Jack Henry & Associates Inc (JKHY) 2010 Q4 法說會逐字稿

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

Thank you, Regina. Good morning. Thank you for taking part in Jack Henry & Associates fourth quarter and fiscal year end 2010 conference call. I'm Kevin Williams, CFO. With me today are Jack Prim, CEO and Tony Wormington, President. The agenda for the call this morning is as follows; Jack will start with an overview of the quarter and fiscal year ended with some specific comments regarding our recent acquisitions. Tony will then provide operating highlights. Then I will provide some additional comments on the press release we put out yesterday and provide our outlook for next fiscal year. And finally we will answer any questions you have.

I need to remind you that remarks or responses to questions today concerning future expectations, events, objectives, strategies trends or results, constitute forward-looking statements or deal with expectations about the future. Like any statements about the future, these are subject to a number of factors which could cause actual results or events to differ materially from those that we anticipate. Due to a number of risks and uncertainties, and the Company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the section in our 10-K entitled risk factors and forward-looking statements. With that I'll now turn the call over to Jack Prim.

Thanks, Kevin. Good morning and welcome to the call. I'm very pleased to announce record revenues and record earnings for the fourth quarter and fiscal year 2010. Fiscal 2010 was a year in which our existing business performed very well and in which we made substantial additional investment which we believe will show significant benefit in future years.

The overall business, including contributions from the three recently acquired companies, grew revenue 19% in the quarter and saw operating income increase 13%. The organic increase in revenue was 3% in the quarter. Perhaps more noteworthy is that the 3% organic revenue growth drove an 11% organic increase in operating income, in spite of the full quarter impact of salary restoration and the ongoing challenges of drawing over lost revenue from failed financial institutions.

In spite of a mixed bag of messages related to the general economy, consumer spending patterns, regulatory environment, et cetera, customer attitudes seem to be improving. Cautious optimism is still the order of the day and as has been the case in recent quarters, discretionary spending on items such as hardware and software continues to be closely scrutinized. As you will recall in this quarter a year ago, we signed the two largest in-house transactions in the history of the Company, with a significant contribution to hardware and software making for a challenging comparable quarter just completed. These factors contributed to license fees being down 29% in the quarter, while hardware was down 10%. However, support and service revenue which now makes up 87% of the total was up 28%. We saw its associated gross margin improved to 41% from 38% a year ago. Now recurring revenue for the year was 78% of the total, up from 75% a year ago. We saw strong sales performances for the year in all three brands, banking, Symitar and ProfitStars.

During the year we completed three acquisitions, any one of which on its own would have represented the largest acquisition in the Company's history. The integration of all three is substantially complete, including the largest and most recent acquisition of iPay. Pemco Technology had the most significant technology integration requirement and the largest part of that technical transition was completed with no disruption to customers and with relatively minor work remaining to be done. Sales staff of all three companies are properly aligned, understand their roles and compensation plans and are engaged with current and prospective customers.

Our payments business showed strong organic growth of 8%, excluding the impact of the three acquisitions. Including the partial year contribution to payments revenue from the acquisition, this business showed revenue growth of 45% for the year and totaled over $200 million. Our year end backlog reflected solid growth at 14% year-over-year. And as a reminder, as reported, the backlog number does not include revenue from any of the multi-year transaction fee-based payments businesses.

Like most companies during the recission, we've taken steps to control and reduce costs. Unlike many companies, the approaches we use to accomplish these reductions did not involve layoffs of employees. We believe this has shown investments in a couple of areas we consider to be of great importance, customer satisfaction and employee engagement. We've seen year-over-year gains in our industry-leading customer satisfaction ratings from our customers. And on a recent employee engagement survey conducted by an independent organization, comparing our employee ratings to their database of results from other companies, we scored higher on nearly every dimension measured.

We believe there is a direct correlation between employee engagement and customer satisfaction and we believe that retaining a long days work force and highly satisfied customers is in the best long-term interest of our shareholders. In closing, I'd like to thank the over 4500 Jack Henry employees who deliver for our customers and ultimately for our shareholders every day. Your efforts, attitudes and loyalty are critical to our continued success. With that I'll now turn it over to Tony for some additional information on the business.

Thanks, Jack. We are very pleased with the increase and strong contribution in all components of our recurring revenue which includes outsourcing data and item processing, in-house maintenance support and our EFT services. Support and services revenue increased very nicely at 28% for the quarter and 17% for the year, compared to the prior year quarter and year. We continue to see strong demand for implementation activities and our core client bases, including both new competitive conversions and conversion merger activity fueled by bank failures and M&A transactions in both the banking and credit union markets.

Our EFT business continues to experience very nice growth in transaction volumes. As a reminder, our EFT revenues consist of ATM, debit and credit card processing, bill payment processing, merchant capture and Check 21 image exchange. ATM and debit card processing volumes increased 17.8% over the prior year quarter. Bill payment transaction volumes increased 26.2% over the prior year quarter. This increase represents bill payment transaction volumes for both iPay and our net teller bill pay solution. Merchant related transaction volumes increased 34.4% over the prior year quarter.

Financial institutions contracted to utilize our Enterprise Payment Solution increased to 918 or an increase of 5.8% over the prior year quarter. Financial institution merchants who installed and utilized our Enterprise Payment Solution increased to 24,413, representing a 26.2% increase over the prior year quarter. As mentioned on our previous quarterly call, the enterprise payment statistics for merchant related transaction volumes, financial institutions contracted and their respective merchants do not include volume from our recent Goldleaf acquisition. Once this acquisition has been a part of Jack Henry & Associates Company for over a year, we will have comparative data and we'll adjust our statistics at that time.

Our core outsourcing and transaction processing solutions, including EFT and bill payment services, are well-positioned to handle increasing demand with minimal additional investment required due to the existing infrastructure and the nature of these electronic processing solutions. I'll now turn it over to Kevin for a further look at the numbers.

Thanks, Tony. Total revenue increased 19% for the quarter compared to the same quarter a year ago. Organic revenue, as Jack mentioned, increased 3% year-over-year and was up 6% sequentially compared to the March quarter. The acquisitions contributed roughly 16% of the total revenue growth for the quarter by contributing just over $30 million in revenues for the fourth quarter just ended. Our license revenue decreased by 29% for the quarter compared to the prior year. Organic license revenue was down 34% compared to year ago quarter, due primarily to lower complementary product delivers during this quarter compared to a year ago.

Support and service revenue increased 28% this quarter over same quarter a year ago. Our organic revenue in support and services grew 9% compared to the same quarter a year ago and was up 8% sequentially compared to the March quarter. The acquisitions contributed approximately [$29] million in support and services for the quarter. A breakdown in support and services, instrumentation used -- revenue increased 26% for the quarter and 10% year-to-date. Electronic payments increased 68% for the quarter and 45% year-to-date. Our Outlink data processing which shows no impact in this line item from acquisitions increased 17% for the quarter and 11% year-to-date. And our in-house maintenance increased 10% for the quarter and 7% year-to-date.

For those same lines of revenue in support and services, the organic revenue growth was--implementation increased 16% for the quarter year-over-year, electronic payments grew 10% organically year-over-year, our Outlink revenue, again which there is no impact from acquisitions, increased 17% year-over-year. However, there was a $1.7 million early termination fee in this line item this quarter and for the year early termination fees were at a low of $2.4 million. And our in-house maintenance increased 3% year-over-year organically. Hardware revenue decreased 10% for the quarter compared to prior year and is down 12% for the full year. Organically, hardware was down again 10% year-over-year and up 4% sequentially.

Our recurring revenue experienced growth of 28% for the quarter compared to the prior year and was up slightly at 6% sequentially compared to the March quarter. Recurring revenue was up 18% for the full year compared to the prior year. Our consolidated gross margin improved 42% for the quarter compared to 41% in the same quarter a year ago. License margins dropped slightly to 85% this quarter from 87% a year ago. Support and service margins improved to 41% compared to 38% a year ago, driven by significant increases in every revenue component in this line. Hardware margins decreased to 24% from 27% a year ago, primarily due to sales mix.

To break this down into our two reporting segments, our banking segment gross margins improved to 43% from 42% a year ago fourth quarter. And our credit union segment margins decreased slightly to 38% from 39% a year ago, primarily due to the impact of the Pemco acquisition. In the bank segment, license margins decreased 82% from 85% a year ago. Support and service margins for the bank segment increased to 42% from 38%. And hardware margins decreased to 24% from 27% this quarter from a year ago, primarily due to sales mix. In our credit union segment, license margins slipped to 92% compared to 95% a year ago, due to more third party product sales. Support and service margins decreased to 34% from 36%, again, primarily due to the acquisition of Pemco as we still had some significant cost synergies to take out in this area. And hardware margins decreased 26% for the year from 27% a year ago.

Our total operating expenses increased 29% for the quarter compared to year-ago, and as a percentage of total revenue only increased slightly from 19% to 20% for the current quarter compared to the prior year. All lines of operating expenses increased sequentially primarily due to the iPay acquisition. Our organic operating expenses only increased 1% and in fact, G&A was down 1% when you back out the impact of the acquisitions and the one-time acquisition costs. Our operating margin dropped slightly to 22% from 23% a year ago for the quarter, primarily to the one-time acquisition costs, but increased slightly for the year to 22% from 21%. Net results was increased operating income of 13% for the quarter and 15% for the entire year compared to the prior year period. Organically, excluding the impact of acquisitions, our operating income increased 11% for the quarter and 13% for the full year compared to prior year period.

The effective tax rate for the quarter was 37.8% compared to 36% last year, primarily due to the timing of R&D credits and other tax impacts that happened during fiscal year 2010. Our EBITDA increased approximately 16% to $68.9 million from $59.5 million a year ago, and increased 14% to $253.9 million for the full year. Depreciation and amortization expense is $19.5 million this quarter with $9.1 million of depreciation and $10.4 million of amortization, compared to a total of $15.9 million in depreciation and amortization last year. The reflection on our acquisitions and guidance for FY '11. The acquisitions we closed in the December quarter which was Goldleaf and PTSI both tracked according to plan as we had laid out upon the acquisition. Combined, they contributed approximately $78 million in revenue for the fiscal year and combined, they contributed roughly 6% EPS for the fiscal year just ended. iPay added $3.5 million in revenue for the quarter and was essentially EPS neutral for the one month we owned them.

For fiscal year 2011, we expect to see revenue growth in the very high single to low double digits. Made up of some projected growth in license revenue, support and services should continue to grow in the mid double-digit range, and hardware is expected to be relatively flat for next year. We expect growth in gross profit similar to projected total revenue growth and anticipate just slightly lower growth in operating income percentage, due to the overall pressure on margins due primarily to significant increases in depreciation and amortization, and the increase in R&D costs related to the PTSI acquisition. As remember, we moved their entire data services from Pemco into our organization at the end of June.

Depreciation is projected to increase by about 13% or about $4.5 million, and amortization is projected to increase by approximately 40% or about $14 million compared to FY '10 just ended, primarily due to the acquisition for a total increase of D&A of approximately $18.5 million in FY '11. We paid down $100 million bullet loan that was part of the recent financing package the first week of July, which now leaves us with $120 million currently drawn on our revolver and $150 million on the term loan. Based on these amounts, considering the current LIBOR rate and the amortization of the upfront costs related to the debt, we estimate total cost of debt for FY '11 to be approximately $9 million. Because of the large increase in depreciation and amortization, we expect EBITDA growth in the low to mid double digits for FY '10 and free cash flow to increase at a little higher percentage than that.

iPay is expected to contribute a little over $50 million in revenue, be nicely contributable to EBITDA and free cash flow, but be basically net income neutral to slightly accretive in FY '11, due to amortization expense and the cost of debt. Also due to the cost of debt and expected slightly higher tax rate this year, we expect 36.5% compared tot he 34.8% in FY '10. We expect net income to grow in the mid single digits for FY '11. This concludes our opening comments and we are now ready to take questions. Virginia, will you please open the line for questions?

Thank you, sir. (Operator Instructions). Our first question comes from Bryan Keane from Credit Suisse.

Good morning. Just talking about the license sales, I know it was a tough comp versus last year. Can you talk about -- as we head into this fiscal year 2011, how license sales should track? I know you talked about for the full year, you expect growth. Just wondering if there was any pent-up demand, any deals, that kind of thing?

Bryan, it's Jack. I think inevitably there is some pent-up demand. We just have a very difficult time predicting when things are going to loosen up. We've seen I think some loosening in some areas. Hardware, believe it or not, actually is one of those where we're seeing some infrastructure investments. Servers and virtualization investments, we've seen an increase there. It's a little misleading when you see that our hardware revenues are down 10%, but that also reflects back to a large extent to the comparable quarter a year ago.

We signed these two large transactions which both included some pretty significant i-series processors. We track probably about a dozen different hardware line items, processors and servers, and sorters and SAN storage and other things. If the i-series line item had been flat with what we did a year ago, hardware in the quarter would have actually been up 10% rather than down 10% and that would have been largely because of some of those infrastructure investments in hardware that we have seen people making.

We are seeing some things come back, and your hardware infrastructure you can only let go for so long before you need to invest some money in it. I think the same thing is true in software. I think we will see some improvement. Hope we'll see it this quarter, but it could be a couple quarters coming.

Jack, just a bigger question, when you do talk to clients, does it still seem that people are on a wait-and-see mode? Or do you feel like you're definitely seeing improvement in decision making and that IT spending for going forward here should be considerably better than it has been in the past?

It's a mixed bag, Bryan. I think a lot of people are certainly feeling better than they were a year ago. We're seeing more evaluations of different products right now. We believe that some of these valuations will obviously result in closed sales. I think people are adjusting to the reality that they're faced with right now. Again, some of those are going to make investments, others are going to be a little more challenged and wait a little longer to do that. But again, I would say overall the environment does seem to be improving.

Okay. Then just last question for me, Kevin, I know you gave some revenue guidance. What does that come out to be for organic growth for fiscal year 2011?

Organic growth, Bryan, would be somewhere in the mid to slightly higher upper single digits, without iPay impacting that.

iPay, and then the December acquisitions will still impact--?

Remember, there's only one quarter more impact from those two acquisitions. Goldleaf closed October 1 and Pemco closed November 1. Essentially there will be some slight impact from those, but taking out iPay, the majority of our growth is going to be organic.

Okay. All right. Thank you.

Thank you, sir. Our next question comes from Kartik Mehta from Northcoast Research.

Thank you. Good morning, Jack and Kevin. Kevin, I just wondered -- or maybe, Jack, whichever one of you would like to answer my question. You just said organic growth about mid to high single digits. Is that the result of I'm assuming the market getting better or is that the result of the acquisitions you've done and the product set being much bigger and that's what's really helping?

I think it's a combination of things. One, the acquisitions obviously have added. Our recurring revenues base has continued to grow. We've continued to see the movement from our in-house basically to outsourcing. We had 37 of those make that commitment in FY '10 which is down slightly from 45 a year ago, but we continue to see that shift which obviously gives us a little more wallet share and brings more revenue in. The payments business has continued to grow, as Tony pointed out. Our traditional bill pay and debit card processing businesses finished the year very strong. I think it's just a combination of just about everything is hitting on all cylinders now, Kartik.

And, Kevin, if I wanted to do maybe an apples-to-apples comparison between you and your competitors, those that give cash burning, what's the amortization impact that you have, to try to get maybe an apples-to-apples comparison.

The amortization year-to-date?

Yes. With all these acquisitions that you've done, I'm just trying to figure out what would be a good apples-to-apples comparison for your EPS if I wanted to convert it to a cash EPS.

I don't have that at my fingertips.

Okay.

I'll try to do some research on that before our next presentation, get back with you on that one.

Fine. And just one last question. As you move forward to iPayment acquisition, what are the one or two steps you take now to really leverage that acquisition, maybe the near term steps you think that produce the biggest bang for the buck now?

Kartik, the main thing is to make sure that all of the sales team understands who is responsible for what, who sells to who, how are we going to go to the market. Obviously, iPay sold through resellers to a large extent. We have had a great deal of success selling our own bill payment system, primarily to banks and to a smaller degree to our credit union customers over the years. It's a matter of saying, okay, we have Jack Henry core customers on the banking side. Who is going to be selling bill payment to them. Do we use the sales force that sold almost 1100 bill payment systems before we owned iPay. Or do we have the iPay sales team involved or is it a shared approach. We've lined all that out on the banking side, the credit union side. There actually are some opportunities in the ProfitStars arena, too to take some of those to market. We started with understanding who is responsible for what.

We also looked at opportunities that might exist with the iPay product to sell to our existing net teller bill payment customers that do not require a net teller bill payment customer to change bill payment systems, but maybe they want the P to P payment capability that iPay has. We talked about -- frankly, there's a couple things that we have in our bill payment system that we think we can take across to iPay customers as well. It's a lot of understanding who sells what, what are the products that can be cross sold immediately, what are the products that with a little bit of time and energy could be cross sold. I think we've got that all pretty well figured out and we're selling the ones that can be sold today and we're working on the ones that can be sold a little farther down the road.

Thanks, Jack. I really appreciate it.

Our next question comes from Tim [Woes] from Baird. Sir, you may ask your question.

Nice result.

Thanks.

Just had a couple quick questions. On support and services, is there really any reason why 40% gross margin isn't sustainable?

The question was is there a reason why the 40% on support and services is not sustainable?

Yes, is there any reason why -- is there an ebb and flow in there, ex out the term fee?

You're kind of cutting out. I think the question is can we maintain 40% support and service, ex out the one-time term fees of $1.7 million.

Yes.

Which wouldn't have had much impact in the quarter. Yes, I think those are sustainable. The thing I would say is that there's going to be some fluctuation in the margin of support and services because of the one-time implementation fee that flow in there. We had a very big strong quarter this quarter, which was up sequentially from last quarter and that really comes down to timing of actually being able to bill and take the revenue for those services. There's going to be some fluctuation. Obviously with the depreciation and amortization that's going to be hitting that line item this next year, it's going to add a little bit of pressure. But we're projecting that the support and services revenue margins will maintain about that level for FY '11.

Thanks. That's helpful. And then just on the license, I think historically Q1 has been seasonally weaker quarter. Just given the weakness in Q4, I mean, should we expect a sequential decline in license revenue in Q1 or should we expect that to maybe be around flat?

I think we have set the bar pretty low, Tim. I certainly hope we don't see further declines. I think at this point some of the forecast activity that we've seen looks fairly promising for the quarter, but we'll just have to wait and see how it plays out.

The other thing I would say, Tim, is with some of the -- especially the larger [alajent] deals that we signed in December our in-house backlog is pretty solid with license revenue. Because the revenue recognition on those is different than our traditional -- when we deliver it and install it, we take the revenue, it's more of a milestone revenue percentage completion method. The license revenue is going to flow out a little more evenly in backlog currently than traditionally.

Hopefully, I agree with Jack, I think we set a pretty low bar so hopefully it will be pretty flat sequentially. And the June quarter was down sequentially from the March quarter but if you remember, the March quarter had a pretty significant impact in there from the Goldleaf acquisition for some large deals that got delivered during that quarter.

Great. And then just a couple quick housekeeping items on guidance. What should we expect for D&A? I missed that. And then on net income growth, I just want to make sure -- you said mid single digits, right?

For D&A? Depreciation and amortization, we predict that depreciation's going to go up about $4.5 million for the full fiscal year 2011. Amortization is projected to go up about $14 million, which obviously the majority of that is tied directly to the three acquisitions.

And then net income growth was mid single digits, right?

Yes, net income mid single digits. We've got about -- projected about $9 million worth of cost of debt in there with iPay being EPS neutral or net income neutral to slightly accretive. Obviously that is going to put a little pressure on net income so it's going to grow we project in mid single digits with obviously very nice growth in EBITDA and free cash flow.

That's all I had. Thanks.

Kevin, did you have a follow-up to Kartik's earlier question?

Yes. Kartik, for the amortization for the three acquisitions for the quarter, the amortization directly related to those was about $2.5 million in the June quarter. The amortization for FY '11 for those three acquisitions is going to be somewhere around $21 million to $22 million. Regina, we'll take the next question.

Thank you, sir. Our next question comes from John Kraft with D.A. Davidson.

Good morning, gentlemen.

Good morning, John.

Good morning.

Tony, one for you. A couple really actually on the iPay deal. The bill pay transactions accelerated year-over-year. I guess I'm trying to get a feel for how much of that was influenced by iPay and whether or not the industry has upticked from what you were running at, the mid single digits -- or mid double digits.

If you look at the transaction volume growth in our net teller bill pay alone, it grew at 13.3%, which is right in line with what we've been reporting previously. The iPay transaction volume growth alone on its own compared to year-over-year for the quarter was 30%, which yielded the combined 26.2% that I reported. That gives you a little better feel for the increases that we had.

Got you. Thanks. And then regarding the implementation, Jack, you said that -- I'm sorry, the integration, you said it was basically done. Are you moving all of the iPay clients onto that -- or all the net teller clients onto the iPay interface? I know that the back end was already being processed in the iPay, but is there some conversions that have to be done there?

No. There really aren't, John. There's not a good reason for us to convert the net teller bill pay customers over, either for the most part from the standpoint of the customers or from the standpoint of efficiencies for us. There would probably be a small amount of cost reduction that you could do but, frankly, there's some comparable cost reduction things we can do without putting all of our customers through a conversion. What we're more focused on is are there pieces of functionality that are available in iPay that we can make available to the net teller bill payment customers. And as I said, we've even identified a couple things that exist in net teller that we think we can take across to the iPay customers.

For example, iPay has a very strong small business banking capability that we think we can take to a net teller bill payment customer right away and something that we think will be well-received. Frankly, it's also something we can take to a non-net teller bill payment customer, pretty much any core, any system that they're using. We're focused more on what the functionality we can cross-sell between the two today, and with a little bit of development effort are -- there are some other things that we think have good potential in the future.

Okay. Thank you. And then lastly, on iPay, are all the resellers onboard with the new owners? I was looking at your guidance for $50 million in that for iPay, that's a little bit of a slower growth rate than they've seen in the past.

Actually, John, I said more than $50 million.

Okay.

And John, to your question, at this point all of the resellers, our feedback's been pretty favorable. Frankly, they've had very good support over the years from iPay. I think that also our ProfitStars strategy has been in the market for a number of years now, whereby we sell various products, non-core products to competitively installed core customers. And while I think some of them may agree to that concept a little bit skeptically six, seven years ago when we first started to roll it out, they've seen that we have done what we said we intended to do with that. It is a non-core related strategy. They've not been particularly threatened by the ProfitStar sales.

I think for us to go in and acquire iPay today and say to those resellers hey, folks, you're going to continue to get great service and it's a non-core approach is probably a more credible statement today than it would have been if we had done this acquisitions five years ago. At this point, the receptivity of the resellers has been good and frankly, there's been interest shown in some other products that they could potentially resell in addition. Feel good about it at this point.

Okay. Thanks. And then just quickly, last question. What was the final count for the year for number of your customers that were licenses that switched over to subscriptions? You were providing a trend line there of an acceleration.

It was actually 37 this year, John, compared to 45 last year. However, I will tell you the average size of those was larger than the average size of the 45 last year.

And I think we actually ended up, if I'm not mistaken, Kevin, the actual revenue to be generated by the 37 was greater than the revenue that would generated by the 45 we signed a year ago.

Got you. Thanks, guys.

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

Hi, guys. Thanks very much. Kevin, on the $9 million in interest expense for the year, how should we think about that in terms of linearity? Does that contemplate you guys paying down some debt over the course of the year?

That contemplates us knocking down the revolver a little bit in the first half of the year. It's weighted a little heavier to the front half of the year, Jon, and then down a little bit in the second half because that -- we're obviously -- these forward-looking statements do not project any further acquisitions or significant stock buybacks. We're just predicting that we'll knock the revolver down a little bit the first half. By the end of FY '11, barring any large acquisitions, we'll be knocking a lot of it down with next year's annual maintenance billing.

Okay. And then, Jack, with regard to further acquisitions, is the plan for, at least the next couple of quarters to execute on existing product portfolio? Or is M&A still important to the near term to add further product to the bundle?

Jon, I think our focus, our desired focus would be to make sure we take full advantage of the opportunities that we have with the acquisitions that we've done. Again, the integration of all of these have gone very well, substantially complete. Again, we could certainly do additional acquisitions if an opportunity presented itself. From a balance sheet standpoint, we have the ability to do additional acquisitions. We certainly will remain open if an opportunity is there that is just one we really think makes sense for the long term. But our desire would be to continue to focus on the ones that we've just completed and prove those out and ideally by the end of the fiscal year maybe get a little more focused on additional opportunities. But if a great opportunity presented itself between now and then, we would certainly take a good look at it.

Okay. That's helpful. Thanks, guys.

Thank you, sir. Our next question comes from Greg Smith from Duncan Williams.

Hi, guys. I'm just a little confused over the net income guidance because if you assume that iPay's neutral, I assume Goldleaf and Pemco should both be accretive on a net income basis. I'm just wondering why the net income -- I understand the additional amortization and all that. But just thinking about the accretion from the acquisitions, GoldLeaf and Pemco, why we're not seeing a little bit higher net income guidance?

Greg, we've actually got some additional depreciation and amortization that's flowing through from a capped software projects that were coming up from last year. We're not projecting quite as much capped software this next year, which means our R&D expense is going to be a little higher. And like I said, from a combination of all those, plus some of the R&D expenses related to PTSI, bringing them in fold, we're going to have some slight pressure on our operating income margin which is going to be slightly less growth than the gross profit margin as I gave in the guidance. By the time you flow all that down with the cost of debt, it puts a little more pressure on the net income margin.

Okay. That's helpful. And then you -- can you reiterate what you said for free cash flow growth in FY '11?

Basically, I said that free cash flow growth is probably going to grow at a very nice premium to the revenue growth. Obviously, there's a lot of moving targets in there, but the free cash flow should be well in excess of mid to high double-digit growth.

Yes. Okay. That's obviously where we see the accretion in the business from the deals. And then what was the termination fee in the quarter? How much was that?

$1.7 million.

$1.7 million.

Pretty miniscule, but we reported in the past, so I just wanted to make full disclosure.

It does offset a little bit of the fees related to M&A. Okay. And then--?

Greg, for the year, our total termination fees were $2.4 million and our total one-time acquisition costs were just under $5 million.

Okay. That's helpful. And then what integration efforts are really left with Pemco and Goldleaf? I believe there still was some movement, data center or even some employee -- can you just remind me what integration efforts are left there?

Well, on Pemco, we listed the processing services out of their parent Company and consolidated that all into our Houston operations, their software set on our hardware platform. That's done and again, went extremely well. I think from a technology standpoint, there's a few server-related transitions that we have yet to move across. But again, compared to the larger integration efforts that we completed earlier this summer, these are much less of an event associated with that.

I think the accounting aspects of the integration are for the most part done. We've probably still got a little work to do on the iPay side, but again, that's a very clean shop. That should come over pretty easily. We had a facilities relocation related to Goldleaf up in the Tennessee office, that's been completed. Really, again, I think we've just got some accounting and small pieces of HR-related transitions that need to take place with iPay. But again, that's all fairly minor in nature.

Yes. Not totally related to the acquisitions, but we completed our facilities in Springfield. We started moving the employees from all the various locations in Springfield to those. That will be complete by the end of September. We'll be out of all the different lease spaces there which obviously, the majority of those different lease spaces came through acquisitions in the past.

Okay. Thank you guys.

Thank you, sir. Our next question comes from Tim Willi from Wells Fargo.

Thanks. Good morning. Two questions. First, Jack, just in the tone of the customer base, could you give any thoughts or just from the conversations you've had, how much of that cautious optimism that you're talking about, customers are talking about, is from seeing some building momentum in the economy? Is it that regulatory burdens for the smaller banks maybe have not been as bad as feared? Just the way you think about the mentality of customers, from the economic versus the regulatory perspective and a capital perspective would be helpful. Then I have one follow-up.

Tim, I think it certainly depends on the bank. If you've got a bank that's severely capital constrained, they're going to have a different outlook on things than somebody else might. I think some of it is just coming to grips with the environment that we're in. There's lots of consternation over the new regulatory impact about Dodd-Frank Bill and what's going to happen to my revenue sources on interchange and overdraft fees. I think in some cases that's probably not been as bad as it was anticipated that it could be. In some cases, we're still yet to be determined exactly what the impact will be.

But the point is that they've had a number of months now to think about it and figure out what would they do under various scenarios and how serious the impact might be. They've had some time to make some plans and they're suggesting the fact that things are going to be different. The regulatory burden is a known effort and frankly, an expense required to keep up with some of the regulatory issues going forward, going to be higher. I think they've come to grips with that and still have a business to run. Again, I think as much as anything else, it is the fact that there hasn't been any earth-shattering new negative news in the last few months and what has been out there before, they've had a chance to come to grips with.

Okay. And my follow-up was still along those lines, just thinking about Dodd-Frank and the Durbin Amendment specifically. Have there been any discussions or user group meetings or just anything you can think of relative to that amendment specifically that you think will have any kind of impact on your payments businesses, particularly the passport business with debit issuance and usage or Pemco? It looks like -- now you have such a large payments business that may be impacted by the Durbin Amendment and customer reactions--?

I don't think so, Tim. We don't make any money in any of our business -- any of our payments businesses off of interchange. Anything that happens with interchange as far as a slice of the transaction fee does not impact us. Obviously, if we had reduced usage of debit cards, that certainly could have some impact. But I think everything we see says that if anything, debit card usage is more likely to increase than decrease. And the decrease, if any, that's seen is more likely to come at the expense of credit cards, rather than debit cards. But I think we did see some of that.

I think that the credit card processors did see as people -- when the news was really more negative on the economy, people did tend to switch from credit cards to cash and debit. But I think that they've seen some firming of the transaction volumes even around credit card processing at this point. I don't see anything out there that says that our payments businesses are likely to see any impact from any of the current legislation.

Okay. Great. Thanks a lot, guys.

Thank you, sir. Our next question comes from Tim Fox with Deutsche Bank.

Thanks, good morning.

Good morning, Tim.

First question, maybe for Jack or Tony, around just the overall pricing environment. How has your pricing power changed at all as the economy starts to show a little bit of life here? I'm thinking specifically around EFT or any other large outsourced deals that have come up for renewal and what are your expectations for pricing in FY '11?

This is Tony. What we've seen is that pricing remains competitive in the marketplace. We continue to do -- solve battles with our competitors. What we see from an environment is an environment of selling value and long-term superior levels of service and haven't seen any what I would call extraordinary impact to pricing at this point. Continue to be discounts in the marketplace, but nothing beyond what we've seen in the past. We project that those discounts would probably be near the same levels throughout the remainder of this fiscal year in the banking side of the market. Jack, you want to--.

Same thing. It is a very competitive market, but response to that same question in the last three years, I would have said the exact same thing, very competitive. It remains very competitive, but I don't see it at levels above what we've been seeing for quite some time.

Okay. Good. And then second question, regarding the in-house to outsource conversion that you've seen. You mentioned it was down on an absolute number, but the value was actually larger. Can you talk a little bit about the breakdown of that 37, I think it was in fiscal 2010 between banks and credit unions. Any change at all to the mix there? Are you starting to see any incremental improvement in the uptake from credit unions?

Yes, I think, if I'm not mistaken, Kevin, about 11 of the 37 were credit unions which compared to I think 4 or 5 a year ago. We continue to see interest from credit unions as well. I think there certainly has been growing interest. Again, I think the banking transactions primarily were the ones that came in larger on average, 40% or so larger on average than what we had seen in the year-ago period. Continues to be solid interest in both camps.

Tim, in the last four years, in 2007 -- fiscal '07 we had 12 banks and no credit unions. In '08, we had 27 banks and 1 credit union. In '09, we had 39 banks and 6 credit unions for a total of 45 and this last year, we the 26 banks and 11 credit unions for a total of 37.

Got it. Thanks for that extra color. And just a quick follow-up on that number you mentioned, 40% larger size on banking. Just to be clear, is that a combination of being larger banks or is that a combination of rolling in incremental products on top of the deal?

I think it's largely just the bank size that we're seeing the interest from, continue to see a good mix of product uptake and typically additional product taken at the time that transition was made. But I think that the change in the numbers is largely due to somewhat larger banks looking at it.

Got it. Thank you. Good quarter.

Thanks, Tim.

Thanks.

Thank you, sir. Our next question comes from [Paul Partoe from PB Investment Research].

Thanks. Good morning, guys. First question on the payments revenues, looks like that improved a bit in 4Q. Just curious what drove that. It looks like the volume picked up a little bit. Just curious, are there any new customers or anything like that?

That's in the payments business?

Payments within services, yes, EFT.

Well, we had strong uptake during the year of additional debit card processing services, primarily on the banking side. We saw a larger number of customers that signed up for our passport EFT services. Trying to think, other than the acquisition of iPay, I don't know that there were any other particular spikes that I could recall in payments.

Well, if you look at year-over-year, you've got both iPay and Pemco and even Goldleaf. Sequentially, you have just got some nice, solid growth and then a one month impact of iPay. It really depends on which way you're--.

I was talking about the organics, 10%, just wondering what drove that improvement?

That's primarily solid growth in bill pay and debit card processing and remote deposit capture. All three drove that nice organic growth.

Okay. Great. Then you guys talked a bit about the integration of Pemco-Goldleaf being on track. Just curious if the earnings accretion that you expected is trending in line with what you thought?

As I said in the opening comments, Paul, that they have combined, Goldleaf and Pemco combined, contributed about $0.06 EPS which is right in the middle of the range we gave last November or December, whenever we gave the original guidance on that. It tracked right in line with that. Based on next year's budget, they combined are going to contribute right in line with about double that next year, as the original guidance we gave. They're both tracking along, right in line with where we thought they would.

It will be double total, so another $0.06 basically?

Yes.

Okay. Then just last on the revenue guidance, just trying to make sure I understand this. The high single to low double, I understand that. The organic guidance you gave of mid to upper single digits, that only includes -- excludes iPay?

Yes.

Because you'll have another $25 million to $30 million I would assume from Goldleaf and Pemco--?

Paul, even if you back those out, we're still going to be in the mid to slightly high single organic growth if you back out all three of those.

Mid to high single excluding all three of them?

Yes.

That's all I had. Thanks.

I'm showing no more further questions in queue. I'd like to turn it back to you, sir.

Thanks, Gina. Again, we want to thank you for joining us today to review our fourth fiscal quarter and full fiscal 2010 results. The recent acquisitions that we've been discussing should continue to contribute very nicely in our fiscal 2011, as highlighted in the guidance we provided for next year. We're extremely pleased with the efforts of all of our associates, all of our managers to help control costs and continue to take care of our customers. Our executive managers and all of our associates continue to focus on what is best for our customers and our shareholders. With that, Regina, could you please provide the replay number and thanks to everybody.

Thank you, sir. Ladies and gentlemen, this does conclude your conference. You may now all disconnect. Thank you and have a great day.