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Operator
Good day, everyone, and welcome to the Jack Henry & Associates third-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 third-quarter fiscal 2006 earnings call. First of all, I'd like to start out by telling you that we've got some severe storms here in the Midwest. So I just want to give you a warning in case the phone service would get dropped for any reason because it's some severe thunderstorms going on.
Statements or responses to questions may be made in this presentation 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 pleased to report the financial results for our third quarter and first nine months of our fiscal 2006 ending March 31, 2006. Our results that we are reporting reflect a solid increase in revenues, especially in our services revenue; continued improvement in gross margins; strong balance sheet with significant leverage opportunities; and a solid backlog compared to the same period last year.
In a few minutes of Jack Prim, our CEO, is going to share some of his thoughts regarding our Company's performance followed by Tony Wormington, our President, with some additional comments regarding the quarter and year-to-date. However, first I will do a brief overview of the quarter just ended and sum our financial-related highlights. During the quarter just ended we had solid revenue growth of 8% or 12% growth in just the combined lines of license and support services without considering the decrease in the hardware revenue which the net effect was to increase total revenue to $145.5 million for the quarter and just under $430 million for the first nine months.
Hardware revenue is down 10% this quarter and 12% year-to-date compared to the prior year. As we have been discussing for some time, this should continue to be relatively flat if not declining in total dollars as financial institutions continue to purchase more processing power for less money and also more financial institutions, both banks and credit unions, continue to choose our outsourcing model of delivery for a wide variety of reasons and more and more of the (indiscernible) products we sell do not require significant additional hardware as in the case with an in-house core solution which requires significant hardware.
Included in the 12% non-hardware revenue growth is just over 10% organic growth for the quarter in the non-hardware revenue considering the Company that we have owned less than 12 months which was only one company in there which is ProfitStars. Our license revenue decreased slightly by 2% compared to the same quarter a year ago, which this includes a record license revenue quarter in the banking segment at $17.4 million. However, this was offset by a decrease in the credit union segment compared to last year. However, last year's comparable quarter was the second-highest license revenue quarter for the credit union segment in the Company's history.
During the quarter and year-to-date we are ahead of last year's contract for new bank core customers and are on track with about the same number of new core credit union customers for both the quarter and year-to-date. However, with such a high penetration in the larger credit union, which we own 30% roughly of the billion plus credit unions, the contracting this year has been to new customers with average assets significantly less than the average last year which obviously this had a significant impact on the average license margin on a specific deal.
Also, we have had better success this year than last at contracting more credit unions to our outsourcing delivery model which obviously this does not generate license revenue but it is good for long-term shareholders because it's long-term revenue growth. The good news is we continue to win a significant number of new core deals and some of our newer (indiscernible) products are creating a lot of interest in both the bank and credit union space which means good license revenue in the future.
For the quarter compared to the prior year our support and service revenue grew a solid 15% which represented a record services revenue quarter for the bank segment and the second-highest services revenue for credit unions second only to the prior quarter in December. The companies that we acquired over the past 30 months have continued to progress pretty much as planned. As we stated last May at our analyst day we expected in excess of $50 million contribution of revenue from these companies and we continue to be ahead of that plan in that regard.
Again, this should be one of the areas of greatest revenue growth and margin expansion going forward, both the growth than operating margins as we continue to grow the revenue and leverage the infrastructure and the sales organization. I believe both Jack and Tony have some additional comments regarding some of these products following my presentation.
We had a very nice increase in gross margins in the banking segment from 42 to 45% as we had increases in both license and support and services margins offset by a small decrease in hardware margins which is obviously the smallest revenue component. The credit union segment had a decrease in gross margin from 44% to 37% caused by the decrease in license revenue compared to last year's quarter. However, support and service margins increased from 20% last year to 28% this year which is due to the increased EFT debit transactions, the increased outsourcing and continued leverage over infrastructure as well as continued focus on processes and procedures to continue to deliver high customer service.
Total operating expenses increased 10% for the quarter and, as a percentage of revenue, increased slightly from 23% to 24% and remained flat at 20% of total revenue for the first nine months. Selling and marketing went down from 9% last year to 8% this year as we continued to see additional leverage from the sales groups that we gained through the acquisitions over the last 30 months.
R&D remained at the same percentage of revenue as the prior year for both the quarter and year-to-date. G&A increased by 19% or about $1.3 million. However, this is slightly lower than our internal budget for the quarter and we are right on target with our budget for the fiscal year. As a percentage of total revenue G&A increased slightly from 5% to 6% for the quarter but remained level at 6% year-to-date.
Based on our continued solid margins at both the gross margin operating margin lines 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 prudent procedures and continuing to improve customer service. Our operating income increased 12% over the same quarter a year ago. Operating margin increased to 24% for the quarter compared to 23% last year, again, as we continued to leverage our resources and infrastructure.
We adjusted our effective tax rate as of March 31st to reflect the new manufacturing deduction for our effective federal tax rate and we have performed a revaluation of our effective state tax rates based on our corporate structure and the actual states that all of the Jack Henry subsidiaries file tax returns in during the quarter. We made the entire adjustment during this quarter which is what caused our effective rate to be lower for the quarter.
We believe that we will end up the year at approximately 35.5% effective tax rate which is what we adjusted the first nine months to as of March 31st. However, there may be additional adjustments in the future depending on when and if Congress puts the R&D credit back in place. So there could be some additional adjustments, but it depends on if and when they put that back in place. Our net income increased 12% for the quarter and 20% for the first nine months -- or 21% for the quarter and 20% for the first nine months compared to last year.
On the balance sheet, we had a nice increase in cash compared to last year as we've not done as many acquisitions. Our trade receivables increased by 25% due to the overall growth of the business related primarily to monthly billing for processing, contracting and transaction fees. Our deferred revenue, which is primarily prepayments for in-house support and maintenance, had deposits on hardware and software orders have increased 11% from last year due to the increased annual billing last June 30th and the additional software implementations during the year.
Our total backlog increased 8% compared to a year ago. And I just want to remind you that there is nothing in our in-house backlog for in-house maintenance on institutions yet to be installed. When we do implement an in-house customer we build in a prorated amount and it goes into deferred revenue on the balance sheet and not in backlog. Also there's nothing in our outsource backlog for the EFT debit transactions, bill pay transactions or merchant capture transactions which are some of our fastest-growing offerings -- which the reason we don't put these in there is the challenge of trying to estimate the future growth of the revenue related to these. With that I will turn the call over to Jack Prim for some comments on our performance.
Jack Prim - CEO
Thanks, Kevin. We continue to see strong growth in our services business with solid volume growth in all of our electronic transactions processing businesses. While credit union segment license fees were lower than expected in the quarter, banking segment license fees showed strong growth and the services component in both segments were up nicely. The recently announced in-house wins in the mid-tier banking market and continuing sales activity in that area bode well for future performance.
Our acquired businesses continue to contribute revenue at or above expected levels. Our recent ProfitStars branding strategy has been well-received in the market and helps bring focus to our diversification strategy as a provider of software and services to financial institutions that do not use a Jack Henry core system. Our ProfitStars group today does business with all of the top ten banks in the United States and 40 of the top 50. 380 non Jack Henry core customers have signed a contract with one of our ProfitStars companies so far this year.
These acquired products are also being well-received inside the Jack Henry banking and credit union customer base. We've had strong reception to recently released business analytic offerings for our CIF20/20 and Episys core platforms based on technology from our Tangent acquisition. We now have an ASP delivery capability for our ATM manager product that came with our e-Classics acquisition that will make this product available to a much broader audience.
And our enterprise exception management system acquired from Optinfo has recently received industry recognition from Tower Group as a product that "should be on every short list for reconciliation and exception management projects" and is showing potential inside our customer base in addition to its more traditional presence in Tier 1 financial institutions.
At the same time our managers continue to do an excellent job of aligning expenses with revenue flow and longer-term services revenue continues to become a larger component of our total revenue. I'll now turn it over to Tony for some additional details on specific areas of our operations.
Tony Worthington - President
Thanks, Jack. As reported in last quarter's call, 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 EFT services. 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 banks and credit unions.
We continue to see the trend of increasing electronic transactions. Our ATM debit card processing volumes continue to increase compared to prior year quarter at a rate of 34% and bill payment transaction volumes increased 74% in the same period. As with our outsourcing business we continue to take on increasing volumes with minimal investments due to the existing infrastructure and the nature of these electronic processing solutions.
Additionally, we continue to see volumes increase for our check imaging exchange offering which will continue to support our long-term support and services growth. Compared to last quarter the number of financial institutions installed with our select payment ASP solution for remote deposit processing increased 53% as well as the merchants installed and utilizing ASP have increased by 244%. As the number of relationships continues to increase we expect to see similar increases in transaction volumes.
As Jack mentioned, we are seeing strong interest in the mid-tier banking market with our flagship product, Silverlake. We assigned two significant wins in recent months with additional interest in the pipeline. We believe there are two primary reasons for growing interest and the increasing market share this system is capturing and the rewarding levels of client satisfaction and retention among these banks. First, Silverlake is a competitively distinct, extremely powerful banking platform that provides highly flexible enterprise wide automation; and second, Jack Henry is driven by a fundamental commitment to provide each client with outstanding service. I'll now turn the call back over to Kevin for any additional comments and questions.
Kevin Williams - CFO
Thanks, Tony. With that, that concludes our formal presentation. Kerry, we'd open up for Q&A now.
Operator
(OPERATOR INSTRUCTIONS). Kartik Mehta, Midwest Research.
Kartik Mehta - Analyst
Good morning, Kevin. I just had a question on the license revenues. I wanted to find out and I think at the last quarter you said you thought it would be up 10% sequentially and it seemed like the backlog was strong enough. I'm just wondering, has there been a change maybe in the fundamentals of the credit union marketplace or did something else happen to have a little bit lower revenue growth?
Kevin Williams - CFO
It was a couple of things, Kartik, on the credit union side. Obviously the bank side was -- actually exceeded our expectation for the quarter. But on the credit union side, as I mentioned, the average asset size deal that we did this quarter and actually year-to-date is about half the asset size deal we did in the prior year for the same nine months and quarter. And the average license margin is about 60%. And then also we find a significant increase in the number of the outsourced credit unions. In fact, earlier this year we had a $250 million asset size credit union that went outsourced which is not really heard of in today's market.
So I think we're starting to see some of the same shift in the credit union side that we have seen for the last couple years in the banking side that more and more credit unions are going to start considering outsourcing. So the license revenue on the credit union side was significantly less than what I had thought it was going to be on our last earnings call; but again, even then I didn't think it was going to be at last year's level. But it was significantly less and part of that was just due to an increased number of the outsourced transactions and just the average asset size deal.
Now having said that, I feel very good about, as Jack mentioned, the business analytics product and the Yellow Hammer fraud solution that we've just rolled out in the credit unions space. In fact, the business analytics just came out of its first data and there is an enormous amount of excitement in the credit union side out there and both of those drive some pretty nice license revenue. So I don't know that we're going to see a significant increase in the fourth quarter in license revenue on the credit union side over this quarter sequentially, but I think it bodes extremely well for next fiscal year with some of these additional products that are starting to get traction on the credit union side.
Kartik Mehta - Analyst
So Kevin, if you could talk about maybe what you think from a margin standpoint, an outsourcing deal versus license -- obviously outsourcing is better in the long-term. But how long does it take to get to the same margins and what would you anticipate?
Kevin Williams - CFO
Obviously the difference is the flow of revenue. The margins actually -- by the time you get through the first full year the actual gross margin could still be higher on the outsourcing side. By the time you blend the margins on the hardware and the low margins for installation with the high margins of software compared to the margins we get in an outsourced environment -- by the end of the first year the margins are going to be basically equal if not higher towards the outsourced side.
Kartik Mehta - Analyst
And one final question, Kevin. With the tax rate -- would you expect the same type of tax rate for '07?
Kevin Williams - CFO
Yes.
Kartik Mehta - Analyst
So about 35.5 or the lower?
Kevin Williams - CFO
Again, right now it looks like it's probably going to be about 35.5, but again that depends on whether they put the R&D credit back in because everybody knows that last at December 31st and Congress did not renew that in their first tax package that came out. We're waiting for the second one. So if they put that in and retro it back to January 1st before June 30th, you could see another slight decrease in our effective tax rate at June 30th. However, if Congress doesn't put back in place or even if they wait until after June 30th, then you won't see it reflected in our effective tax rate. We'll just have to pro forma the financial statements according to FAS 109.
Kartik Mehta - Analyst
Thank you very much.
Kevin Williams - CFO
Thanks, Kartik.
Operator
Paul Bartolai, Credit Suisse.
Paul Bartolai - Analyst
Good morning. First question, on the support and services revenues, particularly given the trend you're seeing towards more credit unions moving towards outsourcing, I was a little bit surprised that that was down sequentially in the quarter. Are you seeing anything different on the competitive environment or on attrition rates?
Jack Prim - CEO
Paul, this is Jack. No, the competitive environment really is pretty much unchanged, same players that we've been seeing for the last two or three years. Attrition rates, no, we have not lost any Episys customers to competition, so really no particular changes in either of those areas.
Kevin Williams - CFO
The biggest difference in this quarter and the December quarter, Paul, was there was not quite as much implementation revenue in this quarter which obviously (indiscernible) margin revenue in the support and services line. Every other component increased nicely quarter over quarter.
Paul Bartolai - Analyst
All right. Then given the strength on the bank license side, anything in particular driving that and do you see that continuing?
Kevin Williams - CFO
I think it's a number of things. One is just all the products that we've put in our sales guys' hands over the last couple years. And as Tony mentioned, we continue to get nice traction in the [FI] space. We put a press release out a week or so ago about our win up in Ohio which none of that revenue has been taken yet. There was another press release that hit the wires early this morning about an FI or mid-tier win down in Texas that was signed at the end of last quarter. And we did get part of the revenue from that in this quarter and the majority of that will be spread out over the next nine months. So I think the banking side of the house, the license revenue looks very strong going forward, the pipeline looks strong both for in-house and outsourcing.
Paul Bartolai - Analyst
Okay. Then last question. Just any comment, Kevin, on guidance? I think the consensus is $0.28 for the fourth quarter.
Kevin Williams - CFO
Obviously with where we've gone with the credit union side, Paul, $0.28 is going to be a stretch. I think there's some out there at $0.27. So it's possible we could hit $0.28, but $0.27 is probably more realistic.
Paul Bartolai - Analyst
All right, thanks. We'll see you tomorrow.
Operator
David Koning, Robert W. Baird.
David Koning - Analyst
Good morning, guys. You mentioned implementation revenues were a little bit lower in Q3 than in Q2 and that's really what caused the sequential decline in revenue. I'm wondering maybe if you can discuss a little bit about the margins. Those did look down sequentially and if implementation was the lowest revenue piece or lowest margin piece was lower -- I would have thought that maybe gross margins would have been stable or maybe even up sequentially.
Kevin Williams - CFO
Well, the gross margins on support and services increased in both segments. In the credit union side year-over-year -- and you're talking about sequentially, aren't you?
David Koning - Analyst
Yes.
Kevin Williams - CFO
I'll have to look at something else. David, do you have another question while I'm looking that one up?
David Koning - Analyst
Yes, sure. I guess the follow-up question would just be last quarter I know there was a drag on internal growth up from (technical difficulty) I think there were some past revenues that were in the prior year period but not in the Q2 period. I'm wondering if that was still a couple percent drag in Q3.
Kevin Williams - CFO
On the [Systech] side?
David Koning - Analyst
Yes.
Kevin Williams - CFO
Yes, there was about -- in total about 1% revenue drag.
David Koning - Analyst
Okay.
Kevin Williams - CFO
There's about $2 million and this should be about the last quarter that there's anything in there. By the end of the fiscal year in this next quarter that should be down to just a couple hundred thousand dollars.
David Koning - Analyst
Okay. And I guess also on internal growth -- for the total business, was internal growth about 6% for the total business?
Kevin Williams - CFO
Actually it was about 7%. The ProfitStars acquisition added about 1%.
David Koning - Analyst
Okay. And I guess one more follow-up while you're looking for that. CapEx and capitalized software was a little over 10% of revenue in Q3. Your competitors are kind of running 5 to 7% of revenue and I just wondered if you could maybe comment a little bit about that too?
Kevin Williams - CFO
Well, part of the CapEx is all the companies we've acquired. We've got a lot of development efforts on these products and, as you know, the R&D expense went up significantly this quarter over the same quarter a year ago. Part of that is because during the quarter some of the development efforts went into beta so we stopped the capitalization and obviously the R&D expense kicks in. The reason it's so high is just because of all the products we had in development through all the acquired companies and all the internal projects we already had going on which would include [JExchange] and IWIM which is a business intelligence solution and a lot of product that we have rolled out over the last three to six months.
David Koning - Analyst
Okay, great.
Kevin Williams - CFO
David, I'm going to have to get back with you on the margin question. I just don't have the answer right at my fingertips. I apologize.
David Koning - Analyst
No problem. Thanks for the help on the other question.
Operator
Philip Mickelson, JPMorgan.
Philip Mickelson - Analyst
I was wondering if I could drill down again on the credit unions especially could you guys, was a timing of the larger deals, was that just a timing issue or some deals that pushed out why we're not seeing as many large deals? And can you kind of comment on the credit union pipeline and how we should think of that going forward?
Jack Prim - CEO
Bill, this is Jack Prim. I think what is going on is really more of a reflection of the industry realities around credit unions and changes that we have made to deal with those. If you look at the 9000 credit unions in the United States, there are only about 2000 of them that are above 50 million in assets. Our Episys product plays well at the higher end of that market. You can segment those 2000 credit unions above 50 million anyway you want to, 50 to 100, 100 to 250, 250 to 500 however you want to slice it up, and our Episys platform is the industry leader in every segment in terms of the percentage of credit unions running on that platform compared to any other platform out there. But traditionally we have been stronger at the higher end of the scale.
But there is only just over 100 credit unions above $1 billion in assets. We already have 30 of them. Our competitors have some that have installed in recent years and aren't likely to make another change anytime soon. So the bottom line is you've kind of got to go where the opportunities are. Almost 40% of those 2000 credit unions that are above 50 million in assets are between 50 and $100 million in assets and while we still have a lead in that segment in terms of the percentage that use our system, our lead is the narrowest in that particular segment of the market. You've got another third of those credit unions above 2000 that are in the 100 to $250 million segment.
So we're still highly competitive and the industry leader in the higher segments of the market, but there are going to be and have been more opportunities in some of the lower segments of the market. We've changed some of the processes and procedures that we use with our Episys product to make it attractive to some of the lower tiers or more attractive to some of the lower tiers than we have historically been. So bottom-line I think we will remain competitive at the higher segment. I think we will continue to have an industry leadership position in every one of those segments, but there are likely to be more opportunities in terms of numbers of transactions in some of the lower segments of the marketplace.
Pipeline wise, again, still involved in a lot of deals, still seeing very good activity in the credit union space. But it -- for at least the next quarter if not the next couple of quarters, I think those transactions are more likely to be along the -- between the 50 and $250 million kind of asset range transactions.
Philip Mickelson - Analyst
And that's a comment that's just regarding just straight core replacements or core conversions -- besides the additional product that you sell into those credit unions?
Jack Prim - CEO
Correct. Yes, I'm just referring to the actual core transaction sales. We're continuing to bring additional products to market over there that will help in terms of sales into our existing customer base and to the new customers that we will acquire. And again, depending on the mix of outsourced versus in-house transactions, that can have an impact as well.
We're not seeing at this point the kind of preference for outsource delivery in the credit union space that we're seeing in the banking space. We are seeing, as we did this quarter in any event, more interest in outsourced delivery but, again, not nearly to the extent of what we've seen on the banking side. But the same factors that I think have influenced some of the delivery preference on the banking side are at work in the credit union space as well.
Again, don't expect to see it move quite at the levels that we have on the banking side, but it is entirely possible that our mix of in-house versus outsource may have more outsource content in it than what it has historically had in the credit union space.
Philip Mickelson - Analyst
Are you still maintaining your -- we'll talk about this at the analyst day tomorrow as well -- but your growth rate's still in the low teens for topline growth? And should we think of that more at the lower end because of this whole -- more migration from outsourced transactions from in-house license deals or how should we think of the growth rate going forward?
Jack Prim - CEO
Growth rate going forward -- probably would be a little lower than what we have historically projected based on some of the transaction sizes and some of the outsourcing content makeup in the credit union side. At the same time we're seeing, as Tony indicated earlier, stronger traction in the mid-tier banking base which could offset that to some extent. Kevin, I don't know if you have any comments on the topline revenue growth expected going forward?
Kevin Williams - CFO
Obviously we expect to see the same type growth in the support and services line this quarter as we've seen year-to-date. Revenue or the license revenue, it should be up slightly over the fourth quarter last year and part of that, again, depends on the credit union side. I think the banking side of the house is going to far exceed the fourth-quarter license revenue last year. The credit union side -- and obviously this is based on everything we've been talking about -- I don't think it will get up to the level last year. But combined we should still see some year-over-year license revenue growth. Hardware -- it should be probably flat to slightly down from last year.
Philip Mickelson - Analyst
And lastly on the hardware revenue, how much of that is pricing-related in terms of just a continued kind of fall in prices versus just deal related and just less volumes of deals?
Kevin Williams - CFO
It's not really the volume of deals. It's actually a combination of things. One, yes, what the I5 series that you can buy today to process a $1 billion bank or the P5 to process a $500 million credit union compared to what the I series or the AS/400 cost three years ago is probably 50% of the cost. Just the cost of the hardware has gone down significantly and then just the continued move to outsourcing where they don't buy an I series or a P series box continues to impact that.
Also with Check 21 -- we're selling a lot of Check 21 deals and Image deals. A lot of those are outsourced -- but even the ones that are in-house are buying smaller reader sorters that are significantly less in revenue. Four or five years ago it was not unheard of for a bank to spend over $1 million on a reader/sorter. Today that's 20% of that.
Philip Mickelson - Analyst
Great. Well, thanks for the color and we'll speak with you tomorrow.
Operator
(OPERATOR INSTRUCTIONS). Nik Fisken, Stephens Inc.
Nik Fisken - Analyst
On the credit union side, what was the license down year on year?
Kevin Williams - CFO
What was it down?
Nik Fisken - Analyst
Yes.
Kevin Williams - CFO
It was down 66% last year, it was $9.3 million for the quarter and this year is $3.2 million.
Nik Fisken - Analyst
And so this was a surprise to us that we're selling to smaller institutions and we're selling more outsource deals?
Kevin Williams - CFO
Probably these surprise in there, Nik, was the number of outsource deals. I mean, a year ago if you had been sitting here telling me that we were going to sign a $250 million credit union to an outsource deal, I would have thought you'd lost your mind. Today that's just reality. That's what we're facing.
And as Jack mentioned, as we continue to improve our process procedures to allow us to effectively market to the 50 plus million asset credit union, the license is going to be smaller but we're streamlining our installation implementation efforts to gain margins there and then we're adding on a lot of the additional complementary products like the business analytics and Yellow Hammer which we didn't have some of those products a year ago.
So hopefully in the near future the total combined package that we sell to even some of these smaller credit unions will be equivalent to a larger Episys deal that we've signed in the past.
Nik Fisken - Analyst
And when do these tough comps go away?
Kevin Williams - CFO
Just a second.
Nik Fisken - Analyst
When was our last big in-house license?
Kevin Williams - CFO
The quarter we're in right now, the June quarter, Nik. Well, actually the June quarter was $7.2 million and the September quarter was $7 million and then it drops down -- actually $4.5 million. Yes, this is the last quarter of the tough comps -- $7.2 million, Nik. So the September quarter drops down to $4.5 million which we should be back in line or above that in the September quarter.
Nik Fisken - Analyst
And how much can these two new products really add to license rev for credit unions?
Kevin Williams - CFO
Again, that just depends on the acceptance, Nik. But the average business analytics deal is 25,000 to 30,000 and Yellow Hammer, depending on which modules they buy it could be 40,000 to 75,000. Which when you're looking at an Episys in-house deal for a 75 to $100 million credit union you're looking at what, Jack -- 150,000 for the core? So by the time you add a couple of those in there you could basically double the license revenue on a small deal.
Nik Fisken - Analyst
So when we launched Yellow Hammer in the banking side what kind of uptick did we have? It was pretty quick on that first quarter, right?
Kevin Williams - CFO
Significant, yes.
Nik Fisken - Analyst
Like 20 deals kind of thing?
Kevin Williams - CFO
I can't remember the first quarter because that was over two years ago, Nik. But yes, I mean it came out of the gate in a hurry. But part of the thing there, Nik, on Yellow Hammer is the banks were under a lot of pressure from the regulators to get an AML solution and also a fraud solution in. And I think the credit unions starting late last call are starting to get some of the same pressures. So the desire for that product is building in the credit union side and I think we're right at the right time to hit that market.
Nik Fisken - Analyst
And just to make sure I got the answer from what Bill was asking -- there were no deals that slipped into the June quarter on the credit union side?
Kevin Williams - CFO
No, Nik, I don't really think so. None that come to mind of saying boy, if would have got that one it would've made a big difference.
Jack Prim - CEO
Nik, to answer that there may have been something that slipped, but it wasn't like a $1 billion credit union that would have made an enormous difference in the license revenue.
Nik Fisken - Analyst
Any effects of converting to PeopleSoft?
Kevin Williams - CFO
You mean other than the strain on our people?
Nik Fisken - Analyst
Right.
Jack Prim - CEO
Everything balanced.
Kevin Williams - CFO
No. There was nothing -- I mean, if you're asking if there was anything that came out of the conversion in cleaning up the data files that impacted the numbers, no. Everything converted the way it should have. Everything is right on schedule. It's an enormous effort. We just put our company through what we expect our customers to go through when they do a conversion which I think helped our employees appreciate what we're asking our customers to go through. But as far as any skeletons coming out of the closet through the conversion, no, there was nothing that hit the financials.
Nik Fisken - Analyst
And lastly, if I look at the earnings growth, if you do $0.27 in the June quarter that's 18% year-on-year growth, but if you ex out the tax rate it falls to 16, 17% earnings growth. Is that what we should be thinking about on a go-forward basis? It seems like things have changed a little bit on the growth side.
Kevin Williams - CFO
Obviously it's a little early and premature for me to give any guidance for '07 since we've just now started the budget process for '07. But it wouldn't surprise me if our growth next year isn't below 20% unless we go out and do some acquisitions. But to be quite honest, Nik, I think with the initial pass at [sell] budgets for next year, what we're seeing out there, I think it will still be higher than the 16% that you're talking about.
Nik Fisken - Analyst
Great, thanks.
Operator
Peter Heckmann, AG Edwards.
Peter Heckmann - Analyst
Good morning. Kevin, it looks like I have modeled ending the fiscal first quarter, the September quarter, with roughly $95 million in cash and no doubt after you get your annual maintenance collections. Any change in thought process on share repurchase versus acquisitions versus other uses for cash?
Kevin Williams - CFO
Well, actually we talked about that with the Board last Friday. And depending on stock price going forward we had the green light to go out and buy additional shares which we're more than happy to do. Obviously we still think the best use of the cash is acquisitions. However, I will tell you that we don't really have any desire to go out and buy any more startup companies. We want to buy -- the acquisitions we're looking at are more developed, proven products with a decent recurring revenue.
So those are the types of acquisitions that we're going to be looking at going forward. But again, we still think that's the best use for our cash, but right behind that would be to leverage up our balance sheet or use those cash flows to buy back stock. And to be quite honest, Pete, I think your $95 million is probably on the low side.
Peter Heckmann - Analyst
Okay, I appreciate it. And then while I've got you, do you see any change in the vendor rebates on the hardware side that would -- that you anticipate changing gross margins in the next couple quarters?
Kevin Williams - CFO
Well, obviously the vendor rebates depend a lot on volumes and IBM continues to change their program. I think you saw where Marguerite Butterworth, our VP and GM of hardware and vendor relations is retiring at the end of June. Her successor, Ed [Walmack], is moving into the sales support group and he has a very good relationship with IBM. In fact, he works a lot of those rebates with them and has for years. So I don't know that there's going to be any significant change, but that's one of the things we don't have a lot of control over.
Peter Heckmann - Analyst
Okay.
Kevin Williams - CFO
But I will tell you that with Marguerite retiring our relationship with IBM is still just as strong. Tony has very good relationships, he goes to the IBM executive conferences. So we're losing something -- we're going to lose Marguerite. Anytime you lose somebody that's been there for 23 years you're using a very valuable resource. But we're not losing the relationship we have with IBM. So any incentives or rebates that are available out there for us we will continue to get.
Peter Heckmann - Analyst
Okay. And then last question. You've announced a couple good multi-billion dollar in-house wins on Silverlake in the last couple weeks. Were those pretty well rounded sales and were they best of suite where you had a number of different applications being sold? And so potentially not only a license benefit in perhaps the second half of calendar '06 but maybe potentially a larger recurring revenue stream?
Kevin Williams - CFO
Yes, both of those were both best-of-suite, Pete, and both of them basically bought everything we have to offer. They bought our teller solutions, our platform solutions, they both signed up for either EFT or ATM processing. They're both buying I series from us. So yes, it was best-of-suite approach on both of them. In fact the one in Ohio also bought ARGO which I think part of that is going to be rolled out this quarter.
That one has a very accelerated implementation because they're supposed to be implemented by October which is a very fast pace for a bank that size, but we're very confident in our implementation team that we can get that done. But yes, both of those were best-of-suites. And as Tony mentioned, the pipeline for those size institutions continues to look very good for us and hopefully more news to come.
Peter Heckmann - Analyst
All right, I appreciate it.
Operator
Kathy Steinbrecher, Wedbush.
Kathy Steinbrecher - Analyst
Just a couple questions and clarifications. So the original net income guidance of 20%, did that include the lower tax rate?
Kevin Williams - CFO
I knew that there was going to be an adjustment in the tax rate, I did not realize it was going to be this significant, Kathy. So I think what I originally thought we were going to get in this quarter was about a penny and it ended up being about two pennies year-to-date.
Kathy Steinbrecher - Analyst
Okay. And then you had mentioned that -- I think there was a question earlier regarding the business analytics and Yellow Hammer on a contract could add 25,000 to 30,000 to business analytics. What was the number for the core product that you had earned on a $75 million assets credit union? I didn't hear that number.
Jack Prim - CEO
Kathy, are you talking about core license fees on a $75 million credit union, that's probably in the $150,000 range -- could be more, could be less.
Kathy Steinbrecher - Analyst
Okay. And then -- so your expectations going forward, it sounds like the growth rate is ratcheting slightly lower. Does that take into account the cross selling opportunities from the business analytics and Yellow Hammer or are you just looking at kind of the transition to a greater percentage of outsourcings going forward?
Kevin Williams - CFO
That includes the cross sell opportunities, Kathy. But remember that all those products are also sold as part of outsource offering which just drives recurring revenue and there's no license related if they buy the outsource delivery model. I think growth may be a little slower in the future. However, I've always tried to be conservative. I think there's some potential upside, especially in some of the ProfitStars products, both inside and outside the base, as Jack mentioned, that eEMS solution. That's kind of an unknown at this time, what that's going to do for us. And we've got some other products out there that could have a pleasant surprise for us. But I'm not sure to come back to you all and tell you that we've going to have a pleasant surprise and a bad surprise.
Kathy Steinbrecher - Analyst
I agree with that.
Kevin Williams - CFO
Thank you.
Kathy Steinbrecher - Analyst
On the credit union side, it sounds as though -- and you mentioned this earlier that the surprise was on the outsourcing. So the smaller sized asset side of the credit union, that's something that you expect. So going forward do you anticipate the contract wins will be even the smaller asset size credit unions or about where you are right now?
Jack Prim - CEO
Kathy, I anticipate being, certainly for the next quarter or two, in the same range where we are now. Again, there's not a surprise associated with the fact that there's more smaller credit unions than there are larger. The fact that on a year-to-date basis we've been selling a larger number of transactions in the 50 to 100 and 100 to 250 range -- it's good news/bad news. The good news is that we've made the necessary changes to the implementation processes and procedures on the Episys side to be able to effectively sell to that marketplace with our system. The bad news is that the sizes of those transactions tend to be smaller.
But at the same time, as I mentioned, there are roughly 9000 credit unions out there, there are roughly 7000 that are under $50 million in assets. We acquired a company, in 2002 I believe it was, that our Cruise solution specifically to address that marketplace. So what we've been doing with the products is continuing to add functionality to the Cruise product to take it up to the above $50 million marketplace, continuing to adjust implementation processes and procedures on the Episys side to be able to take it down closer to the $50 million marketplace so that we have the market very effectively covered.
At the high end of the space, as I said earlier, we have 30 customers over $1 billion in assets running on the Episys platform. The next closest platform has 20. You get down into that 50 to $100 million range, and while we still lead our lead is not as significant in terms of the percentage of customers that are solid on our platform versus the next closest competitive platform. So again, I think it's us adjusting to the realities that are the credit union industry and the size of the credit unions to make sure that we've got the entire market covered.
Kathy Steinbrecher - Analyst
Do you see any upcoming changes on the Bank side in terms of a transition? It seems as though you've already experienced that, so that looks like that might be very consistent going forward. Would you agree with that statement or do you think there are some changes going on ob that part of the business as well?
Jack Prim - CEO
I think in the near-term, Kathy, that it's probably along the lines of what you're seeing right now. Similarly when you look at the market segmentation in the banking space there's a limited number of banks above $1 billion in assets. And so there are going to be a limited number of those transactions that happen for anybody in any given year let alone quarter. And we've had some very good success lately. We have some very good activity currently underway. And so I think as far out as you can look, the next year or so, things look obviously comparable to where we are at this point.
Kevin Williams - CFO
Yes. And I think It's pretty much where it is. You're right, Kathy. Over the last couple years we've seen the shift to outsourcing on the banking side. But I will say we continue to see more opportunities in the mid-tier space, the over $1 billion assets. But again, to echo what Jack said, there's not a lot of them out there and we already own over 15% of that market. But with the products we have and the best-of-suite solution and even with ProfitStars with some of the best-of-breed point product, I think we do have some upside possibilities on the bank side, but I'm not going to build those into my numbers.
Jack Prim - CEO
The challenge is that, as we've said for some time now, the preference on the banking side has been substantially for in-house -- I'm sorry, for outsource delivery for new core solutions. The good news about some of these mid-tier opportunities is they very nicely add to license fees and near-term revenues typically because they typically go in-house rather than outsource. The challenge is that that revenue can be kind of spotty. When a deal happens can make a fairly substantial difference in any given quarter. So it makes it a bit more challenging to forecast some of those, but again, they're nice when they happen.
Kevin Williams - CFO
The other good thing about those big deals is when they buy best-of-suite like the two we recently announced, we don't deliver all the products on day one and both the license revenue and the implementation revenue is typically spread out over two or three quarters as we deliver the product. And then also once they're implemented those do add nice recurring revenue because the maintenance stream on most of our in-house products are 18 to 20% of the license fee.
Kathy Steinbrecher - Analyst
Okay, great. Thank you.
Operator
That concludes the question-and-answer session, Mr. Williams; I'll turn the call back over to you.
Kevin Williams - CFO
Again, we want to thank you for joining us today to review our third-quarter fiscal '06 results. We're pleased with the overall financial performance during the quarter. We remain confident that we are well-positioned and that we have the right products and services to approach both the bank and credit union markets 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 we are committed to build on all of our competitive strengths. Our executives, managers, and all of our members and associates of our team continue to do what is best for you, our shareholders.
Also, I would like to remind you that we do kick off our 2006 analyst day this evening with a small technology fair to explain some of our new ProfitStars products and we basically will have a full day of presentations from a number of our executives, general managers and others starting tomorrow at 8 AM in Dallas, Texas. If you can't join us in Dallas for the presentation, the presentation will be available on the Web. With that, Kerry, would you please provide the replay number?
Operator
Certainly. And 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, Tuesday, May 16th. The dial-in number in the U.S. is 888-203-1112; internationally 719-457-0820 and the confirmation code is 818-8394. You may disconnect at this time.