Jack Henry & Associates Inc (JKHY) 2008 Q3 法說會逐字稿

Good day and welcome to the Jack Henry and Associates third 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 Mr. Kevin Williams. Please go ahead, sir.

Thank you. Good morning and welcome to the Jack Henry and Associates third quarter fiscal 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 factor 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 the call this morning to provide a Company update, and report out financial results for our third fiscal quarter ended March 31, 2008.

With me this morning I have Jack Prim, CEO and Tony Wormington, President, to provide some opening comments, and after our prepared statements, we will then open the call up for Q&A. However before we begin, I would like to remind everyone that our annual analyst event is in Dallas next Monday evening, May 12, and all day Tuesday, May 13. We will start it off with a mini tech fair on Monday night to show off some of our hotter and newer products, including our complete [JJ Broad] Suite, our recent acquisitions Gladiator and Remit Plus product from the AudioTel acquisition, remote deposit and capture products, our Margin Maximizer which is the loan deposit pricing solution, Risk Manager and our new Net Power look and feel home banking and bill pay solution which you'll hear a lot about next Tuesday. And then actual formal presentations by executive of the Company, all three of our national sales managers and our operations general will be on Tuesday beginning at 8:00 a.m. If you cannot attend in person, the entire day of presentations on Tuesday will be provided via Web X.. With that, I will now turn the call over to Jack Prim, CEO, for some opening comments.

Thanks, Kevin. Good morning. We are pleased to announce another quarter of solid revenue growth with new highs for revenue, net income for the fiscal third third quarter, and backlog. Total revenue increased 11% with solid gains from both the bank and credit union segments. Bank segment revenue increased 10% and credit union revenue increased 16%. The organic component of total revenue was 9% in the quarter and 12% on a year-to-date basis. Revenue growth was again fueled by EFT and maintenance growth, and continued strong core license sales, particularly in the credit union segment. Revenue backlog reached record levels, up 12% from a year over and 4% over the sequential quarter, once given driven entirely by the outsourcing business. Outsourcing and EFT growth also helped push recurring revenue growth to 71% in the quarter and 69% on a year-to-date basis.

During the quarter, we saw a continuation of the trend of strong growth in support and services, and challenging growth in license fees. Support and services, which currently represents 78% of total revenue, grew 15% over the record levels of a year ago, driven primarily by strong growth in EFT and and inhouse maintenance revenues. License fees increased 20% from year ago levels, but were below our expectations going into the quarter. Additionally, hardware revenue was down 13% from year ago levels, due to fewer sales of checks orders as more banks have now implemented their Check 21 solutions, and some reduction in processor upgrades at IBM was transitioning to its latest line of I-series processors. The growth in support service revenue in the quarter while strong, was not sufficient as in past quarters to offset the shortfall in license and hardware sales, and allow us to reach the expected levels of earnings per share.

While we are disappointed with the shortfall our net income is tracking right in line with our internal budget on a year-to-date basis, even though license sales were well short of forecast for the quarter. As is the case of most companies and most industries currently, we remain cautiously optimistic in our outlook for the remainder of the calendar year, barring further deterioration in the current economic environment. We do not believe that to-date the economy has impacted our performance. In fact, there are some encouraging signs. Our de novo bank activities levels are at or above year ago levels. We have seen the acceleration in banks looking to move from our inhouse system to outsource delivery, resulting in higher and longer term recurring revenue to JHJ.

We had our second annual ProfitStars conference last month and had over 400 attendees, twice the number from a year ago. This was encouraging, first from the standpoint that banks and credit unions would feel comfortable incurring this clearly discretionary expense in the face of recent head lines. It was also encouraging in individual conversations with bank and credit unions from all over the United States, where nearly every one indicated it was business as usual in their area, and that there are additional opportunities for some because of the tightening credit standards at larger financial institutions. In Callahan's initial review of the first quarter 2008 results for the credit union industry showed favorable trends in membership, deposit and loan growth, and first mortgage originations up 45% from a year ago.

While the level of license fee and hardware sales can potentially impact results in any given quarter, as we continue to reduce our dependence on both of those revenue components as a percentage of the total, our business remains very strong. And while we are certainly not immune to potential economic conditions, we believe our business is highly resistant to significant impacts. With that, I'll now turn it over to Tony Wormington for some additional comments on the business.

Thanks, Jack. 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 the largest increase along with inhouse 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 20%, compared to prior-year quarter and bill payment transaction volumes increased at a nice pace of 34% in the same period.

The number of financial institutions installed with our Enterprise Payments ASP solution for remote deposit processing, increased 17% sequentially quarter-over-quarter and compared to the prior year quarter increased 96%. The financial institutions merchant installed and utilizing the solution increasing by 21% sequentially, and 202% compared to the same quarter a year ago. Along with signing new institutions and their merchants, we saw solid increases in the volume of transactions being processed. Transactions increased by 27% sequentially, and 220% compared to the same quarter a year ago. We continue to see demand for many of our 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. With that, I'll turn it over to Kevin for a further look at the numbers.

Thanks, Tony. As Jack previously mentioned, during the quarter just ended, we had revenue growth of 11% to $187.9 million in total revenue for the quarter, of which 9% of this was organic. Year-to-date total revenue was grown by 14% to $555 million, and 12% was organic. License revenue increased as Jack mentioned, 20% compared to years ago quarter, but also as he mentioned, was below our expectations going into and during the most recent quarter. And license revenue has grown 6% year-to-date.

Our support and services had an increase in every component within the line of revenue for the quarter and year-to-date, respectively. Our implementation revenues increased 6% and 10% respectively, compared to periods a year ago with a large portion of these being not tied to specific license revenue, but rather for the implementation of recurring revenue type items, and the convert merge activity of our banks that are acquiring other banks. Our payments business was up 28% for the quarter and 32% for the year. OutLink data and item processing was up 9% for the quarter and 10% year-to-date. At our inhouse support and services were up 13% for the quarter and 15% year-to-date. Hardware revenue decreased by 13% for the quarter, but still up slighting at 4% for the year, compared to a year ago due to the strong first half of the year.

Our recurring revenue, which is inhouse support and maintenance, EFT data processing, and OutLink data and item processing, or in other words our support and services line of revenue without the one time implementation fee, has continued to grow very nicely with growth of 16% for the quarter and 18% year-to-date. The products that are marketed under ProfitStars brands, both core and noncore customers, continue to increase their contribution to revenue and grow nicely, and currently represent 13% of our total revenue year-to-date. Our consolidated gross margins did slip during the quarter, but we still maintained very strong gross margins at 41% for the quarter and 42% for the year. Our license margins decreased from 94% a year ago in this quarter to 91%. Support and services which obviously has the largest impact on our total margins, decreased from 39 to 37%. Hardware margins actually increased to 27% from 25%.

I'll break this down into the two reporting segments. Our banking segment gross margins slipped to 41% from 44% a year ago in the third quarter. However, our credit union segment margins, increased to 40% from 33%, due to the strong license revenue in the credit union segment in this years third quarter. In the bank segment for license margins, we saw a decrease from 94% to 90%, due to the higher amount of third party software sold during the quarter. Support and service margins for the bank segment decreased to 38% from 41% for the quarter, which is due primarily to higher personnel costs, depreciation and amortization, higher average cost of processing in our payments business, and a lower level of the one-time deconversion fees in our OutLink position this quarter, than either in the year-ago quarter or sequentially from the December quarter. Which is obviously bad for margins in the quarter, but good for long-term revenue to not lose these long-term customers. Also, our hardware margins decreased 26% from 25% this quarter, compared to a year ago, due to sales mix and slightly higher rebates from vendors.

In our credit union segment, license margins were 92% for the quarter, compared to 100% a year ago, due to third-party product sales this year primarily our BSA product. Support and service margins increased from 28% to 29%, and hardware increased from 25 to 29% due to the sales mix. For the year, bank segment margins have decreased to 42% from 44%, and credit union segment margins increased to 42% from 36%, primarily due to strong license revenue in that segment. Total operating expenses increased 12% for the quarter, and as a percentage of total revenue remained level at 18% for the quarter, compared to the prior year.

For the year, operating expenses increased 13% and have remained level at 19% of total revenue. Each component of our operating expenses, selling and marking, R&D, and G&A, each decreased on a sequential basis compared to the December quarter, as our managers did a good job of controlling cost. Our operating margin decreased to 22% from 24% for the quarter, compared at a year ago and decreased slightly to 22% from 23% for the year, tied directly to the decrease in gross margins. Net result was an increase in operating income of 4% for the third quarter and 9% for the year, compared to the prior year. As we had discussed on prior calls, the R&D credit which extends December '06 to the period from January through December of '07, has significant impact on the prior year which is why our effective tax rate is increased from the 34.3% level last year to the 36.6% level this year, or 2.3% increase in our effective tax rate.

Our year-to-date EBITDA has increased this year to $172.1 million from $153.3 million last year, or a 12.3% increase. Depreciation and amortization year-to-date, $46.2 million this year compared to $37.3 million last year, or 24% increase, due in large part to acquisitions and capitalized software in prior years. Our EBITDA margins remain relative to level year-to-date at 31% compared to the prior year. A little bit about our use of cash. During the quarter, we did purchase 1.9 million shares of stock for the treasury. As will you recall, the board recently increased the stock buy back by another 5 million shares, so we currently have approximately 5.1 million shares available under the current authorization. In the last three years since May of 2005, we have used $219 million to purchase 9.9 million shares back to the treasury. Also during the year-to-date, our cash use for acquisitions increased by $9.6 million to $49 million, compared to year ago $39.4 million.

Our Capex is up compared to the prior year by $6.6 million to $27.8 million, due to some larger facilities expansion this year compared to last year. Our capitalized software is up slightly by $1.9 million to $17.5 million this year. Our backlog was at $248.8 million, with $61.7 million inhouse and $187.1 million outsourcing at March 31, which represents a 12% increase over the prior year, driven exclusively by a 17% increase in outsourcing. Our inhouse is relatively flat. Again remember, there's no transactional revenue represented by EFT data processing, our on line bill pay, or remote deposit cash or reflect in these backlogs, due to the difficultly in conservatively estimating transactional type revenue, especially in such fast growing parts of the business. However, the backlog is obviously growing faster than other parts of our business, for these fast growing parts of our business are tied to these long-term contracts.

At this time, I would like to give guidance. We would like to provide guidance for the remainder of our fiscal year. Obviously with the shortfall on license and hardware for the quarter, and we are somewhat challenged to accurately predict these, especially considering the continued shift of new core bank's wanting outsourced delivery instead of inhouse, the fact that more of our current inhouse customers are considering switching to outsourcing, and considering the current economic conditions. Therefore for the fourth quarter, we project that we will come in at approximately $0.32 for the quarter, which should make us end up the year at approximately $1.20 for the fiscal year. We are right in the middle of our FY '09 budget planning, and will have next year's guidance on the year-end earnings call. This concludes our prepared comments. We will now up the call up for questions. Rochelle, would you please open the call for questions?

Thank you. (OPERATOR INSTRUCTIONS) Our first question we will hear from David Koning with Baird.

Hi, guys. I guess my question is, revenue growth deaccelerated this quarter and certainly it was the toughest comp in quite awhile. The last year, I guess Q3 '07 growth 15% organic, it was certainly a tough comp. Do you expect organic growth to resume in the double-digit range over the next several quarters, given the comps start to ease again a little bit?

At this time, David, I don't know that I'm prepared to say in the next several quarters. I think we will finish up the fiscal year with above double-digit top line growth and right at double-digit organic growth. We are still 12% year-to-date organic. I think we will finish up the year obviously, with more than double-digit organic growth. But like I said, we are right in the middle of next year's budget. It's a little tough for us to estimate what the organic growth is going to be for next year, especially with the challenges that Jack and I both mentioned on the predictability of software and hardware sales at this time.

Great. I guess the most important business, still the support and service business, growing very nicely. The margins were down, what, 260 basis points or something like that year-over-year in that business. Was that a function mainly of a tough comp? And we get back to kind of normal slight margin progression or maybe you can talk a little bit about why the gross margin was down year-over-year.

Well, there was a couple of key factors in there, David. One of them I mentioned in my prepared comment on the tough comps on one-time deconversions fees in our OutLink division. If you look back over the last two-plus years that I went back and looked, our average one-time deconversion fees in a given quarter averaged between 1 and $2 million. Actually this quarter last year was slightly higher than that, and the quarter we just finished, the one-time deconversion fees were basically nonexistent. That had about 150 basis points of that.

Then we also had some large PassPort, our ATM debit customers that renewed contracts in the first half of the fiscal year, and obviously there's huge competition in that market. It's kind of a good news/bad news. We've resigned all of the large customers for another five years, but it was obviously at a lower per transaction fee, which is going to have an impact on the margins which we saw in this quarter. Those were it's two biggest components of that. I guess it goes back to, David, it's kind of hard to predict deconversion fees going forward. It was going pretty steady every quarter for the last two-plus years, and I'm challenged to even predict any of those for the upcoming quarter, because I'm not aware of any right now.

All right. Thanks, and congratulations on the low attrition.

Thanks, David.

Next, we'll hear from David Hines with Needham and Company.

Thanks a lot. What was the ProfitStars revenue contribution in the quarter and then, the year-over-year revenue growth?

You have another question while I look that one up.

Sure. I'm sorry. I guess on the acquisition front, have you seen valuation expectations in the pipeline come down at all over the past few months?

This is Jack. We have looked at a number of transactions from a distance. Quite frankly, none of them interested us enough to go to that level and submit a bid, and get into the due diligence phase to actually figure out whether expectations have come in line or not. Have not seen anything that would indicate to me that expectations have come down. But we can't say from having firsthand experience in carrying transactions through far enough to have witnessed that firsthand.

Okay. That's it for me. We can take the ProfitStars question off-line.

David, for the quarter, the process -- and remember, ProfitStars -- this is both products sold inside the bank, and banking and credit unions sales teams, and also outside the bank's through our ProfitStars sales team. But I would tell you during the quarter, it represented about 13% of our total revenue, which is right where it is year-to-date.

Okay. Great. That's helpful. Thanks.

Thanks.

Next, we'll move to Tim Willi with Avondale Partners.

Thanks, and good morning. A question on the backlog. Can you just give us any sort of color on the pro forma margin? I guess that probably gets into the pricing environment for that business that you signed, obviously a nice step up there. And I guess just any additional color that Tony or Jack might be able to add around what appears to be probably one of the strongest jumps in backlog that you've seen for awhile, relative to the commentary of cautious optimism. It just seems that backlog doesn't necessary jive with maybe such a sanguine environment for bank spending.

While Kevin is mulling the details of what some of the numbers look like, I would just say that we have had solid growth in the support and services line item. Again, the backlog is driven entirely by the outsourcing business. That continues to be de novo banks on a somewhat smaller basis, probably some competitive take aways. We have seen an increase in interest from customers that are currently inhouse on our system that like the system, but want to turn some of the technology management over to us. I think that is probably reflected in the backlog as well. When a customer does that, there's a ramp to revenue to help them make that transition. But what we typically see is if we look at the revenue that would have come from that customer in year one, continuing as an inhouse customer, versus year one now as an outsource customer. The revenue increase in year one is probably 75 to 80%, and probably 180% in year two and going forward. Some of those transactions I think certainly have helped to drive the backlog numbers up as well.

Yes. I guess the one thing I'd add to Jack's comment before I go to the margin, Tim, is understand that these customers that are going from inhouse to outsource is a trade-off. We are going to get more revenue, it's a long-term contract, but it is going to take away from our inhouse maintenance, so the growth in the inhouse maintenance could slow slightly. However, we haven't up the bank's move yet to really have any impact, but just a heads up.

As far as the margin, future margin on the backlog, I would have to say that the margins should actually be -- an indication would be that they should be a little stronger going forward. The reason I say that is, as we all know, our outsourcing backlog is for data and item processing. The majority of that is leaning now more and more towards data processing, as item processing becomes a smaller piece. As more and more banks are using Check 21, and branch and teller capture, so that will continue to decrease as electronic payments over take the payment check. I think the increased backlog is a very good sign. I really think that the margins going forward, reflective in that backlog, should actually be slightly higher.

I would also just add, Tim, as we've pointed out a number of times, that because different people look at backlog different ways, I would again reminds that you our backlog is in fact, substantially understated. As we don't include some of the fastest growing support service line items, being ATM debit card, electronic bill payment, and remote deposit capture, because of the transaction and nature of those, it's difficult to accurately predict exactly what the number of transactions are going to be. None of those revenues show up in the backlog. I would tell you that while we have nice growth in that backlog from what we did report, there's other items are contributing nicely as well that are not reflected in that backlog.

Plus the fact, that once we sign an outsource customer, we don't adjust backlog. We put a de novo in there, a de novo will simply grow pretty rapidly and we don't adjust the backlog. Revenues that were actually taking in that we are billing on a monthly basis is typically considerably higher than what we are taking out of the backlog on a quarterly basis.

Two quick questions to clarify something you just touched on. Would you say that or did you say that the backlog for EFT and bill payment, and things like that, while you're not putting it in that number, would it be a fast -- would it be growing faster than this stated 12% for total backlog, 17% for outsourcing?

Yes. Absolutely. I'm not sure -- we are still trying to figure out exactly how to capture the backlog numbers from remote deposit capture, because that's such a relatively new and fast growing product, and trying to figure out how to estimate transactions per merchant and things like that. I can't even go there, but I will tell you that both passport and bill pay, our backlogs are growing significantly faster than the OutLink backlog has grown this year over prior-year quarter.

Okay. And then the last question and I'll hop off, in the gross margin for the recurring, and the maintenance and support, without getting into any sort of like a specific guidance on that line for next quarter beyond. But how do you feel about the cost structure of that division and the scalability from this standpoint, given what you've talked about with the backlogs and those kind of margins? You did mention personnel and processing costs maybe seem to be a little bit higher than maybe had you thought, or at least that maybe some of us on the street would have thought coming into the quarter.

Yes. Like I said, Tim, I think part of the biggest impact on this quarters' margins, compared to either sequentially December or even a year-ago quarter, was the the one- time deconversion fees that had an impact. Obviously, the average cost of processing for our payments, which really is tied directly to the repricing of some of those large contracts that we did in the first half of the year. But having said that, we don't think there's any more large contracts coming up in the near term for -- that were part of repricing to go that degree that will have any impact. We are not predicting any deconversions, so the margin should not do anything but increase in the future quarter.

Okay. You still feel like the scalability in your cost structure is intact? Nothing structurally has changed as to how you are running the businesses?

No. Nothing has changed, Tim. We've still got the same number of data centers that we can continue to leverage, and just add processing power as we ad outsource customers, whether that's new de novos or paid take-a-ways or inhouse customers going to outsource, whatever. Yes, we might have to add a few people, but we can leverage those resources very effectively. There's still significant leverage in our remote deposit capture and our bill pay organizations. Passport may have maxed out on margins, because of pricing pressures which could -- should be over -- at least compensate somewhat by increased volume. But, yes, there's nothing broke within the organization. There was just a couple of one-time things that hopefully happened this quarter that did knock the margins down a little bit, and it's business as usual. We are going to continue to look at ways to drive more efficiencies and get the margins right back up to where they were.

Certainly, the personnel costs will be below the revenue growth line for sure. I don't see that it's personnel costs going that much higher.

Correct me if I'm wrong, Tony, but I'm thinking on a year-to-date basis, excluding the acquisitions, our headcount growth is up 2.2%.

It's very low.

Against revenue growth year-to-date of 14%. Again, our managers have done an excellent job of adding headcount in the high-growth areas. We are continuing to add pretty significant headcount in Enterprise payments, just because to handle the growing volume of merchants that we continue to add there. But at the same time in other areas where we are not seeing the kind of revenue growth, our managers have done a great job of keeping those costs in line.

Great. Thank you very much.

Next, we will move to Bryan Keane with Credit Suisse.

This is Norman sitting in for Bryan. Thanks for taking my call. Just had a couple questions. One on license sales, did you see any trajectory changes for the quarter? Did you think some of the slow down was based on just spending slow down or is it more due to outsourcing?

Bryan, I apologize. I am going to ask you to repeat that question,due to I think I missed part of that.

I was just wondering if you saw any changes in license sales trajectory for the quarter? Was it kind of weak throughout or did it kind of accelerate through the end of the quarter? Did you think that any of the slow down was due to just spending pull back or was it more through outsourcing?

Okay. Thank you. Bryan, I would not attribute any of the slow down to any significant period at all to the cut backs. There were several transactions, actually about three, that were deals that early in the quarter we had projected to close as inhouse transactions on the banking side, which ended up staying with their current processor. In response to a deeply discounted retention strategy to keep those customers there. That's not unusual.

I think you'll find we've been pretty consistent on these calls when asked what's the competitive environment, are you seeing anything particularly aggressive in the pricing area. I think our answer is pretty consistently been, no, I mean it's highly competitive, has been for years, likely to continue to be. But as far as seeing anything new or different, we really aren't. But that the most aggressive pricing actions that you will see will be an incumbent trying to retain a customer who is giving serious thought to going somewhere else. In which case, you can see commonly 30 to 40% discounts to retain those customers. In the quarter, we had three deals that we expected to see come our way as inhouse transactions, which would have carried license fees obviously, that responded to those types of offers late in the game from their current provider.

There's really nothing unusual about any of those transactions individually. What's a little unusual is that you had three of those occur in the same quarter. We really thought -- I can't point at a single transaction of any significance where a customer has said, hey, I'm worried about the economy so I am going to hold off for three months, six months, and see what happens. The economy situation at this point is kind of like this nagging voice in the back of your head that just won't go away, but in terms of something when we dive into, what did we think was going to happen in the quarter that didn't, I can't lay it off on the economy as being the issue.

Okay. I appreciate that. Just one more question, I don't know if you guys already answered this one, but can you give us some detail on -- I think you had said there were some higher processing costs in support and services. Can you add a little color on that?

What I said was the higher processing costs were really related to some resigning of some of our larger EFT debit contracts in the first half of fiscal year. As an average cost of the transaction, those processing costs were higher because like I said, it's kind of good news, bad news thing. We sign these large customers up for another five years. The bad news is we had to give them significant discounts to keep them, which obviously impacts the margin on that. Probably the bigger thing is the one time deconversion fees that we have for outsource customers that get acquired, was basically nonexistent this quarter when in other quarters they typically averaged between 1 and $2 million, which that pretty much drops straight to the bottom line.

Okay. Great. Thank you. That's all I have got for now.

Next, we'll move on to Gil Luria with Wedbush.

Thank you for taking the call. The trends in license I think are pretty obvious, I think they are multi-year trends. My question is about the hardware mix. What's the mix there between categories that are growing categories, such as remote deposit capture versus check sorting, which is obviously a multi-year declining category? What's the mix there and how should that play out in terms of growth looking forward?

Gil, it's Jack. I will let Kevin think about whether we actually have those kind of number breakdowns, but I would tell you as a general statement on hardware, I'm frankly surprised that we haven't seen decreases in hardware before now. A couple of factors there. Hardware as you know, gets cheaper every year, it's faster and it's less cost-per-mix of processing capability every year with every release that comes out. And combine that with the fact that for years now, we've been seeing an accelerating trend towards preference for outsource on the banking side, compared to inhouse. That would -- should lead to a decline in hardware revenues. I think that's been offset somewhat by the growth in sales of scanners for remote deposit, and by accelerated purchases of check imaging systems as banks are moving to implement Check 21 solutions.

Obviously as you stated, the Check 21 solutions are largely in place. There's some activity still taking place there, but the bulk of it has probably moved. We are continuing to see substantial ramp ups in the number of merchants that are doing remote deposit capture. I think we hit a record last month for the number of merchants that we saw in a single month. What has changed a little bit there is that the scanners are essentially a commodity item, and can be purchased from other sources for less money quite frankly, than we are willing to sell them for. Some customers have gone in that direction.

The other thing I would say is comparable on scanner sales, typically the banks, not in all cases but typically, your larger banks were the first to move to remote deposit capture. Larger banks have more business customers and therefore buy more scanners, so your large scanner purchases from individual customers probably took place earlier in the cycle. Some of the folks that are buying now may be a little smaller in size, and not buying quite as many scanners. Frankly, when will I look at the hardware revenues over the last several quarters, the surprising thing to me is that it's kind of held steady in there until this quarter at around $23 million in total revenue. I can't give you any reason why we would not expect hardware revenues to continue to decline as a percentage of the total revenue. Whether Kevin has any specific breakouts on the numbers or not, I'm not sure.

The one thing I'd point out, Gil, is remember that hardware revenue on our financial statement is basically everything we resell other than software, so it's not just iron that we are selling. 10% roughly of that hardware revenue is actually forms and supplies business that we sell, which is pretty nice margins which helps to hold the hardware margins up. About 20% of hardware is actually hardware maintenance that resell on the I Series and P Series, and reader sorters out there that we resell. And we provide front line support. You have 70 percent, and both those, they are not absolutely recurring, but they are pretty close to recurring because people are going to continue to by forms and supplies at pretty much the same pace. Hardware maintenance is either one-year or longer contract. That leaves 70% of the hardware which that goes to I Series, P Series, X Series, check image sorters, all of the things that we sell through our matrix network services.

It can be any number of things. but I will echo Jack's thoughts on that. We've held hardware revenue at about $23 million for I believe the previous four quarters, which we were kind of surprised that the first quarter went up and we were a little surprised that it continued at that level. We weren't overly shocked that it fell this quarter. I was a little surprised that it fell as fast as it did. I thought it came in $1 million or so short of where I thought it was going to be going into the quarter. Having said that, I don't see any reason why it's not going to continue to become a smaller total dollar amount of revenue, and obviously a smaller percentage of our total revenue which also will have a positive impact on our margins.

Got it. That's very helpful. On remote deposit, it seems like we are still on the steep end of the growth curve there. Is it still less than 5% of overall revenue?

Yes, it is, still less than 5% of overall revenue. One of the items that we'll comment on at the analyst meeting next week, Gil, is that the a ABA Banking Journal did their annual survey, and published that I think in March, you probably could find that on their website. We will have hard copy handouts that are for folks that are in independents next week, but one of the things that they were questioning on the banks this time was in remote deposit growth.

Essentially if you look at the percentage of the bank's business customers that currently have remote deposit, and the percentage that they expect will have it within two years, the banks are indicating that roughly triple the number of their business customers they expect to have remote deposit in 2010 compared to where they are right now. Again, the ramp curve of banks moving to offer this service has been extremely steep, and probably begins to level off here before too much longer. But even when that occurs, it sounds like the organic growth of additional businesses is adopting a solution that the outlook still looks pretty strong there for the foreseeable future.

Yes. Currently, Gil, the remote deposit capture product, if you look at the entire revenue driven from that, which would be obviously the recurring revenue, the transactional fees, and the reselling of the hardware, that's a little over 2% of our current revenue. Just the transaction piece is a little over 1% or actually recurring revenue, because remember, that pricing model is a little different that we charge a monthly minimum to the bank or credit union, of which they get a certain number of merchants as part of that. When they add additional merchants, that monthly fee goes up. Then the merchants get a specific number of transactions, and once they go beyond that number of transactions, then we get additional transaction fees. It's a growth model that -- it's been a lane grab, I think it continues to be somewhat of a lane grab, but now it's more of a saturation of the business commercial customers with the bank and credit union, and getting them to use the product more effectively.

Great. Thank you.

Next we'll move on to John Kraft with D.A. Davidson.

Good morning.

Good morning.

Jack, you just commented on three deals, inhouse deals that stayed with their existing processor. On the license line, looking at your December quarters, strong results, were there any deals that were maybe pulled into last quarter that was part of the reason for the weakness or deals that may have been pushed out that you'll see next quarter?

There is always some slippage coming in, moving out. I can't recall anything in either of those or trying to think back to Q2 and -- we are always trying to pull deals in. The sooner you get one in and get it off the street, the better off you are. I can't remember any specific transactions in the December quarter that would have made those results stronger as a result. I can't really name any that slipped out of the March quarter that would have made the transaction -- made the license revenues weaker in that particular quarter. There's some small items always, $100,000 opportunity here and there, a few of those will slip in as well as out. But I can't point to anything specifically, John, that slipped out that would have made a difference in the quarter.

If you back up, though, I think there was a couple of deals that slipped out of the September quarter, that we closed in the December quarter. There were a couple of sizeable deals that we thought were going to happen in the September quarter, which did ultimately make the December quarter a little stronger, John.

Okay, that's right. And then regarding margin, you cited that there were more deals sold by third parties. I was hoping you could discuss that. Is that something that you see as a continuing trend or what exact is happening there?

Are you talking about license revenue?

Exactly.

A big part of that is our BSA product, which if you remember, we contracted with the Red I group of guys to build that product for us. We actually have a revenue split in it. We've had very good success since we rolled that product out a little over a year ago in the bank segment. It's just really taken off in the last quarter or two in the credit union segment. That's what pulled the credit union license fees down from a 100%, because it's only about three products that we remarket on the credit union side. It's BSA., it's Inner Voice and it's OTG. We don't really resell OTG anymore, because we have our our Centurion product. We do continue to sell upgrades, but there weren't hardly any of those, if any in the quarter. Inner Voice was just kind of ho-hum quarter, so there was a little impact from that. But almost all of the impact on the credit union side was BSA solutions that we sold. On the bank side, obviously it's BSA product, but then also any ARGO products that we sell which can either be to the Silver Lake base or the on target ARGO products that we sold in the quarter after base.

That's helpful. Thanks, guys.

Thanks, John. Good luck with your conference.

Thanks.

We'll move on to Brett Hut with Stephens Inc.

Good morning, guys. Three quick questions. Can you give us any sense for the support and services comp term fees comparisons for the June '07 quarter versus what's going to be next quarter? Just to try and tease out some of that --it seems that was a meaningful impact this quarter.

I'll let Kevin look that up if you want to ask the next question.

Are you talking about margins or revenue, Brett?

I guess either, it seems like it impacted both, but maybe more margins.

As far as revenue, I don't see anything in the mix that would change our quarter-over-quarter growth that we've been seeing, basically for the last, what, eight quarters since Forbes Services. I don't think anything is going to change there, so I think the revenue growth will continue right on track in the fourth quarter. Just it repeat it, that the biggest challenge is trying to predict what software and hardware is going to be. As far as reporting service margin, I can't imagine them getting any worse than this quarter. In fact, we should see some slight improvement as we gain efficiencies, and that's without considering any revamp that of deconversion fees or anything in the quarter.

That's helpful. Then on the G&A, it came in meaningfully lower than at least what I expected, was there anything going on there in particular? Second part of that is, is that a good number going forward or how should we look at that?

There's a couple of thing that happened in there, Brett. There was about $2.5 million of user group costs in the fourth quarter, that wasn't in there this quarter, which I actually talked about on the last call. That was the biggest part of it. There was also 5 or $600,000 reduction in depreciation and amortization, because some of the -- we ran out of depreciation on some assets within the G&A grouping. And then, there is just a spattering of other little things, but that's pretty much $3 million of the decrease right there.

Okay. And is that -- that will -- that's a good number, ex any of the seasonal user group stuff?

I mean it's interesting relative to where it is now through June. Then obviously, the September quarter, we have the credit union user group meeting which will spike up a little bit. Then we have the bank user group meeting in the fall, which obviously has the biggest impact and then it will drop back down again next March.

Then last question is you all have a typically strong seasonal quarter, heading into June. Given the commentary on the secular trends of switching from license to outsource, can you give us a sense of -- will we still see, do you think, a secular good license quarter? Or would that moderate or what's the best way to think about that?

I think we will see a stronger quarter than we had this quarter, for a couple of reasons, Brett. One, it's our fiscal year-end, our sales guys are out there beating the bushes trying to close every deal they can to get their quotas in. But because that is our fiscal year-end, had been for years, a lot of our banks are trained that that's when they should be signing contracts. I think we'll have a stronger quarter. Will it be as strong quarter as the fourth quarter as a year ago? There's no way I am going to go out on a limb and predict that.

Thank you.

And next, we'll move on to Tim Fox with Deutsche Bank.

Thank you, good morning.

Good morning, Tim.

Just a quick question on the deconversions to be clear, it sounds like you're not expecting any major deconversion in this fiscal quarter coming up. I'm just wondering what that may have looked like in last year's June quarter. Are we going to have another tough comp?

We don't really expect to have deconversion in any quarter, Tim. I think the fourth quarter last year, and I don't have that right in front of me, but I think it was somewhere around the average of $1 million or something for the fourth quarter. There is going be some in there, but like the quarter we just had, I think there was $300,000.

Okay.

The problem was that the December quarter and the March quarter a year ago were actually unusually high quarters, because both of those had close to $3 million of deconversions in those quarters. Every other quarter in the last eight quarters was up slightly over $1 million. We just kind of go into every quarter, plan on $1 million. For whatever reason, this quarter just didn't happen.

Okay. Great. That's helpful. Second question, you mentioned that you did have some good news, bad news on the resigning of those EFT contracts. I was just wondering, what drives the requirement to have to give significant discounts? Is it a competitive issue or is it more that they are expecting discounts because of what we all would expect is much higher volumes going forward?

Tim, it really has more to do with competitive actions in the marketplace. These contracts that are coming up for renewal would have typically been put in place at least five years ago, and it's a pretty heated market. Not unlike core systems, everybody is competing hard for every opportunity. It's really more of a reflection of the competitive environment.

Okay. And just to be clear, you said that you don't see any large renewals coming up in the near term?

No. None that I think would likely lead to any noticeable impact. There's renewals that take place all the time, and bigger ones are in the bigger challenge. But again. I don't think that we see anything that's likely to the show up in the results.

Okay. Just lastly, on the inhouse sales for competitive take-a -ways, that were aggressively priced and stayed with the other vendor. I'm just trying to characterize your pipeline, heading into the final quarter here. Do you see -- do you have a certain percent of your pipeline that includes possibly some more of these inhouse take-a-ways. The second part of that is, do you think this environment may be causing even more egregious pricing from the competitors? Is there a risk there to the pipeline?

Tim, I don't know that we had any -- I think there's maybe a deal that we are working, where there's potentially some exposure there. By and large, I certainly don't see three where I think we have that kind of exposure in the current quarter. As far as the economy, again, the 11th-hour deeply discounted offer from the incumbent to retain business, as we've said is not unusual. We still win some of those. Even when that happens, we still sometimes win. Probably in these cases, our inhouse deliverable would have been a lower cost solution than the deeply discounted stay with your outsource provider solution might have been. However, there is risk in changing vendors, there's effort required to change vendors. A lot of times that price will cause to you look at and say, am I in enough pain with my current provider that I want to risk that. Could there also be a factor that entered into those this time that said, the economy is a little questionable right now so maybe what I ought to do is just reup here and stay? Could be. I don't think anybody gave thus indication, but I couldn't tell had you that it wouldn't be a factor in somebody's mind.

I will say, Tim, that one of the three did just sign up for one additional year, which means we are going to have another shot at it, this time a year from now. The other two I think resigned back up for the long-term contracts. That one specifically, that may have been going through their mind, wait a year and see what's going on with the economy before they make any significant changes.

That's it for me. Thank you.

Thanks, Tim.

We will take a follow-up question from Tim Willi with Avondale Partners.

Thanks. Kevin, on capital expenditures, just any thoughts you might have about direction of that number, relative to revenues. Or how you think about it, particularly given some of the success you guys are seeing. And it sounds like even maybe some acceleration in customer demand for more of the outsourcing data center intensive services. Do you see your infrastructure with more than enough excess capacity right now that Capex may begin to trim back relative to revenues? Or will you be potentially in a fairly consistent investment mode for awhile to support this growth?

I think we will be in a fairly consistent mode, but if you remember, Tim, the first two -- I can't say the first two calls because I was in the hospital for the first one, but the last one. Actually I think back on the beginning of the year, I predicted that Capex for this year was probably going to be somewhere in the low to mid $40 millions, because of some Capex we had going on at some facilities in Springfield and Branson and Charlotte, and different areas. Right now, we are just under $28 million year-to-date. I think we are probably going to end up the year somewhere in the mid $30 millions, instead of the mid-40s. But that's because that additional is going to slide over into FY '09, because those projects are underway. But they are just delayed a little from where I thought they would be at this point.

Springfield, we've just picked our general contractor there. Probably in the next 60 days, we'll be breaking ground. That's an eighteen-month approximate project. I don't want to say too loud because I don't want our employees to get too excited that I named a date that they can move in. We also have the facility in Branson for the underground, which I'm sure we'll talk a lot more about next week at the analyst day, but that's a much smaller CapEx. We moved into our new facility in Charlotte, which we rented a complete facility and did all the upgrades.

I think FY '09 will be up slightly. I don't have final CapEx budgets in for next year. But I would predict that the $10 million from this year will slide over into next year, and we will be probably back somewhere in the mid-40 mode for next year. As far as the data centers, I don't think we have much to do there. What we are building is people space for support and development people to support all of our products. As far as our OutLink group, the data centers are fine. It doesn't take much room to add another I Series or P Series on the floor. We have a lot of room to grow in the environment we currently have.

Great. Thanks for that.

There are no further questions.

Okay. Well, again, we want to thank you for joining us today to review our third quarter fiscal 2008 results. We continue to be pleased with the overall financial performance during the quarter and year-to-date. Once again, I would like to remind everyone that our annual analyst event is next Monday and Tuesday in Dallas. If you have not registered, please send John Seger or myself an e-mail, and we will get a link sent to you for the registration. Thank you very much for joining us this morning. With that operator, would you please provide a replay number.

Thank you. A replay of today's conference will be available starting today, May 7, at 10:45 a.m., Central Time, and will run through May 14, 2008, at 11:00 p.m. Central Time. To access the reply, dial 719-457-0820 or 888-203-1112, and enter access code 3953439. Once again, those numbers, 719-457-0820 and 888-203-1112, and enter access code 3953439. Thank you and have a good day.