ACI Worldwide Inc (ACIW) 2008 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 financial results second quarter 2008 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 second quarter earnings conference call. Joining me today as management speakers are Phil Heasley, Ron and Scott Behrens. Available on the Q&A we'll also have Mark Vipond and Richard Launder. Our customary Safe Harbor and forward-looking language applies to this call. A full discussion of the forward-looking statements can be found on our website or at the back of the earnings release and presentation which we filed this morning with the SEC. I'll now turn the call over to Phil for opening remarks.

Good morning. I'm going to make some brief overview and then hand it over to Ron. The business is performing well from a revenue sales perspective. We're committed to moving revenue out of deferred and backlog into current period revenues. We're focusing more on margin improvement. The sales pipeline remains strong, though the sales cycle is extended. We're now live on BASE24-eps Version 8.2. This is the hallmark IBM enablement release and was generally available about two weeks ago.

The IBM alliance has performed to expectations in the first half of 2008 and it's clearly bringing us larger size sales opportunities. Time to close deals has lengthened. Traditional selling cycle, we've always said was 275 to 450 days. In the last year and a half two years we've been in the 9 to 12 month cycle. We're probably in 15 to 18 month closing cycle right now. Moving implementations out of backlog has become priority number one for us. 50% of our BASE24, more than 50% of our BASE24-eps implementations are now on the IBM environment. We're working with IBM to expedite our in stalled timeline from a current implementation timetable of 18 to 24 months to something closer to a year, to a year and a quarter.

As we mentioned in our press release, we're announcing the departure of Richard Launder who is going to be leaving in the end of February in 2009. Until his departure he's going to be working closely with me and we're going to be concentrating on our major relationships around the world and also, announcing Mark Vipond's departure at the end of this month after 23 consecutive years and most of his adult life, this is a major change for Mark. It's a major change for the Company.

Global sales and product businesses will, they're poised and they're ready to move forward. The geographic channels and product management will report to Ron effective immediately. Ron who joined ACI in March of 2008 spent the last five months updating our strategic plan and that now having its major architecture completed, he will take over the day-to-day market activities of the Company. As a result of this planning process, we intend to rationalize up to $30 million in annual operating expenses beginning immediately but beginning third quarter of 2008 and it will continue through 2009. We'll be implementing a professional services restructuring, product rationalization and facilities consolidation. We expect near term restructuring charges primarily in the second half of 2008 and less sizable charges in 20009. We're planning to reinvest $16 million funded by these cost savings achieved during our restructuring. In the business to better align our global opportunities, these investments are anticipated at wholesale, fraud, and the aforementioned services organization. Approximately two-thirds will be capital expenditures, with one-third being operating expenditure. We intend to globalize our headcount or that is to realign them so that our revenue structure globally and our people supporting those revenue structures are more closely aligned. With that I'll hand it over to introduce and hand it over to Ron Totara.

Thanks Phil and good morning everyone. It's good to be here with all of you on the phone today. Moving to the quarter just ended I'm going to run you through the business operations from a sales, product and geographical perspective. If you turn to slide eight, you'll see that the quarterly sales performance exceeded that of the same period one year ago. Even though the overall sales figure was higher by 17% we actually had less concentration of revenue with our largest customer sales and our wider disburse all sales dollars to more clients. We also saw a large upwards movement of implementation of professional services sales at 40% of all sales in the quarter which is an indication that we're expending more energy on the services implementation and ongoing services component of contracts. You're beginning to see more services revenue built in as a feature of our new sales contract and this has already begun to be reflected in current period revenue as well.

We did not have any sizable customer losses in the quarter. We had 14 small account closures with clients using products like Golden Gate or other non-core smaller tool products, but no strategic customer attrition. As is evident from the strong sales performance of 17% over last years second quarter we had a number of larger sales in the developed economies but we also booked a lot of smaller transactions throughout the world. We spoke to you at the first quarter call about the Sermepa deal which closed in early May and since then we have also closed on the large transaction with Sterling Bank which we announced in the press release earlier in the year. During the quarter we also had sales bookings activity with processors in North America and some of these deals were in progress for 15 to 18 months so we're pleased to reach signing.

In looking at the pipeline for the second half of the year, we have a number of large IBM alliance transactions which we are excited about and some of which we think will close before the end of 2008. Timing can be hard to call on these larger transactions but some of them are fairly well along in the sales process.

Turning to slide nine, this page depicts several different views of sales in the second quarter. It's worth noting that both Americas and EMEA closed ahead of the 2007 quarterly sales figures in spite of the fact that we did not see any large capacity events or much activity in the term extension portion of our business. And this is in an environment where we've been hearing much news about the challenge of the financial services institutions so it's notable that our performance is ahead of prior year. The new sales, new acts activity in the EMEA and the Americas has several ramifications on the business. For one thing there was not as much cash generation from sales as you would see in a typical quarter with higher term extensions, but it is also demonstrates that the product suite is very attractive to new customers and customers in what were considered to be penetrated and mature markets.

The Asian business has variability depending on the timing of term renewal and you can see that reflected in the drop in sales figures year-over-year. Another impact on the business from all of the new sales activity is higher sales commission and also higher implementation services fees in the short-term.

Slide 10 dives further into the progress on the IBM alliance. We're very pleased with where we are today and the milestones indicate that we're right on track with our relationship. IBM has dedicated what we consider to be a significant amount of heads for joint sales with ACI and their target for Q3 is to nearly double that figure. We believe that the word has gotten out in the marketplace about our relationship and the industry interest and underscored by the number of deals we're tracking jointly in the pipeline. You'll note that the second half of 2008 has a more aggressive number of deals and plays in the first half. This was in our plan as we expended energy in the first half of the year, educating our workforce and theirs about the relationship and how we would grow the business opportunity together. Also, we are beginning to do more joint sales planning regarding our approach to the wholesale market with ACI product and IBM hardware environment.

Slide 11 shows sales by quarter going back six quarters to the beginning of 2007 with a split by new accounts, applications, add-ons and terms. Given the slow sales start in the first quarter of '08 we're a bit behind last years sales at this point in time but we are comfortable that this is not going to derail us for performance in the second half. The year-over-year performance does show the reliance in 2007 on term extension sales compared with this year and this variance also accounts for the softer cash performance in the quarter.

If you turn to Slide 12, this is our standard depiction of customers and geography segmented by product. This is provided as an overall view of the business and product by ubiquity by geography.

Slide 13 takes you through the developments in our various product areas. The big news recently is that we have completed the 8.2 offering of BASE24-eps and it is fully optimized for the IBM System z and Blue Stack. In the wholesale arena we have refined a long term plan for investment in the payment solution hub and are committed today wholesale solution set. We believe that both SEPA and convergence within the industry will provide us with a lot of interesting opportunities.

Finally, the fraud products have also been optimized as part of the retail payment release for the Blue Stack and System z. This is another core product area for ACI and we intend to continue investment and enhancements of the risk offering. Today we have over 147 risk management customers and we see demand globally for our risk solutions.

Finally, my last slide, before turning the deck over to Scott is slide 14. This encompasses the second quarter performance by geography. We see opportunities in nearly all of our markets. The Americas turned in a solid performance in the quarter with sales of about 50 million and revenues of 40 million which was a healthy increase over the 33 million performance of last year during the second quarter. The Americas revenue was enhanced by recognition of a MasterCard deal this year. This was a deal which we signed 18 months ago and it has now gone live. Both North and South America providing us interesting opportunities although we're seeing large deals in the near term pipeline in the USA rather than in Latin America right now.

EMEA's two large groups of deals were faster pay in the Middle East switch, both postponed from the third quarter of last year and finally closed in this quarter. The faster pace situation was the large software event in the UK marketplace since the Y2K upgrade nearly a decade ago. It was a long implementation process and our engineers and services team did a great job as evidenced by the smooth transition to go live in the faster payment environment. EMEA sales were up 30% over last year at $43 million and revenue was substantially better than last years well at $47 million. The big news in our Asia Region was the provision of our business license for ACI in China. We're really looking forward to penetration in enormous China payments market and are working actively with IBM on strategies for penetration. For those of you who know the process to achieve a license in China that was a large step forward for us in terms of beginning a relationship with the enormous Chinese payments market. We also had sales in Korea, another key market where we have historically not had strong penetration.

Lastly we have invested resources in Asia, in the quarter in the services area and ordered a Haitian implementation for customers who install have been under way for long periods of time. We know that we have a lot of work to do rationalizing the cost of provisioning services implementation engineers and this is a situation which requires a lot of work not only in Asia but also in the EMEA channel where they have is sold a lot of new systems and now need to install them. I think in summary our theme for this year and probably well into 2009 is one of managing the install timeline and ensuring that we do it in a way that keeps our customers happy. While we did budget expense growth in 2008 in response to the need for services work throughout the world it is clear that implementations are the most impressing area of investments for the near future especially given the longevity of our customer relationships once these systems are installed. The services implementations issue is the biggest productivity program in the Company right now and while it's involved for my first half at ACI such a large strategic planning exercise. We expect that the roll out of the strategic plan will speed up our investment services, shorten the installed timeline for our customer BASE, and sharpen our focus on core product areas. I look forward to updating all of you on the changes we're making in the business as we refine and complete the details of the strategic plan. I'm going to turn the call over to Scott now who can walk you through the quarter from a financial perspective.

Thanks, Ron and good morning everyone. I'm going to take you through our numbers this morning and share some views on both the quarter and our guidance for 2008. Turning to slide 16, our GAAP revenue performance was significantly higher than last year as we did succeed in moving large deals out of backlog. In particular, the go live of Faster Pay in the UK, which contributed more than $13 million of revenue to the quarter, in addition as Ron mentioned the go live of MasterCard of the US, and the Mid East switch also contributed to the overall increase in revenue year-over-year. Additionally we continue to experience growth in our recurring revenue. As a reminder recurring revenues being monthly license fees, maintenance, and our processing service revenue streams. That growth was concurrent with the decline in initial license fees or ILF revenue. The primary driver of the decline in the ILF revenue on a comparative basis June 2008 compared to June 2007 was due to higher capacity deals in the prior year that did not recur in 2008.

Sales rebounded in the June quarter of 2008 on a sequential basis compared to the soft March quarter. And are higher comparatively to the June quarter of 2007 and as you saw in Ron's presentation on slide eight we do continue to experience strong growth in sales of new accounts and new applications. Operating free cash flow was certainly not where we like to see it, but there were timing issues both with billings and our investment decisions which contributed to the overall cash out flow in the quarter. The new Omaha office was a use of cash in both the physical build out of the facility as well as a rent prepayment, cash rent prepayment.

OFCF was clearly impacted both positively and negatively by the go live of Faster Pay and some of that impact is timing. We simply had the base on the timing of the go live, we simply had some billings that had not yet been paid by the customer and as of June 30, which did impact June cash flows by about $5 million. We also spent more money in 2008 on contractors, particularly the related to the services implementations driven by our large number of projects that are currently being implemented as well as the complexity of the product implementations. Like we told you in February, February services was certainly a risk for 2008 but we believe it makes sense to concentrate on expediting our installation process and we regard that as a productive use of cash.

Another point to add-on the higher personnel costs is that we are over achieving on sales of new accounts, new and applications this year as compared to what we originally anticipated. These sales are obviously a good business indicator yet they do require strong higher commission, expensed both on a GAAP and cash basis than we had anticipated when we planned for overall cash outlays in 2008. As evidence of that sales of new accounts and new applications are running at about 40% of sales in the current quarter versus 23% in the second quarter of last year so that differential has resulted in higher commission.

Another aspect of cash although not specifically highlighted on this slide that differs from second quarter of last year is that we are not seeing as many large capacity deals coming through. We do continue to renegotiate with our large existing customer base for term extensions and renewals but at lower discounts than in the past. This can delay the renewal process. We now expect some of those renewals later in 2008 and some may roll into early 2009 as the customers approach the expiration of their current existing contract period.

Finally, our 12 month backlog decreased on a sequential basis compared to March of 2008 and that was driven by the release of backlog for the large transactions in EMEA being faster pay in the Mid East switch and also in the US Markets with MasterCard. We do regard the reduction 12 month backlog obviously, it's generally a good situation, since it does indicate that we are moving projects out of backlog and taking them live.

Moving to slide 17 and continuing with a review of the quarter, you can see the short term deferred revenue also shrank in line with movements in 12 month backlog. We expect those movements to be fairly consistent. Operating expenses are something we're trying to closely manage while also ensuring that we invest appropriately in the services installations, so that we can reach project go live status. We did spend $9 million more in services personnel in 2008 than we did in 2007 and that was invested both in the geographies and in our wholesale ACI on demand product categories. Selling and marketing expenses as I mentioned in the context of the OFCF on the last slide, were higher as we experienced higher commission expense on higher sales than comparable in 2007. And also higher value deals with an increase in sales of new products and new applications on a comparable basis. We also invested additional resources in the IBM appliance, sales initiatives and lastly overall operating expenses were also impacted by the IBM outsourcing and the related transition and severance expenses.

Finally, regarding other income, we did experience a favorable change in the fair value of our interest rate swaps giving us a $2.9 million non-cash mark-to-market gain on the June 2008 quarter. This combined with approximately $800,000 reduction of foreign currency losses contributed positive income in the quarter.

Turning to slide 18, this slide highlights the relationship between backlog and current period sales as it relates to GAAP revenue conversion in the period, much like the March 2008 quarter we are seeing most of the GAAP revenue derived from backlog. We don't think that these ratios will stay at the 10 to 11% range for the rest of this year. We do expect to see more current period sales flow through to GAAP revenue in the second half of 2008 more like the 15 to 17% range as far as we can see based on sales pipeline right now. Again, that ratio can change depending on sales mix but based on our current forecast we expect that ratio will move up a few percentage points.

Turning to slide 19, this is a break out of non-recurring and recurring revenues. This is a historic view by revenue and by type looking back as far as 12 to 14 quarters. Really the key take away here is the growth in both services and monthly recurring fees, on an absolute basis there was a significant growth in both categories while the ILS have shrunk as we have actively moved away from pay up front deals. We clearly still have capacity deals which had a function of the growth in E-payments rather than any business tactics on our part and those capacity events will recur annually for some customers, biannually or more regularly for others however, capacity events will continue to provide with us sporadic increases or some degree of lumpiness essentially in our revenue stream and a non-recurring license fee revenue line.

Finally, turning to slide 20, that covers our guidance for 2008. We told you in May that we would be reforecasting and updating guidance here in the second quarter call. I'll start with the metrics that did not give us significant change compared to our original guidance and then circle back to cash. Generally we think our sales guidance from earlier this year is very close to where we see it now, a decrease of 2 to 5% is probably the only change based on the fact the banking community is slower to commit to capital outlays right now. Given that sales will be slightly lower than our visibility was in February. This will obviously have a trickle down impact on backlog and revenue so we have lowered the rev log guidance from $200 million to a range of 190 million to $195 million for the year. Cash taxes are in line with our original guidance, expecting that to run at $14 million for the year. Operating expenses we're expecting should grow between 8 and 10% over the 2007 calendar year. This represents a slight increase in expense over the 7 to 9% growth rate that we told you in February but that's primarily as a result of the IBM, IT outsourcing deal which we signed in March. That adds about $8 million to the calendar year 2008 operating expenses and even though we are running higher OpEx year-over-year especially in services area, we had planned for an expected rise in implementation expenses in our previous guidance given in February.

As our expenses are in line with our expectation, operating free cash flow has been primarily impacted by a reduction in cash receipts driven by several factors. One being a longer sales approval process amongst our customer base. That's resulting in a delayed timing of deal closure as evidenced by the March 2008 quarter sales, being approximately half what they were in the corresponding period in '07 and even though in June 2008 quarter is higher than the comparable period in '07, we are still behind compared to prior year on a year-to-date basis. Though we still expect to come in a few percentage points lower compared to our original guidance for the year, the timing of deal closure is expected to risk slippage of the actual cash receipts into 2009. Additionally, though the total economic value of deals is tracking substantially to plan, the actual sales mix is more heavily weighted towards new customers and new applications than we expected which is driving lower cash receipts pending reaching implementation milestones as as compared to the sale of add-on business and term extensions that have shorter time periods from deal closure to cash receipts.

So as an overview, generally speaking it was a good quarter in terms of sales deals closed and for the recognition of some large deals that have been lingering out in backlog for some time, and obviously go live is very important because it begins the recurring stream of revenue and cash from the commencement period and allows us to free up resources to focus on other implementation projects so we can move them closer to go live. And while the expense line is obviously tracking at the higher end of our range we continue to believe that the planned investment in services implementation is a good thing for the business given the sizeable number of projects we're working on in backlog. Also as you heard from Ron we have identified large areas of the business that can and should be reengineered and I think over the next few months we'll begin to provide clarity by region and functional area just how that restructuring will impact our organization. And that's it for our prepared remarks. Operator? We are ready to open the line for question and answers.

Thank you. (OPERATOR INSTRUCTIONS) Your first question come from the line of George Sutton with Craig-Hallum.

Hi, guys. You mentioned that implementation, getting the implementations out of backlog is the number one priority and you did mention some work you were doing with IBM to quicken the pace. I'm not real clear what specifically you're doing differently to try to accelerate that move out of backlog?

This is Phil. Let me answer it. The effort we have going with IBM is what we call the transformation, I can't think of the name of the actual -- payments transformation team. And what we're doing is going through an environment as I said in the beginning where 50% plus of our deals are now on IBM platforms both P and Z, and at this point more P than Z. And what we're doing is we kind of have our left foot in our past legacy of implementations and we have our right foot in these new EPS and multi sales kinds of deals. What we're trying to do is put together a highly coordinated process between platform provider and the software provider instead of two different vendors showing up at the same site getting work done and we're hoping and we're expecting for that to be a much smoother process. That's important, George, because in some of these very large deals having that kind of coordination is going to be crucial. It's going to be crucial aspect of it so it's a real, it's a planned deal.

The last, we've gone and we've done very very well from a share standpoint, we've built a very large backlog of deals that we have to get implemented. We're now at the point that we have good controls around where we are as a business and what not and it's time to get that historical backlog behind us and have the more forward-looking current product backlog moving forward. So I'd like most of what we're doing with IBM to be 8.2 going forward and with these previous releases 7.4 or 6.4, we would like to get those all behind us and be in an 8.2 environment.

You mentioned that that your deal cycle is slowing a little bit, and I'm curious when you're going to market with IBM and you've got a somewhat combined hardware/software package does that not help accelerate the sales process?

Well, I think two things have happened. One is there's been a definite slowdown. I would tell you that our pipeline is probably better than -- maybe we're better at measuring it and what not but our pipeline is probably better than it's been since I've been here, right? The getting that pipeline to closure is clearly taking longer instead of going to capital approval once, goes three times or whatever. We've not really seen any deals being pulled off the table except for some really kind of small, low, medium to small kinds of companies and in the 25 to 50% probability ranges in the pipeline. Not further up in the pipeline. In the very larger deals, I think the larger deals are having even more scrutiny, so even if we have more coordination with IBM there's more scrutiny going on in these deals and in the very large deals, stage one of doing a deal is doing a proof-of-concept and you don't really get the final deal until you'd combine Go and do your, you maybe chosen and what not and then you do this proof-of-concept kind of deal and then you move into the next step. That also slows the growth in actual backlog and the growth in the business by that extra, the very large deals having that extra step.

Your next question comes from Zack Schafran with Waddell & Reed.

Good morning, gentlemen. Two questions actually. I'm wondering what you can say about the amount of headcount that's now being dedicated to implementation generally and then specifically from IBM? And then second question, as you've talked about lengthening sales cycle, could you be more specific and maybe talk about if you see anything different from a competitive standpoint?

All right in terms of -- you want -- was your question, how many people do we have devoted to implementation?

Yes. Generally and then specifically, how many are IBM versus third party versus ACI?

Okay, well direct ACI is about 500 people. We're probably also borrowing from 75 to -- all our -- we've actually had a good R&D year, and we've actually had efficiencies in R&D but all of the efficiencies in R&D has been reinvested in getting these projects done so we're probably devoting closer to 600 of our people on average in terms of it and I think we spent $6 million in contractors in the last quarter. I think that was the right number. IBMs actual supply of people except on a gray hair basis at this point has been very little. We are working with them in terms of rebuilding the process but that's a go forward, streamline the process but they've actually put very few people in.

Will they be adding people over time?

I think what we're going to do is decide what IBM does in the joint installation with the Blue Stack and what we do, so I actually believe that we're going to be doing more that surrounds our payment domain and they're going to be doing more that surrounds their I/O or which is the interface between our payment domain and their actual physical environment, so I actually think that we'll be doing more of what we're experts at and they will start doing more of what they're experts at but they will do it in a joint versus a two -- co-primes versus two separate vendors.

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

Good morning this is actually Brett calling in for Nik. How are you all dog this morning?

Hi, Brett.

Couple quick questions. On the rationalizing or the cost reductions that you all talked a little bit about in your prepared remarks and in the release, can you give us some, I'm sure you're in the planning stages now but can you give us some more details on when we'll start seeing some of that show up in the expense lines and sort of where the focus is and where that expense might hit on which OpEx line?

Well, I'll let Scott and Ron answer that, or Ron and Scott. I will tell you that it's probably further along than you think. There's over 100, there's a lot of initiatives that are actually well defined and Ron has been a very busy guy the last five months. Why don't you--?

Sure. Yes, we had a management meet being two weeks ago and sort of culminated and five months of effort sort of made a bottoms up assessment of the business, looked where our growth opportunities are coming from, looking in areas where there's duplication, frankly we haven't done a great job in the past in some of the integration of our acquisitions, so it was just a step back approach to say how do we best align our resources for growth and also given that we have the IBM alliance, we're committed to doing business in different ways and we have different interactions to consider as we think about how we're going about our day-to-day. So having said that, we looked at the market opportunity, we looked at the implementation services, we looked at our five year sales forecast and projected where our business is going to come from and from that, we said okay, how do we start to move our resources around? That process will begin in September. Some of these events will happen fairly quickly. Others have been identified but they will take another 6 to 12 months to evolve. So, we're pretty excited about where we're at as a management team. Again there's a lot of people at ACI involved with this bottoms up approach, but we need to focus to execute certainly.

And this is Scott. From a geography on the P&L in terms of where the cost reductions are going to come from and where the expense is going to be charged it's really broad based plan so you're going to see expenses really across all of the expense categories being reduced on a go forward basis. To some degree. We haven't quite quantified what that is per expense line item but we will see, it is a broad based restructuring plan.

So on that it will be both OpEx and in cost of sales or mostly in OpEx?

You'll see it across all cost of sales lines as well as the operating expense lines but again, to what extent the magnitude on each line we're not at this point prepared to quantify that but we will see both cash and GAAP expenditure on the personnel displacement and then we'll also see benefits on each line prospectively starting as early as the Q4 of this year.

Okay. And my second question is on the two folks who are leaving, one in August and one in February, insofar as this was planned, did we know about this as we were thinking about the analyst day and things like that? When was this planning sort of started and can you give us a sense of that timeline?

Ask the question again, I'll tell you whether I can answer it or not.

Just the timeline on when we knew about when the two folks were leaving?

I don't think I would say anything other than we've been timely. I mean, we have not -- you're talking about us communicating with you?

Yes.

I don't think we're ready to communicate it until the very recent time period.

Okay. That's what I needed. Thanks.

Your next question comes from the line of Tom McCrohan with Janney Montgomery Scott.

The sequential increase in 60 month backlog, what portion of that do you think is attributable to the IBM alliance?

I don't think I have that information. You're talking about the 60 month backlog increase from March to June?

Yes, outside of just adding global comments on IBM, just trying to look for a metric that we can use to track the progress of success, joint selling with IBM.

Well, right now, we're not, at least in these early stages aren't breaking out our backlog into those IBM and non-IBM, frankly, especially in these early days, as the activity increases over time, maybe that's something we'll look at but right now we're not prepared to do that.

Okay, fair enough and Scott, in your comments on kind of the cash flow dynamics because I know there's a lot of moving parts in there and you did an estimation about how more cash pent up from the implementation but can you give us any insight into the moving parts going into the second half and what would contribute to improvements in cash flow and I'm particularly looking at the deferred revenue line for the six-month, when your cash flow statement was really down dramatically from the six-month period last year, so I think, if you can just talk through how you see the dynamics in cash flow improving the second half with particular emphasis on what moving parts related to the deferred revenue.

Right. Well, obviously the driver of deferred revenue in the June quarter of this year was really pulling out of deferred revenue some of the large projects, faster pay, MasterCard and the Mid East switch pulling those out of deferred revenue and bringing those into GAAP revenue in the quarter. For the second half of the year, obviously the deferred revenue is going to be driven by our sales forecast and our ability to hit that. Obviously we're still shooting for 420 million to $430 million or 430 million to $440 million in sales so obviously closing those deals and the cash events that correspond with closing those deals as well as the continuing implementation in hitting milestones, we should see increases in the deferred revenue but at the same time, it's a combination of closed deals and implementations but we're also expecting to go live with other projects, so we're going to have ebbs and flows in that deferred revenue as we go throughout the year.

Is it fair to assume that when you do sell a large deal that this has implementation milestones that ACI still receives a portion of cash up front? Or is there any change going on in how you kind of negotiate those deals where you don't collect any money up front until we get milestones one, two, three and then you pay us?

No. Generally speaking upon signing a deal and on hitting the milestones those are going to be cash events, but the magnitude of those are going to be depending on historically, we may have significantly discounted a deal to get the cash up front but we're looking, we won't enter into that sort of contract if it's disadvantageous to us from an economic perspective.

This is Phil. That having been said the two largest deals we closed in this quarter had very very little cash on signing and almost all the cash was expended on milestones.

Okay, so that explains some of it. Thank you. And my last question is for Ron. Ron, on slide 11, you introduced a new slide and it had a lot of information on it and I was wondering if you could just give us the primary takeaways from that slide including a definition for total economic value of sales? And that's all I have, thanks.

Yes, I think slide 11 was a slide that Tamar was asked to provide from a prior analyst call showing sort of a timeline of how revenues were evolving, and I think the take away here and as it may relate to some of the cash questions is on term extensions and how that business is evolving. If you look from a March 2007 term extension the number of $43 million to 6/30/2008 of $15 million, you see that as we take in less term extensions that's going to have more of a negative impact on cash, as our mix of sales is going to new apps and new accounts.

And I think an important point to understand here, in terms of understanding the terms of cash, especially the Americas is doing a very good job in terms of renewing the business at reasonable margins, and what's happening is that that's extending where we tended to renew an account at 48 on average, the 48th month in the 60 month contract or whatever or even in the 40th month, these contracts now are running much later. They're coming much closer to closure.

So that represents a deferral with a margin opportunity versus a sale now with a lower margin opportunity and I would take that trade off from a business standpoint and the fact that new applications and new accounts are continuing to move strong and then the renewal of our business are being paid for more volume for the business that we're doing is kind of going through this metamorphosis that we said it was. If I were a betting person, I would have thought that without the economic profit the banks were going through we'd probably have less pushback in terms of getting our fair payment. Right now with the budget pressure they're having and whatnot that's being extended. That's not lost business. That's delayed business but it's both delayed cash as well as delayed sales. From a backlog perspective, it still keeps sitting there in the 60 month backlog as a renewal account. So that's a dynamic. It's mostly in the US.

In terms of the deals they're closing, they are succeeding and I think it's the right strategy and continue to support them, I continue to support them on that and what page 11 does is it lets you see on a granular basis how the sales are coming across and then as well as by the different types of things we sell so you can kind of make 11 and 12 make sense of each other, a little bit. And then your question about economic value is that we just make sure that we value sales the same way we value backlog so that there's no translation from when it goes from sales into backlog.

Your next question comes from the line of John Kraft with D.A. Davidson.

Good morning. First question for Richard. It sounds like you're saying around until February. Are you going to be full-time or act as a consultant?

Probably full time and helping Phil and anyone else that wants me to help so it will be full time.

Okay. And then Phil, earlier in your prepared comments you mentioned you're having some success in the smaller institutions sales and the smaller institutions here and it doesn't sound like that's a function or an effect of the IBM relationship. Are there trends to see here? Is that simply a function of the longer sales cycle in the larger banks and is that primarily domestic?

It is not primarily domestic. It's primarily EMEA, and I think the reason we're seeing small sales or smaller sale, a larger number of smaller sales that I think it's a less arduous process for them. It's more the developing world both in, whether it's the Middle East or whether it's in Asia Pacific and whatnot. They're very actively trying to get into the global business systems and bill payment systems and their deals are just coming to closure faster. We have, it's funny, we're booking more smaller deals as a percent but we have more mega deals in our pipeline than we've ever had before, and those mega deals are just going to take longer to get -- to work their way through the system.

Okay, that's helpful and then Scott, the sales and marketing expense line was higher certainly sequentially. Were there any one time items at client conferences and also can you talk about the timing of commission pay outs for say Sterling and Sermepa?

Well, I would say it's not really not much of an effect in terms of marketing events. It's really personnel and related cost, higher headcount to work on the IBM alliance sales initiatives and then from a marketing commission expense it's just really higher value deal and higher sales volume compared to last year. So the pay out on those particular deals I couldn't tell you off hand in terms of their timing, but obviously depending on when they close in the quarter and depending on there's some lag period between the sales close date and the commission payment date, but it does vary by customer and it depends on the marketing the commission plan, so I don't have that information on those particular dealings. Okay, thanks, that's all I have, guys.

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

Thank you. I had a couple more questions on IBM. In terms of the milestones that you've said with IBM, are you still hitting all those? Are you still on track to getting the -- more of the incentive payments from IBM?

From a sales standpoint, we met or slightly exceeded our first half goals, so as it relates to our enablement projects, we told you we made 8.2. We are actually slightly delayed as it relates to what we initially thought we were going to do. Some of that has to do with the amount of time it took for planning, saying this is what we think we're going to do and then once we finalized it. So that's the little bit delayed and Gil, we are definitely on schedule in terms of our earning whatever additional dollars there are out there.

And the sales that you're generating, to the extent they're also new sales for IBM, are you also collecting commissions from IBM for the boxes that they sell?

Well, we've redacted an awful lot of that contract, but we are, the whole idea is for us to be incented is that it incents us every time we do joint deals that we do joint deals together, and of course the way, none of that shows up in GAAP and we've been very clear about the cash that's come through and the reason it doesn't show up in GAAP I'll defer to Scott but that has to do with the equity accounting and what not. Scott?

Right and as we've talked about in the past there's obviously the three components of the alliance deal, the one being the warrants that we granted, the technical development spending and also incentives on sales, but from an accounting model perspective really any incremental dollars that we would receive as a part of the incentives on sales would all be, it's all deferred until we reach the end of the development period, so there's no P&L recognition of any of that until we're completed with the technical development milestones.

So you wouldn't even get those incentives for sales until you're done developing the products?

On the sales? Well, it would depend. It depends on the sales efforts between now and when we get completed with the technical development projects. So obviously there are different triggers throughout the agreement based on when we hit certain levels of sales.

But Gil to answer your question, we get the cash and we get the cash up front. That's why people said is that real cash, and I said it's absolutely positively real cash, right? We have to earn every penny of that cash, so that had to do with that. As it relates to GAAP, it doesn't show up in GAAP until we go through this completion process that Scott just was explaining, but as it relates to cash, we have been getting it and we will be getting it. We just can't call it GAAP revenue until we hit that completion point and that's why I get a little agitated when people say well the IBM cash is not real cash. It is absolutely, positively real cash and we spent a king's ransom in terms of investing behind this and whatnot so from a cash standpoint that is real cash payments and to us it's ours. It's our money, and that's why that first large chunk of it is non-refundable.

Right, and what you can watch and we disclosed this in our Q is the amount of cash that we received in advance of it becoming essentially non-refundable. A portion of what we received is still refundable and that's subject to hitting milestones whether it's technical development or sales milestones so as that non-refundable portion grows, you'll see that's indicative of us hitting various milestones within the agreement so for the most part we have received the cash in advance of it entirely being non-refundable in terms of the different deliverables under the alliance agreement.

Got it. So on that topic, of your old cash operating free cash flow guidance of 65, I think we previously talked about the fact that about $15 million of that, you were counting was from IBM. Of the new 45 million to $50 million guidance how much of that is IBM cash?

I don't think at this point we're revising or changing that original $15 million. I don't think anything has really changed that would drive that number up or down from the original guidance we gave.

Got it. One last question. In terms of de-emphasizing some of your products, which of the products are the ones you're going to de-emphasize as you go through a restructuring?

We're in the process of making those decisions right now. This is definitely a scenario whereas Phil pointed to, we're looking to increase investments in wholesale and fraud, and to do that, this Company hasn't really sunset products in the past in an aggressive way, so there's an opportunity that sort of reallocates some resources to products that we don't, we're not forecasting to have huge growth in or we may move some of our development resources to a higher growth area as we look for third party alternatives to help beef ourselves up so these are all of the dynamics that during the month of September we'll be finalizing.

But Gil, we have a myriad of products that we've purchased or developed in the past where we've "sunset" them we've never really brought them to end of life or made them timely material for the amount of time and materials kind of basis, and I'm not going to tell you point and verse what they are, but it's fairly obvious that it's not EPS and it's not classic, right? It's a bunch, so we're talking about not a generation ago or this generation. We're talking about two, three, four, five generations or miscellaneous acquired kinds and there is certain of our tools that just don't make sense anymore, whatsoever too, so there's actually some on the tool side also.

Actually let me ask one more question. The faster payment revenue, is that going, is there any of that in the third quarter or fourth or was that all in the second quarter?

We are going to have some faster pay revenue still going forward. There's one customer that still has to reach their Phase I go live and that will occur in the second quarter and then we have other we can't have -- as we go into Phase II of faster pay, there will be continuing revenue streams amongst all the banks that were in the faster pay so we do have some continuing revenue coming through.

And then they are going to go into maintenance, we'll start getting maintenance and those revenues, we will on a cash side we didn't get $5 million, we didn't bill, that's the $5 million you talked and so there's actually $5 million in cash that we were owed half of which has been paid since the quarter closed. And on span, we haven't gotten all the money from spot, those projects haven't all closed out in Saudi Arabia either. There was 12 banks involved in that. They haven't all closed out yet either. They aren't all done yet either so there will be third quarter for those also.

Thank you.

Your next question comes from the line of Michael Christodolou with Inwood Capital.

A couple of sets of questions. First, I noticed there was no stock buyback in the quarter and I'm curious if you were blocked out at all due to either the restructuring or the management departures and can you remind us what's left on the authorization?

We generally -- we did not have, this is Scott. We did not have any formal or official blackout. We generally look at the cash buyback as still a very good use of cash when we're not investing in the business, and obviously this quarter we had a significant investment in the services implementations and obviously as we look forward, we're going to have a near term use of cash involved with the restructuring efforts, so that's about all we can say on that. We still have, I don't have the dollar amount handy in terms of the amount that's left on the buyback. We can get back to you with that. $86 million.

86 okay. And Phil, you've used the phrase pigs passing through the python with respect to certain projects and clearly in this quarter a few passed through and I'm wondering though if you could give us any further thoughts I guess just on the business over the next three to nine quarters. You'd always been talking about a three to five quarter transition period converting the deferred revenue to sales and revenues and it seems like a little bit more of a delay here because of industry dynamics and a little bit more management change and another restructuring and I saw that you even joined another Board the other day and I'm just kind of curious about where you see the next several quarters and how you're spending your time?

Well, let me answer. We said second half, we've always said that we had a whole series of steps and we were going to announce those steps as we moved along that got us the second half of '09 and I am with these changes I am more comfortable, not less comfortable as it relates to the second half of '09 and actually by second half '09, I expect that our GAAP and our non-GAAP kind of performance will start merging pretty quickly, we'll take any abnormalities out of the business.

In terms of the pig going through the python, I think we now give enough data that you can see pretty clearly that it's kind of, we're kind of in the stomach and small intestines at this point versus the throat, the throat and stomach, I hate to be so graphic but what we're watching now is we're watching the beginning of stabilization we went up to almost 150 in deferred revenue, first quarter we went up about 12 million in deferred, second quarter we came back so we're now at the point that we have about the same deferred revenue that we came into the year with. We've made the decision that we have to speed up, not keep at the same pace the amount that we have coming out of the end. That's not only in terms of the capturing the revenues, the service revenues and what not that you see that have grown and that's another way of looking at it is the way you look at the growth in service revenues versus our other revenues, that's in effect all these these new projects working their way through. That's the pig so to speak because what we really want is the long term maintenance and the last values that come from these counts so we feel pretty good about it. We knew we had to get into a much more disciplined set of processes and quite honestly that's why I hired Ron almost a half a year ago and instead of having him go dive into the nearest fire or whatever, I said gee, we really got to sit back and we got to understand what does done or what does finished look like and how do we go and line up the pins in a way that we can throw strikes? So I actually feel very good about that.

In terms of my outside activities, I did resign from two Boards and go on to one Board though. That's correct, so you don't have to worry about me spending my 80, 90 hours a week here. I'm still doing that. That's not an issue. No, we've been doing rope a dope, we went through this crazy period with the stock and material weaknesses. We're not in rope a dope anymore. We're in the best shape in terms of really making this into a third millennium kind of Company that we've been in two years, except this is where the real ground fighting takes place. This is where there's going to be blood and casualties and real transformation. One of the things we did right or wrong, we added a couple hundred people over the last -- almost 300 people in terms of Romania, India, what not, we went and started this globalization so we could actually start rebalancing the Corporation. So we got thrown a little bit of a left hook in terms of our customer base of having to go through a tough economic period.

If you look at, we gave enough information on page 11 you could see that it isn't coming from the marketplace not supplying incremental business. It's coming from a slowdown and renewing the existing business we have. We still believe that our attrition rates are less than 3% on a name basis and actually it's negative attrition on a volume basis, so we're on plan. We're on plan and sober to the marketplace realities around us. We're on strategic plan.

Thank you. Your final question is a follow-up from Nik Fisken with Stephens, Inc.

Good morning. It's Nik. As you guys dramatically increase your professional services rate in sunset products, kind of to Zack's question how are your competitors trying to capitalize on it?

Let's put it this way. We had the unfortunate behavior of charging certain customers less than it cost us to supply them services. This was largely in the United States, and we brought in a General Manager and we put together an SG&A team that was able to make it really clear that this was a behavior that had to change. We are still in the situation in the US that we could actually probably do more services if we had more trained experts and payments than we do right now or if we didn't need our people for other key installations that are going on around the world. I don't believe that move was anything but a move to sanity. We certainly have not gone to some egregious rate structure that allows people to drive tanks underneath us. I think we've done quite the opposite. I think we've gotten ourselves to a rational environment.

Okay, so how do the competitors kind of capitalize on sunsetting products?

Well, I'm sure there are going to be some people that are going to try to capitalize. We have a competitor that kind of, goes with our Latin American folks, we have customers that are showing up or competitors that are showing up with all kind of deals and I think the proof is in the pudding when it comes to medium to large banks, we have a predominant dominating share in terms of that business. People can go and say well gee, we lost 15 Window based deals to some competitor. Well, we're going to continue to lose Windows-based deals because we don't do Windows-based kind of product, so if there's a mom and pop needs for a low value off kind of structure, we're going to lose out to mom and pop or Windows-based kinds of environments. We've decided not to play in that space because it's hard to sell Rolex''s and Timex's because you'll end up selling your Timex and giving the Rolex for Timex kind of prices, and we have enough other opportunities not to do that. So no, I'm not -- that's not a concern.

My biggest concern is to take this very valuable customer base we have that has a large inventory of installations that are waiting for us to complete and get those completed. I mean quite honestly if things speed up a little bit and we were to get every sale we wanted this year and it all came in the fourth quarter, that would be the absolute best possible thing for this Company because this Company really needs to have a more manageable backlog and I would just -- we wouldn't start working those installations any sooner than if we did the sale in the second or third quarter, so and then as it relates to these renewal guys I'm not worried about these big customers. I'm not going to talk about who they are but they're very large customers and we are not going to be jerks and they aren't going to be jerks but we aren't going to for sake of a quarter go and give 10 to 20% discount to get some revenue and cash, so I'm actually very -- do I like the subprime? No. Do I like the fact our customer base is going through the problems they are? No I don't. Am I conformable with our role? Yes, I'm very comfortable with our role. Am I worried about the competition? Not in the space we compete in. I'm not worried. On the wholesale side we have very good competitors and in the retail side we dominate. On the fraud side we have good competitors and we do well. On the wholesale side there are two or three good competitor s and we get our just deserts and they get their just deserts. We're probably 5 to 10 times the amount of wholesale deals we're getting two to three years ago. So should we be up 10 to 20? I don't know. That might be asking too much for ourselves and the marketplace. I'm comfortable with where we're going. We absolutely proved we can grow the business and now we have to prove we can effectively implement and maintain it. Does that answer your question? I guess so.

Thank you for joining us today. I think we've completed our call unless the operate or has further questions. Operator?

(OPERATOR INSTRUCTIONS) There are no questions at this time.

Thank you for joining us.

This concludes today's conference call. You may now disconnect.