ACI Worldwide Inc (ACIW) 2008 Q4 法說會逐字稿

Good morning. My name is Laurie and I will be your conference operator. At this time I would like to welcome everyone to the ACI Worldwide, fourth quarter, 2008, financial results conference call. (Operator Instructions) Thank you. I will turn the call over to Tamar Gerber, Vice-President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everybody and thank you for joining us on our year end earnings call. On today's call is subject to the Safe Harbor Act and all of our forward-looking statements as well as our Safe Harbor are available on our presentation which is on our website.

Management speakers today joining me are Phil Heasley, our CEO. Ron Totaro our COO and Scott Behrens our CFO. Ron and Scott both have prepared remarks and Phil will be available for Q&A as well. So I'm going to turn over the call at this time to Ron Totaro to kick it off. Ron?

Good morning, everyone and thanks for joining us today. I'll be starting my presentation on slide five with the general discussion of the macro economy and what we are seeing in our customer markets. As everyone knows the financial crisis is spread to most markets and we do see its impact on customers in all of our operating regions. This is something that we began to tell you about at the end of 2007 when we describe longer sales cycles. Fortunately for us the customer behavior to date has remained the same. So, when we look at the year ahead, we're still operating on the same premise of dealing with a longer selling process to complete a sale to our end users. But there is still a growing pressure on financial institutions to become more efficient and cost effective by converging their payment platforms. In the explosion of M&A activity at the end of 2008 has acted as a catalyst in many cases for this convergence to occur as these combined entities seek relevant cost synergies. This creates an interesting opportunity for us as our products help make their inefficient technology go away.

Our multiproduct payments hub solution is a timely offering to meet these customer needs and we are also seeing renewed interest from tier two banks for enterprise on demand offering. One potential negative for us resulting from the bank activity is that customers will consolidate licenses as they integrate. We anticipate that some of our largest customers will move to one license stream and while that will cut into some the software licensee revenue through ILF reductions, we will see growth in our ILF capacity and service revenue offerings as the institutions get larger. The capacity revenues do not totally offset the loss of software ILF but we are presented with new up sell opportunities where either the acquirer or acquiree use an ACI product and they need to move the combined institution onto an ACI platform. We will see how it plays out during 2009 but we're reducing our 60 month backlog by approximately $13 million as a precautionary measure for this industry consolidation. Moving to the slide six, probably the biggest operation announcement of the year was the time line for the sunset of Base 24 classic. We are not end of life for this product at all. What we have done is highlight the product road map that will ultimately retire classic and move the client base on to EPS over time. However, during the time period where we still run both products, we will expect the customer, post 2011, to fund any enhancements or regulatory upgrades themselves. And, we will support Base 24 EPS in a multi-hardware platform environment such as IBM system P&Z as well as SUN and HP Nonstop.

And just to remind you where we stand with Base 24 EPS, slide seven underscores how we have licensed EPS over 70 times in the number of operating environments. It's well into its active life cycle and any migrations that happen now are happening on a platform that we've already installed over 35 times. And in 2008, we optimized Base 24 EPS for the IBM system Z as part of our IBM alliance efforts and we think this is a compelling environment for the product. If you turn to slide eight, this is a page that visually show the ACI payment hub strategy and convergence of channels, networks and hosts. Example we provided is a retail payment hub and diagram shows integration of various commands within one processing switch that services six different banking systems with many points of channel authorization requirements. This is one way that we are looking at our longer it term product road maps and how we will sell, service and deliver this solution more seamlessly with the bank's infrastructure. Slide nine is a recap of the IBM alliance. This is both a quarterly and annual review of the alliance relationship.

We add very strong wins in the quarter in both Asia and the Americas and we achieved what we planned for in the alliance this year in regard to enabling our products in System Z and driving coordinated marketing and sales activities with IBM. We are now focusing on optimizing our wholesale products for use in the System Z environment given that we have completed much of the enablement surrounding the retail product.. Slide 10 is an update to a chart we showed you last quarter given the continued volatility and uncertainty in the marketplace we thought it was useful to show our customer base segmented by industry. As you can see, we will largely align with the largest tier one and tier two banks as our primary segment. I've mentioned in the past that we continue to align our scarce head count resources towards markets and customer segments that drive large payment transaction volumes.

We achieved healthy revenue growth from banks and processors during 2008 as we closely examine contracts and pricing and in certain instances made changes with the customer's agreement that led to better economic terms on both our license revenues and services fees. We are seeing a lot more activity in the retailer segment in the US than we are seeing in the immediate past and we are applying more focus in 2009 on this segment. And finally, despite the 2007 loss of a customer in the other segment that you see there, we are continuing to see very low attrition rates across the business. Wholesalers always run attrition-- higher than attrition, rather, but we are now looking at a 4.2% blended attrition rate for the two product offerings. The retail sector in the United States has recently become a more active and dynamic marketplace so we're looking forward to some interesting opportunities in that environment in the coming years. Now I want to move into a series of slides looking at our sales in several different ways. When we describe sales to you, we do so in context of our budgets September FX rates, so sales tend to be a more static like-for-like view of the business, unencumbered by the recent large swings in currency markets. For instance, if we had an adjusted 2008 sales for FX impact then 2008 sales would have totaled $440 million. Slide 11 is a snapshot of the quarter segmented into different categories, sales type and product type. Probably the most notable contrast year-over-year is retail payments due to major term extension signings in the Americas and concurrent add-ons sold in the context of those renewals.

We had a big reduction of application services revenue year-over-year due to one large term renewal in the US during 2007 quarter which came in the form of an ILF. Given the large size of our renewals, the top five customers accounted for a bit more of the quarter sales than is usually the case in a Q4. Last year we saw 38% of sales from the top five customers whereas this year the percentage grew to 45%. Obviously the comparison versus Q3 shows that the year end quarter is a very important time for us during the renewal sales cycle. The biggest theme of our sales this quarter was our continued pursuit and completion of improved economic deals. We were able to sell economically attractive terms as well as enhanced service deals throughout our business at better rates and these practices will continue to drive benefits well into 2009. Over the next page we examine sales by channel. As mentioned, America has had enormous growth that was driven mostly by some sizable term renewals. We were happy to see that large institutions were still not only buying, but also expanding the scope of what they are purchasing from us. EMEA had solid sales over the prior year quarter and they were driven as noted by Arab and UK banks as well as the global processor business.

The variance in Asian sales was driven by term renewals at two large Australian banking customers. Slide 13 is our quarterly break down of sales by category mix by quarter for the two-- past two years. You can see that we sold fewer new accounts and new adds in 2008 while we booked higher add-ons in terms. To some extent that's probably a natural out growth of the longer selling cycle that we have been discussing with over the past 15 months It certainly changes the growth and the back log but we're pleased with the quality of the renewals we have booked in the quarter and ensuring that we continue to pursue profitable growth. As we look toward 2009 and the institution of the deal review committee process that I will talk about in a little bit that might also change the mix of sales along the way and will continue to keep the market updated about that. If you will turn to slide 14, this series of slides will run through our geographies by performance and outlook for 2009. We will begin in the Americas which had a really strong revenue growth and even strong sales growth quarter. New business sales rose 14% over the prior year even while we reduced head count by 17% in the United States.

We had a wide range of new accounts in both North and South America and sold 31 deals with a contract value over $1 million during the year. So, we had a healthy mix of smaller account varied geographies and larger renewals of customers like Bank of America, Fiserv and M&T Bank. When we go to slide 15 and look at the year ahead we definitely see opportunity across the Americas geography. I've already addressed the M&A element in the beginning of this presentation but want to point out that there are still large bank systems on processors. We believe that our solution is more economically efficient and provides a higher degree of customization many of these processor offerings and banks and retailers are increasingly examining our alternative solutions and services. We have on-line banking consolidation happening and we have risk management and wholesale opportunities that we're looking at. In short North America still has a lot of good opportunity and that is not even touching upon the retailer opportunity where we see a lot of fragmented legacy technologies and solutions. Economic pressure on that sector is encouraging customers to look at how they manage their transaction processing systems. Finally Latin America still represents green field market environment for us with a lot of new account activities and wholesale payment opportunities.

Slide 16 runs through EMEA's year quarter in review. EMEA quarterly revenue is reduced largely because of the FX movements during the quarter. We had major term extensions and multiple markets and large services deals in Spain and in the UK for Base 24 EPS. On an annual basis we saw that anticipated pay revenue kicks-- comes in and enhance the total. It didn't hurt that faster pay project closed when the dollar/pound exchange rates were more favorable for booking large deals in UK currency. EMEA had large deals coming in throughout the year and disparate markets ranging from Netherlands to Saudi Arabia which saw term renewals in the year. Overall, we sold 25 new deals with over $1 million in contract value in 2008. Looking towards 2009, EMEA will focus on tier one EPS migrations and new accounts as well as payment hub consolidations. We think that more banks are going to have interest in operating software directly as opposed to using processors given the M&A activities which have created very big banks as I mentioned earlier. We are also having more discussions with customers around the SEPA opportunities and what that market regulation means for their back offices. We will continue to market PRM and are adding emphasis on our professional services opportunities as there is a large service opportunity between migrating Base 24 classic to the new APS migrations.

Slide 18 starts our overall review of the Asian business. The Q4 review was higher than last year because of the strong wholesale service customer signings. Also we had good term renewals in Australia and also had some significant capacity events across markets. We signed our first system EPRM license so we are looking forward to working on that implementation with our partners at IBM. Annual revenues rose 13% year-over-year across the geography because of professional services both in the retail and cash management areas. In general it was a good year across a lot of different metrics we used to assess the business. Sales were up significantly at 37% over the prior year.

Wholesale products really begin to take off and we established operating entities in the two bigger markets of China and India. When we look at 2009 on slide 19, right now we're seeing a lot of north Asian action. Japan upgrading retail/wholesale infrastructure despite the challenging economy. That is a big IBM market and we think that's good fit for us working closely with them going forward. China is now passed its Olympics and the government there is very interested in modernizing its banking system. There is a project where we believe the government will look at best of systems around the world and literally leap frog into a state of the art national switching system. We're very eager to participate in that development and maintain up to date communications with the large players in China to ensure that we are in loop for (inaudible) mandates that come up there.

EMEA payment volumes are growing enormously and today we have more than 10 Base 24 classic clients that will want to migrate over time to EPS. These are customers who have been solely retail only clients in the past and one of the things that we will be looking to do is to upsell them hub products with wholesale and risk along with Base 24 EPS. Australia's banking sectors consolidating like many others in the developed markets. We think the Australian consolidation should drive payment hub opportunities that include retail/wholesale solution sets. So again, a lot of multiproduct and interesting sales are in the horizon. Transaction banking services are also growing as interAsian trade expands. We are now undertaking a strategic review to take a new look at all of the opportunities in markets and Asia-Pac and best align our resources to these very diverse regions to ensure profitable growth. Moving to slide 20 I would like to revisit our restructuring which we announced in August of last year. What's happened since then is a cost takeout of approximately $30 million in 2008. We reinvested some of these savings already into growth regions. We think that when we're done we will have reinvested about $11.5 million in the business and we expect that in 2009 that we will move another $8 million in restructuring dollars. We have reprioritized the importance to balance our presence and approach in mature markets with measured and appropriate investment in growth markets in our sales, services and delivery organizations as well as in our product management road maps that are tailored for regional requirements.

We're working on an interesting plan to globalize Help24 support for our customers so that the tools and services are more cost effective while improving customer satisfaction. We are also assessing our back office suite of product offerings to determine the best means to deliver key functionality. In short, there are a number of strategic and operational initiatives that I have been working on to drive more focus on solid ROI opportunity for ACI and ensure that all critical processes and improvements are in place to drive a higher quality of execution. Slide 21 picks up on the theme and shows you the investments that we've made in key leadership hires within the last three months and where I am still looking to hire. These hires are major roles and I expect them to bring more rigger and discipline to the respective areas of responsibility as they get to know ACI over the coming months. I actually closed on the Asian services manager just this past week so that's one more item that gets moved over to the filled column. One of the things I have been working on since my arrival at ACI a year ago is improvement in standardization of key processes across both geographies and products. I will be discussing the innovations in greater detail at our investor day on March 10. But thought I would include it here in light of last week's contracting announcement in Asia.

Slide 22 shows you some of what we've been instituting to drive resource management, governance and prioritization throughout the region. I's really a speak preview of my investor day presentation and shows how our enhanced project management function is now working. We call it the customer management office or the CMO and it does serve as command center for global project coordination throughout ACI. You can see the various inputs that are all resourced at the CMO level and provide for an escalation outlet and for oversight of projects in remote geographies. Slide 23 is another variant on this theme and it runs you through the purpose and benefits of our revamped deal review process. We went live with the new DRP in the first quarter of '09 and it was created to better manage our product scoping, pricing and implementation. We realize the need for this type of rigger and cross functional review of new deals as we experience the product bottlenecks in late '07 and early '08 with the implementation of new customers and product and the relative scarcity of our high demand services personnel. Between the reinvestment and services growth regions and processes in 2008, we're hoping that type of bottleneck is well behind us. The biggest driver of the DRP was to understand the total cost that we incurred to deliver projects to customers. We have built economic templates to understand the resources needed to deliver multiproduct projects and also to ensure that the functionality we promised customers is understood throughout our organization.

I know time is short and I will definitely be revisiting these process improvements in two weeks so let me finish by saying we had a solid year from a business operations perspective. When I joined last March I did a comprehensive strategic assessment and review of the business and I think we've implemented some new and necessary safeguards that should make us work better both internally and at a customer installation site. We have successfully moved a large number of projects from back log to GAAP revenue this year and we've had-- sold a lot of product. Revisited and renegotiated some key deals in multi-geographies that are more sensibly priced. And, we will still continue to see interesting opportunities in our markets as we prioritize our investments and expenditures. So, thanks for your time and I'm now going to turn this over to Scott for the numbers and guidance.

Thanks, Ron. Good morning, everyone. I will be starting my prepared remarks on slide 25. Key takeaways from the quarter. As you can see we achieved good revenue growth in December, 2008, quarter compared to December, 2007. That's even taking into consideration the considerable strengthening of the US dollar compared to the prior quarter. Driving the increase was higher implementation services revenue primarily in our Asia/Pacific and EMEA region and higher recurring revenue. That being our monthly license fees, maintenance fees and processing portion of our services fees. Overall another strong revenue quarter. Since Ron has already discussed sales quite a bit I'm not going to spend too much time on it here. I wanted to reiterate his comments that sales were extremely strong for us, up 44% on a comparative basis to the December, 2007 quarter. And up 78% on a sequential basis compared to our third quarter of '08. As Ron mentioned, we're quite successful in the quarter and rolling over previously discounted PUF deals in the economically priced deals. OCF increased versus the prior year December quarter. Particularly when you strip out the 2007 IBM cash receipts they're included in the $21 million.

OCF also increased $31 million on a sequential basis compared to our September, 2008 quarter. And I will go into OCF changes in a little more detail here in a minute. Turning to slide 26, the decrease in 12 month backlog was largely due to FX rate changes. We estimated that the 12 month backlog would have actually been higher by about $7 million on a constant dollar basis. Overall our operating expenses declined as we began to see the benefits of restructuring initiatives and other cost control efforts. Finally with respect to nonoperating income in expenses, the significant FX currency movements gave us a $9 million FX gain in the quarter which was -- which more than offset the higher interest rate swap charge of about $4 million. And the FX gains are a function of both exchange rates obviously, but also our net monetary asset positions primarily in our EMEA region.

On the next slide, slide 27, we provide a walk of the OCF from December, 2007 quarter to the December, 2008 quarter. The most significant item driving all OCF growth was strong customer cash collections compared to the prior year. This increase is driven by several factors. One being the overall results of our ongoing management of customer receivables especially in light of the current economic environment. We had especially strong cash collections from our Latin America region and the third item here, just the increase in our recurring revenue streams provide the more consistent recurring cash flow-- inflow. We are beginning to see payroll cash savings from our restructuring efforts and our outsourcing of internal IT to IBM. That IT outsourcing arrangement also reduces our cash CapEx. OCF also improved as a result of lower cash taxes paid this year compared to the same quarter of last year. And on a year-over-year comparative basis we benefited from certain one time cash payments that were made in the December quarter of 2007 that did not recur in 2008.

Turning to slide 28, this shows approximately $20 million of current quarter sales achieved GAAP revenue recognition in the quarter rather than going to backlog which represents a higher sales revenue conversion than we saw in the prior year quarter. This is a direct reflection of the multiple term renewals this quarter than we previously discussed. Consequently we really had a lot of sales which were immediately booked into revenue as there is no revenue recognition delays on the installation. On slide 29, it's a view of our full year financial performance. As I said earlier revenue was higher year-over-year in spite of the negative impact of FX on the top line revenue mainly due to term extensions-- significant term extensions in the US, Australia and various countries across EMEA. Our overall expenses were up only 6% which compares favorably to the anticipated rise of 7 to 8% given in our guidance last March and was undoubtedly improved by the effects of the restructuring actions initiated in the third quarter of '08. Like revenue, FX also had an impact on the expenses-- operating expenses in particular in our EMEA region. Turning to slide 30, we recap our full year performance against both prior year actuals and our previous guidance cash has been discussed throughout this presentation so I won't elaborate too much on it but we're up nicely over last year. We did benefit from a timing of $3 million tax refund that we receive very late in December of '08 that we had expected to receive in 2009. Obviously both periods benefited from the impact of IBM cash. Overall we actually performed pretty close to in line with our original 2008 guidance of OCF.

One metric on which we perform particularly nice -- particularly strongly was sales. Our original 2008 guidance that we anticipated around $450 million coming in 2008 and we ended the year around $460 million largely as we said on the very large term renewal. Overall sales were up $30 million over the 2007 sales rate. So, it was a record sales year for us. Rev-Log has been a tricky measurement for us. It works insofar as that entirely neutral to whether we booked deals-- whether booked deals are reported in GAAP revenue or backlog yet generating OCF. However this year our regional expectations of both the currency movements and the sales mix turned out to be quite different than we'd anticipated. Clearly the extreme currency volatility negatively impacted both backlog and year-over-year revenue. And, from a sales mix perspective, we sold lot more term extensions than we initially had anticipated.

My last two slides, 31 and 32 deal with guidance for 2009. Starting on slide 31, our 2009 guidance metrics differ from 2008. We are using sales, GAAP revenue and GAAP operating income as the guide post for the business this year. The reason we have moved away -- or moved towards GAAP revenue is that we feel the business has matured to a point where there is enough balance between new clients and new applications going into backlog and new business being implemented and accepted and therefore coming out of backlog and into GAAP revenue. We told you in 2006 it would take sometime to work through the impact the old discounted PUF deals in that situation combined with the amount of new business we are booking essentially created a hole of sorts in the '07, '08 GAAP financials. We now feel we are at the end of that period. We have enough visibility on the exit of some of our large -- our longer tenured new customer deals from backlog into GAAP revenue and we also have a sense of the impact of the former PUF deals heading into new economic renewals. Our revenue guidance is a range of 415 to $425 million for 2009 using prevailing currency rates as of the end of January.

While obviously we can't forecast the movement in international currency markets we have supplied with major FX rates we used to prepared our guidance and if there is more currency volatility you will at least have the basis for assessing the impact exchange rates compared to how we determine this guidance. On a sales perspective, we have left the metric pretty much flat year-over-year. We think that our sales pipeline is pretty good and we're very pleased with -- we'd be very pleased, frankly, with another year that looks like 2008 in terms of total sales achieved. It's pretty straightforward metric and obviously one in which we give you a lot of its component parts and you can figure out what goes into backlog versus what converts into current period GAAP revenue. Our last guidance metric is GAAP operating income. We think that operating income will rise even on relatively consistent amount of sales and revenue as compared to 2008. The margin expansion is due to efficiencies from the restructuring we've been executing in the latter part of 2008. As well as getting better and smarter at the implementation services.

Included in the operating income guidance for 2009 is approximately $5 million of expected severance related to the ongoing restructuring initiatives that Ron mentioned also some facility rationalization. And lastly, on slide 32, shows other financial items that will impact financial model for 2009. The first line here is actually not correct or we will say expenses were flat in 2008. We have provided revenue guidance of 415 to $425 million and an operating income will be in the range of 35 to $40 million and we plan to manage and control expenses to get us in that operating income range. When we refreshed our expenditures for 2009 and prevailing rates at the end of January, that line did not get updated to reflect that. I apologize for that. We will also see a rise in service fees related to our IT outsourcing. However, this will be offset as I previously mentioned by payroll reductions and related costs.

When we first told you about the restructuring back in August we believed that we would end up with $30 million in net savings now that we are further along with our various initiatives with better visibility, we believe that will take out approximately $38 million of cost on a gross basis and we'll reinvest around $12 million back into the business in the form of product investment and operations and service as Ron showed you chart of some of the head count investments he's already made as we've removed other costs from the business. Given that, the reinvestment and restructuring proceeded hand in hand. We're probably going to see the full effect in 2010, though 2009 should see about a net $18 million benefit from the actions we already taken. We think depreciation amortization will be pretty stable compared to 2008 right at around $23 million or so. And non-cash compensation is expected to be approximately $9 million. We expect to incur an additional $1.6 million of cost related to the final phases of the transition to our IBM for our IT outsourcing. And we also expect to incur approximately $5 million, as I mentioned, in non-recurring cash charges related to restructuring initiatives and facility rationalization.

Cash CapEx will drop compared to 2008. 2008 we had our large office facility move. We expect 2009 CapEx to be in the $11 million range. We expect cash taxes around $17 million. That's higher than 2008 primarily due to the timing of the large cash tax refund that I previously mentioned. We also wanted to share with you how we see the phasing of the business results over the course of the year as we do have such large variances between quarters. We think operating margin will look like the pattern in 2008 with a strong first and fourth quarters and the cash phasing will also come in those quarters as well. Obviously we demonstrated in the past few years that Q4 is a critical time for us in terms of both cash and business generation. And we don't see any reason for that to change our expectations of the cycle in 2009.

In summary, we're very pleased with the 2008 business performance. We had a lot of different issues and activities going on in the year. IBM alliance, the outsourcing of our IT as well as number of restructuring and reinvestment initiatives, yet at the same time we managed in 2008 to have an extremely strong sales and cash generation year for us. Overall we're very pleased with the business results. As usual, we have generated appendix slides in the back with more information on the business. I won't be going through those. That's all I have for prepared remarks. Operator, we are now ready to open the line for questions.

(Operator Instructions) Your first question comes from the line of [George Sutton of Hallum].

Hi guys, I wanted to better understand from your perspective the strong operating income guidance for 2009 certainly relative to what we are expecting. And I'm trying to understand how much of that is related to the mix of business and getting more of these high margin term renewals and how much of it is cost related? It does sound like you found an additional $8 million of cost that you can work with.

I'm going to let Scott answer-- this is Phil. I'm going to let Scott answer that and maybe Ron chime in. Let me -- I just want to do -- give you one piece of information that I think we mentioned several times in the presentations, but I want to make sure we recap it. The way we are structured in terms of both variable expense and the way we distributed our-- a lot of our R&D around the world. We are virtually -- we have a virtual natural hedge in terms of-- of-- so when FX goes and it reduces our backlog or reduces our revenue, from a net income standpoint we actually -- the expenses both at the margin level and fixed cost level actually move in sequence both down and up.

And when we were doing that a couple years ago people were kind of questioning the wisdom of that and, of course, we didn't get these economic conditions. We saw the need to right balance ourselves because that-- so one of the reasons that it doesn't look like we're going to have that much increase in sales and revenue, but we have an improving bottom line, is the fact that the expenses do move in line with the revenues. I will let Scott answer to the extent that it's renewals versus --

Yeah. Obviously the restructuring initiatives that we have implemented and net of the reinvestments we are looking at getting an $18 million benefit in 2009 from those activities. And just overall other cost control efforts so you can see we had in Q4 we expect to continue looking at other areas of cost as well in 2009. So the large part of it is the restructuring efforts.

Okay, great. Ron made some interesting comments with respect to a focus ongoing after the bank customers that are still using processors. And I'm just -- you mentioned-- and I know there is some advantage you have on both the cost side and potentially the efficiency side as well. Can you give us a little picture as to what that focus is going to be from a marketing perspective?

Sure. Just to again amplify the comment. I think a big point, George, as well is our ability to customizations and take our core product offering and evolve it to the needs of these ever increasingly large banks. Right? So, we have seen a number of requests from banks and I think you will start to see -- well, our clients are starting to see relative to our marketing materials and our sales presentations and how we respond to our IPs and how we can overcome and combat some of the challenges that they face in a static six processor environment, if you would.

George, I would also say that the processors -- processors are an important customer base to us, too. And, the processors have gotten-- I think more -- much more strategic and intelligent against the size of bank. And what -- instead of looking for two or three elephants that represent 40% of their revenues, they are spreading their portfolios out in an intelligent way and that increases the value of our product to them also. It's not only the mega banks but the mega processors.

Lastly if I could ask with respect to the previously PUF deals that you signed that you mentioned, you now getting, quote, more sensibly priced. How does that work with other potential formerly PUF deals? Does that improve your negotiating position?

Yes. I don't want to talk too much about that. We have -- we have gone to a very rational pricing. Makes a lot-- If you are a very large customer of ours, you get massively improved economics versus processors and other kinds of things. And we are keeping class of customer in the same pricing ranges and whatnot. It's going well.

It's not a lot of fun going and saying we gave our product away for five years. And the ones who were injured were ourselves and whatnot. It's not a fun deal. But we have intelligent customers out there. They know the relative pricing versus their other options and whatnot. And they know the value. We are providing is a very value laden offering at reasonable prices. We're in no way trying to overprice our products. we're just trying to appropriately price our products which is not that hard to do in a logical-- in a logical competitive market.

And I would just add to Phil's comments, George, that from our services fee and how we look at pricing on a global basis, we've made some evolutions to be frankly I think more market competitive, that have worked in our advantage. It's taking a number of best practices, whether it's the auspices of PUFing and many other sort of tactical pricing best practices that we are starting to leverage more now and a holistic way versus just a couple of deals. So I think throughout '09 we will move the needle on these kinds of productivities.

Your next question question comes from the line of [Nick Veskin of Stephens, Inc.]

Good morning, everybody.

Good morning.

Good morning.

Ron, can you kind of talk about how customers have responded to the sunset of Base 24 classic so far?

Sure. To -- I think when people sort of really look underneath the hood and understand the EPS story and what we're doing with the IBM alliance, they certainly see the power and vision where we are going. Certainly you get into conversations around the state of readiness to do such and every bank especially in these sort of market environments that we're dealing with and some of the uncertain market environment that each bank is going through with some of these consolidations and market conditions, a lot of times they will say what is the timing of the migration? What makes the most sense? We want to work carefully and closely with our customers to identify what their road maps are.

Make sure that they understand the value proposition of an EPS migration with our IBM alliance partner. And make sure though, that we are not doing things that are going to make them take steps backwards, if you would, with their current operating system. There is a fine line we are walking here. But the goal is to sort of coach, cajole and move them toward a migration at some point. Frankly, we're preparing our capabilities on an ongoing basis to make sure that as 2011 and beyond comes, that we are going to be in a position to do this kind of work in a profitable manner.

How would you characterize sales, renewals in 4Q and thus far in 1Q?

New sales versus renewals?

Yes.

I think I would say that our pipeline is as strong as ever. I think, not flipping back through the pages, but we quoted quite a few deals that were over a million dollars for both EMEA and Asia-Pac and the Americas. It's our best sales quarter or year ever and that was driven primarily by a lot of new accounts and new APPs and we can get you the new numbers and break down. New APPs and new accounts was a big part of our sales mix. It will continue to be going forward. I think, too, though, we're just going to make sure that we are making the most out of the economics around renewals. I think it's a good solid one-two punch and how we're going to grow our top line.

And, Nick, this is Phil. In terms of this year, we expect this year to follow the same curve. I think Scott said that last year and we see that on whether it's cash. Whether it's sales. Whether it's -- we see it following the same deal. One of the smartest moves we made was moving our end of year to match our customer bases end of year and it's kind of changed our -- it's changed our curve to take better advantage of that. Does that answer your question?

Yeah. And the 10 to $20 million you guys referenced on the 3Q call, did you get those sales in 4Q or were they pushed out to 1Q?

We received -- we did very well on renewals. I guess is the best way to--

Originally said that 10 to 20 was at risk. We obviously came in better than we had expected. We got what we wanted out of Q4.

And Scott, how should we be thinking about the GAAP tax rate?

That's a good question. At the consolidated level it's hard to understand because the tax rate, the blended effective tax rate is driven by the combination of our tax rates throughout the world and certain tax jurisdictions we get little to no benefit and it really depends on what the gains or losses are in that jurisdiction. It's really difficult to provide a guidance on that for the year. In generally in our tax jurisdictions our rate is somewhere between 35 and 40%. Higher in the U.S. than most foreign countries. It's really the impact of-- especially our Irish structure we've talked about in the past that weighs on that. As that begins to grow over time, we will see more kind of normalized effective tax rate. At this point we don't have any guidance of that EPR will be.

And last thing I've got is as you have gone through the sunset, have you -- can you talk about the competitive landscape?

I don't want to say too much about the competitive landscape. But what I would say is we are going to give more and more visibility to R&D. And we believe and two weeks you will see lot on that, I believe the big differentiator for us, right now, is the amount of money we're-- with all of these saves and whatnot and restructuring we are still spending very, very heavily from an R&D standpoint and I think it's getting us to a point of differentiation in the EPS hub and we don't have enough time to go through it today. But I think we're really differentiating ourselves in terms of what we are providing.

And I also think we're competing less and less on accounts that are marginal to our customer base and make more sense to other people's customer base. So if you -- give you a little bit of a smart aleck answer, I would say against our segment we are doing very, very well and against the segment that is better handled by Windows or other kind of products that we're doing less well and that's because it's actually-- it's actually economically less sensible for us to be in that -- in those spaces.

Got it. Thanks so much and congrats on the progress.

Thank you.

Your next question comes from the line of [Gale Loria of Web Bush].

Thank you for taking my question. First on IBM it looks like you are making a lot of progress and growing the product set that you have with them and the customer base. I imagine it's still from a relatively small base. At what point do you think that IBM can become a really material part of your installed base and revenue? Where do you see milestone? Let's say IBM customers being 10% of your overall base or revenue from IBM centric customers becoming 10% of your revenue.

Let me answer it and let Ron continue. I think that -- I don't think we ever given the numbers out so I wouldn't be -- I wouldn't be overly specific. I think IBM is actually a larger percentage than you quoted today, right, to begin with, right? And maybe we will give more granularity to that in the future and we certainly are skewed in our new business-- is skewed towards IBM, towards IBM. The percentages of the new businesses radically moved up.

When it becomes critical mass, I think it's another year or two before we really get-- before we get really critical mass. I think that IBM and I should have said that in the R&D side, IBM has been a fantastic R&D partner and what we're building into this 8.2 and now 9.3 or whatever this year in terms of ZOS capabilities and whatnot, I think the turning point will be-- the critical mass will become a year or two years. And I love to say we have a shorter sale cycle than that. But we have been -- we have a long -- we have a lot of opportunity but we have a long sales cycle. So it's going to come in-- it's going to come in a year or two.

Got it. And in terms of SEPA, I think up until a year or two ago the assumption was that the European governments would put pressure on banks to meet some of the milestones and I was driving some of your pipeline. Do you still see some pressure from those governments on their large banks to comply with some of those deadlines? Do you think those deadlines are actually going to be enforced or is there be more leniency considering the tough situation that all of those banks are facing.

Let me give you right hand and left hand. I think on the legal regulatory side I couldn't guess. I don't want to get myself in trouble with Europeans. All my years in Visa and MasterCard I don't ever think I saw the Europe arena make a date that they set for any piece of -- so I would not sit behind -- I wouldn't sit behind that. It's a very loose confederation-- the confederations nature of it.

Then on the other hand, Gale, I would say, the corporate mergers that are going on in Europe are forcing people to rethink their systems. That's moving in our direction because they want very heavy duty -- we are now building much bigger banks as a result of what's going on. These larger banks are not ignoring SEPA. What they are saying is okay, we have got to go and move this, this and this together and whatnot. We are now planning for a bigger infrastructure than we're thinking about in SEPA and might as well be SEPA compliant because why bring the banks together and not have the capabilities? And we are seeing that in our pipeline. And we are certainly struggling with that working our tails off in terms of trying to actualize that in a couple of big deals that are in progress right now in Europe.

Got it. That makes sense. Then lastly on free cash flow, obviously very helpful that you have GAAP revenue and GAAP operating income guidance and you also gave some valuable piece parts for free cash flow. But can we get an overall sense if you think you can grow the free cash flow from 2008 and 2009 at what rate or approximately what direction?

Well, I'll let Scott answer that but we made a conscious decision with-- with the world in the turmoil and whatnot. We're going to give you very granular sets of result -- and we told you it's going to follow the same curve as it did last year. Scott can give you more of an answer on that. We don't-- we're very good at giving numbers that partially embarrass us in the past as we have been growing. And this is something that we -- this and backlog, largely cause FX. We assume every quarter tell you how we're doing and show you the shape of the curve is the same.

And what I will say is part of the reason we aren't giving and-- we are giving the guidance that we are and not giving particular cash guidance is-- 2009 will be a transition year. If we go back to '06 when we started to end the PUFing deals and started really from a GAAP perspective not make a whole lot of sense in '07 and '08. In 2009 we said this the latter half of 2009 we're really going to come out of that-- that cycle and we really will start -- we believe will start to normalize on the -- in the last half of '09. We did give-- as you mentioned, we did give operating income. We gave some key cash or, I'm sorry, non-cash and cash related items to kind of help do the math on that. But this point we're not prepared to provide any annual guidance on the cash flow.

Got it. Can I extrapolate a little from what you said in that now that things are getting more normalized and the historical GAAPs are closing we should expect cash flow to trade your earnings numbers a little bit more closely, at least going forward?

Ours certainly when we -- right. They will normalize when we get to the point where as I mentioned as much as going into backlog and essentially deferred revenue is coming out of it and we're better managing both the sales side and implication side those will better align.

And I would actually agree-- I would actually-- I would actually agree with you. I would tell you and everyone else that we are on strategic plan. When we went into this situation in '07 and said it was going to take us to the middle of '09 for us to feel we really were at equilibrium, think we're very much on schedule for a third-- that our strategic plan is very much on schedule as we said last year we will say it again. We will look like last year. We going to have the same kind of curve.

We are-- the reason we are giving the GAAP numbers is we are much more normalized. And quite honestly we don't want to give you -- I will give you the other one is in terms of our partnership with IBM. There is wild card cash that whether the cash comes in one quarter or another quarter we don't want to get into guidance issues where as it's just a matter of 60, 90 days or something rather like that when we can't predict it that closely.

Actually, if I may follow up on that, it sounds like maybe there is another milestone payment. At the time you signed the deal with IBM I think it was noticeable that the first two pieces that you got from them were $33.3 million and there was a phantom piece that was possible for the future, could we see another type of large investment from IBM in the future if you hit certain milestones?

We could see several more. We aren't predicting the time -- we aren't predicting or forecasting the timing.

Excellent. Thank you very much.

Your next question comes from the line of [Leonard DeProsco] of Janney Montgomery Scott.

Good morning. I wanted to first ask if you see the continued split, kind of 20/80 current period sales recognition versus backlog maintaining itself, or if you see that shifting going forward in 2009?

I think we have been inching up towards the high teen percentages. Obviously it's very contingent upon the mix of sales. We believe that 2009 will be fairly consistent with 2008.

Okay. Thanks. And the other question I had was the impact-- the positive impact of the FX gain from doing my math is roughly $0.17 after tax which is really high versus prior quarters. Any input as to if this is a really out of the ordinary type of quarter or if these types of large fluctuations in your opinion will continue going forward just to kind of get a sense of normalcy on the EPS line.

What Scott gave you with the other income line. So that was one of the FX impacts. He also said earlier there was a $3 million hit to revenue going the other direction. So you can't just -- I think the best way for us to answer that is that on a going forward basis, assuming that there is not another huge drop, right, because with that -- part of that did come from the huge -- our expense structure and our dollar versus other currency structure, we pretty much from an operating income standpoint -- it rounds to zero-- the impact of that movement going up and down.

What would change that movement is if we suddenly sold a lot more or a lot less in one part of the world than the other. There wouldn't be other structural reasons for that to take place or some two currencies, the pound, Euro, the dollar are our main -- we have a lot of other currencies but those are the three really moving parts. And they would have to go out of whack with each other on a permanent basis for that to be.

And to add to that, in the fourth quarter of '08, the dollar strengthened against the pound by 20%. That which is almost-- darn near historical proportions. The other impact and it's primarily impacting our EMEA and our UK subsidiary which is a pound denominated (inaudible). The Euro also strengthened against the pound by about 20% in the fourth quarter. Most of the gain is driven by monetary assets. Cash and receivables that our UK subsidiary was holing that was in non-pound denominated cash and receivables holding. That's what really drove it in Q4. It really is -- would be contingent upon what those changes in FX rates are going to do in the future.

We are working on a pooling our European cash which hopefully would reduce the amount of any non-functional currency we have to carry at any given point in time. That at least would mitigate the risk of FX fluctuations on the cash side. The receivables is a little bit more difficult to manage in terms of FX. Exposure, both good and bad. But we are obviously working to manage our AR balance down and improve the timing of cash receipts and really reduce overall AR and past due AR. That in and of itself should reduce the amount of exposure we have in nonfunctional currency AR.

You should understand going forward another way of saying what I said is that we have absolutely no profit center which is FX. We have no interest in -- we have no interest in making FX bets. What we want to have is natural hedges. Just natural structural hedge of the business. We don't -- we don't want to be in the FX business.

Okay great. Thank you.

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

Good morning, guys. I wanted to try to I guess ballpark or maybe average the total amount that is spent by some of these big financial institutions to do the EPS migration. Not necessarily in dollars. But for every dollar that is spent on an upgrade for Base 24, what roughly are they spending for the implementation and professional services and then hardware and IBM and whatever else may be involved.

This is Ron speaking. My first reaction in hearing that question, John, is that is a very hard dynamic to describe based on individual bank's operating systems currently. Typically we see migrations that there is going to be add-on work and new products added into the mix as well. That ties to some of the things that you've heard us talk about convergence.

The services mix varies on a global basis substantially as far as the cost of those services that we offer and the price that we can gain. It is very hard to put a dollar figure on the average EPS migration. I mean, I'm just hesitant to do such. I think the good news is from our perspective is that it's accretive in the positive and that we are improving the economic situation of ACI from within that migration period both as we sort of spend the money and gain services revenues to migrate them and typically when you look at all of the license fees that are now associated with the migration that tends to equal more than the current economic situation on classic.

Could it be-- Orders magnitude double what the license fee might be and total expenses out of the realm of possibility?

It truly -- it's not out of the realm of possibility. But, it's hard to say that would be an average, right? It's the type of thing that you're going to have two very distinct points at each end of the spectrum and the average is meaningless. I'm not trying to be coy with you but it does vary substantially. Especially as the big get bigger and the mergers are occurring and there is a tremendous amount of uniqueness to these deals.

Sure.

Are you trying to figure out the value proposition on the bank side?

No, no. I'm thinking of simply what all is involved from their perspective and the pros and cons of them migrating versus waiting and having to do some the upgrades themselves.

So I would answer it a little bit different having spent 30 years on the other side, too. I would answer it a little bit differently. If I'm running at 130 milliseconds per switch transaction and EPS can get me down to 30 milliseconds, the pipe I 've just created and the productivity of that pipe is just absolutely massive.

If on the risk side I can save one or two or three basis points in my fraud losses that becomes a (inaudible)--- their motivation if I can save .4 of a cent for switching or ATM transaction, their savings are massive that's the kind of stuff going on on the other side. Yes, it translate itself to big sets of projects, especially if they realize they are only switching 15 to 30% of their volume per application and they can get up to switching everything through mega switch. They have -- they actually have very massive opportunities which translate themselves into massive projects. That's why I answer the question it will take a year or two before you see critical mass with the IBM because these are going to end up being very, very large projects. And that's going to be the big motivation to go to EPS is that it will clearly get them to play on a different plane.

That's helpful. And I guess on those lines, then, Ron, you discussing material increases in business you're seeing from the retail sector which in some respect is countercyclical-- or counterintuitive in this environment. Is that along the same line simply outsourcing to processors versus what you guys can do? Is it just a cost savings? Is that primarily the reason?

No, I would actually-- Ron, I'm sorry for interrupting. But I would give it to you in a different way. I think what the retailers are realizing is that the value of lease cost routing. Right now they kind of go and get the blended rate deal and whatnot. As more and more volume moves to debit, they are giving a bigger and bigger margin to their front ends. If they can actually intelligently move their volume, so they participate with the same intelligence in the payment system as the switches and the issuers and acquirers, they actually have huge productivity saves and there are certain companies that are leaders -- without getting myself in trouble, Wal-Mart is already very, very smart at that. And I think a lot of other companies are becoming more and more cognizant that can be a very big improvement in their cost of sale.

But again I guess the controlling of the routing, is cost savings.

Absolutely. Absolutely. That's totally what it is. It's their cost of sale, point of sale, cost of sale.

Okay. Then last question, didn't hear much about the domestic cash management business. Hoy is Ralph's group doing? Is integration with that product pretty much at your goals now?

They had a record year. I think we said-- they absolutely had a record year and Ralph doing a great job, not only selling that product on demand, but we're really gaining traction on selling the whole suite of ACI products on demand.

Okay. Thanks, guys.

At this time there are no further questions. I will now return the call to Tamar Gerber for further remark.

Thank you very much, Beverly. Thank you, everybody, for joining us. Please don't forget to listen in to our investor day, on Tuesday, March 10th. We'll be holding here in Omaha and we look forward to speaking with you at investor day, or at our next earnings call. Bye-bye.

Thank you, this does conclude today's ACI Worldwide fourth quarter, 2008, financial results conference call. You may now disconnect.