Jack Henry & Associates Inc (JKHY) 2004 Q1 法說會逐字稿

Good day and welcome to the Jack Henry & Associates first quarter fiscal year 2004 conference call. This call is being recorded. At this time, I would like to turn the call over to the Chief Financial Officer, Mr. Kevin Williams. Please go ahead, sir.

Good morning. Welcome to the Jack Henry & Associates first quarter fiscal 2004 earnings call. A little housekeeping. Statements or responses to questions may be made in this conversation which are forward-looking or deal with expectations of the future. Like any statements 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 potentially cause results to differ materially.

Again, thank you for joining us today to report the first fiscal quarter of 2004 financial results, which reflect a 16 (ph) percent increase in revenues, improved gross margin, continued strong balance sheet, increased operating cash flow, and a very solid backlog compared to the same quarter in the prior year. Our total revenues increased 16 percent with a small increase in license revenue of 7 percent. We had another large increase this quarters in support and services of 21 percent compared to the prior year quarter, with our continued success in the outsourcing marketplace, growing ATM and debit card processing business, and additional in-house support fees (ph). Our hardware revenue, which is typically driven by software sales, increased 6 percent, which is in line with the increase in our license revenue.

The components of our revenue compared to prior-year quarter were license revenue up 7 percent, or just under $1 million; support and services, (indiscernible) or $12.6 million; hardware sales increased 6 percent, or roughly $4 (ph) million, for a total increase in revenue of 16 percent or $15 million. Our total cost of sales increased by 13 percent this quarter. Total hardware sales represented 22 percent of total revenue this quarter compared to 23 percent total revenue in the same quarter a year ago. So again, as we've said, our whole total hardware dollars may go up, but as a percentage of revenue, we anticipate it to continue to go down.

Our cost of hardware decreased by 2 percent, while hardware revenue increased by 6 percent, which obviously had a positive impact on our margins. Gross margins on hardware revenues was 30 percent compared to 25 percent in the same period in the prior year. This increase is primarily due to increased sales of our IBM iSeries and pSeries hardware boxes and some nice reader/sorters sales this quarter, which these type products carry very solid margins. We also had an increase in rebates and incentives from vendors on hardware sales due to the volumes and type of hardware sold. As we have discussed before, our margins can be significantly impacted by sales mix.

Our cost of support and services increased 18 percent for the quarter compared to the prior-year period. This compared to a 21 percent increase in support and service revenue for the same period, which is due primarily to the increases in every component included in this line of revenue, which are installation services, ATM debit card switch services, outsourced and in-house (indiscernible). All these components had a nice increase this quarter compared to last year.

We continue to leverage our resources infrastructure and our general managers and employees continue to be very cognizant of cost controls, which obviously, our biggest expense and our asset by far is people. Having said that, we continue to have needs and requirements to add employees. We have added 80 necessary employees since this time last year. However, our total employee count has only gone up by one employee to 2376 from 2375 when we put the current controls in place last January.

Our gross margin is up this quarter to 39 percent compared to 37 percent last year at the same period. Our hardware margins have increased to 30 percent from 25 percent, as previously discussed. Also, support and service margins have increased to 32 percent from 31 percent in the same period last year, and license margins have remained level at 93 percent (ph). Our banking (indiscernible) gross margins increased to 40 percent from 38 percent in the first quarter a year ago and our credit union segment gross margins increased to 35 percent from 31 percent a year ago, which is an anticipated expansion of margins with the additional products and services we are now selling in the credit union segment.

Operating expense increased 21 percent this quarter compared to last year's quarter, and as a percentage of revenue remained flat at 19 percent of total revenue. Our selling and marketing expense increased by 22 percent compared with prior-year quarter. This increase is primarily driven by increased commissions on the increased revenues and a small increase of associated personnel (indiscernible) with an increased number of sales staff compared to this time last year. As a percentage of revenue, selling and marketing remained flat at 8 percent.

Our research and development expense increased 50 percent compared to this quarter last year. However, as a percentage of revenue, it was only a small increase from 4 percent to 5 percent. This increase in R&D is due to primarily increased personnel costs to continue developing new products and improving existing products. Also, there were several large projects under development last year which were being capitalized which we do not have those large (ph) projects being capitalized this time this year. Our G&A expense increased 4 percent over last year's quarter, but as a percent of revenue actually decreased to 6 percent from 7 percent. Our operating income increased 22 percent over the prior-year quarter and as a percentage of revenue, increased to 20 percent from 19 percent. Change (indiscernible) income primarily due to increased interest income due to increased levels of cash, and our effective tax rate remains unchanged at 36.5 percent. The result is an increase in net income of 23 percent to 13.9 million and earnings per share increase of 21 percent to 15 cents.

A few comments about the balance sheet. The majority of significant changes compared to the same time last year, obviously cash and cash equivalents are up 144 percent, which is primarily due to collection of the (indiscernible) support billing from June 30. We had cash outlays during the quarter for capital expenditures of 17.7 million and dividends of 3.1 million. Accounts Receivable are down 9 percent compared to last year due to our collections department doing an excellent job during the year. Change in accounts payable and accrued expenses primarily due to timing of payments. Our deferred revenue, which is primarily prepayments for in-house support, has increased 26 percent from last year at this time due to the shift in billing for the acquired customers to June 30, and also the prepaid support revenue derived from all software installations since last (indiscernible) this year.

Our backlog decreased by 3.6 percent during the quarter to 176.5 million, or 60.2 million in-house and 116.3 outsourcing, from 183 million at June 30, which was made up of -- and has increased significantly from 146.5 million September 30th a year ago. We anticipated utilizing some of our buildup in backlog during this quarter due to a number of reasons. Historically, obviously you cannot look at the past few years as typical for comparison purposes, but you can look back at the '90s. We used backlog during this quarter, business being the weakest contract in the quarter (indiscernible), and it also follows our strongest contracting quarter. So we did anticipate burning the backlog (ph) this quarter.

Also at June 30, we realigned our sales force to more traditional hunter/farmer style to better align our sales personnel with their job descriptions, which we knew would cause a small short-term impact. The transition to this style of farmer/hunter approach went very smoothly and we expect to start seeing some payoff this quarter. After a review of our backlog, sales forecast and sales pipeline, I am comfortable with the range of consensus estimates out there for the next fiscal quarter and the next fiscal year. Also, our backlog should remain strong.

With me today, I have Mike Henry, CEO, and on the telephone is Jack Prim, President, who will probably have to bail off about 9:30 during the Q&A. We remain confident that we are very well positioned and that we have the right products and services to approach both the bank and credit union markets from the smallest institutions (indiscernible) to the largest. In the last couple quarters, we have had very good response to our Cruise credit union product in the smaller credit unions -- they came from (indiscernible) a year ago, and our repackaged (indiscernible) products to the smaller bank market, both in contract (indiscernible) pipeline, which will allow us to continue expanding our market share.

At the same time, we have had very good success with our Episys product with larger credit unions and (indiscernible) larger banks. These sales have been both through in-house and outsourcing. We have also believe we have the proper resources in both people in technology for continued future opportunities. With that, I will open the call up for questions. Operator, would you please take questions?

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Kartik Mehta with Midwest Research.

Good morning. Kevin, a couple of questions. First of all, on the incentives for the hardware, is that something that you think you will see throughout the year or is this somewhat just an anomaly for the quarter?

Well, (indiscernible), first of all, it is hard to say because the vendors continue to change their programs, and sometimes even without telling us. There was actually some incentives we received this quarter that we did not even know we were going to get. Also, it is driven by the volume and the type of hardware we're selling, so obviously, the more iSeries and pSeries we sell, then the bigger rebates we get from IBM. And the larger sales of reader/sorters, then we can get rebates from those specific vendors. So, there is a number of things driving that and it is really hard to predict. So, I don't think we will get this level every quarter, but it is like we said in the past, our hardware margins should stay somewhere between 25 and 30 percent, so I think this probably got us to the high end of that range.

On the Check 21 stuff, are you seeing at all in increase in demand for banks to do outsourcing those that have been in-house and maybe are rethinking their strategy because of this potential new law change?

First of all, Check 21 is not going to force banks to use image (ph). It is going to make it price prohibitive for them not to do image, so I think eventually all banks will want to do image. But having said that, I don't know that we have seen any big change in philosophy from banks wanting to do this in-house or outsourcing. I think it is pretty much if they are in-house, they're going to do most of their services in-house, but there are some banks that just want to do outsourcing for whatever they can.

In as far as your processing centers are concerned, is there a real need to upgrade those or is there -- are you going to have a big CAPEX spending because you need to upgrade those or are these already image-capable?

All of our item (ph) centers are already image-capable. There will be some normal maintenance type CAPEX, but probably the biggest outlay will be the new item centers that we plan on opening in the next fiscal year.

Thank you very much, Kevin.

You bet.

Pete Swanson with Piper Jaffray.

Jeff Baker (ph) filling in for Pete. Nice quarter. It looks like the business is improving based on the comments in the press release. Can you elaborate a little bit more? How -- exactly how giddy are you guys?

I don't think I would say giddy. As we put in the press release, we got a good feeling coming back from our user group meeting that our customers are actively looking at spending. We get a good feeling from looking at our sales pipelines, and that's not just what's in the pipeline but RFIs, RFPs, proposals, etc. It seems to be much healthier than it was a year ago. I would not say it is giddy -- that we were giddy, because as we have said in the past, this is going to come back very slowly and gradually. It is not -- you are not going to see it all in one quarter or probably all in one year. So, there has been an improvement. The pipelines are healthy. So we're very happy with business compared to a year ago, but certainly it is not back to levels that we saw back in say 2000, 2001. But, it looks better.

Mike, relatively speaking, usually this quarter, software revenues decline sequentially due to seasonality; in this quarter, they were up. So how much of that was going against an easy comp in the June quarter versus just a better environment?

You know, I think it is a little of both. We had obviously not a very good quarter a year ago, so that makes comparisons look a little bit better. But, that combined with business being better, you're just going to see better numbers.

Plus Jeff, we've talked in the past that it can depend a lot on the timing of the actual delivery of the software and the size of the software. So, in any given quarter, if you have two or three multibillion dollar bank software delivered in that quarter and not the next, then obviously you're going to see some shift in software. I'm more interested in what I think my software is going to do year-over-year.

I think that too. We're seeing some of the strategies that we've invested fairly substantially in in the last couple years starting to pay off. And we have talked about the fact that our penetration in the larger bank space with our Release 13 enhancements, we have seen good progress there. But, we are also seeing some nice progress on the low end with the repackaged core director offering for the small banks, and as Kevin mentioned earlier, we saw some very nice pickup in business for the low-end credit union solution, with our cruise product that came with the acquisition of CU Solutions. Now, those are going to be small deals. But that activity leads to potentially other opportunities with complementary products, so there is a number of things that are starting to come together that we've been working on for a while as well.

Last question and I will get back in the queue. But Kevin, the credit union services revenue, system services revenues down sequentially, kind of surprised given the large installations that you guys have been talking about. Can you help me figure -- kind of just tell me what's going on there? Thanks.

You said the credit union services is down?

All of the total -- you know, you split your segment revenues between bank and credit union, credit union system services down sequentially -- just give me some flavor there?

You're talking from June?

Yes, exactly.

Actually, in June, there was several extremely large Episys software deliveries, and also the largest pSeries box we'd ever sold in the history of the Company got delivered then, which actually drove some incentives and different things. But, the primary decrease from June is actually software was down slightly, which actually makes me feel better because I got nice margin expansion in the credit union segments with sequential downturn in software.

Got you. Great. Thanks, guys.

You bet.

Brian Keane with Prudential.

Good morning. Mike, would you say that the core deals are starting to pick up as a result of where we are at today? Or is that still we have not seen a turn in bank's purchasing a lot of upgrades in the core systems?

I think -- I don't know if I would call it a turn. We are seeing expansion on the in-house side, which we have not seen before. The outsourcing side has always been very good for us in the last year. But, we are seeing an increase really on the in-house, on the license side, which it has been a long time since we have really been upbeat at all on the license side. It has been down for -- substantially for quite a long time. So, that is the area that we are optimistic on.

Do the RFPs look better as well going forward or the amount of interest in upgrading on the in-house core?

Yes.

Kevin, do you have the breakout numbers by quarter for just some housekeeping, but the CRM deals and the NetTeller and Check Imaging?

Yes. For the quarter, Check Imaging, we contracted 31 deals, which compares to -- it is a little higher than the average for last year total. In NetTeller we signed 34 deals, and CRM we signed 3 of our Synapsis, or (indiscernible) product, and we did not sign an RO (ph) deal this quarter, which obviously carries a pretty price tag.

Okay. Just finally, Kevin, on operating margins, should we expect that as the quarter goes on or as the fiscal year goes on that margins will continue to pick up, and where do you think operating margins are going to fall out for this fiscal year?

I hesitate to say what they are going to fall out for the year, Brian, but I think you're going to continue to see expanded margins on a consolidated basis in -- actually, in both my banking and credit union. Like I said before, the credit union margins by the end of this fiscal year should be getting up close to my bank margins because of the additional services and products that we are cross-selling to that base, which is also going to help me leverage our resource and infrastructure, which will have a positive impact on my bank margins. So, I think you are going to continue to see a sequential increase in margins. I think on a quarter-over-quarter basis, if I gain half to a full percent a quarter by the end of the year, I'm going to be pretty happy on the gross margin line, which obviously I can leverage a little bit more to the operations line.

Okay. That's helpful. Thanks.

John Kraft with D.A. Davidson.

Good morning and nice job on the quarter. A couple of other housekeeping things. What were reimbursements for the quarter?

What were which -- I'm sorry?

Reimbursements? Customer reimbursements?

Oh, crap. That is a good question. I don't know if I even have that, John.

I can get that later.

I will try to get that by the time we get off the call.

Another one. With the San Diego and Charlotte facilities, do you still expect CAPEX for the year to be about 60 million?

That is my belief right now, John. Like I said in the press release, we have closed on the San Diego facility with the initial purchase, but there is -- now we will be building a double deck parking garage out there and doing a lot of infill. So that project, we have not even spent half of the money that that entire project will take.

Okay. Regarding some of the complementary sales, you mentioned the NetTeller 34 deals, are you seeing pricing pressure there with that? It seems to be sort of an industry that is being hit pretty hard.

John, we really don't see a lot of pricing pressure there because of the way we price our products. We don't charge on a per-click basis like a lot of the competitors out there that try to compete in our customer base with that product. We bring some things to the table that they cannot bring. But probably more than anything it is just (indiscernible) for a license fee and small installation fee and then an ongoing fixed maintenance fee that the banks can easily budget for, and it does not prohibit them from wanting to grow and get their customers to use a low-cost delivery channel.

I think you're going to continue to see the pricing pressure that you referenced on some of those other vendors. I mean, we're seeing a good bit of that right now in terms of customers that we are picking up coming to us from -- on their second Internet banking system, having gone with one of the per-customer charge models initially when they had no customers. But, as they have built customer bases, those models get very expensive and that has never been our model. So, what was an inexpensive alternative when they put it in and they were willing to sacrifice some of the feature functionality that we offered to do so, they are now looking at it saying, hey, I can have more feature functionality for less money; it's time to make a change. So I think you are going to continue to see that pricing pressure on some of the folks that have their models structured that way.

So I guess what I was wondering, the flat fee, the $60,000, is that something that you are maintaining?

Pretty much. We have at the very low end, for the very small banks, they can get in for a little less than that. But we really have not had any adjustments and don't anticipate any on our midsize and larger banks.

Okay. Last question, regarding your cash. You still plan to use cash primarily for acquisitions, and I guess if so, how is the pipeline looking?

As we have always said, the best use of our cash is for acquisitions, and we are continuing to look and have a pipeline of acquisition candidates that make sense for our Company -- especially the bigger ones. We want to bring something to the table; we want them to bring something to the table. When we announce an acquisition we want people to look at it and say, yes, that makes a lot of sense for the Company and where it is going. So, as always, we continue to be pretty picky about acquisitions, but that is the best use of our cash.

Okay. Thanks a lot, guys.

Nik Fisken with Stephens, Inc.

Kevin, first off, you said you were comfortable with a range for the quarter we're in and then fiscal year '04?

Yes.

Could just use some clarity there. The range is rather wide -- it is 15 to 17 cents with a point of 16. And then more important, the range for the fiscal year is 63 cents to 72 cents with a point of 66. Can you give us a little more specificity there?

Well, first of all, Nik, 2 cents is not a big range. I guess if you want clarity, I will say that I am comfortable with the middle of the range.

I think 63 to 72 cents is a big range.

I meant for the quarter. I guess what I am saying is the consensus estimate out there for the year is I think 65, 66.

That's right.

And that is what I am comfortable with.

If I look at the backlog decrease in the in-house, did you guys -- are those still in there, the $3 million?

No. Almost all of the ARGO stuff has now been delivered, because it is all on the beta site. In fact, most of that has been delivered by June 30th, Nik.

Okay. If I look out into the December quarter, do you guys think the backlog is going to increase?

I mean, my gut feeling and based on what I said earlier is based on sales pipeline and sales forecast, which obviously the forward-looking statement, and a lot of things change. But I believe by December 31st that we should take consensus estimates and have an overall increase in backlog.

Okay. If I look at the sales and marketing and R&D, the numbers you guys put up, and G&A, are those good run rates on a go-forward basis as a percentage of revenue?

I think selling and marketing will continue to be somewhere around 8 percent, Nik, which I think that works in now for several quarters. R&D is going to be somewhere between 4 and 5 percent, just depending on what type and what size of projects we may be capitalizing. Obviously, we're pretty conservative. We don't capitalize a project unless it is pretty sizable. We just choose to expense it. Like I said, G&A I think will -- this fiscal year unless something really strange happens will continue to decrease as a percentage of total revenue. And total dollar should stay somewhat flat.

So R&D total dollar should be -- take the first quarter number times four?

Yes, that is probably pretty close. It may get down if we find a big project we're going to capitalize and stuff, Nik, but that's probably a pretty good run rate.

On the G&A decrease, how much of that was savings from lower benefits cost?

Probably 20 percent of it. I mean, the rest of it was just some other efficiencies we have gained. Some of the -- we have actually had some decrease in depreciation and amortization, because there's been some things in the G&A line that become fully depreciated or fully amortized.

Okay. Lastly, if memory serves me right, haven't you guys been about 25 Internet banking sales a quarter, and this quarter you did 34?

Last year, Nik, we did for quarters first through the fourth quarters, we did 25, 44, 39 and 40, and we did 34. So it's pretty much right in line with what we have done last year.

Okay. Thanks so much.

Glenn Greene with ThinkEquity Partners.

Hey guys, a couple questions for you. I wonder if you could comment on, of the sales force realignment you talked about, the farmer/hunter (indiscernible) and what you are really trying to do there and what the impact could be going forward. And also, was there an inverse impact in quarter related to contract activity as it relates to the backlog, following on Nik's question?

Jack, do you want to talk a little bit about the restructure in sales?

Yes. What we had before was a sales rep who had a territory and everything in the territory, installed customers as well as responsibility for bringing in new customers. Frankly, the makeup of the type of rep who's good at one is usually not going to be the same makeup as the rep who is going to be good at doing the other. So we realigned our sales staff and now have a group with new account responsibility. Their only responsibility is to bring in new core customers to Jack Henry. And we have an associated sales force that is the only responsible for selling to our installed customer base, basically nurturing those relationships over a longer period of time.

We believe that we will see increased sales to both markets, to the new account customers because these folks are going to be -- their makeup is a little different and they are going to be more focused and only make money if they bring in new customers, so they will therefore, we believe, bring in more new customers. And also believe that our sales to our existing customers will improve because of the fact that the reps will be able to pay more attention to them, not be distracted by some of the activities associated with bringing in new customers, which can consume a large amount of time, so they will have more time available to dedicate to our existing customers as well.

The other part of that question, Glenn, on the impact on the backlog. I mean, obviously, we let our sales people know this realignment kind of sales (indiscernible) that several (indiscernible) knew it was coming. So, they were trying to close as much of their business at June 30 as they possibly could. So, yes, it did have an impact on backlog. And not only because of that, but because of realignment, some deals got handed off and it took a little while for the people to get up and running. And we actually foresaw that it was going to be probably a 45 to 60 day significant impact, and then we start seeing some real benefits of the realignment. And I think at the end of the quarter, we were actually already starting to see some of the benefit of getting these people lined up with the right job functions.

Was there any sort of compensation or incentive compensation changes, for how you compensated these salespeople?

I would say that not substantially -- in terms of the kind of money overall that we will be spending, it's insignificant. We had some changes that would -- for reps who produced at higher percentages of their quota attainment, their compensation increased, and reps who didn't produce at higher levels of production, their compensation will decrease. So, basically we will be rewarding the top performers and not rewarding as well the lower performers. But, the overall net amount to the Company is the same or --

Kevin, to your comment, the 45 to 60 day impact. Toward the tail end of the quarter, I guess the last couple weeks of September and into the first couple weeks of October here, have you seen the benefits yet or is it still too early to tell?

Well, you are starting to see more of at least some contract activity and RFIs from the new contacts. So, obviously it will take a while, just like everything, to turn those into actual contracts and revenue. But, I think based on talking to our national sales manager and actually all the regional managers last week at the user meeting, that they are all feeling pretty good about the changes, and I think our salespeople are happy doing the jobs they are doing now.

I think that is the key point, is the sales reps are excited about it because, again, it's typically two different makeups of individuals, and we believe we've got the right people in the right spots in roles that they are going to be better suited for, so they're actually excited about it. That means a lot.

Kevin, one numbers question. The support and services gross margin, it looks like it declined sequentially, about 100 basis points. I would think that would sort of intuitively just keep ramping up steadily. Was there anything unusual in either quarter?

No, there was not anything really unusual in either quarter, and to be quite honest, Glenn, I did not even look at sequential (indiscernible). I really just focused on year-over-year on that one.

We will follow up later. Thanks.

Only two things, Kevin. We made a pretty substantial upgrade in the Allen Data Center on our Silverlake Processing, which could have some impact. And also, we are really just beginning to ramp up the Episys Data Center for large credit unions. So, we had some expense there without a lot of corresponding revenue, would be the only thing I could think of.

Thank you.

Chris Rowen with SunTrust Robinson Humphrey.

Hi, guys. Of the backlog, I guess, went down on the in-house side about $9 million sequentially. What percentage of that is the license revenue versus the other revenue lines?

Actually Chris, we had never broken our backlog down any further than just in-house and outsourcing. But, I will tell you that -- and obviously, entering (ph) our backlog that's made up of three components, which is license, installation, and hardware. I will say this, that all the components of the in-house backlog went down about the same.

Fair enough. Thanks.

Valerie Libby (ph) with Robert W. Baird.

Good morning. This is Valerie Libby for Carla Cooper. I was just wondering if you could provide any more color on the feedback that you guys got from the user meeting? And any sense of customer budgeting plans for 2004?

The color that we give you from our existing customers at the user group meeting is more of an overall feeling, seeing the people that attend the classes, what they are saying, both in and out of the classes, what some of the projects they have going on. It is more of an overall feeling. We are not in the bank boardrooms this time of the year helping them budget. So, I cannot give you any specifics on their budgeting. It is just more an overall feeling at the user meeting, talking with customers, that they are pretty upbeat and they have projects going on. So, as far as specificity on budgeting, we certainly can't ever give you anything solid on that.

Also you need to understand that almost exclusively, but not totally, the people at our users meeting are existing customers. So, most of those are looking at migration to the cores or just add-on complementary product. What we're really interested in the perspective customers. We did have a couple of them at our users meeting, and I listened to both of them. They were pretty pumped about how our user group meeting goes compared to others. So, I agree with Mike. There is some overall feeling we get, but it is not directed to any particular bank or region of what they're going to do with their CAPEX.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) David Trossman with Wachovia Securities.

A quick follow-up, Jack, on your sales force. How many guys, how many bodies do you have in the new account world versus in the cross-sell world in that sales force, and who is heading up each one of those for you?

The number of new account reps is going to be two or three per region, and we have three regions, and that is the banking structure. Credit union side, I think we have a total of about seven new account reps. On the installed customer side, that is going to be about three or four representatives in each of the three regions. I'm going to say I think there are about 10 or so on the credit union side. We do have a couple of specialty areas, retail products that consist of our teller and CRM and fraud detection products, because those tend to be somewhat specialized in terms of what you need to know about those. We will have retail banking reps that will be one to two per region, but they will sell to both installed and new customers. And then we have the EFT reps that sell the ATM debit card switch services, again we have both banking and credit union combined, about four of those reps that sell nationally to both new and installed customers -- again, because it's a fairly specialized knowledge that is required.

And those guys sell banking and credit union now? Right?

There is more of a specialization. There is, I think, one and maybe -- I think, in fact, I believe there are now two or soon to be two reps on the credit union side that only sell the EFT services to credit unions. And I believe the number is three on the banking side that sell the EFT services only to banks.

Got you. And I don't know who can best answer this, but can you give us a little view right now as to what your outlook is for the timing of the conversion of U.S. Central into your data center on the credit union side, and what your best guess is as to the way business works with follow-on business that can come out of those corporate credit unions? Is that a two-year thing or a ten-year window business?

Well, the individual credit unions, the corporate credit unions that are -- subscribe to the services offices by U.S. Central will be doing individual conversions. So you don't convert U.S. Central as an entity, per se. And I think the first corporate credit union is scheduled to convert -- it's in the first quarter. I think it is probably fairly early in the first quarter. I don't remember the date offhand.

First calendar quarter?

It is in January.

That is progressing very well. Keep in mind that our agreement is with U.S. Central and then U.S. Central in turn contracts with the individual corporate credit unions. And the nature of our revenue flow, or a large part of our revenue flow, will be the same whether U.S. Central signs up 2 or 20 of the corporate credit unions to do business with them. So, we will realize that revenue regardless. They are having good success at this point getting letters of intent from the customers. They have, again, their own contracting methodology that they use to work with them.

In terms of ongoing opportunities, we're really focused right now on getting the core conversions ready and things moved over. I think there could be any number of opportunities going in either direction, other services that we could offer to U.S. Central. There could very well be some services that U.S. Central can offer to our other credit unions as well. But, right now, we have all been very focused on getting those initial conversions done and we'll look to some of those other areas later.

Thanks.

Pete Swanson with Piper Jaffray.

Jeff Baker again. Just to jump back in here and some housekeeping details. Did you get that reimbursable number?

Actually no, Jeff. That's actually, when we realigned that back in the June quarter, we actually reset the accounting system so all those numbers (indiscernible) a separate line, so we do not even break that out anymore within our system. I will tell you this, the percentage that was running as a percentage of revenue is not going to change by a half percent. I mean, as revenues go up, that number is just going to continue to increase at the same rate.

About some color on maintenance and service revenues, how much was outsourcing in there, ATM and debit switch, stuff like that?

Out of the support and service line, just probably 45 percent of that is in-house support revenue, and then 10 percent is ATM switch (indiscernible) and installation services and maintenance on data (ph) make up the balance. Pretty much about half of the balance each.

Okay, so another -- so installation is 45 percent or what did you just say?

No, no. In-house support fee is about 45 percent of that line of revenue.

Okay. ATM debit switch is 10 percent, and what about outsource revenues you were saying?

Outsource revenues is 25 percent probably.

Okay. That leaves installation with the rest, right?

Yes.

Great. Thanks, guys.

Kevin, I'm going to need to drop off here. See you later.

Nik Fisken with Stephens Inc.

In focusing on this change in the sales force, you said that there was a slowdown in the first 30, 45 days. And the question is has it picked back up? Is it back to where you want it to be?

Anytime you introduce a change like that in any department, there is going to be a bit of a drag where the new account reps have to get their pipeline going and the account maintenance reps have to really start concentrating on a lot more customers. They are dealing with a little bit different territory, a little bit different job focus. They have to get their pipelines going. So, it takes a little while for a brand new rep to go to a territory and figure out all the banks that are there and what they're using and get relationships with them, so it is a gradual process. You would certainly think that by the end of this fiscal year that we will see some rewards and benefits there, but there is always a drag when you introduce something brand new like that into a sales force. They like the idea, it makes sense. It is the standard in the industry and we are not doing it -- we never do anything because everyone else's doing it, but there is a reason that it is a standard in the industry, and that makes sense for us. And there will be a little bit of a drag as people get their pipelines and their relationships established.

So does that drag still exist today?

Does it still exist? It might for some of the salespeople, but some of the other salespeople are out there at 110 percent, going strong. So, it is going to be a gradual thing, but I think overall, we are probably at least as good now as we were at the end of the fiscal year and it's just hopefully going to continue to improve.

Okay. Thank you.

At this time, there are no further questions. I will turn the call back over to Mr. Williams for any additional or closing remarks.

Again, we want to thank you for joining us today to review our first quarter fiscal 2004 results. We are very pleased with the overall financial performance during the quarter. We continue to expand and improve our products and services and we are committed to the build on all of our competitive strengths. Our executives, managers and employees continue to do what is best for you as shareholders. Again, thank you, and with that, operator, will you please provide the replay number?

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