Jack Henry & Associates Inc (JKHY) 2005 Q2 法說會逐字稿

Good day and welcome to the Jack Henry & Associates second-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. Again, welcome to the Jack Henry & Associates second-quarter fiscal 2005 earnings conference call. Statements or responses to questions may be made in this conversation which are forward-looking, or deal with expectations about the future. Like any statement about the future, these are subject to a number of factors which could cause actual results to differ materially from those which we anticipate. Such factors are disclosed in our recent SEC filings. There can also the other factors not included that could potentially cause results to differ materially. Again, thanks for joining us today as we report our second fiscal quarter 2005 financial results. These reflect a 21 percent increase in revenue and a 22 percent increase in net income compared to the second-quarter a year ago. Our total revenues increased 21 percent with a 79 percent increase in license revenue, which is primarily due to a very strong quarter for complementary products and a solid performance for new core business and new footprints this year, compared to the prior year. We had another healthy increase in support and services of 14 percent compared to the prior quarter, with our continued success in the outsourcing marketplace, our continued growing EFT processing business and additional in-house support fees. Our hardware revenues that a good quarter increasing 10 percent, driven by continued strong sales of reader sorters and a pretty good quarter for iSeries and pSeries servers for our in-house customers. The component for total revenue compared to the prior year quarter were again license revenue went up 79 percent or 9.7 million, support and services went up 114 percent or 11 million, hardware sales went up 10 percent or 2.5 million for the total 21 percent increase of 23.2 million. In our cost of sales, they increased 19 percent in the quarter. Total hardware sales represented 19 percent of total revenue this quarter compared to 21 percent of total revenue in the same quarter a year ago, which obviously, the decrease is due to the nice increase in our license revenue. Cost of hardware increased by 15 percent while the hardware revenue increased only 10 percent which obviously this did have a negative impact on our gross hardware margins. Gross margin on hardware revenues was 29 percent this quarter compared to the 32 percent in the same period in the prior year, which was primarily again due to sales mix and reduced rebates incentives from vendors on hardware sales due to volumes and the time types of hardwares we sold. As we continue to discuss and discussed in the past, our margins can be significantly impacted by sales mix and these rebates and incentives from our partners.

Cost of support and services increased 18 percent for the quarter compared to the year period which is compared to the 14 percent increase in support and service revenue. The increase in cost this quarter compared to the prior year is primarily due to increased takeout, a full quarter of depreciation on all the new facilities placed in service in the last 12 months, including the new San Diego facility for our Symitar division. In regards to increased headcount, we consider that our largest expense and asset by far continues to be our people. Having said that, we continue to have needs and requirements that employees. Even though we're very cognizant of cost control and how we have these new employees, we did at 327 full-time employees since last year at this time. This count does not include the 186 new employees related to acquisitions during the last 12 months. This brings our total full-time employee count to 2810 at December 31st this year compared to 2297 a year ago. Gross margin is level this quarter at 40 percent compared to the last year at the same period. Our hardware margins decreased 29 percent from 32 percent as previously discussed. Also, support and services margins have decreased slightly to 31 percent from 33 percent for the reasons I previously mentioned. And license margins decreased to 92 percent compared to 98 percent a year ago, which this obviously is due to more third party licenses being delivered during this quarter than in the prior year. Our banking segment gross margins increased to 43 percent from 40 percent in the second-quarter a year ago, which is a good thing. Our credit union segment gross margins decreased to 29 percent from 36 percent year ago, which this change in the credit union margins is primarily due to a large decrease in license margin to 88 percent from 98 percent a year ago, or a 10 percent increase in these license revenues margins, caused by an increase in the third party licenses sold. The decrease in support and service margins of 6 percent, primarily due to increased employee-related costs and a full-quarter depreciation on the new facility in San Diego which we moved into in September. We also had a decrease in hardware margin in the credit union side to 22 percent from 32 percent a year ago, or again, a 10 percent decrease at hardware margins due to sales mix reduced, and reduced incentives and rebates. So, we had a 10 percent decrease in both the license margins and hardware margins.

Our operating expenses increased 21 percent this quarter compared to last year's quarter. And as a percentage of revenue, it increased to 21 percent from 20 percent of total revenue. The bulk of this is in selling and marketing expense which increased 40 percent compared to prior year quarter. This increase is primarily driven by the increased commissions on increased license and hardware revenues compared to year ago and a small increase associated to increase the number of sales staff and their base salaries. As a percentage of revenues, selling a marketing increased to 9 percent compared to 8 percent a year ago. R&D expenses increased 14 percent compared to last year, which is primarily due to increased employee-related costs. However, as a percentage of revenue, it remained level at 5 percent. G&A expenses increased 6 percent over last year's quarter, but as a percentage of revenue, decreased to 6 percent of total revenue this year compared to 7 percent a year ago. Our operating income increased 24 percent over prior year quarter and as a percentage of revenue, increased to 21 percent from 20 percent a year ago. Our effective tax rate this year is 37.5 percent compared to 36.5 percent a year ago, due to changes in the effective state tax rates. If you recall, at June 30th for fiscal 2004, we adjusted our effective tax rate for the entire year to 37.5. So it is comparable to the entire year last year, but for the second-quarter we were still at a 36.5 percent rate last year. The result of all this is an increase in net income of 22 percent to 17.7 million and an earnings per share increase of 20 percent to 19 cents for the quarter compared to 16 cents in the prior year quarter.

Some comments on the balance sheet -- the majority of significant changes compared to the same time last year -- obviously, cash and cash equivalents decreased 79 percent. This is primarily due to acquisitions we've done during the last 12 months. During the first 6 months of the year, we have spent approximately $114 million on acquisitions, approximately 26 million on capital expenditures, 7 million on dividends, and 21 million on estimated tax payments. As you'll see, we did not have cash flow information in the press release this time. And that is primarily due to the number of acquisitions we did in December. We're still trying to finalize some of the operating cash flow items in that. Hopefully, we will get those and we will get those out on our website, even before the 10-Q is filed. Our change in accounts receivable increased by 30 percent compared to last year which is due, obviously, to a very strong quarter and also due to the new acquisitions we've added during the first 6 months. Change in accounts payable and accrued expenses is primarily due to timing of payments. And our deferred revenue, which is primarily prepayments for in-house support has increased 12 percent from last year and is primarily due to the increased annual maintenance that we built at June 30th of 2004. Our backlog continues to be strong. It has increased by 7 percent at December 31st compared to the same time last year. Total backlog increased to 194.5 million, with 68.4 million in-house and 126.1 million outsourced, compared to 182.5 million with 60 million in-house and 122.5 million outsourced a year ago. Total backlog increased slightly more than 5 percent compared to the September 30th quarter with in-house increasing 9 percent and outsourcing increasing 3 percent.

After a review of our backlog, our sales forecast and sales pipeline, I am comfortable with the range of recorded estimates for the next fiscal quarter and this fiscal year that are out there, based on the recent First Call note I saw, which I believe the third quarter estimates are 21 to 22 cents and for the year it's approximately 83 cents. So at this time, based on the information we have, we are comfortable with those estimates that are out there. As we gain more information and knowledge about the acquisitions, especially the three that we have announced in the last 30 days, hopefully we will be able to give better guidance at the April call after the March quarter.

With me today, I have Jack Prim, our CEO, Tony Wormington our President.

We remain confident that we're 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, or de novos, to the largest institutions, especially with the help of some of our recent acquisitions. We also believe we have the proper resources in both people and technology for continued future opportunity and we have the adequate cash and/or financing resources to continue looking at additional acquisition opportunities as they appear that make sense for you, our shareholders. With that, I will open the call up for questions.

(Operator Instructions). Kartik Mehta, Midwest Research.

Good morning. I wanted to ask you the software sales and the resale -- could you tell me maybe what percentage of overall software sales or from third-party?

Kartik, I really don't have that information. I will tell you though that on the banking side, there was quite a bit of our new ARGO ontarget product sold this quarter, which is above that. I don't know what percentage of it is. Obviously, it can't be a big amount but just reduces our gross margins about 3 percent on the banking side. On the credit union side, there's a number of products that get resold. And I will tell you on the credit union side, there was a couple of our products that actually sold -- those third-party products sold as much this quarter as we anticipated for the entire year.

Any particular reason or there was just very strong demand for those products?

Kartik, this is Jack. The -- I think in the case of both the business partners that Kevin is referring to, there were some upgrades, some new releases of their system which required some hardware upgrades and software upgrades as well. And apparently that kind of an every 18 to 24-month type of occurrence that happens there. Probably have worked our way through the majority of those upgrades at this point in time. I would also point out that one of those products in the document imaging -- document management -- is a product that for sales to new customers we will now be marketing the Synergy product that we acquired. So we still have customers that have the other product. We certainly will continue to support that product on an ongoing basis for customers who have it. But in terms of sales of that type of product to new customers in the credit union side, we will be selling our own product with our Synergy acquisition that we now have. So we believe that should have some pretty favorable impact on margins as regard to that particular product area.

And speaking of acquisitions, it seems like you've picked up the pace a little bit on acquisitions. Was that more because of pricing is better than it was maybe a year or two ago? Or is it that you're just seeing the opportunities that you've been wanting to see?

Well, actually, Kartik, it's primarily because of the opportunity. Not to talk about the competition, but some of the competition out there kind of went on a shopping spree over the last 24 months. And some of the small companies that we've been buying that had a -- some opportunity out there, is seeing some of that opportunity go away as the other core vendors fill those voids within their product mix. And this is either a good time for them to sell or they may never be able to sell. So I think that a lot of these small companies that are coming on the market are, for that reason. And the other one is because the valuations still continue to be pretty good for them.

And one last question, Kevin or Jack. The last few acquisitions you've done -- last 3 or 4 acquisitions in terms of integration, especially integrations on the sales force side, will you leave the sales force of those acquisitions by themselves and selling their product? Will they be integrated into the Jack Henry families selling all your products?

Kartik, for the most part, the sales staff in the acquired companies will be left in place. The acquisitions that we have done in the last year share a couple of things in common. One is that for the most part, they are applicable or have some relevance inside our existing customer base. But in all cases, these acquisitions also are attractive products outside of our core customer base, which frankly represents a departure from the way we have approached some things in the past. As you probably know, we've been very focused on our own customer base. All of these products that we have acquired in the last year can be, have been, and will continue to be marketed outside of our base to users of other core products. And for the most part, they are nonintrusive systems to those core vendors. So it doesn't threaten the core. It's not that somebody put this in and throws the core out. Things like bank insurance services provide an opportunity for the institution to generate additional fee income. And it doesn't matter what kind of a core system you're running. So, to answer your question, some of these products like the Synergy product that I talked about, is a replacement for other products that we have or that we remarketed in our own base and will be sold in our own base by our existing sales staff. We do not look for our existing sales staff to try to take that product outside to competitive core system users. We will in most cases use the sales staff of the acquired company to continue to pursue that market. So we're not looking at getting rid of their folks as we bring them in. They will continue for the most part to focus outside the base. There's 10 acquisitions, some different products, and so some variations of how that might get handled. But by-and-large, that would be the approach that we would take. And then the products that have relevance inside our base, unless there's a highly-specialized application knowledge required to sell it, we would look for our sales staff to try to market that to our own customers.

Thanks very much guys.

Glenn Greene, ThinkEquity Partners.

First question I guess surrounds the gross margin. I was -- Kevin I know you gave a lot of explanation for what happened in the quarter, but just trying to think about it for the back half of the year, in terms of not only by line item but sort of thinking about where the credit union segment margins may go and the bank margins as well. It sounds like there's a lot of moving parts there.

There are a lot of moving parts. In the quarter -- and Jack may want to talk about this a little bit more, but U.S. Central has kind of been pushed off a little bit, so we're probably not fully utilizing some of our resources and getting the revenue stream from those that we want. But that should take care of itself in the very near-term. The depreciation on the facilities out there is -- was a pretty sizable dollar amount this quarter, compared to what we had in the past, because of all the new office equipment and facilities for 400 people out there. But I will tell you that the efficiencies we gained because they actually have space to work now should also offset that in the near future. As far as the margins on the license revenue, it's really kind of hard to predict what that's going to be because it's hard to predict what third party soft (sic) we're going to sell. But as Jack said, as we start selling the Synergy product, that is now ours -- 100 percent ours -- as replacement for one of those third party products that we were selling a lot of in the credit union space, that should help take care of the license margins somewhat on the credit union side. On the banking side, the license margins may -- they're going to continue to fluctuate, because it depends on how much ARGO that we continue to sell. And obviously, we want to continue to sell a lot of that, because those are very sticky applications. We'd like to have all of our customers using the ARGO application in some way or another. So I think the credit union margins in the future are going to go back up because I think we're going to continue to generate more revenues which will overcome some of the additional costs that we've incurred. But I will also tell you that we are very focused and continue to be focused on cost control and headcounts. In fact, we're having our annual meeting with all of our GM's and executives next week and that message will be carried thoroughly to that group, that we have got to continue focusing on cost controls and headcount containment.

Glenn, as Kevin commented on several things -- infrastructure related to San Diego. With some of these acquisitions that we've done, there's some duplicate facilities cost in some places, relocations and/or upgrades of their existing facilities. We are underway on implementing some internal systems from the customer service-related systems and accounting systems to replace some very aged systems that we used internally to run our business. So a number of things there that have had some impact, but that are investments for the long-term that will allow us to grow and handle additional revenues as a result. Kevin also mentioned we've seen some delays in some of the U.S. Central implementations -- haven't ramped up quite as fast. They have had some additional scrutiny from the regulatory agencies who have come in. No major problems found or anything of that nature. But again, some time required to step back and let the regulatory agencies look at things that were going on there. So I has delayed some of those implementations. Those are poised to begin ramping back up we believe in February on a pretty aggressive schedule. So that has had some impact in the last quarter as well that we believe will start to turn here shortly.

All right, let me -- different direction. Kevin, you sort of indicated that you saw some strength in sort of core deals coming back this quarter. I was wondering if you'd give us some color on that. And also, in terms of, obviously, there's been a lot of consolidation of vendors in your marketplace and I'm wondering what that's meaning in terms of sort of marketshare dynamics and if that's possibly helping you get some new core deals?

Well, as far as a good quarter, we did have a very strong quarter of new footprint. But having said that, a bunch of those were de novos, which does not generate a lot of revenue out of the gate but will add nice recurring revenue and will grow over time. So we did get a lot of nice footprint there. We've got several nice new footprints on the credit union side that are also in the outsourcing arena -- on the crude side which, again, those aren't going to have a significant impact next month. But over time, it is just going to add to our current revenue which will also help our margins. As we add additional customers on those specific data centers, we'll be able to leverage those resources better. As far as the competitive landscape, I don't know, Glenn, that the consolidation has actually helped us get any. I think there has been an increased confusion out there, which probably has allowed us to be in more deals. But I will also tell you that the realignment we did with our sales force 18 months ago -- I think it continues to show positive results and we've now got our hunters and our farmers and our retail delivery group and they are all very focused on not only the existing customers, but on those new potential candidates out there which I think that we will continue to see positive results from that.

Okay, thanks guys.

Paul Bartolai, CS First Boston.

Good morning guys. Just back on the gross margin quickly, the support and services was a bit below what we were expecting and kind of what it's been over the last year or two. It sounds like some of the stuff is going to be more ongoing. Could you just maybe talk about expectations for the support and services gross margin over the next couple of quarters?

The real slippage in the quarter on support and services, Paul, was on the credit union side. The margins on the support and services side of the bank side was pretty much level. It did dip just a little bit. It went from 35 percent this time last year down to just slightly over 34 percent. But again, that has to do with a lot of the new facilities and different things we put in-place that I think as we continue to grow revenues will offset that. On the credit union side, as Jack mentioned, I think as we get back to more of an aggressive ramp up of U.S. Central, we've also got some large in-house deals to install going forward. I think those should pretty much resurrect themselves going forward. Will it all happen this quarter? I can't really predict that. But I think by the end of the fiscal year, that credit union margins should get back up to where we expect them to be.

Okay. And then on the selling and marketing expense was up quite a bit again. I think you talked about maybe getting back towards 8 percent for the full-year. Is that still your target? And also just kind of given the topline strength, is there some -- I don't want to call it overspending -- but is there some taking advantage of the strength to add to sales force and maybe make some additional spending?

First of all, on the sales and marketing expenses, we had an extremely strong quarter in license revenue and hardware revenue, which those are the two line items that we pay commissions on. So as those become larger percentages of total revenue, compared to support and services, then you're going to see a slightly higher percentage of selling marketing costs as a percentage of total revenue. So if support and service continues to grow at the same clip and hardware goes back down, then that percentage of total revenue should come back up.

There is also, Paul, some additions to sales headcount with some of the acquired companies. Some of these things are some pretty specialized applications that really kind of require a separate, specifically-focused sales organization to address that. In some cases, they were small companies that we acquired that we felt had a really solid product offering but lacked the resources to be able to take that product where it needed to go. In some cases, those products can be marketed into our base by our existing sales force for some nice leverage opportunities. And other cases, to be able to pursue opportunities that are outside our base, and/or in larger financial institutions as some of the product that we acquired have the ability to do, there maybe some additions required in terms of sales staff to be able to pursue that business. So there has been some addition to headcount in some of those areas as well.

All right, great. Thank you.

Carla Cooper, Robert W. Baird.

Could you give us an update, Kevin or Jack on your ATM and Debit business? That had been going great guns -- and describe to us maybe where the penetration levels of that service are today.

Carla, business continues to be very solid over there. I don't know if I've got current percentage-type increases. But every report that we see on that shows continued growth and exceeding -- setting new transaction record levels every month. I think Kevin has indicated the percentage increase in revenue there is about 46 percent. So it just continues to perform very solid. Continuing to see good penetration in the credit union space, both in the larger credit unions, using our Episys product to our pleasant surprise that we've seen increased interest from the cruise customers -- the smaller credit union customers -- as well in that product and continue to see additional footprint if you will in our banking base, taking advantage of the product as well. So again, that continues to be a very solid performing area for us.

And are most of those switching from third-party providers that they currently use to your system?

You know, de novo banks of course, are coming out of the ground with a system from -- that is fresh for them. Certainly any of the credit unions would be switching from somebody else. And frankly as would be the case really for most of the banks. There might be a few cases were some of the banks are going from a batch-type transaction processing approach with us to a real-time processing approach there. But 95 to 97 percent of that I would think would be coming from some other switch.

Now, Carla, also remember that included in that EFT revenue now is not just switch revenues. That also includes ACH revenue and RCK and some of the check collect stuff we're doing which are also considered EFT transactions.

And those are up big, I would assume?

Those are all -- obviously, those are deals that we got into in the last basically 90 days or 120 days. So those are basically startup companies that are starting to take off and grow. But it's going to take awhile I think for us to really get those ramped up.

Okay and then my last question is just on -- you mentioned there were really good sales of your sorters. Does that surprise you in a world that is supposedly moving to image? And could you just update us on what you're doing on the image side? I was thinking check image, specifically.

Well, it didn't really surprise me, because we had a very strong quarter in image license sales that continues to go extremely well. And I think banks are still continuing to get ready to do something with Check 21. But having said that, Carla, yes we sold a lot of reader sorters. But understand that they're the smaller reader sorters. They're not buying the big 24-pocket reader sorters that they would have bought two years ago. BancTec and NCR and Unisys all came out with much smaller devices and much more powerful. The price is smaller, so our margins aren't quite as big. So, we're selling a lot of them. So it doesn't really surprise us that the money we're making off each one of those devices is not what we were making a year ago.

Thanks.

Peter Heckmann, Stifel Nicolaus.

Good morning guys. Could you comment a little bit about how much in the aggregate the acquisitions over the last 12 months added to the quarter and how the weightings broke up between licenses and support and services?

Pete, I don't have the weighting of how it broke down between licenses and support and services and hardware. All I have is total revenue and net income. And obviously, I'm not including the internal or the natural sales to our existing core customers. But having said that, our organic growth was right at 16 percent topline revenue with the acquisitions adding just under 5 percent and net income organic growth was just slightly over 20 percent, and the accretiveness from the acquisitions was just under 2 percent bottom-line.

Okay, so in the aggregate they were accretive. So, that's excellent. Thanks much.

Pete Swanson, Piper Jaffray.

Question about the strong quarter on sales in new contracts. Do you attribute more of that to the overall environment? Or is it just better execution by the sales force?

Pete, I would say I think primarily better execution. I think there was a good number of de novo sales and you know those are just kind of opportunistic. They happen as charters get approved. But at the same time, I think we had some better cap rates that allowed us to play in more of those deals. We haven't seen a dramatic change in the environment. You know there's consolidation among the financial institutions, along with the consolidation that we've seen among the vendors, particularly in the banking side, serving those institutions. On balance, I think that those two factors lead to a smaller number of actual decisions being made. So I think we're -- I think it's better execution from the standpoint that there are probably are fewer decisions being made, or that it's at best flat. But we're able to increase our footprint. So, I think that speaks to execution. But, at the same time, that's a factor in some of the acquisitions that we've done this year as to why we are looking at companies that are relevant for our existing customer base, but equally relevant in terms of their sales opportunities outside of our core system base. So pursuing heavily and as aggressively as ever, new core customer footprints. But looking to try to make some inroads with different products outside that space as well.

And second question, with fewer decisions being made, what are you seeing from the pricing environment, specifically with kind of the incumbent cores that you're running into?

Pete, it continues to be a challenging environment. The incumbents don't want to lose. And one of the things you get with the vendor consolidation in the industry is the players that are left are stronger. There's no slouches really in our market that we're competing with these days. So every deal is very competitive. We're not seeing dramatic price impact. But there's not a lot of opportunity to command a significant price premium at the same time either. There's -- we still feel that we have best-of-breed core applications in every market that we choose to compete in. But, we're competing against players that are stronger than they were two or three years ago. So it remains a very competitive environment.

Okay, thank you.

John Kraft, DA Davidson.

I apologize if I miss some of this. Just a couple of questions here. What was D&A expense for the quarter? Did you give that Kevin?

No I didn't, John. And what I'd said was, because of some of the acquisitions we've done recently in the last 45 days and announced, we are still trying to finalize some of the purchase accounting and cash flow statements. It is one of the things that I told my staff to put off, so we could actually get this part done to announce. So what I'm planning on doing as soon as I get a final cash flow statement is putting it out on our website. And hopefully I'll have that, if not by the end of this week, by the first part of next week, so you all can have that information.

Okay. And in the press release, you say that given the 6 acquisitions you anticipate, well you anticipate those acquisitions to be slightly accretive for the remainder of the year. Is that -- am I interpreting that to be in some or each one of -- you kind of mentioned in each of the individual acquisition press releases?

Well, we assume -- obviously, for each one it would be slightly accretive. And let me just point out a couple of things. About half these exodus (ph) we've done were basically start-up companies. So, we've had to add some resources to some of them right out of the gate, and it's going take a little bit to get them to turn the corner. A couple of the larger ones that we did in December, that being Synergy and TWS -- it's kind of hard to tell what they're going to do for us. Synergy was a piece of a larger organization and they had a whole bunch of allocations running through everywhere. So it's going to take -- probably by the end of March, we'll have a better idea of what Synergy can and will do for us, going forward. But at this time, it's kind of hard to tell. But I do know that it's going to be somewhat profitable for us. TWS's along the same vein. It was a private company held by an individual that was running almost all of his personal expenses through the S Corporations. And I know that it's going to be profitable, but it's hard to take those financial statements that they've provided and try to figure out all that was related to him and what wasn't. So I know it's going to be profitable, but what to what extent, we'll have a much clearer idea at the end of March. So, on the April call, we should be able to give you a whole lot better guidance on what these acquisitions will do for us going forward. So at this time, about the best guidance I'd give you -- I think they'll all be slightly accretive by the end of the year. Combined, they have been accretive year-to-date. And I think they will continue to be.

Okay, fair enough. As far the pipeline going forward, is there still a bunch of more acquisitions in your pipeline?

There continues to be some we look at. I mean, obviously, when you do 6 deals in the last 120 days, it's going to somewhat deplete your pipeline. But there's still more that we're looking at. In fact, I get e-mails and calls almost every day with somebody that has the perfect widget that Jack Henry can't live without. And 80+ percent of those I barely even take a second look at. So we continue to take a look them. It does continue to consume some of our time. And we'll continue to focus on doing the ones that make the most sense for Jack Henry, for our customers and which will help make us grow and get a return on investment for our shareholders.

Okay, and then last question -- regarding complementary products. In the past, you've given us some breakouts for some of the number of deals of imaging an Internet banking and CRM and whatnot. Could you run through some of those?

Sure. During the quarter, for image deals -- again, these include in-house and outsourced deals combined. But for image deals, we signed 49 new contracts during the quarter, compared to 33 in the first quarter. NetTeller -- we signed 49 new ones, compared to 36 in the first quarter. And CRM -- we signed 6 this quarter, compared to 3 -- all of those being the Synapsis product. We didn't sell any of the larger ARGO CRM deals this quarter, but we did sell all lot of ARGO products which is the ontarget products, which is the teller platform solution for our Core Director product.

Great, thanks a lot.

Jim Costell (ph), Kayahoka (ph) Capital.

A couple of questions relating to the acquisitions. You stated that in the last 12 months, you've spent 114 million on the acquisitions. Is that correct?

Yes.

Looking at the backlog at the end of the quarter, I guess it was about $194 million. How much of that relates to the acquisitions you've made in the last 12 months?

Very little, because like I said, the majority of companies were start-up companies. So they are just starting to build a little backlog. TWS and synergy which we announced December 17th -- TWS, the majority of theirs will be outsourcing. It had a very small impact as we go forward. And Synergy, they -- the parent company basically accelerated and shipped just about everything they had and depleted their backlog before we closed on December 16th. So there was very little backlog impact from that acquisition either.

So if we're looking at the old business, if you will, was the backlog up, down, flat year-over-year?

Oh, it was up.

Okay.

Like I said, there was very little impact on our either in-house or outsourcing backlog due to acquisitions. It's almost all old Jack Henry in your words.

Okay.

99+ percent of it is old Jack Henry.

I guess you commented -- and I realize that many of these you just purchased and etc. Your comment earlier implies in the quarter the net income was increased by about $350,000 from the acquisitions -- if my adding is correct. The $114 million, when you spend 114, what sort of a rate of return are you looking for? What's the hurdle rate?

Well, it depends on the acquisition. It depends on what time-line you're talking about. I mean, obviously, we would like to have in excess of a 10 percent ROI. But in some cases, it may take 12 months or even 18 months to get better because we're building infrastructure, building a sales force and different things. But I will tell you that all lot of the acquisitions that we have done have actually had 100 percent payback in 3 years or less.

Okay. Looking at the cash statement, the cash is now less than the deferred revenues. Is it envisioned, as you go through the cycle here -- the cash cycle -- that the Company will be borrowing it from the banks to fund working capital, etc?

Well I will -- and it wasn't in the press release and that was kind of my error. I didn't get it in there. But we actually have $10 million drawn on a revolver right now. And it's possible if we do more acquisitions between now and June 30th, that we will draw additional fund on the revolver. But, however, at June 30th, we will bill our annual maintenance again and we will have another very nice inflow of cash by December 30th September 30th well in excess of $100 million. So we will leverage our balance sheet as we see fit. If the right acquisition comes along and if it makes sense for us to borrow money, then we will borrow that money and do the acquisition.

Please refresh my memory. How big is the revolver that's currently in-place?

Currently in-place is 25 million.

Are you currently discussing increasing that number?

We're contemplating it.

Okay. Thank you very much.

Nik Fisken, Stephens Inc.

Good morning everybody. Jack, we have had a couple of industry think tanks come out and say that they think that '05 spending for BancTec is going to be around twice that of what it's been in the past couple of years. Would you disagree with that given your earlier commentary?

Nik, I don't know that I've seen that particular report that you're referring to. I think if you look at bank technology spending and you include Bank of America and Wachovia, I think there certainly could be some increase there. I don't see anything that would lead me to believe that technology spending in the -- our traditional market is going to be twice what we've seen.

Yes, twice was the growth rate. I'm sorry. And then the only other question I've got that hasn't been asked is, in your M&A pipeline, the last quarter, you said that it's mostly small deals. Is that still the case?

We look at -- there's some big opportunities that we can look at. There are a number of additional small opportunities. Big opportunities, if they are priced right, we would certainly pursue. Having an availability of funding to be able to pursue a significant transaction is not a problem.

The challenge remains, I think, the evaluations there, Nick. I mean, there were some big transactions that we looked at last year that at some price would have made a lot of sense for us. The price they went for was not that price in our opinion. It may have made a lot of sense for whoever ended up owning them at that price, but didn't for us.

So we continue to look at big opportunities. There are some of those available. But it will come back to the valuation and what it would add to the business as far as the opportunity as to whether we act on it or not.

Great, and congrats on the quarter.

Bryan Keane, Prudential.

Questions on the 6 acquisition you guys have made this fiscal year -- I'm just trying to do a back-of-the-envelope calculation. What's the quarterly run rate of those combined acquisitions going forward? It looks to me like 6 to 7 million, Kevin. Is that about right?

Well, it was slightly under that for the quarter, Bryan.

Yes, well, I get the -- I'm adding the 3 that you did this quarter, maybe trying to figure out what it will be for next.

Yes, that's a reasonable run rate for this next quarter. A lot of that depends on the how quickly some of internal sales guys get comfortable with some of these products and start pushing them out to our core customers.

The other thing is some of these, like I said, are startup companies. It just depends on how quickly they can get traction and get stuff installed to start generating revenue. For the next quarter, yes, you're probably pretty close to a reasonable run rate expectation for the acquisitions we've done.

And Jack, I wanted to ask about the competition. Does it seem like Jack Henry's win rates are rising versus the competition?

Brian, I'd say maybe slightly. I think we're still roughly in the same area -- maybe rising slightly, but nothing significant.

Okay, and now that there's fewer competitors out there, but they seem to be trying to keep business from pricing aggressively. So we'll just have to see how that's going to pan out. I assume in the marketplace, there's probably -- when you compete on a deal now, is there usually just 2 or 3 of the big players we probably would think of?

Yes, there's basically the 4 of us that are likely to be in any given deal. And depending on the size of the bank, there's on any given deal, 2 or 3 of us. And again, there's not a lot of new news in that. I mean, it's been a very competitive market for some time. But particularly, the incumbents have to see a really good reason to make a change. And we've seen a lot of cases where there was a pretty compelling financial case to look at making a change. And still, just given the organizational change and everything that they need to go through, they've elected to stay where they were and pressure their existing vendor into substantially lower pricing in order not to have to go through that. But that, again, is not something that started in the last quarter. That's been the case for a couple years, anyway.

So I don't see a lot of change in the market. It's pretty much as it's been shaking out now for some time.

Okay. And then finally, just clarification, Kevin -- I want to make sure I understand it. The credit union gross margins -- you expect those to bounce back a little bit and get back to normal -- maybe not fully back to normal third quarter, but by the end of the fiscal year, we should see them back to kind of where we were expecting levels?

Yes.

(Operator Instructions). David Trossman, Wachovia Securities.

I have just a couple of quick follow-ups. Kevin, you mentioned the ARGO ontarget product a couple of times as contributing on the license side. Are both some bigger deals there, or is there a new upgrade or integration that gets lots of the smaller Core Director customers to buy that?

No, it's not an upgrade. If you'll remember, David, when we bought that product from BancTec back in 1999, Core Director was basically a brand-new product. In fact, I think they had 11 or 12 customers on it when we bought them.

As we add new customers to that, and we started converting some of the old legacy systems -- Banker E and Banker II an access (ph) over the Core Director, one of the shortfalls that we had in that product was it did not have an integrated teller and platform solution.

And so we already had a relationship with ARGO. ARGO had a very solid teller and platform solution that we got to go with them and integrate that into our core product. My comment is -- we sold a lot of those, which -- that had some impact on the gross margins on the license side. But no individual one of those was huge by any degree.

Good. Kevin, when I think about Verinex going forward, is there any significant hardware component to that that plays through the numbers, or is that just too small?

Well, I don't it's going to play into the numbers. For the near future, it's probably going to be a rounding error.

But when we do get that ramped up and start rolling it out, it is going to have an impact on hardware, because the device is the major part of what we're selling there. The software is actually burnt on the device, so there is a little software, an upfront software fee, and a small installation fee. And then there will also be -- once we start getting those rolled out there, there will be a nice, growing, recurring maintenance stream from those. But it will take a while to even see that. But once we start rolling those out, the major line item on the P&L that it will impact will be hardware.

And I suspect that would help the hardware margin. Is that (multiple speakers) gross --

Yes, it will.

One last question. Jack, do I hear you right in -- as I think about you guys making these acquisitions and the impact on the sales force, really, what I should be thinking about is the way you're growing in a sales force to target the external customer base -- and you'll try to put all of these new guys together in something that looks like that?

Dave, if you're asking would I have a sales rep who hits the street calling on competitive core system users to sell Verinex and Synergy and 2 or 3 other products, we may evolve to that. But in some cases, we'll have sales reps that are pretty much focused on their specific product.

We've got to come up with some coordination efforts there -- I think that's more at a management level -- to kind of make sure we're pursuing the market appropriately. But in terms of having a separate sales staff which is responsible for all of these products into the external core base -- not today. It could evolve to that. But there will be some more somewhat stand-alone sales approaches there.

Tim Willi, A.G. Edwards.

Jack, could you talk a bit about the larger bank market -- just sort of, I guess, in conjunction with the efforts in ARGO, but also, again, your willingness to build interfaces with other technology vendors and building out the capacity of your core systems to address the bigger bank market. What are you seeing? What's your feel on the particular slice of your target market?

Tim, several things -- from an ARGO standpoint, we have deployed what we call a retail delivery solutions group -- sort of a subset within our sales organization that focuses on our retail delivery products, of which ARGO is a significant product.

And you know, that's a big-ticket item. It is a fairly specialized sales approach. And we have revisited how we're going to market with that product. And I think that we will see some improvement there. But again, I don't think you're going to see lots and lots of customers put in the large-scale version of ARGO. But I do think we're addressing that appropriately.

The interfaces to our core product -- you know, we've had a pretty significant strategy underway for over a year at this point, which is in the early phases of now being rolled out, to allow more open interface capabilities using current technology, services-oriented architecture, to allow other third-party vendors to offer a more complete integration to our core systems.

We think that's going to generate the most interest in the larger banking arena. That space likes the idea of our core suite. They like many of our complementary products, but they have lines of businesses, in some cases, that are so heavily invested in a particular product that throwing it out is -- and whether it's a cash management system in a particular line of business, or a loan pricing system -- whatever the case, they're too heavily invested in that in that business unit to toss that out. And they need very solid, very strong integration -- the effort that we refer to internally is J Exchange -- going to allow for a lot of that.

Now will that cost us some complementary products sales of our own products? It could be. But we think that that would be minor in comparison to the core opportunities that we will have because we offer that capability. We think it's going to become a requirement. And if you can't provide that kind of integration, you're not going to get the core, so you're not going to have to worry about the complementary products.

Regarding our core product and taking it to bigger markets, we continue to do enhancement of the product to address some of the larger bank needs. The larger banks tend to be some of the ones that have the most difficulty doing a complete core systems swap.

So we think our product plays very well in the space that we're trying to address in the larger systems today. But that is a somewhat less motivated market, I think, to up and do a complete core systems swapout, because just sheer size and magnitude and -- integration that is already built to some of these specialized products, even though we can offer them a superior integration approach, it's still got to be reworked and redone. And there's the whole fear, uncertainty, doubt aspect of getting that redone.

So I'm not sure if I completely answered your question. But I think those were the 3 topics you asked me to comment on.

(Operator Instructions). It appears there are no further questions at this time. Mr. Williams, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you. Again, we would like to thank you for joining us today to review our second-quarter fiscal '05 results. We're very pleased with our overall financial performance during the quarter. We continue to expand and improve our products and services, either through development or acquisitions, and are committed to continue building on all of our competitive strengths. Our executives, our managers, and our employees continue to do what is best for you, our shareholders.

Again, thank you for joining us. And with that, Dana, would you please provide the replay number?

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