ACI Worldwide Inc (ACIW) 2007 Q2 法說會逐字稿

Good morning. My name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the ACI Worldwide financial results for March 31, 2007 conference call. (Operator instructions)

I would now like to turn the call over to Mr. Bill Hoelting, Vice President of Investor Relations. Please go ahead, sir.

Thank you and good morning. The participants for the conference call this morning are Phil Heasley, CEO; and Henry Lyons, CFO. Mark Vipond, COO, will also be available for Q&A following our prepared remarks.

As a reminder, some of the comments made in this conference call by the company, 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.

I will now turn the call over to Phil Heasley.

Thank you, Bill, and good morning. I hope you all had an opportunity to read the press releases which we issued this morning. As you are aware we did not file our 10-Q this morning with the press releases. This is due to the fact that on Tuesday afternoon we were informed of the clarification related to the accounting for the settlement of expiring stock options that were vested but not currently exercisable because of our review of historical stock option practices and resulting late filings with the SEC. This clarification will require us to recalculate and reallocate the cost of purchase of vested options.

In June, when we file our 10-Q for December 2006 we estimated these costs to be approximately $11 million, as of December 31, 2006. At that time we anticipated recording these payments as direct charged equity. Now certain of these costs will have to be expensed rather than regarded as paid in capital. We are extremely disappointed with this situation given that we have consistently tried to communicate with the market the accounting and economic implications of the option review and restatement of our result in non-compliance with SEC reporting obligations. However, it's clearly mandatory that we reflect the recent clarification of the settlement of vested options for accounting purposes.

Unfortunately, this has resulted in a delayed 10-Q filing from what we announced Tuesday morning; however, we are still confident that this filing will be made in the next couple days. In the interim we'd still like to review the operating business metrics and our performance in March quarter. This quarterly release information does reflect the impact of the March quarter that will occur from expensing settlement in vested options. We've already informed NASDAQ of the circumstances and the delay in filing our 10-Q.

The total impact on our number will be approximately $7.5 million expensed through our P&L, and $3.5 million charged to paid in capital; instead of the $11 million being directly charged to equity when we indicated in our most recent filings with the SEC. The March 2007 quarter expense number was $3.5 million.

Now I'd like to move into a discussion of our business results, which is why you're on the call. In our first calendar quarter we delivered solid operating free cash flow and source sequential growth in both backlog and preferred revenue. As stated in our press release we will continue to manage and explain our business in terms of cash generation and long term value creation.

As those of you who have been following ACI are aware, the past year was a transitional one for us. We've been investing in positioning the business for long term sustainable growth and also reoriented the organization to think of the business in what we believe to be a more strategic manner. We combined three business units to achieve better focus, efficiency, and strategic acquisition integration in 2006 and are now utilizing the brand and distribution channel more effectively in the marketplace.

On our July 24 annual meeting we approved the name change of our parent company to ACI Worldwide, Inc. and also changed our NASDAQ symbol to ACIW, all part of our branding process, and a name change which will align the Street with our clients. Additionally, we have changed our fiscal year end to a calendar cycle. Although the fiscal year end change will formally be effective January 1, 2008 we are currently managing and explaining the business on a calendar year basis effective January 1, 2007.

We have expanded our financial guidance to include 60 month backlog and operating free cash flow. These metrics must be understood in conjunction with the traditional GAAP measures to properly gage the health and growth rate of our enterprise.

As we implement these changes we also made some key personnel changes. Richard Launder, a long time ACI employee and former head of the EMEA region, is now President of ACI Global Operations. Richard has tremendous success in growing the EMEA business over the past seven years. Sales have doubled in that region under his leadership. We have the confidence that his sales and marketing capabilities and his ability to transfer his success in EMEA to other markets.

Ralph Dangelmaier, formerly the President of P&H Solutions, is heading the Americas Channel. We're delighted to have him join the team, and also delighted with the wealth of experience in the wholesale channel has brought to ACI with the P&H acquisition.

Finally, Bobby Koscheski is now the Chief Marketing Officer, another ACI veteran with knowledge of our solutions and markets. Bobby is going to be based in our New York headquarters office and oversee Global Marketing efforts of the company.

As you well know, we have an unusually delayed and simultaneously equally accelerated quarterly reporting process due to the historical options review. At this point in the year March is old news. We had some good key results in the quarter and completed the acquisition of Visual Web Solutions which brought a complimentary non-U.S. trade finance product to our portfolio, and also had the secondary benefit of building a sizable Indian presence.

We anticipate that we will adhere to the reporting schedule we outlined this past May where we indicated we would file our delayed Qs every five weeks or so for the remainder of the catch-up period. We now anticipate that our final catch-up 10-Q for the quarter ending June 2007 will be filed in approximately five weeks. In short, we're fulfilling our commitment to the timeline we laid out to the market earlier this spring.

I'm going to turn over the call to Henry, who will walk you through the financial results of the quarter.

Thanks, Phil, and thanks to you all for joining us on the call today. As Phil said earlier, the operational financial story this quarter is our operating free cash flow result and the sequential growth we saw in both backlog and deferred revenue. All of these metrics are fueled by solid contracting billing and collections. The operating free cash flow result demonstrates what we have been saying about the business for the past few quarters. We're going to run the business for long term value and cash generation, and as we grow this business we're going to see stronger cash and backlog metrics before we see correlating GAAP results. This is primarily due to our focus on the sales of broad solutions that do not lend themselves to short term revenue recognition, and our philosophy of not expediting deals to achieve a GAAP result.

Overall, our 60 month backlog was up sequentially $31 million. The strong contracting quarter in EMEA led to a backlog increase of $30 million, while the Americas and Asia Pacific were basically flat. EMEA saw wins in Holland, the Middle East, France, and the U.K., most of which were linked to the faster payments initiative. In the Americas the increase in P&H revenue was offset by a decline in our non-P&H business in this mature market. Latin American and Canada performed to plan, as did Asia Pacific were we signed some new customers in Malaysia.

Revenues by channel look a bit different than the backlog story. Americas is up $9 million over the March 2006 quarter due to the contribution of P&H as just discussed. EMEA is down $8.6 million versus last year due to capacity deals which occurred in the prior quarter but did not recur in calendar 2007; however, the backlog result for EMEA indicates that we are building a strong pipeline.

In terms of operating expenses, we had a $200,000 decrease on the year over year basis when we looked at the business net of acquisitions, stock option related expenses, and the charge related to the purchase of vested options. Acquisition has added $15.4 million to our year over year expense, stock options were $2.4 million, and the charge related to the purchase of vested options was $3.5 million. Deferred expenses increased $400,000 year over year. In addition, we expect to see charges of $3.4 million in the June quarter and $600,000 in the September quarter related to the purchase of vested options.

Moving to margins for the quarter, software license fee margin was 71% compared to 84% in the March '06 quarter. This is due to the aforementioned capacity deals not repeating, as well as the impact of acquisitions including the purchase accounting treatment of acquired deferred revenue. Maintenance and service margins were flat year over year at 54.5%.

Regarding our taxes, our tax rate of 41.6% was higher than last year's 35%, primarily due to amortization related to the Ireland IP transfer. Although this increases our tax rate in the near term, we still anticipate this will be a significant long term benefit to the company.

Turning towards our expected SEC filing schedule and normalized reporting cycles, we are revising our 10-Q for the March quarter to reflect the changes required to comply with the clarification of the accounting policy related to the stock settlement of vested stock options and we expect to make the filing in the next couple of days. As Phil said earlier in this call, we are on track to being compliant next month when we file our 10-Q for the June quarter.

This brings me to the subject of guidance. Obviously we will have a new extraordinary item on the expense line due to the treatment of the settlement of vested options. We did not provide guidance in this release because we're just beginning our work in analysis on the June quarter and our full year forecast. We will have more visibility in a month's time to update guidance. We anticipate doing this during our discussion of June results which should occur in mid-September. This is such an unusually short reporting schedule that we think it's prudent to wait until next month to discuss guidance metrics.

Before I close my prepared remarks I have an announcement which affects our communications with public markets. Bill Hoelting, our VP of Investor Relations who has served ACI for the past 11 years, is stepping down from his IR role. We want to thank Bill for his work over the years and for his dedication to ACI. Bill will assisting [Tomar Gerber], our new Vice President of Investor Relations during the transition. Tomar joined ACI on July 26 and she is based out of our New York headquarters. We believe that with Investor Relations being located in New York, it will help us to better serve the marketplace. Welcome, Tomar.

Now I would like to turn things over to Phil for concluding remarks.

Thanks, Henry. I'd really like to close with the following thoughts. The external market dynamics remain positive for our industry and our vision, which is to be the number one global provider of electronic payment solutions. We're implementing our strategic plan and building our direct global infrastructure through target acquisition of both distributors, as well as add on product solutions.

We are also pursuing greenfield build-out in places like Romania. We are launching ACI On Demand and also expanding the wholesale business internationally. We are leveraging the power of our IBM relationship and building our global services. With our legacy issues nearly behind us, we look forward to building upon our leadership position in the marketplace.

With those thoughts we have completed our prepared remarks and I'm turning the call back to the operator to being our Q&A session. Thank you.

(Operator instructions) Your first question comes from David Parker with Merrill Lynch.

Good morning, everyone.

Good morning, David.

Just in terms of the whole sales to revenue conversion process, you have a pretty steep ramp in the second half of '07 now just given the results of this quarter and in prior quarters. What kind of comfort can you give us that the backlog is actually a good indicator of what we can see in the second half of '07?

Well there's two backlogs that we give you. We report 12 month backlog which should be a very telling number; and 60 month backlog, you subtract the 12 from the 60 and it pretty much tells you what's not -- it's pretty clear what's not in that number.

How often does that 12 month backlog move around, though? I mean, how definite -- it is a non-GAAP measurement. How definite are you or how confident are you that you actually see that 12 month backlog converting to revenue?

This is Mark Vipond; I'll answer that question. There is always movement within a 12 month backlog of customer project that you anticipate will go live in a given quarter. It can move out; either ask for some changes or they delay, or a million things can impact that. But it's pretty solid. I mean, as a general rule you can have things move up and you can have things move out a little bit, but as a general rule a 12 month backlog is pretty solid.

Okay. And then on a separate subject, for the tax you've been transitioning over to Ireland. When are we actually going to see the benefit of that transition on the tax rate?

We've said before that benefit really starts flowing through a little bit in '08 and really '09, and '09, '10, '11 is part of our strategic planning process. We're seeing the benefits in '09 and '11. Also, one thing you will notice, David, this amortization is straight line amortization. That goes on for five years so what we'll have is a five year kind of a fixed cost, non-cash fixed cost running to the tax line, but we'll see increasing benefit as we move through '08, '09, and '10, with the larger benefits coming in '09 and '10.

From an operational perspective, the reason for that is as we continue to sell more BASE24-eps and specific -- internationally we get the benefits of the tax, but the real benefit comes when we start converting our existing BASE24 classic customers over to BASE24-eps. And we expect that activity to start in earnest in about 2009, and quite frankly it will take three, five years before all our customers -- or the majority of our customers would migrate over to eps. But it's in that timeframe that we get the real benefit from the tax situation.

Now in this company almost two-thirds of our sales are overseas, and we've moved the first piece of IP; we've moved es. We actually contemplate moving several more pieces of IP also, so we're going to have to keep you informed as we move those others. The other thing I would do is I would both look at our GAAP and our cash tax rates in terms of understanding our strategy because it makes as much sense on the cash side for us to be doing it now as it does on the GAAP because they're actually in very different places at the moment.

Okay. And then just final question, you have approximately $130, $133 million authorized for share repurchases. Can you just give us an update on your buyback program and have you been active over the last few months?

We reinstituted our instructions several weeks ago, and we've had limited reentry into the market. Nothing that reflects in what we're discussing today, but I am answering your question is that we did reinstitute the instructions and we've had limited reentry option of the buybacks.

Do you expect to me more aggressive or continue to buyback on a limited basis?

We intend to implement a strategy, and it's not a limited -- we're not going to go and buy the whole thing back in two months. We in effect have a set of instructions which, for a lot of reasons, we don't want to make public. And they're not -- we're not doing it ourselves; we're doing it through a third party. So in effect, we do have a set of rules out there and those rules have caused a very limited amount of purchasing to take place at this point. The full strategy -- I mean, it will -- the rules will kick in as the year rolls out. I can't say anything more than that.

Okay, thank you.

Your next question comes from Gil Luria with Wedbush Securities.

Good morning. I believe the last time you provided guidance was in your June 5 release, is that correct?

That's correct, yes.

Has there been any significant changes in the market in the two months since then that would have an impact on the guidance, or is your reluctance to give guidance today more an issue of again that transition from backlog in deferred revenue into revenue?

Well, the reluctance really is where we are in our process. I mean, on the calendar right now it says August, but if you think about this we've just filed our March results, which is our first quarter. We are just now getting through our June results, which is really halfway through [inaudible], and our internal forecasting process. In addition to that, as Phil mentioned on Tuesday, we get some new guidance on the way. We were doing our accounting for the settlement of invested shares, so really if you just throw where we are in our internal process with these -- the impact of these one-time events on many things; that's the reluctance to give guidance today.

Also, we will be back again. Our reporting cycle, although late, is very compressed; we'll be back out in a month. So when you add that all together, it just made more sense for us to take the extra time to evaluate it and we'll be back out in front of you in four or five weeks.

So that means no real changes in the marketplace.

That's correct.

Right.

Could you also remind us what deadlines you have for filing this 10-Q, the 10-Q for the March quarter in terms of your NASDAQ obligations and your debt covenants?

The NASDAQ obligation was August 8, actually, which was yesterday. But we have reached out to NASDAQ with the situation, the uniqueness of the Tuesday event, and we fully anticipate having this thing filed; if not today, it's tomorrow; and just don't see it as an issue.

With our debt covenant, we have until the 13th and I'm not worried at all about the debt covenant deadline. But just as part of prudence we have reached out to our credit facility people just to let them -- to advise them of the situation.

And the last question, is your guidance for tax rate going to still be 38% or is that something you're also not going to be able to address at this point?

You know, we've got to work through that because once again we've got this -- now we've got this new accounting for options which brings our pre-tax number down. That's one thing that's going to affect our tax rate, and then also we've got to re-look at the geography of our profit. Those are the two things that are really going to drive it, we feel, is going to be the geography of our profit and the level of pre-tax because we've got a few fixed parts of our tax expense that don't just go up and down variably like you would think most taxes would.

Thank you.

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

Hi, good morning everybody. How would you characterize the June quarter results relative to your expectations?

I've got to get through them, Nik, to be honest with you. And really the purpose of this call was to speak to March. Not trying to be coy, not trying to be cute, but I just want to be prudent and make sure we can get through the numbers -- through the June numbers before we give color on that.

Okay. And I'm struggling on this buyback question that David asked. Why has it been limited?

Again, it's limited based on the -- we are out under a set of instructions and it's limited based on the instructions that we have put out. And I would love to tell you more about the instructions, but the instructions -- it's not good for people to know our instructions because people can then affect -- work against our -- work the other side of our instructions. So it is just totally an issue between us and our banker, right, who is in receipt of our instructions.

If you guys set the instructions, why did you set them to be so limited?

Well we set them to be initially -- they're not overall limited. The way they were set up they were limited in terms of what's taken place so far. I was trying to answer the question was saying has there been a big buyback on our part? And the answer to that is no there has not been a big buyback, but yes, we have put out the instructions. And because of the way we put out the instructions, which are much longer term in their perspective than just days and weeks, it's limited. I can't say any more than that.

Okay, thanks.

Your next question comes from Franco Turrinelli with William Blair.

Good morning, everyone.

Hi Franco.

Let me add my valediction to Mr. Hoelting and thank him for all his work. A couple of things, though. Do I remember correctly that there were some one-time items related to settlement with a former executive that affected results in the December and, if I remember correctly, in the March quarter as well?

No. What -- the only thing I can think of that you may be referring to, Franco, is we changed our guidance for some things -- some mechanical events like an error we had in our EMEA backlog, etc. And we did say that we were going to change our guidance because of some settlements with executives, but those are not reflected in the March results.

Franco, in our March results it says the core business is basically -- year to year it's basically flat, the organic business. And actually it's flat including the investments in Romania, so the core business is actually down. We do have that big expense that we're humping through in P&H where we don't have -- we have to write off the deferred revenue, but we have the underlying deferred, we have the cost of supporting that revenue and that shows up not only in there being expense and not the corresponding revenue, but that also was 8 of the 13 -- we said that margin went from 84% to 71%, 8% of that margin coming down in license is the fact that we don't have the -- we have the expense, not the revenue on that side of it. So the impact of capacity is the remainder 5%. You're not seeing the same amount of pull forward revenues.

Okay. Maybe I'll follow up with you offline on that one, because, you know. And then are you going to have to re-file the December Q as well, or does this change in accounting only affect March and forward?

No, it only affects March and forward. And that's a good question, Franco, because that was something we had to analyze carefully. And it will just take us some time to run these changes through the draft March Q that we were ready to file a couple days ago.

And that may have been the number one reason why we didn't actually get the Q out at the same time as the press release.

Right. Had to evaluate that situation.

And then my next two questions, they're going to sound like modeling questions but they're not actually where -- internal (inaudible) in the context of how do we, as external observers understand your business better. My first question is really related to the guidance. I understand what you're saying, Henry, but on the other hand, I think we're all smart enough to back out one-time non-recurring things such as this options expense; so I'm not sure that I understand why it is that you can't comment on your guidance, excluding the impact of this change in option expensing.

I can give you some color on that, Franco. Remember, our guidance now has five metrics, and the ones that I really focus on the most -- well, we focus on all of them, but the ones that really -- operating free cash flow, and then the interplay between backlog and revenue. And that's the difficult part of our business. We start with sales; we roll it through backlog; and then we roll it to revenue, and somewhere in there, we actually convert it to cash. And as you see with this quarter, Franco, those three things are interlinked. Revenue on the surface may look one way, and backlog may look one way, and cash make look another way; so it's the interplay between those three things that over-complicate it.

We can all -- you're right, Franco; we could all take a $7.5 million charge and write it out, but's it's really that interplay between cash flow, backlog, and revenue that takes time to sort out, and we want to make sure we get it right before we comment on the guidance.

And let me answer it from the other direction, too, Franco. It's that we for years, and we for maybe a decade -- not even for years -- have had a very, very simple way of kind of communicating with the Street, and therefore, a very simple way of operating internally; and that is that we had this very simple GAAP number of revenue and EPS. And then on 90-day cycles, company (inaudible) go and figure out how to bring revenue forward to make the revenue number, and manage expenses to get the EPS. Now, that's very interesting except that you're basically growing the business down to zero over time. You're not growing it. So we tended to avoid long-term expensive upfront new deals, of which once you go through the detail of this quarter, if you look at the number of new deals we put on, it's kind of impressive around the world. That stuff does bring us cash, but it brings us no revenue, right?

Then, not taking the (inaudible), right, gives us -- we still maintain backlog, right? Our backlog still looks good because we haven't put the backlog forward; but it doesn't bring us cash. So as we keep going and working the re-forecast process, and you know, it's typical in this organization, people try to bring forward, "Oh, gee, I've got this puff deal that'll make everything all right," and if it's at a 20% discount, I don't need $8 million at a 20% discount; or put another way, if that $8 million was in the backlog, I don't need to get $4.8 million or $5 million in cash to reduce an $8 million backlog. We're managing the business, not only at this point forward, but as of last September when we told we're doing it from an enterprise value standpoint.

And if you look at it on a cash-by-cash basis, which is to me, the key metric, I would stop giving the rest of the stuff almost tomorrow, as long as I could explain the cash all the way to EPS. We've got to build business in a way that we know that we are sustaining a growing market share. We're maintaining or growing our real margin, not our brought-forward margin, right, and that's what we're doing; and it's a lot more complicated than we've been historically explaining, and it's a lot more visible once we get -- a couple more quarters out there, you're going to really understand our business a lot better than we've ever presented it before.

Long answer, but it's something I believe very, very strongly.

Right, but I cannot tie it to the second part of my question, which is I understand what you're saying particularly on the cash flow, but a number of people on this call are welcome to chime in, but I am concerned about our ability, again, as outsiders, to accurately or effectively model cash flow when -- we just have to look at three-quarters cash statement. There are very significant swings in some of the working capital items as well as some of the tags and deferred revenue items. I think it's going to be extremely difficult for us to model and for you to explain without having to explain something every quarter.

I don't think so.

Okay.

I don't think so. We've got this damn -- none of us signed up to do this options stuff. Managers are investors, right? None of us signed on to do that, but once we're through that, I think the walk is -- I think Henry has a very logical walk that he takes -- that he can take you through.

And frankly, and I think your point -- it's interesting, because as we dissected this quarter, again, if you think about it -- I don't want to drag the call down on this table we put in here, Table 6. As you kind of look at it across, you'll see a bunch of things -- tend to make a little sense. You'll see revenue is down, but you'll see sequential deferred revenue was up big, and deferred revenue for the most part equals cash. There's some deferred revenue in there that's not cashed out; so we're really trying to lay it out that revenue might look one way, but then you've kind of got to look at deferred revenue in tandem, and voila, you've got a nice pop in cash, but it doesn't come through in the GAAP.

I hear you, Franco, but I think what you'll see, actually, is that the cash flow might be the easiest thing to model. I think the GAAP results, the GAAP P&L, might be the harder one to model; and honestly, that's what I'm finding.

How do you suggest, Henry, what we do think of modeling -- I guess the two things that appear hard for me are deferred revenue and taxes. What should we be thinking about going forward from here?

Modeling deferred revenue -- I won't get precise on that. I'll just get down to cash -- free cash flow. Free cash flow -- if you look at the way we're explaining our business, we say we're a low double digit growth business over time, plus or minus changes in CapEx, Franco; things like that that are lumpy. You would think cash flow would grow at least that, probably 1.5x or so of that. Again, I'm not trying to do it for you; that's what's in my mind. If you think about a traditional business, you would think EBIT growing 1.5x time revenue; think of our cash that way.

Taxes, the GAAP taxes; again, look at our rates now, you can model that on a GAAP basis. But I think you asked the question on the last call about cash versus GAAP taxes, and our cash tax rate right now is about 15%, now 14%, 14%, 15%. Over time, when we did the IP over in Ireland, we're not going to have a GAAP rate of 15%. Our cash rate will go up, it's extremely low now, but I guess the short answer on cash is cash taxes, we pay about a 15%, 20% cash tax rate.

Okay. Thanks, Henry. That's fair enough.

Your next question comes from Leonard DeProspo with Janney Montgomery Scott.

Hi, good morning. I just wanted to ask two questions. One was did you break out the 12 month backlog of $307 million between recurring and non-recurring?

Thinking it through; I want to double-check. I'm looking at two documents; it's broken out in the Q; it's not broken out in this release. So the Q will be filed today or tomorrow; you'll see it.

Okay, thanks. And the second question --

We have broken it out. Unfortunately, we're going to be 24 hours or whatever. As soon as we get that out, it'll be there.

Okay, great. And the other question is trying to think of the $7.5 million spent. On an after-tax basis, is it fair to think of it as $0.06 in March, $0.06 in June, and $0.01 in September for $0.13?

On a GAAP basis, that's fair, yeah.

Okay. I think that's it. Thanks.

Your next question comes from George Sutton from Craig-Hallum.

Hey, guys. I (inaudible), so I hope none of this was addressed. I'm really curious, Phil, from a big picture standpoint, can you just give us a tenor for future acquisitions? Do you have the pieces that you feel you need now? Do some of these internal issues give you some pause with respect to acquisitions?

Well, George, I'll answer the second half first. This three month exercise that ended up being a 12 month exercise in stock options has been a fairly debilitating situation for a company that's got a limited amount of -- just head -- we're not Apple Computer, all right? We can't go cordoning off three departments in our finance unit to work this out; so it's been a little bit debilitating in terms of that. I would tell you that the best freelance work that we've had during this time has actually been Craig Mackey and our M&A group, because he's been very unfettered by a lot of the things that he should be tied down.

I would say versus last year, there's a very large universe of stuff that -- last year, there was very little out there. There's a lot out there right now. Having said that, there's not a lot that we're particularly interested in at this point in terms of neatly fitting our strategy. I'm actually proud that we didn't go after some properties that have moved, because we actually had a strategy, but they didn't make economic sense to us to do. There are some fill-ins. You've seen us -- we really believe that Asia is a huge opportunity. We are going to buy in the distributors that make sense there, George, and then we're just going to have to grow greenfield in places where there's just huge opportunity and we don't have distribution. To a lesser extent that's probably true in Latin/South America. I'm a big believer that Brazil, Russia, India, and China are very important markets for us in the next x number of years.

I would say that we're winning more than we ever have in the marketplace right now, which is probably forcing us to do more internally from a buildout standpoint and whatnot. But I actually believe that the way certain properties have moved and whatnot, it makes it very incumbent on us to win market share at this point and accelerate renewals, which is exactly what we've been doing. It's hard for you to see and it's hard for us to explain to you, but one of the nice things about this quarter is that we've -- when you take a backlog from being an auto-renew number to being a contracted number, that strengthens the value of it.

So I feel good that way. So, no, we're not running out. We don't have any big acquisition we're going to run out and do at this point. We know four or five properties that we want that are strategic, but that's kind of on the options circuit; we're not very interested in it at all.

And then lastly, on your P&H property, there's been a lot of industry scuttlebutt there. Can you just give us an update from your perspective on how that business is?

Sure. We purchased P&H with the expectation that they would grow the business at the rate of about 20%, and they are basically on that plan, in terms of doing that. P&H's numbers will not make a lot of sense until they've been under the shed for about 12 months, because as an ASP, they have a pretty good deferred ledge that's burning its way through in the next June or September quarters, you'll see most of it go on.

But I would say we're doing extremely well. We've forced in -- in our target market, which is middle and large, we've just brought it to middle-sized banks. But in middle to large banks, I don't believe we've lost one deal that I'm away of; and we have picked Mellon -- we've actually picked up several. Mark, you have any different --

That's a fair statement. I think we're doing okay. I'm not quite sure what scuttlebutt you're referring to, George.

I'm sure that's contacts on the phone saying how they're winning all these little deals. We don't go after -- they beat us every single time when they get Podunk Bank & Trust. So, we do lose a lot of deals. But in the middle to large -- you know, our target market, you don't have to go to scuttlebutt. You can -- that's not -- the stuff that's moved has moved to us except for, I think one deal went over to -- we lost one over to Fiserv.

Thanks, guys.

Your next question comes from Michael Christodolou with Inwood Capital Management.

Good morning, gentleman; several odds and ends questions. First of all, in the capacity upgrade that you sold in the quarter, the 28 upgrades for greater than 100,000; what would you say the pricing was on those versus the old regime, Phil, where there was going to be a discount on it in the last few weeks in a quarter?

I don't think we have any great discounting going on.

Most of those would have been just capacity trips. There's two ways that those things happen. Some bigger clients will come to you and say, "Hey, I can see my capacity increasing over the next set of years. I want to work out a deal." And there are also those that come in and say, "Gosh, based upon my reporting, I went over my limit. Here's the check for how much I owe you." And in the past, we would have probably had more activity relative to the former statement than the latter. I think most of them now are of the latter variety, where customers come and say, "Hey, I tripped over my capacity." And if they come to us and say, "I want to pre-purchase a lot of capacity," we aren't as anxious to do it in the near term. We say, "Yep, we'll be happy to sign you up for additional capacity. Here's our standard price, and let's work that."

That's what you've implemented in the last few quarters, right?

Yes, and more than that, is [popping], which is the license renewal and paying it right upfront at a 40% -- 35% to 40% discount. That would kill it. And the other one -- Mark mentioned them all; I think the only other category I'd have is that several of our banks have purchased other banks, which has forced -- and basically we're the provider and they've purchased guys that haven't used us; therefore, they've had to buy more capacity in terms of bringing that under the umbrella. I think that's the only other one that I would mention on that.

Okay. And then the two new BASE24-eps deals you announced, and you mentioned you closed a variety of others to some existing customers; could you just pick a few out without naming names, and just kind of explain those, how those would get manifested into the income statement and the balance sheet? Cash was up, clearly. There's that whole revenue-to-cash model.

Well, you've seen deferred revenues way up (inaudible).

When you say closing a deal, you've just maybe like signed the paperwork and you've collected cash upfront and those things could be several more months, if not three or four quarters into converting all the way through.

Yeah, I would say quarters versus months.

To be real honest, some of them are so large, you're talking a year.

Maybe even two years.

Now I -- we're so far delayed. [Partisys], which is BNP Paribas and -- what's the name of the other big French bank that was in --? (inaudible) That's one of the deals, and that's a very large deal, and that will take a long time to go. Now we've gotten a nice piece of cash on that, but that will take a long time before that deferred revenue makes it.

I don't know if the big -- the one we did in Italy, was that in the quarter? (inaudible) That was not in this -- the point is -- we're continuing -- eps is actually selling very nicely. And the other thing I would say about eps is that while eps is selling very nicely, there is still virtually zero conversion from classic to eps. Most of it -- virtually all of what's being sold on eps is expanding our market share, not converting our market.

But we had a deal in France; we had a deal in Great Britain; I think the two deals here might be Great Britain and France, right, yes, the two deals that are being -- in the March quarter. Next month we'll talk about the next quarter. But what you're seeing is you're seeing cash; you're seeing very little -- the reason we're now giving the deferred expense is that we don't want to say, "Well, gee, our deferred revenue's way up," and then not tell you about deferred expense; so we're giving the deferred expense number now, also. So you've seen a big pop in deferred revenue; you've seen virtually -- a couple, $400,000 in deferred expense. So you're watching the big projects flowing.

Right. And how about the IBM relationship? I know that's been going on for about a year. We might now have exactly seen your dramatic growth here in Asia in the last quarter, but that is an IBM mainframe kind of world, right; can you --?

We're doing -- I'll tell you three things about our IBM relationship. One is that the Unix side of things, we're doing very well. They're doing very well by the relationship, and we're doing very well selling it in the marketplace, all our products on the Unix (inaudible). We really have, if you only talk about this quarter and not go further. We only really two or three mainframe installations going on around the world. I think they're three, right? There's three.

Now, we probably have 250 customers who are big IBM mainframe users that are currently using us in different environments, and that's the second thing I would say about it; and we are to the point where we're within a month away from the next leg, or a month and a half away from the next leg of validation. We're basically doing a load testing and speed testing of our BASE24 application that has -- we did it the first time with modest load balancing; we're now putting massive load balancing. Would that be fair, Mark?

Yes, we went through, about a year and a half ago, of optimization of our BASE24-eps system on the Z-series, the IBM mainframe. And we're going through a second round because we have some objectives, and IBM does, too, that we would like to attain relative to price performance, and we have a high degree of confidence that we will attain those. So we've already done the work; we've done the modeling, and now the next step is probably in the September timeframe. We thought it would be August; it'll probably be September. We're actually going to do a stress test load balancing with IBM to do it at volume, to prove out the final numbers. So then we will roll those changes back into our core product, which will put the price performance of our BASE24-eps system on the IBM Z-series in an exceptionally competitive position.

And IBM is working with us to deliver and position an enterprise-size Z-system into our environment, and we're actually going to build a center of excellence around it and be able to demonstrate that. So while I'd have liked it to move faster than it's moving, we're building a very, very good foundation in that relationship. We have not accrued -- IBM accrued fine on the Unix side of the deal, but we have not -- neither one of us have gotten our dividends yet on the B-side of these investments.

My understanding is that IBM wrote its own couple of hundred page user's manual as to how to use their computers with your software and that's been sent out to --

The Red Book.

-- sales force. Am I understanding that correctly?

Yes. It's called an IBM Red Book. It's a -- we work with them to talk about operating a BASE24-eps system on a Z-series. That was about nine months ago that we went to that work, and then they published, as you say, a couple hundred page manual. That's a -- they only do those things with strategic partners and strategic applications, because they are very expensive to go through all that. But yes, they have done that.

And it was that exercise that has created this [turning] exercise.

So in the next month and a half, after this next validation, could we -- could there be another such document that helps go out to foster more business?

That's a fair question. Actually, there's no plan to do that right now, to update the Red Book; but I guarantee you there'll be communications.

There's more to come on the relationship but we can't be definitive about any of it today.

Okay. How about an update on SEPA? FundTech had their call earlier today, and they did talk about a very robust level of quoting activity, and then applied that a number of banks are under a greater pressure to meet the deadlines. Could you give us your perspective how those plays out over the next few years?

Well, we came to this huge SEPA opportunity. One of the reasons we are carrying such a big backlog in Europe has to do with, not SEPA yet, but FasterPay, which is a Great Britain first cousin to SEPA on its way in. We see a lot of dialogue; some of the strategics have begun putting actual -- they're paying people to do services surrounding it. The great -- the big systems projects, to the best of my knowledge, (inaudible) have not come out yet. But people are doing very well in the services work side of it, which is actually helping them there prepare for the stuff going out.

There's also some expectation and there's already been some and they'll be some more delays from the SEPA committee, in terms of the mandates and dates. But there's lots of activity. It won't happen as fast as it was originally mandated in dates, but it's happening and I guess some of the these systems are very large and the changes are enormous. But yeah, there's great opportunity, actually. It'll be a little bit longer term than what was originally forecast from the mandatory side of the business.

And quite honestly, from a strategic standpoint, I would be more than happy to let the many small projects -- let them go at very competitive rates right now; because the really big deals are going to come down. People are going to have the capacity to do these deals, and one of the reasons that we're building -- we're close to 100 people now in Romania. One of the reasons that we're building infrastructure and building it first in EMEA, the Europe area is to be able to respond to this kind of demand.

We -- believe it or not, our bigger concern is being able to implement what we can sell, not the amount of what can be sold, as it relates to SEPA; and if we don't implement it well, that's going to be a real problem to our brand. So we have to take it in the right-sized bites. As I said, there are no great big contracts yet. It's rolling up to it. You'll know it -- I think we'll know it more when the integrators, when the IBMs and the Accentures and whatnot, as they get really geared up for the enterprise aspects of this, we will know that the applications will follow.

So to [inaudible] and this Italian bank, those were European customers, but they are projects related to SEPA?

Correct.

Correct. They're retail. Actually, SEPA is a wholesale initiative -- is basically a bank-to-bank wholesale initiative. These are retail deals that we're doing.

To be real specific on SEPA, the initial implementations requirements on the wholesale, there will be a retail impact of this, but that's later stages of the SEPA.

Okay. And my last question is about this topic of the buyback; and Phil, it wasn't -- I don't know if it was exactly clear what you were trying to say. You kept referring to "instruction." Are you referring to the company having a 10b5-1 plan, right; where --

That's correct.

-- your broker's just in the market buying -- maybe a certain number of shares every day? Maybe not a lot; around some band of prices? But it's not like Henry's picking up the phone and calling the broker and saying, "Just buy 100,000 today."

No, Henry -- none of us have anything to do -- we want -- we have a set of instructions. We get the board to agree to the set of instructions and then we go implement the set of instructions.

But that's not how you bought all your stock back in the past, right? So is this --

Oh, no, no; yes, it is the way we did it in the past. We've just updated the instructions. It is the way we've done it in the past.

Okay. So all the buybacks are pursuant to the 10b5, and not just while the windows are open, you unilaterally buy stock?

Correct. All right, now before I came, it may have been purchased in a different manner; but since I've been here, which is I think a lot of the recent stock purchases, we've done it all under -- I just don't think -- I don't think the reward is worth the risk, in terms of the company doing it themselves.

Got it, got it. Well, the market says what you're building is worth $100 million less today, and I think most of us on this phone don't believe that, but keep up the good work.

(operator instructions) Your next question comes from Michael Grossman with MFS Investment Management.

Hi, guys. I just wanted to get a better handle on the sustainability on the free cash flow number that you guys reported this quarter. Basically, is that number a sustainable one, and if win rates continue to accelerate and backlogs and deferreds accelerate, should this be kind of a baseline number to work off of, or are there some one-time benefits that we should be thinking about?

I'll answer that. There are no one-time lumpy benefits in here that made the quarter or anything like that. This is a result of the way we do business. We do the contracts, they go into backlog, we do some work, we hit some milestones, we're allowed to build, and we get the cash ahead of the revenue. What I will say, though, is on the -- there's two parts of it; there's the cash in the door, there's the cash out the door. We've got to evaluate the timing of our CapEx. I expect that could be a little bit more; the CapEx was a little bit light this quarter, and we've told you what we think our CapEx outlook is, so that's going to impact it.

But really, there's nothing in here that's lumpy. The sustainability is dependent on our contract, and if our contracting keeps up to pace and our billing keeps up to pace, this number is; so it's related to the business and nothing lumpy in here that made this a one shot, one-time darling.

So if we look back at the last four quarters, it's kind of been all over the map; this is more of a normalized number?

If you look back -- frankly, when we decided to use this operating free cash flow metric, it didn't include CapEx. I didn't look at it quarterly, I looked at it annually. And the way I saw this thing is that there was always -- on the operating cash flow as defined by GAAP, it was 12%, 13%, 14%, sometimes bumping to 16% or 17%, but I think what you'll see is if you look at it on an annual basis, I think you see this has been a fairly stable number.

Okay. And then, just has the delay of the ABN Amro deal at all impacted your business in terms of how you guys book your backlog?

No, it hasn't had any impact on us at all from that perspective.

Well, if anything -- if anything, we've spent money for six months before we actually got the contract. So if anything, it may actually -- that's a big contract. It may actually show up what appears to be faster than from contract date to go wide, but only because we were working on it before we ever got the thing finalized.

Okay. Thank you.

Your next question comes from Michael [Grouting] for [10K Capital].

Good morning, guys. I guess this question's been beaten fairly well, but I'll take another swing at it. On the stock repurchase, I understand the instructions are what they are, and they were approved by the board and so forth. Now that you've reported the March quarter, is it open to you to go back to the board and issue a new set of instructions on the stock buyback? Help me understand how that works from here.

Well, anytime the company's not in blackout, we have the opportunity to change the instructions that we have. Any time it's in blackout, we do not have the opportunity to change.

And so I assume from that, then, that reporting the March quarter isn't enough to get you out of the blackout because you haven't yet reported the June quarter; is that correct, or am I mistaken on that?

The answer is that we have to run through traps and we will run through traps, and if we're out of blackout, we'll report we're out of blackout. We -- quite honestly, job number one was getting this Q out today or tomorrow.

Of course, yeah. Just to clarify then, are you or are you not currently in blackout as far as issuing a revised set of instructions is concerned?

Well, we certainly -- with the Q looming out there, we're certainly -- not that we disclose it, but until we put that Q out, we wouldn't even start running the traps.

Okay. All right, thanks.

At this time, there are no further questions. I will turn the call back over to Mr. Bill Hoelting for closing remarks.

Thank you very much for attending the call, and we look to get back to you in about four to five weeks. Thank you.

And we thank you, Bill.

This concludes today's ACI Worldwide financial results for March 31, 2007 conference call. You may now disconnect.