Jack Henry & Associates Inc (JKHY) 2010 Q1 法說會逐字稿

Good day. Welcome to Jack Henry first quarter 2010 earnings call. For opening remarks and introductions, I would like to introduce Kevin Williams, Chief Financial Officer, please go ahead, sir.

Thank you. Welcome to the Jack Henry & Associates first quarter fiscal 2010 earnings call. Statements or response to questions may be made in the conversation which are forward-looking statements and deal with expectations about the future. Like any statement about the future, these are subject to a number of factors which could cause actual results to differ materially from those 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, good morning, we are pleased to host the call for an overall company update and financial results for the first fiscal quarter ended September 30th, 2009. With us this morning are Jack Prim, our CEO and Tony Wormington, our President. We will provide opening comments regarding the state of the Company and our quarterly financial performance then after the prepared comments, we will open the call up to Q&A. With that, I will open up the call to Jack Prim.

Thanks Kevin. Good morning. We continue to see a challenging economic environment and a continued impact on the discretionary spending in the quarter, particularly related to hardware and software license items. Despite these challenges, on the top line growth, we saw solid growth and backlog and continued increases in recurring revenue. Our ongoing expense control efforts helped us realize an 18% growth in operating income and 19% increase in earnings per share. Core system evaluation activity remained solid in both the bank and credit union segments of our business and we expect that will remain the case throughout the year. We completed our previously announced acquisition of Goldleaf in the quarter and also announced and completed our acquisition of PEMCO Technologies subsidiary of PEMCO Mutual Insurance Company. PEMCO provides a variety of ATM, debit and credit card transaction processing services, primarily for the credit union industry. Their business is highly complimentary to our existing passport ATM debit business and introduces new capabilities for us in the area of credit card transaction switching services. Their company has an excellent reputation for customer service and we believe will fit very well with our current passport and credit union offerings.

Both of these transactions add to the current payment offerings. Goldleaf adds to the small remote deposit capture presence, which is the fastest growing components of the payment solutions with 54% year-over-year growth in the last fiscal year. It is expected to add approximately $48 million in revenue for the current fiscal year and $65 million to $67 million per year going forward. PEMCO will add to our significant presence in ATM debit transaction processing which currently represents 70% of the revenue of our payment's business while also introducing new capabilities in the area of credit card transaction routing. PEMCO is expected to add $26 million in revenue in the current fiscal year and approximately $40 million per year going forward. Both businesses also provide opportunities for cost reduction in addition to the increased revenue contribution. Between them, they add another 2800 new customers that will also be candidates for other profit centers products and increase the number of core and noncore processing customers using one or more of our products to over 11,000. We are pleased and excited to welcome the customers and 540 employees of the two companies to Jack Henry & Associates.

We continue to believe the outlook for fiscal 2010 is better by compairson to 2009. As indicated on our last call, we and our customers remain cautious in the outlook. At our annual bank and user conference last month, while attendence levels were encouraging, there was a more subdued tone compared to a year ago when it appeared the problem in the economy, while very serious, were more likely to be confined to a small number of very large institutions. This year, it appears that the collateral damage from those problems. Specifically high unemployment and reduced consumer and business spending, are weighing on the minds of our customers. These same issues along with recent comments by the NCUA, they do not expect credit losses to peek until 2010 or 2011. Along with estimates for deposit insurance assessments provided for budgeting purposes for credit unions is between and 15 and 30 basis points on assets are similarly impacting spending decisions in credit unions. As we work our way through the current business challenges, we will continue to focus our efforts on the long term best interest of our shareholders, customers and employees. We are confident that our business model will perform well in the current environment and very strong in a more normalized business environment.

With that, I will turn it over to Tony for additional information on the business.

Thanks Jack. Good morning all. Our support and services revenue continues to generate growth and help offset the lack of discretionary, complimentary product license fees in hardware sales in the current economic environment. Within support and service, which was up 3% compared to prior year quarter, one time implementation revenue was down 8% due to weak license sales. EFT revenue was up 7% compared to the prior year quarter. Our revenue from our outlay data and item prosessing centers was up 7% and in house software maintenance was up 3% in the same period. In addition to increased revenue, our EFT business continues to see nice growth in transaction volumes. As a reminder, our EFT revenue consists of ATM and debit card processing, bill payment processing, merchant capture and check 21 image exchange. ATM and debit card processing volumes increased 12.1 % over the prior year quarter and 1.8% sequentially.

Bill payment transaction volumes increased 16.1% over the prior year quarter and 2.2% sequentially. Merchant related transaction volumes increased 46% over the prior year quarter and 10.8% sequentially. Financial institutions contracted to utilize our enterprise payments ASP solution, increased to 871 or an increase of 7.7% over the prior year quarter. Financial institution merchants installed in utilizing our enterprise payments solution increased to 21,308 entities, representing a 39.4% increase over the prior year quarter. We continue to put a strong emphasis on customer satisfaction, the results of our monitoring indicate continued success within our demanding customer basis. In the current economic environment, we will remain diligent with expense controls while maintaining a long term focus on the best interest of shareholders, customers and associates.

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

Thanks. Our total revenue is essentially flat compared to the same quarter a year ago. License revenue is down 14% for the quarter compared to last year and down 35% sequentially, which typically is the case in the first quarter but (inaudible) a little more than expected for all the reasons Jack and Tony previously mentioned. However, during the quarter, our core license revenue was up slightly compared to the year ago quarter and as Jack mentioned, discretionary complimentary product license revenue was down considerably during the quarter, as those are the items that are easiest to put off spending on by the customers. Our support and services revenue increased 3% year over year this quarter and basically flat sequentially. For the quarter, as Tony mentioned (inaudible) revenues decreased by 8% compared to the prior year and was down 13% sequentially, which again was tied to the continued challenges of discretionary, complimentary license sales, because core (imitation) revenues were up slightly compared to a year ago, in line with the core license revenue being up.

Our electronic payments business was up 7% for the quarter compared to the prior year and increased 3% sequentially. Outlink data and processing also increased 7% and increased 2% sequentially. Total deconversion fees for electronic payments and Outlink combined were less than $100,000 this quarter compared to approximately 900,000 in the same quarter a year ago. And there also continues to be a slight headwind in the electronic payments from the check 21 where financial institutions are now going directly to the feds and that head wind this quarter was about $550,000, which as we discussed in the past, continues to become a much smaller impact. Our in house support and services was essentially flat for the quarter compared to last year and up 1% sequentially, which is primarily due to the delayed work orders as customers again are pushing out discretionary spending. Our hardware revenue decreased by 16% for the quarter compared to a year ago, and 21% sequentially due primarily to significant decreases in I series sales for both new and upgrades, and also declines in check orders for all types ranging from reader sorter for check 21 to the small merchant desk top scanners and we've also seen declined in servers which goes along with just about all of our complimentary products. Those are obviously down for the quarter.

Recurring revenue consists of in-house support maintenance or EFT or electronic payment business which included all of the electronic payments business and Outlink Data and processing. In other words, this is our support and services line of revenue less the one time implementation fees. Our recurrent revenue experienced growth of 5% for the quarter compared to the prior year and 3% sequentially. So, we continue to see solid growth in our recurring revenue. Our consolidated gross margins improved 41% for the quarter, compared to 40% in the same quarter a year ago and they were level sequentially. License margins decreased from 92% a year ago to 90% this quarter. Support and service margins improved to 39% compared to 37% a year ago. And hardware margins improved from 25% a year ago to 27% this quarter.

To break this down into the two reporting segments, our banking segment gross margins improved to 41% from 39% a year ago. And the credit union segment margins decreased slightly to 39% from 40%. In the bank segment, for license margins, we saw a decrease from 91% to 89% due to a higher amount of third party software sold in the quarter. Support and service margins in the bank segment increased to 39% from 37% for the quarter, primarily due to lower personnel and travel costs and fringe load. And our hardware margins increased to 27% from 26% in the bank segment this quarter from a year ago, due primarily to sales mix.. In our credit union segment, license margins were 93% for the quarter, compared to 94% a year ago. Again due to more third party product sales this year. Support and service margins decreased to 34% from 37% a year ago, driven primarily by a decrease in work orders and a slight reduction in our electronic payment business in the credit union segment. Hardware margins increased from 23% to 26% due to sales mix and better rebates.

Total operating expense decreased 12% for the quarter and as a percentage of our total revenue decreased from 20% to 18% for the current quarter compared to the prior year. This was accomplished by holding head count steady, cost and salary reductions, and lower health care cost this quarter compared to a year ago. Selling and marketing are down 13% compared to a year ago, which is primarily due to lower commissions related to lower license and hardware revenue. Our R&D decreased 12% compared to a year ago, primarily by lower personnel cost, reduced travel and using fewer outside contractors. G & A was down 11% due to lower health care cost and due to the (inaudible) user group being done virtual this year due to last year so travel related costs were down significantly within G&A. Our operating margin increased to 23% from 19% for the quarter compared to a year ago and was flat sequentially.

The net result was increased operating income 18% for the quarter compared to the prior year. The effective tax rate for the quarter was 37.3% compared to 37% last year. This will most likely be the effective tax rate we will use at least through the first half of this year or until we determine what Congress is going to about the R&D credit. Because until they renew the R&D credit we have to assume that it will not be renewed and therefore our effective tax rate will be higher. Therefore, I would suggest you use approximate 37% rate for modeling going forward until we determine what the impact of the R&D credit will be. Our EBITDA increased 11.2% to $57.8 million from $51.9 million last year. And depreciation and amortization remains level at $15.8 million this quarter compared to the quarter a year ago. During the quarter we did not purchase any additional shares of stock from the Treasurer due to the pending acquisition and the utilization of cash for those acquisitions, which were closed during second fiscal quarter, as Jack mentioned. Our backlog was a $291.2 million with $61.7 million in-house and $229.4 million outsourcing, which represents a 9% increase over that a year ago. Remember that there are no transaction revenue represented for EFT debt processing, online bill pay or merchant remote deposit cash for contracts reflected in the backlog, due to the difficulty in estimating the transactional revenue. However, the backlog is logically growing faster than other parts of the business, since most of these are represented by long term contracts.

For guidance, as Jack mentioned, we continue to face economic conditions that are both challenging and caution does continue in our customer base due to the ongoing uncertainty around the timing and magnitude of potential additional assessments from the regulatory bodies, combined with the impact on our revenue of past and potential future failed financial institutions within our customer base. Obviously, this makes it extremely difficult to accurately forecast discretionary sales to customers, which relates primarily to software, hardware or implementation services revenue, which were all down this quarter compared to the same period a year ago. And to some extent, this creates challenges for forecasting our recurring revenues. Therefore, with a somewhat cautious approach based on the first quarter results, current backlog and sales pipelines, we believe that for FY '10, even with the first quarter being flat that we will have organic revenue growth in the low single digits for the year and have operating income in the mid single digits growth for continued operating leverage. However, if the economy continues to stabilize and our industry receives some clarity regarding the regulatory assessments, than we can hopefully raise our guidance for organic growth in the future, possibly on our next earnings call.

As for the recently announced acquisitions as Jack mentioned, Goldleaf shed approximately $48 million of revenue this year, with an EPS contribution of $0.02 to $0.04. This contribution of EPS will double in contribution for FY '11, as we continue to achieve the identified cost synergies and utilize the NOL. PEMCO Technologies should add approximately $26 million to revenue this fiscal year and contribute $0.03 to $0.05 EPS and we believe that this also will conservatively double the contribution for EPS in FY '11. Therefore, between the two acquisitions, we expect total contribution of approximately $75 million in revenue and $0.05 to $0.08 EPS this fiscal year. Also, as I mentioned on the last call, remember that we will have a one time charge to earnings this quarter in the December quarter, for the transaction fees related to the acquisitions, due to the new rule under FAS 141R. Those expenses are now treated as period cost and are no longer capitalized as part of the transaction.

This concludes our prepared comments. With that, we are now ready to take questions. Ben, will you please open the call line up for questions?

(Operator Instructions). Our first question is from John Kraft with D.A. Davidson.

Good morning. Jack, you discussed the credit union space the special assessment and uncertainty related to that area. But, as far as the banks, you didn't discuss that. And we did hear some clarity on what the bank assessments were going to be like. Did you think you will see a little bit hesitation spending in the banking area because of clarity?

John, I don't know. You may be more current. Last thing I heard, banging side, there was a proposal for them to prepay three years worth of assessments. I am not sure that that ever officially passed and that was the last thing I remember hearing discussed and unless and until you know something definitively, it is hard to predict what is happening there. Credit union side, they were thrown out by the NCUA as budgeting guidelines. And they said, well, we think the assessment is likely to be between 13 and 15 basis points on assets. But that one is still very gray in terms of what it will actually end up being. So, again, I guess we will know a little bit more on both of them as we get a little bit closer but until then, it is still just primary budgeting figures that they are floating.

That is helpful. As far as pipeline specific to core deals. Obviously you have had somewhat of a surprising success given the environment in the core deals. And how does the future look in that market?

Continues to trend to somewhat surprising trend to me. That we saw last year. When we actually had pretty solid core systems sales activity which I would have expected in the environment would have been considerably less. I think the level of activity continues to be very solid. And I don't know that we did a few less credit union deals than we did a year ago. And they were somewhat larger deals and talked about that. And from year to year. And it is just, you harvest what is available. And sometimes they are larger or smaller and right now, we have got a few that are larger in size that certainly helps. Banking side, activity is strong and we had several prospects at our national user conference. I think we had seven competitive banking, core system users that were there to find out more about us and had the opportunity to interact with the existing customers. So, yes it was somewhat of a surprise given the conditions. And the banks and the credit unions both still appear to be willing to look at moving forward with major core system changes if they feel the present system is not meeting their needs.

That's encouraging. Tony, specific to the remote deposit numbers you threw out there. You are seeing a pretty material growth in the merchants, much less so on the number of financial institutions. Is this some sort of a marketing program that you are doing to help get the banks to intern? And get their merchants signing up or is that just more awareness in the market?

We have worked with the financial institutions to help them and provide marketing programs to train them on how to sell merchants and et cetera. We have had sessions all along with the financial institutions as we bring them on to be able to do that and drive additional merchant volume. I think we are seeing the fruits of our labors from the programs to continue to see additional merchants sign up at this point. So, I think its going well at this point. And we haven't done anything. Different than we have done in the past though at this point.

Yes. We are seeing probably two kind of you know, sales right now. You have got the banks that are implementing remote deposit captured because they have to. It is more of a defensive move and if they haven't done it yet. It is probably because they were trying to hold out and being pushed into it now by their customers and saying they wants the capability. And some of of the increase is in the earlier doctors who got something in place to be in there early and are looking for a more fully featured offering such as the one we are offer in they are actually seeing some replacement in their 1.0 implementation of what ever they implemented. And those facts have a pretty good feel for how to get out there and market and made some headway. And the folks that are doing it as a defensive measure, we can offer some help. And marketing materials they can use. And kind of hard to get them to move if they are not so inclined to really promote it.

Competitive take away it sounds like. That's all I have. Thanks.

We will take our next question from Kartik Mehta with Northcoast Research.

Good morning. Jack, I wanted to ask you how you think financial institutions will react once they are comfortable with the economy or FDIC or the insurance assessments. Do you see a bunch of pent up demand and financial institutions spending a lot of money at once? Or do you think when it does come back it will be gradual and more normalized?

That's a great question, Kartik. And I wish I had a good feel for it. I think it is going to be some of both. I think normal. When we get back to normal is going to be different than what normal was a couple of years ago. I don't know exactly what that means. But banks are probably going to be more conservative in some of their lending practices. And I don't know what all that is going to ultimately mean for operational spending. I would tell you at the same time that we are seeing increased interest in some of the security related solutions that we developed with the gladiator technology. And we came out with a fairly advanced offering in that regard. And we are seeing fair amount of growing interest in that. Which is certainly that, you could hold off on doing and people are even now beginning to make decision it is about things that they just feed to make forward. And I want to believe there is pent up demand there. That will come into play. And to whatever extent there is pent up demand, it is a quarter or two. And once things to get back to normal they'll be some kind of a spend. And really hard to predict what the normalized level will be at this point.

Jack, the license spending, obviously it is a little volatile over the last few quarters. I am trying to get a sense of in the past. When they weren't this volatile. What would you say software is spending more as a percentage of CapEx spending for banks and what is it now? I am trying to see what happened currently versus what happened in the past?

I don't know how much I can give you on that Kartik. There is secular trends like there are with hardware and everything related to hardware said the numbers should continue to decline and processors are getting cheaper and faster. And the large checks sorters that are no longer necessary and price competition for check scanners and some of the low ends things. All of those continue to save. And hardware should decline over time. And in addition to the fact that as we talked about it before, we saw growing numbers moving to the out source environment which impacted hardware and impacted licensees. And again from a standpoint of new customers. Anything under a billion dollars in assets these days, the vast majority of time, that's going to be an outsource transaction rather than in house. So, I don't know that trying to compare even if I knew what percentage of their funds they spent on license three years ago, I am not sure would be relevant comparison today because of some of these other trends that we have been seeing. And so, it is just hard to put your finger on.

Plus the fact, Kartik. So many of the offerings we had today that three years ago, the only offer we had was a licensed model. Where as today all the products could be delivered ASP. And for example, you know, electronic document imaging, our synergy product, three years ago, that could only be offered through a license model. And today we have synergy express where you can do basically do ASP and we host all the hardware and software. We impacted that also on top of everything that Jack just mentioned.

Kevin, when you gave guidance, would that have included the Goldleaf acquisition since it closed down on October 1st, when you said low single digit revenue?

No. What I said was that was organic growth.

Okay.

And then, I gave you Goldleaf and PEMCO separately so you could layer them on top in your models.

What was Goldleaf just by itself.

Goldleaf is going to contribute $48 million in revenue and EPS contribution will be $0.02 to $0.05.

Thanks, I appreciate it.

You bet.

The next question will come from Tim Fox with Deutsche Bank.

Good morning. Follow up question to an answer you gave Kevin. About the in-house and out sourcing trends. Have you seen as customers are pinching back more on budgets more a move towards the out sourcing option and not necessarily just for new customers but for existing customers and cutting cost and this is both for the banking and more so for the credit union space for where they hadn't moved there?

I don't know if it is so much for cutting costs. And most of our customers are going to end up spending more money with us through an in house offering over the life of the relationship. And having said. They will cut IT staff and computer rooms and hardware and things like that. The mood from in-house to outsource. It is not so much as capital outlay or cash out lay for the banks, because most of them have quite a bit of cash. It is more of all the other things that are driving, Tim, like security and keeping the systems up 24/7 and dealing with all the LANS and the WANS and large number of things out there. And the banks are saying, I would rather run the bank and let Jack Henry run the back office. I don't think the budgets are really forcing the banks to make that decision.

If you were to step back and look at the high license number and looking at the context of the high outsourcing trends, is there any way to roughly quantify the effect of more out sourcing versus in-house on what kind of "normal" may look like on the license side when discretionary spending starts to pick back up?

I know there is some impact. The fact is over the last three years, 5% of our in house customers roughly have elected to go and move from in-house models to outsourcing. That is not a big number and does it create slight head wind on discretionary spend for additional products, absolutely. The real unknown is what percentage of the remaining in house customers are contemplating going out sourcing. We continue to hold WebEx's and seminars and for in-house customers to show the benefits go out sourcing and if you have a customer that will think about going to the board. And chances of them writing out a check is pretty slim and that is creating as much as head wind on license sales and the customers have made the decision for out sourcing. And is there some impact? Absolutely. A way to measure it? Not to my knowledge. I just don't know how you would even predict that.

Just a question for Tony. On online bill pay and the bill pay trends. I am wondering if you can talk about what is happening in the recent quarter it is around adoption by customers. Is this something that is impacted by the economy? Obviously the transaction volume is holding up nicely and just wondering from a penetration perspective and competitive perspective, how are you faring in the online and bill pay segment?

From a competitive segment, we continue to win our fair share of the bill pay business that we are competing with out there in the market place. And we have a very tightly integrated solution with the internet banking solution and we are seeing strong wins there whenever we sell the internet banking. From an adoption standpoint, we are still seeing on an average basis, the number of transactions that are being paid through bill pay are fairly consistent and have been for a couple of years by the end consumer on a month to month basis. On the number of users we have on the ASP solution. We are seeing some additional adoption in the clients out there. And financial institutions where additional consumers are becoming bill pay users. The growth is consistent at this point. Fairly consistent across our client base. And we have seen continuing growth even though the economic environment is out there. And certainly, there are some thoughts that less payment is going to be made or spent in the economic environment we have or still continuing to see increases in the volumes. I think that speaks well to the position in the market place with our bill pay solution.

Thank you very much.

Thanks Tim.

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

Thanks very much. Kevin, can you help us out with regard to the gross margin profile post acquisition and what the, kind of a mix between license and support and services may look lake going forward as compared to what we saw in the most recently reported quarter?

Yes. The margins have at least for the balance of this year, Jon, will get pressure on them from the Goldleaf acquisition. And there is cost to be taken out of both of those acquisitions. And some of those costs will take three to nine months if not a little longer to get out of there. And leases we need to get out of. And as far as PEMCO, there is transitional service that is we need to get moved off of their data server to our it is before we realize the synergy and there will be some slight pressure on the gross and operating margins for the next couple of quarters. But I don't think it will be tremendous. Our gross margins could take 100 hit next quarter and I don't think it will be significant. And as far as the revenue mix, PEMCO is primarily all services. They don't even sell software. And all of that will go into the support and services line as far as transactions and some installation services. Goldleaf, they the way they were set up, they were pretty heavily weighted recurring revenue. I don't see that Goldleaf is going to have a huge impact on the license or revenue line either.

Did PEMCO have any monthly minimums or any recurring element or primarily transaction as you said?

It is all transaction. It is all ATM, debit and credit card processing. And per transaction fee. Like we do on the passport business today.

It is all practically 100% recurring revenue and probably isn't in our backlog or because it is transactional in nature and all recurring revenue.

Got it, okay. Thanks, Jack. Thanks Kevin.

You bet.

Our next question comes from Gil Luria with Wedbush.

Thank you. Can you remind us how you paid for and what the financing was for the two deals and what you have in your pipeline now? Similar sized deals and if you used cash, how you would want to pay for those?

Well, for Goldleaf, we pay cash for that out of operating cash. For PEMCO, we drew $60 million down on the line. Which we were paying 65 basis points interest on. And it is pretty cheap financing. And so, right now, Gil, we have basically, $60 million draw on the line of credit and $90 million available with the expansion features and and we still got $160 million available on our line that we could use. We still have operating cash in the bank to mack this and as we move forward. As far as pipeline, we are looking at potential acquisitions. And depending on the size of the acquisition and depending on how the finances. And I don't see us doing any stock deals. If there is a smaller deals like the one we just did, we would draw more on the existing line of credit and if its significant deal, we would look at term loan financing.

In general, over the, kind of previous couple of years before Goldleaf, it seems like you felt valuations were not low enough. Should we see the fact that you made the two acquisitions recently as a sign that you think valuations of targets are more reasonable?

I don't know about other ones, Gil. Goldleaf was kind of a unique situation. And in that they had run into some problems, and we bought that at one time revenue. And which in our opinion, anytime you can buy a company with some synergies in it at one times revenue is probably something you ought to look at. PEMCO was, we basically got it for one and a half times or little less times revenue, which for a payments processing company in our opinion is reasonable eve valuation with cost synergies and we also won the PEMCO deal because the parent company, the senior management, considered us as the right company it take care of their employees and their customers. I am not sure, and in fact, I know we were not the high bidder in the deal. And we won that. And they were convinced me were the right company to take the baby and help it grow. As far as other valuations. I have seen not enough to really satisfy myself and come down significantly. And three months ago, we look for deals that at that moment they had not come down to where we thought they were reasonable.

Then, operating expenses. You were just very dramatically. End sequential basis, you have done a lot of that by keeping costs contained. And I think you took some salary reductions to folks am and froze matches and things like that. You did it without cutting your head count very much. How much of that will you be able to hang on to going forwards? How much of that will you have to reverse? At what point of growth and performance are you going to have to start giving people the pay cuts back and start giving them raises, et cetera?

We didn't cut any head count. We did cuts in lieu of a head count reduction. And as far as the expense reduction, Gill, selling and marketing. As I mentioned in my opening comments. Majority of that decrease is related to commissions with licensees are down 14% and hardware is down 16% am and you would expect the commission to be down significantly. That's the lion's share of the decrease in market. Research development, that is due to the salary cut and the biggest part is due to reduced travel. And also, reducing using outside consult at that points for a lot of the things we had been using it for. And G&A, part of that is the salary cut and part of that is the benefit we got this quarter in reduced healthcare cost compared to a year ago. If you remember, this quarter a year ago, our compensation was only up 9%, but our healthcare was up 35%. And because of some very large number of large claims we had last year up to the stock loss. And between that nd the the user group meeting was the biggest in the G&A. I will tell you that the expenses for the G&A will pop back up in the December quarter because the expenses for our national user group meeting will be in there. And back up more in line with where G&A was in the December quarter a year ago, maybe not quite that high but they will be more in line top.

To your broader point, Gil. Particularly on the salary reductions sustainability. It is clearly our intention to restore the salaries when we have better visibility and clarity on operating income growth and exactly how we are tracking there. We did that in lieu of staff reductions and even though a number of folks have taken a different approach to the end result by reducing head count. I am not sure how sustainable that really is. When business comes back, I think you see people start to rehire for the positions that they downsize and there is the recruiting in the ramp up cost. Along with the lower productivity of a newly hired employee so I think there are -- I think there are a lot of costs there. That aren't as obvious as they might be am and ours is very clearly, identifiable as to what came off of the, what came off of the salary line and I think ours in fact in some ways are more sustainable than some alternative approaches.

Got it, thank you very much.

Our next question will come from Brett Huff with Stephens.

Good morning and congrats on the margin improvement.

Morning.

Couple to ask on the guidance. When you talked about internal growth, I understand what that is. And when you gave the operating growth income number, did you say that was pre the two deals or post the two deals?

Pre.

Okay. And then on the support and services leverage margin improvement, I heard you say, was the banking side was better than in the past and the credit union side was lower than in the past. Did I hear that right?

Yes.

Can you articulate what that was again? I didn't get all the puts and takes on that.

The banking was driven by the salary cuts and continued increase in the payments business and leverage of that. On the credit union side. The electronic payments actually drop touchdown off this quarter compared to a year ago, which has an impact on margins. And then in the in-house maintenance line, the number of work orders and consulting time spend from this quarter drop touchdown off. And we were not leveraging them as long for the support and services group we were a year ago.

As we look forward, since that is a big chunk of your business, how should we think about margins going forward on that in particular and do you think you can still sort of drive at least small incremental improvements in that, since it has such an impact on your ability to drive the margins.

I don't know how much improvement we can get out of that. 39% is pretty high margins for support services. And I think there will be continue to be some over all potential improvement and again. It is directly to the credit union and the work orders, which impacted the banking side too. That is clearly discretionary stand for the work they want done on as part of the in house maintenance and when they, when the bank and credit union decide to spend more money and want to do that. And we can better utilize the resources, then that will help the margins. And with the acquisitions and there will be some press sewer on the support services margin until we can accomplish all the cost synergy too. And if we can maintain the 38% of support service margins for the year. I would be happy as we get the two acquisitions integrated in.

That's helpful. Then. You had mentioned the [Symitar] user conference had gone virtual rather than flying everybody in. What chunk of cost is that that we should think about so we can think about apples to apples either including or excluding that?

That's a good question. There is probably $600,000 or $700,000 in G&A that wasn't there this year that would have been there last year, but there was also a few hundred thousand dollars that would be in support and service revenue for the vendors and customers to come up there and based on accounting rules that's where we are required to stick it. It wasn't there this year that wouldn't be there this year too.

Are you netting the hotel cost that we incurred to cancel it.

There was also a hotel cost we had to pay that was $400,000. And that we had to pay just to cancel the hotel. We have to book these things four or five years in advance to get the property reserved, because we basically reserve the entire property. And there was clearly $1 million worth of cost between the fourth quarter and this quarter. And that were there a year ago that were not there this year.

That is helpful. Lastly. I will get off and let other people go. Can you just characterize for us. You did a little bit in terms of the sales and how the conversations are going. Surprisingly, the folk resist interested in talking about core and ancillary and unavoidable rate now. And when you engage a client that may be a new customer. How does it come about. What is the driver? Save money. We don't like the current core. We just merged with another bank and can't scale. Can you give us a sense of how that goes in a tough economic environment?

Yes, Brett. I would say that more often than not, we get involved because the institution, the banking side. They are not satisfied with the level of service they are getting from their provider.

Okay.

And for what they perceive as poor service causes them to look. Once they look, there are other factors that come into play. Culture and product. And capabilities and functionalities. And those kind of things. And pricing comes in to play as well. And I think and Tony, tell me if you disagree but more often than not on the banking side, those discussions start because of service. On the credit union side, service is definitely a factor. And it has been a bigger issue on the credit union side has been, as the credit business union's business has evolved to take on more of the things that were done by community bank, they needed functionality that was never intended to be part of the credit union systems when they were designed. In their case it is more functionality driven and service is a definitely a very big part of the credit union side as well.

Great. Thanks for your color, I appreciate it.

Our next question will come from Paul Bartolai with PB Investment Research.

Good morning. Follow up on the last question and the core deals. And Jack, you mentioned price as being a factor. Just what you are seeing in the environment for the core deals.

Yes, I would say at a high level, Paul, that it is very competitive but, I would say the exact same thing two years ago. You will occasionally on a deal by deal basis see someone pull out all the stops and whether they are trying to save an incumbent or whether they need to book a deal for whatever reason. But not in a consistent manner. In other words, we don't have a consistent competitor that has a win at all costs kind of mentality. And you will see an individual deal where that may seem to be how it plays out, but as a focused strategy it is very competitive. And not necessarily any more so across the board than it has been for quite some time.

Okay. Good. And then maybe. Just, Kevin, if you could give us some thoughts on the organic profile of the new acquisitions and what you are seeing there? And what you expect going forward?

As Jack mentioned, we expect Goldleaf will contribute mid $60 million revenue and somewhere in the mid-40s. $45 million to $48 million in revenue. And as far as organic growth beyond FY '11, we have to get our arms around both of those a little bit more before I am ready to talk to about FY '12.

There are a couple of businesses in the Goldleaf offering in particular, that have been challenged of late. They are lending solutions business and their retail inventory management forecasting business, and the lending solution business, I think very directly attributable to the lack of available credit in the market place. And certainly been pressed. And if you look at what the organic growth has been, it will be pretty strongly negative. But again, I think that that will likely stabilize and now, we continue to looking at the business and make sure we understand how they fit. And how we can get the businesses going again. In particular, those two businesses at Goldleaf, we are just getting a better understanding of what drives the business and what makes it work. It is kind of difficult for us to say at this point, what kind of expectations are appropriate for that going forward. The remote deposit capture business at Goldleaf is one that, we were certainly interested in. And we have been pretty pleasantly surprised with some of the other businesses that is they have that are very complimentary or overlapping with what we have or had some new products that we could do some things with and little early in the cycle to be able to predict and what those will generate. And we feel good and normally when you get in after the fact and/or deep in to the due diligence, you will find surprises that weren't in the direction that you hoped. I would say we have not found any of that with Goldleaf. And more encouraged about some of the up side opportunities with some of their products.

Okay. That's my next question. Nothing has come up. And it seems like everything is at least as good as you expected.

Frankly. Several things we expected and I think by kind of moving some of their moving units into a variety of business units in Jack Henry, there are a number of areas where we have a better fit and the management, the focus and the we are able to bring to some of those areas will definedly be stronger, so yes, we feel good about it..

Just the last quick one. It looks like outlink growth picked up a little in the quarter relative to last quarter. Just curious, what drove that?

Well, it is like part of it is the out source transitions and we talked about that 27 in fiscal '08. 45 in fiscal '09. And you have a number of those that are starting to roll in. And the '08 folks, we see a pretty substantial jump in revenue the first year they are on and it jumps the second year and you have probably got some of the folks that were FY 08 signings that may be a year or so now that are bumping up as well. And we've had a couple of nice competitive take aways that have roll in as well. So, Tony. I don't know if you have anything.

The only thing I would add to that. As the market has pretty much dried up. The numbers there we had in there a year or so would have incubation baked into the deals and providing processing at no cost to get the de novos up and running and they are now paying good minimum monthly processing fees which are probably adding to the increase we are seeing as well.

Other thing to point out. There was no early termination fee to distort the revenue. They were all true organic growth.

Perfect. Thanks, guys.

(Operator Instructions). And we will take our next question from Bryan Keane with Credit Suisse.

Good morning, guys. Kevin, I just wanted to clarify something on the guidance. For fiscal year '10, operating income growth would be in the mid-single digit range and the first quarter operating growth was 18% year-over-year. So, I mentioned something the second quarter had some expense in it. And trying to understand why it declined from that first level?

Well, I mean, there is a couple of things in there. One, it is obviously the operating income margins were up nicely in the quarter but as Jack previously mentioned, at some point in this year, we plan to restore the salary cuts, which obviously will have a negative impact on the operating margins. When we restore those obviously will have an impact on the balance of the year, but also, as I said in that guidance is, we are trying to be extremely cautious in that guidance. Do I think its possible that we could exceed the mid single digits? Absolutely, but I also don't want you all going out there and putting models out there and expectations that we are going to have organic growth at some ridiculous amount because we have made it very clear to our employees that we intend to restore it as soon as possible.

Okay. But, when those salary cuts get restored, it is still unclear if its this quarter or incomes quarter or when that might be.

We have not announced that yet.

Just the other cost controls that you have done on the sales and marketing. And some of the other areas. Those are going to be maintained throughout the year. Or is a chance you start spending more there as well?

We will focus on the other areas of cost control. And done an extremely good job of getting rid of travel costs. And all of our employees are better utilizing technology for some of of the things. That are using technology for installation and travel cost it is are down across the board. And general operational cost. All of general managers are extremely focussed on their P&L to make sure they control the cost.

All right. That's all I had. Thanks.

Due to no further question insist the queue, I do apologize, we have a question from Brett Huff, with Stephens.

Hey, guys, sorry. One more question for you. Kevin, in the past, you talked about how your banks are thinking about commercial real estate and that continues to evolve and wondered if you had updated thoughts on that? That's all I needed. Thank you.

Well, Kevin pondering that. The one comment I would make. I don't know that we have any clear guidance on that. And as I indicated in my opening comments. It was a bit more subdued in our conference. Last fall as bleak as the news was in the October time frame, I feel like the customers we had at our user conference a year ago, still though, hey its just going to be a handful of large banks and doing exotic and crazy things and we will be fine. Or half a dozen states where real estate prices have had steep run ups and we are not in those states and we will be fine. I think the reality, the ripple affect now, with five million people unemployed and still growing. Delinquencies rising. And some of which are commercial real estate and some are car loans, house loans, Credit card payments. The tone was a little more subdued. So, there is good news and bad news to what is a lagging effect. The bad news is a year ago, people were too optimistic in their assessment of the market place. And this year. It was a little more subdued. Hopefully that's a lagging indicator. And fact that Bernanke declared the recession is over. Maybe they are starting to work in a positive direction but the reality starring them in the face is unemployment. And reduced spending. And those kind of things. Maybe we look back at this and say they were overly pessimistic. I couldn't give you anything real specific to commercial real estate. I'm sure that some of the concern around that has increased, just like the other concerns are a little stronger now than they were a year ago.

I will say, Brett, that obviously we had a number of prospects in September. And I asked every bank that I could talk to at our user group meeting. And there is concern about the commercial real estate. Sure. But there is concern about all their loans out there. I will say this, most of the banks, they majority that we talked to they are pretty comfortable with their loan profile because most of it is owner occupied -- occupied type real estate and they know the customers and have had them as customers for years. It is not the huge malls sitting there vacant that are causing a lot of problems in the commercial real estate market. I am sure there are pockets that is going to have more trouble than others. But from the bank prospects that I have talked to are concerned about it. But they are not overly nervous about it.

Great, thank you.

Due to no fur question, I would like to turn the call back over to Kevin Williams for any additional or closing remarks.

Again, we appreciate you joining us today to review our first quarter fiscal 2010 results. We remain committed to build on all of our competitive strength and to do what is right for the long term for our customers, our associates and most of all our stockholders. Again, thank you very much for joining us. With that, will you please provide the replay numbers.

Ladies and gentlemen, this conference will be available for a replay beginning November 4th, 2009 at 10:45 a.m. central time. And will run through November 11th 2009 until 12:00 midnight central time. The phone number to access the replay is toll free at 1-888- 1-888-203-1112. Once again. That number is 1-888-203-1112. This does conclude today's conference. We thank you for your participation.