Nov 6, 2008
Executives
Tamar Gerber – Investor Relations Phillip G. Heasley - President, Chief Executive Officer, and Director J.
Ronald Totaro - Senior Vice President in the Office of the Chief Operating Officer Scott W. Behrens - Principal Financial Officer, Vice President, Chief Accounting Officer
Analysts
George Sutton - Craig-Hallum Capital Nikolai Fisken - Stephens, Inc. Gil Luria – Wedbush Morgan Securities John Kraft – D.A.
Davidson Tom McCrohan - Janney Montgomery Scott Michael Christodolou – Inwood Capital
Operator
Welcome to the September 30, 2008 earnings conference call. (Operator Instructions) Ms.
Gerber, you may begin your conference.
Tamar Gerber
Good morning and welcome to our call. I’d like to let you know that today we will have three management speakers; Ron Totaro, Scott Behrens and Phil Heasley on the line.
All of our customary Safe Harbor and forward-looking language does apply for this call. A full reference of the Safe Harbor statement, please refer to page two of our PowerPoint presentation which is available via our website or via our SEC filing this morning.
I am now going to turn the call over to Ron. Ron you may begin.
Ron Totaro
Good morning and thanks for joining us. As you can see from the financials that we reported today we had a good quarter as presented by all of our reported metrics which came in as expected or better than anticipated across categories.
I’d like to open up my remarks with a general discussion on the market which is on most of your minds nowadays, especially what has happened in the financial market since we last spoke in August. ACI expects our 2008 sales to be in line with the expectations we shared with you in August.
A possible exception that could occur as a result of the market unrest is that the timing of some of our renewals might move out into Q1 as management teams are distracted by the integrations and mergers occurring at the large U.S. and European banks.
I know a lot of you are concerned the banking consolidation could cost us deals. What we are seeing to date in the marketplace is actually contrary to that concern.
Customer M&A activity is not a hindrance in signing new deals. For instance, one large acquired banking customer is still signing their Q4 transaction with ACI as all procurement processes are moving along on a business-as-usual track until the two companies are merged.
We are writing contracts with the pending change and control in mind but the controlling company has assured its new subsidiary that it is empowered to keep moving forward on its software procurement. A bigger item for ACI than M&A has been the sensitivity regarding term renewals and the sensitivity for large customers who have been given lower dis-economic pricing with pay up front or puff deals in the past, as we had explained.
We are certainly aware the pricing increases of a magnitude that are surprising to some of these clients and there is an education process going on regarding what our software should cost as it relates to many benchmarks we have in the marketplace today. We are not receiving any indications that customers will cancel over this issue.
We are simply moving forward in a consistent and steady way so that the customer understands the framework for the price increases that are now under way. This process continues with large term renewals and some of them are very close to their actual expiration date.
We are not worried about the renewals as they would have already notified us if they were moving off the platform but we are still working out the pricing details and timing of some of these deals. Finally, a last point on the M&A situation is that we are hearing from our sales force that the new corporate combinations that we see in the financial marketplace are posing real opportunities for platform improvements in banks that have been operating in a do-it-yourself model for decades.
We believe there might be a sales opportunity there. We are definitely seeing new deals in all geographies, so while the credit side of the financial markets is certainly sobering, the payment side of these banks represents an opportunity for us.
Moving to slide six, this highlights some of the merger activity that has been going on in the past two months in the U.S. and European markets.
We have highlighted ACI’s bank customers which are impacted and what product solutions they are currently using from us. In nearly all cases, ACI customers are buying other ACI customers, the one exception being Santander and Sovereign Bank in the U.S.
What this implies is that our large banking customers are growing even bigger. While we will have some ILF contracted from these customers over time the reduction is mitigated by the capacity needs which will grow enormously as they integrate the two institution’s transaction volume.
Capacity volume fees are mostly booked in ILF with some revenue falling into MLF so there will be offsetting incremental revenue following the loss of multiple system licenses. Slide seven follows up on some of the investor questions with concerns during the September/October time frame given what was happening in the macroeconomic environment.
We are comparing our 2008 year-to-date revenues by industry category for full year 2007 revenue by industry category. Financial services institutions as a percentage of revenue have stayed pretty constant at just under 70% of all ACI revenues, so while we are heavily exposed to the credit lending institutions we also have a large and growing business with processors, credit card agencies, switches and retailers which constitute nearly 1/3 of our overall business.
Moving to slide eight, our sales results this quarter were focused more on the add-on and term renewals areas of our business propelling us to an overall 17% year-over-year growth rate. This is also a different type of sales result than Q2, where we booked more new accounts and applications and very few term extensions.
Now that this trend has clearly been reversed, a notable change this quarter was that two customers signed for Base24 Classic to Base24-eps migration and in at least one of these cases the customer proactively asked us to be upgraded to our newer system. We told you in Q2 we are not seeing the level of capacity deals that we expected and we are unsure whether it was driven by the economic downturn.
This quarter we finally did see some of these sizable capacity events occur and this is reflected in the sales concentration among our top five customers who accounted for nearly ¼ of all sales in the period. We also sold an enterprise banker system to an IBM customer with whom we did not formerly have a wholesale relationship in the U.S.
market. It was good to see some more traction to banking areas using IBM System Z.
We have invested heavily in System Z optimization this year and it was good to have a large sale as validation of our wholesale system in an IBM hardware environment. One final point on this slide, we are not seeing any customer cancellations of any note.
Slide nine is another cut of sales by geographic channel. This slide is pretty self explanatory.
We are seeing a big rise in EMEA sales driven by the last faster banking institutions going live as well as by a significant continental European customer moving out of backlog into live status. Asia dropped compared to last year’s quarter but that was really driven by one capacity deal in 2007 which did not recur in 2008.
Slide ten is our year-over-year look at sales by category mix and quarterly performance compared to last calendar year. We are running a bit behind last year’s numbers, driven by a much slower first half of 2008 as compared to 2007.
Remember that we have consistently told you during the calendar year that we are seeing longer deal cycles in early 2008 with our banking customers. Their cycles are pretty much the same right now as they were earlier this year and the time period for deals closing has definitely lengthened over 2007 even while we are seeing more and more customer opportunities in all of our geos.
Slide eleven is a recap of our IBM alliance. We are very pleased with the IBM relationship and it is proceeding as we expected with 2008 sales tracking nicely to our plan.
In September we announced our joint IBM ACI development plan to further invest in ACI wholesale platforms in an IBM system Z environment at the SIBOS and we think the wholesale deal we signed in the U.S. with the European bank is just a start in this area.
Product solutions and product investments are obviously the foundation of our marketing and sales effort. Slide twelve takes you through our recent and latest activities and product solutions investment.
I think our financials demonstrate that we are spending a lot more money this year on product management than we did in the proceeding years. On the retail payment side we think we are helped by the fact that we are investing more and more in IBM enablement at a time when asset gathering has become a core focus for our financial customers.
Any software that aids in the process of moving money around is a highly profitable tool in these economic times. I already touched on our SIBOS announcement in wholesale but it is definitely coming through clearly to us that large global banking customers want more functionality and are more focused on liquidity, wire and treasure operations than ever before.
Given the macroeconomic situation, we are hearing from more potential customers on a proactive basis about risk management systems. These customers are concerned about fraud in the weakening economic climate and they want solutions to help mitigate this pending risk.
We are also looking at mitigating our back office operations and strategy to ensure our solution delivery and product functionality are running as profitably as they should. My next few slides examine the channels by geography and provide some representative names and product transactions that occurred during the third quarter.
If you’ll join me on slide thirteen, I am beginning in the Americas where we saw a large rise in revenues of 18%. Most of our large sales in this quarter were renewals of Base24 or wholesale solutions so these were immediate revenue recognition events as well.
We have split the U.S. sales force into a group dedicated to renewals and relationship management and another segment focused on new sales and we are please with the early results of this organizational realignment.
We are also getting good traction in the professional services area and that should really help the business margin as it becomes a more sizable component of our business. As I mentioned in the prior slide, we are seeing more demand for payment fraud detection software as the economy weakens.
Finally, Latin American banks continue to reinvest and to grow and we renewed a large PRM customer in Latin America this quarter. EMEA, on slide fourteen, had 47% revenue growth over an admittedly soft Q3 last year.
While not as term-extension dependent as the Americas business was in Q3 we did see some healthy revenue from capacity in renewals. Interestingly, about half of our largest deals occurred in the new account/new application area.
In general, the pipeline is already quite strong in the quarter. We already see a ramp in deal signings in the early half of but it was good to have already contracted over $10 million this early in the quarter.
Asia revenue was flat in the quarter over the prior year. We saw capacity deals in Korea, Japan and India but there were also good new deals in Malaysia and Singapore.
In many global markets we had advantage from the dollar appreciation but it obviously hurt us on the Australian dollar denominated contracts. However, we do have a pretty good size headcount in Australia so to some extent the Aussie dollar depreciation was offset by our Australian dollar expense save down there.
I’m not hearing any concerns on selections or potential spending reductions in Asia from my team out there. It is a very active and very busy part of the world and banks overall have been less impacted as they have been in the U.S.
from the asset crisis we are experiencing. My final two slides before turning it back over to Scott are really update slides for you on what we have been doing in our restructuring and our plan to improve and enhance the profitability, speed and efficiency of our service delivery capabilities.
I told you during the second quarter call that I just completed an exercise to identify cost savings and determine areas for additional reinvestment. On slide sixteen, I summarized for you what has been happening with our restructuring plan to date.
We completed the Americas restructuring during the third quarter and that will account for approximately $25 million in annualized cost savings. We should see about $5 million of that in our Q4 expense numbers although we obviously incurred some one-time severance costs as well.
During the next two months we will finalize the headcount reductions in our overseas locations and the first half of next year will bring the facility rationalizations. Once we have completed the headcount reductions this quarter we are planning to reinvest in product management and particularly in our services leadership to help drive the changes we seek to make.
We will continue to seek out new profitability and efficiency improvements throughout 2009. We also told you in the second quarter call we thought there would be a one-time cash expenditure of $15-25 million.
The good news is that we refined the analysis and estimate that the one-time costs to ACI for restructuring in 2008 and 2009 will run $10-15 million. So that is on the very low end of our expectations and guidance from the last call.
In the area of services leadership and delivery I have worked hard with the services, development and geographic organizations to identify processes to improve our installation time frame and profitability. If you move to slide seventeen, I have summarized the work we are doing there in terms of better organizational alignment, lower cost development centers, global controls processes and governance tools we put in place and ensuring deal profitability and capacity assessment programs.
We are completing the move of our functional people into more rational reporting relationships to drive accountability and we definitely improved the cost of our engineering function over the past year as we invested in engineers in Romania and in India. We have set the stage for our services improvement program and I think we will see greater efficiencies and faster delivery in our sales and implementation pipeline as a result of this exercise.
So in summary, the business is still exciting and we have a lot of opportunity despite and in some cases driven by the external marketplace events. With our internal improvement programs we are establishing a better foundation for ACI and how we prioritize and take advantage of our market opportunities, streamline critical processes for key delivery functions, we will continue to rationalize and reinvest in our solutions set and we are bringing in new leadership talent that complements our unparalleled global knowledge of payments.
So at this time I’m going to turn this over to Scott now to discuss our financials during the quarter and then I’ll be available with the members of the senior management team for Q&A.
Scott Behrens
Thanks Ron. Good morning everyone.
Turning now to slide nineteen, I will spend a few minutes going through the key financial highlights from the quarter. Starting with revenue we had strong revenue growth on a comparable basis, approximately 28% over Q3 of last year and consistently strong on a sequential basis with our strong revenue performance in the June quarter 2008.
On a comparable basis, revenue growth included approximately $12 million increase in software license fee revenue. This growth driven pretty evenly among customer projects moving out of backlog, term renewals being signed and capacity increases from existing customers.
As Ron said, we haven’t seen a lot of capacity deals here to date so this demand was obviously building up in our customer base. We also saw more than $7 million increase in recurring revenue, again that being our monthly license fees, maintenance fees and ASP processing portion of our services revenue.
Not specifically mentioned here but we also saw $4 million of additional revenue from go-live events and additional services provided by the faster pay mandate in the U.K. Again, most of those banks went live in the June quarter but we did have one carry over and go live in the September quarter.
So overall another strong revenue quarter. Sales grew very nicely on a comparative basis with Q3 2007 and on a sequential basis with Q2 2008.
Since Ron has already discussed sales with you quite a bit I’m not going to spend too much time with you on it here. Our OFCF while still negative was significantly improved over the second quarter, an improvement of almost $11 million and came in above our budgeted expectations.
The September quarter saw the go-live of a number of customer implementations for which cash had already been received. Thus really driving GAAP revenue with no coordinating cash receipts.
However, we do see this as a positive as we continue to see the movement of projects out of backlog and into go-live status where we begin to see the benefits of both cash and the revenue stream from the maintenance phase of the contracts. The 12-month backlog decreased on a comparative basis versus prior year and sequential basis versus the June quarter.
Again this was driven by customer projects moving out of backlog and into GAAP revenue as well as the impact of foreign currency due to the strengthening of the U.S. dollar against most of the major foreign currencies.
Turning now to slide twenty, deferred revenue declined as we completed the final installations of a faster pay customer in the U.K. and we also gained acceptance on a number of other large backlog deals, particularly in the EMEA region.
While the operating expenses have risen year-over-year much of that expense growth was driven by one-time items such as the IBM outsourcing transition expenses we have been talking about this year and the related severance costs which combined for $4.9 million of expense in the quarter. In addition we had a little over $3 million of severance related to the announced restructuring initiatives.
We also had a little bit higher distributor commissions and that is primarily driven around revenue mix. With respect to non-operating income and expenses the September quarter benefited from foreign exchange gains partially offset by losses on our interest rate swap.
One last highlight to note is that in spite of the financial market upheaval our billed accounts receivable showed improvement in the quarter. Billed receivables were down nearly $6 million on a sequential basis compared to June 2008.
Also during the quarter we were able to recover a portion of our previously reserved bad debt. So at this point we are not seeing any deterioration in the quality of our accounts receivables as a result of the macroeconomic conditions.
Turning now to slide twenty-one, it shows that approximately $20 million of our current quarter achieved sales achieved GAAP revenue recognition in the quarter rather than going to backlog. That represents a higher sales to revenue conversion ratio than we have seen in recent quarters and this is a direct reflection of more term renewals and add-on capacity business this quarter that Ron referred to earlier.
Consequently, we really had a lot of sales which were immediately booked into revenue as there were no recognition delays related to installation. Turning to my last slide, this deals with guidance.
We have not changed any of our metrics guidance for the year compared to what we provided in August. We think that OFCF, sales and rev log are basically unchanged.
We feel pretty good about sales of $430-440 million for the year. I think Ron did a good job in explaining why the market capitalization works to our advantage so I will just echo we are seeing interesting transactions with really significant sized U.S.
banks. There could be a number of smaller renewal deals that amount to $10-20 million that might slip into Q1 2009 but we are not pushing to close these deal precipitously if the economics don’t work for us.
With that said, the only metric that might move around significantly would be rev log but any movements there are due really entirely to currency translation. In August when we announced the $190-195 million rev log range for the year we were using a June 30 FX rate.
Looking at the same numbers in the context of September 30 FX rates we have approximately $40 million in FX related deterioration on our $1.4 billion of backlog. That represents approximately 2-3% of our value of 5-year backlog and given the difficulties in predicting near-term movements in Dollar/Euro or Dollar/Pound exchange rates primarily between now and year-end, we are sticking with our $190-195 million guidance range with the caveat it can fluctuate due to the impact of FX on backlog.
Given how our business works backlog obviously is a big piece of the rev log indicator. All told, we are pretty pleased with what we are seeing with our business right now.
With that I’m going to let Phil close out with some comments on slide twenty-three as it relates to ACI and the marketplace.
Phillip Heasley
Good morning everybody. I have very few things I have to say before we move into questions.
One is that in terms of everything you have heard from Ron and Scott we are still very committed to our strategic plan and we think our strategic plan is on course. Our belief that ACI’s software is largely a nondiscretionary purchase for banks and actually very strategic to cost efficiencies and feature functions seems to be bearing itself out.
I’ll reiterate our pleasure in our working relationship with IBM at this point and with the combination of working with IBM and the M&A activity motivated by financial markets and governments will tell us that as we go into next year we have to be agile and sensitive to the integration needs of our very large customers as part of our selling plans. We still see growth in pipeline and we are beginning to see our deferred revenues start moving back towards a more reasonable range so that we will have a combination of both working our backlog and working the marketplace and the new addition of working with our customers that have new and somewhat unexpected integration needs.
Our attrition rate we told you was at historic lows coming into this. There has been no increase to our attrition rates which are very good.
We still see second half 2009 the point we get through all the negatives of this tough misbehavior or whatever you want to call it. We have actually been very gratified with the dialogues and interchange we have had with our key and strategic customers in this regard.
They understand us as a strategic partner and they understand the win-win need of our relationship. So I feel very good about that.
The sales opportunities around the globe remain very good. If there is any change it is that mega banks are now thinking more like individual institutions than companies with 15 or 12 parts so the size of projects and complexity of projects is actually increasing, not decreasing.
We have already told you the sales cycle has elongated so we are not saying that as an excuse because last quarter we told you it elongated. It did and now we are beginning to see the sunshine side of that elongated process.
We just believe we are on schedule and on pace for the recovery that we have laid out in our strategic plan. With that I’ll go to questions.
Operator
(Operator Instructions) The first question comes from George Sutton - Craig-Hallum Capital.
George Sutton - Craig-Hallum Capital
As you have realigned your cost structure fairly aggressively over the last couple of quarters and frankly couple of years, you now have a lot more delivery capabilities outside the U.S. relative to before.
Can you just lay out for us what the cost to deliver a new system to a new customer would be today relative to where it might have been two years ago and how that might impact your overall income statement long-term?
Phillips Heasley
I can’t. On an apples-to-apples basis I have to make a couple of statements.
One is the size deals we are doing because of the change in the nature of the banking industry the deals are getting bigger and bigger instead of smaller and smaller. So therefore it is not totally apples-to-apples.
Previous 2006 and earlier we were basically dependent on the United States and Great Britain as our major resourcing locations. We had some support in Australia and the Netherlands on a product basis but those were our two main support centers.
We now have close to 150 engineers in Timisoara, Romania and they are almost 100% dedicated to EPS. We have about 1.5 times that amount in Bangalore, India and they are pretty much 100% devoted to the wholesale side of our business.
So that can explain it a little bit that way. Then over 2/3 of our revenues are actually overseas.
So part of what we did was we grew our business extensively overseas without kind of right-balancing our cost infrastructure behind it. You win your deals market by market based on the competitive nature of those marketplaces and the reason we had to adjust was southern Europe’s engineering costs are about 40% to Great Britain’s.
Great Britain’s are about 110% to the United States whereas Romania is probably 65-70% to the cost of southern Europe. So the combination of using our American staff and our staff from Great Britain along with Timisoara, we have a very competitive deal.
So without giving you numbers, instead of the typical installation costing us 20% we now are setting goals where we are looking for margin of about 20% on an installation. Is that too vague?
George Sutton - Craig-Hallum Capital
That’s what I’m trying to understand long-term as these deals come through your pipeline you are going to consistently see higher margins and that is what I wanted to understand. As a follow-up for Ron, you had mentioned you are in the midst of a number of pricing discussions with customers and I just wondered if you could give us a better sense of what kinds of price changes you are suggesting to the market and again what kinds of discussions you are having on those lines.
Ron Totaro
Sure. As you can imagine the variance is quite varied.
Depending on when the original puff deal was done with some of these larger renewals, which is what I think you are referring to, I am actually hesitant to quote quotes because a lot of this is pending right now. It is substantial and what we have to do is go back and show benchmarks as to sort of what our global pricing looks like specific to some of the regional pricing when some of these renewals are way out of whack frankly.
So we have been going through this process very methodically. It involves typically many iterations at very high levels of these organizations to get their head around the fact there is in many cases a substantial price increase.
So we literally are in the middle of the throes of some of these negotiations right now so I’m a little hesitant to throw out percentages. We are seeing the right tenor of the discussions to get over this hump and to find the right sort of balancing act for a win-win.
Operator
The next question comes from Nikolai Fisken - Stephens, Inc.
Nikolai Fisken - Stephens, Inc.
If I look at your revenue and listen to your commentary you had a lot of capacity upgrades. You’ve got rev rec on a bunch of contracts and on the sales period is lengthened.
If I look at the Q3 GAAP revenue did the stars align in the [108] number? It just won’t happen again the next couple of quarters?
Kind of give us some detail on that.
Scott Behrens
It was really a broad based revenue growth in the quarter. If you compare the 108 from Q3 to the 109 from Q2 the 109 from Q2 had a pretty big pop from faster pay but the revenue and in particular the growth over last year was broad based on increases in recurring revenue, pretty evenly split amongst the license fees amongst a number of projects.
We did have some faster pay in the quarter but there isn’t anything in particular in the revenue for Q3 that is similar to that faster pay in Q2 in terms of some one-time pop. Obviously our ILF revenue is lumpy in that it is where you get generally a different one-time item in there next quarter than there were this quarter than there were last year.
But the overall commentary is that it was a pretty broad based growth in revenue over last year.
Phillip Heasley
Another way I feel comfortable answering it, we never did and never will give quarterly guidance. Yearly guidance is tough enough.
We did reiterate our full-year guidance. So that would give you a pretty good clue whether we believe that…we have basically said some pretty clear things about Q4.
You can put it that way. So that answers your question a little bit there.
The other one is my famous pig in the python. I’m not supposed to talk about that.
It is really clear we are digesting the pig. We should, if we get our service capabilities where they need to be, we get our sales flow which I am telling you that while the process is elongated clearly things are coming through on the sales side.
We want to work ourselves down to an $85-100 million deferred revenue as a guide post versus up at the areas we are at. If you also look at the movement in the 12 versus 60 month backlogs it is very clear that we are beginning to see good movement from front to back standpoint.
I’ll still go back to where we are before. I think we are on schedule for a second half 2009 having a normalized business model.
Nikolai Fisken - Stephens, Inc.
On the $8.2 million of pretax charges was that all in G&A?
Scott Behrens
Primarily in G&A yes.
Nikolai Fisken - Stephens, Inc.
Can you give us a split?
Scott Behrens
I don’t have the split in front of me but I can get it. Most of it was the IBM $4.9 that was all in G&A.
The $3+ in severance was split out amongst the different line items but I can get that split for you.
Nikolai Fisken - Stephens, Inc.
As it relates to that, if I just took it out of G&A you guys are doing a great job at getting R&D down, sales down and maintaining a pretty low G&A level. So if I look at Q3 on an absolute dollar basis of $52 million if I just add up those three items is that a good run rate for a go forward basis?
Scott Behrens
When you say the three line items in terms of cost?
Nikolai Fisken - Stephens, Inc.
Equal to the G&A less that $8 million and sales and marketing at $18.5 and R&D of $11.4?
Scott Behrens
Obviously on the selling market for example that is going to fluctuate based on the size of sales. We are looking at a strong Q4 in terms of sales.
One of the variable components within that is driven strictly not only by sales volume but the mix of sales. So the higher value deals we do we are going to have a higher commission related expense.
So any given quarter isn’t necessarily going to be reflective of what we are going to see going forward. From a G&A perspective I don’t see a whole lot of necessarily variability in that line.
Obviously G&A is pretty consistent quarter-over-quarter. We are obviously going through a number of initiatives with respect to restructuring here and the latter part of this year and the early part of 2009 and that is really going to benefit us across the board amongst all expense line items.
We will start seeing that benefit right away here in the fourth quarter. But continuing through our actions we do in the first half of 2009.
So we are going to see benefit across all expense categories starting in Q4 and going into until we are completed with these efforts in the middle of 2009.
Nikolai Fisken - Stephens, Inc.
What happened on R&D?
Scott Behrens
R&D will be impacted as well in terms of the overall cost structure.
Operator
The next question comes from Gil Luria – Wedbush Morgan Securities.
Gil Luria – Wedbush Morgan Securities
When you are talking about these renewals that are coming up and obviously you have passed off the costs and you are getting closer to the point of renewal and you are obviously asking for the appropriate full list price. How does it work if and when you get to the point of renewal and you haven’t negotiated an extension?
What happens then in terms of the cash flow, revenue recognition? Have you already had some of these negotiations where you have gotten to that point?
How does that impact the financials?
Phillip Heasley
I can honestly tell you that in terms of these big deals we have not gotten past contract renewal on a single deal yet.
Ronald Totaro
In terms of a general statement, unlike a new client implementation renewals don’t have a large deferral period. We’re not talking about the deferral through the implementation period before we get to rev rec.
Renewals we start essentially recognizing right away. Obviously it is in our current run rate.
It is in our backlog. As we renew at higher rates obviously that will increase our revenue run rate and it will also increase our backlog because the backlog assumes renewing at its existing rates.
So there is a benefit really an immediate benefit to revenue run rate as well as backlog because there is no waiting period essentially for starting to recognize the new revenue stream in the new contract period.
Gil Luria – Wedbush Morgan Securities
In terms of your operating free cash flow guidance it is still $45-50 for the year. Where are we year-to-date?
Scott Behrens
Year-to-date we are I believe we are at 30.
Gil Luria – Wedbush Morgan Securities
You put a little bit of a caveat when you put out that guidance which is there is a certain chance some of the deals will slip into Q1. What is the chance of you reaching the $45-50 guidance for the year?
What is the chance of it slipping into Q1?
Scott Behrens
You mean in terms of the OFCF guidance?
Gil Luria – Wedbush Morgan Securities
Yes.
Scott Behrens
I wouldn’t necessarily say if any of the deals slip into Q1 that it would necessarily have an impact on OFCF. It really depends on the timing of how much cash we would receive up front.
So at this point I wouldn’t venture to say we are considering any of these big renewal deals to have a significant impact on OFCF if they slip.
Operator
The next question comes from John Kraft – D.A. Davidson.
John Kraft – D.A. Davidson
Scott, you had mentioned that there was some faster payment revenues recognized in the quarter. My question is what is the backlog for faster payment?
I was under the impression that was sort of winding down.
Phillip Heasley
In terms of the number of banks that went live I think there were four that went live in the June quarter and another one that went live in the September quarter. I don’t think we have another one in the pipeline in terms of go-live.
We have continuing services that we are performing for all the banks even those that went live in the June quarter. There is a second phase albeit I’m not really sure how extensive it is.
There is a second phase to faster pay. Now that we have gone live we do have an ongoing cash and revenue stream on those existing customers.
What we saw in the June quarter and have a little bit more in the third quarter was that initial pop from the fact that during the faster pay implementation we had to defer revenue.
John Kraft – D.A. Davidson
Ron, you mentioned an IBM system Z wholesale deal for an international bank. Is that a subscription deal or a license deal and when do you expect that to be implemented?
Ronald Totaro
It is a license deal and should be around mid 2009.
John Kraft – D.A. Davidson
Just to follow-up and be clear here, the $5 million or so in transition and severance related to IBM that is all completed in Q3? There shouldn’t be any expense related to that in Q4?
Scott Behrens
We said that the overall transition expense would be about $8 million when we are fully transitioned to IBM outsourcing. So far this year we have incurred $6 million in the transition expense.
The remaining $2 million is primarily related to third party data centers and those moves have not been completed. We would expect those to carry into 2009.
But there is still a couple million out there that we will have in terms of transition expense and the timing is really contingent on when we get those data centers moved and in terms of severance we have pretty much incurred the severance related to that because we did go live with the outsourcing arrangement on September 1.
John Kraft – D.A. Davidson
And that $2 million will sort of be dribbled throughout the next couple of quarters?
Scott Behrens
Yes. It is really driven on timing on when we get the data center moves.
To the extent we get them done sooner rather than later we will incur that expense sooner. Again, on the transition expense from a cash perspective we are paying out those transition expense over five years so it does have a P&L effect expense today but from a cash standpoint we are paying out that amount over 5 years.
Operator
The next question comes from Tom McCrohan - Janney Montgomery Scott.
Tom McCrohan - Janney Montgomery Scott
I’m looking at slide 21 of backlog and revenue. I just want to make sure I understand the near term renewal deals, where those revenues are captured.
So for this quarter this was a helpful slide, 20% or 19% of your revenues were from sales. So are term renewal deals captured in that bucket?
I wouldn’t think they would be in the other.
Scott Behrens
Generally the sales and revenue conversion rate is pretty quick. So depending on the nature of it it will most likely be a sales to revenue conversion in the quarter that the deal is signed.
Tom McCrohan - Janney Montgomery Scott
If you renew a deal with someone how does that add incrementally to revenue for the quarter? That just assumes you have higher prices?
Maybe you can just talk about that.
Scott Behrens
Yes that is going to be part of it. It is also going to be the portion of any license fee that is paid upon signing, renewing the deal.
So it depends really on how it is structured on how much license fee we get at the front end versus what is ratable over the renewal period. But yes in terms of a renewal we would have no delay in recognizing that increased pricing and then that would be effective in the first month of the new contract period.
Tom McCrohan - Janney Montgomery Scott
A lot of these term renewals were related to discontinuing past practice of puffing? Is that a way to think about it?
You are heavily discounted now and you have to take much more healthy approach…so puffing and term renewals are kind of interchangeable? Is that the right way to think about it?
Ronald Totaro
Almost all puffs are renewals, not all renewals are puffs.
Tom McCrohan - Janney Montgomery Scott
So that number should be, since we are kind of ending the period of puffing and you have kind of retrained your clients to not expect that from you, should we expect this 20% revenue from sales to trend higher that we have seen in the past?
Ronald Totaro
It depends if we sell an awful lot of new product, EPS or whatever, that could impact it down because we would be waiting for acceptance for it. But if we landed up having a lot of renewals or we landed up selling additional functionality to installed customers then we would have that up front.
I’ll let Scott answer it but some of it is the sales mix. The sales mix drives that also.
Scott Behrens
I have nothing to add to that. It is really sales mix driven.
Tom McCrohan - Janney Montgomery Scott
A follow-up on the IBM alliance. Just looking at slide eleven, the 268 accounts in the pipeline, can you give us any color on geographically where they exist and you talked about that opportunity in terms of the higher hit rate was going to be clients that were already running an IBM shop so it wasn’t a hardware sale.
You have to get over that obstacle and we are also running kind of in-house payment platforms. Can you give us a breakdown of that 268?
Phillip Heasley
I’ll let Ron give you an answer, but I will also say there is no geographic concentration in terms of the IBM pipeline. I would say we pretty much have the entire globe engaged team to team on that.
I do think that certainly our installed base not on IBM is a big target for IBM. The IBM installed non-ACI base is a big target for ACI and I would actually think the greatest success we have had to date because again these are long sale cycles the biggest success we have had to date are neither one of those two.
It has been where they have neither been IBM nor ACI but people that very much needed things and we prevailed together in terms of the opportunity. Ron you may want to add some color to that.
Ronald Totaro
I would just add that this six-quarter view as far as the distribution goes without having all the information in front of me it looks pretty similar to how the distribution of large institutional banks and their location would look like. So there is not a high concentration or low concentration in one country or region at this point.
Tom McCrohan - Janney Montgomery Scott
In the past you have talked about top 500 global banks defining the market. How many of the 268 are in the top 500 global banks?
Ronald Totaro
I could give you a specific answer but I would have to get back to you. I would say again on a percentage basis it is healthy and I wouldn’t say again we are concentrated at tier one, two or three base.
It is a healthy distribution across the board.
Operator
The next question comes from Michael Christodolou – Inwood Capital.
Michael Christodolou – Inwood Capital
Just to understand this possible slippage between the fourth quarter 2008 to the first quarter 2009 is that due to the complexity of these renewals where you are not giving puffs or is this due at all to the elongation of the sales cycle which you have been talking about for the last few quarters?
Scott Behrens
The possible slippage we are looking at are on smaller deals. I said maybe somewhere in the range of $10-20 million and if they slip obviously we want to get the right price so we are not going to rush those deals into Q4 if we can’t get the right price.
We’ll wait and let them slip into Q1 2009. At this point we are not expecting it but they are smaller deals.
They are not large deals.
Michael Christodolou – Inwood Capital
It is slippage though, it is not attrition right? There is no way…
Scott Behrens
Yes, this is on the sales side. This is not attrition.
Michael Christodolou – Inwood Capital
A customer is not going to defect because he is surprised and offended he didn’t get a puff this time. You don’t just switch these things on a dime, correct?
Scott Behrens
No. We have also been articulating to them essentially what price they did receive in the past so I think generally those conversations have been going pretty well under the circumstances.
But we just have to close the gap between what we believe is a fair price and what they are expecting based on their prior renewal.
Michael Christodolou – Inwood Capital
This may have been in the slides and I didn’t see it, but could you recap for us the installed base of Base24 out there and how many Base24-eps accounts are out there and between those how many are new and how many are Base24’s transitioning over? Just kind of a scorecard there?
Phillip Heasley
I don’t think we put it in there. But we have 70 EPS customers and there is probably half dozen or less, we have never given that exact number, but only about half dozen that are actually in transition at this point.
As we said our attrition is close to zero on our installed base. We are not really announcing any change in our Base24 Classic installed base.
Michael Christodolou – Inwood Capital
That number was around 300 so if half a dozen are in transition in theory in the coming years there are still another 294?
Phillip Heasley
It is actually a significantly higher number than 300.
Michael Christodolou – Inwood Capital
Just a couple of questions on stock buyback. I noticed there was no activity in the quarter.
Was that just because you have your plate full with other things?
Phillip Heasley
We have our plate full with other things and I think everyone saw the credit markets completely freeze up from a borrowing standpoint. We have quite a bit of cash and we just are being prudent.
I don’t know any other way of saying it.
Michael Christodolou – Inwood Capital
I commend your prudence. I guess I would observe though that you have $94 in cash and $74 in debt and so the enterprise value of the company at $12 is $400 million and that is 90% of sales and eight times OFCF and those are stunningly cheap numbers in a history of investing in software companies.
Clearly the company has bought back stock between $18-30 and Phil you and the management team have bought stock between $20-30 and IBM has committed effectively $150 million to buy 8% of the company and the other 92% could be have for pick a number, $370 million. It seems like it is an extraordinary opportunity if the world doesn’t come to an end and yet you are implying the world is not going to come to an end, it is a nondiscretionary product with high consumer retention and you are seeing sunshine and prospects of 20% margins are on the horizon.
Am I missing something there?
Scott Behrens
In terms of our cash availability we do have $94 million cash. What you don’t see and we don’t necessarily break out in our disclosures is the geographical spread of that cash throughout the world.
A lot of that cash is overseas and to repatriate that cash would have pretty significant tax consequences. In terms of the amount of cash, we have that cash overseas to run day to day operations and again some of it has repatriation impacts.
So it is not necessarily readily available here in the U.S. in order to utilize for cash buy back.
We also have the restructuring actions we are taking now and will continue in Q4 where we have an estimated $10-15 million in severance, a lot of that which has not been paid yet. We action those in the September quarter late in the September period.
That cash outflow will come here in Q4 so we need to make sure we have the cash in the respective jurisdictions in order to pay out that severance as well. So the total cash availability is not necessarily all available here in the U.S.
for making stock buy backs.
Michael Christodolou – Inwood Capital
After four years at the company and all the great transformation you have helped implement, you still think the ultimate value of the business is what you have been thinking?
Phillip Heasley
I believe the company is more valuable. I think we now have a management team that can actually extract the value out of the assets that we have here.
That is different than being prudent in a financial meltdown.
Operator
There are no further questions at this time. Do you have any closing remarks?
Tamar Gerber
I just want to thank everyone for joining us. If you have any follow-up questions I can be reached via our New York office.
(646) 348-6706. Thank you everybody.
Operator
That does conclude today’s conference call. You may now disconnect.