Jack Henry & Associates Inc (JKHY) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the Jack Henry & Associates fourth quarter and year-end earnings conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to the Chief Financial Officer, Mr. Kevin Williams. Please go ahead, sir.

Good morning, welcome to the Jack Henry & Associates fourth quarter and fiscal year-end '05 earnings conference call. Statements in this presentation and responses to questions may be made 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, good morning, and we're extremely pleased to report the result financial results for our fourth quarter and fiscal year '05. This is the second year in a row that we have returned to the 20% plus net income growth since the late '02 and early '03 economic downturn, and we're looking to extend this.

Our results that we're reporting reflect a solid increase in revenues, continued improvement in gross margins, strong balance sheet with significant leverage opportunities in the future and extremely solid backlog compared to the same period last year. At the end of our presentation Jack Prim, our CEO, is going to share some of the success we are having with some of our acquisitions we've made in the past year and a half and then Tony Wormington, our President, who is also with us this morning, is going to give a brief update on some of the newly developed products that we discussed at our recent annual analyst day in May. However, first I'll do a brief review of our financial statements. Our total revenues increased by 12% for the quarter and 15% for the year ended July 30, 2005. However, as we discussed on the last earnings call in April, they're revenues related to our Sys-Tech business which were actually pass-through costs in the prior year related to construction projects.

However, since we changed the contracts in prior periods to eliminate this pass-through revenue and, in fact, we basically removed ourselves from a lot of this construction business, if you consider this we actually had revenue growth of 14% in the quarter and 17% for the fiscal year. What this represents is approximately 2.4 million decrease in the quarter compared to '04 and roughly 11.1 million in gross revenue for the year compared to the '04 year. So again we had basically 14% and 17% revenue growth with our go forward business that we have today. With a significant increase contribution for both license and support and services for fiscal year, however, the fourth quarter license revenue was down 2.1 million in total compared to prior quarter.

But, again, if you remember we had the largest quarter in the history of the Company in the credit union segment in the fourth quarter a year ago, which the fourth quarter a year ago was 147% increase in the fourth quarter over the preceding third quarter and a 83% over the preceding in '03 fourth quarter. So it kind of skewed last year, so for comparison we're actually trying to compare this to the highest license revenue quarter in the credit union segment. The quarter just ended was also the second highest license revenue quarter in the year, so it's still a pretty strong license revenue year and we ended up overall with a record year. Also, if you remember, this fourth quarter last year skewed the margins for the credit union for the quarter and even for the year. However, to offset this decrease in the credit union segment compared to the prior year, we had a very healthy 23% increase in license revenue in the bank segment.

Our total license revenue increased 32% for the year ended June 30 which compares to growth last year of 30% in license revenue. Support and service revenue increased 20% for the fourth quarter and 17% for the year. This represents our continued growth and success in our outsourcing market play which continues to go at a very good clip. Strong growth in our ATM debit card processing business, which includes our ACH and merchant business, and very good growth in our in-house support fees which comes from not only new customers but additional complimentary products that have been implemented in the last year. There is an increase in hardware sales of 5% compared to the prior year quarter and a decrease of 4% for the year.

So if you consider our revenues went up 15%, or adjusted to 17%, with an actual decrease in hardware, we had in our opinion a very strong year in both license revenue and support and services. Our cost of sales increased by 12% for both the quarter and the year compared to last year, which compares very nicely to the 12% and 15% increases in revenue for the quarter and the year. The increase in cost is primarily due to the increase in cost of services associated directly with the cost of support and service revenue. And this is partially offset by the decrease in cost of hardware. Our cost of license decreased 54% for the quarter, increased 17% for the year, if you'll remember in the first half of the year we sold an enormous amount of third-party product especially on the credit union side, which with our acquisition of Synergy we stopped that, so the margins of our license revenues should continue to remain very solid.

Our gross margin remained level at 42% for the quarter and increased to 42% from 40% a year ago. As I mentioned, our licensed margins improved to 94% and 89% for the quarter and improved slightly to 93% for the year. Our support and services margins were level at 34% for the quarter and 33% for the year. And our hardware margins increased to 31% from 25% for the quarter and slightly to 29% from 28% for the year. This is primarily due to sales mix and some higher vendor rebates we received, especially in this quarter. Our banking segments gross margins improved to 43% from 41% for the quarter. Again, this has lots to do with sales mix of improved license sales and basically flat or down hardware sales.

Our credit union segment margins declined to 41% from 47% which is-- relates right back to my previous discussion about the fourth quarter last year of license revenue. However, for the year our credit union margins remain pretty solid at 38% compared to 39% and considering some of the things that happened in the first half of the year that damaged our credit union margins, we're very happy to get those back up to where they were a year ago. Total operating expenses increased 8% for the quarter, 16% for the year, and as a percentage of revenue decreased slight -- from 19% to 18% of total revenue for the quarter and remains level at 19% for the year compared to the prior year. Our selling and marketing increased 23% for the quarter and 30% for the year which, obviously, this is still being impacted somewhat by the acquired companies as they continue to improve their leverage to the selling and marketing expense line.

Selling and marketing increased slightly from 8% to 9% of total revenue for both the quarter and the year. Our research & development increased 15% for the quarter and 17% for the year primarily due to additional resources related to additional headcount and employee expenses. But this also remained fairly level at approximately 5% of total revenue. Our G&A expense decreased 18% for the quarter compared to the prior year primarily due to a loss related to disposing of some assets in the prior year quarter and decreased 2% for the year. Our G&A actually represents 5% of total revenue now compared to 6% last year. Based on these numbers, both the gross margin and operating margins, I'd point out that our managers have done an extremely good job of controlling costs this year.

Also just for a comparison point, our headcount of full time employees is up 18% this year at June 30th from last year to 2,989 from 2,533 and our part time employees has increased from 119 to 140. However, I'd point out that without the acquisitions our headcount only went up 10%, which compares nicely to the 15% increase in revenue. Our operating income increased 16% over quarter and 21% for the year. Operating margins increased to 24% for the quarter and 22% for the year compared to 23 and 21 in the same periods last year. Our effective tax rate used for provision of income taxes decreased slightly in the fourth quarter to adjust our effective tax rate to 37% for the year, compared to the adjustment made in the prior year of close to 40% to also adjust for the actual year for the effective tax rate. These adjustments were required due to some changes in state tax laws, some accounting rules.

This change in tax rates did not impact our EPS for the quarter or the year. Due to the rounding of the numbers we still would have been at $0.23 and $0.81 regardless of the small change in the effective tax rate for the quarter. Net income has increased 23% for the quarter and 21% for the fiscal year ended June 30. This resulted in an actual increase in earnings per share of 22% for the quarter to 23 -- or $0.23 this year from $0.19 last year and an increase of 20% for the year ended June 30, 2005. Comments about the balance sheet, the majority of our significant changes compared to the same time last year, obviously, our cash and cash equivalents decreased 77% which is primarily related to acquisitions.

Our trade receivables have increased by 24% due to increase primarily in in-house maintenance billing and also the overall growth of our business related to monthly billings for processing and transaction fees. As our outsourcing and EFT business continues to grow, our monthly billings also continue to grow. Our fixed assets are up 13% primarily from the acquisitions and also a building we bought in Allen, Texas for $13 million, but I'd point out that the building we bought in Allen, Texas, the bottom floor that is leased through the next three years which the lease income will more than offset the expense of that to our P&L going forward and it gives us basically all the space we need for expansion for the next three-plus years in the upstairs of that. Our accounts payable and accrued expenses are up 20% due to the timing of payments and overall growth of the business. And deferred revenue obviously is up because of the annual maintenance billings on our in-house contracts just went out, which was about 20% higher than last year's annual maintenance billing.

Our notes payable increased to 45 million as of June 30th, 15 million of that was from the additional -- from acquisitions from the original line we had when we got the new $150 million facility put in place in April. We drew 15 million to pay that off. We drew some more money down as we bought some stock back during the quarter and then we drew another balance on that to pay for the building in Allen. But I'll tell you that as of today, that balance is back to 15 million and as of next week it will be back to zero as we collect the cash from our annual maintenance billings. Backlog has grown to 199.1 million with 64 million in-house and 135.1 million outsourcing. Obviously this is a record backlog for us. Quickly on guidance, at this point I would like to reaffirm guidance of 20% growth next year on ETS.

It will be somewhat back loaded, similar to this year for modeling. If you take this year's actual core result, which I believe were 18, 19, 21 and 23, and basically increase those by 20% you'll approximately be at the consensus quarterly estimates out there reported. Obviously the first quarter will be our most challenging quarter of the year, as that is typically our slowest contracting quarter. Any upside to this guidance would be from continued increase in our in-house bank core sales and credit union sales and, obviously, our continued momentum gaining from our acquired companies. With that I'm going to turn it over to Jack Primm, our CEO, to give you a brief update on some of these acquired companies and then, again, Tony Wormington will give a brief update on some of our newly developed products. Jack.

Thanks, Kevin. Our traditional business of core processing software for banks and credit unions remains very strong. We had the largest number of new core sales in the banking space during the past year then we've had since the pre Y2K ramp-up. And our credit union core sales led the industry for the sixth consecutive year. According to the independent research report published by Callahan and Associates nearly half of the credit unions over 25 million in assets who converted to a new system in 2004 selected our Episys product. Our focus, diversification, acquisition strategy also continued to gain momentum for the second consecutive year. Some recent successes include a top 20 U.S. financial institution has selected our Optinfo In Balance Enterprise Risk Management software as a key component of an initiative focused on operations consolidation and Sarbanes-Oxley compliance that is expected to provide significant cost reduction opportunities.

Two mid-tier financial institutions in the $10 to $15 billion asset range chose our Select Payment subsidiary to provide merchant capture and enterprise payment processing solutions for their commercial customers. Select Payment contracted with 31 banks in the first six months of the calendar year and signed an additional ten banks in July. Several of these banks, including the two mid-tier customers I mentioned earlier, are not Jack Henry core software customers. While this electronic transaction processing business is similar in nature to our ATM debit card business, there is no existing base of transactions to convert. Merchant capture is a new offering in the industry and will ramp-up over time. Our Stratika RPM profitability products had seven customers when we acquired the company in January. We have now contracted 45 customers, again representing a mix of Jack Henry and non Jack Henry core software users. The largest owner/operator of ATMs in the world extended its relationship with our e-ClassicSystems subsidiary with additional modules for advanced cash management and interchange fee calculations.

And will deploy an executive dashboard from our recently acquired Tangent Analytics subsidiary to monitor and track ATM activity. We continue to look for leverage opportunities for the sales forces of the acquired companies and to look for re-marketing relationships with quality companies, such as those we currently have in place with Diebold, UreNet, Profit Star and Cardinal Health. The reception of our acquired products inside our customer base has been very strong and we continue to receive confirmation from non Jack Henry core software users that they're receptive to our best of breed complimentary products that can help them attain their business objectives regardless of whose core software application they're using. With that I'd like to turn it over to Tony Wormington to talk about some additional products we're about to bring online.

As an update to the new product information provided on May 11th at our analyst day in Dallas, the following products are now in general availability for our customers. Our intelligent solutions, Intelligence Warehouse and Intelligence Manager, built on the Tangent Analytics product architecture, are the data warehouse and business intelligence foundation for all Silverlake core processing clients. Intelligence Warehouse and Intelligence Manager deliver targeted insights to the business process and provide templates for sophisticated dashboards, analytic models, formatted reports and proactive alerts that give financial institutions the power to turn knowledge into action. The Intelligence Manager module consists of customizable business dashboards, e-reports, insights and alerts to jump-start financial institutions into analyzing their business data more effectively. In addition to our best of breed check fraud and anti-money laundering solutions from Yellow Hammer Software, our newly developed EFT Fraud Detective is a real-time solution for detecting electronic transaction fraud.

Offered exclusively for Jack Henry's Passport. pro clients, EFT Fraud Detective leverages Yellow Hammer's fraud expertise and proprietary technology to provide real-time monitoring of every ATM and debit card transaction, automatically rate the risk associated with each transaction and generate immediate alerts of possibly fraudulent transactions. Through the use of a statistical history build process, EFT Fraud performs a real-time fraud analysis of transactions occurring and provides immediate e-mail notification of high risk transactions. J Exchange is our integration solution designed to improve application openness by allowing financial software applications to work in unison by sharing business information between all Jack Henry and third-party software products regardless of platform, operating system, or development language.

Based on open modern standards-based interoperability through a services oriented architecture using the Windows server family and .Net Web Services, J Exchange provides reduced overhead in building software applications, increased product return on investment and maximized service capability resulting in higher customer satisfaction, easier product creation and multi-vendor multi-platform openness. Through J-Exchange comprehensive integration with existing Jack Henry complementary products or best of breed third-party products, our existing and future clients can leverage the most feature rich, stable, best of breed core processing applications in the financial industry. J-Exchange is generally available for all Silverlake core processing clients and will be available in future releases for all other Jack Henry best of breed core processing applications.

Thanks, Tony, thanks, Jack. With that, I'd like to open the call up for questions. Candice, would you open the call please.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Kartik Mehta with FTN Midwest Research.

Good morning.

Good morning, Kartik.

Question for you, Kevin. On '06, I think at the analyst meeting you said you anticipate top-line revenue from a organic growth standpoint to be mid-teens. Is that still -- based on the projections you've done, is that still a realistic number in your opinion?

I think based on what we're looking at today, Kartik, organic, true organic growth from what we have today is going to be somewhere in the low to mid-teens, yes.

And I guess, would then acquisitions add about another 40 to 50 million in 06?

Part of the acquisitions are already included in our organic growth but, you know, because after we have owned them a year we consider them part of organic growth, Kartik. So they're kind of rolling in. So, you know, the acquisitions that we have done to date, I mean, should add, you know, another 3 to 500 basis points, I would guess, which will get us very strongly into the mid-teens revenue growth.

Okay.

And that is if our hardware doesn't continue to go down which -- you know, I think our license revenue and our support service revenue are going to continue to grow at a very good clip. It's the hardware piece that is kind of an unknown, as we've said for years.

With the hardware margins this quarter, would they have been impacted by rebates or just -- or is it something else that had an impact on hardware margins this quarter?

It's a combination of things. I mean, one the -- we did get some decent rebates back because of the sales mix of products. But the other thing, Kartik, you got to remember is that as the total hardware revenue goes down in size or remains flat, our forms and supplies business, which carries high margins, continues to clip along and grow at pretty good pace. So as it becomes a large percentage of hardware that actually helps the margins. And then also the Verinex product that we acquired has a hardware component, though it's a pretty small piece, that carries also very nice margins. So as that business continues to grow and get traction that will also help the hardware margins. So even though the hardware total revenue dollars will either stay slate or potentially even go down, the related margins should actually improve on the hardware.

And kind of one last housekeeping question, Kevin.

Yes.

Tax rate for '06, will it be similar to '05 in the 37% or does it go back up?

37.

Perfect, thank you so much.

You betcha.

We'll go next to Tim Willi with AG Edwards.

Good morning. Couple questions, Kevin. One is if you said it I missed it, but could you again say what the internal growth in the most recent quarter was? Also if you adjust for some of the pass-through issues that I think you're still cycling through?

Our internal -- our organic growth for the quarter was a little over -- somewhere between 8% and 9%, Tim, and if you adjust for the pass-through costs, it approached 10%.

Okay.

For true organic.

Okay.

And that's -- and again that's considering that, you know, hardware is doing what it's doing.

Right. So just going back to the earlier question from Kartik and the talk of sort of I guess some re-acceleration in that internal growth rate to the mid to low-teens, would you -- if we look at that difference between 10% and let's just sort of say like a 13%, 14%, would that largely -- that change be on the back of the new -- newly acquired companies or are you seeing things within the spending environment and within your product set that even still some of the sort of Legacy products may very well see an acceleration in their sales volumes next year?

Well, I think it's a combination of things, Tim. Obviously we're continuing to see pretty good traction gained with our core companies. And I would say that Jack mentioned the select payment business, I mean, that's slow coming out of the gate because there's no existing base to convert. But that's going to be very nice growing recurrent revenue and there is a huge demand for that out there. Some of the products that Tony mentioned, the Intelligence Warehouse piece and the EST Fraud. Obviously fraud is a hot topic right now. And the nice thing about the Intelligence Warehouse is that also helps sell some of our other products like our Stratika Profitability piece and our Synapsys Sells automation tool. So it's a combination of not only things we bought but also some of the products we developed and, you know, our sales force is very focused and we've done a pretty good job, I believe, at looking at the opportunities out there and we just feel pretty darned confident that it's going to happen this year.

Okay. And last question. The Synergy product that you acquired towards the end of last year, how has that been received and just sort of an update on that product?

Well, I can let somebody else respond to this too, but it's been received extremely well in the credit union market because it was actually comparable and probably even ahead in technology of the third-party product that we were selling. On the bank side it's being received very well, especially by our in-house customers because it has much more featured functionality than the Silhouette Document Imaging solution that we were providing them. And this is all inclusive in one product versus before they had to buy three different products to even have close to the same technology and they still didn't have things like work flow and power search.

Okay. Great, thank you.

You bet.

We'll go next to John Kraft with DA Davidson.

Good morning, gentlemen.

Good morning.

Morning.

Kevin, is the recurring revenue of 61%, that's about the highest we've seen. Do you have a target or a goal for what we could see in 06?

You know, I mean, John, you're right, that is the highest we've seen but, you know, again our support and services, which is the primary portion of that, is recurring revenue which is our EST in-house maintenance and outsourcing and those three parts of that line are growing at very good clips. And with hardware staying flat, then, you know, it's going to continue to grow. Is it going to -- three years ago, I didn't think we'd ever get to 60%. But it's very conceivable, depending on what hardware does that we could get up into the mid-60s by the end of this next fiscal year.

So would you be disappointed if it ticked back down again?

Would I be disappointed? Probably not because if it ticked back down, and I don't think it'll tick down much because it's held pretty solid in the 57%, 58% most of the year, because if it ticks back down what that means is that our license contracting and even probably hardware contracting has picked up which means our in-house business is picking up steam. So would it disappoint me? No, because I think that would be the only thing that would drive it down from where it is today.

Sure, sure and the question for Tony. Kevin, you just said that was hot topic. Obviously in the press it's a hot topic. Are the banks, credit unions starting to feel pressure to turn around and be a little bit more reactive and actually buy some of these solutions?

Absolutely. There is significant pressure being applied on all financial institutions by the regulatory agencies to meet requirements. The various statutes out there regarding fraud and privacy and security and et cetera and the Yellow Hammer software does a good job of meeting the needs of those customers. There's significant pressure outside our customer base as well for other core customers that are out there. We'll be looking at taking the Yellow Hammer products at some point in the future outside our core customer base as well.

Okay. And Kevin, last question about the acquisitions. And I apologize if you've touched on this. But were they a net drag to the bottom-line in the quarter?

No, absolutely not.

What would you say they contributed to the bottom-line?

Again, I mean, again, John, it's, you know -- several of the companies that we've acquired in the last 18 months we've now owned for more than a year so they are not -- I don't consider them acquired companies any more. But they would have probably added maybe $0.01during the quarter.

$0.01, okay.

The companies that we acquired in the last 12 months and their margins are improving. Their margins are still not quite where the historical company is, but with some of the things that Jack mentioned, you know, the Optinfo product and a lot of Select Payment stuff are things that happened either in June or July which had no impact on this and those should continue to grow very nicely.

All right. Thanks, guys.

You betcha.

We'll go now to Phil Nicholson with J.P. Morgan.

Good morning. I was wondering if you could talk about on the license revenue line, could you kind of disaggregate or give some color on licensing within the core space and then also the licensing environment with some of the acquired or some of the ancillary product. Can you kind of give us like -- I know the acquisition revenue was a little light than what you expected last quarter, so I was wondering if you could give a little more commentary on that side?

Well, I will tell you that we had not only the quarter for the year, Phil, we had strong contributions from every one of our core products. As Jack mentioned, you know, we had very strong contracting years on both the bank and credit union side, so assets and some accrues, the creative side both had stellar years, core director, Saff(ph) 2020 both had very good solid quarters and years and Silverlake had a pretty good year also. Some of the Company products that have done extremely well for the quarter near, obviously are fraud solutions, the Yellow Hammer Fraud Detective and the anti-money laundering solution just continued to do extremely well. We continue to get good penetration there. The Synergy product did some good things for the quarter and the year.

All of our image solutions, our Foresight, check image solutions did extremely well for the year. And even ATM Manager, one of our acquired e-Classic, the year ago, contributed nicely in software for the year. So it was pretty much all across-the-board. Vertex Teller, that we bought back in '97, continues to be a very good selling item for us, continues to contribute very nicely in license revenue and also in recurring revenue. So I don't know that I'd point to any one product and say that was the winner of the year. We had great contributions from a lot of the products, both ones that we developed, both those that we've acquired, you know, three to five, six years ago and then also some of the newly acquired ones.

I guess I'm a little confused though. You know, seasonality, is there typically a pickup in license revenue? I understand last year the comparison was difficult giving the strong credit union performance. But I would have expected a seasonal effect for your fiscal fourth quarter. Is that not in place, that there was a sequential decline in licenses, you know, what is that attributed to? Is that more on the core side or acquired, a combination? I guess I'm still a little confused why I didn't see a seasonal lift in license.

Well, it could be a combination of anything. You know, the fact of the matter is, and I know that people have said this before and I don't even really like saying it, but, you know, we had some credit union deals slide during the quarter that we'd either already closed or still in the sales pipeline which, obviously, those would have not have helped revenue, but they would have increased the in-house backlog. And, you know, it's more on the core side especially, but even on some of the larger Company inter-products, it's just a matter of timing of when we actually deliver those. Because we've got install windows. We've got a backlog of implementation time periods for all of our product. And it's more of a matter of timing of getting them contracted, getting an install window and getting the products shipped.

Phil, this is Jack. One of the other things that we've been seeing for some time, I don't know that I would restrict it to just the most recently completed quarter, but, you know, we've said before that in the banking side of our business in terms of new core sales, there is more interest in outsource delivery of those solutions today than there is in in-house delivery. That's not new. That's been the case for probably two or three years, but I would say that it has increased in terms of the level of it. Whereas two years ago it might have been, you know, two out of three deals that would be outsourced versus in-house. We probably are close to three out of four or four out of five new core footprint deals on the in-house side in banking that would be outsourced as opposed to in-house. We have not seen that to the same extent in the credit union side of the business. Will we see that at some point? I think it would not surprise me if we did. I think that some of the same factors are at work in that market that may cause that shift over some period of time, but that could be a partial contributor to it as well.

Jack, as a follow-up to that then, have you seen any kind of selling in-house licenses to banks? Have you seen any change in that market or have you seen any change in your win rates versus competitors? Still trying to understand -- or is it just a factor only of just the market pendulum kind of swinging more towards outsourcing deals?

Well, we have not seen a change in terms of win rates. You know, again, we had a very good year in terms of new customer acquisitions in the banking market. Significant number of those new footprints were de novo banks and those with only very rare exceptions would have been outsourced transactions. You know, we really -- I don't see the market itself from a competitive standpoint being significantly different now than it has been for at least, probably, the last two, three years. It's a competitive market, and it has always been a competitive market, but it's been particularly competitive for several years now. I don't see it being substantially different.

The other thing, the fourth quarter may not, as far as life server, may not have been where a lot of you all had it in your models or even in your estimates out there. But, you know, it came in right in line where we thought it was going to be. And for us to finish the year with a 32% increase in license revenue and that would have been fairly close to 30% increase in license revenue even without any of the acquisitions in the last 12 months. So, you know, in our opinion, we had a stellar year.

All right, thanks for the commentary, guys.

We'll go now to Bryan Keane with Prudential Equity.

Good morning. Maybe, Kevin, you can follow up on that because I must have miss modeled it wrong as well. The licensed revenue growth for fiscal year '06, what should we expect then?

For fiscal 06? It should be, you know, again this is kind of crystal balling, Bryan, but it would not surprise me to see similar license revenue growth in '06 that we saw in '05.

So keep similar type growth rates, I guess then.

Yes.

Just to follow-up on the acquisition, I just want to fix my model correctly, what was -- how much of the revenues in the fourth quarter come from the acquisitions? Let's just say the ones you've completed in the last 12 months. Was it about 5 million?

Yes, thereabouts.

Okay. And then I didn't hear anything, maybe I missed it, but FAS 123-R, are you guys planning to adopt that.

Yes, Brian. In fact, we filed an AK in June and we accelerated all the options that were underwater and which prevented us from incurring about half the expense because about half the options that were still out there were underwater. The other half we're going to adopt 123-R. We will expense that over the next year and I would say that the full impact of 123-R on us in fiscal '06 should be less than $0.005.

Okay. And then finally on your new bank ads both in credit unions and in -- on the core bank side, is that a net number or can you give us a idea of how many might have merged or did you lose?

In terms of the net number, you're talking about the number of new footprints? I don't know that I could tell you how many are acquired. That's pretty much a wash in a typical year, Bryan. We will lose some banks to acquisitions, our customers will add banks as -- that they will acquire. We don't track that number that closely because, again as I said, it typically is pretty much about a wash. So I believe the answer to your question is that would be a net number in terms of the increased footprints.

Yes, and let me just say, Bryan, I think, and I got this from our marketing guys so take it for what it's worth, I think that during the year our banks, our core customers acquired about 15 other banks that then either converted to our software or remain on a charter and bought additional licenses, which compares to about 10 or 12 a year ago.

Okay.

So net-net-net I would agree with Jack, I think for the banks that our customers that got acquired is probably about a wash with the customers that our customers acquired.

Okay. And is there a number that, you know, you lost to competition or you lost somewhere else or is this a complete, this includes those, the 60 and 49?

No, I would tell you that we did lose a few to competition but I would also point out that the majority, if not, you know, almost all the ones we lost were the very low-end bank that were on a Legacy system. Most of them on the Banker Two system that came from the Bank (inaudible) acquisition back in '99 that were 50 million or smaller in assets that we were probably losing money on anyway. And they just -- they're the type of bank that they just refused to spend any money on technology and they just went to the low cost provider.

Okay. That's helpful, thanks.

You bet.

[OPERATOR INSTRUCTIONS] And we'll go now to Carla Cooper with Robert W. Baird.

I think this is following up on Bryan's question but did you say that 5 million came from acquisitions in the quarter? Heard the answer but not the question.

That's about right, Carla.

So that's a lot down from, I think, the 9 million you talk about, is that -- ?

But understand that there's three of the companies that we acquired that we acquired in the June quarter of last year.

Okay. Well, I'll call you later.

Because e-Classic, our regulatory requirements Company and the assets that we acquired, the ACH assets that we acquired in Waco were all in the June quarter. They're not included in the acquisition numbers, they are now included in my organic growth numbers.

All right. I got two of those. I didn't model it right. My other question is just thinking about your kind of guidance for the year and in contrast with the backlog growth that I think year-over-year was 4%, how do you grow -- I mean inherently -- did the backlog growth need to be -- over the long-term, does that need to mirror the revenue growth? Or what's the dynamic we should think about there?

Carla, I guess my comment to that would be if you look back to, let's say, June 30, '04, our backlog was up 4% or 5% maybe.

Right.

So, I guess to answer your question, I don't think there was a direct correlation to growth and backlog to growth in revenues we discussed before. I mean, backlog is more just a gut check that things are going along okay and that we're not doing something crazy trying to hit numbers.

Okay. And is that -- ?

And the other thing I'd point out, Carla, we started talking about this three or four years ago that, you know, at some point backlog is going to level out because, especially on outsourcing side, because as that base continues to grow and you're rolling off those monthly billings that we do, it takes a whole bunch of new customers or renewals just to restock that and keep it level.

Right. Kevin, I guess, just housekeeping. Could you give us the number of Internet, Foresight and CRM in the quarter?

Sure. During the quarter check image deals, we had 42 of them, which compares nicely to the 39 in the third quarter. NetTower we sold 52 which brings us to 200 for the year. And I'll tell you that our Power Pay product during the fiscal year '05 we actually sold about 20% more of those than we did net tower. So we're getting very good traction wit our Power Pay product and CRM during the quarter, we sold 14, 13 of those being Synapsys and one of those being a ARGO solution.

And then I think my final question was just about the, you know, your operating margin ticked up in the quarter and a little bit of that is seasonal but just it looked like you had good leverage on expenses. You know, was there anything special that happened this quarter to drive that and how can we think about that going forward?

Well, I mean, one of the things I pointed out in G&A we had about a $1.2 million loss on disposal of assets in this quarter last yea, so that kind of helped the G&A comparison. Carla, if you remember on this call last year, I told you that I thought we could keep G&A expenses pretty much flat and that's pretty much what we did. Research and development, I think, are going to continue to grow at somewhere around 5% of revenue because we've got to make that investment to continue developing new product and enhancing the products for our existing customers so they can compete with the tier one bank and the non-traditional providers. Selling and marketing, you know, it ticked up a little bit this year as a percentage of revenue and, as Jack pointed out, we're getting really good traction in some of the acquired product. As those continue to pickup and we get more leverage, that should stay somewhere around 8% or 9% of revenue. So I honestly think that we can continue getting some decent leverage to the operating margin line.

Great, thanks.

You bet.

We'll go now with a follow-up from Tim Willi.

Thanks. Just a question on the buyback in the CRM. First, Kevin, how many shares, what was the dollar value of what you bought back in the last quarter?

Tim, you know, I just -- that just totally blew my mind, I forgot that. It was somewhere north of 0.5 million shares or something like that.

Okay.

At an average price of north of $18.

Okay. The second thing, that CRM total, if my memory serves me correctly, that seems like probably one of the largest quarters by a wide margin in the last year or so.

That is the most we've ever sold.

Yes. I mean, any thoughts as to the dynamic behind that? Is it -- ?

There's a couple of things to that, Tim. We've finally got the product to where it is the right product for the credit union space. We've actually broken that product into, and Tony may want to come in on this. We've broken the product into two modules because we came to realize that a lot of the credit unions didn't want the entire Synapsys product, they either wanted the sells automation or the call tracking feature. So we broke that into two modules, which we're having a lot more success selling that in the credit union space. Then the fact that you tie that in with our Stratika Profitability solution and our Intelligence Warehouse, those three products put together just gives a very strong solution for a financial institution. So it goes back to my early comment, a lot of the products we build and acquired, even though when we bought them people kind of questioned them, they're fitting together extremely well in helping to sell each other.

Yes, with that comment, are those then -- so somebody is buying not only Synapsys but Stratika at the same time?

In some cases, yes.

How many of those -- ?

I'll just go on out here and say this. We had a bank that was looking at Synapsys, decided it was not the right product for them. When we rolled out the Intelligence Warehouse and General Availability and we had acquired the RPM profitability solution, they came back and looked at the suite of products and bought all three.

Okay. So of those 14, would you say that like half of them involved the purchase of the Warehouse or Stratika along with -- I mean -- ?

Tim, I really don't have that detail in front of me, I'm sorry.

That's okay. Great, thank you.

You bet.

And that concludes the question-and-answer session today. Oh, we do have a follow-up question from Carla Cooper.

Hi, just one more for me. Do you think about the backlog at all in terms of what came from the acquired companies versus core and can you give us a little sense of that?

Do I think of that? Yes, I actually look at it.

Do you have it?

And I will tell you, I mean, I'm not going to break the numbers out for you, Carla, but I will tell you that the backlog for mostly acquired companies, and we talked about this when we acquired them, is they didn't have a backlog. I mean, most of them were start up companies that solid technology with very little, if any, sales force. So we're building a sales pipeline and backlog from those, especially in the last six months and they're starting to build that. You know, as a percentage of our total backlog, it's still pretty small. I mean, the most of that is our core products, not core products, they're core and complimentary products in our traditional space still make up the vast majority of our backlog.

Got it.

And one more thing to remember. When you look at backlog, one thing that we've never put in there is any of our EFT backlog.

Right.

Which if you think about our EFT business grew at a clip of 43% this year and now represents 10% of our total revenue.

Yes, okay. Thank you.

Up bet.

Thank you. That does conclude the question-and-answer session today. Mr. Williams, I'll turn the conference back over to you for any additional or closing remarks.

Thank you. And again, back to a previous question, I would like to reaffirm our guidance of 20% growth of net income next year. We feel very solid with that and very comfortable. And again, we want to thank you for joining us today to review our fourth quarter and fiscal year-end 2005 results. We're extremely pleased with the overall financial performance during the quarter and especially the fiscal year. We remain confident that we're very well-positioned and that we have the right product and services to approach both the bank and credit union markets and all other financial services markets from the smallest institution or de novos to the largest. We also believe we have the proper resources in both people and technology for these continued future opportunities.

We continue to expand and improve our products and services and are committed to build on all of our competitive strengths. Our executives, managers and all the members of our team continue to do what is best for you, our shareholders. Again, thank you very much for joining us this morning. And with that, operator, would you please provide the replay number?

Thank you again for joining today's conference call. If you would like to listen to a replay of this conference, it will be available from 1:45 P.M. eastern time through midnight, Tuesday August 9. The dial-in number for the U.S. is 888-203-1112. Internationally is 719-457-0820. And the confirmation code is 8023484. Thank you for your participation. You may disconnect at this time.