ACI Worldwide Inc (ACIW) 2007 Q4 法說會逐字稿

Good morning, my name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide 2007 quarterly and annual 2007 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you. Ms. Gerber, you may begin your conference.

Thank you. Good morning and welcome to the ACI earnings call. This morning, our management speakers include Richard Launder, Mark Vipond, and Henry Lyons. We will walk you through the quarterly and annual performance for the year ended December 31. We also have other members of management on hand for the question-and-answer session, including our CEO, Phil Heasley. As usual, safe harbor language applies in this call and the presentation we're providing you with today. Please refer to our regulatory filings and our website for a more detailed discussion of safe harbor. The presentation we will be discussing today is also available via our investor relations website. I will now turn the call over to Richard Launder to open the discussion on the quarter and the year. Richard?

Thank you, and good morning, everyone. I'm covering the sales results for the quarter and for the year, and the progress we have made. Starting with quarter four, I'm very pleased to say that we had an exceptionally strong sales quarter. We always expect the last quarter of our year to be a good one, in line with salesmen trying to make targets, et cetera for the year, but it was even above our expectations from a sales point-of-view. It was good not only in quantity, in terms of the business we signed in dollar value, but it was also good in quality, in terms of new accounts and new applications, which is good for the future of our company.

EMEA had a particularly good quarter, finishing a good year. There was improvement in the domestic market U.S. market, and the Americas, generally speaking, had a good quarter. We won a considerable number of new customers, 17. And these were right across the world in places like the Middle East, Brazil, Africa, Russia, Thailand, and in the U.S. market itself. In addition to that, 37 new products were sold to those customers. We also got one new country, Kenya, part of the African market which is a good emerging market for us, and that's helped to strengthen our position there. And we also got a considerable number of major renewals from our larger customers, particularly in the U.S. which is good to demonstrate the loyalty and high retention rate we have with our customers.

Moving on the next page, talking about the year in itself. Part of our strategy, a major part of our strategy for 2007, was to win new customers and new applications. We had a particularly good year in that respect, and our strategy was fulfilled, growing in new customers in 2006 from 30, 31, to 49, new applications from 147 to 212. So that was a key part of our strategy that's produced results in 2007 --- what was a very good for us in the long-term of our business. We know new customers produce a significant amount of add-on business and new applications in the future. We also had a stronger focus on the payments market in 2007, and really, that was moving away from tools to cross-industry type sales and focusing purely on payments.

In terms of the channel update, we started to have progress in the domestic U.S.A. last year as I recently mentioned. Had a number of successes in the last quarter, particularly in selling our application on-demand to U.S. customers. That was an investment we made last year, and once again starting to produce results. Latin America had a particularly good year, winning lots of new customers and new applications with considerable progress in Brazil and other markets. Of course we had -- as I just mentioned, a sizable number of renewals in the America's channel. EMEA continued another strong year, at least by example in the Company in terms of what we're trying to achieve. Had a great year, grew sales numbers considerably. There were a number of significant successes, the Middle East really being the high spot of EMEA. A relatively small market is producing huge returns for us, and is an endorsement to our model of having our employees where our customers are.

We had renewed momentum in Italy particularly. We had a lot of success in the late 90s. We had a tremendously good year, winning new customers and getting a lot of business. France and Spain have always been strategic markets for us. We've had historically not the success we'd like. We had considerable success in France through the year, and are starting to build up a very good pipeline in Spain which I'm sure will produce results in 2008. We also had success in our wholesale strategy of getting sales outside of domestic U.S.A. and other markets, had success in the UK and Holland, and other parts of the world.

In terms of Asia, a successful year on the sales side as well, made good progress in moving to direct model. This is a process that will take several years, but in the first year of doing this, we've had good progress in opening up offices where we had distributors. And they had a great year, in terms of winning new customers also. In terms of 2008 and moving towards the outlook for 2008, well the IBM relationship is going to be a key part of our strategy. It has huge potential for us. We have already seen some success and some benefits on the back of having EPS on Z Series and P Series. We expect that success to continue, grow, particularly with IBM's backing and partnership. And in the past up to this -- our relationship was very much driven by our sales, but with IBM's support, their commitment to us as a company and our products. They are banded with helping us in certain markets where we could do with greater footprint if you like and more people on board.

All of those commitments, we are confident will produce considerable growth and considerable sales for us in the next 12 months, and of course for the years beyond. Specifically in certain markets, they are going to help us, China and Germany, throughout Spain, where we have had some success, but will do --- and we'll benefit from their presence, and the large Z Series base there of in-house solutions. That is still our biggest competitor and still our biggest opportunity in replacing those solutions. Most of those solutions run on IBM Z Series, so having that partnership with IBM will be of great value to us. And as I said, they will --- increase our bandwidth to go to these markets.

In terms of our business-as-usual, if you like, in sales, we will continue to focus on some of the major markets. We still have a lot of opportunity in, Spain, France, China, India, Brazil. Germany also presents us with a lot of growth opportunities. We will continue that focus on new accounts. That will help us grow our business in the future and increase our revenues. And we have the opportunity which we started on to expand our wholesale sales into outside the domestic U.S.A where we've considerable --- where we have considerable presence. We have the opportunity, as I mentioned earlier --- are starting to get some results on that. So with a combination of business-as-usual opportunities in major markets and our partnership with IBM, we have a huge amount of potential to go and harvest in 2008. That's my update complete. I would now like to pass it over to Mark Vipond.

Thanks, Richard. Good morning, everybody. I'll give you a quick update on the business operations review for last quarter, for 2007, and a few comments about key focus areas for 2008. Starting first with slide number ten, we told you we would start giving this to you quarterly, which indicates our product customers and also by industry segment --- or by various solution areas as well. So you see the payment engines, the risk management, payments management application infrastructure, both in the banking industry as well as the retail industry, and then our other industries where we have primarily sold or the old incession tools application infrastructure tools to other market segments. And as Richard said earlier, that is an area that we have defocused in the last year, year and a half. So you can see the totals, which replaced also the new customers and new applications sales that we made in the quarter.

Slide number 11 in terms of some statistics as of the end of December 31, 2007, we now have customers using an average of 2.7 products. I am repeating some of the information that Richard presented, in terms of 17 new customers in the quarter and 49 new customers in the year. But quite frankly, that success bears repeating. I can't exactly say this for a fact, but the 49 new customers in the year is pretty close to the most I have ever seen in my 23 years of being here with the Company. I would actually have to go back a long time to figure out exactly how many new customers we have had at our peek, but it's somewhere between 40, 45. So I actually believe this number might eclipse that. We now have 821 total customers, with over 2200 products deployed. And with the addition of Kenya, we now have customers in 86 countries.

Moving on to slide 12 in terms of commentary on 2007 operations. Areas of progress, certainly the Base24 - eps deployments, with now over 30 live customers, has been an area of progress in the past year. And we obviously are going to leverage that going forward. Likewise in our on-demand, we had some issues that --- as we've talked about, relative to the stability and reliability of our on-demand operation. For our enterprise banking customers, we have made a tremendous amount of investments and improvements in that area in the last six months. And have improved dramatically the results for our clients. Likewise, we are leveraging that, as Richard said, for other areas, other solution sets in the America --- in the North American marketplace. And are having success both in sales, and our first non enterprise --- our first customer went live in the last couple weeks, using our retail commerce server product in an on-demand environment.

Other areas of progress in the last year, is in the growth of our global resources. We now have over 100 people in Romania, 100 employees over in India, over 40 in Malaysia. We have our Ireland operation. It was a very significant investment we have made to grow our global resource pool. The infrastructure is now in place. And we are looking to leverage that even more as we go forward, as we increase the productivity from those resources as they have come up to speed in our technology. And we can utilize them to accelerate our delivery of our solutions.

Areas of challenge for the Company continue --- one of the areas is in solutions deployments versus product deployments. We have talked about this quite a bit as it impacts through revenue. But more and more of our sales are with multiple versions and instances of our software. It's not just one product. It's customers acquiring a solution. In order to respond to that, we do need to improve our game, in terms of how we manage projects, how we manage risk across the breadth of the solutions, and integration of our products. We are making progress, but it's an area we have to make more progress, and to get better at it for satisfaction with our customers. And also, speeding up the time from a project to go live to recognizing the revenue.

Another area of challenge that we're focused on is implementation --- implementation and services margins is what I mean by that. The margins we derive from our customers for our services work is insufficient and not satisfactory to us. And we are taking some specific acts in terms of our contracting processes, as well as our pricing practices, to make sure that our margins improve in that area. In other area challenges and product life cycle management. What I mean by that is, we have acquired a lot of companies and products in the last few years, and many of them overlap. And we need to be more aggressive in the maturation and sunsetting of some of the older legacy products to get our customers to move forward with this on our products that we're investing in, the ones that are strategic to us, like a Base24 - eps. So, we are spinning a number of cycles to be more aggressive in the management of our product life cycles and moving our customers along with our investments.

Flipping to slide number 13 for 2008 outlook, one that we cannot talk about enough is the IBM impacts to our partnership impacts to our operations and to our Company. One of the impacts of that relationship is in terms of our products. There's a number of applications underway to enable our products to be optimized and to run on IBM server technologies, specifically the Z Series as well as the P Series. So that impacts virtually all of our product plans, and we are moving very quickly down the path of doing the enablements, projects we have contemplated with IBM to improve our delivery of the APF --- of --- payments framework. There is also big impacts relative to migration processes. The formation of what's called the payment transformation team, which is a combination of --- resources and IBM resources to help move our customers to migrate to our ACI payments framework, and to move them along with the Z Series is a very significant investment by both parties to facilitate the migration of our customers to our newer technologies.

As a consequence, we are investing more resources and technical headcount. We're adding more people, both from IBM and for ourselves, in terms of the technical enablement as well as migrations, aggression and product life cycle management. You will see us move very clearly towards Base24 - eps for all our legacy retail payment engines. We have been telling our customers since 2002, that there will come a time where we will ask them and motivate them to move to Base24 - eps once we've proven it out. We are at that time, in the next couple months. We have already begun talking to our customers about that migration. And in the next couple months, we will be more formalized in moving all of our customers to our Base24 - eps product.

The whole self-payment hub opportunity is a very high priority for the Company. We think there is a tremendous opportunity to leverage our wholesale product suite, as the customers, the marketplace go towards the concept of a hub to manage and control all of the wholesale payment transaction sets. And we think we are well-positioned to take advantage of that market move, and we're making investments in that area at a very high priority. Solutions and integration focus, I already mentioned that. We have beefed up our project management staff. We've added more project management. We're focusing more on the integration of our solutions. Again, to meet the need and the market reality of customers acquiring multiple aspects of our product solution set, and one --- and deployed as one focused and cohesive unit. And also the implementation of services margin improvement, as I said before, we are changing our contracting prices --- our processes, and our pricing model to make sure we achieve the margin improvement that we desire.

And last but not least, is the harvesting of the backlog, as you no doubt note from our press release. The deferred revenue continues to increase in our business. We need to take that deferred revenue and turn into revenue. And a big focus of the entire operation is harvesting our backlog, and having that show up in our financial results. With that I'll turn it over to Henry to talk about the financial aspects of the Company.

Thanks, Mark. And for everyone on the call, I'll start on slide 15 which are key take-aways from the quarter. And before I get into the numbers, I would just like to let everyone know that or introduce Scott Behrens. He is also joining us from Omaha on the call today. Getting into the quarter, sales were strong. You have heard from Richard and Mark, solid contributions from the UK and the U.S. A good operating free cash flow quarter of $21 million versus about $7 million in the December quarter of last year. Need to point out that that $21 million does include a net 9, about net $9 million received from IBM in the quarter. Sequential backlog growth of $39 million. We continue to grow backlog. These sales of new products, new applications, continue to have the impact of birth and backlog.

We had a strong revenue quarter, $101 million in revenue versus $93 million in the comparable quarter of last year. In addition to the strong revenue growth, we also had deferred revenue growth of 15.5, call it $16 million sequentially. And if you compare that to 2006, we only grew about $1.5 million sequentially. So the results are coming through on the revenue line, and on the deferred revenue line on our balance sheet. Our deferred expenses rose about $3 million compared to prior year rise of $2 million. So we continue the pattern of deferred revenue growing much faster than deferred expense. Operating expenses grew about $10 million quarter-over-quarter. The big pieces of that are continued investment in R&D, higher commission spend due to an outstanding sales quarter, and about $3 million of professional fees. That's just the timing of our professional fees that hit in the December quarter. Looking at last year, other expenses essentially flat. We had some favorable foreign exchange, but it was offset by a FAS 133 non-cash charge

Flipping the page to 16, key take-aways from the year, we'll follow the same pattern. Again, as a strong sales year as articulated by Richard. Operating free cash flow of about $52.5 million versus $39 million last year. And again, I'll remind you that the $52 million includes about $9 million received from IBM. For the year, our deferred revenue grew --- rose about $42 million compared to prior year overall growth of less than $1million. So again, the continued strengthening of the balance sheet. And consistent with the quarter, our deferred expenses rose about $5.5 million compared to a smaller increase in 2006. But again, you see the pattern of deferred revenue growing more rapidly than deferred expense.

Our backlog end of the year, at $1.38 billion, $138 million-growth for the calendar year, very strong. Our revenue was up 5%. And really what you have there, is you have the impact of our acquisitions adding to revenue. And then, you've got our elongated revenue recognition cycle. Mark talked about solutions and products and applications, kind of hurting us in revenue line. But you see it coming through on deferred revenue. Other income expense for the year was about $10 million adverse. And that's the negative impact of the FAS 133 non-cash charge interest expense and currency. The purpose of slide 17 is the last time we spoke to you, we talked about some slippage into 2008. And now that we've closed out 2007, just to put things in context. We told you that revenue of about 15 to $20 million, from multiple banks who are participants in the faster pay in the Middle East switch deals, slip from '07 to '08. We now expect these deals to be complete sometime in the first half of '08.

Paid up front deal renewal is large U.S. bank in the second half of '07 didn't work out. We now anticipate that yet to close in 2008. Operating free cash flow was -- we had one discrete deal where about $6 million in cash. We closed the deal in December, but we're going to receive the cash in 2008. Then also, the impact of the items above. But, again, the point of this slide is just to --- now that you have this --- the numbers in front of you put in context, the slippage we were talking about the last time we were together. Looking forward to 2008, we're going to guide on two metrics, operating free cash flow and in revenue and backlog growth in total. Operating free cash flow, we're calling about a $65 million operating free cash flow metric in 2007, or in 2008. And then, that's going to include about $24 million of CapEx and interest. The comparable metrics for 2007, were $52.5 million of operating free free cash flow, inclusive of CapEx and interest of about $10 million. And both 2007 and 2008 will include the impact of IBM- related cash receipts and disbursements. So the IBM impact was in both numbers.

Our Reg-log growth, we're calling for about $200 million --- $200 million of growth in the combined revenue and 60-month backlog metrics in 2008. The comparable metric in 2007 is $157 million. So again, continued commercial growth in 2008. Slide 19 are just other items impacting the 2008 financial model. We thought you might find this useful. We expect total sales to grow about 5% year-over-year to about $450 million. We're going to see a change in sales mix. In 2008, about 80% of our sales are to be new client or new applications, as opposed to term extensions. That metric in 2007 was 70%.

As far as phasing, we expect to see sales and revenue to be higher in the second half of the year than the first half of the year. And we would like to remind you, that our first quarter after the year-end is traditionally weak. And since we've just changed our fiscal year-end, we're entering into that quarter -- in to that March quarter is upon us. Operating free cash flow, we think about the phasing of the $65 million. We'll see a higher operating free cash in the first half, in the second half of the year. Overall expenses should grow about 7 to 9%. About half of this can be attributed to the IBM alliance. And as far as phasing, we expect expenses to be consistent throughout the year. Deferred expense and revenue, we expect to be relatively flat. That doesn't mean exactly flat, but you know, we're not anticipating seeing a $40-some odd million growth in deferred revenue. We may see some growth, but not to the extent that we saw this year.

The other expense line on the P&L, we see being about $3 million in 2008 versus $6 million in 2007. In 2007 we took the brunt of -- basically front-loading the FAS 133 expense related to our swap. We're also going to see in 2008, some benefit from the cash that we're generating on the interest income line. Our tax rate is -- we expect to be 35 to 40%. As you see in our quarterly results, that is really driven by geographic profit mix. And then, there's a little typo in that sub-bullet. It's not a 14% effective cash tax rate. It's about $14 million in cash taxes, we expect to pay in 2008. That's compared to about a $10 million cash taxes that we paid in 2007. We're assuming a diluted share count of about 34.6 million shares. And non-cash comp and acquisition intangibles of about $22 million in '08. And that's about half and half roughly. The split is about half and half between the two.

Slide 20, 2009 to 2011 outlook. We have talked about this, and we still see revenue and backlog growth in the low double digits. We still see operating free cash flow to grow about 1.5 X times revenue growth. And this excludes the impact of the IBM incentives. The IBM incentives would be operating free cash flow base, would be incremental to the growth we're stating here. And we're going to work towards about a 20% operating margin over the planning horizon. We talked before high teens, 20 is where we would like to see the business get over the planning horizon. We continue to --- strive for that.

Risk and opportunities, what could impact these numbers? What could make them move? Obviously, higher sales of new products and new applications. It helps us on all fronts. It helps us with cash. It helps us with our rev log metric. It would just make all of the metrics a little bit better. IBM, Richard spoke of the potential -- you know, of IBM. But we still think there's tremendous upside in that relationship. Risks, you know, the flip side of the higher sales of new products and applications. Sales mix could make it go the other way to the extent that we sell more term extensions, and less new products and new apps. It could adversely impact cash, and our rev log metric, and timing.

The reason I have timing here, is I you know --- I told you on a previous slide that we thought sales and revenue were going to be higher in the second half, in the first half. And as we found out in the fourth quarter of this year, to the extent that we closed a bunch of deals they sent us in December. And we don't get the cash --- that may push some cash. But again, that's something we'll get in to later in this year, but I just wanted to mention it. And then, services, profitability and implementation, and cost of new business. Mark mentioned before, we have got to get better at project management, project implementations. We are really counting on some improved profitability in our services business in 2008. And to achieve the guidance we have just given, we do have to achieve that. And here, it's just appendix slides. It's the typical slides that you've seen historically from us. There are also contained in the press release, so I wasn't going to go into them, you know individually. So with that, I think we should just turn it over to questions.

Operator, we are ready for our question-and-answer session now.

(OPERATOR INSTRUCTIONS) Your first question comes from Gill Luria with Wedbush.

Hi, this is actually Nick [Setian] for Gil Luria. My first question is, you mentioned some improvement in the U.S. Could you differentiate between national and smaller regional banks?

Should I answer that Richard Launder?

Sure, you can answer it Richard.

Anyway, obviously I have comments. The success that we predominantly had in the U.S. in new accounts was around application-on-demand. That was around retailers and smaller banks typically. Of course, we did have a lot of renewals in the larger customers. But the new accounts, new customers, new applications was mainly around application-on-demand.

And I guess I would add, we also had some real success in our fraud products in the U.S. also, right, Richard?

Yes, we did have one notable win. One very large win.

Thank you. And also can you talk more about the type of income you are receiving from IBM? Is it reimbursement for R&D?

We -- we -- this is Phil Heasley talking. We said we're not going to describe in any great detail the IBM relationship. We do have some co-development going on, but that's not the revenue that you will -- that's not the revenue that we're referring to here. That's co-investment.

Okay. And what is the currency benefit to the top line in 2007?

To the top line -- I don't have that number. I know what you're talking about. I don't know what the overall currency impact on revenue was, Nick. I'll have to get back to you on that.

Okay. Thank you. That's it for the questions.

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

Hi guys. My first question is for Mark. You had mentioned the migration of Base24 - eps. Can you just give us a sense of what that means? How significant that is for these bank customers? My sense has always been the Base 24 is a very stable system. It's primarily on the HP platform. So how does that now work?

Yes, it is a very significant event, George, for us and for our customers. Let me just make sure again, to reiterate the history. We have been telling the clients since 2002, that our strategic platform is Base24 - eps. That's where the majority of our investments have gone, and will be going. And at some point in the future, when we're satisfied with the stability and capabilities of the system to replace the client systems, we would move to migrate all of our legacy systems. So that does include Base24. It includes the ASX system that we acquired from IPS in Germany. The on two, the open two systems that we acquired from S1, I'm sorry S2, a couple years ago.

It also includes the OCM-24 and Trans-24 systems that we have had for sometime. So, what that will entail as we role out that migration to our customers is -- and it won't be overnight by any means. This will take, you know, years, probably five years or so to migrate the customers over. And we will do that in an orderly fashion. Some of those products are already sunsetted. We do not make investments in them today. The most notable one that will impact a lot of our clients is the Base24. And we'll give them plenty of time to move them over. And now with the IBM migration, our payments transformation team that we have in concert with IBM, it does give us added resources to help with that migration that we don't have to hire all ourselves. We can do that in concert with IBM.

Okay. With respect to the guidance of backlog plus revenue growth. Obviously, $200 million is a big number. And this year, we saw primarily -- that growth came primarily on the backlog line. Is there any sense you can give us on the breakdown of where that growth might come from?

George, this is Henry. I -- what we'll say is --- first of all, I'll give you something a little --- when I say forward-looking --- in terms of--- Obviously, as we close quarters, you'll see it, you know, actually. But I think it's safe to say, we have said that we see revenue low double digits --- high single-digit, low double-digit growth throughout the, you know, planning horizon. And we still feel comfortable with that --- statement.

So you're not expecting a significant -- you're not expecting the backlog to really push into revenues a lot more rapidly than we saw last year?

George, this is Phil. What we said was that we expect deferred income to stay about the same, if not grow a little bit in 2008. And, you know, that would be the most descriptive -- that would be the most descriptive comment we've provided.

Got you. Last question, capacity upgrades weren't even mentioned here. Can you just give us a sense of what we should expect there? When you might turn the corner, now that you are not doing the puff transactions. Thanks.

Whoever wrote that value investor piece, I think understood our business pretty well. I think you are going to see the -- the pops go from negative to positive in the middle of '09.

Middle of '09. Thank you.

Your next question comes from Nick Fisken with Stephens and Company.

Henry, you know, the Company is finally starting to show some significant strides on the revenue front. And I'm wondering on the timing to depart?

I'm sorry, Nick, the timing for me to depart? Is that what you said?

Yes. It seems ---

That's a fair question. And I'm going to give you a thoughtful and thorough answer on this, Nick. It's a very fair question. There are two sides to this decision. One is a personal side for me, a personal and professional side. And, you know, I don't think it is appropriate to you know, kind of share that on the call. And I think you agree. But the other side is kind of --- the status of ACI. And I'm going to talk a little bit about where we are with the finance function. And then, we'll talk about how these two decisions kind of collided. In our controllership group, we've --- you know, Scott joined us, you know, a few months ago. He has done a good job at hiring new leadership under him. We had some talent from --- you know, from our previous ACI. We had some talent there, too. And this team, they have put together five filings in nine months, okay. That is a lot.

And they have worked through some pretty tough technical issues. We adopted FIN 48 this quarter which was no piece of cake. This team came in for [tail] under the options which was no piece of cake. We had a difficult tax issue to struggle with last quarter. We resolved that, and that kind of behind us. Focusing on another part of finance which is financial planning and analysis, Nick. We have gotten new leaders in corporate. We've gotten new leaders in the Americas, Asia-Pacific, EMEA. We have got some experienced ACI leaders, supporting both the product and our CIO. We got improved underlying business rhythm and that's going to feed our budgeting and forecasting process. . That function is in good shape.

Investor relations,Tamar is new to the Company. She's brought that function here to New York, and is doing a fine job. We have got a new tax leader, whose dealt with just a ton of technical issues. We have got an infrastructure team, focused solely on financial systems and processes. And we have got a contract revenue team, focused on you know --- controls around backlog and revenue recognition. Craig's making some good strides in Treasury. So if you look at it from my perspective, Nick, I know it seems an odd time to leave --- or to resign --- but I would also say, it is a time when you can do it with comfort. Because you know --- I think the press release had something like, you know, the function is in good hands. And it's true.

So when you combine the fact that I was presented with an opportunity that, you know, I think is something that I want to do. You combine that with the fact that we have done a ton of work, Nick, both the function and the business. I'm very proud of what we've done. But it was just a time -- you know, it was just a time that would allow me to take this decision. And further, when you do things like this, you have professional conversations with your boss, and then, professional conversations with your colleagues. And you work an orderly transition. And that's what we're doing. So that's really --- The honest answer is -- it was the combination of, you know --- I feel very strongly about the finance team. And so you can chime in if you want. I was just presented with something that I thought was better for me personally and professionally. And those two collided for lack of a better term, Nick. That's the honest answer.

That's fair. Thank you. On R&D, and sales and marketing, and G&A, I'm trying to get my arms what we should expect for '08, because those were up significantly, year-on-year. In know there's some one-timers in there. I'm just wondering if you could just break those out?

Yes. Well, or we could do it another way. I have kind of -- you know, when I look at where -- I think cost of sales, or R&D -- I think we can expect R&D in the 12 to 15% range next year. It was about 15% in '07, and 12 to 15% is a reasonable number for next year. I think selling and marketing, 18 to 20% is a fair range. I think it's been consistently 19% over the years. And G&A, you're right. We had ups and downs, I think 23 to 25% would be a fair window, a fair window for --- you know, for '08.

And why did you use your share count at 34.6.

Well, what we've done is we know where we landed. And remember, when you report a loss, you can't dilute shares. So we're going to make money next year. So we have actually used the diluted for that. And then, we have also have figured in the impact of, you know -- we believe the impact of our share buyback program in '08. So it's kind of a walk of where we are now to actually being able to dilute them to some share repurchase activity.

And are you willing to share that number with us on what you are assuming on the buyback?

No. I mean, we'll report it actually -- much like now --- I'm not trying to be cute, Nick. But much like sales, and revenue and backlog, as we close quarters, you'll see it in the actuals, right? And it will become apparent really soon.

Okay. And then on accounts receivable, was up $18 million sequentially, and then, non-recurrent liabilities almost doubled sequentially. Can you give us some detail on those two?

You know if --- you are talking about just the quarter, or are you talking about the year?

Just the December quarter.

Well, the receivable is up. We had very strong sales. Right? So very strong sales would grow the receivables. And I'm sorry the one that you mentioned?

Your non-current liabilities went 19 to 37 sequentially?

A big piece of that is IBM. That's where --- the IBM $33 million in cash --- 24 of it went to equity or warrants. And the other 9, that we have talked on operating free cash flow --- went to other current liabilities. I know that is some of it. I might have to do some digging, Nick, to get the other details. Oh, and the compensation, too. We have larger compensation accrual in the fourth quarter, just the way our bonus structure works. But those are the two that jump out at me as reasons why other current liabilities would go up.

Last thing I have got is for whoever wants to handle it. But, we have been hearing about a potential slowdown in spending for your large bank customer base. What signs are you guys seeing of that?

This is Richard Launder speaking. To date, we are not seeing any signs of that. And I would say, historically, when there has been issues in the banking areas, providing they haven't been directly in the payment space. Historically, we have been not affected by those. We have had other at times when banks had crisis situations and spending cuts. I stretch, as long as they haven't been in the payment space, we have really seen the impact of that. I don't know if you would add any comments to that, Mark?

Yes, I would be in agreement with that. In fact, there are some that was suppose that this is a good opportunity for the banks to consolidate. And the convergence of payments might be accelerated in the investment --- in the convergence might actually be accelerated in some areas to take out costs of the bank operations.

This is Phil Heasley, I think if you read Gartner right --- what they are saying is that they actually expect the banks to -- They may decrease over all, but they expect the banks to increase their infrastructure projects, in light of what is going on. Because they are looking for productivity, and that may be why we're not seeing any slowdown at this point.

Okay. Thanks so much.

Your next question comes from Tom McCrohan with Janney Montgomery.

Hi, good morning. The 157 of rev log in '07, how much of that was actually converted to revenues? And do you expect that conversion rate to hold, improve, get worse, whatever in '08?

When you say, Tom, what -- when you say what was converted to revenue, what --

You have that 157 rev log number that you disclosed for '07, and you have guidance of 200.

Right.

So how much of the 57 in '07 --- was converted to revenues?

I don't think -- well, I guess maybe the metric is not clear. What it is, it is actually the growth in revenue, and the growth in backlog. And of the 157, I don't have the data in front of me, but I think we said backlog grew 139. So the revenue was the balance, right? The revenue growth would have been the balance of that. That's the way the metric works which kind of --- rough log growth, Tom. It's not really -- when you get in to conversion rates, actually, they are irrelevant to the rev log metric. And that's kind of the reason we're guiding the way we are. It's because to the extent that --- if it's a customer pushback or self-induced or whatever, it's a bit irrelevant to us as long as we get the cash up front. I don't that us answering your question, but I want to be clear. You know, it's --- the growth in revenue and the growth in backlog, and it's about last year's metric is around --- 40 in backlog and the rest is revenue.

I guess the --- expect that breakout to hold in '08? The percent -- now that 200 is the percent that is being backlogged versus the percent that is revenue?

Where we embarrassed ourselves in '07 is trying to predict to the quarter where backlog becomes revenue. And our strategy of bringing on these new customers and new accounts, to predict them within a quarter is --- you know --- is a prescription to -- you know, for the Company to embarrass themselves. Whereas, if we give you rev log, we're giving you an accurate assessment of the economics of the Company, without trying to micro predict what is actually -- So we're much more comfortable telling you cash and telling you rev log, than we are telling you what quarter things are going to mature.

And actually, Tom, to be really clear, and again, I'm not too proud to say --- you know, knowing what I know now, this is how we would have guided last year. I don't want to go back to last year for many reasons, but I did kind of go back to some of our calls and guidance, and had we guided on rev log and OFCF, we would have been fine. It's to Phil's point, when you try to split it between revenue and backlog, and then the trickle down to EPS and everything, is when we got in to trouble. So, we feel this is really the way to call the business. And frankly, it's the way we look at the business. First metric is what we sell. Second metric is what's backlogged. Third metric is what's cash. And so we're trying to actually -- we have learned and we're prying to present the business the way we're running it.

Okay. And the operating free cash flow guidance for '08, how much -- what is included in that number for IBM payments? You had a little bit of that in your '07 operating free cash flow. I think it was $9 million. Kind of the, you know, guidance for '08. What is the assumption for an IBM payment?

The answer is it's all of the ins and outs. That's kind of the conceptual answer. What you do know when we announced the IBM deal, we did say that there was another incentive payment due upon us meeting certain requirements. That payment is obviously in there. But what we don't want to get into, Tom, I don't think is -- you know --- we're trying to make --- it's not ACI and IBM. It's one. You know, we're one Company. So what's included in there is any incentives if we will ---

One company, meaning it's --- we're operating it as if it's within ACI. We're not running it separately. So in there is this second round of $33 million that we anticipate receiving, plus any reimbursements to sales point early that we expect receiving. But also coming out is all of the cash we're going to spend. We're going to spend money on development. We're going to spend money on, you know selling and marketing, and you know, some accountants or whatever we need. So, it's all in there, Tom.

You know, what we did tell you is that half of our growth and expenses is related to IBM. We did tell you that we're taking Cap spending up to $24 million from less than $10 million. And that's our -- you know, there's large aspects of that that deal with the IBM fund. So if there is no clean way to tell you what the number is, but we can tell you the moving parts.

Okay. And the 7 to 9% in expense growth guidance which I think you said includes IBM spending. So are we to assume that most of the investments you are making to optimize your product is going to be capitalized?

No, some is capitalized. Some is capitalized. Some is going to be capitalized and reimbursed, and some of it is expensed.

Yes, that's the right answer. And also to -- I didn't make it clear. I should have. The 7 to 9% expense growth, of course, takes out all the one-time items, the stock options and all that kind of noise -- we have kind of given you that on the quarter. So that's 7 to 9% on what I'll call, you know, kind of normalized operating expenses.

Okay. It just seems 7 to 9%, somewhat low if some of the spending --- investment spending is kicking up --- you know, going up a notch because you are investing in optimizing your products, and you only have 7 to 9% expense growth. So it seems --- capitalize a lot of that spending.

Well, we are going to capitalize certain, and we going to --- and then we're co-investing on some of it. And there's capital spending on some of it.

But the biggest driver, Tom, and this is something that the Company can tout a little bit as we move through 2008. We're getting a lot of productivity from our R&D group. Ad we mentioned our services -- we're trying to get increased productivity, you know, from our service --- for lack of a better term, our service P&L. So there is some --- yes, expenses are only going to grow 7 to 9%. Yes, there are some things being capitalized and reimbursed, but we're also getting some tremendous productivity on R&D and services launching.

You remember last year we said we were going to add 100 people in Romania. And that we were going to expect, you know, the benefit of that more this year than last year? That's part of it. Another part of it is that we spent a tremendous amount of money on services this year. And that had a little bit to do with our model. A lot of our competitors try to give their licenses away for a very low price, and they make their money on services. We have very long-term relationships on feature-rich licenses. And we often if we take a discount, we'll take the discount on services side, which is today's rev reck world is not great, because you are losing money on the servicing side, in order to make money for the next 20 years on the license side. And your license revenue sits in deferred, versus sitting in the current account. So if we have a risk in that 7 to 9%, is that we don't get as good as we -- you know, we don't get the improvement we expect this year on the service -- on the service productivity side.

Okay. And this is the last question on the tax rate, if you guys can talk to that. It was 200% or something this quarter. You got in to a more normal tax rate, but it sounds like -- it's hard to get --- seems like it --- visibility in to the tax rate. I'm just trying to get a read on how much conviction you have on that tax rate guidance that you gave us.

That's a great question, Tom. Really what is driving our tax rate, and actually, you know Scott did a --- kind of a really strong analysis for us --- the walk through, But basically, if you think about --- it's easier first to think about the end game. The end game is we have moved a lot of IP to no or low-tax jurisdictions. So when we -- as we start getting things out of backlog into revenue, and start driving profit in these low to no-cost jurisdictions, Tom, you are going to see our tax rate go down.

Well, right now you have the flip side of that. We're building backlog. We not recognizing our own new --- we're incurring expenses. So essentially, we are taking losses in countries, where on a GAAP basis, we had --- we give zero tax break for it, if that makes sense. So it's really ---what we're seeing is what's going to be the flipside of a turnaround when we start having profit in this no or low-tax jurisdictions. We've also got the fixed amortization charge over an actual --- international IP move to Ireland. It's about $2 million a year. When you have got higher profit, higher pre-tax profit, that's kind of minimal impact on your rates. But when you are at or near a loss, it really magnifies the impact on the ETR. So, the 35 to 40% next year that we're talking about is going to be totally driven by the geographic profit, to the extent we have break even or make money in these low tax jurisdictions,Tom. We'll be closer to that 35. To the extent that it goes the other way, we'll be closer to the 40. And also, you know, we --- we won't have these one-time --- these option charges. We didn't have any in this quarter. But for the year, all this other non-sense that brings your pre-tax down to zero really kind of messes with your --- really impacts your effective tax rate also.

Yes.

And I guess the other thing we would say is that we're very comfortable with the $14 million.

Of the cash tax, and that's why we called the cash tax number. It was about $10 million this year, about $14 next year. Thus, the cash taxes. And if you think about it, that gets kind of into rev log and -- so yes, fairly, that's what we're managing to. I'm not saying we're not paying attention to GAAP tax rate, because of course we are. But again, we've learned --- we learned that it is something that, over time will work it's way out. The strategy is right, we just got to execute.

Okay. Thank you.

Your next question comes from Franco Turrinelli with William Blair.

Good morning, everyone.

Good morning.

Going back to a couple of questions --- a couple of comments that Richard and Mark made. I wanted to get a sense from Richard as to -- in terms of the outlook, the sales outlook for 2008. Richard how much broadly, and I mean broadly, I mean how much of this do you really think is going to be from the IBM relationship, and how much is really business-as-usual sales?

That's a very good question. In terms of the growth, a lot of it will come from our organic position. We planned for that growth before the IBM relationship was finalized. So, a considerable amount of growth will come from the business-as-usual. The IBM growth, I expect to be towards the end of the year. We are in a business with long sales cycles, to put in new payments engine in, particularly is the --- from my experience which is considerable, is in the 6 to 18-month period. So that really sets from a standing start to the beginning of the year. The earliest we can expect IBM sales to come through of any significance is the second half of the year, with the potential of them taking longer than that.

So the question more is on the IBM side is timing, not if -- we're very confident it will produce results, but there is significant ground work to be done to get that to happen. So to answer your question, most of the increase will come from organic business-as-usual growth, with a lesser percentage coming from the IBM relationship in fiscal 2008. It will be a very different story in 2009, and et cetera. That help?

Yes, it does. I mean, you see where I'm go with the question, right? And --- one of the other comments you made --- I think you said that you had already seen some successes, deriving from the IBM relationship? Can you maybe flesh that out a little bit? I mean, what I'm looking for is --- is indications that the IBM relationship is starting to gain real traction, that we should then have confidence that the result in sales if not in '08, then in '09.

Okay. I'm make two points to that question. The first is although --- although the agreement was signed at the end of last year, we have formed a closer worker relationship with IBM, certainly in some key tactical markets, or strategic markets should I say, around the world. We were working close with IBM through the whole of 2007. We -- one of the large new customers we got in Europe was a very -- actually two, one in Spain, one in France -- were based on that relationship. But that is -- that working prior to the agreement will produce some results early this year. There's a significant new customer in Europe that we expect to get this quarter, based on a very close working relationship with IBM that was already in place. Now, we're two months into the agreement, nearly. And what I won't say is that there are --- the major deals that are close to happening because of this agreement. But what I would say is we're already building up a qualified list of good prospects that we will go through that sales process with --- or are in this process of doing that now. So the momentum is starting to build up in a market that has a very long sales cycle.

Great. Thank for that ---

Franco? Franco? This is Phil Heasley.

Yes. Go ahead, Phil.

I think another thing you might want to -- you know, just as backdrop, of our new EPS sales, about two dozen of them are on the IBM platform as we sit today. And less than a half dozen is probably on the next biggest platform, right? Maybe I could even say a quarter of a dozen.

Okay. Mark, question for you and to some extent, Henry may want to chime in, too. You had a comment on harvesting of backlog, and I guess to some extent, my question is, you know, what does it take in order to do that? I mean, to what extent do you really have control over your ability to quote, you know, harvest that backlog? Or is it just that --- some extent you need to be reactive to the needs, and schedules and demands of the customer?

That's a fair question. And the answer is we don't have complete control over it, that's for sure. But there are aspects that we can improve in our operational deployment. You know, it's -- as a company we grew up with Base24 as our primary product for a number of years. Then we have expanded quite rapidly into other areas. Usually we sold those solutions as stand-alone, one-off solutions. But now, the customers are frequently coming to us and saying I need your authorization engine, I need your back office, your settlement processing, I need your wholesale system to be integrated into there. All right.

So as a company, the customers are asking for us to have tighter integration of all of our solutions, whether it's in the user interface and the data models they support, in terms of implementation, installation. So there are things that we can improve to tighten up the implementation of our solutions together. That also has an impact -- or we also can impact it based on how we manage the projects. Rather than managing individual implementations of individual projects, we have to manage the totality of the solution. That will require more project managers with --- improving or increasing our skill sets. So there are things that we can do to put ourselves in the position to make the customer live quicker, and therefore, get the revenue recognized sooner. You are right though, Franco, in that, you know --- if a customer delays projects for things outside our control, we still are always --- you know, going to be impacted by any changes they make. But there are tangible and tactical things that we can do to improve our --- our ability to implement our solutions, and therefore, impact our recognition of the revenue.

Great. Thank you. Henry, best wishes.

Thanks, Franco.

At this time, there are no further questions, sir.

Thank you for joining us on the call. And we look forward to speaking with you next quarter.

This does conclude today's conference call. You may now disconnect.