ACI Worldwide, Inc. Q1 2008 Earnings Call Transcript

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 |  About: ACI Worldwide, Inc. (ACIW)
by: SA Transcripts

Operator

Good morning. My name is Phyllis and I will be your conference operator today. At this time I would like to welcome everyone to the ACI Worldwide financial results Q1 2008 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) I would now like to turn the call over to Tamar Gerber, Vice President of Investor Relations.

Tamar Gerber

Good morning and welcome to the ACI first quarter conference call. Joining me today as our management speakers are Richard Launder, Mark Vipond and Scott Behrens. Richard will be reviewing global sales and Mark will be discussing product developments in the quarter and Scott will take you through the financials. Phil Heasley is also on the line and will be available for the opening Q&A after our prepared remarks. As usual, our customary Safe Harbor and forward-looking statement language applies for this call. A full discussion of our forward-looking statements may be found at our website or at the back of both our earnings release and presentation which we issued this morning.

I will now turn the call over to Richard to open up discussion of the quarter.

Richard N. Launder

Good morning everyone. As Tamar said, I will review the sales for quarter one from the general point of view, say a few words specifically about the channels and then give you an update on our IBM alliance performance and how we’re moving forward in that very significant partnership for ACI. I would start off by saying that in a sense it was a pretty typical quarter one, in that way the sales were lower than the average quarter but I stress that is normal for our first quarter. The numbers we put forward there actually compares to the same quarter last year but it is worth pointing out that it was actually our Q2 last year because we changed our year end [inaudible] so we’re not really comparing apples with applies in that sense.

There are a number of factors that affected our performance and our results. We should also point out that we finished an exceptionally good quarter four at the end of 2007. It was a record quarter for ACI and a lot of business was closed in that quarter and it was with that background that we move forward in to quarter one. Also, timing is always a critical issue for us particularly around term extensions and major new sales in the sense that they can vary from quarter-to-quarter and performance results in ups and down numbers. I’ll say a few more words about that in a minute as we did have a couple of major deals that were closed in quarter one but I’ll come back to that later as I said.

I’d also say that quarter one this year was different to other quarters and a huge amount of time and investment on the sales force went in to our IBM partnership and relationship. I’ll talk a little bit more about that later but significant progress was made and we’ve made a good start to that partnership. There were some key points worth mentioning, our visual web product sales were maximized. We had a very good quarter in that respect particularly in Asia Pacific and a good result in using our global distribution network to sell those products, so some good success there. I’d also point out in terms of looking forward we do and are planning for a considerably stronger Q2 2008. By now the pipeline, where we look at our pipeline and we’ll have a much stronger quarter, we’re already having some good results. In terms of our general update I think that’s all I’d say at this point.

Moving on to the channels themselves and a few comments. You have the breakdown of the channel performance. I already mentioned the success that Asia Pacific had with our visual web product. I also had a couple of large deals in Thailand and Korea. EMEA had some term extensions but not to the same decree as 2007. I do stress that is a timing issue in many ways. The variance in services sales was driven by the timing of some larger deals. America’s term extensions, we had a few but not to the same degree of 2007. There will be some in this quarter that make up for some of those numbers and I stress it is timing again. So, a quick update on the channels.

Let’s move on to the IBM alliance and where we are. Well, we already had some success in signing a new customers on System p but I’m pleased to report that one of the deals I’ve referred to in quarter one that we had to get actually has now closed. It is a very large process [inaudible], it is a significant win for both IBM and ACI and it will run on the IBM Z-series. We’re very pleased with this very, very significant win. It’s a major opportunity close for ACI. In terms of the more day-to-day work in the partnership and putting it together, we’ve had a number of very significant activities. Our sales forces spend time together, our marketing people spend time together working on how we move forward so we’ve done a lot of work at looking at how we go to market both from a geographical standpoint, from a product standpoint and from an account planning point of view looking at the major opportunities for us and how we work together. We’ve done a lot of training both ways, training IBM on our products and vice a versa and as part of our moving forward as a company and understanding our sales pipeline which is very significant in working with IBM but also important to us. We’re a deploying sales force, we will help with manage and understand our sales pipelines much better than we’ve done today.

We’ve also made a very significant announcement to our customers in the sunset of all of our payment solutions and that we’ll be moving in due course towards BASE24-eps. We’ve communicated that to all of our customers across the world. Also here we’re going through planning [inaudible] societies and reviewing a number of target customers, countries we should work in and prototyping those. We’re working on a calling plan for senior executive on our top 50 target customers and we have now actually identified and working hard on a number of large system details in our 2008 pipeline. As I started off this call by saying, there’s always long sales cycles and often slipping in the timing but we are very confident we win a number of major deals this year with IBM on Z Platform.

So that’s all I have to say in terms of the general uptake. Obviously, I’ll be here for question and answers later on. On that note I’ll pass it over to Mark Vipond.

Mark R. Vipond

Good morning everybody. I will give you a brief update on some of the key activities relative to the global product deployments. If you flip to Slide Number Nine, this is a standard chart that we’ve been producing for the last two quarters for this call that shows the number of customers that we have by solution area meaning retail banking, wholesale, risk management; by geographic market and also by key industry segments. Going on Slide Number 10, also some statistics we’ve been providing on a quarterly basis. We still have 2.7 products per average customer, that uses 2.7 of our different solutions. We hope to continue to increase that number as we go forward and cross sell additional applications to our existing client base.

In the quarter, in March we had six new customers, 16 new applications sales during the quarter and we also had two new countries Romania which obviously we have a significant operation in today from a development standpoint and service standpoint but from a customer perspective we have our first client in Romania. And, in Kyrgyzstan we also have our first client, one of the Soviet Union countries that came in to existence a few years ago. That now bring us to customers in 88 countries with over a total of 808 customers using ACI solutions with 2,189 products deployed across that customer base.

On Slide 11, I’ll just give you a key update on the various solution areas that we’re focused on starting first with the retail payment solutions. Richard made reference to the fact that on March 24th and we announced it publically on March 25th we began announcement of the migration of our retail payment engines. That included OCM24, On/2, OpeN/2, ASX, all which had been acquired over time through various company acquisitions and also BASE24 with the intention to move all of those clients over to our BASE24-eps product. That is the culmination of a story in the planning we’ve made with our customers since 2002 saying that we would eventually migrate them all to BASE24-eps and we’ve started that formal process with the announcements at the end of March. So, a lot of work has begun now to begin that migration planning. This is being done in concert with IBM. We have a mechanism called the payments transformation team where we have staff from both ACI and IBM participating with our customers to start the migration planning over to the BASE24-eps system.

Also during the quarter we’ve made significant progress in the Z enablement. If you recall, part of the IBM partnership was enabling our products, our suit of products to run on the IBM Blue Stack as it relates to the retail payment solutions in June of this year and a couple next month. We’ll be releasing the next release of BASE24-eps which will be optimized to run on Z and it will also incorporate the Blue Stack components as well as DB2 as our database engine.

On the wholesale payment solution side of the marketplace we continue to have good sales and market opportunities, quite frankly in all regions. You saw that in Asia Pacific, we had some good results in the first quarter of the year. We also have opportunities in EMEA as a result of the SEPA initiative but we’re also seeing an uptick in the United States in terms of opportunities. In fact, I’m out in California for the next couple of days with a select group of our key customers in the wholesale payment solution area and we are seeing very good opportunities starting to materialize in the United States for our wholesale strategy as well.

One area we are investing in is what we call the hub. It is a common industry term which is basically a mechanism for infrastructure for bringing payment systems or payments in to a common system structure. We are seeing opportunities in there and we are making investments in the hub and quite frankly, in concert with IBM. We’re trying to use as much of their infrastructure as possible so that we can focus our efforts on continuing to extend our business services, the functions that we provided that the customers need and let IBM make as much of the investment as possible in the infrastructure that’s needed to tie them all together.

Also, in the on demand, I put this in the wholesale payment solutions because most of our on demand customers remain in the wholesale area. We are going to leverage the [IGAN] Data Center and data center operations around the globe for delivering our on demand capabilities. That’s very key for us and for our clients. We believe the expertise IBM brings in terms of data center and operations far exceeds that which we have available in our current organization and so one of the key parts of the alliance was to leverage that in concert with our domain expertise and payments and we are starting to do that.

In the risk management solution area, enterprise risk potential continues to be huge. We see ourselves in a very advantaged position in terms of what we provide within our solution to address enterprise risk. We continue to make investments in that area to take advantage of the marketplace and we are looking at options to accelerate that investment. Again, in concert with IBM because we think we can increase our sales and results with the customers by bringing that to market sooner. We are also introducing a new version of our automated case management solution this summer, early summer. This is very important because as more and more customers are taking their risk solutions across the entirety of the enterprise, they are looking to have a case management system that also will automate the process of handling any fraud conditions or fraud cases. So, we’ve had a solution for a few years, we’re taking a quantum leap forward in terms of capability with the version that we’re coming out with this summer.

Also, real time rules and scoring of transactions; we haven’t talked about this much but we can now in that part of the IBM partnership was optimizing our risk management capabilities with a new technology they have coming out called Z Sale which we believe will allow us to practically let customers score every transaction in a very cost effective basis. So, we have been working IBM to take our risk management capabilities and optimize in on this Z Sale technology which quite frankly will give us an advantage position in something that’s not available on any other platform or with any other solution.

Flipping to Slide Number 12, in terms of focus areas for the next 12 months, key areas that we’re watching is one, obviously the IBM optimization enablement and also driving that in to market success. I mentioned the BASE24-eps, I mentioned what we’re doing with PRM with IBM. We’re also optimizing our wholesale products. There are a number of enablement efforts underway. It will take over two years to complete all of them but we continue to focus on that and that’s a big part of our resource commitment and investment that we’re making as a company. We’re also continuing to be focused across the global on our services revenue and margins. We quite frankly have increased some of our rates to be more market sensitive. We probably were below market in terms of the charges we were commanding for our services and that has changed and we are starting to see some results from that.

The big effort that we have going on is the migration for our retail payment customers. Obviously, the announcement of the migration of our legacy systems is a very big item for our company and it certainly is for our customers. It will take us years to migrate all those customers over. The timing of the migration of those customers in terms of the migration of our existing products is over the next four years. So, we truly believe it will take that long to migrate all of our customers over, if not longer in some cases. And obviously, the investment that we are making in the payments transformation team with IBM is significant in facilitating that migration. Also, the wholesale payment solution strategy and investment, the investment in what we’re calling the infrastructure hub, the messaging hub is very important. It allows us to expose more of our business services and service oriented architecture approach for our clients and also looking at extending the capabilities that we provide by developing new capabilities on that architecture and hub such as file transfer capabilities.

Customer satisfaction is always a key focus area for us. More so now than ever from a standpoint as we’ve talked about many times in the last few quarters of the multiproduct deployment that our customers are putting in place. That introduces a level of complexity and also a level of project times that we want to get those live with our customers not only for their satisfaction but also that we can harvest the backlog associated with those projects.

Then also finally, enhancing the ACI brand. We are looking at our 10 year product strategy, at where we’re going as a company in terms of evolving our solutions to a service oriented architecture approach. That will take years and obviously with our customers we have to evolve them to those types of solutions. As part of that effort we are looking at different branding of our solutions and making sure that we have common terminology that we use to reflect our position and our capabilities in the marketplace. And, you should expect from us in the near future that we will be disclosing those branding equations and the mechanisms that we’re going to employ both to our clients and to the investment community.

With that, I’ll pass it over to Scott to go through the financial review.

Scott W. Behrens

Good morning everyone. Let me start with the key financial takeaways from the quarter starting on Slide 14. As Richard has previously described, sales were down on a sequential basis for the first quarter of 2008 and that was following a record sales quarter in the fourth quarter of 2007. However, we do think that the second quarter is looking pretty good as Richard mentioned and we are obviously very excited with the signing of the [inaudible] relationship this past week in the EMEA channel.

Moving on to operating free cash flow, inclusive of net proceeds from the IBM alliance, operating free cash flow was $45 million in the March quarter compared to $18 million in the March quarter of 2007. Excluding the net proceeds from the IBM alliance operating free cash flow was $9 million which was clearly down compared to March of 2007 but was in line with our expectations. Driving this decline is higher cash expenditures from our investment in the services personnel. Really, two main drivers there, one is the implementation services which is a response to that higher rate of new customer sales that were booked in 2007 as well as the ramp up of personnel levels to support the various initiatives in our relationship with IBM.

12 month backlog increased $11 million in the March quarter 2008 compared to December 2007, that’s sequential growth. This increase is primarily driven by projects moving in to the 12 month view and therefore closer to GAAP revenue recognition. I will point out that $3 million of the increase was driven by favorable movements in foreign exchange rates during the three months. Revenue increased almost $3 million compared to the March 2007 quarter. This was driven by $4 million increase in recurring revenue and that would be monthly license fees, maintenance and processing services, processing services being a sub component of our services revenue offset by a million dollar decline in the initial license fee revenue.

Turning to Slide 15, this quarter saw a slowing of the overall rate of deferred revenue growth. Still growth but when I say overall I mean the total combined short term and long term revenue. But, we did see a significant shift from the long term to sort term deferred revenue. That shift was approximately $19 million and similar to my comments on the 12 month backlog movement, this is a indicator of projects moving in to our 12 month view and therefore closer to GAAP revenue recognition. Overall, operating expense were up $3 million in the March 2008 quarter compared to March 07. However, excluding certain prior year expenses related to our stock option review, our operating expenses increased $9 million. This increase was driven primarily by our investment in our services personnel. And additionally, we had higher distributor royalty costs, higher professional fees compared to the prior quarter. We also had higher expense related to our on demand initiative and we had about approximately $1 million from acquired businesses that were not included either in part or full in the comparable period in March 2007. Other income and expense was essentially flat quarter-over-quarter as our losses on our interest rate swap were more than offset by favorable foreign currency exchange gains.

Now, I’d like to move on to a discussion of our revenue in the quarter which is Slide 16 in the presentation. As you can see backlog was a very important contributor to the quarter’s GAAP revenues as we booked much more business out of backlog this year than in the prior quarter. This was due to a number of factors including the decline in sales but also the sales mix. We had fewer total sales and fewer term extensions and both of those products extend themselves in to rapid revenue recognition for at least part of their contract value. Over the past five quarters we have actively moved toward selling multiproduct applications and fewer tools so you won’t see as many quick GAAP revenue contributions out of our current sales as we use to book.

Richard did say in the September on one of our earnings calls that we were seeing a 20% current period sales move or fall through in to GAAP revenue in that quarter, June I believe and at that time a 20% figure was a reduction compared to how we’d experienced in the earlier years. Now, we’re starting to see that number down in the teens as far as we can anticipate this year’s sales cycle to be looking. Certainly, this quarter we only saw 11% of sales move in to GAAP revenue. There will be some variations in that sales figure depending on term extensions, capacity deals and things like that. Also important to note is that as Richard said we did spend a significant amount of time of our sales force during the quarter revisiting potential customers to share with them the details of our IBM alliance and what benefits it can bring to their organization. So, we had a shift in some of their focus away from closing some of the deals and working on communicating the benefits of the IMB deal.

Turning to Slide 17 this is a slide that we know interests many of our investors. Basically, we’ve been asked by many of you how we look at our cash margins and what factors in to it. We define cash margin as our operating free cash flow which is a metric we’ve talked to for some time divided by what we call cash revenue. That is calculated as reported revenue plus increases in deferred revenue minuses increases in accounts receivables. This chart shows kind of a three year view in addition to the current quarter view. As you can see we did included the IBM cash in there because we are incurring expenses and diverting some of our headcount resources in to projects which are solely IBM alliance focus and we thought it was in accurate to move the IBM cash from our operating free cash flow if we were not also able to remove all of the commensurate costs. Obviously IBM is both a source and use of our cash in our business right now. If you look at 2008 clearly we are front loaded in terms of operating free cash flow due to the cash received from IBM in March. We told you this on the fourth quarter call and that still holds true. This year operating free cash flow will be front loaded and revenue and sales will be more second half loaded in the business.

We think that the 1.5 times cash to revenue metric that we discussed in February is still a good one when looking at the 2008 year but not necessarily in our outer years. When we start thinking about 2009 and how IBM sales and potential revenue will impact our 2009 model and beyond, the 1.5 times ration may not hold as true in the later years. But, this is obviously a forward-looking number and we’re really not in a position to modify it just yet since we have not yet revisited our long term strategic plan side-by-side with the alliance model now that it’s operational. So, we have targets and joint selling plans in place now but we’ll see how the relationship unfolds this year.

Turning to Slide 18, this is recap of the outsourcing deal we announced in March. We’ll see some cap ex savings this year as a result of this deal. Although, we’ll also incur transition expenses, some of which will be cash, some of which will be paid out over the five year period and we’ll also incur cash severance expense as well this year. We obviously still control our IP and our software but this outsourcing deal will take care of facility and hardware needs particularly as they pertain to the wholesale product solution. It is an estimated $116 million deal over the expected seven year term and we are estimating that the agreement will deliver us operating savings of $25 to $30 million over the course of the contract.

Turning to Slide 19, we had a very aggressive share buyback program in Q1 and achieved a repurchase of over 1.6 million shares. We do have some remaining capacity, $56 million remaining on the buyback authorization available for us to utilize under the guidelines and parameters set out by our board under a 10B51 program.

The rest of the Slides are appendix slides we provide for your information. We also provide them in the press release as well. This completes my prepared remarks and I’m going to turn the call back to the operator to open the flour for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of George Sutton – Crag-Hallum Capital.

George Sutton – Crag-Hallum Capital

A couple of questions, first on the pull through that you mentioned of sales bookings in to revenues that had been 20% and we had talked about that at length at the analyst day. I’m just curious what’s changed so quickly to have that result in the teens expectation for this year?

Scott W. Behrens

First of all obviously we have a lower sales amount so even if you had a constant percentage of flow through of sales on a year-over-year basis your sales are down so the absolute dollar that is going to flow through is going to be lower. It’s also a matter of the product mix, that being lower term extensions as well as the tools. Those have a faster flow through to GAAP revenue than some of our larger implementation or multiproduct more complex implementations so if that product mix changes that also impacts the percentage of flow through in the current period. But, what this does point out is a reliance more on the backlog which is obviously more stable, more reliable source of recurring revenue than current period sales.

George Sutton – Crag-Hallum Capital

Scott, I think you may have answered by next question related to sales expectations for the year. Yes, they were lower in the first quarter but does that necessarily portend to change for the full year?

Scott W. Behrens

No, I don’t think at this point we’re early in the year. Obviously, we had a significant refocus of attention just following the December signing of the IBM deal so we had a shift in some of the attention and focus of the sales forces here in the March quarter. So no, I think at this point it’s too early to say that we don’t expect this to take us off course. We feel that we’re still tracking to the sales figure we previously provided.

Richard N. Launder

Could I just add a few words to that as well? Obviously, until contracts are signed things are never done but what I could say is that the pipeline is very healthy and therefore our expectations are good for the year.

George Sutton – Crag-Hallum Capital

Regarding your optimism related to Q2, how much of that is coming from Faster Pay and is there any way that you could quantify that for us?

Philip G. Heasley

I’ll let Richard answer after me. Faster pay is coming to revenue, it’s not coming to sales. We do the sales of Faster Pay kind of the same quarter last year and I guess even earlier than that, some of them were even earlier than that so they’re on the other side. They’re the pig coming out of the pipe not the pig going in to the pipe and we are still looking at second quarter in terms of those. Now, we did tell you that we saw some [inaudible] in the first quarter it would have significantly, I’m not going to tell you the dollar amount but it would have significantly changed the first quarter. The only covert was it was no big deal, there was no big deal signed in the first quarter. Several people have asked me, I’ve gone around and talked to some of our owners, do I believe this slowdown? The one thing we didn’t say that I would add is that I do think all, or at least our major customers went back and checked and double checked their capital spending. We do have the banks as our major customer and I think they checked, and double checked and tripled check their capital expenditures and we have not seen anything cancelled but I do think things that we thought would actually close in the first quarter have been closing in the second quarter. So, there certainly was a relook at capital expenditures in the first quarter.

Operator

Your next question comes from the line of Nikolai Fisken – Stephens, Inc. Nikolai Fisken – Stephens, Inc.

Can you give us some more detail, I don’t know who wants to handle this one, on the higher professional services costs? What I’m wondering is how much of that went towards getting ready for IBM? How much of it went towards working through the backlog? Where there any separates in there, etc.?

Scott W. Behrens

I’ll talk about it but then maybe Mark and Richard both want to talk about it. A year ago we told you that we were going to, we saw increase demand coming down and probably the clearest thing we did was we added 110 engineers in Timisoara, Romania so we in effect took on a cost that was coursing through last year at this time it was probably close to zero or much closer to zero. But, we added a large staff there. We also purchased a distributor in Kuala Lumpur which added, and we purchased Visual Web that added 250 people in India for us. We very much realize that as we work throughout this cycle that we were going to have a much larger surface business and we also had to get ready to support the IBM deal. Although, a lot of those expenses are coming through this year. We made a very open minded decision that we had to bring these people on and train them which we have been doing for the last 12 months. And, as you see in the backlog, the 12 month backlog you’re getting to see it grow and grow and you saw the 16 month backlog grow that year. These are the resources that are working on these projects that are working their way through the system right now is probably the best way to explain it.

Plus, we’ve increased our R&D as it relates to these 10 projects that we’re working on with IBM.

Some of that is going through our balance sheet on equity accounting but we’re also increasing our energy on the wholesale side and on the PRN side over and additional to that. Do you want to say anything Mark?

Mark R. Vipond

No, I think you got it right.

Nikolai Fisken – Stephens, Inc.

So it went up $4 million sequentially? If you look at the number, it went up $4 million sequentially and I’m wondering if you guys can comment on the outlook on that on an absolute basis?

Philip G. Heasley

When we went to our investor day we said, “Gee, when we put on these new projects it takes 18 to 21 months for these projects on average to be done.” So, those 18 to 21 months we pay probably, I don’t know, maybe Scott will correct me, we probably pay 85% to 90% of the current costs of installing those and expense them at the time as we go through. Then, once those come out we get paid back for some of our service and then we start receiving in most of these cases monthly license fees and I think if you look at the balance sheet and the income statement the pigs going through the pipeline in a very orderly fashion. You’re watching 12 months backlog go up, you saw 16 month go up, you saw deferred revenue go up, you saw accounts receivable pretty much flat now. You saw monthly recurring revenue go up by $4 million and then you saw the puffing type revenue go down by $1 million. So, Nick I think you lay out the balance sheet and the income statement and it’s making sense. It’s certainly has an underlying investment to it. We can’t put on all this new business without investing behind it. Some of my managers think I should be investing more.

Scott W. Behrens

Obviously, we had a very strong sales year in 07 and in particular the December quarter and if you recall what we’re going through right now is essentially a ramp up of the services implementation and we have a mismatch in terms of timing of the cost of those implementations versus the GAAP revenue recognition which will be somewhere in the future. But, we’re starting to see the ramp up of those implementation services in advance of the GAAP revenue recognition.

Nikolai Fisken – Stephens, Inc.

On the [Sirmepa] win, I know this is a tough question but what kind of details can you give us? Were they always going to run IBM? Who brought who to the table? Size of it? Anything you can give us.

Mark R. Vipond

I’ll give you a little background on it, no they were not reliant on IBM for this aspect of the business. They in their underlying banks, this is a switch so many of the largest Spanish banks are part of this as well. They certainly had an IBM relationship. I think IBM would probably give us credit for being the initiator in this process. We’ve been talking to [Sirmepa] for quite a long time and of course, [El Cordon Clay] who we were also putting on to Z base, the largest credit card issuer or the second largest in Spain, I’m not sure which one they are. They are a member of [Sirmepa] and a big IBM customer. So, it was certainly a joint effort between us but we probably had as much or more bringing this one to the table then they did.

Nikolai Fisken – Stephens, Inc.

No comment on size or anything?

Philip G. Heasley

Well, let’s put it this way, it would have very significantly, in our language this was to be considered a very, very big, we don’t do deals much bigger than this. We can’t give you any more descriptive than that. But, we don’t do big deals, we typically don’t do deals bigger than this.

Nikolai Fisken – Stephens, Inc.

Then last question and this has been a topic we’ve talked about in the past, can you give us what you think your cash margin will be once the business normalizes?

Philip G. Heasley

Let me talk to you about the $30 some million in IBM. If we could go and make that whole deal naked you would see that a lot of our expense increases and a lot of our balance sheet cash increases, so cash from both sides are really, I’m not going to say they’re going to be $37.3 million but they’re certainly not going to be zero. A very large portion of that cash is actually forecast in terms of activities and what not that we have going forward. So, from a margin standpoint maybe, the whole deal with IBM was we’d get cash in front of, because we have such delayed revenue recognition process that we were going to get cash in front of, we were going t get front loaded with cash so that the company didn’t have a cash risk in terms of what it’s doing. So, if you were to look at this, forget last year but if you were going to look at this on a 12 or 18 month kind of basis, I don’t think the cash that we’ve received is going to have any major change in where our net cash position would be after that time period. So, if we have four or six months more cash from IBM then we’re going to need at least 12 months, that might be as accurate as I will get you. I’m not going to be any more descriptive than that. Does that help you? If it doesn’t, I told you that half of our increase in costs this year were going to be IBM related. And I’m telling you that you take that plus the cash impact of our balance sheet and you get closer to that $37 million than you get to half of it.

Operator

Your next question comes from the line of Gil Luria – Wedbush Morgan Securities, Inc.

Gil Luria – Wedbush Morgan Securities, Inc.

I wanted to get an understanding of the timing, Scott you talked a lot about this on the analyst day of how revenue and cash come in for various deals. Using the [Sirmepa] deal as an example, when would you expect the big impact for cash to be? And, when do you expect the big impact on revenue to be?

Scott W. Behrens

Well, it’s obviously a large deal and so the impact on the revenue will obviously be dependent upon, obviously it’s a size issue and a complexity issue. So, in terms of revenue recognition we’d estimate it would be on the high end of what we’d consider our implementation period. In terms of the cash again, that’s going to be dependent on the cash milestones that we have and what point we hit those milestone targets. Obviously, most of our deals, we look at receiving approximately a third of that cash over the contract value, a third of that cash over call it the one year or plus implementation period. So obviously this is as large a deal as Phil said that we’ve entered in to so that implementation could be longer than our historical typical implementations.

Gil Luria – Wedbush Morgan Securities, Inc.

So with 18 to 24 months you’ll start recognizing revenue? you may recognize as much as a third of the cash over the next 18 to 24 months.

Scott W. Behrens

I’d probably say that’s right.

Philip G. Heasley

That’s very good. That’s knowing the contract probably better than, I won’t say probably better than Scott but figure a third of the cash in the next 18 to 21 months, I wouldn’t say 24 months. Then, starting to see revenue recognition at about 18 to 20 months I think that would be as accurate as we can get today.

Gil Luria – Wedbush Morgan Securities, Inc.

Then in terms of our guidance, I think the two metrics you are guiding on now are cash flow for the year and rev log. Are you standing by the $65 million cash flow guidance for the year? And, does that include the $36 million from IBM?

Scott W. Behrens

Yes to both.

Gil Luria – Wedbush Morgan Securities, Inc.

Then on the rev log guidance, are you keeping that the same too?

Scott W. Behrens

Yes, right now we are.

Operator

Your next question comes from the line of George Sutton – Crag-Hallum Capital.

George Sutton – Crag-Hallum Capital

One of the things that you said on the call today that was certainly new to my ears was the uptick that you’re seeing in US activity and I know you’ve made some people changes there. Could you just address, it’s been lack luster for so long, what are you seeing specifically in the US that is picking up?

Philip G. Heasley

We do have quite a few management changes. We have Ralph Dangelmaier in there who I believe who really has number one a tough task and two I think he’s doing a good job. Some of our problem George is the fact that we have such high market share in the United States in our core product and I think part of it has been that we just needed a manager of Ralph’s stature to deal with a lot of the aspects of the business. We have lately a fantastic services business around our intellectual property in terms of our installed base and I think that that’s being approached in a logical and good manner. I think our on demand business, especially as we migrate out from just the commercial offering that we purchased and we start offering it to others, right now that’s actually hurting us in terms that we’re spending more money than we’re getting in. But, we do have our first wholesale customer coming on board and we’ve added a retailer and that’s going very well and we’re beginning to build a nice pipeline there. So, we have that part of the business. I just think that Ralph has expanded the horizons, the thought and vision horizons of our people to see that there are other market segments that we own the core, we own two cores but there are a lot of other pieces that we could be building and I think they’re working pretty industriously towards that. We’re not going to be having any big celebration in 08 in terms of the US. In 09, I think we might have some big celebrations but we’re rebuilding very nicely and I think in 09 we’re going to see some really good results.

George Sutton – Crag-Hallum Capital

One other thing if I could, Mark had mentioned you may accelerate investments in the risk area potentially with IBM, could you just give us a little bit more of a sense of what you might be considering there? And, how significant?

Philip G. Heasley

Well, it’s not actually an issue that we might, we actually are and we’re doing some ourselves. Mark, do you want to go through that?

Mark R. Vipond

I mean one of the enabling agreements with IBM, as I said we couldn’t talk about it before but we can now because IBM has announced their Z Sale, was to optimize our risk management solution using their Z Sale technology. So that’s one of the enabling agreements that was contemplated in the contractual arrangement with IBM so that’s already underway, we’re doing that work. What I was referring to is we’re also investing in enterprise risk. The marketplace like in retail, like in wholesale and risk management we’re seeing consolidation and convergence of systems where historically customers had deployed a credit risk system, a debit risk system and a money laundering. Well, what we’re seeing within the marketplace is the desire to say, “No, I have to look at my risk evaluation across my enterprise.” So most of our customers, as in the market in general have deployed point solutions for risk management. They’re looking to say, “Hey eventually I want to migrate to an enterprise risk solution.”

We have a capability of doing that today, there are enhancements that we have to make to make that even a better solution and a differentiated solution in the marketplace. We are making some investments in there today but what we’re looking at is should we accelerate that investment to get at the market sooner than what our normal investment levels would allow. So we’re going through that analysis right now to say what can we afford, what makes sense and where’s the market driving and how fast do we need to go. So, I can see where we would potentially make some decisions to increase that investment, not a ton, we don’t need to invest a lot more but it would be very nice to be able to have a solution rather than an 18 to 20 months to have it in 12 months to capture the market potential.

George Sutton – Crag-Hallum Capital

Last clarifying question, it sounds like that is more an internal build?

Mark R. Vipond

Yes, most of that is internal build. But, IBM would also look at that and say that’s needed in the marketplace and there is an opportunity for both of us if we make that happen.

Operator

Your next question comes from the line of Clinton [Yarra] – RS Investments.

Clinton [Yarra] – RS Investments

Thanks for the disclosure around the cash margin. I was just wondering, if you look at the historical it’s bumped around from anywhere between 11% and 15%, I was just wondering, as this business stabilizes over the next three to five years just given all the near term noise would you be able to share with us how we’d be able to think about the long term potential of where cash margins should land?

Scott W. Behrens

We’re going through right now the process of looking at our beyond 2008. So we’re looking at our strat plan and really merging that with where we see the impact with IBM. Obviously, we’re five months in to the IBM alliance, we’ve also entered in to the outsourcing arrangement which we expect to provide cash savings prospectively so we really have to merge those together and we’re going through that process right now to give us visibility in to what that cash margin should be beyond 2008.

Clinton [Yarra] – RS Investments

Would it be safe to say versus historic you expect it to be significantly higher in the future?

Scott W. Behrens

At this point we’re not prepared to forecast what that will be beyond 2008.

Philip G. Heasley

At any point, if you go back to 2005 when we probably had somewhere around two thirds stated revenues and about half the revenue potential that we have today. We had very high margins because we had little to no investment in new business. So, as the impact of new business coming on board and this 18 month phenomena that gives you some cash relief but it doesn’t give you good cash relief, you get to the point where that’s less impactful. Then, by definition, your cash margins go up. I’m not going to say any more than that but if the model we have today is reminiscent of the underlying model of both and the fact that we’re not toughened, I would add another one. You notice that we’re not pulling backlog forward to get cash and earnings the way it’s been done in the past. You’re going to end up with higher sustainable cash margins.

Operator

Your next questions comes from the line of David Parker – Merrill Lynch.

David Parker – Merrill Lynch

You’ve already stated on a previous question that you’re still comfortable with the 2008 guidance for operating and for cash flow and also the rev log growth. Just so that we’re fully clear, I think that the rev log growth that you anticipate in 2008 is $200 million. Just so that we’re fully clear, where are we at, at the end of the first quarter? Could you calculate that for us?

Scott W. Behrens

You mean just the growth for one quarter?

David Parker – Merrill Lynch

Yes. You anticipate $200 million for the full year, where are we at after the March quarter?

Scott W. Behrens

I don’t have that with me. I think it’s $19 million approximately.

David Parker – Merrill Lynch

Then just moving on to the gross margins, they were down, you’ve talked about some of the added expenses associated in the quarter but they were at the lowest level that we’ve seen them for some time. How do you anticipate the gross margins going forward?

Scott W. Behrens

Well obviously impacting those gross margins are the heavy investment and the implementation costs. So since they are front loaded in what we call the GAAP earnings cycle we would expect its front loaded on the expense side but back ended on the margin side.

David Parker – Merrill Lynch

Then just final question is you’ve had a relationship with MasterCard for some time, you’ve made it an official statement this week or a press release this week. Can you just provide some of the background behind that relationship and what you’re doing for their debit platform?

Philip G. Heasley

Let me answer that one. MasterCard is another very good example of the 18 month pig in the pipeline. We entered in to a deal just about 18 months ago with MasterCard and MasterCard put a release out I don’t know how many weeks ago and we put a release out this week that both of these release were signaling the completion of that endeavor between the two of us. This is something new we’re doing for MasterCard, we’ve actually been supporting MasterCard on the debit switching side I think for 12 or 14 year so we’ve actually had a fairly long relationship with the. What this is doing is we’re signaling just as they signaled a couple of weeks ago that we’re at the completion phase of that project. I don’t know if Richard or Mark want to say anything more about that. But, MasterCard is, as is Visa, MasterCard is a major customer of ours.

Mark R. Vipond

Just a couple comments here to clarify that is they’re a license customer so the relationship is as a normal customer, typical customer it does involve BASE24-eps so it’s been a long project like a lot of these big ones and it’s coming to its fruition finally.

Operator

Your next question comes from the line of Nikolai Fisken – Stephens, Inc.

Nikolai Fisken – Stephens, Inc.

One quick follow up, if I look at the December quarter slides you guys pointed to $15 to $20 million delay due to Faster Pay and a Middle East switch, can you give us an update on that?

Philip G. Heasley

Yes, we said that it was delayed to second quarter this year.

Nikolai Fisken – Stephens, Inc.

You said delayed to first half 08, so it’s second quarter?

Philip G. Heasley

Second quarter, we’re not being cute there, we’re trigging off of Great Britain’s timeline which I think is May 20, I don’t know the exact date.

Richard N. Launder

It’s a similar situation in the Middle East. We are dependent on the actual central body going live.

Nikolai Fisken – Stephens, Inc.

The point is that was not recognized in Q1?

Philip G. Heasley

No, it was not.

Operator

At this time there are no further questions. Are there any closing remarks?

Tamar Gerber

No operator, I think that’s it.

Philip G. Heasley

We thank everyone for being on board. Whereas we said Faster Pay was not in the quarter we’ll also tell you the Saudi switch was not in the quarter either and that’s what Richard was alluding to in terms of Atlas, another one of these large multi banks, I think there’s 10 or 13 banks involved in that project.

Operator

This concludes today’s ACI Worldwide financial results Q1 2008 conference call. You may now disconnect.

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