Jack Henry & Associates Inc (JKHY) 2009 Q1 法說會逐字稿

Good day and welcome to the Jack Henry & Associates first quarter fiscal year 2009 conference call. Today's call 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 call over to Mr. Kevin Williams. Please go ahead sir.

Thank you, Connie. Good morning and welcome to the Jack Henry & Associates first quarter fiscal year 2009 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 statement about the future, these are subject to a number of factors which could cause actual results to differ materially from those which we anticipate.

Such factors are disclosed in our recent SEC filings. There could also be other factors not included that could potentially cause results to differ materially. We're pleased to host the call this morning to provide a Company update and report on our financial results for our first fiscal quarter ended September 30, 2008. With me this morning I have Jack Prim, our CEO, Tony Wormington, our President. We'll each provide some opening comments regarding the state of the Company and our quarterly financial performance, then after our prepared statements we will then open the call up for questions and answers. With that I will now turn the call over to Jack Prim, CEO.

Thanks, Kevin. Good morning. In affect of the challenging operating environment, made even more challenging by an unprecedented stream of progressively worse economic muse, we were able to increase revenue 5% to a new record for the fiscal quarter. This level of (inaudible) was below our expectations largely due to a more cautious outlook by banks related to discretionary software and hardware expenditures. While we saw (inaudible) sales for certain products including fraud, customer relationship management, and performance and profitability management add-ons, we have seen a more cautious outlook on some discretionary license sales. In the credit union segment we actually sold twice the number of new core systems as in the year ago quarter, but the average asset size and margin was less than half. At this time, credit union and discretionary spending on license fees have not seemed to be as impacted as we have seen in the banking segment.

Hardware sales were down significantly compared to the year ago period primarily due to previously discussed declines in scanner sales, related to remote deposit capture, fewer large sorter purchases and fewer I series processor sales and upgrades. Related to remote deposit scanner sales although the number of banks installed on our solution is up 50% year-over-year, the number of scanners sold is down 39%. This is due to the fact that typically the larger bank implemented RDC earlier in the adoption cycle and also ordered larger numbers of scanners than the banks we now see moving down from that. Additionally these small scanners are now available from a variety of sources, many times as lower prices than we will offer. The (inaudible) sales are a similar reflection of the fact that many banks, including nearly all the larger ones, has implemented Check 21 solutions and do not need the larger sorters. We are however seeing strong sales of the smaller branch capture devices as imaging capabilities pushed out farther toward the point of item entry.

There were several factors affecting i series processor sales compared to the year ago period. IBM had a November 2007 deadline for an upgrade option on a specific i series model which drove the number of upgrades in our in-house base in the July, September period a year ago. They also had a separate trade in program which ended in June of this year which also tended to influence sales in that period. We have seen some banks in the current economy stretch their hardware capacity a little further to postpone certain capital outlays and the positive long-term move of our in-house customers to outsource processing will also have an affect on hardware revenues.

Support and services continue to show steady growth up 10% over the year ago period and with the primary contributor to a 12% year-over-year increase in backlog, an increase exceeded only once in the last five years. Support and service growth in the period was somewhat restrained by decreased implementation revenue attributable to the significant slowdown in bank acquisitions and the related merger conversion activity, which we believe is directly related to the economic environment. Also in support and services is the check image exchange revenue which decreased 25%, and as we have discussed in prior calls, it's because our customers continue to go directly to the FED for check covenant rather than writing through a third party provider.

Despite these challenges, we are encouraged by a number of signs in the economy. At our National User Group meeting in Washington D.C. last month we had over 1200 bankers in attendance, and the nearly universal business outlook expressed by the attendees was cautiously optimistic. Most reported seeing substantial deposit inflows as customers move money from some of the large banks and brokerages that have been in the headlines and also felt that the opportunities to compete for business customers were improved by the tightened credit spans at the larger financial institutions. Several new products and partnerships were introduced to this audience and received a strong reception which we believe bodes well for future sales, particularly in the second half of the fiscal year.

Credit union segment continues to lead the industry in core system sales and we have more core activity among mid-tier banks than we have seen in quite sometime. And since banks of this size tend to prefer in-house delivered systems we see opportunities for significant improvement and license fee sales by fiscal third quarter. Similarly we remain cautiously optimistic in our outlook for the remainder of the fiscal year barring further significant shock to the financial industry. We remain focused on cost control but also on continuing the system investments that will allow us to take advantage of what we believe to be the inevitable increase in spending by financial institutions as stability and clarity returns to their environment. With that I'll turn it over to Tony Wormington for some additional comments.

Thanks, Jack. Our support and services revenue increased in all components with the exception of implementation revenues. We have seen less merger and acquisition activity by financial institutions which have a direct impact to our conversion merger component of implementation revenue. As Jack mentioned, while we saw increases in our electronic funds transfer processing businesses these increases weren't as significant as we had expected, our Check 21 Image exchange revenue is down due to customer preference of exchanging images through FED. Our ATM debit card processing volumes increased 12% compared to prior year quarter, and bill payment transactions volumes increased 23% in the same period. The number of financial institutions installed with our enterprise payments ASP solution, for remote deposit processing increased 50% compared to prior year quarter, and the financial institutions merchants installed and utilizing this solution increased by 112% to over 15,000 merchants in 60,000 locations.

Along with signing and implementing new institutions and their respective merchant we saw solid increases in the volume of transactions being processed. Transactions increased by 145% compared to the same quarter a year ago, and 18% sequentially. We continue to focus our efforts on customer satisfaction, the results of our monitoring indicate continued success with our demanding customer basis. To meet the ongoing demand of our customers we develop new products and services as well as enhancement features and debt to functionality in our existing products. While we continue to see strong demands from many of our complimentary products and services a number of complimentary products deals for in-house banking clients had benn put on hold in some cases due to the use of capital for loan loss reserves and in general in uncertain economic environment. It is important to note we have not seen an increase in any losses to competitive solutions. With that I'll turn it over to Kevin for a look at the numbers.

Thanks, Tony. As Jack previously mentioned we did experience revenue growth of 5% to $183.1 million in the quarter, at which organic growth was 3%. Our license revenue was basically flat decreasing by just 2% for the quarter compared to the prior year. And as Jack mentioned this was below our expectations for the quarter. Sequentially our license revenue was down 27% as is typically the case in the first quarter, but again, was down a little more than our expectations than would have thought there'd be. Support and services increased in every component within the line of revenue with the exception of implementation revenue for the quarter. For the quarter, implementation revenues decreased by 5% compared to prior year quarter and decreased 7% sequentially, which is primarily due to the decrease in the convert merger activity that Jack and Tony mentioned. This is directly related, in our opinion, to the overall M&A environment.

Our payment business was up 16% for the quarter compared to the prior year and increased 5% sequentially, and this is what the headwinds created by the banks moving their Check 21 Image exchange go directly to the FED as we mentioned. Check 21 revenue decreased 61% or $833,000 for this quarter compared to year ago, and was down 38% or $327,000 from the June quarter. Our Outlink data and IM processing was up 8% for the quarter compared to last year, but was down 2% or $648,000 sequentially, due primarily to one time deconversion fees in the June quarter of approximately $680,000 compared to essentially no deconversion fees in the current quarter and also the reduction due to some reduction in item processing revenue, as that business continues to move from a traditional item processing to electronic image capture at the branch and teller. Our in-house support and other services was up 12% for the quarter compared to last year and 5% sequentially as our new annual agreement start in for FY '09 based on the reprice asset sizes over financial institutions.

Hardware revenue did decrease by 24% for the quarter compared to year ago at 18% sequentially due primarily to the significant decrease in i series and sorters activity, as Jack previously mentioned. Our recurring revenue consists of in-house support maintenance, our EFT business, which includes all of our electronic payments business and outlink data i-processing. In other words, this is our support and services line of revenue on the income statement without the onetime implementation fee, and this has continued to grow very nicely with growth of 12% for the quarter compared to the prior year and over 3% sequentially. Our consolidated gross margins remain level at 40% for the quarter compared to both last year's quarter and sequentially to the June quarter. Our license margin decreased from 94% a year ago to 92% this year. Our support and service margins remain level at 37%. And hardware margins decreased slightly from 26% a year ago to 25%.

To break this down into our two reporting segments, our banking gross margins slipped slightly to 39% from 40% and our credit union segment margin remained level at 40%. In the bank segment our license margins we saw decrease from 93% 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 37% from 38% for the quarter, due primarily to higher personnel costs and depreciation and amortization. Hardware margin in the banking segment decreased to 26% from 27% this quarter compared to year ago primarily due to sales mix. In our credit union segment, license margins were 94% for the quarter compared to 97% a year ago, again due to more third party product sales this year in the credit union segment. Our support and services margin increased from 32% to 37%, driven primarily by increases in our electronic payments business. And our hardware margin decreased from 25% to 23% in the credit union segment due to sales mix and vendor rebates. For the quarter bank segment margins have decreased to 39% from 40%. And credit union segment margins remain level at 40%.

Our total operating expenses increased 10% for the quarter. And as a percentage of total revenue increased slightly from 19% to 20% for the current quarter compared to prior year. On a sequential basis operating expenses only increased 1%. As I mentioned in the press release, we have had an precedented number of significant health claims which have either exceeded our stop loss or are approaching it during the last couple of quarters. This has increased our fringe load allocation to the various lines and cost causing some unusual increases. For example, our G&A increased 17% in the quarter compared to last year, however, excluding the fringe related costs our other G&A cost only increased 10% compared to last year and was essentially flat sequentially. This had a similar impact on our cost of sales, selling and R&D lines of expenses. Our operating margin decreased to 19% from 20% for the quarter compared to both a year ago quarter and sequentially. That net result was a decrease in operating income with 2% for the quarter compared to the prior year.

Our effective tax rate for the quarter was at 37% compared to 36.5% during the first quarter last year. Also for your future modeling remember that it's part at the financial bail out package signed by Congress last month, the R&D credit was put back in place during our second fiscal quarter, and at this time it appears that our effective tax rate for the year will end up at approximately 35.5% to 36%, with a significant catch up benefit in the December quarter. Our December effective tax rate will be somewhere in neighborhood of 32% to 33%. Our EBITDA increased slightly to $52.0 million from $51.9 million last year. Our depreciation and amortization of $15.8 this quarter compared to $14.4 million last year. During the quarter we purchased an additional 1.5 million shares of our stock for the treasury, and of September 30th, we had approximately 7.2 million shares available remaining under our current authorization, which we'll continue to buy back (inaudible) with our free cash and also with our available lines of credit.

Our backlog was at $266.3 million with $65.1 million in-house and $201.1 million outsourcing at September 30th, which represents a 12% increase over that of a year ago with nice increases in both in-house and outsource parts of our backlog. I would like to point out that in the press release there was an incorrect date in this part of the backlog. It says June 30th, 2007, but is actually comparing our backlog at June 30th, 2008 and I apologize for getting that date wrong. Also remember that there are no transactional revenue represented by EFT debit processing, online bill pay or remote deposit capture contracts reflect in the backlog due to the difficulty in conservatively estimating these transactional revenues especially in such fast growing (inaudible) business. However the backlog is obviously growing faster than other parts of our business since most of these are long-term contracts.

For future guidance, we are prepared to update our guidance for the year with the understanding that software and hardware components continue to be a significant challenge to project especially with the ongoing influence of the economy, which could impact this guidance more going forward. We are lowering our projected topline revenue growth slightly from that of high single-digits to potentially double-digit growth to a more conservative topline growth rate of mid-to-high single-digits. We think software and hardware will continue to be either relatively flat or slightly down from FY '08. And support and services revenue will continue to grow in the low-to-mid teens. We continue to not project any margin expansion at this time for the fiscal year. Obviously we hope there is some future upside to this guidance with additional software sales as Jack mentioned and cost control efforts, but we'd rather set conservative, realistic and achievable expectations. Our primary goal with the current challenges and economic headwinds is to maintain our current operating margin. Therefore EPS growth should approximate that of topline growth with some potential improvement for continued stock buy back and the impact of the R&D tax credit.

Also we are still not providing specific quarterly guidance due to lumpiness of software and hardware, but rather our guidance is for the entire fiscal year. However because the growth is coming from our support and services lines of revenue and specifically our reoccurring revenue, it should grow somewhat steadily over the remainder of the year. This concludes our prepared comments and we are now ready to take questions. Connie will you please open the call lines up for questions?

Thank you. (OPERATOR INSTRUCTIONS) And we'll take our first question from John Kraft from D.A. Davidson.

Good morning, guys.

Good morning.

Good morning.

Hey Jack you mentioned in your prepared remarks the core pipeline I guess increasing in the mid tier I guess in the credit union space. And I guess I'm curious what gives you-- what's happening there? And then also if I can reconcile a little bit for last quarter you had talked about the increasing acceleration, if you will, on switching from in-house deals to subscription deals, I think you had 14 in the quarter.

Yes, John couple of things. My comments were that we actually had in terms of units a pretty solid quarter on the credit unit side was about twice the number of credit union sales that we had in the same quarter a year ago, they were just smaller deals. Those are what they are. You can sell what you can when it's ready to close. The comments related to increase in mid tier activity was more related to the banking side than the credit union side. And just we have several of those opportunities that we're working on out there at the moment.

Regarding the increased switching from in-house to outsource, we did end up the fiscal year with 27 banks that made that change and you'll recall that 14 of those were assigned in the fourth fiscal quarter. I think we had about 5 in the first quarter which again if you kind of take out the 14 out of the 27 and divide by 3 quarters you get four point something, so we're tracking in Q1 in line with the kind of change that we saw in Q1 of the year ago or at least in the first-- average of the first three quarters a year ago. So again will we see another large jump up in fiscal Q4? Hard to say. But again I think that all the factors that have been causing this number of transitions to increase year-over-year-over-year are still at play. So I think there is the potential if not the likelihood for that to continue to increase.

The other thing to note John is the other what 14 assigned in the June quarter, that I would-- and I don't know this to be a complete fact but I would doubt that any of the 14 have converted yet. So they're still on the backlog to be converted. So that's why you're not seeing the switch from in-house maintenance to outsourcing in the financials.

Okay, got you, that's helpful. And then another bigger question-- big picture question, if I could, about the TARP program, and I guess your anticipation or what you're seeing as far as the number of banks that you cater to that are accepting some of the funds or applying for it and the potential for some of those to use some of that money for technology spending?

Yes, interesting to watch. Now I don't know that I could tell you how many of our banks have applied. We sort of see a press release come out every so often where a bank has said that they're going to look to participate in the program. And some of them it kind of surprised us, it's actually some pretty strong banks that are looking to participate in the program. And we do believe that at least in a couple of instances that there may be some of that money that ends up getting put to work to improve technologies. I don't know where whether the view is that it's a challenging time right now and nobody is necessarily expecting the banks to put up significantly improved earnings, so let's shore up the underpinnings so that when we see normalcy return to the economy that we're prepared, got to right platforms in place to move forward. But dont know the number, do see some participating and do believe that some of that will go to technology and related expenditures.

Okay. And then just a couple housekeeping questions.Tony I thought you said as far as transaction growth, you threw out a 145% year-over-year number, was that specific to remote deposit? Or is that--?

Yes, that's the transaction increase for remote deposit this quarter compared to the prior year quarter.

Okay. Good numbers there obviously. And then Kevin I thought I heard you mention it, but I didn't get the number. Reoccurring revenue percent for the quarter?

It went up 12% but the-- it was 75% of total revenue, John.

75%. Okay, great. Thanks, guys.

Yes.

And we'll take our next question from Tim Fox from Deutsche Bank.

Hi, good morning, thank you.

Good morning, Tim.

A follow-up on the prior question about the strengths that you're seeing in the pipeline for mid tier banks. Now in the possibility of improving license down the road. Our impression was that the banks tend to go more outsource as opposed to in-house, is this just because it's more mid tier focused banks rather than larger banks?

Yeah, Tim. It seems like somewhere right around the $1billion asset mark is where the banks tend to be lean a little more towards in-house rather than outsourcing and the bigger they get the typically the economics just dictate that that's a-- the scale advantages that that brings them even though, even though our outsource pricing provides some scale advantages, it's not at the same level that they would be able to realize with having their own hardware. So the-- above north of $1 billion in the banking states there definitely starts to be a stronger preference for in-house process.

Got it, okay. And second question was around hardware, you mentioned that there were a couple specific programs that were in place that made your comparables year-over-year difficult. How do those compares look going forward? Are there any other programs that were placed last year that are not in place this year that might impact hardware even further?

Well the one program that I mentioned was the September of '07-- I'm sorry November of '07 end of the life on an upgrade. That was a specific model. And it was kind of like, hey, if you ever want upgrade this model to a higher capacity model, you have to do it by November because the upgrade pass is being withdrawn for this model. So that spurred some activity. Trade in program in June, probably pulled a couple of deals that might have happened in Q1 back into the Q4 deal. I'm not aware of a fifth year of any specific promotions that IBM is running right now, however, it is I believe it's coming up to the end of their fiscal year, so it's entirely possible that we could see something if we haven't.

On the other two items I mentioned the remote deposit scanner sales I see that likely to run at about kind of the same levels that it is right now for the reasons that I mentioned, big banks went earlier, big banks buy more scanners and so that's an impact. And again because these things are pretty close to a commodity item, they can get them for less money somewhere else than we're likely to sell them for. And then of course on the Check 21 side, good activity with the branch capture, but those are again pretty small devices and it takes an awful lot of those to make an impact. But the big by and large the large Check 21 enabling implementations have already taken place so we suspect that in all os those categories it will be similar to what we saw this quarter.

Okay, great. And lastly just on the implementation services on the conferred merger, if we were to look out for the remainder of the year, are we going to be seeing similar headwinds assuming that the merger activity stays rather muted here? Are we looking at tough compares across the rest of the year?

Depends on a couple of things, if we see some of the mid tier opportunities that we're working on move to closure, there is a good opportunity to catch up on that and see some pretty significant improvement in some of those implementation numbers. In terms of the general economic environment, banks stocks are depressed right now, people-- if they were thinking about selling their bank probably don't want to sell it at these prices. So I-- in the absence of some change in the economy I don't expect to see a lot of uptick in the merger-related conversion activities. Just to give you an example, I think last year we did 78 conversion mergers in our customer base. And through June of this year, I believe I'm correct, that there had only been 64 announced mergers in the entire industry. So if you double that to in the second half of the year, that's still going to be spread across all the vendors that are out there a dramatically reduced number. So I don't know that I see in the remainder of the fiscal year anything that's likely to influence or called an increase in merger-related activity.

That's very helpful. If I'm-- just one quick follow-up there, is there a way to think about as a percentage of the revenue either total revenue or the support and service revenue, how much of that is related to this convert merger business?

I'll flip through some numbers here and see if I can get my hands on that. Do you have another question while I'm trying to look that up?

No that's all I have.

Okay.

I guess I can-- I'll throw one more out I have done here. You mentioned I think that EFT was not quite as good as you expected. Was there anything in particular within EFT that was soft and was that more macro-related?

That was really related to the transactions in September for the quarter were down as a whole compared to what we were expecting. Last September transactions were off a little bit as well but they weren't down as much as they were this year from a ATM and debit card perspective. Also we had the drag on EFT from the Check 21 movement to FED.

Okay. Thank you.

Ti,m, on your question about the merger activity, I mean all of that happens in the bank segment, and basically. I think we had one or two in the credit union side. But the majority of it's in the bank side of the house. And if you look at our invitation revenue in the bank segment it was down 15% or $2 million, if all of that is attributable to mergers, probably not because there was some decrease in some of the other add on products and different things. So as a percentage of total invitation what percentage of that makes up convert merge, I don't have that specific number with me. But that should give you kind of an idea of the impact that convert mergers can have on our invitation revenue.

Great, that's helpful. Thank you.

Thanks, Tim.

(OPERATOR INSTRUCTIONS) And we'll go next to John Maietta from Needham & Company.

Thanks very much. Kevin in your prepared remarks, you had mentioned that gross margins would tick down a little bit due to some third party software that was embedded in some of those sales. I was wondering if you could describe what type of software, without naming vendors, just by function?

Well the biggest thing there, John, is the BFA, the bank (inaudible) product that we had developed for us that we share the license fee. And that product has-- it's done well historically on the bank side since we rolled the product out but in the last couple of quarters it's picked up steam in the credit union side. So that's having a slight impact in both the banking and credit union sides of the business. Also the Argo solution we sell for the platform automation to typically our larger banks, that's also a third party that we split the revenue with. And then on the credit union side we still have a relationship, a reseller agreement with a couple of vendors over at Innervoice and OTG that we sell upgrades for at electronic doc damaging. We try to sell our synergy solution over there but for-- the customers already have that product. We do sell them upgrades and again split the revenue on that. So those are the largest products that have an impact on the third party license sales in the related margin.

Okay. And then Jack were there certain new products that were discussed at the User Group meeting that generated the most interest coming out of that event?

Yes, John there were several. We mentioned that when we did the acquisition of Gladiator Technologies a little over a year ago that, and as you may recall that Gladiator does the network monitoring intrusion prevention services with about 600 banks and credit unions that use that service. And it's a great service, but the real interest we had in that acquisition going forward was the ability to develop more of an enterprise wide view of security and not only monitor servers and fire walls and Internet facing devices but also to be able to pull in security-related information from our core applications and from the operating system of the i series or p series and for that matter from third party applications into a consolidated reporting engine that would provide consolidated management view of security. We've been working on that solution for about the last year, we have it installed in beta now, it's gone very well and it received a very good reception at the User Group meeting. If you look at pretty much any of the industry surveys, the Grant Thornton, the Independent Community Bankers Association, security is pretty much the number one item that banks are indicating that they're focused on.

We also announced a rewards program that they were working on that will allow the banks to implement rewards programs to encourage debit and credit card usage. And we also announced an extension if you will of our remote deposit capture, a consumer and small business or micro-business capture capability using flatbed scanners rather than the more expensive remote deposit scanners that folks are seeing. And all of those products received a good reception. I would also tell you that all three of those products are delivered in an EFT delivery environment. We are seeing more and more not only from ourselves but from ancillary vendors out there that for example would be in the exhibit area at our trade show, that most of the new solutions that anybody appears to be bringing to the market these days are EFT delivered solutions. So good for reoccurring revenue but again not for the most part significant license impact kind of offerings.

And one more offering that we rolled out with synergies and service which is our electronic doc to imaging solution in an ASP hosted environment, which that also showed quite a bit of excitement. And again it doesn't drive license revenue but it should drive nice reoccurring revenue going forward.

Yes, okay. And then just my last question speaking to the Gladiator acquisition. In an environment like this Jack, have you seen valuation expectations start to come down a little bit for companies in your pipeline or are they still lagging pretty significantly?

Yes, John, they (inaudible) a lot of what is on the market right now has not been terribly interesting to us to pursue that far. I mean if you're looking to, certainly there's exception to this, but I mean if you're looking to sell a company in this environment, it's pretty tough environment to be wanting to sell. But you would think that expectations that moderate, I couldn't tell you that with most of what we've seen in the market out there that we'd gone far enough in the process to be able to reach a conclusion. I don't know if yet they sold or necessarily what they necessarily sold for. So all logic would indicate that people should be more realistic but I don't know that I could tell you if that's the case or not.

Got you. Thanks very much.

Thanks, John.

And we'll take our next question from Dave Koning from Baird.

Yeah, hey guys. First of all on the support and service line I think the Audiotel acquisition was done early October of last year. So I think you anniversary it in early Q2. And that's been helping, I think it's been helping the support and service line by about 2% or 3% year-over-year. So I'm wondering why we wouldn't see a little more deceleration in that line in Q2 given that anniversaries?

Well it was actually October 1st when we closed that, Dave. And it's-- and Audiotel is not 2% of that line. In fact it's barely 1% of our support and services line. But we've got other things that are coming on that are driving that, we saw some slowdown in some businesses that we think will pick back up. One of those is our-- in part of our payments business. So I don't think that we'll see much deceleration in the growth of support and service line going forward because obviously the two biggest decelerators there in this quarter was the implementation revenue and then also the headwinds that we're getting from the Check 21 changes in the electronic payments line. When you take $900,000 basically out of revenue again that's very, very low margin business that we're taking out of that line and even sequentially it has a pretty big impact, that's going to run its course hopefully in the next couple of quarters and not have near the impact on our support and services line.

Okay, that's great, thanks. On the license side,m I think you signed or announced the signing of a pretty big bank, I think a $14 billion or so bank in late August. I'm wondering when that license is expected, because I would imagine in the quarter that that hits that would be a pretty big jump?

Dave, that was kind of a unusual deal, that's a farm credit bank and the way that deal was structured, that license is not going to hit a specific quarter that's actually going to be spread out over time as different modules are delivered and different milestones are reached within that agreement. So it'll- that software and the related installation will probably be spread over about four quarters.

Okay. And then finally when you talked about license and hardware expecting flat to down maybe, do you expect hardware to be down around 20% or so? I mean is that kind of the tone there, is it going to stay around $18 million to $20 million over the next few quarters or you truly expect it to come back closer to flat for the year?

I don't know if it'll get back to flat, Dave, because obviously the first quarter going to set up a pretty big roadblock to get over. But December is typically a very strong quarter in hardware, because the hardware vendors, as Jack mentioned, the hardware vendors that's their end of the year, so they simply put some promos out there to drive some business. The banks will spend some of their money in Cap Ex to get those. And also as Jack previously mentioned I think some of our customers are actually stretching their hardware a little farther in the current economic conditions and hopefully that they'll see relief in our second half fiscal year and they'll open up the wallets and do some upgrades on hardware. So again we're cautiously optimistic about both software and hardware going forward and a lot of it depends on the stabilization of the economy.

Well and also keep in mind too, that the mid tier activity that we're seeing will impact license fees but can potentially have a nice bump to hardware revenues too because those would be some pretty sizable boxes that they would be looking at for that solution.

That's helpful. And then just one final question. I think last year your margin-- your gross margin in support and service was the strongest in Q2, and I'm wondering if there's some seasonality you expect this year or if it bounces around but should stay in the 37, 38 range through the quarters and it's just hard to predict exactly when the strength jumps?

It's going to bounce around a little bit, David, and actually in the second quarter last year that was our largest deconversion quarter on the Outlink, which obviously that drops pretty much to bottom line which had a impact on those margins. So I think for modeling purposes, if you can just model 37% and hopefully we can improve on that slightly throughout the year, I think you'll be pretty much on target.

Great, thanks so much.

Thanks, Dave.

(OPERATOR INSTRUCTIONS) And we'll go next to Gil Luria from Wedbush.

Thank you for taking my question. At what point-- what's your threshold for taking action to cut cost? Last couple of quarters you've grown around the 4% rate but your expectation for the year is still mid-to-high single-digit for the topline. At what point of the decelerating growth or of maybe if the growth hits low single-digits or lower than that do you decide to take actions to cut down costs?

We've historically maintained a pretty tight focus on cost control that I think is evidenced by our operating margins. And we are certainly are tightening that up even further looking at the usual things like discretionary travel and number of those types of things. In terms of layoffs of staff, that is not something that we're looking at at this point in time. Again the-- our challenge is more likely to be with some of the success that we have the potential to see in the mid tier sales, we're going to need all the folks that we have to implement some of the things that we're looking at and think we have a good opportunity of winning. So if we continue to maintain a close watch on costs, there are some things that as Kevin mentioned with the surprising number of healthcare-related issues that we had, that those are pretty challenging to foresee and be able to predict. And hopefully we're kind of past some of those particular issues. But believe me we understand the importance of keeping costs in line and are focused on that. But I would not tell you that we have planned as we sit here to make a substantial reduction. So A we don't that they're needed based on what we believe the business outlook to be, and B because I don't think we've gotten out of control with those expenses at this point.

Got it. And let me just try again in terms of the higher level issues here. You're obviously having a lot of conversations with your customers, a lot of them in the budget cycle right now, how does this compare to previous years in terms of where they're at with the decision making, how many of them are you hearing talking about reducing spending significantly, freezing them until they get more clarity, just holding onto the capital, is that -- do you get a significant number of your customers that are saying those kinds of things?

Yes, I'll have to tell you, we don't. I mean there certainly are some. If you can believe any of the surveys that are out there, and two that we tend to look at, we look at them all but two that are have some consistency to them year-over-year is the Grant Thornton survey and the Independent Community Banker survey, and all of those indicate that for the majority of banks, their spending is going to increase or remain the same at current levels. I doubt that there's more than 15% or 20% responses to either survey that anticipate spending less money in the area of technology. Would tell you that I ask every banker that I came in contact with at our User Group meeting how business was in their area, and they felt good about the business. Most of them would say its probably not going to best year we ever had but it's definitely not going to be the worse. And I had quite a few that said the fact that it is going to be the best year that they ever had. The deposit inflows have been substantial. And they're not having to pay up top get those deposits, they're just telling him because of the people being nervous about some of the larger institutions and brokerage firms. At the same time that they see the large financial institutions tightening credit standards, potentially making it easier for them to win some of the small businesses opportunities that they might have been losing to some of the bigger banks, they're feeling pretty good about what's going to happen.

The news hopefully now that we're kind of past the election and we can get back to focusing on the economy and people start actually talking about here's the steps that we're going to be taking to address the economic environment. I think once people can kind of get clarity, but it's been tough to pin anybody down about what's going to happen next in terms of taxes or incentives or anything else to try to get the economy going. So hopefully we're past that now and we'll get some straight talk on some of those things and folks can have better information to make plans with.

That's very helpful, thank you.

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Okay, thank you, Connie. Again we want to thank you for joining us today to review our first fiscal quarter 2009 results. Obviously it was a somewhat challenging quarter, but we feel that we can change to be positioned correctly for the future with the right people, the right product and continue to provide leveled-- superior levels of service. Again, thank you very much for joining us this morning. And with that, Connie, will you please provide the replay number to the listeners.

Thank you. A replay for today's call will be available starting November 5th, 20088 at 10:45 a.m. Central time through November 12th 2008 at 11:45 p.m. Central time by dialing in the US 888-203-1112, and internationally by dialing 719-457-0820 and referencing the passcode 546-3698. Thank you, you may now disconnect.