ACI Worldwide Inc (ACIW) 2009 Q2 法說會逐字稿

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide financial results for Q2 ending 2009 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Ms. Gerber, you may now begin your conference.

Thank you and thank you, everybody, for joining us today. On the phone with me, I've got Phil Heasley, Ron Totaro, and Scott Behrens, and all speakers will be available to answer questions after we complete our prepared remarks.

As usual, all of our phone call is subject to the Safe Harbor for forward-looking statements. If you'd like to read that more fully, we do provide it on Page 2 of our presentation today. Other forward-looking investor events we will be [doing] the market is ACI is speaking on October 6 at the William Blair conference in New York, so we hope to see many of you there.

I will now turn over the conference to Phil Heasley, our CEO. Phil, go ahead, please.

Good morning and thanks for joining us today. I will lead off the call this morning with comments on our business, and then I will share my comments on the market in general.

First and foremost, I'm here to assure you that we are holding to our full-year guidance. We are having another hockey-stick year with major projects coming due in the third and fourth quarter. We also expect strong revenue performance as we recognize our annual license payments at year end. Our cash position on June 30 was in line with our expectations. I will leave it to Ron and Scott to give you an in-depth look into our financial and operating metrics for the second quarter.

We are at an important crossroad. For the last 2.5 years, we have stated our conscious decision to stop highly discounted PUF, and we stated it would be difficult. This prediction has proven true beyond our expectations. No CEO, least of all me, likes to intentionally deflate his company's revenue stream. In July, we closed a renewal of our last large American Legacy PUF, as we told you we were going to do when I spoke in June at the Wall Street conferences.

The PUF challenges are now history. Our future will no longer include negative pressures resulting from PUF deals and their sensation.

Over the last three years, we have undertaken three major initiatives -- first to grow our business, second to transform from a renewal business to an integrated product company, and third, develop a strategy for actual payments. Our results for the first initiative will become clearer and the growth in backlog will begin to level off as our project inventoried matures.

Not only are we getting smarter about revenue dynamics and renewal bookings, and improving our expense structure, but we're also doing a much better job managing our customer implementations. Stress project are at a three-year low. In other words, we are adjusting to the company's ongoing growth mode without creating a services or contracting crisis.

Taking ACI from a no-growth enterprise to one which matures 150 to 200 projects a year has required a learning curve. Fortunately, we are now skilled at maintaining close to 400 projects simultaneously. In these times, we are fortunate to have no shortage of work.

Our efforts to transform from a renewal business to an integrated product company are also largely complete. We have created a balance between product sales, service and R&D. Our restructuring is taking firm hold and costs will continue to improve.

When I state that balances among sales, service and product, I mean the three areas of the companies are working in tandem. We don't have one channel driving business to the detriment of another.

Our efforts to develop a strategy for actual payments is taking hold. We now have a well-defined set of product roadmaps which will transfer our current offerings from point-to-point product sales to infrastructure, hub and service capabilities. This will result in larger, more productive solutions for our customers and larger deals for ACI. We now expect this triple-pronged initiative to yield results that are not dilutive.

We continued to refine the structure of our organization to meet business needs. One outcome of the changes and improvements we have instituted is that Ralph Dangelmaier, who has done a very good job managing the Americas channel, is now leading Global Sales and Service for ACI. I had respect for Ralph's work when we purchased P&H in 2006, and he has brought the same customer-facing diligence to his role at ACI.

I would be remiss if I didn't knowledge the efforts of all of our other employees around the world who have worked so hard to get us to this point.

Before I conclude, I want to comment on the current market conditions. Obviously, the situation is still stressful for financial institutions around the globe. It is my belief, however, that the payments market is still growing regardless of the disruptions and consequent consolidations that are taking place. Market disruptions like this one we have just seen usually herald more and better improvements in payment technology and systems.

Payments are high on banks' customer priorities, much as they were during the '70s and the '90s banking crises.

I specifically perceive EMEA to be our most exciting market segment. In EMEA the bank's capital spending was pretty much dormant during the first months of the year, but now they're getting quite active. Some European banks have large ambitions and interesting plans that dovetail with the solutions we can offer them. The net observation is one of significant stress and also significant opportunity.

I will now turn it over to Ron so that he can give you an update on our Q2 business operations.

Thanks, Phil.

I'm going to start my prepared remarks on slide eight with the business performance. We generally felt good about the quarter's performance, and we closed the midyear where we wanted to be. Our revenues were weaker due to a large $15 million variance related to government-mandated deals, which went live in Q2 of last year. We think there's an important distinction between government-mandated events and regular business with new customer "go lives", so that's why we draw the distinction. There is no five-year recurrence of a mandate event, whereas a new customer begins a recurring five-year renewal and revenue cycle with us.

We also had a negative foreign currency impact on a year-over-year basis, notwithstanding the weakening US dollar, since we reported first quarter in May. We are pleased that the recurring revenue has grown even while the topline revenue figure decreased. Recurring monthly or quarterly revenue gains helped contribute to better quarterly predictability in the business, which we like to see.

We are also experiencing positive results from our cash collection efforts and business cash-management practices. Scott's team is doing well on the cash collection side, and our business operations are smarter about all expenditures of cash. We benefited on the expense side from both the fuller effect from the restructuring actions taken in late 2008 and early '09, as well as from the weaker dollar compared to Q1 of this year.

The expense improvement is real, and we are seeing the savings coming in at a recurring $5 million per quarter, which is pretty much in line with the run rate I told you to look for back in February on our year-end call.

In terms of alliance activities in the quarter, we signed an exciting IBM alliance deal in France with a large bank. Its customer desires the integration of BASE24-eps, Payments Manager, and Proactive Risk Manager in an IBM System P environment. This is a type of repeatable deal we strive for as we cross-sell three value-added products within one SOA environment. We are very interested in this implementation, as it helps us create a benchmark for the installation of a complex multi-product solution within an IBM environment.

Our deal pipeline for the remainder of the year is still robust, particularly in large retail payment system deals. We are anticipating a real ramp between the third and fourth quarters in terms of the dollar value of sold products.

Just as Phil said, our revenue and sales phasing looked very similar to 2008. We think we will have a solid Q3, aided by the July closure of the JPMorgan deal, but we still see a real emphasis on fourth-quarter performance in both sales and revenue. Last year, we saw that phasing on sales, less so on revenue.

Turning to our sales results, this is our standard three-slide depiction of sales segmented by geography, type of sale and type of product.

Slide 9 shows that we had a lot of term extension activity in the quarter, amounting to $44 million of sales versus only $15 million last year. While we saw a similar amount of new account sales, the new application sales were slower than prior year due to mix and timing of what we are selling across geographies as well as the type of RFPs we are seeing in the market.

For instance, there have been a number of wholesale RFPs in the Americas where we would not drop our pricing to economically unattractive rates to match other bidders in the market. We continue to think that our pricing makes sense in terms of the value proposition we offer, and we will remain disciplined in the type of new business we engage in.

Despite the timing issues around new apps, sales were solid from a relationship-management perspective. We had a number of healthy term extension renewals that made the sales quarter a very solid one.

Probably the most important thing I could highlight on this slide is my post-Q2 commentary that we did sign a very large US bank renewal deal in July, which we had highlighted for you at our comments in June at public conferences. This customer is now paying an initial license fee annuity structure at fair value-based pricing. Some components of this customer's contract were formerly structured as pay-up-front transactions on discounted terms.

Slide 10 segments sales by geo and product type. While we still had good numbers in the Americas, it was lower than last year's quarter due to the aforementioned decline in new account sales and the lack of similar capacity add-on type of activity. Last year in the quarter, we had Sterling savings, another American bank, and two US processor deals sales, whereas this year was a quieter quarter for the US business.

However, Latin American renewals were very strong. We renewed Banelco, Banco ABN Amro, and [Real] SA. These renewals in Latin America are a validation of our relationship and market presence, but they do not contribute to sales dollars in the same way big US renewals due.

On the new sales front in the Americas, we saw some competition in online cash management due to robust price battles. We are not interested in utilizing steep discount and pricing packets to win business from the competition, so there are simply some deals that we will have to pass on.

In the sales process, we will continue to emphasize the value of all of our offerings with a pro forma business case that quantifies the return to the bank associated with our differentiated product capabilities. We believe, in the moderate long-term, that this approach will result in the best win ratio while passing on business that simply offers an untenable return.

EMEA had a lower new sales quarter also, but they had some major renewals which mitigated the weakness in new sales. We think our new sales structure will greatly improve the sales management practices in that channel as we globalize our most effective sales management and functional best practices. Global standardization of these practices will enable us to more effectively respond to RFPs in the marketplace and pursue sales opportunities more consistently throughout all of EMEA.

Finally, in Asia-Pac, they had a solid quarter in all respects, exceeding last year's quarterly performance. Their performance spanned both new sales and term renewals. They did a nice job and came in above our expectations for the second quarter.

Slide 11 highlights how our quarterly performance varied by product for the past six quarter, and it is mostly a leave-behind to help you with your analysis around our business model.

We are not trailing far behind last year's performance at this time. However, the way in which we are achieving this performance differs from the half-year summary in 2008. We are seeing stronger term extensions, not even including the large US bank renewal signed at end of July, but weaker new application sales. We think this is somewhat related to the global credit crisis, as the deal flow simply is moving more slowly when it comes to new decisions. Renewals represent a business-as-usual scenario, which is why they signed, irrespective of the economic climate.

Customers are exceedingly cautious, even in situations where they are going to market with comprehensive RFPs to lower the cost of their back offices and are insisting on very thorough cost/benefit analysis prior to awarding any new business.

On a summary basis, Slide 12 covers our geographic operations. Americas continues to consistently improve results, as it has over the last 18-month time period. The channel continues to look both for incremental service fee rises across the business, as well as renewal deals in both Latin and North America. As we move through the renewal cycle in this geography, we are experiencing a nice rise in monthly recurring revenue consistent with our stated aim of a more predictable flow from our current installed customer base.

EMEA performance was impacted by the weaker sterling and euro, compared to the prior year, but if you strip out the impact of the FX and the one-off faster-pay deals in 2008, EMEA is continuing to show good, steady-state performance. As Phil mentioned, we think there are some great deal opportunities in EMEA, and senior management continues to dedicate a lot of time to this channel, as we told you we were going to do at our Q1 call. Right now, EMEA is probably the most interesting channel for us in terms of untapped opportunities in the near term.

Asia gave a solid performance over last year and had some key clients go live on fraud and retail products. One of the go-lives was a risk installation at a large new New Zealand bank which went live on IBM System Z. The go-live took approximately 90 days from installation, a real testament to our partnership with IBM, and the investments we are both making to optimize our delivery model on IBM platforms.

My final slide relates to product and software development. We have spoken a lot over the past order since my responsibilities and operations have affected major business changes.

We have reinvested in our key product competency areas, eliminated product duplication and inefficiencies, and also invested in critical leadership talent. This is bearing fruit in our robust product releases in Q2. I am highlighting releases in retail, wholesale, and payment manager to give you a sense of all the work that is going on with the product team right now.

Product and software development are now working more closely together to provide all necessary support during the selling process while ensuring that our product features, functions and capabilities are aligned to how we price and deliver a new account or a new application solution across all geographies. This is an important improvement over prior practices due to our newly rolled out global processes as well as the new global leadership we have in both our services and product organizations.

So, in concluding my remarks, we remain very encouraged by what we are seeing already in Q3. We have had large deals go live in July in Europe, New Zealand and in our other European large retail chain stores. We see a lot of pent-up demand for product around the world, even while customers are moving cautiously. They are interested in affecting major productivity improvements in their operations, and we are involved in some bidding situations that are very intriguing in terms of how they change our perspective of global customers.

Generally, I am looking forward to sharing with you the details of our busy third quarter next time we are in the marketplace. I will now pass the call over to Scott to address the financials. Thanks.

Thanks, Ron. Good morning, everyone. I will be starting my comments on Slide 15 with the key takeaways from the quarter. I am going to jump right into revenue since Ron has already done a pretty good job of covering our sales performance.

In the second quarter, we saw $87 million of revenue. The decrease compared to the June quarter of 2008 is largely the result of the UK government mandate faster payments that went live in the June 2008 quarter. I did remind investors of this when I spoke at the UBS conference in New York in June.

The June 2008 quarter's revenue is unique in that it had six relatively large UK banks all go live at the same time as a part of a government mandate. So that, along with the Middle East switch go-live last year, really skewed the comparability of the two periods.

So on the positive side, we did continue our trend of seeing increases in year-over-year growth in our recurring revenue base, that being about $1.5 million increase in real dollar terms, which was really despite the negative effects of the foreign-currency headwinds.

The effects of the strengthening of the US dollar compared to the second quarter period of last year reduced revenue by approximately $4 million. The final highlight in this slide -- even though the second quarter was a fairly quiet one for us, we did manage some capital markets activity with our share repurchase program, acquiring approximately 1 million shares at a cost of $15 million. So that still leaves us with about $42 million remaining on our buyback authorization.

Turning now to Slide 16, overall operating expenses were down almost $18 million year-over-year. Here we've provided an expense walk to highlight some of the key reasons for the decline, one being the beneficial impact of foreign currency. That was approximately $3.5 million, so like revenue expenses were also impacted by FX.

Second, our headcount reductions and other cost reduction initiatives that we took in late 2008 resulted in a nearly $5 million reduction in operating costs. Additionally, we saw a nearly $4 million reduction in preferred-cost recognition year-over-year, which is basically the spread between the net recognition of deferred project costs last year as a result of the large go-live events and the net deferral of costs this year, so a $4 million expense reduction there.

Also, if you recall, in 2008, we were transitioning our internal IT to outsource to IBM, so last year, we had a little more than $3 million of transition-related expenses in the second quarter of last year. The remainder of the reduction, a little more than $2 million, includes about a $700,000 reduction in bad debt expense.

Our other income and expense continues to be fairly volatile for us. We saw higher foreign currency exchange losses in the second quarter this year compared to 2008. Adding to that year-over-year variance, we incurred a slight loss on our interest-rate swaps, whereas last year we saw a gain of nearly $3 million. Though not highlighted here, these combined losses were offset by the recognition of a $1 million gain on the finalization of a 2006 sale of certain intellectual property. We've recorded a gain on a cash basis on that, so this quarter, we have received a final $1 million settlement from that sale, so -- but that sale did originate in 2006.

Lastly on this slide, looking at operating free cash flow, we had a strong cash-generation quarter. Just generally speaking, we saw overall improvements in our global cash-collection efforts. Additionally here, I have highlighted some of the key drivers of this quarter's performance.

We mentioned, in the last quarter call, that we had some slippage of trade cash receipts from Q1 into Q2, so a part of this is carryover from Q1. We saw cash savings from our cost-reduction initiatives, and finally lower capital expenditures compared to 2008, so overall, a pretty strong quarter from a cash flow perspective.

Turning now to Slide 17, you'll see we had relatively similar percentage contributions to GAAP revenue from both backlog and current-period sales in 2009 as we did 2008. Obviously, the reduction in absolute dollars of revenue from backlog is the impact of the government mandate events in 2008.

So looking at where we're at here at the midway point in 2009, we are running approximately 7% combined sales to GAAP revenue conversion rate. So just looking at what we need to do from a business perspective to achieve our year-end guidance, it is pretty clear that we expect a larger percentage of current-period revenue from sales in the second half of this year than we saw in the first half. That is pretty consistent with what we achieved in the second half of 2008.

So that leads into Slide 18 with our outlook for the full year 2009. As Phil already stated, we are reaffirming our annual guidance although, as of now, we expect to come in at the low end of the guidance range. We still think there is a skewing towards Q4 on both sales and revenue. Much like 2008, we see sales phasing a lot higher in the fourth quarter than in the third.

Just as a reminder, as we've discussed before, the fourth quarter really sees a disproportionate amount of the annual license fee revenue recognized as what's both billable and recognizable annually in the fourth quarter. That is approximately about a $15 million benefit to our Q4.

So just to summarize, we had a strong cash flow quarter. We continue to get traction and benefits from our 2008 cost-reduction initiatives. Revenue was flat on a sequential basis with Q1 '09, but as Phil indicated in his remarks, we have seen a number of projects go live here in July as well as a key US contract renewal signed here in July as well. So we will obviously see those benefits -- the benefits of those events showing up here in our second-half performance.

That concludes my prepared remarks. Operator, we are now ready to open the line for questions.

(Operator Instructions). John Kraft, D.A. Davidson.

Good morning, gentlemen, and congratulations, Ralph, on the promotion.

I guess to you first, Ralph, I assume you're there. The -- you talked about -- or Ron I guess talked about the new account sales being -- seeing some pricing pressure, and then also later you mentioned cash management. Is that the competitive -- are we talking about the same thing? Is this competitive-based pricing pressure or simply economic pressures?

Well, I will answer the question this way, John. In the last six months, we have taken a step back to sort of review the kinds of deals that we've done in the past. Some of those were at margins and economics that made a lot of sense for ACI, and some of those deals were a little bit thinner. A lot of that had to do with the cost of implementations and us sort of effectively looking at the full costs and how we are going to sort of move these things forward.

So we have put in a fair amount of global process now that will help us better align what comes into the top of the funnel, if you would, from a sales perspective, so that we don't sort of get ahead of ourselves in doing deals at either economics that are underpriced or offering product capabilities that are going to be very hard for us to deliver from a custom perspective. So we've just streamlined our business.

You alluded to Ralph in the first part of your comment. You know, we started doing a lot of this in the Americas and now we are transporting a lot of these best practices to EMEA. It's one of the reasons why he got the promotion he did, to your point.

Okay. So it's not a particular change in the competitive landscape?

John, this is Phil Heasley. A couple of years ago, we had similar -- it is somewhat competitive. A couple of years ago, we had the same kind of situation on retail, on other parts of our product set. What we've done is we have a discipline that says that if we know the deal is going to be sold at a loss, right, do we want to take the loss or do we want a competitor to take the loss? We've decided that, unless it is a very strategic customer and there's some unusual situation, we think it multiplies our opportunities in the future for them to take the loss versus for us to take the loss on those deals.

That doesn't say that -- you know, last year was a record year in cash management, and we expect this to be a very good year for cash management. We are just not going to take every deal regardless of whether it is profitable or not.

No, fair enough. Then, Ron, you mentioned the deal in France. It sounds like it was an IBM partnership deal. Was that an existing IBM customer -- an ACI customer, or what drove that sale?

It was a joint sales process that we had worked on for quite a while with IBM. IBM did have some relationship there; we had some relationship there as well. Basically, we were able to sort of evolve it to the next level. So it was a real big win for both the -- well, for the alliance but certainly IBM and ACI respectively.

John, you know, we already have -- we've had a large relationship in France with -- I don't know if we are supposed to say names or not, but it's basically the [Banco Nationale] -- I guess they call themselves Lyonnais now. It's not B&P anymore, it's BNL. We've had a relationship with their group for a couple of years, and that's been a very successful implementation. IBM was involved in that. But this is too another very large French banking group, and it is somewhat a duplication of the other deal.

Well, congratulations. Scott, just the last question here -- the cost of software license has bounced around considerably, both as a percentage of revenue and on an absolute basis. Can you sort of guide us a little bit towards what you might be expecting going forward?

Well, there is really, in our defined recasted P&L, there's really only two components now on the cost of software. That is the cost of acquired or internally developed IP. For us historically, we haven't had a history of capitalizing significant amounts of IP, so that is primarily acquired through acquisition.

The second component is through third-party product royalties. That's where we are selling other software products embedded with our solutions.

So the amortization of the IP is pretty consistent. That is pretty flat period-over-period. Really the variability in that is coming from our -- basically our sales mix. So depending on what's sold and/or what's recognized as revenue in any given particular quarter and how much of that has third-party products embedded in it, that's really going to drive the variability in that. So, it is really a function, the variability is pretty much a function of the sales and revenue and how much of it is associated or has third-party products embedded in it.

Brett Huff, Stephens Inc.

Good morning and congrats on the nice business trends. Just first of all, just getting to the numbers, can you go through the ForEx discussion again, Scott? I got part of that but I didn't get all of it.

Really, well, there's two drivers of foreign currency. If you look at just topline revenue and costs, on a year-over-year basis, the dollar was stronger in the second quarter of '09 compared to the second quarter of '08, so revenue was down $4 million and costs were down approximately the same amount, so not a significant impact on operating income.

Where we had the movement year-over-year was in our foreign currency gains and losses. That's what we record in other income. Pretty much with that, what drives that is cash and receivables that we have in non-functional currency. That is essentially just a mark-to-market at each quarter end for those open positions. So the movement of the -- the weakening of the dollar in this quarter, compared to where we were at March of 2009, is driving those losses.

Okay, thanks. Then can you give us a sense of color on the impact of the slippage from 2Q to 3Q, the large renewal will have? Can you just size it somehow for us so that we can make sure we understand the impact on 3Q?

I mean, I don't think we are prepared to broadcast what impact it's going to have on the quarter. I would say obviously that renewal, as well as the number of go-live events that we saw here in July, are going to -- we're going to see benefits of that here in Q3.

Then can you talk a little bit about the eps sales that you mentioned? I think those are part of the go-lives that you mentioned just a second ago. But also, in terms of renewals, how is the upgrade to eps going as well as the obviously positive renewals even just remaining on classic at better prices? Can you comment on both of those things?

Well, I will comment on the go-live. We had three very large customers in EMEA that have gone live just in the last three weeks of the month. In fact, we've had seven go-lives in July already.

I think what's most notable about these three customers, they are all BASE24-eps, usually in combination with Payment Manager. One also included MTS and various custom work that we did around these. I would say these projects have been going on for the two-year time frame if not slightly longer. It is a seminal moment for us, as Phil sort of pointed out, because when we first did these, we did not have the kinds of services, capabilities completely in place, especially in EMEA, to execute on these with the efficiency that we would have liked.

So now that we've gotten through some of these challenging products, frankly the good news is the customers are thrilled because we did put a lot of blood, sweat and tears into this and get it to work for them in the right way.

But most importantly is that we now have the capabilities going forward so that we can more effectively do multi-product solution implementations in a more robust way and efficient way.

Yes, and this is Phil. I would like to add a little more color on that. I don't want to steal next quarter's call, but one is we will - on the MTS means the wholesale side -- we will have one -- you know, we have, as of the middle of July, we now have one of the largest-volume commercial SEPA-enabled systems in all of Europe. We are very, very proud of that. That has been 2.5 years worth of work and it's a very, very big player.

The other thing is that we now have eps running in Spain and in Italy live on the mainframe, on the IBM mainframe, and again very, very large -- one is a very large European Bank; the other one is a very large retail big credit card player. So we are very pleased with some of these projects and it's worth noting.

Okay, thanks. And then the last question is can you talk a little bit more about the success you've had on -- in the renewal conversation? Obviously, the one that you've renewed 3Q is a big deal, but there are two things that I think you've talked about in the past. Number one is getting better pricing on an apples-to-apples basis if somebody doesn't upgrade from, say, classic to eps yet. Can you comment on how that's going and whether you're still getting those prices?

Then number two, for those successes that you've had in getting larger, more existing customers on classic to upgrade to eps, can you tell us how the timeframe in terms of that implementation is going?

Yes, we've basically gone from trying to make a quarter by putting a $15 million, $20 million highly discounted deal into the quarter to having five-year reasonable market-realistic pricing in place. Like I said, I don't want to talk about any particular customer, but we are now -- we've basically gotten to the point that we've renewed the vast majority of the big ones and that, from a go-forward standpoint, it is no longer going to be a negative in terms of what we are doing.

We've also signed them on a philosophy which is like-for-like. What like-for-like says is that whenever they are ready to move to eps, their renewal recognizes the like-for-like value. So if someone wants to move in two or three years, we recognize the like-for-like value of EPS versus classic.

Even though we've signed -- we are closing in on 70 new eps sales. We've had very few, at this point, conversions from classic to EPS, and the reason being is that most of these are going to end up being multi-year, very large activities. And I know you hear a lot of [press].

The other thing is that a lot of these companies -- say an American bank who is a big customer of ours, if you actually get in their D&A, you will find out that they probably -- one of them has 85 what were licenses that we sold over the past, and they haven't totally standardized what they have. So in order for them to go to the next level of open technology and whatnot, they are going to have -- they'll have a big operating phase but they also have a pretty big science project going from probably 4 or 5 or 15 different ways they are confronting their customers today to 1 standardized kind of solution. So those projects are going to end up becoming multiyear projects, big productivity saves for the customers, but it's just not going to be shutting out -- it's not going to be taking one diskette out and putting another diskette in.

Great, that's what I needed. Thank you.

George Sutton, Craig-Hallum.

Phil, I wonder if we can talk bigger picture in beyond 2009. Combining Ron's mention of pent-up demand and the broader integrated product shift, what does the growth opportunity look like, in your opinion, beyond 2009?

Well, I think the opportunity looks good. I think, in today's world, it's really crazy to be too forward-looking because of what's going on. But clearly, both Ron and I said this. EMEA has to go through a -- you know, SEPA is going to -- Europe is going to -- if they are really going to be a single European economic force, you're going to see the consolidation of banks continuing, and that's going to create a lot of opportunity. A lot of people think of it in terms of the mandates. I don't think it's so much the mandates as it is the actual consolidation itself and really meeting robust, high-volume durable kinds of infrastructures.

Asia, although it is starting off of a low base, it will have the highest growth rate. China has to rebuild. Brazil is actively rebuilding. India is rebuilding. We still haven't been able to perceive or been brave enough to see Russia as a big opportunity, but those other places are doing well.

I think Ralph, to his credit -- and Ralph's not on the phone; Ralph is on vacation. Ralph, to his credit, has seen the real opportunity in the Americas versus perceiving it as a mature market and whatnot.

I think the biggest transition we are going to go through that will kind of change the size of business we are at is whereas we do business with a customer defined as ten customers because they have ten subsidiaries around the world, we are more and more having a single dialog at the corporate level, and they are looking to truly globalize what they are doing into a more singular offering. I think what that's going to do is we're not going to do more deals than we've been doing. I think we're going to start doing much larger deals than we've been doing, and I think that's going to be the transformation.

So how that comes to a percentage growth number for '10 or '11, we are not ready to talk about, but don't see it as -- we see it as a growing market, not a shrinking market. But we're not going to assign a number to it.

I would just add, George, Phil sort of covered the various aspects of topline growth. We still think that, from a bottom-line productivity perspective, there's a lot of maneuvering that we have on a go-forward basis which should contribute to sort of healthy bottom-line growth. So it's certainly not the case where we are going to provide guidance going forward, but I think the mechanics of those things are all in place for a while.

Yes, George, you're going to hear us speaking a lot more about getting our services margins to where they need to be. You know, we've made a large investment in our IBM relationship but we haven't booked a dollar of incremental revenue from that deal and we've spent a lot of incremental expense dollars in that deal. We are expecting that to mature as we look into next year and the year after.

We're also looking to make sure that -- and I think we're also going to be working harder on our maintenance margins, which some of the stuff we've been doing already does that. So, yes, it's very -- we do expect growth in the topline; we're not willing to talk about it. But we are nowhere near done getting the efficiency of the operating model in place.

Well, the discussion helps me understand your expectation for much larger size deals, so I appreciate that. Looking closer into Q4, it does strike me as challenging to combine a need to grab some sales opportunities in Q4 while at the same time pushing a no-discounting theme. How are you managing those contradictory challenges?

I think the really good customers out there are much more driven by -- they are going to do a deal; they are going to risk adjust that deal for what they think they are going to pay to what they're actually going to pay and against their productivity and growth assumptions. I think there's a lot of business for us in that category without us chasing the 10%, 15% of deals that, for whatever reason, cost versus effective cost is the only thing that drives it. In the past, we went through that same thing only to pick up about half of those customers two years in when it's been attempted otherwise. So I don't think it really dilutes the marketplace in a -- you know, it's disappointing for commission people. It's not disappointing from a -- how big is the environment and what you can yield from us.

I would just add, George, to Phil's comments that, as the deals are getting larger and more strategic, certainly all customers want fair and balanced pricing. But it's not sort of the one-off product set of the day where you are just trying to get something that is commoditized at the lowest cost. We would like to think that our combination of product assets, combined with the services wrapper, create the kind of solutions that ACI is uniquely positioned to sort of offer in the marketplace. So that helps us quite a bit in preventing sort of downward pressures on the larger, more strategic types of deals.

Lastly, if I could, for me, Phil mentioned the IBM relationship not driving incremental revenues, if I heard you correctly. What is the thought process around that relationship? Is there an inflection point we should anticipate at some point with respect to the deal flow coming from that channel?

Well, I am less talking about deal flow than the fact that the way the contract is --

-- okay, revenue recognition.

-- is structured, we have yet to spend the money every quarter. We don't get to recognize any revenue.

This is Scott. There's really two components that drive. What Phil was referring to is that we have -- we earn sales incentives under the joint sales and marketing portion of the alliance.

Right now, as long as we're still in the mode of developing some of the technical and software, we are not allowed, under the accounting rules, to recognize any of that incentive revenue. So that's the component (inaudible) says right now we are earning but we are not able to recognize. That will be recognized in future years.

Gil Luria, Wedbush.

Yes, thanks for taking my question. In your guidance, by maintaining the low end of your guidance for the year, I think you implying that you are going to have about $65 million of incremental revenue in the second half versus the first half. I think you touched on a couple of the components of that. One is the $15 million of annual license fees that you collect in the fourth quarter and those are probably set. Then you have the big renewal that you had in July that's probably some piece of that. But that probably leaves $40 million to $50 million of incremental revenue in the second half of the year. How much of that do you expect to come in the fourth quarter?

I would say that, both from a sales and a revenue perspective, we are expecting Q4 to be stronger than Q3. So the phasing will look similar to last year. In terms of a sales perspective and based on what we're seeing right now in terms of our expectations of sales-to-revenue conversion, it is going to be higher in Q4.

So then let's say the $30 million magnitude of incremental sales -- incremental revenue in Q4 versus the run rate in the first two quarters of the year. How much of those could be pushed out into the first quarter? How much of it could be pushed out? We're talking about longer implementation cycles, longer sales cycles? How much of that is at risk of getting pushed out to next year?

Look, obviously, to the extent that it's going to Q4, we do run the risk of it crossing years. But based on where were at today with whether it's a sales cycle or an implementation cycle with respect to a go-live event, at this point, we are comfortable we will get those in Q4. But yes, there is a risk anything that gets closer to the end of the fiscal year, that it could spill over.

Gil, this is Ron speaking. I would just add, from an implementation perspective, it's just not a new sales-driven phenomenon. Obviously, as we sort of get projects done, which we've been more effective doing in the last six months, and our leaders are sort of getting the troops to do the kinds of things in a more effective manner, that should have a positive impact as well, both in Q3 as well as Q4, to getting and closing some of that gap that you alluded to.

Yes, I would say, too, just two bullet points. One is that we are still working on our cost base. And two, Scott, what do we have? $15 million in ALFs that come in the fourth quarter every year?

Right, that's right.

That being the annual license fees?

Right.

Okay, then I also wanted to ask about cash flow. You maintained the guidance for everything else. I'm assuming you are also maintaining your guidance for cash flow for the year.

Yes, and technically we didn't provide guidance. We provided the components of it, but the information in summary we provided at our investor day, we are still comfortable with that for the full year.

But then, in terms of capital expenditure, you've been below trendline for the last three quarters. Is this a new sustainable rate that you've achieved a lot because of the prior investment in IBMs, or is this really below trendline capital expenditure that's going to have to go back to trendline going forward?

Well, I think if you look year-over-year, last year we had a significant amount of capital expenditure related to our new facility in Omaha. So, I would say that this year's quarters -- I mean, we have been very disciplined about our capital expenditures, and that discipline will continue.

I'm not sure much. I still think we're tracking generally for the -- you know, as trending this way for the year. I'm not sure at this point into next year. We have not gone through the capital budgeting process for next year, but I would say we are trending pretty well for the rest of this year.

Scott, the IT outsourcing converted what had been certain capital spending to expenses, correct?

In some cases, certainly in terms of cash CapEx, yes.

Got it, thank you.

Franco Turrinelli, William Blair & Co.

Good morning, everyone. First, I'd like to -- I think, Ron, you made a comment that you had a number of global opportunities that were particularly intriguing, and I was intrigued by your comment. Could you give us a little bit more color on what it is about those that is particularly interesting right now?

Sure. Well, as we've been saying for the last several quarters, these tend to be deals that have very long cycle times. The good news is one of the reasons we even talked about third and fourth quarter sort of being the size that we think they're going to be to get within guidance is that they are larger global-sized deals that we have been managing very carefully with the customer through this long selling cycle.

I think what's intriguing about them, in the past perhaps, there's a lot of focus obviously on the license fee component to these deals. What's interesting is, as we get to more of a solution-sale approach and the selling of a solution and the implementation of a solution, there is an ever-larger services component to these deals as well which should add nicely to the top line.

So these are both reasons why we are getting the larger deal size that Phil alluded to with call it the tier 1 and tier 2 banks and processors. Frankly, in a lot of markets, we are trying to de-emphasize the smaller-sized deals that would make us go through a lot of resource utilization, if you would, to implement something that has just a smaller deal size associated with it. So we are trying to figure out the best balance for that, but certainly these large deals represent a substantial license and services aspect for growth for our business.

Thank you. That's helpful.

I don't know if this is more for Scott or for Phil. As you point out that now we've kind of gone through the majority of the process of converting the PUFs to recurring revenue, I am assuming that other than issues of timing in terms of when a particular contract falls -- contracts fall, that the term extension and to a certain extent the add-on business components and sales should become much more predictable or regular. Is that kind of a fair statement?

I mean I would say, generally, yes. I mean, there is still, to the extent that there are -- for example, if we contract for annual license fees versus, say, monthly license fees, you'll still have -- even on a term extension, you'll still have some lumpiness on that annual license fee component.

If it's structured as a monthly license fee, that will show up ratably throughout the deal term. So there still can be lumpiness on the annual license fee component. Capacity bumps are still going to result in some lumpiness in the P&L. So obviously, the recurring portion of our revenue base is consistently trending upward. So, that's becoming a larger and larger portion of our total revenue. But there will still be periods of lumpiness depending on the number of deal signings, the number of go-live events, when we're pulling forward out of backlog, both services as well as license and maintenance, in some cases, that has been build up in deferred revenue and in backlog during the implementation cycle. So we will still see lumpiness in the revenue line.

Yes. To answer it, I agree with everything that Scott said. I think what will make it a little more predictable is the fact that we went for years on a five-year contract that renewed 3.75 to 4.25 years into the contract. Going and re-stabilizing everybody into logical pricing tiers and whatnot pretty much drove us to 4 years and 360-some days in terms of renewal. So we've basically re-stabilized the renewal, and I, quite honestly, missed that. I did not believe that it would push the renewals out to virtually five years so that we in effect created a hiatus there, Franco, that I should have predicted and I didn't predict, so whether it was six months or nine months or whatever, but we lost some time and therefore some predictability because of that.

Right. Scott, I think understand that in terms of the particularly annual renewals will fall at the end of the year or whatever it is, but kind of year-over-year, but the pattern during the year of at least the term extension should be fairly predictable.

What I wanted to segue to -- and in a sense this is maybe also a question for Phil -- is it seems to me that we are or are getting pretty close to the point where both we, and I think you, are going to start to spend more time worrying or thinking about that new account and new application kind of category. I've got two questions related to that. One is obviously you've got a tremendous portfolio of products; and Phil, you've commented before that your penetration with your customers is pretty low, so I am kind of curious as to what Ralph or what the company generally has planned for that.

Then the other thing, Phil, is I'm curious if you are agreeing with the statement that, over maybe the last couple of years, really since the PNH acquisition that brought Ralph in, you have been somewhat inwardly focused on the product portfolio and if anything have been reducing and rationalizing the product portfolio. I'm wondering if we are getting closer to the point where you're going to kind of stick your head up above the trenches again and take a look around, and what your thought on that was.

I think you are absolutely -- let me be clear, but I think you're absolutely correct. If you were to go and sit in a room with Ron and I, what we were worried about 6, 9 months ago, 12 months ago was getting through all of this restructuring and the renewals of these PUF accounts and whatnot.

Now, what we sit down -- is we are very interested in rational organic growth, which is the growth of more units and whatnot. Quite honestly, getting out of being totally a point-to-point, a product solution provider and -- a product provider and becoming much more a solution provider. That's what Ron was talking about in terms of those interesting deals around the world.

We have done -- you know, we've been more quiet than noisy in terms of paring the old -- I don't think it was within the culture of ACI to ever want a mature product, right? If you sold it 20 years ago, you should be maintaining it 20 years from now and up. So a lot of what we are doing is actually coming out with a very clear what is called the agile -- the strategy for agile payments. Louis Blatt, Dr. Blatt, our new Head of Product, has done a really good job in terms of laying out very specific roadmaps for what we need to do and having a fairly good understanding of what we need to build, buy or divest, right, in terms of actually getting there.

Actually, we have, under nondisclosure, we've taken most of the industry analysts through it. We've taken a couple of the big consulting agencies through it and whatnot. We are just about ready to go public with that. I don't know if you, Ron, have anything.

No, I think this is -- it's a great question. If you look at what we've been doing over the last three to four quarters, we've been really preparing the company organizationally to figure to grow, while we are sort of figuring these dis-economic deals around PUFs, etc. So I really couldn't agree with everything more that Phil is saying.

You know, the easy thing to do with the business is to take out costs. The more challenging yet fun part of it is to apply the resources in a way that are going to grow the top line of the business organically. We feel comfortable that we have the resources now to do that and making the investments to look at both organic and even inorganic ways that we can evolve our product line, our solution line, our services line, all things that are going to contribute to the top line growth in hopefully a step-function way as we build the business.

We have reached the allotted time for questions. Ms. Gerber, are there any closing remarks?

I think that there is nothing besides we want to thank everybody for joining us. We will be at the William Blair conference in New York on October 6. In the interim, you are free to call me. Thanks for joining us. We will see you next time.

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