Jack Henry & Associates Inc (JKHY) 2006 Q2 法說會逐字稿

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  • Operator

  • Good day and welcome to the Jack Henry & Associates second quarter earnings conference call. This call is being recorded. At this time I would like to turn the call over to the Chief Financial Officer Mr. Kevin Williams. Please go ahead sir.

  • Kevin Williams - CFO

  • Good morning and welcome to the Jack Henry & Associates second quarter fiscal 2006 earnings conference call. Statements or response to questions may be made in this conversation which are forward-looking or deal with expectations about the future. Like any statement about the future these are subject to a number of factors which could cause actual results to differ materially from those which we anticipate. Such factors are disclosed in our recent SEC filings. There can also be other factors not included that could potentially cause results to differ materially.

  • Good morning again. We are extremely pleased to report the financial results for second quarter fiscal 2006 ended December 31, 2005. Our results that we are reporting reflect a very solid increase in revenues, continued improvement in gross margins, a strong balance sheet with significant leverage opportunities remaining 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 regarding our Company's performance which will be followed by Tony Wormington, our President, who is going to provide some of his thoughts on certain aspects of our business. However, I will first do an overview of the quarter just ended and some of our financial related highlights.

  • During the quarter just ended we had a very solid revenue growth of 8% with a 13% growth in just the combined lines of licensed and support and services revenues without considering the large decrease in hardware revenue year-over-year. Which the net effect of this was to raise our revenues to $147.4 million for the quarter. This compared I believe to the consensus reported estimate on NASDAQ of $149.1 million, based on that it appears we were about $1.7 million shy on total revenue. However we were approximately $3.5 million shy on hardware which means we exceeded expectations for licensed and support of service which is obviously our highest margin lines of revenue.

  • Our hardware revenues as we had been discussing for some time will continue to be relatively flat if not declining, and in total dollars as more institutions choose our outsourcing model as their choice delivery method and more and more of the complement of products we are currently selling do not require significant additional hardware as with a core in-house solution. Included in the 8% revenue growth is 6% organic growth and therefore 2% growth from companies that we have owned less than 12 months.

  • Our license revenue is down 6% compared to the same quarter a year ago; however this is being compared to the largest license revenue quarter in the history of the Company. I think it is also important to note that sequentially over September quarter our license revenue increase 23% over that period. Also for the quarter compared to the prior year our support service revenue grew at very solid 21% which is comprised of organic growth in the support service line of 20% with only a 1% increase in the quarter from those acquired companies we have owned less than 12 months.

  • Also as you will recall discussing in prior quarters we changed the contract terms for our Sys-Tech group in the prior year for pass-through costs of construction and hardware related revenues which we got out of these businesses last fiscal year. There was still some impact in this quarter and taking those -- that impact out of this quarter last year, we would have had a 10% revenue growth compared to the 8% revenue growth noted before.

  • The companies that we have acquired over the past 24 months have continued to progress mostly according to plan. As we stated last May at our Analyst Day we expect in excess of $50 million in revenue from these companies this fiscal year. I'm happy to report that we are ahead of plan in that regard. Again this should be one of the areas of greatest revenue growth, margin expansion going forward, both the gross and operating margin lines. Also I would point out that 9 of the 12 acquired companies continue to be either at plan or well ahead of plan considering both inside and outside base of sales. And two of the remaining 3 are very close.

  • Select Payments, our merchant capture solution and Stratika profitability both are making very good strides which Tony will be sharing some of his thoughts on Select Payments and our other electronic payments here in a few months. But our Stratika profitability sales pipeline is looking extremely strong and we expect it to be at or ahead of plan by the end of this fiscal year. The one remaining is Bank Insurance, and it is improving but it is just taking a little more time to build the volume of insurance premiums flowing through our pipeline required to get the commissions, but we still think this is a very solid business model.

  • We continue to see strong gross margin expansion in both segments by leveraging resources at our existing infrastructure, improvements to operating process and procedures and also especially in the credit union segment by continuing to sell higher margin product and services like our EST services and outsourcing for data processing.

  • Our total operating expenses increased 17% for the quarter and as a percentage of revenue increased slightly from 20% to 21% of total revenue for the quarter. Selling and marketing as a percentage of revenue went down slightly from 9% to 8% as we start to see some leverage from those sales groups that we gained through the acquisitions. Our R&D remained at the same percentage of revenue. G&A increased by 37% or about $3 million this quarter compared to last quarter which is slightly ahead of what our internal budget was. The increases year-over-year are for maintenance and other costs associated with our new PeopleSoft enterprise solution, user group expenses being higher than they were last year, stock option expense related to FAS 123-R was about $260,000 in the quarter, so it is still less than $0.01 impact for the year. And the largest contributor to G&A and the primary reason we were over budget for the quarter was the G&A associated with the acquired companies which the majority of this was from the Profitstar acquisition which we have not owned long enough as of December 31 to obtain the synergies we fully expect to obtain in the future.

  • Based on our solid margins we continue to believe that all of our managers continue to do a very good job of controlling their respective operating costs while focusing on improving procedures and continuing to improve customer service. Our operating income increased 22% over the same quarter a year ago; operating margin increased 23% for the quarter compared to 21% last year as we continue to leverage our resources.

  • The effective tax rate was 37%, the same as it was last quarter compared to 37.5% last year. Our net income increased 22% for the quarter compared to last year. And we also believe we're still on track to hit our 20% net income growth for the year.

  • On the balance sheet we had a nice increase in cash compared to last year primarily because we have not made near the number of acquisitions this year that we did last year. Our trade receivables are up 17% due to the overall growth in the business related to multiple billings for processing, contracting and transaction fees. Our deferred revenue which is for prepayments for in-house support and maintenance is up 12%.

  • A couple of comments on backlog. Our contracting continues to be very strong especially for our service offerings. The significant contracting is somewhat reflected in the backlog. Both in-house, which remember in-house is for assigned contracts for license, installations and hardware only, and our outsourcing which is backlog which reflects a fraction of the remaining minimum guaranteed payments for data and item processing contracts with no EFT debit processing, PowerPay or Bill Pay and Select Payment which some merchant branch capture contracts are included in this backlog due to the difficulty to conservatively estimate transactional revenue especially in these fast-growing parts of our business. Our backlog has grown to $213.8 million with $63.8 million in-house and $150 million outsourcing at December 31, which represents a 10% increase over that of a year ago and a 4% increase over that of last quarter.

  • I would also point out that our in-house backlog is down 7% or $4.7 million from that a year ago with well over 90% of this decrease is due to hardware reflected in the backlog. So based on this and other signals we continue to say that our hardware is going to continue to become a smaller percentage of revenue. However, software licensing and installation services in the backlog continue to be extremely strong. And also this is another record backlog for us.

  • With that I will turn the call over to Jack Prim our CEO.

  • Jack Prim - CEO

  • Thanks, Kevin. We are pleased with the overall performance in the quarter. We feel like it is noteworthy that while the delivery preference for core systems on the banking side of our business continues to be for outsourced rather than in-house delivery, license fee revenues this quarter were the third highest in our 30-year history. And at the comparison quarter a year ago was our highest.

  • We continue to see solid interest in all areas of our electronic processing products which Tony will comment on and further detail. We have a strong reception to our recently released Yellow Hammer frog products for our Symitar credit union customers. Additionally we are seeing strong interest in our business intelligence products built on the Tangent Analytics acquired productline in both our bank and credit union markets. And a growing prospect pipeline for our Stratika customer profitability product.

  • Our most recent acquisition, Profitstar in Omaha Nebraska, brings us a company with a great reputation, incredible C-level contacts in over 2000 banks and credit unions throughout the United States. Our acquired businesses are contributing higher revenues than we have suggested at our annual Analyst Meeting last May. We expect this trend to continue with increased emphasis on that group's sales force structure and focus and branding initiatives by our marketing department to increase our visibility as a provider of software and services to financial institutions that do not use a J2J core system.

  • With that I'll turn it over to Tony Wormington for some further comments.

  • Tony Wormington - President

  • Good morning. We continue to be very pleased with the strong interest in all the components of our recurring revenue which include outsourcing, in-house maintenance and our ATM debit card processing. Prior capital expenditures and hardware, software and infrastructure continue to bring leverage to our margins in these areas. Aligned with the current outsourcing trend in the banking segment we are well positioned to continue to take on significant growth in our data and item outsourcing businesses for both direct banks and credit unions? As Jack indicated we continue to see solid interest in all our electronic processing solutions. Compared to a year ago ATM debit card processing volumes increased 34% and bill payment transaction volumes increased 70%.

  • As with our outsourcing business we continue to take on increasing volumes with minimal investments due to existing infrastructure and the nature of these electronic processing solutions. Compared to last quarter the number of financial institutions installed with our Select Payment ASP solution for remote deposit processing increased 46%, as well as the merchants installed and utilizing the ASP has increased by 149%.

  • As the number of relationships continue to increase we expect to see similar increases and transaction volumes. Additionally we continue to see volumes increasing monthly for our check image exchange offering and with substantially all the required infrastructure in place we stand to benefit from the volume growth predicted by many to occur in the next several years.

  • Jack Prim - CEO

  • Thanks Tony. With that, Rachel would you please open it up for questions?

  • Operator

  • (OPERATOR INSTRUCTIONS). Our first question will be from Tim Willi with AG Edwards.

  • Tim Willi - Analyst

  • Kevin, two questions. One, could you maybe talk a little bit about the trajectory of revenue growth in the coming quarters in terms of the internal growth rate. Which it sounds like sort of on a true net basis might have been closer to 8% when you make the adjustments for those contract changes. And sort of maybe where you see that going if you can even though I know you haven't given '07 guidance -- if you are able to look even just a couple of quarters out and give some general commentary.

  • And the second question I had is could you talk a little bit about Yellow Hammer sales in the quarter and how that might have compared to prior quarters?

  • Kevin Williams - CFO

  • I think that our total revenue should accelerate somewhat in the next couple of quarters Tim as sequential growth. And the reason for that and the primary reason for that is one, I think our license revenue is going to continue to go up a little bit. As Jack mentioned we continue to see a much larger demand for outsourcing in the space. We are going to continue to tweak our numbers a little bit. I do think that license revenue should go up sequentially -- you know possibly close to 10% for the next two quarters. I think hardware will remain relatively flat and with hardware remaining relatively flat year-over-year compared at about the 20 or $21 million range, I think there is where you're going to see the revenue accelerating because we don't have those tough hardware comparables from a year ago when we were selling an enormous amount of ISeries and tSeries.

  • Tim Willi - Analyst

  • And then regarding the Yellow Hammer sales?

  • Kevin Williams - CFO

  • The Yellow Hammer -- I don't know that I have the exact number that we sold or contracted on it, but I will tell you that we are in the first half and this is both in-house and outsourcing Tim, we've have probably sold 70% of total contracts last year already in the first half of this year.

  • Tim Willi - Analyst

  • And if I could sneak in one more, could you just help me remember the impact of acquisitions in the coming quarters? You said it was about two percentage points of the growth this quarter. Is Profitstar really the only remaining acquisition that will be impacting you going forward and can you give us some sort of rough figures on the revenue for that?

  • Kevin Williams - CFO

  • After the March quarter Profitstar will be the only one that we haven't owned for twelve months because Stratika we bought January a year ago, and Tangent was February a year ago. So both of those were rolled into our organic growth in the March quarter. Profitstar is -- their annual run rate is somewhere around 8 possibly $9 million a year right now. The thing about the Profitstar acquisition as Jack mentioned that brings us in relationship with over 2000 financial institutions at the C-level, which only about 500 or 600 of those were Jack Henry existing customers. So it gives us a whole bunch of new relationships and that sales group is not only going to be selling the Profitstar products but they are also going to be selling our Stratika RPM profitability solution. So we expect a ramp up from those revenues that we bought when we got that company.

  • Operator

  • Paul Bartolai with Credit Suisse First Boston.

  • Paul Bartolai - Analyst

  • First question just on the support and services margins; certainly seen some nice moves there the last couple of quarters. Can you just give us some sense of what you expect going forward and how much of this is sustainable?

  • Kevin Williams - CFO

  • Well, obviously that, Paul, that depends on the mix of sales in a given quarter. Like I have been saying I think we will continue to see nice margin improvements year-over-year in the credit union side. I have said for a year that I think eventually the credit union gross margins can get up in line or exceed the bank margin and we are getting close. And I will tell you that we have had some turnover in senior management in the last 12 months; change is good. We are getting some new operating process procedures in place that are helping to drive margins out there. We continue to get a very strong sales effort for our EFT debit card solutions on the credit union side which carries pretty nice margins. And the outsourcing business on that side continues to do well. So, can the margins stay at 44% next quarter? I don't know, it depends on sales mix. But I think unless barring a large acquisition we can continue to see a trickle of increased margins as we go forward in time.

  • Paul Bartolai - Analyst

  • I guess just to follow-up on that on the license side, I mean with the acquisitions you have done there and reselling less of other people's software, is 94, 95 kind of where we should continue to see that?

  • Kevin Williams - CFO

  • For the margin on the license?

  • Paul Bartolai - Analyst

  • Yes.

  • Kevin Williams - CFO

  • Yes, because, I mean we are still selling a voice response system on the credit union side and we are still selling the ARGO relationship which we split that license revenue thin. And we are starting to see some pretty good activity out there for the ARGO product that goes in line with our Silverlake solution. So that is a pretty high ticket item. I am not sure what the average sales price is of ARGO's key product. It is probably well over $1 million. Of which we split that revenue with them. So in a given quarter if we deliver one or two of those in a given quarter that can have an impact on the license margins. But the license margins should stay well above 90%, yes.

  • Paul Bartolai - Analyst

  • Okay, great, this is last question; on uses of free cash flow can you give us an update there? Are we now more in a mode of integrating and digesting all the deals that you have done in the past year or two and what your thoughts are on share repurchases?

  • Kevin Williams - CFO

  • Share repurchases, I mean we had a board meeting last week and basically they said that to continue to being opportunistic and buy the stock at reasonable levels we will continue to buy some shares back. If nothing else to try to offset the impact of options that are out there which obviously we're not bringing any more options. As far as free cash flow, I mean the integration efforts we got all the companies pretty much integrated, the one that is left is Profitstar. This quarter has always been a tough quarter from operating cash flow perspective. In the first quarter we bill for the annual maintenance which brings in a lot of money, a lot of cash comes in. We have significant tax deposits that have to be made during this quarter which has a negative impact on our operating cash flow. Particularly our March quarter and June quarters both are fairly strong operating cash flows which obviously impact our free cash flow.

  • Jack Prim - CEO

  • Paul, I would just add as Kevin indicated we've pretty well got the acquisitions integrated; continuing to emphasize some of the focus of the sales staff on some of the newly acquired companies to continue to leverage those opportunities. But much like being opportunistic with our share buybacks we would also continue to be opportunistic with acquisition opportunities that might present themselves. There are not a lot of holes in our product line that we have to go out and fill so the kinds of acquisitions that make sense for us we have to study those and figure out if they really are the right thing to do or not. But we still have an appetite for acquisitions if we can find those that meet the criteria that we have for an acquisition.

  • Operator

  • Kartik Mehta, FTN Midwest Research.

  • Kartik Mehta - Analyst

  • A question on the hardware, is that just a function of if you look year-over-year -- is that just a function of you had a great last year rather than demand and (technical difficulty) incentives by manufacturers? I know in the past incentives have caused financial institutions to buy.

  • Kevin Williams - CFO

  • I think that is part of it, I mean the iSeries was a fairly new platform a couple of years ago so there was a lot of banks that were upgrading from the old AS/400 to the new iSeries. And obviously IBM has not come out with a new model for a while but I think that is about to change. Hardware just continues to get cheaper and cheaper. Banks can buy an iSeries that will do twice as much for half the money as they have (technical difficulty) would three years ago. But I think then the other thing is as we continue to see more and more banks and credit unions (indiscernible) banks selecting outsourcing there is no hardware that goes with that. And the fact that we anticipate good solid license revenues from some of these acquired companies but they are the type of products that don't drag hardware sales along with them.

  • Jack Prim - CEO

  • And there is also a factor Kevin mentioned, that he commented on the incentives that the manufacturers offer and that can drive some things. There is periodically technology changes as they come out with new models that at some point you pretty well have to go along with the upgraded model. And there just haven't been any of those of late that said the following models will be discontinued or no longer upgradeable or whatever the factors are. So that could change at anytime, that's typically roughly a three-year cycle that you see new hardware coming out that will require some type of operating system upgrade or those types of things as well.

  • Kartik Mehta - Analyst

  • I think if I heard the number right for electronic bill payment growth you said 70%. If that is the right number is that growth just the result of organic growth in that particular marketplace or is that because you're taking marketshare?

  • Jack Prim - CEO

  • I think the reference to 70% had to do with primarily transaction volume growth in the, in our bill payment segment. It is a combination of moving customers from alternative bill payment solutions. It is also a factor of more customers within the banks adopting bill payment. So in other words, if you look at the number of average bill payment customers that a bank or credit union has a year ago and look at it now the number of active Bill Pay customers has increased within the banks. And we are also seeing increases in the number of payments made by the active Bill Pay customers year-over-year. So it's a combination of all of those things. Taking customers away and more people adopting bill payment and writing, doing more electronic transactions.

  • Kevin Williams - CFO

  • And the beauty part of the Bill Pay is that as we continue to get more and more volume which means we can leverage our infrastructure and still get quality support, that also the percentage of electronic payments versus us having one of our data centers create paper check continues to improve. So the revenue went up 70% and I will tell you that the margins went up well over 100%.

  • Kartik Mehta - Analyst

  • And kind of a last question Kevin you talked a lot about what is not included in your backlog. So how do you think the backlog is reflective of your potential revenue or is that number become a little bit obsolete considering all the things you don't include in there? Or can't include in there?

  • Kevin Williams - CFO

  • I think the number becomes a little obsolete because when you look at our EFT business, I mean if we were to look at the minimum guaranteed in that business similar to what we do in the OutLink divisions, our outsourcing, I mean the numbers are probably comparable. In Select Payment and Bill Pay those things are growing so fast that it is hard to even predict what those are because you are starting -- especially with the Select Payment you are starting with zero volume when you sign a contract. But yes, I agree totally, I think our backlog is somewhat obsolete. It does give -- still should give you some indication that we are at least signing up more new outsourced customers than what is rolling off into revenue in a given quarter. In the in-house piece should continue to show you that we continue to have pretty good contracting on the in-house side even though the hardware backlog is down.

  • Jack Prim - CEO

  • And it's particularly difficult to try to compare it to backlog calculations from other vendors because of the way people count differently. For example, as Kevin indicated we don't include maintenance in ours; some people include five years worth of maintenance in their backlog calculation. But obviously as you commented on some of our highest growth and highest margin items like bill payment and ATM EFT are not counted in the backlog. But even the traditional outsourcing item and data processing outsourcing which is counted in the backlog is counted in the backlog at a reduced rate. Typically 30% off of what they are actually going to be paying us day one, and it is very rare that a bank or credit union would go on a data center and not increase their volumes as time goes on rather than decrease them. But in spite of that we typically come in 30% lower than what they are paying us the day they go on the system. My point being that as we continue to see the trend towards outsourcing for data processing even though that reflects increases in the backlog, it doesn't adequately reflect just what that part of the business does let alone the high-growth, high-margin types of items that we don't include there.

  • Operator

  • Philip Mickelson with JPMorgan.

  • Philip Mickelson - Analyst

  • Just wanted to first of all get a quick update on one of your acquisitions you made, Verinex. I know you talked about some of the other products in there but was there any kind of progress made on Verinex? I think it was a little slow out of the blocks.

  • Kevin Williams - CFO

  • Verinex continues to be moving a little slower than what we would like to see, our existing relationship with Cardinal Health continues to be very solid. We are seeing more adoption within the bank and credit union markets. It has been a little slower from adoption from the standpoint of again what we had hoped to see in the bank and credit union space. You read various surveys that are out there as to what the likely adoption rate is going to be within those industries. It has not been as robust as we would like to see but we still are very pleased with the product. The customers who have adopted it love it. And we are trying to get them help us figure out how to tell the stories so that other people will see what the potential could be for them.

  • Philip Mickelson - Analyst

  • And then the improvement in the acquisitions, the acquisition I guess related net revenue was that more of a function of just the familiarity -- the salespeople getting up to curve? Was it kind of new initiatives to push those products? Was there any kind of sale -- change in sale strategy along those lines?

  • Jack Prim - CEO

  • Not really change in sales strategy; we have commented before Phil that with some of these -- many of these small companies -- the sales organizations are not managed in the way that we are used to seeing sales organizations manage. Some of them may not have even had a quota -- go out and sell as much as you can. Others may have had quotas -- may or may not have been obtaining those quotas. So a lot of what we have done since bringing in [Steve Thompson] to head up that sales organization is to focus on sales staff to be sure we've got the right players in place. To make sure we have got the right sales processes and procedures being followed and just basically focusing and professionally managing the sales organization. When you hire a -- when you acquire a small company with three or five employees and the president is also the sales guy it is just a little different ballgame. So it is a combination of taking some of those products, rolling them into our sales staff that can sell them into our base and getting the right players on board to sell those products outside the base.

  • Kevin Williams - CFO

  • And also getting some cross training put in place because as Jack mentioned a lot of these small companies, they only have the knowledge to sell their product that they had through relationship. So we are through Steve Thompson's direction we are getting some cross selling and getting multiple products in a salesperson's briefcase so they can go back to the relationships and have additional products to sell which will drive additional revenues for us.

  • Philip Mickelson - Analyst

  • And then just on a broader note I guess, what is your as you wrapped up the year, the banks' spending growth rates you are anticipating maybe within your guidance or the way you look at budgeting for the business? In kind of the credit union side and then maybe contrast that with the banking side, is credit union still a higher growth market? Or maybe give us a little color on what to expect this year?

  • Jack Prim - CEO

  • Well, Phil I don't know that we have any scientific surveys or processes to go out and assess that. A lot of the surveys that we read out there forecast technology spending in banks and credit union markets in the 4% kind of annual year-over-year range. We are not seeing anything that leads us to believe it is going to be dramatically different one way or the other. It is probably slightly higher percentage in the credit union space but pretty much I would agree with most of the industry assessments out there.

  • Philip Mickelson - Analyst

  • And one last thing is kind of the conversion of paper to more electronic transactions, can you size up the exposure you have to check processing or the paper and is there a trend now at least in the near-term of more banks outsourcing to you guys in that side? Or is that a business that is flat or declining? And can you highlight the products that make up for if there is a decline in check processing?

  • Kevin Williams - CFO

  • The number of paper checks per institution is decreasing but our volumes and at all our item centers continues to grow because we add additional customers to them. But as far as exposure, I think with Check21 coming out, I think we are going to continue to get more volume and that will drive additional electronic type processes for us and transactional revenue for us. But as far as exposure even if paper checks would go away tomorrow we have very little capital cost that we could not redeploy because all of our IT shops are either in owned facilities or in operating lease arrangements and we could redeploy the iSeries and reuse sorters in those facilities to use in other places. If nothing else in our security and disaster recovery site.

  • Jack Prim - CEO

  • I think we will likely see our volumes be very slow growth or flat as far as the items that we are processing in our item centers. But much like the banks as those paper items go away there is labor associated with handling those paper items that also goes away. So while revenues associated with processing paper checks may be flat or potentially declining at some point, your margins can potentially improve because of the fact that you are handling those electronically. The other thing to keep in mind to turn a check into an electronic item there still has to be an entry point into the system somewhere. Either the financial institution has got to have some type of capture device that is turning that into an electronic transaction which benefits us through the sales of our check imaging products to banks and credit unions that want to run their item operations in-house.

  • Or they have got to hand those checks to an item center like the ones that we run for us to turn that into an electronic item to get it into the system in which case we still benefit there. And being positioned with the remote deposit capabilities and other elect and the bill payment where we are going to see those types of moves to electronic processing, with the strength of the offerings that we have there. What we may see again in flat or at some point declining paper volumes in our item centers should be offset by very nice growing high margin business in some of those other areas.

  • Operator

  • Nikolai Fisken with Stephens Inc.

  • Nikolai Fisken - Analyst

  • The EPS for March in the June quarter you said in years past basically take the 20% on the prior year quarters, is that the right thing to do Kevin?

  • Kevin Williams - CFO

  • Yes, I think the consensus estimate out there I believe right now of 25 and 28 for next two quarters and at this point I am comfortable with both those.

  • Nikolai Fisken - Analyst

  • And how much stock did we buy back in the quarter? Do you have shares out at the end of the quarter, either one?

  • Kevin Williams - CFO

  • You know what Nick, I don't have that with me. I'm sorry.

  • Nikolai Fisken - Analyst

  • What is our internal growth embedded in the guidance for the rest of fiscal year? Stay around the 10% range?

  • Kevin Williams - CFO

  • Yes.

  • Nikolai Fisken - Analyst

  • And then if we look at fiscal year '07, I know it is a little bit early and you don't like to comment about it but I will give it a shot. If we don't acquire should that internal growth go down because you have been -- we have gotten those acquisitions -- those acquired products sold into the customer base?

  • Kevin Williams - CFO

  • You know Nick you are right. It is a little early for me to comment on that but the beauty part is I will tell you we are as Jack mentioned, we are just now starting to see good traction with Yellow Hammer and some of the other fraud solutions in the credit union space. And the business analytics, I mean we just rolled that out this quarter and are seeing a lot of interest. So I think in the acquired companies we are going to continue to see very solid growth next year over this year. A very high percentage. And the typical banking and credit union businesses can slow, can grow in the very low single digits. We can still have some very nice growth in '07 without any acquisitions.

  • Nikolai Fisken - Analyst

  • And how about our outlook for G&A for March, June quarters?

  • Kevin Williams - CFO

  • G&A should drop back down in both those quarters; you know well over $1 million from where it is this quarter. So I think we are at 11 million this quarter? I mean it should drop back down in the $9 million range.

  • Nikolai Fisken - Analyst

  • And last question for Jack, comments on the in-house environment, any changes since the last quarter?

  • Jack Prim - CEO

  • No, it is pretty well tracking as it has been for some time. In-house delivery on the credit union side is still the preference. Outsource delivery on the banking side remains the preference and I don't see anything near-term that is going to change either one of those. I would not be surprised if you took a three-year view on the credit union side just to see potentially more emphasis on outsource delivery in the credit union side. Because all the same factors that are at work on the banking side, the technology environment, complexity, FFIEC requirements for multifactor authentication. All these things that these folks are having to deal with, you know I think at some point will impact the credit union area as well. But there is a long-standing preference in the credit union space for in-house delivery over outsource, but there was a long-standing preference for that in the banking space up until three or four years ago. But anyway next two quarters, next 18 months I don't see any significant change there but longer term I would not be at all surprised to see more interest coming from the credit union side in outsource delivery.

  • Operator

  • [Tom Lamb] with Weybosset Research.

  • Tom Lamb - Analyst

  • It looks like licensing revenue will be pretty strong in the mix, licensing revenue growth will be pretty strong in the next couple quarters. Could you give us a sense of where that growth is deriving from in terms of a product mix perhaps?

  • Kevin Williams - CFO

  • I don't think it is going to change much in product mix from the way it has been for the last six or eight quarters; somewhere between 60 and 70% of that growth is going to be add on complementary products. Both those that we have had for a long time we developed internally and those that we've acquired in the last two or three years with the other 25 to 30% being in-house core solutions for both banks and credit unions.

  • Tom Lamb - Analyst

  • And would the preponderance of the licensing revenues be derived from banks or credit unions?

  • Kevin Williams - CFO

  • Both. I mean we continue to see high interest levels for all of our products, especially our primary products on both sides of the house. In-house core solutions we continue to see very high activity levels on the credit union side and we are picking up more prospects to sell especially in the mid-tier space on the banking side.

  • Operator

  • (OPERATOR INSTRUCTIONS). Kathy Steinbrecher with Wedbush Morgan Securities.

  • Kathy Steinbrecher - Analyst

  • Just a couple of questions. On the acquisition versus organic growth, do you have the numbers for the percentage of revenue from acquisitions versus organic growth maybe a year or so back when you were making more acquisitions versus what you're looking at today and into the future?

  • Kevin Williams - CFO

  • Kathy, I do not have that with me. But I will tell you that if we don't do any more acquisitions by the end of this next quarter, 95% plus of our growth is going to be organic.

  • Kathy Steinbrecher - Analyst

  • And what was that in -- no idea what that was a couple of years ago?

  • Kevin Williams - CFO

  • Not off the top of my head. I mean two years ago before we made all these acquisitions, all of our growth was organic. Because we had not made an acquisition for to speak of probably since the '01 or '02 time period.

  • Kathy Steinbrecher - Analyst

  • In the press release it was mentioned that the gross margin leverage was primarily through the outsourcing of electronic payment infrastructure but it also mentioned process improvements. Could you give us a little bit of color on that?

  • Jack Prim - CEO

  • Kathy we continue to look at how we do things and whether we can improve the quality and level of service that we are providing and do it without throwing more and more and more people at the problem. You know whether that is training, whether it is better tools, things of that nature. In particular in the credit union side of our business, we have been very successful, have been fortunate to have very strong growth in that business here after year after year. Some of our processes there were very good five years ago when we were maybe handling a third to one-half the number of annual conversions that we were handling but quite frankly they were beginning to stress the organization. We spent a good bit of time going back revisiting some of those processes and procedures that we're using there as well and we're seeing improvements in installation quality; we are seeing improvements in customer service. And again being able to do that with existing headcount instead of having to just continually hire and apply more people to the projects.

  • So generally speaking those are some of the kinds of things that we are looking at. There are other process improvements that we make in various parts of the business. For example in the payment processing, in the Bill Pay organization where there is still some percentage of those payments that are done by paper check, even though a customer on their PC is making an electronic payment, some of those can be actually processed electronically, some cannot. So we continue to look at ways we can improve the processes related to those paper transactions. In some cases that may involve outsourcing to an organization that has got a more substantial and therefore lower cost printing and production type facilities. So it is ongoing looking at all areas of the business and trying to figure out is there a better way to do this.

  • Kathy Steinbrecher - Analyst

  • Would you say that some of the increase in operating costs were a result of improving processes and maybe those processes are improved, helped your gross margin, however going forward we will see even more of an improvement? Or is it incremental?

  • Kevin Williams - CFO

  • I don't know that you can tie the operating expenses to this because most of what Jack was talking about would be above the gross margin line in those operations. You know below the line those are -- I mean I mentioned the enterprisewide PeopleSoft conversion was an increase in our G&A. We do expect to get some long-term gains from that as we have got the CRM solution for all of our CFR's. We converted the HR payroll piece January 1st and we started the back office financial piece, actually the conversion yesterday. So we should be totally live on that solution by the end of this quarter so we do expect to get some leverage there on the operating side. But the improvements that Jack is referring to are truly operational and not our back office.

  • Kathy Steinbrecher - Analyst

  • And I am not sure if you actually have these numbers but do you have a breakout of the bank and credit union revenue and cost available?

  • Kevin Williams - CFO

  • For the quarter?

  • Kathy Steinbrecher - Analyst

  • Yes.

  • Kevin Williams - CFO

  • Yes. The bank revenue was $117.8 million and credit union was $29.6 million.

  • Kathy Steinbrecher - Analyst

  • I was thinking about a little more color in terms of the breakout of license support and hardware, in the banks segment as well as the costs associated with those.

  • Kevin Williams - CFO

  • On the bank side licenses 14.6, for the services 88.6 and hardware is 14.7. Related cost license is 0.6, support services 53.9 and hardware is 10.2. And on the credit union side the revenues are 6.2, 18.0, 5.4 and the related costs are 0.5, 12.5 and 4.3.

  • Operator

  • Glenn Greene, Think Equity Partners.

  • Glenn Greene - Analyst

  • First question just relates to the overall competitive environment. Obviously with Fidelity acquiring Certegy and clearly they made a number of acquisitions over the last 12, 18 months what not. The level of to the degree -- what have you seen in terms of the level of integration that they have done and have the competitiveness of their products has it increased. Are there any changing in pricing dynamics? And also Fiserv when they talked about in their conference call that they were seeing pretty good strength in the core sales in both the bank and credit union side. And it may be too early to tell but obviously they brought in a new CEO and are you anticipating any changes in the way that they are thinking about going to market?

  • Jack Prim - CEO

  • Well Glenn, Fiserv is certainly a solid competitor in the one that we see most consistently everywhere that we go. Then we see other players in certain markets. I don't have any color on the Fidelity Certegy process and what that means. We have not as of yet seen anything as a result of that in the marketplace. It is a competitive marketplace, has been a competitive marketplace for many years, don't see anything particularly different in the marketplace in terms of pricing dynamics or anything that we have seen as of yet related to the Certegy Fidelity merger. Don't know what Fiserv's new CEO's plans are. I'm sure he is trying to digest a lot of things right now and it may be a while before we see what comes out of that. But as of yet it continues to be business as usual from all of the traditional players that we see out there.

  • Glenn Greene - Analyst

  • And Kevin on the credit union side the growth picked up very nicely from the last quarter -- couple of quarters were kind of like mid single digit growth. And you had a real nice pickup this quarter and especially with a difficult comparison it looked like. And also the margins ramped up nicely. Was there anything unusual in the quarter or what drove the strong results for the credit union side this quarter.

  • Kevin Williams - CFO

  • I don't think there's anything unusual Glenn. There was two very significant drivers, one of those is in-house maintenance and we -- not to be confused -- we did not increase maintenance but we were getting the impact of some of those large credit unions that we installed over the last 12 to 18 months. We're starting to see that maintenance revenue come in which is causing very nice growth in that line. And then EFT business continues to get extremely good traction in the credit union side and I will tell you that the contracting in the credit union side and even the bank side for this quarter for EFT just continues to be extremely strong. Which obviously that was noteworthy maybe that will be future revenues when we they get those converted and installed in the next six to nine months.

  • Glenn Greene - Analyst

  • So the kind of growth that we saw (technical difficulty) sustainable next couple of quarters?

  • Kevin Williams - CFO

  • Yes, I think it will be.

  • Glenn Greene - Analyst

  • And then just finally you typically provide us with certain metrics for the ancillary products and you might have given some on the call, but in the Internet banking CRM sounds like Bill Pay was up 70% and if you could just run through the EFT debit metrics.

  • Kevin Williams - CFO

  • The Bill Pay 70% Glenn, understand that was actually revenues, in transaction volume from the Bill Pay solution. The -- some of the product that we talked about, image deals, and again all these are both in-house and outsourced, we signed 40 new deals for image. We signed 54 new NetPower home banking which is up nicely even from last quarter and continues to be a very solid seller. PowerPay we sold about the same number of new PowerPay or Bill Pay customers that we sold new NetPower deals and then CRM in the quarter we signed three new deals. With one of those being ARGO. And if you don't mind Glenn I will go back to while you're on here, to one of Nick's questions. I just had it handed to me. We repurchased 350,000 shares in the quarter so year-to-date we repurchased 687,000 shares or in total since we started buying back stock last May we bought back 1,241,000 shares.

  • Operator

  • There are no further questions at this time.

  • Kevin Williams - CFO

  • Thank you. One thing I would like to tell you all is so you get it on your calendars is our annual Analyst Day is going to be dinner on May 9th and the Analyst Day on May 10th. And we are sending -- you will be getting a link out on the Web sometime in the next few weeks to register for that. It will be in Dallas, Texas again in Las Colinas. And we're going to have a small technology fair on May 9th to let you all see some of our products. We're going to have at least five of our new products set up and demo'd there. So please get that on your calendar.

  • And then to wrap up again we want to thank you all for joining us today to review our second quarter '06 results. We are very pleased with the overall financial performance during the quarter. Our net income growth is on track to attain the 20% increase this year that is one of our goals, contracting continues to be very solid with backlog being up 10% over a year ago. And again this does not reflect any of our transactional based revenue. We remain confident that we are very well positioned; that we have the right resources and the right product to go after both the banking and credit union and other Tier 1 financial institutions. And with that, Rachelle would you please give the playback number.

  • Operator

  • Yes. Thank you for joining today's conference call. If you would like to listen to a replay of this call it will be available from 11:45 AM Eastern time today through midnight Wednesday February 8. The dial-in number in the U.S. is 888-203-1112 and internationally 719-457-0820. The confirmation code is 6879104. Thank you for your participation and you may now disconnect.