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

Good morning. I will be your conference operator today. At this time I would like to welcome everyone to the ACI Worldwide Inc. financial results for June 30, 2007. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. Ms. Gerber, you may begin your conference.

Good morning and welcome to our June 30, results call. Our earnings call today will follow a slightly different format than it has in the past. We've prepared a power point presentation which you are encouraged to download from our website at www.ACIworldwide.com/investorrelations and follow along with our speakers. Our management speakers today are Mark Vipond, the Chief Operating Officer; and Henry Lyons, our Chief Financial Officer; our CEO, Phil Heasley is also present and will be available during the Q&A period which will follow our presentation.

Consistent with all of our public calls, any forward-looking statements we might make today should be regarded in the context of the Safe Harbor language regularly included in our presentation, earning releases, and filings with the SEC. For a fuller discussion of Safe Harbor, please refer to the first page of today's presentation on the website. The Company disclaims any duty to update forward-looking statements. I will now turn the call over to Mark Vipond, who will discuss the operating business during the June quarter.

Thanks, Tamar. Good morning, everybody, from sunny Omaha. I'm going to give you a brief update on key activities from the June quarter and in our business operations. Let me start first by summarizing key sales activities.

If you refer to slide number 5 in the deck, this is information we typically provide you on sales for the quarter. You'll see three points, seven new customers signed, which included three new accounts in our PRM, our proactive risk management product, which continues to have good momentum in the marketplace. We also extended our Enterprise to banker on demand business by signing two new customers in the quarter, and we had a major win in Europe for our BASE24-eps and for our PRM product on the IBM-Z series. We're very excited about that. It furthers our relationship with IBM.

You all know that cross-selling is an important part of our business and this quarter we had 31 new products signed with existing clients. Most notably for our PRM product, our payments management product, which is our back office solution set, our retail commerce server product which is the product for payment authorizations that we sell directly to retailers, specifically in North America, and also a lot of activity for Enterprise Security Services. This is our old ICE product were web access and security. In the quarter also, we had nine capacity upgrades over $100,000.

A couple notable points on that. All of these capacity upgrades were outside the U.S., where there is higher growth in transaction volume. One very large deal in Canada. You will note that the number of capacity upgrades is lower than in past quarters, but that's to be expected because it's consistent with our strategy to let capacity upgrades happen naturally and not to motivate clients prepurchase capacity. We expect that trend to continue until our customer's capacity needs exceed their current licensing.

If you'd now flip to slide number 6, I want to review the three primary solution sets for ACI. That's the retail payment solution, the wholesale payment solutions, and risk management solutions. Starting first with retail payment solutions, as you all know, it's still the largest part of our business. BASE24 classic, as we call it continues to be the gold standard and the market leader in the marketplace and is doing quite well. We're not signing up a lot more of new customers on BASE24 classic, most of that business is moving to BASE24-eps. And now we have over 50 customers using EPS. We continue to build out our EPS product set so that we can migrate all of our legacy systems to this solution. That includes BASE24, open two, on two, ASX, OCM24, TRANS24, a number of different products that we have either built, developed, or acquired over the last 10, 15 years. Our intention is to migrate them all to BASE24-eps, our leading-edge technology over the next three five years.

We're also quite pleased with the increasing global demand we have for our payments management, our back office product. Historically, that's really been a U.S.-centric product set, but now we are finding good opportunity throughout the world, in Asia Pacific as well as EMEA and we're very excited about that. On the wholesale payment side, the solutions that we acquired from PNH and Visual Web complemented our high-value money transfer system very nicely. I'm happy to report that the integration of these companies is almost complete. We can remain very bullish on the international opportunities we have in the wholesale payment side, but quite frankly, as I'll talk about in a minute, our U.S. business has been weaker than expected.

On risk management solutions, we now have over 110 PRM customers. We've done very well in the fraud detection business, but the marketplace is moving to fraud prevention, as well as complete enterprise risk management. We believe the combination of our risk management capabilities along with our payments authorization expertise puts us in a unique position to do well and I think we're actually seeing that happen in the marketplace.

Moving to slide 7, I want to look briefly at our channel operations. As you know, we have three major channels, Americas, EMEA, and Asia-Pacific. All three channels showed increased revenue and backlog year over year, but there's some color commentary that I would like to provide on each of those. Starting first with Americas, Canada and Latin and South America remain steady for us. They're still doing well. The U.S., quite frankly, is weak. We've talked about this for the last year, but it continues to be a weak market for us. The catalysts for change are absent. The transaction growths, while growing, are not as high as other places and therefore we have not seen the production out of the U.S. market that we've expected. We do see an opportunity for convergence of payment systems in this marketplace, but quite frankly that is a longer-term opportunity and we don't see an immediate turnaround in the near-term in the U.S. marketplace.

Fortunately, we are a global company and our footprint helps us mitigate those issues. EMEA has been phenomenal for us. It continues to be a strong market, driven by market catalysts like faster pay and [SEPA], the emergence of payments in Africa and transaction volume growth. We've been very pleased and continue to be pleased about the EMEA prospects. Likewise in Asia Pacific, we've also seen an increase in sales growth that's reflected in the revenue and backlog that we've achieved for Asia Pacific by going direct to Malaysia and in Philippines and our plans to go direct in other key markets. It's a cornerstone of our strategy to grow this marketplace faster than we have historically experienced.

Moving on to slide number 8, other areas of focus that I want to update you on. One is on demand, when we bought the P&H product, we acquired an active ASP for the Enterprise banker. We continue to grow that Enterprise banker base, as it was reflected by the two new customers, but not as fast as we had hoped, but we continue to progress that. We are leveraging this ASP, the operation that we have, from P&H for also providing on demand opportunities for our BASE24-eps, MTS, PRM, and retail commerce server product. Our specific focus for 2007 was to establish that business in North America. We will expand that into other regions of the world after we have success here in North America. We started actively marketing that in January. I'm happy to report that this quarter or the next quarter that we report we will actually get to announce our first deals in our OnDemand outside the Enterprise banker arena.

Recall also that we are investing heavily in the global technology centers remote development areas. We have our operation in Ireland, which is overseeing this and that's where we have the IP for our BASE24-eps product. We have over 100 people now in Romania. We have 115 people in India through the acquisition of Visual Web and over 40 people in Malaysia from the acquisition of Stratasoft. We continue to expand and expect that we'll be growing those areas. We're also looking to find a low-cost center of expertise in the Americas so that we have a balance of resources here in the Americas as well.

We're doing this to balance our cost structure and quite frankly also to take advantage of the services growth potential that we have. We need skilled people to service the future retail payments convergence demand that we expect as we migrate customers to BASE24-eps, and also our customers are asking us for more work, more services, integration services, testing services, and we need good, skilled people at the right cost structure to service those opportunities.

Finally, on this slide, strategic partner update, we consider IBM and HP to be our most strategic partners. We are working with both of them on doing performance enhancements to our system on their platforms and in making good progress. Both partners are being very active with us and we see good growth opportunity with both of them and expect to have additional market share through these arrangements and these engagements with IBM and HP.

Finally, on the last slide, slide number nine talking about the commercial performance for the rest of the year. A couple of key comments. We do expect our sales will line up with the expectations we set for ourselves. Having said that, underneath there, as I've indicated, the United States is down, but we're making up for it in the rest of the world. So we do expect to meet our sales expectations. Having said that, a key thing has happened. The mix of sales that we expected when we started the year and even three, four months ago has changed. We are seeing a higher level of term extensions. This is where clients contractually extend the license term that they have with us for our solutions. That is great for making sure we solidify the backlog that we have, that it's contracted, not just projected, but it does very little to increase the incremental growth of our backlog.

On the flip side, we are seeing a lowered level of new applications, new accounts, and add-on business than we had set for ourselves. That's not to say it's bad. Quite frankly, I think we've had good growth year over year in all those areas, but our expectations that we had set for ourselves was much higher. This change in sales mix does have an impact on our backlog, on our GAAP revenues, and on our cash flow metrics. It's reflected in our results and also reflected in the guidance that we're providing. With that I will now turn over to Henry to review those financials and also that guidance.

Thanks, Mark, and good morning. With this finance pitch, what I hope to do is give you more transparency into the June results and also the elements that drove our changes in financial guidance for the calendar year. And I'm also hopeful that this transparency will make our Q&A more useful for everybody. If you move on to slide 11, the key takeaways from the quarter, and we'll walk through each of these in detail, our operating free cash flow metric grew 5 times year over year. We had another strong sequential backlog growth quarter, where we grew our backlog $26 million sequentially.

Our revenue is up year over year due primarily to acquisitions. Our expenses are up year over year, contributing to that were acquisitions, stock options, related costs, acquisition-related intangibles, employee-related costs, release of deferred expenses, and as Mark mentioned, our investment in Ireland and Romania. Our other expense grew due to lower interest income received and higher interest paid as we have a credit facility used to fund the P&H acquisition and we also had an adverse OpEx impact on the quarter. And taxes, which I'll get into in a little bit more detail were really nonrepresentative in both periods that we're going to talk about today.

Slide 12 and for those of you that don't have the pitch in front of you, slide 12 is actually table 1 in our press release. This just shows our operating free cash flow quarter over quarter. Nearly $12 million of operating free cash flow in the quarter ended June '07, $2.3 last year. So as previously stated, a 5X -- a 5 times growth year-over-year in cash flow. A strong cash flow quarter for us.

Slide 13, which is table 2 in the press release. I'm not going to spend a lot of time on it, but it's really our reconciliation between our GAAP EPS and our non-GAAP EPS. I'll just remind you that non-GAAP EPS excludes the impact of one-time items, amortization of acquisition intangibles, and non-cash equity-based compensation.

Slide 14, our 60-month backlog, which is the equivalent of table 3 in the press release. The takeaway here is you can see the numbers, $26 million sequential growth, but what's important is that all channels contribute to the growth. The growth in the March quarter was very strong, but it is primarily EMEA contributing, if you look at what happened in June, all regions contributed to our growth in backlog.

Slide number 15, again, which is table 4 just shows our revenue by channel. 16% growth year over year. That's driven by acquisition revenues of $13 million, excluding the acquisitions our organic revenues were essentially flat year over year. That will show some detail in a further table.

Slide 16, monthly recurring revenues, you see a nice increase in monthly recurring from a 47 to $55 million. Monthly license fees did decline. That sales mix and weakness in the Americas segment as Mark referred to earlier and our maintenance and processing service fees are up. That's activity in our EMEA region and our acquisition, primarily the P&H acquisition.

Slide 17, deferred revenue, this is also an important metric for us. The takeaway on deferred revenue, if you look at the bottom of the slide, basically our deferred revenue grew again from last quarter. We're sequentially up just over $1 million and if you look at last year, we were sequentially down $5 million. So really we're closing the quarter with a much stronger deferred revenue position than we closed last quarter. I'll remind you that this $1.1 million increase in the June quarter is coming off about a $20 million increase in the March quarter. On a year-to-date basis, very strong growth in the deferred revenue metric.

Slide 18 is deferred expenses and just for clarification, these are capitalized deferred expenses, the deferred expenses on our balance sheet and the movement in deferred expenses is very important to understand our cost structure. If you look in the June quarter of '07, our deferred expenses grew about $800,000 where last year our -- I'm sorry, our deferred balance sheet declined about $800,000 and last year our deferred balance sheet grew about$700,000. What that means when you net them is about $1.5 million more went through our P&L through the release of deferreds in '07 versus '06 and that explains some of the year-over-year cost increase that we experienced in our organic business.

Slide 19 really pulls it all together. What it does for you is it walks our revenue quarter over quarter and you can see that most of the revenue growth was driven by acquisitions our organic business was essentially flat, as previously discussed. If you look at our increase in operating expenses, our organic expenses increased $2.5 million. That's primarily the release of deferreds that we just talked about and also our investments in Ireland and Romania. You can see the impact of our acquisitions there, the impact of employee-related costs and then the impact of stock options. We talked before, there are two elements to stock option costs. There's the cost of the professional fees that we have incurred to resolve our historical review and there's also the cost of divested option settlements that we now have to run through our P&L instead of through our equity accounts. The far two columns, they just really show the impact -- the strengthening of our deferred revenue position this quarter versus last year and the increased release of deferred expenses quarter over quarter, as we've talked about.

Slide 20 talks about taxes. The takeaway, as I've previously said, we've really got a nonrepresentative tax rate in the June '07 quarter and a nonrepresentative tax rate in the June '06 quarter. To put a little color around it, we have reduced GAAP revenue expectations due to sales mix as Mark has talked about. Also, we have several nonrecurring charge, the options and vested share settlements and employee-related charges, et cetera. What that does is these significantly reduce our pretax income. We've got a couple of costs in our tax structure that are really fixed.

We've got the fixed amortization charge related to the intellectual property transferred to Ireland. That's about $2 million a year no matter what pretax is and we've also established our expense tax structure in Ireland ahead of the recognition of GAAP revenue. If you think about it, Ireland has very low minimal tax rate, so when that turns to profit, our tax rate will go down, but when it's expenses, you get the opposite effect, your tax rate goes up. When you net all of these issues, we're going to report 195% of effective rate in the June quarter. Again, very nonrepresentative. What we expect is there are some discreet items that are going to come and drive an incredibly favorable ETR in the September quarter. So unfortunately you're going to see an odd tax rate in the June quarter and another odd tax rate in the September quarter. But when we get to the calendar year and it all comes down to the 12 months, we still expect to see the 37% that we anticipated at the beginning of the year. So the noise in taxes, bear with us for a couple of quarters, but the end of the year you'll see a normalized tax rate.

Our share repurchase program, this slide is now -- this is the first slide I've gone to that's not in the press release, so you'll have to have the deck on the website to follow this one. But basically on a calendar year-to-date, we've purchase 1.3 million shares, in the June quarter, we purchased 463,000 shares, and then subsequent to the June quarter, actually through September 14, we've purchased just over 900,000 shares. Total shares repurchased since 2005, 4.2 million. Our average repurchase price in the market is $30.41. Our buyback program, we have 210 million of authorization, 92.4 million left. In addition to this, as we've mentioned before, we have settled vested share settlements for employees another 513,000 shares we've basically taken off the market.

Slide 22 just introduces the guidance section. Again, this is not in the release, so to follow along with these slides precisely, you'll have to have the pitch.

Slide 23, the way all these charts will work is the bar on the left is our previous guidance and the bar on the right is our current guidance. What I'm trying to do here is to give you all some color as to what is impacting our change in guidance. If you look at the operating free cash flow, our cash taxes paid are going to be about $5 million higher than we thought. That's mainly triggered by the fact that we filed our tax return and with the filing of that tax return we were in a net owing position which we didn't anticipate at the beginning. Our cash expenses -- our cash other income expense is higher due to higher interest expense and lower interest income than we thought originally. Our cash operating expenses are actually favorable. Then the sales mix that Mark referred to earlier is going to cost us somewhere 4 to $9 million in operating free cash flow. That's how you get from point A to point B on operating free cash flow.

Slide 24 is our backlog walk. Same format here, it's very simple. We had some projects, specific projects, that have been deferred from 2007 to 2008. What that will do, as you'll see on the next slide, it will make our revenue go down, but it makes our backlog go up. That's a favorable impact of backlog, but then backlog will be down 33 to $43 million due to the sales mix that Mark talked about. That's a dynamic that Mark explained appropriately before, where if you sell term extensions, it solidifies the backlog, but you don't get the backlog growth that you anticipated in the original guidance.

Slide 25, again, a revenue walk, it's the same format. You see here you've got the flip side of the projects deferred into 2008 and then you've got the sales mix and other. Again, that focuses on the new applications and new accounts that Mark alluded to during his presentation. They are growing, they are growing well, but they're not growing in-line with the expectations that we had set out for ourselves at the beginning of the year.

Slide 26, our EPS walk. This is the busiest chart. I'm just going to touch on a few items here and we'll get to the non-GAAP, which is simpler. That's why we have a non-GAAP metric, frankly. If you start with our previous guidance and you go to our current guidance, the items in the middle, the projects deferred, we've talked about that, that's the $14 million, that's that's the EPS impact of the $14 million that's deferred to 2008. Sales mix is the big issue here, when it's not revenue, it falls straight to EPS. A little color on that, I've said this on previous calls, in our business, if you miss your sales mix by 10%, that's $40 million that could got to the P&L or not. That's the way we are. We're a fixed-cost business and if you don't get the revenue, you don't get the EPS. Then you can see the other items, the other income expense. That is price primarily the foreign exchange we mentioned before. Also with our share buyback activities, the vested shares we've had to repurchase and our cash taxes, we've had other uses of cash that we didn't plan on at the beginning of the year so that's driving up our interest expense.

The nonrecurring items, the employee-related charges we're going to take between now and the end of the calendar year and the stock options related cost, that's primarily the vested shares. This is over and above our previous guidance, we've talked about those items. Then basically there's no real impact. Our effective tax rate didn't move so much, our shares outstanding didn't move so much, there's not a lot of impact there. This is very messy, a lot of moving parts. Just kind of the complexities we're dealing with. If you go to the next page which is non-GAAP, it's much cleaner. The non-GAAP metric, as we've discussed before takes out all of the one-time items. It takes out share-based compensation. It takes out amortization of intangibles. It takes out a lot of the things that cause noise in our numbers. So the result is a much simpler walk.

What you have is you still have the impact of projects deferred, you still have the impact of sales mix, but then essentially some favorable operating expenses offset some unfavorable income expenses. It's a much cleaner walk from A to B. That's why we have the metric, because it takes the noise out. So I'm hopeful that that gives you some insight, financial insight into the June quarter and the rationale from our previous guidance to current guidance. With that, I think we should turn it over to Q&A.

Operator, we are ready for question and answers.

[OPERATOR INSTRUCTIONS] Your first question comes from George Sutton with Craig-Hallum.

Good morning, guys. Henry, these slides are extremely helpful. With respect to the upgrades and the timing for the capacity upgrades, obviously that's something you haven't been doing for, I would say, several quarters now. At what point do you start to see that natural demand return, as you described it?

George, this is Phil Heasley. Last September I think -- I think what I said last September was that we were going to go through seven to nine quarters in which we would -- it would -- and you could argue that my seven to nine is eight to ten. You can get into an argument, but somewhere around seven to nine quarters it's going to take for -- by taking the puffs out, it's initially harmful, but then CHE -- compound growth rate actually goes back in your favor, right. We're probably three of -- we're three to four quarters into the seven to nine quarters.

Okay. Then you discussed the investments you're making for the conversions that you see. Can you just give us a sense of how significant those expenses are today and what sort of timing are you looking for the convergence to really start to take affect?

Are you speaking to our investments in Ireland and Romania?

Yes, yes.

I can speak to the expense side. We said we're going to invest 4, 5, $6 million in Ireland and Romania this year to get those entities up and running. Aside from the commercial impact, remember too, with the intellectual property transfer to Ireland, we also get a significant tax break that we'll see. Mark, do you want to speak to the timing of the conversions and of the commercial uptake?

Yes. The intention is, as I said before, to move to all our legacy systems to BASE24-eps. We are target -- well, today we already have some clients who are moving to a BASE24-eps, but we have not gone out and forced them or actually motivated them to actually make that conversion. We expect in the 2009 time frame that we will be in a position, we'll be making very strong and deliberate statements about the plan to move customers over there to the BASE24-eps product. And we expect, George, it will be a three to five year heavy transition, where there'll be a lot of services work required, literally needing hundreds of people to convert our 400 plus different legacy payment systems over to the BASE24-eps product. Therefore, we have to get ourselves in the position to service that demand. We're also talking to IBM and HP about helping us service that demand as well as other outside entities so that we don't have to make all that investment ourselves. A lot of the investment we're making relative to Romania and to other areas will be geared toward anticipating that increased level of services demand.

George. This is Phil Heasley. I would also answer the question a little bit differently. I'm kind of changing -- the way we sit today, the way we sit today we have countries like Canada in which we do services in a very intelligent way and we make good margin on it. IN our historic hub and spoke of both Watford and the countries that supported -- Watford, England, and the countries it supported and the U.S. and the territories it supported, we are running many projects at -- in terms of implementation, whatnot at break even to negative -- and I think it's pretty fair to say in the U.S., our services is actually a negative margin business. We have now put in over 100 people in Romania. We've got people in Ireland, we've got almost close to 50 people in Kuala Lumpur. We've got 115 or so people in Bangalore. This has not been anything but an expense this year, except for Bangalore, which is doing work for Visual Web.

The turnaround -- and of course we're paying money to have moved the IP to Ireland. The taxes are actually negative, they're not positive. So I don't know how you want to deal with that. So there are a lot of factors. Now, we have to execute on those factors. We have to change -- we have to change what we charge for services and we have to be more sophisticated in terms of how we deploy installations and whatnot. It's a very big -- that's a very big transformational area. We have to prove we can -- we have to prove we can do it. We've made the investment in the people and now we have to -- now we have to demonstrate that we can actually execute on it.

That's a helpful perspective. One more, if I could. The IBM relationship, you obviously signed a nice win during the quarter. You had additional meetings, I know, to further the relationship. Can you just give us a little bit more color around that?

We're working with IBM, I guess, on three -- I would say three fronts. One front is we're working on them to make sure that this new system that we have is really efficient from a MIP standpoint. That's millions of instructions per second. Those activities are going very well. We don't have a new announcement on that, but I can just give you progress.

On the second front, we have a good ISV relationship with them and we're working on improving that. We're, quote, a partner there and whatnot. I think we have particularly strong contribution to that partnership, especially on the mainframe side of the business. To get moving over our several hundred customers, there are probably an equal amount of customers give or take 20 or 30 that are running old homemade systems that are mostly on IBM mainframes. So that part of the partnership is an important one for us. And I think the third area in which we're working together is this whole -- is this whole validation, working jointly with IBM and a user group in terms of the red books. I think we put a press release out a week or two ago that said the second red book has now been published. The first one was a validation of the system, the second one is a guide book in terms of how you actually -- how you'd actually go through the conversion process to BASE24-eps on the mainframe. So I would say that that's progressing along very, very well.

Our next question comes from the line of Brett Huff with Stephens Inc..

It's Nik Fisken, good morning, everybody.

Good morning.

Henry, if I go to slide 27 and I kind of back into the implied margin on the $0.23 and and the $0.41 to $0.56, that's an implied margin of 100% pretax, right?

Right.

So there's no payout to the sales staff that are selling those?

Meaning there's no offset? That's a good question, Nik. First of all, these are in ranges for a reason. There are ranges. But the real answer is, remember the sales staff, although they're selling -- there's some breakage, but our sales are on line. Our salespeople are getting paid, our salespeople are getting their commissions and frankly in parts of the world outside of the U.S., they're actually overplanned, which really accelerates their commissions and in the U.S. it decelerates it, but the net breakage is that I feel that nearly 100% of this will -- nearly 100% of this will fall to the bottom line. Also in there -- I didn't get into every little nit on the walk, but that's a good observation is that we've got some overpayment -- not overpayment, overexpensing of some commissions around the world offset by some underexpensing of some commissions in the U.S. Does that make sense, Nik?

Does that mean there's revenue going into backlog that's got 100% margin that we're going to get pulled out over time?

It means it has 100%, it doesn't have any -- it does -- there's no margin hit for it as it relates to selling expense.

Right. Nik, I guess what I'm saying, is when something -- when something goes in the backlog, it doesn't go into backlog at net margin. It goes into backlog at its commercial value, right? 100% commercial value. When it comes through the P&L, it comes through the P&L at its commercial value with a haircut for commission.

Okay. Mark, can you give us the explanation again on why exactly the shortfall on those two items, projects deferred to '08 and sales mix? Thanks.

On the sales mix, we had set some pretty aggressive expectations for ourselves, which we thought were right, but primarily in the U.S. The shortfall in the sales in the U.S. has impacted us greatly and that has been where the sales mix was most different from what we had set for expectations, pure and simply. Now, we are making it up in other areas of the world, but it's being made up in term extensions as opposed to the new business, new accounts, new application add-ons. Relative to the deferred revenue, basically what the implication of that is is that we aren't getting some of these projects out to be recognized quick enough, and that is a true statement. That goes for a number of factors in terms of resourcing to make sure we have the right resources on it.

But also we're impacted by customers. A lot of our projects, especially around BASE24-eps and our payments management product appear to have -- or don't appear -- do have multiple phases from our customers. The time from when we actually begin a project to when we get it out and actually recognize the revenue is a bit higher now than it has historically been due to the complexity of the deals, the integration of multiple products, and the projects just being longer and the customers want the phasing in various business functionality. That's a big part of why the deferred revenue has grown, because the projects are not getting out fast enough. That is an issue that we're trying to address relative to the harvesting of our backlog. It's something that we have to improve on.

So the U.S. sales mix -- what exactly is going on in the market that's not in-line with what you guys thought was going to happen?

We thought there would be more -- we thought we had an opportunity this year. We've had some down times in the U.S. for a couple years, two or three years. We thought this year that the capacity would start increasing, that there would be more opportunities, and quite frankly they aren't materializing. It's just pure and simple. There's not a lot of things going on in the U.S. in the payments market.

There is some activity relative to mobile payments now, but it's fairly scattered and certainly not a crescendo from the market that says something's going to change. Our customers are pretty much sitting back, doing the same things that they've always done and not really doing a lot of new, innovative things. As I said earlier, I do believe or we do believe there's an opportunity to convergence to payment systems, there is interest in our customers in terms of the story and the solutions that we have to facilitate that, but that is not something that they're saying, boy, I have to do something in the next six months or 12 months, that's a longer-term payback for them and something that they'll be more deliberate about. And I think we just plain missed it. We thought we would have better demand in the U.S. than we have had this year.

And our assumption going forward, is that doesn't get any better?

I don't see anything changing over the next 12 to 18 months, quite honestly.

This is Phil Heasley. We certainly are not -- in our long-term planning, we are not viewing the U.S., very specific to the U.S., we're not viewing the U.S. as having a growth rate that is anywhere near the rest of the world. Let me give you two more pieces of color on the U.S. One is that we're much further behind in terms of restructuring the U.S. to be a single coordinated -- a single coordinated effort. In that we actually expect a lot of productivity to come from that. Some of that's going to come in new sales, but we're still not expecting it to have the growth rate.

Second thing is is that certain -- you've talked about the delayed projects and stuff that goes from '07 to '08 and whatnot. Certain aspects or rev rec we just have to live with. We had a deal where we thought we lost a bank in the United States. We ended up, through an acquisition process, we ended up gaining the other bank. So in terms of what would have been revenues this year, you'll end up combining the two contracts and you will end up having to do it ratably from other two years. It goes from a revenue you thought you were going to make this year to revenues you know you're going to make this year. Rev rec is just rev rec. We can't fight -- we can't fight those things.

The third one is perhaps more -- is almost as important and it has to do with growth in the rest of the world and stability in the United States. Before we bought P&H, we were in a fairly rapid decline in our U.S. -- in our U.S. wholesale business. And we saw the future to the U.S. wholesale business because of the amount of share we had in the United States. We saw that mostly outside the United States. But in order to be able to garner what was outside the United States, we had to stabilize what was in the United States.

So in terms of not being thrilled with the growth rates that we have, we have stabilized and created a platform for wholesale to grow outside the U.S. I would say that wholesale has more missed its numbers in the U.S., actually, than wholesale and retail have missed their numbers this year. And that's a piece of color that I think you should -- and I think that's a more temporary -- that's a more temporary situation. I'm saying that, gee, we have -- gee, it's across the board and retail's not making its numbers, so I'm not saying, but it's more on a wholesale standpoint.

The other thing I would -- the other thing I would say as it relates to -- as it relates to this year's -- to this year's thing is that this organization really wasn't able to get out of the -- we've had a trench mentality up to when we put this next Q out and an awful lot of the changes that we wanted to make internally, we really couldn't switch around our company until we had ourselves a current set of financials. Quite honestly, we didn't have 125% of our financial staff worried about options instead of planning to make the changes we need to make. Rest of the world is not the issue. Canada, Latin and South America is not the issue. U.S. is the issue.

Can you guys hear me?

Yes.

Okay. Two quick final ones. When are we going to get the 10-Q for June, and what should we think about for a tax rate for '08?

The 10-Q for June we will file on Monday, is that still Nik? The 10-Q for June will be filed on Monday. The tax rate for '08, we do not have '08 guidance out there yet, Nik, but I will tell you that I would think it would be mid-30s, mid- to upper 30s. But again, let us go through the arithmetic and do it. But if I had to tell you now, that's what I would tell you.

All right. Thanks.

Your next question comes from the line of Gil Luria with Wedbush.

Morning.

Good morning, Gil.

Looks like you have -- for your non-GAAP guidance, looks like it's very, it's back end loaded for the year in terms of September, December being much larger than the first half of the year. Can you explain what the dynamic there is and more importantly, is it going to be more weighed to Q4 since you're not going to have the additional expenses for all the restatements that have gone through this quarter and since some of the rev rec stuff is working itself out?

Gil, let's work it out piece by piece. Our non-GAAP for the first six months of our calendar year's roughly $0.25. If you do the arithmetic between that and our guidance, you'll see that we've got to do anywhere between $0.57 and $0.77 in the back half of the year. That means the back half is going to be anywhere from $0.32 to $0.52 higher than the first half. Just so we have our arithmetic straight. Simply put, if you look at our revenue guidance, and as we've seen, we have a fixed cost business when the revenue drops to the bottom line, revenue alone is about $0.32 impact on the second half greater than the first half. So most of it's revenue. Then remember, we've got 195% effective tax rate in June and I told you that's going to normalize to about 37%. So that's probably another dime or so. So really it's not -- non-GAAP excludes the cost of options and all those things. Non-GAAP is supposed to really -- I won't say reflect what's going on in the business, because it still starts with GAAP, but non-GAAP is supposed to reflect more what's going on with the business than let's say GAAP would. So the two things that's going to improve in the back half as opposed to the first half is revenue, which is for the most part going to drop straight down. And going from a crazy bad tax rate to a crazy good tax rate which will net to a normal tax rate for the year are the two primary elements of that. As far as quarterly guidance, we don't give it. I'll just stay away from it because -- not being cute, not trying to duck the question but we just closed another quarter and we just talked about revenue recognition items and those numbers swing big in any 90-day cycle. But it's revenue, GAAP revenue and taxes that are driving the delta, half one, versus half two.

But in terms of the activity in the U.S., if you listen to Funtac and S1, they are talking about substantial activity in the U.S. and outside. They both reported winning a top ten bank in the U.S. recently for their cash management businesses and growing that cash management business very substantially. So it's not -- they're not just winning smaller banks. Can you explain a little bit of what the challenge there is? Is there a high turnover of the P&H sales force? What is the disconnect there?

Gil, this is Phil Heasley. Let me make something clear. We've actually had -- we've actually had good growth in the P&H business. We're talking about the entirety of our business. The part of our business on wholesale that was not having growth was our core intranet, the IMTS business. We may not hit the 20 -- we may not hit the 20Z% plus growth rate that we projected, but we are going to have good growth in that business. If that was the only business that we were -- if that's the only business that we were talking about, we would use very different adjectives in terms of growth and whatnot. In total that was about a $30-some million business. So that is not -- that's not the swing factor.

The IMTS business was going downhill for five years and that business is kind of stabilizing to getting ready to -- stabilizing to potentially growing, but we've got a huge amount of the U.S. market share already. So to say that we're going to grow that business by double digits and whatnot would be -- would be foolish. Then on the retail side of the business, I would suggest -- well, you probably can't see the last quarter of eFunds and whatnot. Relative to the marketplace, we have won the vast majority of everything's that's out there to win. So what we're describing is -- we may be describing how we are going to recognize revenue differently and we're describing -- being honest with you guys about some real issues we have in terms of realigning ourselves to the American markets and the expectations of the American markets, but we have absolutely been the, on the retail side, we've been the winner and on the wholesale side, we've had at least our share of the growth in market, maybe if we just were -- if we were just doing cash management, we might say that we're the most successful player. I don't know. I would have to go, but we're certainly -- we're certainly doing as well as anyone else in that category. That category just isn't that big a percent of our business.

Finally, for your share buyback, there's some overlaps in the numbers you're reporting. Can you break down how many shares you bought in July versus August and the first half of September?

I can't do that on the fly, here, Gil, I don't have that data in front of me.

Talking about the 900,000 versus?

I don't know. The answer is sitting here, Gil, I don't know.

Okay. Thank you.

Your next question comes from Tom McCrohan with Janney, Montgomery Scott.

Thanks for taking the call. It's really just clarification on the sales mix and other. I want to make sure I understand that in all the walks in your presentation of the power point slides, when you talk about sales mix and other, how much of that is the weakness in the U.S. market versus something else?

How much of it is the weakness in the U.S. market as opposed to something else? That's an interesting question because the sales mix, I'm thinking it through as we do it, the sales mix is sometimes a mix -- it's going from new applications and new accounts to term extensions as Mark articulated. That's not really a U.S. issue, that's really in the other parts of the world.

How does someone extending the term of their contract negatively impact earnings?

How does it negatively -- no, no. That's my point. We've got less -- actually, it's a very good question. If someone buys a term extension from us as opposed to buying a new sale or a new application, a portion or all of that new sale or new application or capacity upgrade, frankly, would go to our P&L in terms of revenue and would serve to increase revenue, which would increase EPS. If someone buys a term extension, what it really does, it really serves to solidify or contract our backlog, but it does not increase our revenue, nor does it really increase our backlog unless the modified term extension that they signed is higher than we assumed in our backlog projection.

So what we're saying is, Tom, simply put, if we thought, just to make it really simple, if our sales are in-line with our expectations, as Mark said, but if we thought we were going to sell $10 of new products or new applications, some portion of that would go to our P&L as revenue and help us. But what we've really done is sold $10 of term extensions, which doesn't. So remember what this walk is, it's a walk from our previous guidance or previous expectations to today's expectations, so what's happening is our previous expectations were that some of these sales would contribute to revenue, but they're not so thus they are making -- they are making EPS go down. It's a relative point. It's relative to our previous guidance. Does that make sense, Tom?

Sort of. It sounds like, when you're talking about sales mix, it's the term extensions, which in one case you're saying for the same customer, relative to your prior expectations, that customer would have not extended their contract?

No, no no.

If they didn't extend the term, what was the other option. They just would have renewed and that would have been a better?

Again, think kind of big. We're trying to call a $400 million business here. In our assumptions, let's say in our assumptions a few months ago, we thought a particular customer -- and it's not this granular -- we thought a customer was going to a buy a $10 million capacity upgrade. Let's take the most extreme example. Well, the customer didn't buy a $10 million capacity upgrade that was taken up-front. What the customer did was renewed his existing contract and paid us over time. So the impact of that is sales were fine. We sold $10 worth of product, okay? But if you look through our financials, what happened is the $10 that he would have bought of capacity upgrade would have been $10 of revenue and straight down to the bottom line, but instead he bought a capacity -- he bought -- he renewed -- he did a term extension so it did not increase our revenue or did not hit our revenue and it did not increase our backlog.

This is Phil Heasley. Let me explain another way. Most of the PUF, the paid up fronts, most of them took place out of the United States market. Historically, that's point number one. In a paid up front, you would get 60 -- you basically are getting somebody to renew or add capacity and they're paying the 60 months up-front. So you're getting in a 90-day financial reporting period, you're getting the equivalent of a perpetual license, kind of. You're getting paid 60 months of revenue up-front. I have pretty -- and a discount is expected for that activity.

Right, wrong, or indifferent, I have deemed that that is injurious and the wrong thing for the business and in a 90-day period, we're going to take 90 day's worth of income. So if someone goes and sells a sales extension that's going to begin January 1, of next year, no new revenue is going to be booked this quarter, but we will have gotten a five-year subscription, right, going forward. And quite honestly, in terms of maintaining our position in the marketplace, we very much need to renew all -- our contracts are five-year renewable. We need to renew them, but we also need to renew them as 60-month annuities, not as paid up front kinds of deals.

I'm taking a lot of heat from every corner, right, whether it's salespeople to Wall Street, but if I knew this two months into the job, I would have changed it two months into the job. It took me 12 months into the job to figure it out. And I'm just going to stand behind it and that's a lot of the weakness. We talk about the weakness in the United States, everyone has their perspective, but that in and of itself is part of the weakness in the U.S. Is that if you've already spent your revenue, it doesn't look -- you don't look very good. And it's going to take us seven to nine quarters for that thing to turn itself around. This is quarter -- this is quarter three of quarter -- quarter three, quarter four of that turner.

That's a healthy approach to changing the business. I'm sure it's although painful, definitely a healthy long-term approach. I was just trying to understand the big delta in what's really -- that's helpful. So a lot of what we're seeing relative to the original expectations is the consequence of you trying to make that healthy change.

And then having it interrupted by this massively confusing option issue that takes seven to twelve years.

Right.

I do not know if it's healthy, but I do know it's painful. I can absolutely promise you it's painful.

Tom it's Henry. One more thing, if you look at the symmetry of the impact of our sales mix, it's the largest in backlog. When I say symmetry, the symmetry of the impact, that's the largest in backlog and that's because term extensions versus new products, new aps, it's smaller in revenue, so it's still significant to revenue, but smaller. But it's even smaller on operating free cash flow, which is also what we're trying to articulate is as you look at these change in mix and all these things that we're trying to fix and stopping puffs and whatnot, it will increase the GAAP metrics much more than it will increase -- it will impact the GAAP metrics much more than it will impact our ability to deliver cash.

Our next question comes from the line of David Parker with Merrill Lynch.

Good morning, everyone.

Hey, David.

Phil, you mentioned that you're further behind in the restructuring in the U.S. Anything outside the options issue that has caused that delay and how far are you behind and when do you expect to finish that restructuring?

Well, the reason the options put it behind us is that a company in the options, we were told that we had a material weakness in terms of -- we had to post material weaknesses in terms of how we did our financials. It makes it virtually impossible for us to have worked the option issue, the material weakness issue, and then going around start changing -- starting changing the operating structure of the business at the same time. You just have too many flaming torches in the air. Next Monday we are current, right. And part of what you saw in this new guidance was -- what's the range -- what's the expense range?

For options?

No, for -- we're.

6.5 to 7.5.

Yes. We are making the next move in terms of our organization structure and in these numbers is about a $6 million one-time expense that's going to create a $5 million--.

About a one-year payback.

A one-year payback. and we now are moving forward with the changes because we feel -- we've had people working 75 hours a week from September 17, of last year until now. We've replaced virtually our entire senior infrastructure of our financial staff and we're now getting to the point that we feel we're in control and we can take the next -- we can take the next step. So we are moving immediately forward as it relates to that and the only thing that we did in the interim was we figured we could buy -- we could go from distributors to direct. We bought a little -- we purchased a little product and we took it on the chin hiring 150-some people outside the United States to train them this year as engineers. So as they swing from being trained to being contributory, right, we see that as part of the next step, but we're also organizationally taking the next step almost immediately. By the end of this month, we'll have taken a very large piece of that next step.

Okay, good. Then you mentioned that there's been some deferred projects from consumers. Has the credit issues in the overall marketplace, has that caused some of your financial institution customers to push out some of their purchases?

Well, I think we're always -- I think the answer is, we haven't seen anybody take projects off the board yet. I think -- we're always more optimistic how quickly something goes from someone saying we're going to do the deal to them getting final approval. We tend to be more optimistic than they are and I would say there may be a little slowdown in the approval process, but we haven't seen anything actually pulled off the table. I can't think of a single deal in the world that's actually been pulled off the table. It may be a little slower in terms of making decisions, but nothing's been pulled off the table.

Okay.

I know what's been pulled off the table.

Okay. And then Henry, I know that you said that you haven't provided '08 guidance yet, but there has been a lot of movement in the numbers this morning and can you just give us an update on your long-term growth expectations and will '08 be an anomaly and should we see higher growth, or should it be in-line with those long-term growth expectations?

We've said it before that we're a low double digit topline grower over our planning horizon and we feel that -- that's still our statement. We're going to be a low double digit grower over the planning horizon. This noise of product mix, Phil talked about seven to nine quarters. That will work its way through the system. I'm not going to -- I'm don't want to get into '08 a lot, David. Again, we're a few months away from putting that out there, but I'll just say strategically and over the long-term, we're going to stick -- we still believe or we know that we are -- or we believe we're a low-double digit topline grower.

Your next question comes from Frank Turrinelli with William Blair and Company.

Good morning, guys.

Good morning.

Henry, you just mentioned something quickly that I wanted to just make sure I understood, on slide 16 you referred to the year-over-year decline in monthly license fees. I just wanted to -- could you go over again why that is?

Well, it -- geographically, it's the America segment and a lot of it is related to this PUFing that we're talking about. These lumpy deals up-front. Remember, this is a revenue metric, which is a GAAP metric and it means less PUFs equals less -- less PUFing equals less monthly license fees. In the U.S. is where we've seen the PUFing more in the past. That's where you're seeing it show up on our GAAP statements this year.

Why does the PUF generate follow-on monthly license fees? I thought a PUF was a one-time payment that doesn't then generate monthly recurring fees?

It's the structure of the deal. If it's a -- Mark, do you want to help me out?

Yes.

It's the structure of the deal. Go ahead, Mark.

One of the things -- we've talked about this in the past, Franco, that's been going on for a few years, that you've seen the monthly license fees decrease year over year because part of the revenue recognition issues that we've had in the past is that we needed to move those monthly license fees to maintenance. So we used to sell monthly license fees where a customer paid an initial up-front fee in monthly licensing and that was it. And in that monthly license fees, we embedded PSFs, product support fees, and because of revenue recognition changes several years ago, whenever we renew contracts, we now carve out the PSF from the monthly license fee. So you have seen, if you've looked at it over the years, the MLF go down slowly but surely almost every quarter, every year and that's the big reason why.

And that's the U.S. driving that, Mark?

Yes. That's where most of the monthly license fees were in the U.S.

Right. Mark, does the decline in the old Internet product also affect that, or is that unconnected?

There's probably a linkage not to the Internet, but to the old inconcession?

Yes, I'm sorry.

As we've taken those tools and focused our effort of selling tools and applying those tools to our payments industry, yes, we have less cross-industry sales of those tools, absolutely. So that would also have an affect on it.

Franco, there's one more affect. Remember, I even hate to bring this up, but the restatement we went through -- the first restatement that we went through where revenue that was previously recognized was kind of deferred and set up on the balance sheet and then we took it into income over time, kind of no-cash, no anything, just accounting, I don't have the numbers here in front of me, but I know that was still giving us an uptick in revenue in '06, significantly more -- it's pretty much off the table now, so '07 -- it's about $10 million of year-over-year difference, '06 versus '07. We had some what I'll call artificial or accounting revenue that's now off the table. So now as we go forward from '07 forward, what you're going to see is true business operating revenue, nothing previously deferred from restatements or anything like that. That is another thing contributing to the downturn on that line.

Your next question comes from [Mike Cristadelo] with [Inwood Capital Management.]

First a question for Mark and Phil. We still have four or so quarters left to muddle through this backlog to revenue conversion. Then, Mark, if I heard correctly, your thought is maybe, there's still another couple of quarters before the big migration of the 400 classic customers to EPS starts to happen. Could you confirm that that's kind of the sequence of things? Then just Phil, could you elaborate a little bit just on your confidence factor. As you've made these investments in costs right now, your confidence factor in fulfilling all those conversions and how should that look in terms of revenues and backlog starting say, two years out?

You want me -- I'll start, Phil. You asked a lot of questions there. Relative to the four quarters I think you referred -- because Phil had said before, we thought -- or he stated in September based upon our change on not focusing on PUFs, it would be seven to nine quarters until it normalizes itself, and I don't think we have any reason to believe that's not true. So you're taking the seven and as Phil said earlier, could be eight to ten. But it's not overnight. It will take some time and I think we believe that to be true. Specifically on the conversions, let me just make sure I clarify, because you said some data in there that's not quite accurate. We have some 270 BASE24 customers, classic customers today and we have about 140 others that would be open 2On, 2ASX, OCM24, TRANS24, so that's where the 400 customers, when we talk about converting our legacy customers over to BASE24-eps, that's the 400 we're talking about.

We expect that that will start in earnest in 2009. We intend to come out with the release of our BASE24 solution that will motivate the BASE24 classic customers. We will also and are already targeting some of the other, the open two, the ON2, customers for that conversion. We expect that to start in 2009 in earnest. What that means to us is those customers will license BASE23-eps. There will be some uptick in license fees for various new functions that they will take advantage of, but they will then convert their systems over and it's really a big services play for us at that point, assisting them in that conversion. We believe, though we haven't proven yet, that there's also an opportunity at that time to facilitate some of our customer's conversions to the on demand. We believe some of our clients, and they have expressed interest in this already, would prefer to say, hey, ACI, take this conversion from me, run it on your systems, do the work for me and maybe I'll take it back in-house later or maybe I won't. But we also see this dovetail very nicely with our on demand efforts, that as we get that in place and get that proven out that it is a stable facility for us to actually provide the conversion services for our customers. So we look for the revenue -- I'm sorry, I should say sales and revenue to come from services in the on demand primarily in that conversion exercise. Phil, I forgot the other question. Confidence level.

I'll answer the -- I'll answer the confidence level. I think I can answer a little more on yours. There is a difference -- there is a -- Mark, can you talk about a handsaw authorization a little bit too.

Yes, that's what I said when we license BASE23-eps to customers, we will also sell some add-on modules. One of them is the enhanced authorization capability of EPS. We have this scripted authorization mechanism, which is a true differentiator. Current customers don't have that capability with any of our existing legacy systems. Quite frankly, I don't think there's any payment system in the world that has the capability that we have within our scripted off. So when we license EPS decline, we believe the vast majority, if not almost all of them will also license scripted off. And that's a couple hundred, 200,000, $300,000 a piece of licensed for that functionality. And there's other things, too, that are available in our BASE24-eps system that are not available on our other legacy systems that we will get additional license fees in addition to the services revenue.

And just, Phil, maybe as a follow-up to the confidence factor question, I've observed that you've basically doubled your stock position in the last month and a half between 24 and 30 and you still have about 10% of the Company to buy back for the benefit of all shareholders. Can you -- anything else you would like to elaborate on? The fact is that the Company is valued now less than when you started, and yet the reality is you've made a lot of investments and it's -- had you not made those investments, you never would have been able to convert these 270 customers over. Any commentary on how aggressive you'll be in shrinking the share base in front of this impending wave of business that is going to be out there?

Well, let me answer the first -- let me answer the confidence question. I don't like to mix -- I don't want too much mix my personal investment -- I have friends that have a lot more invested in this Company than I do. My confidence is -- I've said all along since I came onboard, I said my approach to terminal value is not 90 -- I don't know how to run this kind of company on a 90-day basis. I don't think the terminal value of this Company has ever been higher, right? You can believe in our 60-monthly backlog approach or not. But every quarter it seems to be more validating itself than invalidating itself. So we feel pretty good about that. I believe that this is much more balance sheet business than it is an income statement business in terms of really -- in terms of really understanding it. So from a personal standpoint, I have never been more confident with where this Company can go. I did not bargain to go through the last 12 months that I did. I think you would have been been better off having a retired judge running the Company than me the last 12 -- the last 12 months.

The investments we've made in infrastructure in Romania and whatnot, I think, guarantees that we have a -- that we have a future and that we don't have a imbalance between our ability to manufacture and our ability to deliver and I feel very confident. I also feel very confident we now have a senior management that is very capable of taking this Company to its -- taking the Company to its next -- to its next level.

As it relates to us, we've purchase 4 million shares of stock. I think -- we've purchased quite a bit of stock already and we intend to continue to purchase the stock. Quite honestly, with the -- we go through a fairly disciplined economic analysis between -- in terms of what it is we would buy in the marketplace, in terms of additional businesses and whatnot and with our stock the way our stock is, it makes our stock -- and we say we're never going to buy anything that's not as attractive as buying back our stock. Our stock is awfully attractive to buy back at this point, which puts pressure on us in terms of what else we can buy out there. We're going to remain -- we're going to remain aggressive. Like I said, we are managing this business on terminal value of cash over cash basis and that would incent us to continue to do what we're doing. The fundamentals of the business are better than they were before. The optics, in terms of the PUFing stuff forward, the optics are not as pretty, but the fundamentals are actually much better.

Your final question comes from the line of Ethan Meyers with Westfield Capital.

Good morning, everybody. A quick question on the free cash flow guidance reduction for the year, the operating free cash flow number. If I just take the midpoint of the previous guidance of $62 million and I take the midpoint of your current guidance of $52.5, and I look at some of the adjustments that you guys have made, how much of the $5 million in the tax rate adjustment is something that you would consider recurring in nature? That's sort of the first question. We'll start with that.

Yes. That, and as odd as it is, the cash tax has nothing really to do with our effective tax rate. That was really kind of a -- when you file your corporate tax return you kind of settle up for the whole year. That came out of our taxes payable. It doesn't really affect our VTR. But I would say our cash taxes paid, to get right to the question, our cash taxes paid is going to be around $12 million this year and I feel comfortable that that will continue, I don't want to go too far out, but I would say the next 12 to 18 months, that's a good rate for us. So it's interesting that if our pretax were $80 or our pretax were $10, the way we're structured, our cash taxes paid are going to be about the same.

But with regard to the incremental $5 million reduction to free cash flow guidance?

Yes. That gives our cash taxes -- that's what I was trying to say, that makes our cash taxes paid forecast for the year about $12 million and I'm saying that's a good number for the next 12 to 18 months.

Thank you, okay. So if I give you guys credit for that, it's something we wouldn't have anticipated beforehand. And then the $3 million in reduction from lost interest income and other allotted, that went to buy back your stock. Son on an earnings per share basis -- or I'm sorry, a free cash flow per share basis, giving you credit for some of these things, your free cash flow per share number really doesn't change, right? Because we're looking at a much lower share count?

Correct.

If I give you credit for those items.

Correct.

Okay. Just wanted to make sure I was looking at this right.

Yes. And then of course it takes time, again, on a GAAP basis, for the fully diluted to catch up, right, because it's a weighted average. We'll really see it kick in next year as we have four quarters of the lower shares. Yes, Ethan, that's a conceptually, you're going in the right direction.

Then the last question for you is you mentioned your guidance for the second half and the question regarding how it is somewhat back end loaded and a relatively large, if not all of the improvement is coming from revenue. Quite frankly, revenue's been a little bit of a problem in the last year in terms of when it's being recognized and when we're going to be able to count on it. As you're looking at -- we're almost through your September quarter already. So I have to believe you got a nearly -- well, nothing's perfect, but pretty good visibility into September. How confident are we in that second half revenue guidance at this point?

Let me correct you on that. I said this on the last call, and I'm not trying to be cute here, but on the last call, it was August I believe, but I said, guys, internally it's really April. Yes, it's September, and we're gaining speed and we are going to be current externally come Monday and we're going to take some time to enjoy that, but we're still not current internally so don't think that I -- we've got the view on sales, we can see that. But the view on revenue, although it's -- what is it, September 20, please don't think I've got a September 20, view on revenue, because I don't, because we haven't gone through the contracts and seen what gets recognized and not. What I will tell you, and that is quantitative, not quantitative, is the process we go through, as we look from the ground up, everything we're going to sell, everything's that's coming out of backlog, we look at detailed contracts and it's been frustrate -- the revenue, I respect your comment about revenue being hard to call. I'll tell you, nothing's in the bag, but we went through due process and we've looked at it from the ground up through the executive team and this is the number we feel good about it. That's the range, 390 to 400 is the number we feel good about.

I'll now turn the call over to Ms. Gerber for closing remarks.

I would just like to thank everybody for coming and remind you that if you have any follow-on questions, I would be happy to take them for Investor Relations on an ongoing basis and we look forward to hearing from you soon. Thank you for joining us.

Thank you, this concludes today's conference call. You may now disconnect.