Jack Henry & Associates Inc (JKHY) 2010 Q2 法說會逐字稿

Good day everyone and welcome to the Jack Henry & Associates second quarter 2010 conference call. As a reminder today's conference is being recorded.

At this time I'd like to turn the presentation over to Mr. Kevin Williams. Please go ahead, sir.

Thank you, Michelle. Good morning and welcome to the Jack Henry & Associates second quarter fiscal 2010 earnings call. Statements and responses to questions made in this conversation which are forward-looking or deal with expectations about the future, like any subject 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.

Good morning, again, we are pleased to host the call this morning to provide a Company update and report on our financial results for our second fiscal quarter ended December 31, 2009. With me this morning I have Jack Prim, our CEO, Tony Wormington, President. We will each provide some opening comments regarding the state of the Company, our recently closed acquisitions and our quarterly financial performance. Then, after our opening comments, we'll then open the call up for Q&A. With that, I'll now turn the call over to Jack Prim, CEO.

Thanks, Kevin, good morning. The general trends in our business remain unchanged compared to the last several quarters. Our customer spending continues to be restrained and likely will continue to be until improvement in the economy is reflected in their individual markets and ultimately in their individual financial performance. In addition to the general restraint on discretionary spending, hardware and software licenses were likely further impacted by the continued trend from in-house to out source processing. And as discussed previously this trend is positive for the long-term and is reflected in the continued growth in recurring revenue and the outsourcing backlog growth.

The integration of the recent Pemco and Goldleaf acquisitions continues to go very well. Much of the operational integration is complete and all sales, marketing, accounting and human resources functions should be complete by the end of the current quarter. Some integration at Pemco related to the technology platform we will continue into the June quarter with some possibly being completed shortly thereafter. The expected call synergies and earnings per share contributions from these acquisitions are tracking in line with our previous projections. Those acquisitions contributed nicely in the quarter, allowing us to show an 11% increase in total revenue, even though organic revenue declined by 1%.

While the Pemco revenue ends to be more recurring in nature, Goldleaf had several nice software successes in the quarter, related to the Alogent product lines and larger financial institutions. The nature of these implementations is such that revenue needs to be recognized on more of a percentage of completion basis, than all up front. This is a contributing factor reflected in the growth in the software backlog of 23%, even though year-over-year software revenue was down 23% and sequentially up only 5%. We continue to see positive earnings impacts resulting from our cost control initiatives with a 14% improvement in operating income even with the inclusion of the one-time expenses from the Goldleaf and Pemco acquisitions. We will continue to closely manage expenses and balance the needs of employees, shareholders and customers in this challenging economic environment. With that I'll turn it over to Tony for a little more insight on the business.

Thanks, Jack. Our support in services revenue grew 19% for the quarter compared to the prior year quarter, a large part of this increase was related to recent acquisitions. However, organically, support and service still grew 5% compared to prior year quarter and 4% sequentially. Our EFT business continues to experience very nice growth in transaction volumes, as a reminder our EFT review consists of ATM and debit card processing, bill payment processing, merchant capture and Check 21 image exchange.

Our ATM and debit card processing volumes increased 14.3% over the prior year quarter and 3.4% sequentially. Bill payment transaction volumes increased 15.3% over the prior year quarter. And 3.7% sequentially. Merchant related transaction volumes increased 51.8% over the prior year quarter and 14.8% sequentially. Financial institutions contracted to utilize our enterprise payment solutions increased to 886 or an increase of 6.2% over the prior year quarter. Financial institution merchants installed and utilizing our enterprise payments solution increased to 22,166, representing a 31.9% increase over the prior year quarter. The enterprise payment statistics for merchant related transaction volumes, financial institutions contracted and their respected merchants do not include volumes for our recent Goldleaf acquisition. What this acquisition has been part of Jack Henry Associates for over a year, we'll have comparative data and we'll adjust our statistics at that time. Let me now turn it over to Kevin for a further look at the numbers.

Thanks, Tony. Again, as Jack mentioned our total revenue increased 11% for the quarter, compared to the same quarter a year-ago. Organic revenue actually declined by approximately 1% but did grow 3% sequentially compared to the September total revenue. The acquisitions contributed 12%, total revenue growth for the quarter, by contributing approximately $23 million in revenue for the quarter. And again, Goldleaf closed on October 1, and Pemco closed on November 1, so they both were right on schedule with where we thought they'd be for the quarter. Our license revenue continues to be a challenge, as Jack mentioned. We did close some very nice deals which had a significant impact on our backlog, December 31, and this revenue will be recognized in the future over some period of quarters as we actually deliver and install the software.

Support and services revenue, increased by 19% this quarter over same quarter a year ago, organic revenue in port services as Tony mentioned is up 5% compared to a year-ago and 4% sequentially and the acquisitions contributed approximately $21 million in support and services for the quarter or 14% of the revenue growth in that line of revenue. The break down of support and services, as you all know, we break that into four categories, our implementation, our EFT out link data processing, inhouse maintenance. Implementation for the quarter increased 13% from a year ago and is up 3% year-to-date. Our electronic payments is up 51% for the quarter and up 29% year-to-date. OutLink increased 11% for the quarter and 9% year to date and inhouse maintenance increased 7% for the quarter and 4% year to date. Again, those are total revenue numbers.

Our organic growth for the quarter for these same line items, again, backing out the two recent acquisitions, implementation increased 1% year-over-year or 10% sequentially compared to September quarter. Electronic payments increased 11% year-over-year, again that's organic and up 2% sequentially. OutLink, which is our, again our data 9 processing, increased 11% year-over-year and was up 9% sequentially from September quarter. And I will tell you, there were virtually no early termination fees during the quarter or year and actually year-to-date was down from the prior year. This is all true organic growth. In-house maintenance organically was flat year-over-year and was up 3% sequentially.

Our hardware revenue, like license sales continues to be a challenge and again experienced significant declines for the quarter, compared to the prior year and down slightly sequentially with very little hardware sold within the two acquisitions. Most of that was just basic Jack Henry organic. Our recurring revenue experienced growth of 19% for the quarter compared to prior your and 18% sequentially. Organic growth in our recurring revenue was 6% year-over-year and 4% sequentially compared to September. Some color on our gross margins, overall consolidated gross margins improved 42% for the quarter. Compared to 41% in the same quarter a year-ago. Our alliance margins increased to 91% from 86%. The important service to margins improved to 40% compared to 38% a year ago. And hardware margins decreased to 27% from 30% a year ago.

To break this down into our two reporting segments, our banking segment gross margins improved to 43%, from 40% a year-ago, second quarter. And our credit union segment margins decreased to 38% from 43% ago primarily due to lower software sales this quarter compared to year-ago. In the bank segment, for license margins, we saw an increase to 90% from 82%, primarily due to a smaller amount of third party software sold within the banking segment during the quarter. Our support and service margins for the banking segment increased to 42% from 38% in the quarter, due primarily to lower personnel and travel costs. And our hardware margins decreased 28% from 30% this quarter from a year-ago, due primarily to sales mix and vendor rebates.

In the credit union segment, license margins were 93% for the quarter, compared to 95% a year-ago. So margins were pretty stable within the credit union segment, however license sales were down, compared to year-ago. And also, there was fewer third party sales this quarter. Support and service margins decreased to 34% from 35%. And hardware margins decreased to 24% from 28%, again due to sales mix Our total operating expenses increased 17% from the quarter and as a percentage of total revenue, increased slightly from 19 to 20% for the current quarter to our prior year. However, included in the operating expenses are one-time transaction costs related to the acquisition of approximately $1.6 million. Considering these one-time costs, operating expenses will remain level at 19% of revenue for the quarter, compared to the prior year.

Our operating margin remained level at about 22% for the quarter. Net result was increased operating income of 14% for the quarter, compared to the prior year. Organically, excluding the impact of the acquisitions and the one-time acquisition costs, our operating income increased 13% year-over-year and 12% sequentially. The effective tax rate for the quarter was 36.5%, compared to 32.1% last year and remember that last year we had 12 months of R&D credit in the December quarter when Congress renewed the R&D credit. This will most likely represent the approximately 36.5, our effective tax rate for the year, again unless Congress reinstates the R&D credit which expired in December. At this time, I would suggest to you use a 36.5 to 37% rate for modeling, as there could be some small increases in the change to state rates, but that should be our effective tax rate until the President gets his new budget bill passed, which because in that, the R&D credit is proposed to be reinstated and made permanent, which would be a good thing.

Our EBITDA increased approximately 13%, to $65.2 million from $57.9 million a year-ago quarter. Depreciation and amortization of $17.8 million this quarter compared to $16.1 million last quarter. As for guidance, obviously as Jack mentioned, we continued to face some tough economic challenges that are challenging at best. Which just adds to the complexity of forecasting in the remainder of the year. As for the acquisitions we closed in December quarter, they are both tracking right on plan and should contribute the previously guided $75 million in revenue for the fiscal year and combined should contribute the $0.05 to $0.08 EPS for the fiscal year as we've guided on previous earnings calls. Therefore, with a somewhat cautious approach, based on second quarter results, current backlogs and sale pipelines, we continue to be comfortable that we'll have a low single-digit organic revenue growth for the complete fiscal year with leverage of that to the mid to high single-digits, operating income growth for the fiscal year, organically and then layer the acquisitions on top of that to get to a high single-digit, top line growth with operating income in the low to mid-double-digit growth for the year. This concludes our opening comments and we're now ready to take questions. Michelle, will you please open the line up for questions?

Of course, sir. (Operator Instructions) We'll take our first question from John Kraft with D.A. Davidson.

Good morning, gentlemen. Kevin, you just mentioned that the one time acquisition costs were $1.6 million in the quarter and I think you said that it's going to take another quarter or two to fully integrate, do you have an idea or estimate of what the cost might be in upcoming quarters?

Well, John, those one-time costs were truly for lawyers, bankers and that sort of thing. The integration costs that we have going on now are just the normal use of internal resources, I think as Jack alluded to, all of their accounting systems should currently be on our back office, PeopleSoft solution now. All the employees were on RHR benefits effective January 1. Now, it's just integrating the ongoing technology of the PTSI acquisition, which, as Jack said will probably take through the end of this fiscal year to get that all done and then the Goldleaf and some of the other things, the business units have been divided up between the different GMs, and now it's just ongoing normal day-to-day, getting efficiencies done.

Okay, that's helpful. And Tony, moving to the fastest organic growth pieces of the puzzle here, you're -- the metrics that you gave from the remote deposit side of things were organic, I guess I'm wondering whether, just orders of magnitude, whether Goldleaf's contribution will accelerate what you're seeing organically or are those a little bit slower than what you're seeing?

I expect that they'll be in line with what we've got today. The numbers that we had were not broken out the way that we tracked them, within our statistics. So we're needing to have those on board for a year before we can begin giving comparative data, but I expect them to be in line with what we're seeing today. There are a number of merchants that are just slightly less per institution than what we have, but I would expect them to be pretty much in line with what we're doing today.

I think their volumes in terms of total volumes are roughly 30% of the volumes we were running preacquisition.

Right.

From a growth standpoint, I would think the growth would track somewhat with ours.

Okay, thank you, that's helpful. I guess just to follow onto that product line, there's obviously a pretty big delta between the growth you're seeing and the number of FIs that you've signed versus the number of merchants that those FIs are signing. Is that partly due to some particular marketing efforts or efforts on your part? Or is that simply what the FIs are pitching these days?

That's really -- if you're referring to the merchants that are being signed up on a quarterly basis, the number of merchants that are being signed up are really the efforts of the FI. We don't have a program specifically per se that is driving additional merchants to sign up, other than education and training that we've done with the financial institutions to market and sell their services to their merchants. so I think that's more a display of what we're seeing. Generally, in the marketplace, for merchants desire to have a remote deposit capture solution.

Well, there's also a component of that as well, that has to do with our remarketing efforts through non-financial institutions. As we mentioned before, Pitney Bowes for example being one of the commercial entities that remarkets our solution as part of their solution. We've talked about other providers of core accounting systems for various -- in other industries like city, county, government, utilities, faith-based organizations that embed some of our payment processing capability into their software. Merchant acquirers who need to electronify, in addition to their credit and debit card transaction abilities to help their merchants be able to electronify checks as well. So there's certainly some growth that's coming in the form of additional merchants through non-financial institution margins as well.

Got you, that's right. Well, thanks, that's all I have.

Thanks, John.

Our next question comes from [Dave Cohen) with Baird.

Nice job.

Thanks.

First of all, a quick question on the gross margin in support and services, it was the highest you've ever had, it seems like there's now a permanent mix shift towards more EFTs with Pemco and Goldleaf, is it fair to say that the 40% now is kind of the baseline and it might even be able to grow from here just as payments continue to grow faster than the rest of the business?

Dave, obviously you have, a lot of moving parts within the support and services, we're very pleased with the margins, we do continue to focus on leveraging the infrastructure. We've done a very good job of controlling costs. We had -- our fringe load was down for the last couple quarters, compared to year-ago, because better than expected Health Care. We'd like to think that's part of the wellness initiative we put in place. So there's just a number of things in there. I don't know that I'm willing to stand up and wave the flag and say 40% is the baseline. I'd like to hope we can keep it there and is there potentially room for improvement as the payments continue to come at a large percentage of the business? Absolutely, but I think that's a long-term goal and not something you're going to see this type of pick-up on a quarterly basis.

Okay, good, that's helpful. And then another thing, it was about a year-ago that you mentioned the the slight wage adjustments that had been helping the margins a little bit. Is that, I know that's set to anniversary pretty soon here, but what's the impact, or how are you looking at that going forward? How should that impact margins over the next several quarters?

It's Jack. We have announced to our employees that we were going to restore their salaries to the previous level uh, effective March 1, however, along the way, we've been doing some other cost reduction initiatives, uh, some of it in the form of Health Care, cost pass throughs. Some of it surgical types of adjustments that we made in certain areas of the business. So our expectation would be that the March quarter from the standpoint of the types of cost reductions you saw in the September and December quarters will be comparable to what you've seen in those quarters and frankly that with some of the other changes that we've made, we expect very little increase in that area. Even in the June and going forward quarters.

Okay, great and just finally, license tends to follow a pattern. I think the last five years, Q3 is always down from Q2 for license revenues and then Q4 is usually a big increase again. Is there anything that's changed now that would make Q3 up sequentially? I know you signed quite a bit and now with Goldleaf on too. But has anything really changed that dynamic much?

Well, we've seen very good growth in the, in the software backlog which is different. I can't say, David, anything has changed, it's just been our ability to predict what is going to happen with discretionary items like license fees and and hardware. So I doubt whether we'll follow the typical patterns we've seen with Q3 down and Q4 up, frankly is anybody's guess right now. We didn't expect to see the kind of falloff in Q2, compared to the pretty miserable Q2 a year-ago. You take hardware, probably a dozen individual line items of hardware-related things that we track, every single one of them was down. I don't think a single line item was up. Whether it's sorter, servers, processors, scanners, you name it, every line item was down. I think some of that is just financial institutions, trying to squeeze the last possible mileage out of the existing equipment. I think some of it is the -- I think it would affect both hardware and software. It would be the continued trend from in house to an out-sourcing preference.

On some of the hardware, you certainly would believe there's some pent up need, that if your server infrastructure needs to be replaced, and you've been kind of milking it, sooner or later you're going to have to spend some money there, so I think hardware is going to bounce around, license fees, the nature, as I mentioned, we had some nice wins with the Alogent product. It's large financial institutions which certainly help the backlog. Those implementations tend to be a little more customized in those larger financial institutions. We don't recognize that revenue up front like we traditionally do with packaged product that we roll out. We have to recognize that on a more of a percentage of completion basis. There's good news on that, it's license fees and it's high margin and it's somewhat more predictable in the sense that it's going to roll out over the next 12 months, instead of being a big pop in the December quarter and then you're back to a strange comparable again. The bad news is, you don't get it all in the December quarter, when you -- might have been nice to have had.

So again, I'm -- it's a rambling answer to your question, but I think the ability for us at this point to accurately forecast what's going to happen in any given quarter with hardware and software is just considerably different than it used to.

No, that's great, thank you.

Thanks, Dave.

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

Thanks very much. Jack, when you're speaking with prospects, do you get the sense that coming out of this downturn that folks are looking at outsourcing even more so than they were maybe a year-ago versus inhouse?

I don't know, Jon, that I think they're looking at it more. We had a pretty strong move in that direction, last year. We continue to see solid, solid interest, we've seen growing interest from credit unions the -- but I think we're, I would say that we're just continuing to see solid interest. I don't know that it's any more than what we've seen in recent years.

Okay. And then, Kevin, taking into consideration the puts and takes with one-time expenses, wages coming back, would you expect G&A roughly to be down sequentially next quarter? Or should we think of it as being flattish or?

G&A should be down next quarter. Probably $1.5 million or a little more.

Got it, okay. Okay, guys, thanks very much.

You bet.

We'll take our next question come Gil Luria with Wedbush.

Thank you, good morning.

Morning, Gil.

Jack you started by saying that the the trends that you've seen from your customers have not changed over the last few quarters. What is it that's particularly weighing on them right now? We talked about FDIC fees last year. Those certainly haven't gotten lower, but they also have -- are now constrained in how much overdraft fees they can charge, interest rates on credit cards, the ability to get good deals out there. What are the particular topics that you're hearing from them when -- that's still keeping them from spending as they did before the crisis?

Yes, Gill, I think it's, I think it's all of that. I think it is -- there's certainly a concern about potential loss fee income in the forms of overdraft and interchange fees. I think that even though there is somewhat less shell-shock related to special assessments, those are still pretty big numbers. And that's just the ones that they know about right now and, depending on what happens with bank failures, there's still the opportunity for that to go up. Those things are still there.

I would say that I think the biggest issue, impacting our customers at this point, and impacting their confidence and willingness to spend is unemployment. A year-ago the, the issues seemed like they were going to be confined to a dozen very large financial institutions on Wall Street that were involved with exotic securities and other things, which our customers weren't involved in, but I think the reality is that 10%, plus unemployment affects everybody, everywhere. And when your customer is unemployed, obviously it's pretty hard for them to make a car payment or a house payment and so, non-accruals increase, charge-offs increase. And I think, of course there's commercial real estate, which I don't know how to handicap that in terms of what kind of exposures there. Just like with the current situation, there's going to be certain areas and certain institutions that have more exposure than others. But I think that the biggest overhanging impact is that our customers need to see start to change is the overall economic conditions specifically and unemployment.

Got it. Got it. And Kevin, just if in terms of how you're accounting for the acquisition, did you put both of them all in support services?

No, I mean, well, let me back up, Pemco which is basically a credit card transaction processing unit is basically all within the payments line. Because they don't sell software and they don't sell hardware. It's truly a service that's 99.5%, probably within the payment line, if not all of it. Goldleaf, on the other hand, they're going to hit all three lines. They have a little data software, because they do sell products. As Jack mentioned, Alogent had some nice deals that impacted the inhouse backlog. So there would be a little bit of software going forward. Obviously they have some maintenance on some of their products that they deliver for some of their in-house products such as Alogent and other things. They've got some transaction processing which fall into payments, for their remote deposit capture products and then they also do resell some hardware in some instances as well. Goldleaf will probably eventually hit all three lines. Pemco is basically all in payments.

Got it. And then the last thing, you had Goldleaf for the whole quarter, you only had Pemco for two months, what should we assume for the Pemco monthly run rate to add to get the full run rate for the two acquisitions?

They will add $25 million to $26 million a quarter for the next two quarters. Combined.

Thank you very much.

Thanks.

(Operator Instructions) We'll take our next question from Tim Fox with Deutsche Bank.

Thanks, good morning. Looking at the support and service line, obviously organically you saw some nice uptick on EFT and the OutLink business. Implementation of maintenance however are lagging a bit. Any sense of what that may look like over the ensuing quarters here, obviously implementation being driven by some of the license sales that came through. What's your -- what should we be thinking around for implementation maintenance throughout the rest of the year?

Well, I think, Tim, implementation, obviously you're right, it kind of trails the software sales, in a big part, however, there is implementation involved in just about everything we do, including OutLink and [Path 4] and everything else. There is some implementation services related. Probably one of the biggest things imitation is the M&A activity for convert merges that when our customers are buying banks and doing things like that. So imitation is going around a little bit. We hope it's at best flat for the year. As far as in-house maintenance, it should be up slightly for the year organically. As we continue -- as can see the deferred revenue was up nicely, part was attributable to Goldleaf, but the deferred revenue was even up at the end of the first quarter, compared to the prior year. So organically inhouse maintenance should be up a little bit and it should track pretty much for the rest of the year, in total, where we ended up the quarter.

Got it, okay, that's helpful. And my second question is kind of two-part competitive question. Your volumes, that Tony was talking about, in bill pay in particular, I believe it was up 15.3% year-over-year, pretty impressive growth, relative to some of your competitors. I'm wondering if you could talk about why you think you're seeing a better uptake around bill pay than some of the larger providers of that service?

I would tell you that if you look at our bill pay trend, what we've seen is those percentages are declining somewhat, if you look at them, although we're up 15% this particular quarter over the prior year quarter, the numbers we have seen in the past were even larger than that. Were up 3.7% sequentially which bodes well, but part of that, probably is the long, large numbers with some of our competitors versus the size of our bill pay volumes at this point. We are seeing good increases and continue to see good increases. Will they continue to be at this level? I suspect they will not. They will continue to trend down slightly in -- in percentages just because of the size of the bill pay business as it continues to grow. But we did see an increase, sequentially in this particular quarter which we hadn't seen as large a sequential increase in prior quarters. So part of that, I also would tell you, I think it's just based on consumer confidence and spending, beginning to happen a little more than it has in the prior couple of quarters that we've seen with the economic situation that we have out there.

The other thing I'd say, Tim, I think if you look at our average customer, the historical adoption rate has been lower than some of the bigger banks have experienced. So I think with the economy and different things that Tony mentioned, I think that we're seeing a pick-up in adoption rate with some of our regional and suburban banks customers opting to do that rather than stick a $0.44 stamp on an envelope and write a check.

So it's as much about customer exposure as it is necessarily overall secular trends?

I would think so, yes.

And lastly, the -- one of the competitors was speaking about a new entrance into the credit union, large credit union space from a core banking perspective. Can you talk a little about that -- whether you've seen that competitive pressure at this point? Where you stand relative to their product?

Tim, we certainly have seen press releases and heard about it. And I think may have recently funded our first domestic -- our first US customer for that product, so don't know that we have a whole lot to add, don't know that we've run into it a lot competitively, it seems to us that their initial emphasis with that project is approaching their existing customer base to get some initial implementation. Don't know that we have a lot of light that we can shed on that. We do have the largest presence in credit unions of any single platform. We have the largest presence in larger credit unions, any way you want to define large, so we feel very good about our position in the marketplace and certainly expect to continue to see strong competition from a variety of sources.

Thank you.

We'll take our next question from Brett Huff with Stephens.

Good morning, thanks for taking my call.

Good morning, Brett.

Two quick questions, one is, can you give us a sense of where the smaller banks and the medium sized banks and credit unions are on the real estate for residential, but more importantly on commercial? If there's any change on what you're hearing from that or if that's impacting their buying decisions? And then the second question is unrelated, can you just remind us of the penetration into your core base of the various ancillary services that you hold now that it's bill pay and EFT and RDC and that kind of thing. Just give us a sense of what inning we're in on cross selling to those? Thanks.

Brett, from a residential mortgage impact, in the SAN space, the 5 or 6 space that has been most impacted in this environment, I think certainly our customers, like everybody's customers in those areas have struggled, I don't know that it's getting a lot worse. As unemployment stays at these levels, if it stays at these levels for an extended period of time, it's logical to assume that there'll be more defaults and potentially more foreclosures and and issues that our customers have to deal with. But, I think that the worst of the residential issues are at least on the table and hopefully declining somewhat.

The commercial piece is a little harder to -- for us to pin down, that's going to depend more on the individual -- primarily bank and to some extent credit union's approach to the markets. Most of the banks that we talk to and we ask the question, don't seem to be overly concerned with their real estate exposure, they tend to do more owner-occupied lending and less of the strip-mall financing, those kind of things. There's exceptions to that, of course, I think it's likely that the bigger the bank, the more likely they are to have some exposure to the commercial real estate.

So when you get into the $5 billion to $10 billion range, the odds are they may have gone a little farther afield and probably done a little more of that. But I just don't have a good way of estimating that on the basis at large. But our gut feel at this point is that it's not a huge exposure, but there's -- as with anything, there's a ripple effect. I mean, what we're seeing largely right now is the ripple effect of what happened a year-ago, which is now driving 10% plus on unemployment. If there's enough commercial real estate failures that take place out their individual portfolios are probably not that much at risk, but doesn't mean there isn't some risk potential there.

Okay, thanks. And then on the penetration question, of the -- kind of take the ancillary services that you guys are most focused on, and what is the penetration rate approximately into your core base?

Well, I mean, as far as -- are you, are you referring primarily to the payment space, Brett?

Yes, I mean, it seems like those are the ones that you all are focused on and having the most success growing. Just I think it's a question of where your uptick rates on some of those products have been better than sort of the market average. So I assume that because of -- driven by that cross sale and also just banks are further -- aren't too far along on that secular trend of uptake. I'm just trying to understand, kind of what inning we are in each of those payment space? And, again, if you can be broad, it doesn't have to be specific to the product.

Okay, in the bill pay space we have got roughly 1100 of our core customers using that. We only sell bill pay to our core customers. So somewhere, about half of our core customers are using our bill pay product. How many of them out there are using somebody else's or don't even have a bill pay yet. We don't know that for sure. As far as the ATM/debit, which again we primarily sell that just to our core customers. We have got roughly in the neighborhood of 700 of our core customers using our ATM/debit switch. Now as far as the PTFR, or the Pemco credit card transactions, I don't remember how many of our core customers use that. I was thinking--?

Well, it's primarily focused on credit unions only. There's probably 50 or 60 of our Symitar customers that use it. But a couple comments I would make is that, the, the ATM debit card, adoption or sales of late on the banking side in particular have been stronger than what we have seen in some recent quarters. Takes a while to get that implemented and begin to convert that so I think there's still some good growth opportunity there. Again, the Pemco offerings, give us some additional exposure outside of our core customer base for both debit card, and credit card transactions routing as well as the fact that now having the credit card capability probably makes some of the sales to credit unions off our debit card options even better. Because we can now, from a single platform, deliver both credit and debit card transaction process and routing.

I guess my point would be we're seeing better sales in recent quarters than what we've seen in recent past on the banking side. Have reason to believe that the Pemco acquisition will improve our win rates both inside the base and outside on the credit union side.

And as far as remote deposit cashier, as Tony mentioned, we have 885 or so FIs that are using our remote deposit capture. That is our previous remote deposit capture, that's done with Goldleaf, the vast majority of those are our core customers. I will tell you some of our largest RDC customers are other core competitors customers so that -- but the vast majority of those are our core customer using our RDC. There's some runway left there, but I would tell you, most of the RDC opportunity now is upgrades and replacement cycles. The second-time buyers because most of the banks have something, we believe out there. We think there is still some runway there and really the opportunity there is selling to merchants through the other channel and then continuing to leverage the customers that came through the Goldleaf acquisition. So those are the three primary components in our payment business and kind of where we're at, Brett.

Okay, thank you. That's what I need. I appreciate it.

Thanks, Brett.

We'll take our next question from [Carl Holt] with Fiduciary Management.

Hi, guys, nice quarter.

Thank you.

I just -- quick question on the Goldleaf acquisition, could you address the net operating loss and will you be able to use it and what value, or impact will you see going forward?

Are you talking about the NOL that came trough the acquisition?

Right.

Yes. We planned to utilize that as we go forward, obviously that depends -- that depends a lot on how much we can use each year based on operations from that organization to move forward and then also there are some 382 IRS limitations that also impact how much we can use that. But we do expect to get the utilization of a majority of that, however I will tell you or just remind you that that has no impact on our effective tax rate. That's truly just a cash EPS impact. Because that was actually in deferred taxes through the purchase price allocation.

Okay, but it, it shouldn't reduce -- ultimately reduce the cost of that acquisition, is that correct?

Ultimately reduce the cost?

I guess I figured the value of that was maybe $5 million to $10 million, have you put a value on that--?

Well, there's a value -- obviously the value is in place on it through purchase price allocation that is sitting in deferred taxes. The offset of that would be most likely goodwill, so, I mean, ultimately it doesn't reduce the purchase price, it just -- we will get the benefit as it flushes out of the balance sheet as we utilize the NOL as we actually use that deferred tax asset.

Right, okay, I guess I was referring to the economic benefit. Thanks.

You bet.

And at this point, gentlemen, we have no further questions.

Thank you, Michelle. First of all, I'd like to let everybody know the dates of our upcoming annual Analyst Day which will be held May 10, and 11. The event will be held again in Dallas, Texas this year and we'll kick it off as we have in the last few years with a mini tech fair and dinner on Monday evening for those of you that would like to come in Monday evening. Which during that event we'll highlight some of our newer and hotter products. And then starting Tuesday morning, you'll have the opportunity to hear from most of our operational GMs and all of our national sales managers, just in years past.

The Tuesday event should conclude about 2:00 p.m. that afternoon. So please schedule accordingly, and get this on your calendars. A registration link will be sent out in the near future. To summarize the call, again, we want to thank you for joining us today to review our second quarter, 2000 results of 2010. The acquisitions we closed last quarter are tracking with our expectations and should continue to improve in, in their commitment as we complete the integration activity. We're very pleased with the efforts of all of our associates to help control costs during the current economic environment. And our executive, managers and all of our associates continue to focus on what is best for our customers and our shareholders. With that, Michelle, would you please give them the replay number and thank you all again, for joining us.

That's does conclude today's presentation. For the replay it is 1-888-203-1112. Once again, 1-888-203-1112. Thank you for your participation. This does conclude today's conference.