Jack Henry & Associates Inc (JKHY) 2012 Q2 法說會逐字稿

Good day and welcome to today's Jack Henry first quarter 2010 earnings conference 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, Annie. Good morning. Thank you for joining us today for the Jack Henry & Associates second-quarter of fiscal 2012 earnings call. I'm Kevin Williams, Chief Financial Officer. With me today are Jack Prim, our CEO, and Tony Wormington, our President. The agenda for the call this morning is as follows.

Jack will start with an overview of the quarter. He'll then hand it over to Tony to provide some additional operational highlights for you all, and then I will provide some additional comments on the press release we put out yesterday, and then we'll ultimately try to answer any questions you might 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 which we anticipate due to a number of risks and uncertainties, and the Company undertakes no obligation to update or revise these statements.

For some of these risk factors and additional information, please refer to yesterday's press release, and the sections in our annual 10-K entitled risk factors and forward looking statements. With that, I will now turn the call over to Jack.

Thank you Kevin, good morning. We are pleased to be able to start in new calendar year reporting record revenues, gross profit, and net income in our second fiscal quarter. We continue to see gradual improvement in the general economic environment, and renewed focus on the future by our customers.

Sales performances in the quarter remained strong, with all brands again over 100% of target, and sales projections remained solid for upcoming quarters. We are particularly encouraged that there is no single area that is outperforming. We see good activity in core system sales in both the bank and credit union segments, add-on product sales in both segments and in the ProfitStars customer base, as well.

There is certainly a focus by our customers on products that can help increase revenue and efficiency, but their focus appears to be on building for the future. Details related to the impact on interchange income from the Durbin amendment are hard to get after only three months or so, but the consensus seems to be that it had minimal impact for most financial institutions under $10 billion in assets.

Most seem to believe that this carve-out will lose its effectiveness over time, but as of yet, it has not been a deterrent to spending. Total revenue growth of 5%, all organic, and well-managed expenses in the period, allowed us to grow operating income by 11% and net income by 7%.

Operating expenses were lower by 3% compared to the year ago period, and our operating income margin improved to 24%, even though our highest-margin revenue category of license fees was down 12% from the same period. Although license revenue was down in the quarter, the comparable period was one of the highest license quarters in the last two years. These fees should be expected to fluctuate from one quarter to the next, generally staying in the range of 5% to 6% of total revenue.

Hardware revenue and the associated gross margins were up significantly in the quarter. This was primarily related to mix of business with more activity related to the IBM power processors, the I series and P series processors, than the lower-margin servers and printers that we have seen in recent quarters. The point here is that there has not been a change in this part of our business. The trend for hardware as a percentage of total revenue will continue to be down, and the margins will be expected to be more in line with what we have seen in previous quarters.

Implementation revenue was up nicely, with strong contributions from both the bank and credit union segments. Payments revenue continued to show solid growth and software maintenance increased, even with the continued trend of in-house customers transitioning to outsourcing and the headwinds of previous-period bank failures.

The focused efforts of our over 4,700 employees have allowed us to deliver solid financial results, while improving customer service metrics from the already-high levels of a year ago. We appreciate their efforts and look forward to the second half of our fiscal year. With that, I will turn it over to Tony for some additional insight on the business.

Thank you, Jack. We are pleased with the strong contributions in all components of support and services, which increased 6% over the prior-year quarter and 5% fiscal year-to-date, and represents 88% of total revenue. The largest contributor to this was our electronic payments revenue, which grew 9% compared the to prior-year quarter, and 10% year-to-date, and represents 33% of total revenue.

Another large contributor to this line is our software maintenance for our in-house customers, which increased 3% for the quarter and 2% year-to-date and represents 29% of total revenue. Our outsourced data and item processing services increased 4% for the quarter and year-to-date, and represents 18% of total revenue. Which is driven by both new customers that preferred its delivery model, as well as the continued movement of our existing in-house customers electing to migrate to this service model.

In addition, our one-time implementation revenues increased 16% compared to prior-year quarter and 2% year-to-date, and represent 7% of total revenue. Our demand for implementation services in all areas of the Company remain strong. Our electronic payments transaction volumes continued to experience solid growth. Passport, ATM, and debit-processing volumes increased 13% over the prior-year quarter. Bill payment transaction volumes increased 18.6% over the prior-year quarter.

Financial institution merchants installed and utilizing our enterprise payment solution increased to over 37,500 merchants, representing a 10.6% increase compared to the prior-year quarter. And merchant-related transaction volumes increased 9.5% over the prior-year quarter. I would like to thank all of our customers for their business and their continued loyalty, and additionally, I would like to thank the 4,700-plus associates for their hard work, dedication, and loyalty to our Company. I will now turn it over to Kevin for a further look at our numbers.

Thanks, Tony. Again, as Jack said, our total revenue increased 5% for the quarter and is up 6% year-to-date, compared to the same period the year ago. And actually, it was a continuation of last fiscal year, which also had about the same organic growth.

Our license revenues decreased by 12% for the quarter compared to the prior year, but this was a tough comparable, with the second quarter a year ago being the strongest license quarter last year, and in fact, one of the strongest in the last couple of years. License revenue for the first half is still up 4% compared to prior year. We think license revenue will continue to be fairly stable for the balance of the year.

Our support and service revenues increased 6% this quarter, as Tony mentioned, over the same year a year ago, and it did represent 88% of total revenue. Support and service break down compared to the prior year, implementation increased 16% for the quarter, it was up 2%. Our Payments business is up 9% for the quarter, 10% year-to-date.

OutLink data processing, which is just our data and item processing, increased 4% for both the quarter and year-to-date. In-house maintenance increased 3% for the quarter and 2% year-to-date, and as Jack pointed out, these are all still growing over some of the bank failures, so we are pleased to see the growth that we are seeing in these lines of business.

Hardware revenue did increase 13%, for the reasons Jack pointed out. Our consolidated gross margins held today at 42% for the quarter, compared to the same quarter a year ago. License margins increased to 92% this quarter from 87% a year ago, due to a decrease in the third-party software delivered during the quarter.

Our support and services margins held steady at 40%, compared to a year ago, and hardware margins increased to 31% from 27% a year ago, primarily to the sales mix that Jack referred to, selling a lot of the bigger boxes this quarter.

To break this down into our two reporting segments, our banking segment gross margins dropped slightly in the first quarter to 42% compared to 43% a year ago, and our credit union segment margins increased to 41% from 39% a year ago. In the bank segment, license margins increased to 90% from 85%. Support and service margins for the bank segment decreased slightly to just over 40% from 42% a year ago, primarily just due to some costs in the quarter. And hardware margins improved to 33%, compared to 28% a year ago.

In our credit union segment, license margins increased to 95% to the quarter, compared to 91% a year ago, again due to the sales mix and fewer third-party products in the quarter. Support and service margins improved to 38% from 35% last year, and our hardware margins increased to 23% from 22% a year ago, again due to sales mix. Our total operating expenses decreased 3% from the quarter compared to prior years. As a percentage of total revenue, decreased to 18% of total revenue from 20% a year ago.

This decrease is primarily due to slightly-higher capitalization of RB projects, which obviously, these are going to fluctuate around from quarter-to-quarter as projects go in and out of capitalization. And there were several different things that impacted G&A, but the largest couple of things were a decrease in litigation fees compared to a year ago.

We had some settlements with some patent trolls a year ago, which, those are just going to happen in our business. It is just a part of doing business anymore, it seems like, so they are out there. And also we sold one of our planes in the quarter and had a gain on that $0.25 million. Those are the biggest things that impacted G&A in the quarter.

But then also, our continued focus on cost controls. I compliment all of our managers and associates for continuing to focus on stronger cost, to squeeze as much of the bottom line as we can. Our total operating expenses for the year was up 1%, a decrease as a percentage of total revenue of 18% from 19% last year.

Our operating margin for the quarter and year-to-date improves 24% from 23%, compared to the prior years, and the net result was operating income increasing 11% for the quarter and 10% for the year-to-date. Obviously, interest expense is down this quarter compared to prior year, due to the significant repayments on the credit facility we made last fiscal year, and also scheduled payments we have made on our term facility year-to-date this fiscal year.

The effective tax rate for the quarter was at 35.2% compared to 31.4% last year, primarily due to the timing and impact of the R&D credit and other tax incentives that were in place last year that are changing this year as the R&D credit, last, at 12/31 this year has not been renewed. We're not sure where that is in Congress. I know they are talking about it, but we have to use our effective tax rate is if that is not were to be renewed, which is at the 35.2%, which should be relatively close to what it is going to be the balance of the year, without the reinstatement of the R&D credit. Obviously on an apples-to-apples basis, this change in our effective tax rate was close to a $0.03 negative impact on our EPS this quarter, truly just due to the effective tax rate.

Our EBITDA increased approximately 9% to $84.6 million from $77.9 million the year-ago quarter. Our year-to-date EBITDA also increased 9% to $166.2 million from $152.9 million a year ago. Excluded in EBITDA is the depreciation and amortization expense of $23.7 million this quarter, with $11 million in depreciation and $12 million in amortization compared to $22.9 million in depreciation and amortization this quarter a year ago. For the first half, depreciation and amortization was $47.4 million, with $22.1 million in depreciation and $25.3 million in amortization compared to the $45 million D&A a year ago. Included in total amortization is the amortization intangibles from acquisitions, which was $6.2 million for the quarter and $12.5 million year-to-date.

Operating cash flow increased to $96.3 million year-to-date this year from $85.8 million a year ago, or a 12% increase. Our in-house backlog, which represents contracts-in-hand for software, hardware, implementation services yet to be delivered, is at $73.7 million, which is down 6% from a year ago, but up 1% sequentially. Our outsourcing backlog, which is just for data and item processing contracts, has increased nicely, and is up 6% sequentially and up 16% compared to a year ago.

Total backlog was up 11% compared to a year ago and up 5% sequentially. Backlog is at an all-time high as of December 31, or is a record as Jack mentioned, and also, just a reminder, there is nothing in our reported backlog numbers for our payments businesses. Again, this is just in-house and dated item processing.

For guidance, for the balance of our fiscal 2012, as Jack mentioned, we continue to see trends that appear positive for future performance. We anticipate our revenue growth will continue in line with our year-to-date growth in the mid-single digit range of approximately 6%, maybe a little higher. And our gross margins should remain solid as we continue to grow our payments business and continue to see the trends of existing in-house customers moving to outsourcing, which both of these allow us to leverage our existing infrastructure long-term.

We expect net income and EPS to grow in the range we have seen in the first half of the year, of high-single, potentially up through to the low double digits. If spending continues to improve and the grow-over of failed banks continues to get easier. As of right now, we are comfortable with the recorded consensus estimates out there at this point. This concludes our opening comments, we are now ready to take questions. Amy, will you please open the call for questions?

(Operator Instructions) Our first question comes from Kartik Mehta of Northcoast Research. Your line is open.

I wanted to ask you, your thoughts on spending by community banks and credit unions, there have been a lot of articles out that both community banks and credit unions think that they can gain market share. And I'm wondering if you have seen them increase their spending as a result for new products or ancillary products in an attempt to compete with some of the larger banks?

Kartik, I would say yes. As I mentioned earlier, there's a lot of focus on products that can both help them grow revenue as well as improve their efficiencies. We have seen an increase in spending around CRM systems for better booking of business and cross sales to the new customers coming in. There's been a lot of activity. I don't know that -- there was certainly some account pickup associated with bank transfer day that took place last November. I don't know that that was huge in and of itself, but I think as much as anything else, it is the fact that they haven't seen a major, if any, impact at this point from a debit card interchange, which if you'll recall, in the early stages of that discussion, it looked like the impacts were going to be massive. And certainly they have been massive for the larger banks, but it was generally believed that that same thing was going to apply to all banks. I think a lot of what we are seeing is just the fact that their revenue has not been impacted nearly as much, if at all, from Durbin, and I think they feel like they have a little more room to do some things that they probably have been wanting to do for a while. It is pretty much an across the board spending, in that there is no one area that appears to be leading the charge.

Jack, would it be fair to say that compared to 2011, I know just from a calendar year standpoint, 2012, so far you're seeing improved spending compared to 2011?

Yes, definitely.

And then, Kevin, just a question on the hardware side, I know in the past, that you have had some hardware vendor incentives at times that have helped margins, and I'm wondering if you anticipate any for the upcoming year, or if that part of the business has kind of changed now and you don't get any incentives anymore?

Obviously the whole hardware business has changed as we have moved into an outsourcing mode. The number of large boxes and large hardware that we sell to really drive those incentives has gone down over the years. As Jack pointed out in his opening comments, we had some really nice activity in the large iSeries and pSeries in the quarter, which drove some of that, but I do not look for the incentives and rebates to ever get back to where they were at one time, because I don't think we'll ever be at the same level of selling new large boxes the way we used to be. I will tell you that even the rebates this quarter and the incentives were actually down from a year ago. So they did not help margins this quarter, this was really just what was sold in the mix.

Thank you very much, gentlemen.

Our next question comes from Greg Smith of Sterne, Agee. Your line is open.

First question, Kevin, did you say there was a $0.25 million gain? Was that this quarter or the year ago quarter for the plane?

That was this quarter in G&A. It was about $250,000 gain on the sale of one of our planes. And obviously, the aircraft market is really good out there. This time, it only took us two years to sell the plane.

And then are you seeing any pickup in de novo activity or are things pretty slow there still?

I think we saw one, all of last calendar year. It is still pretty slow. I think as long as the regulators are still -- primary focus is making sure that banks are well capitalized and trying to figure out which ones to shut down, I think there has been seven shut down so far in January, and still focused on other things, I don't think we're going to see a big surge in de novos. I think we will continue to see some third parties buying small bank charters that want to be in the banking industry, like we've seen in the last couple years, but as far as brand new charters, I just do not see that happening in the real near future.

Okay, and then just weaving together, thinking about the balance sheet, buybacks versus acquisitions, are there any significant holes you're looking to fill? Is there any chance of a larger acquisition of a competitor? What is the latest on those issues?

Greg, it's Jack. I don't know that from our standpoint, anything has changed in that regard. Our first choice is, and has for quite some time been, to use our excess cash to do accretive acquisitions and acquisitions that will bring profitable future revenue growth, so we continue to look for those opportunities. I would not tell you that we see a whole lot of opportunities out there, we certainly have the capacity and the willingness to do a larger acquisition, if we find one that looks like it would have the right kind of a payoff down the road, but I do not think there is anything that has changed in our outlook in terms of what we are looking for, or willingness to do any of those transactions.

Any chance we could see an uptick in buybacks then, in the absence of any acquisition activity?

I think Greg, obviously, we still have a little over 5 million shares out there for authorization. We're actually meeting with the Board this week to talk about some strategies at our annual strategic meeting with the Board and all of our General Managers. There will be a lot of things to talk about and one of the things will be use of cash, which obviously can be acquisitions, stock buybacks, dividends, or whatever. I think that stock buybacks are obviously something we're going to look at. I understand from doing a little survey of my own that that is probably the preference that people would like us to use our excess cash.

But you also have to remember we have a pretty conservative Board. They like to have a little dry powder so if the right acquisition comes along, and we have done a couple of the better acquisitions that we've done in the last 10 years because we had dry power and did not have to run out and get financing, and we can close the deal in a timely manner. We have got access to capital markets. As Jack said, we will continue to look for the right acquisitions. iPay was the largest we've ever done, but believe me, we've had commitments from banks for a lot larger deals, we are not afraid of them. But it's just got to be the right one that makes the right sense for our stockholders. Obviously if we're sitting here, Greg, this summer, after we have collected our annual maintenance, if we have done an acquisition, then, yes, I am pretty sure that stock buybacks would move to the forefront.

Great, very helpful. Thank you.

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

Within the bill pay market, you talked about I think 19% transaction growth. Can you talk about how much of that you perceive to be share gain, and how much of it is truly just the natural growth of transactions? It seems to me that industry-wide or country-wide, bill pay transactions are growing maybe in the 5% to 8% range, so the 19% would suggest that there is some market share gain. If that's correct, could you tell me where that is coming from, or where you're having success?

Pete, I think most of that is coming from market share gains, and it is a mixture of vendors that we are taking customers away from. There is actually a surprising number of institutions that are offering bill payment for the first time. Those tend to be pretty small, so they do not typically drive a lot of volume, but there is some content there. In terms of the same-store growth or the same bill payer growth, the end customer, I do not know that we are seeing a lot of increase in the number of bills paid per household online, there are a few more households, maybe, that are moving and paying bills electronically then than there were before, but most of what you're seeing there is market share gains.

We have one remarketer, for lack of a better term, that worked with primarily some credit union institutions, that was remarketing a different vendor's bill payment system to about 60, I believe, small credit unions. They have elected to move to the iPay product and move over to that. That's in process, probably more than 50% of the way through that, I think, at this point. Again, smaller institutions, but every little bit helps.

The other thing I would throw in there, Pete, is in the last six months or so, we have seen very good success in selling our NetTeller product into our Episys space with the iPay solution tied to it, so a lot of our Episys core users are refreshing their home banking. They're also refreshing their bill pay relationship, and a lot of times, they are taking that with us.

That is great. How about on the corporate side? Your community banks and credit unions selling your solutions to corporate customers, and looking at things like invoice presentment and bill pay. Is there any progress there that is worth mentioning?

Well, it is not material at this point from a financial impact, Pete, but we definitely are seeing some uptick for the business bill payment capability that iPay has, particularly in the banking business. And we are working on and expect to release in the March timeframe some iPad tablet-type applications which will have an initial focus on business-related bill payment functions, and we think that that will also help drive some additional mobile sales as well as additional business bill payment sales. So again, if you look at the percentages, and I couldn't quote them off the top of my head, but the percentages of uptake of the business bill pay, the percentages are impressive. The actual material impact on the financials at this point is not going to jump off the page at you.

That is helpful, I appreciate it.

Our next question comes from John Kraft of D.A. Davidson. Your line is open.

Good morning, and congratulations on the steady progress. First, let me just follow up on a couple of Pete's questions. The bill pay transactions obviously accelerated. You said that there were 60 new credit unions due to that reseller. But is that only half-implemented, only half in the numbers, is that fair to say?

I think, that is about right, John. About that many I think are implemented, and of course that is all within the last, probably 60 days. I do not know that we have a full quarter of payment transactions out of any of the half that we have implemented at this point.

But again, John, those are all very small credit unions, so even 60 of them aren't going to add up to one of our large banks that's very heavy and bottom-built. But it is an avenue for additional growth.

I'm just trying to get a better feel for essentially how your growth doubled over the last few quarters? We can continue that offline, but going back to the business bill pay, are you seeing any benefit or any better looks from kind of the acquisition turmoil that is happening with some of the vendors that are typically involved in a more corporate bill pay and cash management applications?

John, at this point, that has not had much of an impact in our area. Actually the two vendors that you are referring to that are in acquisition/merger discussion actually both happen to be at some level a remarketer of the iPay business bill payment product, so at this point, I do not think it had a significant impact. If anything, seeing some of that settle down might actually help us a little bit. In terms of customers that are concerned about what is going on that are looking in our direction, we really have not seen any motion there.

Okay, and then a couple for Kevin. Going back to the G&A that was down materially from last year, looking forward, isn't the user conference in the December quarter, did that occur? And if so, wouldn't we expect going forward, that it would even tick down sequentially from here?

I will say John, that you're right, the user conference was in the December quarter. Our bank user conference. Our credit union conference is the September quarter, bank education conference is in the December quarter, so we would essentially see a tick down in the March quarter, and we might, but I would tell you that we had such a drop this quarter of about $1 million for legal fees and litigation settlements and different things, that is kind of the wild card going forward, because obviously we have constant things going on with patent trolls out there and different things. So we might see a sequential tick down in G&A, that we would typically see, but for some of the other one-time things this quarter I don't know how significant it will be in the next quarter compared to this specific December quarter.

That is fair. And then just lastly, housekeeping, recurring revenue still 80%?

It actually dipped down slightly to 79% this quarter, but still roughly 80%, yes.

Thanks, guys.

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

First question, Kevin or maybe even Jack, with the growth in the backlog, either quarter-over-quarter or year-over-year was pretty impressive, I think we have to go back to 2008 to see year-over-year trends like that. Maybe a little bit of color there. And more specifically, were some of those press releases, Brookline, UniBank just included in there, just a little more color on the growth in the backlog, outsourcing specifically?

Glenn, that's a large part of what is probably making that up. We have had pretty good success in the last year, and certainly in the last quarter, with finding mid-tier over $1 billion asset size financial institution on the banking side in particular. And out of the five that we have signed in the last nine months or so, mid-tier banks that have elected to come our direction, I believe, I'm right, Kevin, that four of those were outsourcing, one was doing in-house license. I think probably there were at least two in the current quarter that would be adding to that backlog. So Kevin, I'm trying to think if there is anything else? Particularly, there's some end-out migration.

Two other things. We had a very nice quarter of end-out migrations that contracted, that obviously impacted the outsourcing backlog then. But then I would also say that we had a very good quarter and first half in credit union outsourcing contracts, that the credit union outsourcing backlog jumped up significantly, compared to the prior year. So it is really a number of things and basically we are clicking on all cylinders on several fronts.

So a couple follow-ups related to those comments. So one, the in-house migration comment, going back a few quarters, I think you guys have been doing metrics on how many banks have been transitioning from in-house to outsource. Do you have that? Either for the quarter or year-to-date?

Yes. It was roughly 20 in the first half if I'm not mistaken, between bank and credit union.

12 for the quarter, 19 year-to-date.

12 and 19, which is comparable to the last couple of years, it sounds like.

It would be tracking, if you annualize that first half it would be tracking right on last year's number.

It's actually ahead of the first half of last year, but it is exactly half of last year's total.

So last year was 38, is what you're saying?

Yes.

And then it sounded like, so five mid-tier bank wins, you said in the last nine months, and I assume these are all takeaways?

(Inaudible).

Some sense, what is happening? You have not really had a product refresh. Good for you, but why are you winning these deals?

I think that particularly in the banking space, it is probably back to that point that I made earlier that people are a little more focused on the future. It has not been but 1.5 year, 2 years that frankly people were wondering whether any banks were going to survive or not. I think people have moved past that, and certain of them realize that they're going to survive, and are planning somewhat more aggressively to position themselves for the future. There is talk about consolidation that will likely take place in the industry to some extent, I do not know that I see that accelerating to overall rates that are going to be much greater than what we have seen for probably the last 10 years, but I do think that the, as has also been the case for the last 10 years, that most of that net consolidation will be at the low end of the market, and you will have more financial institutions moving into that $500 million to $1 billion and over $1 billion space, where they need a little more robust system capabilities than what they might be using today. I think that in the majority of the cases that we find in recent months it has been a case of, what is the solution we need for the next 10 years, and we've been fortunate to win a fair number of those.

So the other thing I would point out is, if you think about these mid-tier wins, and obviously I am very excited about the success we are having in the market, but the impact on the quarter is really only some implementation revenue.

Exactly, future revenues. But how much -- on a $5 billion asset bank, what is the future potential annual revenue once it is fully converted?

Well, it depends on the mix of products, did they get bill pay. In some cases, bill pay can be as much or more than the core processing number. And outsourcing a bank to be paying $80,000 to $100,000 a month would not be an unreasonable number, would it, Tony?

It certainly could be that.

Without bill pay?

Right, and over top of it, you have ATM and debit.

A bank can take that full suite win, and a $5 billion could easily be $0.25 million a month.

Thanks a lot, guys.

Thank you. Our next question comes from David Koning of Robert W. Baird. Your line is open.

On the payment plan, I know it had been growing 12% to 13% the last few quarters and this quarter, it came down just a bit to 9%. Is there a good reason that that ticks back up to the low-double digits again over the next few quarters?

Part of the challenge there has been bank failures. Certainly the boost to organic growth, just getting past bank failures, which are trending certainly in the right direction and came down substantially last year. Hopefully that will be the case this year as well. That certainly has had some impact. There certainly is also some pricing compression in the marketplace that we had been seeing, and continue to see. It looks like that in some cases, there may be some shifting of transactions from debit to credit processing. We seem to be seeing a little bit of that on the credit union side, the PPS product related to the Pemco acquisition indicates that there could be some of that activity as well. So again, I think that there is certainly the opportunity for it to move back into double digits, but I think a lot of things have to align properly.

The other thing I would say, Dave, obviously, the organic part of the capture was just growing like gangbusters there for three or four years, and I think we have hit some level of saturation there. Obviously, we are still having good sales, but it takes a lot of those now to move the needle.

Okay. And then the one other thing, obviously bankruptcies seemed to have peaked now a couple years ago or whatever and have come down nicely. But M&A activity is still quite slow. I'm just wondering if, as the banks heal, if we do see an improvement in the M&A market, is that over -- the first couple years of that improvement, a pretty nice positive given implementation work, if banks are joining each other and maybe termination fees in the early stages? Is that how you see it playing out maybe over the next couple years at some point as M&A picks up a little bit?

Well, Dave, if all the supposed experts out there are right, which I think the three of us in this room tend to agree with them, I think most of the M&A activity is going to happen in the smaller banks. Banks typically under some number, that number still is yet to be determined, you hear anywhere from $150 million to $500 million, but the smaller of the banks are going to have more of a challenge to be able to afford the regulatory compliance and the changes that the regulators continue to push down on them. So all indications are, is that that is going to happen.

Obviously we do not like our potential market shrinking, but the fact that if that truly is where the vast majority of M&A activity happens is in that bank, that is actually a positive for us, because that's not an area of the market that we particularly play all that well in, as we've talked about before. So as these banks consolidate and merge, and you get a couple of $250 million banks to go together and now they are $500 million banks, they are actually now in our sweet spot and that is actually a positive for us in some regard. So yes, implementation is going to be strong for that, but we also continue to win new core business, which hopefully that will drive more implementations than just M&A.

Okay. And then just the last one, OpEx, there have been quite a few questions on it already, but just high level, for about the last 10 years, operating expense has been very tight range, right around 19% to 19.5% of revenue year-in, year-out. The last four quarters have been more on the 18% to 19% range. Now on the lower end of that, and I know you have called out the gain and stuff, but it seems like you might be at a new kind of baseline where maybe we're closer to 18% going forward now than that more 19% to 19.5%, just given the scale of the business. You think we are at kind of a new level now?

That's possible, Dave, but if you looked at the history of the OpEx line, if you are looking back eight years ago, that is kind of when we put PeopleSoft in. We had a whole bunch of additional costs that kind of jumped it up, and then we had a flurry of acquisitions in the last eight years where we have done close to 19 or 20 acquisitions since 2003, which, obviously, that has an impact on G&A. You're right, I congratulate all of our managers for maintaining the G&A at 19%. There are some things that are flopping around in there like some things that can impact the quarter like litigation and settlements that we talked about earlier, that can impact on a quarterly basis. So do I think we have set a new level? I think potentially we have, but there is always that wild card out there of an unusual thing that can impact a quarter.

You've also got just generally an improving economy is going to put some pressures in some areas, wages and some of those kind of things, as the economy continues to improve. It will come into play. Like the rest of the world, merit increases in recent years have been at lower levels than what we have typically done historically, and again, at some point, that probably starts to swing back in line.

Great. Thanks, good job.

Our next question comes from [Evan Cisner] of RBS. Your line is open.

Kevin, quick question for you. The win rate this quarter, how is that compared to historical win rates?

Evan, this is Jack. I would say on the banking side, it is probably -- compares fairly consistently on the credit union side. I would say if anything, the win rate has probably increased at this point.

I think in regards to the mid-tier deals we've been talking about, Evan, if that's what you're referring to, that's not so much that our win rate has changed, it is more the institutions have actually made a decision, because it is amazing how many institutions actually go through an evaluation process and their final decision is to not do anything.

Got it, excellent. And in terms of the backlog, do you see growth in the backlog coming mostly from the credit union side or mostly from the banking side?

For the outsourcing, it was pretty evenly split. Both sides had very nice quarters.

And on the licensed revenue side?

In-house was basically flat sequentially, Evan, so both sides are driving that. We had some nice wins, as Jack mentioned, one of the mid-tier deals was an in-house deal, so there are some nice things there. We had a decent quarter for complementary products. We had a great quarter for in-house credit union core deals. As Jack mentioned, those sales pipelines all look really good going into this quarter. So backlog where it is.

If you saw an increase in the in-house backlog, it would be more likely to come from the credit union side simply because 90% or more of the deals that we do on the banking side are outsourced transactions, and we are somewhere in the neighborhood of 50% on the credit union side. So for that reason alone, I think if we were to see growth in the in-house backlog, it probably, likely barring some one-time large banking transaction, it would be more likely to be coming from the credit unions.

Perfect, thank you.

Our next question comes from Brett Huff of Stephens Incorporated. Your line is open.

Two quick questions. One, you mentioned pricing pressure, and I recall in payments, and I recall a couple of years ago, maybe 1.5 years ago, that you had some big renewals on the debit side. Are we having some roll over there again or is this just general debit processing pricing pressure that exists in the mid-market bank space overall?

This is Tony. I would tell you that we have had a number of renewals that have happened on any given quarter basis, and pricing pressures in a renewal deal are pretty strong. But they are also strong in competitive takeaways. We had hoped to see those pricing pressures subside a bit, but we are continuing to see them as strong as they have been in the past.

That is helpful. Second question, there's been some talk. You guys have talked about bank consolidation, and my understanding is that you guys continue to face a headwind both revenue and margin-wise from bank consolidations, whether they be forced or maybe not. And I'm curious if you guys can tell us this quarter, did you see that start to abate or increase relative to the headwinds you had over the past couple of years? And when did that start to taper more if you guys had to look out and give a thought on that?

Brett, as far as M&A activity, I am not sure that that has changed dramatically or the impact at least to us. The real impact of the last four years has actually been bank failures, especially on an outsource deal. When they deconvert, you lose that revenue immediately. FDIC has made very clear there aren't any contracts, so we don't get any early termination fees. So the biggest impact the last three or four years has been that. You are right, in 2010, there was 157 bank failures. In 2011, there was roughly 92 bank failures, so it did go down 40%. The other thing that I would say in 2011, the average asset size bank that failed was smaller than the year before, so the impact is diminishing. And I will tell you that based on some of the numbers I have looked at, the grow over is actually going to get easier for us next quarter as long as the regulars will start leaving our customers alone.

And Kevin, you have a number you quoted about what the outsourcing growth would've been last quarter absent bank figures, I was trying to remember that number. I think it was 10%?

It wasn't quite 10%, but it was almost double the growth of what it actually was for the quarter, without the bank failure impact. You throw the in-house in there, just the impact on the quarter on an apples-to-apples basis, Brett, you are looking at several million dollars of revenue that went away and obviously, our cost structure does not go away. You're right, it impacts revenue, and probably even more, our margins.

That's what I need. I appreciate your time.

(Operator Instructions) Our next question comes from Tim Willi of Wells Fargo. Your line is open.

I was curious if you could give us some thoughts around, your comments around spending and the mentality or the attitude of the mid and small-sized banks. As we look forward, obviously mobile banking is the next big thing potentially. The big banks, pretty aggressive with it, and typically that is the case where the big banks go after something pretty aggressively and then the mid and small-sized follow. I'm curious about two things. One is, do you think that the smaller and mid-size banks are following on the mobile front more quickly than maybe they did when the Internet banking and the bill payment curve was sort of playing out?

And then second, does that discussion around mobile and mobile banking and Internet banking and all this stuff, does it actually lead to banks doing some deeper soul-searching about the systems they have in place to move into this next generation of how people do things? Is that plausible, is that big dollars, is it just a very nice underpinning? Anything you can give us on sort of those types of conversations? Or maybe thoughts you guys have from where you have sat for the last 10 to 15 years in the industry?

Tim, I think that any survey that you would look at, I have probably seen a half dozen of them in the last 90 days or so. The number one area of spending that they comment on that you are likely to see, and the financial institutions is in and around the mobile, and in some cases, tablet applications. We have had pretty good success with our banks and our mobile offering in the sense that we are right at 500 mobile banking financial institutions. We have had good success signing financial institutions already, and then certainly with somewhat less concerned about bank survival and Durbin interchange impacts. I think some spending is likely to continue to pick up, and again every survey will point you in that direction.

I think that there is a fair amount, Tim, of looking at your electronic delivery channels in general. Your Internet banking, your mobile, and how all of that ties together. Again we get very significant penetration on the banking side of our business with our Internet, and as a result, mobile typically as well. The credit union side, as you know, we began offering our NetTeller Internet banking solutions there about two years ago. We are seeing very strong adoption over there. A lot of refreshing of the electronic delivery channels appears to be taking place there.

So the soul-searching that you mentioned is largely going to be around electronic delivery channels and in some cases, it may be around the core. Does the core interacting with the electronic delivery channels deliver the right kind of integrated solution for the end customer or the end member, in the case of the credit union? Having said that, mobile in and of itself is not going to be a major revenue driver. The challenge with mobile is it is yet another service that banks can't charge their customers for. They pretty well have to offer it for free.

So if there is any reluctance to having mobile, it's the fact that it incurs costs and it's difficult for them to clearly see where there is revenue to be gained by doing it. So recognizing that, we have priced our mobile solutions to try to make it very attractive for a very fully-featured system deliverable. But, again, I think where the potential upside comes from is people look at the refreshing of the entire electronic channel and/or in some cases, core to get to that. Integrated delivery is where there is probably a better opportunity.

Thanks very much for your thoughts.

I'm showing no additional questions at this time. I would like to turn the conference back over to Kevin Williams.

Thanks, Amy. In summary, we want to thank you for joining us today to review our second-quarter fiscal 2012 results. We are pleased with the results and the efforts of all of our managers and associates to help control costs, and at the same time, continue to take care of our customers. The three of us, our managers and all of our associates continue to focus on what is best for our customers and our shareholders. Again, thank you for joining us today. With that, Amy, would you please provide the replay number?

Ladies and gentlemen, this conference will be available for replay after 11.45 AM today through February 8, 2012, at 11.59 PM. You may access the replay system at anytime by dialing 855-859-2056 and entering the access code 44485245. Those numbers again are 855-859-2056, and access code 44485245. That does concludes our conference for today. Thank you for participating in today's conference. You may now disconnect.