Jack Henry & Associates Inc (JKHY) 2009 Q4 法說會逐字稿

Good day, and welcome to the Jack Henry & Associates fourth quarter fiscal 2009 conference call. Today's conference is being recorded. With us today are 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 fourth quarter and fiscal 2009 year end conference call. Statements or responses to questions may be made in this conversation which are forward-looking or deal with expectations about the future. Like any statements about the future, these are subject to a number of factors, which could cause actual results to differ materially from those which we anticipate. Such factors are disclosed in our recent SEC filings. There could also be other factors not included that could potentially cause results to differ materially.

Again, thank you for joining us. We are pleased to host the call this morning to provide a company update and report our financial results for the fourth fiscal quarter and fiscal year ended June 30, 2009. With that, I will now turn the call over to Jack Prim, CEO.

Thanks, Kevin. I can't recall when I have been as glad to reach the end of a fiscal year as I am to close out fiscal 2009. The last 12 months have represented the most challenging, uncertain, and rapidly deteriorating economic environment for our customers that I have seen in over 30 years for the business. We feel fortunate to be able to finish the year with flat revenues and increased earnings per share in such an environment.

In spite of the unprecedented difficulties, we saw a number of positive accomplishments during the year. In the fourth quarter, we signed two of the largest transactions in the Company's history, when we signed Whitney National Bank in New Orleans with over $12 billion in assets and Community Bank in Canton, New York with over $5 billion in assets. These companies manage to appear to a long term view, even in the midst of the economic obstacles, and committed to major platform modernization projects that will position them to take advantage of the eventual upturn in the economy.

Our Symitar segment continued a now decade-long string of years leading the credit union industry in new core system sales, exceeding in number, if not in size, their strong 2008 performance with 33 new customer signings. And this is accomplished while at the same time maintaining and improving the strongest reputation in the industry for implementation quality and customer service. Again, we are encouraged that even more credit unions in FY 2009, while taking massive deposit insurance assessments, were able to hold to their long-term view and invest in systems that will allow them to better serve their members.

The in-house outsource transitions grew significantly over our strong 2008 performance. Its 44 in-house bank and credit unions chose to move in this direction. As discussed before, these transitions result in higher and longer term committed revenues at JHA and a simplified operating environment for our customers. Our profits aren't thinning despite a pullback on discretionary spending for add-on modules, improved their cost sales to their base of over 6000 customers, and improved operating efficiencies, resulting in an increase to their operating income contribution by over 33% from previous year.

While we believe we are seeing some improvements in the economic environment, certainly improved over the outlook six months ago, we remain cautious on the outlook for fiscal 2010, as do our customers. While the June quarter brought some relief related to the original assessment amount or timing for banks and credit unions, both deposit insurance agencies stated the probability of additional assessments before the end of this calendar year. This will undoubtedly continue to have a dampening effect on discretionary spending. Aside from economy-related discretionary spending impacts, hardware spending will continue to remain under pressure, as we see increased interest in outsourcing among both banks and credit unions.

The 80-plus financial institutions who have signed in the last three years to move from in-house to outsourcing will not need future processor or storage upgrades. In move towards server virtualization will impact the number of servers needed, and remote deposit scanner sales will grow at a slower rate, as we continue to move further along the adoption curve. Regardless of these challenges, we enter FY 2010 with a large and growing recurring revenue base, no debt and a long-term view towards the running of our business. This will allow us to take advantage of opportunities wherever they may exist. An example would be our announced acquisition of Goldleaf Financial Solutions. This acquisition further extends our industry-leading position in remote deposit capture, which most of you will remember has been the fastest growing component of our payments business for the last few years, and our payments business is the fastest growing component of our revenue.

Our remote deposit capture solutions will now be installed in over 30,000 merchants, with 90,000 locations, and marketed to their business customers nationally by over 1700 financial institutions. We will also take up a number of other products for potential distribution through our profit starters, bank and credit union sales channels. We expect this acquisition to add over $65 million in annualized revenue to be slightly accretive in the first year and to be more so in subsequent years. We look forward to welcoming the Goldleaf customers and employees to the JHA family.

We anticipate closing this transaction pending their shareholder approval in our second fiscal quarter. In closing, I would like to thank the 3840 JHA employees whose efforts and focus through this challenging fiscal year have allowed us to continue to perform for our customers and shareholders and to improve our already high customer satisfaction ratings from year-ago levels. Your efforts, attitude and loyalty are critical to our continued success. With that, I'll turn it over to Tony for some additional information on the business.

Thanks, Jack. Our EFP business continues to see nice growth in both revenue and transaction volumes. As a reminder, our EFP or payments revenue consists of ATM and debit card processing, bill payment processing, merchant capture, and Check 21 exchange. EFP revenue was up 12% for the year and 8% for the quarter.

ATM and debit card processing volumes increased 10.5% over the prior year quarter and 9.9% sequentially. Bill pay transaction volumes increased 14.1% over the prior year quarter and 4.8% sequentially. Merchant-related transaction volumes increased 55% over the prior year quarter and 9.3% sequentially. Financial institutions contracted to utilize our enterprise payments ASP solution increased to 868 over an increase of 8.4% over the prior year quarter. Financial institution merchants installed and utilizing our payments ASP solution increased to 19,345, representing a 45.4% increase over the prior year quarter.

We continue to have strong activity in our banking division for Nucor footprints. As Jack mentioned earlier, our success in the mid tier market, we continue to focus our sales efforts from de novo and small community banks to deals such as these mid tier wins. Complementary product sales of our enterprise contact management suite or synergy suite, along with enterprise payments and remittance lock box also performed very well in the quarter and for the year. We will again be surveying our customers this fall as a part of our annual survey process, customer retention and customer satisfaction continues to be a strong focus for all of our operational division. Our ongoing monitoring of daily customer service surveys continue to show extremely high ratings, as our customer service groups interact with our clients. As we look at the upcoming new fiscal year, we will remain diligent with our cost control and takeout measures where and when appropriate. As we have stated previously, we will manage the business for the long-term benefit of our long-term shareholders, clients, prospects and employees.

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

Thanks, Tony. During the quarter just ended, we experienced an increase in total revenue of 2% to $191.9 million compared to the prior year quarter and a 6% increase sequentially compared to March. Year to date total revenue increased slightly to $745.6 million compared to a year-ago. License revenue actually decreased by 4%, compared to a year-ago quarter and was down 21% year to day. However on, a sequential basis, total license revenue was up 38% for the quarter, which related directly to the large deals that Jack mentioned, which had an impact on the quarter and will have an ongoing impact as a lot of that software's still in the backlog.

The banking segment license revenue was up 6% for the quarter and down 14% for the year compared to year-ago, and the credit union segment license revenue was down 38% for the quarter and 37% for the year, primarily due to the average size credit unions contracted. Every component of recurring revenue within support and service line of revenue showed growth for the quarter and year to date with the only component within that line that didn't have growth being invitation revenue as a result of the decline in license sales primarily. For the quarter and year to date, implementation revenue increased 1% -- decreased 1% and 9% respectively compared to same period a year ago. However, implementation revenue increased 18% sequentially, which was the largest impact on support and service margins in the quarter compared to the March quarter. Our EFT, or electronic payments business, was up 8% for the quarter and 12% year to date.

OutLink Data [nine processing] was up 3% for both the quarter and year to date and remember that a significant head winds on this part of the business in OutLink revenues, the decreased traditional IP, or item processing revenues, as people switched to branches before capture. There was no significant impact this quarter due to one-time early termination fees. In fact, there was actually head wind. These one-time early termination fees totaled $383,000 for both EFT and OutLink customers combined for the quarter, compared to $1.8 million in this quarter a year ago. And for the fiscal year, these one-time fees totaled $3.5 million this year compared to $7.1 million last year.

In-house maintenance grew 4% for the quarter and 8% year to date compared to last year. Recurring revenue represented 75% of total revenue for the fiscal year just ended and grew 8% over the prior year. Hardware revenue decreased by 13% for the quarter and 18% for the year compared to the year-ago, primarily due to the things that Jack mentioned. Our gross margins improved for the quarter to 41% compared to 40% a year ago, but year to date margins declined to 40% compared to last year of 41%. This is a direct impact of the decrease in license and hardware and implementation revenues for the year. Gross margin in both our banking segment and credit union segment improved for the quarter, but declined for the full year compared to last year.

Banking segment went from 41% to 42% for the quarter and from 42% down to 40% for the year, while the credit union segment increased slightly from 37% to 39% for the quarter, but decreased from 41 to 40% for the full year. Our total operating expenses decreased 2% for the quarter compared to the prior year and for the year, our operating expenses actually decreased 1%. This is primarily due to lower commissions related directly to the software and hardware margins and overall corporate-wide cost controls had a very positive impact on our operating expense decrease. Our operating margin improved from 21% to 23% for the quarter, but declined slightly from 22% to 21% for the year. Net result was an increase in operating income of 11% for the fourth quarter and a 4% decline for the year compared to the prior year period. As we have discussed on prior earnings calls, the R&D tax credit was extended last December.

This reduced the overall effective tax rate for the year to 34.5% from 36% a year ago. Our EBITDA decreased this year to $222.8 million from $228.4 million, slight increase from last year, or 2% decrease. Depreciation and amortization was $64.1 million this year compared to $62 million last year, or a 3% increase. In our EBITDA margins decreased slightly for the year to 30% compared to 31% a year ago. Year to date use of cash for acquisitions has decreased by $46 million compared to year-ago, to only $3 million this year, which was directly attributable to finalizing some remaining earnouts on previous acquisitions.

Our CapEx was basically flat compared to the prior year at $31.6 million compared to $31.1 million last year and capitalized software was up slightly by just $0.9 million to $24.7 million from the year compared to $23.7 million last year. At this time, our CapEx projected spend for FY 2010 is roughly $50 million to $55 million, which close to -- a little over $30 million of that is directly attributable to our Springfield and Branson facilities that are currently under construction currently. During the year, we purchased 3.1 million shares of stock for the Treasury for $58.4 million.

Our backlog was $289 million, with $67 million in-house and $222 million outsourcing at June 30, which represents a 12% increase over that of a year ago, with outsourcing up 15% compared to a year ago. Remember that there are no transactional revenue represented by the EFT, debit processing, online bill pay or merchant remote deposit capture contract reflected in our backlog, due to the difficulty in estimating these transactional type revenue.

For FY 2010 guidance, first, I want to point out that this guidance does not include any anticipated or announced acquisitions, as we have never incorporated those into our guidance until they finally closed. With that said, the economic conditions continue to be a challenge and caution remains in the base due to the uncertainty around the potential additional assessments, as Jack referred to, then combine this with the impact on revenue of past and potential future sales institutions within our customer base, this continues to make it difficult to forecast discretionary sales to customers which relates directly to software, hardware and implementation revenue and to some extent recurring revenue.

Therefore, with somewhat cautious approach based on our annual budget, current backlog and sales pipeline, we believe that FY 2010 we will have revenue growth in the low to mid single digits, 3 to 5%, with operating income in the high single-digit growth, 6 to 8%, and through continued operating leverage. Our EPS expansion from the operating income growth will depend on the effective tax rate and stock buybacks. If the economy continues to stabilize and we get some clarity regarding the regulatory assessments, then we hopefully can raise our guidance in the future. For modeling purposes, I would suggest you use an effective tax rate of 36%, since at this time it is unknown whether Congress will renew or extend the R&D credit, which is scheduled to expire again on December 31, and in which case our effective tax rate would be in the 36 to 36.5% range. However, if they do renew it, then we will let you know then, but our effective tax rate will probably be more in the 35 to 35.5% range.

Some comments on the pending Goldleaf acquisition. As you can hopefully recognize and appreciate, up to this point, on the Goldleaf acquisition that is still pending shareholder approval, we have only had access to the online data room and senior management, which is very typical of an acquisition, as you don't want your employees distracted until you actually have something to announce, which this happened just two days ago on Monday. So starting as early as next week, we have meetings scheduled with both organizations, key management and critical employees to focus on the transaction process of bringing these two organizations together. As we are doing this, we will be determining revenue cross-sell opportunities, but more importantly for the near term, host significant cost synergies that are available.

Depending on when we can obtain shareholder approval and have a final close will dictate the impact to our financial statements to this fiscal year, but as Jack mentioned, we are hoping to close in the second fiscal quarter. Assuming that is the timeframe of the closing, and based on cost synergies that we are aware of today, we anticipate this would have an accretive impact to our FY 2010 earnings of 2% to 4% per share and believe the accretive impact should more than double for the following fiscal year as we successfully remove the overlapping costs O our next earnings call, we plan to state what our actual cost synergy targets are that we have identified at that point through these detailed business unit reviews and disclose those in various categories and then report on subsequent calls how we are tracking on obtaining those cost synergies.

Also in the quarter that the transaction closes, we will have a one-time charge to earnings for the transactional-related fees due to the new rules under FAS 141-R, these are no longer capitalized as part of the transaction. We also plan to fund this transaction with cash from operations. With that, I will now open it up for questions.

(Operator Instructions) We'll go first to John Kraft of DA Davidson.

Good morning, guys.

Good morning.

Following on the Goldleaf, since that was the most recent thing you talked about, obviously you haven't had a chance to dig in, I know it's early, but presumably part of the transaction was the opportunity to cross sell into their customer base. Have you had a chance to look into how much overlap there is?

John, only at a very high level. We certainly know what most of their products are. Again, as I mentioned, very strong presence in the companies separately and certainly combined from the standpoint of remote deposit capture, which is a very nicely growing business still, even though growing at a somewhat slower rate than it was for the last couple years. Some of their ACH products look particularly attractive. We believe for a certain segment of our customer base. As Kevin mentioned, there's a number of overlapping areas, so there's some cost synergies, but we'll really begin starting a deeper dive this next week in looking at some of the different product lines, figuring out which ones we will be marketing through our bank and credit union segments and which ones will be marketed through Profit Stars, anticipate that frankly all of them will be marketed through all of those segments, but the methodology might be a little bit different. So we have a very high level feel for the products, but not detailed at this point.

Okay. That's fair. And then Kevin, just trying to get a better feel for the status of the implementation at Whitney and Community Bank, you said that obviously the backlog jumped because of some of these deals and that it will have an impact on the license for a while. Is that another couple quarters or a year, or how long will it take to get these deals finished

The Whitney transaction, John, that's a $12 billion decision, that's about a two-year implementation process. We actually had a kickoff meeting last week, but I would say we had implementation teams there basically before the contracts were signed to start laying out the conversion plan and get people there. So there was some software shipped there. There was also a little dab of hardware there. There will be more hardware coming, either late this quarter, next quarter at Whitney. The other pieces, like ARGO, will not ship until later and in fact, I'm not sure what the time line is of that, John, but there will be software trickling in from Whitney for probably the next four quarters. As far as DeWitt, kind of the same way. There was some -- the software that they needed to get things started was shipped in the fourth quarter, but there's more software like ARGO that will be coming later this year. However, DeWitt is actually scheduled for president's day next spring, so most of that software, if not all of it will be either this quarter or next quarter.

Okay. That's helpful. And then Tony, I missed this. If you could just repeat what the bill pay transaction growth was.

Yes, the bill pay transaction volumes increased 14.1% over the prior year quarter and 4.8% sequentially.

Okay, great. And then lastly, this is kind of a bigger picture question, I guess. You've talked a lot over the recent past kind of acceleration of deals, got customers that might have traditionally been license-based, now move into sort of the outsourced camp. One quarter doesn't make a trend, but is that something that you're seeing stabilizing or may settle back down again?

Well, I don't know, John, that we will see the kind of growth in fiscal 2010 over fiscal 2009 that we saw in fiscal 2009 over fiscal 2008. We did 27 in-house to outsource transitions in FY 2008, we did 44 in FY 2009. Frankly I would be very pleased if we got another 44 in FY 2009. I think all of the same pressures that have kind of been in place for several years are still there for financial institutions to consider this. We have seen an increase in interest in this option in the credit union space, which is encouraging. In FY 2008, that 27 transaction consists of 26 banks and one credit union. The 44 this year consisted of 38 banks and six credit unions. So we are definitely starting to see some more interest in the credit union space, which I have expected for some time. So I think it's hard to say for sure what will happen. We still have a good pipeline of that type of activity, but frankly I would be pleased if we saw another 44 transactions this year.

Okay, interesting. Thanks, Jack. That's all I've got. Nice work on the quarter.

Thank you.

Thank you.

We'll go next to Bryan Keane of Credit Suisse.

Hi, good morning. I just wanted to follow up on the license sales, Kevin. Do you think it was obviously a pretty big license sales quarter, $17.6 million. Should that be more flat sequentially, or should we have a stepdown there? Then what about for the year-over-year for license deals.

Well, I think we'll have a stepdown in the first fiscal quarter in license sales, just like we do every year, Bryan. I mean being June 30 year end, our sales guys are, they make a big push in the June quarter to hit their quotas and get things done. There was some impact in there from the Whitney and the DeWitt transaction. I believe there will be a stepdown in the first fiscal quarter, but for next year, we actually anticipate license revenues for the year to be somewhat flat, if not slightly up.

Okay. Okay. That's helpful. And then I wanted to ask Jack, the environment, we've seen a little bit of a pickup in bankruptcies in banks. Could you just talk about the impact that has on your business model and kind of what you guys are modeling in the future for bankruptcies?

We estimate we would see about 100 banks nationally that would fail this year and that was -- we were right on track with that number through May, if not through June. Obviously it's picked up a little bit here of late and my best revised guess on calendar 2009 is 120 to 125 banks. But, it doesn't really change our outlook on the business. There's not a lot that we can do to influence any of that. I -- again, not terribly surprised to see a little bit of an acceleration here. I would be surprised if we saw that number get to 200 this year or 200 next year. I think there's some reason for cautious optimism on the economic outlook in general. I think as unemployment begins to stabilize, that some of these issues become less pressing for the customers, but there's still a lot to be worked through in the current environment. I don't know that I could give you a good revised estimate of what we think we'll see in the way of bank failures in the next 12, 18 months.

The one thing I would throw in there, Bryan, is what we have seen is our customers have been pretty much representative to our percentage of the market, which is about 18% to 20%, and going forward, that's kind of what we would anticipate seeing.

Okay, but it doesn't really have much of a material impact on the results even in fiscal year 2010?

It's never good. There's nothing good about seeing a bank fail or losing a customer. And it just makes the hill you got to climb a little steeper in terms of trying to find revenue growth, but in terms of a material impact, no. We would have to see a pretty dramatic acceleration in the rate of failures for it to be a material impact on the numbers.

Okay. Last question for me, obviously a lot of buzz around the combination between Fidelity and Medivante. Do you think that gives Jack Henry a potential opportunity to go pitch some of their customers?

Well, we've looked for every opportunity to go pitch their customers and certainly we'll continue to do so. They have got a large integration task ahead of them. They have got a lot of experience in doing those types of integrations, but I'm sure that they are thinking it through pretty thoroughly. We certainly expect to try to take advantage of any missteps they might have along the way, but I don't know that I could give you -- whether it will serve as a catalyst for core system evaluations or not, remains to be seen at this point.

Okay. Congratulations on the quarter.

Thank you.

Thank you. We'll go next to Jon Maietta of Needham & Company.

Thanks very much. Jack had mentioned a little bit, you had mentioned the prepared remarks it improves outlook and I was just wondering if you could talk about that a little bit. Are you seeing shortened sales cycles or accelerated close rates or any color you could provide there would be great.

Jon, I was really referring more to kind of the general economic outlook, some of the slowing increase in unemployment and some movement in home price sales, so just kind of more general trends that the economic environment in general. I would also tell you that customers, bank and credit union customers seem to be certainly less shell shocked than they were in the March quarter when, if you'll recall late January, early February, is when the initial news about the assessments came out, and then in the June quarter, we got a little bit of relief at least in terms of the timing in the case of credit unions and the actual amount in terms of the banks. So I think they started to feel a little better about the economic environment, but as I mentioned, both agencies have at the same time they provided that relief, if you will, turned around and clearly indicated the likelihood of additional assessments before the end of the calendar year.

In the case of the NCUA, they floated a potential amount, which if that was 15 basis points on assets, I believe is the way that they did it, and if that's the case, just to give you an example on top of the assessments that the credit unions have already seen, that additional assessment, if it happens at that level before the end of the year, would be three times the level of the assessment that the banks got hit with in the first assessment this year. So there's still some, not insignificant charges that these folks may still have to absorb this year. So, again, I think their outlook is better than it was, six months ago, but, again, cautiously optimistic at this point. We think it's such that there will still be some restraint in the area of discretionary spending.

Got it. Okay. That's helpful, Jack. And Jack, should we assume with regard to Goldleaf, that you move forward with all the product offerings, that retail piece, for example, are there potentially some product lines that you may sunset over time?

Jon, we have to get in and take a look at those. Viewing Goldleaf from afar before any of this process, I would have to tell you we looked at some of those lines of businesses and weren't real sure what they were or whatever. I would tell you that related particularly to the lending solutions piece, and again, all we've really had an opportunity to do is a very high level discussion on that. But I think we view that a little bit differently after having done, so it appears to us to be essentially a software business that just happens to generate some of its revenue in the form of a percentage of the accounts receivable that are financed. So it is less mysterious and unusual to us than we thought before we engaged with these folks. But I think we certainly have a good bit more education that we need to receive on that and to understand that business better and figure out exactly how it fits. So don't anticipate any short-term decisions in the next couple of quarters related to the business. We just need to get our arms around it first and really understand what it is and whether it adds value.

Okay. Then one quick last one, Kevin, if you were to exclude the two transactions, the two larger deals in the quarter, would you still, still have experienced a sequential ramp in license revenue?

Yes.

Okay, great. Thanks very much.

We'll go next to Dave Koning of Baird.

Hey, guys. Nice job.

Thanks, Dave.

I guess first of all, it looks like the outsourcing subsegment reaccelerated last quarter 1% and reaccelerated to about 3% growth and in-house decelerated. That's I guess the pattern that we would expect to be seeing now that you're shifting quite a bit, quite a few clients to outsourcing. Is that the pattern that we should I guess continue to see going into next year, that outsourcing continues to reaccelerate while in-house maybe stays around this level or maybe even decelerates a little bit?

You're referring to on the in-house side, are you referring more to license or maintenance-related ?

Oh, yes, sorry, all the stuff within support and services. So in-house maintenance has been decelerating and then the outsourcing has been kind of reaccelerating this quarter.

Well, certainly as these folks transition into the outsource delivery, that, as we've talked about before, the benefit of that transaction is in the first year that they do it, it represents about an 85% increase in the revenue over what they would have paid us had they stayed in the in-house arena. And when they do that, they stop paying you maintenance, so it impacts both. It increases your outsource related revenue. It also decreases whatever they would have been paying you in the, in the form of maintenance fees. So, yes, I think we've got a pretty good backlog at this point of financial institutions that are making that move and that move would impact both of those line items positively in the case of outsourcing revenues and negatively in the case of maintenance revenues.

Okay. Okay, good. And then you talked a little bit about guidance within the license line for fiscal 2010. Hardware, I would assume it sounds like is going to be down again next year in support and service then would have to be up at least mid-single digits. Is that kind of the way you would outline it?

Yes.

Okay.

And of course they, all the numbers we're talking about are referring to our business as it exists today and don't take into consideration the combination with Goldleaf. But, Goldleaf is also a strong player in the remote deposit capture business. So there is some potential that when we get this transaction done, that hardware gets some additional growth based on scanner sales between the combined entity that might push off a little later some of that hardware decline, but the items that I mentioned in my opening comments, the reduced growth rate industry-wide of remote deposit capture, still strong, but not as strong as it was two years ago. Significant interest in customers looking at server virtualization and of course as we talked about the in-house outsourcing trend, all of those things are dampening effects that over the long-term, and frankly even over the next 12 months, should continue to put pressure on hardware sales.

One other comment I would throw out here, obviously my opening comments, the guidance I gave for FY 2010 did not include any potential acquisitions, as we never try to estimate what those are in guidance. So I would hope for consistency sake that all of you guys would put your estimates out there for FY 2010 without the acquisition for consistency until it actually closes and we can update those.

Okay, great. And then just one final question, the back half of the year, the operating expenses, I guess as a percent of revs -- I know that reflects some of the cost savings. Is that 18.5% of revs that realized in the back half of this year, is that kind of how to think about next year that a lot of those savings are already in the numbers, or can that actually go down as a percent of revs because you started doing some more cost savings towards the back end of this quarter that help next year?

Well, we did a couple things in the back half of the year just ended. We had a voluntary time off program, which helped the March quarter. We implemented some salary reductions, which we basically saw one month of impact of that in the June quarter and that's, of course, in conjunction with all the other cost containment steps that we accelerated since last fall as well. The salary reductions are still in place and so in the September quarter, we would expect to see more of an impact than we saw in the June quarter. Likely that those salary reductions will remain in effect through the December quarter and then whether we restore those salaries after that will depend heavily on our outlook in terms of our operating income targets and what the economy is doing and what our customers are doing and those kind of things as well. I think there's probably some additional benefit from the moves that we made in the June quarter that certainly will be impacting us favorably for the next couple quarters at least.

And Dave, on the operating expenses, I mean selling and marketing, obviously the most heavily impacted because of commission expense related to the decline in software and hardware sales for the year, so they were down slightly. Research and development ended up the year basically down 1%. I will tell you that that has to do not only with the pay cuts that Jack's talking about, but also our management team has done a much better job at controlling outside contractors in the utilization of those. As far as G&A, it was basically flats year to year. I will tell you that that's most heavily impacted by the fringe benefits and healthcare costs because we are self insured and thankfully we kind of got that under control the second half of the year and hopefully we can control that going forward through our wellness initiatives.

All right, great. Thank you.

Thanks.

We'll go next to Greg Smith of Duncan Williams.

Hi, guys. I think this has been discussed a little bit, but just looking at the overall sequential increase in revenues in the quarter for software and hardware, is the majority of that due to the two large deals, or is that kind of not giving you enough credit?

Well, the majority of it was not duo oh well, the majority of the increase might have been, but like I said earlier, we would have had sequential upside in both software and hardware without either one of those deals. So our sales guys in the environment did a really good job. There were some nice other software contracting and hardware that happened in the fourth quarter, so did those two have a significant impact on fourth quarter? Absolutely, but would we have been up sequentially without them? Absolutely.

Okay, perfect. That's very helpful. And then just on the Goldleaf acquisition, the revenues were down quite a bit in the latest reporting, where you do you get the confidence that you can kind of stop that bleeding, I guess?

Well, they have got a very solid business, Greg, I'm sorry. They have certainly been challenged with a lot of the same kind of impact that a lot of us have, and carrying as well some debt that may -- that much more difficult to deal with, but again, we think that there's definitely some opportunity to market their products through all of the areas of our business, our bank and credit union segments, as well as through profit stars, some additional marketing and sales fire power that we can bring to what they have. So we don't believe that the, that the slowdown that they have seen is in any way a reflection on the quality of their products or their services. We think it is just more associated with the economic environment. The -- and again, the other aspect of this transaction is there is a fair amount of overlap -- several areas of our two business, which potentially will result in some fairly nice cost reduction opportunities as well. So the combination of those two things certainly helps a good bit.

Okay, and then just lastly, you guys have kind of been using 100% of your free cash flow for buybacks and dividends. As we think about fiscal 2010, you're obviously going to have to pay out for the Goldleaf acquisition. How should we think about sort of total free cash flow usage and buybacks in that context for FY 2010?

Well, obviously, we intend to fund the Goldleaf acquisition with available cash. Currently we are debt-free. Our revolver sits at zero. We have somewhere around $85 million or so in the bank and actually I think it's a little north of that. So we will obviously pay this with free cash flow. We will continue to look at other acquisitions that we've got the revolver in place that we can utilize. We have a board meeting later this week that we will talk more about stock buyback and see where we go with that. But we still think the best use of our cash is acquisitions at this point to give the best return to our shareholders, if they are the right acquisitions long-term.

Okay. Thank you.

We'll go next to Paul Bartolai of PB Investment Research.

Thanks, good morning, guys.

Hi, Paul.

First, on the services margins -- partly due to the implementation revenues. Was that the biggest thing there, or are you guys seeing any other benefits on the margin side?

That was the biggest thing, Paul, is the 18% sequential increase in implementation revenues, and we think that there's a nice solid backlog of implementations going into FY 2010, but again, that's heavily impacted by merger activity, because we get very nice revenue off when our banks are buying other banks through the M&A activity. So that, that was the biggest impact during the quarter, but that combined with overall cost of services actually decreasing slightly because of cost controls and the pay cuts that Jack talked about, those two things are basically 99% of the impact in the margins.

Okay, great. And then looking at the payments business within services, I mean if you look at the revenue growth there versus some of the transaction growth metrics you guys have given, looks like the revenue growth is growing a little bit more slowly than the transaction growth the last couple quarters. Are you guys seeing some increased pricing pressure there, or is there something else impacting that?

Yes, I think there definitely is some pricing pressure there, particularly in ATM/debit contract renewals. We've talked about that before. It's a highly competitive marketplace. That's probably where we see most of it really minimal, if any, in the remote deposit capture space and frankly not in the bill payment space to any significant degree. We offer probably one of, if not the lowest price bill payment offering in the space today. So we're probably causing problems for other people more so than feeling any pressures in that area. I don't know if you would add anything to that.

I think that's absolutely on target, Jack.

And the pricing pressure on ATM, is that something that has increased -- or has that been constant?

It's been pretty constant, gosh, last two years if not longer.

Okay, great.

And the other thing, Paul, we continue to add products into our payment suite, especially in the ATM debit through frog center and frog solutions and some optimization products to help maintain those margins that are there today.

Okay, great. And then Kevin, on the accretion you gave for Goldleaf, sorry, was that 2 to 4%?

$0.02 to $0.04.

And that was for the back half, from when you closed the deal, or was that for a full year?

That's for the back half of this year.

Okay, great.

That's assuming that the close date is somewhere in the October timeframe.

Okay, and then just lastly, the leverage you guys expect with the operating income growing faster in 2010, is that more on the operating expenses, or do you expect to see some benefit on the gross margin as well with some of the implementation stuff you guys talked about?

We think there will probably be equal opportunity at both lines, Paul.

Okay, great. Thanks, guys. Good job.

Thanks.

We'll go next to Gil Luria of Wedbush.

Good morning.

Good morning.

The large deals usually have a pretty long sales cycle. Do you have anything else in the pipeline right now that's kind of at that size or close to that size that you could get further down the road this year?

Yes, Gill, this is Tony. We do have additional mid tier banks that we're working today on the banking side. None of them are of the current size of Whitney National, but certainly still solid mid tier prospects that we're working with. I do think there's some good opportunity there. The sales cycles tend to be a little longer for those mid tier clients, but we have been working some of these for sometime now and look to try to close some of those deals in this fiscal year.

Gill, I would add on the credit union side, we have some activity early stage, but some activity under way with some little bit larger credit unions, too. We had a great year in trading space in terms of new customer signings, 33, all of them with the exception of one, a competitive takeaway. And that one was a very rare de novo formation among credit unions. But the challenge that we had was that the average asset size and related fees generated by those transactions were roughly half of what we saw in FY 2008, so you harvest what's available in the marketplace. It just happens that that's what the mix of business was this past year, so we do have some activity that's increased among some of the little bit larger credit unions and that could help offset -- help show some growth in that area as well.

In terms of the Goldleaf acquisition, sounds like a big part of it was the remote capture part of the business. There's a few different business models there. Either bank license fee, fee per merchant or a fee per transaction. Could you tell us a little bit about which of these business models you utilize more in your remote deposit capture business, and what Goldleaf is doing and if that would change if you were to acquire them?

Yes, Gil, our model today is an ASP-hosted delivery which does involve a monthly minimum amount to the bank offset against that monthly minimum are per merchant fees, and then there are transaction fees beyond certain threshold level on a merchant basis. I think Goldleaf has a couple of different models. One model that I think is probably somewhat more predominant for them is very similar to that, through the Sierra products, which are the products that they picked up with the Halogen acquisition.

I think they tend to sell more seat licenses for that, which are basically license fees for the number of seats. And I'm not completely clear at this point on what type of ongoing transaction or merchant-related fees come with that. So I think they have a couple of different models, slightly different variation particularly with the Sierra products and we'll be taking a look at both of those and see how they match up and what their sales history has been and if they have got a model that's more successful than, than the way we've been doing it. We're certainly open to consider new approaches.

Got it. And then when you had a wave of acquisitions in the 405 timeframe, you were able to hang on to a lot of those managements and they are now product managers and products that have been well integrated into your core offering. Is there a similar plan to hang on to the management team there and get them signed up for at least the two, three-year timeframe to create Conneaut for those products?

That's certainly part of what we'll be digging into more deeply in the next 60 days or so, Gill. We certainly -- we need to understand who the key management players are in each of those product areas. We know who they are on an organization chart and we need the opportunity to spend more time with some of those folks and understand what their long-range plans are. But it would certainly be our intent to, to keep the management that knows the products, particularly the products that are successful today and different from products that we have so that we keep that momentum going forward. Again, obviously there are some cost synergy opportunities here and we'll be looking at those and there may be some parts of their business because of the, the degree of similarity to existing businesses that we already have that would be folded into some of these businesses or potentially the other way. So that's all things we'll be taking a look at here in the next 60 days.

Great, thank you.

(Operator Instructions) we'll go next to Tim Willi of Wells Fargo.

Thanks, and good morning, guys. Kevin, just one question around the Goldleaf comments. You talked a little bit about the accretion this year and what could potentially be an FY 2011. How much of that accretion assumption is driven from the expense side of the equation rather than anything around revenue synergies? Could you give us a feel for that?

At this point, Tim, almost all of it is cost synergies that we are aware of that are in place for the taking. As I said, going into next week, one of the things that we will be focused on in these meetings is looking at revenue synergies and where we can get some of those. I mean we know there's some out there, but we also know a lot easier with some of the costs that we can take out from overlap and different things, which is the cost synergies that are built into that estimate. I would hope that when we are done with the meetings, as Jack mentioned in the next 60 days, that we will be able to give very firm guidance on what it will do for us, and hopefully it will be even higher.

Okay, great. And then just a question on the remote deposit business. Were they selling their product -- using channels other than banks and channels that you may not be using? In particular I'm curious about the merchant acquiring and iso channel. If they were doing anything there or if you all are considering utilizing that channel rather than just banks going forward?

They were, they were not doing anything much, if anything at all through that channel, Tim, and you may or may not know we have been doing a lot through that and other related channel in recent years. So we've been very active in pursuing those distribution So we've been very active in pursuing those distribution channels as well, along with distribution channels like other software providers, who have a payment processing aspect of their business, which in many cases has nothing to do with the banking industry. It could be a company that provides accounting systems to city/county government or utilities or churches or whatever the case might be, but all of these places take in payments. Many of them take in payments by check and we work pretty closely with a number of these software companies to embed our remote deposit capture technology into their software companies, ISOs, merchant acquirers, we've been porting that market, having some good success in that market for the last 18 to 24 months. But to your question, it is my understanding they have done very little in that area, so there is potentially the opportunity for us to leverage some of their sales talent to help us be able to make those contacts and get consideration from an even larger number of these third party remarketers.

Great, thanks a lot, guys.

Thanks.

We'll go to Greg Smith of Duncan Williams.

Yes, hi, guys. Just a follow-up. Especially with the Goldleaf acquisition increasing your amortization related acquisition, have you given any thought of reporting a cash EPS number similar to what your competitors do?

Greg, I mean we have not really given a whole lot of thought to that. Obviously as we go through this process, we may consider that.

Okay, because it just seems like your cash EPS ties in with your free cash flow pretty well and would match you up against your competitors. Anyway, just food for thought I guess. Thanks.

Thanks.

At this time, I'll turn the conference back to Mr. Williams for any additional remarks.

Thank you. We want to thank you again for joining us today to review our fourth quarter and fiscal 2009 results. We were not overly pleased with the results. However, we did finish the year strong and we are very confident going into FY 2010 that things are looking a little better. We also remain confident that we are well positioned, that we have the right products and services to approach the financial service market and believe we have the right resources in people and technology. With that, operator, would you please provide the playback number?

Yes, a replay will be available beginning today, August 19 at ten-forty-five a.m. central time through August 26, eleven-fifty-nine a.m. central time by calling 888-203-1112, or 719-457-0820 and entering replay code 6300431. That concludes today's conference call. Thank you for your participation.