ACI Worldwide Inc (ACIW) 2012 Q2 法說會逐字稿

Good morning. My name is Sarah, and I'll be the conference operator today. At this time, I'd like to welcome everyone to the Q2 ACI Worldwide financial results earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I'd now like to turn the call over our host, Ms. Tamar Gerber, Vice President of Investor Relations. You may begin your conference.

Thank you, Sarah. Good morning, everybody, and thanks for joining our earnings call. Today's call is subject to Safe Harbor and forward-looking cautionary statements. You can find the full text of both statements on the first and last 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 are Phil Heasley, our CEO, Ralph Dangelmaier, President, Global Markets, and Scott Behrens, our CFO. All speakers will be available for Q&A following our prepared remarks, and will be joined by members of the Executive Management Team.

A last piece of ACI housekeeping to announce. Effective July 15 as part of our Global Facilities Optimization, we moved our principal executive offices to Naples, Florida.

Thanks for joining us, and I'll now pass the phone to Phil for his remarks.

Good morning, and thank you for joining our call. Quarter two represented a key milestone in our integration. We have now fully identified and begun executing our second and final phase of operating synergies in the transaction. Today, we announced an additional $20 million in cost savings across the combined company. As we indicated in Q1, given the scale of the combined company, we are now executing on our plan to in-source the internal IT function, consolidate our data center facilities and combine overlapping global office locations. With our phase one and phase two cost savings, we expect $53 million in annual savings when we fully implement by the end of 2013. From the team's effort, we expect to realize $48 million in cost savings in 2013 and the full $53 million in 2014.

Importantly, in addition to cost consolidation of ACI and S1, we have begun to communicate the product and solutions roadmap to our global customer base. During the second quarter, we shared a complete view of our product roadmaps with our customers through our ACI Exchange events around the globe, as well as through customer visits and a comprehensive customer letter campaign to our entire customer base.

Furthermore, we conducted an industry-focused Analyst Day on June 20. I'm encouraged to say that we're receiving positive feedback on the combined companies' product direction and technology strategy.

We have completed the customer and industry-facing events ahead of our planned integration schedule and we believe this heightened level of transparency will help customers make key buying decisions and improve their confidence in ACI as their strategic payments partner.

Finally, and probably the most compelling point I can leave with you, is we believe that ACI's suite of solutions represents one of the broadest and most proven in the industry. Our product set delivers unparalleled functionality, reliability and choice to our existing and new customers.

On the corporate finance side, we had an active quarter, repurchasing 962,000 shares for approximately $38 million in capital. Year-to-date, we have purchased 1.1 million shares for $44 million in capital, representing nearly 3% of our shares outstanding.

Lastly, we believe that our global sales pipeline is as strong as ever and is primed for very good growth going forward. Many customers who are waiting for our roadmaps now have the comfort they need to go ahead with purchase decisions. Our business focus remains the growth of new sales to existing and new customers, which will continue to build long-term backlog and recurring revenue.

In summary, I think quarter two was a hectic, yet excellent, transitional quarter. We are managing the business for a very clean 2013 and have pushed through acquisition integration costs, higher deferred revenue haircut and product roadmap decisions and communications into the first half of the year. We have diligently pursued the integration and believe that we have set the stage well for a more margin-rich 2013.

I will now hand the call over to the team to discuss the business review, as well as the financial results for the second quarter. Ralph, please go ahead.

Well, thanks, Phil, and good morning, everyone. It's a good overview and I'm happy to provide an overview of our wins, some of the global trends and the outlook for the second half of the year.

So on slide 6, you'll see there is an overview of the deals and we've highlighted a few of the key deals in the Americas. So we had good activity with add-on sales during the quarter across multiple products and multiple markets. Our SNET was up 51%. Term extensions were off slightly due to a difficult comp against last year. We had a large term extension. Our revenue increased 41%.

In Asia-Pacific, we had a strong commitment for BASE24-eps with a leading processor in Taiwan, strong add-on sales growth SNET, which increased 129%. Term extensions were down due to some timing. Revenue increased 37%.

In EMEA, we'd like to note significant term extension with one of our large customers, Barclays, during the quarter. We have a relationship with them for over 25 years, and in the face of difficult economies in parts of EMEA, our sales were up almost 50%. SNET was up 38% year-over-year with great add-on and cross-sell activity. Term extensions increased 66% and the revenue increased 18%.

So turning to page 7, you'll see that besides many onsite customer visits, we held two customer Exchange events in the Americas and EMEA, and our feedback was excellent, and here's what we've heard about global trends around the world. One of those was focused below, but I'd like to spend some time on regulations, growth, cost reductions and innovation.

And around innovation, there's two that are significant -- EMV in the Americas. At our event, we heard from many clients, including MasterCard and Visa, that investments in EMV contact and contactless chip technology will speed up the adoption of mobile. We see a good pipeline for EMV-related activities, and given that we have a history of providing these products globally, we're well positioned for that in the US market.

Speaking about mobile, you can't pick up the newspaper or the magazine without mobile being mentioned. Our mobile experience globally is strong and the market buzz, we're experiencing great sales lead activity, as should proven out (sic) in the next half of the year.

So talking about the next half of the year, in the Americas, the US and Canadian banks are strong. Our focus will continually be on cross-selling and large add-on sales. As noted, the innovative initiatives above in the US around EMV and mobile will help us.

In EMEA, although some of the European countries are facing some challenges, like Spain, Portugal and Greece, which is causing those markets to be slow in sales, northern European banks are actually in large expansion mode and looking at Pan-European opportunities. There's major transformation projects are a consistent theme, and we are viewed as a strategic partner with strong, long-term relationships with our customers and the products to provide them. Africa also remains in good shape and growth is still projected.

In Asia-Pacific, we have a real strong pipeline around consumer payments, online and fraud. We see a big focus on national payment infrastructure switches and projects in places like Australia, India, Malaysia and Singapore. And India and [Afshan] remain very strong for sales and a large growth opportunity.

So in summary, our pipeline is strong, as Phil said, and we have lots of opportunities with new add-ons and cross-sells for the remainder of the year, and we continue to be focused on our best practices and will continue to serve as thought leaderships with our customers and prospects.

So thank you, and I'd like to turn this call over to Scott.

Thanks, Ralph, and good morning, everyone. I'll be starting my comments on slide 9 with key takeaways from the quarter. Since Ralph's already done a good job going over sales, I won't spend too much time on that here, other than to reiterate that we saw strong sales growth in the EMEA region. We also saw strong growth in new sales net of term extensions, growing $38 million, or more than 50% over the prior-year quarter.

Turning to backlog, foreign currency movements had a significant impact on both 60-month backlog, as well as 12-month backlog, reducing both metrics by $23 million and $6 million respectively.

We saw a solid revenue quarter with our first full quarter of the S1 business contributing $43 million of revenue to the quarter. The S1 contribution to revenue was impacted by $9.6 million of deferred revenue haircut. Again, that is the revenue that would have been recognized in the normal course of business by S1, but was not recognized due to GAAP purchasing accounting requirements -- so really, $9.6 million of pure margin revenue that we weren't able to recognize. And of all the quarters this year, this June quarter will see the greatest impact of that deferred revenue haircut, as we roll that out the rest of the year.

Our monthly recurring stream coming out of our backlog represented 70% of our total revenue in the quarter, which provides a stable, reliable and predictable base of our revenue stream.

About half of the $6 million decline in organic revenue was driven by foreign currency movements when compared to the prior-year quarter, and we also saw about $10 million of nonrecurring revenue from backlog that moved from Q2 to the second half of 2012. Still, in the full year, but pushed out to the second half.

Continuing on to slide 10 with key takeaways from the quarter, the operating expense growth compared to the prior-year quarter was almost entirely related to the S1 acquisition, as operating expenses for our base organic business represented only $2 million of the expense growth.

We also incurred $7.6 million of integration-related one-time expenses, primarily related to the next phase of our integration, which includes the consolidation of our IT infrastructure and facilities. Excluding the impact of this $7.6 million in integration-related one-times, and the impact of the $9.6 million in deferred revenue haircut that I mentioned previously, we saw solid operating income and adjusted EBITDA of a little more than $9 million and $25 million respectively.

And, finally, on this slide, we ended the quarter with nearly $150 million in cash, and as Phil already mentioned, we used a part of our cash this quarter to repurchase stock, about 960,000 shares in the quarter for $38 million. So year-to-date, we've purchased 1.1 million shares for approximately $44 million. We used a little more than $4 million to acquire one of our Latin American distributors and we used $3 million of our cash for our scheduled paydown of our term loan. And finally, we finished the quarter with $366 million of total debt.

Turning next to slide 11, for an update on the status of the S1 integration, we have completed the integration of our SG&A functions and are now focused on the integration of our IT infrastructure and facilities consolidation. The IT and facilities plan includes closure and consolidation of 14 offices worldwide, the consolidation of our outsourced IT and third-party host data centers into in-house operations. We expect these actions to result in an additional $20 million of annualized savings once complete. We expect to complete about 75% of these actions by the end of 2012, with the remaining 25% completed by the end of 2013.

As a result of these actions, we expect to incur an additional $15 million of one-time expenses in 2012. That's in addition to the $16 million already incurred for the SG&A consolidation, but we expect to be able to achieve an annualized run rate savings of $15 million by the end of 2012 and the full $20 million of cost savings by the end of 2013. So overall, including the $33 million of cost savings we actioned in the first quarter of the year, when combined with the $20 million in savings we're expecting from the consolidation of IT and facilities, we expect to achieve an annualized cost savings of $53 million when fully implemented. So overall, we're very happy with the integration effort so far.

Turning lastly to slide 12, for our full year outlook, we are reaffirming our outlook for both operating income and adjusted EBITDA for the full year. So we continue to expect operating income to be in a range of $99 million to $104 million and adjusted EBITDA in a range of $165 million to $170 million. And again, both of those metrics exclude the impact of one-time transaction and integration-related expenses.

With the foreign currency movement since our first quarter earnings call, really, a strengthening of the US dollar against all the major currencies in which we conduct business. We expect top line revenue to come in lower by about $10 million from our previous range -- again, this being a rate issue, not a volume issue. The FX movements obviously also reduced top line expenses as well, so we don't expect this FX movement to impact our total expectation for operating margins and EBITDA for the year.

And we are also expecting a $3 million increase in our deferred revenue haircut resulting from the purchase accounting of S1, so we have reflected this adjustment to our top line revenue as well. We are now expecting full year revenue to be in a range of $683 million to $693 million, reflecting a reduction from both the FX movements and purchase accounting revisions. As you can see here though, due to operating cost efficiencies, we're not expecting this revenue reduction to have an impact on our overall earnings.

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

(Operator Instructions) Your first question comes from Gil Luria, Wedbush Securities. Your line is now open.

Yes, thank you, and good morning. In terms of S1 and how well it's doing as a business, can you give us an update on that? On the February call, we talked about guidance for that standalone business as $20 million to $33 million of EBITDA on $213 million to $223 million of revenue. Where are we on that trajectory for the year? Will we be able to make that trajectory?

Well, I mean, right now, we're still reaffirming the full -- except for the foreign currency and the increase in deferred haircut, we are reaffirming where we were in our earlier earnings call.

So from an operating income and from an EBITDA standpoint, we're saying that we're going to make or exceed what we told you last quarter because we just gave you the phase two synergies. And those synergies go both ways, right? Now, it's two offices becoming one office, two distributors becoming one distributor, the in-sourcing and whatnot that we're doing. So you can't ascribe it to one side or the other, but you can certainly ascribe it to both sides.

Right. And if you look at the metric, and we provide the revenue and expense contribution of S1, and if you look at it on a non-GAAP basis, net of adding back the $9.6 million of deferred revenue haircut, the S1 contribution this quarter was about $53 million of revenue, $41 million of expense, to get us around $13 million of operating income.

Got it. And then so my follow-up is about a comment you made about bringing IT in-house. If I remember correctly, you outsourced that to IBM as part of your deal from a few years ago. Combining that with the fact that IBM is terming out your contract at the end of this year, should we be concerned about your ability to sell with them side-by-side, to sell to IBM-centric banks?

No. I think I wouldn't say that at all. I would say that our relationship with IBM is a co-prime to co-prime. We're side-by-side prime contractors is (inaudible) the way we do business. I think it's very safe for us to say we have never done more side-by-side business around the globe than we're doing right now with IBM, and that would be true from a pipeline, as well as actually doing business.

Great, thank you.

Your next question comes from George Sutton, Craig-Hallum Capital. Your line is now open.

Good morning. So you obviously reported a somewhat complicated Q2 and the optics aren't pretty. But I think the most important question I could ask is, as we look out to 2013, you've kind of walked through with us how the numbers might start to look in 2013, given the math of the acquisition. Is there any change in your thoughts relative to 2013 based on what we've just discussed?

I think again, the math is pretty much the same as we've discussed in the past. The $23 million of deferred haircut will go away in 2013, so all else being equal, the revenue will step up. We'll have the $48 million of cost savings and obviously, we're getting -- the first $33 million, we're getting a three quarters' run rate this year, but we'll get a full year of the potentially $48 million run rate savings next year. Then we pick up another six weeks of operations of S1 next year at our richer margins. So that's pretty much the same I think we talked about in the past.

Yes, George, I think it's fair to say that from a GAAP standpoint, the quarter is cluttered and we wouldn't -- we don't give quarterly guidance. I think you know that, right? And we told you what we're going to deliver for the year. We're still fully committed to deliver for the year what we want to deliver for the year. I'm glad you asked a 2013 question because I view my number one mandate is to deliver an integrated company that largely doesn't have any trailing costs or trailing tax into 2013 in terms of bringing the company together.

I see too many companies where they aggregate their acquisitions versus integrate their acquisitions. The first three years I was here, I ended up integrating acquisitions from 20 years -- that had taken place 20 years prior. So we don't apologize for the amount of pain that we've taken ourselves through this quarter and a half. If you think about it, we are only a quarter and a half into this and we probably have another -- we're probably on the down slope in the quarter we're in right now in terms of the pain. But if you think about the amount of work these guys have done -- and we don't say "Do this project because it isn't deferred" and save the deferred one for a different --

Quite honestly, if we could have done all $23 million of the deferred revenue in this quarter, we would have happily have done it, right, to have it behind us. And of course, we don't control FX; we just control the way we have revenue and expense around the world, so that we're naturally hedged. And that one is outside the acquisition. But I will tell you from an effort standpoint, and as kind of the leader of 3,500 people, I couldn't be more happy with what they've done in the last 90 days. And 2013 is going to look very good as a result of that.

Perfect. Ralph, I had a question on your EMV discussion relative to the Americas. So I viewed EMV as helping drive more PIN-related transactions, which would be great for you. It sounds like you actually view it as a more holistic change agent for other parts of your suite. Is that what you're trying to say?

Yes, exactly. It's PIN and it's going to drive other adoption. Like it's going to be a lot easier to do mobile with EMV, right?

Yes.

I think EMV is going to play a bigger role in mobile than it's going to play in PIN-based --

Yes.

Okay. I appreciate it. Thanks, guys.

Your next question comes from John Kraft, D.A. Davidson. Your line is now open.

Good morning, guys. I apologize if I missed this, but you talked about the official announcement of your product roadmap. I guess I would assume that the bulk of the questions have been due to how you might integrate the BASE24 and the Postilion. Are you planning to retain two separate products and sort of cross-pollinate features with each, or are you moving to one single consolidated product?

Well, of course, Postilion is going to continue to support the African continent the way it has the last 20 years and we're totally committed to that. Postilion is going to be used as our premier retailer platform around the world and eps is going to end up being the financial services engine around the world. Actually, I will tell you that there was probably -- there was some noise around that, a fair amount of noise, but actually, there was much more noise about our roadmap on the online side of our business and how EB was -- how we were going to bring together the different pieces of that. And that culminated very well in that by June 20, I think we took -- I think we froze a lot of people at the 11th hour of trying to make decisions, because in a lot of cases, we were the number one and number two decision. They wanted to make sure they didn't pick the one that they thought we'd sunset or do something negative to -- in that process.

That's right. And so we communicated via letters to our customers at the end of April and then in June at our user conferences and we had about 500 people at those between Europe and the Americas. We went through in detail all of the roadmaps that we had and how -- what products we're keeping, how we're integrating those, and it was received extremely positively by our customers. And Phil is exactly right that it has allowed people now to really understand what the right product is to buy for them as they go forward. So it kind of started to open up the sales channels a lot more. So I think that was really well handled and it was done very quickly in the integration process, so our customers were satisfied.

Okay. That's helpful. And then I guess my follow-up would be on potential decisions to divest. It sounds like the roadmap might include basically keeping and retaining all of the products.

No, we haven't made final, final decisions on all our products, but we have made -- we're doing very well with our community banking products. And because they were Postilion, we didn't get a real look at them until we finished that process, or whatever you want to call it, with the Justice Department. So we didn't really get to look at that until the end of February and we want to make sure that we accrue all the efficiencies before we decide that we're going to keep or not keep those pieces of the business. And right now, I will tell you, they're performing at, or better than, expectation, so they're not a drag on the business.

Great. Thanks, guys.

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

Good morning.

Good morning, Brett.

One question on bookings -- I think my math is right, that if I take out the S1 portion of bookings, that came in at about $117 million organically for ACI. Is that math right, first of all?

That sounds right, yes.

Okay. And when I look back sort of over the last five years, I think your average for 2Q -- and I think these things are somewhat seasonal -- have been about $108 million, so a little bit above the average. But I think you guys have talked about trying to hit -- and again, correct me if I'm wrong -- a little above $500 million in annual bookings or sales. And so we're tracking a little bit behind. We know that 4Q is usually big, but can you just give us any color on how that looks? And both Phil, I think, and Scott and Ralph, all said that the pipeline looks good, but we -- I'd just like a little comfort about how that's going to play out, if you can give it to us.

Well, one thing I can tell you is the second quarter cannot -- there's no way we're going to sit here and justify what we sold in the quarter when we froze the marketplace during the quarter in terms of which way to go with the products and whatnot.

Yes.

So we're not going to describe this quarter as it relates to other quarters because it's one-off. We have not given guidance for full-year sales, but I'll tell you that -- and I think it's really clear that with having gone through the renewal cycle once since sunset with all our customers, that renewal is not our big focus. We're very comfortable with the renewal cycle; we're very comfortable with attrition.

So what we call SNET is our real focus as a business, sales net of term, which is growing the back -- with respect to growing the backlog, our sales to existing and new customers. And we are very comfortable we're going to make or beat -- we are comfortable we're going to make or beat that number for this year. Which says, yes, we'll -- without quantifying anything yet, we are going to look more like '08, '09, and '10 than we did '11. Now, 2008, 2009, 2010, all the hard work we went through to try to get 40%-some of that in the beginning of the year, where -- we're not back to square one, but the acquisition has put us back to the task of evening out the year.

Great. And then just the follow-up is just specifically on EMEA. It looked like that was very good. Can you give us a sense of how those -- how EMEA, and specifically continental Europe, performed maybe by both ACI and S1, just so we get a sense of kind of the organic ACI growth? It sounds like it was good, but can you just give us more color there?

Again, I think I'd be disingenuous comparing what we booked in this quarter to a normal quarter. And because of the way we will end up moving the roadmap, the ACI BASE24 to financials, we're going to probably do better than we expect. S1 Postilion to financials, by definition, are going to do worse than we expect because we made the decision one way. The online business is leaned more heavily toward S1, so we expect that we're going to do better on the S1 side on that. And we said that Africa was doing -- Africa and retailers are both doing well.

Right.

So I think that's the most honest way to answer. The market is beginning to -- is behaving the way we've now done -- we've now drawn out the roadmap.

Okay. That's what I needed. Thank you for your comments.

All right.

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

Hi, good morning. I was hoping if you could just break out a little bit on just the demand outlook on the continent of Europe. I know you guys have good demand in Africa and potentially parts of the Middle East, but excluding Barclays, can you just kind of give us any commentary on the appetite for sales to new clients? And I'll stop right there on that and I have a follow-up.

Yes. I'll let Ralph actually answer the question, but I think we said -- I think I said, and Ralph said, that our pipeline has never been better than it is in Europe, and why don't you give some color on that?

Yes, sure, that's easy. So most of the European banks, it's Continental Europe, and most of the European processors are already customers of ours, and they're expanding dramatically throughout Pan-Europe, which is what we talked about on our opening comments. And so our products fit perfectly into what they're trying to do from an expansion point of view.

So as Phil kind of mentioned, sometimes it's always hard to call exact timing of signing, whether it's a Q3 or Q4 deal, but we are regarded as the premium supplier and we are regarded as a strategic partner to those customers. And so we're involved in lots of strategic discussions with them. So we feel very good about the Pan-European continent, given what's going on there.

Okay. So another way of saying it -- and I appreciate that color and I thank you for it. But another way of saying that you haven't seen any reduction in demand or activity just on the continent as it relates to the financial institutions in that geography?

So overall, I would say no. Now, when you get into specific countries, some countries are down a little bit than maybe the trend lines, but overall, I would say it's positive and up.

Could you give us an update on the prospects for entering Japan and any kind of color on that country?

Yes. So Japan, we've got a major initiative going on with a large Japanese processor and we also have some other customers there, and that project is a multi-year project which is going very, very well. We're actually ahead of plan and the customer is extremely satisfied. I think once we complete that project, which will be toward the end of this year, early next year, then that's going to be a real gateway for us to do a lot more business into Japan.

Terrific, thank you. I appreciate it.

(Operator Instructions) Your next question comes from Tom McCrohan, Janney Capital Markets. Your line is now open.

Hi, everyone. I just was named after John McEnroe. I'll take it.

Good morning, Tom.

Can you -- how are you? Can you help us understand the phasing of adjusted EBITDA for the rest of the year? So from -- if my math is right -- about $55 million or so of adjusted EBITDA for the first six months. Your low end of guidance, 165. So it kind of implies that the run rate, adjusted EBITDA, is going to ramp up pretty considerably in Q3 and Q4. So just -- if you can just kind of talk to that and help us understand the phasing, that will be helpful.

Yes. I think if you look at the phasing of revenue and -- well, I guess, for sales and revenue and EBITDA, I think it's going to look more like it did prior to 2011. I mean, that's where -- 2011 is probably the anomaly in terms of our quarterly phasing, but because of the timing of sales and revenue, I would expect EBITDA to trend consistent with that and with Q4 being pretty strong.

And then in terms of the adjustments that you make in your -- you don't provide an adjusted EPS kind of number. You do a non-GAAP number and the adjustments you make for adjusted EBITDA, the list is a lot longer than the adjustments you make for your -- call it non-GAAP EPS. The $0.16 number for the quarter doesn't really -- you can't fully appreciate that if you take your adjusted EBITDA on a per-share basis, it's like $0.65. So there's a big gap between the $0.16 and the adjusted EBITDA on a per-share basis.

So is there any reason why you're not providing kind of a walk with a similar adjustment? So just -- so I think that creates some confusion and I'm trying to -- and consensus for the quarter was, I think, in the 30s, $0.30 range. So there's a lot of noise between GAAP and non-GAAP and there's no consensus on the Street on how -- what's the right non-GAAP number to use and I don't know how that benefits anyone. So is there any reason why you're not providing a walk and guiding people to some sort of non-GAAP number?

You mean on the -- we do provide -- in the press release table, we do provide a walk of adding back the deferred and adding back the one-time to get to our adjusted EBITDA. That's the $0.16 you're talking about.

Well, the $0.16 does not add back the deferred revenue. The adjusted EBITDA number does. So the $0.16 adds back -- if I'm reading it right -- right, the amortization stuff, the non-cash, the stock options, you get $0.16. You add back the deferred and the one-time costs, I think you get to a much bigger number. Well, we'll take that offline. It just seems like there's -- you can drive a truck through the different EPS numbers floating out there for your stock.

Yes.

I mean, I don't -- I know there's some noise, but the sooner we can resolve it, I think the better for you guys. In terms of the deferred revenue, given that it is such a high-margin adjustment, is it fair to say that the deferred -- the $9.6 million, you're adding a similar amount of deferred revenue from S1 today as you're being impacted by. So there will be a step-function up next year in terms of what's now a headwind becoming kind of step-function up next year, and the only reason that would happen is that you're adding as much deferred today as you're taking away right now from the acquisition accounting, if that makes sense.

Well, no, I don't think the deferred is going to be a headwind next year.

No, no, no, what he's saying is that we -- this year, we're hair-cutting our revenue by $23 million --

Right.

-- because of the deferred, and he's saying that come next year, a lot of that $23 million will come back.

Right. It absolutely will come back.

Right.

And coming back, because you can see that now, right? I mean, you're seeing the deferred being added now, which when -- so if it's coming back, it's going to be added now and you're going to recognize it next year.

That's correct. The answer is you're right. What is this year a wind in our face will be next year, a wind at our back.

Got it.

Isn't that the question you were asking?

That is -- Phil, yes, exactly.

And you're exactly right.

That's such a headwind.

Yes. It's a huge headwind and it's purchase accounting, unfortunately. But the good news is, we're taking it all -- we originally thought we were going to take part of it this year and part of it next year. We've now said we're going to be able to absorb it all this year, so what's a huge wind in our face this year is going to be wind at our back next year. That goes to my initial comments saying that my number one mandate is to clean all this noise out in 2012, so that in 2013, we've got a clean balance sheet and income statement.

Got it. And my last question -- and I'll jump off -- is more on the mobile side. A lot of the stuff you guys do is behind the scenes and it's kind of hard to get your arms around what role you guys play, and I know you guys play an important role for banks in terms of payments and there's a lot coming with digital wallets. Visa is coming out with a digital wallet, I guess, later this year. Are you folks part of that process as banks start to embrace this new VDOT-Me wallet? Are you part of that ecosystem in any way to kind of enable the banks to roll out those new offerings that are around the corner, outside of EMV?

Yes. So this is Ralph Dangelmaier. We actually are part of the ecosystem in several ways. So number one is if somebody takes a wallet from Google or from Visa or from one of the phone -- telcos, what the wallet is, is a place to put credit cards or loyalty cards or reward points or couponing. So when that goes into the wallet, when someone goes out and buys something from the wallet, it goes through the normal channels it would. So whether it goes through a POS device, it goes through a credit card, we then are driving a lot of those devices on behalf of the processors of the bank. So we get a transaction increase.

The second place we play is also we -- those are being linked up generally to the same fraud systems that the card systems have, and we have a fraud engine. So that actually links to our fraud transactions. And the third place that we play as part of the ecosystem of the wallet is people are now issuing virtual cards and from our point of view, that's no different than issuing a plastic card. So we can actually help in the issuing of it.

And the last place that we actually play is on the merchant side. We help the merchants with reward tracking in that kind of -- for those kinds of products, so we actually have a play on the merchant side as well. So there's multiple steps in the ecosystem that we actually play as part of a wallet. So we feel the whole mobile wallet, mobile payment, as the market moves to that, that's going to be -- that will be good for us and our selling and revenue campaigns.

Great. Thanks, guys.

Thank you. At this time, I'd now like to turn the call back to Ms. Gerber for closing remarks.

Thank you very much, Sarah. We are out of time, but thank you for listening and joining us and if you have any follow-up questions, please call me directly and I'd be happy to address them. Speak with you next quarter.

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