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Edited Transcript of ACIW earnings conference call or presentation 2-Mar-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 ACI Worldwide Inc Earnings Call

NEW YORK Mar 2, 2017 (Thomson StreetEvents) -- Edited Transcript of ACI Worldwide Inc earnings conference call or presentation Thursday, March 2, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Kraft

ACI Worldwide, Inc. - VP, IR

* Phil Heasley

ACI Worldwide, Inc. - President & CEO

* Scott Behrens

ACI Worldwide, Inc. - Senior EVP & CFO

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Conference Call Participants

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* Brett Huff

Stephens Inc. - Analyst

* David Eller

Wells Fargo Securities - Analyst

* George Sutton

Craig-Hallum - Analyst

* Wayne Johnson

Raymond James - Analyst

* Shane Svenpladsen

Avondale Partners - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Scott and I will be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide reports Q4 earnings conference call. (Operator Instructions). John Kraft, Vice President of Investor Relations, you may begin your conference.

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John Kraft, ACI Worldwide, Inc. - VP, IR [2]

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Thanks, Scott and good morning, everybody. Today's call, like all of our events, is subject to both Safe Harbor and forward-looking statements. You can find the full text of both statements on the first and final pages of our presentation deck today, a copy of which is available on our website, as well as with the SEC.

On this morning's call is Phil Heasley, our CEO and Scott Behrens, our CFO.

Before I hand it over though, I wanted to remind everybody that ACI will be attending the 38th Annual Raymond James Institutional Investor Conference in Orlando on March 7 and we will also be hosting an Analyst Day here in Naples on March 9. With that, I'd like to turn the call over to Phil.

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Phil Heasley, ACI Worldwide, Inc. - President & CEO [3]

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Thanks, John and good morning, everyone. I'm pleased to report our fourth-quarter and full-year results for a very strong ending and exceptional year for ACI. We saw increasing demand across all our UP Solutions segments and delivered new bookings growth of 6% and total bookings growth of 16% for the year.

We also continue to see strength for our SaaS and platform offerings with new bookings growth of 19% in 2016. In quarter four, we signed three new customers that will use our UP Retail Payments solution. In the US, we signed a new top 10 bank for our UP Retail Payments on Linux. In EMEA, we signed a new customer that will utilize UP Retail Payments to replace a regional competitor. Lastly, we signed an important strategic alliance with AGS Transact in India that will bring our UP Retail Payments capabilities to the Indian market via a comprehensive cloud-based services offering that integrates cross-channel payment, fraud prevention and transaction management capabilities. We are excited about the future prospects of this partnership in India.

We also saw significant success with our existing customer base. In conjunction with a fourth-quarter renewal, we upgraded one of our largest customers to UP Retail Payments solution. This agreement has a material increase in annual transaction volume and represents the largest contract in ACI history.

In quarter four, our largest Australian bank went live using UP Wholesale as a pure hub to transform their payments infrastructure. We expect this capability to result in several multi-year projects in the future.

In our UP Immediate Payments solutions segment, we signed an important contract with a long-time customer, Rabobank, who will initially utilize our technology to connect to the new Netherlands Immediate Payment network. While Rabobank appreciated the reliability of our proven solution, Universal Payments' multi-scheme support and connectivity ensures that they will have the flexibility to connect to new schemes in the future.

In quarter four, we also delivered strong results in our UP e-commerce, including a contract with another leading payments processor in Brazil, which now brings us to over 60% of the acquirer volume in the Brazil market using our PAY. ON and ReD offerings. We plan to provide more detail and background regarding these customer wins, as well as our growing pipeline at our annual Analyst Day next week.

Lastly, we accomplished several strategic milestones in 2016. We divested our Community Financial Services for $200 million in cash with which we repurchased $60 million in stock, more than offsetting the EPS dilution of the divestiture.

Over the course of the year, we reduced our debt balance by $185 million and in response to significant demand for our solutions in a hosted environment, we built and went live with a new European data center able to support both our SaaS and platform-on-demand solutions.

As we look forward to the rest of 2017 and beyond, we feel confident in our financial guidance and excited about ACI's positioning within the evolving global payments space.

With that, let me turn the call over to Scott to provide details on our fourth-quarter and full-year financial results and for 2017 guidance. Thank you.

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Scott Behrens, ACI Worldwide, Inc. - Senior EVP & CFO [4]

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Thanks, Phil. Good morning, everyone. I first plan to go through the highlights of the fourth quarter and full-year 2016 and then provide outlook for 2017. We will then open the line for questions.

I will be starting my comments on slide 6 with key takeaways from the quarter. Overall, as Phil said, we had a very strong finish to the year. Our total bookings grew 50% from last year's Q4 after adjusting for foreign currency and the CFS divestiture. We saw particular strength with our renewal bookings, which doubled from last year, clearly rebounding from some of the timing delays we experienced earlier in 2016 as customers are moving renewals closer to their expiration.

Headlining our successful bookings quarter, we signed a transformational Universal Payments contract with one of our largest customers. This customer significantly expanded their transaction volume commitment with ACI and the deal with an estimated $80 million five-year guaranteed total contract value represents the largest deal ACI has ever signed.

Also, very notable were the three new logos we signed in our BASE24 switching business. As Phil mentioned, one in the Americas, one in EMEA and one in our Asia-Pacific region. Also of note is a large UP media payment contract we signed with our long-term customer, Rabobank.

These bookings, as well as the go-live contributed to a very strong growth in revenue with organic revenue up 21% compared to Q4 last year and given our relatively fixed cost structure, this revenue growth delivered adjusted EBITDA growth of 46% compared to Q4 last year.

We ended the year with $76 million in cash and $753 million in debt. This debt balance is down $185 million from $939 million at the end of 2015. We exited the year with a total net leverage ratio of approximately 2.8 times.

Also, earlier this week, we announced the refinancing of our existing credit facilities, which provides us with additional flexibility as we execute on our long-term plan. Under the terms of the credit facility, the LIBOR spreads declined, the size of our revolver increased to $500 million and the maturity date was extended to February 2022. And lastly, we have $78 million remaining on our share repurchase authorization.

Turning to slide 7 with key takeaways from the year. For the year, new bookings and total bookings set new all-time highs for ACI with new bookings up 6% over last year and total bookings up 16%. Our 60-month backlog ended the year at $4 billion, up $126 million or 3% after adjusting for foreign currency and the CFS divestiture.

For the year, organic revenue was up 4% over 2015 after adjustment for foreign currency, which represents an acceleration from the organic growth of 3% we saw in 2015.

Adjusted EBITDA of $241 million was down slightly from last year. Operating free cash flow of $72 million was down from $143 million we generated last year, mainly due to the late timing of Q4 bookings. This timing increased our year-end accounts receivable balance by $61 million compared to the end of 2015; however, those cash receipts have come in subsequent to year-end with overall accounts receivable down $77 million in the first two months of this year.

As we have discussed before, during 2016, we sold our CFS assets to FiServ, which generated $200 million in cash proceeds. With this and cash generated from operations, we repurchased $60 million in ACI shares more than offsetting the EPS dilution from the divestiture. We also paid down $185 million in debt and recall that this sale generated an after-tax gain of $93 million.

Finally, turning to slide 8 is our outlook for 2017. For your financial modeling purpose, we've provided a pro forma view of 2016 to normalize for the divestiture of CFS and to reflect 2016 revenues at year-end foreign currency rates. With our mix of foreign currency-denominated revenues and expenses, FX is generally a top-line phenomenon, but has minimal impact on the margin level.

So for the full-year 2017, we expect revenue to be in a range of $1.0 billion to $1.025 billion, representing organic growth in the 2% to 5% range. We expect adjusted EBITDA to be in the range of $250 million to $255 million, representing approximately a 100 basis point improvement over 2016.

We expect our revenue phasing by quarter to follow our historical seasonality with Q1 revenue expected to be in a range of $215 million to $220 million, which represents 3% to 5% organic growth over the comparable period in Q1 of 2016.

On slide 9, you will also find we've provided additional data for your 2017 financial models. We expect GAAP interest expense to be approximately $36 million with cash interest payments of $33 million. Capital expenditures are expected to be in a range of $55 million to $60 million, which is down from 2016 levels. We expect depreciation and amortization in a range of $105 million to $110 million and non-cash compensation expense expected to approximate $36 million for the year, but this too is down significantly from 2016.

Pass-through interchange revenue should approximate $155 million and we expect our cash taxes to be in a range of $25 million to $30 million and our diluted share count should approximate 119 million shares, which excludes any future share buyback activity.

And lastly, our guidance excludes approximately $14 million in expected one-time integration and divestiture-related expenses for PAY.ON, CFS and our continued data center facilities consolidation.

So overall, we had a very strong finish to 2016 and look forward to continuing that momentum in 2017.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions). Brett Huff, Stephens.

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Brett Huff, Stephens Inc. - Analyst [2]

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Congrats on that big UP win. On that, just first question is you had talked about some of those renewals coming more down to the wire. I think the signature UP win that you are talking about with the bank, that was one of those, I think. And if that's the case, as it got closer and closer to the deadline, I know the banks internally were deciding whether or not they should go after or take this deal with the more favorable pricing and offer you guys made. How did those conversations then go and what kind of finally got them over the hump if you have any insight into that?

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Phil Heasley, ACI Worldwide, Inc. - President & CEO [3]

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I think the UP offering, the RPS offering, which allows these companies to bridge the technology from a classic closed system to UP Retail, is a very, very compelling offering and I think, at end of the day, I think it's the same thing that has created the three new sales on the other side of the equation.

It's a very powerful ability to be able to get the use of a fully-orchestrated payments engine capable of very, very high efficiency and very high functional requirements and to be able to run it on Linux and you can just keep going on and on and on. It is also a very large capital decision on these guys' parts. So I think it's only natural that these conversations are going to go along. We repositioned ourselves last year to renew on renewal and I think that makes tremendous sense.

One thing I will tell you is -- in case you are concerned -- if there is any concern -- is that terms are actually growing, they are not shrinking. So it's not, well, gee, we are getting the renewal and they want the same or shorter term. They are actually looking for longer terms, not shorter terms.

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Brett Huff, Stephens Inc. - Analyst [4]

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That's helpful. And then in terms of revenue recognition as we start to see this, I think we and many (technical difficulty) expect that these will take a little time to spool up given the complexity and given that this is maybe one of the first really large ones. Just give us some insight into how we should think about that going forward so we can model it correctly.

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Phil Heasley, ACI Worldwide, Inc. - President & CEO [5]

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Two different swim lanes. These new guys are going to take as much -- we'd like to say they are going to be 18 to 21 months and they often go 24 months, 27 months to get implemented. They are big deals.

The renewals, however, these renewals are not about conversions of any shape or form; therefore, the increased volumes, the increased contracts will end up kicking right in over the term.

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Brett Huff, Stephens Inc. - Analyst [6]

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And the way the contract is structured, the key part for you all I think is that they will hopefully move volumes from older payment switches onto yours. Is that really where the incremental revenue should come that we should look for?

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Phil Heasley, ACI Worldwide, Inc. - President & CEO [7]

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Well, what we are doing is we are selling people the ability to do transactions. Capacity is a large portion of what we do. People are buying more capacity as they are trying to make their switching more efficient.

Perhaps the biggest issue we may have is that the Company has five switches and one of them now is our eps, one of them is our classic and three are other switches. The chance that classic is going to get converted as number one is fairly low, so it will more likely than not come from other switching and other transactions that could use -- people don't realize the efficiency of these transactions, vis-a-vis other kinds of -- less traditional now that you have an open real-time mechanism, the kinds of transactions that can flow through this mechanism is much, much broader. It's not limited to the traditional classic transactions you would think of. So it really opens the vector.

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Brett Huff, Stephens Inc. - Analyst [8]

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That's helpful. And then just last question from me. When you guys changed your guidance after 3Q because of the delays and the renewals happening a little bit closer to the renewal date, it looks like you got a lot of the revenue back that seemed to maybe have been delayed, but the EBITDA didn't come back quite as much and I want to make sure is that right, am I understanding that right? And if so, what was the change that happened? Were there additional costs that we had to incur as we think about installing these (multiple speakers)?

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Phil Heasley, ACI Worldwide, Inc. - President & CEO [9]

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I think that is going to be an interesting challenge. Scott is going to be able to answer this a lot better over time than me, but that is an interesting channel. If we keep booking at the percentage we are booking and we keep doing as much platform and SaaS as we are doing, you realize we are absorbing a change in accounting and that change in accounting first shows up on the EBITDA side and also shows up on the revenue side. I think the trick on [staying with] ACI is that look at the cash.

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Brett Huff, Stephens Inc. - Analyst [10]

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Great. Thanks again for your time.

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Operator [11]

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(Operator Instructions). David Eller, Wells Fargo.

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David Eller, Wells Fargo Securities - Analyst [12]

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Scott, you mentioned organic revenue up 21% and that's working very well with your fixed cost structure. I wondered if you could take a second to just talk about how you feel about your overall cost structure. Obviously, over the last couple years, R&D expenses floated up towards the 17% of sales range. G&A expense is up a good bit this year. If you could just talk about how you feel about your overall cost structure.

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Scott Behrens, ACI Worldwide, Inc. - Senior EVP & CFO [13]

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Well, maybe two things. One is with respect to our R&D. We are always going to have a pretty significant investment in R&D and so it's edged up a little bit, but that is reflective of a heavy investment in new feature functionality, innovation. It's a part of making our competitive moat and barrier to entry into the competitive space.

With respect to the rest of the cost structure, I think the biggest driver of cost increase over the last several years has been building out the infrastructure to support the cloud, the SaaS and platform business. That requires both physical investment, that being in data centers, both consolidation of data centers, building out of new data centers, but also virtual types of investments in cyber security, scalability and product enhancements.

And so the cost structure there in many respects is fully loaded and now we just need to build the scale into the cloud business. So there is a heavy investment upfront into that transition and the growth and the layer-on of the incremental recurring revenue into that cost structure will come with a pretty high margin. So I'm comfortable overall that the cost structure we have is highly scalable.

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David Eller, Wells Fargo Securities - Analyst [14]

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Okay. And then second question from us, you obviously announced the refinancing for revolver and term loan. You talked about that adding additional flexibility. Would that be flexibility for M&A, for share repurchases or maybe increased R&D? And then as a follow-on to that, should we assume you will look to refinance your bonds soon as well?

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Scott Behrens, ACI Worldwide, Inc. - Senior EVP & CFO [15]

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Well, a couple things. In terms of the increased flexibility, we are coming up on the end of a seven-year deal. We signed the prior existing facility back when we were a much smaller business, so when we say expanding our flexibility, it's going to be flexibility over the next five years and so I wouldn't read anything into that other than it's a facility that we'll grow into over the next five years.

In terms of the bonds, obviously, those are expiring in 2020. This facility gets us out to 2022. I guess I would expect the results, the refinancing, as well as our fourth-quarter results to ultimately improve our bond ratings, but, at this point, I wouldn't project any timing on a refinancing of those.

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David Eller, Wells Fargo Securities - Analyst [16]

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Okay. Thank you for taking all my questions.

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Operator [17]

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George Sutton, Craig-Hallum.

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George Sutton, Craig-Hallum - Analyst [18]

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Thank you. I wondered if you could walk through, now that you have started to see UP deals go live, can you talk about what that might do to your pipeline? I know there were a lot of potential customers that wanted to see that happen. So is it happening, or is it performing well as it has gone live and what might that do to change the trajectory of the pipeline?

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Phil Heasley, ACI Worldwide, Inc. - President & CEO [19]

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George, you should come to our analyst meeting next week.

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George Sutton, Craig-Hallum - Analyst [20]

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I will be there as long as you don't have the cold you have right now.

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Phil Heasley, ACI Worldwide, Inc. - President & CEO [21]

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Okay, sorry. Actually, we are going to have one of the live customers there, so you can almost talk to them. We've never had pipeline activity like we have right now on pipelines, not bookings. So we are really, really happy about the interest and the kind of interest that we have is probably more important to me than the interest. And I think we are going to go through that in a fair amount of detail next week.

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George Sutton, Craig-Hallum - Analyst [22]

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Okay. I know you will probably handle something like this next week, but I'm curious as we look at 2017's implied growth rate of 2% to 5% on the top line, if we look out five years and we think, okay, the UP platform will have -- we will have seen the impact of a lot of UP platform opportunities, we will see the impact of Immediate Payments, we will also have anniversaried any of that SaaS potential impact. What kind of growth rates are we looking at as we look out over that next five-year period?

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Scott Behrens, ACI Worldwide, Inc. - Senior EVP & CFO [23]

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George, let me answer it this way. If we look back several years when we really started to see that shift in customer behavior, call it the 2013, 2014 time period where our organic growth was bouncing around zero and customers were shifting to a demand for cloud delivery, we saw the early days of the shift in retailers to e-commerce and the demands for solutions to support e-commerce. So that's really that, call it, 2012 to 2013 time period. 2013, 2014 time period was when we started seeing that shift.

That SaaS revenue comes back, but it comes back in incremental layer-ons every year in terms of recurring revenues. So in 2015, we had a call it 3% organic growth. 2016 was 4%. 2017, we are projecting upwards to 5%. So you are going to see that trend continue of layering on that incremental recurring revenue over the five-year term.

So I would say I would look out over the five years and I would see that trend continuing of that incremental growth that layers on each year over the next five years.

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George Sutton, Craig-Hallum - Analyst [24]

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I understand. Thank you.

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Operator [25]

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(Operator Instructions). Wayne Johnson, Raymond James.

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Wayne Johnson, Raymond James - Analyst [26]

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A couple of questions. So first question is what is the potential, what is the likelihood of the existing BASE24 classic user base converting to UP and eps now that we've got UP up and running, so to speak?

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Phil Heasley, ACI Worldwide, Inc. - President & CEO [27]

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A very, very large percentage of the renewals are UP RPS, which means that they are taking the combined -- they are renewing into the combined environment. How quickly they actually transfer part or all their classic volume over to it, I think it's going to be a function of where it ends up sitting on their priority list.

On the one hand, it's great to have a system that never goes down. Two, the bad news is it puts you on the bottom of the list of projects, but I think if you see what's going on at the point-of-sale and what's going on being motivated by the retailer side of the equation and the FinTech side of the equation, I think what you are going to see is less a rush to conversion and more a rush to cooperation where they are running both eps and classic coincidently because they are using the eps side to meet the needs and opportunities of the new payment types that are making it into the marketplace.

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Wayne Johnson, Raymond James - Analyst [28]

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Okay, that's great. And I think you mentioned that -- as a follow-up -- I think you mentioned earlier that the average installation time, if I'm understanding this, is 18 to 21 months. Should we apply that to all the new business? Is that how we should think about the timeline, or could it be shorter, could it be longer? How do we think about that over the next few years?

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Scott Behrens, ACI Worldwide, Inc. - Senior EVP & CFO [29]

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I think Phil addressed that in an earlier question. I think there's two scenarios. One is where you have a net new customer. This quarter, we sold three new BASE24 installations, net new logos. Those will take upwards to a couple years to get installed.

Many of the UP deals are in conjunction with renewals and customers are buying it in addition to their existing [environment]. Those are going to essentially start to deliver revenue right away because there's really no installation period. So there is, as Phil described it, two different swim lanes, but the net new installations are still going to be a couple years.

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Wayne Johnson, Raymond James - Analyst [30]

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Great. Thanks very much.

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Operator [31]

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Shane Svenpladsen, Avondale Partners.

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Shane Svenpladsen, Avondale Partners - Analyst [32]

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Could you discuss the sunset of certain legacy products discussed in the 10-K and specifically what products and just some color around timing and how you expect customers to react?

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Scott Behrens, ACI Worldwide, Inc. - Senior EVP & CFO [33]

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I wouldn't say there was anything necessarily new in the quarter in terms of products. It's what I'd call typical software product lifecycle management, meaning older releases of strategic products and/or products that we no longer build out net new functionality. But in terms of customer reaction, in many cases, because these are mission-critical systems, what that means is that customers are generally going to pay higher product support fees. These are not end-of-life decisions. These are situations where we would charge them more to support those products over time, but I wouldn't read anything into this K or the disclosures we have here. Nothing significant has changed during the year.

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Phil Heasley, ACI Worldwide, Inc. - President & CEO [34]

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And we have a policy that says that, because our systems are mission-critical, we will sunset them, but we will not end-of-life them as long as there is no technical reason why they can't be supported. They are no longer roadmapped products and over time those customers tend to convert to either newer releases or other products of ours.

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Shane Svenpladsen, Avondale Partners - Analyst [35]

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Okay. That makes sense. And then the announcement last night regarding the MasterCard settlement and license sale, did that hit fourth-quarter bookings or revenue, or is that going to hit in the first quarter?

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Scott Behrens, ACI Worldwide, Inc. - Senior EVP & CFO [36]

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Well, it's a 2017 event, so it's a license sale in 2017.

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Shane Svenpladsen, Avondale Partners - Analyst [37]

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Okay, thanks. I will get back in the queue.

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Operator [38]

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There are no further questions at this time. I will turn the call back over to the presenters.

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John Kraft, ACI Worldwide, Inc. - VP, IR [39]

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Thanks, everybody, for joining us and we look forward to catching up in the coming weeks. Have a good day.

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Operator [40]

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