Jack Henry & Associates Inc (JKHY) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Jack Henry First Quarter Earnings call. At this time, all participant lines are in a listen-only mode. Later there will be an opportunity for questions. Instructions will be given at that time. If you should require assistance from an operator during the conference, please press zero, then star. As a reminder, the call is being recorded. I would now like to turn the conference over to CFO, Mr. Kevin Williams. Please go ahead, sir.

Good morning. Welcome to the Jack Henry First Quarter Fiscal Year 2003 Earnings conference call. First, the forward-looking statements. Statements or responses to questions may be made in this conversation which are forward-looking or deal with expectations about the future. Like any statement about the future, these are subject to a number of factors which could cause actual results to differ materially from those which we anticipate. Such factors are disclosed in our recent FCC filings. There could also be other factors not included that could potentially cause results to differ materially.

Thank you all for joining us today as we report our First Quarter 2003 financial results. These results reflect a 2 percent increase in revenues, continued strong balance sheet, and a solid and growing backlog compared to the same quarter in the prior year. Our total revenues increased 2 percent, with a large increase in support and services of 14 percent, compared to the prior year quarter, with our continued success in the outsourcing marketplace, our growing ATM and debit card processing business, and additional in-house support fees.

This increase helped to reduce the impact of the continued slowdown in new in-house core sales. The slowdown in these new in-house core sales impact the core in-company software licensing and installation revenue, and the related hardware revenue that goes along with it. The impact on licensing and installation revenue was a reduction of 18 percent compared to the prior year, and reduction of hardware revenue of 3 percent.

The components of our total revenue, compared to prior year quarter, were: software licensing went down 18 percent, or $3.9 million; support and services went up 14 percent or $6 million; hardware sales went down 3 percent or down $700,000, with a net increase of 2 percent or $1.4 million.

A little discussion about cost of sales. Our total cost of sales increased by 10 percent in the quarter. Our total hardware sales was pretty flat as a percentage of total revenue with last year, at 23 percent this year compared to 24 percent last year. Our cost of hardware, though, increased 9 percent, while hardware revenue decreased 3 percent, which has obviously had a negative impact on our margins. Gross margins on hardware revenues was 25 percent compared to 33 percent in the same period in the prior year. This is primarily due to reduced rebates and incentives from vendors on hardware sales, and also some additional discounts and changes in pricing from one of the vendors, which impacted both hardware and gross margins this quarter. Also a reminder, our margins can be impacted by sales mix.

Cost of services increased 12 percent for the quarter compared to the prior year period. This is compared to a 3 percent increase in non-hardware revenue for the same period, which is due primarily to the decrease in software licensing and installation revenues of 18 percent, offset by the 14 percent increase in support and services. However, if you compare cost of services this quarter to the fourth quarter fiscal 2002 or the June quarter we just previously finished, our cost of services only increased 1 percent, which is primarily related to personnel. Our general managers and employees continue to be very cognizant of cost controls which are biggest expense, and our biggest asset by far is our people. Having said that, we still have major requirements to add employees, and we added 48 necessary employees during the quarter. However, not all of these are in cost of service. Some of them are down in operating expenses.

Gross margin is down this quarter to 37 percent compared to 42 percent last year in the same period. Hardware margins, as I mentioned, have gone down to 25 percent from 33 percent. Non-hardware margin is down to 41 percent from 45 percent, which is due to the lower software sales, which is our highest margin sales.

A little about operating expenses. These increased 3 percent this quarter, compared to last year's quarter, and as a percentage of revenue increased less than a half percent of total revenue. Selling and marketing expense increased by 10 percent compared to the prior year. The increase is primarily due to increased personnel costs associated with increased number of sales staff. As a percentage of revenue, selling and marketing was 7.6 percent this quarter, compared to 7.2 percent in the same quarter last year, or relatively flat. R&D expense increased 22 percent compared to last year, again, primarily due to increased personnel, to continue developing new product and improve existing products.

G&A actually decreased 10 percent over last year's quarter, and as a percentage of revenue decreased to 7.1 percent from 8.1 percent last year. This is primarily due to our second consecutive quarter of improvement to employee benefit costs, specifically in the area of our self-insured health care benefits.

With all that, our operating income decreased 20 percent over the prior year quarter, and as a percentage of revenue decreased to 19 percent from 24 percent.

Change in other income is primarily due to lower interest rates on our available cash reserves. Our expected tax rate actually increased by a half percent this year compared to last year; we went to a 36.5 percent rate due to some changes in state laws which have a slightly negative impact on our effective tax rate.

With all this, this caused a decrease in earnings per share of 20 percent for the quarter.

A few comments about our balance sheet. The majority of significant changes compared to same time last year are: cash and cash equivalents went down 7 percent. This was primarily impacted by the buy-back of Treasury shares during the quarter of $15.9 million. Capital expenditures during the quarter of $16.5 million, and dividends paid out at $3.1 million. [Indiscernible] were down 8 percent compared to last year, due to good efforts from our collections department and also due to the fact that licensing and hardware sales were down significantly this quarter compared to last year. Change in accounts payable and accrued expenses is primarily due to the amount of income taxes required to be accrued this year compared to last.

The only other significant item would be deferred revenue, which is primarily pre-payments for in-house support. This increased 11 percent from last year, which relates to all of our in-house core and company products.

Our backlog [has grown] to $146.5 million, with $55.2 million in-house and $93.3 million outsourced at September 30, 2002, increasing from $141.7 million at June 30 and from $128.9 million a year ago.

We still have over [indiscernible] total customers with well over 2,400 core in-house outsourced banks and credit union customers, with over 400 other customer relationships.

With me today I have Mike Henry, my Chairman and CEO, Terry Thompson, the President, and Jack Crown, our COO. We remain confident that we are very well-positioned and have the resources for continued future opportunities. Operator, with that, I would open the call up for questions.

(CALL INSTRUCTIONS). Our first question is from the line of Brian [Keene] of Prudential Securities. Please go ahead.

With these results and kind of the economic environment we're in, do you have any comment on top line revenue guidance for the rest of the fiscal year and EPS? Thanks.

I haven't really given a lot to top line guidance yet, Brian. I would tell you that with the changes in the economy and different things, the outlook – it's a little harder to see all that far out. I will tell you that the December quarter that we're now currently in, I believe will be slightly better than the quarter we just finished. I would say at this time, bottom line should be in the 13 to 14 cent range. And we'll just have to see where it goes from there.

Next question. Nick [Fiskin], Stevens Incorporated.

Kevin, can you give us an idea of what the GNA run rate's going to be? Are we going to see it stay at that 6.7 level?

I think it'll probably go back up a little bit, Nick, because obviously, as I said, the [nice] impact we've had is primarily from health care, which obviously we're going into the winter months, which – obviously, health care cost is going to go up a little bit. But I think we should keep it around that 7 to 8 percent rate. And obviously we're doing some things to constantly evaluate and trying to reduce those health care costs.

And if memory serves me right, have you renegotiated the IBM contract for hardware? Are you in the midst of doing that?

Nick, this is Terry. If I remember, that schedule's always a January 1 type of renewal period. So we haven't hit that yet at this point in time. And you know, from a contract perspective, there aren't any definite set numbers that we get all the time there. They do readjust things during the year, but you know, some of their own objectives [in these].

Have we had a readjustment this year?

They've had some promotional things that have impacted the margin dollars that we achieved.

I guess what I'm getting at is, can you kind of give us an outlook on the hardware line and the margins there?

I would say this, Nick. I think that the hardware margins will creep up a little bit from the 25 percent level we're at this quarter, because there was actually some promotions done this quarter that actually dropped our revenue and margins significantly, which I'm not sure how much longer those promotions are going to run. But the hardware margins should go back up. I don't think we're ever going to get back up to the 33 percent, but it should get back up to 27, 28 percent.

And what exactly are you spending on, on the R&D side? What specific products?

Nick, this is Terry. We've had significant efforts going on this year, especially, for our Silverlake system, trying to work on the annual enhancement process there. We've also added some additional feature function there, which we believe positions it, already being the leading product, we think that it's even more so going to be that case as we go into the normal installation process of that release next year. Along with regular enhancement of all the other existing products, too. But the biggest single effort has been tied to Silverlake and then probably behind that is 4|Sight.

And we also continue to do some R&D work on the Transcend CRM product, and also the ARGO CRM product, which is, particularly on the ARGO side, a tremendous amount of work on the R&D side for integration.

And one last question for Mike. Can you kind of give us an idea of what October is looking like so far on the in-house core, and what you're really looking for to see it turn?

We still core deals in the pipeline. Right now, for every core deal, we're probably seeing at least two outsourcing deals. Which makes sense in this marketplace; when bankers hunker down a little bit, the outsourcing deals will be more prevalent. So we're still seeing the in-house deals; we're not seeing them at the ratio to outsourcing deals as we had in the past, so the pipeline's okay, but it's not as full of nice big in-house deals, obviously, that we like to see, which has an impact on our earnings because we're not an 85 percent recurring revenue model.

Is October shaping up better than the September quarter?

I don't think there's any significant difference in the pipelines recently. Credit union business continues to be very solid. It's just the in-house side that's a little disappointing.

The thing about it, Nick, this quarter is historically better than last quarter due to the vacation season in July and August. So I believe – we would be comfortable in saying that we are starting out better just because we started out on the low end in July. That'd be the only favorable comparison at this point.

You tend to see more decisions made in the quarter we're in now than the summer quarter because of vacations and people just waiting. But we'll see.

Richard [Zande], Deutsche Banc.

We just did a quick survey of the community banks. Of 22 that we just looked at, 15 beat their numbers, 4 met and only 3 missed. So the community banks which you're targeting seem to be doing fairly well, and yet they don't seem from your perspective to be investing in their systems. I was wondering if you could comment on that discrepancy.

The banks that we talk to – and we just back from our [User] meeting – the banks that we talked to, especially the medium and larger banks, are doing pretty well on the bottom line; they are making fairly good money. And they are spending on technology; we continue to be very successful with our complementary products. We just haven't seen the movement of the larger purchases on the in-house side on the core deals, but they are making money and they are spending money on technology. Many customers spending more on things like platform automation that will create efficiencies and make what they have better than spending the big money for new in-house deals.

I think the other part of that, Richard, is the bankers are very conservative, and their customers are nervous. And because the banks don't see an immediate opportunity for huge growth right in front of them, they're not willing to cut loose with the large dollars it takes for a new system right now.

I was wondering if you could comment on the linearity during the quarter. You know, the license revenue drop is pretty large, so I was wondering at what point you realized that the close rates weren't going to be what you thought they were going to be.

Probably about mid [technical difficulty]. We knew that they were not going to be where they thought they were going to be, Richard, but until mid-September, we weren't sure where it was going to be. We didn't know if it was going to be an impact of a penny or whether it was going to be four cents.

Is it your view that the macro environment is just causing a temporary shift in banks to outsourcing, or do you think we're seeing a permanent trend here?

I think it's more temporary, based on the economy. I don't think that you're going to see a major shift to outsourcing. It's just that in a difficult economic environment, at some point it makes more economic sense not to have large capital outlays, and outsourcing is a viable opportunity for those banks. So in my opinion, I don't think it's a trend that's going to continue for a long time, unless we're in a depressed economy for a long time. It certainly makes sense in tough times, but I don't think it's a major trend that we're going to see.

Richard, Terry. On the outsourcing transactions that we are seeing, it's primarily an existing outsource customer that's switching to us to be their outsourcing vendor, not a switch from in-house to outsource. So I don't think there's a change in the trend there; it's just the in-house guys don't have to make a decision, in most cases, because they don't have contracts that are expiring. The outsourcing customers do have to make decisions if their contract is coming up on expiration. I think that's reflective of the environment, not the number of in-house core transactions; they're just being delayed a little bit.

The other thing I'd add to that, Richard, is if we look at our pipeline, we look at the prospects that are in that pipeline and, obviously, I don't know what the timing is – whether it's this quarter or year out – but some of those [appear as large] [customers] that are currently outsourced that are looking at our in-house Silverlake product. So I'm not sure that I would even say that I'm seeing a trend; it's just a stalling in the decision.

One final question. Apparently the visibility remains low; you're not comfortable talking about where revenues can be even for this next quarter. At what point do you start to look at your costs and your head count a little bit more seriously and start to think about realigning your business with your opportunity?

We have been looking at costs for several months now. And even more recently than that, we've been taking a hard look at head count, making sure that if we hire people, that we're hiring them in revenue-producing areas and areas that are very necessary. But we don't see a big reason for us to ramp up for business. It's a little bit different than the Y2K area, where we knew within a few months that business would be back. Not so sure of that now, so we are doing, continue to do, an increasingly better job of looking at head count. And although we haven't made any decisions to broadly reduce head count, we're very careful about the areas that we're hiring.

One follow-up question. Have you taken a look at the dividend as something that might be adjusted to reflect the environment?

There have been no discussions on reducing or eliminating the dividend. Our cash flows continue to be very good and the cash piece isn't the problem right now.

[Carla Cooper], Robert W. Baird.

Could you talk a little bit about -- I'm just trying to compare your commentary this quarter with last vis a vis ancillary products and services? It seems like your commentary might be a little better, but specifically on the ancillary, do you see that slow in line with hardware or maybe a little bit of a pick-up?

Actually, Carla, in our complementary products, there was actually somewhat of a shift in the product. I mean, our 4|Sight products which were selling extremely well in the fourth quarter slowed slightly. As you remember, we sold 59 of those in the fourth quarter; we sold 31 this quarter. NetTeller, we sold 42 in the fourth quarter, which was a huge quarter for us, but we sold 25, which is still a nice number, this quarter. And CRM Solutions, we sold 5 again, which is right in line with what we sold in the fourth quarter. The one thing we did see additional pick-up in and strength is the additional products. Like in the NetTeller, we saw a lot of sales this last quarter in our PowerPay product, our Bill Pay, and also our Commercial Cash Management, and also a strength, as Mike mentioned, in platform and especially teller products. Teller actually exceeded budget by quite a bit this quarter. So it's kind of like we said in the past, that banks are kind of in a defensive mode right now; they are looking at painting the car and putting new tires on it, and not buying a new one, and they're looking for products that will actually bring them an ROI. And those are the products that we're seeing them sell: the Commercial Cash Management, the Teller platform – those are things the banks can actually see a return on their investment.

And then on the credit union side, your commentary in the press release is that credit unions are doing quite well, but when I actually look at the numbers there, they're about flat. What's driving some of your qualitative thinking on credit unions as you describe it and think about it as being strong?

Well, I mean, the pipeline looks extremely well on the credit union side, Carla. And our September quarter last year for credit unions was just a huge quarter, and I agree with you, it was relatively flat, but compared to what has happened to the in-house bank side, the in-house credit union side - I mean, I would have to say is strong just to be flat with where we were last year. The other thing is that we're just now starting to gear up the outsourcing piece for the credit unions, and we've got several of the large credit unions looking at the Symatar product for an outsourcing environment. So the credit union piece just hasn't – it either hasn't slowed by comparison to the bank or we have such a small base in comparison that we've never noticed the slowdown.

That was going to be my next question, which is, do you think the credit unions have got a different mentality regarding spending than banks? Or is it that you're kind of smaller market share, so you think a lot of the gains are really market share gains?

I personally think they've got a little different mentality. Obviously, they don't pay taxes. They don't worry a whole lot about bottom line because they're not for profit. I mean, their primary goal in life is to keep their members happy, and the best way to do that is to give their members the best feature functionality and new technology and bells and whistles out there.

Got it. And then just finally, your backlog on the in-house side is actually up, as you look at it both sequentially and year over year, and that's as revenues are down. I'm thinking about what other changes are going into the translation of that backlog into revenue. Is there something about the turnover in the pipeline that's changed? Something else that's changed there?

It's not so much that; it's just a timing of installations and, you know, we don't want to ship software way too early. So there may be some software build-up in the backlog that will go this quarter, but it's more just a timing thing. And I guess, as we've always said, Carla, the backlog is not something to try to figure out a trend for the next quarter. It's more of a long-term growth and health of the company.

Right. And that's why I was just thinking about the fact that even over the last four quarters, I think, it's trended flat to up, and yet revenue on the in-house side has been weaker, and that's why I'm just kind of trying to reconcile that in my mind.

You have to remember the components that are in that in-house backlog, and that is software, hardware, and installation services. And the installation services is a pretty big part of that, and it just takes a while for that to roll off. Especially on the large Silverlake deals.

And on the order of kind of two to four quarters, as opposed to one to two quarters for Silverlake?

Yes, that'd be correct.

[Glen Green], [Sync] Equity Partners.

Thank you. Most of my questions have been asked, but I did want to get a little bit more color on your outsourcing business. What kind of revenue growth you're seeing there, and at this point, what percentage of revenue? And also, Terry, you made a comment that the customers that you're getting on the outsourcing side are really just switches from other vendors as opposed to moving from in-house – can you sort of talk about that? I mean, who you're winning from -- is there any change competitively? Just really more color on the outsourcing business.

I'll talk about the competitive environment there from the change perspective and then let Kevin hit the numbers. I don't believe there's any one specific vendor that we're stealing away from [in bunches], Glen, at all. We've historically been able to win from several different vendors in the marketplace over time. We do pride ourselves on our service levels that we provide to customers, whether that's on the in-house or the outsourcing side. And so we do believe that we offer the customers, in most cases, better service levels, period. So that's a strength of ours that continues to move forward, and we are working constantly on improving the service levels that we have with our customers. And so – no specific vendor at all seems to be the weak dog that we're taking from. So from our end, no change there from that perspective.

Except -- Glen, this is Jack -- I would add that since we have only recently announced our Symatar outsourcing capabilities on the credit union side, we're having some impact against some competitors that are new for us, because not having had that solution before, we're gaining some conversions from entrenched competitors on the credit union side that would not have been reflected before. But there is no one competitor that we're taking the majority of conversions from.

And part of that, Glen, is because we don't focus on any one competitor out there. I mean, it's not like we pick one out and say, "Okay, this is the flavor of the month, this one we're going after this month."

And then the metrics on the outsourcing business, Kevin, if you have those?

The outsourcing business revenues for the quarter actually grew about 28 percent over this quarter a year ago.

And what percentage of revenue is that now, roughly? In the 20 percent, something like that?

It's probably 17, 18 percent.

And then just two other quick questions. The progress on converting your Liberty customer base? And program on sort of getting ARGO product up to speed?

I believe the Liberty base estimate their decisions by the end of this year, so that we can convert them in 2003. And there's about 25 to 30 Liberty customers left to make a decision; we hope to win on a good portion of those – 80 percent, probably. And the other question was -- ?

Progress on getting ARGO?

Keep in mind that ARGO requires a tremendous amount of work to integrate. We believe we're still on target with what we want to do on the deposit side and then the loan side, and we have interest in the ARGO side from the upper end of our customer base, and we believe that not only will it generate some revenue from some of our customers, but it will allow us to play in the larger and larger banks; the banks $4 to $10 billion. We have a great advantage, being partnered with ARGO, which is a very strong name in large banks.

Which, Glenn, we're also still on course to have Deposits in beta in the March quarter, and also the Loans sometime next summer. So we're pretty much still right on course with the beta of those. So we'll start getting some nice revenues from those in the Fiscal '04 year.

Let me ask one more question. Kevin, you made a comment regarding Bill Pay activity picking up. Bank of America had some terrific numbers regarding Bill Pay. I was wondering if you could give some color on that. What are you seeing, and is this sort of a pick-up and acceleration here?

I don't know if it's a pick-up and acceleration. I think maybe it's just – it was a fairly new product for us and we just saw some nice sales this last quarter. Some of those are migrating off the [Meta Vate] product, but the majority of those are just new customers that didn't have a Bill Pay product because there's still, Glenn, an enormous amount of banks out there that even though they might have an internet solution, they don't have a Bill Pay solution.

Pete [Heckman], [Desalle Nicholas].

As regards the Liberty platform, was that they have to make the decisions by the end of calendar '02 or your fiscal '02? And you say there's around 25 to 30 customers left? Is it accurate to say that your experience to date has been that you've been winning about three-quarters, or converting three-quarters, of those onto either 20/20 or another Jack Henry platform? And so only losing about a quarter, 20 percent of them?

I believe the win rate has been near 80 percent for the ones that have moved so far. They do have to make a decision by December 31st of this year, and we're happy with the ones that we've converted. We lost a few of them based on price; as you all know, we're not the cheapest software vendor out there. And we've not played in some of the real nasty price wars that are going on out there. We sell a lot of value. So we're very happy with the hit rate on the Liberty side and they will all be converted by calendar [technical difficulty] 2003.

And then if I remember correctly, you have another 700 banks or so on older legacy platforms. Given the environment, are you more interested in sunsetting any of those platforms in calendar 2003?

We really didn't make the Liberty decision based on, 'Hey, we need some income, let's make these people spend money.' We look at a business case of how many folks are on those products; as it gets small, it gets more difficult. We look at the talent that we have in-house. Some of the good Liberty folks have moved onto other areas of the company, which is good and healthy for everybody. And we look at how fast are they moving. You know, there's a lot of things that go into a business case for making banks move. It's not something that we really like to do, because it puts a percent of your customers in play, and you're going to lose a percent of those, regardless of how happy you think they are. So it continues to be a business case. We look at it about once a year, on each of those products, to see if it makes sense for any of those customers to move and to sunset the product. Don't have any plans today of sunsetting those, but we continue to look at it.

And if I could get in one last question. You mentioned in your press release you're looking at rolling out another ten item processing centers over the next three years. Could you talk a little bit about the cap ex requirements for each item center, kind of the anticipated returns of item processing compared to more of the core applications? I'm inferring from this that the banks are increasingly wanting their item processing with the same vendor that they have for their core, and is this a market-based decision that over time could pressure margins somewhat?

Pete, this is Jack Crown. What we're looking to do with the item centers is to attract, of course, some item processing revenue, but frankly, the real goal is the outsourced data processing revenues that, as you indicated, tend to come along with that, as well as to provide some capabilities for some of our in-house customers in certain areas as well. We're not pursuing item processing business for the sake of item processing business, although I think that our margins in that business are as good or better than anybody who is in that business, because all of our item processing is done using image platforms, so we don't have some of the traditional higher cost operating environment that you get with the older image systems. So we do have some advantages, and do make good margins there. But we're primarily interested in expanding our footprint and our presence to attract other higher margin business like the data processing outsourcing, and it can also influence some in-house deals, to be able to outsource that portion of it. In the ideal world, a customer would certainly prefer to have their item and data processing outsourced to the same vendor, and I think we're acknowledging that as well.

And could you comment on the cap ex requirements for an item center, and the relative return compared to the core processing?

Pete, at this point we think we can actually get one open for about a half million dollars. And there's actually some new technology out there that we can use to actually push the profitability even more. But you know, it's kind of like Jack eluded to – item processing is not something we want to get in business – just item processing, because we don't like [indiscernible] margins. But our sales people tell us that they have actually lost deals for data because we didn't have an item capture center within the geographic area. So that's the reason we're doing this. We have done some extensive case studies on the best places to put these item centers, and we're going to roll them out slowly; it's not like we're going to try to open ten this year. So don't think there's going to be an enormous impact on my cap ex budget. We're probably going to try to get three of them opened in the next twelve months, see how those go, and as we're getting those up and on line, we'll be evaluating where we want to put the next three.

David [Jossman], Wachovia Securities.

I also wanted to follow up on the [indiscernible] of rolling out some more item centers. Jack, can you give us any sort of geographical targeting that you have as you think about the process? And generally, I would think that you guys would be 'make' versus 'buy' in terms of item centers. Would you go out and buy some item centers if they were available?

David, I don't know that I would want to be very specific about the locations that we're thinking of right at this time. But what we look at is, we go to our sales staff and find out where they feel the best opportunities are from a sales activity standpoint. Sometimes there may be a vendor in a particular area that has some vulnerability or whatever. So we start there. We get their recommendations. We look at the surrounding territory; how many Jack Henry customers are in that territory that could help support one of these centers; what is the prospect opportunities; the new prospect opportunities that we could bring to Jack Henry. Looking in a reasonable geographic radius around where we would put that footprint. So we look at all those factors. I'm sorry – give me the latter part of your question?

As far as acquiring item centers, we want to be real careful there. If we were going to acquire an item center that had several Jack Henry customers on it, that would probably be a lot more desirous than just non-Jack Henry customers, because like we said before, we don't want to be just in the item processing business. Because I think if you look at the return on investment of acquiring a whole bunch of non-Jack Henry item customers, the return on that investment is a long time or never. So we want to be careful in the acquisition part.

In particular, as Kevin mentioned, we have some technology that lets us operate an item center more cost effectively than some others. We prefer to start with our own technology, as opposed to having to figure out a way to replace some existing technology that we purchased on a center.

That makes sense. When was the last time Jack Henry opened a new item processing center?

Most of our centers of late have been acquisitions, but they were acquisitions of centers that were processing for Jack Henry customers, in Denver and California.

California was the last one.

California was the last one that we acquired. It's been a while since we have de novoed an item processing center.

April 1 of 2000 was the acquisition of Bank Data out in California, and that was the last new item center we opened, David.

All right. And I may have missed this. Kevin, do you just have a head count number at the end of the quarter?

Total employees, full time and part-time, was 2298.

And my last question is, can you help us understand whether there's any timing that we should have in our mind of the cost benefits of the Liberty sunset, as it allows you to operate a little bit more efficiently?

I don't know how much efficiently it's going to get us, David, because I mean, we're just reallocating those resources into other areas, so it's not like it's going to gain a whole lot of efficiencies, but there are some really good, talented people there that we're actually putting into different areas. And we may actually look at reducing head count a little bit there, if the people don't make the right sense. But I'm not sure how much significant efficiencies we're going to get out of that.

It would sound like those kinds of things are going to happen in the second half of calendar '03? Is that the right way to think about that kind of stuff?

Well, it's starting now, and it's just going to basically go on from now through the end of '03, calendar '03.

David, we're talking about less than ten people remaining focused in that product area, so you're not talking [much] impact at all. We'd just – we'd gain greater efficiency in the areas in which we'd move 'em into, with their experience.

Brad Moore, Putnam Lobell.

A couple things. Can you tell me, how does the tax situation work with regard to your community banks' behavior in purchasing core systems, in terms of how these companies typically depreciate their systems and how the tax plays into their thinking, in terms of replacing those core in-house systems?

The majority of them, Brad, will set the software that they'd buy up for a three to five year amortization. The hardware will be typically five to seven years. So I think what you're trying to get at here is, yeah, there's a lot of banks out there that updated in '97 and '98 for Y2K, that those systems are now becoming fully depreciated.

Brad, this is Terry. Also, there were some incentives put in, I guess early this year, late last year, to allow accelerate write-off. I don't believe that those accelerate write-offs really enter their decision to make a purchase or not, but it's just an extra little factor on top of, if we gain some efficiencies, then we can get some additional tax benefit. So it's an extra kick, but it's not a major factor in the decision-making process.

Of course, just to make life more interesting, Brad, most of the states have uncoupled themselves from the federal government as far as additional tax depreciation write-off. So the states aren't given that early write-off. Which makes it really interesting.

So there's really, from a business financial perspective, there's not necessarily anything that would get banks off the dime to accelerate, or to make any decisions on their core systems.

Personal opinion, Brad, I think it's going to take the economy stabilizing and for us to stop talking war. Because like I said, I really think – and I've heard these from some of the bank [User] meetings - I mean, as long as our customers' customers are nervous, they're going to continue to be a little hesitant in how much money they spend in big cap ex layouts.

And then you talked a little bit about the competitive environment on the outsourcing side, and you mentioned that there was not any one vendor in particular that you were gaining share from. But do you see any vendors, any competitors on the outsourcing side, that are sort of rapidly losing share or sort of falling apart in this environment?

Well, I'm not going to name names on that one. You know, our big competitive advantage is customer service, customer satisfaction. We've seen some vendors out there that have shown some weakness in that area. And we've been pleasantly surprised to be able to take some customers from them. But I don't think there's any big vendor out there that's in major trouble that we're going to see a big influx of wins. I think if you look at our wins, both on the in-house side and the outsourcing side, they're very well spread out.

Any major client turnover or attrition on either side of your business that you anticipate here in the next quarter or two?

No, Brad, I mean, obviously, we had some customer loss when we acquired OSG, which you have that any time you do an acquisition, because it takes a while to stabilize the base, but that's pretty much stopped. And I don't look for us to lose any more customers.

Except [Indiscernible].

Yeah, just [Indiscernible] and possibly some delivery customers. Out of twenty-five or thirty left, there may be 20 to 30 percent of those that don't decide to come to one of our product. But other than that, no.

And then last question, were there any accrual adjustments or reversals that influenced your expenses this quarter?

No.

Our next question is from the line of Jeff Baker, U.S. Bancorp.

Just a couple follow-ups on the item centers. Of the fourteen that you guys currently have, are they all set up to handle image check and statements?

Yes, all of our centers are fully imaged, which again, we talked about. It's one of the advantages we believe we bring to the table. And the only centers we would look to open would be fully image capable.

So with that in mind, then, can you give us your thoughts on the check truncation act legislation that's running through Congress, and how you anticipate to benefit, and the demands from the financial institutions, to be benefited from that?

We're watching that very closely to see how that takes shape. We certainly, we feel, are in a position to take advantage of that when it is further shaped, because of the fact that we are fully image-enabled in all of our centers. At this point, I don't know that we have put a pencil to it to try to figure out what economic advantages there might be, or exactly how all that would work. We're trying to wait on the various groups that are looking at that project, to pin it down a little further. But we feel we're ready to take full advantage of it as soon as it's a reality.

When do you foresee that being signed into legislation?

We're always aware that the wheels of government move very slowly.

And then, Kevin, on your share buy-back, how many shares did you buy back this quarter?

I will tell you this, Jeff, we just finished buying the first three million shares back. And I'm not sure what that actual count is for this quarter, that we bought back.

Okay. And then how much is left? Is there any left authorized?

Yeah, we – if you remember, last month we authorized an increase of an additional 3 million shares. We actually just crept over the 3 million mark, so we've still got close to 3 million shares left that we could buy back.

Oh, I see what you're saying. So I guess, what was – not the average shares outstanding, but what did you guys exit the quarter from a share perspective?

How many outstanding shares do we have?

Exiting the quarter, not the average over the quarter.

What's the actual share count?

At the end of the quarter?

Yes.

Basic share count is 88,951,000.

And then, last question, any attrition in the sales force that you guys are seeing?

The only attrition, Jeff -- this is Terry – would be if someone's not performing to our expected levels. And they would be addressed on a one-on-one type basis.

Okay. I guess another way to ask it is, you know, with the fall in the share price, how are you guys compensating or incentivizing your employees to stay?

On the sales side?

Just across the board. Mostly in the sales, yeah.

The sales area is based on commission, and based on the margin of the deals that they sell, as it always has been.

Which I'd be willing to bet, Jeff, even though we're having some challenges, our sales guys are still making as much as any organization out there can offer their sales team. As far as our other employees go, yeah, there's some relative deprivation going out there because of the stock price, but, you know, our compensation package for our employees is competitive without the options. So, yeah, we've probably got some employees nervous because their 401K is down, but they're going to have that whether working in Jack Henry stock or in mutual funds.

Tim [Wooley], AGE.

Hi, this is Dan Orr, works for Tim [Wooley]. Do you have any thoughts on your outlook for capital expenditures for the fiscal year? And has the recent prolongation of the difficult environment caused you to have to change that outlook or projection at all?

No, it has not changed our outlook, because most of the cap ex that we have in place for this year is actually facilities that are in process right now. I'd be willing to say that our cap ex probably did creep up a little bit this quarter instead of down, and I'd say that our fiscal cap ex budget is probably in the $40 to $42 million.

Our last question is from the line of Nick Fiskin, Stevens Incorporated.

Two quick follow-ups. What did you learn incremental at the User conference as it relates to core in-house sales? What new did you say, "Wow, I didn't know that?" Anything?

Keep in mind these are our customers, so any core deals would be from an existing customer moving from an older product to one of our newer products. I don't think we saw anything at the new group meeting that really surprised us. We know that the banks are doing pretty well, health-wise, on their bottom line, which is refreshing. And they continue to be very happy and looking at a lot of our complementary products. But from a core perspective, it's a little difficult because you're talking about your existing customers.

And then, as it relates to your purchase program, are you guys going to be in the market on Monday?

For stock?

Yeah.

Obviously, that depends on the stock price. It depends on a lot of things, Nick. I mean, the stock price; where the market's moving; other avenues we have for use of our cash. We continue to believe that the best use of our cash is for acquisitions, but sans any cash acquisitions, we continue to believe that because of the dividend that we pay and the accretive nature of buying stock, that it's a good use of cash in the right scenarios.

Are there any acquisitions opportunities that you foresee in the near term?

We continue to have an acquisition pipeline and I wouldn't comment about timing or size or anything on that.

We have no other lines queued up with questions at this time.

Again, thank you for joining us today. Obviously, the quarter wasn't where we would have liked to have seen it, but based on where we were, we think we're still positioned extremely well with a strong balance sheet. Our backlog looks strong; we think we're positioned well for future opportunities. With that, Operator, if you'd give them the replay number, I would appreciate it.

Certainly. Ladies and gentlemen, this conference will be available for replay after 11:15 a.m. today, until October 24th at midnight. You may access the replay service by dialing 1-320-365-3844, and entering the access code, 656048. That does conclude your teleconference for today. Thank you for your participation. You may now disconnect.