ACI Worldwide Inc (ACIW) 2008 Q3 法說會逐字稿

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the September 30, 2008 earnings conference call. All lines is placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS). Ms. Gerber, you may begin your conference.

Thank you, Christie. Good morning, everybody and welcome to our call. I would like to let you know that today we will have three management speakers, Ron Totaro, Scott Behrens and Phil Heasley. All of our customary, Safe Harbor and forward-looking statement language does apply to this call. For full on the Safe Harbor statement, please refer to page two of our PowerPoint presentation, which is available via our web site or via our SEC filing this morning. I will now turn over this call to Ron. Ron, you may begin.

Good morning. Thanks for joining us.

As you can see from the financials that we reported today, we had a good quarter, as presented by all of our reporting metrics which came in expected or better than anticipated across categories. I would like to open up my remarks with a general discussion on the markets, which is on most of your minds now a days especially given what has happened in the financial markets since we last spoke in August. ACI expects our 2008 sales to be in line with the expectations we shared with you in August. A possible exception that could occur as a result of the market unrest is the timing of some of our renewals might move out into Q1 as management teams are distracted by the integrations and mergers occurring at the large US and European banks. I know a lot of you are concerned that the banking consolidated could cost us deals. What we are seeing today in the market place is actual contrary to that concern. Customer M&A activity is not a hindrance in signing new deals. For instance, one large acquired banking customer, is still signing a Q4 transaction with ACI as all procurement processes are moving along on a business as usual track until the two companies are merged. We are writing contracts with the pending change and control in mind but the acquiring company has assured its new subsidiary that it has the power to keep moving forward on its software procurement.

A bigger item for ACI than M&A, has been the sensitivity regarding term renewals and extensions for large customers who have been given lower [diseconomic] pricing with pay up front or PUF deals in the past as we've explained. We are certainly aware that the pricing increase is a magnitude that's surprising to some of these clients and there's an education process going on regarding what our software should cost as it relates to many benchmarks we have in the market place today. We're not receiving any indications that customers will cancel over this issue. We are simply moving forward in a consistent and steady way, so that the customer understands the framework for the pricing increases that are now underway. This process continues with large term renewals and some of them are very close to their actual expiration dates. We are not worried about the renewals as they would have already notified us if they were moving off the platform but we are working out the pricing details and timing with some of these deals. Finally, a last point on the M&A situation is that we are hearing from our sales force that the new corporate combinations that we see in the financial market place are posing real opportunities for platform improvements, and banks that have been operating in a do-it-yourself model for decades. We believe there might be a sales opportunity there. We're definitely seeing new deals in all geographies. So while the credit side of financial markets is certainly sobering, the payment side of the banks represents an exciting opportunity for us.

Moving to slide six, this highlights some of the merger activity which has been going on over the past two months in the US and European markets. We have highlights ACI Bank customers which are impacted and what product solutions they are currently using from us. In nearly all cases, ACI customers are buying other ACI customers. The one exception being Santander, and Sovereign Bank in the US. What this implies is our large banking customers are growing even bigger. While we will have some ILF contraction from these customers over time, the reduction is mitigated by the capacity needs which will grow enormously as they integrate the two institutions' transaction volume. The capacity volume fees are mostly booked in ILF with some falling into MLF and so there will be a offsetting increment for revenue falling the loss of multi system licenses.

Slide seven follows up on some of the invested questions and concerns during the September October time frame given what was happening in the macro economic environment, we were comparing our 2008 year-to-date revenues by industry category to full year 2007 revenue by industry category. Financial Services Institutions as a percentage of revenue has stayed pretty constant at just about--- just under 70% of all ACI revenues. So while we are heavily exposed to the credit lending institutions we also have a large and growing business with processors, credit card agencies, switches, and retailers, which constitute nearly one-third of our overall business.

Moving to slide eight, our sales results this quarter were focused more on the add-on and term renewal areas of our business, propelling us to an overall 17% year-over-year growth rate. This is also a different type of sales result in Q2 where we booked more new accounts and applications and very few term extensions. Now that this trend has clearly been reversed, a notable change this quarter was two customers signed for Base24-plastic to Base24- EPS migration, and at least one of these cases, the customer proactively asked us to be upgraded to our newer system. We told you in Q2, we were not seeing the level of capacity deals that we expected and we were unsure whether it was driven by the economic downturn. This quarter, we finally did see some of these sizable capacity events occur, and this is reflected in the sales concentration among our top five customers, who accounted for nearly a quarter of all sales in the period. We also sold an enterprise banker system to an IBM customer, with whom we did not formally have a wholesale relationship in the US market. It was good to see more traction to banking area choosing IBM SystemZ. We did invest heavily in SystemZ optimization this year and it was good to have a large sale validation of our wholesale system in an IBM hardware environment. One final point on this slide, we are not seeing any customer cancellations of any note.

Slide nine is another cut of the sales by geographic channel. This slide is pretty self-explanatory. You are seeing a big rise in EMEA sales driven by the last faster payments banking institutions going live, as well as by a significant continental European customer moving out of backlog into a live status. Asia dropped compared to last year's quarter but that was driven by one capacity deal in 2007 which did not recur in 2008.

Slide 10 is our year-over-year look at sales by category mix, and quarterly performance compared to last calendar year. We were running a bit behind last year's numbers driven by a much slower first half in 2008 as compared to 2007. Remember that we have consistently told you during the calendar year that we were seeing longer deal cycles in early 2008 with our banking customers. Their cycles are pretty much the same right now, as they were earlier this year and the time period to deal closing has definitely lengthened over 2007, even while we are seeing more and more customer opportunities in all of our GOs.

Slide 11 is a recap with our IBM Alliance. We are very pleased with the IBM relationship and is proceeding as we expected with 2008 sales tracking nicely to our plan. In September, we announced our joint IBM ACI development plan to further invest in ACI wholesale platforms and an IBM SystemZ environment at the SIBOS Conference in Vienna. And we think that the wholesale deal we signed in the US with the European bank is just the start of this area.

Product solutions and product investments are obviously the foundation of our marketing and sales efforts. Slide 12 takes you through our recent and latest activities of product solution investment. I think our financials demonstrate that we are spending a lot more money this year on product management than we did in the preceding years. On the retail payment side, we think we are helped by the fact that we are investing more and more in IBM enablement at a time when asset gathering has become a core focus for our financial customers. Any software that aids in the process of moving money around is a highly relevant tool in these economic times. I already touched on our SIBOS announcement in wholesale but it is definitely coming through clearly to us that large global banking customers want more functionality and are more focused on liquidity, wirer and treasury operations than ever before. Given the macro economic situation we are hearing from more potential customers on a pro active basis about risk management systems. These customers are concerned about fraud in the weakening economic climate and they want solutions to help mitigate this pending risk. We are also busy looking at our back office operations and strategy to insure that our solution delivery and our product functionality are running as profitably as they should.

My next few slides examine the business channels by geography and provide some representative names and product transactions that occurred during the their quarter. If you will join me on slide 13, I am beginning in the Americas where we saw a large rise in revenues in the quarter of 18%. Most of our large sales in the quarter were renewals of BASE24 or wholesale solutions. So these were immediate revenue recognition events as well. We have split the US sales force in a group dedicated to renewals and relationship management, and another segment focused on new sales, and we are pleased with the early results of this organizational realignment. We are also getting good traction in the professional services area, and that should really help the business margins as it becomes a more sizable component of our business. As a mentioned in the prior slide, we are seeing more demand for payment fraud detection software as the economy weakens. Finally, Latin American Banks continue to reinvest and grow. And we have renewed a large customer in Latin America in this quarter.

EMEA, on slide 14 had 47% revenue growth over an admittedly soft Q3 last year. While not -- while not as term extension dependency as the Americas business was in Q3, we did see some healthy revenue from capacity and renewal. Interestingly, about half of our largest deals occurred in the new account, new application area. In general, the pipeline is already quite strong in the quarter. We really see a ramp in deal signings in the early half of December so it was good to have already contracted over $10 million this early in the quarter.

Asia revenue was flat over the prior year. We saw capacity deals in Korea, Japan and India, but there are good new deals in Malaysia and Singapore. And many global markets we had advantage from the dollar depreciation but has obviously hurt us on the Australian dollar denominated contracts. However, we do have a pretty good sized head count in Australia, so to some extense the Aussie dollar depreciation was offset by our Australia dollar expense base down there. I'm not hearing any concerns on collections or potential spending reductions in Asia from my team out there. It's very active and very busy part of the world, and banks overall have been less impacted as they have been in the -- in the US from the asset crisis that we are experiencing.

My final two slides before turning the deck over to Scott are really update slides to you, on what we have been doing in our restructuring, and our plans to improve and enhance the profitability, speed and efficiency of our service delivery capabilities. I told you during the second quarter call that I just completed an exercise to identify cost savings and determine areas for additional reinvestment. On slide 16, I summarized for you what has been happening with our restructuring plan to date. We completed the Americas restructuring during the third quarter, and that will account for approximately $25 million in annualized cost savings. You should see about $5 million of that in our Q4 expense numbers, although we obviously incurred some one-time severance costs as well. During the next two months we will finalize the head count reductions in our overseas locations and the first half of next year will bring the facilities rationalizations. Once we have completed the head count reductions this quarter we planning to reinvest in our product management and particularly in our services leadership, to help drive the changes we seek to make. We will continue to seek out new profitability and efficiency improvements throughout 2009. We also told you in the second quarter call that we thought that there would be a one-time cash expenditure of $15 million to $25 million. The good news is we have refined the analysis and estimate that the one-time cost to ACI for restructuring in 2008/2009 will run $10 million to $15 million. And so that's on the low end ever our expectation and guidance from the last call.

In the area of services leadership and delivery, I worked hard with the services, development and geographic organizations to identify processes to improve our installation time frame and profitability. If you move to the slide 17, I have summarized the work we are doing there in terms of our better organizational alignment, our lower cost development centers, the global controls processes and governance tools we put in place and insuring new deal profitability and capacity assessment programs. We are completing the move of our functional people into more rational reporting relationships to drive accountability and we definitely improved the cost of our engineering function over the last year as we invested in engineers in Romania and in India. We have set the stage for our services improvement program, and I think we will see greater efficiency and faster delivery in our sales and implementation pipeline as a result of this exercise.

So in summary, the business is still exciting. We have a lot of opportunity despite and in some cases driven by the external market place events. With the internal improvement programs we are establishing a better foundation for ACI, and how we prioritize and take advantage of our market opportunities, streamline critical processes for key delivery functions while continue to rationalize and reinvest in our solution steps and bringing in new leadership talent that compliments our unparalleled global domain knowledge of payments. So at this time, I will turn it over to Scott now, to discuss our financials during the quarter and then I will be available with the Members of the Senior Management team for Q&A. Thanks.

Thanks, Ron and good morning, everyone. Turning now to slide 19, I will spend a few minutes going through the key financial highlights from the quarter, starting with revenue. We had a strong revenue -- we had strong revenue growth on a comparable basis, approximately 28% over the Q3 of last year and consistently strong on a sequential basis with our strong revenue performance in the June quarter of 2008. On a comparable basis revenue growth included approximately a $12 million increase in software license fee revenue. This growth driven pretty evenly among customer projects moving out of backlog, term renewals being signed and capacity increases from existing customers. As Ron said, we haven't seen a lot of capacity deals here today, so this demand was obviously building up in our customer base. We also saw more than $7 million increase in recurring revenue, again, that being our monthly license fees, maintenance fees and ASP processing portion of our services revenue. Not specifically mentioned here but we also saw $4 million of additional revenue from go-live events and additional services provided in support of the faster pay mandate in the UK. Again, both of those banks went live in the June quarter, we did have one carry over and go-live in the September quarter. Overall, another strong revenue quarter.

Sales grew very nicely on a comparative basis with Q3 2007 and on a sequential basis with Q2, 2008. Since Ron has already discussed sales with you quite a bit, I won't spend too much time with you here. Our OFCF while still negative was significantly improved over the second quarter, an improvement of almost $11 million, and came in above our budgeted expectations. The September quarter saw the go-live of a number of customer implementations for which cash had already been received, thus really driving GAAP revenue with no correlating cash receipts. We do see this as a positive, as we continue to see movement and projects out of backlog and into go-live status, where we will begin to see the benefits of both the cash and the revenue stream from the maintenance phase of the contracts. The 12-month backlog decreased on a comparative basis, versus prior year and sequential basis versus the June quarter. Again, this was driven by customer projects moving out of backlog and into GAAP revenue, as well as the impact of foreign currency, due to the strengthening of the US dollar against most of the major foreign currencies.

Turning now to slide 20, deferred revenue declined, as we completed the final installations of the faster pay customer in the UK and we gained acceptance on a number of other large backlog deals, particularly in our EMEA region. While the operating expenses have risen year-over-year, much of that expense growth was driven by one-time item such as the IBM outsourcing transition expenses that we have been talking about this year in the related severance costs which combine for $4.9 million of expense in the quarter. In addition, we had a little over $3 million of severance related to the announced restructuring initiatives and we also had a little bit higher distributor commissions and that's just primarily driven around revenue mix. With respect to nonoperating income and expenses, the September quarter benefited from foreign exchange gains partially offset by losses on our interest rate swap.

And one last highlight to note is that in spite of the financial market upheaval our build accounts receivable showed improvement in the quarter. Build receivables were down nearly $6 million on a sequential basis compared to June 2008. Also during the quarter, we were able to recover a portion of our previously reserved bad debt. So at this point, we are not seeing any deterioration in the quality of our accounts receivable, as a result of macro economic conditions.

Turning now to slide 21, 21 shows that approximately $20 million of our current quarter sales achieved GAAP revenue recognition in the quarter, rather than going to backlog. That represents a higher sales to revenue conversion ratio than we have seen in recent quarters. And this is a direct reflection of more term renewals and add-on capacity business this quarter that Ron referred to earlier. So consequentially we had a lot of sales, which were immediately booked into revenue as there were no recognition delays related to installations.

Turning to my last slide, 22, deals with guidance. We have not changed any of our guidance metrics for the year, compared to what we provided in August. We think that OFCF, sales, and RevLog are basically unchanged. We feel pretty good about sales of $430 million to $440 million for the year. I think Ron did a good job of explaining why the market capitalization works to our advantage. I will just echo that we are seeing interesting transactions with significantly sized US banks. There could be a number of smaller renewal deals that amount to $10 million to $20 million that might slip into Q1, 2009. We are not pushing to close these deals precipitously if the economics don't work for us. With that said, the only metric that might move around significantly would be RevLog, but any movements there are due really entirely to currency translation. In August when we announced $190 million to $195 million RevLog range for the year, we were using a June 30, FX rate. Looking at the same numbers in the context of September 30, FX rates, we had approximately $40 million in FX related deterioration on our $1.4 billion of backlog. That represents approximately 2 to 3% of the value of our five-year backlog. And given the difficulties in predicting the near-term movements in dollar/Euro or dollar/pound exchange rates primarily between now and year end, we are sticking with our $190 million to $195 million guidance range, with the caveat that it can fluctuate due to the FX impact on backlog. Given how our business works, the backlog, obviously is a big piece of the RevLog indicator.

But all told, we are pretty pleased with what we are seeing with our business right now. With that, I'm going to let Phil close out with some comments on slide 23, as they relate to ACI in the market place.

Good morning, everybody. I have very few things I have to say before we move into questions. One is I would say in terms of everything you have heard from Ron and Scott, that we are still very committed to our strategic plan, and we think our strategic plan is on course. Our belief that ACI is -- our software is largely a non-discretionary purchase for bank and actually very strategic to cost efficiencies and feature functions seems to be bearing itself out. I will reiterate our pleasure in our working relationship with IBM at this point, and with the combination of working with IBM and the M&A activity motivated by financial markets and governments, will tells us that as we go into next year we have to be agile and sensitive to the integration needs of our very large customers as part of our -- as part of our selling plan, but we still see -- we still see growth in pipeline and we're beginning to see our deferred revenues start moving back towards a more reasonable range so that we will have a combination of both working our backlog and working the market place and the new addition of working with our customers that have new and somewhat unexpected integration needs.

Our attrition rate, we told you, was at historic lows coming into this. There's been no increase to our attrition rates, which are -- which are very good. We still see second half of 2009, the point that we get through all the negatives of this -- these previous-- this PUF misbehavior or whatever you want to call it we have actually been very gratified with the dialogues and the exchange that we had with our key and strategic customers in this regard. They understand us as a strategic partner and they understand the win/win need of our relationship, and so I feel very good about that. And the sales opportunities around the globe remain very good. If there's any change, it's that mega banks are now thinking more like individual institutions than companies with 15 or 12 parts. So the size of projects and the complexity of projects is actually increasing and not decreasing. We have already told you the sales cycle has elongated. We are not saying that as an excuse because last quarter we told you that it elongated and it did. Now we are beginning to see the sunshine side of that elongated process. We just believe that we are on schedule and we are on pace for the recovery that we have laid out in our strategic plan. With that, I'll go to questions.

(OPERATOR INSTRUCTIONS) We will pause to compile the roster. Your first question comes from the line of George Sutton with Craig-Hallum.

Phil, I have a question. As you realign your cost structure fairly aggressively over the last couple of quarters and, frankly, couple of years, you now have a lot more delivery capabilities outside of the US relative to before. Can you just lay out for us what the cost to deliver a new system to a new customer would be today relative to where it it would be two years ago and how that might impact your overall income statement long-term?

Yes, I can. And it's -- on an apples to apples basis, George, I've got to make a couple statements. One is the size deals that we are doing and because change in the nature of the banking industry, the deals are getting bigger and bigger, versus smaller and smaller. So therefore it's not totally -- it's not totally apples to apples, but previous 2006 and earlier, we were basically dependent on the United States and Great Britain as our major resourcing locations. We had some support in Australia and the Netherlands on a product basis, but those were our two main support centers. We now have close to 150 engineers in Timisoara, Romania, and they are almost 100% dedicated to EPS. We have about 1.5 times that amount in Bangalore, India, and they are pretty much 100% devoted to the wholesale side of our business. So that can explain it a little bit that way. And then 70% -- no, over 2/3 of our revenues are actually overseas.

So part of what we did is we brought our business extensively overseas without right balancing our cost infrastructure behind it it. And what this -- and you win your deals market by market, based on the -- , on the competitive nature of those market places. And the reason we had to adjust was, southern Europe's engineering costs are about 40% to great Britain's. Great Britain's are about 110% of the United States. Whereas Romania is probably 65, 70% the cost of southern Europe. So the combination of using our American -- using our American staff and our great -- our staff from great Britain along with Timisoara, we have a competitive deal. Without giving you numbers, instead of a typical installation costing us 20%, we now are setting goals where we are looking for margin of about 20% on a -- on an installation. Is that too vague?

No, I think actually I do the math given a lot of those numbers and that's -- that's what I'm trying to understand is long-term, as these deals come through your pipeline, you will consistently see higher margins and that's what I want to understand. Also if I could -- as a follow-up for Ron, you had mentioned that you are in the midst of a number of pricing discussions with customers, and I just wondered if you could give us a better sense of what kinds of price changes you are suggesting to the market and, again, what kinds of discussions you are having on those lines.

Sure. And as you can imagine, the variances is quite varied. Depending on when the original PUF deal was done with some of these very large renewals which is what I think you are referring to. So, anywhere from -- actually, I'm hesitant to quote -- quote, right, because a lot of this is pending right now, but it's substantial. And what we have to do is go back and show benchmarks as to sort of what our global pricing looks like and specific to some of the larger regional pricing when some of these renewals are way out of whack, frankly. And so we have been going through this process very me . It involves typically many iterations at very high levels of these organizations to get their head around the fact that there is, in many cases a substantial price increase. We are literally in the middle of the throws of some of the these negotiations right now. I'm hesitant to throw out percentages. But we are seeing the right tenor of the discussions to get over this hump and see a right balancing act for a win/win.

Perfect. Got you. Thanks, guys.

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

Hey, good morning, everybody.

Good morning.

If I look -- I don't know who wants to field this, but if I look at your revenue and listen to your commentary, you had a lot of capacity upgrades. You had RevRec on a bunch of contracts and then the sales period is lengthened. The question is, if I look at the 3Q GAAP revenue, is this -- do the stars align in the 108 was the number. It just won't happen again in the next couple of quarters. Kind of give us some detail on that.

Well, I will take that Nik. This is Scott. It was a broad-based revenue growth in the quarter. You though, if you compare the 108 from Q3, to the 109 from Q2. The 109 from Q2 had a bigger pop from faster pay, but the -- the revenue and in particular, the growth over last year was broad based on increases in recurring revenue. Pretty evenly split on the license fee amongst a number of projects. We did have some faster pay in the quarter, but, there isn't anything in particular in the revenue for Q3 that is similar to that capacity pay than Q2, in the one-time pop. Our ILF revenue is lumpy. That's where you will get different one-time items in their next quarter, than there were last year. But the overall commentary is that it was a pretty broad based growth in revenue over last year.

Nik, this is Phil. Another way I feel comfortable answering, we never did and never will give quarterly guidance. Yearly guidance is tough enough. We did reiterate our full-year guidance and so that would give you a pretty good clue whether we believe that . We basically said some pretty clear things about quarter four. So that answers your question a little bit there. The other one is my pig and the python that I'm not supposed to talk about. We are digesting the pig at this point. We should if we get -- if we get our service capabilities where they need to be, we get our sales flow which I'm telling you, while the process was elongated, we are seeing things -- clearly things are coming through on the sales side. We want to work ourselves down to an 85 to $100 million deferred revenue as a guide post versus up at the areas that we are at. And if you look at the movement in the 12 versus the 60 month backlogs, it's very clear that we are beginning to see good movement from the front to back stand point. And I will go back to what I said before, we are on schedule for our second half of '09, having a normalized business model.

And a follow-up on the 8.2 million of pretax charges, Scott, was that all on G&A?

It was primarily G&A, yes.

Can you give us a split?

I don't have the split in front of me, but most of it was the IBM, 4.9, that was all G&A. The three plus and severance was split out amongst the different line items.

As it relates to that, if I just took it out of G&A, you guys are doing a great job. I'm getting R&D down, sales down and maintaining print low G&A level, so if I look at the 3Q on an absolute dollar basis, of $52 million, if I just add up those three items, is that a good run rate for a go forward basis?

When you say the -- those three line items in terms of the cost?

Yes, so 52 is equal to the G&A less the $8 million, which is sales and marking and R&D of 11.4.

Well, obviously, on the selling and marketing, for example, that's going to fluctuate based on the size of the sales. We are looking at a strong Q4 in terms of sales. One of the variable components is not only the sales volume, but the mix of sales. So the higher value deals we we will have a higher commission-related expense. So any given quarter is not necessarily reflective of what we are going to see going forward. From the G&A perspective, I don't see a whole lot of necessarily variability in that line. Obviously G&A is pretty consistent quarter over quarter. We are obviously going through a number of initiatives with respect to the restructuring here in the latter part of this year and the early part of '09, and that is really going to benefit us across the board, amongst all expense line items. We will start seeing that benefit right away here in the fourth quarter, continuing through our actions that we have in the first half of '09. So we will see benefit across all expense categories starting in Q4, and going into -- until we are completed with in the middle of 20 -- the efforts in the middle of 2009.

How about R&D?

R&D will be as well in terms of the overall cost structure.

Thanks so much and congrats on the progress.

Thanks.

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

Thank you for taking my question. When we are talking now about the renewals that are coming up and obviously you passed up the PUF and you are getting closer to the point of renewal and you are -- you are obviously asking for the appropriate full list price, how does it work if and when you get to the point of renewal and you haven't negotiated an extension, what happens in terms of the cash flow, the revenue recognition? Have you already had some of these negotiations where you have gotten to that point? How does that impact the financials?

This is Phil. I can honestly tell you, we have not made it -- in terms of these big deals, we have not gotten past contract renewal on a single deal yet.

But I will say, to answer that, in terms of a general statement, unlike a new client implementation, a renewals don't have a large deferral period. I mean, we are not talking about, the deferral through the implementation period, until we get to RevRec . Renewals we start recognizing right away. Obviously it's in our current run rate. It's in backlog. As we renew at higher rates, obviously, that will increase our revenue run rate and it will also increase our backlog. Because the backlog assumes renewing at its existing rate. So there is a benefit to -- really immediate benefit to both the revenue run rate, as well as backlog, because there's no -- there's no waiting period, essentially for starting to recognize the revenue dream in the new contract period.

Got it. In terms of your operating free cash flow guidance, it's still 45 to 50 for the year, where are we year-to-date?

Year-to-date, I believe we are at 30.

Okay. And -- and so you put a little bit of a caveat, when you provided that guidance, which is there is a certain chance that some of the deals will slip into Q1. What's the chance of you reaching the 45 to 50 guidance for the year? What is the chance of it slipping into Q1?

You mean in terms of the OFCF guidance?

Yes.

I wouldn't necessarily say that if any of the deals slip into Q1 it would necessarily have an impact on OFCF. It depends how much cash we receive up front. So at this point, I wouldn't venture to say, we are considering any of these big renewal deals to have a significant impact on OFCF if they slip.

Got it. Thank you.

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

Scott, you had mentioned that there was some of the faster payment revenues recognized in the quarter. My question is, what's the backlog for faster payments? I was under the impression that was sort of winding down.

Well, in it terms of the number of banks that went live, I think there was one that went live in the June quarter and I don't think we have another one in the pipeline that's big in terms of go-live. We have continuing services that we're performing for all the banks, even though who went live in the June quarter and there is a second phase, albeit -- I'm not necessarily sure how big or extensive it is. There's a bigger phase in the fast to pay. Now that it's going live, we have a faster revenue stream. What we saw in the June quarter and a little bit in the third quarter. During the faster pay implementation, we had to defer revenue.

Got you. And then, Ron, you mentioned an IBM SystemsZ wholesale deal for an international bank is that a subscription deal or a license deal and when did you think it will be implemented?

It's a license deal and it should be around mid-2009.

And last question here, just to follow up on Nik's. The $5 million or so in transition in severance related to IBM, is that -- that's all completed in Q3, there shouldn't be any expense related to that in Q4?

There will be -- we said that the overall transition expense would be about $8 million when we are fully transitioned to IBM outsourcing. So far this year, we have incurred $6 million on the transition expense. The remaining $2 million is primarily related to third party data centers, and those moves have not been completed. We would expect those to carry into -- even carry into 2009, but there's still a couple million out there that we will have in terms of transition expense. The time is really dependent on when he get the data centers moved. In terms of severance, we incurred most of the severance related to that because we did go-live with the outsourcing arrangement on September 1.

And that will be dribbled throughout the next few quarters.

Yes, it really -- it's really driven on timing, on when we get the data center moves. So it it will -- to the extent that we get them done sooner, rather than later, we will incur that expense sooner. Now, again on the transition expense, from a cash perspective, we are paying out the -- those transition expenses over five years. So it it does have a P&L effect, expense today. But from a -- a cash standpoint, we are paying out that amount radically over five years.

Thanks, Scott. That's all I got.

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

Hi, good morning. I had a follow-up question on -- I'm looking at slide 21, Scott of -- I think it's backlog and revenue. I just want to make sure I understand the -- where term renewal deals, like where those revenues are captured. So for this quarter, this was a helpful slide, 20% or 19% of your revenues was from sales. So are term renewal deals captured in that bucket I didn't think it would be captured in the other.

Generally on a term renewal, the sales and revenue conversion rate is pretty quick. So, depending on the nature of it it, it is most likely going to be a sales to revenue conversion in the quarter that the deal is signed.

So -- and here's where it is unintuitive for me. If you renew a deal with someone, how does that add incrementally to revenues for the quarter? That just assumes you got higher prices? Maybe you can just talk about that.

Yes, that will be a part of it. It's also going to be, the portion of any license fee that is paid upon signing, renewing the deal. And so it depends really on how it's structured and how much license you would get at the front end, versus what is radiable over the renewable period. But, yes, in terms of a renewal, we would have no delay in recognizing that increased pricing. And then that would be effective in the first month of the new contract period.

A lot of these term renewals were related to discontinuing the practice of PUFing, is that the way to think about it? You would heavily discount now, you would have to take a much more healthy approach. So PUFing and term renewals are kind of, interchangeable. Is that the right way to think about it?

Almost all PUFs were renewables but not all renewables were P UFs. Does that make sense.

Got it. That number should be -- since we are kind of ending the period of PUFing and you retrained your clients not to expect that from you, should we expect the 20% revenue from sales to trend higher than we have seen in the past?

That's -- let me answer it first, Scott and then you answer it. It depends how much -- if we sell an awful lot of new product, EPS or whatever, right, that could impact it down because we wouldn't -- we would be waiting for acceptance for it but if we ended up selling a lot -- if we ended up having a lot of renewals or we ended up selling parts to install additional functionality to install customers then we would have that up front. So I will let Scott answer it it, but some of it is the sales mix -- the sales mix part of that.

I have nothing to add to it. It is really sales mix driven.

Thanks. And I do have one follow-up on the IBM slide, slide 11. The 268 account, I guess in the pipeline, could you give us any color on where they exist and the opportunity in terms or additionally the higher hit rate is going to be clients that were already running an IBM shop, that wasn't a hardware shop, and get over that obstacle and also running in the platform. Can you give us a little breakdown?

Well, I will let Ron answer it and give you an answer, but I -- I will also give you an answer that says there is no -- there is no geographic concentration in terms of the IBM pipeline. I would say that we are -- we pretty much have the entire globe engaged, team to team on that. I do think that, you know, certainly our install base, not on IBM, is a big target for IBM. The IBM installs non-ACI base is a big target for ACI and I would actually think the greatest success we've had to date, because, again, these are long sales cycles. I think the biggest success we've had to date are neither one of those two. It's been where they've neither been IBM nor ACI but people that very much needed things and we prevailed together in terms of the opportunity but, Ron, you may want to add some color to that.

Yes, I would just add that this six quarter view, as far as the distribution goes. Without having all the information in front of me, it looks similar no how large institutional banks and their location would look like. It's not a high concentration or a low concentration in one particular country or region at this point.

You talked about top 500 global banks and you were defining the market, how many of the 268 are in the top 500 global banks?

To give you a specific answer, I would have to get back to you. I would say, again it's a healthy -- on a percentage basis, it's healthy. And I wouldn't say, again, we are concentrated at Q1, Q2, or Q3. It's a healthy contribution across the board.

Fair enough. Thanks, Ron.

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

Good morning, everybody. I have three questions. First, just to understand this possible slippage between the fourth quarter of '08 to the first quarter of '09, is that due to the complexity of these renewals where you are not giving PUFs or is this due to the elongation of the sales cycle which have you been talking about, you know, for the last few quarters.

This is Scott. The possible slippage we are looking at are on smaller deals. You know, I said maybe somewhere in the range of 10 to $20 million and we are -- if they slip -- we obviously want to get right price and so we are not going to -- we are not going to rush those deals into Q4, if we can't get the right price, we will -- we will wait and let them slip into Q1 '09. At this point, we are not expecting, it but they are smaller deals, not larger deals.

It's slippage, not attrition. There's no --

Yes, this is on the sales side. No, this is not -- this is not attrition.

And a customer is not going to defect because of -- he's surprised and offended that he didn't get a PUF this time? You just don't switch these things on a dime; is that correct?

No, we have been articulating to them, essentially what price they did receive in the past and so I think generally those conversations have been going pretty well under the circumstances. We just have to close the gap between what we believe is a fair price and what they are expecting based on in the past.

This may have been in the slides, but I didn't see it. Could you recap for us the install base of BASE24 out there and then how many BASE24-EPS accounts are out there and between those, how many are new customers and how many are BASE24's transitioning over, just a little score card there?

I don't think we put it in there, but we have -- we have 70 EPS customers and there's probably a half dozen or less -- we have never given that exact number, but there's only about a half dozen that are actually in transition at this point. And our -- as we said, our attrition is close to zero on our install base, so we are not really announcing any -- any change in our base running for our classic install base.

So that number was around 300 so if half a dozen are in transition, in theory, in the coming years there's still another 294?

Yes, well, it you will it's actually a significantly higher number than 300, but I don't want to --

Directionally, though. I understand.

Right.

And then just a couple of questions on stock buyback. I noticed there was no activity in the quarter and was that just because you are -- you have your plate full with other things?

Well, we have our plate full with other things and I think everyone has seen the markets completely freeze up from a borrowing standpoint. We have quite a bit of cash and we just -- I think we are just being prudent. I don't know. I don't know of any other way of saying it.

I commend your prudence. I would observe you have 94 of cash and 75 of debt and so the enterprise value of the company at $12 is $400 million, and that's what, 90% of sales and eight times OFCF and those are stunningly, cheap numbers in the history of investing in software companies. And clearly if the companies bought back stock between 18 and 30, and Phil, you and the manage bought back stock. IBM has committed effectively, what, $150 million to buy 8% of the company and another 92% could be had for, -- pick a number, $370 million. So I -- it seems like it's an extraordinary opportunity if the world doesn't come to an end and yet you are saying, -- you are implying, right that the world will come to an end. It's a non-discretionary product and high consumer retention. You are seeing sunshine and prospects of 20% margins are on the horizon. Am I missing something?

This is Scott. We do have $94 million in cash. What you don't see and what we don't necessarily break out in our disclosures is the geographical spread of that cash throughout the world. A lot of that cash is overseas, and to repatriate that cash would have pretty significant tax consequences. In terms of the amount of cash -- we have that -- we keep that cash overseas to run day-to-day operations and, again, some of it is -- has repatriation impacts. It's not necessarily readily available here in the US in order to -- to utilize for cash buyback. We also have the restructuring actions that we're taking now and will continue in Q4, where we have an estimated 10 to $15 million in severance, a lot of that has in the been paid yet. We action those actions in the September quarter, late in the sent period. And so those -- that cash outflow will come here in Q4. So we need to make sure that we have the cash in the respective jurisdictions to pay out that severance as well. So the total cash availability is not necessarily all that -- is not necessarily all available here in the US for making stock buybacks.

But, Phil, I mean, after four years at the company and all the great transformation you have helped to implement, do you -- you still think the ultimate value of the business is what you have been thinking?

I believe the company is more valuable -- I think we now have a management team that can actually extract the value out of the assets that we have here but, that's different than being prudent in a financial meltdown.

I agree. I agree. Well, listen, it's a marathon and not a 100-yard dash. Keep up the good work.

Thank you.

There are no further questions at this time. Ms. Gerber, do you have I in closing remarks.

No, I just wanted to thank everybody for joining us and if you have any follow-on questions, I can certainly be reached via our New York office phone number, 646-348-6706. Thank you, everybody.

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