Jack Henry & Associates Inc (JKHY) 2004 Q4 法說會逐字稿

Good day, and welcome to the Jack Henry & Associates fourth quarter and year-end fiscal 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, and welcome to the Jack Henry & Associates fourth quarter and fiscal year-end 2004 earnings conference call. Statements in response to the questions that are made in this conversation, which are forward-looking or deal with expectations of 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 but could potentially cause results to differ materially.

Again, good morning, we are very pleased to report the financial results of our fourth quarter and fiscal year-end at June 30, 2004. These results reflect a very healthy increase in revenues, continued improved gross margins, strong balance sheet, increasing operating cash flows, and a solid and growing backlog compared to the same period last year. In reviewing our income statement, our total revenues increased by 15% for the quarter, and 16% for the year ended June 30, 2004, with a significant increase contributions from both license and support and services for both the quarter and fiscal year-end. Our license revenue increased 83% for the quarter over prior year, and 30% for the year ended. There were several products that helped support this increase in license fees this year compared to the prior year, and in the order of significance of dollar impact compared to prior year those were, Episys core product on the Credit Union side or Silverlake core product on the bank side, and then some significant Company products were ARGO, 4|sight image, NetTeller, and Synapsis were all large contributors to the increase in license revenue this year over last year. Our support and service revenue increased 20% for both the quarter and year. This represents our continued success in the outsourcing marketplace, our strong growth in our ATM and debit card processing business and additional in-house support fees. To further emphasize the growth of our recurring revenue, which is then the support and service revenue less the installation revenues, which are included in that line. They also increased 20% for the quarter and represented 57% of total revenue for the quarter and the year. There was a decrease in the hardware sales of 26%, compared to prior year this quarter, and a decrease of 2% for the year ended June 30.The decrease in hardware sales was primarily attributable to customers delaying the purchase of new and upgrades for iSeries and pSeries boxes due to impending announcements of new product and promotions by the vendor during our fourth fiscal quarter in our opinion.

Changes in the various components of lines of revenues, where licensing went up 83% for the quarter, 30% year-to-date; support and services went up 20% for both the quarter and year-to-date. Our hardware sales down 26% for the quarter, and down 2% year-to-date. Cost of sales increased by 10% in the quarter, and a 11% for the fiscal year ended June 30, 2004, which is primarily due to the increase in cost of services associated with support and service revenue and its increase is partially offset by the decrease in cost of hardware. Our cost of license increased 89%, and 22% for the quarter, year-over-year respectively. This cost represents our cost of third party software, which we resell to our customers. Cost of services increased 18% for the quarter and 17% for the fiscal year ended respectively, compared to the 20% increase in support and service revenue for the same periods. Gross margins on our services improved slightly during the year as we continued to leverage our resources and infrastructure. Total hardware sales represented 16% of total revenue this quarter, compared to 25% a year ago, and 20% of total revenue compared to 24% for the year ended. However, our gross margin on hardware revenues decreased 25% for the quarter, compared to 33% a year ago. They remain consistent at 28% for the fiscal year, if you remember, a year-ago in this quarter we had some large rebates since and incentives came back from our vendors that really knocked our margins up for the quarter. The margins primarily can be fluctuated significantly by sales mix and the various incentives and rebates we get from our vendors. We continue to believe that our ongoing sustainable hardware margins will be in the 25% range for the foreseeable future. Gross margin increased to 42% for the quarter and 40% for the year ended, compared to 39% and 38% in the same period last year. Hardware margins have fluctuated as previously discussed. License margin were in a level of 92%, support and service margins were 34%, compared to 33% for the quarter, and 33% compared to 32% in same period of the prior year. In regards to our segments, our bank segment gross margins improved slightly to 41% from 40% for the quarter, and again up 1% to 40% for the year. Our credit union segment gross margin improved to 47% from 36% for the quarter, and up to 39% from 30% for the year. This increase in the credit union segment margins was anticipated with the additional products and services. We are now being sold into this segment of our market. Those primarily being our PassPort ATM Debit card switch services and outsourcing. However, going forward into the next one to two quarters, these margins on the credit union side should probably drop back down below 40% because this quarter was very heavily weighted in license revenue. However, we continue to expect to see that year-over-year increase in gross margin on the credit union segment.

Total operating expenses increased 16% for the quarter and 17% for the year. And as percentage of revenue remained fairly flat at 19% of total revenue for the quarters and the years. Our selling and marketing increased 22% for the quarter and 17% for the year, which is pretty much in line with the increase in revenues. If you remember, we paid commissions on our margins, which because of the increase in our software license fee this year, commissions were significantly higher at 22%. Our R&D expense increased 41% for the quarter and 49% for the year primarily due to additional resources, but this expense also remained fairly level at approximately 4 to 5% of our total revenue. Our G&A expenses decreased 3% for the quarter compared to the prior year and total dollars were flat with last year for the total year. A decrease to 6% of total revenue this quarter compared to 8% last year with a similar decrease for the year from 7% to 6%. Barring any large acquisitions, we think that we can hold G&A dollars relatively flat going forward into fiscal '05. One of the things I point out for compared point our head count of full-time employees is up 12% at June 30 this year compared to June 30 last year to 2,533 from 2,257. The majority of the increase was obviously in the credit union segments growing, our R&D areas, and the new positions related to our recent acquisitions. Operating income increased 32% over the prior year quarter and 28% for the year in total dollars. The effective tax rate used for our provision for income taxes increased in the fourth quarter to adjust our effective tax rate to 37.5% for the year compared to 36.5%. This adjustment was required due to some changes in state laws. Back in 1999 and 2000, we did a complete tax restructuring and some of the changes are impacting that restructuring to the Back Ben and our effective rate has crept up a little bit. We think that 37.5% to 38% will be the actual effective rate for fiscal '05 going forward. This change in tax rates impacts our net income by approximately $0.01for the quarter and the year. Our net income has increased 25% for the quarter and 26% for the fiscal year end June 30. This was all an increase in earnings per share of 22% for the quarter to $0.19 this year from $0.16 last year, an increase of 24% for the year-end of June 30 to $0.68 from $0.55. To comment on the balance sheet, the majority of significant changes compared to the same time last year obviously our cash and cash flow has increased 66%. Our trade receivable has increased by 13% due to increase in in-house maintenance billing, our fixed assets are up 10% due to CapEx and facility expansions during the year. Other assets increased 32% primarily due to acquisitions and our total assets increased by 19%. Accounts payable and accrued expenses were up 35% due to timing of payments in deferred revenue, which is primarily-- the deferred revenue portion is primarily pre-payments for in-house support and deposits on hardware and software orders. This has increased 10% from last year. Our total annual maintenance billing at June 30 this year compared to last year was actually up 17%. To comment on acquisitions during the year, we spent a total of $48.3m on acquisitions, all of these which were in the last five months of the year and for the period since acquisition all of these were either slightly profitable or close to breakeven and the total combined impact of the acquisitions during the year was less than 0.5% up to 16% revenue growth and less than 0.5% of the 26% net income growth. Therefore almost all of our revenue and net income growth was true to organic in nature. Backlog, our backlog has grown to $191.3m with $67.2m in-house and a $124.1m outsourcing at June 30, up from $187.9m at March 31 and up from $183.1m a year ago June 30. This represents a nice sequential growth in total backlog. The other comment I would make regarding backlog is last year at this time we had over $6m in backlog related to the large ARGO deals we sold in the prior year, which that revenue has trickled in over the last fiscal year. At June 30, we have just slightly over $2m in ARGO backlog, but we are better positioned, the product is a lot closer to markability now and we are more comfortable that we will get more revenue from that relationship in fiscal '05 than we got in '04 even with both significantly lower backlog going into the year. As far as guidance, I would like to go ahead and reaffirm guidance for fiscal '05. We think that we'll grow 20% growth next year conservatively on EPS.

We believe that it will be somewhat backloaded in fiscal '05 somewhere to fiscal '04. If, for your modeling purposes, if you take this year's actual results, I believe 15,16,18, and 19; just take one of those, then increase it by 20%, that's pretty close to where we think we're going to be, which I think could just add slightly higher than the First Call Consensus as in out there for the full fiscal year. The to this would be the continued increase in in-house bank core sales. With me today, I have Jack Prim, CEO; Tony Wormington, President; and Mike Henry, Chairman, hopefully; he should be stepping in. We're in a concept that we are very well positioned and that we have the right products and services to approach both the bank and the credit union market from the smallest institution or de the largest. We also believe we have the proper resources in both people and technology for these continued future opportunities. With that, I will open the up call for questions. Operator, would you please open the call?

Thank you, sir. Today's question and answer session will be conducted electronically. If you would like to signal for a question at this time, you may do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone today, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, ladies and gentlemen, that's star one on your touch-tone telephone. We will begin with Bryan Keane of Prudential Equity Group.

Hi, good morning.

Good morning.

So, the license revenue growth year-over-year of 83%, that was quite impressive. What kind of growth do you think you can maintain going forward in fiscal year '05 in license sales?

Well. I mean obviously, the 83% was very heavily weighed on the credit union side of this year, Bryan, or in this quarter. The 30% growth for the year-to-date, I think would be a stretch to say we can do that in fiscal '05, but it will be somewhere -- I would think probably in the high 18's to low 20's, I'm hoping.

And you mentioned a little pickup in the core sales. Did that seem to continue throughout the quarter, and is the pipeline for new core deals look like it might become a backsum?

We had some nice core deals in the quarter, which obviously, the majority of those are still fit in backlog, Bryan. The sales pipeline continues to expand. I'll tell you that the pipeline of core deals at this point is a whole lot broader and more robust for, on the bank side especially than it was a year ago at this time.

Okay. And then I just wanted to ask about the hardware sales. Do you expect the hardware sales then to pick backup to its normal growth rates going forward? Or is this kind of the rollout of a new product, is that kind of delay, kind of the growth there for a couple of quarters?

Well, we've always said that hardware is getting cheaper and cheaper and our total hardware dollars continue to grow, but it's percentage revenues is going to still get smaller. Obviously, this quarter was smaller than what we had anticipated and it was primarily due to IBM getting ready to come out with some new products now, and are we're going to go back to our typical growth? I don't know that we'll ever get back there just because the hardware continues to get cheaper, but hopefully the next quarter is back up to the traditional levels where we were in the prior quarters before this quarter.

When did the IBM iSeries and pSeries come out already?

Well, they're already out. This is just a new version.

Yes. I mean the new versions.

They've been announced. Yes.

Okay. So then, you should see a little picked backup in the 1Q '05?

Yes.

Okay, great. Thank you very much.

Yes. Thanks Bryan.

And, we'll now go to Kartik Mehta of Midwest Research.

Good morning.

Good morning.

A couple of quick questions here. Check 21 if you can outline for us a little bit more if there is extra progress being made there, if there is real interest by banks and credit unions. Also, what are the main things driving the demand on the credit unions side? And, is there any change in demand that you really foresee on the in-house? On the in-house business, you did mention that might be an opportunity to upside this?

Yes this is Jack, couple of things. Check 21 is certainly a topic of interest, I think it is part of what's driving the significant sales of the 4|sight check image product. There are still lot of unknowns, not the least of which being, what the adoption rate will be of electronic image exchange and I think we are just going to have to get into that before anybody really understands. But our 4|sight opportunities and pipeline continue to be strong, so that is interesting, we believe there is continued opportunity there. Regarding demand factors on the credit union side, there are lot of things that work there. Credit unions are expanding their fields of membership, so that they can reach a much broader audience, which necessitates stronger core product offerings, they are going to community charters in some cases, but in a lot of ways they are becoming the community bank model, although they might not feel good about hearing their reference. Further in summary, they are needing stronger core products and that certainly has played to our advantage. In addition to that, there has been a lot of acquisition activity in the credit union space, which leads some uncertainty, people start looking around, we've got a couple of our hardware vendors, HP specifically, that have discontinued, some hardware platforms that some of the credit unions were using, so that has driven some demand. So, it has been a very nice environment in the credit union space for us for the last several years, driven by a number of those factors. Regarding the in-house bank software license opportunities, we have a stronger year this year in that area than we had a year ago. We have a solid pipeline; I would tell you that for whatever reason, I don't know that I could put my finger on it, the in-house demand is a lot stronger on the credit union side than it is on the banking side. On the banking side, for whatever reason, we are seeing more interest in outsourcing solution, there is a percentage of the recall for footprint opportunities. So, there is clearly some upside opportunity there, but nothing that I would forecast really strongly at this point.

And we'll move on to Paul Bartolai of Credit Suisse First Boston.

Thanks. Good job in the quarter, guys. You guys talked a little about guidance, free cash flow was strong during '04. Can you give us any update on your free cash flow outlook for '05, and may be what --- do you expect CapEx to come in?

Yes, I mean, obviously operating cash flows, we think will go up similar levels to where they were this year or the last year. As far as free cash flow in CapEx, CapEx for this year is probably going to be somewhere in the mid $40m. I know a year ago, that tends to be lower but we actually had some things that were projected for this year in fiscal '04, that slid into '05, but you'll remember going into fiscal '04, our projected CapEx to be somewhere in the neighborhood of $60m, and it actually came in at about $49m, so some of those projects that we had slated for '04 has slid into '05, so as far as CapEx for modeling purposes, it should be in the mid $40m.

Okay, then can you just provide an update on the US central for just -- for contract?

US Central is going very well, we've converted a number of the corporate credit unions already. They have gone, the conversions have gone very well, project is tracking forward and were continuing to work with some of the individual corporate credit unions as to outsourcing through US Central, so all systems are go and tracking well at US Central.

Great, thanks.

Our next question comes from Glenn Greene of ThinkEquity Partners.

Thank you. Hi guys. Few questions, the first one is if you can just give us an update on the sales force realignment that you had announced about a year ago, and sort of the progress there sorting, if you sort of about pathetic state there and sorting getting a good traction or what sort of you are feeling?

Glenn, this is Jack. The sales force realignment is fully in place, I think we are getting good traction, we increased the number of new core footprints this year as compared to last year, which was one of the major objectives of making that change. I think it is moving forward full speed ahead, we have some additional restructuring that we are looking at this year. It's much smaller in scale, and that has to do with more focused group, that will look at some of our retailed delivery strategies or Teller Automation products ARGO, Vertex are fraud offerings as well to make sure that we are getting maximum penetration with those projects.

Our products but, again that's not nearly the magnitude of what we did a year ago, and as far as what we did a year ago, shaping up very nicely. I would say Glenn, based on the sales pipeline that we follow all the art fees, proposals and demos like I mentioned earlier, that's swollen significantly from a year ago, hopefully that will all turn into additional contracting activity going forward

Okay, and then competitively, obviously there has been a lot of consolidation in your market and some new vendors who have certainly emerged. I wonder if you, sort of, talk about the dynamics and how you guys play your position now relative to a year ago or so?

This is Jack. We feel very good about our position. We have best-of-breed core application products in every market that we compete in. We have a very focused strategy, it's very clear which products fits where. There is a lot of digestion that's got to be done by some of these recent acquisition activities that have taken place. We think there is some opportunity to be a little for them, to be a little distracted, in some case from the core business. We are very focused, continue to be very focused and feel very good about our position in every core market that we compete in making it to .

Okay. Thanks guys.

And our next question comes from John Kraft of D.A. Davidson.

Good morning, and nice quarter guys.

Thanks John.

Just a couple of follow-up, regarding the US Central Credit Union, how much of that business is in your backlog right now?

Well, what would be in there John is in the outsourcing backlog.

Right.

And I don't have the exact number with me, but it's not a large percentage of it.

Okay. How about in the quarter the contributions from that?

From the US Central?

Yes.

Again, that would be very small because I believe at this point Jack, I think we've got two of them converted, one of those is converted during the quarter, the corporate.

Yes, that's true and of course the way the revenue on that contract ramps up. I'm trying to remember specifically, but I think it will be the vast majority of the monthly recurring revenue I think we will see by the end of the fiscal second quarter of this year. But, it's still a modest contribution thus far.

Yes, I am guessing it. Probably less than 1% of our total data center revenue during the quarter.

Okay. And then, in the CapEx follow-up you said that there was a project that you are pushing out to '05, you are talking about new processing facilities, right?

No, it was -- we had originally thought we would be done with the Santiago facility; there is some of that that is being wrapped up this year. We are doing some additional build out, but then the in others also additional item centers to be done.

Okay. And as far as in the past you guys have given us a product break down for the number of NetTeller deals and 4|sight CRM? Could you deal those handy?

Sure.

Just waiting for me to ask that.

Yes, I like those type of questions, like giving me a of the softball. As far as Image deals during the quarter, I believe it's the second highest quarter of David sold 50 deals. NetTeller, it was a record quarter, we sold 58 deals, in CRM, we sold 10 deals which was also record quarter all of them being Synapsis.

Great, thanks a lot.

You're welcome.

And we will move on to Tim Willi of A.G. Edwards.

Hi, good morning. Just a couple of questions. First, regarding the pipeline if you could give maybe a little bit of clarity of I guess as this quarter progressed and looking out what it sounds like some of them may be larger deals moving out of the pipeline and then to revenue. During this quarter, did anything move out quicker than expected? I guess I am just thinking back to your comments in the third quarter call that there should be a pretty strong bump in the pipeline, because 4Q is pretty strong quarter for you and I guess relative to my expectation as why a little bit less sequential growth than I thought? I am just curious if there is some timing issue that maybe we haven't really thought about where some stuff came in to revenue quicker than expected?

Growth in which aspect Tim?

I guess I'll probably say software, I was just thinking about the sort of the sequential growth, in general, for the pipelines only up a bit about -- guess up 2% sequentially.

You are talking about the backlog?

Yes. I'm sorry backlog.

Okay. I think in one of the things I tried to point out is if you just back out what happened in ARGO during the year, the true historical Jack Henry in-house backlog actually went up by about 8% year-over-year and obviously, we think we are in a better position and I believe Jack returning to talk more about where we are with the ARGO relationship but in my opinion, with the new sales force that Jack mentioned, I think we are in a much better position this year to make actually better revenues and bottom line impact of the ARGO relationship in '05 than we were in '04. You are starting out with the third of the backlog. So, considering that, I was pretty pleased with the uptick in the in-house backlog year-over-year and even quarter-over-quarter.

Okay. Great. Thank you.

And next is Nik Fisken of Stephens Incorporated.

Hi, good morning everybody.

Good morning.

Kevin, at the analyst day you guys had a couple of months ago, you said that if you don't get some acquisitions done, that you are going to put the cash to use in the form of a repurchase program. Can you kind of give us an update on that?

Well, obviously our cash position right now Nik is in the $50m or so. Obviously we've got a lot of cash inflowing right now from our annual maintenance billing but I will also tell you that our acquisition pipeline right now is pretty full of deals we are looking at. None of them are huge by any stretch but that -- we still think that's the best use for cash, is doing acquisitions, just like the ones we've done in the last five months or six months now, I guess. We spent about $50m. None of those were home run for us but every one of them was a base hit. They added to our product suite. They helped differentiate our core from the other competitors out there and we are going to continue looking at those. So we continue to think that is the best use for cash and I repeat what I said at the analyst day, if we are sitting here at our annual stockholders meeting in October and we are sitting on well north of $100m in cash and our acquisition pipeline did not look like there is anything of insignificance, then we will consider alternatives, those being first of all probably a stock buyback and second of all, doing something additional with dividend.

So, the cash you expect by the end of August should be about $150m roughly?

Roughly, yes.

So you guys could buy the same amount of acquisitions you've done in the last five months instead of $100m cash?

Absolutely.

Okay. On net NetTeller deals, how many of the 58 were new to Internet banking?

50 of the 58 were new deals.

They didn't have Internet banking before?

No.

Okay.

There were eight replacements in there.

And how many of those eight or how many of the 58 came with the core sale?

I don't have that information right here in front of me. I do but I don't have the number.

And out of the eight, do you feel like you are signing larger institutions now?

Are you talking about NetTeller Nik?

Yes.

I think we are -- I think particularly that if folks look at our cash management product compared to other cash management product, they are finding it to be very competitive product at a much lower cost than some of the supposedly best of breed cash management products out there. I think that's helped a lot. I don't have either the numbers in front of me in terms of the number that we associate with the new core deal but I would tell you -- my recollection of that, was that it was a relatively small as a percentage of the total.

Actually it's 20.

Okay and then, Kevin, on this hardware issue, how much of that -- if you could kind of put some goal post around how much you think hardware revenue -- how much of that, which can get deferred into the first quarter?

Well Nik, I would hate to even guess because obviously, not only do the customers have to make the decision that they want the new operating system but then they have to get the contract signed and then the vendors actually have to deliver before we can take the revenues. So, there is no way -- I'll try to pull a number out through that one.

If I look at Q1 last year, was that roughly $24m. Shall we see growth after $24m?

No.

Okay. Great. Thank so much and congrats on the quarter.

Thanks.

And we will now go to Flay Lewis of Research.

Hello, is the Flay Lewis of Way Boston Research. Just wanted to ask a question, there 's been a -- over the past four, five, or six years a decline in the return on equity at your company. And that -- well, what margins have held up fairly well. Can you talk about that, and tell us what the future of that number might look like?

Well, I think the reason you have seen a diminishing return on equity is because, we have been paying dividends out at a discount to earnings, which means our equity has being growing faster, we have been paying it out. I mean, that's the big driving force of that. And that is our, go forward strategy is continue paying dividends at a discount to earnings growth, as long as we are continuing to grow at the 20% level.

Okay.

So, the return on equity will probably continue to diminish at some small percentage.

So, the sort of mid-teens type results we have been seen for the past three, four years, rather than the high 20s number of the late 90s. That is more, the feature there, is that what you're saying?

Well, that was given fact, that we're a much different Company, stay, than we were in the late 90s. We're more than twice the size we were back than, our revenue base is much larger and it's a whole lot harder to grow at the 25 plus percent bottom line levels that we were in the late 90s.

So, it's okay. So, it's sequential of the growth as well. Thanks very much.

You bet.

And again ladies and gentlemen, that is star one, if you would like to ask a question. We will now go to Carla Cooper of Robert W. Baird & Company.

Hi, good morning.

Good morning Carla.

I wonder if you could just talk a little bit more about, some of the drivers to the strong in the quarter. Can -- You think it was really a -- was the big number a factor of the number deals, or the size of deals, or it's like the mix?

Hi. It was truly a mix Carla, because, I mean there was a combination of all different types of products in there. I mean obviously, Episys was a big driver for the quarter, if it -- we had some server like deals limiting it. And it's not so much a matter of contracting; it's delivery of the software, based on installation slots that are out there. Which is why, we were able to hit the numbers that also still have a nice increase in backlog.

Okay. And then I guess back to the question that someone was asking previously about sort of about the velocity of the backlog. Is there any thing else that you point out other than ARGO that appears at this point to have really strong revenue potential in fiscal '05, yet today is represented by a fairly small number in the backlog. And you made the point on ARGO, is there anything else?

Well, I think one of the things in it -- and you'll probably never see it in backlog except maybe in the outsourcing would be summer ACH product, that regain regular rollout. I mean that could have an impact on revenue for the year. But, it's not sitting in backlog right now, but other than that, there is really no product that we have on the sideline, that we expect to have significant growth in '05 that is not already represented in the backlog.

And Carla, it's Jack. If you look at the pipeline, it's blocking and tackling; I mean it's our core products. We're seeing a lot of interest in the Synapsis, our end product, our vertex, teller product; foresight remains strong, net teller remains strong. Some of that is why we've reorganized a little bit with the retail delivery group to make sure that those products are getting the right level of attention, but there is no magic there, it is fundamentals and it looks very solid.

Okay, I'm sorry. Kevin, can you -- Jack can you just come back with me and talk about the ACH products. What are going to have for sale this year that you did not have last year?

Carla, we have a number of products that we'll be bringing to market, probably in fiscal second quarter, that are products that our customers will be able to market to their corporate customers, their merchants, their retailers, that they give this customers some additional product processing flexibility, from ACH check collection capability return, return item collection capabilities, that -- these are products that can be sold directly to merchant and retailers, and other business establishment and through independent sales organizations, we will do some of that type marketing, but they also can be marketed, and we intend to work with our banks for them to be able to take these products, to their commercial customers, share and some of the additional fee income opportunities that I maybe missing out on today.

Great, thank you.

And we'll now take a follow up question from Glen Greene.

Hey Kevin, just sort of thinking about the backlog into the September quarter. I mean, last year it, you know, dropped fairly sizably sequentially into the September quarter, and obviously due to seasonality, wondering if you could give us some expectations for this September quarter. How to think about the backlog?

I mean, you know, if you look historically, I mean, obviously the last couple of years have been kind of strange. I don't foresee the same drop-off this year that we had last year, but still would not surprised if we don't burn some backlog in this quarter, just because the follows are strong as contracting quarter, but it should not have the same drop-off that we had a year ago. And I think, part of that is driven by -- the economy is a little healthier one year ago and the other thing is our sales force. I think we are truly starting to see the benefit of the restructuring, and just based on the sales pipeline and different things, I would not foresee a significant drop-off in backlogs.

And then, just one question on the credit union gross margin of 47%. If I look at the absolute gross margin sequentially third quarter to fourth quarter that grew greater than the absolute increase in revenue, and I'm just having trouble reconciling that. You follow my question?

No.

Your increase in revenue for the credit union segment in the quarter went up about $3m and change sequentially. Your increase in the credit union gross margin went up over $4m sequentially, I can follow up offline, if you want.

Okay, because I'm not following the numbers you're throwing at me.

Okay, I will take it offline.

Alright.

Any other questions Mr. Greene?

No. Thank you.

And we will move on to Bob of Wachovia Securities

Hi guys, good quarter. Kind of have a question relating to your outlook in your backlog, could you give us some flavor for your install capacity today as it relates to, we will say, a year-ago, whether it be the number of accrues or the lead time between sign to install, just give us a little bit of a handle on how you're growing your capacity to install products?

Bob, this is Jack, comment on a couple of those, the accrues capacity we have grown. We have more than doubled the capacity on the accrues side. We believe we had adequate capacity there -- can relatively, easily increase that if the need present itself. I think we're in pretty good shape there. I think we're good shape on capacity on all of our banking products. Our product on the credit union side has pushed out, as it has become a little longer in lead times, just simply a factor of two things. The amount of demand that we've had and the size of some of the deals that chews up some additional implementation resource. We continue to keep an eye on that and add staff as needed. It is a bit of a challenge to, you know, bring the staff in and get them up speed, fully able to do the kind of installs that we are known for doing. But I would tell you that, I think we're in good shape from a backlog standpoint, lead-time standpoint, and all of those probably continuing to focus on the implementation and try to bring that lead-time down a little.

But based on what you said and you could show some pretty significant growth, without significant growth of backlog, based on your increased install capacity?

Yeah, I would say that would be a true statement. Everywhere except on the side, we would have to boost the side, I think to realize that, but everywhere else that would be true.

Okay, thanks a lot.

And our next question comes from David Trossman of Wachovia Securities.

Thanks a lot. Kevin I was hoping you could comment within the support services revenue line, could you comment on the relative growth between the debit transaction side, the outsource side, and the install side, and whether you would expect significant changes in those trends as you look into '05?

Yeah let me, find my numbers here. Yeah, EFT services for the year, David, grew, which our ATM debit services grew 36%, and we don't see much slowing from that, I mean, it may not be quite as fast because base, that we are also getting some really good tracks down the credit union side, so that should continue, our data centers revenue grew at 17%, I think that's going to continue at that pace especially with what we're doing in the credit union side because like we mentioned already we've got several in the backlog on the credit union side.

Which -- that is going to continue to help our gross margins, our revenue margins on the Credit Union side are already looking pretty good. And then our in-house maintenance grew at a level of 19% year-over-year. That may not quite as high this year. Like I said, our in-house maintenance annual billing was 17% over last year, so its going to be somewhere in the mid-to-high teens growth. And then our installation services, which are included in that group, up 15% for the year, that should hold true again this next year and be pretty solid.

Well, that's very helpful thanks.

You bet.

And our next question is a follow up from Tom Lynn.

I'm okay. Thanks very much.

And we have another follow up from Nik Fisken.

Kevin, on the hardware, if I look back at the last three fiscal years it was a 101 to 96, but they were 94, just reported. So, we expect a flat year-over-year hardware in '05.

Nik, it actually is flat to slightly down, there; like I said hardware -- hardware, it continues to get cheaper and cheaper from the vendors. They can buy more processing power for less money.

Okay. And then just -- I guess, clarification on this. How would you characterize the in-house market for banks today versus three months ago?

Nik, this is Jack. I would say the in-house market for banks today compared to three months ago is stronger. I don't know whether I can quantify that on a percentage or number of transaction opportunities, but definitely more activity -- I think it's for probably two reasons. It gets continued traction from our reorganization and I think we are engaging in more opportunities, and I think there are a few more opportunities out there. I wouldn't say that it's a dramatic difference compared to what it was three months ago, but I do believe it has improved.

And it crossed all size banks?

Yes, it pretty much crossed all size banks. We would like to see a little more activity at the high end of the schedule, but even there I think we have more than we had three months ago.

And Nick, I would add that you are comparing to three months ago, it's significantly higher than it was a year ago especially in the bigger banks. We've got a lot more opportunities identified in the pipeline of the now we did a year ago.

Great. Thanks.

And we'll now take a follow-up from Tim Willi of A.G. Edwards.

Thanks. Hardware question. I apologize if this was addressed earlier, but I guess I'm just looking at hardware and bank or credit union, will they be, given the strength of the credit union business though, I don't know whether it's correct, but that's more than out with in-house kind of product sale -- I mean -- is there any potential upside I guess may to the estimate that you would have articulated on your hardware, it could be driven by stronger than expected performance out of credit union versus bank or vice versa or -- but basically both started to have the same kind of hardware characteristics versus their license revenues?

I don't think you are going to see that Tim, because the pSeries is a much less expensive block than the iSeries, so even with the success we are having in-house on the credit union side, the price of the hardware that toils with the software sales is significantly less.

Yes Tim, regarding potential upside, we mentioned earlier the potential upsides of the estimates that Kevin gave, being increased in-house licensing activity on the banking side, along with increased licensing activity on the banking side would come some opportunity for uptick in hardware sales, because that would be in most cases on the iSeries platform from IBM, which carries higher margins than the pSeries and is also typically a bigger dollar transaction associated with that hardware. So, the same upside that Kevin said, potentially is out there being the increased in-house licensing activity for banks, would help both license fees than hardware potentially.

The only other wildcard out there, Tim, is the adoption of Check 21 and the potential sale of reader and sorters, but I will tell you that majority of the banks are buying reader/sorters now are buying the low-end product, because that's all they need to satisfy their need.

And that's, when you say reader/sorters, you've been processing the actual physical check rather than those that are being imaged.

They have got the reader/sorters to capture the image.

Okay. They have seen one hardware bundle that actually saw big drop-off in hardware sales on the item side, so I just want sure you want to lead into that kind of business. Okay.

No.

Great. Thanks.

And gentlemen, it appears we have no further questions at this time. Mr. Williams, I would like to turn the call back over to you for any closing remarks.

Thank you. Again, we want to thank you for joining us today to review our fourth quarter and fiscal year-end 2004 results. We are very pleased with the overall financial performance during the quarter and the fiscal year. We continued to expand and improve our products resources and we are committed to build all other competitive strength. Our executives, managers, and all the members of our team continue to do what is best for you, shareholders. Again, thank you very much for joining us this morning and with that, operator would you please provide the replay number.

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