Jack Henry & Associates Inc (JKHY) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the second quarter earnings announcement conference call. At this time all lines are in a listen-only mode. Later there will be an opportunity for your questions and answers with instructions given at that time. You require assistance during the call press zero followed by star and a specialist will assist you off line. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to our host, chief financial officer Mr. Kevin Williams.

Good morning. And welcome to the Jack Henry & Associates second quarter fiscal 03 conference call. Before we start statements may be made in this situation which are forward-looking statement are forward-looking ordeal with the future. Like these statements about the future these are subject to a number of factors disclosed in a recent SEC filings. There could also be other factors that could potentially affect these differently.

Thank you for participating in our call, which reflects a four percent increase in revenues, a continued strong balance sheet and a following growing backlog compared to the same quarter the prior year. Total revenues increased four percent with large increase in support and services of 20 percent increase compared to the prior year quarter with our continued success in the outsourcing marketplace , our strong growth in our ATM and debit card processing business and additional in-house support fees.

These increases helped to reduce the impact of the continued slow down the capital goods market or primarily for our businesses of new in-house core deal which obviously those impact our core and complementary product software licensing revenues and the related hardware revenue that trailed behind the sales. The impact of this was in our licensing and instillation revenue was a reduction of nine percent compared to prior year and a reduction of hardware of 10 percent.

The components of our total revenue compared to last year were software licensing and installation were down nine percent a little over two million, support and services increased 20 percent or almost eight and a half million. Hardware sales were down ten percent or 2.6 billion. The customer reimbursements past through increased nine percent a little over half million dollars for the net increase of four percent increase or $4.3 million.

Our total costs of sales related to these revenues increased by 11 percent in the quarter. Our costs of sales are comprised of two components: cost of services which includes customer reimbursements or non-hardware type expenses the way we talk about them and the second is the cost of hardware.

First of all I'll discuss the cost of hardware. Total hardware sales represented 24 percent of total revenue this quarter compared to 27 percent total revenue the same quarter a year ago. Typically, this decrease would help our gross margin, however the cost of hardware decreased three percent while hardware revenue decreased 10 percent which obviously has a negative impact on margins.

Gross margin on hardware revenues were 26 percent this year compared to 32 percent in the same period in the year ago, which is primarily still due to reduced rebates incentives from vendors on hardware sales and some additional discounts and changes in pricing from one of the vendors which impacted both our hardware revenue and gross margin. Our margin was basically the same as the hardware margins in the September quarter since there's been little changes in the price incentive rebates since that time.

Also in this category the mix of hardware sales can have a significant impact on our margins. Our profit services including customer reimbursements increased 17 percent for the quarter, compared to the prior year period. This compares to the 10 percent increase in non-hardware revenue for the same period which is due primarily to the decrease in software licensing and installation revenue of nine percent offset primarily by the 20 percent increase in support services.

The increase in cost of services primarily driven by the increased head count of 11 percent compared to a year ago and related benefits to those employees compared to a year ago. Our GMs and employees continue to be very cognizant of cost controls, which are our biggest expense and asset by far as people. Having said that we still have requirements to add employees and we have added about 75 employees during the quarter. However obviously all of these are not in cost of sales.

Our gross margin is down this quarter to 36 percent compared to 40 percent last year in the same period. Our hardware margins are 36 percent and non-hardware margins decreased to 39 percent from 43 percent in the same period a year ago, primarily because of the increased head count and the decrease in the software sales which is primarily our largest margin product we sell.

Operating expenses decreased three percent this quarter compared to last year's quarter and those percentage of revenue has decreased about one percent of total revenue. Selling and marketing expenses increased by 10 percent compared to prior year quarter. The increase is primarily due to increased personnel costs associated with increased number of sales. As a percentage of revenue selling and marketing was about seven and a half percent compared to a little over seven percent of the same quarter last year relatively flat.

R&D expenses increased 12 percent compared to last year which is also primarily due to additional people. Several of those related to the ARGO project that we have going on. G&A expense increased 19 percent or decreased 19 percent over last year's quarter and as percentage of revenue decreased about one and a half percent. Which is primarily due to another quarter of improved employee benefit cost, specifically our health insurance and also significant less expense in this quarter than a year ago for our national user group meeting.

We are very focused on trying to control costs on our user groups this year. Eight percent over the prior quarter decreased 18 percent from 20 percent last year. Change in other income primarily due to interest income decreased close 400,000 which is due primarily to the decreased interest rates on our money market accounts. Our effective tax increase six and a half from three and a half which is where it was last year quarter. Due to changes in state tax law net effect is reduce our earnings per share seven percent of the quarter compared from last year from 14 cents to 13 cents. Quick snapshot of the few of the balance sheet highlights majority of the significant changes compared to last year would be cash, cash equivalents are down 18 percent. A large part of this is due to the increased passes we had to pay this year compared to last quarter. We did not have near the stock options exercised the first half of the year as the first half of last year because of the stock price we did not get the benefit so therefore our actual taxes we had to pay were significant.

Cash receivables are down 19 percent compared to last year. This is primarily due to the change in the billing cycles that we've done for the acquired customer bases we announced in the press release and also our collections department continues to do a very good job. Our receivable aging continues to improve and looks very good compared to last year. Deferred revenue which is prior in-house support deposits has increased nine percent from last year at this time which is primarily decreased, I'm sorry, which is primarily due to the change in the support going.

Backlog. It has grown to 158 million from 146 million at the end of September and 130 million a year ago. I'd like to point out there is the ARGO deals in there that we're just not in beta testing on a few of the modules. There's more to go so that's going to be a slow burn on the in-house part of the backlog. We still have over 3,000 total customers with over 2500 core customers for banks and credit unions open in-house sourcing.

With me today I have Mike Henry, Chairman and CEO and Jack Crown president. We remain confident we are well positioned have the position for continue opportunities. With that I'd like to open up the call for questions.

Ladies and gentlemen, if you do wish to ask a question, please press the 1 on your touch-tone telephone. If you have pressed the 1 prior to this announcement, please press the 1 again at this time. You will hear a tone indicating you've been placed in queue and you may remove yourself from queue at any time by pressing the point key. If you're using a speaker phone pick up your handset before pressing the numbers. The first question will come from the line of Art Bender () with CSFB. Please go ahead. Your line is open.

Good morning. Can you give us your outlook for the third quarter and for the rest of fiscal '03?

Yeah, Art. Obviously the in-house core deals have not come back full circle yet. I would guide you this next quarter probably 13 to 14 cent range and the fourth quarter probably 14 to 15 cents. So we see some small improvements in bottom line but obviously we're not going to get back to the 25 percent growth in this fiscal year.

You mentioned one vendor in your hardware business had changed their pricing, can you give us a little more detail on that?

Sure. IBM starting I guess six months ago came out with a new program and I believe, correct me if I'm wrong, Jack but I think it was called green street, where they were given significant discounts on our hardware which I think up to 40 plus percent which obviously had a big impact on our hardware revenue and an even bigger impact on our hardware margins..

Okay. Can you give us an idea of the contribution of ARGO and transcend to this quarter's revenues?

Well, ARGO is zero. ARGO, we did not have anything installed. We didn't have any software shipped during the quarter December 31st. We've been sitting in backlog. We do I think now do have the deposit side of ARGO in a beta site. That happened post-12-31. So it had no impact. Transcend, we sold nine Transcend deals during the quarter so it did have a small impact, that maybe somewhere north of a half million dollars I would guess, total.

Okay. Just one last question. Can you give us some idea on what you think the margin trend is going to be going forward. Should we see a similar decrease over the next four quarters or so?

I think that the margin trend should level out about where we are, maybe improve slightly, Art. Remember our head count is up 11 percent over a year ago. And the board referred the Christmas bonus again this year that was in the fourth quarter, which had an impact on margins. And then just the overall decrease when you consider that our installed revenues in that top line were actually up a little bit over this quarter last year. That means the whole decrease in that line was software sales, which that's based on 100 percent margins which that has a significant impact on our gross margin. And if the software sales come back a little bit then the margins will automatically go back up nicely.

Great. Thanks very much.

You bet

The next question will come from the line of Nick Fiskin with Stevens, Inc., go ahead, your line is.

Good morning. On that Kevin backlog number for in-house, it went up let's say a little over $4 million. On the in-house side. How much of that was from ARGO?

Over half the increase was from ARGO.

Like 70 percent of it?

Yeah, in that ballpark.

What are the margins on ARGO sales versus your traditional margins?

They're going to be lower because basically on the ARGO agreement we actually split the licensing. So obviously we are contracting those on our paper, which means that that's going to show up through a pass-through cost or cost of sales to us.

We just book our portion of the ARGO piece so that all the numbers that are in the backlog are numbers that will flow to Jack Henry.

That's a net number. And what's the average sales price on an ARGO sale? .

It really varies across the board, Nick, depending on which modules they buy. I would think a bank would have a hard time getting into it for less than a half million and could go up substantially from there.

I think I remember about a million bucks or 800,000, something like that, as an average.

NEW SPEAKERI would think on an average that would be more in line with what you see.

Kevin, on that guidance you just gave, what does that assume on the software line? Are you assuming any kind of return of in-house or kind of walk us through that.

No, I'm not assuming much come back on software. We're just going to continue to increase services and until the in-house piece comes back, we're going to continue to control costs and watch our head count and I think that we can gain some efficiencies going forward with the same level of quarterly sales.

So does it assume an acceleration from the 20.8 in software rev?

No.

Do you guys buy back some stock during the quarter?

No.

During the fourth quarter?

You mean our second quarter?

Yeah.

No, not a single share.

And how much was that Christmas bonus in total?

Just under $2 million.

And then lastly, --

Just so you know the executive got the exact same Christmas bonus that the people working in our data centers.

The same absolute amount?

Yes.

The last question, R&D was $4 million, the highest ever. Can you give us what you're spending it on and what's a good run rate going forward?

First of all, let me just point out one thing, Nick, then I'll let Jack jump in here. We had an enormous capitalization going on for what we call White Glove which we talked about in the last call, which was the 30,000 plus man hours put into the SilverLake product and those were being capitalized during September and we rolled those people back into their other support and install jobs. So by the discontinued capitalization and the R&D function is going to go back up. And also on the ARGO, we're spending quite a bit of dollars there.

So does the $4 million accelerate then, is what it sounds like.

I don't know that it's going to accelerate much more than that, because most of the people that continue to be in R&D are there. The ones that are still tinkering with White Glove will go back into support will not increase the R&D area.

Thanks so much .

The next question will come from the line of Jeff Baker with Piper Jaffray. Please go ahead.

Hey guys, a few questions. I'm confused with the comments in the press release talking about tough spending patterns then later on with reference to an increase in sales activities and revenue possibly beginning in the rebound. Is that kind of backwards where we know it was tough in the December quarter and things may start, are appearing like they may be improving? Can you elaborate?

December has the same challenges about the same as the September quarter. I mean there was changes in the overall activity, I guess that I don't know how much of that was driven by the banks finalizing their cap ex for next year willing to sign contracts. How much of that is truly that there's some things breaking loose and that's why at this point I think we need to be a little caution going forward that it's going to come back big time

We're still having good pipeline activity and sales activity and the credit union market and the outsourcing market. Those in-house bank sales have an impact.

If you were to look at I guess a good judge is your RFPs. What is your RFP pipeline looking like for, what is the mix between in-house and outsourcing?

The RFP pipeline is comparable or up somewhat from what we have seen and again to reemphasize what Kevin has said we're cautiously optimistic. We see signs that we think maybe point to a fall in some of the spending patterns but at the same time we don't want to get, we don't want to be premature in that judgment. During the period we transitioned through. We've seen increase in visits in the quarters here in mow net. We're seeing increases in proposal activity. We think there are some good signs out there but we're just not ready to declare that we've turned the corner yet.

Fair enough. And then Kevin housekeeping details, can you give us cap ex in the quarter and then the breakout between bank and credit union revenue breakout, please?

Sure. Capex in the quarter, if I can find it, was about 11 million dollars. So we've spent about 27 million year-to-date. And the one thing I want to go ahead and make public, Jeff, is that there are cap ex for the year is probably going to go up higher than what I've said in the last two quarters and let me just explain why. In both the San Diego and Charlotte facilities, we're currently evaluating whether it makes more sense for us to continue in a lease space, because both those facilities are growing big, especially in the Charlotte area where we did the Solutions acquisition or whether it makes more sense to acquire and own. And we're going through an evaluation right now. We're actually looking at the properties. So capex, instead of being the original 35 to 40 million of assets for the year could easily go up another eight to ten million at this point. I'm not sure. It's a number I'm not sure about because we had not finished our evaluation but I just wanted to give you all a heads up that capex may go up a little bit.

If you buy those centers, right?

Yes. Now, as far as revenue out of the 1.0025 billion total, 878 million of that was banks and 14.8 million was credit .

Last question. Cash flow from operations in the quarter.

I have not got that number yet, Jeff my folks are just now working on the cash statement. I can give you depreciation.

That will work.

Depreciation and amortization for the quarter was 7.7 million, which is up a couple hundred thousand dollars from the September quarter..

You expect that to ramp about the same?

It will ramp up a little bit because we're still moving some stuff out of CIP. We've still got some facilities here that should be rolling out CIP and start depreciating in the next three to six months. So yeah it will continue to ramp up a little ALT a little bit.

Thank you

Greg Jones () ThirdEquity Partners.

I want to drill down on the gross margin trends, specifically the software and services. Kevin can you give us a little more granularity on what drove that. I know you mentioned the head count. Was there anything else on there, what sort of trend or was this a reasonable level in the quarters?

I think that -- hello.

I'm here.

I think primarily it's two fold. If you think about our head count is at 11 percent, which that's probably Installed software. I mean that is a significant impact on margins. Software is 100 percent margin.

But you had a pretty significant software license decrease last quarter as well, more like 17 percent. And the margin, if my recollection is right it wasn't quite this low.

I agree with that. What I'm saying is I'm comparing this quarter to last quarter. If you want to compare this quarter -- I'm sorry, this quarter to a year ago, if you're comparing sequential quarters, then the majority of the decrease is the Christmas bonus.

Okay. Is this a reasonable level or we should, given the fact that the Christmas bonus is in this quarter the gross margin should trend back up.

It should trend back up next quarter.

Second question would be your backlog which increased, I know you mentioned a lot of it was due to the ARGO CRM product. Can you just sort of clarify that the timing to recognize the backlog, I know the outsourcing is probably three five-year contract it gets recognized over time but the time to recognize t the in-house portion.

The outsourcing is the minimum guarantee remaining on five-year contract. So there's probably an average of a two and a half to three year retirement in the outsourcing, remember that's only about half of what we actually billed for the outsourcing customers. The in-house piece, even the ARGO piece that's in there should be less than a 15 month burn. We should have all, or almost all software and hardware and services within the backlog delivered in less than 15 months.

Okay. And then finally just on the macro outlook. Do you have any sense, jug to the clients and IT spending budgets what are they planning for the upcoming year? Do you get any sense that things are loosening up? What are your clients telling you?

This is Mike. There's been a lot of guessing out there from people going to trade shows and talking to customers and trying to guess about people's budgets and when they're going to start spending. We'd rather wait and see what happens. We thought it would be back earlier than it has been. I certainly think that banks are going to spend more in 2003 than they did in 2002 but how much of that is really core in-house sales which is where we're really being impacted remains to be seen. So we're very cautious about making any statements that based on conversations with a handful of customers that we believe spending is going to be back. We always get a little bit more of an idea at our user group meetings which happen in the spring and fall. But even that that's not real indicative of the thing that's really hurting us right now which is brand new bank in-house business. It's tough even for being at trade shows to guess about people's statements turning into real dollars spent

Of course, having said that there's a number of surveys out there that I'm sure you read, we read that seem to be fairly consistent in saying that their conversations with a larger sampling size than what Mike is talking to seems to think that there's going to be an increase in spending. At SunTrust Robinson Humphreys, for example, had a survey of banks they did in the southwest region, whether that's typical of the whole nation or not, I don't know. It looks like the increase is going to be there in 2003 over 2002 and that apparently the majority of those increases were going to come from the banks a billion and over in their survey, which is hey market where we're very strong.

There was a study by the independent community bankers association in association with infinite resources that talked about the items that were on the bank's shopping list or top 10 strategic areas they were looking at or technology areas in the next year or two. And a lot of the things that they're looking at are rising on our area of expertise and not only in core systems, which was part of that, but also in check imaging and document imaging and CRM and a number of products.

So the things that customers say are going to be the top areas that they're looking at a at in the next year to two years, we're well positioned to take advantage of. That's one of the reasons why that in spite of the fact that revenue growth has certainly been less than what we would like to see we have in Texas added head count because we are preparing. We do believe there's going to be a turn and we want to be ready to take advantage of it. You may see some R&D increases because we're bolstering our products for the change that we are certain is going to come. We're not as certain about when. But we're certain that it's going to come. We want to make sure we're prepared when it does

Obviously if we weren't cautiously optimistic we wouldn't be adding head count in some very important and strategic areas to us.

Okay. Then I'll just ask one more question. Just if you've been able to finalize the IBM volume incentives. It's been a -- I think we're certainly talking about getting clarification in October November time frame. I wonder if you have that at this point and when the implications of the hardware gross margin going forward.

Are you referring to the rebate?

Yes.

Obviously the bar got readjusted, Glen, that actually with the promo they put in place last year I would say pretty much all bets are off incentive and rebates coming from them. They're just now coming out with some new programs that I think are going to announce in the next week or two, some new products, that thing. Until that happens I'm not sure what's really going to happen with that. We're not really counting on any big return incentives and rebates to get to the guidance I gave.

Thanks. I'll leave it there.

We'll now go to the line of John craft with DA Davidson. Go ahead.

Good morning, guys. Regarding one more question regarding the backlog. You specifically mentioned that CRM, ARGO, CRM is strong, but you also mentioned that you're seeing some success in other complementary products. What are some of the complementary products that are doing pretty well? Are you seeing a little bit more I guess promising than some of the others?

Well, obviously our 4/Sight system continues to be pretty strong, our check imaging solution, we sold 31 of those this quarter which is very comparable to the first quarter. We sold 44 NetTeller, which is up nicely from last quarter, which I think still amazes the three of us in this room that we continue to sell that many NetTellers, which obviously a lot of those pass the competitive wins. So those continue to sell well. A couple of other ones that continue to sell well obviously is our teller and platform automation for the in-house. Then on the outsourcing side, we continue to sell a lot of our passport switch ATM debit card switch services. So those are some of the bigger ones. And then also CRM, we sold 11 deals this quarter on CRM versus five last quarter. Nine of those being transcend, two of those being ARGO. And I think three of the Transcend were actually in the credit union world.

Okay. Now, the 4/Sight, all of your processing centers are capable of imaging, right?

That is correct.

How about this: Have you seen any signs that some of the traditional, the banks that traditionally use the license based in-house type core processing products, any sign that they're moving to outsourcing type models or even I guess maybe a different mix with some of the brand new banks starting out?

This is Jack. We have historically seen about 10 percent of our service bureau customers moving from in-house systems to our outsourcing system. I don't believe we've seen an increase in that percentage. I would tell you that in terms of new proposals going out and new contracts being signed, we are seeing a higher ratio of outsource deals than we are seeing on the in-house side. In the new bank start-up, the de novo bank marketplace, it's probably even more dramatic.

I think largely because it's only been fairly recent years that software solutions with the breadth of capabilities that in-house software has been available on an outsource basis. I think there's a lot of receptivity in that base to say, hey, let me have that software now in an outsource delivery. At that point in time when I think I can bring it in house and run it for less money and more efficiently than what I'm paying for outsourcing I have no conversion requirement. It's a very attractive thing to a bank when they're building a building and selling stock and trying to get off the ground not to have to worry about an in-house data processing system and that's the recovery plans et cetera. That's been the case somewhat for a while I will tell you all de novo banks today it's an unusual de novo bank that would go in-house I would say rather than outsource. But in terms of banks that have in-house systems moving away from that to go outsource, it appears to be running about the same level that we've seen historically.

So the trend is really the pipeline of new deals out there. We see a larger percent that are outsourcing proposals than we had in the past but I don't know that you can extrapolate that to a trend that banks are going from in-house to outsourcing.

Okay. Thanks. Last question. As far as the tax rate, do you expect that it should stay around the 36 and a half percent going forward?

Barring any other additional state rate changes or changes, significant changes in tax laws, yes.

Thanks, guys

Carla Cooper with Robert W. Baird. Please go ahead.

Good morning. Could you talk, you just made a couple of acquisitions can you comment on how the integration is going with them and perhaps what's in the pipeline or what you're looking forward to .

I'll comment on those. The CU acquisition is going very well. It was a small company and a small acquisition. So being able to fold that in has been pretty easy. Very excited about their product. And literally feel like we've got the best offerings in the credit union industry from the various small to the very largest. We're pleased with our product offering there. I think they're very excited being a part of a larger organization and being involved. So that one is going extremely well. Just a quick comment on the NBDF acquisition we announced up in the Chicago area. That's very recently announced. We expect that will go very well. They're already using our check processing products and our core application software to run their bank with. The 15 or so banks that they do item processing for, of course they're processing that on our item processing system and most of those banks data is processed on our saint Paul Minnesota data processing facilities. So for the customers, there should be no visible changes. For the staff and other folks up there, we think they had better opportunities and we think they think they have better opportunities. So we expect that T that one to transition very well also

The only thing I'd add to that, Carla, is CU solutions as Jack mentioned it's small. Great product. Our salespeople are really excited and our primary goal is to not screw it up and try to impact our margins and their opportunities too quickly. Because if we start throwing a whole bunch of overhead then all of a sudden it's not that good of a deal for us..

Kevin and Mike and Jack, are you still looking for a very small product on the bank side? What's the priority of that right now?

As I've talked about in the past, if we had to pick out one segment of the banking marketplace that we don't play that well in, it's the small banks. And I would consider that to be under100 million in assets. And I can tell you that we're still not successful in that area and I don't think we'll be successful in that area with the software and business model that we use for the larger banks. So if and when we become successful, it's going to take, it's going to take a real change or an acquisition to become successful. Are we looking at areas in acquisitions for that marketplace? Sure

The one exception I would add, Carla, in that 100 million dollar marketplace would be the de novo start-up marketplace. Again, as we talked about, most of those banks today are looking at outsourced alternatives. Where we are very strong offering and they come in and typically buy the whole suite of products or large number of products. The revenue stream they're paying us as they come in the door is nice and as those banks grow over time it gets even better. So we do very well in the new bank piece of that under 100 million dollar market. It's the more traditional bank. The 30 million dollar bank that ten years ago was a 28 million dollar bank where we typically don't fare as well

Most of it is related to price. The way we do our installations, the way we do our support. We would have to change that business model drastically, to be able to really complete pricewise with some of the folks that specialize in small banks.

That makes sense. Finally on the competitive side, are you seeing any change, I guess, in who is showing up to deals and what they have to offer. And I guess maybe a comment on whether the five, you expect the Pfizer acquisition of the ETT business of EPS. Is that to change your outlook on the EFT side?

We're not seeing different people in deals today. One thing we're seeing today that we didn't see a couple years ago is some of the strange pricing that some people do. One vendor in particular that gets very aggressive on pricing and will give some things away. And we're careful not to destroy the value of the software that we have out there. We do get aggressive in deals, but we see some pretty crazy things out there in the way of pricing and we've chosen at this point not to do crazy stuff. But we have to get pretty aggressive for deals out there. It's a little more aggressive pricing marketplace than it was a couple years ago

I think related to the EFT business, I don't know that we expect to see a lot of change based on the Pfizer acquisition of the EDS business. RFT business is doing very well. I mean the volumes from the existing customers are growing. We're adding a good number of new customers. We're really just getting traction in the credit union space with our EFT offerings. Frankly it's taken us a little while to figure out the best way to present it, sell it to that market. But we have really had a good reception in the last few months from that marketplace. And I feel like we've got some real good opportunities there.

Thank you.

Carla, one of the biggest things in the EFT market is just the competition that everybody is getting more and more competitive for the pricing, which at this point is way more offset by volume. And our volume is increasing dramatically. In fact, our volumes this quarter or a quarter ago is up like 43 percent.

That's from -- is that organic from existing customers or does that include existing customers.

Includes a few new customers the majority of that I would say 30 to 35 percent of that is organic. So we have huge growth especially in the debit card side.

Thank you.

You bet

We'll now go to the line of Chris Rowan () with SunTrust Robinson Humphreys. Please go ahead. .

ARGO, you're bookings are on gross or net, those deals, in revenue and in backlog?

In revenue they will be booked gross and we'll show the cost back to them, because it's on our paper the contract is we'll bill 100 percent and then .

Shows up in the gross numbers as well?

Yes.

You made some comments about the environment remains tough and all that. But license did increase sequentially fairly decently this quarter. Was that from out of backlog or something or how do you reconcile that.

Could you say it again, Chris.

You've been talking about the environment remaining tough but you actually didn't have too bad of a sequential increase. So is there something I'm not seeing that you pulled it out of backlog or you being cautious in your comment?

We didn't pull it out of backlog because obviously backlog went up. The ARGO deals we signed was not the full increase. But back in Y2K we learned how to sell product and we're still living off those. At some point you're going to start to get into some saturation points and it's going to get more of a challenge to get growth just off common area products. So yeah we're still cautious because we're waiting for the in-house piece to come back, of the new deals.

Okay. Great. And then did you say that you expected license revenue to be roughly flat for the next two quarters, or did you mean just the next quarter? ?

I think it will be probably flat this next quarter. It's hard to say at this point, but I think the fourth quarter will go up a little. We should see December to June quarter. June is the strongest contracting quarter. There will be some additional software sales and shipments in the first part of that quarter.

Okay. Great. Then finally, how much of the gross margin changes over the last year in general have been driven by the move to outsourcing?

Honestly I don't have an exact answer for you, Chris, but I'd have to say very little. Because if you look at the margins we have on an in-house deal by selling the software and installation services and the hardware, the 25 to 30 percent, you get a blended margin right there that's not a whole lot different than what we're getting off our services which is roughly 45 to 50 percent. So is it impacted somewhat yeah but in some cases the max would be improving it especially with the decrease in software sales.

That's fair. Thanks a lot

We'll now go to the line of Peter Hackman () with Nicholas Applegate ().

I was away from the call I don't know if anyone asked. Did you have much impact -- In-house backlog from the remaining sub setting that liberty platform.

We did have an impact because I think we

We continue to have good success with those migrations we're still running somewhere in the 75 percent plus rate of banks staying with us with another Jack Henry product. We look at the banks that have chosen to go in a different direction a direction in most cases but not all. In most cases they've been the smaller banks that went for a solution on a lower cost hardware software operating platform. So we've gotten most of the larger transactions. We've done a number of surveys a lot of 20-20, so we're pretty pleased with the percentage that we've retained in size of the individual banks.

We had about eight or nine decisions made this quarter, Pete. Obviously all of that did not flow to revenue. Some of that is still sitting in backlog. And I believe at this point there's still five or six banks left out there remaining to make a decision. So the transition is pretty much complete, beginning with close to 90 customers. There's five left. So there's not a whole lot of migration opportunities in that base going forward.

Okay. And I also don't know if you mentioned this, average size of the ARGO/CRM deals in terms of gross revenue, if there is an average at this point.

Jack mentioned that it could be somewhere in the, I think we said 800,000 to a million dollar range. And if you're asking about the deals that we've sold, that's really not a fair question or a fair comparison, because the ones that we have contracted are some of our larger institutions, which obviously are going to be at the upper end of the range versus the lower end.

Of course, having said that we expect it's going to be our larger institutions that are going to have an interest in this solution as compared to our transcend solution. So as we mentioned earlier, probably the least amount of money that somebody can get into the ARGO solution for, if they were only buying select applications, would be in the half million dollar range. We would expect somewhere in the 800 to a million to be pretty much the average price going forward, I think.

All right. Thank you

Your next question will come from the line of Brad Moore with Putnam Please go ahead.

Can you give us a breakdown on the licensing installation category. Can you give us a sense as to how much was licensing, how much installation, if you can give us an idea how many core systems were sold during the quarter and included in the licensing category.

The first part of that Brad I'll answer it the way I've always answered it. If you look at the top line of our revenue. It runs pretty close at two-thirds software and a third installation, revenue. And this quarter may be a little more heavily weighted towards the installation but it's still pretty close two to one ratio. And your question about the quarter, what was that?

Can you give us an idea as to how many core deals you've sold during the quarter and how much do they contribute to the license software piece.

We've never disclosed, the core deals that we sell in any given quarter. We do that on an annual basis.

And then curious to know, what are you hearing from your credit union customers about their 2003 budgets? If you can give us any comparison and contrast between credit union and bank customers, in terms of body language and what they're telling you about spending, their incoming spending?

I don't know that they have told us a lot about their upcoming spending plans. Would I tell you if we look at their current spending, we're quite pleased and quite optimistic and frankly very glad we decided to get into that market. That part of our business is doing well, even on the license side, it continues to be a very strong business on the license side.

The outsourcing, again, we've seen at this point no revenue from the outsourcing side. No significant revenue from the outsourcing side. But we have some significant transactions that we had signed. I believe that's going to make some very nice contributions in the next fiscal year. So again I don't know that we have any specific information about what they plan to spend in 2003. But they've been in fiscal 2004 but they've been very good through fiscal 2003 and we've also heard nothing that would lead us to believe that's not going to be the case in 2004.

Okay. Couple of other things. Have you changed all your pricing incentives? Are you trying to be more aggressive in terms of what incentives you're offering? Are you offering any acquisition costs both on your in-house and outsourcing solutions?

We certainly are trying to be competitive. We offer a high end solution and feel like we have a value proposition that warrants a higher price than a number of the competitors that we feed against out there. Having said that, we understand that it's a tough market for a lot of folks out there and we've had to be competitive in some of our offerings. But again I think not to any extent that would alter the value of our offering on a go-forward basis

Probably, Brad, more than anything on the in-house and some of our deals we have seen with the customers, especially on the banking side, more than price breaks or whatever, it's more a matter of when they have to pay it. And they're looking for some sort of an extended payment plan.

Okay. And then finally, can you comment on your client retention, both on in-house and outsourcing?

Our outsourcing, we just don't lose them. I would guess it's way less than one percent a year, once we get them on one of our data centers when we lose a customer. Excluding acquisitions, we'll lose some of those. Our 20-20 customers, I mean it's a very small number on some of the acquired bases, the OSG base, they're looking at having to make us a migration boost somewhere down the road any way we'll lose a higher percentage of those or some burn off of the banker two EM banker customers that are making a decision. Most of those are looking at the cheapest price because those are the smaller bank customers that are making a decision. Most of those are looking at the cheapest price because those are the smaller bank customers

We talked about what we're experiencing on the liberty side, just to support what Kevin said. We just rarely lose a customer off one of our flagship products to a competitive situation. In the absence of an acquisition, sort of like 20-20, quarter after CU solutions we very rarely lose a customer off of those to a competitive situation. We would be more vulnerable on the acquired base products, because they are probably at some point faced with a conversion. But, again, from an ongoing basis in our outsourcing and our flagship products, there's going to be minimal movement.

Great. Thanks

Next question from the line of Tim Willi with AG Edwards. Please go ahead.

Two questions. First was regarding share repurchase. Was the reason that there was none during the most recent quarter, was that attributed to quiet periods and associated possibly with acquisitions or prospect of the acquisitions that you did in the quarter?

Not necessarily, Sam. I mean it was more of a matter that our stock price leveled out and actually rebounded a little bit. And we just think there's better use for our cash, namely acquisitions, which will give us a better return for our shareholders than to buy that stock.

Is it around 3.3 million shares left under the new authorization.

There's three million. We actually sold the first three million.

So about three million left then?

Yes.

Second question. I guess sort of back to the outsourcing, I guess I'm just outside of the de novo issue that's been talked about in prior questions, when you're talking to more established banks and in the outsourcing contracts, are you generally having more discuss with larger institutions than you have been? Are you definitely seeing that kind of migration where larger and larger institutions are more receptive to your calls or the idea of outsourcing?

If they're currently running in an outsourcing environment, Tim, then obviously we're going to be in the game. But I guess if you're asking is there more of the larger in-house institutions, I would have to say I still see a trend. If they're in-house currently they're pretty good sized institution. Most of those they're looking for a new product, they're going to be looking at an in-house solution

Tim, I'd say depending on the time frame you're talking about, if we went back three years and said do we have larger customers today looking at outsource solutions than we had three years ago, I would say yes. Partly because we weren't offering SilverLake three years ago. But also we're running some pretty substantial size banks on CU 20-20 both in-house and outsource. So compared to what we would have seen three years ago, yes I think we have some larger banks that are willing to consider the outsourcing alternative.

Largely, I think, due to reasons of complexity of the operating environments, not so much the in-house operating environment as everything combined, Internet banking, seven/24 access Security intrusion detection , the more and more services that they end up needing to offer to be competitive the more complicated it gets to be able to run it all and do it in-house. And I think that's why we have seen a number of the again as I've said earlier in the 10 percent range of our service bureau customers have come mostly from our in-house systems. So I really like the software I just don't want to run this thing anymore, I have too many things to manage, I'll let you handle the data processing piece. But in terms of are we seeing a movement right now where larger banks are thrown in the towel in-house I would not say that we've seen that.

I have two quick other questions. One is the whole issue disaster recovery and business continuity, still a pressing issue, is that something that you generally see mentioned and discussed when you're pitching an outsourcing deal as a priority any more than it has been in prior years or has some of that sort of subsided recently as we've sort of distanced ourselves from the events of last year.

It won't be in the outsourcing environment. That's an issue of contention in every deal that we're in, whether it's in-house or outsourcing, who is going to offer that. And just about every in-house deal for sure that goes out, disaster recovery is quoted in there as an option. The outsourcing is pretty much just natural. It's part of the agreement with them.

I was curious that that might be one of the sort of deciding factors for somebody that's debating in-house versus outsource, if the ability to maybe get a little bit easier somehow with an outsourcing model sort of as the swing factor or not.

Tim, I would say it's a factor. It's one more factor you throw on the stack. When you look at, like the items I mentioned, that were causing the complexity to increase, that's just one more of them. The bank examiners are pressing them more and more on those items as well. I don't sense that we're getting a lot of folks that are going with an outsourcing solution because of the disaster recovery. I think it's just one more factor that gets added to the stack.

And then last, on the branch and teller automation, the branch platform products, is the -- do you see your customers sort of focusing more so on building more and more branches and really trying to maximize that investment as they begin to sink it into the ground or is this just a retooling of the existing branch network? I mean there's been more with the larger regional, super regional banks focus on building new brick and mortar branches, I was curious if you're seeing that more so in your customer base as well.

Yeah, I think we're seeing a small trend with our customers are building and acquiring more branches. I think everyone understands now that the Internet is not going to do away with the need for expanding your business with brick and mortar, and I think one of the reasons why our teller and platform systems have become very popular is that many of our customers are expanding the reach with additional brick and mortar locations in outlying areas.

Great.

The other thing I'd add, Tim, is by getting our platform and teller which is solely integrated into our core solutions, it gives them a whole lot better information and efficiency and the information is very important if they decide to go with a CRM solution.

Great. Thank you

We're now going to the line of Richard Zandi with Deutsche Bank. Please go ahead.

Good morning. I think it was mentioned that there were eight or nine liberty decisions in the second quarter. Could you give us an idea how much the liberty migrations contributed to licensed revenues in the quarter.

Way less than half a million dollars, Richard?

Has that been consistent around that level for the last couple of quarters?

Yeah, pretty much. The June quarter was a little higher than that. But that's pretty similar with what it was last quarter.

Great. And then just trying to understand your deferred revenues a little bit more. From September '01 to December '01 deferred revenues increased by 6.6 million. From September '02 to December '02 they decreased by 9.6. That's a turn of 16.3 million. From your perspective, is the entire 16.3 million turn, is that all related to this moving the billing date on maintenance for the acquisition related core customers? Or is there anything else going on?

It would have to be 95 plus percent, Richard. Our typical billing for the peerless and OSG acquired customer base is that we were moving the annual billing that we were billing was well over 20 million. So we billed half of that this year which impacted receivables and deferred revenue and then we'll get them on our normal billing cycle so June 30th, which I know this is going to screw you all up to try to do DSOs on because June 30th we'll be billing that additional amount to those customers.

We had about a 30 million dollar increase from March to June in '02, 31 million dollar. So we should have about --

Richard, you've got the normal burn in each quarter coming out of deferred revenue and hitting revenue. And then when we bill historically June 30th and December 31st, that offsets that plus additional billing. So last June 30th what we billed for our in-house customers for annual maintenance was well north of 45 million dollars.

So we'll have a 55 million, 55 million to 65 million billing for this June.

It should be.

I understand. Now just looking to your cash, 31.2 million in cash. You indicated earlier that your cap ex may go up approximately eight million dollars if you decide to buy those facilities. In your paying down about three million dollars a quarter for dividends. If the market remains challenging, I think that's your term, if the market remains challenging, given your cash balance level and what's going on in the business, is there -- has the board discussed at all the viability of the dividends?

That hasn't been a discussion. We haven't started direction that we will pull back or eliminate the dividend and not -- it's not been a discussion.

Right now it's not contemplated? ?

No.

Okay. Great. Thanks very much

Question now from the line of Steven Laws with WR Hambrecht & Quist.

Quick question. The foresight image, did you say 31 or 41.

31.

31?

Yes.

Kind of following that up with regard to I would imagine NetTeller, the Internet banking is mainly take away wins. What about the CRM and at the 4/Sight, are you typically selling those into banks that don't have that product or are you taking that business from someone else?

CRM definitely is primarily I would guess overzealous for someone who doesn't have a CRM solution because it hasn't been out there especially in this industry for very long and definitely not very popular for very long. The 4/Sight, the image solution, some of those are competitive takeaways. Some of those are still new deals. I'm not sure if I got a real good feel for what percentage that is. You look at the statistics. It depends on whose survey you look at out there. There's anywhere from 40 to 60 percent of the surveys I've seen of institutions that have an image solution.

So obviously some of those take away from some of our brand new deals. The Internet, yeah, I would have to agree with that totally. I think a lot of those are customers that were on somebody else's solution that signed up five or six years ago their five-year contract has run out. They've realized it makes a whole lot more sense to pay an inordinate licensing fee and ongoing maintenance rate than to pay for quick charge that penalizes them for growth.

Okay. Great. And one final, my last question. You mentioned next quarter you'll look for 13 to 14 cents in earnings. And I think that reflects basically the same business level we had with excluding the Christmas bonus and then an increase of a penny in Q4. And I think to Chris's question, you said you expected the license revenue to tick up slightly in the June quarter. Is there any other business segments or what demand out there are you seeing that you think will drive that sequential penny increase in the June quarter?

Jack mentioned earlier, we've had some really good success, recent success in the, in our passport switch business in the credit union. We're going to get some of those installed, which is actually going to drive some nice revenue and nice profit margins to our services line. There's also our credit union piece continues to do well and cross sell other things other than passport. And I think we're going to continue to sell more teller platform and image solutions going forward. And the other thing I have to say, Steve, is when we get into June, that's our fiscal year-end. That's when our sales guys are hitting the bushes trying to hit that year-end sales quota.

Great. Thanks a lot

We'll now go to the line of Nick Fiskin with Stevens, Inc.. please go ahead..

Hi. If you look at your backlog in terms of the migration opportunities, it's a considerable number. And most of those banks have depreciated their in-house systems as they bought them pre-Y2K. It seemed like in our bank survey that participants were expecting that (inaudible) System was going to push banks to buy new systems by the end of 2003. What's your thought on that?

First you confused us, I think because you said our backlog then you went to the migration opportunities. So I assume you're talking about the remaining acquired customer bases, the OSG and P 21 customers; is that right?

Yes.

I mean I have to agree, I think there could be some impetus for those banks to go ahead and move to get the advantages of the accelerated depreciation. And is it going to be a huge motivator, no, but it's like Jack was saying with some of the product offerings that we have, it's another factor to help them make a decision.

So if -- what's your gut tell you when in-house will turn given your RFPs that you've been looking at and talking to users?

I don't know, Nick. I've got a magic eight ball on my desk that's about as right as I am. So I don't think it's going to be like Y2K where we just wake up one week and it's turned. I think it's going to be a very slow process where bakes will hopefully end up buying in-house systems but I don't think they're all going to come to that decision in one quarter. I think it's going to be a slow come back.

Then lastly, a question for you, Mike, if you look at the acquisition outlook, I know you guys have expressed some interest in merchant processing in the past. Given the mishap of another company in that field, what's your thought process there?

Nick, I've always thought, and I've always said, that any time a company diverse identifies into areas that are not they're strength and not how they got to where they are, they run a big risk of screwing it all up. And we still believe that. We still look at diversification of things that aren't just in the processing of data for banks and credit unions. But we've done a very, very slowly and carefully. We want to make sure that if we acquire outside of our strength, that it is a solid company with a good reputation, with a good management staff under it and it makes sense for our company. So we continue to look at things that you would call diversity for our company. But we use a lot more care in looking at those companies and we only look at really quality companies when we look at it. So if and when we go that route we'll be real careful, because we've seen what's happened to other companies in the past.

Another thing I'll say, Nick, is we're going to go forward with the same strategy we've always had. We're going to be very careful as we look at acquisitions. We are not going to go out and make a quick acquisition just to throw revenues on the top line and enhance our bottom line to make Wall Street happy. And nothing against you guys, but we don't want to be the three of us don't want to be sitting here two years from now looking saying why the hell did we do that. So we're going to continue to look at things that are the right thing for the company long-term and strengthens our position in our industry.

Fair enough. Thanks very much

There are no further questions in queue. Please continue with your remarks.

Thank you. Again, thank you for joining us today to review our second quarter fiscal '03 results. Obviously our results are not what we have produced historically, nor are our growth where we would like it to be. However with the current economic conditions we feel the most important thing for us to do is to continue to make the correct move and directive for the long-term health of our company. We have continued to make strategic acquisitions even though small and the correct decisions to build on our competitive strengths. We feel that under the circumstances our managers, employees continue to do what is best for you, our shareholders. Again, thank you and with that, operator, will you please provide the replay number

Ladies and gentlemen, this conference will be made available for replay beginning today at 11:15 a.m. central standard time, continuing through Thursday, the 23rd of January,