Jack Henry & Associates Inc (JKHY) 2005 Q1 法說會逐字稿

Good day and welcome to the the Jack Henry & Associates first quarter fiscal year 2005 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 first quarter fiscal '05 earnings conference call. Statements or response to the questions made be made in this conversation and presentation 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. Again, thanks for joining us today as we report the fiscal -- first quarter fiscal 2005 financial results which reflect a 14% increase in revenue with improved gross margins which allowed us to leverage to a 20% increase in net income. We continue to have a very strong balance sheet, very fall(ph) backlog compared to same quarter in the prior year. Total revenues increased 14% in this quarter, or 15.2 million, with an increase of 51% or 6.6 million in licensed revenue this quarter compared to prior year. With significant increase in support and service revenue of 15% or 11.2 million compared to same period last year which this reflects our continued success in the outsourcing market place, our growing ATM and debit card processing business and additional in-house support fees. Harder revenues decreased 19% or 2.6 million, primarily due to a significant decrease in delivery of I series boxes and Reger sorters this quarter compared to the same quarter last year. Our total cost of sales increased by 11% or $7.3 million in the quarter compared to the total increase of revenue of 14% or 15.2 million. Our total hardware sales represented 17% of total revenues this quarter compared to 22% of total revenues same quarter year-ago, which we've said for some time hardware revenue will continue to become a smaller percentage of total revenue dollars. Cost of hardware decreased by 3% while hardware revenues decreased by 11%. Which, obviously, this had a significant negative impact on our hardware margins. Gross margin on our hardware revenues was 24% this quarter compared to 30% in the prior year. Which this is primarily due to the sales mix, types of hardware shipped during the quarter and reduced rebate incentives from the hardware vendors due to the lower volume.

As we have discussed before our hardware margins can be significantly impacted by sales mix, rebates, and incentives. Our cost to support the services increased 14% for the quarter compared to prior year period. This is compared to the 15% increase in support and service revenue for the same period, which again this is due to our increase ATM debit card Swift(ph) services, increased outsourcing, and in-house support revenues with the only offset being a slight decrease in actual install revenues this quarter compared to the same quarter last year which is primarily timing difference on billing and recognized the revenue on some of the 6 installs. We continue to leverage our resources infrastructure and continue to be very proactive looking for additional efficiencies within our organization. However our biggest expense and asset by far continues to be our people. Having said that, we continue to add employees and we have added 753 full time employees since this time last year. At this time bringing out total full time employee count 2646, which represents a 16% increase. However approximately 125 of these employees are a direct result of the various acquisitions we've completed in the last 9 months. Our gross margin is up this quarter to 41% or 50.6 million compared to the 39% or 42.7 million last year. Our hardware margins have decreased as previously discussed, however support and service margins have improved slightly to a level of 33% from 32% compared to last year and licensed margins decreased slightly to 92% compared to the 93% a year ago due to the higher amount of software being resold -- that we resell for third parties being sold this quarter. Our banking center gross margins improved 42% from 40% in this quarter compared to last year. This increase is primarily due to the increase in license revenue in this segment offset by the decrease in hardware revenue and related margins. Our credit union segment gross margins increased to 37% from 35% a year ago for the quarter. This increase is impacted by a number of things. We had a 58% increase in license revenue in this segment but at margins of 83% on the license revenue compared to 89% last year. Our increase in support and service revenues of 32% or $3 million in this segment with an increase in margins of 17% from 12%.

Again we continue to find efficiencies in our processes, improved cost control in the credit union segment. Our harbor revenues were basically flat or level in this segment with last year's quarter but the margins on harbor sold this segment decreased by about 10 percentage points due to sales mix, reduced rebates and incentives from vendors. Obvious this segment's margin is down slightly from last fiscal year margin of 39%. However, if you recall on our July earnings call we stated that you should expect our credit union margins to decrease somewhere less than last year's margin in at least the first quarter and possibly the second quarter because the very strong licensed revenue in the fourth quarter of last year which skewed the margins for the entire year. Having said that, I will stand by what I've said on that call and these margins should continue to improve through the year as we continue to get additional cross sales of the higher margin products and services and continue to improve our processes and control cost. Our operating expenses increased 15% or 3.2 million this quarter compared to last year's quarter. And as a percentage of revenue it increased slightly to 20% from 19% of total revenue. Our selling and margin expenses increased by 22% or 2.0 million compared to the prior year quarter. This increase is primarily driven by increased commissions on the increased revenues and a small increase in personnel costs associated with a increase in total number of sales staff compared to this time a year- ago. As percentage of revenue (inaudible) marketing remained relatively level at 9% of total revenue compared to 8% a year-ago. Research and development expense increased 15% or $800,000 compared to last year. But as a percentage of revenue remained level at 5% of total revenue. The increase in expense again, is due primarily to the increased personnel cost to continue developing new products and improve existing products. Our G&A expense increased 7% or $500,000 compared to last year's quarter but as a percentage of revenue remained level at 6%.

Our operating income increased 22% or 4.7 million over the prior year quarter and as a percentage of total revenue increased to 21% from 20% last year. The effective tax rate increased to 37.5% this quarter compared to 36.5% in the same quarter last year due to some changes in the effective tax rates. However, if you remember we made an adjustment in the fourth quarter of last year to adjust the effective rate for the entire fiscal year to the 37.5% rate. The result of all this is increase in net income of 20% or $2.8 million to 16.7 and earnings per share increased 20% to 18 cents compared to 15 cents in the prior year quarter. Some comments about the balance sheet. Majority of the significant changes compared to same time last year, obviously cash and cash equivalent are up 16% or 16.8 million. This is primarily due to collection of the annual support billings from June 30th and the impact of some of the follow: We had cash outlays for capital expenditures of 12.1 million this quarter compared to 17.7 million last quarter. Payments for acquisitions this quarter 6.7 million compared to none last year. Payments for acquisitions in this quarter 6.7 million compared to none in this quarter last year; Proceeds from issuance of common stock exercised from stock options brought in 2.4 million this year compared to 7.3 million last year; And dividends this year are 3.6 million compared to 3.1 million last year. Accounts receivable increased by 15% or 9.7 million which is directly in line with the increased revenue of 14%. Change in accounts payable and accrued expenses primarily due to the timing of payments including estimated tax payments, our deferred revenue which was primarily prepayments for in-house support, and deposits has increased 16% or 4.1 million from last year at this time. Our backlog increased by 5% at December 30th compared to same time last year. Total backlog increased 185.1 million with 63 million in-house and 122 million outsource compared to 176.5 million or 60.2 million in house and 116.3 million outsource a year-ago. Total backlog decreased 3% compared to June 30th,

which we predicted some backlog burn this quarter on the July year-end earnings call. As a result of this historically being our weakest contracting quarter due to a number of things, 1 of those being it follows our year-end which June is typically our strongest contracting quarter. Having said that with 14% increase in revenue and only a 3% decrease over our backlog it was still a pretty decent contracting quarter. After reviewing our backlog, sales forecast, sales pipeline I am comfortable with the range of the consensus estimates for the next fiscal quarter which I believe the consensus for next quarter is 19 cents. Also, backlog should continue to be strong in the next quarter since December is typically our stronger contracting quarter on the banking side. With me today I have Jack Prim, CEO, and Tony Wormington, President. We remain confident that we are very well positioned and that we have the right product and services to approach both the banking/credit union markets from the smallest institutions or de NOVOs to the largest financial institutions. We also believe we have the proper resources in both people, technology for a continued future opportunities and adequate cash and financing resources to continue looking at additional acquisition opportunities that make sense for you, our shareholders. With that I will open up for questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question please press the star key followed by the digit 1 on your touchtone phone. Once again if you would like to ask a question please press star, 1at this time. And we'll take our first question from Bryan Keane, Prudential Equity Group.

Yeah, hi, good morning. Kevin the hardware sales should that going forward stay -- stay around 21 million a quarter or what is the outlook there going forward.

Bryan, I mean, obviously that's kind of a tough call at this point and part of that depends on the vendors and how aggressive they get. You know, typically the December quarter is a fairly strong quarter because that is the year-end for most of the hardware vendors. So, I would assume that it should pick-up a little bit in the December quarter but it should probably remain pretty level for the balance of the year after that would be my best guess.

Okay and the acquisitions in the quarter, I kind of summed them up and I'm guesstimating, I don't know, maybe a 10 million annual run rate for those -- the 3 acquisitions in the quarter. Does that sound about right? And then what kind of EPS impact will those have.

Well, we actually only closed 1 acquisition in the quarter. BIS was the only acquisition we actually closed in the quarter. Select Payments and Verinex were actually both closed effective October 1st. As far as revenue wise, yeah, you are pretty much in the ballpark, I mean, we still got some fine tuning to do on their sales projection stuff because, obviously, they were small companies, they didn't have a real sophisticated budgeting process. You're probably right, but I would guess somewhere in the 8 - $10 million revenue run rate for this fiscal year. That would be a best guess. And between the 3 of them, like I said earlier, they should add 1 to 2 cents the balance of this fiscal year.

Okay. Okay, great. And then I was just hoping to get the segmented information on any image deals, NetTeller, the check imaging CRM deals, that data.

Okay. As far as image deals we had 33 of them in the quarter which is 2 up from this quarter last year. Net Teller we had 36 total deals which is again, 2 more than we had in this quarter last year. And then CRM we had 3 of the Synapsis products, no ARGOs in the quarter which is exactly the same level that we had this quarter last year.

Okay, great. Thanks.

Thanks, Bryan.

We go next to Paul Bartolai, CS First Boston.

Thank you, it's a great job on the quarter, guys.

Thanks, Paul.

License sale obviously pretty strong, it sounds like a lot of it was on the credit union side just wonder if you can give us anymore color on where you guys saw any particular strengths?

We had actually strength on both sides, Paul, I mean, obviously, credit union side was pretty strong, you know, it went up -- license revenue went up about 70% over this quarter last year which quite a bit of that obviously was Epsis in-house core deals which is about a $3 million increase. But, you know, on the banking side we actually had a 42% increase which in total dollars was actually a larger increase than the credit union side. And that was -- obviously there were some core deals in there but that was heavily weighted towards complimentary products being driven significantly by Image and our fraud products.

So, are you -- but are seeing some pick-up on the bank side on the core deals?

Paul, this is Jack Prim. I'd say the banking side is pretty much running at about the same rate that we have seen it. Again, there is probably more activity on the credit union side, activities running about level on the bank side with what we've been seeing.

Okay. And then on the support and services revenue was up pretty nicely year-to-year but was down a bit sequentially. Just wonder if you would comment on anything there and maybe give us some of the specific growth rates for the different products in that segment?

Yeah, I mean, our EFT services continues to just go along at a very good clip. This quarter over the same quarter a year-ago are EFT services were up 47%. Our outsourcing was up 13% over this quarter last year and our in-house maintenance was up 17% which reflects all the additional software or in-house licensing for all the different complementary and core products we sold last year.

Okay, then last on the selling expense came in a little bit higher is this kind of the level we should expect going forward or is this kind of more just due to the real strong license sales.

It primarily reflects the high license sales because a lot of that is commission related. You know, I've said last year and pretty much all along that selling and marketing should continue to float along somewhere around 8% of total revenue, again that depends on sales mix so it may bounce around a little bit. I don't really think 9% is probably the right number going forward but it will be somewhere between 8 and 9.

We will probably have some ramp up in sales related expenses for some of the acquired products so that we can get a little broader distribution on that. We believe that that would be offset, obviously, with the increased revenues, maybe a bit of a timing issue, you know, on a couple of those but it shouldn't be significant.

All right, great, thank you.

We'll go next to John Kraft with D.A. Davidson.

Good morning guys.

Good morning, John.

Just wanted to go back to the hardware margins, rebates continue to fall is there kind of a baseline where they can possibly get to or, I guess, kind of what are your expectations for margins going forward there.

Well, I'm hope that the incentives and rebates don't get any slower than they were this quarter. But, you know, we've said all along that we thought a sustainable margin on hardware was somewhere around 25%. Obviously we're -- we're about that this quarter, we fell just slightly below that. And that was not only -- the 24% compared to what we've said at 25% it is not just incentives and rebates that is actually sales mix, also. Because some of our higher margin products that we took this in this quarter did not go through.

Okay, that's fair and a couple of housekeeping things. Recurring revenue percentage wise.

This quarter our recurring revenue was 59%.

So a little bit of an uptick, wasn't it 58 last quarter.

Well, it was 57 last quarter which if you look back at last fiscal year for the quarters we ran at 56, 59, and second quarter 57, 57 and now we are at 59% in this quarter. A lot of that is due to the hardware revenues being down slightly. But, again we continue to increase our number of outsource customers and our EFT switch customers.

Another one on the housekeeping line there. Your CapEx expectations have bounced around a bit, last, I think, you said you were expecting mid 40s's for the year. It that about -- are you sill in that range.

Yep, I think that is a good number is somewhere in the low to mid 40's for the year. Again, that is barring any large acquisitions, but where we are today that is a good expectation for CapEx for the year.

Okay, thanks a lot.

You bet.

And we'll take our next question from Tim Willi, A.G. Edwards.

Good morning, just two questions. One just going back to hardware quickly, I think you had mentioned in the last quarter when hardware was down that it was partially due to IBM getting ready to rollout some new products and people holding off on decisions, did they actually roll those out or was there maybe a little bit longer delay in that happening that could have contributed to hardware this quarter.

Actually I think they rolled most of the discounts out some time in July, Tim. Even at that it take a while to get those pushed through and get the customers to actually order the hardware and get it shipped. And, again, hardware kind of follows the software. And, you know, some of the software we have sitting in backlog, obviously the hardware hasn't even been shipped yet. In fact some of it hasn't even been ordered yet so it's lying in hardware backlog.

Okay. And then on license, you said that the bank saw about -- the bank division saw a 42% increase that was mostly complimentary product. What kind of year-over-year increase or sort of color could you give as to the growth in just the core license component?

Tim, the growth -- the core license component I'd say is tracking about even to where we were same time year-ago.

In terms of absolute dollars?

Yes.

So essentially a flat year-over-year rate growth then?

Pretty much.

Okay, and I guess -- if you look at the bank marketplace and think about where Jack Henry is as a company now with product offering a lot of, you know, outsourcing products with lots of capacity and all of the same bells and whistles as license and the change in the company. I am just curious, given your years of experience in talking with customers, is it at all possible in your mind that the ability of people to now outsource the very same products that 3, 4, or 5 years ago they were only allowed to license could be to some degree cannibalizing license sales or you just don't think that is a possibility.

Tim, I don't don't really think that is a possibility. We have been at this in some form or fashion for over 10 years now. And there is usually a pretty clear preference for the direction that somebody wants to go whether it is in-house or outsource. We just don't see that many deals where somebody is on the fence and, you know, just trying to make up their mind or run the numbers to see necessarily which one's more cost effective. It is typically more of a preference for which way they want to go. Now there can be a deal here or there where that might not be the case. But, by in large there is a preference and I don't think that we are cannibalizing opportunities. I think we are gaining opportunities that we would not be allowed to participate in the deal if we did not have the outsourcing alternative that we have. I think what is probably more at work is that the complexity of the operating environment is dramatically higher than what is was 10 years ago or even 5 years ago. With the proliferation of 7 day a week 24 hour a day banking and internet banking and voice response and network land and when and real time ATM processing. It is just not the same business that it was it was 10 years ago and I think some of the banks while they may not have a particular preference for in-house versus outsource in general it is the issue of managing that level of complexity that they want somebody else to assume responsibility for. I don't think it's cannibalizing sales I think it's the other factors.

And I will tell you, Tim, that I am extremely thankful that we got into the credit union space and also that we did the Cruse acquisition a couple years ago because we're having very good success with both of those in an outsourcing environment now.

No, I agreed. I just say I guess as I look at these numbers and obviously you have got great products and platforms if there had not been people that weren't a Jack Henry customer that always liked the product but, you know, just didn't want to go to a another license solution and then when you brought out the opportunity to outsource if they, as you said, they became a Jack Henry customer. But, instead of being a licensed one they finally their outsourcing option. You know, it's all just speculation. I was just curious if you had a feel. Thanks a lot.

The nice thing, Tim, is we we don't really care which way they go and we offer the exact same products, both in-house or outsource and we're going to make about the same money over a 5 year period regardless of the direction they go. We just want them as a customer.

Agreed. Thank you.

You bet.

We'll go next to Glenn Greene, ThinkEquity Partners.

Thanks. Hey, Kevin, a couple of questions. The first one is the maintenance and services line which, you know, was flat sequentially and I realized the fourth quarter was a strong quarter and I think you referred a little bit to the installations being down a little bit. Could you, you know, provide a little bit more color on that line item and how we should think about sort of the growth projectory for the year and are you still comfortable sort of high teens growth for that line item. And I've got a couple other questions.

I don't know that I ever said I'm comfortable with high teens growth for that line item but I am comforted with mid teens growth. The install -- you know, a lot our installations on especially complimentary products and even our small core products we don't bill or take the revenue for those until the installation is complete. So there can be a timing issue in there and, you know, for when I say install dollars were down slightly, you know, it is down, you know, less than $1 million from this quarter last year. So it is not down in huge dollars, but that was the only component within support and services line that was down at all. The others were all up nicely.

Okay. And on the credit union side the gross-margin, the 37%, is it fair to think that this is the bottom that we should probably be growing 100 - 200 basis points sequentially throughout the year or how should we think about that?

It should grow -- obviously depending on sales mix, Glenn, there may be some fluctuation depending on the amount of hardware that goes in there and whatever but it is going to grow between now and the end of the year and by the end of year should exceed 40% nicely.

Okay, great. Thanks a lot. You bet.

We'll go next to Nik Fisken, Stephens, Inc.

Hi, good morning, everybody.

Good morning, Nic.

Kevin, on the sales and marketing line if I look at the license number it went -- the license number June to September was both relatively good license numbers but the sales and marketing went up subsequently and I'm wondering -- you said that the higher sales and marketing because of license but I'm trying to make those 2 things check.

Well, also -- I also said, Nik, that we added some sales people and some sales people came through some of the acquisitions we did that obviously we have not gotten the ramp up in revenue yet. So that's gong to effect the percentage a little bit. I mean, it's going to make it as a percentage of total revenue higher because those sales guys have not hit the ground running yet. Our number of sales people has gone up about 9 or 10% in total from this time last year. So, we've added some sales people that are not producing the same level of revenue and quotas as we had historically and that is something we'll be working on throughout the year. It is kind of like Jack said, as those revenues start coming in for some of those acquired companies then that selling and marketing as a percentage of that should go back down.

Okay. And then you said to an earlier question that you are comfortable with the 8% of revenue or did you not say that?

For selling and marketing?

Yeah.

Yeah, I think for the whole year it should be around 8% for the year. It may bounce around a little bit quarter to quarter.

Okay. Can you kind of give us an update on ARGO. If we go back a year or 2 the number of sales that we've had in total, the number of installs and are all the products in this subsegment G&A.

This is Tony, Nik. The ARGO solution is out and running live in production in 3 sites for the deposits and CRM applications. We are running in a Beta environment on the lending applications in 2 sites, these are all Silverlake customers. We are a bit behind on the lending applications due to some complexities that we've experienced in integrating a couple of the technologies in the forms providers. But that is pretty much behind us at is this point. And the 2 institutions that are running in pilot or Beta today should be in full rollout around the first of the year so we expect to be able to sell additional solutions of ARGO to our Silverlake customers which is the largest licensed revenue opportunities and implementation revenue opportunities as compared to our OSG customers. It has been a situation where without the lending pieces in production it has been a little difficult to get the traction with the ARGO solution that we felt we would experience at this time. But, we should be in production by the first of the year or first quarter so I expect that to increase in the future.

Nik, we -- it's Jack -- we've also done a small restructuring establishing kind of a retail delivery sales group that deals with this product and several others that are similar in nature so that they -- including the fraud products and some of our other platform automation products and CRM products, but, again, so we can kind of focus that -- the knowledge of all those different solutions in a more focused sales group. So we think that is going to have some positive impact as well. And the fact that we have the products, the ARGO product now running and live, as Tony said, for deposits in CRM and in beta certainly viewable by a prospect for the lending applications currently is a big step ahead of where we were. ARGO is essentially a tool kit in its original design. So, we are no longer just talking about what could potentially be done with the product, we have a product that people can actually touch and feel and see. So we think that both of those things will help us with that going forward.

So, if you look at your pipeline you expect, you know, after you go full rollout on the lending side to see a big pop in license?

I don't know if I would predict a big pop right away, Nik, I think again, this is a -- there's a lot involved with implementing a solution like this, large part of which is cultural in nature at the institution. They have got to be willing to do -- to commit to a number of changes in the way they do their business to be able to justify an expense of this type. That is probably the biggest challenge anybody has selling a CRM type of an application is are people really willing to change the way they do business to fully leverage the capabilities . So I think that they can much more easily see what the product can do now that we have a demonstrable product. But, again, there's still some pretty significant decisions they have to make about the way they run their business. I think it will be improved, I don't know that I would be overly aggressive with my projections for what it would do in the near-term.

Okay. And then last question, you know, given the M&A you've done the last couple of months and your cash balances mid 70s million, let's say. Can you kind of comment on your pipeline in the M&A and your level of really aggression to go after more acquisition properties?

Well, I'd answer it this way, Nik, you know, we said in July call that our acquisition pipeline was very full that there is a lot of deals we're looking at. We've closed 3 since then and I would tell you that those 3 have been replaced by another 3 or more that we are currently looking at so the acquisition pipeline continues to look strong. We continue to be somewhat aggressive in that area because we think there is still some good products out there that will allow us to leverage additional revenues into our base and also allow us to get into some new addressable markets that's still within or closely related to the financial services industry.

Nik, I think also we mentioned last time that we'd done some restructuring and Dave Foss has assumed a new role for us as General Manager of Acquisition and Business Integration so that we can move a little more quickly once we do close on one of those and get them integrated properly, lose as little time as possible with all the administrative things you have to go through with an acquisition and get out there and start selling their product into our base or other bases depending on what it is that we have acquired. That has gone very well. I think that our focus has been more on some of the smaller acquisitions that compliment what we do and in some cases open up new markets for us and I would say that that's kind of the pattern of the things that we're immediately looking at going forward as well. So again, there is that whole integration process with the new acquisition that you have got to go through and this will let let us hit those a little faster and move on to the next one. So that's working well.

And pipeline in terms of size of deals, they're small and large, I would take it.

Mostly small to medium. Okay. I mean, there is, again, there's no huge deals that we're currently looking at that I'm aware of.

Great, thanks so much.

We'll go next to Carla Cooper, Robert W. Baird

Good morning. Tony, I guess, and Jack specifically, could you talk about just what the environment feels like right now in terms of are we back to sort of a normal operating environment following the slow down that you guys saw post 9/11 and maybe what is different, if anything, you know, as you think about earlier periods?

Carla, I think it is the new normal environment. I think we are back to an environment that is about as normal as it is going to get. It is, you know, different than the environment 5 years ago, Y2K looming on the horizon, obviously there was a lot of activity there to get prepared for that. A lot of of system changes were made and are in place and running along nicely. As far as the environment, particularly on the banking side, obviously there has been a lot of consolidation among the vendors there. Most of the players, certainly the major players, that are left on the banking side are credible, viable vendors and doing a pretty good job. So, you know, there's -- there just aren't any vendors, at least not in significant numbers, that are just doing a terrible job that could cause, you know, a lot of activity for people looking to make a change. So, the new normal environment is, I think, one of, as we talked about before, just less activity because the -- some of the catalysts that have existed there in past just aren't there on the banking side. Credit union side continues to remain strong as customers and prospects there are looking for expanded systems to handle, you know, member business services. We've done a lot of that, enhancement of our product to accommodate that. Expanded charters dealing with broader membership bases in the growth that that brings along with it. There are still some things that are heating up the credit union market, unfortunately we don't have those same factors at work on the banking side but I would say that the environment does not look significantly different to me than it has in the last several quarters.

And I guess just with respect to core bank deals, then you are not shocked that you're relatively flat versus year-ago?

No, I'm not.

And then my other question was on the ATM debit switch, Kevin, it seems like every quarter you talk about great results there. What is your level of penetration of those services into your current customer base and do you think at some point you hit a wall with respect to growth there?

I think it is like with any product, Carla, you will eventually hit a wall at some point. However, if you remember we just rolled this out to the credit union space less than 2 years ago. So, we've got relatively low penetration on the credit union side, with a lot of room for upside. Out of your 20 - 24 plus hundred core customers, I would guess that maybe 25% of them are currently using our EFT passport switch.

And Carla, even a lower percentage than that using the debit card capability. And that's where the significant transaction growth in ATM EFT is taking place today. I don't think your ATM transaction growth nationally that there's much too that, it is relatively flat maybe up a little but nothing significant. The debit card growth is continuing to increase at a rapid rate. We are well positioned to capitalize on that and have an even lower percentage among our base, I would say that one is probably in the 15 - 17 kind of percent range with debit card penetration. So, that certainly will begin to level off at some point but I think we're a ways away from seeing that.

And the growth is not only, Carla, from new customers but it's just increased volume with existing customers because more and more people are using their debit cards rather than checks.

Thank you.

We'll go next to David Trossman, Wachovia Securities.

Thanks. Hi, Jack, I was hoping you could give us a couple minutes on the item processing business and image side, are you still looking to built a few more centers this year, are you seeing any customers who had done this in-house moving more to an outsourced environment as they thing about image exchange and are you seeing any interest in those customers using Jack Henry's image gateway over time?

We will continue to be opportunistic related to new footprint item sights. You know, we have a couple that are possibilities that kind of hinge around a specific anchor client making the decision to get with us and in that case I think you can see us establish a new footprint where a large part of the revenue needed to obtain profitability comes as part of that transaction. Not aware right now that in the absence of something like that that we are looking to plant the flag anywhere. Again, things could change in a particular given market area that might change that. Continues to be a lot of interest in check image and check 21. I think everybody is still looking for gradual adoption of that. I don't know that we're seeing a lot of customers who currently have an image item processing product in place looking to move to outsourcing unless it is an older image product that is going to have to be replaced one way or the other, either with something new in-house or with outsource, but I don't know that we are seeing a lot of currently in-house image customers looking to move to out outsourcing. We are seeing a good bit of interest with our -- some of the sales that we are currently making either of our foresight check image product or outsourcing services where they are also going ahead and signing up for our image exchange network at the same time that they are signing up for those transactions. Now, you know, those volumes are still going to be very, very low for a while and I don't know that there is going to be any meaningful revenue associated with the image exchange aspect of that for some time yet but people are clearly thinking about it, seem to like the solution that we have in place and I believe as that begins to pick-up we are well positioned for it.

Good, thank you. Kevin when you say 8 - $10 million of run rate of revenue in the acquisitions that you -- the 3 acquisitions that you've closed. That is an annualized number? Is that what you think they could contribute for the rest of the year?

That would be annualized for this year.

So, in your press release when you say there is 3 - $4 million of EBITDA coming for the remainder of the year just in Verinex, you're really just telling us that these are very high margin software businesses.

Yes, that one is.

Thanks for that clarification.

You bet.

We'll go next to Tim Willi with A.G. Edwards.

Hi, just a followup question. Could you talk a bit about the Verinex transaction and just sort of, you know, where you see the most visible near-term opportunities for that product. Is it more something along the lines of payments or a general security market or is there something within the banking credit union industry that makes that -- gives that a lot of visibility?

Tim, one of the top areas on the -- there's 2 different studies, one the ICBA study about a year ago on the banking side and the Callahan & Associates study on the credit union side. In both studies the number 1 area that banks and credit unions expressed interest in was systems security. Now that can mean a lot of different things, you know, it can mean security monitoring services, et cetera. But a couple of things that related to that, where we're seeing interest, are in the fraud area and while our fraud detection software and anti money laundering software does a good job of helping them watch for some of those types of transactions, the majority of fraud that occurs, probably anywhere but certainly in the financial industry, occurs from inside. So we feel like the Verinex solution when used for employee identification verification moving away from passwords, which can be fairly easily cracked and may half the time be written on a sticky note on the side of the PC monitor, anyway. We think it's a more secure and a better method of securing systems for employee identification and employees plus there is a number of productivity benefits that go along with it. So our initial thrust with the product is for employee identification, some integration to our various applications, you know, some of the productivity benefits mean, for example, you know, I don't know what you do when are you come in the morning and sign on but I usually log on to our company intranet, an outside website that I might check stock prices and overnight announcements and bring up a couple of applications like Word and Excel. You know, in many cases that is 3 or 4 different passwords or log-ons that have to be done versus just a single finger depression on a workstation scanner which can launch those applications and sign you on to those applications and do so with a much higher level of authentication security than what would be done with the individual password sign on. So, Again productivity benefits, security from a standpoint of employee identification. We were contacted recently by a pretty good size financial institution that is a non Jack Henry core customer that expressed interest in being able to use that solution for customer identification at their teller and platform workstations. So, again we think there is a good opportunity for this product in our own base. We have every intention of looking at opportunities to take that outside of our base in the financial institutional marketplace, hadn't planned on doing that right out the shoot but, you know, for the right opportunity we'll look at some of those in non Jack Henry core customers in the near-term. And the solution is such that it really isn't tied to a particular vendors' core technology or application meaning it would be relatively easily to integrate that to competitive core systems in financial institutions. It would also be relatively easy to do the same thing in non financial institutions in commercial related businesses and to do so without a distraction from our core business of dealing with our financial institution customers. So we think there is a lot of opportunities but to answer your question our initial thrust is employee identification within our core financial institutions probably leveraging off from that into the customer identification capabilities in those same institutions and others selectively as opportunities present themselves.

And some of the ROI, Tim, will come from not only the password administration efficiencies that Jack kind of eluded to but also, you know, another big area is time and attendance. It gets rid of the buddy system for clocking in. There's been some studies done that, and this was in retail, that they actually cut their compensation cost by 22% by having this type of technology in there to get rid of the buddy card punching system.

Okay. Just a quick followup on that, I mean, in terms of the spend and any kinds of hardware that somebody would have or hardware undertaking that goes with this, I mean, could you size up this product, I mean, in terms of a comparable complimentary sale you currently offer, I mean, as a comparable to what somebody would spend on, you know, the fraud solution, is it reasonably priced, is a little bit more of a higher end spend? And than also, just is there additional hardware people have to buy and then plug into computers and how easy is that? It sounds like is could probably pretty easy to do.

Tim, it's pretty easy. It is a plug into their workstation, it's along the lines of plugging in a mouse. There is a pretty -- very straight forward setup process. Not a lot of time, not a lot of on sight support requirement to get it up and running. The financial institution can get into this for a very reasonable price, you know, the individual components are less than $200 per workstation, there is some small license fee that go along with it. So, it is a solution that can be significant from a volume standpoint. I mean, we'll need to sell a fair amount of volume on these to have it pay off. The good news is that we can sell a pretty good volume of these because the implementation requirement effort is such that we can ship those out and do a lot of that over the phone without a large on sight requirement or staffing requirement to go out and do installations unlike our other products like fraud or core or others that require a lengthy parameter settings and training on what the different parameter options do and at least some on site component of training and implementation, you just don't have nearly that level. So it can be implemented quickly and pretty cost effectively.

Great. Thanks a lot.

And once again it is star, 1 for questions. And we'll go next is Peter Swanson, Piper Jaffray.

Hi, Jack, had a question about the core environment on the bank side. You talk about a new normal environment. Are you seeing any changes in pricing, is that becoming more important in the end game with a little bit less activity or are you concerned that that might become a more important factor in winning new deals.

Peter, I would say there is some pricing impact that we're seeing. A lot of it comes from the incumbent that doesn't want to loose the existing customer because the number of new opportunities to add new customers it is, you know, it's not the same environment that we've had a few years ago. So, people that have the customers are fighting pretty hard to hang on to them. That is a particularly noticeable in a customer that is currently in an outsourcing delivery environment. We've seen some pretty substantial price reductions by some of the incumbents and in the outsourcing arena to retain a customer. You know, a customer who's in-house with a competitor or for that matter there is not as much room to work with that because they are paying you annual maintenance fees and, you know, you might can adjust that some but that's not going to be a significant number. I think, as I said, the bigger discounting seems to be coming from incumbents in an outsource delivery. Are we seeing come pricing impact on new core deals in-house as well as outsourcing? I would say we are seeing some. I would not say that we are overly concerned about it at this point. One of the things that we did, gosh I'm guessing probably now 2 years ago with our core director product, was somewhat in response to that that, you know, we kind of retooled that package to address the low-end of the market where price sensitivity is clearly a bigger issue. And that has gone well for us. We're probably seeing some pricing impact up the line, farther up the line but would not say that we are overly concerned about it at this point.

Okay and do you see any differences in the pricing between the bank and the credit union environment that appears to be significantly more healthy right now?

I don't know that I see anything significantly different. I mean, you know, it's probably -- you have got to be competitive wherever you are, whichever side you are on. The credit union side, because they are looking at expanded functionality in the system that they are looking to put in and because they have some catalyst or some incentive to make a change from some of the current systems that they are running on, I'd say maybe they are going to be a little less price sensitive then on the banking side where, again, the systems that are in place there are, you know, regardless of who's they are, for the most part are solid and stable and backed by credible companies. So there's maybe a little less price sensitivity on the credit union side but you're going to have to be competitive price wise wherever you compete in this day and age.

Okay, thanks. And one other question, can you comment on the net new core footprints that you gained in the quarter on both the banking and credit union side?

Pete, that is something we have never disclosed and to be quite honest I don't even have that information with me.

Okay, thanks, guys. Thanks.

And once again it is star, 1 for questions. There are no further questions at this time. Mr. Williams, I would like to turn the call back over to you for any additional or closing remarks.

Thanks, Peter. Again, we want to thank you for joining us today to review our first quarter fiscal 2005 results. We were very pleased with the over all financial performance during the quarter. We continue to expand and improve our products and services through development and through acquisitions and are committed to build on all of our competitive strengths. Our executives, managers and employees continue to do what is best for you shareholders. Again, thank you and with that, Peter, please give them the replay number.

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