Jack Henry & Associates Inc (JKHY) 2003 Q4 法說會逐字稿

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Good morning. Welcome to the Jack Henry & Associates fourth quarter and fiscal year end 2000 earnings call. Statements or responses to questions may be made in this conversation which are forward-looking or deal with expectations about the future. Like any statement about the future, these are subject to a number of factors which could cause actual results to differ materially from those which we anticipate. Such factors are disclosed in our recent SEC filings. There could also be other factors not included that could potentially cause results to differ materially.

We are pleased to report the financial results of our fourth-quarter of the fiscal year ended June 30, 2003. These results reflect a small increase in revenue, improving gross margins during the year, continued strong balance sheet and increasing operating cash flows and a solid and growing backlog compared to the same period last year.

To review our statement of income, our total revenues increased by 3 percent for the quarter and increased 2 present for the year ended June 30, 2003, with a significant increased contribution from support and services for both the quarter and fiscal year end of 14 percent increase. This represents our continued success in the outsourcing marketplace, strong growth in our ATM and debit card processing business and additional in-house support fees. To further emphasize this growth, our recurring revenue -- which is included in the support and services line, less the installation revenues, which are included in this line -- increased 19 percent for the quarter and 17 percent for the year, which means actually our installation revenues went down slightly. And our recurring revenues represented 54 percent, or 58.6 million for the quarter, and 55 percent, or 22.6 million of total revenue for the quarter and year, respectively. This increase in recurring revenue helped reduce the impact of the significant decrease in our license revenue of 34 percent for the quarter and 27 percent for the year, in what has been one of the most difficult markets the technology industry has ever seen. This decrease in license revenue also had an impact on gross margins, which I will discuss in a minute.

There was a slight increase in hardware sales of 3 percent, compared to the prior year, for the quarter, and a decrease of 5 percent for the year ended June 30. Change in the various components of revenues were -- our for the quarter went down 34 percent, or 6.1 million, and for the year went down 27 percent, or 18.3 million. Support and services increased 14 percent for both the quarter and the year, and increased 8.6 million in the quarter, or 31.7 million for the year. Hardware sales went up slightly by 3 percent in the quarter, or 700,000, or down 5 percent for the year 5.4 million, which obviously, hardware trails along behind the decrease in license revenue. Our cost of sales increased by 5 percent in the quarter and 7 percent for the year ended June 30, 2003, which is primarily due to the increase in cost of services associated with the non-hardware revenue and directly related to the increased headcount from a year ago. Our cost of license increased 23 percent for the quarter and 55 percent for the year, compared with the prior year. This cost represents our cost of third party software which we resell to our customers. Our cost of services increased 11 percent, or 4.6 million for the quarter, and 10 percent, or 16.7 million for the fiscal year, respectively, compared to the 14 percent increase in support and service revenue for the same period. Gross margins on services improved during the year, as we continued to leverage our resources infrastructure. Total hardware sales represented 25 percent of total revenue this quarter compared to the same level a year ago, and 24 percent of total revenue compared to 26 percent for the year ended. However, gross margin on hardware revenues increased to 33 percent for the fourth-quarter, based on sales mix, and decreased to 28 percent for the year, compared to 25 and 30 percent in the same period a year ago. This is primarily due to the sales mix of revenue and the various incentive programs and payments from hardware vendors. We continue to believe that our ongoing sustainable hardware margins will be in the 25-30 percent range for the foreseeable future.

Gross margins on sales decreased slightly to 39 percent for the quarter and 38 percent for the year ending, compared to 41 percent in the same periods last year. The most significant impact on gross margins obviously was the 34 percent and 27 percent decrease for the quarter and fiscal year for our license revenue, which obviously carries the highest gross margin of any of our lines of revenue of well over 90 percent. Support and service margins were 33 percent for the fourth-quarter and 32 percent for the year, compared to 32 and 29 percent for the same periods last year. Both these areas increased slightly. These small improvements in service margins are due to the continued leverage of our existing resources; therefore, our overall blended margins were impacted by the change in revenue mix and change in various kinds of revenue costs. The change in our gross margin the revenue line was in -- licensing, went down 37 percent, or 6.4 million in the quarter, 31 percent, or 19.7 million year-to-date; support and services went down -- increased 20 percent, or 3.9 million in the quarter, compared to the same quarter last year, and increased 22 percent, or 15 million for the year -- nice increase in gross margin of support and services line. Hardware sales margins went up 36 percent, or 2.4 million in this quarter, and down for the year 11 percent, or 3.2 million. Obviously, the fourth-quarter was a pretty strong quarter for us.

As far as segments go in regards to revenue and gross margins for our banking and credit union segment -- for revenue in the fourth-quarter, our bank revenue was 90.3 million, or decreased 2 percent from the prior year, and our credit union revenue in the fourth-quarter is 18.9 million. Our gross margins year-to-date -- I'm sorry -- our revenues for year-to-date for the bank was 343.1 million, or up 1 percent. Credit unions was 61.5 million, or up 7 percent from last year. Our gross margins on the bank side went down 9 percent compared to this quarter last year, to $36.1 million margin. Our credit unions were 6.8 million margins, or up 94 percent from last year. Year-to-date margins -- banking was down 6 percent at 135 million, credit unions were up 3 percent to 18.3 million. Credit unions continued to do very well for us, and we expect it to do even better as we continue to cross sell more profitable services and higher margin services into that segment of our business.

Total operating expenses increased 9 percent for the quarter, and as a percentage of revenue, remains fairly flat at 19 percent of total revenue, compared to 18 percent last year. Selling and marketing increased 2 percent, which is in line with the 3 percent increase in revenue, and remains level at approximately 8 percent of total revenue. R&D increased 39 percent, primarily due to headcount increases, but also remains fairly level at 4 percent of total revenue. G&A expense increased 4 percent remained level at 8 percent of total revenue this quarter. The operating expenses for the year ended increased 2 percent, and as a percentage of revenue, remained level at 19 percent of total revenue. Selling and marketing increased 4 percent, which is pretty much in line with the 2 percent increase in total revenue, and remains fairly level at approximately 8 percent of revenue. R&D increased 27 percent, remained level at 4 percent of total revenues, while G&A decreased 10 percent for the year, and decreased to 7 percent from 8 percent of total revenue for this year compared to last. Depreciation changes and decreased employee benefit costs were the primary contributors to the decrease in G&A for the year. Also for a comparison point on headcount, our full-time employees were up 8 percent this year-end to 2257, from 2093 last year, which has a direct impact on our employee benefit costs. Our part-time employee count actually decreased from 167 last year to 107 this year.

Our operating income decreased 7 percent over the prior year quarter and 11 percent for the year in total dollars. Our operating margins decreased 20 percent for the quarter and 19 percent for the year, compared to 23 and 22 percent in the same periods last year. This mirrors the decrease in our gross margin. So basically, the same leverage to the operating line that we have at the gross margin line. Changes in other income are obviously primarily due to the change in interest rates on our short-term investments. Our net income decreased 11 percent for the quarter and 13 percent for the fiscal year ended June 30, compared to last year. Our tax rate has been 36.5 percent for the entire year, compared to 35.5 last year, because we got some benefits from refunds from some state changes last year. The overall effect of this decrease was a decrease in earnings per share of 9 percent for the quarter, to 16 cents this year from 17 cents last year, and a decrease of 13 percent for the year ended, to 55 cents from 62 cents.

A few brief comments on the balance sheet. The majority of significant changes compared to the same period last year. Obviously, our cash and cash equivalents increased 76 percent. Our trade receivables increased by 15 percent, primarily due to the shift in timing of the building for annual support previously mentioned, and our other current assets increased 27 percent, due to, primarily, prepaid maintenance and some other prepaids. Fixed assets went up 13 percent due to capital expenditures, and our total assets increased by 14 percent. accrued expenses went up 32 percent, primarily due to timing of payments and the deferred revenues included in that -- went up slightly, which is also primarily payments for in-house support and the on hardware software orders. has increased 28 percent from last year at this time, also due to the shift in billing.

During the year, we spent a total of $18.1 million on our stock buyback, all of which was occurred in the first four months of the year. Our backlog has grown nicely to 183.1 million, with 69.5 million in-house and 113.7 outsourcing at June 30. This is up from March 30, which was 172.8 million, or a nice increase, with 64.2 million in-house and 108 million outsourcing at March. And a very nice increase from a year ago in backlog, when last year was 141.7 million, or 52.8 million in-house and 88.9 million outsourcing. We still have over 3000 total customers with well over 2400 core in-house and outsourced bank customers and credit unions. With me today I have Mike Henry, my Chairman and CEO, and Jack Henry, the President of the Company. We remain confident we are very well positioned and have the resources for continued future opportunities. This is evidenced by our improving margins throughout the year from leveraging our service revenues and continuing to have the appropriate resources for the return of additional in-house core contracting in the banking side. With these comments, I will open it up for questions. Operator, would you please open the lines up?

(CALLER INSTRUCTIONS). Jeffrey Baker with U.S. Bancorp Piper Jaffray.

Kevin, no guidance for 2004 was given in the release or your prepared comments -- do you have anything to say?

I would I think that next year we will grow bottom-line 18-20 percent, conservatively. I think topline will be in the upper single or below double-digit growth, and that is without any acquisitions. I think that that growth is going to come slowly. I think that our first quarter -- I am comfortable with the consensus estimates out there; I think they are in the 14-15 cent range. I am comfortable with that in September, and then I think it will grow probably a penny or so a quarter throughout the year, to get to the close to 20 percent bottom-line growth.

The expenses in the quarter -- I understand revenues were higher, so obviously, some of those expense categories were higher -- but should we expect those to come back in on the seasonally-down sequential revenues, or should we use this as a base to grow revenues -- I mean, grow expenses?

Which expense are you talking about?

So like we saw a jump in R&D sequentially of about 300,000, and also in G&A. Are those base numbers we ought to start going from?

On the R&D side especially, yes, because what we had was -- throughout the year we had quite a few of our were being capitalized for some large projects on. Most of those salaries are now being expensed, so that should be a good base number going forward. G&A numbers in whole dollars actually should remain pretty flat now, barring any acquisitions.

Can you give us a little bit more granularity on the revenues? For example, customer reimbursements in the quarter, debit switch revenues -- stuff like that?

Our ATM switch fee -- lets see -- I don't really have those numbers right here with me, or the percentages. Our data center revenue, our outsourcing, was roughly -- for the quarter was roughly about $17 million. And our ATM switch fees were roughly 5 million for the quarter. For the year, those 2 would have been close to 65 million in the data centers and just under 20 million for switch services.

And then reimbursables -- do you have those for the quarter?

I'm not sure if I have a total number for that. For the quarter, it would have been close to $8 million -- about where it was in prior quarters.

Kartik Mehta with Midwest Research.

You continue to have success on the outsourcing side of the business. Is it just a particular type of financial -- is it banks, S&Ls, credit unions -- or do you think it is broad across all of your customers?

I think it is broad across all the customers. We are primarily in banking right now. We do have -- earlier this last month, we got our first credit union up and running successfully on a data center, so that piece of the business will now start growing. We have several customers already signed and in the backlog that will be installed, several between now and the end of the calendar year, so we will start leveraging that side of the business. But also, with our data center, we continued to sign some of the larger banks, a billion and up, on our outsourcing service. So it is kind of all the way across the board. And with our 20-24 Core Director, obviously, we're still getting our fair share of the de novos.

We have talked about this in the past, or at least you have talked about it in the past conference calls -- the impact of Check 21. As it's getting nearer and nearer passage, are you seeing an increased interest from financial institutions -- either A, for hardware, or B, for additional outsourcing possibilities?

This is Jack Henry. What we are seeing has remained pretty much study. We are still selling roughly the same number of units, same level of interest. Still a lot of unknowns about Check 21 and what it will ultimately mean. I think that there is a good percentage of banks that are continuing to evaluate Check Image Solutions, but we are not seeing any mad rush to sign contracts based on the legislation.

What about Internet bank sales, in terms of product? Is that still fairly steady, or are you seeing an increase or decrease in any manner in that product?

In Internet? We are still selling a surprising amount of new first-time buyers out there; in fact, during the quarter, we signed 40 deals, and the majority of those were first-time buyers. We continue to see even more success in selling our add-on bill pay products and commercial cash management. And on the credit union side, almost every new in-house credit union also takes our MemberConnect Web, on that side. So there is still a lot of interest and a lot of activity going on in the Internet as the products become more solvent.

When you say new buyers, would these be banks that you're taking market share away from another provider, or are these banks that never offered Internet banking solutions and now are offering that solution?

When I say first-time buyers, that's people that -- it is not a competitive win from somebody else; they have never offered the Internet to their customers.

If you look at your pipeline or if you look at the number of customers you have, what percentage do you think there is still a possibility that you could have first-time sales for this product?

This is Jack (). I don't know how to put an estimate on that. We continue to be surprised every quarter with how many banks are putting in Internet banking systems for the first time. We also take away every quarter some from our competition. If you look at the folks that are putting it in for the first time and the ones that we're taking away from the competitors, of that combined number, about 20 percent of those tend to be competitive takeaways, and the rest -- the other 80 percent, at least if this last quarter is indicative -- appear to be first-time -- I think all of the banks have websites, but transactional Internet banking sites -- there is a surprising number to us of first-time users still out there. So we have, between our banking and credit union operations, a little over -- if I am not mistaken -- 1000 Internet banking customers. If you look at the number of core customers that we have, that latest number is roughly, on both sides of the house, 22, 2300?

24.

2400. So I don't know how to extrapolate that, but I think there is still a fair amount of opportunity, we're just not seen any slowdown. It is pretty consistent in that 40 per quarter range -- what we are seeing.

Bryan C. Keane with Prudential Securities.

Could you give us an update on what is happening in the core in-house bank contracting? I know in your comments, Kevin, you mentioned something about that. That obviously is going to be key. What are you seeing over the last 3-6 months, and what are you seeing going forward? Have you signed many deals, and what does the pipe look like?

You know, we continue to be cautiously optimistic about the in-house. Is it better than it was twelve months ago? It certainly is. Is it back to the levels that we would call normal? No. We continue to have success on the whole spectrum, from small to large banks, really doing well on the credit union side. But we are still really cautious that this is not a bounce back, that business is a little bit better and the economy gets a little better and the stock market gets better, and people have a little more confidence out there. So business is better, but still not where we would like to see it. But we are pretty happy with the way the quarter went.

Are you going to be able to -- are we going to witness more competitive wins, or what is the environment going to be the next twelve months? Are you going to have to steal customers away to get these core deals, or is it just going to be people deciding to upgrade?

Practically everything, except -- with the exclusion of de novo start up banks, everything that we sell on the in-house side is a competitive takeaway these days. Everybody has some system out there. We are a little fortunate that there has been continued consolidation in companies like us -- people that do what we do continue to consolidate and put some questions and uneasiness out there, and some of those other customer bases that help us. But everything is a competitive takeaway.

Switching over to the services margin, was better than I expected. I guess I would be interested in the reasons for that rise into the low 30s, and is that sustainable going forward?

It's sustainable. It's a couple of things -- one, we have continued to do a better job of levering our infrastructure on the outsourcing, which -- as we continue to add more and more credit union on the outsourcing, and get those running on a single system -- that is going to get even more expansion in those margins on the services side; and also, that we are now getting a pretty good traction selling ATM debit switch services on the credit union side, which some of those are some fairly large deals. We can continue to leverage those resources very nicely, because we can add a whole bunch of credit union customers and not have to spend a whole lot of CapEx. So not only are those margins, in my opinion, sustainable, I think you're going to see them continuously expand over the next 12-18 months.

I just want to make sure I'm clear on what you said on the forward guidance. If 18-20 percent is the target below on the EPS line, that gets me to 66-67 cents. But if I run through kind of a 14-15 and then a penny up thereafter, that gets me into the low 60s. Should we be more low 60s, or is that 67-66 number where we are supposed be targeted at?

I think if you start out the next quarter at 15 and add a penny a quarter, I think you are going to be right at 66 cents, which is 20 percent growth, unless my math is bad.

15, and then go up from there a penny. I thought I heard it differently. Okay, great.

John Kraft with D.A. Davidson & Company.

You mentioned the competitive wins, specifically in the core group. And I guess if there was some change in the landscape, I guess maybe you could shed a little bit of light on that, or are these still just one-off type of deals?

I don't think that -- with the exception of the credit union side, I don't think that there is any one vendor that shines that we are having a lot of success from. I think people are continually impressed with our record on integration. Integration is extremely important to them -- track record with all of our software and being able to use any of our customers as references. Really, our reputation in the business that they really like the products that we have out there and the integrated approach. And there's a lot of products out there that aren't integrated, and they are having to deal with 12, 13 different vendor relationships. And there is some uneasiness out there continually about companies that aren't doing well or have been acquired -- all of that goes and benefits us on both the banking and the credit union side. I would not pick on any one in particular vendor, because it seems to be -- we have been successful with practically all of them out there in the marketplace.

Another broad question on the ATM/Debit processing -- do you have -- do you see concerns or opportunities out there with the pending First Data Concord merger?

We really don't compete in the same markets that FDC does. FDC is going after the huge retailers in the merchant side. We basically provide the front end switch for our financial institutions. So we compete with them, but it is a different animal, and we bring a couple of things to the table that FDC can't bring-one -- one, we bring integration; and two, we keep them from having one more vendor relationship to have to deal with.

I guess I was thinking more along the lines of maybe the concerns by the banks that the -- you answered; that's fine. And a housekeeping question. What was CapEx for the quarter?

I knew you were going to ask that. CapEx for the year -- I can't remember what it was for the quarter -- for the year, it was 46 million.

Glenn Greene with ThinkEquity Partners.

The topic of the net margin compression in your customer segment base, whether the potential is your clients to sort of slow down their willingness to spend on IT, given the impact on profitability. Are you not seeing that? Just some color and comments around that?

Could you repeat that? You lost me on that one.

The question of the net margin compression on your clients, and whether that is slowing down their willingness to spend on IT?

Oh, on our clients. I think more than anything, what it does is it causes some financial institutions to at least consider outsourcing, when they might not in the past, which is probably one of the drivers for our significant increase in outsourcing. I don't see a big change in their thinking, I think it just opens the door for a lot of them to at least consider outsourcing that would not have thought of it before. But as far as spending, more than anything, I think they are looking at things that they can actually see an ROI on, and things that they gain efficiencies in their bank or actually figure out a way to get some fee income off of. In my opinion, that is what they are looking at because of the margin compression.

I would also say that the economic environment in general has caused them to be a little more cautious, and I would echo everything that Kevin said in terms of the kind of things they have been buying. But I think we are reaching a point now where you can only hold off on some of these technology expenditures, waiting on things to turnaround, for so long. And I think we have got a number of banks now that are reaching the point where they need to go spend some money just to keep their business running the way it needs to run. So at this point, if there had been any reluctance to spend based on the impact there, I think we may be seeing a little bit of easing in that posture at this time.

Different question -- it relates to Fiserv's acquisition of the EDS credit union business. Just your thoughts related to competitively what that may mean? My guess is (technical difficulty) likely manages that business better than their predecessor, and you have probably done a fairly good job of winning some business from EDS prior to Fiserv's acquisition. Just some color and comments around that?

When we take a look at the competitive landscape out there on the credit union side, it tends to not quite be as strong. We have taken several customers from EDS, and when we look at our model out there -- we have a great model on the credit union side -- we attack it with 2 products, and we are extremely successful, from the very smallest to the very largest credit union out there. We have been a more than a little unwilling to throw anything into that mix and complicate things. We are very happy with what we have got out there. Symitar has an unbelievable reputation out there in the credit union marketplace, solutions is gaining traction. We just have a lot objection out there. And will the acquisition of the EDS base improve that? I don't know, that remains to be seen. But we continue to take customers away from all competitors out there. And I guess like you, we are not really sure what that means, but we don't see anyone else out there that has a strategy like ours in the credit union marketplace.

Kevin Williams The customers do not like confusion, and we have a very clear and very solid strategy -- great products, great service, great reputation and a very distinct delineation as to where product A fits versus product B. And frankly, I am not sure that any of our competitors out there have nearly as clear a story to tell, and we think that will work to our advantage.

Kevin Williams I guess the other thing -- this is some information (), and Jack can probably correct me on this -- but we actually added more new net customers last year than our six largest competitors combined. So I guess the way I would answer that is I don't think it matters who . With the momentum that we have in the market and what we did last year, I think we can continue doing that going forward.

Chris Rowan with SunTrust Robinson Humphrey Capital Markets.

Kevin, on that last comment -- was that more than your six largest competitors in the credit union space?

Yes.

Can you tell us anything about demand for branch systems? Have you seen an uptick in branch, either more so or less so, than other ancillary solutions you're selling?

We have seen continued selling in both our seller and platform automation systems. I don't know that I would say it is more, but it was one of our stronger selling complementary products all through the year.

I think it is a reflection both of banks continuing to acquire and build branches out there, plus it is a product, like we talked about before, that you can see a good ROI on; it brings a lot of efficiencies to the bank, brings money to their bottom line. So both of those help sell those branch automation products.

Peter J. Heckmann with Stifel Nicolaus Hanifen Imhoff, Inc.

Kevin, on the change in reporting on the reimbursements, what was your rationale there, and can we get some -- do you plan to put out some historical figures?

Obviously, the rationale was that we break out customer reimbursements into a separate line item, and basically, 99 percent of it related to our support and services line anyway, and it had absolutely no impact on margins. And actually, I had John Seeger call a majority of the analysts to see what their thoughts were, and nobody really cared. So we just showed it in there together to keep from having a separate line to even have to worry about, because it all goes into that one line anyway. And per the accounting rules, all they require is that we gross it up, and it is grossed up in there now. But as far as historical, you can basically go back and shove everything up into support and services for both the revenue and cost, and that is what you get; however, I will give -- when I give out the annual report here in a month or so, I will give the prior 2 year's quarters with a grossed up ().

As regards pricing on the bank side, specifically in outsourcing but also in core -- like you say, there has been a lot of consolidation of core providers. And I guess what I have been surprised at is, despite what I would view as maybe a shaky deal with Fidelity National and ALLTEL, we have been saying ALLTEL sign a number of big billion dollar banks. And Fiserv is out this morning saying Precision won a multibillion dollar bank out on the West Coast, despite their transition. Can you talk about the pricing, what type of magnitude of pricing are you seeing at renewals, particularly of outsourcing, and how are you counteracting some of that?

This is Jack. We are not seeing significant changes in the pricing. a deal by deal basis, it could be -- with some of the consolidation activities that have taken place, I think some of those folks are anxious to win some business to show that the new organization makes sense. And so you might see on an occasional deal some increased pricing competitiveness, but we are not seeing dramatic changes. The deals that Fidelity announced, I believe, were First Tennessee and -- we were not involved in those deals. First Tennessee in particular, I think, is a little outside the range we typically would go after. The Precision deal you mentioned on the West Coast is the one I am thinking about. I think that deal was pretty much all but concluded prior to the acquisition by Fiserv. We heard about that quite some time ago. So I don't not think that there is a lot relating to this. I think that the Fidelity transactions you mentioned may have benefited from the acquisition by Fidelity, just because they may feel that there is a little more direction there than what there had been under their previous ownership. But we are not seeing significant changes in the market.

Kevin Williams The biggest changes that you'll probably have seen in our company in the last year is that we are getting more aggressive and have a better vision on the small in-house banking side, where price has always been a really big issue for us. We have typically not done well in the small in-house bank marketplace, and we have a new renewed effort and focus to be able to get our products priced where there is not a huge difference in us and our competitors. And I think you will see continued renewed success in that marketplace for us, and that is probably the biggest change that we have seen over the last year, for us.

So primarily on the Core Director side?

Correct.

On the pricing issue, we had heard that there was one competitor that was looking at providing 1 year free on outsourcing. Is that not being picked up competitively by other providers?

Not in that form. We are not seeing as much of that at this point in time out of that particular competitor, and I think that most of the competitors probably have some alternative, which if they have to go to that from a price competitive standpoint they will. But even at that point, it is not going to be that dramatic; it's not going to be at that same level.

Nikolai D. Fisken with Stephens, Inc.

Kevin, if you look at the last couple of years, you guys have missed the September quarter twice in a row. And I know you guys have increased the outsource and the recurring earnings base. I'm wondering if you can kind of give us your visibility into the September quarter?

I think I already said that I am extremely comfortable with the consensus estimates out there. At this point I don't envision missing those, because with the backlog and, obviously, our recurring revenues well over 50 percent right now, with the installation in, I have probably got way over 80 percent visibility of where we are at for the quarter and maybe even over 90 percent right now.

If you look at the installed schedule for in-house deals, can you give us the -- what it looks like today versus six months ago? Are we booked out a year, has that installed scheduled gotten more -- have you added more deals to it?

We have added more deals to it, and actually, our install schedule is -- we have actually got some deals out there more than a year from now. And obviously, with some of the bigger deals, when you've got a 5-$7 billion bank, you can keep a Silhoutte install team pretty much busy an entire year, just getting them up and live. So our install schedule is fuller now than it was a year ago, obviously.

How about versus three months ago, six months ago?

This is Jack Henry. I would say we are probably in a little better shape, meaning not booked out as far, than we were three months ago. We did a lot of migration conversion activity, which is converting from the Liberty product to one of the flagship products, since we have sunsetted that. That still takes essentially the same conversion resources bringing in a new customer would take. We have largely worked our way through, or will have, certainly, within the next 90 days, those Liberty migrations. We continue to see some migrations from some of our other products, the peerless products and others, but there is no compelling event that is requiring them to do that -- they are simply doing that because -- again, going back to the point I made earlier, I think some folks are now looking at the point and saying we have held off making some of these technology investments, and now is the time to revisit that. So we are continuing to do some migration activity; but there is no compelling event like the sunset of the Liberty product that drove a larger number of those a year ago, so I think that our backlog on those type of deals is freeing up. We have seen some increase in the transactions with some of the larger customers on the side, on the banking side. So I would suspect that they are probably about where they were three months ago, might even be booked out a little farther than where they were three months ago. The credit union business has remained, fortunately, very consistent and very steady. I would say that they are probably in roughly the same position that they have been for some time.

If you look at the share count, Kevin, you guys did a grant of 3.6 million shares. I am wondering, given the strong performance of the stock -- the grant was around 10 or $11. What is that share count going to do, and what are you assuming for the fiscal year 2004 for share count?

A lot of that depends on what the price is at the end of 2004. But for projection type purposes, I am projecting now that by the end of 2004 it will be somewhere around 93 million. So I'm building some increase in share count, and I am still comfortable with basically a 20 percent bottom-line growth off the increased share count -- if that is what you're trying to get at.

Exactly. Lastly, related to the overall environment -- are you still seeing RFP volumes increasing? You have commented in the past that the sales cycle has lengthened, and I am wondering if there are going to be any changes in that? Has it shortened at all??

Obviously, we continue to see a nice increase in RFP's. And the sales cycle, more than anything -- and Mike can jump in here, too -- but typically what we have said is the sales cycle has gotten longer because we are in more and more larger deals. The sales cycle on the complementary products and some of the smaller deals, there is not a lot of difference now than there was two years ago. Our average sales cycle, just because of the average size of the deal and the number of products going into those, has gotten longer.

When you add things into a deal that complicate it -- such as, perhaps, an ARGO electronic transaction -- some of those things, just by the sheer complexity of it, will lengthen that. And that is typically on larger deals.

One last question for Jack. Have you guys added a Silverlake install team recently?

No, we still have the same number of teams, and we feel like we have got them appropriately engaged and productive at this point. We have the ability to shift some resources between a couple of areas if we see fluctuations in demand on a particular product. But right now we are pretty comfortable with what we have.

If we saw a big return of in-house on the Silverlake side, we could probably throw together a couple of teams in a quarter, by stealing some resources from the existing teams and breaking a couple of them up and transferring other people or resources from our 20/20 group or other areas and then adding new people. So we are in a pretty good position right now.

Carla N. Cooper with Robert W. Baird & Company.

Kevin, do you do have a CapEx protection in mind for fiscal 2004?

I was wondering when this was going to come out. Yes, and actually it has changed a little bit. I was saying throughout the year that our CapEx was probably going to go down next year. I would actually predict now that my CapEx is probably going to be close to $60 million next year, and the reason for that is we are getting ready to acquire a facility in San Diego that is -- by the time we get total buildout and everything else -- is going to be about half of that price, or half of that CapEx fee. We are also getting ready to acquire and build out a facility in Charlotte. But let me just point out that the reason we are doing this, the combination of those two in less than three years out will be saving us in excess of $1 million a year. So we are pretty comfortable with why we are doing it, and obviously, people look at us and wonder why a technology company would spend that much money. But let me just reaffirm that we are not truly a technology company -- we are a services organization. We have an enormous amount of support people and we have to have a place for those people to work. So we are going to continue to add buildings as we see fit, and if it makes sense for us to own rather than lease, as it does in both of these cases, then we are going to spend the money. But obviously, we have got good enough free cash flow to more than take care of that. Our operating cash flow this year was 99, almost $100 million. Currently, as of last Friday, based on maintenance already had well in excess of 60 million in the bank. So it is not like we are going to have to borrow money to do these, so it just makes a lot of sense to spend this money to save money in the long run.

The other question I had was on the hardware in the quarter, you mentioned very quickly in your commentary that it was strong this quarter. Can you give us a little more color on that, in terms of both revenue and margin, and then thoughts on sustainability of those levels?

It was very good in the quarter, because we find some fairly large deals and shipped several new iSeries -- some of the larger ones -- pretty much at list price, which obviously had a nice impact on our margins. But we also shipped several reader/sorters for our image products, which we get nice margins on those. And based on our backlog of hardware, which has a lot of reader/sorters in it -- that's why I feel like our margins are going to stay where they are going forward.

Could you talk to us a little bit about -- US Central was a big signing earlier this calendar year -- could you talk about how the conversion is going there, the preparation for conversion? And then, continued prospects for signing some of the member credit unions?

The conversion training is coming along very well. In addition to the conversion aspect, that there is some front end development effort that is pretty significant as well. Both of those are tracking very well. We are still tracking towards our original conversion timeframe for the first corporate credit union before the end of this calendar year. We have had recent meetings with the group. The nature of the way that transaction is done is that they actually contract with US Central, rather than directly contracting with Jack Henry. So the paperwork is being handled by US Central, so they are kind of driving that piece of it. We are assisting them in the process. We have gotten very positive feedback. They were particularly -- at a meeting here within the last 30 days -- Kevin mentioned a recent report which, if any of you are interested, it is by Callahan and Associates out of Washington D.C., that is a pretty comprehensive review of the credit union industry, and shows wins and losses by vendor. We presented them with some of the data from the Callahan report; they were particularly pleased with what they saw there, in terms of our progress. So I would say all in all, that is coming along very nicely. Again, our -- the nature of the contract we have with US Central is such that we will receive pretty substantially all of the revenue, independent of their success with signing up some of those corporates. So we are all interested in getting those corporates signed, and we're assisting them every way that we can. But the nature of our agreement does not change substantially, depending on how that goes for them.

Tim W. Willi with AG Edwards & Sons.

I apologize if this has already been addressed, I don't remember hearing it asked. Kevin or Mike, could you talk about what is going on in the CRM pipelines? Are there any new developments, in terms of accelerating activity, whether that be with Transcend or ARGO?

I'll answer this a couple of different ways. We signed five new Transcend deals in the quarter; we have not signed any ARGO. However, earlier this spring, we had what we call our big bank symposium. And now that we have ARGO in three beta sites, there is an increased interest level, at least, from some of the larger institutions, now that we have got it out there and they can actually go look at it and see that it is working. So I think that we should have some interest in ARGO going forward in the next year, but obviously, what's in the pipeline today was still there -- or was there earlier this quarter, but we do look for good things going forward on our Transcend side.

CRM is one of those products that's really hard to attach an ROI on. I think you'll see CRM be more popular in an economic environment where people are willing to spend money, where they don't have a good, fixed short-term ROI on a product. So it is important that we have that product on both the low and high end. We will continue to be successful. Will it be as successful as we would like it to be? Probably not, until the economy improves a little bit. But we are very happy with the strategies.

We also went live within the last week at our first ARGO site large bank, some significant volumes. I think over 1100 individuals sign-ons through the ARGO product on the day they went live, and it has performed extremely well. We believe that that kind of feedback to the other customers who are working through the current implementation process will be very well received, as well as some of the other prospects that we're talking to. Really, up until this week for the most part, what we have been doing with ARGO is a joint development effort, and we're talking about what the product is going to be. But it has not been a live and up and running product on our Silverlake Application product. It is now in our first implementation, and like I said, the results have been very good. So we believe that will elicit some additional interest in the product.

If I could just ask a follow up along the same lines? Could you talk about -- Mike, you mentioned people are obviously very careful with their dollars, looking for real tangible ROI, and it is not hard to calculate one with this product. But how have you, or do you expect to potentially maybe change -- is there anything you can change in the sales process, whether that's bringing more research and education about the product, and helping people set an expectation that may be able to make this a sales cycle that is just not reliant upon a generally improving economy? Do you see opportunities to tweak the sales process, where you can maybe get people a little bit more interested, regardless of seeing a dramatic uptick in the macro environment?

There's obviously 2 things that you can do -- number one is to educate people. This is what it does, this is what it can do for you this is why you should do it; and probably more importantly are the people that have done it. Once you have references that say -- we put in a CRM system; this is why we did it; this is what we have seen; here are some tangible things, returns on those investments, that bankers can actually look at and point to -- it makes it a lot easier to sell within a board of directors room at a bank if you have tangible evidence that it's worked for other banks, other credit unions like us, and this is what it means to us. So it is a lot of an education process, because still today, a lot of people don't understand what CRM is and what it can do for them. So it is a continued education process, much like Internet banking was a few years ago, when people really did not understand -- why do I need one of these and what it is it going to do for my institution?

The other thing I would throw out there is, at our user group, we actually had breakouts for all of our products, which ARGO and Transcend or both of those. And we like to have current users in those breakouts, so they can actually say whether what we are saying is true or false. And like Mike said, this is truly a referral business, and until you have a referral base, you're not going to have success. And we're just now starting to get that traction on the ARGO side. We have it on the Transcend side, and now it is just a matter of educating those folks and pointing to those work referrals.

How many transcend customers do you currently have, roughly?

I don't have that number.

Maybe I can get that from you off-line?

Actually, I will try to put that in some sort of public document.

Bradley J. Moore with Putnam Lovell NBF.

I was curious to know what you are hearing from your own in-house clients, in terms of their own budgeting process for the next year? Are they leaving any room at all in their budgets to accelerate core or in-house IT decisions?

Most bank's budgets are formulated in the fall, and it may be a little bit too early to get any feedback. And getting feedback from our customers from, say, a user group meeting in the fall -- I don't know if that is completely indicative of feedback that we want. We can get a good feel for what our customers are budgeting for, but maybe not so much of a feel for the non customers that are budgeting for a new core system out there. So we typically get a decent feeling for people's appetites for add-on products, possibly migration, but that is about as far as it goes for us.

So is your guidance based on a more conservative view of clients' budgets, or are you keying off the full potential of a client's budget?

We don't typically budget off of what we think banks are budgeting for. It has more to do with the traction that we have, the sales pipeline, those sort of things.

Typically, the way we budget is we actually push it out to our regional sales reps, which actually push it on down to their direct reps, because nobody knows the sales paths better than they do. They get feedback into what they think they can sell, which is actually the best way to do it, because that way they are actually helping to establish their own quotas. And we bring those back in, and that is basically the foundation for building our budget.

I was curious to know what your clients are telling you, the ones that purchased in-house systems pre-Y2K. What are they telling you about the functionality of those systems and the ability of those systems to meet their current needs?

We do pretty consistent surveying of our customers as to satisfaction levels with the different products and service provided on those products. We continue to get very solid reviews. Our customers continue to be our best salespeople as we put prospective customers in front of them. All of the feedback we get is that they are pleased with the investments that they have made.

Lee Hauser with Red Chip Research.

As you collect the maintenance receivables at the beginning of the year, are you going to potentially restart some of the share buybacks this quarter? Related to that, could you update us on your priorities for excess cash?

First of all -- and Mike can add to this -- first of all, our number one priority for cash is, and the best use of it, is for acquisitions, because we think we can get the best return off our investment for our shareholders. As far as a stock buyback, we will continue to evaluate that and watch the stock price. And at certain points it makes sense, and obviously, we do have some excess cash right now, and we will have more by the end of the quarter, and we will continue to evaluate that.

(CALLER INSTRUCTIONS). David A. Trossman with Wachovia Securities.

We are now 3 quarters into this nice, steady build of the in-house backlog growth, and yet it still seems like a real struggle to find license revenue out of that backlog. I'm wondering if you could give us a little bit more help understanding maybe where the big chunks are as you are adding things into the backlog, and what you think the timing might be of running that backlog off over the next year?

First of all, almost the entire ARGO backlog that was in there in March was still in there, because we shipped very little additional product through the quarter. There is still an enormous amount of installation in that in-house backlog for that complementary product. At the end of June, there was a handful of very large transactions that closed, basically, in the quarter, on both the banking and credit union side, which those license revenues will start flowing out this quarter and through the next two quarters. So I guess the answer to your question is, in my opinion, everything that is in the in-house backlog today, or 95 percent of it, will flow out in the next 12 months.

Nikolai D. Fisken with Stevens Investment Bank.

If you look at the option question I asked earlier, Kevin, the 3.6 million shares -- I just went through the Q, and it says that half of those shares vest if the stock maintains a price of $13.50, which it has done, and then the other half vests if the stock maintains a price of $16.26, which it has done for 10 days. The 3.6 million -- I just want to make sure everybody is on the same page -- that is going to be in the first quarter number for the entire quarter. So you are using 93 million shares outstanding for the entire year?

You don't get the full weight of that in the quarter, because you use the treasury method, and basically, you have to go through the calculation of how much the gain is of the strike price. So you are going to get maybe a third of those shares weighted into the in the first quarter.

We'll follow-up off-line, thanks.

(CALLER INSTRUCTIONS). At this time there are no further questions. Gentlemen, I would like to turn the call back over to you for any additional or closing comments.

First of all, a follow-up to Tim W. Willi's question about the Transcend product. My best guess right now without going back is we have probably got somewhere between 60 and 70 of those customers out there, because I think there was a little over 30 when we acquired them January 1 two years ago -- and we have sold about 38 or -- 35 or so units since then. So I am guessing that we have got somewhere between 60 and 70 of those installed. So that is the answer to that.

The recap -- again, we want to thank you all for joining us today to review our fourth quarter and fiscal year end 2003 results. Obviously, our results are not what we have produced historically, but nor was our growth where we would like it to be; however, we feel that the most important thing for us to do is to continue doing the correct things for the long-term health of our company, which is also driving part of our CapEx for next year. We have continued to improve our products and services, and are committed to build our competitive strength. Our managers and employees continue to do what is best for you, our shareholders. With that, operator, would you please give the replay number?

That does conclude today's teleconference. We thank you for your participation. You may disconnect at this time.