Jack Henry & Associates Inc (JKHY) 2007 Q2 法說會逐字稿

Good day and welcome to the Jack Henry & Associates second quarter fiscal year 2007 earnings conference call.

At this time I would like to turn the call over to Chief Financial Officer Mr Kevin Williams. Please go ahead, sir.

Thank you. Good morning. Welcome to the Jack Henry & Associates second quarter fiscal '07 earnings call. Statements or response to the questions may be made in this presentation and conversation which are forward-looking or deal with expectations about the future. Like any statement about the future, these are subject to a number of factors which could cause actual results to differ materially from those which we anticipate. Such factors are disclosed in our recent SEC filings. There could also be other factors not included that could potentially cause results to differ materially. Again, good morning. We are pleased to host this call this morning, provide a Company update, and report the financial results for our second quarter and first six months of fiscal 2007 ended December 31, 2006. With that I will now turn the call over to Jack Prim our CEO

Thanks, Kevin. We are pleased to come out with another solid quarterly performance with record revenue and net income. Total revenue gross for the quarter was 13% and included organic growth of better than 12.5%. This revenue growth was led by another strong quarter in support and services, which grew by 17%, and included solid growth in all line items in this category. License fee growth was essentially flat compared to the same quarter a year ago, primarily because we continue to see a smaller number of core decisions in the credit union segment and smaller average deal sizes due to the asset size of the institutions. In spite of these headwinds, the only previous comparable second quarter with higher license revenues was a record license fee quarter in second quarter of 2004. The banking segment performed well in the quarter with a 19% overall increase in revenue, with solid contributions from license, install and hardware areas, which for the calendar year allowed us to win the IBM Global Services US Sales Leadership award.

Our ProfitStars solutions continue to increase their revenue and profit contributions. Our recent US Banking Alliance acquisition is exceeding our sales expectations in the 90 days that we have owned them, due to its proven ability to help financial institutions address the two biggest challenges they currently face, improving net interest margins and increasing core deposits. Our Remote Merchant Deposit solution continues to lead the industry in sales, with over 350 banks, both inside and outside the JHA core customer base, having now contracted for the product. The total revenues from this product actually exceeded the total revenue from our electronic bill payment product for the quarter, even though total bill payment revenues grew in excess of 57% during the quarter. This growth in revenue allowed us to generate an increase in earnings per share of 17% without taking into consideration the benefit of the much discussed reinstatement of the Research and Development Tax Credit and would have been at or above the consensus estimate. Factoring in the $0.03 per share favorable impact of the R&D credit allowed us to show a 30% increase in EPS for the quarter.

We continue to buyback our stock during the quarter, purchasing just over 1.25 million shares with a remaining authorization of just under 5 million shares. We continue to look for the most effective ways to deploy cash for shareholder value and believed that with our stock currently trading at around nine and a half times trailing EBITDA, this represents a good use of our excess cash. And in addition, we now started this week an 18% increase in our quarterly dividend to $0.065 per quarter. I'll now turn it over to Tony for some more detail on the business.

Thanks, Jack. We continue to be very pleased with the strong contribution in all the components of our recurring revenue, which includes outsourcing data and item processing, in-house support and maintenance, and our EFT services. We are continuing to see nice increases in all components of our electronic funds transfer transaction processing businesses. Our ATM debit card processing volumes continue to increase nicely compared to prior year quarter, increasing at a rate of 31%. And bill payment transaction volumes increased at a very healthy pace of 61% in the same period. We are well positioned to take on increasing volumes in all of our outsourcing areas, both core processing and EFT services, with minimal required additional investments due to the existing infrastructure and the nature of these electronic processing solutions.

Compared to last sequential quarter, the number of financial institutions installed with our enterprise payments ASP solution, where remote deposit processing increased 36% as well as the financial institutions merchants installed and utilizing this ASP delivered solution has increased by 88% in the same period. We are seeing significant increases in the volume of transactions being processed on a monthly basis, both in total and on average, number of transactions per merchant. As we continue to increase both the number of financial institutions, their respective merchants and those merchants that we sell to directly, we expect to see these transaction volumes to continue to increase at a very rapid pace. We continue to see strong activity in the mid-tier banking market, which we define as banks over a billion in assets. We continue to experience solid and referenceable implementations of recently contracted and installed customers in this market, as well as the many de novo banks and the credit unions we have either installed or are in the process.

Strong demand continues for many of our complimentary products and services in both the banking and credit union markets, supported by our core processing customers as well as our non-core customers through our ProfitStars brand. I'll now turn it over to Kevin for a further look at the numbers.

Thanks, Tony. During the quarter just ended, we had followed revenue growth of 13%, as Jack mentioned, to 167.2 million in total revenue for the quarter. This compared to the reported consensus estimate of 161.6 million, so we were about 6 million ahead -- or about 6 million ahead of the consensus estimate reported out there. Our license revenue increased by 2% compared to the year ago quarter. We had some very nice mix of sales of both core and primary product and our license revenue was actually up 36% sequentially compared to the September quarter. Support and services had an increase in every component within that line of revenue, especially in our recurring revenue items, as highlighted by both Jack and Tony. Our hardware revenue increased by 9% compared to year ago quarter due to strong sales in I-series, source for our check imaging solution, and a very strong quarter of scanner sales for our remote deposit cash we're offering, as Tony and Jack both highlighted, the large growth in that area of our product offerings.

The products that are marketed under our ProfitStars brand, to both core and non-core customers, are slightly ahead of plan and at the end of the first half of the fiscal year and continue to increase their contribution to revenue, gross profit and net income growth. We continue to see strong gross margins that are relatively level with prior year at 44% for the quarter and 43% year-to-date. Both our banking and credit union segments continue to have strong gross margins by leveraging our resources, our existing infrastructure and by continued improvement to operating process procedures. Our banking segment margins remained relatively level with prior years margins for all lines of revenue. However, we did experience a slight decrease in our total credit union segment gross margin for the quarter and the year. This is due primarily to sales mix, with license revenue as a smaller percentage of total revenue this year and year-to-date, as we continue to increase our recurring revenue in that segment of our business.

The gross margin related to license revenue improved, our support and service margin were down slightly for the quarter and year, and our hardware margins improved slightly in this credit union segment, but because of the sales mix it did decrease slightly overall. Our total operating expenses increased 6% for the quarter and as a percentage of total revenue decreased slightly from 21% to 20% for the quarter compared to prior year. Year-to-date operating expenses have increased 11% and remain level of 20% of total revenue. Our selling and marketing remained level at 8% this year, compared to last year's percentage of total revenue. Our R&D increased 12% in dollars compared to the prior year quarter, but remained level at 5% of total revenue for the quarter and increased slightly from 5% to 6% of total revenue year-to-date, as we continue to increase headcount compared to the prior year to continue enhancing our existing product and to develop our new products for our customers.

Our G&A increased 2% for the quarter and 13% year-to-date compared to the prior year period, which the increases are primarily for maintenance, personnel and other costs associated with our new PeopleSoft enterprise solution we implemented at this time last year, higher user group expenses related to our national user groups that was in the core -- our banking user which is in the quarter, being higher this year than last. And as for savings revenue -- as a percentage of revenue G&A decreased to 7% this quarter compared to 8% a year ago and remained level at 7% of total revenue year-to-date compared to the prior year. Our operating margins improved to 24% this quarter compared to 23% a year ago and remained level at 23% year-to-date compared to last year. As Jack mentioned and we have discussed in the prior three earnings calls, the R&D credit, which was reinstated in December of 2006 for the period from January 2006 and runs through December of 2007, had a significant impact on our effective tax rate for the quarter and year-to-date.

The tax benefit was approximately $3 million or $0.03 per diluted share in the second quarter just ended due to the catch-up all being recognized in this quarter according to the current accounting rule. Had the credit not been reinstated and recognized this quarter, the effective tax rate for the quarter ended December 31 would have been 37.5% as it was in the first quarter. However, I'd also like to point out that this entire $0.03 EPS impact is not truly retroactive, because approximately half of this is attributable to the second half of last fiscal year and approximately half was attributable to the first half of this fiscal year. Therefore about $0.015 would be attributed to last year and a little over $0.015 to the first half of this year, which means if everything being equal our EPS would have been around $0.28 for the quarter compared to the $0.27 impacted without any R&D impact. Also, the R&D credits we generated in our future third and fourth quarters of fiscal '07 will reflect the computation of the estimated annual effective tax rate, which by the end of the fiscal year, we're projecting that our full year effective tax rate will be approximately 35%, which is what I would suggest you use to update your models.

Our pre-tax income increased 16% for the quarter compared to last year and our net income increased 28% due to the strong increase in pre-tax income and the impact of the change in our effective tax rate. At this time, we feel confident that we are on track for the projected low double-digit revenue growth. With some small growth in license revenue, support and service revenue should continue to increase in the mid-teens and hardware should remain relatively low for the remainder of the year. Our gross margins should remain fairly stable for the rest of the year for each of the three lines of revenue. obviously, there could be some sequentially quarterly movement in the margins for the various lines, but overall should be able to maintain the current levels, which this should allow us to grow our net income in the mid to upper middle-teens for this fiscal year. Jack mentioned our stock buyback. During the quarter we repurchased 1.27 million shares and year-to-date we have purchased 2.26 million shares.

Actually, since May 1st, when we stepped up our stock buyback, we've purchased 3.8 million shares since last May 1st. During the first six months of the year, we've spent $48 million to repurchase shares in the first half of this year compared to 12.6 million first half of last year. Also during the first six months, we used cash for acquisitions, which increased by $16.8 million this year compared to last year due to the acquisition of USBA. And our CapEx this year is down slightly compared to the prior year by about 3.5 million and capitalized software is slightly ahead of last year by just under $2 million. Our depreciation and amortization expense year-to-date are at 23.8 million, which is about 2.5 million higher than the first half of last year. Our backlog has grown to 225.3 million with 66.2 million in house and 159.1 million outsourcing at December 31st, which represents a 5% increase over that of a year ago and slightly ahead of last year.

Again I remind you that there are no EFT debit processing , bill pay, merchant or capture or Check 21 contracts reflected in this backlog due to the difficulty in conservatively estimating transactional revenue, especially in such fast growing parts of our business. However, this does represent another record backlog for us. With that I would like to open the call up for questions. James, we'll take questions now.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Kartik Mehta from FTN Midwest.

Good morning, Kevin.

Good morning, Kartik.

Question for you on just the demand. It seems as though outsourcing demand continues to outpace maybe license or software demand. Is this just a reflection of what the market is demanding or maybe a reflection of how you're selling the product over the last couple years?

Well, I don't think it has anything to do with the way we're selling it, Kartik. We have seen this shift in the bank segment now for probably approaching four years. The technology gets more advanced, the banks have to keep their systems up 24-7 for ATM and bill pay. The difficulty of the lans and wans, the security, intruder detection, everything else, especially the smaller banks below 1 billion in assets, have basically decided that they would rather not have to fight with technology upgrades, the hardware upgrades every three years, let Jack Henry run the back office, let them run the bank. Now, the mid-tier space, as Tony mentioned, we've had some very good success. We continue to have a lot of activity there. The majority of the bank over 1 billion that have the technical resources will typically go in-house because it is more efficient for them. So we will continue to see that shift, I believe, in the banking segment and we're starting to see it a little bit in the credit union side.

And, Kevin, you talked a little bit about your backlog and all the things it doesn't include. Is there a different way now to look at the business, maybe trying to project the business that's going forward? Because it seems like so many of your growing products aren't included in the backlog?

Yes, the main things that are not included in our backlog, Kartik, is all of our electronic payments, which is our EFT debit switch, our bill pay, and our Merchant Remote Capture, which those combined are growing at about a 44% rate for the quarter and about the same for year-to-date. So I think the recurring revenue you're just going to have to, if you're of going to build a model, I would use somewhere in the low to mid 40% for those and the in-house and everything else basically the way you've always modeled it.

And what percentage would you say of total revenue is electronic payments now, Kevin?

Our EFT business represents about 13% of our total revenue now, which compared to four years ago it was 5%.

Thanks a lot, Kevin.

You bet.

Thank you. Our next question comes from Bryan Keane from Prudential.

Good morning. Just taking a look at the hardware revenue growth. It did pop a little bit and that's been weak for awhile, so just want to make sure I understand what was going on there and how to think about it going forward.

Well, Brian, obviously, we had some nice mid-tier business during the quarter. We shipped some nice I-series. Check 21 and our image, check image solution continues to be a hot seller, so we continue to have some pretty good reader/sorter business. But probably the biggest pop in this quarter compared to same quarter a year ago is the scanner business for our Remote Deposit Capture. A year ago, scanner sales represented somewhere around $0.5 million. This quarter, scanner sales represented just under $2 million in hardware revenue.

Okay.

And so we're still pretty early in that game. As Jack mentioned, we've contracted with 350 banks. We're contracting an average of one to 1.5 additional banks each business day. And as those banks sign up, their order of scanners to put out to merchants, so I don't see any slowdown in the scanner sales in the near-term.

Okay, and then just turning to the segment groups, bank obviously had a real big quarter and the credit union was a little bit softer as, I think, was a little bit expected. Do we see that same trend line going forward as well, that bank will be well in the double-digits and credit union might be more flat to slightly negative year-over-year?

Yes, Bryan, this is Jack. I think generally the same trend we're likely to see for awhile. Again, part of the challenge on the credit union side is some of the comparables that we've been measured against before. That's probably starting to change some now, but we're seeing, as we've indicated earlier, less number of decisions being made in the credit union space and the average size of the credit unions that are making decisions is smaller than what we had projected going in. So I think we're likely to see the same general trends. We do expect to see some improvement in the last half of the year in the credit union business compared to where we are currently, but the same general trends, I think, we're likely to see.

And I think that we will continue to see solid growth in the support and services line on the credit union side of the business.

Okay and then finally just a clarification question, Kevin. I think you said mid to upper mid-teens, net income growth for fiscal year '07. In that I just want to make sure that includes the R&D credit, the full R&D credit this quarter and the 35% tax rate going forward?

Yes.

Okay, great. Congratulations on a solid quarter.

Thanks, Bryan.

Thank you. Our next question comes from Dave Koning from Robert W. Baird.

Hi, guys, nice quarter.

Thanks.

On the guidance, just, I guess, one more question on that. Is this pretty much the same? I know last quarter you guided to mid-teens net income growth so now mid to upper teens. Is it basically the same guidance, just now that you get the tax credit now you've raised it mildly?

Yes.

Okay, great. And then secondly, I guess remote capture within the EFT line, what sort of revenue opportunity is that? I realize it's still probably reasonably small and growing very fast. In a couple years, what type of revenue dollars could that generate?

Well, obviously, Dave, it is very early in the game, but we're seeing a lot of growth. Right now, it is a very large land grab out there. I think we've got a lead on the competitors with feature functionality and the technology we bring. One of the other things that we have is the Check 21 infrastructure, that was already there, which allows us to leverage our existing infrastructure more. But we have been saying for the last six to nine months that we think this product has the ability to be the next EFT debit revenue generator for us with that type of opportunity.

Dave, just as Kevin mentioned, it's kind of a land grab opportunity out there right now on the part of the banks. It's moving pretty fast, quite frankly, faster than pretty much anything I've seen like it in a long time. So I think we continue to sign a good number of banks and that is likely to continue to be the case for the next year or more. I think I saw a recent survey that indicated that something like 48% of banks anticipated offering this type of a solution within the next three years and, if anything, I think that estimate is probably low. So I think we'll continue to see some good growth for the foreseeable future, relatively near-term year to year and a half from banks adopting this capability. Then I think that what you'll find in that outer time frame there is that most people will have done something and your growth will come from -- it will be similar to the bill pay model. There's the initial land grab to get customers signed up and then as the adoption by those customers continues to grow over time, that's where you get the growth in future years. But it's a very interesting market out there right now.

And one other thing I might do, this is one of those products that just in the last 60 days we have rolled this into our banking sales team to sell inside the base. Part of that we were selling exclusive with just ProfitStar sales team. So now it is in the hands of our hunters and farmers on the bank side to sell within our core customer base and the ProfitStar sales groups continue to sell it to non-banks and to non- Jack Henry core customers. In fact two of our largest customers on this are non-Jack Henry core banks. So there's a lot of opportunity out there for this solution inside and outside our core base.

Great. Thank you.

Thank you. Our next question comes from Glenn Greene from ThinkEquity Partners.

Thank you, good morning, guys.

Good morning, Glenn.

Could you just update us on the ProfitStars businesses, where you're getting traction, relative strength and weaknesses, and what kind of annual run rate the revenue of that business may be on right now?

I will tell you, Glenn, that for the quarter, compared to year ago, the ProfitStars groups of businesses, and again remember this includes sales to both inside the base and outside the base, because some of these products are sold through the ProfitStars sales group and some of them are in the hands of our banking and credit union sales teams, but the revenue this quarter compared to the quarter a year ago is up a little over 30%. Margins are very healthy and I think there's even additional opportunity there across the gamut. I think all the companies are contributing nicely. The only one that's still dragging a little bit is the bank insurance solution and we're doing some things to correct that, but all the other ones are pretty much right in-line and on target with where we thought they would be. And at the analyst day last year, I said ProfitStars last year was going to represent roughly 10% of our revenue and they were slightly ahead of that. And I predicted 25% growth within that group of businesses for this fiscal year and like I said earlier, we are slightly ahead of plan on that.

Okay, that's helpful and just going back to the Remote Deposit Capture. I know you guys have been talking about it for awhile, but this is kind of the most visibility you've given on a conference call it seems like. Have kind of the spickets sort of opened up and banks are really just sort of all of a sudden saying hey, we have to have this. And what's kind of spurred this and is there really an acceleration out in the market?

Actually, Glenn, this is the most visibility we've had.

Yes, Glenn, I would say that we've been at this for a couple years. We got into this a little earlier than most with the acquisition of some products that gave us ACH check conversion capability. We initially went to market with that product, we discovered from talking to the banks that there some other things they needed to have. In other words just the ability to convert items to ACH was not enough because not all checks can be converted to ACH items. And so they didn't want to go to their business customers with a partial solution and say well, you can convert 70% of your items, the rest of them you still have to bring into the bank. So we had to go back and adapt those products to handle the types of items that can't be ACH, business checks, government checks, which we can do very effectively because of our Check 21 infrastructure. So we've been at this for a couple of years but I think we really just got to market about a year ago with a fully developed product that met the needs the banks have. And I think at the same time, that's about when some of the early adopters began making some significant end roads.

One example, we've got a $250 million bank that attributes $72 million of additional deposits that they have picked up to the fact that they had this product ahead of the competition. They implemented it about a year ago. And one of the biggest problems banks face out there right now is attracting additional core deposits, so when somebody can point to $72 million they've picked up in that size bank because of having this solution, it gets people's attention. And I think that a lot of banks that are going after it aggressively, like the one I just mentioned, are going to do very well with it. But I think even the banks that have been less aggressive are going to need to do something to hold on to the business customers that they have. So it is a product that business customers love because of all the advantages that it brings to them and whether you're using it offensively or defensively, it's a solution that I think the banks are going to need to have a strategy for and we're really starting to see them realize that.

How do you price it? Is it license base or service bureau ?

There's an initial implementation fee. It's an ASP delivered product, which is one of the strengths because the banks don't have to load any software on the equipment in their businesses, so it doesn't potentially interfere with their QuickBooks accounting system or whatever else they might be running at that business, So it's an ASP operation. There's an initial implementation fee. There is a per merchant per month fee, and then think are some transaction fees as well.

Okay, great. Thank you.

Thank you. Our next question comes from John Craft from D.A. Davidson.

Good morning, gentlemen.

Good morning, John.

The first question that I have, I guess a follow-up to Glenn's question. It sounds like all the sales groups are able to sell the remote deposit. What sort of a spread do you see, I guess, between the deals going to your existing core and credit union customers versus outside of that? Just ballpark.

Ballpark, I don't know if I could give you a percentage but I would tell you that a significant majority of the deals have gone to the existing customer base. Understanding the payments business, there are a lot of intricacies here related to ACH check conversion and how things flow and image replacement documents and those kind of things. It takes a pretty solid foundation of payment processing knowledge to be able to explain this and sell it. And so initially, we had a more specialized team that was focused on this, John, and selling it primarily inside the base because quite frankly, that's the low hanging fruit. We sold it that way for about a year until we felt like we had had enough time for our traditional banking sales force to have an adequate understanding of the product.

One of the challenges our sales guys have is we have -- the good news and the bad news is we have a lot of product and so they are responsible for a lot of things, so this was a fairly specialized sale that they had to get comfortable with. So for the first year, we had the ProfitStar sales group selling primarily inside our base a specialized product. We have now been able to get the other sales staff up to speed on the product so that they can now handle it inside the base and we've taken the team that we did have selling inside the base and focus their efforts outside. So today, the majority of the implementations that we have would be inside our base but we've gotten some very good reception outside the base. We have some very successful installations in some pretty sizeable financial institutions outside of our base, so we feel like there's a good leverage opportunity.

A recent survey was done, I think it was conducted by or commissioned by the Western Independent Bankers Association and a significant percentage of the respondents to that survey indicated that when they looked at solutions, they would be looking at best of breed solutions, as compared to just whatever solution their core provider offered or whatever solution their item processing vendor offered. A good percentage of those indicated they were looking for best of breed solutions and that is clearly where our product falls, largely because I think we've got a 12 to 18 month head start and learned some early lessons on the products. So we feel like we're out there with truly a best of breed product and that's what the banks are going to be looking for. So feel very good about our opportunity to sell the product well outside of our base.

Okay, that's helpful. And you didn't mention, at least I didn't hear anything, about your cash management product. What's the status with that?

Well, our cash management product we've had for some time and it sells very successfully. I'm not sure exactly what you're referring to there, John. We did make some enhancements to our capabilities in the Treasury Management, Treasury services area. Those were not for the most part chargeable enhancements. We did that as part of the improvement of the product on an ongoing basis. So it was needed, it was appreciated by the users but it was not to be a significant revenue generator. We have very good penetration already in our customer base for our cash management product, so, those changes didn't represent a big sales opportunity. It was more of a response to the demand from our customers.

What that does do for us, John, though is makes us extremely competitive with a Treasury Management services when we're going after the mid-tier banks.

Okay. And then last question, in the press release, you mentioned that there was less license revenue coming from your reseller agreements. Is that some sort of a trend or is that a result of your ProfitStar rebranding and less utilization there or what's going on there?

I'm not sure if we mentioned less license revenue coming from resellers or whether we said that we resold less of our business partners solutions, which is what I think we said. And if that's, while Kevin is rereading the press release, if that's what we said, what we meant by that, John, was that we probably replaced some of that third party content in our offerings with our own solutions. The one that comes to mind most is that we've had a partnership relationship for a number of years in our credit union business for a document imaging product, which we continue to support and enhance and sell upgrades to. But in terms of new customers who are looking to implement a document imaging solution for the first time, we sell our own Synergy product. So that would be part of it. I think we've also had partnership on the voice response side for our credit union business which saw lower sales. Not that it's been replaced with another product, it just saw fewer upgrades and fewer implementations of that product in the quarter. So I think we were referring to reduced sales by us of third party products.

Yes.

Understood, okay. Thanks, guys, nice work in the quarter.

Thanks, John.

Thank you.

Our next question comes from Pete Heckmann from A.G. Edwards.

Good morning, guys. Most of my questions have been asked, but I was wondering if we could get a quick recap on the multi- factor authentication rollout and any potential contribution from that in the quarter, as well as any new opportunities that may have been created by other vendors kind of falling short of their requirements?

Pete, I think we're in good shape from the standpoint of what we have delivered to our customers. I know some folks put out press releases talking about what they were doing in that area. We didn't, but we were in good shape. Our customers continue to roll that out. I think the regulatory agencies have realized that the 12-31 date that they initially gave everybody was awfully aggressive and what they're focused on is making sure that people had a plan in place by 12-31, more so than having a solution fully rolled out by 12-31, which was a good move on their part. But we're in good shape. Our customers are well along the path to implementing MFA. To your point, I don't -- we don't see and never did see that that was going to be a big revenue opportunity for us. It's probably a better revenue opportunity for the business partners that we've all chosen to work with. But in terms of representing any significant revenue to us, we don't really believe that there's a lot there that's really worth talking about.

Yes, Pete, to that point, we actually offer two versions of MFA, a premium and a basic, and basically, the basic package is at no charge to our customers. We will probably increase maintenance a little bit to help cover our costs on that, but there really is no revenue from those. There is just a tad on each one's premiums, but not enough to even think about moving the needle.

Okay, okay, and then secondly, the payments business is growing really nicely and accounting for a pretty decent chunk of overall growth. Are there opportunities there to expand the breadth of services either through organic development or potentially acquisitions and really kind of broaden your exposure to electronic payments?

Well, we definitely are very focused on that and quite frankly have been for some time, Pete. The organic growth opportunities, I think, are strong. Our electronic bill payment business, as we have it today, we really only sell that to our customers, to our customers who use our internet banking system. We've got a pretty solid penetration there, so there's some potential plateauing effect in terms of new financial institutions that we'll be adding. We will certainly have a good opportunity to add those with new customers that we pickup, particularly with de novo banks, but there's still some very good growth there from an organic standpoint as the banks and credit unions become more effective at getting their customers to adopt bill payment and as their customers write more checks or pay more bills electronically. So there's certainly some good growth there.

We've looked at the ATM debit card growth at 30% plus year-over-year for an extended period of time and there's bound to be some point at which that begins to plateau somewhat. But again, we're very early in the adoption curve on remote deposit and believe that there's some nice offsets that that business will bring for the foreseeable future. So organically, yes, I think there's definitely some good growth opportunities left. Acquisition wise, we would love to do that. We've for some time been looking at ways to continue to do that, but as you might imagine with a high growth, high margin business, everybody wants to do more of that business. There aren't a lot of really good opportunities that we can see, continue to look for, but not a lot that are obvious to us and the ones that are out there are pretty pricey. So we are very much focused on that space and ways to continue to grow it. I don't see any easy answers to that question though.

Okay, I appreciate it.

Thank you. Our next question comes from grill lure it a from Wedbush Morgan.

Yes, thank you for taking my question. The growth in the electronic payments very impressive. I wanted to see if I could clarify some numbers. So what you've said is that electronic payments the breakdown is EFT, bill pay and remote capture, I think you said that EFT represents 13% of total revenue. Could you kind of complete the puzzle there? How much of total revenue is bill pay and remote capture? I know that they are relatively small still?

I mean, Gil, we've never really broken that number down, but I can assure you that our EFT debit business, which we've been in since 1992 when we acquired into that business, probably still represents 90% of the total revenue in that EFT line.

I think, correct me if I'm wrong, Kevin, I think what we said Gil was that that 13% of total revenue consists of all three of those components.

Including Check 21.

Not just EFT business.

Okay. And then just to follow-up on that, remote capture seems like a very new category. What kind of competition -- who are the main competitors that you're seeing that are also getting some of this early adoption?

Well, Gil, all of the core processing vendors have something to offer, whether they developed themselves, whether they are offering a partnered product, but all of them have something to offer. Those would be the primary players that we see out there, whether it's a spinoff of their item processing business or their core processing business, most everybody has something like that. Then there are a lot of smaller companies that may offer some ACH check conversion capabilities, but those tend to be fairly basic, fairly basic products that may not offer the breadth of capabilities that some of the more mature solutions in the market would offer. But there are a lot of people who obviously seeing the same things we're seeing in terms of the growth potential that are trying to come to market with solutions. But, I think, for the most part people that are coming into the market now and coming in quickly, appear to us to be coming with somewhat more basic offerings that again, you can compete -- if you're not the core provider, you can compete if you got a best of breed solution.

I don't know that the basic solutions are going to get a lot of traction in that market. And the reality is that the [incommanent] core vendors always got the first shot at the business. I think this is one, because it's a product that's deployed into the business location, that best of breed has a very strong opportunity of being selected because it's not really a part of the core system. It doesn't need to be a part of the core system. But again, I would say that the majority of competitors that we would see would be the other core system providers and occasionally, a small entrant to the market that may have a lower cost offering.

And Gil, a lot of those small players that are trying to get into the market are going to have a challenge because they don't have the Check 21 network and infrastructure in place like most of the core customers do, which means basically, they'll only be able to offer an ACH conversion and they will not have the ability to do a Check 21, or if they do, they are going to have to plug into somebody like us and their cost structure is going to go up.

Great. And then on the operating expenses side, it seems like for the first half of the year you're pretty much flat as a percent of sales compared to last year. Is part of that because of the USBA that you haven't had necessarily the time to take out some of those costs as you integrate USBA?

Well, we don't look at acquisitions for the opportunity to take out costs. We look at acquisitions for the opportunity to grow revenue. If anything, we probably add costs when we do an acquisition. And that would be the case with the USBA product as well. We're really pleased with what we're seeing from that product. It's exceeded our expectations for what we thought we would do right out of the gate. And I think it's based on the fact that they can demonstrate the fact that they've helped banks improve their net interest margins and more effectively price their deposits. So what we're looking to do there, frankly, is add sales firepower and to keep up with the increased demand that we are seeing, because we're now selling at a faster run rate since the acquisition than they were selling at before the acquisition, and they were doing well pre-acquisition. So now that we're selling at a faster rate, we're going to be needing additional implementation resources to help drive that. So, but again, we're very pleased with that. We wish that all of them came out of the gates like this one has. But as a general statement towards our acquisitions, we typically take out minimal cost.

But as far as the true operating expenses, Gil, the only thing that USBA really has in the way of operating expenses is some selling and marketing and some small R&D. Most of what Jack is referring to is above the line up in the gross margins, which we will be adding resources up there.

Okay, thank you.

Thank you. Our next question comes from Jennifer Duignan from Merrill Lynch.

Oh, hi, it's actually Greg Smith. Guys, what do you think CapEx will be in '07 and then is there anything significant that would move the dial in '08 that we should be looking at at this point?

We've said all along that we think CapEx for the year is probably going to wind up somewhere around 40, low 40 million. We've got quite a few projects that are in place, that's barring any acquisitions, and to look out into '08, barring any significant acquisitions, I would think that CapEx should stay relatively level there.

Okay, great. That's helpful. And then just regarding your online bill payment offering, can you give an updated thought on whether or not that's something you might want to bring in-house versus using a third party vendor?

Well, Greg, the only part of that that we use a third party vendor for is some of the electronic transaction processing, and I would say that it would be unlikely that we would look to bring that in-house. Well, I would say we also outsource some of the check printing functions, but we had that in-house and found that we could outsource that more cost effectively. So I wouldn't expect us to bring that part back in-house and the electronic transaction processing, we're using pipes that are already in place. I don't know that we feel the need to own those pipes. That can be done pretty effectively. To try to replicate what Preston Ecom -- I'm sorry, Online Resources and MasterCard RPPS and some other folks have built out there, just wouldn't seem to us to be something that would be worth trying to do.

Okay, and then can you just talk about have you seen any change in competitive behavior out of Open Solutions, now that their ownership structure is a bit different?

No, we really haven't. They are still in deals out there. My impression is that they've been a little more focused on trying to get this transaction completed and figure out how things work now that there's some new ownership there. So we certainly haven't seen anymore of them since the acquisition, possibly might be hearing from them a little bit less. But fully expect that will change and that we'll see them back out there, but have not, at this point, seen any competitive change in behavior from them.

And then just lastly, what about the acquisition environment out there for you? You guys are pretty rigorous on your kind of accretion and ROI target. Are things getting more expensive or are we seeing any change?

Yes, it continues to be pretty expensive. The landscape changed about a year ago when a lot of the private equity groups decided they wanted in this space and the multiples range anywhere from 14 times EBITDA to we've seen some as high as 20 or 30 times EBITDA, which that might work for private equity. We just can't figure out a way to make it work for a public company when it's going to be dilutive for the next three years. So we'll continue to look at deals. We'll continue to use, basically, the same due diligence that we have used in the past and continue to look for the right acquisitions that will give us a good return for our shareholders.

Great. Thanks a lot.

Thank you. Our next question comes from Nik Fisken from Stephens.

Good morning, everybody.

Good morning.

Tony, when can we expect some leverage on R&D?

From what perspective are you asking that?

Well, it seems like for years we've been chugging along at the same rate as a percent of revenue, and I would think you'd be able to get some leverage at some point.

Well, we continue as we bring on other companies, as Jack was referring to with USBA, as we acquire these companies, typically they've got small research and development groups. There's a number of resources that we continue to add in those areas. This R&D line that you're looking at is a total cumulative line for research and development across the corporation, so we're adding resources in many areas in R&D.

We've got a number of projects that we continue to fund, whether those be integration projects or frankly new product that we're developing and coming to market with. Things that come into mind over the last year or two have been our business intelligence business warehouse solution that we have, IWIM, business analytics is another solution we've rolled out that we've developed, Treasury Management. So those are a number of products that we're continuing to develop and continuing to enhance and bring to the market. Not to mention our core processing products on both the banking and credit union side continue to require significant demands to enhance the product to compete in the marketplace and provide value to our existing client base. So frankly, I don't see the R&D number going down. I continue to see it floating along at about the same level of percent of revenue year-over-year. So there's going to continue to be some likely some increases in the R&D spend, but I would expect it to be along this line of percent of revenue.

Nik, it's right about 5% total revenue for the last six, seven years. And the other thing I'd point out is when we are talking to new prospects either a bank or credit union core customer, that's one of the things that they really focus in on is our R&D spend and the percentage of revenue. And I can assure you if we go into a $1 billion credit union or a mid-tier bank and they see that our revenue spend is going down as a percentage of revenue, that's not typically what they want to see.

Okay, and then are the days of under 20 million of license revenue over? On a quarterly basis?

I'd like to say it has been. I think the rest of this year looks pretty solid, Nik. Obviously, we're pretty early in this quarter, but the forecast looks pretty good for this quarter and, obviously, June is typically our strongest quarter of the year, so I think the balance of this year should stay up there.

It's just been such a volatile number, 15 to 26 million the last six quarters.

That is pretty volatile, but when you have a quarter that you deliver a couple of mid-tier banks and a $1 billion credit union and then the very next quarter you don't have any mid-tier banks delivered and no $1billion credit union, that's the delta right there in the license, basically.

And the other thing is that our first fiscal quarter tends to always be a lower license quarter than any of the other four, so if you look at that trend, it's been historically been lower.

Okay, the last question that nobody asked was kind of the sales pipeline. What kind of big banks do you have and big credit unions do we have in the pipeline?

Pipelines look pretty solid, Nik. We continue to see some good activity in the mid-tier space in the banking side. Do seem to see a little more activity out there currently with some larger credit unions and, obviously, those are highly competitive deals, but we feel like we're in pretty good shape on several of those. So the sales pipelines continue to look pretty solid.

Is it better than it was 6, 12 months ago or about the same?

I would say on the credit union side, it's certainly better than it was about six months ago and on the banking side, I would say it remains pretty comparable.

Great, thank you.

Thanks, Nick.

And there are no further questions at this time.

Thanks, James. Okay, to recap, again, we want to thank you all for joining us today to review our first quarter '07 results. We're very pleased with our overall financial performance during the quarter. Our net income growth is on track to obtain the projections that we laid out earlier in the call. We remain confident that we're very well positioned and that we have the right products and services to approach both the bank and credit union markets and the other financial service markets through our ProfitStars organization. We also believe we have the proper resources in both people and technology for these continued future opportunities. We continue to expand and improve our products and services and are committed to build on all of our competitive strength. Our executive Board of Directors, managers and all of the members of our team continue to focus on what is best for our stockholders. Again, I want to thank you for joining us this morning and with that, James, would you please provide the replay number?

Thank you, Mr Williams. Thank you for joining today's conference call. If you would like to listen to the replay of this call it will be available from 11:45 a.m. eastern time today through midnight Tuesday, February 15th. The dial in number in the U.S, is 888-203-1112, internationally it's 719-457-0820 and the confirmation code is 4891550. At this time you may disconnect. Thank you.