage of your revenue, I'm not trying to kind of force you into a corner here, but how much revenue can you in fact be getting from Asia-Pacific if you look a few years out?

Well, I think I have said it publicly before -- again Asia Pacific should be somewhere between -- it should be half the size to a little larger than half the size of EMEA and it should be growing faster than EMEA does.

Okay. And then, I'm really interested in your comments on the -- on the training and not forcing deals into cars. I hope that you never go teach car dealerships how to run their business because that will make it hard for us to buy cars.

But there have been a lot of reports from other companies of software softness and I am very interested in your assessment of what you're seeing out there? If you feel that these were really timing decisions that were, in a sense, able to be controlled by you and to what extent on the other hand were you really responding to the needs of your customers and with that I will hand it back.

Okay. Well, a simple way of looking at it, if you manage a business for full year, what you constantly manage is year-to-date. And what we have told -- what we have told everyone is that we want to grow the revenues in low double-digits, it's our platform number. And we want mid double-digits -- we want 12% to 15% in EPS growth. And so we basically have plotted out on a full-year basis, against full year attainment, how do we go and do that?

And so forgetting -- and it's not that I do not have great respect for you guys, I do, but and I tend to agree with you on your – your full year numbers were pretty close -- but if you think about how we budget or how we plan, we are virtually ahead of our plans in every single category of how we manage the business. And we are very, very comfortable that unless some fluky behavior takes place, that we're going to land very comfortably in both revenue and the EPS side of your business. The only thing that makes our business a little bit complicated at this point is that our major, our hallmark product, is a deferred revenue sale. So we can do fantastic in selling Base24-es but that does not count for current period revenue attainment. But it does count in terms of creating the wealth -- creating wealth in the company. That's only caveat I am not using that to hedge my bet.

I'll go back to what I said, I'm very comfortable. We are ahead of every internal plan that we have line item by line item. And that we're comfortable, that we're going to deliver, what we said we were going to deliver, on the full year, we just can't do it -- we just can't do it on the quarter. We can’t do it based on the last 15 days of the quarters as when the revenue comes in.

And I'd rather take the pain now, than when we are pumping out a 110 to $115 million a quarter. Because CAGR works against us. I was the banker for too long. Compound annual growth rate works against you when you misbehave, just as much as it works for you, when you plan further out. I've just seen too many companies keep borrowing from their wealth to make quarters, and we're not going to do that.

What I was curious about was to what extent were you accommodating client's needs to may be more cautious before moving forward and to what extent?

No, I will tell you. We have a step in front of revenue which is sales, right. And we have the best demand for our product that it's probably happened 4-5-6 probably till late 90's. That's just a flat out honest assessment of where we are. It had -- back in the '97 and '98 time frames, when year Y2K was coming around, it's probably the last time there was this kind of demand.

Thank you.

Okay.

[Operator Instructions]

You have a follow-up question from the line of Nik Fisken with Stephens, Inc.

Can you guys, give us an update on PRM and IMTS activity in the quarter, kind of sales in RFP outlook?

Wait a second you said PRM and what Nik?

Yes, wholesale banking?

We call it WPS.

We said we changed name.

Jeff, why don't you tell them about the award you received.

Yes, Mark mentioned in his script. But I was in Brazil recently at a banking show and it was pretty neat to watch one of our customers ABN AMRO in Brazil who actually uses this software at what we call the enterprise level to look at patterns of fraud across every chain of the bank. It actually won an award for the best fraud-detection system in the country.

And we actually had several bankers sitting with us at the table who were sort of the mind, I would like to get that award next time. So we are certainly seeing a lot of demand for it. It's definitely top of mind for our client. Our global insight study suggested that payments are going to go up 13% a year and what we don't know is how fast product will grow, if it will be the same rate, but you can bet it will grow and still be pretty significant dollars after we send it off of our wholesale payment.

Wholesale payment systems, you know, we have mentioned Europe is the place where we see the most net new activity. We continue to have additional services, additional sales to our existing clients in the US. We do not see an enormous, a large new market in the US, but we do expect the signs of new clients. But our real opportunity comes internationally in the near-term. Near mid-term it's really again driven from Europe as results of the seminar. There is also some opportunity down in Australia in that area, but we're really most bullish about the opportunity we have in Europe. We just signed a customer here in the last week in Europe, a major bank in Europe and we expect to follow that up more in the near future.

So, we have actually signed the major -- another major European bank and it's probable that we'll have more signings this quarter in terms of that. And I would say it is EMEA is the main place, but a lot of the deals in EMEA are what you would call global deals, which mean they actually do back, still back into their New York -- into their New York offices, until their New York capital markets offices.

So we land up selling multiple systems, one in the US and one overseas. So it lands up going that way. So, the WPS or the old IMTS, we are doing extremely well in terms of productivities around the world in that category.

And on capital deployment, can you comment on the M&A pipeline and then would you change your 10b51 to aggressively buy back more stock?

Well. I'll answer the second one first. I mean that's clearly as much a governance issue as much as it is a management issue. So I'm not going to speak for my board in terms of that. And what I will say in terms of the acquisition side is that we are in niche player. We are very, very committed to payments and we're committed to the global payments and convergence.

There are -- we're thrilled having Craig Mackey with us. He used to work for a pretty good company, Nik, and we believe that the opportunities for acquisitions are very good. And we're now at -- I think we're now developed and we have been doing it long enough now that it's an issue of doing what is strategic and appropriate versus -- our options have never been better, let's just put it that way.

We have -- you know we got pretty good -- we got pretty full menus in terms of what we can and might do. And so it is a matter of allocating the capital and allocating the calendar in an intelligent way in terms of how we keep growing the business on that dimension.

Okay. Thanks.

Your next question comes from the line of Shawn Boyd with Westcliff Capital Management.

Good afternoon, thanks for taking the question. Quick -- as you hear is just I certainly understand it and I appreciate that you are running the business for the long-term recurring contracts. What I want to understand, though, is the volatility of the business quarter-to-quarter and just in this situation, given the guidance that you have talked about for the full fiscal year, when you get a significant boost in the initial fees, on the software license fees, is it fair to assume that that gross margin can swing you know 300 to 400 -- 500 basis points quarter-to-quarter?

I wouldn't -- an extreme case, yes, it could swing as much as you're talking about, but I would not lock ourselves into numbers. There are certain behaviors we do not want going forward. We would much -- we much more prefer doing deals in which we get paid annually or quarterly or monthly than get paid five years at a time. So if you get paid five years upfront for a capacity deal you're going to land up you know —- an awful lot of that's going to go to margin and it's going to swing -- it's going to land up swinging your margin.

If we go do a new large commercial deal, that will be a percent completion deal and it will actually look like it's not as big a revenue boost, but it will have really nice legs for two or three years in terms of how you burn money. On the BASE24 -- BASE24 not BASE24-es I mean typically you get paid about half your money upfront and half your money over the life of the deal. On BASE24-es, because it's still a C category, we don't get our revenue.

We need to recognize the revenue or the associated expense until it hits acceptance and then it lands up coming out. But it lands up coming out at a more naturalized margin because the expense has flowed through with it. Does that answer your question?

Yes, it does, and that's probably helpful. So basically the -- if you do get a lot of upgrades, then, you might see that growing but otherwise you would probably see it over.

That's correct. We should -- we...

[inaudible - microphone inaccessible] pro rata?

That's right.

Okay. Great. Thank you very much.

At this time, there are no further questions.

Well, if there are no further questions, thank you. Thank you for your time. And we'll talk to you in 90 days.

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.