Jack Henry & Associates Inc (JKHY) 2006 Q1 法說會逐字稿

Good day, and welcome to the Jack Henry & Associates First Quarter Earnings Call. This call is being recorded. At this time, I'd like to turn the call over to the Chief Financial Officer, Mr. Kevin Williams. Please go ahead, sir.

Good morning, and welcome to the Jack Henry & Associates first quarter fiscal 2006 earnings conference call. Just to remind you, statements in this presentation or 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. We're very pleased to report the financial results for our first quarter ended September 30th, 2005. Our results that we're reporting reflect a solid increase in revenues, continued improvement in our gross margins, strong balance sheet with significant leverage opportunities, strong operating cash flows and an extremely solid backlog compared to the same period last year.

In a few minutes, Jack Prim, our CEO, is going to share some of his thoughts in regard to some of our acquisitions and some of our other products. And then, Tony Wormington, our President, is also with us today, and is going to give a brief preview of our upcoming National User meeting which we are all going to next week. However, first, I will do a brief review of the quarter just ended and a summary of our financial related highlights.

Based on our year-end earnings call on August 3rd, to just remind you all, we stated that our target for this fiscal year was to grow net income by a minimum of 20%. We also stated this year, like all of our fiscal years, would be back-end loaded and also that the first fiscal year would be most challenging. However, we are pleased to report that we continue to be on track to grow net income by 20%, and in fact we're slightly ahead of plan in regards to net income, and also ahead of plan in regards to contracting for products and services.

However, the contracting was influenced by the continued large demand for our outsourcing services, including our transaction and revenue-based products. These are the types of products that drive recurring revenue, enhanced margins and increased visibility. The significant contract is somewhat reflected in the outsourcing backlog. However, this backlog only reflects data and item processing in our OutLink division. And the EST data processing, PowerPay and Select Payment contracts are not included in the backlog due to the difficulty in conservatively estimating transactional revenue, especially such fast growing parts of our business.

Now to the financials. Our total revenues increased by 10% for the quarter. However, as I pointed out during the last two earnings calls, there are revenues related to our Sys-Tech Business line, which were actually pass-through costs in the prior period related to construction, hardware and consulting project. And since we changed the contracts in prior periods to eliminate this pass-through revenue, and the fact that we have basically removed ourselves from this line of business even though it takes some time for all of the contracts and revenue to work through the financial statements in a year-over-year comparison.

If you consider this, we actually had a revenue growth of 13% for the quarter with approximately $2.5 million in this type of revenue in last year's quarter. The impact of these changes will continue to become a less significant impact over the next two quarters. And by the end of this fiscal year there will be no impact in the fourth quarter. Based on these numbers our organic growth was approximately 8% for the quarter, which includes any acquisition that we have owned for 12 months or more. And the balance of the growth in the current quarter revenues was from those acquired(ph) companies that we've owned less than one year.

The first quarter license revenue was down 2.6 million in total compared to the prior year quarter, with the majority of this happening in the credit union segment. This decrease in the credit segment is primarily due to the average revenue per core system delivered during the quarter compared to last year. The number of core systems delivered during the quarter was approximately the same as last year; it was just the average size of them was somewhat smaller.

Also we had some large revenue generating add-on products delivered during this quarter last year compared to this year, which just represented over half of the decrease in license revenue and credit union segments. License revenues in the bank segment were relatively level with this quarter last year.

Our support and services revenue increased 19% for the first quarter. This represents our continued growth and success in the outsourcing marketplace, strong growth in our ATM and debit card processing businesses, which include our ACH and Merchant Branch Capture business. And finally very good growth in our in-house support fees which comes from new core customers and addition of implemented complementary products. It is important to note that we had a 34% increase in support and services in the credit union segment, and a solid 16% increase in our banking segment. Hardware revenue was basically level with the same quarter a year ago.

Our cost of sales increased by 9% for the quarter, which compares to the 10% increase in revenue. The increase in costs is primarily due to the increase in cost of services associated with support and service revenue, which is partially offset by the decrease in cost of hardware. The cost of license decreased 47% for the quarter compared to the prior year, which represents our cost of third-party software which we'll resell to our customers, with the majority of this in our credit union segment which was positively impacted with the acquisition of Synergy about nine months ago.

Our gross margin remained level at 41% compared to the same quarter a year ago. License margins improved to 95% from 92% for the quarter, again, due to the fewer third-party product sales. Support and service margins increased to 35% from 33%, which means we continue to leverage our existing infrastructure and resources.

I think it's important to note that even though we had a decrease in license revenue in the credit union segment, our gross margins held solid at 37%, which means we continue to improve our profits, procedures and leverage our existing infrastructure. Our hardware margins increased slightly to 26% from 24% for the quarter. This was due to sales mix. Our banking segment gross margins held steady at 42%, and again, our credit union held solid at 37%.

Our total operating expenses increased 7% for the quarter and as a percentage of revenue decreased slightly from 20% of revenue to 19% of revenue for the quarter. All of the components of our operating expenses remained at about the same level as a percentage of revenues of prior year quarter, with the only exception being selling and marketing which actually decreased as a percentage of revenue 9% to 8% as we continue to leverage our sales infrastructure. Our operating income increased 17% over the prior year quarter. Our operating margin increased to 22% for the quarter compared to 21% last year, as we continue to leverage our resources.

The effective tax rate used for our provision for income taxes decreased to adjust our effective tax rate of 37% for the quarter, which compared to 37.5% of last year's quarter. However, this agrees with the adjustment we made in the fourth quarter of last fiscal year for the entire year, so it does really compare to a 37% rate. These adjustments in our tax rate, if you remember, were required due to some changes in some state tax laws and accounting rules.

Our net income increased 16% for the quarter compared to last year. Our share count increased due to the impact of the adoption of FAS 123-R the impact on EPS was more impacted due to the increased share count than the actual expense related to options which was clearly an insignificant amount.

Before I move on to talk about some of the highlights of the balance sheet, I would like to give an update on the companies we have acquired in the past couple of years, which obviously we've received a lot of question about. As you know, one of the basic things we typically look for and expect in most acquisitions with some exceptions is that it will be accretive by the end of the first 12 months, not for the 12 months, and then we look for an ROI in the second 12 months of least 10% with ongoing improvements from there.

Having said that, this is a high level view of how the 11 companies we've acquired in the last 18 months are doing. Two of the companies we've owned for more than one year and one of the companies we've owned for less than one year are already producing ROIs in excess of 10%. Three companies that we've owned for over a year are still less than accretive. One is at breakeven and should be accretive before the end of the calendar year. One is not far from breakeven and the other one will take a little longer just due to the nature -- and that is what we expected which is our bank insurance services. It just takes a while to build that volume.

These were the companies we knew that would take a little longer to get traction and they are still not far behind. We're right on course where we thought they'd be at this time. Also at least one of these we still expect to see the required ROI in the full second year. Three companies we've owned less than one year are currently accretive, and we are still expecting the 10% ROI in the second full year on all three of these. And finally, two of the companies we've owned less than a year are at about breakeven and we have all the confidence that they will be accretive by the anniversary date and produce as planned next fiscal year.

Couple of comments about our balance sheet. The majority of the significant changes compared to the same time last year, our cash and cash equivalents decreased 53%, which obviously is due to the acquisitions. However, we currently are in a very strong cash position with in excess of $50 million in the bank. Trade receivables have increased by 18% due to overall growth of our business.

Fixed assets are up 10%, other assets increased 68%, primarily due to the acquisitions in capitalized software. Accounts payable and accrued expenses are up 9% which is just due to the timing of business. Our deferred revenue which is reflective of our in-house maintenance which was pre-billed on June 30th is up 19%.

Just remember during the quarter we paid down our credit facility, which was at a balance of 45 million at June 30th and also we purchased 337,000 shares of stock during the quarter for the treasury. Our backlog has grown to 205.8 million with 63.4 million in-house and 142.4 million outsourcing, which represents an 11% increase over that of a year ago. Again, this represents another record backlog for us showing extreme strength in the outsourcing area.

With that, I will now turn it over to Jack Prim, our CEO, for some comments.

Thanks, Kevin. In spite of the fact that the first quarter of our fiscal year is historically our most challenging sales quarter, sales contracting was up significantly, over 25% from the same quarter a year ago. The mix of our business continues to drift towards outsourced or transaction-based pricing.

As we have discussed for several years now, the core system delivery preference on the banking side of our business is now predominantly for outsourcing rather than in-house. Additionally, we continue to see strong growth in our ATM/debit card business in excess of 40% from last fiscal year and our electronic bill payment volumes where we saw a nearly 200% volume increase than the last fiscal year.

Volumes in our Select Payment subsidiary continue to ramp-up with significant interest in remote deposit capabilities from banks both inside and outside of our core customer base. These outsourced and transaction-based pricing products are good news for those with a long-term view of the business due to the recurring nature of the revenues and the fact that we will drive more revenue during the customer lifetime than with our traditional license model.

I would also remind you as Kevin indicated that none of the contract values for ATM/debit card, bill payment or Select Payment volumes are reflected in any of the backlog numbers that we provide. Our acquired businesses continue to ramp up in volume and we continue to find synergies between the products. For instance, we will debut two products at our upcoming Banking User Group meeting that are built on the foundation of our Tangent Analytics acquisition.

These products will offer significant data warehouse and business analytic functionality for our Silverlake and CIF 20/20 customers at lower prices than available alternatives. We have already delivered similar Tangent-based value-added solutions with our Optinfo risk management and e-Classic ATM offerings. We remain confident that our acquisition strategy provides valuable products for our existing core customer base while providing us with excellent growth opportunities outside of our core customer base.

Now with that I'd like to turn it over to Tony Wormington to talk about some upcoming events.

Good morning. Next week we will be hosting our banking customers, business partners, vendors and prospective clients at our Annual National User Group Conference and Technology Showcase in Las Vegas, Nevada. This year's conference theme is Look Beyond. This is a perfect opportunity for our customers to learn about many of our new acquired or developed solutions to help them meet their banking challenges now and into the future.

We are expecting over 1,600 customers, over 200 business partner and vendor attendees, supported by 340 Jack Henry & Associates employees. Over 150 educational break-out sessions, most of which are repeated to provide attendance flexibility and to allow our customers to maximize the educational benefits of this conference.

Our technology showcase will feature all Jack Henry & Associates products and services whereby institutions can observe informal demonstrations. We'll be showcasing new solutions such as our Intelligence Warehouse and Intelligence Manager, Yellow Hammer's EFT Fraud module, Synergy's Intelligent Document Management Solutions, Stratika's relationship profitability management solution, Tangent Analytics Business Analytic Solution and TWS' ATM Deposit Management Solution.

In addition there are approximately 50 formal product demonstration scheduled throughout the conference agenda to allow for a more in-depth viewing of all Jack Henry products and services. This annual conference has historically generated significant leads for our sales organization just in time for customers to budget for their next calendar year. And we are confident that with the number of new solutions being unveiled, this year will be no exception.

Thank you Tony and Jack. That concludes the formal presentation. With that I would open it up for Q&A. Trish, would you please tell them how to do that.

Thank you (Operator Instructions). We'll first go to Bryan Keane with Prudential.

Yes, good morning. Kevin just update us, how many acquisitions are there now, that -- I know you talked about 11 over the last 18 months, but I guess how many are less than 12 months now?

Five. That'd be Verinex(ph) - actually -- no - yes, six. That'd be Verinex, which it's anniversary -- actually it's already anniversaried this month, Optinfo, TWS and Synergy which are both December, Stratika was in January 2nd and then Tangent which is in February.

Okay. And that group in itself looked like it did about 3 million in revenue in the quarter?

Yes, pretty close.

And if you add those five or six, is that about breakeven or are those six losing money still?

We've got three of those are slightly accretive Bryan, one of those is driving a very good ROI. However, the one that's driving good ROI, is Synergy, and that is if you remember that is the doctored imaging solution that replaced the products we had -- we shelved our product. So I'm not -- as far as the growth in that product for calculating organic growth any sale into our base of that product, I'm backing out because we would have sold our product in lieu of that.

Okay. And just from your comments it sounds like you are a little bit ahead of quota but there seems to be a little bit of a shift towards outsourcing. Does that mean the license sales revenue growth, if we look forward is that going to continue to lag the rest of the business and still be on a decline or should that pick up back to positive territory year-over-year?

Well, I mean honestly we budgeted a little higher software in this quarter what we actually saw, Bryan. We cannot control the buying decisions of our customers. We've been talking for three years about, it appears to have been more of a shift towards outsourcing and with some of the natural disasters we've had I think that that may drive even more potential outsourcing decisions over in house. Now having said that, we have budgeted for the increased licensing revenue, we've still got a lot of upside with the acquired products, with the Stratika and Tangent and some of the other products that we mentioned, so we still think that the license revenue will obviously move back into positive territory and hopefully by the end the year get back up to the 20% level.

Okay. And that's from looking at the backlog and looking at demand from what you've sold in the last couple of quarters?

Yes.

Okay. Great. Thanks.

Thanks Bryan.

Our next question comes from Paul Bartolai with Credit Suisse First Boston.

Thanks. Good morning. Just a follow up on Bryan's question, on the license sales. You said you still expected to get 20% revenue growth, is that as you exit the year or the full year in aggregate?

At this point for the full year in aggregate.

Are you still comfortable with that target?

Yes.

Okay. And then you commented on the credit union side that you're seeing smaller average deals. Could you just talk a little bit about what you think might be driving that whether that's kind of one off in the quarter or a trend you're seeing?

Paul, its Jack. The combination of just the way the deals fell as well as the fact that there are only some many larger credit union opportunities out there. And we have a larger number of the large credit unions as our current customers, and so there's only so many of those opportunities out there and only so many that end up in a transaction making a change in any given quarter or year. So again, I think a lot of -- some of it's timing and some of it that a lot of the larger ones have made some decisions already. So we expect to see a mix of those transactions, I don't know that I can predict exactly how many of which type.

All right. Great. And then just last, curious to hear, just any thoughts you may have on the Synergy and Fidelity merger. Thanks.

I don't have any thoughts. I'll let them talk about it.

All right. Fair enough. Thank you.

Thanks, Paul.

Our next question comes from John Kraft with DA Davidson.

Good morning, fellows.

Good morning, John.

I guess following up on the last question here, the number of deals -- core deals Kevin you said is -- were similar to what you saw last year but the ASP was smaller, and you've been talking about how those tended to be smaller FIs. Have you also seen some pricing pressure which contributed to that or are the trends in pricing similar to what you've seen in the past?

I don't think we have seen any significant pricing pressure, John. I mean, it was just a matter if they were smaller FIs that we delivered to this quarter than the same quarter a year ago. The only real pricing pressure, and we've talked about this before, is in the outsourced environment, and typically the pricing pressure comes from the incumbent to try to keep that customer. And that's typically on the bank side. On the credit union in-house side, we have not, which is what we're talking about, we have not seen an enormous amount of change in the pricing.

Sure, okay.

John, I just would add to that. I mean, we've get asked that question a good bit about what we're seeing in the pricing pressure. Certainly it is a very competitive market but in terms of, is the pricing pressure greater in this quarter or most recent quarters, then what it has been for the last two or three years, we don't really think so. It's been a competitive environment for quite some time - we anticipate it will continue to be -- but we are not seeing noteworthy changes in pricing in the market.

Okay. And then Kevin at the beginning of your comments you mentioned a significant outsourcing contract, if I heard you correctly. Can you shed some light on when that might get converted over to your platform? What maybe --?

John what I said was, we during the quarter in our contracting, we saw a significant amount of that was in the outsourcing, not a specific contract.

Okay, okay. And then how about recurring as revenue as a metric, you've been providing that the past. Do you have that offhand, what it was in the quarter?

During the quarter it was 63%, which obviously was up a little bit and that was driven partially because of the decrease in the license revenue, which obviously the decreased license revenue was on the credit union side. We expect that to come back. The banking license held pretty solid. So I would look for it to go back down going forward for the year, but by the end of the year, our recurring revenues should be up about 50% as hardware continues to become a smaller percent of our total revenue.

Okay. Thanks guys.

Thanks.

We'll now take a question from Tim Willi with AG Edwards.

Thanks. Good morning. Two questions. One, on the credit union side of the business, could you just give us any update on the, I think it was the US Central conversions, and sort of how that's progressing and any thoughts you have there about the roll out?

US Central continues to with some new management in place to look at some of the development projects and kind of decide whether they want to proceed on the path of certain development requirements we had versus other priorities that have come about now since this project has been going for two to three years. It is moving a little slower than we would like but we're working with US Central to re-address their new priorities and directions on development and anticipate that picking up steam again after the first of the year.

Okay. Great. Second question is on the issue of software verses outsourcing, with the experience you had now having a business model that sort of is offering both of those solutions, I'd be curious about any observations you might have as to when you sign up a new customer, do the outsourcing customers tend to take more products initially than a brand-new license customer because of the more attractive economics or is it vice a versa? Just any kind of characteristics you can sort of put out there about the propensity of one over the other to purchase more products sooner into the relationship?

Well, I think it depends a little bit, Tim, on the size of the institution that they have but typically a de novo or startup bank will take everything we have. Some of the larger institutions which have different systems that we don't currently either have or operate, we, they would probably continue running those and provide interfaces. So I think outsourcing, they're going to take more products on the outset but again it's going to take longer for us to get that revenue in the door.

Okay. Great. Thank you.

You bet. Thanks Tim.

We'll now go to Phil Mickelson with JP Morgan.

Good morning.

Good morning Phil.

Just a quick question on the -- you talked about the service and maintenance. You said that you're having good growth in that area. Can you kind of give some color in terms of the pricing dynamic on kind of your incumbent maintenance revenue? What is a typical kind of pricing increase in maintenance and how much of that is driven maybe by just the asset base -- that kind of thing?

Well, understand that support and services is made up four different components. One of those being our implementation revenue, the other three which make up our recurring revenue is our EFT/ATM debit switch services, our outlink which is our data and item processing solutions, and then our in-house maintenance. And to answer your question on the in-house maintenance, that is typically, depending on the product, 18 to 20% of the license fee. It's been several years since we've had a price increase per se, but every year we've repriced the maintenance based on the asset side of the institution so as the institution grows the maintenance goes up.

The nice thing is if license revenues is just flat year-over-year, we've got a nice 3% to 4% organic growth built in based on the maintenance revenue that we're billing those installations from last year. So that part of the growth - the part of -- the rest of it is just new product and the new maintenance on those. And obviously the EFT component is based on volume growth, which again as we'd indicated was over 40% last fiscal year. The outlink item and data processing is also based on account and in some cases transaction volume growth by the institutions as well.

Okay. And then switching gears, again, to the kind of the forecast for acquisitions, a lot of, rapid rate of deals last year and we haven't seen real big significant transactions in the last couple of quarters. Is that kind of a digestion mode for those acquisitions and is that going to -- as cash is coming in, is that going to be earmarked again for acquisitions this year? Or are we going to go switch that, to maybe some more share buybacks or maybe can you -- if you can just update us on where we are on the share buyback program?

Yes. Phil, I'll comment on the acquisitions, and let Kevin talk about the share buyback program. I think related to acquisitions, it is a case of continuing to look for acquisitions that meet the criteria that we're looking for, which are going to be acquisitions in most cases that have products that would be valuable and of interest to our existing core customer base, and ideally, products that would be strong enough in the market for us to be able to sell them successfully outside of our core customer base to other vendors' core customers who maybe perfectly satisfied with the core system that they're running, along with the financial guidelines that Kevin talked about earlier in the year, that they'd be accretive in the first year and generate a 10% return on investment within the second year.

So we are continually looking for acquisition opportunities that meet those criteria. I would say that if there has appeared to be a slowdown it's because we're still looking for the right candidate. We continue to believe that the best use of our cash is for acquisitions, where we can find the acquisitions that meet the criteria that we have.

Yes. I would add to that. Last spring, I think, we were in a digestion mode, but by summer we're actively looking probably -- I probably had 20-plus deals cross my desk this last quarter. But if they don't make sense, they don't make sense. It doesn't - yet - we're not going to go out and buy a company just to try and throw revenue on when it doesn't make sense and there is no synergies and it doesn't leverage anything. But we will continue to look.

The cash that we have, we will continue to -- it's not necessarily earmarked. Remember, we've got a fairly sizable credit facility in place so we could do a number of smaller acquisitions or a large acquisition if we need to go get more debt and build large so it makes sense, we'd be more than happy to do that. But again, it has to meet the criteria that Jack stated.

During the last two quarters we acquired about -- or repurchased about 900,000 shares of stock. We'll continue to be opportunistic as the stock price dictates. And we'd -- more than anything have that stock repurchase plan in place to help protect our shareholders' value in the event that something would happen to our stock price or if there was a large block of stock hit at one time that would drive price down.

And Kevin, do you have the current authorization and what you have used to that current authorization?

Yes. We actually have a 5 million share authorization and we've repurchased 2.9 million of it back.

All right. Thank you, guys.

Thanks.

Our next question comes from Carla Cooper with Robert W. Baird.

Hi. Good morning. I had a couple of questions, just housekeeping. What was headcount in the quarter?

Headcount was 3,148 total, 3,020 full-time.

3,020 full-time, okay. And then, my second question was you may and that -- you may get this at your conference, but I wondered maybe Jack or Tony could comment on just how you think that your financial institution customers are approaching calendar 2006 in terms of what they're thinking about with budgets? Are they thinking very bottoms up - they've got certain priorities? Are you seeing them more skittish or more conservative given what's gone on with the economy?

What my perspective and what I've seen is -- this is Tony -- is that they're looking to purchase products that will generate income for the institution, fee-based income that sort of thing, also looking for products that will generate efficiencies and reduce costs for the institution. Those are the two primary things that, I think, I would say that they're looking at. I would also state that, obviously, with the Yellow Hammer acquisition we did last -- a year ago spring, we've seen significant interest in that product. It continues to have significant interest and we'll also be rolling out the new EFT module for the product solutions as a part of that suite that it can be purchased as well so significant oversight by the regulatory agencies are driving a lot of volume in that area as well.

I think one other thing would be our Optinfo product for risk management is going to get a lot of attention, especially from the larger financial institutions for compliance issues and even as far as Sarbanes-Oxley.

And Carl, one other comment that, I think, potentially bodes well for us the Bank Insurance Services product that we offer in the flat yield curve environment that is getting in lot of discussion right now. Banks and credit unions are looking for additional fee income opportunities and additional ways to grow organically. And that's that we're hoping that that will put some additional spotlight on our BIF offering.

Okay. And then, my next question is just the profitability in the quarter was really excellent. And I - a lot of the commentary behind that was, it was about operating leverage. I guess, the question is really sustainable. Do you think that's going to bounce around, or have we hit a new plateau from which you'll continue to improve from here?

Well, I mean, obviously, Carla, it can bounce around from quarter to quarter but, I think, we should continue to see improvement by the end of the year. I don't know how huge it's going to be, but our managers did a spectacular job this year -- or this quarter controlling headcount, I mean, our headcount -- full-time headcount only went up 31 employees during the quarter. They did a lot of upgrades to get -- make sure we've got the right people. And we're still hiring people. We still got a need for additional headcount. And then it comes down to timing of -- chicken and egg. You got to get people in before you can do the additional in -- sort of support. So it is going to bounce around. But I -- we are pleased with the margin and very proud of them and I think they are sustainable.

Got it. Thanks very much.

Thanks, Carla.

(Operator Instructions). We'll go next to Nick Fisken with Stephens.

Good morning, everybody.

Good morning, Nick.

If we've beat the quotas, then why is sales and marketing as a percent of revenue the lowest it's been in five quarters?

Because the commissions, which is the biggest part of sales and marketing, Nick, does not get recognized until we actually recognize the revenues. So it's sitting in prepaid commissions on the balance sheet.

So give us an outlook on that line item?

Well, I mean, we're obviously down as a percent of revenue down by 8%, and we expected -- what drives a lot of that commission expense, Nick, is software, because, obviously, that's the biggest ticket that drives commission expense. So as software goes back up, you're going to see selling and marketing, again, go up as a cost. However, we hope to maintain it as a percentage of revenue at the 8 to 8.5% level, where we've been for the last two -- couple of years before we did the acquisition. Because we're - we're continuing to get leverage from the outside of the base sales force that we put in place last spring.

And if you look at that 20% fiscal year '06 license growth, what's going to get better to hit that number?

Well, I think there are number of things. I mean, one it's -- obviously, we think that we're going to continue to get more core footprint. The other thing is some of these additional add-on products, for example, the TWS product management, the Synergy, document imaging, Straticka profitability, the Tangent analytics, which we're just ready to roll that out it's in beta. As Jack mentioned, we're going to show that at our User meeting.

There is some product there that all drive license revenues that all are significant enough dollars that they need to be in the CapEx budget. So those are things that were not in this year's budget for credit unions that we think will be in next year's, which will drive a lot of software. In addition to that, the Yellow Hammer Software, which Tony mentioned, we just now rolled that out this quarter into the credit union side. And we're just now rolling the Straticka profitability into a beta site on the credit union side. So -- and all those are very nice license revenues, which we think will pop that back up.

So how much you're going -- the add-ons that I think are totally there, but in terms of the core improvement, what are we banking on there as a core possessing center?

Primarily, the number of deals that are in the pipeline.

And mostly credit union, bank, kind of even split?

Well, I mean -- obviously, I mean it's for the pipeline, yes, it's probably a fairly even split. I mean, obviously, we're in more bank deals, because we've just got a bigger base out there. But if you think about it, on the credit union side still the majority of the deals that we're in or that are in the pipeline are in-house deals. On the bank side, I mean, we're in a lot of in-house deals but the number of deals in the pipeline are skewed more and more each quarter to outsource versus in-house.

And Jack, if I look at the credit union side, the revenue growth has been 5, 6% in the last couple of quarters, and the margins went down sequentially, and the reason you said were lower SP -- ASP on the core side, I was telling you had some tough comps on the add-on side. Was there anything related to the management change there, that affected the September quarter?

No, Nick, really nothing that affected that there. I mean, we continued to have good sales quarters as we were transitioning through some of the - management, I think did a good job of managing the expense levels through that as well. We've got a solid group in place there and I'm confident with the management direction that we have out there now that's -- that's only going to improve.

Yes. And Nick one other thing, I mean, you said the last couple of quarters, but if you remember, the fourth quarter that we announced in August was horrible comps because in the fourth quarter of '04 we had the largest license revenue quarter in the history of the company on the credit union size, in fact it was almost double what any other quarter had been previous to that.

Right. Okay. And then Kevin, CapEx for fiscal year '06 -- and if you can split it between maintenance and then projects, investments?

At this point right now, Nick, it looks for maintenance is somewhere in the high 20s -- mid to high 20s. And CapEx, obviously, there are still some decisions that need to be made on some different things we're looking, but probably in the low teens.

Great. Thanks so much.

You bet.

We'll now go to Glenn Greene with ThinkEquity Partners.

Thanks. Hi Kevin. Hi Jack.

Good morning.

Just following up on Nick's question on the license sales, I just to make sure, I understand that. I mean I've heard it twice but. Kevin, you articulated being comfortable, sort of, 20% aggregate growth for the year, which by my math means almost 100 million license revenue for the year, which would mean you'd sort of have to average 27 million or 28 million a quarter for the balance of the year, which is - a heck of a ramp from the first quarter.

Is this a question of you have the timing of license sales that didn't close in either September quarter that you're convinced you're going to close going forward? I know you talked about some of the add-on products, but I'm just trying to get a sense for A) am I thinking about that right, and how do I get more comfortable with that?

Well, I mean, I agree, there was still Glenn -- yes, there is going to be some significant ramp up going forward, especially with a lot of these add-on products and, for example, our Optinfo product. We're in a project right now and we're putting that in -- what Jack, a $69 billion bank --

80.

-- $80 billion bank. And we're developed a template there, so now we can take that out and market to others. And that individual license is and is the first time sales based on $1 million of software. And when you throw a lot of the other add-on products on there are still fairly new that we're displaying at our User meeting next week that, that hopefully will be in the bank's CapEx budget, we should and we fully expect to see a steady ramp up for the next three quarters in license revenue.

Okay. And then going back to another question, it's actually related to Carla's question, but taking as it is slightly different. If you, sort of, think about the bank's spending outlook going into '06, and not necessarily in terms of what products they're focused on, but what's the, sort of, the temperament out there when talking to your clients relative to where it was six to nine months ago and sort of, their willingness to spend on IT?

We haven't seen any significant change in the amount of set and the spending outlook. There is an awful lot of press about the flat yield curve and what does that mean and it's one of those things, I guess, you can keep talking about it enough and sooner or later people will start ringing their hands over it. But the outlook that we're seeing out there now, and again the sales contracting in the most recent quarter being 25% ahead of our retainment plan, we think it speaks to the fact that they're still a good environment out there and in particular for some of products we have that can help the institutions drive additional fee income and/or reduce costs. We think those are the kinds of things they'll be focused on.

And then just one final, quick housekeeping. Thinking about the acquired revenue for December quarter, Kevin roughly 3 million or so?

Yes, probably. I'm mean, we've got two or three of these that are now going fully, fully into the organic mix this quarter. But, yes, it should still be close to 2 million, 3 million.

Okay. Thanks.

Thank you.

We'll now go to Pete Heckmann with Stifel Nicolaus.

Good morning, gentlemen.

Hi, Pete.

Could do, Kevin, could you walk us through Centurion and what type of activity they had in the quarter, and exactly how that model works? Whether there is a -- it has a disaster declaration fee or incremental fees related to some of the additional facilities and what type of costs you might have seen in the quarter?

Well, Pete, I mean first of all, we had a huge contract in quarter -- this quarter for new customers for Centurion Disaster Recovery. But the way it works is they actually pay us an annual fee, which goes into deferred revenue, which we amortized into revenue over the year. And that's basically a fixed fee based on the size of the institution that they pay us on an annual basis. Then in the event of disaster if they declare a disaster then they do pay us a declaration fee. If they do use one of our facilities than they pay us an additional fee. And if they use our people in the facilities, they pay an additional fee for that also.

So -- and can we quantify what type of magnitude we might have seen from the -- from that hurricane activity? Was it significant in the quarter?

No. No, I mean it was pretty small. I mean that the fees are not that huge, Pete. I mean we had quite a few banks and credit unions that were impacted, but we try to price that service so when they're already down we don't want to hurt them anymore. So it's not a huge fee. It's not highly profitable for the declarations, but the Centurion Disaster Recovery business is a very nice model and very profitable for US on an annual basis.

And Pete, I would add, in terms of any cost that we incurred those were minimal, if any. I mean it was essentially the facilities were there, the equipment is there, our people that were involved worked some extra hours. But any cost that we would have seen as a result of combining as customers would have been minimal. I think that if anything, the upside is in the likelihood of new Centurion annual agreements being signed as a result of A) the wake-up call that Katrina and Rita caused and for some customers who may not have had our service and may have used a different service.

There is a very -- it's a very different environment when you are walking into a Jack Henry facility with people who know the application software and are wide area connected to every expert in the company on hardware, software, operating systems, application software. Compared to walking into a sterile facility, which has hardware ready if you have the people that know how to make it run and they're available and not impacted by the disaster such that they can't get there to make it run. It's a very different environment in our shop and I suspect that some people probably came to that realization as they executed some disaster recovery plans at other facilities who may now want to talk to us more about our offerings.

Okay.

And Pete, one other thing. I would say that our biggest expense was actually making sure that our facility in Houston had everything battened down and that we were ready to sort of complete fail over to our backup systems to make sure that we continue to support our customers on our ATM/Debit switch services, which is how - out there in Houston and also we've got a large data center there with the number of banks that we will make sure that not only our banks were taken care of but also there are people taking care of the suite. That was probably the largest expense, that plus the company match that we did for payroll deductions for the Katrina relief fund.

Okay, okay. Am I correct in that part of your comfort in the outlook for the credit union space, that that there is still six, seven, eight corporate credit unions that are in the conversion backlog for this fiscal year? Isn't that correct?

In terms of this fiscal year that is probably correct.

But understand, Pete, those are all outsourced,

Right, right.

So I mean even when they get converted you're not going to see a big pop in the revenue side.

Yes. But in the aggregate there, I mean, there are material new pieces.

Yes.

Okay. And what was that number from Sys-Tech in the year-ago period? I missed that.

It was 2.5 million.

2.5 million.

And I'll tell you that -- that the impact in the December quarter is a little over 1.5 million of that type -- revenue that was in the December quarter that will not be there this quarter.

In fiscal 2Q.

Yes.

Okay. Last question and I'll let someone else come in. Is there -- so the numbers that you reflected here fully reflect the option expensing, and can you give us a little bit more idea of exactly how that flowed through?

Yes. I mean the option expensing is obviously in there, Pete. And it is --for the year it's roughly $0.01.

Okay.

So it is less than a quarter of a penny this quarter. And as you -- I'm sure about the call have seen and in our proxy statements, we are asking our shareholders to approve a restricted stock plan that we will use for a performance-based grant to employees going forward and not use options. So, two things; one we can control the actual impact of the P&L and second -- secondly it'll be much less dilutive.

All right. Thanks.

Thanks, Pete.

And gentlemen, it appears there are no further questions at this time.

Okay. One question that didn't get asked and I know somebody will call me this afternoon and ask me, so I'll go ahead and answer it. Some of the products -- company products that we sold during the quarter, image products, we sold 32, which is down a little bit from the fourth quarter but very comparable with the first half of last year. Our NetTeller we sold -- we licensed 49 during the quarter with several nice competitive takeaways in there. And I will tell you that CRM, we contracted for three during the quarter and PowerPay just blew right through the roof though the quarter. We sold almost twice as many PowerPays for our own internal bill-pay solution as we did NetTeller. So just to cover that in case somebody wants to know that later and they forgot to ask it.

As a recap, again, we want to thank you for joining us today to review our first quarter '06 results. We're very pleased with the overall finance performance during the quarter. Net income growth is on track to attain the 20% increase this year. Cash flow from operations is up 20 million from this quarter last year or 23%. Backlog is up 11% and does not reflect, remember, any of our transaction-based revenue products. We remain confident that we're very, very well-positioned and we have the right products and services to approach both the bank and credit union market and other financial services markets.

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 our shareholders. Again, thank you for joining us this morning. And with that, Trish, would you please provide the replay number.

Sure. Thank you for joining today's conference call. If you'd like to listen to a replay of this call, it will be available from 11:45 Eastern Time today through midnight, Wednesday October 26. The dial-in number, if you're dialing from the U.S. is 888-203-1112. And if you're an international caller, please dial 719-457-0820. And the confirmation code is 4701463. You may disconnect at this time.