Jack Henry & Associates Inc (JKHY) 2005 Q3 法說會逐字稿

Good day, and welcome to the Jack Henry & Associates third 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 and Associates third quarter fiscal '05 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 could also be other factors not included that could potentially cause results to differ materially.

Again, thanks for joining us today as we report our third fiscal quarter '05 financial results, which reflect a 12% increase in total consolidated revenue and a 19% increase in net income compared to third quarter a year ago. Our total revenues increased 12% with a 36% increase in license revenue, which is primarily due to a very strong quarter for complementary products, and a solid performance for new core business in both the banking and credit union segments this year compared to prior year.

Just to highlight our license sales, we already had more license revenue this year in the first three quarters than we had all of the prior fiscal year. We also had another healthy increase in our support and services of 18% compared to the prior year's quarter; however our hardware revenue decreased by 20% due to a decrease in I Series and P Series revenue compared to prior year quarter and a significant decrease in our construction and consulting division revenues. However, this decrease in hardware revenues, especially the decrease in the construction and consulting revenues, which carry a very low margin, had a very positive impact on our overall margins because of the related costs.

Again to highlight the components of revenue, our license revenue increased 36%, or $5.6 million over last year's quarter, support and services were up 18%, or 14.2 million, and our hard sales were down 20% or 5.1 million for a net increase in revenue of 12%. Based on this, we actually had a little over 21% increase in licenses core services if you don't consider in the decrease in hardware revenue. A few of the things we are most excited about going forward is the organic growth we had this quarter and the year-to-date in license and support and service revenues, and the significant increase this quarter in credit union margin compared to last quarter, which shows that that was a short-term issue, as we tried to highlight in last year's - - or last quarter's earnings call.

Our organic growth and license revenue was 29% for the quarter, and is 49% year-to-date. Support and services were approximately 11% for both the quarter and year-to-date. The credit union margins increased to 44% this quarter compared to 29% last quarter. Another thing to point out is that several of our acquired companies are just now starting to get traction, and our sales organizations are finally up and running and fully trained and fully organized to begin sell some of these products and services which should lead to future growth in both revenues and continued expansion in margins.

Our total cost of sales increased by 7% in the quarter, compared to the 12% increase in revenue. Our total hardware sales represented 16% of total revenue this quarter, compared to 22% of total revenue in the same quarter a year ago. Our costs of hardware decreased by 24%, while our hardware revenue decreased by 20%, which again, this has a very positive impact on the hardware margins. Gross margin of hardware revenues was 30% this quarter compared to 26% in the same period a year ago, which is primarily due to the sales mix and types of hardware sold, including some of the hardware pass-through costs in our construction business.

As we had discussed before, our margins can be significantly impacted by the sales mix. Our cost of support and services increased 18% for the quarter compared to the prior year period, which compared to an 18% increase in support and services revenue. This increase in costs this quarter compared to the prior year is primarily due to increased headcount and a full quarter of depreciation proceeding for some of the new facilities we placed in service during the last twelve months, including our facility in San Diego compared to the prior year.

In regards to our increased head count, we continue to have needs and [inaudible] employees. We have added 319 full time employees since last year this time, which this count does not include the 213 new employees which related to the acquisitions. This brings our total full time employees count to 2,935 at March 31st, compared to 2,403 a year ago.

Our gross margin increased to 43% compared to 40% last year in the same period. Harbor margins have increased to 30% from 20 - - 26% as we previously discussed. Also our support and service margins have remained relatively difficult level at 34% compared to the same period a year ago, and license margins increased to 95% compared to 93% a year ago, which is due primarily to less third-party license being delivered during the quarter compared to last year. Our banking segment gross margins increased to 42% from 41% in the second quarter a year ago, and our credit union segment margins increased to 44% from 35% a year ago. Which this change in the credit union margins is primarily due to the large increase in license revenue this quarter compared to a year ago, and an increase in hardware margins 27% from 21% last year, due primarily to sales mix. Again, we're very pleased with the credit union margin compared to the second quarter we just finished. However, I would point out that these margins at 44% will probably go down a little the next quarter, but should be comparative in the next quarter to the year-to-date margins.

Our operating expenses increased 20% this quarter compared to last year's quarter, and as a percentage of revenue increased 20% from 18% of total revenue. Our selling and marketing expense increased by 34% compared to the prior year quarter. This increase is primarily driven by the increased commissions on increased license revenues, which remember licensed revenues went up 36%, a small increase in personnel costs associated with an increase in a number of staff - - of sales staff compared to prior year, and also a small impact due to the acquired companies. As a percentage of revenues, selling and marketing increased to 9% this quarter compared to 7% a year ago, and is relatively the same as a percentage of revenue compared to the last quarter.

R&D expenses increased 22% compared to last year, which is primarily due to increased employee related costs. However, as a percentage of revenue, it remained relatively level at 6%, compared to 5% last year, and as we continue to grow and put out more product, we continue to increase our R&D costs to make sure that our customers have the products they need to succeed. Our G&A expenses increased 1% over last year's quarter, and as a percentage of total revenue decreased to 5% from 6% a year ago. Again, we are doing a very good job of controlling our G&A costs.

Our operating income increased 22% over the prior year quarter, and as percentage of revenue increased to 23% from 21% last year. Which shows again that we continue to do a good job of controlling costs, which helps to expand these operating margins. Our effective tax rate of 37.5% this quarter compared to 36.5% a year ago, if you remember we adjusted the effective tax rate in the June 30 quarter last year to adjust the entire fiscal year up to 37.5%, so year-over-year we are the same tax rate. The result is an increase in net income of 19% to 19.4 million. EPS generated by the organic business was $0.20 cents, with less than one penny being contributed during the quarter from acquisitions. Year-to-date organic businesses generated $0.57 cents with the acquired companies contributing just over one penny.

A few comments about the balance sheet. The majority of significant changes compared to the same time last year. Obviously our cash and cash equivalents are down 81%, which is primarily due to the acquisitions. During the first nine months of the year we spent. approximately $120 million on acquisitions. We spent approximately 33 million on CapEx, and 11 million on dividends. Accounts receivable increased by 19% compared to last year, which is due to, again, a very strong quarter and due to the new acquisitions added during the year. Change in accounts payable and accrued expenses are primarily due to timing issues, deferred revenues, and - - is primarily for in-house support has increased 11% from last year.

The other thing I would like to point out, as most of you noticed, we filed at 8-K yesterday to announce a new $150 million credit facility. The reason for this facility is not an immediate pending acquisition, but I would like to point out that a couple of acquisitions that we've done in the last twelve months, if we had not had the free access to cash, we would have not gotten those acquisitions. The board of directors decided that we should have some dry powder in the event that another larger acquisition comes up, so we have immediate access to funding is the reason we put the facility in place so it's more of an insurance policy than anything.

Comment on the backlog, which increased 5% at - - this quarter compared to the same quarter a year ago, to a level of 198.2 million with 67.1 million in-house, $131.1 million outsourcing. After a review of our backlog, our sales forecast and sales pipeline, at this point, we're currently comfortable with the range of the quarter estimates for the next fiscal quarter, which I believe, based on the recent first call note is $0.23 to $0.24 cents.

With me today I have Jack Prim our CEO, and Tony Wormington our President. We remain very confident that we are well positioned and that we have the right products and services to approach both the bank and credit union markets from the smallest institutions and Denovos, which we have had very good success in the Denovo markets, to the largest financial institutions. We also believe we have the proper resources in both people and technology. With that I would like to open the call up for questions. Susan, would you please open up the call?

Thank you, Mr. Williams. [Operator Instructions] And we'll take our first question from Brian King with Prudential Equity Group.

Good morning. Kevin I heard the part of - - that the discussions were about a Penny in the quarter. I didn't get that - - and maybe I just missed it, but the revenue component of the acquisitions over the last twelve months in the quarter.

Over the last 12 months or in the quarter, Brian?

Well, I'm just thinking - - I'm just looking for the acquisitions in the quarter, what the total revenue component was.

Total revenues in the quarter from the acquired companies was right at $9 million.

Okay. 9 million. So what - - when we model it going forward, Kevin, how do we think about that ramp on a sequential basis? Will it be slow, and then it picks up kind of sequentially, especially going into '06, or how do we think about that ramp-up?

Well, I think it's going to be somewhat slow, Brian. I mean, for example, the stratic of product that we acquired January 2nd, you know, we just now got our sales folks geared up and ready to sell that. We had a series of webinars that we had over 160 banks participate in, so we know that there's an enormous amount of interest for this product. You know, maybe not as much interest as we have in the fraud product, but it's still very high interest, and even though you have 160-plus banks looking at webinars, it still takes a while now to get demos scheduled and get people out there similar to our tangent products and others. So, its going to be a slow ramp-up, but I think it's - - especially some of the products with the software; there's going to be some nice impact, even in the first fiscal quarter of next year.

Some the other products like our select payments, and our BIS, which are primarily services, is just going to be kind of a nice, slow ramp-up of growth in the support and services line, you know, however, the [slight] payment piece is electronic payments, which is very much like passport, that as it grows, the revenue doesn't have to grow a whole lot to have a nice impact on the bottom line, because they have very nice margins. So you're not going to see much more impact, probably, in this quarter, but, it's just going to continue to be a nice ramp-up in this business for the next - - for the foreseeable future.

And, Brian, this is Jack. A couple of - - couple of the acquisitions, too, will have revenue flows that will be kind of spiky in nature. Our opt info enterprise risk management product is one that by its nature is going to be targeted at larger institutions, and those are longer sales cycles, and will tend to be larger deals, typically, when they happen, so they can spike in any given quarter, and be less of a contributor in the next quarter, as compared to the select payments acquisition which Kevin mentioned as transaction oriented that will start out fairly slow, but grow over time slowly, or maybe not slowly, but steadily over time on a more ramped up kind of basis.

Okay. Great. Thanks.

We'll know now move on to Paul Bartole with Credit Suisse First Boston.

Thanks, guys. Good morning. You mentioned that you saw a couple of core sales in the bank and credit union market. Can you fell us a little bit more about those deals? Were they Denovos versus existing banks?

Paul, a combination. In the case of the credit union sales, they were all to existing credit unions. You don't see much Denovo activity in the credit union space. On the banking side, it was a mix of existing banks, as well as Denovo. In fact, I expect we'll be putting out a press release later this week, if not this - - if not, it will be early next week, announcing the signing of 14 Denovo banks in 14 weeks. Very strong performance from Denovo banks on the banking side.

I would just take the opportunity to point out, you will also probably so a few more press releases from us maybe than what you've been used to seeing in the past. I think we probably need to do a little better job of telling our story, particularly with some of the acquired companies, where some of those deals may not be large from a financial impact standpoint, but are significant in terms of the revenues being gleaned from non-Jack Henry core customers, so you will probably see a little more press release type activity from Jack Henry in the quarters to come than what you've seen in the past. That should not be interpreted every time you see one as a material deal, we certainly don't intend to announce every transaction that we close, but we're going to try to tell our story a little better than we probably have in the past. But to your question, a good mix of business, very pleased with the Denovo business. They don't add a lot in the immediate quarter, right out of the gate, but they do grow very nicely organically over time.

And one of the additional things on the press releases that you may see from us in the future; if any one of those a significant event, and will have a significant impact, it will very clearly state that in the press release.

Okay. Great. Is this an indication that you're maybe seeing a little bit more of an improved environment in general for core sales?

We think the environment is solid. I don't know that I would tell you that we see a dramatic upturn in a number of new core deals. We have seen an increase in a Denovo bank activity. We are focused on that, and I think doing a pretty good job of getting into those deals and winning our fair share of those new opportunities. In the existing bank marketplace, it is still running at about the same level. Credit union side, probably about the same level. There are a few of the catalysts that we used to have in the credit union space that are somewhat less right now than they used to be.

You know, we had some competitors that had some challenges with new product offerings that have slowed down a little bit, and a couple of the acquisitions have stopped some of the outflow of customers on that side of the business, but, again, very solid performance there to the best of our ability to determine at this point, we still think we're winning more new customer footprints there than the competition, but I would say in general, outside the Denovo marketplace, the activity level seems to be about where it has been. Denovo activity has definitely increased, and we do feel like, as Kevin mentioned, that some of the reception that we're getting with some of the acquired products, the customer profitability, the stratika acquisition, for example, almost 170 banks setting in on that webinar, typically with multiple participants from each bank sitting in, and in that particular set of webinars that we did, we had a couple of users of the product that were there to talk about and answer questions, offer testimonials, and interestingly, one of those customers was a $4 billion bank that is not a Jack Henry core customer who happens to have the product and be very pleased with it, again, I think validating the viability of that strategy to sell some of these products to non-Jack Henry core customer.

Okay, then last on the support and services gross margin, pretty nice sequential uptick. Can you give us a little more color about maybe what drove that, and was that mostly from the credit union side of the business?

I mean, obviously, the credit union side of the business had a nice increase in support and services from last quarter. You know, and that was driven by a number of things, and basically it's every component within that line. You know, we did - - as we mentioned on the previous call, we went back to installing the U.S. central corporate credit unions this quarter, which gave some relief there, utilized the resources; our EST business continues to grow extremely well on the credit union side, and just the in-house maintenance on the in-house customers is growing at a very nice clip.

So it's really every component within there does extremely well, and basically all of those returns from last year are - - the banking side just kind of continues to grow at a very nice clip, and continues to just kind of move along with about the same margins on support and services that we had this quarter last year.

Okay. Great. Thank you.

You bet.

Kartik Mehta with FTN Midwest Research has our next question.

Good morning.

Good morning.

I wanted to ask you a couple of questions on the acquisitions. Could you talk a little bit about how you might go to market with the recent acquisitions? Will they be part of a suite that is a Jack Henry product suite, or will you go to a market separately, each product being separate?

Kartik, this is Jack. We are, at this point, essentially going to markets separately with each of those products. One of the things that we're doing is trying to structure that sales focus over there a little bit better. We brought in a sales manager to focus on the outside the base activities. As we have indicated before, we do not want our existing sales staff that sells new core deals and sells complementary products to existing Jack Henry customers to lose their focus, and go outside the base. So we're addressing the outside the base market with a separate sales staff. Typically with the sales staff that were in place at the companies when we acquired them. Some of these companies are pretty small, and may not have had a sales staff, per se. The President of the company may have been their primary sales person, so in some cases we are adding some sales representatives there.

Today as they go to market, they are marketing individual products, but, as I've mentioned, we've brought in a sales manager to bring in some focus to that. Specifically the sales manager that we brought in is a gentleman named Steve Thompson, a name that's probably known to some of you. Steve was a former general manager with Jack Henry who left to be the CEO of a small software company for the last few years are has come back to join us to head up that sales organization. Steve's background is primarily sales with IBM and other community banking software-related companies, knows our Company, knows our products, knows all of the personalities, so we feel like he'll be able to get up to speed faster than somebody without that particular background might be able to, but it is focused right now on that group.

In small companies, it's - - the sales function tends to be pretty loosely managed, several of these folks had no specific sales quotas. It was kind of a go out and sell as much as you can kind of an approach. They may have been more focused on services than they were on higher margin software product. So, we will be addressing all of that, refocusing them. And one of Steve's challenges, as he's been in the job now about 30 days; one of his challenges will be to look for leverage opportunities, what products can we put in the rep's hands, so that instead of just marketing the product, they may have been acquired with, there may be two or three other products that make sense for them to to have in their bag as well.

So we'll be looking for leverage opportunities there. Today, to answer your question, they are selling the products they were familiar with. We anticipate that they will have more tools in in their bag going forward here in the near future.

Now, Kart, there will some - - as you put it, suites of products that some of these will put together. For example, the tangent analytics and dashboard will make a lot of sense to put on the front of several of these products, including the profitability, the opt info, and the eclassics ATM management solution, and even the EFT fraud solution that we're getting ready to roll out we the eclassics piece. So, we are going to leverage those sales forces. Put additional product and there will be clusters of products that these guys will have that will actually complement each other.

Great. Just one other question. The vendor rebates you received on the hardware, is this earlier than in previous years where you've received rebates, or is this fairly in line with what you would expect at this point in time?

Pretty much in line. It's not - - it's not earlier or later, Kartik, I mean it just kind of happens every year. You know, the fact of the matter is the impact on the marg - - hardware margins this year - - this quarter were not that significantly impacted by the rewards and rebates compared to this quarter a year ago; it was more the mix of hardware, the types of things that we were selling, and as I mentioned in the opening, our consulting and construction business has decreased a little bit. And part of that was a little over a year ago, we changed how we did the contracts with our customers, because prior to that, all of the revenue passed through us, and we had to gross that up, and we changed that had to where the revenue did not pass through us, and basically it just comes down to a small manager fee.

So those revenues, which basically were 100% revenue and 100% cost, both in the support and services line, and the hardware line to some extent, which carry very little margins, are not in there. So those were the significant impacts, and actually if you take those grossed up revenues out of last year's quarter that were not in this year's quarter, our revenue would have actually increased about 16.5%, instead of the 12% increase in revenues that is shown.

so, Kevin, you don't include any of the pass-through revenues now. Right?

Yes and no. I mean, the pass-through revenues that are associated with all of our outsourcing applications, our EFT and everything else, according to the EITF that came out a couple of years ago, those are all still grossed up. It's just related to the consulting instruction piece with our systec division, those we stopped doing, because when you are managing a construction bus - - project that's $3 or $4 million in revenue, and you're earning a 3% management fee off that, and you have to gross all of that up, that has a pretty negative impact on your margins, so we changed that, and basically all we're getting is the management fee, and not grossing up those revenues, which will probably decrease in both support and services and the hardware revenue. But it has a very nice impact on the margins.

Thank you very much.

You bet.

Moving on to John Kraft with D.A. Davidson.

Good morning.

Good morning, John.

Kevin, now just so we can compare on a more of an apples to apples basis, organic growth with what you've given us before, you said the 9 million in revenue - - that equates - - am I doing this right that that's about a 5% overall organic growth quarter?

Yes, if you're looking out all components, and including the decrease in hardware, yes.

Okay. And the U.S. central credit union, is that all done, the implementation?

No, we're back on schedule, and back in - - in the midst of doing those conversions. Those conversions will continue for probably the better part of a year. They're going well; conversions have gone smoothly, but they have got a while to run yet.

Okay. And then I hate to keep talking about the acquisitions here, but the - - you talked about how the ramp-up has been a little slower than expected. Can you quantify how much of a drag they've been, I guess specifically I'm wondering whether the margins on these businesses, you know, overall should be - - are expected to be higher than your overall margins?

Well, John, first of all, I want to point out that I don't - - I wouldn't say that they're ramping up slower than what we anticipated, because if you remember, when we announced all of these deals, we said, basically, that they would be, you know, basically accretive or breakeven for the first year, and that's about where they are. I mean year-to-date they've added not quite a penny and a half between all of them. You know, the drag on the margins, there's been no more drag this quarter in effect than there was in the December quarter. I mean, yes, we've added stratik and tangent, but in the overall scheme of things, you know, the gross margins in the acquired business are about 600 basis points less than the historic Jack Henry margins. Do we think those are going to grow? Yes. And in fact I would be very disappointed if most of these acquired companies' margins by the end of next year are not well in excess of our historic traditional margins.

I think it's worth noting as well that kind of the acquisition flow last year; we did three acquisitions in the first six months of last cal end are year, and we did 8 acquisitions in the last six months of last calendar year, and even those were fairly heavily weighted towards the last three months of last calendar year. I think it's worth noting as well that kind of the acquisition flow last year; we did three acquisitions in the first six months of last calendar year, and we did eight acquisitions in the last six months of last calendar year, and even those, I think, were - - I'd have to get a sheet out and look, but I think those were even fairly heavily weighted towards the last three months of last calendar year. So, again we are still very early on with the biggest part of those acquisitions. And still, they're settle in. They're functioning. We're past all the initial integration; getting them set up on systems and those types of things . That's gone extremely well. It's now just a matter of focus on the sales and ramping those effort up.

So not only do we expect a very nice ramp-up in revenues but a very significant impact to the gross margins, and an equal if not greater impact to the operating margins of those companies, because basically we're trying to just get the same leverage off the selling and marketing in those that we've got off for traditional selling/marketing groups.

Okay. Good enough. Thanks for clarifying.

You bet.

And Pete Heckmann with Stifel has our next question.

Good morning, Pete.

Good morning . In terms of the acquired revenue of $9 million, was there any portion of that that was hardware? I would assume not. I mean Varinex may have a very small hardware component, but would could we say all of that $9 million is software and services?

Oh, no. Absolutely not. There's about 1.5 million of that that's hardware, Pete.

1.5 million is hardware, okay.

Because - - yes, Varinex has a hardware component, but so does TWS.

And in terms of the schedule for U.S. central affiliates and other large credit union implementations, what did you get done this quarter - - two or three or four new credit unions on board? I think you had alluded to the fact that's one of the factors helping margins, and then should we expect any large implementations for the fiscal fourth quarter?

This is Jack, and I do not have the number of acquisitions that we did in the quarter. I was looking around for that this morning, realized I did not have that. To the best of my recollection, I believe we did about five implementations in the quarterer. I think this coming quarter will be a little less than that, but none that are going to make a dramatic increase in any of the numbers in the current quarter. That's going to be, you know, more or less a - - more of a steady build as we go forward with each one.

And as I said, Pete, on the support and services margins on the credit union sides - - yes, the core piece and the central piece had a pretty significant impact on that, but, you know, the other parts that's in that component continue to do extremely well and grow like our EFT. You know, Bruce [Pormode], which is the general manager of the credit union division has done some very nice things to - - for process and procedures to enhance the margins on the installations and the maintenance. So it's every component within there that has improved over last quarter, and we think it will continue.

All right. Thanks.

You bet.

We'll now hear from Shane Diamont with Stephens Incorporated.

Good morning, Shane.

Question on the R&D expense. You guys indicated you were investing in new types of products. Can you give us some, I guess, examples or some ideas of the area of focus for the R&D efforts?

Yeah, Shane, it's Jack. Several things. You know, they're just kind of the ongoing work that you do you on you're systems to keep them current, but in terms of in some of the new offerings and things that have a potential to generate additional revenue, we've been working for a about a year now on a data warehouse business intelligence product that started as a partnership arrangement with tangent analytics, just over a year ago. We are in beta with that product now. We are expecting general availability of that product in the next quarter. The nature of that product is that it's going to be targeted at our larger customers, several customers initially, but again, we will be in GA with that product in the next quarter.

As you know, our last acquisition, we did actually acquire tangent analytics, liked what we saw during that partnership when we worked together to develop the business intelligence product. We are going to take the tangent base offering and come up with a scaled-down verse of that product that would be financially affordable to our - - some of our smaller customers, so it will be - - it won't be quite the full scope of the data warehouse product that we are in beta with currently, again it will be a scaled down more affordable version of that product for the smaller customers.

The yellow hammer software product, we've been doing lot of work on that product for integration to the [effisus] customer base, so that will be in general availability here in the next quarter, as well. We also have been doing a considerable amount of work for the better part of a year on a services-oriented architecture for integration of third-party and our own core application software products. That's essentially going to open up the systems to allow for better integration to best of breed third-party products initially with our own core applications as well going forward. Again, a requirement that exists certainly in the mid-tier states. Again, it will be a very current technology offering to accommodate that. That will not be a big revenue generator, but again, that's kind of in the category of things that you need to do to continue to advance your product and keep them current in the market.

We also are doing a good bit of work on the yellow hammer product for ESP offering. It will be an add-on module that will provide fraud protection in the area of ATM debt card related transactions as well. So a number of new products that we'll be bringing to market here shortly.

However, Shane, the - - a significant amount of the products Jack mentioned are actually being capitalized, so they'll show up as capitalized software on the cash flow statement. The real significant change to R&D is related again back to acquisitions. If you consider the R&D expense that was added through the acquired companies, our R&D dollars expense is actually flat dollar-wise with last year, so as a percentage of revenue, it would have actually decreased.

So then the increase, then, is actually just a result of the M&A?

Right. And what that - - what that also points to Shane, is that as we continue to get traction and grow revenues in the acquired businesses, that, again, points to the fact that we should get very nice leverage to the gross margin and operating margin line.

Okay. And then I guess one other question for Jack. We've been hearing a lot of noise, I guess, in the marketplace about price competition between the - - the remaining core processors, especially on renewals, and wanted to get your thoughts on that, and any kind of specifics on what you're seeing how that's impacting your pricing or your volumes in - - in I guess in your contract wins.

Yes, Shane, I mean, it's a competitive market, there's no doubt about it. It's- - I don't know that I would tell you that it's dramatically more competitive at this point than it has been for the last year. I would agree with your statement that the majority of the pricing pressure tends to center around renewals. That doesn't affect us as much as it does some other players in the market, from the standpoint of having to reduce existing revenues. You know, where that tends to be a factor is in large outsourced opportunities, and it's not uncommon, doesn't happen on every deal, but it's not uncommon to see that the incumbents reduce their existing monthly processing fees by 20 to 30% to retain an existing customer.

We don't typically see that on our renewals because most of the banks that we're doing the outsourcing processing for are not up in the range where they're spending the kind of monthly numbers where they're the kind of opportunity to do that, and even if we did have to do a reduction to keep one, the reduction we would be doing would be considerably smaller by comparison to say a $3 or $4 billion bank that was outsourced on an existing provider. So, yes the encumbants particularly in an outsourced arena are being aggressive to retain are their existing customers, but I don't know that that's much different than it's been in the the last five years. That's always been the case.

In some of the acquire bases where some - - that have been done, if they're wanting to move a customer to one of their - - off of the acquired predict to one of their existing core products, we are frequently seeing discount - - deeply discounted or no charge conversion fees, so, you know, there's not much we can do to go in and say, okay, fine, then we'll give you our system for free. That's just not feasible. So there is pricing pressure, mostly around outsourced renewal opportunities; to a lesser extent around moving somebody from an acquired core product to an existing product, but, you know, I don't see it being any different now than it's been for the last year.

Okay. That was helpful. And Kevin just one final question for you, on the guidance for next quarter, the $0.23 to $0.24 cents - - it's a little bit of a step-up, I guess, from here to get there. Anything, I guess, specifically that you're looking for to improve to get you guys to that earnings level?

I think more than anything, it's business as usual, basically doing the same thing this quarter we did last quarter, and then, also, getting some contribution from the acquired companies in this quarter. We're not looking for significant step-up for them, but a little more contribution every quarter is what we're anticipating from them.

Okay. Thanks a lot.

You bet.

[Operator Instructions] We'll now move on to Carla Cooper with Robert W. Baird.

Good morning.

Good morning.

I wonder if you could talk a little bit about kind of thinking sequentially here. You had a very strong quarter last quarter, and I think you made the comment, and I'm thinking here about license, that you had a lot of large signings. Wonder if you can kind of trace that through the revenue cycle for us. Are there revenues that came from prior installations that you either saw or didn't see, or we could see in Q4?

Well, Carla, if your question is, did we see a bunch of things flip, the answer would be no.

Okay.

You know, obviously, sequentially, I think what your point is, is that the license revenue was down $1million, and I would tell you that the majority of that decrease sequentially was in the acquired companies. TWS and one other company had a pretty strong license quarter in December, and they did not follow that up in March, for a number of reasons. So, the license revenue, barring the acquired customers is relatively flat quart-over-quarter, and the fact that our - - you know, our backlog continues be to strong, and March. has historically been our second-weakest contracting quarter, with September being the weakest, obviously. and for our backlog to only go down about $1 million, I think that should be a very good indication that things are working pretty well.

Okay. That's helpful. And then what about, Kevin, a way to think about the fact that at least the numbers that I run, you know, you're organic growth moved down from the December quarter into this quarter, you know, fairly significantly, if I've done the math right-how to think about that? Is there something that has change in the historical base or are we getting to a point where we're anniversering some easier comps? It didn't look like that to me, but I wanted your thoughts there.

Well, I mean, if you go back, Carla, and you look at the first half of last year, we were running at about an average of 12.5 million a quarter in license revenues. You know, we're now up to 20 million, which is more in line with what we were in the fourth quarter of last year, which was not only the strongest quarter of the year, but it was the strongest quarter in the history of the Company for license revenue.

So I think part of it is we have gone past the anniversary date of some pretty easy license comps, but, still, we've had a pretty solid quarter, and, again, like I said, if you forget about the hardware, which again, that's kind of a moving target, and because of some of the consulting type stuff that pulled out of there, we still had a - - more or less a 16.5% growth instead of the 12%, and pretty strong organic growth in license at 29%, and support and services at greater than 10%.

Okay. And then I had one other thing, which was - - oh, you gave us the split of - - you mentioned to, I think to Pete that hardware - - the acquisitions contributed about 1.5 million to hardware. What was the split, then of the remaining 7.5 million between support and services, just roughly?

About 1 million in license, and the rest was in support and services.

Okay. And then just finally, one more little one. You mentioned software capitalization. Did that go up a lot this quarter versus, I think it was, kind of 1.5 million the first - - each of the first two quarters of the year?

It's right along about the same, about a 1.5 million a quarter.

Okay. Thanks a lot.

You bet.

Our next question comes from Phil Mickelson with J.P. Morgan.

Good morning. I was just wondering if you could comment on the core market. Now that you're one quarter into things in 2005, what does it look like for just the number of opportunities out there for Jack Henry for competitive, you know, replacements? Is it a similar number that we've seen to years past? Is there less opportunities, or if you could give a little color on that, please.

Phil. Jack. I think for the most part, it looks - - it looks pretty comparable. You know, the banking space, you've kind of got two segments worth talking about there. There are the existing banks, and there are the Denovo opportunities. Core conversions of existing banks are a challenge.

Again, with the consolidation that has taken place in the industry, the folks that - - the folks that are left as core providers are pretty solid companies and doing a pretty good job for the most part, so - - and as we talked about on an earlier question, in many places, going to great lengths to try to make sure they retain the customers that they have. So some of those opportunities certainly are a little more challenging, but we're still, I think, winning our fair share of those. The other part of the market is the Denovo bank marketplace, which with the new opportunities coming in, and as we've indicated, we feel like we're doing very well with that marketplace. Those folks come in typically needing all of the products the the day they open the door, or very shortly thereafter, and only get bigger over time. And since the vast majority of those are outsourced transactions, they - - your revenues tend to grow with them as their size and transaction volumes increase.

So, again, I think pretty much the market for core opportunities on the banking side is as it has been, with a little more activity in the Denovo bank space than what we've probably seen in some recent years. On the credit union side, again, still very solid performances being turned in there. As I mentioned earlier, there are some catalysts that were there two or three years ago that are not there to the same - - to the same extent today.

The other thing is that in that space, we have led the industry in terms of new customer footprints, according to Callahan's research data, for probably at least the last six or seven years. If you look at the opportunities for our [effisus] product, which is our higher end product, there are probably fewer of those out there in no small part because of the success that we've had at that end of the market, which is not to in any way cast a gloomy picture. We still see a very good number of opportunities, but again, when you've had kind of the roll that we've been on over there for a number of years now, there are fewer of those to sell to, and you don't have the opportunity for the Denovo credit union opportunity, so I think the market is still very solid. I think the new core sales opportunities in both the banking and credit union space are running about as we have seen them for the last year or two.

The other thing I would point out, though, is that on the credit union side, we continue to put more products in those sales people's hands as we have on the bank side through the Synergy and TWS acquisitions, the yellow hammer fraud solution is just being rolled out this quarter in the credit union side, which when you have products like that, it can help attract some additional new core footprints.

And just with a lot of the core vendors changes handing and terms of ownership, I'm assuming that kind of, you know, changes maybe customers' perspective of maybe we should look at new - - possibly replacing our core vendor. I mean, have you seen any changes as far as win rates versus competitors because of that, where Jack Henry hasn't been acquisitive? Is that a net positive to some degree? And then the second question is, is there any kind of momentum shift, and this is maybe a little longer term, in looking, you know, outsourcing this function with smaller credit unions, banks, et cetera, versus licensing this in-house?

Phil, I would say that the core consolidation, probably in the short-run, can tend to slow down some decisions. When a base is acquired, the vendor typically tells them things are going to get better, and customers don't want to go through a core conversion if they don't absolutely have to, so if they had been thinking about changing their core system before the acquisition, a lot of times, they're willing to give the new vendor a year to see if things, in fact, do get better. So in the short-term, it can slow down some decisions. Depending on the vendors approach to the market - - to the acquisition - - if they come in and immediately start carving out large amounts of costs out of the acquisition, and if that impacts customer service, then that can lead to more opportunities after they give them that year to see how things are going to work. If the vendor comes in and says, you know, we're going to require you to convert to one of our other products within this time period, that will cause some people to at least go look at the market and open up some new opportunities.

So in summary I would say in the short-term, when a poor base is acquired, it probably tends to slow down some of the decisions, but it can be a catalyst for some decisions a little later, just depending on how things are handled.

And then has there been any meaningful change, positive or negative, in the win rates that I you've seen against your traditional competitors?

No, I would say our win rate is running about where it has. I didn't answer the other part of your question, Phil, on momentum shifts of outsource versus in-house. We have seen with our - - with our core deals, particularly on the banking side, in recent years, I would say least the last three, that there is somewhat more interest in outsource delivery than in-house. Say that probably three out of four deals;, new core footprints on the banking side are probably going to be outsource deals as compared to in-house.

I think there's a lot of factors there. There's the complexity of the technology today with all of the products that you have to offer. I think check 21 may have some impact there. Just a number of things there that come into play.

We haven't seen a shift to quite that extent, or anywhere near that extent on the credit union side. In fact, it probably runs three out of four in the opposite direction towards in-house. On the credit union side today, my hunch is that we'll start to see a shift on the credit union side over time for all of the same reasons we are seeing it on the banking side. And fortunately we are very well positioned with all of core application that we deliver all of them in either an in-house or an outsource delivery, so we're prepared to take advantage of whatever the market wants to see happen there.

All right. That's great. Thank you.

Moving on to Mark Ukelson with Sagamore Hill Capital.

Hi, guys, this is actually Charlie Ackerman with Sagamore. And I just had a question on your acquisition strategy. And you guys - - I kind of look at it in calendar years, but in the last calendar year you spent, on what, 158 million in cash on acquisitions? Once these acquisitions are up to speed, what kind of after tax return on investment do you expect to get, and when do you expect to sort of reach that fully ramped-up return?

In every one of the acquisitions, we anticipate in our line excess of 10% by year two.

So that you would be kind kind of calendar '06ish; end of calendar '06?

Well, it depends - - I mean it depends on the various acquisitions. I mean, some of those we bought a year ago now that I anticipate those to get to those levels within this fiscal year.

But just to be conservative - - so if I was looking, if you did 158, 10% is $16 million, and then - - so that would be like a 4 million a quarter run rate in earnings by Q4 '06? I mean, hopefully you'll get some of that a little earlier, too, but by the time you get to Q4 '06? Is that the ballpark, I mean if I just do the math right?

That would be the anticipation on the low side.

On the low side. And then - - okay, and I guess some was started earlier, so you should see a little of that ahead of time?

I mean, some of the acquisitions we've done are already well in excess of 10%, like the yellow hammer solution.

And then just on the hardware, so the change you made, was that - - has that flowed through the income statement for the last few quarters, or was it - - when was the change made on the construction consulting business?

It was actually made during the December quarter last year.

December '04?

Yes.

And so this is kind of the run rate of hardware we should expect going forward?

No, actually, it was December '03 that that was made.

Okay.

So this is really the first full quarter of that change.

December '04 for the first full quarter?

Well, no, because the change was made during the December '03 quarter. So it wouldn't have - - so we wouldn't have gotten a full impact quarter-over-quarter until this quarter.

Okay. Okay. And so you had given a metric, I think you said hardware revenue would have been up 16% versus 12%?

No, that's total revenue.

Oh, total revenue. What would hardware revenue have done?

Instead of being down 20%, it would have been down 14.5%.

And do you expect that to bounce back? Are you guys de-emphasizing hardware?

No, we're not de-emphasizes hardware. Part of the decrease was that. The other part of the decrease compared to year-ago was just fewer P Series and I series boxes being shipped. That plus the fact , as we have talked about for several years, the cost of hardware continues to go down. People can buy more processing power for less dollars, so we have always - - we have stated the last three or four years that total hardware is going to completely go down. Router and sorters as part of check 21 have increased. However, most of those are going for the smaller routers and sorters as the amount of paper goes down. So, it's not that we're de-emphasizing hardware, it's just becoming a smaller piece of our total revenue and as we continue that's going to continue.

Okay. All right. Thanks very much.

You bet.

[Operator Instructions] And now we'll hear from Chris Owen with Sync Equity Partners.

Good morning.

Good morning.

Just wanted to make sure I'm understandings this right. In terms of the bank segment sequential revenue decline, would it be right to think that most of the activity this quarter in the bank segment was Denovo activity? Just trying to reconcile your commentary on the core market with the revenue.

Wait a minute, say that again. The bank market? What now, Chris?

Looking at the bank segment, which I think declined 6% sequentially this quarter, and thinking about your comments of - - of sort of healthy core activity, would it be correct to reconcile those two by thinking that this quarter's activity was predominantly Denovo and therefore smaller?

The bank segment and - - to be - - I apologize, Chris. What was the bank segment - - you say it was a 6% sequential decrease?

Right. I think it went from 111 to 104.

I -- I can't answer that. I -- I don't know the answer to that right off the top of my head, Chris. I apologize.

No problem. Was also wondering if you could give us kind of an update on the Varinex and the stratika pipelines , and if there's been any change in when we can think about more revenue attributable to those acquisitions.

Chris, this is Jack. The Varinex pipeline, you know, is increasing slowly. We're doing fairly extensive QA testing on the product. Our customers just have an expectation of knowing that that's going to work not only with their core system, but with all of the complementary products that they have with us, so we've been doing expense everyone testing with that before we took it to the market. That pipeline is starting to build slowly.

There's also some technology changes that we're going to be looking at to accommodate a couple of specific operating environments that will take a little bit of time, but that's coming along nicely. We've got some some very good interest in the product from non-Jack Henry core customers outside the base, as well. We also put that through a security, using an outside firm, some security testing, to make sure that the product was soundly built from a security standpoint, pretty critical item in financial institutions right now.

Related to stratika , again, the customer profitability, that pipeline is building nicely. Again, we just introduced that product to our customers by way of webinar presentations within the last 30 days, so that was sort of their initial view of the product. I think the amount of people that we had signed on for that view is indicative of the interest in the product, and I would say that we've got very good interest in that product outside of our core customer base, as well. In fact in, you know, some pretty nice-sized institutions in the $5 to $10 billion arena, we've got a couple of banks that are pretty interested in the product, banks that are not users of Jack Henry's core application software.

So again just beginning to roll that out and ramp that pipeline up, but have some good expectations for it.

Hey, Chris, back to your question on the sequential on the banking side, I think the majority of that is related to a small slowdown in the check image or foresight solution, and the related routers and sorters on the hardware side would be the biggest decrease sequentially on the banking side this quarter over last quarter.

Great. Thank you.

We'll now move on to David Trossman with Wachovia Securities.

Kevin, for a while now, the license revenue has grown much faster than the in-house backlog. Is that because there's sort of more complementary solutions that get sold on a - - on a faster kind of selling cycle, and can that dynamic continue to happen for quite a while?

I'm not sure how you want to define quite a while, David, but, yes, it can continue to happen, because, you know, more and more of the products we have can be delivered quicker than the traditional core solutions. You know, for example, our net seller. I mean, it can be very easily delivered in the same quarter, if not the same month, that we contract the solution. You know, and some of these products that we're selling outside the base will also have very quick delivery times, because they won't have the same levels of integration that our historical inside the base sales have had, for example stratika [inaudible] when we sell it outside the base, it's not going to have the same level of integration that it does inside the pace, and it will be a quicker delivery.

That makes sense, and Kevin can you tell us how many net tellers and foresights you sold in the quarter?

Sure. Check image deals, which was a combination, again, of in-house and outsource, we sold 39 this quarter. So for the year, we have sold 121, we sold 33 in the first quarter, 49 in the second quarter, and 39 this quarter. Net teller, which again this is combination of in-house and outsource, we sold 63 in the quarter. We sold 36 in the first quarter, 49 in the second quarter, and 63 this quarter.

So we continue to sell a significant amount of net teller. And I will tell you that still the majority of those are first-time buyers.

Last question, do you guys have any discussions, or will you entertain more discussions with the board come the fall when you have a boatload of cash of doing more on that share repurchase side with the stock down where it is in?

We have been discussing that, David, and I will tell you that if - - if the stock stays at the current levels where we all believe it to be undervalued, that there's a very good likelihood that there will be - - the stock repurchase will be exercised. And we may not wait till Fall when we have a lot of cash, because we do have the credit facility in place now that if the board deems that it worthwhile to use those funds to acquire stock back, especially since in 90 days, we are going to have a significant amount of inflow of cash so that we can retire the debt anyway, that we would be willing to do that.

Yes. Yes, you know we love leverage.

I know you do.

Thanks.

You bet.

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

Thank you. Again we would like to thank everybody for their involvement in the call, some very good questions today. We would like to thank you for joining us to review our third quarter fiscal '05 results. We are very pleased with financial - - overall financial performance during the quarter, especially our increased license revenue and our expanding margins both the gross and operating margin's line. We continue to expand and improve our product and services, either through development or acquisitions, and we are committed to build on all of our competitive strengths. Our executives, managers, and employees continue to do what is best for you, our shareholders. Again, thank you, and with that , Susan, would you please provide the replay number?

Thank you for today's conference call. If you would like to listen to a replay of this call, it will be available from 1:45 p.m. Eastern time today through midnight Wednesday, April 27th. The dial-in number in the U.S. is 888-203-1112, and internationally 719-457-0820. And a confirmation code is 2470401. That concludes today's conference call. Thank you for your participation.