Jack Henry & Associates Inc (JKHY) 2008 Q2 法說會逐字稿

Good day and welcome to the Jack Henry & Associates second quarter fiscal year 2008 conference call. Today's conference is being recorded. With us today is Chief Executive Officer, Mr. Jack Prim, Chief Financial Officer, Mr. Kevin Williams, and President, Mr. Tony Wormington.

At this time I would like to turn the conference over to Kevin Williams. Please go ahead, sir.

Thank you, Mehalla. Good morning and welcome to the Jack Henry & Associates second quarter FY 2008 earnings call. Statements or responses to questions may be made in this conversation which are forward-looking or deal with expectations about the future. Like any statements 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 filing. There could also be other factors not included that could potentially cause results to differ materially. We are pleased to host the call this morning and to provide a Company update and record our record financial results for our second fiscal quarter ended December 31st, 2007. With that I will now turn the call over to Jack Prim, CEO.

Thanks, Kevin, good morning. We are pleased to announce another strong quarterly performance with new records for revenue, net income and backlog. Total revenue increased 15% with strong performance from both the bank and credit union segments, with bank revenue increasing 14% and credit union revenue increasing 18%. The organic component of total revenue was 12% in the quarter and 13% on a year to date basis. Revenue growth was fueled by EFT and maintenance growth and strong core sales particularly in the credit union segment. We continue to show significantly greater core system market share gain in the credit union industry than any other vendor as has been the case every year for the last eight years. Licence fees increased 10% and set a new record for the second fiscal quarter. Higher license fee revenues had only been attained in two prior periods and both of those were fiscal fourth quarters. This occurred even as support and services continue to represent a larger percentage of our total revenue.

Support and service continued to show strong growth with an increase of 17% to 76% of total revenue. This increase was driven by strong performance in the maintenance and EFT line items in particular. We completed our transition to a new bill pay processor for our electronic transactions during the quarter and have already begun to see improvement in the percentage of payments that can be processed electronically. The AudioTel integration, acquisition integration is complete and our records are now focused on leveraging their nonJack Henry customer relationships with other JHJ products through our PROFITstars sales team.

The recently announced alliance with Shelby Systems Inc. illustrates one of the reasons we were interested in acquiring AudioTel. Shelby is a leading provider of software solutions for faith-based and nonprofit organization. They will imbed AudioTels remit plus solution into their software offering to electronically process and manage contributions. Shelby joins over 20 other software providers sorting a variety of industries including other faith-based organizations, water and power utilities and City/County Government that have taken a similar approach to automating their customers payment processing needs with one of our enterprise payment solutions. Additionally our check [entering] system sales continue to be strong and the AudioTel solution will now allow to us address a smaller bank market with a ,ore affordable image solution.

Our operating income increased 16% in the quarter and our backlog increased 7% from the year ago levels to a new record driven entirely by the outsourcing backlog as the core system delivery (inaudible) system for bank's continues to favor outsource delivery. We continue to believe that our stock represents a good investment and repurchased approximately 700 shares in the quarter. We have not seen indications that the current economic environment has or will impact our sales in the near term and we remain cautiously optimistic on the economic outlook in general. We expect to continue to lead the industry in organic revenue growth, profitability and customer satisfaction. With that I will now turn it over to Tony Wormington for some additional comments on the business.

Thanks, Jack. Good morning. As Jack mentioned our support and service revenue component continues to increase nicely. We are pleased with all the components of our recurring revenue especially EFT services which experienced a large increase along with in-house support and maintenance, outsourcing data and item processing and implementation services. We are continuing to see solid increases in all components of our electronic funds transfer transaction processing businesses. Our ATM debit card processing volumes increased 26% compared to prior year. And bill payment transaction volumes increased at a nice pace of 38% in the same period. The number of financial institutions installed with our enterprise payments ASP solutions for remote deposit processing increased 15% sequentially quarter-over-quarter, and compared to the prior year quarter increased 127%. The financial institutions merchants installed and utilizing this solution increased by 25% compared to the last quarter and 280% compared to the same quarter a year ago.

Along with signing new institutions, new merchants we saw solid increases in the volume of transactions being processed by this solution. Transactions increased by 29% compared to the last sequential quarter and 239% compared to the same quarter a year ago. As indicated other prior call we continued to see strong demand for our many complementary products and services in both the banking and credit union markets including our imaging solutions, CRM solutions and risk management solutions particularly our yellow hammer BSA solution. I'll now turn it over to Kevin for a further look at the numbers.

Thanks, Tony. Again, good morning. As Jack previously mentioned during the quarter just ended, we had revenue growth of 15% of $192.2 million in the quarter, of which 12% of this is organic. This compared to the consensus estimate of $187.9 million in total revenue for the quarter. Year to date total revenue grew about 16% to $367.6 million. License revenue increased by 10% compared to the year ago quarter and is basically flat year to date. We had a very strong quarter in license. We continue to believe that our sales teams have some very good momentum going into the second half of our fiscal 2008 under all three of our brands and based on recent successes in our sales pipeline. Support and services increased in every component within the line of revenue for the quarter and year to date implementation increased 13%. With a large portion of these not tied to specific license revenues but rather to implementation of recurring revenue type items and convert mergers of banks of our customers because our bank-- as our bank customers continue to acquire.

Our payments businesses was up 24% for the quarter. Outlink data was up 9% for the quarter and in-house support and services was up 19% for the quarter, as that piece of business continues to grow with a lot of work orders. Our hardware revenue increased by 8% for the quarter and 14% for the year compared to year ago due to strong sales in I series upgrades, sorters for check imaging solutions and our scanner fills for remote to public cashier. We also had a strong quarter and year to date in our J. J. Direct forms and supplies business. The products that are marketed under our PROFITstars brand, as Tony mentioned to both core and noncore customers contributed to increase their contribution to revenue, gross profit and net income. We continue to maintain strong consolidated gross margins at 44% for the quarter and 42% for the year.

Our banking segment gross margins slipped a little by 1% to 44% in the second quarter primarily due to sales mix. However our credit union segment margins increased to 45% from 39%due to the strong license revenue in the credit union segment in this years second quarter. In the bank segment for license margins we saw a decrease from 95% to 91% due to the higher amount of third party software sold during the quarter driven by our BSA solutions. Support and service margins increased to 40% from 39% for the quarter, driven in part by the strong increase in (inaudible) revenue and EFT revenue and hardware margins increased 31% from 21% from primarily due to sales mix and due to an increase in, slight increase in bid rebates from a year ago.

Our total operating expenses increased 17% for the quarter and as a percentage of total revenue remain level at 20% for the quarter compared to prior year. For the year operating expenses have increased 14% and remain level at 20% of total revenue. Our selling and marketing increased 9%, R&D went up 27% which the majority of this increase is in the acquired companies in the PROFITstars brand and to-- not only the three companies that we've acquired in the last 12 months or 13 months but also additional R&D spend for the existing products. G&A went up 18% for the quarter. Part of that is due to increased personnel cost compared to a year ago. Our user group fees were $0.5 million or more higher than they were last year. And also some additional accounting, auditing and tax related type services were the majority of that increase this year over last year. And just FYI in the quarter there was a little over $2 million in total cost related to the user group which should not be there in the March quarter.

Our operating margin remained level of 24% for the quarter compared to a year ago and decreased slightly by 1% to 22% for the year compared a year ago. The net result was an increase in operating income of 16% in the quarter and 13% for the year to date. As we have discussed on prior earning calls the R&D credit which was extended in December of 2006 for the period of January '06 through December of '07, has significant impact on our approximately $3 million or $0.03 per share during this quarter year ago. Because of this and other offsetting factors our effective tax rate for the quarter-- this quarter increased to 36.8% from 30% last year. A date tax rate-- to date year tax rate, I'm sorry, is increased to 36.6% from 33.5% last year. Without this one time impact a year ago to our net income we're basically adjusting this to compare apples-to-apples, our net income this year would have been an increase of over 16% with an 18% increase in EPS for the quarter compared to the prior year.

EBITDA increased this year to $113.5 million from $98.4 million last year, or a 15% increase. Depreciation and amortization of $30.1 million this year compared to $23.9 million last year or a 26% increase is due in large part to capitalized software in prior years, acquisition and additional upgrades to hardwares in all of our support structure. EBITDA margins remain level year to date at 31% compared to the prior year. We continue to feel comfortable in providing guidance for the rest of FY '08 with top line revenue growth in the low double-digits with some slight margin improvement to expand operating income margins to somewhere in the low to mid-teens.

Use of cash. As Jeff mentioned there were 700,000 shares of share stock repurchased this quarter and 900,000 shares year to date. During January we purchased another 1.9 million shares as we thought the drop in our stock price was very good opportunity to utilize our capital. As you probably know this also the Board recently increased the stock buy back by another 5 million shares as the current number authorized of 10 million had gotten down below 100,000 shares left on the authorization. In the last three years since May of 2005 we have purchased roughly 9.9 million shares of stock for the treasurer. Also during the year to date our cash used for acquisitions increased $13 million compared to last year of $49 million. Our CapEx is up compared to the prior year by about $5.6 million, to $21.1 million. And which goes in line with the earlier guidance we gave of CapEx this year somewhere in the low to mid-$40 million.

Our backlog as Jack mentioned was at $240.2 million with $61.6 million in-house and $178.6 million outsourcing. Which does represent a 7% increase. And again I want to remind you there are no transactional revenue represented in these backlogs that relate to EFT debit, bill pay or remote deposit capture due to the large growth in those areas and we're trying to keep our backlog as conservative as possible. With that I will open the call up for questions. Mehalla will you please open it up?

(OPERATOR INSTRUCTIONS)

Hello?

Our first question comes from John Maietta from Needham & Company.

Okay thanks very much. Good morning, guys. First question I had, Jack on the previous quarter call had you mentioned that there was some license deals that had slipped. Did any of those close in this current quarter?

Yes, they did. The ones that we were tracking mostly in the credit union space just took a little longer to get done but did get those done in the quarter.

Okay. And then, Kevin, were there any integration charges associated with the acquisitions that fell into the December quarter that we may not see in the March quarter?

Very few, John. I mean we've got the integration down pretty much to a science, so I mean there-- basically we just asked our people to do a little bit more rather than adding a whole bunch of additional cost. But having said that we try to capitalize everything we can as part of a purchase price when we do an acquisition. So there shouldn't be much impact in the December quarter that would go away in the future quarter. The biggest thing that will go away in the March quarter will be the user group fees that we had in the quarter.

Got you, okay. And then just the last question I had, I know it's early days, Jack, but if you could talk a little bit about yet maybe some of the early traction with regard to the mobile banking product?

Yeah, John, that's going very well. We have 49 at this point financial institutions that have signed up for our mobile banking offering. Again our product is designed to work with any phone, any carrier and I think we have something like 12 carriers that are represented among the 49 banks. So it's been very well accepted. It goes in very easily and again is working well with pretty much any phone, any carrier out there. So we're pleased with it at this point.

Okay. Thanks very much.

And our next question will come from Tim Fox with Deutsche Bank.

Thank you, good morning. Since you ended your commentary on backlog maybe I can start there, Kevin just talking a little bit from a trend line perspective, up 7%. I think it's down a bit sequentially, can you talk a little bit about the backlog, what we should expect from a trend line perspective, is that an indication in any way that things may be tightening or is this just more of a seasonal issue?

Well, first of all, John, it's actually up 1% sequentially for the September quarter, did it not go down. September 30th our total backlog is 237.6 and this -- at this point it's 240.2. I think that one thing we've always said about backlog is in-house represents contracts for software, hardware and installation services that yet to be delivered. So obviously when you have those type numbers especially the hardware and software going in and out there's going to be some lumpiness and our in-house backlog is going to bounce around a little bit. So I don't know that I would take a whole lot away from it being down $2.3 million from last quarter. Then the outsource piece of the business basically what that means is we, we continue to sign up new customers and renew existing customers at a faster pace than we're actually rolling those amounts out on a quarterly basis.

Got it. Okay. And hat's helpful. And just secondly can you talk a little bit about the relative strength between the banking and credit union verticals of what are you seeing in the credit union side of things? I mean you mentioned strong licensing there but is there anything in particular from a secular perspective going on there that's helping to drive that outperformance?

I would say, Tim, that there-- it's (inaudible) for whatever reason and I don't know that I could give you a good reason why but there appears to be a little more core system activity on the credit union side than there does on the banking side. Banking is strong and again we had solid revenue growth there. A lot of De Novo activity continues to be the case on the banking side. But not as much replacement of existing systems on the banking side as we see on the credit union side. Paramount of discussion around their Internet banking systems and opportunities to make some improvements in the number of the capabilities there but again just for whatever reason the credit union side seems to be a little more likely to change core systems than what we see from established banks on the, in the banking segment.

Okay. Great. And lastly big picture you mentioned cautiously optimistic on the both the banking and credit union front. We've seen a lot of the same head lines I'm sure about the credit tightening trickling down to regional banks and maybe even some point credit unions, but are you suggesting that at this point it doesn't seem to be trickling down to IT budgets as it relates to the systems you're selling?

Tim, in terms of what we have seen and heard to date in the first half of my statement where I said that we haven't seen anything that looks like it's going to impact our sales in the near term that would be sort of how we see things at this point. The qualifier of being cautiously optimistic about the economic outlook in general, I think that's as much as anything else a reflection of the fact that we keep hearing the stories in the press about the larger banks and in some cases the regional banks and the news media, are we in a recession or are we not? So if enough of that kind of discussion continues, probably not going to be a good thing. So it's basically our way of saying, right now our business hasn't been impacted. We have not immediately heard anything that leads us to believe that it's going to be impacted. But there seems to be an awful lot of people out there ringing their hands over the economic situation so we don't want to appear to be unaware of some of that discussion going on.

Understood. Thanks. That's helpful. Congratulations.

Thank you.

Thank you. And our next question comes from Dave Koning with Baird.

Yes, hi guys and welcome back Kevin after about six months of you not being on the calls with last quarter you being gone.

Thank you, good to be back. I was meant to be here.

Yes, exactly. That's great. On the organic growth side, when we think about support and services, I think AudioTel's there and did contribute to Q2 and I saw a little bit of deceleration in support and services even though it looked like AudioTel was in the numbers this quarter for that. And just maybe you could talk a little bit about the deceleration and maybe what contributed to that?

Well I don't know that I would really classify that as a deceleration, David. I mean we still did support services 17% for the quarter. Our guidance going into this year was somewhere in the upper teens which I think we're still there. But even if you back out AudioTel and Gladiator, which both those contribute to support services, our organic growth in support service line is still above 15% for the quarter compared to last year. And if you look at sequential quarters there are some things in the first quarter like we got a significant onetime rebate in the EFT world that basically went in there and pumped up the revenue a little bit which also helped the margins a little bit. So there is always some onetime things that happen in the quarterlies that's going to cause all of our lines to move around a little bit. But for us continued growth in support service 17% I'm pretty proud of that.

Yeah, I definitely agree. That's a very good growth.

Especially when you consider with that, David, that even throwing the acquisitions in there we were able to actually to expand the support and services margins.

Yeah, that's great. And I guess the one other question on the license side, what should we expect looking forward? I know there's always a lot of volatility there but given you've got some of the revenue from Q1 into Q2 getting those deals closed will Q3 kind of fall off a little bit and then we'll get the normal seasonal ramp in Q4?

I don't know that it'll fall off much in Q3, David. I mean one thing about sale people is once they get going and get some momentum it seems like they can maintain that momentum. So we [get pre-quarter]. We had some deals slip from the first quarter to the second quarter, that we have deals slipping every quarter. In the first quarter there was two or three pretty significant ones that we thought were going to sign. In fact one of those we thought we were going to sign in the first quarter, they signed but they decided to go outsource instead of in-house. So there's always going to be some slippage and there's always going to be some of those banking and credit unions that at the twelfth hour when it comes time to contract, for whatever reason they decided to go outsource instead of in-house. So there's going to be probably some lumpiness in the license revenue line.

Then one thing I would add to that is that the pipelines on both the banking and credit union side looked pretty strong, which again on the credit union side the predominant delivery preference is for in-house delivery while the preference on the banking side is for outsource delivery. So again what-- that's what we saw in the current quarter and, based on sales forecast that we're looking at expect to see something pretty similar in the upcoming quarter, current quarter.

Great. Thank you.

Thank you. And our next question comes from Greg Wowkun from Banc of America.

Good morning, gentlemen. You highlighted that R&D spike in the quarter a bit. How should we think about R&D trends going forward?

Well, R&D should level out a little bit but one of the things had you in the quarter, there's a couple of things impacting that? I mean you had, AudioTel in there throwing in their R&D cost, which we've obviously added some headcount. And then also one of the things that's kind of hard to control is this time last year we had some major projects which we still have major projects going on, but any given quarter there can be some salaries and personnel costs that now become expensed instead of being capitalized as those products get rolled out into GA.

Great. Thank you.

So I don't look for R&D to go down any, I'll put that it way. I think it should grow a little less in the next quarter than did it in the quarter we just ended and still maintain somewhere roughly the same percentage of total revenue.

(OPERATOR INSTRUCTIONS) And we'll now go to John Kraft with D.A. Davidson.

Good morning.

Good morning, John.

Morning.

Most of the questions have been answered, but just a couple follow-ups here. The remote deposit, obviously very, very strong. What percent of that business is actually done at the branch versus at the merchant?

John, in our case when we talk about those numbers, the numbers we're talking about are entirely at the merchant location. We really don't quote, frankly don't know that we even track what is actually taking place at the branch. We are certainly seeing an increase in interest in branch capture. We have, Tony, if you know off the top of your head what kind of an installation we've got or percentages, but we're seeing strong growth in branch capture, but those transactions typically don't pass through our systems. In other words, the financial institution captures the transactions at their branch and sends those transactions directly to their core system for processing. And so they don't pass through our accounting mechanisms if will you. So really it isn't something we track. The license fees and related scanners sales to the banks for implementing branch capture, we certainly see those. But any of the numbers you here us talking about that are in that EFT section are all merchant related capture.

Okay, are you seeing license scanner sales, license sales, implementation fees, that sort of thing in the branch growing at similar rates?

The-- this is Tony, the branch sales, we still continue to see strong purchasing for our branch capture solutions but certainly not at the pace that we're seeing the ramp up of the merchant capture or the remote deposit capture scanners. I would say that our branch purchases by our institutions are in line with what they've been for the last several quarters.

One thing I would add, John, just for future reference, the actual scanner sales as far as merchant capture in the quarter were down compared to the previous quarter. Down over 20%. That is not a reflection of waning demand at the merchant site for this service offering. It's more of a reflection of the fact that these scanners have become pretty much a commodity item. You can pick one up at Office Depot and install it, unlike some of the core systems that we sell where we do extensive testing of the operating systems provided by IBM and everything before we release and support those for our customers. Frankly there's not a lot of value-add that we can do to a $300 scanner, so I think we have seen a fair amount of folks buying their scanners directly and locally. So I would mention that simply to say that scanner sales in previous quarters have driven a fair amount of the growth in our hardware, but as we kind of annualize on some of those quarters I don't know that we're going to see quite the same kind of percentage growth in hardware that we have seen in recent quarters based on at least the component related to scanner sales.

Okay, interesting. That's helpful. And then moving on to another fast growing area, the bill pay. This switch you made, this processor switch, you mentioned Kevin that it improved your electronic rate but ultimately what was going on here was you trying to lower your overall costs, right? And I guess my question is has that happened and by what percent roughly were you able to do that?

Well there's a couple of things there. The-- as I think we indicated on the last. last call there's some modest reduction in pricing but we didn't make this move so much for the near term cost savings as much as we did for the ability to position ourselves to be able to do least cost routing a couple of years down the road. I don't know how much explanation we want to go into about that, but basically there were some things that we needed to be able to do in terms of database management to be able to take advantage of a variety of providers of payments that we weren't in a position to do with our database at the time. So the biggest reason for the change was to position ourselves for least cost routing two to three years down the road. We have seen some cost reduction. It is pretty modest cost reduction in the transaction pricing. The benefit that we are more likely to the see out of that is the increase in electronic transactions because of the lower cost associated with the electronic transactions as compared to the printing of checks. And we have as indicated begun already to see even in the middle of that transition improvements in our electronic penetration percentage.

Okay thanks Jack, that's all I got guys.

Thank you. And our next question will come from Greg Smith with Merrill Lynch.

Hi, guys. You mentioned a third party software sales were incrementally higher. What are some examples of those third party software sales?

Probably the biggest one, Greg, would be our BSA product that we actually had built for us outside and we split the license revenue with them as we sell it.

Okay.

That'd be the biggest one. And then on the credit union side I would say we still sell some upgrades to the OTG product that-- which is a (inaudible) energy solution that we use to market before we acquired synergy. We no longer market that to new customers but there's still some up grades there. Just like with inner voice in the credit union space, we sell some upgrade there which a third party and we actually split the revenue with them with all those people as we sell the license.

Okay. And then the hardware, just remind me, what causes hardware margins to jump around quarter-to-quarter? Is that just mix maybe more scanners lowers it a little bit?

It's a couple things, Greg. It's primarily mix. We had a strong quarter this year, or this quarter with I series upgrades because IBM came out with a new upgrade last summer and the more I series we sell the higher vendor rebates we get from them, and they put us in different programs which helps improve the margins on that side. But also it depends on how our JJ directives is doing because we get pretty healthy margins off our forms and supplies business. So a lot of it's just sales mix and then depending on what we are selling within that mix.

Okay. And then you guys really don't play in the mortgage market. Are there any opportunities for you? I mean is this the time to be looking at that space from a processing standpoint?

Greg, I don't think we would particularly look at the mortgage from a processing standpoint. We continue to think about whether we need a mortgage loan origination product. A number of our banks and credit unions both are into conventional mortgages and have a solution for mortgage loan origination. I think our challenge is to figure out if there's some value that we can add to that part of the transaction. In all likelihood by partnering with a vendor and doing some tight integration of s strong mortgage loan origination system with our core solution. But that's about the only thing we're discussing related to the mortgage market at this point in time. Just is not an area that we have been in in the past and don't know that it's one we're real anxious to jump into right now.

Okay. And then just one last question, I mean you talked about the economic environment, Jack, your comments were helpful. Just wondering, is there something we can watch for that would be a big warning sign or is it more, just, hey, this is recurring revenue, mission critical stuff for banks and we're going to keep ticking along?

I don't know of any red flags I could tell to you watch for. The--one of the things we've said all along is that in a recession one of the negative impacts to the business would be a slow down in formation of De Novo banks. We do a good bit of business every year with new start up banks. To the extent that capital became constrained or for whatever reason there was a reduction in the formation of De Novo banks that can impact our business. But even in that case it would be unlikely to affect our business in the near term. A De Novo bank doesn't spend a whole lot of money with you right after they open the doors. It's, you're 12 months into that relationship before there's much material revenue being generated out of that. So even if De Novo sales stopped completely tomorrow, it would potentially be nine months to a year before we would see that reflected in the business.

Similarly I guess on the credit union side if all of a sudden credit unions shut down and stopped spending, that would be something that would be more noticeable in the near term but, again, if anything credit unions appear to be in terms of percentage of financial institutions that will make a change in any given year, actually appear to be changing at a faster rate than the banks do. Part of that I think is the fact that they are not as concerned about having to report to stockholders as nonprofit-- not for profit organizations. They don't have to report to stockholders. And if the average return on assets for credit unions as I believe the industry is about 0.75, and if that number drops to 0.5 or 0.25, it's not ideal but it's not overly concerning to them as it would be to somebody that has to report to stockholders and that kind of thing. So they will spend money, they will continue typically to spend money on technology if they believe it will improve member service. So I don't know of anything I can highlight for you that would say, hey, if this happens, that you ought to be cautious but again we continue to watch it.

Greg, the other thing I'd throw in there is now that 70, almost 70% of the revenues recurring in nature and that recurring revenue piece is growing in high teens, roughly 18%, 19%, this quarter to last quarter if that's something that they can't spending, because those are long-term contracts, we're going to keep getting the per clip charges so that's (inaudible) going to grow. So even if there was some sort of red flag we watch for out there what it's going to really impact is that other 30% of our business in license and hardware. Yes, I agree with Jack, I don't know what that red flag would be. That we feel a whole lot better with 77% of our business being non-recurring than five years ago when it was 35% or 40%.

That was very helpful. Thank you.

Thank you. And our next question will come from Gil Luria from Wedbush Securities.

Thank you. A follow-up on the De Novo question. There's a stream of De Novos that's coming in and when you talk to them are you hearing more about the fact that they're starting up in spite of the current environment? Are you hearing that they see this as an opportunity because other banks are saddled with the bad decision that they've made and therefore this may not be the same as previous recessions where De Novo activity was reduced?

Gil, I think the-- what we're hearing is pretty much the belief that there's an opportunity because of acquisitions that have taken place in local markets or for whatever reason that they feel like they can better serve the market. And certainly a factor is the ability to come in unhindered by previous decisions and processes and methods. Which again is kind of the thing you hear whether the economy is good or bad. From De Novos in terms of their reasons for starting a bank. I don't know that I've heard anybody say that the economic environment is actually better for them but at the same time we're really not hearing from the De Novos that it's any more difficult for them either. So I think that the reasons that they are forming banks are the same as the reasons why they have traditionally formed banks over the years.

And the other thing I'd throw in here Gil, I think we've got about as many De Novos in our sales forecast and pipeline currently as we ever have.

And can you share with us what-- about what percentage of De Novos you've won let's say over the last 12 months?

Out of the percentage of all De Novos that have been formed? I don't know that I could give you that percentage. I think in the last 12 months we're somewhere north of 40 De Novos that we've signed. Part of -- and the way, I'm not sure everybody counts De Novos exactly the same way. For example, we've got one customer that their business is forming De Novo banks. They go into various states and areas where they think there's a good economic opportunity and form a De Novo bank. We're really not counting those into the number of new footprints that we're adding because we're-- they're kind of a captive customer. They just choose to open it up run it as a De Novo separately as they do that. So I don't exactly what percentage of that is of the total number of De Novos that were formed in the last year.

Got it. And last question I think you mentioned you talked about a slight margin improvement. Is this-- does this mean that, because you started I think in May by saying that you expect 50% to 100%-- a 100 basis points EBITDA margin expansion, should we now expect that to be on the lower end of that?

Yes.

Thank you.

Thank you. And our next question comes from Brett Huff with Stephens, Inc.

Good morning everybody, nice quarter.

Good morning.

I want to do follow up on the ESP discussion and more of a long-term question. Obviously the percentage growth in that line of business has been great. Can you give us a sense of from your view will that continue on, will it take more investment in new products, et cetera? Will we start lapping some really nice comps? I mean how do we think about that sort of the next two years or so?

Brett, I think that the business continues to be strong is that it's driven by a couple of things. The largest piece of that-- of the EFT business is ATM debit card processing and really it's debit card processing. ATM is flat, wouldn't be surprised if was down slightly but I think for the most part the ATM transaction aspect is pretty flat. The debit card component is driven by a couple of things. More people using debit cards and using them in more places. And you're seeing more and more financial institutions that are coming out with reward programs designed to incent customers to use their debit cards so you've got, you got some tailwinds there that help that situation. It's also driven by us continuing to sign new bank and credit union customers to use our debit card processing compared to whatever other processor they were using before. And we continue to see some solid growth and new customer signings to move to our debit card switching. So frankly at some point I expect to see that level out but I'm not sure that I can tell where you that point is.

The bill payment component, to be honest with you I expected to see that level out by now. Again our bill payment product today we sell only to people who use our Internet banking system and we only sell our Internet banking system to people that use our core system. And the, we've got excellent penetration particularly on the banking side of the bank customers who use our Internet banking system who also use our bill payment product. So there's a fairly limited run way there. And that's somewhat offset by the fact that more people are adopting electronic bill payment and the people who have previously adopted it tend to write more checks the more comfortable that they get with it. I think that you'll also see probably two or three quarters out more emphasis in the credit union space, on our bill payment product as we begin to do some system changes there, and also the AudioTel Internet banking customers there's an opportunity for us to take the bill payment product to some nonJack Henry core customers that are using Internet banking systems. So again some things in our favor on the bill payment side but again expect to see that business potentially level out in the not too distant future, level out from 38% growth down to who knows what, 25%, maybe.

And then on the merchant capture solution, obviously there's been significant ramp up. I can't remember a product that has ever ramped up as fast as this one has in the banking industry, outpacing ATM adoption or anything else. Again the expected run way on that is probably 12 to 18 months where we see the kind of financial institution adoption of the product that will likely start to level out. But as I mentioned in the start of the call we are pursuing other initiatives simultaneously like the partnership with Shelby Systems and over 20 other software providers to a variety of industries that have seen our enterprise payments product, realize that we've got a more comprehensive offering than most of the people out in the market. And have chosen to imbed our enterprise payment solution or some piece of our enterprise payment solution into their software offering that they sell to a variety of non-financial customers, but customers who still need to process payments.

So we hope that there is some opportunity for additional traction there even as the financial institutions themselves may hit a point where their adoption begins to slow somewhat. So a lot of components there. A lot of different factors that are affecting the business makes it a little hard to pinpoint exactly what it'll do on a quarter-by-quarter basis.

Thanks. That helps. And just sort of another product question. Kevin, I think had you mentioned that the Yellow Hammer solution continues to sell well. If you sort of look at trends and I guess in a way, remote deposit and all these things, what is the sort of hottest product right now and what do you sort of see in the next 12 months?

Well I mean remote deposit cash continues to be the hottest product. I mean that is just a huge lane drive out there because typically and historically anything we try to sell through our banks was very unsuccessful because our customers aren't real good at pushing our product out to the end users but this is a product that the merchants are demanding and they are going to get it from their bank or they're going to go somewhere else to get it. So it's just a huge lane grab the banks know they have to have this offering, so that's by far the hottest product. I think BSA is probably close on its heels which is the Yellow Hammer BSA the bank feature act product which we've had very good success with that since we only rolled it out last June 1st. So that continues. Anything related to check imaging continues to be a hot topic either at the branch or at one of our IP centers. We continue to see significant growth in all the check image products.

I would just add to that, Brett, in the security area, it's a little early but as we mentioned before with the acquisition of Gladiator technology one of the initiatives there is working on an enterprise security solution that will, we believe, enable us to deliver a much broader set of security related solutions and reporting solutions than is available in the marketplace. Again, that one is not finished. It is not rolled out for general availability yet. And it will take some ramp up time based on the fact that it's a completely recurring revenue type of an item. But that, that is one that we expect in F-- fiscal year '09 will get a lot of attention. We also think that there's a fair amount of interest in Internet banking on the credit union side with some of our other product that we're in the process of adapting for that marketplace as well. That again is not a near term impact. It is more of a fiscal year '09 kind of a solution. But one that, based on the feedback we're getting we think will present some opportunities for us.

That's great and helpful. Just two more quick questions. On the G&A side were there any sort of year end pay related stuff, bonuses or anything like that that were in there, Kevin? I know you mentioned there was a $2 million user group but was there anything pay related that was bonus?

Not in G&A.

Okay and then-- sorry, go ahead.

Well there was the holiday bonus that was-- that happened in November, which obviously part of that would be in G&A.

Okay.

But that did get spread out to where ever the employees are, but there would be a little bit of that in G&A, and that would have a slight impact but pretty small. Other than that there was no other year end bonuses that were paid or accrued.

Okay. And then the last question is, you obviously were-- have been aggressive so far in January in buying back stock. Can you just give us your thoughts on capital deployment? It sounds like you still think your stocks a good deal especially at the prices it was earlier, but anything thinking about M&A and multiples coming down or just give us a sense of capital deployment?

Well I will tell you that we have-- we constantly get books and teasers on companies and there is very few of them that we'd even have real interest and spend much time even reading the book, yea and that was one of the reasons why we stepped up and accelerated our stock buy back this quarter. But as we continue to evaluate other potential acquisitions or different markets or whatever we may choose to go in that direction, if those heat up, and obviously we would much rather use our cash to do acquisitions, but obviously the second best use of that cash is to continue buying back stock at some price level. And yes when our stock gets down to $22, $23 we'll probably be pretty aggressive, Brett. But when it gets up to $25 and higher we'll probably get a little less aggressive based on commentary we got from the Board last week.

Okay. That's helpful. Thank you.

(OPERATOR INSTRUCTIONS) And our next question comes from Glen Greene with Oppenheimer.

Good morning, guys.

Morning.

I want to go back to the macro picture in question too and I actually want to go back to I guess sort of last time you guys saw an earnings growth slow down and actually I think earnings went the other way was sort of 2002, 2003. And it correlated to the fact when the Fed I guess cut rates pretty dramatically kind of from six to one directionally. We're not quite in that environment now but we're clearly the Fed's pretty aggressive. I'm trying to understand what happened five years ago and what-- why that did slow down IT spending and why this environment right now is different?

Well, one of the things that I point out, Glen, is back then when they started cutting rates they cut them I believe seven times in eight months. And at that point the banks were still getting pretty good interest spreads. Well we've been-- so last two years our FIs have been fighting the invert yield curve and skinny interest margin, so they've all been focused on other ways to get good fee income which the good thing is we've got a lot of those products that will help them get that additional fee income and expand their margins. So I mean the big thing back then was it was just a big unknown and when you drop the interest rates that fast in seven months, the banks are now paying higher interest rates on CDs than they are loaning money out for, which is not a good thing for an FI. Compare that to today, I think the banks are a little more ready for what they're facing because as I said they've been fighting inverted yield curve. But also they've been focused on getting their institutions more on non-interest fee income related type products.

Glen, I would just add to that. The percentage of our revenue that is now recurring in nature compared to what it was in 2002 is substantially higher as well. So I think there's some buffer there that we probably didn't have in 2002. The other thing that I think was a factor in that timeframe was I think we have been doing a better job of managing headcount growth in the last couple of years than what we probably were doing in 2002. In that timeframe, particularly with the ramp up,the Y2K and even before that, one of the biggest challenges we had was how are we going to find enough people to deliver all the systems that we're selling. And while certainly after Y2K that slowed down some.

I think we expected a turn around in the economy sooner than it came. And it probably didn't restrain hiring to the extent that we should have at that time. And I think that our Managers have done an outstanding job of managing the headcount to the business environment that we're dealing with today. And so I think those two factors in addition to the points Kevin made I think make this, again, a recession is not going to be good. I mean there's nothing good I can say about what happens if we go into a recession. But what I would say is I think we're in better shape to come out of it strong than we were in 2002.

And one more comment, Glen, if you think about 2002, 2003, 2002 was actually a record year for us in both revenue and ETF. The first half of FY '03 was a horrible six months. Our margins dropped down because we didn't do a REIT because we don't, I mean as Jack mentioned we're trying to get by because we didn't want to lose the good ones. So our margins were horrible in the first half. But then in our margin June quarters that year we went right back to having record quarters so it actually just six months, in the last 18 years or 18 years now, that was relish of huge shortfall.

That's very helpful. Different direction. Kevin, if you could just help me, what was the growth for the PROFITstars brand portfolio and also for your aggregate payments business, i you said it I missed it? And also what percentage of revenue did those two represent?

PROFITstars currently represents about 13% of our total revenue.

And what was the growth on the quarter roughly?

In revenue?

Yes.

30% for the year and the quarter.

And the payments-- various payments businesses?

Payments business, was up 24% for the quarter.

And percentage of revenue roughly?

Hold on.

I can get it offline if you don't have it.

I'm going to have to dig for that one.

Okay and just clarify your '08 outlook? You're comfortable with low double-digit revenue. And you're saying mid-teens EPS or mid-teens net income?

Operating income.

Operating income.

I'm trying to avoid the taxes and go to the bottom line yet because I still don't know what's going to happen with the R&D credit and some of those things. With this being election year it's hard telling what some of them may do to try to gain some votes or whatever. So it's very possible the R&D credit could be put back in place before the end of the year which obviously would have a significant impact. If they don't leave it then our tax rates going to (inaudible).

Okay. Okay. I think I'm good. Thanks, guys.

Thank you. And our next question comes from Dan Perlin with Wachovia.

Thanks, good morning, guys. My question, I need to kind of go back for a second to clarify a statement you made earlier, Kevin, about the license in the second half. One of the earlier callers had ask that you should typically see this fall off in the third quarter and then bounce back, which I would have expected, but then you made the comment that it might not actually fall off that much. And I was wondering are you referring to the percent change? Were you actually talking to the absolute dollar of license going into the third quarter not falling off much?

Absolute dollar in license revenue should be fairly level in the third quarter I would think (inaudible) to the second quarter.

Okay. And so, and that should continue roughly into the June quarter as well? Is that with your pipeline?

Typically June quarters our strongest quarter.

Right.

So you would think that license revenue for the fourth quarter would go up somewhat.

Okay. And then on the margin side of that equation, are you seeing the third party products actually growing faster than your other areas?

Well BS A is growing faster and obviously depending on what percentage that is of total license fees it can have a significant impact on the margins. On the credit union side, the two major products over there is third party products are inner voice and OTG with stocked end solutions. Those are both basically an upgrade modes. We're not actually marketing OTG. We will sell invoices to a new customers but those don't happen very often.

Okay. So we should expect I guess similar margin profile for license in the back half is what we've seen out of this quarter?

Yes.

Okay. And then can you just clarify specifically the reason for staying at the low end of your margin guidance now as opposed to maybe previously thought, just what the key driver to that is?

Well, I think the key driver to that is the shortfall that we have seen in license revenue especially in the first fiscal quarter. Which is driving-- because obviously if license revenue would have been where we had anticipated it being in the first quarter we'd be extremely strong in license fees year to date, which would make me feel a whole lot better about EBITDA margin expansion going forward. But where our EBITDA margin is you have currently a 31% year to date, which is where we were last year, you have a half a year to gain that additional spread.

Okay. And then lastly I think at one point in the past you had talked about payments, gross margins being 50% plus, is that still a true statement? Or do I even have that right?

Yeah. Yeah, they're in the 50% gross margins.

And they pretty much are all captured in support and services?

Yes, those are all support services?

Got it. Okay. Thank you very much.

And one follow-up on a question that Glen asked, the-- our ESP as a percentage of total revenue is about 15%.

Thank you. And our last question comes from Tom Lamb from Weybossett Research.

Good morning, gentlemen. Couple of questions, one is regarding the De Novos again, are you seeing them flat or up year-on-year or year to date?

Tom, I-- the number of De Novo formations appears to be down a little bit but I don't think substantially from a year ago, I think it's down slightly to flat.

Okay. Thanks. And then when you think about your recurring revenues, are they-- is the tendency of the contracts or the product flow to make the recurring revenues rise or stay flat or decline? I mean in a scenario where say you're not delivering more product, would your recurring revenues be declining or staying flat or in terms of the volumes being processed are they going up? If you could give me a sense of where you see recurring revenues going in a couple of different scenarios?

Well, first of all you need to remember that in recurring revenues there's three primary components to our recurring revenue. There's our outsourcing for bank's credit union where we do the back office processing. There's our in-house maintenance which that's pretty level throughout the year because we charge the majority of those in June for the following year which that goes then for revenue which basically just gets spread over 12 months.

Okay.

The only opportunity for that to increase is for us to add additional product or add additional customers with core solutions which would drive the maintenance up a little bit, but you'd hardly even notice it. And then the third part of our current revenue is our payment business, EFT business which is almost exclusively transaction based.

Okay. All right, great. That's very helpful. Thanks a lot.

Yes.

It appears there are no further questions at this time. I'll turn the conference back over to you for any additional comments or closing remarks.

Thank you, Mehalla. We want to thank you for joining us today to review our second fiscal '08 quarter results. We're very pleased with our overall financial performance during the quarter and year to date. We remain confident that we are very well positioned and that we have the right products and services to approach the markets that we are going after. We also believe with proper resources and the proper technology to take advantage of these opportunities in front of us. Continue to expand our margin improvement and our products and services are committed to build all of our competitive strengths. Our Executive Managers and all of our employees are focused on what's doing right-- doing the right thing for you our shareholders. With that, Mehalla, I would appreciate if you would give them the call back number, or the play back number.

Thank you. And to access a replay of today's conference you may do so by dialing (888)203-1112, or (719)457-0820. Reference access code 6548443. And, again, that is (888)203-1112, or (719)457-0820. And that concludes today's conference. We appreciate your attendance and have a wonderful day.