Jack Henry & Associates Inc (JKHY) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to today's Jack Henry First 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.

Thank you, LaToya. Good morning. Thank you for joining us for the Jack Henry Associates Second Fiscal Quarter 2011 Conference Call. I'm Kevin Williams, CFO. With me today are Jack Prim, CEO and Tony Wormington, our President. The agenda for the call this morning is as follows. Jack will start with some opening comments on the quarter, Tony will provide some additional color an operation highlights, and then I'll provide some additional color around the financials and the press release that went out yesterday. Then we will open the call up for questions.

I need to remind you the remarks and responses and questions today concerning future expectations, events, objectives, strategies, trends, or results constitute Forward-looking statements or deal with expectations about the future. Like any statement about the future, these are subject to a number of factors which could cause actual results or events to differ materially from those which we anticipate, due to a number of risk 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 sections in our 10-K entitled risk factors and Forward-looking statements. With that, I will now turn the call over to Jack.

Thanks, Kevin. Good morning. We are pleased to be able to begin the new year with record revenue, gross profit, and net income in our second fiscal quarter. Our most recent acquisitions have made meaningful contributions to these results and our organic revenue growth of over 7% speaks to the underlying strength of our business. Total revenue increased 15% in the quarter led by continued strong performance in the support and services area. Our payments businesses led the growth in this area both organically and with strong contributions from recent acquisitions, increasing 40% overall. Our outsourcing related revenues also had a strong performance with a 12% increase over the previous year and software maintenance grew 2%, even as we continue to see customers transition from in-house to outsource processing. Combined, these areas led to recurring revenue at 79% of the total in the period, which continues to provide a stable base of operations.

License fees also showed solid gains of 29% in the quarter. This increase was largely due to the sale of our Alogent branch capture product to a Tier 1 financial institution. The sale was made approximately a year ago, and as we discussed at that time, these types of sales will frequently require revenue recognition on a percentage of completion basis. We are pleased with the increase in License fees in the quarter, but we caution against interpreting this as a trend. License fees will continue to vary significantly from period to period and over the long-term, we expect them to continue to trend downward as a percentage of total revenue. Having said that, the in-house backlog increased both sequentially and year-over-year to a new high, as did the outsourcing backlog.

Another area that should be expected to vary between periods is Implementation fees in our support and service line. In our September quarter, these fees were up 45% over September of 2009. This quarter, they are down 15% from September 2010 and down 1% from December a year ago. These fees have been positively impacted in recent periods by merger and acquisition activity, but are not something over which we have direct control. Regarding the environment, there appear to be better, or at least stable, trends in the general economy. We are encouraged by this and hope that further stability will favorably impact discretionary spending by our customers. We would like to thank the over 4,600 Jack Henry associates that make it possible for us to deliver solid financial results for our shareholders, while at the same time, increasing our support levels as rated by her customers. With that, I'll turn it over to Tony for some more information on the business.

Thanks, Jack. We're very pleased with the strong contributions in all components of support and services. Support and Services revenue grew 15% for the quarter and 24% year-to-date compared to the last year. The largest contributor to the growth line was our Electronic payments revenue which grew 40% compared to the prior year quarter and has increased 60% year-to-date compared to the first half of last fiscal year. Electronic payments represent 32% of our total revenue for the quarter and year-to-date. Another large contributor to this line is our OutLink, or Outsourcing services, which grew 12% for the quarter and 13% year-to-date, which is driven by both new customers electing this type of service delivery, but also due to the continued movement of our existing in-house customers electing to migrate to this model. Both of these contributed to the overall increase of 15% for the quarter and 23% year-to-date in our recurring revenue compared to the prior year periods.

Our Electronic payment solutions transaction volumes continue to experience very nice growth. As a reminder, our Electronic payment revenue consists of ATM, Debit, and Credit bill payment and Merchant Capture transaction processing. Path forward ATM and Debit card processing volumes increased 18.1% over the prior year quarter. Bill payment transaction volumes increased 13% over the prior year quarter. This increase is a combination of the growth in our bill payment solutions. When we purchased iPay, we announced we'd be selling this solution and all bill forward sales engagements. As a result, we will not be disclosing percentages by specific product line, we will instead provide a combined increase percentage, giving a complete picture of our bill payment volumes.

We have owned Goldleaf now for over a year, and as a result, have rolled their remote deposit capture volumes into our combined statistics for enterprise payments reporting for Merchant-related transaction volumes, Financial institutions contracted, and their respective Merchants. Financial institutions contracted to utilize our enterprise payment solution increased to 1,115. Financial institution merchants installed and utilizing our Enterprise payment solution increased to 34,096, representing a 10.2% increase compared to the prior year quarter. Merchant-related transaction volumes increased 12.7% over the prior year quarter. We are well-positioned to take on increasing volumes in all outsourcing areas, especially Core and Electronic payment processing 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 Kevin for a further look at the numbers.

Thanks, Tony. Total revenue increased 15% for the quarter, compared to the same quarter a year ago. Organic revenue increased by 7% year-over-year. The components of revenue -- License revenue increased 29% compared to last year and still only represented 6% of total revenue, as we anticipate license and hardware both continue to become smaller percentages of our total revenue as our recurring revenue and Support and Services continue to grow at a higher pace. Our Support and Services revenue did increase 15% this quarter, compared to same quarter a year ago. The breakdown of that Support and Service revenue implementation, revenue is actually down 1% compared to the same quarter year ago. As Tony mentioned, our Electronic payments increased 40%, our OutLink, which is our data end item processing, increased 12% for the quarter, and our in-house maintenance was actually up 3% for the quarter.

For comparative purposes, just FYI, iPay contributed right at $12.4 million in the quarter and the PTFI, or PEMCO, acquisition that actually anniversaries the first of November, contributed $4.5 million which would not be considered part of our Organic revenue growth. All the revenue from both these acquisitions is included in the Support and Services line of revenue. Neither one of them contribute software or hardware. Our Hardware revenues increased slightly by 1% for the quarter, compared to prior year. Our recurring revenue experienced growth also 15% for the quarter, compared to the prior year, and was up 2% sequentially compared to September quarter. Our consolidated Gross margins held steady at 42% for the quarter, compared to the same quarter a year ago.

Licensed margins decreased to 87% this quarter from 91% a year ago, due to an increase in third-party software delivery during the quarter. Our Support and Service margins held very steady at 40%, which we think that is sustainable going forward as our Electronic payments and OutLink, or outsourcing, has become a much larger percentage of our Total revenue. Our hardware margins decreased to 26% from 27% a year ago, just due to sales mix.To break this down into our two reporting segments, our Bank segment gross margins remained level at 43%. Our Credit Union segment margins improved slightly to 39% from 38%, again as payments becomes a larger percentage of that total revenue pie. In the Bank segment, License margins decreased to 85% from 90% a year ago. Again, just due to more third-party software in the quarter.

Support and Service margins for the Bank segment remained level at 42%. And Hardware margins held steady at 28%. In our Credit Union segment, license margins decreased to 91% for the quarter, compared to 93% a year ago. Support and Service margins improved slightly to 35% from 34% and our Hardware margins decreased to 22% from 24% a year ago. Total Operating expenses increased 15% for the quarter, compared to the prior year, but as a percentage of Total revenue, remained level at 20% of revenue, which obviously the majority of the increase and operating expenses is due to the iPay and the one-month additional PEMCO in there that was not in there last year. Our Operating margin for the quarter improved to 23% from 22% a year ago. The net result of all this was an increase in our Operating income of 16% for the quarter compared to the prior year.

Obviously, our interest expense is up this quarter compared to the prior year due to the Credit facility put in place last June for iPay acquisition, as we have roughly $245 million in total debt this year, compared to just $64 million a year ago. We anticipate, barring any acquisitions, that we will have our revolver basically paid down to zero and be hitting away the term loan sometime later this summer as we collect our Annual Maintenance revenues or Billings sometime in June, July. The effective Tax rate for the quarter was 31.4% compared to 36.5% last year, which obviously, this is due to the reinstatement of the R&D credit in December. Therefore, we had 12 months of catch-up in the December quarter for this R&D credit, which this represents approximately a $0.03 impact on our EPS for the quarter. Considering this impact, we still beat the consensus estimate by about $0.02 for the quarter. Our EBITDA increased approximately 19% to $77.9 million from $65.2 million a year ago quarter. Depreciation and Amortization expense of $22.9 million in the quarter with $10.7 million of that in depreciation and $12.2 million in amortization, compared to $17.8 million in depreciation and amortization this quarter a year ago.

Update on guidance, obviously we're very pleased with the quarter from both a revenue, margin, and net income perspective. But again, I'd like to remind you of the one-time impact of the reinstated R&D credit which impacted the quarter by approximately $0.03. Based on where we are today, we anticipate ending up the fiscal year ending June 30, 2011 with revenue, gross profit, and operating income growth in the mid-teens compared to the prior year. Although we have a slightly lower Tax rate which we anticipate to be approximately 34% effective rate for the entire year, the interest expense and the cost of debt, we anticipate net income to be dragged down just slightly from the operating income growth, but still in the lower to mid-teen growth for the year. This concludes our prepared opening comments. With that, we'd open it up for Q&A. LaToya, can you please open it up for questions?

Yes, thank you.

(Operator Instructions).

And, our first question is from Tim Fox of Deutsche Bank. Your line is open.

Thanks. Good morning. Congratulations on the quarter, folks.

Thanks, Tim.

My question, first just to clarify, Kevin, on the guidance, you suggested here revenues and operating margin -- operating income to be mid-teens. Is that a slightly higher outlook? I think you had said something like very high single to low teens last quarter. So, is this is a slight bump up?

Yes. A slight bump up, Tim. I think, obviously, we're now anniversaried two of the three [Inaudible] last year. We still got the additional increase the second half of the year from iPay. But, it is a slight increase from where we were a quarter ago. The payments continues to grow at a very nice clip and, as we continue to see the trend, or the shift, from our in-house customers going to outsourcing, we continue to see a very nice ramp up in our OutLink revenues.

And, just a follow-up, if I could, on the payments business. iPay, I believe about a year ago, it was in May, had put out some numbers about 3,600 institutions that they had at that point, which was up, I think, 500 year-over-year, subscriber growth was up 50% plus. And, I just was curious, since that time, how has the iPay penetration continued? And, is there a risk that given that they're up to over 3,600 institutions presumably at this point that, that institution and subscriber growth may slow? Or is this just such a competitive product that there's much more opportunity going forward, in your view?

Yes. This is Jack. We have continued to add -- gain bill pay customers every month in the form of new institutions implementing bill pay, as well as competitive takeaways. So, we've continued to gain subscribers and customers on a net basis even with bank failures and other activities that take place out there. The product is very strong, it's very competitive. So, we think there's still some good, good growth in the basic bill payment product, but we also have some other products that we think have the opportunity to add to that. There's some small business offerings that we think will gain some additional interest, as well.

So, even for a financial institution who may be largely penetrated with their customer base, and quite frankly, we think there's still very good opportunity for most financial institutions to increase utilization of the retail bill payment product in their customer base. But, even if a financial institution was fairly well penetrated in that regard, we think that the small business offering has got some additional opportunity for growth even beyond the retail side. So, we think it continues to look pretty solid.

Great. Thank you, both.

Thank you. Our next question is from Dave Koning of Baird. Your line is open.

Yes. Hello, guys. Nice job.

Thanks, Dave.

Thanks.

So, first of all, just one thing we've picked up on from a few different merchant acquirers we've talked to is that with the Durbin thing going through that, some of the core processors might actually get a pickup if the large banks start charging fees, extra fees, and the small banks might have an opportunity to pick off clients by promoting their own bank. I'm just wondering how you think that could actually play out over time?

That's a real wild card right now. You've got everything about -- discussions about trying to overturn debt provisions of the Durbin amendment, who knows how that will play out. Yes, the way it's structured, there is an exemption, if you will, for financial institutions under $10 billion in assets. Right now, I'm not aware of any of the processors out there that have the ability or the networks to provide that multiple tiered pricing structure. Although Visa has indicated they will, I'm not sure if MasterCard has yet announced whether they will or not. There is still the ability for the merchants to steer some of that volume. So, even if Visa and MasterCard both offer a multiple tiered pricing structure, it's just a big unknown as to how much, if any, benefit the community financial institutions will see from that. So, I think we're in a bit of a wait and see mode at this point until this shakes out a little further.

Yes, that's fair enough. And, the second question that I had was, the last few quarters, operating expenses grew year-over-year a little faster than revenue growth. But, this quarter, it was pretty much in line and I know there's a lot of moving parts there with the acquisitions, et cetera. But, it feels like now we're really starting to leverage here -- just getting close to leveraging that line. Is that something that you do expect in the next several quarters now to have revenues start growing faster than the operating expense line?

Yes, Dave. I think that we can get some leverage there. Obviously, the biggest line that we should see leverage is historically [Inaudible] is our G&A line. We should not see significant growth in the G&A line. Obviously, selling and marketing, as the top line grows, selling and marketing will continue to increase, as a large part of that is commissions.

At some point, we would like to see some leverage on the R&D line, but the fact of the matter is, we continue to move up into larger banks. They are very demanding and we will have to continue increasing our R&D spend. So, like I said, the biggest leverage there will be at the G&A line, but we should see some leverage going forward.

Great, thank you.

Yes.

Thank you. Our next question is from Kartik Mehta of Northcoast Research. Your line is open.

Hello, good morning. Jack, I wanted to ask a little bit about iPay. It seems like one of the opportunities that you had for iPay was going after customers that were not Jack Henry internet banking customers. And, I think you alluded to that a little bit in your previous answer. I'm wondering if you could maybe provide some metrics as to how that's succeeding and what type of maybe market share gains you're having utilizing iPay from that standpoint?

Yes. I don't have any stats on that, Kartik. We have had some success there in our credit union space. About a year and a half ago, we began offering our NetTeller Internet banking product to the credit unions. That previously been offered only to our banking customers and, as you no doubt recall, the NetTeller bill payment product that we had was really designed only to work with the NetTeller Internet banking. And, we were pretty well heavily penetrated on that side. What we're now seeing is some nice adoption of the NetTeller internet banking product on the credit union side, typically paired with the iPay bill payment product. We have also had some gains in our customer base with replacement of competitive bill payment solutions, whether -- regardless of what internet banking system they had.

I don't know that the number of those has been a meaningful number at this point. But, iPay certainly continues to add significant new customers every quarter which are, in almost every case, using a non-Jack Henry, non-NetTeller internet banking solution. So, again, that's not new for them, that's pretty much been how their business has operated from day one and that continues to go well. We are seeing some of that within our own base, but I think where we've seen better wins, if you will, has been where we have had credit unions moving to our internet banking system and replacing their bill payment product with iPay at that time.

Jack, I think in your opening remarks, you said that you're starting to see a gradual improvement in spending from fiscal 2005. I'm wondering, if you look to when it was normal, maybe two, three years ago, to where we are today, can you quantify where we are today versus where we were a few years ago? Just to get a sense of maybe how off we are from the peak?

I don't know that I could quantify that, Kartik. We're still trying to be a little bit cautious. We certainly feel better about the economic environment. There seems to be more consistent good news, as compared to good news one day, bad news the next day. There seem to be more people that feel like, yes, this recovery appears to be real. But, at the same time, I don't see anybody making any bold statements about improvement in unemployment to any significant extent in the next 12 to 18 months, so there are some mitigating factors. We certainly hope and want to believe that the economy is on the mend and will continue in that direction, but it still appears to be a bit fragile.

There are some things that could potentially cause it to slow down again. So, at this point, we're seeing improvement. I think that our customers are -- certainly have come to grips with the operating environment and as the problem loan scenarios that they're dealing with appear to be mitigating. Again, we think that bodes well, but I don't know that I could pin a number on it.

Kevin, I think you said this number, I apologize I missed it, what was the organic revenue growth for the quarter?

7%.

What would you expect then organic growth for the fiscal 2011 then, Kevin? Would you expect it somewhere in the 5% to 7% range considering the backlog has improved and fundamentals are starting to improve?

Yes, Kartik, so far, year-to-date organic growth is slightly ahead of 7%. We were right at 7% the first quarter and just a little over 7% the second quarter. So, it's holding pretty solid and backlog is looking good, deferred revenue is very solid, up 15%, so I think our organic growth can easily hold at the 7%. Could there be some upside to that? Maybe. But, as Jack said, we're still trying to be a little cautiously optimistic going forward. But, I think right now we're looking pretty solid at the 7% to 8%-type organic growth for the year.

Thank you very much. I appreciate it.

Thanks, Kartik.

Thank you. Our next question is from Peter Heckmann of Avondale Partners. Your line is open.

Good morning, gentlemen. Can you hear me all right?

Yes, Pete.

Great. Can you talk about the conversions in-house to outsourcing this quarter and remind us how that compares to recent trends?

We continue to see interest there, Pete. I don't know that I have the exact numbers that made that election to move across. We're certainly implementing now the institutions that made that selection a few months ago, so, they've now rolled into the implementation cycle and we're certainly seeing some of the benefit of that. Continuously, very strong interest there. I don't know, Kevin's looking, but I don't know that I have the number that actually signed in the quarter to move over. We do continue to see interest from somewhat larger banks, by comparison.

So, much as we saw in the full fiscal year basis last year, fiscal year 2010 had actually fewer institutions that made that election, but the total associated dollars were equal to the larger number of institutions that had made that election year before. So, we continue to see some interest from some of the larger institutions in making that transition. Also, continue to see interest on the credit union side, which began together some good momentum last year and that continues as well. And I think --

Okay. Okay. And, as to the hardware, can you talk a little bit about the composition of hardware -- how that's changed? Whether there's less interest, reader sorters, imaging equipment, I know remote deposit capture was doing very well there for a while.And, should there be any change in terms of bank's needs in terms of Windows 7 not supporting older operating systems and so that may require hardware upgrades or potentially the tax rules? Do you anticipate any material changes in mix or the volume of hardware revenue for the next few quarters?

I don't know that I see anything significant there. I think that hardware should continue to trend down as a percentage of total revenue. Several areas being impacted there -- obviously processor upgrades being impacted by the in-house to outsource transition. Reader sorter sales are almost nonexistent, very few good reasons to buy one of those any more. You mentioned remote deposit capture, for a period of time, we had significant sales of the smaller scanners as banks were moving to adopt pretty quickly. The remote deposit capture capability, that is -- we're not seeing nearly the number of scanners sales that the pace to implement remote deposit capture has slowed considerably. It would've had to, it was on a very steep trajectory for a couple years in a row there.

The number of financial institutions moving to implement remote deposit capture has certainly slowed up and the institutions that haven't done it yet, for the most part, tend to be somewhat smaller institutions. So, even the institutions who move now, typically are going to be smaller, are going to have a smaller number of merchants and will need a smaller number of scanners. S,o again, it's continuously good merchant growth in the quarter and certainly think that's where the growth for remote deposit capture generally is going to come is additional merchant uptake of those solutions. So, processor upgrades will be less. No reader sorters. Scanners, probably in line with what we've seen in the last quarter or so. All of that being said, I don't think any of that would amount to a significant change from current hardware spend levels. But, again, over time, would expect to see it continue to trend down.

Okay, that's fair. And, then, just one more. Could you, Kevin, tell me what the amortization related to acquisition intangibles was in the quarter and in the previous quarter?

Which acquisitions, Pete?

Well, I'm just trying to compare --

Our total amortization for the quarter was $12.2 million.

And, what portion of that was related to acquisition-related intangibles?

Roughly $3 million of that's related to the acquisitions we did last year.

Okay.

And, the rest of that, obviously, the majority of that would be to acquisitions and software that's been developed.

Right. Right. Okay.

And, then, the first quarter amortization was $11.9 million and again -- actually, let me take that back, Pete. About $3.7 million was due to the acquisitions done last year.

Okay.

And, about the same in first quarter.

$3.7 million, okay. Appreciate it.

Yes.

Thank you. And, our next question is from John Kraft at D.A. Davidson. Your line is open.

Good morning, gentlemen, and congratulations on the progress.

Thanks, John.

Just a couple clarifications left. And, Jack, you started to get to my question on the remote deposit, but, a question that Pete asked. But, specifically looking at those transactions and the drop-off in the growth rate, I wanted to clarify whether or not that is the Goldleaf influence, now that those numbers are included or if that's across the board across both those business units?

It's really not the Goldleaf influence per se, John. It's just that this business, I think we were kind of out in front on remote deposit capture and it was as steeply ramped an adoption curve as I've seen for any product in 30 years in this business. So, it had to tail off, it was just a question of when. And, we're still seeing solid growth, I think, Tony, 10% plus growth in merchant --

10.2% in merchants. Yes.

But, the number of financial institutions -- I don't know the percentage right off hand, but it was pretty -- a relatively small number. But, again, we continue to see good growth in merchants. We actually continue to see competitive replacements of folks who put in version one remote deposit capture solutions two to three years ago and now find themselves needing a more robust offering, which ours is. And so, we've had a number of replacements, which, what happens there is it tends to bring you a pretty nice chunk of merchants when they're moving them from an existing environment to our environment. But, so again, the growth is solid, but 10% growth in merchants compared to two or three years ago, we were probably seeing 30%, 40% growth year-over-year in that regard. So, really unrelated for the most part to anything associated with Goldleaf.

Okay, that's fair. So, obviously fast growing. And, then, second question regarding the large Tier 1 Alogent deal, this is probably for Kevin. You suggest that you're recording that or recognizing that as a percentage of completion. How long of an implementation cycle do you expect that Tier 1 bank to be? Or what percent is completed?

Well, this was the large one that we signed in the December quarter a year ago, John. That we've actually taken part of the license revenue in the last three or four quarters, but the majority of the project was completed this quarter, so we actually recognized the revenue in this quarter. So, that project is essentially done. But, I think, as Jack pointed out in his opening comments, the good thing is that we had a really solid software quarter in the December quarter, but our in-house backlog continued to be very solid which goes right back to the earlier comments of why we're having a little more confidence in the financial institution spending right now.

Understood. Thanks, guys.

Thanks.

Thank you. Our next question is from Glenn Greene of Oppenheimer.Your line is open.

Thank you, good morning. Hello, Jack and Kevin.

Good morning.

Just touching on the license pickup in the quarter, I'm just trying to get a sense, was it steady throughout the quarter? Were there a few big deals? Did the Alogent deal have a big influence? Really just trying to get a sense for loosening the purse strings.And, also, related to that, reconciling the comment in the press release that the license and hardware are still not at your expectations entering the year. Maybe you can just comment?

We had a good, but not great, license quarter, in my opinion, Glenn. If you look at the net increase in license fees year-over-year and you look at the amount of the Alogent transaction that was recognized in the quarter, you could say that the entire -- most of the -- almost all of the increase was associated with the recognition of that revenue. Having said that, we had several very nice credit union signings in the quarter.

So, and, again, as Kevin indicated earlier, even at that, even with the full impact of the Alogent deal, we would have expected, when we set about this budget building process, license fees to have been higher than they were. We have continued to ramp down, year after year, our expectations in the area of license and still can't seem to find the right formula. So, again, I'm pleased that it was up 29%, but that's less than we expected when we put the budget together a year ago and expect that it is going to be spotty, as license fees tend to be, in quarters to come.

Part of that when we were building the budget process, obviously, we did take into consideration the number of failed banks, that's one of things that's really hard to predict. And, when 20% the banks out there are our customers and 20% of the banks that failed last year were ours, that creates some headwind on additional license and hardware sales. In addition to the headwinds, the other headwinds we were facing just from the economy and then you compound that with the continued trend of our in-house customers moving to outsourcing adds additional pressure on new license and hardware sales. So, it's a combination of all those which made the budgeting process last year somewhat of a challenge. And, we'll continue to try to fine tune it and, hopefully, as we start next year's budget process, hopefully, we'll be a little better at it.

So, was Alogent roughly $2 million, $3 million in the quarter?

Yes.

So, as it relates to that, it sounds like license and hardware aren't necessarily better than what you thought entering the year. I'm just trying to understand the increase in your guidance for the year. Is it more margin driven, revenue driven? What's driving the pick up in your guidance?

A couple things. As I said in my opening comments, it's really driven by the increase in our payments business, as we had a very successful last fiscal year and very good so far this year at signing additional core customers to our PassPort debit card processing business.

As we continue to grow the iPay and even our NetTeller bill pay offerings and then, the uploads that we are getting from our OutLink group from primarily converting our in-house customers to outsourcing, the lift that we're getting in revenue that we've been talking about for the last couple of years. So, it's really a combination of things and which, obviously, that does help to, if not improve, stabilize our margins as our recurring revenue continues to become a much larger percentage of our total revenue.

And, just one more, support and services gross margins look strong and given the payments continuing to grow a pretty fast clip, any reasons gross margins in support and services can't continue to trend up? And, is that also part of the reason you got somewhat of an upward bias to guidance?

I think that there is some potential upside, Glenn, but the one thing that we have to keep in mind is a large percentages of that total support and services line continues to be one-time implementation fees which are going to bounce around a little bit which can cause those margins to bounce around a little bit. Long-term, do I think there's some additional leverage? Absolutely. But, from a quarter-to-quarter basis, it's going to be somewhat lumpy.

Okay, great. Thanks, guys.

Thanks, Glenn.

Thank you. Our next question is from Brian Carney of Credit Suisse. Your line is open.

Hi, good morning, guys.

Hi, Brian.

Jack, when you look at the organic growth, it's been pretty solid here the last two quarters at 7% and obviously, over the past year or two previously, everybody was struggling at low single digits or even worse. So, what would you point to that is the difference between the old organic growth of that low single-digit to this 7% level?What's driving that difference?

Well, Brian, I think it's a lot of things that Kevin just mentioned. We see significant growth in our payments-related businesses. That's probably the biggest chunk of it. But, when you -- when you see 12% growth in outsource services, that's a pretty good-sized number and that certainly helps. And, we have been able to continue to see modest growth in in-house maintenance.

But, the fact we're seeing any growth at all in in-house maintenance with well over 100 customers that have moved from in-house to outsourcing, that certainly helps because that maintenance number is very large number, 2% or 3% growth on top of that certainly helps as well. So, I think it's primarily payments and outsourced services that are driving -- most definitely you get a little boost where you have a solid license quarter or at least, solid by comparison, and that adds up.

Well, and one other thing, Brian, software and hardware now represents 8% to 10% of our total revenue. When you've got that percentage of our revenues that a year ago or basically, it's the last several -- 18 months probably, on a year-over-year basis, has dropped 20% to 25%, as Jack mentioned, just to have that somewhat stable, but to become such a small percent of our revenue, that is not dragging our organic growth down like it was a year ago.

That's helpful. So, the payments business, is that just the increase in the amount of just transactions due to more credit debit transactions, more bill pay transactions that you guys are just picking up? Or is it new sales products, new products that's creating that increase?

Both. As I mentioned, as I responded to Glenn's question, Brian, we had an extremely successful year last year adding customers to our ATM debit processing, our existing core customers on the bank side and pretty good success on the credit union side. So, just adding additional customers plus just the use of card growth. But, then, also, additional products like our fraud center and some other products that we're now offering in the payments line, all contribute to that growth.

I would also add that, Brian, on the payment side, you've got the PEMCO acquisition that is primarily credit card transaction routing. And, a year or so ago there was less credit card spending. I think that's come back a little bit. Of course, what credit card spending didn't take place shifted to debit card for the most part, so we benefited there. We've continued to see good growth in our debit card transactions, we've seen growth in our credit card transaction routing as well as the economy has gotten better.

Even though, as Tony indicated, we're not separately reporting our bill payment growth, I would tell you that just our growth in our NetTeller bill payment product was higher than anything we've seen as far as industry averages. And, certainly, the growth in iPay bill payment transactions as our go-forward solution -- marketed solution can certainly out pace this general industry growth and the area of bill pay. So, it is pretty much all areas of the payments business that are contributing.

Okay, last question for me, did I hear correctly that implementation revenue was down 1% year-over-year? And, then, what's implementation revenue look like going forward? Thanks, and congrats on the quarter.

Yes, implementation revenue was down 1% compared to a year ago, Brian, or roughly 1%, and obviously it was down $3 million sequentially from the September quarter. Implementation revenue -- the backlog looks pretty solid. But, the challenge there is trying to predict what M&A activity is going to happen within our customer base, because that is a huge driver in the one-time implementation fees. As far as normal implementations, the backlog looks pretty solid. But, again, it's going to be a little bit lumpy just depending on M&A activity within our customer base.

Okay, thanks, guys.

Thanks.

Thank you. Our next question is from Tim Willi of Wells Fargo. Your line is open.

Thanks, good morning. Just the two questions. First, Jack, Kevin or Tony, as you think about the confidence drivers of your customer base, relative to the Durbin amendment, and I think there are still a lot of concerns that Visa, MasterCard may not be able to create the tiered structure, obviously, Visa has committed to doing it, MasterCard yet to be seen, but do you think that there was, or still is, any kind of confidence issue with small banks around the revenue stream?

Because of that issue and the certainty around collecting that debit interchange about being better than it was given Visa's news and, obviously, that can be a nice high-margin revenue stream for a bank if it could help their confidence level. Or do you think it's yet to be resolved in the minds of your customers? Or was it just never even an issue that you picked up on?

It was a significant issue. And, I don't know that it's been resolved yet. Conversation I had with the CEO of a $2 billion credit union and the bottom-line impact to her business assuming implementation at the $0.12 per transaction level is $2 million a year and it comes -- falls almost straight from the top line to the bottom line. So, scale that, based on the size of the institution, it's an equally painful kind of a consideration if you're a $400 million bank or a $2 billion credit union, relatively speaking. And, so, you've got Visa who said they will support it, but they haven't said when, and MasterCard hasn't said. You've got the routing ability that the merchants have that they may be able to impact that somewhat, as well. So, yes, I think it's very much an unanswered question and there's more talk of late about trying to go back to Washington and get that provision changed in some manner.

But, again, how fast can you get anything done in Washington?So, yes, I think it's very much on their minds and I think you've got a lot of institutions that are having to rethink pricing of their services. Do we start charging for checking accounts? Is there an opportunity to pick up some of that business as the large banks, who for sure are going to get charged as things stand right now, or going to receive less revenue as things stand right now, they're all making noise that they're going to have to raise their fees. Will financial institutions under $10 billion pick up customers being run off because of those fees? Don't know. I think they're actually having to figure out whether they're going to have to do the same thing or not. So, that one is very much a cloudy issue right now that is definitely not resolved.

So, it sounds as if we get closure on this and it works to the benefit of the community banks, let's say, that should be yet again, another pretty substantial positive in terms of confidence and spending would be -- that would be the correct assumption it sounds like?

Absolutely.

Okay.

Without question, if it was resolved favorably for the community financial institutions to where they didn't see that kind of impact, there's no question that is very, very meaningful.

Second question, just again, on market demand, would you give us a sense where you think the pent up demand dynamic is, in light of maybe some things that still need to be resolved like we talked about? And, then, if there's just any, again, key areas where you feel like people really make their move if they get that confidence in terms of products that you guys are offering might be sort of a bigger ticket or bigger decision type products?

Tim, it's all across the board and it just depends on what kinds of things, as institutions have prioritized their spending needs in the past, what things did they hold off on?Some folks may have held off on the fraud-related solutions, some folks may have held off on hardware infrastructure upgrades. The question earlier about what we're seeing in the area of hardware, I didn't mention that one of the things where we are seeing a lot of renewed interest and expect to see that grow is in the area of server virtualization.

A lot of interest in some infrastructure upgrades that consolidate the number of servers down to a smaller number. Again, I don't think that it's sufficient to reach the level that we used to see spent on processor upgrades on an annual basis two or three years ago, but I think there are a number of institutions that probably will look to that area. So, I don't know that there's any one area that I could pin it to, but it's pretty much across the board, depending on what they've done without, up to this point.

Great. Thanks a lot.

Thank you. Our next question is from Jon Maietta of Needham & Company. Your line is open.

Hello. Thanks very much. First thing was, Kevin, I missed a little bit of what you said around the term loan and I was wondering if you could just repeat what you commented about the paydown?

About the term loan, Jon?Is that the question?

Yes.

Well, what I said is, right now we're sitting at the $150 million term loan and the $90 million draw down on the revolver. I actually had a couple of investors send me e-mails yesterday wanting to know what the timing was, so I was just trying to respond to that as a pay down. Barring any acquisitions, which obviously kind of throws this whole process out the window, but barring any acquisitions, we'll be sending our annual maintenance billings out the first of June. Be collecting a couple hundred million dollars which, by the end of July, we would anticipate having our revolver paid down to zero and start chunking away a little bit at the term loan. So, obviously, the -- our interest in cost of debt would go down considerably in 2012. But, again, that's barring any future acquisitions.

Yes. That make sense. Okay. And, then, Jack, I was wondering if you could talk about -- in that license line, or just more generally, the level of activity you're seeing with some of the more discretionary offerings and ProfitStars in particular? Just how that segment's performing today versus six, eight months ago?

The ProfitStar segment's performing very well. I don't have -- I don't think any kind of a breakdown related to their license performance per se, but we continue to see very solid growth there. Their sales, on a year-to-date basis, are the strongest that they've been, I think, since we officially have had the ProfitStar's brand in place. I would say we had such strong sale performances in the first half from all of our brands, but ProfitStar's in particular is -- had a very strong first-half performance and seems to be feeling pretty good about certainly the next quarter. About as far out as the tend to look. But, still feeling good about it, so it's been very solid performance.

We saw some nice pick ups this quarter compared to a year ago in the document imaging area, software, and also in the CRM-related area, which is our Synapsis product, primarily on the credit union side. So, we are starting to see some nice pickups in the discretionary spend though, because those are clearly discretionary type items that they don't have to buy or upgrade.

Okay. That's helpful. Thanks very much.

Thanks, Jon.

Thank you. Our next question is from Brett Huff of Stephens. Your line is open.

Good morning, Jack, Tony, and Kevin, and congrats on a nice quarter.

Thanks.

A couple clarifications, I want to make sure the net income guidance, I think I heard you say mid-teens now, Kevin, is that right?

Yes. Obviously, we started out the year very solid, Brett.Year-to-date revenue is 21%. But, again, we've anniversaried Goldleaf and PEMCO now, so, the only non-organic growth the second half of the year will be iPay. So, that's going to slow down a little bit, but with organic growth pretty solid at the 70%-ish range, I think we will end up the year at roughly a 15% top line growth.

Okay. And, then --

And, then, obviously, holding margins relatively stable where they are for the first half of the year, the gross profit and operating income should both grow at about that same clip.

Okay. You talked a little bit about revenue, I think in the press release the revenue is a little below plan, and that was a reference to [x] the Alogent revenue recognition event, that you still expected the license to be stronger other than that. Does that imply there's some more, that you guys see some more in your pipeline coming to fruition by the end of this fiscal year?

Well, just, I think, Brett, any company you talk to, your sales team is pretty bullish, but they're always going to back end load stuff. So, I think as the economy continues to stabilize, as we continue to see some more positive than negative signs out there, we anticipate additional license sales, is it going to jump up tremendously? Probably not, but we're still -- based on our sales guys, right now, we still think that the second half is going to be pretty solid.

Okay. And, then, you had talked a little bit about the tax rate and gave us a sense, I think $0.34 for the fiscal year this year, any thought, given that it's a relatively more permanent change?As we look into 2011, how should we think about that tax implication?

Well, obviously the R&D credit was only extended for one year. So, we got a 12 month catch up in December quarter. We'll get the next, obviously the second half of this year will impact it. Then we'll go back into having to anticipate that it won't be extended again going into 2012, which means that our effective rate will go back up starting July 1 to the 36%-ish range would be my best guess.So, you have to go with what is in place at the time and what I'm trying to give you all is what we expect our full year effective rate will be for fiscal 2011, is the 34% type range. But, then, obviously, it will go up again as we go into next fiscal year.

And, then, last question, you had talked a little about, in the past I think, about the opportunity to sell iPay or maybe it was even NetTeller to your credit unions, given the relatively low penetration there. Is that part of what's driving some of the strength in the bill pay? Or can you give me a sense of, is that still a very large opportunity you see to take advantage of?

We think it's a very nice opportunity. I don't know how much it has driven bill pay to this point. I think that some of the benefit there will be realized in the next few quarters as we begin to convert some of these credit union customers to NetTeller and typically to iPay as part of that transaction. But, yes, we have felt that, that was a very solid opportunity and still feel very good about it.

Last question, on -- have you talked at all about what the float impact is or how much float you have involved in your bill pay operation now?And, when interest rates do come back, what kind of impact that could have positively?

We have not talked about that. Of course, it's got basically no impact at the moment. I don't even know that I know what the amount is. I probably should, but I don't.

Yes, I don't know what it is either. But, Brett, we don't have any float impacts on our NetTeller bill pay solution because of the way we process that. The only potential float would be on the iPay transactions and, as you said, with the interest rates right now, there really is no impact. Could there be some, as interest rates come back? Yes, but, like Jack, I apologize, I don't know what that is right now.

All right. That's what I needed. I appreciate your time.

Thanks, Brett.

Thank you. Our next question is from Greg Smith of Duncan Williams. Your line is open.

Yes. Hi, guys. Kevin, just one clarification, on your total amortization, how much of that is acquisition-related, including all acquisitions?And, then, how much, I guess the rest is just software, can you give a percentage split or a dollar amount split?

I apologize, Greg, I do not have that. I will try to get that breakdown for the next call, but, right now, the only breakdown I have is for the acquisitions that were -- that we did last year.

Is there a rule of thumb, maybe half of the amortization is software? Just trying to do a cash EPS calculation, obviously I want to add back the amortization-related acquisitions, but not the software. Any rule of thumb?

Greg, any number I gave you right now would just be a wild guess. And, I choose not to do that.

Okay.

I apologize.

Okay. No problem. I'll get back to you guys.

Thank you. I'm not showing any further questions at this time. I'll turn the call back over to Kevin Williams.

Thank you, LaToya. In summary, obviously, we want to thank you all for joining us today to review our second fiscal quarter 2011 results. We're very pleased with the results and the efforts of all our associates to help control costs. And, at the same time, as Jack mentioned, continue to take care of all of our customers. Our executives, managers, and all of our associates continue to focus on what is best for our customers and our shareholders. With that, we want to wrap up the call. And, LaToya, would you please provide the playback number?

Yes, ladies and gentlemen, the replay number is 800-642-1687. Once again, the replay number is 800-642-1687. That concludes our conference for today, you may now disconnect. Good day.