Affiliated Computer Services F4Q07 (Qtr End 6/30/07) Earnings Call Transcript

Aug.22.07 | About: Affiliated Computer (ACS)
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Affiliated Computer Services, Inc. (ACS)

F4Q07 Earnings Call

August 21, 2007, 4:30 PM ET

Executives

Jon Puckett - VP, IR

Lynn Blodgett - President and CEO

Tom Burlin - EVP and COO

John Rexford - EVP and CFO

Kevin Kyser - EVP of Finance and Accounting

Analysts

Moshe Katri - Cowen and Company LLC

Ashwin Shirvaikar - Citigroup Smith Barney

George Price - Stifel Nicolaus

James F. Kissane - Bear, Stearns & Co.

David Grossman - Thomas Weisel Partners

Adam B. Frisch - UBS Investment Securities

Timothy Willi - A.G. Edwards

Tien-tsin Huang - J. P. Morgan

Julio Quinteros - Goldman Sachs

Presentation

Operator

Good afternoon and welcome to the ACS Fourth Quarter Fiscal 2007 Conference Call. Today's call will consist of prepared statements by ACS, followed by a question-and-answer period. All participants will be able to listen-only until the question-and-answer session begins. The call is webcast live on the company's website and available for replay purposes. If you have any objections, you may disconnect at this time.

I'd now like to turn the conference call over to Jon Puckett, Vice President, Investor Relations. Mr. Puckett you may begin.

Jon Puckett - Vice President, Investor Relations

Good afternoon and thank you for joining us today to discuss our fourth quarter and fiscal year 2007 results. Today on the call we have Lynn Blodgett, President and Chief Executive Officer; Tom Burlin, Chief Operating Officer; John Rexford, Chief Financial Officer and Kevin Kyser, Executive Vice President, Finance and Accounting.

As always, I must caution everyone that any statement from this call that are not historical facts may be considered forward-looking statements within the meanings of the Federal Securities laws. As you know, forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed and or implied by these statements. Additional information concerning these factors is contained in the company's filings with the SEC. Copies are available from the SEC's website, from the ACS website, or from ACS Investor Relations.

We have also provided a presentation on our website that we will refer to during our discussion. We will reference certain non-generally accepted accounting principle financial measures, which we believe provide useful information for investors. We have posted both the presentation and the reconciliation of those measures to generally accepted accounting principles on the Investor Relations page of our website at www.asc-inc.com. And finally, we disclaim any intention to and undertake no obligation to update or revise any forward-looking statements.

I will now turn it over to Lynn Blodgett, our Chief Executive Officer.

Lynn Blodgett - President and Chief Executive Officer

Thank you, Jon. I want to thank each of you for joining us today; I'd also like to make special mention of our 1400 leaders who are convened in an assembly hall with me and our client, the Walt Disney Company in their beautiful facility in Orlando, Florida.

Now I always have a deep feeling of gratitude for the people of ACS, but the gratitude I feel is stronger now than it has ever been. Since Darwin Deason founded the company 19 years ago, we've always had high standards at ACS and we expect the best performance from our team. However, this year we asked for more. Between the stock option investigation and the process of potential ownership change, not to mention the normal rigor of competition, complex service delivery, sales and so forth, we have asked our people again and again to dig deep and despite challenges perform at the highest level, and perform they have.

As a team, we delivered record revenue, exceptional cash flow, a nearly 10 point improvement in our renewal rate and 11% growth in adjusted non-GAAP diluted earnings per share. In the face of headwinds that could have easily effectively sidelined our sales efforts, our sales organization produced outstanding results of $607 million in annual recurring revenue with an estimated total contract value of $2.8 billion.

Our operational engine is running on all cylinders, which we could not say 12 months ago. Our finance, legal, human resources and other support organizations have handled increased work load due to the deal process and the stock option investigation, not to mention the normal stresses and strains in an organization that grew by 10% last year. If I sound proud of them, I would say that I am not only proud I am in awe of our team. Frankly, I don't know just how far we can go and how fast we can run when we have all of our headwinds behind us.

I am fully confident that the operational challenges that arose 18 months ago are behind us. The ongoing stock option investigations are handled by a small team in our legal area. Of course we face normal business challenges in sales, operations, administration every day, but this is normal course of business stuff. The continued consideration of strategic alternatives for the company remains a challenge to our pipeline and new business signings that we must overcome. But I am confident our sales teams will continue to succeed in the face of this challenge as they did in fiscal 2007.

No matter what the headwind or tailwind, my strong charge to our great organization is the same as it has been since I became CEO. Run your business, focus on your customers, focus on your people, focus on costs, focus on making your solutions more innovative, focus on making the right decisions for the business for the long-term.

We are a public company and due to the state of the debt markets, we will most likely remain a public company for some time, our ownership structure makes little difference as to how we should run the business. At the end of the day, our shareholders, whether those who come through a public market or those who might come through a private transaction expect the same thing, good growth and a fair return on their investments. Our customers expect the same thing; phenomenal service, lower cost and new solutions to their problems. Our employees expect the same thing; fair pay, reasonable benefits, respect, loyalty and trust and opportunities to grow and develop. These are the same whether we are public or private.

If we focus and perform well on these items, we will thrive, it's just that simple. I said earlier that I don't know how far we can go and how fast we can run when we have this headwind behind us, but I'm staking my career on my team. They are the best of the best. I also have tremendous confidence in our customers, they have shown faith in ACS and we have lived up to the faith that they have placed in us.

I won't go into much detail on the financials, but as you look at slide number 4 and 5, I do want to highlight the trends. We are trending positively in most categories. Fourth quarter and fiscal 2007 results were strong. Revenues increased 10% from the prior year for both the quarter and the fiscal year. Sequential adjusted margins declined slightly, but year-over-year trended slightly up. Our adjusted earnings per share increased over the prior year by 21% for the fourth quarter and 11% for the fiscal year.

Before I turn it over to Tom Burlin, who will discuss our performance in more detail, I want again to thank our employees for their effort and the determination this year. I look forward to a continued success and a great year in fiscal 2008. Tom?

Tom Burlin - Executive Vice President and Chief Operating Officer

Thanks Lynn. As a team, ACS employees made great strides operational this year. Today our fundamental business is stronger than a year ago and we will continue building for the future.

Please turn to slide 7, and I will review our business... new business signings. In the fourth quarter, we closed a $153 million of annual recurring revenue, which represents $509 million of total contract value. Although $150 million of signings in the quarter is lower than I would like, it was a solid considering the non-operational issues the company has faced and bookings may continue to somewhat affected until the special committee reaches the conclusion. Because of the recurring nature of our business, this will also have an impact on our near term growth.

New business signings by service lines were consistent with our overall business, from about 75% BPO and 25% IT solutions. Our Commercial segment, which represented 78% of signings had nice new logo wins such as our finance and accounting outsourcing contract with Georgia-Pacific as well as add-on business from new clients.

Our Government wins included several expanded relationship with existing clients as well as new relationships such as our greater opportunity with the city of Cleveland for parking fare collection. For the year, government represented 36% of new business signings.

Please turn to slide 8. I want to spend a brief moment on our fantastic renewal rates in fiscal year '07. As you can see, our renewal rate was 94%, a nearly 10% improvement over the prior year. In terms of dollars, we renewed $869 million of annual recurring revenue with an estimated $2.4 billion in total contract value. As we always say, you cannot achieve high renewal rates without satisfying clients. I'm proud of our client service teams for their excellent work in delivering these results.

Please turn to slide 9. We finished the year with the largest qualified new business pipeline in our history, at approximately $1.7 billion of annual recurring revenue. Our line of business, the Commercial segment comprised approximately 65% of the pipeline, with the remaining 35% in the Government segment.

In service... by service line, 76% of our pipeline is BPO business, and approximately 24% is IT solution. We are seeing particular strength in commercial healthcare, transactional BPO work, multi-scope HRO and finance and accounting deals.

In the Government segment, we are seeing pipeline strength in our transportation business, including international opportunity, government healthcare, and the federal government.

Beginning on slide 11, we highlight the Commercial segment results. Total revenue growth for Commercial was 6%, with 1% internal growth. Our revenue growth was negatively impacted by known client losses, including three from the acquired HR business. This headwind will subside in the first quarter of fiscal 2008. In addition, our internal growth was challenged by commercial trailing 12-month signings, which were below the prior year.

Turning to profitability, on an adjusted basis, operating margins decreased by 30 basis points sequentially driven by anticipated startup cost. In general, we are paid cash for upfront work to cover a portion of our startup cost, but must improve revenue recognition which obviously impacts early contract profitability. Year-over-year adjusted margins improved 80 basis points. Most of this improvement came from optimization efforts throughout the year, as well as improved performance on underperforming contracts discussed on previous calls.

Please turn to slide 12, and I will provide a high level review of fiscal 2007 and provide an overview of our Commercial operation initiatives for fiscal 2008. I would characterize fiscal 2007 as the year of operational focus. We conducted a critical review of our operations, addressed client delivery issues, and worked hard to implement changes to improve our service delivery. We added resources and training for our project management offers. This was one of the most critical areas of expertise gaps we identified on some of our most complex accounts. We increased focus on project management and improved financial results, and client satisfaction.

Our improved renewal rates are a testament to our client satisfaction. Our focus on service delivery has resulted in both year-over-year, and sequential improvements in Commercial renewal rates. In fact, there are several clients where we struggled with client satisfaction issues in the last year that has completely turned around and are now referencable. We also ended the year with a strong and broad commercial sales pipeline. Our unique set of services which are demanded in both strong and weak economic cycles allows us to offer client services, whether their objective is growth, operational improvement, speed to market or cost saving.

We look forward to converting the pipeline into signings in fiscal 2008. In 2007, we addressed issues in several of our markets that were in their formative states, for both clients and providers. Today we're confident in our ability to deliver in these markets and industry analysts agree with our assessment.

In the second half of fiscal 2007, Lynn introduced the concept of Divide and Conquer. This is one of the tools that we have used to combat the law of large numbers and remain focused on our business and drive our future growth. The concept of Divide and Conquer is to reduce the span of control of our operational managers, to allow them to focus on fewer tasks, clients, people and administrative duties. And as a result, deliver better outcome. While this initiative may seem counter intuitive to the prevalent culture of the more people you manage the more power you have, we believe that this dividing allows our managers to hone their focus and conquer more than before.

Looking towards fiscal year 2008, new business signings are the primary focus area for the Commercial segment. We think the existing and future organizational changes from Divide and Conquer will increase our new business signings, which is a critical first step in improving internal revenue growth. We will also strive to deepen our relationships to become a stronger operations partner to our clients. We believe we're properly positioned with our clients to help them improve with our operational expertise and process re-engineering skills.

We intend to pursue strategic acquisitions of four or five and build upon our service capabilities. Our acquisition pipeline is in good shape with opportunities across all of our lines of business. We have a time-tested process of pursuing right acquisition at the right evaluation and will continue that in 2008. We've challenged our lines of business to create and expand product and service offering in the fiscal 2008. We use acquisition to help drive service innovation.

Finally, we'll continue to identify and future train strong leaders in our organization as well as aggressively recruit top talent in the industry. This approach will help us innovate in existing markets and enter new markets we identify.

Now let's discuss the Government segment, please turn to slide 14. Total revenue growth was 16% with 15% internal growth. Internal growth was driven by the 7% increase in trailing 12 months signings and increased transport revenue project work. We are leveraging the end-to-end capabilities of this business. We continued the progress we made last quarter and increased sequential internal growth by approximately 3 percentage points.

Keep in mind, Government revenue was challenged in 2006, so we did have a bit of tailwind, and as well it would be unrealistic to expect to grow at twice the industry average.

On an adjusted basis, year-over-year operating margins were stable. Sequential operating margins increased approximately 60 basis points due to new business signings in fiscal 2006 and 2007 that ramped to profit during the quarter. As we've always said, margins would typically be pressured in times of growth as we initially ramped the business. I am extremely proud of the improvements we have made in the Government segment and appreciate all the hard work that drove those results.

Please turn to slide 15. We had several key operational accomplishments during fiscal 2007. The most notable was return to strong internal growth. We achieved outstanding renewal rates and we delivered add-on work with several existing clients.

In March of this year, we began work on the Indiana Eligibility Contract which is an important contract for ACS, the state of Indiana and the integrated eligibility market. States are looking to outsourcing as a means to deliver increased services to their constituents in a less expensive manner, so several states are monitoring the success of this contract.

We've addressed a few important client issues in 2007. We settled the North Carolina Medicaid dispute and I was pleased with positive outcome of this issue. We also reached resolution with the Department of Education, whereby we agree to seize development of certain in-process software implemented under our Common Services for Borrowers contract. Our amended contract has a lower risk profile and less capital intensity.

Finally, we expanded our pipeline with strengths in our international transportation business, government healthcare and federal government opportunity. We had a very strong year in the Government segment. In fiscal 2008, we continue to work on innovative solutions and platforms. Our new enterprise platform for the state Medicaid system is the most advanced solution in the market. In the last four state Medicaid contracts on which we have competed, ACS has had the highest technical score.

We will continue to grow our business internationally; several of the issues that governments face are the same around the world. We are a dominant player in the international transportation business. In fiscal 2007, we signed transportation contracts in Switzerland, Australia, Israel, France, to just name a few. Additionally, this week we announced the contract with the Dubai Roads and Transport Authority. Beyond transportation, we have several solutions that address property, health, public safety and judicial needs of government and we hope to extend our reach into these areas globally.

We have been very successful in implementing our activity-based compensation system in several of our contracts as part of our efforts to continue optimization, and we'll continue to due so in the future. As noted before, it'd be challenging to continue to grow at twice the industry average. We understand the market and we feel that we have a great plan to continue growing at or above the industry average over the long-term.

In summary, I am pleased with the operational progress we made in fiscal 2007 in both segments. I think we are well positioned for fiscal 2008 and beyond. I would also like to add to some of Lynn's comments. I appreciate the efforts and commitment of our people, without them none of this would have been possible.

Now, let me turn to John to take you through the financials.

John Rexford - Executive Vice President and Chief Financial Officer

Thanks Tom. Please turn to slide 17. On this slide, we provide reported and adjusted non-GAAP results for the fourth quarters of fiscal 2007 and 2006. I would like to highlight that we grew adjusted operating income by 11% year-over-year with stable operating margin. Our stable operating margins reflect we are continuing to sign new business as similar margin profile as our consolidated operating margins. Despite the fact, we have some of the highest margins in our industry; we remain focused on improving our operations and optimizing our costs.

You can also see that interest expense increased approximately $17 million from the prior year quarter due to share repurchase activity in Q4 of fiscal year '06 and Q1 of fiscal year '07. Our Q4 effective tax rate on an adjusted basis benefits from a higher international mix of profit, which is taxed at a lower rate. Obviously, our international mix in any related tax benefits can fluctuate from quarter-to-quarter.

Adjusted EPS increased to $0.88 in Q4 fiscal year '07 from $0.73 in the prior year quarter, a 21% improvement.

Please turn to slide 18 and we'll review our record cash flow results for Q4. Fourth quarter operating cash flow was approximately 23% of revenue. Free cash flow was approximately 17% of revenue. Our excellent cash flow results were driven by improved collections and good management of our overall working capital. I would like to thank our client accounting teams and finance group that work together to help deliver these superior results.

Full year cash flows results were also strong, with operating cash flows of approximately 13% of revenue and free cash flow of approximately 7% of revenue. Both of which were significant improvements from FY06. I'm extremely proud of these results as well as our improvement in capital spending. Q4 in fiscal year '07 spending on CapEx and intangibles dropped by almost 2 percentage points to approximately 6% of revenue, which is more in line with our historical CapEx spending.

During fiscal year '07 we began a procurement initiative to consolidate spending and drive cost savings on CapEx. These efforts resulted in the significant improvement in CapEx over the prior period.

Let me make one final point on cash flow. Internally, we analyze cash flow on an unleveled basis, excluding certain items that we have highlighted on slide 18. That totaled approximately 3.5% of revenue for Q4 and nearly 4% of revenue for the year. If you consider these items in your cash flow analysis, our Q4 and FY07 results are even more impressive.

Now let me shift to the balance sheet. I've recapped our major balance sheet categories on slide 19 as well as the most significant fluctuations for March. Cash increased approximately $211 million due to our strong cash collections and working capital management. PP&E and software decreased approximately $47 million, primarily due to the non-cash Department of Education software impairment charge. This was partially offset by capital lease additions and assets acquired. The Albion and CDR acquisitions were the primary drivers for the $52 million increase in goodwill and intangibles as well as earn out accruals related to past acquisitions.

Accrued compensation increased approximately $80 million, primarily due to the timing of those accruals. Other accrued liabilities increased by approximately $50 million, primarily due to the acquisition earn outs mentioned earlier, and software enterprise agreements. Overall, our balance sheet is strong and we are well positioned, given the current credit markets.

We do not provide financial guidance, however, I would like to provide you with some color on certain key items to consider as you update your financial models. With respect to revenue growth, the lower 12 months trailing revenues will impact our near term growth. With respect to our industry leading operating margins, we do not believe that they will change dramatically based upon the margins inherent in our new business lines.

As you set your first quarter and fiscal year '08 EPS, I would recommend you to consider our historical quarterly trends over the last several years. With respect to cash flow, it is important to know that our first quarter cash flow is historically the lowest for the year, largely due to the timing of our annual bonus payments. However, we expect full year cash flow to be strong. I hope this color will be helpful as you update your models.

Let me close by also thanking our dedicated workforce for delivering strong results amid the distractions we previously mentioned. We finished the year in a strong fashion and are poised for an even better fiscal year '08.

Operator, let's open it up for questions. Let me remind you that we will not be addressing any questions with regard to the ongoing activities of the special committee and their evaluation of potential strategic alternatives. We have many people on the line, so please hold your questions to one per caller. Operator, you may begin the question-and-answer session.

Question And Answer

Operator

[Operator Instructions]. Our first question comes from Moshe Katri of Cowen & Co.

Moshe Katri - Cowen and Company LLC

Yes. Thanks and congratulations for a very solid execution in a very tough environment. Can you comment briefly on ACS' exposure to the financial services in this trade, just in terms of revenue mix somewhere in that context, any exposure to the mortgage industry? Thanks.

John Rexford - Executive Vice President and Chief Financial Officer

Yes Moshe. This is John, thanks for the comment. Subprime lend, we did have to take a charge in the third quarter on a client. So that was the balance sheet risk there. Right now, we are not seeing any other balance sheet risk related to the subprime markets or clients and frankly, we don't see any income statement risk on the subprime. We do have some mortgage business in the non-subprime sector. The good news is that a lot of our business is data management, if you will. So there is a recurring revenue component to that that is not completely depended upon new originations.

Moshe Katri - Cowen and Company LLC

Can you quantify the maximum percentages?

John Rexford - Executive Vice President and Chief Financial Officer

I don't have that right now Moshe. Kevin, do you?

Kevin Kyser - Executive Vice President of Finance and Accounting

I think the mortgage industry probably represents less than 1% of our revenue. So it's pretty small.

Moshe Katri - Cowen and Company LLC

Excellent. Thanks.

John Rexford - Executive Vice President and Chief Financial Officer

Yes.

Jon Puckett - Vice President, Investor Relations

Operator, next question?

Operator

Our next question comes from the Ashwin Shirvaikar of Citigroup.

Ashwin Shirvaikar - Citigroup Smith Barney

Hi and let me add my congratulations on the quarter. The question I have is with regards to your cash flow performance. Obviously good cash flow here in the fourth quarter and there is seasonality involved, but in terms of looking at cash flow as a percent of revenue, has something changed with regards to just the fundamental assumption of roughly 6% you know, 5% to 6% of revenue, being a good target for free cash flow?

Kevin Kyser - Executive Vice President of Finance and Accounting

Yes, hey Ashwin, it's Kevin. No, I think the only seasonality really in our business is as we've mentioned the first quarter, is being a little bit lower because the timing of our incentive payment, but I don't think anything fundamentally has changed. We are still targeting roughly 6% to 8% of revenue for free cash flow. I don't think that has changed. I think what you saw this quarter was just a phenomenal job by our account managers, our finance groups of making it down in collections; I think you can see that, that's pretty well reflected in our cash balances, so.

Lynn Blodgett - President and Chief Executive Officer

And I think... this is Lynn here, I just add to that, that I think we have sort of redoubled our efforts on collections, that is we put more emphasis on it in the fourth quarter and we are going to continue to do so. Our objective is to drive down our DSO as much as we can and so we are going to continue to push on cash and I think we will continue to see good results there.

John Rexford - Executive Vice President and Chief Financial Officer

Yes Ashwin, this is John, this blocking and tackling stuff. This is getting our billing practices in order, getting customers to pay us on time, following up on issues quickly, so it's just a lot of blocking and tackling that we are doing here.

Ashwin Shirvaikar - Citigroup Smith Barney

Okay, thanks.

Jon Puckett - Vice President, Investor Relations

Great. Operator, next question please.

Operator

: Your next question is from George Price of Stifel Nicolaus.

George Price - Stifel Nicolaus

Hi, thanks very much. Just... first a quick clarification on... did you mention what the performance actually was John?

John Rexford - Executive Vice President and Chief Financial Officer

Going forward?

George Price - Stifel Nicolaus

Well in the quarter and going forward will be helpful.

Kevin Kyser - Executive Vice President of Finance and Accounting

Well, yes this is Kevin, we won't give any specifics on a go forward, but obviously, if you look at adjusted number, I think it's in the back of... back of the schedule, I think you can see, an effective tax rate of about 33.5%.

George Price - Stifel Nicolaus

Okay.

Kevin Kyser - Executive Vice President of Finance and Accounting

That tax rate is due to the competency of our business. We had pretty healthy revenue this quarter from our international operations.

George Price - Stifel Nicolaus

Okay. And then just on the Indiana contract, can up just update us in terms of where the things are with the potential impact from the foreign bill, I think that's still sort of sitting in the senate at this point, but where does that stand from your advantage point, and what are you and IBM kind of doing to mitigate any potential risk on that? Thanks.

Tom Burlin - Executive Vice President and Chief Operating Officer

Sure George, this is Tom. First of all, both ourselves and IBM, our primary focus is performance on the contract. That's what we have control of, and that's what we are responsible for, right now. So delivering outstanding service to Indiana and the constituencies is first and foremost, and that's being focused on. As far as the bill is concerned, as you probably know, it's passed the house, it is in the senate, but there is a lot of work between there and it becoming law, and there is a lot of comment coming from other parts of both the political process, and of course from other associations in ourselves, working in that environment, but we will let the political process take it's course, and I think we'll at the end of the day, we will be okay.

George Price - Stifel Nicolaus

Thank you.

Jon Puckett - Vice President, Investor Relations

Operator, let's move to the next question.

Operator

Our next question is from James Kissane of Bear Stearns.

James F. Kissane - Bear, Stearns & Co.

Thanks, and a great job guys. Lynn, you said that you were confident that the operational challenges are now behind you. I guess the big ones from fiscal '06, but can you kind of update us on some of the problems in contracts especially in the HR, BPO arena, and your view on the market, how... what's in that business?

Lynn Blodgett - President and Chief Executive Officer

Yes, you bet Jim. Thank you for the comment. We are... we've made so much progress in the last year in our operations, and it really goes across the number of our life to business. Jim you mentioned that the HR, I can tell you that, that team has been phenomenal. They have gone into... and we had a few accounts that have really given us a run for our money and those have all been turned around, that's one of the comments I think that Tom Burlin made, that as many that we were really upset, now our referencable accounts and so we made really, really strong progress in our HR area. In IT Jim, we have... we had a couple of challenging accounts there, and we're actually signing new business with those accounts, which is the best indicator that we're on top of it. So, we've just cut... we focus at kind of the cash collection here, we will not go down, focus on the basic operations, basic running of the business, delivering service and we've made great progress. While we're so much stronger today than we were a year ago Jim, it's really... it's pretty phenomenal.

James F. Kissane - Bear, Stearns & Co.

That's excellent. And just one follow up just generally, the pricing on renewals and new business as well, thanks.

Lynn Blodgett - President and Chief Executive Officer

Year, I don't... we will see some discount when we have a renewal, that's typical for us, but we haven't seen anything unusual in the last year or so. I don't think there's been any significant change and now we do see in the first quarter because of the just over this... course of our history, because of the beginning of our fiscal year, we tend to see the renewal starts to kick in more heavily in the first quarter than they do in the other quarters, but there hasn't been any thing that has been... any kind of fundamental change in the amount of discounts that we have been having to give to people and I might say that we're working like crazy to do cost reductions, to help us to overcome that. So we're just focused on the thick indoor meeting, if I can say it that way.

James F. Kissane - Bear, Stearns & Co.

Okay, great. Thanks Lynn.

Lynn Blodgett - President and Chief Executive Officer

You bet.

Jon Puckett - Vice President, Investor Relations

Okay operator, next question?

Operator

Our next question is from David Grossman of Thomas Weisel Partners.

David Grossman - Thomas Weisel Partners

Thank you. I think John, you talked about flattish margins kind of going forward and could you maybe help us understand other than growth and acquisitions, what are the kind of major headwinds or tailwinds, if they exist, in fiscal '08. I guess secondly, Lynn, if you could just remind us of what the timeline is for the strategic alternatives and committing to make some decisions and kind of what the timeline is going forward over the next couple of months? Thank you.

Lynn Blodgett - President and Chief Executive Officer

Well John, you want to do this?

John Rexford - Executive Vice President and Chief Financial Officer

Yes, you mentioned flattish margins; I guess I don't really perceive it that way. I look at my margins as pretty dark on high relative to the rest of the competitors that we have in the market place, so we are actually quite proud of them and our margins really won't change a lot, unless the mix of our business changes a lot. So if we end up having some higher margins, its probably because we are taking a little bit higher end or higher risk profile type of business and if our margins fall down a little bit, its probably going to be the result of taking a little bit lower margin business. So again, we are not, we are not forecasting that margins are going to increase and that's primarily based on the new business that we are signing, it's very consistent with what we have right now.

Lynn Blodgett - President and Chief Executive Officer

Yes, and I think also that one of the comments that Tom Burlin made in his remarks, its really important, its important that you guys understand that... just that as we sign new business and we receive cash on those new signing, we are not able to recognize revenue at the time that expense is incurred and we take that over the length of the contract and so that, as we sign new business, is going to have an impact... a short-term impact on margins, and as Tom mentioned in his comments that we saw a little bit of that in this last quarter. In terms of the timing with the special committee, just other than what's been said in the press and relative to the exploration of the recent service agreement and so on as there is really not a lot more that we can say, I wish I could.

David Grossman - Thomas Weisel Partners

Okay. Thank you.

Jon Puckett - Vice President, Investor Relations

Operator let's move to the next question.

Operator

Our next question is from Adam Frisch of UBS.

Adam B. Frisch - UBS Investment Securities

Thanks guys. Good afternoon.

Lynn Blodgett - President and Chief Executive Officer

Hi Adam.

Adam B. Frisch - UBS Investment Securities

Just wanted to go over bookings for a quick second. If my math is correct, the average duration on the deals is a little over three years, if you just take the total contract value divided by the recurring revenue. So can you just go through what kind of deals you're signing right now, what the composition is of those deals, and then I have a quick follow-up?

Lynn Blodgett - President and Chief Executive Officer

You bet.Tom, do you want to...

Tom Burlin - Executive Vice President and Chief Operating Officer

Yes. Sure. Well, I think that you look through the numbers that's in the prepared statement there. It's been pretty much in line with the mix of our historic business, so we were about 75% BPO and about... 76% BPO about 24% IT, that's pretty close to the mix of our historic business. We are seeing a pretty healthy mix of what has been our tradition bread and butter, the mid sized contracts and renewals and extension to renewals added incremental revenue to our renewals that... and increased our annual recurring revenue. So again, I don't see anything drastically different than our history. We are not relying on very large deals, although we have several of those that are in our forward pipeline. It was a healthy mix of across the range and size and in the mix of business. So I am pretty comfortable that it's across our lines of business, good mix from size to contracts and very similar to our historic range of operating.

John Rexford - Executive Vice President and Chief Financial Officer

Yes, Tom I would concur with that, I mean Adam I think for '06 kind of the average life of our contracts for the total year was like 3.7 and '07 it's like 4.6 years, in the entire fiscal year. You are right and at the quarter, your math is about right I think, and there was a little bit of skewing in the Indiana contract; that was a ten-year contract that we signed in the December period, I think. But I look at a year-over-year basis and actually the total year... year-over-year average life actually went up.

Adam B. Frisch - UBS Investment Securities

Okay. And then --

Lynn Blodgett - President and Chief Executive Officer

And let me just add one of the comments, if I can, and I am just elaborating really on what Tom said. One of the most encouraging things for me is that, we go through times where one particular line of business might have a higher percentage of bookings than kind of its proportionate and one of the great things that's happening now, is we are really seeing bookings coming in across all the lines of business and that's obviously very encouraging.

John Rexford - Executive Vice President and Chief Financial Officer

You had a follow up, Adam?

Adam B. Frisch - UBS Investment Securities

Yes, quick one. I know we are not really resolved yet on everything going on with the strategic review, but does that mean that the balance sheet plans are pretty much in a holding pattern now, until we get confirmation of what you guys are doing or do you guys... are you guys going to use the balance sheet in the near term to do stuff like acquisitions or buyback?

John Rexford - Executive Vice President and Chief Financial Officer

Yes, I mean, I think we said in our prepared remarks that acquisitions, you know the core competency of ACS, we think we get... we know how to do it and so I think there's a lot of opportunities out there in the acquisition field. Our pipeline is pretty solid, it's across all lines of business and we will use capital to acquire businesses that kind of fit our criteria and as you know, we have been quite disciplined over the years and we don't expect to change that.

Adam B. Frisch - UBS Investment Securities

How long the same kind of size is what you have been doing in past couple of quarters, $30 million to $50 million kind of thing?

John Rexford - Executive Vice President and Chief Financial Officer

Yes, It's always hard to tell, in the acquisitions, some deals get bigger and some deals are smaller, but you know where our sweet spot is, that's where we've kind of been for many years.

Adam B. Frisch - UBS Investment Securities

Okay.

Jon Puckett - Vice President, Investor Relations

Operator, let's move on to the next question.

Operator

Our next question is from Tim Willi of A.G Edwards.

Timothy Willi - A.G. Edwards

Thank you. Well, a quick question and then a follow up if I could. First is just on the balance sheet topic John, sorry if I missed this in your answer to Adam, but assuming that the special committee elects to not go private and again, I am not asking you to offer opinion there, but if that were the case; what would your thoughts be about the balance sheet and share buyback versus also obviously balancing that with acquisitions. You guys were pretty aggressive last year on the buyback, before a lot of things begin to happen at the governance level, what would your thoughts be, if you remained in the pattern [ph]

John Rexford - Executive Vice President and Chief Financial Officer

Well I think, the Board is constantly evaluating the best uses to increase shareholder value, and I am sure they are contemplating that as they meet regularly.

Timothy Willi - A.G. Edwards

Okay. And my follow up was just on renewal rates. Is there any... if you look at that big movement year-over-year, is there any thing that should be called out within a commercial versus government, an area that was much stronger, one that still has some pretty notable upside over the next 12 to 18 months and improve renewals for north?

Kevin Kyser - Executive Vice President of Finance and Accounting

Hey Tim, its Kevin. I think that, the past year, pretty much government and commercial were right neck in neck on the... to make up the 94%. As we look forward into fiscal year '08, if you just think about quarter... a specified business coming up for renewal in the next year, I think it will be about right on target and I don't see anything that would cause us to be way out of that, I think it would be business as usual.

Timothy Willi - A.G. Edwards

Okay, thank you very much.

Jon Puckett - Vice President, Investor Relations

Operator, let's move to the next question.

Operator

Our next question is from Tien-tsin Huang of J.P. Morgan.

Tien-tsin Huang - J. P. Morgan

Thanks. On the transportation business, I didn't quite catch this, can you give us more detail there on the project work, how large is that and is it sustainable?

Tom Burlin - Executive Vice President and Chief Operating Officer

Yes, it's very typical, the work that our transport revenue business has done for a number or the years. Some of the contracts recently signed, you will see it in our press release, these are very representative. They tend to run in the middle $10 million to $20 million range, they tend to span to two to three years and we have... this group that we have now had for over 18 months, has been pretty consistent in performance. If you look back over the history, pre-acquisition was pretty consistent. So although we report those project revenue, that's pretty consistently repeated revenue. We tend to get a fair amount of project data on work to existing client base within that... in that portfolio as well.

Tien-tsin Huang - J. P. Morgan

Okay. And if I can sneak two quick housekeeping questions, just can you remind us what percentage total revenues are project or non-recurring and then also for modeling purposes, do we still expect the rule of thumb, the 60% of new bookings coming in the year one and 40% in year two or has your pace of the implementation changed?

Kevin Kyser - Executive Vice President of Finance and Accounting

It isn't its Kevin again. I think we'll obviously report... release our 10-K that will detail out lot of this disclosure. But I believe a non-recurring is kind of in the 15% range, mid teens range. And from a booking standpoint, when we looked to model bookings, we typically looked to model about 30% to 35% of revenue contributions from the current year bookings. So if you book, for instance; if you booked $600 million in a year, you would typically look for about $180 million, $190 million of revenue in that year.

Tien-tsin Huang - J. P. Morgan

Okay, Kevin thanks. I think I had a reverse, I appreciate that.

Jon Puckett - Vice President, Investor Relations

Operator, let's move on to the next question. Let's hope this will be the final question.

Operator

Final question is from Julio Quinteros of Goldman Sachs.

Julio Quinteros - Goldman Sachs

Hey guys, good afternoon. One quick question, I guess I want to go back to the initial presentation Lynn that you gave us when you sort of outlined your strategy to address kind of growth and margins. Can you go back to some of those spots and just give us sort of an update in terms of where you expect the growth profile of this company are going forward? And then secondly, where do you think the operating improvements are related to some of these restructuring initiatives, contract execution, resource utilization. All the issues that you outlined are actually expected to lead margins as we go forward from here?

Lynn Blodgett - President and Chief Executive Officer

Well, I think that first of all the growth areas as I mentioned earlier and we are encouraged that we are seeing good activity in almost all our lines of business. We have a number of businesses as you know, and I can't say everyone, but the vast majority are seeing good activity. That being said, I think that the transportation area that we have talked about is such a... its so universally applicable. The problems that they face in terms of traffic problems in New York City are pretty similar ones you are going to face in big city in China or any where else. So I think that you are going to see strong growth, our pipeline was excellent in our transportation area. We are also very encouraged in our healthcare area, obviously that whole sector is kind of activity going in that's not only the government healthcare, the Medicaid things that we do, it's also are things in the private sector. We are providing service to the payers and to providers and that area looks very strong.

We are actually seeing a tremendous amount of activity in customer care as that area has grown like crazy for us over the last four or five years. And we went through a little bit of a flattish period in that area last year. But we are seeing that pick up and be real strong. So I think that in those areas we also are doing a lot of things in the other government areas in our what we would call in child support areas and there are many other services that we provide, and I don't think those areas seems to be strong. So we are very encouraged, our IT group actually... again, we had a little bit of a flat period in IT, and we are seeing a good pick up there. So I hope that helps.

Julio Quinteros - Goldman Sachs

I guess I was just specifically going back to the 8% organic number, plus acquisitions. I mean in terms of the long-term targets that you've talked about initially. Are those still intact, and then, the second part of what you have talked about initially was you know the drivers from margin expansion. Are those fully, I am sorry behind this, and this is kind of a steady state of the business, or will there be other sources of margin leverage, as we think about the model. So I guess just specifically, the 8% number, and then what, where are we in terms of the drivers of margin improvement from where we were back in February?

Lynn Blodgett - President and Chief Executive Officer

In terms of the growth prospect of the company, we are confident that in the long run, we will continue to either meet or exceed what are the industry averages for those respective markets. We are very comfortable with that. We obviously given some of the challenges over the last 12 to 18 months, those are putting some pressure on us as you can see. But we expect to work through those, and there is nothing that has given me any reason to think that we are not going to reach those long-term objectives.

In terms of restructuring and so on, there is two different aspects that I hope that you will make note of. One is that on a day-to-day basis, we do things that you might call restructuring. We have, you know we reduced headcounts. We are constantly pushing to optimize our workforce to pick our best performers, and focus on those people versus the lower performers.

And so there is always going to be in the normal course of business, severance and training costs and those kinds of things that you might consider as restructuring. Those are things that we are focused on as... really not trying to call out because that's part of our normal course of business. Now from a... on a periodic basis going forward, we make... there is still room for opportunities to do other headcount reduction, to do facility consolidation that's just part of kind of a normal business that we are in. I think you will see as we mentioned we have little tiny dip in our margins this quarter because of some of the startup costs. I don't expect that our margins are going to dramatically change, those are the kinds of things that we have to remain competitive in the market. We have to continually reduce cost in order to stay competitive. And so we are... I don't see anything that you could expect for any kind of dramatic change in margins.

Julio Quinteros - Goldman Sachs

Okay, great, thank you.

Jon Puckett - Vice President, Investor Relations

Okay, operator I guess that wraps up for the day. We'll be around for calls and to answer any questions you may have after the call.

Lynn Blodgett - President and Chief Executive Officer

Thank you.

Tom Burlin - Executive Vice President and Chief Operating Officer

Thank you.

John Rexford - Executive Vice President and Chief Financial Officer

Thank you.

Operator

This concludes today's conference call. You may disconnect at this time.

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