Jack Henry & Associates Inc (JKHY) 2009 Q3 法說會逐字稿

Welcome to Jack Henry & Associates third quarter fiscal year 2009 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 Tony Wormington.

At this time, I'd like to turn the conference over to Kevin Williams.

Thank you, Michelle. Good morning and welcome to the Jack Henry & Associates third quarter fiscal 2009 earnings call. Statements and 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 that could cause actual results to differ materially from those of which we anticipate. Such factors are disclosed in our recent SEC filings. There could be other factors not included that could potentially cause results to differ materially.

Again, we're pleased to host the call this morning to provide Company update, report our financial results for third fiscal quarter ended March 31, 2009. I will now turn the call over to Jack Prim our CEO.

In our last earnings call we commented on the cautious outlook regarding discretionary spending by our financial institution customers. Particularly for hardware and license expenditures and the fact that in most cases this outlook t stemmed more from uncertainty about the economic environment than from their actual financial performance. As we expect this cautious approach to continue until more signs of economic stability were clearly visible, we modeled that we would see revenue increases or decreases in the second half of our fiscal year that would be consistent with those observed in the first half.

A six month period that had seen a steady stream of dire economic news and frequent depression era comparisons. Although we expected this onslaught of bad news would moderate in the second half, we took cost control measures designed to mitigate the impact of a continued slow spending environment. About the time of our last earnings call we began to get the first reports of special one-time assessments to be levied on banks to shore up the FDIC insurance fund and on credit unions to bolster the US Central Corporate Credit Union. These initial assessment estimates were substantial in the case of banks and massive in the case of credit unions. Following these initial estimates, US Central, along with Western Corporate Credit Union was put into receivership and already significant initial assessment amounts for some credit unions were more than doubled.

As concerning as these assessments would be on their own, the problem was compounded by confusion about amounts and accounting treatments. The original FDIC assessment amounts were projected at 20 basis points per $100 deposits. Later discussed that it might be lowered to 10 points with some indication it might go to six. The final amount is still unresolved and awaiting action on Senate bill 541. For credit unions the confusion is around whether the assessments will have to be written off immediately as is currently required by law or whether the Senate will approve the creation by the NCUA of the stabilization fund that would allow the assessments to be recognized over a period of seven or eight years. This bill is scheduled to be voted on last week, but was delayed after as many as 20 amendments were added by senators from both parties that is currently scheduled to be voted on later today. These significant and unexpected financial impacts and the continued confusion surrounded the exact amounts and timing of these impacts added increased pressure on financial institutions discretionary spending and those results are reflected in our quarterly performance.

License fee sales were down 31% in the quarter reflecting reduced spending for add-on modules in both the bank and credit union segments. The credit union segment continued to see new core sales activity in terms of number of new customers in line with our industry leading performance of a year-ago, but also continued to reflect the trend of the last several quarters of smaller average asset size credit unions making these core replacement decisions and the corresponding impact on licenses. Hardware sales were down 22% as a result of discretionary spending hesitancy regarding any non-mandatory additions or upgrades. Lack of capitalists from manufacturers such as promotions or required upgrade and the continued trend of customers moving from in house pricing to outsourcing.

Through the first three quarters we have exceeded the numbers of in house to outsource transitions signed all of last year. This is the biggest contributor to the 19% increase in the outsourcing backlog compared to a year-ago. These continued head wins on license and hardware revenue, further increase our recurring revenue percentage to 77% of the total in the quarter and 75 % year to date. Supporting services which includes one-time implementation fees as well as the recurring components represented 84% of the total in the quarter. One-time implementation fees decreased 18% related to both the decrease in license sales and related installation and some delayed product implementations.

While electronic payments businesses appear to have grown at rates above the industry averages, they were down from more the aggressive rates than we have seen in previous quarters. Our out link revenue growth slowed due to paper-based check processing services and our item centers transitioning to teller and branch capture alternatives and continued decline in Check 21 image exchange services as more customers elect to switch to the Federal Reserve for these services. In house maintenance was impacted by delayed decisions for complementary products and related implementation services and work orders. While our customer-base continues to absorb these unplanned, unbudgeted financial assessments and wrestle with the normal impacts of the recessionary environment, the fundamentals of their business remain solid and we continue to believe that the discretionary spending environment will improve when some clarity around these points can be found.

The cost control actions we took in the last quarter allowed us to maintain solid growth and operating margins in spite of the significant shortfall in higher margin licenses. We indicated in our last call that we had additional cost control measures that could be implemented if we saw further deterioration in the business environment. While we're still believe that we are facing temporary economic head wins, we'll implement further cost control and cost reduction actions to minimize the impact of the slower spending environment. As always we will continue to look for an appropriate balance of the needs of the employees, customers and stockholders.

With that I'll turn it to Tony for an operational update.

Thank you, jack. Our customer retention and customer satisfaction continued to be a strong focus for our operational divisions, our ongoing monitoring of these metrics continued to show very positive ratings from our clients as they interact with our customer services groups. As jack indicated, we're continuing to see nice growth within our various payments business lines and nearly all cases our growth percentages continue to outpace industry standards and year-over-year and sequential quarterly comparisons.

As a reminder, EFT and payments revenue consists of ATM and debit card processing, bill payment processing, merchant capture and Check 21 exchange. ATM and debt card processing volumes decreased this quarter sequentially by 1% and increased 11% over prior year quarter. January and February volumes were off with March volumes up nicely in the quarter. Bill payment transaction volumes increased this quarter sequentially by 4% and 16% over prior year quarters. Merchant related transaction volumes increased this quarter sequentially by 9% and 73% over prior year quarter. Financial institutions utilizing our enterprise payment ASP solution increased to 851 institutions or 15% increase over prior year quarter. Financial institution mergence installed in utilizing our enterprise payment ASP solution increased to 17,880 merchants. This represents a 64% increase over prior year quarter and number of installed merchants.

We continue to have strong activity in our banking division for new core footprints. Work continues with mid tier banking prospects. We believe this economic environment provides opportunities for conservative and strongly managed financial institutions. We'll continue to control and take out costs where appropriate, however, we are managing our business for the long-term benefit our long-term shareholders, clients, prospects and employees.

With that, I'll turn it over to Kevin for a further look at the numbers.

Thanks, Tony. As Jack previously mentioned, we experienced a decline in our total revenue of 4% to 180.4 million for the quarter. Year-to-date total revenue is flat at 554 million. License revenue decreased by 31% compared to the year ago quarter and is down 26% year-to-date. Also on a sequential basis, license revenues down 14% and both the banking segment license revenue was down 25 % and the credit union segment license revenue was down 47% sequentially. These decreases were primarily across all product groups as the impact of the uncertainty in the industry that Jack talked about along with delayed decisions created from that.

Every component of our recurring revenue within the support of service line of revenue showed growth for the quarter and the only component within that line that didn't have some growth was implementation revenue. For the quarter and year-to-date, implantation revenues decreased 18% and 11% respectively compared to the same periods a year ago. Also implantation revenues were down 12% sequentially, again, this is due primarily to customer imposed delays, the related decrease in license revenues of 26% year-to-date, which obviously has a direct impact on implantation revenues and also due to the slow down in the convert merger activity related to M&A. Our EFT or electronic payments business is up 6% for the quarter and 13% year-to-date and sequentially was up [9.5%] from the December quarter.

Our OutLink Data 9 and processing was up 1% for the quarter and 3% year-to-date. As Jack pointed out, significant head wins in Outlink revenues is the decreasing traditional item processing revenue as people switched to branch and teller capture. Sequentially Outlink was up 2% compared to the December quarter. There was no significant impact this quarter compared to last year or sequentially due to one-time early termination fees which is a good thing for Jack Henry because it means we are not losing our customers.

In house maintenance grew 6% for the quarter and 9% year-to-date compared to last year. In house maintenance declined sequentially 6%, which we typically see a small decline in the March quarter compared to the December quarter, due to the significant work orders around year-end work in the December quarter. Hardware revenue decreased by 22% for the quarter and 20% for the year compared to a year ago primarily in line with the decreased license revenue which drives hardware sales and also due to the ongoing migration of in house customers going to out source offering. Also, Hardware was down 22% sequentially due to the same reasons already stated and due to the fact that December is usually a stronger quarter for hardware due to vendor incentives at their calendar year-end.

Our gross margins dropped for the quarter to 39% and year to date to 40% compared to last year, 41% for the quarter and 42% year-to-date. This is a direct impact of the decrease in license, hardware and implantation revenues during the quarter and year-to-date. Gross margins in both our banking segment and credit unions slipped slightly for the quarter and year to date compare to last year. Banking went from 41% to 39% for the quarter and from 42% to 40% for the year. While the credit union went from 40% to 39% for the quarter and 42% to 41% for the year. Again, gross margins directly impacted by the decrease in license hardware and implementation revenues. Our total operating expenses however decrease 4% for the quarter and for the year operating expenses have decreased by 1%. Our operating expenses were down 7% sequentially. This was accomplished by continued cost controls and the fact that the banking national user group meeting was in the December quarter which caused for some of the drop in operating expenses.

Our operating margin decreased 21%. Still a healthy 21% from the 23% for both the quarter and year-to-date. Operating margin also decreased sequentially slightly from 22% in the December quarter to 21 % in the quarter just ended. Net result was a decrease in operating income of 13% in the third quarter and 9% for the year compared to prior year. As we discussed in prior earnings called R&D credit was extended again last December which impacted our effective tax rate for the quarter for just under 33% from the 36.5% a year-ago. The impact for year-to-date was reduced to the effective rate of just under 34% this year compared to 36.6% last year. The effective tax rate estimated approximately 35% for the last quarter, fiscal year at this time.

Our EBITDA decrease this year to date to 163.3 million form 173.1 million last year or a 6% decrease. Depreciation or amortization was 48.3 million this year to date compared to 46.1 million last or 5% increase in D&A. EBITDA margins decreased year to date to 29% compared to prior year of 31%. For guidance, first of all we're somewhat hesitant to provide any guidance in current environment we're in. Obviously, the economic conditions continue to be a challenge. There is definitely an extreme caution in the base due to the uncertainty around potential assessments and the affinity to those which makes it much more difficult to forecast or predict discretionary sales to customers which obviously related directly to software, hardware and the related implementation revenue. Therefore, based on what we know today, our base case scenario would be the remainder of the year, the final fourth quarter tracks right along with the first three quarters and we see virtually little to no growth in revenue and potentially flat EPS for the prior year. But in this case or in just about any case, we'll continue to be very profitable and generate continued free cash flow. The best case scenario at this point with one quarter remaining in the fiscal year would be if we closed some decent sized software deals, the economic environment shows signs of stabilization and there gets tobe some clarity around the assessments, which we then could potentially show some slight overall revenue growth and EPS improvement. Regardless, we'll continue to manage our expenses and strive to maximize shareholder value for the long-term.

Use of cash during the quarter and during the year, we purchased 500,000 shares of treasury stock this quarter which takes us to 3.1 million shares year-to-date. Since May of 2005, we've now purchased 14.4 million shares and have 5.6 million shares remaining under the current authorization. Also year-to-date, our cash use for acquisitions has decreased by $46 million. We have not done an acquisition in close to a year and half now.

Our CapEx is down compared to prior year by 7.2 million to 20.6 million year-to-date. Capitalize software is up from last year by just 1.4 million to 18.9 million year-to-date. Just like our operating expenses, we'll continue evaluating and controlling our capital expenditures just like our customers are doing in these unusual times.

Real quickly, our backlog was 277 million at the end of the quarter with 55 million in-house and 222 million outsourcing at March 31, which represents an 11% increase over that of a year-ago with outsourcing up 19% compared to then. Again, remember, their are no transactional revenue represented in our outlink backlog which would included our EFP debt processing, our bill pay or (inaudible) deposit capture contract which are not reflected in backlog due to the difficulty in conservatively estimating these transactional type revenues.

With that, I would now open the call up for questions.

(Operator Instructions). We will go first to Glen Greene with Oppenheimer.

Thank you, good morning, Jack a nd Kevin.

Good morning.

First I'll ask your thoughts on FIS (inaudible) acquisition the implementation competitive dynamics and how you see that playing out, an opportunity or a threat for you?

Yes, Glen, it's certainly a large transaction. I don't know I see it changing anything substantially. Obviously they'll have a lot of work to do to get that done, but they, I have a pretty good track record of getting those done and hitting their cost takeout numbers so from our standpoint, this puts them, from a size standpoint, right around the same size. Maybe a little larger than Pfizer. I think we competed pretty well against larger competitors in the business for quite some time and would expect that to continue to be the case.

Okay, and different direction. I was just wondering, given where we are early in the year, obviously into May already, what you're seeing in terms of IT budgets within the Community Bank Credit Union space. We've heard low single-digit declines and we've done survey work that sort of suggests the same, I'm wondering what you're seeing and if you're seeing similar, the next question following coupe that would be why the discretionary parts of your business seem to be falling harder than the IT budget falls suggest, if that makes sense.

Yes, I don't know Glen, that I've got any great insight to specific percentage increases or decreases in budgets. The survey, the last survey on that I saw was the Independent Community Bankers Association survey which I think was done in November and 85% of banks and I think last survey I saw on credit unions was in the same range, although it's a little more dated. But 85% of banks were projecting budget expenditures in '09 equal to or greater than their '08 budgets. I think the thing that is a little different now than when they were putting those budgets in place, by and in large, the biggest different is these unbudgeted, unplanned surprise assessments from the FDIC and the NCUA related to the items I talked about earlier. You got it believe that most people probably went into the year with a relatively modest budget as far as growth and that was at absolutely zero knowledge or expectation around these assessments. Just to give you an example, the magnitude of the assessments we're talking about, we have one bank that I'm familiar with that's about $250 million in assets and they're FDIC assessment initially was another $400,000 on top of whatever they budgeted and planned on spending this year. Credit Unions were more dramatic. One case I'm aware of, $2 billion credit union who's initial assessment when the first news about US Central came out, was going to be somewhere in the $8 million range. And then after US Central and Western Corporate were put into receivership, they happened to have a fair amount of money and paid in capital in Western Corporate that was wiped out, that number more than doubled. They were looking at $20 million or more which in January, they had no plans on. So regardless of what you budgeted last Fall going into a new year these kind of things show up in the first quarter it's going to impact the amount of money you spend no matter what you budget.

Okay, that's very helpful. Thank you.

And our next question comes from Brian Keene with Credit Suisse.

Good morning, just the drop in support and services was a little more than I expected. I know you guys talked about some of the volumes being less. I guess I'm just trying to model or think about how to model going forward. I don't know, Kevin, if you have any thoughts there?

Well, I mean, obviously there were some things this quarter that were in line with the same quarter last year such as the slight drop-off sequentially, in the in-house maintenance due to the work order, December quarter, payment business, as Tony mentioned volumes were down in January February, back up in March. They looked respectful in April. I look for payments growth to be kind of back in line in the fourth quarter, in house maintenance should be, you know, right back to where it was in a year-over-year comparison to where we were the first half of the year. OutLink, a lot of that depends on the deterioration of the IP, item processing business there. The recurring revenue parts of the business should be fairly strong right on through the fourth quarter, Brian. The wild card there is (inaudible), but all indications say our (inaudible) revenue should be fairly solid in the fourth quarter. There's quite a bit of activity going on. Some of the financial institutions can delay things, but can only delay it for so long. For example, annual releases that come up, can they put those off for a while? Yes they can, but only for so long. I think our support in services will return to more of a normalized growth going forward.

Okay, and then Jack, just on the assessment fees, you talked about the vote today, but when will we have some final numbers on that? When will banks and credit unions be able to turn the page?

That's a great question. I wish I knew the answer to it, Brian. I think to some, the bill that is scheduled to be voted on today has to do with the creation of this fund that would allow credit unions to spread these assessment fees out over, I believe it is eight years that they're talking about. In spite of that, some will probably write it off all at one time. Some will spread it out. The ones that will spread it out will be the ones if they wrote it off at one time would be in a weakened capital position that might cause them a different set of problems. I think the credit unions will at least know what they're dealing with assuming this bill passes this week. On the FDIC assessment, is it 20 basis points? 10? Something different. Again, that's tied to Senate bill 541. My understanding is not even scheduled for a vote at this point. So I don't know when they'll know the answer and I would assume that until they know the answer, they have to assume it'll be the higher amount.

One other thing, Brian, remember those assessments are points based on $100 of deposit. If you think about a financial institution out there sitting here right now saying, okay, six basis points off my $300 million of deposits or 20 basis points? That's a pretty big number of uncertainties.

These are on top of known increases they know about. For most banks, I think they're FDIC insurance premiums are three five times what they paid last year. They went into this year knowing they would have to pay three to five times what they did last year and got this message. The challenge for us, with the percentage of our revenue, which continues to be hardware and software related, those are discretionary purchases. Your out sours sourcing revenues, those are somewhat left impact. You're going to continue paying for the services you're already getting. You might delay implementing some new services, but that would keep revenue flat. Just if you didn't add any additional services. Related to those discretionary items, those are things that, if there's a way to hold back it's being exercised.

One other thought, Brian, these assessments are all still relatively new. These both FDIC and NCA have basically been, in the last 90 to 110 days since our last earnings call. They're both relatively new. They're trying to evaluate those, but I think as much as anything, they're wanting to make sure that the last shoe has dropped. This is the last assessment, there's not more to come.

Yes, I mean, that's what my next question was going to be. Once you get past these assessment fees, get finalized, is there another six months they have another fee on top of that or just a one-time hit?

Well the, the purpose, Brian on the credit union side is to shore up the Corporate Credit Unions. Western Corporate as I mentioned was put into receivership in the case of the $2 billion Credit Union that I mentioned. That move alone almost doubled the assessment they were looking at when they wiped out their paid in capital. The primary driver behind this stabilization fund is to prevent the other corporate credit unions from suffering a simple fate. If they can write this off over a longer period of time, they don't need to wipe out all the capital. Assuming the bill passes, that potentially stabilizes things to a large extent, but is that the end of it? I, I certainly wouldn't guarantee that.

Okay, all right, thanks a lot

Our next question comes from Jon Maietta with Needham and Company.

Thanks very much.

Hi, Jon.

Hey guys. Tony the color you provided on different pieces of the business was helpful. I was wondering if you could roll it , how much of a slow down did you actually see in the electronic payment side relative to other quarters? How much was the growth rate

The growth rate haircut was comparing the passport ATM and debit volumes to the prior sequential quarter. That decrease by 1% in total for the quarter, the current quarter, versus the December quarter. That is always going to be a difficult comparison due to the spending that takes place and the October to December quarter based on holiday spend et cetera. If you look at it from a, a current quarter to prior year, 11% increase is a significant increase in those volumes and still speaks good to the volumes that we're experiencing versus the industry at large. So I think the tough comparison is, is one, current quarter to previous quarter, and the volumes of January and February were off a little bit from where we had expected them to be. But we picked up nicely in the March quarter, again, performing well, but not enough to cover the prior sequential quarter.

Got it, okay. And Kevin, at 6% sequential decline on the in-house maintenance side, that, that decline is, is typical? The magnitude of that decline?

The magnitude's probably not, Jon. I mean, typically we'd probably see a 2 to 3% decline, but the fact of the matter is, we just didn't have enough software delivered in the first half to continue driving the growth we've seen in prior years. So the delay in software or lack thereof has a direct impact on that maintenance going forward.

Now did you have folks actually cancelling maintenance contracts?

No, it's just that, let's think about it. Our implementation revenue is down considerably. Once an install is complete, Jon, then we start building the maintenance. We, we send a bill to get them to June 30 year-end and take the maintenance. As license has followed off the first half of the year, that's going to have a direct impact on organic growth of in-house maintenance going forward.

Got it, okay. And the last question I had with regard to cost control measures and cost reduction measures, could you help maybe frame that and quantify that?

Yes, Jon, we are moving forward with some cost reduction. We put in place some cost control steps in the last quarter. I can't recall if we discussed what those were, specifically, but essentially it was a voluntary time off program that we went to our employee-base and encouraged them to consider taking a couple days off without pay. To kind of buffer some of the things we were seeing and very proud of our employee-base that we had 62% of our employees stepped up and took an average of a little over two days off without pay. Which again, I think that evidence is their commitment to the Company and to, to keep things moving forward. That certainly had a favorable impact in the quarter, but I think given where we are, we realize we're going to need to do a little more than that. We have additional cost control and cost reduction plans. I'm, I'm going to not be real specific about that on this call because some of these things we have not yet had a chance to discuss with our employees and we think it's important for them to hear about that from us rather than on an earnings call. Those conversations will be taking place this week and we will be in a better position to be more specific about it at the analyst meeting next week. If anybody's not going to make it to the analyst meeting, they can give Kevin or myself a call next week. We can comment on it then. To give you some idea, the cost reduction, things that we're looking at, we believe will have an impact roughly 3 to 3.5 % on our salary base.

Okay. Thanks very much.

Next to Brett Huff Stephens Incorporated

Good morning. A couple follow-up questions. Kevin you mentioned the professional services was one of the big chunks this quarter that drove the difficulty in the sales and support growth, can you give us a sense, give color on why you think the next quarter will be good. People can only put things off for so long. Is that the main driver or is there other things going on?

That's the primary driver. I've actually in to this call, I talked to managers, they highlighted significant projects that were delayed in the March quarter, but the work load is pretty solid through April and going into May, which that is a big driver to implementation revenue. It's not the convert merge activity which we actually make more money on, but the implementation teams are busy this quarter and going strong. That's probably the bigger indicator that I have. There's, we've got some activity, the back, the backlog continues to be pretty strong for implementations. They have shortened somewhat, but and then a lot of it depends on the timing of the billing because you know, some of our contracts are relate allied to some of our complementary products. We don't bill for the implementation services until the implementation is complete. So there can be also some lag time for that on some of the bigger complementary products that are delivered.

Do you mean on the timing, meaning things were done in March but will be billed in, this quarter? Or that they get pushed from this quarter, maybe even to next fiscal year?

No, you if we get a little bit of that in each quarter. That happens all the time. Some quarters are bigger than others. I don't know that there was a whole lot of that in March that will be recognized in this quarter, but there is fluctuation up and down in the revenues because of that.

Okay, and then just looking ahead on term fees or anything we need to call out. June quarter. Anything notable?

Not in terms fees last year. So far I don't foresee any this quarter. Knock on wood, I hope I don't hear of any.

It was 300,000 for the 1Q '08 quarter? Is that right?

Yes.

My last question or two questions. If a lot of the spending is being put off because of the assessments, both bank and credit union, how much do you sense is pent up as a result of that? How much of it is really part of this cyclical funk we're in overall?

Brett, we definitely think there is pent up demand out there. They feel better that they have some idea what the future holds. It's not that much, for most of our customers, it's not so much the recessionary impact that they're dealing with that's the big issue. They've managed through those kinds of cycles before, but it's, again, the magnitude of these large numbers that have appeared quite suddenly and lack of certainty about whether that's the end of it, even if you knew what that number was. So I think customers need products, and I think we definitely have some Pent up demand out there we'll benefit from in the last few quarters.

That's helpful. On the general banks you serve aside from the assessments and the one-time nature of them, you mentioned you thought the health of the banks you serve and credit unions you serve is largely okay. Can you comment on that versus the sort of, we continue to read more about the commercial real estate exposure that banks have. When you look at the balance sheets of your banks, do you see risk because of the commercial real estate write downs coming?

I wouldn't tell you there's no risk, but Brett our customers, so much of what ends up in the news relates to larger financial institutions certainly our customers do commercial real estate and those kinds of things, but there's much of the commercial real estate they do is owner occupied. They're not doing typically a lot of strip mall financing and those kinds of things. It certainly appears to us and from conversations with our customers and prospects that you know, they feel like it's a manageable number. So, I don't think that we're looking at anything that is major in terms of the potential impact there.

Okay, that's what I had, thank you very much.

Brett, one more comment. Our margin maximizer product, one of our sales guys did a complete survey of the banks that use that product. I can't remember the exact numbers, but out of, that the 300 or 400 banks they looked at, it's like 65% of all the commercial loans are less than $50,000. Which helped me believe there's not a huge exposure out there from our bank users from commercial loan aspect, on individual loans.

Our next question comes from Dan Perlin with RBC.

Thanks, on a different note, I'm wondering with the merger with [Medafonta] and Fidelity, obviously you get tossed out to be a company to be acquired, Jack, my question to you is really what , what kind of, I guess, standards or expectations or demands would you have upon an acquirer, as you look at kind of the state of the industry right now? And then understanding how important you are to your

I don't know that I have any specific demands, we certainly understand our obligation to our stockholders. Our view tends to be more the long-term view for the Company and unless we decided that the type of premiums we've seen on some of these were better than what we felt like we could do long-term, that's not really even an item we're spending a lot of time talking about. We think that some of the consolidation activity in the marketplace works to our advantage, both from the standpoint of core sales. I think we've long had the most focused strategy in either the bank or credit union market of any company we compete with. I don't think the sheer side advantage of some of these combinations is necessarily a size advantage. Again, we've had at least one competitor that's been in that side range all along. I feel like we've competed very effectively against them. We don't believe those types of combinations would be better than what do for them for the long-term.

If we flip that equation, given the fact that a lot of other players are distressed in the market, would you be willing to look at opportunities as an acquirer of other technology players here or outside the United States?

Absolutely. I think without question the answer is yes here in the United States and I'll qualify that as I always do, at some reasonable price. Obviously those prices were two or three years ago, not until the realm of what we felt like were reasonable. May or may not be. Domestic opportunities we'll we'd be interested in. Internationally, I think we certainly would take a look at an opportunity there. That would certainly take a fair amount more study and due diligence to make sure it made sense.

Excellent. And I appreciate your comments around 3 to 3.5% on salary base reduction, I'm wondering when you target other opportunities and , I understand you're not going to speak specifically, but are there opportunities where advertising dollars are cheap nowadays. Selling and marketing could be reigned in. You are getting more for that but you're spending less. On the R&D side, do you feel like you have to keep running hard to develop these products in a market where it seems like most people have already, I guess signed up for what you've, you have already built into your backlog for several

Well, if from a marketing standpoint, I think we have seen some benefits there and I think that some of that impact is probably reflected in the numbers currently. I don't know that I could tell you that I expect to see dramatic decreases in that going forward. From an R&D standpoint that's the business we're in. I think we will continue to invest in our products. To keep your product competitive, there's a significant amount of development that, that you need to do on an ongoing basis, just enhancing the basic features, functionality and integration of your existing products. Many of those enhancements are not billable, chargeable enhancements. In addition to the product development that you do for new applications and things. you can generation additional revenue on. I think we've done a pretty good job of trying to I will say reign in those R&D expenses. I'm not sure that's the right term, but don't know I see dramatic changing coming in the area of R&D investment. I think it will be important for us to stay at somewhat comparable levels to take advantage of opportunities that are in the market potentially related to some of the other consolidation activities that are taking place.

Okay, thank you very much.

As a reminder if you'd like to ask a question today, it is star 1. We'll go next to John Craft with D.A. Davidson.

Good morning, gentlemen.

Good morning.

You there, John?

Hello?

And we'll go next to Tim Fox with Deutsche Bank.

Just a broader question around the pipeline, obviously the pipeline conversion right now is being pressured and you did mention that there may be a fair amount of some Pent up demand in certain aspects of your business, but can you comment broadly on your owl pipeline when it comes to different segments of the business, whether on license or implementation for that matter.

Tim those numbers tend to jump around some and from, from quarter-to-quarter, but roughly flat in terms of what we're seeing there. The credit union side of the business, frankly somewhat to my surprise, we continue to see new core sales, implementations there. We had a really solid year in terms of number of new customers added last year and right now we're tracking right in line with that number of total customers. May actually exceed a little bit for the year. On the banking side, obviously the De nova activity has gone away for the time being. On the topic of Pent-up demand, that's one where we think there'll be building demand for that when both the economy stabilizes and capital is a little more attainable. There's awfully strong interest in this country. We think there's a good bit of De nova activity we'll see come back. That's a year or two away before we're likely to see that.

Our profit stars, business, again, I think that some of the consolidation in the industry, not so much the big kinds of transactions that we've talked about, but the fact that everybody in the business is trying to have a very complete product line. They want to be the provider not only of the core but internet banking, teller automation and check imaging, and all the products they can provide to their core customer base. I think your smaller niche players, your stand alone software providers are being impacted by that. I think that while banks like to have alternatives, our profit stars approach represents a nice alternative because they are best of breed products, but they also happen to be associated with a company with a very strong balance sheet that these folks have maybe a little more confidence spending money with than they might with a small niche provider. So again, generally pipe lines, while they can vary quarter-to-quarter, they're roughly flat and pretty much the same thing we've been seeing.

Yes, and my follow-up is , you talked about a dynamic in the past where you're seeing an increased amount of in-house going to outsourcing. It sounds like that continues at pace if not ahead of last year and you also talked about, in the context of this in-house to outsourcing, how you've actually increased the run rate some of these engagements. Just wondering in this environment, are you still seeing when these things convert an increase in the run rate as customers tend to buy follow-on products on a

Yes, again, Tim, we can say there's a strong interest in that. The environment may even be accelerating some of that interest. We talked about the fact that on hardware upgrades, processor upgrades. If it's at all discretionary, people tend to hold off. Sometimes the ability to hold off just isn't there. You either need to make a movie or -- move or whatever, but you've seen what the sticker price is going to be when you get to the point where you can no longer hold off. Some of these things have probably accelerated the interest level and we are also seeing accelerated interest level on the credit union side where of course they have traditionally been much more inclined towards in-house deployments. So in terms of the run rate and the revenues that we're seeing there haven't done the average on that on a year-to-date basis, like we did last year. We'll take a closer look at that and be prepared to comment on that next week. I think we're definitely still seeing increases. Whether they're increasing of the same magnitude or not, I'd have to do the math on that to see. I suspect they'll be close to in line with what we saw a year-ago.

Great, thank you.

With no more questions in the queue, I'd like to turn it back to Mr. Kevin Williams for additional or closing remarks.

Thank you. One thing I'd like to clarify that nobody asked the question. In the press release we talked about our preferred revenues were down. I'd like to speak on that real quickly. If you remember our deferred revenues are actually broke down into two components, the current revenues and long-term. Long-term deferred revenues which accounted for 30% of the overall decrease is exclusively long-term hardware maintenance related contracts. The current deferred revenues was actually down about $6 million or 6%. Which half of that is due to change in billing which I talked about last quarter. We changed the timing we were billing for our Synergy Disaster and Recovery Services to June 30th, instead of December 31. Half that decrease is related to that. The other half is primarily due to the other comments I made earlier in just the decrease in license sales of the first half of the year that we're not changing the prorated maintenance to June 30th. I want to clarify that incase there's questions about it our deferred revenue on the balance sheet. With that first of all I'd like to remind everyone we're having our upcoming analyst day in Dallas, next Tuesday May 12th. We'll kick it off with a mini tech fair and light dinner on Monday evening to highlight some of our newer products and then on Tuesday you can hear from the majority of our operational GMs, our national sales managers and executive team. The Tuesday event should conclude about 3:00 P.M. on Tuesday afternoon. If you've not yet registered and would like to attend, please send John or myself an e-mail and we will get you the registration link to get you signed up. Now in summary, we want to thank you for joining us today to review our third fiscal 2009 quarterly results. We obviously are not overly pleased with the discretionary revenue during the quarter and year-to-date, however, we are please with the effort of all of our associates to help control our cost. We remain confident that we're well positioned and with the right products and services to approach the financial services market. We also believe we have the proper resources in both people and technology for these continued future opportunities. We remain committed to build on all our competitive strength, our executives, managers and all the members of our team continue to focus on what is best for our shareholders. With that, Michelle will you please provide the replay number? Thank you all for joining us today

A replay of today's conference will be available starting 10:45 A.M. Central Time through May 13, 11:59 P.M. Central Time. The confirmation code is 9343402 and you may reach it by dialing toll-free, 888-203-1112 or for those of you outside the United States, 719-457-0820. This concludes today's conference. We thank you for your participation.