Jack Henry & Associates Inc (JKHY) 2003 Q3 法說會逐字稿

Good day and welcome to the Jack Henry and Associates third quarter 2003 conference call. This call is being recorded.

At this time I'll turn the call over to the CFO Mr. Kevin Williams.

Good morning.

Welcome to the Jack Henry & Associates third Quarter 2003 earnings conference call.

Statement or responses to questions made be made in this conversation may be forward looking or deal with expectations about the future. Like anything about the future, these are subject to a number of factors which could cause actual results to differ materially from those we anticipate. Such factors are disclosed in our recent SEC filings. There could be other factors not included that could cause results to differ materially.

Thank you for joining us today as we report third fiscal quarter 2003 financial results, which reflect 1% decrease in revenue, compared to a year-ago quarter, a continuing strong balance sheet and growing backlog compared to the prior year.

Total revenue decreased 1% with large increase of support and services 18%, compared to prior year quarter. With our continued success in outsourcing marketplace. With strong growth in (inaudible) business, increase in (inaudible) services and additional in-house support fees, all of these show strong support and increase in services.

This increase helped reduce the impact of continued slowdown in capital goods market, primarily for the business new in-house core customers, which impact core (inaudible) software license revenues related (inaudible)which trailed these software sales.

The impact on license revenue was reduction of 41% compared to prior year quarter and reduction on hardware revenue of 13%. This is in line with second quarter we ended December 31, with decrease of 24% in license revenue and hardware of 10%.

Quick snapshot of revenue. Software licensing went down 7.2 million, compared to a year ago quarter. Support and services went up 18% or 9.1 million. Hardware sales down 13% or 3.2 million.

Customer reimbursements, pass-through cost to customer increased 5%, which reflects increase in outsourcing. 388,000. For overall net decrease of 1% or 886,000 dollars. Total cost of sales increased by 1% in the quarter. Cost of sales, comprised of cost of license, cost of service, cost of hardware and customer reimbursement expenses. Cost of license decreased 1%, compared to a year ago. This cost represents cost of third-party software, which we resell to customers. During the quarter, we delivered less third-party software than the prior year quarter. Cost of service increased 7%, compared to the prior year, compared to 18% increase in support and service revenue for the same period. Increase in cost and services is in line with headcount of 7%, compared to a year ago and related benefits compared to a year ago.

General managers and employees continue to be confident in cost control. Having said that total headcount decreased by 1%. So, for this quarter, we have very much controlled headcount and our personnel expense. Our cost of hardware decreased by 10% compared to a year ago and decrease in hardware revenue of 13%. Gross margin on hardware revenue is 28%, compared to 31% a year ago, due to reduced rebates from vendors because of reduced volumes of hardware sales and changes in pricing, which affects margins. Hardware and continues to become cheaper and margins get thinner. This is actually small improvement in hardware margins from the prior two quarters. This impacts margins.

Gross margin is down this quarter to 39%, compared to 40% this quarter last year. However, this is an overall improvement over the prior two quarters. The primary reason for the decrease is the decrease in license revenue from 18% of total revenue last year, compared to 11% this year. This software is over 90% gross margin. However, this was offset by increase in support and services and more importantly, the enhanced gross margin on services. Margins on services improved to 38% this quarter, compared to 32% in prior year quarter.

We continue to see overall shift in business and as service and recurring revenue cut a larger part of revenue. We should continue to see margin expansion in these areas. ( inaudible) Overall, our gross margin remained steady.

Little bit about operating expenses. They decreased 1% this quarter, compared to last year. Selling and marketing expense decreased by 2%. Primarily due to commissions. Research and development expense increased 37% this quarter, compared to last year, due to increased personnel to continue developing new products and improving our products. Last year we were capitalizing quite a bit of the R&D compensation as we had several large development projects in progress that we were capitalizing. And remember we only capitalized the large products.

However, percentage of revenue, R&D is 4.1% of revenue, which is pretty small for a technology shop. General and admin expenses decreased 12%. It decreased 1% from last year, which is due to decrease in depreciation expense in G&A on fully depreciated property and new equipment, buildings and equipment and building improvements going in now are going in cost of sales. We have more data center build-out which is appropriately for the cost of goods.

Operating income decreased 8% over the prior quarter and as percentage of revenue decreased 20% from 21% last year, only 1% decrease.

Change in other income was due to interest income decreasing $230,000, due to decreased interest rates. Our effective tax rate compared to last year is up a half percent, in line with prior two quarters.

Net effect is to reduce earnings per share by 6% for the quarter.

A few comments about our balance sheet. Majority of significant changes compared to the same time last year, our cash and cash equivalents were down 30%, impacted by increase in income tax paid. Obviously impacted by our tax deductions for stock options, which is in line with our stock price. Also, cash is impacted by change in our annual support billing. We talked about the last quarter, we changed our annual billing for a lot of acquired bases to June 30. Just to give you an idea of the impact of that, last year June 30th, it was just over $50 million. This year it will be over $80 million. So, we will have a nice inflow of cash in first quarter of fiscal '04 year.

Our accounts receivable are down 18%, compared to last year, due to collection firm doing a good job of collecting and due to decrease in licensing and hardware sales and deliveries this quarter compared to last year. Deferred revenue is in line -- the decrease is responsive to the change in the annual billing.

Our backlog has grown to 172.8 million, with 64.2 million in-house and the rest out-sourced at March 31. This is up from $158 million three months ago or almost 15 million dollar increase. From 136.5 million a year ago, with 54 million in-house and the rest outsourcing. We have over 3000 total customers, with about 2500 core in-house and outsource bank customers.

With me today, I have Mike Henry, Chairman and CEO and Jack Craimer (ph), President is on in our Charlotte office.

We remain confident the we are very well positioned and have the resources for future opportunities. This is evidenced by improving margin from leverage and resource revenues and continuing to have appropriate resources for return of new in-house core contracting.

I will open up for questions.

Thank you. Your question-and-answer session will be conducted electronically. If you would like to ask a question, press the key, followed by 1 on your touch-tone telephone. If you are on speaker phone, make sure the mute function is turned off to allow your signal to reach the equipment. Please press 1 now.

We will take the first question from Jeff Baker of Piper Jaffray.

Kevin or Mike, can you give us flavor of feedback from the user group conference. I am curious about backlog being up. It sounds like you are still a little cautioned as to exactly you will start seeing revenue start to flow?

this is Mike Henry. I decided the mood at the users conference was positive. They are happy customers. They are comfortable buying things from us, relationships extremely good out there. I have had many comments that it the best meeting we have ever had. I agree with that. Although you have to understand that gives us no indication of people who are ready to make new core decisions.

Most of the customers look at add-on products. We did have about eight perspective customers there, the most we have ever had. And there is still a lot of interest out there in software upgrades. Certainly not a clear indicator to us on the business that is lacking right now, which are new in-house core deals. Jack or Kevin, do you want to make comments?

This is Jack. There were several encouraging signs with attendance at the meeting by customers was up 28% over our attendance at the fall meeting. Mike mentioned we had what I believe was a record number of perspective customers and some were pretty large transactions, if those come to pass. We also have a vendor technology exhibit, which of course is a lot of Jack Henry exhibits and a lot of non-Jack Henry exhibits. It rivals many of the national trade shows in size. The feedback from our sales staff and from a number of the non-Jack Henry sales staff in the exhibit area was also very positive.

So, you know, there are a lost encouraging signing there. It is just that knowing exactly when the banks will open their wallets is just hard to predict.

This is Kevin. In-house backlog went nicely. I have to agree with that.

There is a few large deals in there. During the quarter, we had a nice (inaudible) transaction. We had a couple of large Semitar (ph) in-house transactions. We did not rollout any of the Argo (ph) stuff that was in there last quarter, which is still in there.

And also, during the quarter, you remember we announced US Central Credit Union, that is outsourcing deal, but a sizable chunk of future revenue is sitting in backlog for installation services that will be coming in over the next 12 months.

Kevin on backlog and Argo, last quarter was two and-a-half million. What was the contribution to backlog this quarter?

We didn't sell any Argo deals this quarter.

Can you talk about pricing and as it relates to software license gross margin was down, is that reflection of lower revenues, obviously or price? It doesn't appear to me you are giving the farm away since top line is struggling on the license side.

There hasn't been a change pricing from our perspective. If you look at margins, if you consider where our software as percentage of revenue is now compared to a quarter ago, it is down significantly. That is a high margin piece of the business. That will have an impact on margins.

However, you know, I think we have done a very good job over the last quarters of reallocating resources and becoming cost conscience as we move into a recurring revenue business. We are 52 or 53% of total revenue is now recurring.

You know, the other thing that we are doing is with pricing is we have come up with a product now we are going to go downstream into the smaller banks and think we can still sell that at similar margins to what we have now. We will not give away the farm.

Thanks.

Next question from Brian Keen (ph) of Prudential Securities.

Good morning. Kevin, could you give us the CRM deals, check imaging and maybe net teller for the quarter?

Sure. Check imaging deals, we did 29, which is compared to 31 in each of the prior quarters. So, that is a strong seller. Our net teller deals, we had 39, which compares to 25 in the first quarter and 44 in the second quarter. So, net teller still continues to be a shining star for us. We continue to see very aggressive growth there.

Then, on the CRM side, we sold 4 Transient (ph) deals during the quarter, which compares to 5 in the first quarter and 9 in the second quarter. Obviously, we sold two Argo deals in the second quarter. Transient has not done what we projected it would be. I will tell you that coming out of the user meeting our sales guys for the Transient product had an enormous amount of leads and were pumped. Most of the sales guys were pumped coming out of the user group meeting.

If I look at the core processing deals and you haven't seven a pick-up there yet, do you see more or what is the RFP pipeline look like and the sales cycle, usually 6 to 9 months to land a deal?

RFP pipeline continues to be nice, it is steady. don't think there has been a lot of drastic changes in that. As far as the length of time it takes totally depends on the bank, particularly the size of the bank. Smaller banks, you know, the cycle may be six months. Larger banks could be over a year, particularly some of the multi-million dollar banks. So, the bigger the bank, typically, the more complex the deal and the more people involved and the longer it takes to close it.

I think the number of proposals - RFPs we are seeing is similar to what we have been seeing We are encouraged some of the deals that we have been working for a while that again, not losing, just not closing deals that slipped, we think hopefully are starting to move in more with settlement of the international situations maybe folks are feeling better about paying out money.

Mike, do you see opportunities for acquisitions that maybe you have the ability to upgrade their core processing legacy systems, like you have done with Liberty where Jack Henry could upgrade the system? Is there acquisitions out there that Jack Henry might be able to take over?

Yeah, there are.

As I always said, the best acquisitions we have done in the past have been competitor acquisitions. We take their products and continue to support them, but move those customers up. We have done that successfully with Maytag and Peerless and Liberty. There continue to be others out there.

You have to wait for when they are ready to do something. We are very cautious to throw multiple products out there that we are going to continue to sell because it confuses the marketplace and our sales people and impairs our strategy going forward in the bank and marketplace.

We have a great strategy now. We have very good products and very good niches. We don't have multiple sales people in one account. That is our strategy. We didn't want to have one of everything and having salespeople fighting to sell three different Jack Henry products into the same bank or credit union. I think we covered the marketplace well.

I believe there will be consolidation in the marketplace. We have seen consolidation in the last three to six months and will see the weaker folks go away and stronger ones with the stability and the reputation and the money continue to acquire some of the smaller ones. I believe that will happen and it will be slow and steady.

Good. Helpful. Finally, Kevin on forward-looking numbers, we are at 15 cents for next quarter and then, 66 cents for fiscal '04, are we in the right ballpark there? Are you comfortable with the numbers or how should we think about the expectations going forward?

I think that is probably the right range for next quarter, somewhere in the 15 cent range.

You know, obviously, 14 to 16, but you are in the ballpark. And we are just now really getting started. We just got through with the sales budget for fiscal '04 on the banking side. We are getting ready on the budget review. At this time, I guess probably the mid-60s would be the right range for next year. Obviously, when we get the budget process done and I get feedback next quarter on the year-end call, I will give better guidance. That is pretty close.

Great. Thank you very much.

Next to (inaudible) with Midwest Research.

Good morning. On the outsourcing business, you indicated you are still seeing growth in outsourcing. Is that related to market share gains or just new customers wanting to outsource?

I would say it is the combination of both.

We are adding a good number of new customers on both the banking and credit union side. We see occasionally in-house customers that want to retain the software they have with us, but move into an outsource delivery of the software. I am not sure if I answered your question exactly, but basically coming through new additions and new customer additions.

It sounds like it is customers that have never outsourced coming to Jack Henry and saying, "I would like to outsource."

No, new customers are mostly outsourcing before. Now they are coming to us for our Jack Henry outsourcing solution. There are a few different things out there, but the majority of new outsourcing customers were outsourcing when they came to us.

I would be surprised if 1 in 10 of our add-on outsourcing customers are people that converted from the in-house product.

That is a very low number.

Also, in the press release, you said you are seeing reduced in-house courses of sales. Do you still think that is because of the kind of economy we are in and lack of capital spending or is there any type of fundamental change in the way financial institutions are looking at core systems and not wanting to change at this buoyant in time?

They go hand-in-hand.

A lot of in-house deals are not done because people of not willing to pony up the money to do it right now. You can blame the economy or whatever you want to on that. Some people were never outsourcing before and are looking at it because they want a change, but not a big up-front capital expenditures.

You know, is it a trend? It is probably a little bit of a trend right now. I would say that trend a lot because of the economy and consumer confidence is eroded in the last few quarters -- is a trend that will continue and be sustained if and when the economy comes back nicely. I don't think so, but you can guess on that as well as I can.

I would rather say it is a shift in philosophy for the time being with all the different elements pushing on it, rather to go out and say trends at this point. When the economy comes back and spending goes back to a natural type spending, if it is still this way, I will say we see a trend.

We see a trend when we see in-house customers doing outsourcing, we see a lot of that happening, then I will be comfortable saying that is a trend you can chart.

On the other side of the fence, are you seeing more demand as some of the Y2K contracts are expiring, those signed in '99, because people were preparing for Y2K?

I think we are seeing some related to the Internet banking business.

I don't know for the most part that we are seeing -- if somebody signed a contract to move to Y2K compliant core system, I don't know at this point if they are looking to change again. We will see that more on the outsourcing side because for whatever reason there tends to be some more inclination to change. They have to make a decision at end of five years on the contract, make a decision to renew the contract with existing vendor or change. There is some reason for folks who went to outsourced solution five years ago to reconsider whether they want to stay with it or make a change.

We believe we are seeing a number of Internet banking systems that we have been signing are second-time around systems as they are replacing some of the early Internet banking products. Those wouldn't have any particular relevance to Y2Kissue.

On Internet banking, is that more of you taking market share from certain providers or is it just people wanting the next version of Internet banking platform?

If you look at sales we have done, about 75 to 80% of first-sometime buyers.

The balance is competitive take away. That could be from any number of vendors. No particular one we see rolling over. It is because they are getting end of that five-year window of their contract. As their customers begin using the product, they realize that per account charge makes our up-front license fee seem reasonable.

Thank you very much.

We will take our next question from Nick Fiskin (ph) with Stephens Incorporated (ph).

Good morning, everyone.

Question for Mike and Jack, do you think the environment improved versus three months ago or even one month ago on the in-house core?

Yeah, I think it has improved. We are not doing back flips and having keg parties because we are so excited about it. We believe from the pipeline and backlog numbers, it is slightly improved.

Can the trend hold up long-term? I certainly hope so. But, you see kind of a gradual lifting of the gloom and doom out there. It is a little bit refreshing. Certainly nothing that we are running around in circles high-fiving each other over, Nick.

What would be the next data point that you would look for to see if it is accelerating?

I think if we see sustained increase over three-quarters with increased backlog numbers making our numbers on the sales side, I would say that is definitely a trend that would make me feel better.

Probably the biggest data point that I would look at is obviously the June quarter is our biggest selling quarter anyway because it is our year-end and the sales guys are beating the bushes. My real data point would be the September quarter to see how strong or weak it is in comparison to prior years.

Okay. In the meantime, Mike, you have basically no debt. You have a good amount of cash and you have got to get a bunch of cash in the matter of three to six months. Arguably, some of your peers have been getting accessions we thought you guys might get. Can you talk about increasing the dividend, buying back stock, what else you might think of doing?

Nick, we always thought the best use of our cash are acquisitions.

We've certainly been active out there and looking at acquisitions and for various reasons, we haven't done big ones lately, but I think that is okay. We've looked very hard at the stock buyback the last few months to see kind of where the market is going, where our stock price is in relation to the dividend. We always said we would increase the dividend at a discount to earnings growth. I think you will see in the years of earnings growth our Board will be hesitant to increase the dividend.

So, are we looking at stock buyback? Yeah, we continue to look at it based on stock price. Do we look to increase the dividend just to send a message we are happy? I don't think so. Our logic has always been to report to the file hand-in help hand with the earnings growth.

And if we are sitting around here six months from now with 80 or 90 or 100 million in cash, I think that is okay. I was taught cash is a good asset and that is why it is at the top of the balance sheet. So, I don't think you could say that simply because we haven't done an acquisition and used the cash in the last six months, there is not an opportunity in the next six months.

That is not to say we have not been actively looking at acquisitions. The ones we looked at were really ugly or didn't fit our strategy, one of two things.

Or they were priced incorrectly. The work in acquisitions doesn't always show in the box scores.

Was there -- since you have been talking about the repurchase program, sounds like heavily recently, is there a certain price where you guys would be active?

There is a price, we do not want to publicize. We were actually at a point in the last couple of months ready to pull the trigger, but the price never really got down to the level we thought was the right thing to do.

Okay. Then, last question, numbers for Kevin. What was the software license and install revenue under the old reporting?

Our install revenue for the quarter was $7.8 million.

Okay.

Combined, 18.2 million or something like that in license. Installation revenue was actually up 9 and-a-half percent from this time last quarter or a year ago.

Great. Thank you.

We will take our next question from Steven Long (ph) with WR Hamron (ph).

Good morning.

First wanted to touch base on going to your fiscal '04, last year we saw up-tick in revenue. Was that a specific event last year or seasonal thing we see in your business or can you talk to that as far as maybe what you expect the top line to do this quarter?

I will get that first, Steven. Last year was not really, because we have always had nice up-tick in revenue in the fourth quarter. For a number of reasons, one, the sales guys are selling a lot of stuff. Even the small things that can be installed in the same quarter we sell it. We had openings in the install schedule a year ago. Some of the larger deals could be shipped. There is a number of things. Do I look for up-tick in top-line revenue in June of this quarter?

Absolutely.

I think you will see seasonality on sales and in the pipeline than you will on the revenue income side because our last fiscal quarter upcoming is big on sales side, which doesn't really always translate to revenue because a lot of times those sales go into backlog and are recognized over 9 to 12 months. More seasonality on the sales side than the revenue and income side.

Great. I guess the next question is you know, coming out of the user group conference, I it is environment where a lot of the financial institutions are not spending. Are you seeing demand for new products you guys don't currently offer? When you started seeing demand for CRM and went out and developed or formed relationships to address the demand?

Yeah, we have been saying some demand for fraud-related products. That is a hot topic in the banking and credit union markets now.

We have partnered with companies that put us in very good position with product offerings in a short timeframe to meet that requirement. Those were announced at the user group meeting. We've also announced at the user group meeting, some add-ons, if you will, to Internet banking product, which improve the functionality of that product particularly for the customers that for the banks that want to pursue small business related customers. We think that will be well received.

Beyond that, Steven, I don't know that we are hearing much requests for product that is we do not currently have. We have a pretty complete product line. I think the sentiment coming out of the meeting is that a number of our existing customers may be more inclined to add some of the existing products they may have wanted for a while, but possibly been holding up purchases of.

We are optimistic about activity that we expect to see related to products we currently have. But, not hearing much in the way of demand for products we don't currently offer.

Steven, the hottest topic in the last 12 months and it has gotten hotter, is fraud and security. We have the right solution to assist with all of that now.

Great. Thanks a lot.

We will go to Glen Green (ph) with Bank Equity Partners.

Couple of questions.

Really for Kevin, just trying to understand the gross margin ramp in support and services versus a year ago, up about 700 basis points it looks like. Help me understand the ramp in that and where that is headed over the next three or four quarters.

Obviously we have added a whole bunch of outsourcing customers, which allows us to leverage our data centers a lot more. Our ATM switch revenue, which has a nice margin, that revenue in ATM switch is up 40% over a year ago. Those margins are well north of 50%. That is going to continue to drive. Now that we are gaining traction in the credit union side for the EST and debit card switch services and selling outsourcing over there, I expect those service margins to continue to expand and improve.

Looks like it is on the way to low 40% range, but --

Yeah.

Can it get to 45%?

On services, yeah, I think it will get to 45%, but it will take until this time next year and maybe end of fiscal '04. I think our services margin will get back to where it was.

Okay. The next one, there was a statement in the press release about expanding the item processing centers? Just color on that, rationally for it and cost implications?

We had our sales department do white papers on where they thought the most appropriate place to plant a flag because of the concentration of bank and prospect because obviously our sales people know where the outsourcing banks are, the ones that have contracts coming up for renewal. That is how we decided where these two should go.

As far as content, Glen, we can open a new item center for somewhere between half million to a million dollars. It is not a huge cost, basically finding the appropriate lease space, putting readers in there and hiring a couple of people.

The logic was the other part of the question. We have said before we are not interested in the item processing business because of the profit margin available with item processing. I think our profit margins are probably as high or higher than anybody in the industry because of the fact we are pretty much 100% image and we don't have some of the traditional non-image item processing that folks who have been in the business longer may still have. We are 100% image in all of our centers. We are also able to use technology both communications and our own product technology so that we can manage our resources much better than a traditional processing shop. We can get into the operations for less money than some of the traditional approaches. The logic is that we want these sites as feeder sites to feed the higher margin data processing, outsourcing, core outsourcing deals and in some cases, can lead to license fee revenues for folks that have a certain amount of money available to put into license, but maybe not enough to put into licenses of core system and full-blown image system if we are conveniently located, they can let us handle the image processing and they have money available for core in-house processing system. The logic is we are using item centers as gateway to higher margin opportunities.

Got you. One final question related to backlog, Kevin, if you could remind me the typical timeframe to recognize the in-house side of the backlog?

90 to 95% of the backlog will turn into revenue in the next 12 months.

Okay. Thanks a lot.

We will take our next question from Ryan Dunagan (ph) of Robert W. Baird (ph).

On the credit union side, any signs from the US central numbers they would be inclined to buy the Jack Henry outsourcing services?

We are seeing a number, the US Central deal is kind of an outsourcing deal, primarily, certainly for core processing for US Central themselves. Then primarily through US Central for us to provide outsourcing to their customers. Their customers don't have to do business with US central or Jack Henry. That is the direction US Central would prefer to see them go.

US Central has secured a number of letters of intent from the credit unions they process for. I am hesitant to quote the number, I am not sure if I remember it correctly. If I recall, it was more than half of the current centers they process for and indicated by letter of intent, the desire to do business with US Central. Our agreement with US Central is a very favorable agreement, regardless of the number of customers they get to sign up. For it to be a win-win for both Jack Henry and US Central, they do need to see a fair amount of participation in that. But, it does appear things are tracking in that direction.

Great. Could we get the breakout in revenue between credit union bank, Kevin?

Total revenue for banks was 84.4 and credit union 14.5 million .

Great. Then, was there any reset in the incentive levels on the hardware side at all or is that pretty consistent with the past?

No, there hasn't been a reset. Obviously what one of our vendors, not saying names, did to us last fall, with a promotion they had to move a whole bunch of I-series, that went away. Our margin on hardware has kind of returned to normal level. Obviously we didn't move a lot of hardware this quarter and obviously rebates incentives are driven by volume of business and obviously we didn't hit some of the thresholds. We got decent rebates incentives this quarter. It was about 60% what we got compared to a year ago. Our hardware margins are pretty much in line with what that will be going forward.

To name the name of the vendor that makes (inaudible).

This will probably come up and I want to tell everybody.

We reclassified the numbers last quarter to break licensing and license costs out and put the installation in the services and I will have restated quarterly numbers for the last three years out on the web site sometime next week. You can grab those to redo your models.

Thanks a lot.

We will now go to Brad Moore (ph) with Putnam Lovell.

Couple of things. Just to press further on the issue of the outlook, particularly on the core side of the business, the in-house side. Can you give me a sense as to what you are hearing from your clients in terms of them actually budgeting in the calendar year '03 for new in-house solutions? What are you hearing in terms of their budgeting and behavior toward spending? Are they increasing budgets or provisioning for in-house solutions or what is the behavior right now?

You know, we don't typically talk about the banks and budgets. Budget time is generally in fall around November or December timeframe. We have to believe there is probably a fair amount of unspent budget out there now. We don't get to see their budgets, nor do they get to see ours. That is difficult for us to know what they are thinking about six months from now.

Okay. And then, could you give us an update on your new acquisitions, (inaudible) in terms of revenue up-take - and in growth there?

Kevin mentioned Transient sales and those to date have not performed where we hope to see them, but also qualify that with the feeling coming out of the user group meeting last week that we will see pick-up there. CRM is one of those purchases that is easy to delay if there is uncertainty about where the economy is headed and that kind of thing.

We believe some of that uncertainty is beginning to be removed and based on the activity last week, we think we will see pick-up there. The CU Solutions acquisition has been a process since December of getting those folks used to new accounting systems and various things. We just moved them into the Charlotte facility this past weekend. We have been adding staff in key areas there going ahead to ramp up on the install side.

We are also ramping up on the sales side. Anticipate launching some fairly significant marketing campaigns in the next 90 days because of opportunities that we believe exist in the credit union marketplace. At this point, I would say CU Solutions revenues have been essentially flat from the time of acquisition. We are expecting to see that begin to change here shortly as we're focusing our time now preparing ourselves and getting ready to go out and aggressively go after the market.

The other thing I would add, Brad, even though Transient solutions have not sold the way we had kind of projected, that acquisition is very much accretive under CU Solutions. The other acquisition was MBDS, in Chicago, I will tell you that our direct sales rep in the Chicago area is very much excited to have that in his briefcase or toolbox when he goes into perspective customers. That would also is accretive.

Okay. Do you happen to have the amount of acquired revenue in fiscal third quarter?

I do not have that with me, but I can assure you it is not a big number.

Thanks.

Jeff Baker (ph) of Piper Jaffray has our next question.

Just housekeeping details. Capex during the quarter, free cash flow, that ought to -- if you have ATM switch revenue, the absolute number, that would help? Thanks.

Uh, Capex for the quarter, Jeff, was $8 and-a-half million, which brings us year-to-date to just under $35 million. And I will tell you that we will spend $50 million this year as most of you know and I talked about on the last call, we are looking at facility in Charlotte and San Diego. We will have the one in San Diego closed by the end of the year and we have moved into there. Capex will be up over $50 million.

However, again, we are just now doing Capex budgets. If we get both of those done this quarter with the other projects that are ramping up, our Capex should drop significantly, maybe down into the low $20 million for next year, which would be a different change from the prior three years. So, that is the Capex. The other question?

I do not have free cash flow yet, we have not completed cash flow statement.

Okay. and ATM debit switch flows?

It's about 10% of that line item.

10% of the total maintenance excluding the installation?

No, 10% of total support service.

Including or excluding installation?

Including installation.

David (inaudible) of Wachovia Securities.

Kevin, did I hear you mention a new product or strategy for entering the smaller bank market? Did you elude to that? If you did, could someone give us more color on that?

It is not a new product, David, it is the core product that we got from the OSG from Maytag. I don't want to give the wrong impression and I am sure Jack will add color. We did not skinny down the project. We figured out a way to sell on a single server. The hardware cost is much cheaper. We are changing installation strategy a bit to effectively compete with price and precision and modern banking of the world and still maintain a respectable margin level.

I want to add this is not a scale-down version.

It is the exact same product that is running in over 100 banks and banks as large as a billion dollars in assets currently. It is more of a architecture redesign that allow us to run on smaller service configurations. We have invested heavily in the product since we acquired it from Maytag. It is a future function competitive product and it can be marketing at considerably lower hardware and operating system costs for the AS-400. AS-400 is a great solution, the I-Series, I'm sorry. Great solution for a lot of banks. At the low end of the market the hardware and operating system platform is just too expensive. We believe we have addressed that problem and we have a very feature competitive product and quality install and reference base to allow us to sell the core product at that end of the market.

David, to go after that market is the biggest thing, and gain market share on the competitive take away. Obviously it will be similar margins. Revenue dollars are pretty small compared to a 20/20 or so like $300 million plus size bank. There are nice add-on products we can sell going forward once we add them to the base.

These are customers that would like to do this with the outsourced items, right?

Not necessarily anymore than other customers. Again, we are seeing interest in outsourcing items from very substantial banks, for example, Kevin mentioned the fact that we will be establishing an item center in New Jersey. The start-up of that center or the charter client, if you will, on that center, is a bank in excess of a billion dollars in assets that wants to outsource their items. So, these folks are -- I don't know they are more or less inclined to outsource their items than any other size bank.

David, I was referring to the switch services and you know, disaster recovery service and things like that that are nice add-on products. Don't get me wrong, I don't look for this offering to blow the numbers away or be anything great any time immediately happening. It is just nice that we now have a product we can actually offer to that segment of the market without having to walk away.

Thanks. One more question. On the margin, I mean, it sounds like the results are still very strong on the EFT business. Do you sense that is getting a little bit more competitive as you are out bidding for new business? It certainly feels like the network guys are in there aggressively, especially with their recent acquisition that will start pushing in more aggressively. Do you get that feeling?

You know, David, we frankly have been expecting to see that for sometime and have been somewhat surprised that we haven't -- it hasn't been the case. It is clearly a competitive business out there. You know, our pricing is competitive. Can the competitive landscape change with acquisition of ATM business from EDS? It could, but they paid a lot of money to buy the business. I don't know they are going to want to reduce cost too much going out there. So, frankly I would have expected what you said to be the case and that we would be feeling some impact for the last couple of years. Frankly, that hasn't materialized.

One thing that shielded us from the pressure, it doesn't prevent it from happening, but a shield there. Couple of things, one, if they use us for a switch service, then they are still dealing with one vendor, they don't have to deal with multiple vendors. Using us, they get a level of integration they can't by using somebody else. We have competitive advantages that help offset some of the pricing pressures.

Thank you.

Next to Steven Corn (ph) with Lowe's Corporation.

Hi, just a quick question. I apologize if you have answered this. Could you clarify as to when you put booked business in backlog and then just a little more color as to how the outsourcing business should translate into revenue over time from backlog?

Sure. The backlog, two components, in-house and outsourcing. The in-house is signed contracts for software, hardware installation services that we have not yet delivered. Per the contract, they will owe us if we deliver it or not. If they walk away, that is a guaranteed amount we will get per contract.

On the outsourcing side, what goes in there is the minimum guaranteed monthly payment. So, if you as a bank sign a five-year agreement with me for a thousand dollars minimum guarantee a month, $60,000 goes into backlog day one. As each month goes buy, a thousand rolls out of backlog and a billion hits P&L.

In addition to that, I bill for the number of accounts and volume transaction fees, which is typically another thousand dollars. What is in backlog actually represents half the revenue I will get off the contracts I have in hand over whatever remaining time period there is.

Given that why are you less certain as to what your revenue expectations are given the backlog is rising and that is the way you record it?

Well, outsourcing -- obviously recurring revenue, I have a good handle on what that will be, but that is only 52% of total revenue. In-house business, we could go out and sell one big deal that was a big prospect at the user group meeting, a large deal that could be 4 to 6 million dollar deal, but the bank may not want it installed for 18 months, so I will not ship until the fall. The backlog is good overall indication of the health of the business, but not a good indication of the revenue the next quarter.

Thank you very.

Mr. Williams, we have no further questions at this time. Back over to you.

Thank you for joining us today to review third quarter results.

Obviously, our results are not what we have produced historically nor is our growth were we would like it to be. With the current economic conditions we feel the most important thing for us to do is to make the correct decision and directives for the long-term health of the company.

We are committed to expanding our outsourcing footprint, as we indicated and make the correct decisions to build on competitive strength. We feel under the circumstances our managers, employees continue to do what is best for you our shareholders.

Thank you. Operator, would you provide the replay number?

Thank you.

Replay of today's presentation will be available at 10:45 a.m. central time today and go through April 23rd. You may dial into 719-457-0820 or dial 888-203-1112 and type in code 5078. Thank you, that concludes today's conference and have a great day.