Henry Jack & Associates Inc (JKHY) SEC Quarterly Report (10-Q) for Q1 2016

FORM 10-Q

Commission file number 0-14112

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As of May 2, 2016 , the Registrant had 78,884,710 shares of Common Stock outstanding ($0.01 par value).

TABLE OF CONTENTS

In this report, all references to "JHA", the "Company", "we", "us", and "our", refer to Jack Henry & Associates, Inc., and its wholly owned subsidiaries.

FORWARD LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, in Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements are identified at "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended June 30, 2015. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

See notes to condensed consolidated financial statements

See notes to condensed consolidated financial statements

See notes to condensed consolidated financial statements

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

Description of the Company

Jack Henry & Associates, Inc. and subsidiaries ("JHA" or the "Company") is a provider of integrated computer systems and services that has developed and acquired a number of banking and credit union software systems. The Company's revenues are predominately earned by marketing those systems to financial institutions nationwide together with computer equipment (hardware), by providing the conversion and implementation services for financial institutions to utilize JHA systems, and by providing other related services. JHA also provides continuing support and services to customers using in-house or outsourced systems.

Consolidation

The condensed consolidated financial statements include the accounts of JHA and all of its subsidiaries, which are wholly-owned, and all intercompany accounts and transactions have been eliminated.

Comprehensive Income

Comprehensive income for the three and nine months ended March 31, 2016 and 2015 equals the Company's net income.

Common Stock

The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or short-term borrowings on its existing credit facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At March 31, 2016 , there were 23,962 shares in treasury stock and the Company had the remaining authority to repurchase up to 6,028 additional shares. The total cost of treasury shares at March 31, 2016 is $855,594 . During the first nine months of fiscal 2016 , the Company repurchased 2,120 treasury shares for $155,122 . At June 30, 2015 , there were 21,843 shares in treasury stock and the Company had authority to repurchase up to 8,148 additional shares.

Dividends declared per share were $0.28 and $0.25 , for the three months ended March 31, 2016 and 2015 , respectively. For the nine months ended March 31, 2016 and 2015 , dividends declared per share were $0.78 and $0.69 , respectively.

Interim Financial Statements

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America applicable to interim condensed consolidated financial statements, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and accompanying notes, which are included in its Annual Report on Form 10-K  ("Form 10-K") for the fiscal year ended June 30, 2015 . The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements included in its Form 10-K for the fiscal year ended June 30, 2015 .

In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial position of the Company as of March 31, 2016 , the results of its operations for the three and nine months ending March 31, 2016 and 2015 , and its cash flows for the nine months ending March 31, 2016 and 2015 . The condensed consolidated balance sheet at June 30, 2015 was derived from audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements.

The results of operations for the period ended March 31, 2016 are not necessarily indicative of the results to be expected for the entire year.

Litigation

We are subject to various routine legal proceedings and claims, including the following:

In 2013 a patent infringement lawsuit entitled DataTreasury Corporation v. Jack Henry & Associates, Inc. et. al . was filed against the Company, several subsidiaries and a number of customer financial institutions in the US District Court

for the Eastern District of Texas.  The complaint seeks damages, interest, injunctive relief, and attorneys' fees for the alleged infringement of two patents, as well as trebling of damage awards for alleged willful infringement.  We believe we have strong defenses and have defended the lawsuit vigorously.  A part of that defense has been the filing of challenges to the validity of plaintiff's patents in post-grant proceedings at the Patent Trial and Appeal Board ("PTAB") of the U.S. Patent and Trademark Office. On April 29, July 8, and September 1 2015, the PTAB issued decisions holding that all relevant claims of the plaintiff's patents are unpatentable and invalid.  DataTreasury has appealed the PTAB decisions to the U.S. Court of Appeals for the Federal Circuit.  At this stage, we cannot make a reasonable estimate of possible loss or range of loss, if any, arising from this lawsuit.

NOTE 2.    FAIR VALUE OF FINANCIAL INSTRUMENTS

For cash equivalents, amounts receivable or payable and short-term borrowings, fair values approximate carrying value, based on the short-term nature of the assets and liabilities. The fair value of long term debt also approximates carrying value as estimated using discounted cash flows based on the Company's current incremental borrowing rates.

The Company's estimates of the fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available. The three levels of the hierarchy are as follows:

Level 1: inputs to the valuation are quoted prices in an active market for identical assets

Level 2: inputs to the valuation include quoted prices for similar assets in active markets that are observable either directly or indirectly

Level 3: valuation is based on significant inputs that are unobservable in the market and the Company's own estimates of assumptions that we believe market participants would use in pricing the asset

Fair value of financial assets, included in cash and cash equivalents, and financial liabilities is as follows:

NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers in May 2014. The new standard will supersede much of the existing authoritative literature for revenue recognition. In August 2015, the FASB also issued ASU No. 2015-14 which deferred the effective date of the new standard by one year. The standard and related amendments will be effective for the Company for its annual reporting period beginning July 1, 2018, including interim periods within that reporting period. Along with the deferral of the effective date, ASU No. 2015-14 allows early application as of the original effective date. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect as of the beginning of the period of adoption. In March 2016, the FASB issued ASU No. 2016-08, which addresses principal versus agent considerations under the new revenue standard. The Company is currently evaluating the newly issued guidance, including which transition approach will be applied and the estimated impact it will have on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs be presented in the balance sheet

as a direct deduction from the carrying amount of the related debt liability (same treatment as debt discounts). ASU No. 2015-03 will be effective for the Company in its fiscal year ended June 30, 2017. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company currently classifies debt issuance costs as an asset, and will adopt these changes beginning July 1, 2016.

ASU No. 2015-17 was issued by the FASB in November 2015 as part of the Simplification Initiative. This ASU eliminates the requirement to separate deferred income tax liabilities and assets into non-current and current amounts. ASU No. 2015-17 is effective for the Company for its annual reporting period beginning July 1, 2017 and early adoption is permitted. In the third quarter of fiscal 2016, management elected to early adopt and all deferred income tax assets and liabilities are reported as non-current. At March 31, 2016 , the current portion of our deferred income tax liability was $7,034 . Prior periods were not retrospectively adjusted.

The FASB issued ASU No. 2016-02, Leases, in February 2016. This ASU aims to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and requiring disclosure of key information regarding leasing arrangements. ASU No. 2016-02 will be effective for Jack Henry's annual reporting period beginning July 1, 2019 and early adoption is permitted. The Company is currently assessing the impact this new standard will have on our consolidated financial statements.

The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting in March 2016. The new standard will simplify several aspects of the accounting for share-based payment transactions, including reporting of excess tax benefits and shortfalls, application of forfeiture rates, statutory minimum withholding considerations, and classification within the statement of cash flows. ASU No. 2016-09 is effective for the Company's annual reporting period beginning July 1, 2017 and early adoption is permitted. The Company is currently evaluating the newly issued guidance, including the estimated impact it will have on our consolidated financial statements.  The Company has not yet determined when the changes will be adopted.

NOTE 4.    DEBT

The Company's outstanding long and short term debt is as follows:

Capital leases

The Company has entered into various capital lease obligations for the use of certain computer equipment. The Company currently has short term capital lease obligations totaling $213 at March 31, 2016 .

Revolving credit facility

The revolving credit facility allows for borrowings of up to $300,000 , which may be increased by the Company at any time until maturity to $600,000 . The credit facility bears interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the highest of (i) the Prime Rate for such day, (ii) the sum of the Federal Funds Effective Rate for such day plus 0.50% and (iii) the Eurocurrency Rate for a one month Interest Period on such day for dollars plus 1.0% ), plus an applicable percentage in each case determined by the Company's leverage ratio. The credit facility is guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of March 31, 2016 , the Company was in compliance with all such covenants. The revolving loan terminates February 20, 2020 and at March 31, 2016 , the outstanding revolving loan balance was $100,000 .

Other lines of credit

The Company has an unsecured bank credit line which provides for funding of up to $5,000 and bears interest at the prime rate less 1% . The credit line expires April 30, 2017 . At March 31, 2016 , no amount was outstanding.

Interest

The Company paid interest of $748 and $415 during the nine months ended March 31, 2016 and 2015 , respectively.

Property and Equipment

Property and equipment included $(1,379) and $5,444 of net change in assets acquired via accrued liabilities or capital lease at March 31, 2016 and 2015 , respectively. These amounts were excluded from capital expenditures on the statement of cash flows.

NOTE 5.    INCOME TAXES

The effective tax rate was  32.1%  of income before income taxes for the quarter ended  March 31, 2016 , compared to 33.8%  for the same quarter in fiscal 2015 . The decrease in effective tax rate was primarily due to the recognition of additional federal Research and Experimentation Credit ("R&E Credit") tax benefits in the current period compared to the prior year quarter.

The Company paid income taxes of $65,064 and $60,164 in the nine months ended March 31, 2016 and 2015 , respectively.

At March 31, 2016 , the Company had $7,644 of gross unrecognized tax benefits, $6,147 of which, if recognized, would affect our effective tax rate. We had accrued interest and penalties of $1,249 and $1,388 related to uncertain tax positions at March 31, 2016 and 2015 , respectively.

During the period ended March 31, 2016, the Internal Revenue Service commenced an examination of the Company's U.S. federal income tax returns for fiscal year ended June 30, 2014. The examination is expected to be completed in December 2016. At this time, it is anticipated that the examination will not result in a material change to the Company's consolidated financial statements. 

The U.S. federal and state income tax returns for fiscal 2012 and all subsequent years remain subject to examination as of March 31, 2016 under statute of limitations rules. We anticipate potential changes due to expiring statutes could reduce the unrecognized tax benefits balance by $1,500 - $3,000 within twelve months of March 31, 2016 .

NOTE 6.    STOCK-BASED COMPENSATION

Our operating income for the three months ended March 31, 2016 and 2015 includes $3,101 and $2,759 of stock-based compensation costs, respectively. For the nine months ended March 31, 2016 and 2015 , stock-based compensation costs totaled $8,213 and $7,342 , respectively.

2005 NSOP and 1996 SOP

The Company previously issued options to employees under the 1996 Stock Option Plan ("1996 SOP") and to outside directors under the 2005 Non-Qualified Stock Option Plan ("2005 NSOP"). No stock options were issued by the Company during the nine months ended March 31, 2016 .

A summary of option plan activity under these plans are as follows:

Compensation cost related to outstanding options has now been fully recognized. The weighted average remaining contractual term on options currently exercisable as of March 31, 2016 was 2.41 years .

Restricted Stock Plan

The Company issues both share awards and unit awards under the Restricted Stock Plan. The following table summarizes non-vested share awards as of March 31, 2016 , as well as activity for the nine months then ended:

At March 31, 2016 , there was $1,233 of compensation expense that has yet to be recognized related to non-vested restricted stock share awards, which will be recognized over a weighted-average period of 0.92 years .

The following table summarizes non-vested unit awards as of March 31, 2016 , as well as activity for the nine months then ended:

The Company utilized a Monte Carlo pricing model customized to the specific provisions of the Company's plan design to value unit awards subject to performance targets on the grant dates. The weighted average assumptions used in this model to estimate fair value at the measurement date and resulting values for 118 unit awards granted in fiscal 2016 are as follows:

The remaining 12 unit awards granted are not subject to performance targets, and therefore the estimated fair value at measurement date is valued in the same manner as restricted stock award grants.

At March 31, 2016 , there was $12,330 of compensation expense that has yet to be recognized related to non-vested restricted stock unit awards, which will be recognized over a weighted-average period of 1.34 years .

NOTE 7.    EARNINGS PER SHARE

The following table reflects the reconciliation between basic and diluted earnings per share.

Per share information is based on the weighted average number of common shares outstanding for the three and nine months ended March 31, 2016 and 2015 . Stock options and restricted stock have been included in the calculation of earnings per share to the extent they are dilutive. There were no anti-dilutive stock options and restricted stock shares excluded for the three month period ended March 31, 2016 . 112  shares were excluded for the  three month period ended March 31, 2015 . For the nine months ended March 31, 2016 , there were no anti-dilutive stock options and restricted stock shares excluded, and there were 83 excluded for the nine months ended March 31, 2015 .

NOTE 8.    BUSINESS ACQUISITION

Bayside Business Solutions, Inc.

Effective July 1, 2015 , the Company acquired all of the equity interests of Bayside Business Solutions, an Alabama-based company that provides technology solutions and payment processing services primarily for the financial services industry, for $10,000 paid in cash. This acquisition was funded using existing operating cash. The acquisition of Bayside Business Solutions expanded the Company's presence in commercial lending within the industry.

Management has completed a preliminary purchase price allocation of Bayside Business Solutions and its assessment of the fair value of acquired assets and liabilities assumed. The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their preliminary fair values as of July 1, 2015 are set forth below:

The amounts shown above may change in the near term as management continues to evaluate the income tax implications of this business combination.

The goodwill of $5,884 arising from this acquisition consists largely of the growth potential, synergies and economies of scale expected from combining the operations of the Company with those of Bayside Business Solutions, together with the value of Bayside Business Solutions' assembled workforce. Goodwill from this acquisition, none of which is expected to be deductible for income tax purposes, has been allocated in our Bank Systems and Services segment, as we have commenced our integration of this company within that reporting unit.

Identifiable intangible assets from this acquisition consist of customer relationships of $3,402 , $659 of computer software and other intangible assets of $944 . The weighted average amortization period for acquired customer relationships, acquired computer software, and other intangible assets is 15 years , 5 years , and 20 years , respectively.

Current assets were inclusive of cash acquired of $1,725 . The fair value of current assets acquired included accounts receivable of $178 . The gross amount of receivables was $178 , none of which was expected to be uncollectible.

During fiscal year 2016, the Company incurred $55 in costs related to the acquisition of Bayside Business Solutions. These costs included fees for legal, valuation and other fees. These costs were expensed as incurred and were included within general and administrative expenses.

The results of Bayside Business Solutions' operations included in the Company's consolidated statement of operations for the nine months ended March 31, 2016 included revenue of $2,921 and after-tax net loss of $277 .

The impact of this acquisition was considered immaterial to both the current and prior periods of our consolidated financial statements and pro forma financial information has not been provided.

NOTE 9.    REPORTABLE SEGMENT INFORMATION

The Company is a provider of integrated computer systems that perform data processing (available for in-house installations or outsourced services) for banks and credit unions. The Company's operations are classified into two reportable segments: bank systems and services ("Bank") and credit union systems and services ("Credit Union"). The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue.

The Company has not disclosed any additional asset information by segment, as the information is not produced internally and its preparation is impracticable.

NOTE 10: SUBSEQUENT EVENTS

Sale of business

On April 19, 2016 , the Company announced that it has entered into a definitive agreement to sell its Alogent division ("Alogent") to Antelope Acquisition Co., an affiliate of Battery Ventures. Alogent, which is included in our banking segment, provides branch deposit automation and remote deposition solutions to large financial institutions. The closing of the transaction is expected to occur by May 31, 2016 . The final purchase price is subject to change based upon certain conditions present at closing, therefore the final purchase price and net gain or loss has not yet been finalized. The following table presents the aggregate carrying values of the respective asset and liability classes related to the Alogent sale:

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q for the quarter ended March 31, 2016 .

OVERVIEW

Jack Henry & Associates, Inc. (JHA) is a leading provider of technology solutions and payment processing services primarily for financial services organizations.  Its solutions are marketed and supported through three primary brands. Jack Henry Banking® supports banks ranging from community to multi-billion dollar institutions with information and transaction processing solutions.  Symitar® is a leading provider of information and transaction processing solutions for credit unions of all sizes.  ProfitStars® provides specialized products and services that enable financial institutions of every asset size and charter, and diverse corporate entities outside the financial services industry, to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. JHA's integrated solutions are available for in-house installation and outsourced and hosted delivery.

A significant portion of our revenue is derived from recurring outsourcing fees and transaction processing fees that predominantly have contract terms of five years or greater at inception. Support and service fees also include in-house maintenance fees on primarily annual contract terms. Less predictable software license fees and hardware sales complement our primary revenue sources. We continually seek opportunities to increase revenue while at the same time containing costs to expand margins.

RESULTS OF OPERATIONS

In the third quarter of fiscal 2016 , revenues increased 8% or $23,477 compared to the same period in the prior year, with strong growth continuing in our support and service revenues, particularly in our bundled services and Outlink revenue streams. Cost of sales increased 9% and gross margin increased 5% . The Company continues to focus on cost management. Operating expenses increased 8% compared to the third quarter of fiscal 2015 , mainly due to increased headcount and related salaries. The provision for income taxes decreased 1% compared to the prior quarter. The increased revenue and above changes resulted in a 6% increase in net income for the third quarter of fiscal 2016 . There was a significant decrease of $4,188 in one-time deconversion fees during the third quarter compared to the prior year third quarter's total of $9,335. These are fees charged on agreements that are canceled prior to the end of their contracted term.

In the  nine months ended March 31, 2016 , revenues increased  7%  or  $65,200  compared to the same six months last year, with strong growth continuing in our support & service revenue, particularly bundled services and outsourcing services. Cost of sales increased  7% and operating expenses increased  8%  for the  nine  month period ended March 31, 2016 . Provision for income taxes increased  4%  compared to the prior year-to-date period. The increased revenue and above changes resulted in a  9%  increase in net income for the  nine  month period. Deconversion fees for the year-to-date period were relatively flat with last year, with an overall increase of $734.

We move into the fourth quarter of fiscal 2016 following strong performance in the third quarter. Significant portions of our business continue to come from recurring revenue and our healthy sales pipeline is also encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these times they have an even greater need for our solutions that directly address institutional profitability and efficiency. Our strong balance sheet, access to extensive lines of credit, the strength of our existing product line and an unwavering commitment to superior customer service position us well to address current and future opportunities.

A detailed discussion of the major components of the results of operations for the three and nine months ending March 31, 2016 follows. All dollar amounts are in thousands and discussions compare the current three and nine months ending March 31, 2016 to the prior year three and nine months ending March 31, 2015 .

REVENUE

Non-bundled license revenue for the third quarter of fiscal 2016 was lower than the same quarter of the prior year due mainly to a reduction of standalone license sales in both our Banking and Credit Union segments. Conversely, non-

bundled license revenue for the year-to-date period increased due to heightened standalone license sales in our Banking segment in fiscal 2016 . Such license fees will fluctuate as non-bundled license sales are sporadic in nature.

There was growth in most support and service revenue components in the third quarter of fiscal 2016 compared to the same quarter last year, as well as in the year-to-date period ended March 31, 2016 .

In-house support and other services revenue increased due to annual maintenance renewal fee increases for both core and complementary products as our customers' assets grow and increased software usage revenue due to mobile deposit revenue increases.

Electronic payment services revenue continues to show growth over the prior year, although that growth is slowing due to some of our large customers being acquired and price compression in our card services offerings. The revenue increase in both the quarter and year-to-date periods is attributable to increased revenue across debit/credit card transaction processing services, online bill payment services and ACH processing. Deconversion fees for electronic payment services decreased $1,791 for the third quarter compared to the prior year same quarter, and without this reduction electronic payment services would have grown 3%. For the year-to-date period, deconversion revenue has increased $5,417 and excluding those fees, the year-over-year increase in electronic payment services would be 4%.

Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to show a preference for outsourced delivery of our solutions. Revenues from outsourcing services are typically earned under multi-year service contracts and therefore provide a long-term stream of recurring revenues. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. The quarter-over-quarter and year-over-year increases in outsourcing revenue were both tapered by a significant decrease in deconversion fees included in this category. For the quarter, this decrease totaled $2,219, and year-to-date it totaled $4,556. Excluding the impact of deconversion fees, outsourcing revenue grew 14% in the third quarter compared to the prior year third quarter, and 13% in the year-to-date period.

Implementation services include implementation services for our electronic payment services customers as well as standalone customization services, merger conversion services, image conversion services and network monitoring services. Implementation services revenue decreased due to a decrease in both banking and credit union standalone implementations compared to the prior year. Revenue from these standalone services has decreased as implementation services related to our bundled arrangements have increased.

Bundled products and services revenue is combined revenue from the multiple elements in our bundled arrangements, including license, implementation services and maintenance, which cannot be recognized separately due to a lack of vendor-specific objective evidence of fair value. Bundled products and services revenue increased quarter-to-date due to terminations of pending products and services on certain contracts that have allowed for the release of revenue that was being deferred until contract completion in both our credit union and banking core and complementary arrangements. The year-to-date increase over fiscal 2015 is mainly due to increased revenues from our core and complementary credit union arrangements, which is also in part due to these terminations.

Hardware revenue increased in the third quarter of fiscal 2016 compared to the same quarter a year ago due to an increase in complementary hardware products delivered. Year-to-date hardware sales were lower than fiscal 2015 . Although there will be quarterly fluctuations, we expect an overall decreasing trend in hardware sales to continue due to the change in sales mix towards outsourcing contracts, which typically do not include hardware, and the general deflationary trend of computer prices.

COST OF SALES AND GROSS PROFIT