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Executives

John F. 'Jack' Prim – Chief Executive Officer

Kevin D. Williams – Chief Financial Officer and Treasurer

Tony L. Wormington – President

Analysts

David Togut – Evercore Partners

Glenn Greene – Oppenheimer & Co.

David Koning – Robert W. Baird

Peter Heckmann – Avondale Partners

Brett Huff – Stephens Inc.

Greg Smith – Sterne Agee

Jack Henry & Associates, Inc. (JKHY) F2Q13 Earnings Call February 6, 2012 8:45 AM ET

Operator

Good day and welcome to today’s Jack Henry's Second Quarter 2013 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.

Kevin D. Williams

Thank you [Latoia]. Good morning. Thank you for joining us for the Jack Henry & Associates second quarter of fiscal 2013 conference call. I am Kevin Williams, CFO, and on the call with me today are Jack Prim, our CEO; and Tony Wormington, President.

The agenda for the call this morning is as follows; I will turn over to Jack and he will start with an overview of the quarter, Tony will then provide some operational highlights, and then I'll provide some additional comments on the press release we put out yesterday after the market closed, and provide some additional comments on the financials, and finally we will open up to Q&A and try to answer your questions.

I need to remind you that remarks or responses to questions today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statement 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 risks and certainties, then 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'll now turn the call over to Jack.

John F. 'Jack' Prim

Thanks, Kevin. Good morning. We are pleased to announce a record quarter for revenue and gross profit. Operating and net income were impacted by one-time events in the quarter as we will discuss. Although our financial reports are noisier than normal for Jack Henry, including one-time events with both positive and negative impacts in the quarter, when you look past those events we had a very strong performance in the quarter.

The most significant of these events was related to the Hurricane Sandy damage to our New Jersey facility and the subsequent recovery efforts. This facility provides item processing services for over 100 financial institutions, and hurricane damage required relocation to our disaster recovery facility. Longer than expected delays in the initial recovery effort lead to delays in processing and other issues for customers.

The one-time costs incurred include compensation to customers for the problems and inconvenience they experienced in the recovery. Significant lessons learnt from this event have been applied to all of our business continuity plans to assure that these issues will not be experienced in any such future event. Recovery of some portion of this charge via insurance claims is likely, but any such amounts are unknown at this time.

Despite these distractions, we again had strong organic revenue growth of 9%, leading to a record revenue quarter, and gross profit increase of 14%. With the inclusion of the one-time disaster related charges, operating expenses increased 35%, and general and administrative costs increased 103% in the quarter. Operating expenses increased 5%, when excluding the charges, and G&A increased 1%.

Operating income decreased 1% with the charges and increased 20% without them. Sales were strong in the quarter in all three brands. Our credit union sales team had strong new core and EFT processing sales. The banking team had a strong quarter in spite of some delays from customers impacted by the hurricane events. Since the significant majority of those sales were for hosted solutions, any delays would not have impacted overall financial results in the quarter.

ProfitStars continued to successfully leverage their base of over 9000 financial institutions that are not using a JHA core system for a solid sales quarter. All of our payments businesses saw strong growth as Tony will address. In the PassPort, debit and credit transaction processing growth in the credit union segment was a strong contributor to the improved gross margins in that segment, and the backlogs showed very solid growth on continued strong sales of both in-house and outsourced solutions.

I would like to thank our over 5000 employees for their continued efforts on behalf of our customers that allowed us to deliver these solid financial results. I also want to assure our customers, shareholders and employees that we are fully committed to seeing that the one-time events in this quarter will indeed be one-time events.

With that, I'll turn it over to Tony for some additional business updates.

Tony L. Wormington

Thank you, Jack. We are pleased with the strong contributions in all components of support and services, which increased 11% over the prior year quarter.

The largest contributor continues to be our electronic payments revenue, which grew 18% compared to the prior year quarter. Our outsourced data and item processing services increased 11% for the quarter. Our in-house annual maintenance fees increased 4% for the quarter. In addition our one-time implementation revenues increased 8% compared to the prior year quarter.

Our electronic payments transaction volumes continue to experience very solid growth. PassPort, ATM and debit card processing volumes increased 10.4% over the prior year quarter. Bill payment transaction volumes increased 18.4% over the prior year quarter. And financial institution merchants installed and utilizing our enterprise payment solution increased to over 44,000 merchants, representing a 14.7% increase compared to the prior year quarter, and merchant related transaction volumes increased 25.8% over the prior year quarter.

I'll now turn it over to Kevin for a further look at the numbers.

Kevin D. Williams

Thanks Tony. As Jack mentioned, our total organic revenue growth was 9% for the quarter compared to the same period a year ago. License revenue was down by 3% for the quarter and represents 5% of our total revenue. Support and service revenue increased 11%. We had deconversion fees in the quarter in both OutLink and our electronic payments totaling about $3.5 million this quarter compared to $1.6 million in the same quarter a year ago, which represents a little less than 1% of support and service revenue growth in the quarter. So without those our true support and service revenue growth would have still been a little lower 10% growth.

Support and services breakdown, implementation revenue of $20.9 million was an 8% increase for the quarter, electronic payments of $98.9 million was an increase of 18%, OutLink at $52.4 million was an increase of 11%, and in-house maintenance of $78.1 million was a 4% increase over last year.

Hardware revenue decreased 9% in the quarter compared to the prior year and represented 5% of total revenues, same as our software did. Our recurring revenue experienced growth of 10% for the quarter compared to the prior year and represented 79% of total revenue for the quarter.

Our consolidated gross margins improved to 44% for the quarter, impacted by over 1% for the de-conversion fees compared to 42% in the same quarter a year ago. License margins decreased to 91% this quarter from 92% a year ago due to sales mix. Support and service margins improved to 42% compared to 40% last year and hardware margins were flat with last year at 31%.

To break this down into our two reporting segments, our bank segment gross margins improved to 44% from 42% a year ago, and our credit union segment margins increased to 45% from 41% a year ago due to the increase in outsourcing and electronic payments within the credit union segment.

In the bank segment, license margins decreased to 86% from 90% a year ago. Support and service margins for the bank segment improved to 43% from 40% a year ago, and hardware margin remained in the level of 33%.

In our credit union segment, license margins improved slightly to 96% for the quarter compared to 95% a year ago. Support and service margins improved from 38% to 41% this year, and hardware margins improved to 25% from 23% a year ago.

Total operating expenses increased 35% for the quarter compared to the prior year, which this included the $13.7 million expenses related to Hurricane Sandy. Without these operating expenses would have only increased 5%. As a percentage of total revenue, our operating expenses increased to 23% from 18% last year. Without the one-time cost they would have been level at 18% of total revenue. Our operating margins for the quarter increased to 26% from 24% a year ago, excluding Lyndhurst, but including it, our operating margin decreased to 21% as reported from 24% a year ago.

Operating income increased 20% for the quarter compared to last year’s second quarter, excluding the one-times, but actually decreased by 2% because of these one-time costs.

Our net interest expense was down slightly this quarter just because of the continued payment on our funding. The effective tax rate for the quarter was 31%, down from 36% last year primarily due to the release of some previously unrecognized tax benefits that were recognized in this quarter due to finalizing an IRF audit on previous years. The deconversion fees I mentioned earlier included in support and service added approximately $0.025 EPS to the quarter, which as we mentioned in the press release yesterday, our normal operations without the effect of Sandy and the tax release generated $0.54 EPS for a quarter. So net of this deconversion revenue we would have been at about $0.51 or $0.515 EPS.

Again this $0.03 compares to $0.01 EPS impact from deconversion fees in the same quarter a year ago.

EBITDA was relatively level at $84.2 million compared to a year ago. However without the effect of the disaster, our EBITDA would have been $97.9 million, or an increase of 16%. Depreciation and amortization expense of $24.2 million this quarter was $12.3 million in depreciation and $11.9 million in amortization compares to $23.7 million in D&A this quarter last year. Included in the total amortization is the amortization of intangibles from acquisitions, which was $5.3 million this quarter, compared to $6.2 million in last year's quarter.

Operating cash flow year-to-date increased to $119.2 million from $96.3 million a year ago. Free cash flow year-to-date is calculated as operating cash flow less capitalized expenditures, of $19.0 million, which was up slightly from $18.9 million last year. Capitalized software of $23.8 million compared to $15.7 million last year and dividends of $19.8 million up from $18.2 million last year.

Free cash flow increased to $56.6 million year-to-date compared to $45.4 million last year, which equates to free cash flow per share of $0.65 year-to-date compared to $0.52 last year.

As Jack mentioned, we had nice growth in our backlog. In-house backlog, which represents contracts in hand for software, hardware and implementation services yet to be delivered, is at $89.8 million, which is up 22% from this time a year ago. Our outsourcing backlog, which is for data and item processing contracts, is up 19% compared to this time a year ago. Total backlog was up 19% and as a reminder there was nothing in our reported backlog numbers for any of our electronic payments businesses, which currently represent 35% of total revenue for the quarter.

Looking forward, without all the noise in the quarter of the Lyndhurst cost, and the tax benefits, and the increase in deconversion fees, we would have been at about $0.51 EPS for the quarter, and $1 year-to-date. However, this is a $0.03 shortage from the consensus out there, which puts us a little behind for the year on EPS. Revenue growth should continue probably at a slightly slower pace than year-to-date, because hopefully we will not have any more deconversion fees that added [$0.07] growth in the quarter, and $0.04 of growth year-to-date.

Our gross and operating margins should stay solid and pretty much in line. However, there is always some quarterly fluctuations as we all know. For the year, we are still projecting to finish in the low to hopefully mid double-digit range for growth in net income and EPS. However, as a reminder, both revenue and margins just moved down sequentially in the third quarter of our fiscal year, which is the March quarter due to a number of things.

First our annual release fees of bank user group in the December quarter adds revenue, but the larger impact is the fact there are two less days in the March quarter for processing of electronic payment transactions, and our in-house maintenance revenue, which these combine for an average of approximately $2 million in revenue a day at current levels. So two days is a significant decrease in this quarter compared to last quarter. And also both of these are strong margin businesses, which is why our gross margins get impacted in the third quarter.

Also just to add some noise, in our upcoming third fiscal quarter, the R&D credit that was signed into law earlier this year, and made retroactive from 2012, will be reported in our third fiscal quarter as required by GAAP, and will be a positive impact of $0.04 to $0.05 EPS in this quarter.

This concludes our opening comments. With that we are now ready to take questions. [Latoia], will you please open the call lines up for questions?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) The first question is from David Togut of Evercore Partners. Your line is open.

David Togut – Evercore Partners

Thank you. Good morning gentlemen.

John F. 'Jack' Prim

Good morning.

Kevin D. Williams

Good morning.

Tony L. Wormington

Good morning.

David Togut – Evercore Partners

Could you give us a sense of whether you think the high teens growth in electronic payment services is sustainable? It seems like that growth rate continues to accelerate, and some of the underlying drivers, you know, seem to be putting up very high growth rates, and maybe you can talk about why some of those growth rates are high, and whether you think that is something that can continue?

Kevin D. Williams

I will make one comment, if Tony has any additional color on it. I think that the number should remain at similar levels. One of the things that we have seen is increasing traction in the credit union segment with our acquisition of the former Pemco business that we have rebranded as payment processing solutions.

So we have had some very solid up tick in the credit union industry for some of the credit card transaction routing offerings that we did not have prior to completing that acquisition. So that certainly has helped on the credit union segment side, and I believe our sales have been pretty solid on the banking side as well for new EFTs.

Tony L. Wormington

Yes, we had a very strong sales quarter, this quarter for the banking side, for ATM debit card processing, and are also continuing to see nice transaction volume growth in that business as well, and which would account for what we are seeing in the way of revenue growth.

David Togut – Evercore Partners

Thank you, and then could you give us your insights into what implications you see from Fiserv’s recent acquisition of Open Solutions, particularly what this means from a competitive standpoint in the credit union space versus Symitar?

John F. 'Jack' Prim

Well, you know, we think the transaction makes sense probably for both companies. We certainly have had very solid competition for quite some time in both the banking and credit union segments. You know, we have got significant momentum in the credit union segment. We certainly anticipate that we will continue to win our fair share of the business, but I think the two companies are probably better off today as a result of the acquisition than they were separately previously.

David Togut – Evercore Partners

Thank you, and just a final question Kevin, can you quantify software capitalization in the December quarter versus the year ago quarter, and what your expectation for total software cap are FY 13?

Kevin D. Williams

Yes, Dave, as we mentioned our software cap kind of ramped up in our June quarter last year, and has remained relatively level at about the $11.5 million, $12 million range a quarter, and I said it will probably be at that level for the next couple of years. For the quarter -- for the year-to-date it is 23.7 compared to 15 -- hold on. I got to find it David. I said it in the opening comments, now I lost it.

Yes, it was $23.8 million in year-to-date this year compared to $15.7 million year-to-date last year. So, sequentially about $11.5 million in the last three quarters, and that is probably where we are going to finish out the year, just double that. We are probably going to be up a bit -- be at about 46 million for the year.

David Togut – Evercore Partners

Thank you very much.

Kevin D. Williams

Thanks David.

Operator

Thank you, and the next question is from Glenn Greene of Oppenheimer. Your line is open.

Glenn Greene – Oppenheimer & Co.

Thank you. Good morning and nice results.

John F. 'Jack' Prim

Good morning.

Kevin D. Williams

Thank you Glenn.

Glenn Greene – Oppenheimer & Co.

I guess the first question, I wanted to sort of talk a little bit about the outsourced backlog growth. It was a heck of a quarter and you have been having a number of these, and I wanted to just sort of get some sense of how much of that is coming from the credit union side versus the banking side, and really in the context was kind of like the sales environment for each, and kind of what you are seeing?

John F. 'Jack' Prim

Glenn, the sales environment has been very good on both banking and credit union. Credit union, in particular, has been very strong. While we do sell a higher percentage of outsourced solutions on the banking side, 90% or better of all new core transactions on the banking side are outsourced. On the credit union side that number is probably about 60%, but we had in addition to solid outsourcing sales in both, we also had good movement or signings rather of in-house customers looking to move to outsourced processing, and several of those customers were of pretty good size, you know, a billion dollars in assets or larger. So that certainly contributes nicely to that backlog, but again I think the sales environment is pretty solid in both segments.

Glenn Greene – Oppenheimer & Co.

All right. Then on the margin side, you know, obviously a nice up tick, excluding sort of the Sandy’s effects, on the credit union side the 45% I think it was probably a record?

John F. 'Jack' Prim

It is.

Glenn Greene – Oppenheimer & Co.

I know Kevin you sort of in previous years have been sort of hesitant to suggest margins could move much, but I kind of feel like we are at a -- I want to get a sense for are we at a new higher level, or can we continue to rise from here, any reason to think not? And I know you have also had a headwind from the bank failure environment for a number of years, which continues to lessen. Is that a factor helping your margins at this point?

Kevin D. Williams

Well, it probably is a factor Glenn. I mean, I’m not sure how to quantify how much pressure that is, but obviously the bank failures continued to anniversary, decrease is a headwind on both revenue growth and margins. You know, as far as the credit union side of the business, it is really due to the, as Jack mentioned, the PPS, yes, the electronic payments business and the PassPort, the success we’re having in the credit union side, and the outsourcing.

As we used to comment in the last, probably 4 years now, the trend of in-house to outsourcing started in the bank side, and it spread over to the credit union side. And I will tell you year-to-date this year we have actually had more credit union sign ups that moved from in to out than we have banks in the first half of the year.

So I think that is going to continue now. Can we maintain a 45% margin? I think it is going to fluctuate a little bit. As I mentioned, as we go into the March quarter, I think all of our margins go down as they do every year in the third quarter for all the things I highlighted in the opening comments. But I think we are at a place where we can continue to trickle that margin slightly, but they are still going to fluctuate from quarter-to-quarter.

John F. 'Jack' Prim

And I would just add as well, you know, a potential offset to some of the improvement is the likelihood of continued declines in license fees. The market is shifting away from the traditional license model. It isn’t dead, but it is probably dying. I don’t know how long it is going to take. But software is more and more not the preferred method of contracting for products. So certainly the margins associated with license fees are dramatically higher, and as that continues to tail off as we frankly think it will over the long term that is going to have some impact on margins as well.

Glenn Greene – Oppenheimer & Co.

All right. Then just one final clarification question, for Kevin, in sort of your

outlook comments, and you were kind of talking about the current results, and I may have misheard this, but it kind of suggested that based on the $0.51 kind of your viewing normalized ex-the conversion fee in the quarter that you are behind schedule. I misunderstood that?

Kevin D. Williams

No. What I meant was -- our actual reported results for the quarter was $0.47, was $0.03 behind consensus estimates.

Glenn Greene – Oppenheimer & Co.

Okay. Never mind. Thank you.

Kevin D. Williams

That was what I was referring to Glenn.

Glenn Greene – Oppenheimer & Co.

Okay.

Kevin D. Williams

Sorry for the confusion.

Operator

Thank you, and the next question is from David Koning of Baird. Your line is open.

David Koning – Robert W. Baird

Hi guys. Great job.

John F. 'Jack' Prim

Good morning.

Kevin D. Williams

Thank you.

David Koning – Robert W. Baird

Yes, and I guess so my first question just on the guidance comments, when Kevin mentioned low to mid double-digit net income and EPS growth, is that assuming the kind of previous tax rate, kind of assuming that 36% tax is meaning it will be a little better than low to mid double-digits due to the IRS kind of refund and then the R&D credit this quarter?

Kevin D. Williams

Yes.

David Koning – Robert W. Baird

Okay. Okay. And then I guess, what is the ongoing tax rate going to be like if I guess after -- this last quarter was an adjustment and then Q3 obviously the R&D catch up, but what would you expect the ongoing tax rate normalized to be?

Kevin D. Williams

Yes, that is a good question Dave. I mean this whole fiscal year’s effective tax rate is going to bounce all over the place because of what happened this quarter with settling the (inaudible) and with the R&D credits next quarter, our effective tax rate for the year is probably going to I don’t know, 30% or 31%. You know, the next year we will have the R&D credit for the first half of the year, and then it expires again. So next year is probably going to be, I am guessing in the 35% range for the year.

David Koning – Robert W. Baird

Okay. Lower in the first half and then higher in the second half?

Kevin D. Williams

Yes.

David Koning – Robert W. Baird

Okay. And then finally just it sounds like the shift to outsourcing is almost happening a little faster, I guess it sounds like, than maybe which you would have even thought of a couple of quarters ago, does that mean that the license line it has been kind of slow growth mode, you know, maybe instead of slow growth maybe it is flatter, and then the support and service line continues to be really strong?

Kevin D. Williams

Well, my prediction again long-term is that license fees continue to taper off. I don’t know that we necessarily see a steep drop, but again I think customers are moving away from the license model, and I believe that is going to continue.

David Koning – Robert W. Baird

Okay. Great, thanks. Good job.

John F. 'Jack' Prim

Thanks David.

Operator

Thank you. (Operator instructions) The next question is from Peter Heckmann of Avondale Partners. Your line is open.

Peter Heckmann – Avondale Partners

Good morning guys. Could you talk a little bit more about the flooding issue, it seems like that the charge is awfully large compared to the relative amount of revenue that you would probably generate through that item processing center. Where there some contractual obligations or some SLAs in the contract that required penalties over and above what you would normally receive for that type of service?

John F. 'Jack' Prim

Pete, no. I think frankly it reflects more our feeling about what was fair and appropriate for our customers. It was a very difficult event for our customers, for our company. We felt like that the right thing to do was reimbursements for the difficulties that were encountered there, and more of a -- quite frankly thinking more about the long term relationship with those customers than short-term impact in the quarter.

Peter Heckmann – Avondale Partners

Okay. I mean, again I guess, it seems to be like that could be several years of profits from item processing, would that be correct?

John F. 'Jack' Prim

I don’t know.

Kevin D. Williams

But Pete, the other thing you got to remember is even though we’re just talking about an IT center, the vast majority of customers are also on data processing centers, and that is the relationship that we want to protect, because obviously that is where the profits come from is from the data processing side of the business. So, yes, it might have been more than our IT profits were, but it was the right thing to do.

There was also other than just reimbursement to the customers and counseling them, there was also a pretty big chunk in there for our people’s time, the overtime they worked, the relocations, moving people around, the property damage, and as Jack mentioned in his opening comments, I have filed some insurance claims, which are not reflected in the financials because we’re not allowed to book insurance until you know that the claim has been accepted and approved. And there will be other claims filed for some of this. So there will be money coming back in. At this point I’m not sure what that dollar amount is.

Peter Heckmann – Avondale Partners

And then as regard to the follow up on the capitalized software side, could you just describe some of the projects that are going on there and the relative timelines for them going into a live release?

Tony L. Wormington

Yes, this is Tony. We have got several significant projects, one of which is a new user interface that has streams across all of our core and complementary solutions. It is a very large project that has been ongoing for some time, and will continue to take place in the future. We continue to look at many things that are -- Internet and mobile that we are working with that is in those numbers as well, as well as a significant architectural upgrade of our Episys solution in the credit union market, and probably a few others that I am forgetting, Jack.

John F. 'Jack' Prim

Yes, those would certainly be the larger items. But when you have as many products as we have, there is always a need of ongoing architectural refreshes, whether it is an asset liability management standalone solution or a core solution. So there is continuous development on an ongoing basis on all of those products that adds up.

Peter Heckmann – Avondale Partners

For continuous development of products that are already in the field, would you necessarily typically capitalize that?

John F. 'Jack' Prim

It depends on -- it depends on the nature of what we are doing, if it is a significant re-architecture of a product that is going to be -- likely to be able to be capitalized.

Kevin D. Williams

Pete, well that comes down to the accounting rule. I mean, if you look at a project, and it meets the rules that are required to be capitalized under GAAP, then we have to capitalize it, which means it is going to be a product that either extends the life of a product, it is going to generate more revenue or generate some new sales. If it falls in that bucket it is capitalized. If it is just an enhancement that is not going to do any of that, then no, it gets expensed.

Peter Heckmann – Avondale Partners

Okay, and then can you talk about the relative interest from your customers for real-time processing versus multi-batch?

John F. 'Jack' Prim

Well, certainly our credit union solutions are all real-time, always have been. On the banking side of the business, real-time is not a concept that has caught on or frankly it is even requested in looking at RFP solutions and those kind of things. It is pretty unusual to even see a question in the RFP regarding real-time capability. So, will that over time become a more important factor? Possibly, but we certainly aren’t seeing it near term.

Kevin D. Williams

With some of the features that we have in our banking solutions with memo posting and other thing, it gives the effect of real-time currently to that.

Peter Heckmann – Avondale Partners

Okay, all right. That is helpful. Thanks.

Operator

Thank you, and the next question is from Brett Huff of Stephens Inc. Your line is open.

Brett Huff – Stephens Inc.

Good morning guys.

John F. 'Jack' Prim

Good morning.

Brett Huff – Stephens Inc.

Congrats on a nice quarter. One quick question, somebody I think asked about what are some of the other M&A going on? What about the ACI-ORCC deal and your thoughts on competitive -- the changing competitive landscape in bill pay because of that and also consider net banking?

John F. 'Jack' Prim

You know, Brett, I don’t know that I would see that changing anything. It is the same product we have been competing with quite successfully for quite a while. It is under new ownership, you know, probably not unlike the other transaction that was mentioned. It probably clears up some question marks around financial viability, you know, of the previous company.

So other than that possibly making people a little more comfortable in looking at that solution competitively. We frankly don’t see it changing anything at all.

Brett Huff – Stephens Inc.

Okay, and then a follow up question on the conversation before about in-house to outsourcing that has been a trend over time. I just want to make sure I heard you right. It sounds like the accelerate -- that banks continue to do that, credit unions have accelerated a little bit, is that the right takeaway?

John F. 'Jack' Prim

Well, you know, if you look back over a three-to-five year period, the number of credit union transactions has been steadily growing. You know, they came to that party a little later than the banks did, but in the last few years it has definitely been picking up. We had a number of transitions that have taken place in the first half of the year or signings do take place.

And the other factor that is influencing it Brett is that the size of some of the customers that are doing it. It is not just the small bank who is overwhelmed necessarily by technology, I mean we’re seeing some $1 billion to $2 billion banks that just don’t want to manage the technology, or either staffing issues or whatever their motivations might be. So it has appeal to some pretty sizeable customers. So even smaller number of customers, but bigger customers could make a difference in that number as well.

Brett Huff – Stephens Inc.

And then, can you guys give us a sense of -- I mean, it seemed your organic growth has been really good. And it sounds like a good chunk of that is from the cross sales you are doing and getting some of the transaction growth in the payment stuff that you have invested in, but it also seems like this is contributing to that. Can you give us a sense of how much this insourcing in-house to outsourcing contributes to the organic growth in a rough sense, is there anyway to quantify that for us?

Kevin D. Williams

Well, I mean, I don’t know if I can quantify that for you Brett, but as we said in the past, and you have heard Jack and I say this for the last three or four years because we got a slide that actually shows it. I mean when a typical bank or credit union goes from in-house to outsourcing, the wallet share that we get from that FI essentially doubles. So whatever they were paying us for in-house maintenance, hardware maintenance, DR, whatever, on average we’re going to make, we’re going to get double the revenue out of them the next year, plus entitlement to a long-term contract, plus if they get acquired they have an early termination fee, which they don’t have if they are an in-house customer.

So there is a whole bunch of positive things that go with this move besides just the doubling of revenue. Obviously that is going to -- the contribution from the revenue in true dollar amount is going to alter significantly from quarter-to-quarter, year-to-year, depending on the make-up of the banks that we move. So, for example, two years ago we had 45 FIs that moved over, and last year I think we had about the same number.

But if the make-up is, the average asset size is double of last year, then the wallet share we are going to get out of them is going to be a whole lot more. So, it is kind of a moving target, but all I can say is at the end of the day Brett, it is a really good thing for Jack Henry long-term. It is having a very nice impact on our overall growth.

John F. 'Jack' Prim

And further clouded, although we believe now we haven’t kind of passed this point, but we have talked a good bit about the heavy winds from bank failures that we have dealt with over the last few years, and certainly doesn’t slow down, but you still got to grow over the previous ones. And I think for the most part we are largely there. Even the growth that you see coming from the transitions is we’re all set somewhat by the bank failures and lost revenue there. So, separating those numbers out just makes it a little bit more challenging, but again it is a phenomenon we expect to see continue moving forward.

Brett Huff – Stephens Inc.

Great. That is what I needed. Thanks for your time guys.

John F. 'Jack' Prim

Thanks Brett.

Operator

Thank you, and the next question is from Greg Smith of Sterne Agee. Your line is open.

Greg Smith – Sterne Agee

Yes, hi guys. Just wondered about how we should think about the use of the balance sheet over the next year, are you looking for acquisitions and if let us say we don’t see anything, would you be inclined to buy back more stock, just can you help us out there please?

Kevin D. Williams

Yes, Greg, I mean, obviously we have been looking at acquisitions, and we will continue to look at acquisitions trying to find the right one. But as you well know, we have got a pretty rounded product suite. So it is not like we’re having big gaping holes to go find something. But we will continue to look and I’m sure we will find something down the road.

But yes, in lieu of that if we don’t find the right acquisition, I’m sure we will get a little more aggressive buying back stock. We did not buy stock back this last quarter primarily because of the Lyndhurst event, and I had about 300 of our employees blacked out during the quarter, and if I got my employees blacked out, then I have blacked the company out.

Greg Smith – Sterne Agee

Got it. Okay, that makes sense. And then just there has been some talk about some of the M&A, is there really any further consolidation, any meaningful consolidation to go at this point in this industry, or you think we’re pretty much sort of done. There will be small things here and there, how do you think about that?

John F. 'Jack' Prim

Greg, I think it is largely down to smaller kinds of transactions. Kevin mentioned that we continue to look at acquisitions, and you know frankly we look at those are the ones that were mentioned earlier on the call. You know, they solved different problems for somebody else than they do for us. I mean, I don’t -- if I am buying a product that I have already got that kind of product in my suite, then my incremental revenue gains are going to be probably modest, my cost takeout, and it just depends, but generally there is going to be a lot of integration effort associated with that.

And if that solves a big enough problem for you, you know, then it is worth doing, but if not, we are better off focusing on continuing to offer the best of breed solutions that we already have. But as I look out there, I can’t tell you that I see any significant core consolidation opportunity like the open transaction out there that certainly everybody knew something needed to happen there because of the balance sheet challenges, but getting away from that one that was fairly obvious.

I don’t know if anything that is obvious to me that needs to happen. The folks that are out there are doing okay, and operating pretty well, and I’m not aware of any pressure that are going to push anybody to go do anything as a result of anything we have seen thus far.

Greg Smith – Sterne Agee

Okay. That is helpful. Thank you.

Kevin D. Williams

Thanks Greg.

Operator

Thank you. There are no further questions at this time. I will turn the call back over to Kevin Williams for closing remarks.

Kevin D. Williams

Thank you [Latoia]. I just wanted to mention that you all will be getting a invitation shortly, and a whole the date e-mail for our annual analyst day. If you want market calendars, they will be held at the Grand Hyatt at the DFW Airport on Monday evening and Tuesday morning, May 6 and May 7, which will be the Monday and Tuesday after our third quarter earnings call.

And we hope that all of you can find time to join us for that annual event. In summary of the call, we want to thank you for joining us today to review our second quarter fiscal 2013 results. We are pleased with the results from our ongoing operations and the efforts of all of our associates to take care of our customers. Our executives, managers and all of our associates should continue to focus on what is best for our customers and shareholders.

With that, [Latoia], would you please provide the playback number.

Operator

Yes, ladies and gentlemen, this conference will be available for replay after 11.45 Eastern Time today through February, the 13, at 11.59 Eastern Time. You may access the replay system by calling 1-800-585-8367 and entering the access code of 90545827. Again, the number is 1-800-585-8367, the access code is 90545827. That does conclude our conference for today. You may now disconnect.

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