Jack Henry & Associates Inc (JKHY) 2006 Q4 法說會逐字稿

Good day and welcome to the Jack Henry & Associates fourth quarter and fiscal year-end 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.

Thank you. Good morning. Welcome to our fourth quarter and fiscal 2006 earnings call.

Statements or responses to questions may be made in this conversation which are forward-looking or deal with expectations about the future. [Inaudible] future these are subject to a number of factors which could cause actual results to differ materially from those which we anticipate. Such factors are disclosed in our recent SEC filings, there could also be other factors not included that could potentially cause results to differ materially.

Again, good morning. We're very pleased to report our financial results for fourth quarter and fiscal year ended June 30, 2006.

Our results reflect solid increases in revenue for the quarter and fiscal year. We also continued to show an improvement in gross margins and operating margins for the quarter and year. We continue to have a strong balance sheet with significant leverage opportunities and a nice increase in backlog compared to the same period last year.

With me this morning I have Jack Prim, our CEO, and Tony Worthington, our President, to provide some additional comments regarding the quarter and year just ended in just a couple minutes, however, first I will do a brief overview of the quarter and year just ended and some of our financial related highlights.

During the quarter just ended we had solid revenue growth of 15% and 11% growth for the year compared to the prior year. Our net income increased 17% for the quarter and 19 % for the year compared to last year.

Organic revenue growth for the year was approximately 9% compared to the 11% total, and organic net income was 17% compared to the 19% total growth for the fiscal year. And the only company in there that is not considered organic growth is the ProfitStar acquisition that we did last November and as of November this year, that will be considered part of our organic growth also.

Our license revenue increased by 30% compared to the same quarter a year ago. We just concluded a record license revenue quarter in the banking segment at $21.9 million.

However, this was offset somewhat by a decrease in the credit union [inaudible] compared to last year, as we talked about in the last couple of earnings calls, due to tough comparables last year and the number, the size of the deals we are winning because of the limited number of billion dollar credit unions as the asset size is smaller which reduces our license revenue.

Total license revenue for the year increased by 2%. We are continuing to win a significant number of new core deals in both the bank and credit union segments, also some of our newer complimentary products continue to create a lot of interest which bodes well for future license revenue.

Our support and service revenue grew 13% for the quarter and 17% for the year, which represents also a record for service revenues for the quarter and year. We continue to show strong growth in every component of our recurring revenue within this line which includes our in-house maintenance, outsourcing, which is data and item processing, as well as all of our electronic payment processing.

Hardware revenue for the quarter increased 70% this year, primarily due to the mid tier banks signed during the third and fourth quarters of our fiscal year, which all of these selected the in-house delivery model for the efficiencies that it will gain the respective institutions, however, hardware revenue decreased 8% for the year compared to the prior full-year. As we've been discussing for some time, hardware revenue will continue to be relatively flat if not declining in total dollars as financial institutions, especially on the bank side, continue to purchase more or go towards the outsourcing delivery model, and also, all financial institutions combine more processing power for less money today than they could a year ago.

We had nice increases in gross margins in the banking segment from 43 to 45%, as we had increases in both license and support service margins, which these were offset slightly by a decrease in our hardware margins due to, obviously, lower costs or lower revenues than in the hardware portion and also fewer, less rebates and volume discounts.

The credit union segment had a decrease in gross margin from 41% to 37% for the quarter and remained flat at 38% for the year, which the decrease for the quarter was caused by the decrease in license revenue primarily compared to last year; however, this impact was offset by the support and services margin which increased from 23% last year to 29% this year for the fourth quarter, an increase from 18% last year to 29% this year for the full-year.

This increase in support and service margin is primarily due to increased EFT debit transactions, increase in outsourcing and continued focus by our management and our associates in that segment to leverage our infrastructure as well as continue to focus our process procedures while at the same time continuing to improve our customer service.

Total operating expenses increased 18% for the quarter and 13% for the fiscal year compared to last year, however, they remain relatively flat as a percentage of total revenue by only increasing 1% for both the quarter and the year. Based on our solid margins we believe that all of our managers continue to do a very solid job of controlling their respective operating costs while focusing on prudent procedures and continuing to improve customer service.

Our operating income increased 18% over the same quarter year ago and 17% for the year. Operating margins increased to 26% for the quarter compared to 24% last year and improved to 24% from 22% for the entire year.

If you remember, we adjust our effective tax rate as of March 31st to reflect the new manufacturing deduction for our effective federal tax rate and we also performed a re-evaluation of our effective state tax rates based on our corporate structure. We made the entire adjustment during the third quarter to catch up for the year which had a very positive impact, however, at the same time we discussed at the last earnings call, Congress has yet to reinstate the R&D credit which expired December 2005, and therefore, there is no R&D credit in the second half for our fiscal year which had a slight negative impact on our effective tax rate for the quarter.

If this credit is reinstated in the future, we will potentially have another adjustment similar to what we had during the third quarter of FY '06, again, in this next fiscal year '07 in the quarter that is reinstated, and this impact will be more significant if it is made retroactive to January 1 of '06.

Our net income increased 17% for the quarter, impacted by the increased tax rate to 36.5% during the quarter compared to the fourth quarter rate last year of 35.7%. Net income for the year increased 19% compared to last year. We were very pleased with our net income growth during the year.

On the balance sheet our increase in cash compared to last year is primarily due to timing of annual maintenance billings. We sent our annual maintenance billings out a couple weeks earlier this year as we got them out of the system and some of our customers started paying a little earlier.

There was roughly $40 million collected on those annual maintenance billings which makes it a little tough comparable to last year, which also had a significant impact on our operating cash flows, which our operating cash flows increased to $169.4 million for the year from 108.3 last year, but again, this is impacted by some of those earlier maintenance billings and the subsequent collection of the cash.

Our cash flow from our investing activities included Cap Ex of $45.4 million during the year, and our preliminary Cap Ex budgets for next year appears that we will spend somewhere in the upper 30s to potentially $40 million next year, or roughly 6% of our projected revenues for FY '07 will be spent on Cap Ex. We made payments of $20.7 million for the acquisition of ProfitStar and additional earn-outs on other previous acquisitions during the fiscal year.

Also during the year we capitalized $16 million of capitalized software and based on some of the projects that we have in place and some of the plans, we project that our Cap Ex for FY '07 will be approximately at the same level. Our financing activities during the year included $41.8 million used to repurchase shares for the treasury, and we paid $18.4 million in dividends.

Our total backlog increased 11% 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 or institutions yet to be installed and when they're implemented we then build in a prorated amount and it goes into deferred revenue on the balance sheet.

Also, there is nothing in backlog for EFT debit transactions, bill pay transactions, or merchant capture transactions, which are some of our fastest growing offerings. And the reason these are not included is due to the challenge of estimating the future revenue due to the growth in these specific lines of business and we want to keep our numbers as conservative as possible.

With that, I will turn it over to Jack Prim, our CEO, for some additional comments on the quarter and the year.

Thanks, Kevin.

We're pleased with the performance in the quarter with solid growth and revenue and net income and record levels for both for the quarter and the fiscal year.

15% growth in revenue in the quarter was primarily organic and in the quarter we saw a strong performance in license fees especially in our banking segment, based on the strength of our performance in the 1 to $10 billion mid tier banking space. We are encouraged by our progress in this space and the activity that we see there.

Our credit union segment had a record quarter against a strong comparable quarter a year earlier and had record net income for the year in spite of lower than expected license revenues. Our [Semitar] educational conference last week in San Diego had record attendance with over 700 credit union attendees and strong interest in a number of new product offerings including our fraud and business intelligence products.

Our performance for the year was solid with 11% growth in revenue. Our manager's strong focus on the business and control and cost us to leverage that 11% growth in revenue to a 19% growth in net income and earnings per share. Recurring revenue increased sequentially and year-over-year, although as a percent of total revenue it was lower in the quarter due to the strong license fee performance.

Our electronic transaction processing businesses, ATM, debit card processing, bill payment and remote deposit continued to show solid growth. Remote deposit in particular continues to be an exciting long-term opportunity as we believe nearly all banks will need some capability in this area and we are well positioned with our ASP delivery to meet the needs of any bank or credit union regardless of their core processing system.

Our ProfitStar products continue to contribute to revenue and earnings growth both inside and outside our core customer base, and our customer satisfaction ratings for all products continue to improve on a year-over-year basis as well.

We continue to look for ways to deploy our cash to best serve our stockholders. We continued to buy our stock during the quarter, purchasing over 1.5 million shares with the remaining authorization to buy another 2.2 million shares. We feel that at current price levels stock buybacks represent a good use of our cash.

With that, I'll turn it over to Tony Wormington, our President, for some more details on the business.

Thanks, Jack.

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. As indicated in prior calls, this aligns well 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 and 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 36%, and bill payment transaction volumes increased 69% 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 checking and exchange offerings which will continue to support our long-term support and services growth.

Compared to last sequential quarter, the number of financial institutions installed with our select payment AFP solution for remote deposit processing increased 65% as well as the merchants installed in utilizing the AFP have increased by 128% in the same period. As the number of relationships continues to increase, we expect to see similar increases in transaction volumes.

Jack mentioned our solid performance in the 1 to $10 billion mid tier banking space and this traction comes from continued investment in development of additional feature and functionality in our products being offered in that space, both in our core SilverLake product as well as our complimentary products that round out our best of suite offering in this market. Some of these complimentary products are Yellow Hammer fraud detective and anti-money laundering, Intelligence Warehouse, Intelligence Manager, remote branch and merchant capture solutions, treasury management and cash management solutions, as well as our partnered solutions with ARGO Data Resources.

These industry leading products, coupled with our superior levels of client satisfaction and retention in this market allow us to continue our success in this highly important market.

I'll now turn it over to Kevin for additional comments and questions.

Thank you, Tony. At this time, I'd like to go ahead and provide some guidance for FY '07.

At this time, we are projecting revenue growth of approximately high single-digits to low double-digits which is organic growth in FY '07, which is approximately the same level this year, and we anticipate our EPS growth to be in the mid-teens. Again, this is all organic.

We also anticipate some slight margin compression during this year compared to the entire year of FY '06, however, it should not be a material margin compression. This guidance does not project any acquisitions or becoming more aggressive in the stock buyback than we have in the past, however, we do believe that our first quarter EPS will be relatively level with last year's EPS due to a number of things.

First, the large amount of software shift in the past two quarters, which as Tony and Jack both mentioned, a significant portion of this is related to some of the mid tier wins which [inaudible] had accelerated implementation guidelines, so significant amounts of software were shipped in the last couple quarters to begin the conversion process during our fiscal year just ended, and during the next couple quarters we will have significant amounts of implementation revenue related to these which obviously implementation revenue has lower margins than software as we all know. Therefore, we do anticipate the margin compression in the first quarter similar to the margin compression that we saw in the same quarter, first quarter of last fiscal year.

And as we know, another reason is due to September typically being our slowest contracting quarter due to decision makers not being in the financial institutions due to vacations, holidays, et cetera, and the fact that this quarter follows our typically strongest contracting and revenue quarter of our fiscal year which is the fourth quarter just ended. We believe this guidance to be obtainable at this time and if we see any changes during the year, we will update on our quarterly earnings calls.

Also, again, as a final reminder, we do not project any acquisitions into our guidance and we do not anticipate in this guidance any additional stock buybacks in excess of what we've been doing at an opportunistic level.

With that, Cecelia, I would like to open the call up for questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Kartik Mehta at FTN Midwest.

Good morning, Kevin.

Good morning. Kartik.

I just wanted to ask a little bit about margin compression. Is that related to the fact that you're being more successful on the outsourcing business?

Maybe in the short-term there's margin compression, but as you move forward, the margins improve and there's greater recurring revenue?

Well, yeah. I agree with that, Kartik, but I think the margin compression if you look back at the last fiscal year just ended, our margins in the first fiscal quarter last year I believe were 41% and they just improved throughout the year, which a lot of that is just due to revenue mix and the percentage of license revenue as a percentage of total during the quarter.

We've stated that if you look at the complete blended sale of in-house versus outsourcing, there's not a significant difference in the margins in the two. Obviously, license revenue is close to 100% margin, hardware is somewhere in the 25% and implementations can be anywhere in the single to double-digit margins so by the time you blend all of that out you're somewhere around a 50% margin on the installation of an in-house, which is similar to the same margin you get on outsourcing, so the margin compression that we're anticipating in the first September quarter is truly related to revenue mix and, obviously, in the December quarter we think license revenues will jump right back up there.

We're just anticipating this quarter is that it's always been our slowest contracting quarter for the things I mentioned, not the least to mention is after year-end, most of our sales guys, which are pushing it really hard to try to get their year-end quotas, you know, they're taking some vacation time in July. We have our annual sales meeting in July to not only wrap up last fiscal year but to kickoff this next fiscal year, so we're actually taking most of our sales people off the street for about a week, and then you figure a week vacation for most of them somewhere in there if not more, and then the fact that the decision makers are also taking their vacation and taking their kids [inaudible] before college starts, it's hard to get contracts signed and then you've got a couple holidays in there.

So there's just a number of factors that I think will driver our margins a little lower this quarter and then I think they will continue to grow sequentially throughout the year very similar to the same way they did this year.

And then Kevin, one last question.

In the past when we've talked about pricing in the way you've tried to quantify it, or help to quantify it is, looking at discounts you gave out, one year versus the year before and if you look at that for this year and kind of what you're expecting next year, any differences or maybe some color on what's happening to pricing?

No. Kartik, about a year and a half ago, we rolled out a customer loyalty program which has some discounts on our existing customers and it also has some built in discounts for existing customers when they buy certain additional complimentary product, and I will tell you that based on the math we've done, our total discounts are about flat, if not even a little less than what they were before we put that plan into play because it takes a lot of negotiation out.

We don't have customers calling Jack or Tony or I, you know, trying to get a sweetheart deal because they've been a customer for 20 years. So I don't foresee any real changes in discount and this time, we don't anticipate much difference in pricing either.

Thank you very much.

Thanks, Kartik.

We'll go next to Paul Bartolai at Credit Suisse.

Thanks. Good morning, everyone.

Good morning, Paul.

Just a quick follow-up on the 1Q guidance. I mean, does that imply that you think license revenues will be down in the quarter?

Compared to first quarter last year?

Right.

No.

Okay.

So then I'm not sure I understand what is causing the negative mix. That that would cause the margin compression.

Well, Paul, I mean, I think our license revenue is going to be down from this quarter.

Right.

But you know, it's going to be a mix of a lot -- we've got a lot of implementations going on which, obviously, the margins are less on there, we've added additional staff to do some of these implementations, you know, it's just going to take, and if you look at just the sales mix of why [inaudible] down, we should get down probably close to the 41% margins that we had last year.

Oh, so you're saying the margin compression is sequentially, not year-on-year?

Yes.

Oh, okay. I'm sorry, I misunderstood that.

Yeah.

So year-on-year margins should be roughly flattish?

Yes.

Got it. Okay. That's helpful.

And then just switching to the results in the fourth quarter, you know, you guys had some nice momentum on the bank side and you talked a little bit about the mid tier space. Is that the biggest driver or any other details on the strength in the bank side?

Paul, the strength in the mid tier was probably the biggest driver. I mean we continued to see solid sales in a number of different areas in terms of new customer additions as well as cross sales to the existing base, but probably the larger upside was sales in the mid tier space. And we continue to see good activity and interest in our products in that segment of the market as well.

Okay.

And then on the credit union side, I mean we've talked about a lot of issues there. Can you talk about how you think you guys are performing relative to the market and also kind of your outlook for the credit union space as you look towards '07?

Yeah, I think, Paul, we're continuing to perform very well against the market. Again, we've mentioned in previous conversations there's pretty good data available on that through the Callahan Research reports and they continue to show that we led the industry in credit unions in new customer footprints in conversions in the last calendar year, 2005 and that that has been the case since 1999, and it is by a significant margin. So I think relative to the industry we continue to do very well.

As we talked about on our last call, one of our challenges is the average deal sizes have been a little smaller. Probably, I'd say the average deal size in the quarter just ended were probably in the 65 to 70% range in terms of the size of the credit union we were dealing with.

On a full-year basis you look at all of the transactions we did they were probably about half the size of what we did in '05 and we talked about a number of the reasons for that. Number one, a lot of it's, part of our success at the higher end of the market and only so many transactions that will take place there in a given year, and again, just the larger number of potential sales opportunities at the lower end of the market.

So, but again, in terms of system sales, continue to do well and I would tell you that not only are we doing more conversions from, again, the only information we have available, not only are we doing more, these are all new footprints for us. A number of our competitors are doing a lot of conversions, acquired customers, so what we call a migration where you get a legacy product or something that you've acquired and you're moving them to another product within the family but not going out and taking them away from a competitor.

Darn near everything we had in there in terms of the industry leading number of conversions was a take away from a competitor, very few, if any, moving within the different product families. So to answer your question, I think we feel very good about what we're doing in the market and don't anticipate this year being any different.

Yeah, and I mean, that's a varied answer on the core side and I will tell you, Paul, that we continue to gain traction for our EFT debit solution, switch solution in credit union side which ultimately that will help continue to drive the margins up on the service and support side, our line of revenue within the credit union space which, obviously, we've seen dramatic improvement in the gross margin on the credit union side in the last year in the support and services line and we think that that will continue to improve sequentially.

Okay. Great. If I could just sneak one last one in.

Kevin, the tax rate I know there's some moving parts there with the R&D credit, but what is included right now in your guidance if we don't get that reinstated?

Right now included in the guidance, Paul, is about 36.5%.

Okay. Great. Thanks.

Thanks.

Next we'll go to Glenn Greene with ThinkEquity Partners.

Good morning, guys.

Good morning.

First question, Kevin, just on the, again, on the outlook for '07 I was wondering if you could break that down a little bit for us between the bank and the credit union side, maybe give us some granularity on your expectations for revenue and gross margins for each segment for the year.

Actually, Glenn, I don't have that with me, the break down on that.

Okay.

[Overlapping speakers] Obviously it grew 18% this quarter and credit union was 2% and credit union has been challenged certainly in the back half of the year. Maybe Jack or someone can give us sort of a high level view or how you're sort of thinking about the two segments in terms of the growth.

Well, I think we should see better growth in '07 from the credit union side, Paul, and part of that, or Glenn, I'm sorry, is part of that is a tough comparables we came off of '06 to '05.

In '05, we had a couple, if not $3 billion plus sized credit unions in there which drove a lot of license revenue and also a lot of services consulting revenue, which during this last year, and correct me if I'm wrong, Jack, I don't, I don't think there's single billion dollar transaction, asset credit union transaction in there, in ours, and I think that there was only two or three industry-wide. So we're back, obviously, to easier comparable, so I think we're going to see some decent growth on the credit union side both in license and in support and service compared to last year.

Honestly, banking had a stellar year this year in the license side with a 24% increase over '05. We look for that to continue to increase not at those levels but, you know, I would look for a pretty nice blend of the revenue growth in both segments in '07 compared to '06.

So it sounds like it's more likely that the growth rates are going to converge closer to the overall average for each segment meaning the bank was very strong this year and probably slows down and credit union gets a little bit better?

Yes.

In terms of the gross margins kind of similar trends or you're thinking there's still leverage on the gross margin on the bank side?

We're probably getting close to the max on the bank side. Obviously, we've still got some opportunities with some infrastructure but pricing continues to be tough out there and it's hard to say what's going to happen with some of our EFT switch business and different things, so I think our revenue is going to continue to grow in those businesses but I don't know that we're going to see much additional margin expansion.

On the credit union side I think there is still some additional room for margin expansion there.

And then your operating expenses in the quarter were up, you know, looked like 18% but obviously you had a strong license quarter. Did you sort of use the opportunity to sort of reinvest in the business?

And the follow-up to that is this sort of a sustainable operating expense baseline to build off of or do we sort of come down as we go into 1Q?

Well if you look at this, Glenn, I mean selling and marketing obviously went up 13%, which, the big portion of that is related to commissions which is tied directly to license and hardware that was delivered during the quarter. Our R&D expense is up 23% and I will tell you that, yeah, that's a huge increase for the quarter and, yeah, it's up 15% over the year, it's sequentially R&D is up only 3% from the third quarter and that is primarily related to, we have continued to increase headcount in our R&D areas to enhance our products for customers and develop new products.

The G&A, it went 22% compared to year ago, 21% for the year. There is some leverage opportunity there, but part of that increased cost is, as you all know, we implemented the PeopleSoft solution earlier this year and I will tell you that the cost to support that solution and the related amortization is significantly higher than the old solution we had which ran on an I-series, which I think is why a lot of customers opt to take our solution on I-series because of the low cost of ownership.

But there is still some people costs in there that we're doing some realignment so I think there will be continued leverage going forward, but as a percentage of revenue, R&D, selling, marketing and G&A have all remained about level as a percentage of revenue and that's pretty much just the investment it takes to run this business. So all those are going to continue to grow and that probably is a pretty decent base spend going forward, Glenn.

We'll go next to Nik Fisken at Stevens Incorporated.

Good morning, everybody.

Kevin, on the last question a base spend in terms of total dollars or percent of revenue?

Percent of revenue.

Since we're two months into the September quarter can we comment on trends relative to the June quarter, and specific on this mid tier bank strength?

What trends are you referring to, Nik?

Sales.

Oh.

Nik, I'd say related to the mid tier banking trend, we continue to see good activity there and strong level of interest. These deals tend to take time to work and you're not likely to see several of those in any given quarter, and we had a very solid year last year.

I think we had about four transactions in the last six, seven months that pretty much represented a significant take away from just about every one of our competitors in that space. Again, very solid activity that we're continuing to see going forward, but whether you'll see that level of closed transactions in the next 7, 8-month period, again these are bigger deals, take a little longer to work so, again, seeing good activity there, don't know that we could say that in the September quarter that you're likely to see the kind of performance that we had in the last quarter.

Yeah, and I guess the other comment I'd make to that, Nik, is, you know, understand that we now own about 17 or 18% of that market of 1 to $30 billion in assets by the bank. So there's still a lot out there to go after but they're going to get fewer and further and there's only so many of them that make a decision in a given year.

What's going on in that market? Why are you guys taking shares? Because SilverLake's now got a more referenceable customer list and you got ARGO and these other enhanced products.

I think it's a combination of things. Yeah, we've got a very solid reference base. We've got, you know, approaching 90 customers that are in that mid tier space.

SilverLake, in our opinion and opinions of a lot of the consultants is, that's the [breed] core solution, we do have ARGO, we have the Intelligence Warehouse solution that Tony mentioned earlier that we rolled out that a lot of these larger banks want and the full integrated solution and we've got open architecture on both the bank and credit union side that we will allow any third party to integrate to our solution through our JExchange solution, so I think we just got a very robust solution that is competitive, if not better, than anything else out there.

Nik, I would say we have and have had for some time a very solid reference base in the mid tier space. I think other things that have impacted, ARGO has had an impact, a couple of the transactions that we closed in this last eight month period did involve ARGO and it was a key factor in their decision, but I think it represents investments in general that we've been making into the product since we made the decision several years ago to go harder after that mid tier space, and in 2003 we did substantial reinvestment into the SilverLake product to assure that it had the functionality that it needed to compete in that space and above.

I think that we're seeing a combination of all of those factors come together to influence our results along with some refocusing of the sales organization in that space as well, so I think a combination of all of those things add up to the improved performance we've seen.

Yeah, and then one other comment on the bank side, Nik, is we continue to do extremely well in the de nova market which, in our opinion, it takes a whole lot of those to make up for one mid tier deal but that is very nice recurring revenue that grows very nicely for the first two or three years typically of a de nova bank's life.

And were all of those four you referenced, Jack, were those all in-house?

No. Let's see. Going in-house with us, yeah, a couple of them, one of them was in-house on their previous system and I believe the other three were all coming off various types of outsource deliveries.

Okay.

And on this tax thing we said 36.5 is what we assumed in the guidance. Where would it go, Kevin, if we got that credit back?

Probably, Nik, somewhere around 35 to 35.5.

Okay.

You know, so obviously my point there is if they reinstate this before September 30th or even December 31st, whatever quarter they reinstate that, if they retro that back to January 1st, then we will take, effectively get the adjustment for the second half of the fiscal year ended '06 plus a catch up year-to-date this year.

So that --

So the quarter that it impacts we could potentially have a 32% tax rate.

Got you.

So the reason I'm pointing this out is I don't want the same reaction to an effective tax rate change like we had in March.

Okay. And what's our cash balance now if we collected 40 of the maintenance, how's it, what's it look like now?

Well we had about $75 million at June 30 and we had $50 million in debt that we had borrowed during the fourth quarter to do stock repurchases and various and sundry. I believe as of today that $50 million is paid off and we should still have approximately $70 million in the bank as of today.

Great. Thanks so much.

You bet.

We'll go next to Gil Luria at Wedbush Morgan Securities.

Good morning. I had a couple questions.

One just to follow-up on the guidance for share buybacks. Is the guidance assuming that you maintain the same rate of buybacks or that you don't do any buybacks at all?

Well, we're really not predicting any buybacks in the future because as we stated in the past, we're being very opportunistic from the guidance from our Board and so, basically, the guidance we've given is where we are as of today.

Great.

And then just a follow-up on the rebranding effort that you've discussed in the past. How is that progressing? Are you seeing a lot of results in ProfitStars or have you really focused on that brand for non- core, of your non-core products?

Yeah, Gil, it is going well. We had good acceptance in the market, I think over 650 customers signed contracts in the fiscal year that were not core customers with one of our core solutions continue to get good interest and input in the marketplace.

We did exceed the revenue that we had projected to hit from that group of products in the fiscal year, and I think we've made significant progress in terms of focusing that sales organization, solidifying that sales organization as we've talked about before with particularly the size of some of the companies that we acquired.

There are small companies, there are medium sized companies with varying levels of sales sophistication and process and things in place so we had to spend a good bit of time over the last 18 months identifying what we had and getting that sales staff, the right people in place and focused on the right things. So I think we go into this fiscal year with all of that solidly in place and the brand launch and some recognition for the brand already being received in the marketplace, so yes, it's progressing very nicely.

Great. Thank you.

Next, Pete Heckmann at A.G. Edwards.

Good morning, guys. I wanted to follow-up on M&A within the industry.

Are there -- have you seen any M&A activity that you think has the potential for risk of loss for customers on your side or the opportunity to gain and what's kind of your outlook there?

Pete, this is Jack. You're talking about M&A in and among the financial institutions?

Yes.

Pete, our view on that is it's pretty much unchanged. I mean, you continue to see 2 to 3% per year net shrinkage among banks and credit unions combined, it's probably a little more aggressive on the credit union side.

What we have seen probably in the last 12 months, though, is that the consolidation is taking place at the lower end of the market, in the credit union space, that would be the under $50 million asset market, in the banking space, it would be the under $100 million asset range and we tend to be stronger in the segments above $50 million in credit unions and above $100 million on the banking side. And in some cases what we actually end up seeing is that in the segments where we are stronger they are either flat or in some cases growing slightly, and I don't see anything significant that changes there.

Impact from the M&A activity, if you lose a small bank or a small credit union, the impact to you just based on their size is typically not significant unless you lose quite a few of them. Obviously, if you lose one of your mid tier customers to an acquisition that's pretty painful and that probably happened to every vendor in the space one or more times last year but, again, not a lot you can do about that but I don't see anything that would cause me to predict any more or any less M&A activity in the space.

Okay.

And when you say painful from your perspective of a mid tier loss due to M&A, I guess that would depend significantly on whether they were in-house or a service bureau customer and if they were service bureau then there would be related termination fees?

Correct. But even an in-house customer, your bigger customers are paying you larger maintenance dollars, so I guess my point is the loss of a single mid tier customer has more significance than the loss of a single, or in some cases, maybe several of the smaller customers.

Now, is it a material impact? No. It would not be a material impact through the financials but, again, you don't want to lose any of those and certainly, if it is an outsourced customer depending on where they are in the term of their outsourcing agreement, there could be, there would likely be some early termination fees.

If they're one year into a five year agreement that's a significant fee. If they're four years into a five year agreement somewhat less though.

And probably, Pete, on especially on an in-house, the pain of losing a mid tier in-house customer, yeah, the maintenance stream or recurring revenue loss hurt, but it's the ability to sell them additional products because most of the banks are very easy sells and low cost of sales for us to push additional products into them, however, you know, if and when that happens and we lose them, then whatever institution acquires them now becomes a target for our ProfitStars sales organization to go in there and sell some of those other products that we have that we sell outside the base.

Uh-huh. And would you assume that with mid tier consolidation of institutions of relatively similar size, would they typically do a bake off between, you know, is it always not the case that the acquiring institution will use their core system?

Not always but typically.

Yeah, it's not always the case. We had one deal last year in particular on the credit union side where a couple good sized credit unions merged, our credit union was not the, was the smaller of the two and was not the surviving entity, but they did go out and look at the market and decide, the acquiring credit union decided to convert to our Episys product rather than go the other way.

That's probably a bit unusual. You know, a lot of times when these M&A deals are done, a lot of the justification for the price paid is based on eliminating cost and eliminating them fast, and you're not going to find a lot of people that are going to want to take the time to go and do an objective analysis and review and they're going to, many times, want to just get it done and get moving and start realizing cost savings even if it's a short-term focus versus a long-term, but sometimes it does work that way.

Yeah, one of our largest bank customers, Chinden, up in Burlington, Vermont, acquired a couple of our SilverLake banks and when they tried to convert them they had mass mutiny on their hands so they decided to look at us and we converted the entire holding company to our SilverLake solution.

Okay.

And then let me ask you a question and as a follow-up as regards non-traditional banks. Talk about the sales channel and the sales efforts.

It seems like every mortgage company, every brokerage, H&R Block, a variety of different non-traditional banks are rolling out banking capabilities. Talk about how you're selling there and if you've had any success.

Well H&R block is using our product.

You know, we typically are involved or are invited to participate in those transactions. I think compete very well, as Kevin mentioned.

H&R Block looked at the marketplace and elected to go with our solution so we participate in those as they occur. Again, those are somewhat more difficult to find in that somebody may make a decision that they're going to launch a bank as a supplement to their insurance business or whatever and they may be well down the road before you find out that they're in an evaluation process, unlike, you know, an established bank that you know when you call on a regular basis to kind of see where they are in their contract life cycle or decision-making timeframe, or a de novo bank where they're opening up and they have to make a decision, but we do well in the ones that we do get an opportunity to participate in.

Right. Is there a track like charter applications with the FDIC in terms of like a, ala Wal-Mart or Home Depot? Is there a way to track those in terms of getting a heads up on new customers?

Yeah. There are various ways of staying on top of that and our sales folks do a pretty good job in staying in the loop with us.

I will tell you though, Pete, and a lot of time in the de novos, if you wait until you see the charter file, you've already lost out because they've already made a decision on their core processor. So it's more word of mouth, keeping in touch with loan officers and different people that have left banks that got acquired and just word on the street and reference.

I mean, it's just good old fashioned feet on the street sales people that get those deals rather than watching the stream. A lot of our sales people watch the trade rags and they see when an acquisition happens and they see the people that left the institution and they reach out to those people because they know that typically those are the ones that are going to start de novo in the near-term.

Okay. I appreciate it.

Yes.

And we'll go next to David Konig at Robert W. Baird.

Yeah, hi, guys.

I wanted to pursue the margins a little bit more. In support and service that's where over the last several quarters the strongest revenue growth has been and where most of the margin expansion has been as well, and I'm wondering the gross margin here was 36% this year. Is that now a pretty full margin or is that something that over time can continue to expand?

On the banking side, I would say, David, that we're pretty close to the top. I'm not sure how much more leverage we can get there.

I mean I think we'll continue to see revenues grow but I don't know that we're going to see much additional margin expansion on the bank side. I mean 36% gross margins on a support and services organization that includes implementation is pretty solid margin.

Now on the credit union side, you know, where we're at 29%, yeah, there's still some margin expansion there. And hopefully, throughout the next year, I mean you're not going to see a huge increase in any given quarter but I think throughout the next fiscal year and probably further you'll see small sequential growth in the margins on the credit union side, hopefully, to get it up in line with the banking a year or so out.

Okay. Great. That's helpful

And then just secondly, it looks like Cap Ex plus capitalized software, it looks like 8 or 9% are still [inaudible] in '07 which is a bit lower, it's been, I think, 10% plus for the last few years. I guess two parts of the question. First, is 8 to 9%, is that kind of how you're looking over the next several years kind of in that range?

And then secondly, it is a bit higher than most of your competitors which are kind of in the 5 to 7% range and maybe you could just remind us why it's a little higher at Jack Henry relative to the competitors?

Well it's going to bounce around from year-to-year and I think probably if you combine the two, 7 to 9% for FY '07 is probably a good range. One of the things I think that the reason ours was a little higher is because when we have bought companies in the past, we have made a commitment to those people and typically we buy the location because we go through a very thorough analysis of whether its cost of ownership is better to our P&L and long-term value of our corporation to own that facility than lease.

We own a lot of our properties where we have significant clusters of our associates and we will continue to evaluate that going forward and if it makes sense long-term for our Company to build revenue [and lease], we will continue doing that because that's the way we have always operated as a Company and as far as I'm concerned we always will. It's for the long-term good of the Company, not what makes it good for the next quarter or fiscal year.

Great. Thank you.

You bet.

[OPERATOR INSTRUCTIONS] And we'll go next to John Kraft at D.A. Davidson.

Good morning and nice work on the quarter, guys.

Thank you, John.

I just wanted to follow-up one quick question, and that is regarding the cross selling, the complimentary products into non-core processing customers, is there a way to quantify that? I mean, Jack you mentioned an absolute number but as far as maybe a percent of revenue or a percent of backlog or even just an absolute number versus what we saw last year? And that's all I've got. Thanks.

Kevin, do you want to provide some color on the numbers or a little bit more detail?

Yeah. I will tell you, John, that if, for the year, if you'll remember last year at the analyst day, we projected that these, that the acquired companies that we acquired in the last two-and-a-half years would add approximately $50 million in revenue to fiscal '06 and I will tell you that they beat that projection.

In fact, even if you back out the license revenue sold inside the base, they beat that projection slightly. So I think that there's a significant amount of cross sales.

And the other thing to remember is that over half of that revenue is recurring revenue because some of those companies we acquired had a very nice customer base when we acquired them, in the, particularly in the Synergy Document Imaging group and also in the ProfitStars group, which not only gives us recurring revenue, but it gives us the ability now to go back to those existing relationships and cross sell other products, which we have done that and we continue to do that and focus our sales teams on the ProfitStars to leverage those relationships and put more products into the sales peoples hands to also leverage the selling and marketing expense, which I've talked about for the last fiscal year as the selling and marketing expense as a percentage of revenue and at ProfitStars group it's grew significantly higher than our corporate-wide average and that has gone down just about every quarter and it continues to go down.

Does that answer your question, John?

Guess so.

And there are no further questions in the queue at this time so I'd like to turn it back over to Mr. Williams for any additional or closing remarks.

Thank you, Cecelia. Again, we would like to thank you for joining us today and review our fourth quarter and fiscal 2006 results.

We are very pleased with the overall financial performance during the quarter and year. We remain confident that we are well positioned and that we have the right products and services to approach both the financial services markets that we serve.

We also believe we have the proper resources in our people, our technology for the continued future opportunities that presented themselves. We continue to expand and improve our products and services and we are committed to build on all of our competitive strength. Our executives, managers and all of our associates of our team continues to do what is best for you, our shareholders.

Again, I want to thank you for joining us this morning. And with that, Cecelia, would you please provide the playback number?

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 a.m. Eastern time today through midnight Wednesday, August 30. The dial in number in the U.S. is 888-203-1112. Internationally it's 719-457-0820 and a confirmation code is 8349694. Thank you for joining today and you may now disconnect at this time.