ACI Worldwide Inc (ACIW) 2010 Q2 法說會逐字稿

Good morning. My name is Sara 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 June 30th, 2010. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions.) Thank you.

Ms. Gerber, you may begin.

Thank you, Sara. Good morning everyone, and thanks for joining our Q2 call.

On 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 text of both statements on the first and final pages of our presentation deck today, a copy of which is available on both our website, as well as filed with the SEC this morning. Our management speakers today will be Phil Heasley, our CEO; Louis Blatt, our Chief Product Officer; and Scott Behrens, our CFO. All three management members will be available for Q&A following our prepared remarks, and will be joined by Ralph Dangelmaier, our President of Markets and Services, as well as Tony Scotto, our application development leader.

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

Well, good morning and thanks for participating on our call. Similar to our first-quarter call, I'm going to commence today's discussion with some general comments on our performance before turning it over to Louis to address the business operations.

We had a much stronger operating margin performance this quarter than in the second quarter of last year. And I think that a lot of this improvement really speaks to the discipline of our expense management, combined with better, stronger recurring revenue across the business. In spite of operating a global company with revenue streams in countries and currencies that have recently seen volatility, we achieved a healthier rate of both top line growth as well as profitability. The expense management initiatives we've undertaken over the last two-plus years have shown that they have been fruitful as we continue to operate at a sub-$90 million per quarter expense run rate even while growing our top-line revenues.

In addressing the revenue improvement, I think many of you know that recurring revenue is a very important business metric to me, and I'm pleased to see that ACI's senior management has embraced the importance of, and begun to execute upon, a recurring revenue business growth model. Our growth this quarter came primarily from maintenance revenue improvement of 7% over last year's quarter. Maintenance improvements continued the trend we saw in the first quarter.

On the sales side we achieved an extremely robust second quarter with a rise of $11 million over last year's quarter. This was led by a doubling of the add-on product sales category as we continue to experience success in upselling our products into more sophisticated modules with existing customers. Furthermore, add-on sales contributed to more than $15 million to the 60-month backlog for the quarter.

Lastly, we are reaffirming our calendar-year guidance. We are very comfortable with the year and our ability to achieve the margins we have indicated, that the business can and should attain.

I'm going to close here and let Louis and Scott take you through the second-quarter business and numbers, but I will remain available for Q&A afterwards. Louis?

Thanks, Phil, and good morning, everyone. If you'll turn to slide 8, I'd like to share some prepared remarks on the business operations.

My first slide reviews recent market developments, as well as explaining customer needs that I think are useful to share with you. The quarter was very encouraging for us as we saw the pipeline of deals strengthening. We had very positive and constructive client interactions at our recent user group meetings in both Las Vegas and in Madrid.

I know that we've been discussing significant-size deals for several quarters now, but we're beginning to see a lot of progress with very large deals across geographies ranging from the Middle East to Canada with banks as well as with payment switching customers. The large deal increase is being driven by continued consolidation and convergence in the industry, the continued success of our Agile Payments strategy, and our global sales leadership and approach, as well the back-office products being an addition to our portfolio.

In addition to the performance of sales net of term extensions, opportunities are abounding globally. For instance, we're seeing new RFPs for our national switch infrastructure opportunities in emerging economies. Credit card issuing and transaction volumes in China continue to exert pressure upon legacy in-house systems, forcing replacement. In Japan, corporations are looking into international markets for business growth and therefore international standards are being adopted more and more within the Japanese market.

A continued demand for our ACI On Demand solution is indicative of customers that require their solutions to be delivered through alternative delivery channels, because they minimize their requirements for installation, deployment, hosting and customization, yet it preserves their ability to operate and control their own payment systems.

Slide 9 reiterates the point that Phil had just made, that we saw stronger business performance across all of our business metrics. Q2 sales, driven by strong add-ons and significant wholesale wins, were $11 million over last year. Sales net of term extensions are growing and driving a significant increase in our 60-month backlog despite the headwind forces of foreign exchange. Backlog grew $8 million over the March 2010 quarter.

Our customers' continued investment in their existing platforms was evidenced by the wholesale managed products segment experiencing a significant rise in add-on sales. For example, add-on sales related to money transfer system alone grew $9.4 million from $0 in Q1. In general, the wholesale category add-ons were 2.5 times as large as the value of the term renewal themselves. So it was a strong indication of our success in selling modules and new features into our existing customer base.

In addition, BASE24-related add-on sales grew from $7.7 million in Q1 to $20.4 million this quarter. It's clear that we're beginning to see the mid-year ramp that is typical of the seasonality of our business. Remember, our Q1 is the quietest quarter as bank spending tends to peak in the second half of every calendar year.

We're also pleased to announce a major milestone. We've signed our first major US domestic bank on BASE24-eps.

Lastly, I should add that we continue to release new solutions to the market, including Payment Service Management and ACI Analytics. We've already sold our first Payment Service Management solution in Latin America. Large banks have been monitoring their systems for many years. The problem with existing monitoring systems is that they only manage the hardware and software that comprise the system. Our customers demanded a monitoring system that went beyond telling them if the application server or storage devices were up or down. They wanted a monitoring solution that manages the payment service and provides business-relevant information about the transactions, like the size of the transactions, velocity of transactions. Our newest solution, Payment Service Management, is our response to that significant customer requirement.

On slide 10, to follow up on my earlier point from slide 9, this chart depicts the rise in what we refer to as sales net of term extensions, or what we call [SNTE.] We believe SNTE is a very significant driver of value in our business, because it represents a customer relationship that's moved beyond that of a renewal. We experienced a 31% improvement in SNTE. The growth experienced in SNTE was driven largely by add-on capacity in modules of existing products. There was tremendous module and upgrade purchasing in the quarter, amounting to a 74% rise over second quarter last year in the Americas alone. Add-on sales represent a shorter time to implement, install and go live than an entirely new product sale, delivery value to our customers more quickly.

In North America, and in EMEA in particular, add-on sales are a very important metric for us, because of the base of longstanding, large banking clients in these two territories. We're more likely to continue to see add-on business in those two geographies and more new sales in markets that are greenfields to us. SNTE is also becoming a big factor in markets like the Middle East, where we are actively discussing migrations to eps with our larger banking customers.

Slide 11 clusters sales by product line view as well as by type. The product lines that had the most notable gain is what we refer to as the managed business. That includes our wholesale and retail payment engine products. We had an 83% rise in wholesale payment product sales. Wholesale in the Americas accounted for the totality of the rise in the managed segment. Four of the wholesale contracts were valued over $4 million, whereas last year we saw no contracts of this value. As I mentioned earlier, some of the biggest wholesale renewals contained add-on components which were significantly larger in value than the renewal itself.

In EMEA, the managed business line was still largely a BASE24 or retail sales story, with a small amount of back-office products as well. But of the $39 million sold in EMEA in Q2, approximately $31 million of it was related to BASE24 sales. Asia-Pacific was slightly less BASE24-centric, but still sold just over half of their total sales in the managed retail segment.

The reduction in new accounts and applications year over year is really a matter of timing across the business. As many of you know, predicting renewal timings is a much simpler science than anticipating the closure of new deals. We think the lack of new sales apps in the first half of 2010 is really timing, and we're not seeing anything that would lead us to believe that others are winning large RFPs in the market. Indeed, whatever RFPs we've seen, particularly in the United States, we have won.

Lastly, I want to touch briefly upon alliances and partnerships. We continue to work with our partners to protect choice for our customers. We continue to see the benefit of the IBM relationship as we support our customers in their consolidation and migration projects. We won deals in the Middle East as well as Japan. In addition to the platform partners, we successfully signed deals with Integrated Research for the payment service management product I mentioned, as well as with Opera for the ACI Analytics product that we just brought to market.

This concludes my prepared remarks and I'd like to turn it over now to Scott, who will take you through the numbers. Thanks.

Thanks, Louis, and good morning, everyone. I'll be starting my comments on slide 14, with key takeaways from the quarter, starting first with revenues.

As Phil said, we are very pleased with our revenue improvement of a little more than $5 million, or about 6% compared to last year's second quarter. The main driver of that revenue growth, as Phil said, it's from increases in our recurring revenue, again, that being monthly license fee revenue, maintenance revenue, and the hosted ASP portion of our services revenue.

Secondly, operating expenses were down $2.3 million compared to last year, primarily driven by lower general and administrative expenses, that coming from lower personnel and related costs, combined with lower professional fees. So both the combination of stronger recurring revenue with continued cost management drove strong improvements in our operating income over last year, or about $7.6 million.

Turning now to slide 15, as Louis has already done a pretty good job of going through the sales performance for the quarter, I won't spend too much time on it here. But just to reiterate, we had sales growth of 11% over last year's second quarter, that driven primarily by stronger sales in the Americas region.

Operating free cash flow for the quarter came in flat. And it looks low when compared to last year's second quarter, but, if you recall, the first quarter of this year we had strong cash receipts. And if you recall from last year, second quarter was a bit of a catch-up quarter as we started the year slow in '09 in our cash receipts. So it's a bit of a timing issue when comparing two periods.

Below operating income we saw foreign currency losses of $1.6 million, which was driven primarily by mark to market losses on some of our euro-based receivables and cash. But this is down considerably from last year's second quarter.

In the last highlight here, we did repurchase more shares in the second quarter of the year, which came on top of a smaller round of purchases in Q1. So in total we have purchased 840,000 shares in the first six months of 2010, which as of June 30th left us with $26 million remaining on our original $210 million Board-authorized buyback program.

Turning to slide 16, this is our normal depiction of the ratio of revenue derived from backlog versus that revenue that is derived from current-period sales. As you can see, the mix is relatively consistent compared to last year. And just overall, we are very pleased with our recurring revenue coming out of backlog, which is providing us with a consistent, stable and predictable base of our revenue stream.

Lastly, on slide 17, at this point in time we are tracking, as we expected, so we are reaffirming guidance that we laid out in February for the full year 2010.

So in summary, on a comparative basis to Q2 of last year, we saw strong improvements in operating earnings, improvements in net earnings, higher sales, and we saw healthy growth in our recurring revenue base. And we continue to track to our full-year guidance expectations.

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

(Operator instructions.) George Sutton; Craig-Hallum.

Good morning, everybody, and nice results. I wanted to first talk about the large domestic bank that you added on BASE24-eps. Obviously, you've got a huge number of large US banks on BASE24. So what you're saying is this is the first customer to uniquely purchase eps? Is that the message?

I'll answer that, George. Actually, it's the second one, second large US bank. But we also have other large customers in the US, but this is the second large US bank.

Okay. I understand. So the message being, even though you've got a pretty significant market share in the US, you're adding more with the new product. And I assume that is either a competitive takeaway or an in-house solution that's migrated?

That's correct. It's one of those.

Okay. And you don't need to narrow it down for me. I'll try to figure that out on my own.

So I wondered if Phil could just briefly address some of the impacts of the bank bill. It seems from our read that corporate payments are going to become a very significant portion of a bank's income stream. And obviously debit card interchanges is meaningfully impacted by this bill. So I was just wondering how you feel this affects your business opportunities?

Well, I think simply stated, I think that nuisance fees by definition have been somewhat legislated out of the revenue stream of the banks. Therefore it says that real transaction fees become more and more important. So that one's kind of the undisputable logic that says that, gee, we can't -- we basically made a lot of money in the banking industry by people not behaving per contract. Now people have to -- the bank's going to have to make money per customer usage. So we've kind of gone from a equivalent of income taxes to consumption taxes from a behavior standpoint.

The other part that I think is the follow-on that really impacts us directly is now that fee growth, regardless of how you got it, was the mantra for the last decade. Now, productivity is going to become the real mantra, so that the only quick bump that the industry can get is to lower its cost per average active account and increase its revenue per transaction. And that's the bull's eye of our business, George.

John Kraft; D.A. Davidson.

Good morning, gentlemen, and nice work on the cost discipline, especially.

In the past -- I just wanted to go back to some of the guidance. I believe in the past you did provide some sort of commentary on your expectations for sales bookings, expecting that this year would flattish. But, given the run rate at, at least at this point, the first half of the year, it certainly seems like you could do better than last year. Is flattish still what you expect?

We are extremely confident we're going to make the guidance that we gave you guys.

Okay. And then, another clarification; I guess this is for Louis or maybe Ralph about the --

John? John, can I interrupt you for one second?

Yes.

I take with all graciousness your good marks on our costs, and we have been very diligent in how we manage our costs. But, if we weren't sitting -- if we weren't reporting against a 1.22 euro we would actually have higher costs and much higher revenue. So some of the credit you're giving me is embedded in the strength of the American dollar, whereas if that turns around and the euro and the pound strengthen we'll actually get richer and not poorer. But it's going to show up in improved revenue and deterioration in expense. So I just wanted -- I didn't want to leave you with a misc- -- so part of our improvement in expense, as well as our lack of additional improvement in revenue, is coming from a very weak euro and a somewhat equally weak pound.

Understood. Thanks for that clarification.

Moving on to the success, at least domestically, on the wholesale side, just to clarify, was that predominantly -- obviously there was a lot of add-ons, but was there also some new wins there?

Well, we had a lot of add-ons that were done with current customers. This is Ralph Dangelmaier speaking. And there were some, I'd call it smaller wins with some new products. But primarily we did a lot with our current customer base, which is a great sign of confidence, obviously.

And you sort of suggested that the add-on business is seasonal. But wouldn't that also be somewhat cyclical? I mean, you're going to probably see that sort of business increase as the purse strings sort of loosen?

Yes, I guess you could say -- everything's done off a business case. So it really depends on each bank's business case. And some of that is seasonal and some isn't. But as banks look to spend money I think we would do better, yes.

John, what's very seasonal is the fact that banks -- all companies have operating budgets and they have capital budgets. The add-on business tends to reside in the operating budgets, which means that instead of buying "N" amount they're going to buy 120% of "N." Right?

Capital budgeting tends to be the last part of budgeting that's done, especially in financial services and especially large capital purchases. So first, second quarter is the RFI/RFP negotiation kind of stage. Quarters three and four tend to be where the vast amount of major new purchases. I think the seasonality we were referencing was much more on those capital items than we were talking about it being seasonal on the add-on business.

Yes, I think -- just to finish up with a final comment, I'd say the MTS 4.0 release is charging up customers' continued investment in the platform. And I think we're seeing some of the success from that.

Got you. Okay. And then lastly, I guess this is for all of you guys -- the buyback, as that sort of winds down, any reason to believe that you wouldn't go back and re-up that at your next opportunity?

Well, I probably -- as long as we're getting rewarded at the level we're rewarded, Wall Street, and we have the confidence that we have, I think we'll continue to re-up our buybacks.

Okay. That's it. Thanks, guys.

Brett Huff; Stephens, Inc.

Morning, and congratulations on a nice quarter. Scott, let me ask you a quick question just on taxes. The way we did the math, taxes were a little bit crazy. Can you just give us some commentary on that and looking forward at all any color, guidance, et cetera?

Yes. I mean, generally, the clos- -- we came in pretax a little over $2 million. And it's really a function of the source of that pretax revenue. And so the income -- the tax expense does look -- on a consolidated basis looks unusual. But if you break it out into the entities, it's still a pretty relative -- 35% effective tax rate with the exception of the jurisdictions in which we are currently deriving little tax benefit from. And so as the year progresses and that pretax earnings grows it'll normalize itself. It's just a little bit pronounced in the quarter in which we're lower on the pretax earnings.

Okay. And can you all talk about cross sales? I know Louis has been working on getting sort of a more comprehensive, or more focused, view of your products. And Ralph, I'm wondering how that new focused view is helping with cross sale either conversations or successes. I'm assuming some of the success in the add-on is a result of that?

Yes. So maybe I can give you a little color on that. This is Ralph speaking again. What we've done is we've been very proactive with our customers in doing two things; one, making sure that they clearly understand what current, let's call them modules or components, they're using within a product today and how they can add on when they do an upgrade new components, or new modules, within our product. So that's where you're seeing a lot of the add-on sales. So we're very diligently doing that.

The second thing that we've done is we've put a process in also to work with some of the executives on how we can consult with them and help them with ROIs, return on investments. And that's a process we put into the sales force earlier in the year, late last year. And it's really starting to pay dividends for us.

So those are the two changes that we've made recently, if that answers your question.

Yes, that is helpful. And just in general, your cross sale penetration, there's still a lot to go, given you guys have roughly ten product groups now, right?

Well, Brett, I'll give you that, right? We have 11 products and we average 2.3. Right? And probably the average effective is probably 8.5, 9. You think about different kind of customers we have. And so probably 8.5 to 9 products per customer is what they could consume, because not all our customers would use all our products and whatnot. But we're at 2.3 and cross sale is by far our number one opportunity as a company.

Okay, that's helpful. And then, can you talk a little bit about the fourth-quarter ramp? I mean, I think that that's one thing that investors will start to look at after you guys have had a couple of good quarters, particularly this quarter. That's always a pretty steep number. Any additional color on that? Phil, you mentioned that you feel very confident about the guidance you gave, but maybe you could --

Well, I felt confident two years ago and no one believed us, but we made it. I felt very confident last year and we made it. And I feel more confident this year than I have the last two years.

Okay, that's helpful. And then last question -- any status on -- as you're getting more stuff from backlog can you give us a sense of how your implementations are going? Are they tracking as expected? I know you've got a system sort of down pat now, but any color there on how things should roll off from a revenue point of view versus the implementation pipeline?

We don't -- you never in our business have -- we never get on the phone and say we have everything down pat, right? We have an interesting model. We go get a new customer and we finance our future revenues for 18 months by pushing our expenses through the income statement, but withholding our revenues and whatnot. We've certainly got the pig through the python in that we're probably putting out as many projects at the end of the pipeline as we're putting into it. That deferred revenue is sitting at 150, right?

Yes. It's actually up for the quarter.

Yes. So --

And that shows the health of what we're putting in (inaudible).

Yes. So that tells you that our expectations grew in terms of future revenues. They didn't shrink and whatnot. But we sell heart surgery, right? I mean, we fundamentally change the way a company does business. And we're continuing to get better, but I think we've got many, many quarters of continuous improvement to get better and better and better as it relates to that, Brett. I don't know what the other guys want to say, but --

No, you said it well.

Gil Luria; Wedbush Securities.

In terms of your IBM relationship, do you have any updated statistics about how much business you're doing with them, what percentage of new customers, when you'll start recognizing some of the commissions on sales of IBM equipment?

I think we report it -- yes, we report that at year end. We don't report it before. And I would say that we did very well last year. Almost two-thirds of our new sales were on IBM and I don't think we're tracking very differently from that at this point. We just can't say anything -- I just wouldn't say anything more than that.

In terms of when you'll start recognizing some of the commissions on the earliest sales?

Right now we still have development projects. We've said that we'll begin recognizing it once we get through the technical enablement. We still have projects through the end of this year and that will carry into '11. Not sure how far into '11 that will carry, but once those projects are complete we will begin to recognize incentives.

Got it. And then, in terms of Europe, earlier in the year when things were starting to stabilize there, it sounded like that was contributing a lot to your pipeline in terms of the opportunities. As things there have gotten a little shakier and banks there are coming under scrutiny, et cetera, should we make something of the fact that the results in that region looked a little weaker than in the other regions?

I wouldn't. I think I could very comfortably have Ralph answer it. But our pipeline has not shrunk in Europe. It's, quite honestly. grown.

Yes. I feel very comfortable in Europe. And the strong economies like Germany, France, Italy, England, we're doing very well. And even, quite frankly, in the places where there's some trouble, they're still doing a lot of transactions and they're looking for more risk solutions. And it really plays into our hands, so.

Great. And then, in terms of the revenue for software hosting -- this is a relatively small item, but it has been growing. But in this quarter that number actually went down sequentially and year over year. I usually think of software hosting as kind of stream, a recurring stream that you would get from customers and therefore that should grow over time. Why would that number be down in the quarter?

Yes, Gil. Really the dynamics there is we had a customer that had renewed and added products. And in that period of time where we are delivering that additional functionality we have to defer all of the revenue. So the revenue isn't going away on that customer. I think there's two customers that are impacted by it. But it is as a result of renewing with incremental value that we have to defer for a period of time and then that will catch up at a later point, so once that functionality is delivered. So it's not a -- it's more of a temporary reduction, but that will all come back at a later date.

That's a present from GAAP, right? It's totally GAAP. It's very safe to say that if we didn't have to make that GAAP adjustment -- and we will make the GAAP adjustment -- we'd actually have had growth there --

That's right.

-- versus shrinkage. But if we do an add-on sale, we basically have to suspend the revenues that are current revenues until we get it done. And then you divide by the remaining number of months and you start earning it from that point on. So good catch, but --

Right. And you're correct that it is pretty much a subscription model. It's fairly stable, but I wouldn't read anything into the drop. It's more the dynamics of our ability to cross sell additional functionality. It just happens to cause the entire revenue stream to halt temporarily, not just the incremental piece. It really kind of defers the whole bit of hosting revenue.

All right. And one just last question -- what's the currency adjustment to revenue in the quarter? What would it be in constant currency?

You know, I don't have that number. It is -- obviously, if you look at where we were at the beginning of the year, the euro in particular has declined, so it has had some impact. But obviously, we have overcome that in terms of exceeding prior year. So we made it up in volume, essentially.

Got it. Thank you.

Wayne Johnson; Raymond James.

My question, and I apologize if you guys have already gone over this. For whatever reason I had a hard time getting into the call. The number of conversions from backlog of the old BASE24 Classic to the eps, did you guys provide that?

The number or the dollar amount? I don't think we did.

Okay, so -- or if you could -- I'm just looking to see on how that's tracking. So if you could remind me how many of -- I believe on one call you said you had about 200 core customers on BASE24 Classic. Can you remind us how many of those BASE24's customers have converted to the eps? Where do you guys stand on that and how do you see that playing out over the next few years?

We have closer to 400 Classic customers. And what I said in a previous call was that I thought five years from that call that half of those Classic customers probably still be on Classic. You know, we're a sun-setting company but we're not an end-of-life company. And we'll keep supporting -- our desire to support the people will continue. We have to get paid for it, but we will do it.

Of the 70 -- what's it, 75 eps systems that we've sold, I think we're up to 8 of those being migrations from Classic to eps. Does that answer your question?

Well, yes, it does. And that's what I was focusing on, was the 200 that have been earmarked for conversion. I guess what I'm trying to figure out here is should we track -- is tracking this metric really a metric of success or progress as it relates to eps? Is there kind of a quarterly conversion rate that I should be thinking about? I'm just looking for a little color on that particular topic, that's all.

Well, let me give you it from a business perspective, overall business, is that we spent an awful lot of money building eps. And it only makes sense that after the amount of time we supported Classic and being closed system it's time for us to move on and whatnot. That being said, we are a sun-setting not an end-of-life business. So as long as our customers need us to support them in their Classic infrastructure we will support them in the Classic infrastructure, just like we support TRANS24, OCM24, ON/2, OpeN/2. There's all these products that we've been out of for a long, long time that we still support. And there's always going to be a residual amount.

Now, they're going to have to pay us for that because we're, in effect, running another system. From a selfish business standpoint I'm kind of happy that I'm 9 to 1 new system to conversion at this point, because that just tells us that we're more using eps to increase our global share of the payments market than we are just flipping or forcing our current customers to flip. So I have a little bit different -- I wouldn't view our success on how quickly we forced our customers to move, but how important our overall systems are to making global payments work.

Well, a think it's a great point. A 9 to 1 ratio is a healthy ratio and I hope you guys are able to maintain that, particularly if the eps conversion picks up. My point here is that the existing customer base -- I'm trying to get a sense of how the existing customer base thinks of eps. Are they embracing it? Are they keeping it at arm's length? "We don't want to have to do that until the last possible moment." Because if you guys have spent so much money on this upgrade, you guys are going to want to get something for it.

Yes. So maybe I can help answer as well. The customers have three choices here. This is why it's very hard to directly answer your question. They could do a full migration to eps, which Phil just covered. And we're talking to our customers about that all around the world. The second thing they can do is we have an opportunity for them to increment their way into eps. They would actually use eps for new functionality they don't do today or maybe do something more as a starter, like what we u- -- call it networks.

And the third thing that we go to the customers and say is that you can stay on one of your payment engine and we'll put a support agreement in place for you that's above and beyond what we do today. And the customers have been extremely receptive of that. And some people have chosen to stay for the year and move next year. Some have said, "I'll do a partial, put my toe in the water." And some have said, "I'll go all the way." So the results of that just work through our business, just in the normal course of business. And I think that's going to go on for next couple of years. And that's -- sorry, it's Ralph again answering.

Okay. Thank you. I appreciate it.

Tom McCrohan; Janney.

First, congrats on a solid quarter. I had a question just on how you position the products when you're talking to your customers. In the context, Phil, you had a really important point earlier about the obsession with fees now becoming maybe more of an obsession of productivity. So when you're in conversations with (inaudible) your customers, are you positioning the business case as a way to save money or a way to increase revenue? Both? I just want to understand that better.

So maybe -- may I take an answer to that, Phil? So I think we do a couple of things with the customer. The first thing we have to do is we have a process that we go through where we really understand what the customer is trying to do, whether it's an acquisition, whether it's a cost savings, whether it's an increased revenue. And once we really understand that, we would gear our sales story to what's most probable in that account -- accelerate focus on cost savings, accelerate focus on growing revenue. We help them in both of those scenarios. We led probably more with cost savings by replacing multiple systems to one that we have. But as we just talked about earlier, the ability for them to generate revenues in multiple ways or be more responsive to regulatory changes, or be more responsive to customers is also something that's really attracted our folks.

And then I think the real underlying glue there is the fact that all our products integrate really well together so that they don't have to go out and spend a lot of money trying to integrate our systems together.

Yes. Let me add on to what Ralph is saying. I think we come after it from a sandwich approach. We have very good, very longstanding relationships at the technology-operating levels of the company. And by definition, a lot of their focus is productivity and quality and whatnot. And we really help them. With Ralph and Louis and -- recently our approach has been to massively increase our engagement at the C-level and especially the CIOs and whatnot. So whereas they have revenue opportunities as well as productivity, [saying].

Like right now one of the impacts of the credit card act that just went through is that large relationship banks have now a wonderful opportunity to go back into relationship credit card and the monoliths don't have the advantage that they used to have. And so we sit there and we show them how to get back into the credit card business from an infrastructure standpoint and whatnot. And we actually play a valuable role. I know I put in over 300,000 miles last year basically visiting the C-levels and talking about how they were going to react to both the opportunities and the risks.

You can take other places like Asia, who say, "Wow, this big pullback has created a huge opportunity for us to be more direct players in the payment system. We don't necessarily have to go through the larger and more regional banks. We have to set ourselves up." Countries like Thailand have gone from being secondary players to very primary players, both in how they deal with China and the rest of the world and whatnot.

So we participate very much as much in the revenue opportunity side as we do the expense, but we do it by kind of sandwiching the organization, continuing to help from a day-to-day standpoint, but also helping from a top-down approach in terms of dealing with their opportunities. Does that answer --

There's a lot of forces at play and I appreciate that. And just to add a simplistic question -- I apologize for the simplicity of it -- but what is the average cost savings to a bank if they bought one of your products, BASE24 or BASE24-eps?

There's no simple answer to it. But in our largest customers, because we've gone through -- we've actually had to put some price increases through. So we've had to have pretty significant debates versus alternatives and why we should do 100% of their volume versus 40% or 60% or whatnot.

And on very large banks the leverage is like 50 to 1 to processing alternatives. So we have massive opportunities. And if you get to the bottom of where we make sense, selling directly versus selling through processors, it's probably 5, 6, 7, 10 to 1 kinds of opportunities with a year and a half, two years' effort in front. So when it's 50 to 1 it's easy to put two years' effort into installing what we have. When it's 5 to 1 the ROI gets further out.

And those are on our big payment engines. You get onto the initiate side, the on-line side, it's a smaller opportunity but it's implemented in a much faster manner, so therefore less risk, less reward.

Yes. I think the regulatory reform is setting you guys up for, in a good way -- potentially it's like a big watershed replacement cycle, potentially. But I'm just trying to get a sense from you, Phil, because you're talking to the customers directly, does the uncertainty surrounding particularly the debit card interchange fees, is that uncertainty going to delay buying decisions until there's some more clarity as the Fed kind of comes out with its ultimate rules? Do you have any thoughts on that?

I think if you talk to Boston Consulting or Booz Allen or McKinsey and whatnot, they're warning these guys -- as well as we are, but we're viewed as biased -- they're warning these guys that if you look at the last time when we went through this kind of shock, those who waited, in the case of the credit card [industry], they lost their entire piece of the game in the credit card. And that's how it reshifted the way it did 15 years ago and whatnot.

So I think what you're finding, the guys that are not in the game that have the opportunity to go in the game, they are actually -- you know, dealing with banks you always deal with a certain level of rigor mortis. There's very little rigor mortis in those decision processes right now, which is good. The really big guys that are looking for productivity you still have to deal with the bureaucracy, but, boy, where productivity projects were 10 to 20 on the major project list, they're probably 1 to 10 right now, because there isn't that much belief that you're going to invent the greatest, newest derivative you're going to sell in the marketplace and whatnot. We're back to meat and potatoes and the old fashioned way of making money in the banking industry. And that plays very well for -- and time is not your friend in kind of-- anytime consolidation takes place the last guys in never make it in. Right?

That makes sense.

I would just add that the -- sort of on the tail of the consolidation comment, when the customers are consolidating and converging at the rate that they are, due to the consolidation in the industry, they're really thinking about how do they take all the assets, that is, everything they get through their mergers and acquisitions and then cross sell their products to that larger customer base. And with our recent back-office investments, we're the only company who can really help them in delivering a solution to be account or customer-focused, customer-based. And that really gives them an opportunity to cross sale within the financial institution. So I think that we're actually in a good position as a result of the consolidation and the recent regulatory change.

One last quick question and I'll jump off. Your interpretation of the Durbin amendment in the context of fraud and the potential for Chip and PIN to come here to the United States. If Chip and PIN does come to the United States, will that be a major replacement cycle on the software side, you being a major beneficiary? Thanks.

It would be a major add-on, not a major replacement. Our software is Chip-and-PIN capable. We sell it all around the world. It would just open up a very, very big market for us.

Operator, are there any further questions?

There are no further questions at this time.

Thank you. Thank you, everybody, for joining us on our call. And we look forward to speaking with you at Q3.

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