Jack Henry & Associates Inc (JKHY) 2010 Q3 法說會逐字稿

Good day and welcome to today's Jack Henry third quarter 2010 earnings call. This call is being recorded. For opening remarks and introductions, I'd like to introduce Mr. Kevin Williams, Chief Financial Officer. Please go ahead.

Thank you, Mary. Good morning and welcome to the Jack Henry & Associates third quarter fiscal 2010 earnings call. Statements or responses, questions may be made in this conversations which are forward looking or deal with expectations about the future, like any statements about the future these are subject to a number of factors which can cause actual results to differ materially from those which we anticipate. Such factors are disclosed in our recent SEC filings. There can be also other factors not included that could potentially cause results to differ materially. We're pleased on this call this morning to provide a Company update report on our financial results for third fiscal quarter ended March 31, 2010. With us this morning, I have Jack Prim, Chief Executive Officer and Tony Wormington, our President. We will each provide some opening comments regarding the state of the Company and our quarterly financial performance. At that point, we will then open the call for questions. With that, I'll now turn the call to Jack Prim our Chief Executive Officer.

Thanks Kevin. Good morning and welcome to the call, I'm pleased to be reporting the results of this quarter compared to the outlook we had a year-ago at this time. Amid growing signs of improvement in the economy and recent comments from the FDIC chairperson which she believes bank failure will peak in 2010 and the expected number of failures will be lower than the expectations, even as recently at 90 days ago, we believe the general fund is also improving in our customer base. While this is not yet resulting in significant spending increases, we are seeing signs of interest which should result in improved sales in the latter half of the calendar year. Nonetheless, (inaudible) record revenue and earnings for the most recent quarter, improved organic growth rate, including the first organic growth and licensees in six quarters and solid contributions from our two recently acquired companies.

Total revenue increased 19% in the quarter, which included organic growth of 4%. While these indicators are certainly encouraging, we'll remain somewhat cautious in our organic revenue growth projections, due to the need to grow over wash revenues from the accumulated bank failures going back to the fall of 2008. We also encourage some restraint (inaudible) particularly in the fourth quarter outlook. As you may recall in last year's fourth quarter, we signed two largest transactions in the history of the Company, both of which had significant license content.

We saw solid growth in our backlog in business, increasing 17% overall compared to a year-ago, including a 42% increase in the in-house backlog which was the largest year-over-year increase in this component in over five years. We think this increase is highlight while we chose to pursue cost reduction initiatives over the last couple of years, it would still allow us to obtain our employee-base. Although revenue growth has been and likely will still remain challenging, our actual work load has not declined. We've been fully engage in our associates. We've been able to continue to deliver quality products and services to our customers through this business cycle. And we're well-positioned to continue to do so if business continually picks up and the work load increases.

On March 1, we restored the (inaudible) to voluntarily receive salary reductions last June. We appreciate the company wide commitment from our employees to allow us to continue to be the life link for all of our constituent groups.

In addition, the recent Pemco and Goldlief acquisitions continues to go very well. Goldlief is now fully integrated and most of the Pemc integration is complete with the exception of the transfer of their technology platform which is expected to be completed by this July. We expect the call Synergy and EPS contributions from these acquisitions continue to track in line with our previous projections.

As far as the GoldLief acquisition, we picked up a small business base in Riverside, California called RMFA. The RMFA business employs 58 people and provides inventory forecasting services to retail stores like clothing, jewelry, and college bookstores. Following more indepth review of this business after the acquisition, we'd decided it would be a better fit for someone in the retail business services space.

On April 30th, we sold RMFA to an private investment group in Atlanta. No material impact is expected on our financial statements.

Again, I want to point to over 4,300 Jack Henry employees who take care of our customers everyday. And with that, I'll now turn it over to Tony with some additional comments on our business.

Thanks Jack. We continue to be very pleased with strong contributions in all of the components of our referring revenues which includes outsourcing data and (inaudible), in house support and maintenance and our EFT services. We continue to see strong demands for outsource solutions in the banking market as well as the increased interest in the credit union markets.

Support and services revenue increased nicely at 20% for the quarter, compared to the prior year with an organic growth of 4%. We've generally seen an increase in core implementation activity, including both (inaudible) competitive conversions, as well as convert and mark activity fueled by bank failures and M&A transactions. Our EFT business continues to experience very 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 energy exchange.

ATM and debit card processing volumes increased 15% over the prior year. Full payment transaction volumes increased 17% over the prior year quarter. Financial institutions merchant related transaction volumes in our EPS profiting, increased 36% over the prior year quarter. Financial institutions contracted to utilize our Enterprise Payment Solution increased to 900 or increase of 6% over the prior year quarter. Financial institution merchant installed and utilizing our enterprise payment solution increased to 23,366, representing a 31% increase over the prior year quarter. As mentioned on previous quarterly calls, the enterprise payment statistics for merchant related transaction volumes, financial institutions contracted and their respective merchants do not include volumes from our recent Goldlief acquisition. But this acquisition has been a part of Jack Henry and Associates for over a year. And we will have comparative data with (inaudible) statistics at that time. We are well positioned to continue to take on increasing volumes in all of our outsourcing areas both core processing and EFT services with minimal required additional investments due to the existing infrastructure and the nature of these electronic processing solutions. I'll now turn it over to Ken for a further look at numbers.

Thank you. Total revenue increased 19% for the quarter compared to the same quarter a year ago. Our organic revenue asJack mentioned, increased by 4% year-over-year and was basically flat sequentially compared to the December total revenues. The acquisitions contributed roughly 15% of the total revenue growth for the quarter by contributing approximately $28 million in revenue for the quarter. License revenue increased by 29% for the quarter compared to the prior year and our organic license revenue was up 5%, compared to year-ago and up 30% sequentially. So pretty solid quarter. And as license revenue grew, we were very happy to see.

Our support and service revenue increased 20% this quarter over the same quarter a year ago. Organic revenue and support and service grew 24% as Tony mentioned, but was down 3% sequentially which was due explicitly to implementation services being down compared to the December quarter. The acquisitions contributed approximately $24.8 million support and services for the quarter or 16% of this line of revenue growth.

To break down the support and services a little bit, implementation increased 6% for the quarter and 4% year-to-date. Organically, implementation was down 8% year-over-year. Again primarily or explicitly due to implementation revenues from complementary products, core revenue installation remained pretty solid. Our EFT or electronic payments increased 53% for the quarter and 37% year-to-date. And organically EFT increased 5% year-over-year. Our out length data processing increased 10% for the quarter, 9% year-to-date with essentially no early termination fees in there. And this is the same as our organic growth at 10% year-over-year of the acquisitions contributed nothing to our outlink data processing services revenue.

Our in-house maintenance increased 9% for the quarter, 5% year-to-date. And in-house maintenance increased 1% year-over-year organically.

Our hardware revenue increased 8% for the quarter, compared to the prior year, but it's still down 13% year-to-date. Organically, our hardware was up 3% over the prior year and at 14% sequentially. So pretty solid growth, both organically and from the acquisition and the support and services lines of revenue.

Our recurring revenue experienced growth to 21% for the quarter compared to the prior year and was up 1% sequentially compared to December quarter, again drove somewhat -- I'm sorry, due to recurrent revenue performing extremely well as we move forward. Our consolidated gross margins improved to 40% for the quarter, compared to 39% in the same quarter a year-ago. Our license margins remained level at 89% this quarter. Support and service margins improved to 37% compared to 36% a year-ago. And hardware margins increased 26% from 24% a year-ago due to sales mix.

Traces down into our two reporting segments. Our banking segment gross margins improved to 41% from 39% a year-ago primarily due to stronger license sales and continued leverage on our support and service margins within the segment. Our credit union segment margins decreased to 36% from 39% a year-ago which is primarily due to the impact of the recent acquisition of PTSI within that segment. which brought our margins down since we still have cost Synergies there as Jack referred to in the transaction processing to get over into our data center.

In the bank segment, license margins remain level at 88%. Support and service margins for the bank segment increased to 39% from 37%. And hardware margins increased slightly to 26% from 23% this quarter a year-ago.

In our credit union segment, license margins slipped slightly to 91% compared to 92% last year due to more third-party software info in the quarter. Our support and service margins decreased to 31% from 34% a year-ago in our credit union segment, again due to the full quarter of the PTSI acquisition being that they are pulling those margins down a little bit. And our hardware margins remain level in the credit union segment at 27%.

Our total operating expenses increased 29% for the quarter compared to the prior year and as a percentage of total revenue, increased slightly from 18% to 20% for the current quarter compared to prior year. However, the 20% of revenue is in line sequentially with the December quarter. All lines of operating expenses increased sequentially, primarily due to the full quarter impact of the acquisition and also some increase in selling commissions due to the nice increase in license revenue. Our organic operating expenses only increased 5% year-over-year and 3% sequentially. Our operating margin dipped slightly to 20% from 21% a year-ago. Net results with increased operating income of 18% for the quarter, compared to prior year. Organically, excluding the impact of acquisitions, our operating income increased 13% for the quarter and has increased 14% year-to-date compared to the prior year periods.

The effective tax rate for the quarter was 27.2% compared to 32.8% last year, which the rate last year was lower than normal due to the renewal of the extension of the R&D credit a year-ago.

The decrease in the tax rate this quarter is attributable to the benefits recognized related to the Company's domestic production activities deduction which was basically the Internal Revenue code section 199. This was a one-time benefit of $3.2 million in the quarter which, without this benefit in the quarter, we would have been right at the consensus EPS of $0.33. Our effective rate should move back up closer to the 36% level for the fourth quarter.

Our EBITDA increased approximately 16% to $62 million from $53.4 million a year-ago. Depreciation and amortization for the quarter was $18.4 million. And to break this down, depreciation was $9.1 million, amortization was $9.3 million for the quarter. And this comes to $18.4 million total compares to $16.3 million in depreciation and amortization a year-ago.

As Jack mentioned, the acquisitions we closed in December quarter are both tracking right on plan and should contribute approximately previously-guided $75 plus million dollars in revenue for the fiscal year ended June 30. And combined should contribute, right on track to contribute the roughly $0.05 on $0.08 EPS guidance for the fiscal year as we guided in previous earnings calls. There are still significant cost synergies that we will continue to benefit from, from these acquisitions as we achieve them moving forward. This concludes our opening comments, and we're now ready to take questions. Mary, will you please open the line for Q&A.

Thank you. (Operator Instructions) Our first question comes from Greg Smith with Duncan Williams. Good morning, guys.

So, Kevin you pretty much explained it. We were confused by this sequential movement in margins, but it sounds like that acquisitions weren't fully annualized and that sort of big thing. I'm looking for a little more color on that. And as we look at what the gross margin was in the December quarter, of over 42%, was that a bit of an aberration, then? Because that was the highest level in quite a while. Help us understand exactly what happened sequential sequentially and what the outlook is sort of for margins as we go forward.

Well, you have two things Greg. One, if you remember, we only had Pemco for two months in the quarter. We had them for the full quarter during the March quarter. And the margins within that group are quite a bit lower than our corporate average, as we still have comps interviews to gain. As Jack mentioned, we still need to get off of their (inaudible) to Pemco profits or transactions to get those over in our data center. Those are scheduled. Those are going into process right now to be completed hopefully by July. So hopefully going into next fiscal year, we will have those margins up more in line with our corporate average, from that acquisition. And Pemco represents roughly 20% of that segment of revenue. That's the primary bearing on the gross margins in the credit union, which pulls them down about 3% from a year-ago. And then also, just the implementation revenue dragged that we had in this quarter compared December quarter, pulled those down. Because obviously the cost of all of our implementation resources are still there, but with the actual revenues, I'll tell you, that is almost exclusively due to two things.

One, complementary installations are down a little bit this quarter from a year-ago. And then also just the timing of actually being able to build and recognize the revenue on some of those implementations, especially on convert merge and some of those things. Those are basically build and recognized when we complete the project. There was a flurry of activity that happened in the December quarter and it eased off a little bit this quarter. But we anticipate that the implementation revenues should go back up in the June quarter, which obviously will have a direct impact on the margins for this quarter.

So the margins were a little higher in December, due to not having the full impact of Pemco. And the really huge quarter for implementation fees. But I think the margin this quarter are pretty much in line and maybe some improvement for the June quarter. And then we should see ongoing improvement in gross margins next fiscal year as we get the balance of the cost synergies from the two acquisitions.

Okay. That's helpful, thanks. And then the hardware revenue, was there anything in particular where you were seeing more demand in that segment? And what specific products were kind of driving the little better growth there?

Well, Greg, it's really kind of across the board. I will tell you there was some nice iSeries and pSeries upgrades that happened in the quarter, which I think that was probably driven by last year a lot of our customers were putting off upgrades to do that. So there were some pretty decent iSeries and pSeries upgrades. And then just the Goldlief acquisition helped generate some additional hardware revenues. So nothing really outlandish jumping in there, but it's just kind of a general demand, I think, returning seems to cut off hardware upgrades only so long.

Okay. And last question, have the failures over the past few months impacted you in any detrimental or positive way?

Well, I don't believe any, Greg, I don't believe anybody is positively impacted by bank failures. Even if your customer is the acquirer of the failed bank, the revenue you pick up is always going to be less than the revenue that you gave up from the failed bank.

Our percentage of the banks that have failed that have been Jack Henry customers has tracked right in line with our percentage of market share among core systems. So, the last few months, haven't been notably different than going all the way back to when this thing got started in 2008. But you get the revenues that you are receiving from those banks that is gone once they once they fail. You've got to basically replace that revenue, to get back to zero percent growth. Then you can start talking about positive organic growth after that. So it's a challenge. I don't know if it's a bigger challenge for us than it is for anybody else. But again, until we cycle through this thing, we're trying to be a little bit cautious on the outlook for organic growth.

Okay, thank you.

Our next question comes from Brian King from Credit Suisse.

Hi, good morning, I guess just following up on that question. In this environment we've seen with the bank failures taking the place of M&A activity. Can you talk about the changes to the model as a result? In other words, are bank failures that we're seeing now in this environment, is that worse for the model than a lot of M&A activity? Because we know that M&A activity has been really pretty slow this period.

Yes, I'd certainly trade M&A activity for bank failure activity any day of the week. There is some benefit in M&A activity in the form of early termination fees in some cases. I just think from all of us that early terminations have down for the better part of the year. So typically when the bank is acquired theres is in some cases the opportunity for some of those type of fees. When a bank fails, it's pretty much, tell you up until the last day that they run and the revenue stops at that point.

But again, we think this is a temporary phenomenon given where we are. And again, 90 + days ago, I think Sheila Mayor indicated they think the bank failures will peak in 2010. And within the last few weeks she made a subsequent comment they believe the number of bank failures we'll end up seeing will be less than what they were expecting even when she made the comments about bank failures peaking in 2010. It's just something we have to get through. That again, I don't think, in the long run, significantly changed with the model.

What's the latest discussion on assessment fees for both banks and credit unions?

Well, it's interesting. Especially for the credit unions, it's somewhat challenging in that they've been given a range of what the assessment could be. That range is from 15 to 40 basis points on assets. Either number is big. And the range is pretty wide.

So they're having some budgeting challenges right now. The budget take an average of the two. I think you have credit unions that are budgeting in a variety of different of different ways. The banking side, they prepaid their insurance premiums. There hasn't been as much discussion about an additional assessment, but I think that nobody would be surprised to see one. So, you kind of got that back of the mind. You kind of a caution that I think folks are at least aware of. I would tell you that certainly the mindset is substantially better than it was a year-ago. A year-ago, particularly the credit unions, but to a large respect the banks were almost shell-shocked from the assessment figures that they were hearing about. Even though the credit union side, the number, the potential number is as large or larger than it was a year-ago. They could at least come to grips with the concept a little bit better and aren't as phased by it, but certainly feel cautious in their outlook.

And then just turning to the license sales. They were up quite a bit more than I expected. Is there any trend in that, in that we can take from that about the environment? And should we continue to see license sales improvement or was that just some clearing of the pipeline?

It's a mixed bag, Brian. I think there's probably some of that that is clearing in the pipeline, in a sense that much like the hardware upgrade that Kevin talked about you can only put those off for a long. A lot of times you can put add-on software modules off for a longer period of time. But again, I think it speaks to the outlook looking better and things loosening up a little and that accounts for some of it. Our credit union core system sales have continued to remain very steady through the relative, almost the entire cycle. So I think it's some of that. But again, I don't know if there's any one significant kind of event that I'd point to.

Okay and then just last question for me, Kevin. Just looking at those margins, you talked about some of the additional costs from the acquisitions. Can you talk a little about seasonality? Isn't typically the March quarter seasonally a little bit lower?

For support and services, no, not really, Brian. If you look at seasonality, which I think you'd have to go back a couple years now to get back to a normal year which I'm hoping at some point we get back to a normal year. But March margins would be down a little bit. But, that was more driven because December and June quarters historically have been our strongest quarters for license and hardware sales which would have the biggest impact on gross margins overall.

But support and service, those margins, even though last years margins were the lowest of the year, they shouldn't be any different than a typical quarter?

No, I mean, the only caveat in support and services, Brian is that the implementation fees which can have a pretty significant impact on a quarter-over-quarter comparison on support and services margin. The recurring revenue margins are just pretty much spot on and will continue to stay level, if not some improvement, especially as we get the additional Synergies from the acquisition.

Okay, thanks a lot. Congratulations.

Thanks.

Our next question comes from Kartik Mehta from Northcoast Research.

Good morning, Jack and Kevin. Jack I wanted to get your thoughts on if you think there is pent up demand out there. Do you think once the credit union issue gets resolved some how with the assessments and maybe the banks start feeling a little better. It will take time, but we could see an acceleration in spending? Or do you think banks will just spend at a normalized pattern and we won't see an acceleration?

I kind of think there's probably some amount of pent up demand. I don't know how to put a number on that. The credit unions have really been somewhat of a surprise to me though this whole cycle, particularly with the continued spending on core that we've seen there. The bigger challenge for us has been add-on sales to existing customers.

And, I think there's a certain amount of pent up demand there, not necessarily for any one product. Different banks have held off on different things, but I think whether it's security or fraud or profitability solutions, whatever the case might be. I think there are some of those that could see some acceleration. I think that that would be kind of a quarter or two in kind of impact and then return to more normalized spending if we actually recognize some acceleration there. But really kind of hard to put a number on what kind of uptick we might see.

And then, Jack you talked about lightened revenues. I think last year in the fourth quarter, you had two big deals. Is there an implication that year-over-year you probably see a decline in license revenues because the number last year was so big and comparisons are so tough right now?

I think that there's that possibility. Whether it declines or whether it does an increase, we have some pretty reasonable license growth n this quarter. But again, as we talked about, two very large transactions , last Q4 with a good bit of license content in there. So, certainly continuing to work on a number of transactions. But I think the possibility of flat is definitely there. And whether we see a decline or not, hopefully not, but that potential is

Obviously, the comparison just to the fourth quarter last year is, is pretty tough. Obviously it's the highest we had last year. But I agree with Jack, I think flat may be something to look for. Our in-house backlog is at a very solid base right now. As we talked about last quarter, there are some sizable deals, some of the Allergent deals. They're spinning backlog. Those licensing will come in as we hit those contract milestone. So like I said last quarter, it is kind of a good thing/bad thing. It's a good thing we're getting license revenue. And it levels out and takes some of the peaks and valleys out of license revenues. because it gets spread over a specific period of quarters. And bad news is, we have license revenue and can't recognize it. But I think if we can get to somewhere comparable to this quarter to up to flat with a year-ago, I'd be pleased with fourth quarter.

And Kevin then just lastly, I want to make sure I understood what you said about the tax rate. Did you think the effective tax rate for the fourth quarter will be 36% or for the year will be 36%?

For the quarter.

For the quarter.

For the fourth fiscal quarter, our effective tax rate should go back up to close to 36%, which I think that will make our effective rate for the year somewhere around just under 35%.

Thank you.

Yes.

Our next question comes from Dave Koning from Baird.

Hey guys, one more thing on license. Is the implication that if we did $16 million this quarter and ballpark flat, next quarter, year over year, $17 million maybe $16 million next quarter, whatever. Is that sort of a run rate now that you have such a more stable backlog that we go into next year and think of it as $16 million a quarter for a while?

I don't know if we can say it's stable, Dave. I mean, as long as we can continue to have large sales that replenish those that are in the backlog, rolling those off, then I'd say yes. But sometimes those large deals can be far and few between. So I'm sure there'll still be volatility in the license revenue going forward. We're right in the middle of our annual budget for next year. Obviously, we're drilling down into sales. And we'll be giving guidance for next year probably on our next quarter earnings call. Which hopefully we can give you more clarity around where we think the license revenue's going to go. Obviously, we'll be three months farther into this year and hopefully we'll see the up swing in the back half of the year that everybody is hoping for.

Okay. Okay and then secondly, the EFT line, I think you said 5% organic growth in Q3. That was a little slower than last quarter. I think it was up 10% or 11%. In the comp this quarter, was pretty easy. I think Q3 of last year was the slowest growth of the year. So maybe if you can talk to a little bit why the growth was slower there. And if you do expect it to reaccelerate to double digits again over the next few quarters.

Part of the part of the challenge David is price compression on some of the renewals particularly in the area of the ATM debit card transaction processing. The price compression challenges are likely to continue for a period of time in terms of how we look for that to shape up next quarter. Kevin, do you have anything?

Yes, I mean, I think it would be similar to what we saw last year, Dave. We saw a little slow in the growth in third quarter and I think it will pick back up. I think if I remember correctly, last year on this call, we were having a similar discussion in the slowing of EFT revenue compared to the prior year on a sequential basis and then it just continued to ramp up for the rest of the year. I'm not sure what it is about the March quarter with EFT revenue. I don't know if it's following up the holidays or whatever. But it has always seemed like the March quarter was a somewhat slower grower than the other quarters of the year.

Okay, but longer term you still feel like this is a double-digit growth type segment?

Yes. Once we work through the pricing comparison that Jack has referred to, yes.

Yes, okay. And then finally, I think you mentioned some higher costs or maybe some nonrecurring costs related to the acquisitions. I know for sure last quarter, I'm not sure if there were some nonrecurring costs this quarter yet. And maybe you could talk a little about that. How much of the $0.05 to $0.08 of synergies have you already gotten this year and how much is left in Q4.

As far as the synergy, we've already gotten about a lit over $0.03 out of the acquisitions. I believe that's right. Which we expect to get another $0.02 to $0.03 in the next quarter, depending on timing with some of the revenues coming in. It may be higher than that. And also again on the timing of some of the synergies that we have yet to get. As far as one-time (inaudible) , there were a few write overs in this quarter, but nothing real significant. The majority of those were expensed in the December quarter. So, there wasn't a lot of one-times. It was more the fact that we had both acquisitions in our numbers for the entire quarter which caused some of the expense items, especially to increase slightly primarily , Pemco. We had them for the full

That's great, thank you.

Thanks.

Our next question comes from John Kraft from DADavison.

Good morning, guys.

Good morning.

Tony, I don't want to leave you out. So I have one for you.

Okay.

On the bill pay side, specifically this quarter you said growth was 17%. That's faster growth than we've seen in several quarters, here. Were there any material share wins here or are you seeing underlying trends reaccelerated?

We've seen those underlying trends reaccelerate. There's a significant conversion that we've done that would drive bill pay there you I'm aware of that would have hit in this particular quarter. Certainly, we've seen some increase in bill pay activity in our credit union markets with our NetTeller offering in that particular space. But we have seen some acceleration. I think that is simply due to increased spending by the consumer spend from that perspective. Is what we've been seeing.

Okay. And then Jack just to go back to something you were talking about. I don't know if this is reasonable or not. But growing over the accumulated bank failures, is there a way to quantify the financial impact of all the failures that have happened?

John, the couple ways we've tried to model that, we've looked at the individual banks that have failed. And we kind of said okay, what was the total revenue that we received out of that institution in their last full fiscal year? So, if they failed in 2009, fiscal 2009, what did they pay us in fiscal 2008. And if we assume that ff we seen the same thing going forward in fiscal 2009 that we received in fiscal 2008, what's that amount. And look at that with all of the bank failures.

And we keep referring to bank failures. There are similar, slightly different issues, but similar tend to think more in the form of mergers. Slightly better impact maybe from those in than maybe what you see on the bank side where all contracts become essentially null and void. But similar impact on revenues. So kind of trying to ballpark that, we put that at 2.5% to 3% impact on revenue going forward when you accumulate all that together.

Which, part of that, John, is compounding from the last year and what has happened this year. But the total impact we estimate to be roughly about 3%. And that's total revenue. So there is some cost in there, but not an enormous amount of costs which you can take out when you have failed institutions. So, that's a rough impact.

Now, what that doesn't take into consideration is the small pick-ups that we've gained on the flip side from some of our existing customers acquiring assets. Which there is a little uptick there, but as Jack says, nobody's a winner in that situation. That's roughly the head wins that we've been challenged with for the last four quarters or so, to overcome, just to get back to even to then have growth.

Some of that grow over is already underway. If you take for example a bank that failed in 2008, or actually lost all that revenue in fiscal 2009, we're three quarters of the way through fiscal 2010. So, we've already begun the grow over in the process with some of these folks, but again, it's just the dynamic you have to deal with.

That's very helpful. Thanks. And lastly, a clarification. Did you say the wage increase hit March 1st?

Correct.

One month. Okay, thanks guys, see you next week.

Okay.

Our next question comes from John Maietta from Needham and Company.

Thanks very much. Kevin, if you make the assumption that you'll do roughly 21% operating margin in Q4, what type of growth will you potentially see in fiscal 2011? Would you feel comfortable with 100 basis point re-expansion? Could it be more than that?

I mean, as I said, we're right now in the middle of our budget process, that with some of the cost synergies, we still have yet to come out acquisition. And again, it depends on the economy, the environment, there's a whole bunch of buts and ifs I can throw in there. But if everything remains equal, I think we could see an 100 basis point increase in operating margins over the course of 2011. And I'm thinking that's probably conservative. It could be higher than that, but again, there are so many unknowns right now. I'd hate for you to throw a whole bunch of numbers at models out there for 2011 and assume much more improvement than that on the operating margin line.

No, that makes sense. Thank you very much.

You bet. Thanks John.

Our next question comes from Brett Huff with Stephens.

Good morning.

Good morning, Brett.

Good morning, I wanted to make sure I understood the comments, Kevin you made around the sales and marketing line higher than we saw. I think you said it was partially due to another month of one of the acquisitions, but also due to a strong contracting quarter. Can you reiterate that or give us more color specifically on the contracting quarter side?

Well, it's not contracting, Brett It's actually the license revenues up so high. We also recognize the commission expense. So, any time the license revenue and hardware revenue goes up dramatically, you're going see a pick-up in our sales and marketing line from the commission which are roughly 8% to 9% of that pick-up in the margin calculations.

Okay, that makes sense. And then you also had mentioned when you were talking about backlog, I think you gave us an organic backlog number as well. And, I didn't get that down. Did you give us that number?

No I didn't. In fact I don't even have that number at my fingertips to give you, Brett.

Okay. And then last one, just to go back to the EFT question asked before. I think the numbers you all give us are transactions year-over-year, correct? Not revenue that Tony gives us?

Correct, those are transactions.

And so if the numbers are right that it was 11% before, and it's 5% now or less, of course 11% now, not 5%, that's a transaction number, not a revenue number. So is there, it seems may not be revenue or price compression but just seasonality. Kevin, you kind of eluded to that?

Some of that factors into the failed bank kinds of issues that have transaction volumes associated with those that are impacted as well.

Okay. And then just last, quick question, what's your bank saying about addressing the new overdraft regulations that are coming through? Are what's the stand they're taking? And what are they doing with you all to address that issue?

Well, they're really trying to figure out, I think at this point, Brett, how to communicate properly with their customers and convince them to opt-in appropriately so that they can do that. And we certainly had a number of conversations with our development teams of course are very busy. Have been very busy, spent a lot of time coding to the new regulatory issues and things of that nature. Certainly they're looking to us to make sure that they can handle all the requirements, from regulatory standpoint.

We certainly don't know that we're experts in telling them how to communicate with their customers, but certainly think the 80/20 rule applies there as it does in most things. There's probably 20% of the customers and generally 80% of their overdraft fees and they'd be well-advised to identify that 20%. If they don't communicate well with anybody else, they at least communicate well to that segment to protect as much of that as they can. I think there is a fair amount of fault, potentially in distraction being given to how, how to deal with that, but I think that most people, certainly believe there will be some negative impact on their fee income lines from some of the new some of the new requirements and again, just get another potential challenge to earning and spending [inaudible]

Great that's what I needed. Appreciate your time.

Thanks.

Our next question comes from Tim Willi from Wells Fargo.

Thank you and good morning. Just a couple questions. First, Kevin, could you talk a little bit about the balance sheet? I know you get your annual payments coming through here in the next handful of months. Just start giving thoughts about buyback or capacity on M&A what that environment looks like and how we should think about the cash over the next one or two quarters?

Yes, our earnings and maintenance billings will be going out at the end of this month, which obviously based on history will collect a significant amount of that in June. So our cash balance will be up nicely by the end of June.

Our total annual maintenance billings this year is just north of $200 million. So, probably by the end of June we'll have over $100 million in cash balance and receivables that'll be collected during the month of July and August. We will have significant amount of cash by the end of September quarter. We currently have $70 million drawn on our revolver, so cash. As far as the M&A front, Tim, there's assets out there and we continue to kick the tires and, and look. We'd love to say we got more bargain deals that we found like Goldlief and Pemco that really fit in there. We're still trying to figure out exactly what valuation expectations are out there but we will have pretty good cash. We continue to have a pretty good balance sheet. We'll continue to look at potential acquisitions that drive the earnings growth for our shareholders. And obviously, if we don't find any of those, and the M&A pipeline is empty, then we will consider going back into the market and buying back our own stocks.

Okay. That's great and then just two other questions around the P&L. Number one, on revenue, I know they've been a lot of questions around the outlook and the tone of business. I just wanted to clarify, make sure I understand something. Is sales tick up?

And it sounds like you feel like it's worth maybe the inflection point. Is this a situation that first of all, between the license and sort of the outsourcing mix, we should really begin to see improvement in town in your comments about activity really hit the income statement in a fairly orderly fashion. Or do you see a situation, particularly with the way the mix has moved to the outsourcing that there could be a lot of talk about things improving, signing deals. We're back in the saddle, so to speak. But the revenue flow may be a little bit farther out than it's historically been given the nature of the contracts and relationships we're signing. Is there anything to think about in an offset, increase in positive tone that people think that we may in the next couple quarters?

Well first of all, Tim, remember 30% of our banking core customers are currently out sourced. And we continue to see the trend existing in in-house customers going out. So, that'll continue to put some pressure on our licensed sales. However, the good news is, we take significant more wallet share out of those customers when they make the decision go outsourcing, which is a shift from one line of our revenue to another line, but it's a whole lot more revenue and has a positive impact on margins. So, that's one thing.

As far as the contracting activity, our in-house backlog is at a very solid position right now. In fact one of the highest, if not the highest in the history of the Company. So the contracting has continued to be very solid. And you're right, it takes some time to get the revenue, for example on the Allergent deals we find in the December quarter. Very good contracting be activities if that revenue gets spread over a period of five or seven quarters

So it's really the, if you want to see immediate impact, would be the return of some of the discretionary spending on complementary products that we can basically contract and ship and start the install process in the quarter that the contract has signed. And that's where we'd see the largest impact for contracting activities.

As far as new customers, the line share, it's still going outsourcing, which we've seen that for the last several years. That 85% to 90% of new in-house core customers on the main side has gone for outsourcing. On the credit union side, the shift towards outsourcing continues to increase from new core deals. And I will tell you that the trend from in-house outsourcing on the customers, on the credit union side continues to pick up a little speed too, as we've seen more activity there this year than we saw last year.

So, I guess that's a long way of answering your question. Contracting activity continues to be pretty strong. And how that relates directly to the P&L. Could some be delayed? Absolutely. If we see insurgence in pick-up of product sales, we could see a nice pick-up in license revenue going forward.

Okay, and the last question we had, sort of headcount and operating expenses, how do you feel about sort of the staffing levels, where you're at now? And where or how quickly you'd have to move as things pick up just in terms of your own internal productivity efforts, et cetera? Do you think there's a decent lag in terms of what you've done in this latest slow down to benefit on the margin side from a pick-up in business? Or do you think it'd be somewhat linear in terms of going out and staffing up again as things get better?

Well, Tim, first of all, we never did layoffs. We did across the board salary cuts which were reinstated March 1st. So we maintained our headcount. We never put a hiring freeze on per se. We continued for the last year to hire additional people in the areas that were growing revenues.

We will continue down that path for areas that are going at revenue that justify the additional headcount. We will have that headcount in there. So even if there is a resurgence because we didn't do enormous layoffs, we don't have the need to go out and hire additional staff. We have got some excess capacity in our existing staff. Not a lot. I mean, as you well know, we've always ran very lean. But we have some excess capacity that if, if the resurgence comes back it wouldn't take much at all for us to ramp up to get there.

One thing just to add to that is as we talked about our credit union core sales have remained very consistent and very steady. So the backlog , for new implementation there is still roughly 12 months out and that really hasn't changed. We don't anticipate a dramatic change in the number of new core opportunities in credit unions. I think that business remains pretty steady.

There are probably, actually right now, a little busier than they have been because of some of the merger activity that's going on n the credit union industry. So they're handling that now, along with a pretty steady amount of new core implementation.

So I think anything with the merger activity slows down, we probably have additional capacity to handle core implementation. See, it's more dramatic on the banding side. It's busiest they've been since the ramp up to Y2K because of the M&A activity taking place on the banking side. That's not necessarily reflected in , you know, license numbers and revenue growth because you're not going to generate the kind of revenue from merging in a failed bank that you get when you implement a new core customer. But I would tell you, our implementation varies on the banking side are extremely busy right now.

If anything, when bank failures slow down, we get back to, I wouldn't , definitely say excess capacity, we get back down to running at capacity, most of a very solid effort that you have on the way right now. With some of these bank failures have call volumes, potentially dropped off a little bit in the support area? Probably a little that again not in a way that says hey, we've got 15% less volume over here and that kind of access capacity. So I think the answer there is that staff is positioned to absorb a good bit of growth going forward without having to

Great, thanks very much.

Thanks Tim.

Our next question comes from Tim Fox from Deutsche Bank.

Thanks, just a quick follow you-up, on the numbers were you rattling off showing some very strong growth. I think the number of financial institutions was up 6% year-over-year. Can you just talk directionally about where that growth, do you think, is going to come from? Do you think it needs to be more on the merchant side or financial institution side? Are we looking at more of a penetration story from here going forward?

The financial institutions have slowed slightly at this point compared to some of the prior year quarters that we've announced at 6%, at 900 financial institutions. We'll continue to add additional financial institutions and you'll see growth in that particular line. However, I think you'll continue to see a larger growth in the financial institution merchants as adoption continues to add them with those financial institutions that are adding additional merchants out there. Financial institution merchants as I stated 31% year-over-year versus 6% on the financial institutions.

Plus the fact is we continue to sell that product through ISOs and business partners that integrate our solution into their core product that need to process payments. So you're right, Tim, I mean, what we will continue to have some financial institution sales, but the larger growth will come from additional penetration and just adding additional merchants.

And as a follow-up there, mentioned the ATM debit part of the business on the other parts of that business, with any EFT bill pay merchant in particular, how are payment trends holding up relative to renegotiations or even some of these new deals you're signing on merchant cash or size? If you could talk about pricing in general outside of ATM debit, that'd be useful.

The pricing on the other items has held up pretty well. We're not seeing the same type of compression there for whatever reason that we've seen on ATM and debit card. I think part of that is on the bill pay side, our solution is one of the lowest price bill pay solutions out there. So most, most anything else out there, there's not likely to be the kind of opportunity for cost reductions on that. And I think on the merchant side, we're also not seeing a lot in the way of price compression there. I think that's, quite frankly because we've got a very solid offering compared to many of the other alternatives out there. I think it's a larger business with much more focus and attention to servants and those kind of things for us, than it is for maybe other folks in that business. We right now feel like we still have a kind of a leadership hedge in the marketplace on that one that's allowed us to be able to resist pricing compression on that side.

That's all for me, thank you.

Our next question comes from [Mateg Candan] from Single Hill.

Thank you. Good morning, Jack could you comment on your win gate versus your competition. How you're fairing versus them? Thank you. Good morning, Jack could you comment on your win gate versus your competition. How you're fairing versus them?

Yes, I'd say we, on the banking side there hasn't been any notable change there. I think that there's probably been a lot of focus internally, in terms of getting those two companies put together and completing that acquisition. I don't think we've seen a particular change there. We've also not seen them make any missteps at this point that would cause their customer base to go out and start looking at alternative solutions. But competitively, we still like our position when competing for new opportunities against anybody out there. Obviously taking away an installed competitor is a challenge, particularly in the out source world because you'll typically see very substantial retention discounts offered to try to keep a customer from leaving but that's not a new challenge. That's the same for a while.

I'd tell you on the credit union side, we continue to gain market share, compared to anybody else in the marketplace there and again, that's also not a new dynamic. That's pretty much been the case for several years. So I'd sum all that up and say that it's pretty much, in terms of the opportunities of business as usual. On the banking side, we don't maybe have as many opportunities as we had when the novo banks were forming at the rate of 150 or so per year. Certainly expect that at some point we'll see an increase in that area, but again in the opportunities where we just get engaged, we're not seeing any change from a competitive standpoint.

Okay. And just another question I had was maybe you'll touch on this next week at the analyst day. But as you think about putting your investment dollars to work, what are some things you're investing in, not new growth initiatives that could be a catalyst over and above basic core processing, maybe on the payment side or initiatives you'd have in place more investment dollars as you move into fiscal 2011?

Particularly from an acquisition standpoint, we're looking for a couple things. One would be products that we can sell, not only to our core customers but outside of our core customer base to Profit Star and emphasis on the payments side of our business. Again, that obviously the payments business related to the Pemco acquisition and a significant portion of the Goldlief business, payment-oriented as well around remote-deposit capture. So the payment's aspect of both of those acquisitions as well as the fact that both had heavy implementation presence in non-Jack Henry core system users made those particularly attractive.

So I think the things we'd be looking at going forward would be very simpler there from an acquisition standpoint. We continue to invest heavily in our internet banking and bill payment solutions and built from a standpoint of refreshing those products as well as adding additional functionality and, and things that we need to make sure to keep those products competitive and then we have a lot of different product areas throughout the Company and there's always improvements that are needed in any of those areas to keep them competitive with other solutions in the marketplace. But again, I would think certainly an emphasis on ProfitStar content and payments related content could be a large part of the focus.

Great that's helpful. I just had one more question. More of a margin question for Kevin. If you think longer term in terms of margins, what do you think is an optimum margin level given the mix of business trending toward more out-sourcing? Do you think we're there now and will stay around this level? What would be some level that you have a target? Over what time do you think you can achieve that?

I don't know that I have established targets

Do you think there's improvement from where we are today?

Yes, I do. As I mentioned, there's still synergies within both the acquisitions we did last fall to come through. As we continue to see the shift of our in house customers going to outsourcing, that has a positive impact on the outsourcing margins. The EFT margins, we have to have the growth there to offset the March compression, especially on the ATM debit side. That hopefully, we've seen nice contracting year-to-date on new contracts for that. We think there's solid growth there to offset there. So, I think there's some decent upside with margins long-term over the next fiscal year or so. As I mentioned earlier, it wouldn't surprise me if we could see operating margins go up 100 bit. Could it go up higher? Yes, but there's a lot of things that has to happen. And you still have the wild card of our license revenue which still represents roughly 77% of our total revenue that in any given core, that can have a significant impact on our overall margins. But I think long-term, there is some improvement opportunities there.

Great, that's helpful, thank you.

You have a follow-up question from Dave Koning from Baird.

Just a couple real quick ones. Next year's tax rate, any reason not to expect 36% in Q4? Is that kind of a good rate into next year?

Yes, that's a good rate. And the only caveat I would give to that is still, the R&D credit has been kind of talked about by both the Senate and the House for renewal which I have to believe that it will be passed sometime before the end of the calendar year. Obviously the quarter that that hits in, we'll basically have a catch-up credit which we have a one-time impact on our effective tax rate for the quarter. But I think going forward, you could reasonably use a 36% to 36.5% rate for next fiscal year for modeling purposes at this time.

Okay and then you didn't talk too much about earnings in Q4, but I mean, is the consensus, I think it's around $0.37. Is that in the ballpark? You'd say something if it was way outside the ballpark, right?

Well, yes, I mean, I think $0.37 for the quarter is aggressive. I think we're going to have to have a very stellar quarter with license revenues in line with where they were in the quarter a year-ago. Which I think, Jack has already commented, that may be doable, but it's going to be a stretch to get there. So I think with the return of the tax reform back to 36% a quarter, is $0.37 doable? It might be Dave, but it's definitely going to be a stretch.

All right, that's great, thank you.

Okay.

Mr. Williams, I'm not showing any other questions at this time.

Thank you, Mary. First of all, I would like to remind everyone that our annual Analyst Day we refer to a couple of times during this call will be held next Monday evening and Tuesday, May 10th and 11th in Dallas. The event is being held again at the DFW Airport. It's very convenient for people to get in and out of. We'll once again kick off with a Mini Tech Fair and dinner in the evening, where we'll highlight newer hard products. And on Tuesday, we'll have the opportunity to hear from most of our operation PMs and all of our national sales managers from all three brands, will be there. And we're actually changing up a little bit this year. We're going have a customer panel present this year and take some questions from you all. That's been a suggestion from the analysts the last couple years. We're going to give it a shot, but you got to play nice. And then we planned for it to be over about two or so on Tuesday. So please schedule accordingly. If you haven't registered, you should have received a registration link. If you've not registered, you can send me an e-mail or Mary Sue, my director admin and get the link to get registered.

That's all for the call. We want to thank you for joining us today to review our third fiscal 2010 end quarter results. The recent acquisitions continue to track with our expectations and projections we've provided in the past. And they continue to improve and will continue to improve as we complete the activities and achieve the additional cost synergies. We're very pleased with the efforts of all of our associates that have continued to help control costs and help continued to take extremely good care of our customers. Our executive managers and all of our associates continue to focus on what is best for our customers and shareholders. With that, we'll wrap it up. And Mary if you'd please provide the relay number, I'd appreciate it

Thank you. Ladies and gentlemen, this recording will be available for replay starting today at eleven forty-five AM Eastern time until May 12th at eleven fifty-nine PM. You may access replay fulfillment anytime by dialing 1-800-642-1687. International participants dial 1-706-645-9291. Entering access code 69036499. Again the number is 1-800-642-1687. International participants dialing 1-706-645-9291. This does conclude today's program. You may disconnect and have a wonderful day.