ACI Worldwide Inc (ACIW) 2009 Q4 法說會逐字稿

Good morning. My name is Amanda. I will be your conference operator today.

At this time I would like to welcome everyone to the ACI Worldwide financial results for Q4 and year ending 2009 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session.

(Operator Instructions)

Thank you. I now turn the call over to Tamar Gerber, VP of Investor Relations. You may begin your conference.

Thank you, Amanda. Good morning, everyone. Welcome to our year-end earnings call.

Before we get started, I wanted to remind that you ACI will be holding its third annual Investor Day next Thursday, March 4th, in Boston at the Lenox Hotel, and we hope to see many of you there. Please contact me directly if you need further information on this upcoming event.

The substance of today's call, like all of our earnings events, is subject to both Safe Harbor and forward-looking cautionary statements. You can find the full texts of both the Safe Harbor and forward-looking statements on the first and final pages of our presentation deck today, a copy of which is available on our website, as well as filed with the SEC this morning.

Our management speakers today will be Phil Heasley, our CEO; Ron Totaro, our COO; and Scott Behrens, our CFO. All three management members will be available for Q&A following our prepared remarks.

I will now hand the call over to Phil Heasley for his opening remarks.

Good morning, and thank you for joining our year-end earnings call. I would like to share a few summary thoughts on ACI's 2009 performance, before I hand the call over to Ron to discuss the business operations this past year.

I have been saying for a number of years that 2009 would represent an inflection point for our business. I think our results proved that. We demonstrated the ability to grow recurring revenue across all categories, and saw $7.6 million rise in that metric, led by maintenance growth in particular. Maintenance was positively impacted by renegotiating contracts throughout the business; with a new economic rate pricing, it has now begun to impact our recurring maintenance streams.

We announced a restructuring in September of 2008; much of the head count reduced in that exercise related to the rationalization of our head count. We reinvested capital over the past two years in our Asian, EMEA and Latin American operations. Once those engineering centers were up and running, ACI was in a position to globalize our service centers. In doing so, we were able to reduce our head count expense by approximately $30 million over the prior year. And the new Centers of Excellence more closely match the areas of the world where we're investing in customer growth.

We sold $425 million worth of product during 2009. This accomplishment took place against the backdrop of unusual financial sector dislocation, and the total shut down of major European bank decision-making in the first four months of the your. I am pleased with our performance, especially under such challenging circumstances. Our operating free cash flow remains stable in 2009 versus 2008, as we managed accounts receivable and operating expenses carefully. The discipline is now embedded within the business organization, and I expect us to continue to manage both OpEx and receivables prudently in the future.

Finally, we have doubled our operating income. I have shared with our owners in the past that our profitability growth is the key metric in the business, and I am proud that we have doubled it over the last year. The improvement I am expecting in 2010 represents a 15% to 20% rise over 2009's operating income figures, and represents another step on our way to our goal of 20% operating margin.

I am now turning the call over to my team to discuss the quarter, and the year in review. Ron, you can go ahead.

Thanks, Phil, and good morning to everyone.

I am going to start my prepared remarks with slide seven. Phil alluded to our strong sales performance during 2009, and you can see that the contracting processes and deal review we have implemented over my time here at ACI have resulted in better margin and higher recurring revenue deals. The former [pup] deals are now delivering desirable economic rates of return, as well as predictable monthly recurring revenue streams. New deals are vetted through the Deal Review Committee, and we're now rejecting potential deals if the economics of the transaction do not make sense for us.

The financial crisis has begun to slow down the sales cycle as far back as Q4 of 2008, but in 2009 the credit crisis manifested itself in the amount of business we did in new sales applications, compared to the prior year. ACI sold approximately 30 million fewer new applications to new sales clients in 2009, compared to 2008, while we held our own on add-on business and term extension deals. This means that we think there are a lot of potential and interesting new client deals that could occur in 2010, because deal horizons lengthened during 2009, and this year pent-up demand should finally be realized.

Finally, the change in the macro credit environment led customers to examine their global back office operations more closely; and some customers, even in the processor segment, began to reach out us proactively to discuss the possibility of managing our business with them on a global account management basis. So we think that this development represents a new potential way to view our business partners who share global footprints, and understand their needs on a better and deeper level. We expect to see some nice results from this account management approach in 2010.

If you look at the sales on a quarterly basis, as shown on slide eight, it is clear the quarter did not have as many large-sized term extension deal. We did 22% less business from a dollar perspective in term renewals, due to timing. But we saw a small uptick in new applications and add-ons in the quarter. Interestingly enough, even though we sold 10% less than Q4 2009 compared to Q4 2008, the number that really stands out is our wholesale system sales, which rose 167% over prior year.

Enterprise Banker system sales were up $24 million, largely predicated upon hard-won renewals. One of them in particular was interesting because it involved a customer in the midst of a cross-border bank M&A deal, which provided another level of complexity into the transaction. Approximately $5 million of the quarter-over-quarter variance in Enterprise Banker related to new customers. In our Money Transfer System product, we saw a $27 million rise over last year. Most of the sales came from cross-selling to existing customers, with a smaller amount of dollars coming from renewals in the Americas.

Slide nine depicts our customer sales by geography. As you can see, the concentration of customer sales dollars in the Americas contracted significantly over last year's Q4, when we saw both the variable large bank and large processor customer renew. This quarter, we're less concentrated on a few mega-deals in the Americas, even though we did sell a fair amount of wholesale business. Nine of our top 15 sales deals still occurred in the Americas channels, so we've continued to perform in spite of the strains the financial crisis has put on our customers.

In EMEA, we saw similar deal-sized concentration to last year's fourth quarter. Sales remain heavily weighted towards retail payment systems. Approximately $20 million of sales occurred in what we call the northern region of EMEA, which includes the UK and Scandinavian countries. Most of our business consisted of add-on product sales at existing customers. Asia had several good-sized sales in both Australia and Indonesia, and Australia continues to be a country where particularly interesting and complex multi-product deal opportunities lie for us.

Turning to slide ten, this highlights our stand summary page of year-over-year sales mix by quarter. The good news is that add-ons and term extensions for the most part held steady year-over-year. Term extensions are dictated by timing over five-year deal renewals, whereas add-ons are more discretionary, so it's good to see them come in at the same level as prior year.

We have spoken throughout the year of a new account and new application drop-off, as customers have been slow to sign contracts even while spending many months in discussions with us. This is one reason why we anticipate so many new apps and account deals in this coming year, as these deals finally come around. As you can see in the chart, we saw a 23% drop in new account sales versus 2008, largely due to the sales cycle issues related to the credit crisis as mentioned. New applications dropped 34%, but most of that $19 million difference was driven by one quarter's large variation. In Q2 2008 we booked one mega--sized transaction, which accounted for approximately half of all dollars generated in new apps. Additionally, there were six deals in prior year sized over $1 million, versus one deal of that size in the 2009 second quarter.

On slide 11, I am going to discuss the Americas in greater detail. Overall, we had 28 client projects go live in the Americas, of which only two projects were BASE24-eps. Seven were MTS systems, 11 were Enterprise Banker, and the remainder were for our Payments Manager risk -- for Retail Commerce Server offerings. As a result, we're seeing more product demand outside of our traditional retail segment. We anticipate this trend to continue, as we partner with our base of retail customers to provide more holistic payment solutions covering the breadth of ACI's product portfolio, and it is a testament to the professional services capability we have improved on in our effort to complete client projects in a more timely and profitable manner.

The revenue rise over Q4 2008 was strongly driven by our success in bringing services revenues and associated license fee revenue from the balance sheet forward into our operating income, as a result of completed customer projects. The annual revenue rise really had to do with the cumulative impact of customer go-live project completions throughout the second half of the year, as well as the associated higher recurring maintenance and monthly licensed revenue fees. We are seeing more On-Demand business emerging, as it relates to our Retail Commerce Server and Enterprise Banker offerings. Customers continue to like the flexibility of our outsourcing solution, and our ability to provide them with speed-to-market as a lower-cost alternative. Additionally, fueling this increase in On-Demand business is our expansion of EB functionality, as demonstrated through our ability to drive add-on business with existing customers, and the signing of five new customers in the US. Our Latin America segment continues to flourish, based on success in securing health renewals, and in response to capacity revenue upticks driven by growth in these local economies.

And looking ahead to 2010 in the Americas on slide 12, we anticipate more cross-selling as we -- as well as sales of our risk and fraud management solutions. In the quarter just completed, we sold more wholesale than retail payment systems for the first time in the history of the Company, which demonstrates our successfully we can cross-leverage our long-standing BASE24 relationships and drive further diversification and growth of our revenue streams. Canada and Latin America should continue to see BASE24-eps growth, and Latin America will see continued attention to renewals.

Turning to slide 13, EMEA performance in the fourth quarter came back on track after a challenging first half of 2009. EMEA had 16 go-lives of deals which were backlogged previous to this quarter, with over half of them BASE24 Retail systems. We spoke earlier this year of how EMEA simply was not selling much in the first half of the yea,r largely due to banks unsettled budgets after the unprecedented government bailouts. Q4 demonstrated that EMEA is beginning to normalize from a sales cycle perspective, and is coming back to life. Even though annual revenues were up 19% over 2008, some of that drop-off was related to the one-time faster payments mandate, and to the FX impact of very strong sterling and euro during the prior year. BASE24-eps is making inroads with customers, and major banks in both France and South Africa signed up for both newer systems. EMEA sold 24 deals with over $1 million of value, and saw a lot of progress in services and sales, where we successfully rolled out more enhanced support programs. The deal in France also marked an important milestone, as we now represent the majority of the French retail market, up from a nominal market share only three years ago.

Looking ahead to 2010 on slide 14, we think EMEA should have solid and predictable growth. The new product alliance with Bell ID, and the acquisition of Essentis, will be additive and compelling enhancements to our global retail solution offering, especially in the UK, Western Europe and the Middle East. There are a lot of interesting and large-scale global account deals that are centered around this geography, which will deepen the sales cycle on right now. There are a few key renewals coming up in 2010 in the UK, and with several key processor accounts. In short, we expect to have a much busier year in EMEA this coming up year, as compared to 2009.

As shown on slide 15, Asia-Pacific saw some healthy go-live activity in risk products during the fourth quarter, led by two implementations in Australia and Indonesia. Annual revenues grew at a nice 11% rate over prior year, although we think sales are somewhat slowed by the market conditions. Most importantly, we will continue to push new professional services projects out into live status, and expect continued focus and improvement on product execution in Southeast Asia.

Turning to slide 16, this coming year should bring similar cross-sale opportunities in APAC as to those we highlighted in the Americas channel, while we continue to concentrate on our China direct model, and make prudent investments there to build necessary customer-facing and product capabilities. ASEAN will continue to be an area of emphasis in both retail and wholesale systems, and we expect to continue our expansion of BASE24 into those markets which are more underserved today.

Slide 17 provides an annual snapshot of the type of industries into which we sell our products. We continue to sell nearly 70% of our revenue into banks and credit unions, although the dollar amounts shrank a bit as large regulatory mandates, like the one we had with faster payments in the UK, did not recur in 2009. Processors still comprise our next largest segment, at 17% of revenue concentration. The retail category and our other remaining segments round out our industry types, and account for the remaining 15% of revenue, and is very similar to last year's performance. Our product attrition rates dropped slightly from 4% to 3% this year, and and we remain pleased with the stickiness of our products.

I am now going to turn to product and cost initiatives instituted during the course of the year. As you can see in slide 19, we implemented several IBM Alliance hardware systems in EMEA and Asia, in both risk and retail environment. We also did a regulatory upgrade of the MTS program for the EMEA market.

Slide 20 highlights our largest product initiative this past year, which was the rollout of our Agile Payment Solution approach in the marketplace. As I have discussed before, this represents a more encompassing next-generation approach of what we formerly called our hub view of the product world. We have now identified 11 key products, which will encompass the various stages of a payment's life cycle in segments we identify as initiate, manage, secure and operate. We think this will help customers better understand how they can cross-leverage our solutions and services offerings with their existing payment infrastructure, to help them effectively grow, integrate and manage their payment platforms.

Turning to slide 21, our new Alliance leader who joined us from Accenture, Jon Elwyn, rolled out a comprehensive strategy to examine our Alliance activities across our platforms and geographies, including the predominant IBM Alliance relationship. We have begun to assess and refine our Alliance programs to ensure that we are maximizing these opportunities to their fullest, while exploring opportunities for new Alliance relationships.

In terms of the IBM relationship, we have sold some substantial deals in the EMEA region this year in both Western Europe and in the Middle East. IBM sales in total have risen 31% over 2008 to equal $162 million in the 2009 calendar year. More impressively, 63% of all new sales are on an IBM platform. Clearly, the Alliance has allowed us to tap into cross-sale opportunities that might not have been open to us had our products not been IBM-optimized, while diversifying the hardware platforms our applications run on. We remain very pleased with the progress of the Alliance.

Slide 22 is my final page before turning it over to Scott to run you through financials. A year and-a-half ago, I shared with you a major restructuring plan which we carefully implemented after first spending six months of determining where we wanted to take the Company, and what capabilities and resources were required to get us there. Large head count rationalizations occurred, mainly in Q4 2008 and Q1 2009. This exercise was an important step that enabled us to reinvest in new capabilities and leadership to drive innovation, and higher resources in developing regions of the world where we anticipate robust, strong future -- revenue opportunities in the future.

We succeeded in reducing our costs by $31 million over prior year, which is slightly better than the figure I told you we would achieve when we spoke one year ago. We did so even while reinvesting in over 20 new leaders to drive global competencies in product management, development, sales, services, alliances, customer management and finance. We have also looked more critically at acquisitions and alliances, and have tried to more prudently use our cash and our ability to partner in order to achieve more relevant product scope for our customers throughout the world.

In short, it has been a period of significant internal change during a period of unprecedented market conditions. But you can see that the business held its own, and in some respects even grew, as we pared away at inefficiencies in our structure. While we realize that our [conscious] exercise was hard on our associates, we think the outcome has been successful, as it lays a firm foundation for the Company, and sets the stage for future growth. I have been involved in restructurings many times over my career, and believe that this reinvestment approach will reap rewards for ACI.

Finally, as you all know from our announcement this morning, I will be leaving ACI to pursue a CEO position at a private eCommerce company. I have been privileged to work with Phil and the entire organization over the last two years, and am very pleased to have played a role in aligning the organization, building new capabilities to capitalize on the key growth strategies, while providing business process improvements and functional best practices across our global business. ACI is in a much stronger position than it was when I arrived two years ago, and the current management team is very well positioned to continue on the path to take ACI to the next level.

I am now finished with my prepared remarks, and will be available for Q&A afterwards, and I will turn it over to Scott.

Thanks, Ron, and good morning everyone.

I will be starting my comments on slide 24, with key takeaways from the quarter. Overall, we had a strong quarterly performance, and we're generally in line with the expectations we communicated in our Q3 earnings call. We saw a significant increase in operating income, both compared to Q4 of 2008 as well as sequentially compared to Q3 2009, and we ended slightly above the high end of the range we provided at our Q3 call. Probably the biggest surprise, and it was an upside surprise, was the strong cash flow in the fourth quarter. In November, we had anticipated operating free cash flow to come in around $20 million, but we actually came in around $30 million, driven by combination of strong cash collection efforts coupled with our continued focus on cost management.

Looking at revenue, Q4 of 2009 was a record revenue quarter for us, led by a number of customer project go-live events. We had approximately 48 customer project go-lives in the quarter. Five of those customers contributed nearly $15 million to our fourth quarter revenue alone, and included banking customers in Asia, Europe, the Middle East, as well as in North America; so really a broad global contribution. The quarter also saw strong growth in our recurring revenue over last year's fourth quarter; a rise of nearly $6 million, or almost 10%. So overall, a good mix of growth in both our recurring revenue stream as well as revenue from go-live projects.

Finally, our sales numbers were very strong, especially coming at the tail end of such a challenging year for the banking customer market. Compared to Q4 of 2008, a quarter where we saw a few large term renewal deals signed that made up large percentage of our sales number, this year's fourth quarter saw probably a better mix of deals, and was less reliant on a few large deals. So overall, a pretty good mix of sales in Q4 of 2009.

Turning now to slide 25, with key takeaways from the full-year 2009. Operating income rose $20 million, or more than 90% compared to the full-year 2008. This growth was driven largely by our cost reduction initiatives that Ron mentioned, that we actioned starting in the fall of 2008 and carried forward into 2009. Recurring revenue for the full year grew nearly $8 million, led by growth in our maintenance fee and services fee revenue. And really, if you exclude the impact of foreign currency movements, the full-year revenue was relatively flat with 2008. About 80% of our total decline came from foreign currency movements. And finally, on expenses we saw significant improvement in operating expenses compared to 2008, again driven by our cost reduction initiatives as well as the benefits of the foreign currency movements.

And while we don't tend to spend much time discussing our other income and expense, that being below operating income, it is important to point out that the year-over-year impact of foreign currency gains and losses, and our swap, were rather sizeable. The full-year 2008 had a net gain from these two items of about $8 million, being primarily foreign currency gains, while the full-year 2009 came in at a net loss of about $7 million, again primarily FX losses, for a net unfavorable swing of about $15 million year-over-year. So, assuming about a 40% effective tax rate, this equates to a decrease of about $0.26 per diluted share when comparing 2009 to full-year 2008. So to put it in perspective, our growth in earnings per share of $0.27 from 2008 to 2009 had to really come up -- overcome the headwinds of this $0.26 negative year-over-year swing in our foreign currency and swap losses.

Turning to slide 26, this is our normal depiction of the ratio of revenue derived from backlog, versus that revenue that is derived from current-period sales. You can see revenue from backlog rose 27% over last year's period. This was led by higher project go-lives in Q4 of 2009 compared to Q4 of 2008. And then at 90% contribution rate, the amount of current-period revenue generated from backlog is relatively high compared to last year's fourth quarter, but actually fairly comparable to the other quarters of 2009. So overall, we're very pleased to see the more predictable backlog revenue within our quarterly revenue mix.

Turning now to slide 27, this slide illustrates graphically the trending of our revenue over the past eight quarters. You can see in general our revenues remained back-end loaded in both years, and as we highlighted before the fourth quarter, does see the recognition of about $15 million in annual license fees, which makes up a key part of our seasonality. And another observation, it -- is the go-live of the large UK faster payments mandate in the second quarter of 2008 sort of distorts that back-end loaded trend a bit, but generally speaking we expect this trend -- this back-end loaded trend of revenue in the latter half of the year to continue in 2010.

Similarly, slide 28 is an illustration of the trending of our operating income over the same eight-quarter period. Both years show positive second half performance compared to the first half, and that's driven primarily by higher revenues we're seeing in the second half of the year. I mean, a general commentary about our operating expenses is we -- our operating expenses have become more stable, leveling out at about $90 million a quarter, plus or minus. And because of the nature of our cost base, our operating expenses generally tend to be relatively flat -- relatively fixed in nature. And we have been better able to manage that -- that level of cost, that cost base the past five or six quarters. So top line revenue has really the driver of our trending and operating income quarter-to-quarter.

On slide 29 we summarize our full-year results compared to the most recent guidance. We anticipated, and for that matter achieved, a tremendous sales quarter to end 2009, which enabled us to reach the upper end of our sales guidance range. Of particular note, our sales of wholesale solutions reached a milestone in Q4, outselling our retail systems for the first time in our history. Revenue came in as expected, at $406 million. And lastly, our operating income came in a bit higher than our full-year guidance. So overall, we're very pleased with the performance of the businesses as we closed out 2009.

That leads me to my final two slides, prepared remarks on slide 30 and 31 related to our outlook for 2010. Our guidance metrics for 2010 are similar to 2009, starting with revenue. We anticipated revenue growth -- we anticipate revenue growth in the range of 3% to 5%, or a range of $418 million to $428 million. The mix of sales will have an impact on revenue in 2010, as we expect to focus more on sales of new accounts and new applications, which can have a longer sales-to-revenue conversion cycle. I will add a little more color on sales on the next slide.

We believe we can grow operating income 15% to 20% in 2010, really building off the cost disciplines that we have now integrated in the business. And new this year, we are guiding to operating EBITDA, which we define as GAAP operating income, adding back depreciation and amortization, and adding back nonstock compensation -- or noncash stock compensation. We expect to grow our EBITDA -- our operating EBITDA 14% to 18% in 2010.

On slide 31, we show some additional information that impacts our 2010 financial model that we think is important. Sales can -- can be hard to predict, which is one reason we pulled it from our key guidance metrics in 2010. That being said, we expect sales to be relatively flat compared to 2009; however, as I said before, our focus in 2010 will be to increase sales from new accounts and new applications, as opposed to renewals. So a change in the mix of sales. Term renewals are generally more predictable than new accounts or new applications. So even though less predictable, we do believe it is important to continue our growth in our backlog, or essentially growing the annuity stream of our install base through sales to new customers and new applications. So that will be the focus of -- for sales in 2010.

We expect cash expenses to grow a little bit in 2010, largely related to the type of sales we expect to book. New account, new application sales tend to carry a higher -- higher level of upfront investment than add-on or renewal sales, or in other words higher selling and marketing costs, as well as implementation costs that go with new customers or new applications. We expect operating free cash flow to trend higher, in line with our operating income growth of 15% to 20%. And the final point of emphasis here is that we expect our phasing of our operating performance in 2010 to be consistent with what we have experienced here the last couple of years, with continued seasonality in the timing of revenue and operating income similar to the -- the charts I showed on slides 27 and 28.

So overall, we finished 2009 strong, and expect to continue our trajectory of operating performance improvement in 2010.

So that concludes my prepared remarks. Operator, we're ready to open the line for questions at this time.

(Operator Instructions)

Your first question comes from George Sutton from Craig Hallum. Your line is open.

Hi, guys nice quarter.

Thank you.

Having covered the Company for quite some time, and having obviously lived through the end of the [puff] transactions in the middle of 2006, I would say, you know, today seems to be that definitional point where things become a little bit more predictable. I will say it is the first call I'm not confused at the end.

So with respect to that, how much have the end of the puff transactions, and sort of moving out of the backside of that, really built into this -- what looks to be a more predictable business for you now?

Well, I will let Scott answer it also, but the more and more our recurring revenue -- I think back in 2006, you know, initial license fees were close to 30% of our revenue. Now we're look at 10%. We should be a heck of a lot more -- you know, standard deviation should be pretty -- pretty small as it relates to that, George.

Okay.

That's right. I will just add to that that it is not -- it is coming from, you know, not only our repricing of the license fees on an undiscounted basis, you're also seeing it in a higher and better-priced maintenance stream as well.

Got you. And just -- with respect to leveraging retail to sell wholesale, I am intrigued that you did sell more wholesale than retail this year. Can you give us a better sense of how that process is working? What types of growth we should expect in wholesale, and then also online banking, looking forward?

Well, I don't think we're going to give you any of those percents, George, but I -- you know, when we made the decision to rebrand the entire Company ACI, and really put the strength of the ACI brand and the commitment and its reputation behind all our wholesale and online products, I think that was very well received by our -- by the marketplace and our customers. And where we kept talking about that -- we felt the [cross] was going well and we were building pipeline effectively, we were building reputation effectively, and it was -- I think especially the Americas did an absolutely no fantastic job of actually -- of actually delivering on it.

I actually -- the hardest -- what is most difficult about forecasting it at this point is that I actually believe that now that we have a -- a single global sales and service infrastructure, and the ability to really export and expatriate the wholesale capabilities for the rest of the world, I don't think we know how large our actual demand and opportunity is as we start propagating, because from a pipeline standpoint it is a [ratio] showing up overseas but it is very hard to predict its maturation, especially in these times.

Just as a clarification, George, we sold more wholesale in Q4 relative to retail, not on the full year but just in Q4, but again still a strong (inaudible).

Your next question comes from John Kraft from Davidson. Your line is open.

Good morning, guys, and congratulations on a nice quarter.

Good morning, thanks.

I guess the first question, kind of following up on the previous a bit on the -- you know, specific to the wholesale, and the strength you have had domestically there, would you suggest that that's maybe due to simply the banks being more healthy now? Or is there some competitive change in the landscape?

I don't want to touch the competitive piece. You know -- go ahead.

Well, this is Ron speaking, John. I would just add, and it is similar to what Phil was saying a moment ago, we have -- you know, as we have rationalized our organizations and have put more competencies in the sales and services side, a large focus has been wholesale. Just not in the Americas, but also, in EMEA and APAC as well. That's in line now with our product strategy.

So we have been hiring individuals, and focusing sales attention even more so, to yield the kinds of results, while we're adding functionality to things like EB, and we're starting to see a lot more growth, or much more growth at -- at MTS than we have seen frankly in the last multiple years. So it is just a double-down focus, and really the things we have been doing to build the capabilities to tell a better story, show a better future and road map to our customers, and executing on things like, you know, product capabilities.

Okay. That's helpful. And Ron, by the way, good luck on your next phase here.

Thanks.

It sort of sounds like in the commentary in the press release that -- that Phil, you're not going to be hiring a replacement for Ron?

No -- no, we're not. We're evolving. And Ron has done a fantastic job of leading this restructuring, and I am very confident with Ralph and Louis, and we have hired someone to run the application development side of our -- our business, and they will all be in Boston, and I am going to be spending a much larger percentage of my time in Boston with them. So this is -- this is a natural evolution, and it is a good evolution. And we -- you know, we -- we wish Ron the best in his next -- his next endeavor, and we will -- Ron and I will stay very much in touch.

That's right.

Thanks, Phil. Just one last one for Scott. I didn't hear if you gave any sort of guidance for tax assumptions in 2010?

I didn't. I think from a cash taxes perspective, we're looking at about $19 million on the year from an ETR -- you know, again, this is one of the reasons we -- we guide to operating income, is -- it really is our -- our effective tax rate is driven primarily by, you know, the earnings in the countries where we generate our earnings and losses, and what the effective tax rates are in those jurisdictions.

But if you see 2009, we ended up with, you know, approximately around a 40% effective tax rate. I'm comfortable with, you know, that being, you know, a good starting point for where we're going to be in 2010. But I -- you know, again, it is going to be volatile by quarter depending on where we generated our earnings and profits.

Sure, I understand it bounces around 40%. Appreciate that, thanks, guys.

Thanks.

Your next question comes from Wayne Johnson from Raymond James. Your line is open.

Hi, yes, good morning. I was wondering if you could comment on the status of the 200 largest BASE24 classic users, and where are they in the migration to eps?

Great question. We have migrated -- I will give you a total number. We have migrated six customers, and as I said last quarter, you know, we are -- we are -- we have not end-of-lifed BASE24 classic, we have sunset it, which does have maintenance implications. I was -- we are in dialogue with all these customers, and we're in the planning phase with all these customers. I would say that five years from now we probably will have half of these classic customers still on classic.

Okay. That's helpful. I appreciate the direction on that. And then on the -- on the pricing, you know, how are these conversations going in terms of the migration and the upgrade to eps?

We have a -- we have a -- I guess we're somewhere between -- we're just about at six-dozen new eps systems around the world right now. And half of them are installed. Pricing -- our pricing, you know, our customers think they are paying a little too much, and we think they are paying a little too little. But our price is holding up very well.

I would just add it is holding up very well but it is also -- and I think you're starting to see for the first time in tangible results the real benefits of cross-selling. These opportunities lend themselves very nicely for us to get a better share of market share, the payments pie, if you would, of these customers. So there is more room for win-win when you're selling more things to customers.

I think that is an excellent point that Ron just made. I don't think we have sold BASE24 as an individual product to more than a handful of these 70-some customers. We're selling three and four different related and -- or probably two and three is probably more accurate number. So, it is really not just about selling EPS. It is about solving their -- their -- their -- their payment opportunities for them.

Right. The results are terrific in the fourth quarter, and profitability was outstanding. I am just trying to get as a witness of, you know, once we anniversarize some of these comps, on what the stimulus could be towards -- on the top line. So, the next -- my follow-up question is, you know, have you seen anything out in the market that makes you less optimistic about the prospects of BASE24-eps being really successful?

Absolutely nothing. We told you our attrition rates were down not up overall, right, and -- and, you know, our pipeline -- you know, our biggest thing is the pipelines are doing better than they have ever done, but -- this is a very different world for these financial institutions and whatnot. And decision-making is still -- I wouldn't say it is lethargic, I would say it is very careful right at this point. So, no, I think we see -- we're more optimistic than we are cautious.

Thank you. I'll get back in queue.

Your next question is from Gil Luria from Wedbush Securities. Your line is open.

Thank you. You're about three years into the transition from the upfront sales to the more term basis. What percentage of renewals do you still have in 2010 and 2011? Since they're five-year contracts, three years ago you moved to this model. What percentage of renewals do you still have in 2010 and 2011?

I don't know if I would give it in percentages, but what I will tell you, Gil, is we have less than handful of any significance, less than one handful of any significance in 2010. And then, less than -- I don't even know if it is a couple of handfuls in terms of 2011 and 2012, right? So we -- we are -- this has been one hell of a painful process. But, you know, we got ourselves into it, and we have to get ourselves out of it. But it is no longer -- that's why we said second half of 2009 was the inflection point. We're no longer -- it is no longer an excuse -- revenue recognition is no longer an excuse for down revenues after 2009.

Got it. In terms -- just a follow-up, in terms of the implications for sales in 2010, for the last couple of years term extensions have been about 30%, of your sales. And so -- I think what you were implying earlier in the comments is that is almost going away, but you still think your sales are going to be at a similar level as they were in 2009, in spite of almost 30% of the -- those sales going away?

No, we didn't say it was going away. What we said was is that we were going to do -- we're not going to sign up for larger sales numbers than we have this year. And what we're saying is that a good portion of those sales will -- there will be a significant lessening of renewals that will be replaced with new business, and the reason -- you know, and of course we like that because, if you look at our five-year backlog, new business creates -- creates are growth in recurring revenue, and its value is mostly -- value is mostly year two, three, four and five, right? So that's actually a good -- you know, flat growth -- flat growth that is very dominated with new business guarantees us revenue growth in the outer -- in the outer years, and that is the positioning we have. So we're past the critical mass, yes, you know, -- we didn't give you the number, but it is a significant -- it is a significant switch between renewals, but it is not 100%.

Got it, thank you.

Your next question comes from Brett Huff from Stephens. Your line is open.

Good morning everybody, and congrats on a great quarter.

Thanks.

And Ron, we wish you well in your next endeavor.

Appreciate it, Brett.

Two questions. Number one, on the revenue guidance of around 4% midpoint, somebody asked about kind of what your thoughts were going forward on sales and things like that. I'm curious, you had talked about -- you have talked about for several quarters some larger deals, I think particularly in the EMEA pipeline. I'm curious how you're sort of handicapping those in your guidance for 2010?

I wouldn't say -- I mean, one instinct that I guess to point out is, it -- especially on the larger deals, I mean there is a likelihood on those that there is going to be a longer sales to revenue conversion cycle. So I don't think we're in any way saying that those larger deals aren't out there. It is -- it won't necessarily translate into revenue in 2010.

Yes, certainly not revenue and maybe not sales. Let's put it this way. We're not predicating our sales forecast on shooting a bunch of the elephants, right?

Right, that's exactly what my question is.

Okay.

And the second question on margins, can you give us a sense of where the improvement in margins will primarily come? It seems like the OpEx has leveled out a little bit, or maybe there are opportunities there, and could you comment on those? And then also, you know, what are your thoughts for gross margins, and where is the work that Ron has been doing on getting some of those problem projects taken care of? Will that continue to show up in 2010 in terms of improved margins and, if so, kind of where?

Let me answer you. I think your comments on expenses somewhat flattening out is appropriate. Now, I will -- I will pull FX to the side, because FX really changes both our revenue and expense. You know, if we had a normalized FX year-to-year, our revenues would have been much higher and our expenses would have been much higher, right? So FX is still going to be -- you know, it doesn't really hit us at the -- at the operating income level. We -- we level back out, but it plays with both of those. It -- it plays with those two.

As it relates to problem projects, I am not going to give you good -- whole numbers, but I will give you percentages. 80% of our problem projects, are -- you know, are behind -- are behind us. We still have 20% of them left, is probably the best way of -- best way of thinking it. And I think you saw that we did 48 go-lives in -- in the fourth quarter, and 41 in the third quarter. So we had a very large graduation of our service projects in those two -- in those two quarters.

And, you know, we -- the complexity of our installations, we made be more open and transparent than a lot of other Enterprise players and whatnot, but we will always have complex projects and -- we're always going to have a certain inventory of [red] projects, and we create some of them and our customers create some of them but -- we -- we end up having the same objective. You have to get them resolved, and you have to have satisfied customers at the end of the process.

Okay. Just one last question. It sounds like 1Q is going to be the typical low end. Any -- any sort of -- you gave us a little bit of phasing thoughts on that. Phasing both low on revenue and on margins, is that fair, as in past years?

I think if you -- if you look at -- if you're looking at phasing by quarter, we would expect a very similar look as we had in both 2008 and 2009. And -- in my commentary I tried to -- our operating expenses are leveling out. We still do expect our revenue to be back-half loaded, which will drive then really the operating income to be back-half loaded as well. Some of that is related to the -- the fourth quarter, where we recognize the preponderance of our annual license fee revenue. That is about $15 million of the uptick in Q4, and then just generally following the sales cycle and based on mix of sales. Our second half of the year typically provides a higher sales -- sales volume as well.

So just taken on a consistent sales-to-revenue conversion percentage, you're going to see revenue go up in periods where the sales go up in periods as well, but will look pretty similar in the past few years.

Thanks for the color, and congrats again on a nice quarter.

Thanks.

Your next question comes from Tom McCrohan from Janney. Your line is open.

Thank you for taking the questions. I had a question on monthly recurring revenue, slide 36. It seems like that is a big part of the story, is obviously building kind of term-based deals and recurring revenue streams. Can you just help us understand what the drivers are for those three categories? You had nice growth in maintenance fees on a recurring basis, but monthly license fees were up a little bit but not much. Processing service up a little bit but not much, but I'm just trying to understand what the drivers are for those three categories going forward?

You're going to get it from -- if you look over the last couple of years, we have had strong new sales quarters as we take those customers live. We are beginning to pick up that incremental or recurring maintenance stream. We also have our repricing, as we have gone into deals and repriced contracts on a renewal basis. Those are coming with a better pricing with respect to maintenance. And a bit of the growth year-over-year is probably, you know, $1 million or a little over $1 million, are from projects that when they go live, have had, say, maintenance that has been in deferrals. So I would say about a third of this growth is coming from the go-live events that we have. So new customers and their recurring revenue stream, repricing of existing customers, and the top we get when we go live on revenue that has been building up and deferred.

So if you're a customer operating one of you -- like, you know, one of your BASE24 products, is there any recurring -- you know, and they're on a term-based model, and you're selling more term-based models, shouldn't that have kind of an upward lift to monthly license fees, or am I thinking about that wrong?

Well, yes, it can. I mean, it depends on how the contract is structured. For example, customers that contract for an annual license fee, where they build -- where we build them annually, that is not recorded as a recurring revenue, because it doesn't recur month-to-month or quarter-over-quarter. But if you look at it on an annual basis, it does recur year-over-year. So -- but it is just the way we have categorized it, because it wouldn't be what we consider, say, monthly recurring. It is recurring annually.

So if they contract as what we call an ALF model, an annual license fee, they wouldn't be in these numbers. But if they contract to have a monthly license fee or, say, a quarterly license fee, they would be in these numbers.

Now we have pretty much disclosed in the past what our annual recurring revenue percentage is.

Can you remind us what that was? I don't remember.

We're at 60% on average.

On average.

Obviously in a quarter like the fourth quarter, where you have a large -- where you have $15 million of annualized fees, and you have, you know, five customers that go live and bring in $15 million you're going to have more nonrecurring in that -- in this quarter. But -- you know, 60% annualized basis is our recurring.

So sounds like you were able to push through pricing increases on the maintenance side, despite the difficulties of the overall, you know, end-user market of the banks?

Yes.

And that's pretty impressive. On the backlog, just wanted to kind of get your thoughts on how we should be thinking about that 12-month backlog, which seems like the best leading indicator for revenues going to 2010. You had 9% growth and 12-month backlog exiting this year, and how do we reconcile that to flat revenue growth? Why wouldn't your revenue growth guidance be a little bit higher, given the growth in the 12-month backlog?

Year-over-year 12-month backlog, what we're entering the year with is $20 million higher than were -- where we were at December 31, 2008. So we're going into the year with more revenue in backlog. But as we said, we're focusing more of our sales efforts in 2010 on new sales as our -- sales to new customers in our new applications. So that is going to have a lower sales-to-revenue conversion cycle, just the mix of sales that we're going to have is going to have a lower sales to revenue conversion percentage in 2010.

Or -- or put -- maybe a non-financial way of putting is that the 12-month backlog gives a very good indication of our recurring revenue, and the growth in our recurring revenue. and because we're expecting to do a lot of new business, and we're committed to 60-month payment versus ILF payment, we're less and less dependent and interested in the one-time moneys we're going to get from selling those deals, and we're more interested in their 5-year backlog implications and, you know, what they are going to do for 2011, 2012, going forward. Does that make -- we have already gone from 30% to about 10% in initial license fee, and we're -- we're not predicting that number to go up. If anything, fluctuate or go down a little bit from where it is right now. Does that make sense to you?

Yes, thanks, that does make sense.

And one last question, and I will get back in the queue, on the IBM-related sales. Is there any way to put that in context, the $162 million of total IBM Alliance sales? You have sold through IBM not maybe at such a formalized basis in the past, so I am just trying to figure out how the $162 million kind of compares to kind of previous sales with IBM?

Well, I think the 62% of our total sales was the best way -- is the best -- do you want to say something?

No, I was just going to say it is a 31% increase over 2008, to give you a magnitude year-over-year, and it still -- 63% of our new -- new sale business.

And is that still predominantly outside the US where most customers or prospects, as you've talk about in the past Analyst Days, are already committed to IBM mainframes?

No, I don't think I would characterize it as -- we're not going to tell you -- I don't think it is appropriate for us to tell you where it is but it -- I will tell you it is not mostly outside the United States.

Okay. Thanks, guys.

Your last question comes from George Sutton from Craig Hallum. Your line is open.

Hi, guys. I figured while we had a second, you mentioned Agile and where that program sits. You have identified 11 products. Where is that in the continuum of being live and ready to sell?

Well, George, you know, you have to come to the -- that's going to -- come next week to Boston, because that is the topic of the conversation. Instead of getting an awkward and poorly-answered question from me, Louis will take you through it with elegance.

All right, I will get as close as I can to the front row. Thanks guys.

There are no further questions at this time.

Thank you everybody for joining us. We look forward to seeing you next week at Investor Day.

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