Fidelity National Information Services Inc (FIS) 2002 Q1 法說會逐字稿

Please stand by. Your meeting is about to begin. Please be advised that this conference call is being recorded. Good morning, and welcome to the InterCept Q1 2002 earnings release conference call for May 6, 2002. Your host for today will be John Collins. I will now turn the call over to Carol Collins.

Thank you. Good morning. The purpose of this call is to review the company's financial and operating results for the first quarter of 2002. During the course of this call, we'll attempt to update you on our expectations for the remainder of 2002 and will make several forward-looking statements. Anything we say concerning InterCept's projections, expectations, and beliefs for future operations, growth, prospects, strategies, business, or financial condition is a forward-looking statement. Actual results may differ materially from those expressed or implied by those forward-looking statements due to many factors, including whether we can contain -- continue to sustain our current internal growth rate or our total growth rate, whether we can successfully close and integrate recent or future acquisitions of assets and businesses and other operations, the continued and future success of and demand for our products and services by our customers and other factors discussed under management discussion and analysis of financial condition and results of operations disclosure regarding forward-looking statements in our Form 10-K and other SEC filings. Now that we have the legal preliminaries out of the way, I'll turn the call over to John Collins.

Thank you, Carol. With me this morning is Lynn Boggs, our president, and Scott Meyerhoff, the CFO, and as usual, there will be no presentation other than Scott's presentation of the financial information, other than to say that we're -- we're just proud to be with you again today, and continue to have good quarters, continue to just try to do what we said we'd do, so with that, we'll tell you what we've done. Scott?

Thanks, John. As we've discussed in previous conference calls and press releases, we continue to provide segmented data that details both stand-alone OPS of InterCept as well as the gains and losses derived from our ownership interest in Netzee. With that being said, my discussions today will primarily focus on the results of operations of InterCept, excluding the Netzee component, which we'll discuss at length later on, I'm sure. I'm happy to report strong results. Revenues grew to 37.7 million in the first quarter of 2002 from 27 million in the first quarter of 2001, which is a growth of about 39.3%. Net income available to common shareholders increased to 4.7 million, or 25 cents per share, from 2.7, or 18 cents in Q1 of 2001. Due to the implementation of FASB Statement No. 142, we ceased amortizing goodwill in the first quarter of 2002. This added approximately 3 cents per share to the reported results in the first quarter of 2002. In regard to the revenues, the increase was fueled by internal growth of about 14.4%. This growth came across most product offerings, but specifically, continued strong growth in core processing check imaging and the ATM/debit card processing arena. An important measure for us is recurring revenues. During the first quarter, recurring revenues totaled approximately 88%. Gross margins were about 55.5% for the first quarter of 2002, as compared to 57.6 in the first quarter of 2001. The decrease was primarily due to the incremental revenues from the acquisition of Holmes & Shaw, the printing and rendering business which we acquired in October of 2001, which carries a lower gross margin. For the first quarter 2002, SG&A as a percentage of sales was 32.3, which is a decrease of almost 130 basis points from the first quarter of 2001. As we talked about, net income was 4.7 million, 25 cents per common share, as opposed to 2.7 million or 18 cents per share with income tax provision, approximately 37%. EBITDA increased from 6.5 million to 8.7 million for the first quarter of 2002. In regard to the recently announced acquisitions, as many of you know, we have disclosed the I-BILL transaction which occurred in mid-April and are in process of closing the EPX transaction. The original guidance that we had given was that these transactions, we'd try to have them both done by May 15 and we expect that we will be able to close the EPX transaction shortly and meet the goals that we have given. We have not changed our guidance on the acquisitions. As we had stated previously, we're expecting them to add between 49 and 52 million in revenue in 2002, and 9 to 10 million in EBITDA. One quick update. We combined or are in the process of combining our centers, our imaging centers in the Dallas, Texas area. This should be complete by the end of the second quarter. This was facilitated by the move of the statement rendering and printing business to the InterCept output solutions acquisition and, as such, we'll incur a charge of approximately 4 to 500,000 in the second quarter related to lease obligations and things of that nature. At this time, I'd like to turn the call back over to John.

Thank you, Scott. We want to get straight to the question and answer session, so we'll have -- try to have plenty of time to address everyone's questions, so Jennifer, let's go ahead and start with the questions.

Thank you. We will now begin the question and answer session. To place yourself in the question queue, please press star 1 on your touch-tone phone. If you are using a speakerphone, please pick up the handset and press star 1. To withdraw your request, press star 2. You will be limited to one question and one follow-up. Please go ahead if you have any questions. Your first question comes from Steven Laws. Please state your affiliation.

Steven Laws] of [W. R. Hambrecht. Good morning. Looks like, you know, strong -- another strong quarter and great revenue. Wondered if you could touch on, you know, where you think the gross margins will go on the service business, especially with the acquisitions, and additionally, just kind of a standard question, if you could comment on the competitive scenario out there and any impact of pricing you've seen over the last quarter.

Steve, let me address the competitive issue first, and then I'll get Scott to address the margin question. As far as the competitive issue, literally not to make the answer very long, we just haven't seen a change in the landscape as it relates to competition. It's still -- you know, as I've stated many times -- about 50-50 on the big player, the mom and pop, as far as the people we're competing with. As far as pricing, haven't seen any particular price pressure. Just hate to be boring, but it's just the same, same. I mean, we're just competing with the same people, we're competing on the same field, and haven't seen a lot of change.

Steven, in regard to the margin question, as I talked about, we had some additional revenues in the InterCept output solutions division, which is the statement print work. As such, we go ahead and record a good bit of their costs in the margin line, and get some benefits that go down to the G&A component. But 55.5% on consolidated total. We'd expect to see that continue to go up in the 56-and-a-half to 57% range here during the 2002 period, and specifically in the service fee line, given that that's the majority of the revenue of the company, we'd see light gains in that area as well.

Great. Thanks a lot.

Thank you.

Thank you.

Your next question comes from Jeff Baker. Please state your affiliation.

Yes. Bancorp Piper Jaffray. Hi, guys. A couple questions. Scott, just a little clarity on the 400 to $500,000 charge.

That will be in the SG&A number.

Okay. And can you comment a little bit sequential growth and SG&A, you know, what can we expect to see that go for -- or go over the remainder of 2002?

As far as the SG&A, you know, we continue to go ahead and build, you know, for our future, continue to put in the infrastructure to become a much larger company, and as such, you know, we have some visibility, being that we have 88% recurring revenue and can spend the money as needed in certain areas. We continue to go ahead and promote our products and push them heavily and spend the money when we can.

By the end of 2002 or .

Yes.

Okay. And then can you talk about any kind of onetime opportunities where you've spent this quarter, given the strength in the top line, et cetera?

I don't think there's any notable onetime opportunities, and I think what you're talking about is where did we -- in G&A, was there anything that we spent the money on one time that was above the others, and I think it's just continued promoting of our product set and our offerings. Debit card as well as others.

Okay. And last question and I'll let somebody else ask some questions, but your internal growth rate, 14.4% for the quarter, is -- can you talk about that -- you typically target 15, 18%. Can you talk about where that could go, what is the sustainability of the mid-teens number and why it may have dipped down this quarter? Thanks.

Jeff, I'll -- Scott may want to address that more from the financial side, but just from the philosophical side, we've -- the guidance has been that that's on an annualized basis and we're still not changing that. I was asked back two or three consecutive quarters why it was in the 20s and I said we just got lucky. There was some objection to that. Maybe they didn't think we just got lucky. But I think that we're not -- we're not looking to change the guidance. We still feel like that that will be the annualized number for the year. Of course, I have said in previous calls that as we grow larger, that -- that number gets harder and harder to achieve, as we all know, but we still have -- we are still not changing the guidance for that number for this year.

Okay. Great. Thanks.

Thank you.

Thank you.

Your next question comes from Art Bender. Please state your affiliation.

Good morning, guys. Credit Suisse First Boston. Congratulations on the quarter. Just wanted to ask you for a little bit of detail on I-BILL, particularly the sales strategy going forward. What sorts of clients are you going after? Are they big companies, small companies, any particular industry focus, and what are some points of differentiation between your card processing services and some of your bigger competitors?

Our -- okay. I'm going to try to bring all that together. The difference between our services and our bigger competitors, just like our other core businesses, there's not a -- a tremendous difference other than the focus on how to build relationships. I mean, obviously through these new acquisitions in the merchant processing side of the business, we still-you know, we'll still try to be competitive from a price standpoint, and we'll still have to compete with all those guys on the same playing field that everybody else has to. We're offering very similar services, and I think we can do it on a competitive -- competitive pricing standpoint. So, you know, I think that the differences in us and the competition is still the same as it has been. We'll try to build the relationships. As far as the focus on selling on the merchant processing side, I think that really, this fits into our business very well from the standpoint that we'll still focus on selling merchants through community banks. I mean, that's -- obviously, we're trying to sell all merchants, and of course, you know, you ask the question are we going to focus large or small or whatever. I mean, we're going to focus on merchants. So certainly there will be some larger players that we're going after, but we're not going to get away from -- from providing services to the smaller players, too. I think that's the beauty of pulling these acquisitions into InterCept is the fact that banks, particularly -- and I'll just speak to banks right this minute. Banks, particularly, have kind of gotten away from a lot of merchant processing over the years because they're unable to be competitive with the -- and I don't really even know who to name here, but with the Concords, the Novas, the more defined as ISO arrangements. It's hard for a bank to be competitive with those people because usually there's not enough merchants in town to really build a decent operation, especially for the under 500 million and under billion merchants. So it's hard for the bank to be competitive, even though they have a great relationship with the merchant. So where we see us fitting in this is that we can take this product and go out to our banks and we -- and we're getting some good response already. I mean, we've gotten favorable response from some of our banks and from the bankers' banks on promoting this type of services through -- this type of service through community banks to all their local merchants and putting them back in a position where they can be competitive and they can -- they can go out -- they have the relationship already, and instead of losing that business to Nova because they have to charge a hundred percent more, now they may be able to retain that business because they're doing everything else with the merchant already. So the focus is still going to be focusing on community banks and providing more services for those. Now, certainly there's salespeople out on the road that are trying to sell larger merchants because that -- a lot goes to the bottom line when you can do that and we're certainly not going to give that piece up, but we'll still try to take this service out to community banks just like we've done everything else we've ever acquired and all the other services we brought to them.

Okay. Thanks John and just one quick follow-up for Scott. Scott, was there any impact of EITF 103, the reimbursement of out-of-pocket expenses on your revenues this quarter.

No, sir.

Okay. Thank you.

There were none -- no revenues were included in those numbers from the past-due costs.

Great. Thanks very much. And again, nice quarter.

Your next question comes from Andrew Jeffrey. Please state your affiliation.

Good morning, gentlemen. Robertson Stevens. Scott, can we drill down a little bit on the internal revenue growth number to get a handle on sort of how it broke out between the core DP and your EFT business and certainly appreciate the -- the annual guidance on internal revenue growth. I just want to try to get a sense as to why you think, you know, the back half of the year, the last three quarters of the year, might be better than the first quarter.

Sure. And even to go in a little bit -- you know, as you look at revenue growth, there's always a tie-in to the recurring revenue component as well. Recurring revenue went from 86 to 88 which means there was less onetime sale in that number and more recurring. It's where we want to be. We want that recurring revenue number to go up, but as that occurs, you know, clearly it shows that there was -- was not as much in the onetime sale area this quarter. EFT was about 23%. Core processing and check imaging together, just above 10. Products group, which are the ancillaries and a number of the other products which tie directly to the core processing, about 25%. And then the communications, about 8. And you saw what the equipment was on the face. So clearly, the -- the internal revenue growth, we continue to go ahead and have strong EFT, which is the ATM and debit. When you break -- when you put the core processing and the products group together, that's somewhere in the -- in the 12% range or so, and then the communications in the other.

Okay. And just some color on the balance of the year in terms of, I guess, particularly that core DP number.

I didn't understand the question, Andrew. I'm sorry.

I was just trying to get a little color on what the balance of the year might look like in terms of internal revenue growth in the core data processing business.

Real similar to what -- our -- you know, our future guidance is real similar to what we did here in the first quarter.

Yeah. When we're -- we're saying that, you know, we're still -- we still are not going to change the guidance on the at least 15 internal growth, and it may not vary very much from the numbers that Scott just gave you, but as far as your comment about why we would think that -- that some future quarter would be better than this one, it doesn't have to be a lot better. I mean we're right at the 15, and we think we're -- we're right in the neighborhood. So, you know, with just a slight fluctuation, we still feel like we'll be on the number.

Okay. Thanks.

Thank you, sir.

Thank you.

Your next question comes from Charles Trafton. Please state your affiliation.

Hi. Good morning, it's Charles Trafton] with Adams [Harkness. Scott, the prepaid expense and inventory line took a jump up from 9 million to 15 million. Can you -- essentially, that usually does go up from December to March, but can you break out how much of that was inventory and why the big jump?

Yeah. Actually, Charles, it had nothing to do with inventory. There -- in closing the I-BILL transaction, there was $5 million put in escrow to close it.

Okay.

And that amount was in that number at the end of March. It was out there and as you know, the transaction closed in mid-April.

Right.

if you seasonally adjust that out, it goes from about 9 million to about 10.3, 10.4. The majority of that would be prepaid annual expenses, just really due to our growth, and no -- no component of note relative to inventory.

Right. So then the 5 million is a cash earn-out that you're going to keep on the balance sheet for a while.

No, that was not an earn-out. That was something put in escrow and had been paid in the closing of the deal.

Oh, as part of the purchase price.

Yes, sir.

Okay. Got it. How was cash flow from ops this quarter? I know you did about 9 million in EBITDA and certainly your working capital constraints were almost nothing, so do you have that number handy?

I don't, but I'll have it for you before the end of the call.

Okay. Great.

Anything else, Charles? Okay.

Your next question comes from Nick Fiskin. Please state your affiliation.

Hi, this is Nick Fiskin with Stevens. Congrats on the quarter, everyone.

Thank you, sir.

Thank you.

Scott, can you give us the -- the internal growth rate, or give us the EFT growth rate sequentially?

The EFT growth rate sequentially. The internal growth component?

Exactly.

It was 23%.

That's versus Q1 of last year?

Right. I don't have it sequentially. Actually, as you know, the fourth quarter is the highest seasonal quarter, given the holiday season.

Uh-huh.

Q1 to Q1.

No, I think he's talking about Q4 to Q1.

Oh, sorry.

We normally see a bleed-off from Q4 to Q1 because the November/December is the largest season, but I know we saw a bit of a decrease but that's something that happens of each and every year.

Okay. And then following on an earlier question, to get the acceleration in internal growth, if you look at those same four product groups that you detailed, can you give us an idea of where you expect the most acceleration?

I think that actually what I'd -- what I'd said to Andrew, and I think this is generally true, I think that they'll be about those numbers that Scott just quoted and it would only take a point something in each one of those to achieve the 15, so I don't think there's going to be a drastic acceleration in one to achieve that .6.

Yeah. There's really nothing out there to cause those numbers to change markedly from where they are in the first quarter to the second, third, or fourth, that we know of.

And can you give us a breakout of other income, and is the one two a good number to use?

Well, that will change pretty dramatically with the completion of these transactions, because the majority of other income was interest income, and as you know, with -- with going ahead and having paid cash for the transactions, that -- that will go down. We can go ahead and give future guidance once the next acquisition closes on where other income goes to, but really, now we're just -- it's based on the closing date of the transaction. Going out to Q3, you know, those -- that other income would be -- would actually be an expense because we would have some interest expense from our borrowings.

Okay. Thank you.

Thank you.

Thank you.

Your next question comes from Chris Bonomo. Please state your affiliation.

It's Chris Bonomo] of [inaudible capital. Question on the tax rate. What is the tax rate that we should expect going forward or why was it a little bit lower than the 38% you told us to look for.

Well, actually it was 37% last quarter and 37% again this quarter, so it was -- it was consistent. I think that we've gone ahead and gotten some -- some good state tax strategies, which are allowing us to benefit. We would continue to see those -- those percentages in the same ballpark of the 37 to 37-and-a-half range.

Oh, okay. I'm sorry. I thought you had told us 38% for 2002 on the Q4 conference call.

Well, actually, we've -- we've benefitted a little bit more than we thought we would from -- from our state tax strategies, and that's a continued benefit on the tax rate.

Got it. And on FAS 142, your total is about 5 to 10 cents annually but it was 'cents this quarter, so we're on a 12-cent run rate now.

10 to 11. It's a rounded number.

10 to 11. Got it. Can you tell us what it is just on a quarterly basis on a dollars basis?

I'm sorry?

How much is it per quarter on a dollars basis?

I don't know the dollar number off the top of my head, but I do know it's 10 to 11 cents for this year.

Got it. Thank you.

Thank you.

And your next question comes from David Trossman. Please state your affiliation.

Thanks. It's David Trossman, from Wachovia Securities. And it feels to me like you've had a lot of success bringing the [Holmes & Shaw] capabilities out to your client base. I'm wondering if you could maybe give us a little more color on the things that that facility has been able to do for the customer base in terms of printing and rendering and the year-end stuff, and then Scott maybe you could just tell us what that acquisition contributed from a revenue perspective in the March quarter, given that it's, you know, by far the biggest one with impact.

Sure. David, as far as the first question, what does it mean to our customers, well, we did that transaction back in October of last year, and one of the things we touted was that they were a very automated shop and were doing roughly the same volume of print -- or statement rendering and print work as our current company did, and had about 20 to 25% of the number of employees doing it. We also talked about how, in addition to them out selling their own wares, that we could go ahead and start converting some of our customers in that Midwestern region, in the Texas, Oklahoma, Kansas markets, and go ahead and start bringing those into that center. We have started doing that. We've started with some of the larger customers, and what it actually does, being an automated process versus a manual process, we believe is it goes ahead and gives a better product to our customers, as well as gives us an opportunity to reduce some of the, you know, manual expenditures relative to not being an automated shop. It has allowed us to go ahead and take enough volume out of the Dallas centers -- and when I say volume, on the statement rendering and print side -- that we can combine those centers, so that's one direct benefit. There is a schedule in place to go ahead and convert, you know, four to eight banks per month for the foreseeable future to that center, which we believe we have the capacity and the wherewithal to do. And I forget the second half of your question.

So -- so I'm trying to understand, if you can tell us how much revenue that business contributed in the -- in the quarter.

Approximately 4 to 4 and a quarter.

No. No, sir. Well, there's two opportunities. For instance, in Oklahoma City, we used somebody else completely in this whole process of converting over. We found out that there were 30 banks that were using another vendor.

Uh-huh.

So the -- clearly, the idea would be, why not use our self, if we have the wherewithal to do it. That's going to be internal growth, because we're switching it from an external vendor. If we're moving it from ourselves to ourselves, it's not going to be -- you know, go away from the internal growth piece or the revenue of the company just because it went to a center that heretofore was an acquired piece.

Got you.

That's really -- you know, it was six of one or half dozen of the other. It stayed exactly how it would have stayed.

Right. Right. So it could be -- so basically that business feels like it's -- on a revenue run rate, that it is a good chunk higher than where we thought it would be when you acquired it, because I think that we were talking about maybe a $14 million run rate then.

Right. But there are -- there are pieces in the first quarter that are relative to year-end print work, so I think we're right on track with what we had projected. I don't believe we're on a 16 or $17 million run rate. I think we're in a 14 to a $15 million run rate on that business.

Perfect. That helps a lot.

Thank you.

Your next question comes from Jeff Baker. Please go ahead, sir.

Thanks. Follow-up question. Can you guys talk about the acquisitions opportunities in the core processing or on the merchant side that you -- you know, things that you may pursue going forward? Thanks.

Jeff, as you know, we don't usually spend a lot of time talking about -- certainly we don't talk about any specific acquisitions, but just to be a little more generic, rather than specific, we still, on a regular basis -- as I've always said, we're constantly talking to 8, 10 candidates that pretty much stay in the queue, and some of those roll out, some of them go away, but it's -- certainly it's always been a business line for us, and we still think there are plenty of candidates out there. There's an awful lot of candidates in the merchant processing side that deal with a lot of community banks and a lot of banks in general. So, you know, we still don't see the landscape as having changed much. We still think there are a lot of candidates out there to acquire in the banking industry, and the outsourcing of the banks side.

What about -- what about some of your -- I mean some of your competitors have moved into the credit union space. You see that as a viable opportunity for you guys?

Well, I do and I always have. I've -- I've actually said a couple of times that, you know, we're still -- we're still waiting and looking for the right opportunity. I've been asked several times would we get -- will we get into credit union processing. Well, we will if it's the right opportunity, it's the right software, it's the right company, and it's accretive. Certainly we do some business with credit unions already. Certainly on the EFT side and the check processing side. So we want to do more with credit unions, and it's just a matter of having the right opportunity to do that, and when -- if we find it, we'll do it.

Uh-huh. And Scott, do you have some -- somebody asked a question on the SFAS 142. Do you have the number for 2001 first quarter as well as the year?

I don't have it -- have it for the full year, although I will point out that last year, we had 13.7 million shares outstanding in the first quarter, and this year we had 19.1 million shares outstanding in the first quarter, so we had about a 40% growth in shares outstanding, and as such, it really becomes a bit distorted to compare year over year.

Uh-huh. But you don't have a -- a Q1 impact?

No. I would imagine it would be very similar to what it was in -- in the Q -- in the first quarter of this year, as -- in terms of numbers. I mean, it would be real close to being the same number.

From a dollar standpoint.

Correct.

Right.

The only acquisitions we did -- as you remember, 142 stopped on July 1st, so the only acquisitions that we had done in the first half of the year were on the smaller side, so the -- the piece wouldn't be as material.

Okay. And then last thing, to follow up on David's question regarding the Holmes & Shaw acquisition, revenues were much larger than what we were looking -- or what I was looking for. I mean, clearly since that was acquired in October, that's going to negatively impact the growth rate, internal growth rate, for this first quarter, correct?

Well, I don't think it negatively impacts the internal growth rate because it's not in it. As far as if you're saying revenue growth was up and internal wasn't -- wasn't where the 15% number is, you know, clearly that was in the revenue number but it didn't negatively impact internal growth in any way, shape, or form.

Right. And then last question and I'll hop off. John, in-house versus outsourcing trends, some of your competitors have definitely been saying that outsourcing is strong and, you know, do you see a return to in-house, et cetera?

No. I think the outsourcing is -- is holding its own. I don't think -- certainly I don't see -- I mean, this is the world as John sees it. I don't see a return to in-house. Certainly not a trend to do that. I mean, you've still got a lot of banks that are in-house and a lot of them will be. That's just their -- the way they handle it philosophically. I mean, they think that they ought to be doing that. But there's certainly no trend that I can see to move back to that. If I -- if I actually wanted to say there was a trend, then the trend would still be to continue to outsource. And I even -- of course, I occasionally read something, just like everybody else. I even read in the Wall Street Journal that even larger banks were -- their research indicated that larger banks were looking harder at outsourcing. So, no, I don't think there's at all a trend to go in-house. It's either at -- well, I started to say worst case. I guess it depends on your perspective. But in any case, status quo is a minimum and if you said there was a trend one way or the other, it would be to outsource, I would think.

Okay. Great. Thank you.

Thank you, sir.

Your next question comes from Nick Fiskin. Please go ahead.

Hi. Scott, follow-up question on the EFT. Given the recent noise as -- focusing on your internal growth rate, can you give us the EFT revenue numbers for Q4 of last year and first quarter of this year?

We -- we have never gone ahead and given out the numbers. We've just given the growth rates. And I don't have the fourth quarter number in front of me. Just the -- just the growth rate percentages that we'd given.

Okay. And can you speak to the -- the -- if you split out the internal growth of core versus imaging, you said combined it was 10%. Can you give us an idea of what that would be if it was split out?

I think the core processing is a little bit higher and the check processing is a little bit lower. And by "little bit," one to two points. I don't have the empirical data in front of me, so it is rough. But I think that the core -- core piece internally is a bit quicker than the -- than the image piece.

Okay. And are you seeing that core growth coming through your new sales efforts in new geographical areas or further penetration in your existing territories?

Well, obviously a little of both, but -- well, actually, I may have -- I may have even misunderstood the way you said that. You're talking about new customers versus some organic growth from our existing customers or are you talking about new geography?

I'm talking about new core customers, John. Are you seeing them -- is it expanding like your current areas or are you going out to -- I know you guys were looking out on the West Coast to expand there. I'm wondering, you know, that 12%, is the majority of that coming from going out and signing up new banks in new territories?

Gosh, I don't know that I can answer about the majority. I mean, we're still very strong in the southeast, and a lot of the core business is still coming out of that. But we are picking up customers at a favorable rate, I think. I mean, I'm certainly pleased with what we're doing in the other geography. No doubt, we're still very, very strong in the southeast, so I guess I would -- and I'm -- and I am guessing. I would guess that still the bulk of that growth is coming out of the southeast area. But I'm very pleased with where we are, specifically in California. You mentioned that. I mean, out on the West Coast. I think that we've come along very nicely. Certainly as much as I expected to in a new area. Those sales are coming along pretty well. So I'm -- I'm certainly pleased with the geographic expansion, but I guess we still are getting the majority of that growth out of the southeast in the places where we're known best.

Great. Thank you.

Before we go to the next question, I'd promised an answer on the cash flow from ops. Excluding that $5 million piece that we put in the escrow cash flow from ops was about 6-and-a-half million dollars and capex in the first quarter was about 2 .4.

With that, we'll go to the next question, Jennifer.

Okay. Great. The next question comes from David Trossman. Please go ahead.

Okay. Thanks, and Scott, just chastise me if there's too much -- if I'm getting too much into detail here, but I was a little surprised that the deferred revenue didn't go up in the March quarter for billing of DPSC kind of subscription revenue. Have we changed the big cycle there? Is that sort of more integrated into what you're doing with your community banks?

Well, actually, you're wrong on one part. Actually, two parts. But I'll go through each individually. The deferred revenue did go up about $1.5 million, but the deferred revenue on DPSC, which is the regulatory reporting division, is billed four times a year.

Okay.

And it's billed four times a year -- about 25% of the customers go through each billing cycle for a year in advance. So you wouldn't see a year-end spike on that. You'd get that four times a year at the end of each quarter.

Got you. Good. And very generically, John, if you -- would you say that you're getting more revenue growth and traction out of new customers or are these really strong revenue numbers coming from selling more stuff to existing customers?

I think that that -- that even varies quite a bit by business line. Certainly we're getting strong growth on the core side out of new customers. Although we are -- we are getting some organic growth out of our customers just getting larger. But new customers would be the real focus on that side. On the EFT side, it's a closer combination. I mean, there's -- still have a lot of new customers but we still get some tremendous growth from existing customers. So by product line, it does vary, but certainly we're still -- we're still very actively selling and are very pleased with our sales force and where we're headed on that front.

Thanks.

Thank you.

Once again, if there are any other questions, please press star 1 on your touch-tone phone. Your next question comes from Tony Lisa.

Tony Lisa, HLM management company. Great quarter, guys.

Thanks, Tony.

John, I was wondering if you could -- going back to a previous question asked, you made the comment about putting your community banks back into the merchant processing business, if you will, and, you know, the logic for this whole acquisition as we've discussed before seems to, for me, at least, revolve around, you know, that thinking. Can you get a little bit more specific in terms of how you bring the pricing down and how your structuring and going at this business relative to who they're serviced by now brings the pricing down such that it is a profitable business opportunity for them?

Yes. Yes, sir, I'll try to get a little more specific. I'll even try to quote some numbers, but understand that I'm not the -- I'm not the technician here, and -- nor the mathematician, so I'll round them out pretty well.

Fair enough.

Specifically, we have -- we have dealt with one -- I hesitate to say "customer." One entity. I'll call it that. Who was offered services through community banks that they were having -- that the community bank was having to charge about a 4-point discount rate, just to pick numbers.

Uh-huh.

And again, don't hold me to this. I'm not the -- I'm not the guy that knows the numbers. That's -- I deal with Scott if a question involves a number, he has to answer it. But about a 4% discount rate was being offered to community banks.

Sure.

I don't think that's really an important part, as far as which vendor. But it is -- this is run-of-the-mill. This is the way it works.

Could you go through the -- what each of those vendors are, just so I sort of have the map down?

Not the names, but the business.

Yeah. Well, it's all across -- what do you mean the business?

Like what each vendor does, so I have the map of the whole process and how you kind of replace them when it's all done -- said and done.

Well, the vendors -- really, it's the lineup of usual suspects. I mean it's FDR -- or FDC, but the FDR division, the Concord, and then I guess Nova was acquired and I'm sorry I can't remember who acquired Nova. Somebody help me.

U.S. Bank.

U.S. Bank acquired Nova and then you've got Global. And oddly enough, some of these people don't handle everything -- you know, Global handles certain components and they're real good at certain things, and people use them hopefully somebody in this room's going to help me if I'm messing this up. I think Scott's heard a lot of this too, but they use Global for maybe a cost center. They may use Vital to drive terminals. They may use, you know, FDR for some component. So there may be several vendors along the way in any of these deals that are structured that actually run through community banks, up to and including, I guess, what's Equifax's new name.

Surdagee.

Surdagee]. Surdagee offers services also, but then they do -- use other vendors for certain components, such as call center.

Right.

So back to the point of the discount rate, they came to this discount rate because of all these various vendors and what they charged, so the banks that we looked at, this particular group that I'm talking about that's a real example had about 20 merchants per bank, yet if you look at -- you take a small pocket of, say, Concords bank, they do some business with community banks too, their banks may have 200 merchants per bank, and -- and it's -- the reason -- who inaudible Yeah. The -- Lynn was pointing out to me that our merchant portfolio that we had already, I mean that we do this, they have about 200 per bank. So -- but their prices were a little more competitive than this 4% discount rate. To get to this point and try to make this story a little shorter, is that we think we can get this down to a couple of points, and that that will be the types of fees that the bigger players are passing on to the bigger players. And if we can do that for a community bank, then our theory here is that that community bank already has a relationship with a hundred merchants in town, or 200, or whatever the number is, and the reason that they can't get their business is because you can't go to the guy, even if you're loaning him money, banking him otherwise, you can't go and say, "I know 60% of your business, retail business goes through a credit card and I want to charge you 4 instead of 2." The guy will just look at you funny. So we think that what we can do, by -- by being a tier I processor, which is where we are, where we'll be when we close this final transaction, we think that the position it puts us in is we can cut out a lot of the middle man businesses and we can charge that type of rate, or at least put the bank in the position where they can charge that type of rate to their merchant so that they're not looking at doubling the price and they can go in and instead of Nova getting that business, that they'll take it back from Nova. I mean, that's -- that's the view that we have.

And at the end of the day, does -- does it come down to the fact that you -- you -- you have all those sort of intermittent processing that you, you know -- call centers, terminals, whatever, and you can provide sort of soup to nuts what the bank needs?

Yes, I think so. And I think that is the point.

So at the end of the day, then, in addition to a new business opportunity, do you hope to get some leverage out of existing sort of facilities, if you will, by driving this business forward?

Certainly. I mean, we hope to get that. We're not -- we're not projecting any of that. We don't -- we try not to look at things like that, as far as trying to build models, but, sure. We hope to get -- get some synergies out of not only facilities and people and computer rooms, but out of sales, out of our partnerships. I mean, we hope to actually gather some synergies from all aspects of our business. We think -- I've even had some comments about somebody wondering how this fits into our business. We think this is our business. I've said for four years that we want to offer anything to a bank in the back room from the back room standpoint that -- any type of technology or outsourcing that the bank uses. Well, as far as I'm concerned, no that a lot of people have looked at this a different way in recent years, but credit card processing is bank. I mean, there's a lot of independent companies in it, but the card's issued by a bank, you have to be a bank to sign up a merchant, the bank's on Mastercard and Visa. I mean their associations. This is banking.

Right.

So clearly, this is just more banking, to me. It's just more community banking. More midrange banking. I mean, we focus on 500 million and below, but some of our banks grow larger, and we're not going to get rid of them if they get bigger. So this is still banking, to me.

Thanks very much, and again, guys, congratulations on another good quarter.

Thanks, Tony.

Thank you.

Your next question comes from Lee Hicks. Please state your affiliation.

Hi. This is Lee Hicks with off Wall Street. Hey, I know in the last conference call, you guys commented on -- that the seasonality in the EFT business. Can you give us the numbers sequentially, how that went from the fourth quarter to the first quarter?

Actually, Lee, this is Scott. Nick Fiskin had asked that question a couple minutes ago and I told him I did not have that information handy. I told him I'd be willing to go ahead and get with him off-line and give that. I'd be glad to give you the same.

Okay. Thank you.

All right, sir. Thank you.

Okay. There are no further questions at this time.

All right. Well, thanks very much. As always, it's a pleasure talking with everyone on the call, and we continue to just look forward to doing what we say we'll do. That's always been our goal, and we'll continue that. Thanks very much. Have a good day.

This concludes today's conference call. Please disconnect your lines and have a great day.