Jack Henry & Associates Inc (JKHY) 2004 Q3 法說會逐字稿

Good day and welcome to the Jack Henry & Associates third quarter fiscal year 2004 conference call. This call is being recorded.

At this time I would like to turn the call over to the Chief Financial Officer, Mr. Kevin Williams. Please go ahead, sir.

Good morning and welcome to the Jack Henry & Associates third quarter fiscal 2004 earnings call.

Statements or responses to questions may be made in this conversation which are forward-looking statements or deal with expectations about the future. Like any statement about the future, these are subject to a number of factors which could cause actual results to differ materially from those we anticipate. Such factors are disclosed in our recent SEC filings. There could also be other factors not included that could potentially cause results to differ materially.

Thank you for joining us today as we report our third fiscal quarter '04 fiscal results which reflect a 21% increase in revenues, improved gross margins which contributed to a 32% increased net income. We continue to have a very strong balance sheet with no debt, increased operating cash flows, and a very solid backlog compared to the same quarter in the prior year. Our total revenues increased 21% with a 47% increase in license revenues this quarter compared to prior year. We had significant increases in support and services of 18% compared to prior year quarter with our continued success in our outsourcing marketplace, our growing ATM and debit card processing business, and additional inhouse support fees. Hardware revenue, which is typically driven by software sales, also increased 19%. The components of total revenue compared to prior year quarter were, our licensed revenue went up 21% or 4.9 million, support and services went up 18% or 11.8 million, hardware sales went up 19% or 4.1 million for a total increase of the 21% or $20.8 million. Our total cost of sales increased by 20% in quarter. Total hardware sales represented 22% of total revenue this quarter compared to the same level last year. Cost of hardware increased by 21% compared -- while hardware revenue increased 19%, which, obviously, had a slightly negative impact on our hardware margins. Gross margin on hardware revenues was 26% compared to 28% in the same period in the prior year, which was primarily due to the sales mix and type of hardware shipped this quarter.

As we have discussed before our margins can be significantly impacted by sales mix, rebate and incentives which our hardware margins year-to-date are still up nicely to 29% compared to 26% for the first 9 months last year. Cost and support services increased 19% for the quarter compared to the prior year period. This compared to the 18% increase in support and service revenue for the same period, which is due to the increase in every component included in this line of revenue, which those components are installation services, our ATM debit card switch services, outsourcing, and inhouse support revenues. We continue to leverage our resources and infrastructure and continue to be very cognizant

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of cost controls. Having said that we continue to have needs and requirements of employees. We added 153 full-time employees since this time last year which bring our total full time employee count 2408 which represents a 7% increase compared to a 21% increase in revenue which points out the fact we were leveraging our resources extremely well. Gross margin is up this quarter to 40% compared to 39% last year and year to date gross margin is 37% last year. Our harbor margins increased. Our support and service margins remained level compared to last year. License margined increased 93% compared to 92% a year ago. Our banking segment gross margin remaining consistent compared to last year and improved slightly at 40% from 39% for the first nine months. Our credit card union margins increased to 35% from 26% a year ago. Very nice increase on credit union gross margins and for the year to date increased from 35% to 27%. This is an anticipated expansion with additional products and services in the segment. Operating expenses increased 14% compared to last year's quarter and percentage of revenue decreased to 18% of revenue from 19% last year. Selling and marketing expense increased 14% compared to prior year quarter. This is compared to 2% increase in revenue. The increased in sales and markets is primarily driven by increased commissions on the increased revenues and a small increase in personnel cost associated with increase sales compared to a year ago. Percentage revenues remain relatively flat at 7% compared to a year ago. Research expense increased 57% compared to last year. However, as a percentage of revenue, only a slightly increase of 4% to 5% due to increased personnel cost for continued development of new products and existing products compared to this time last year. Also the timing of large developed projects capitalized can have a large impact on R&D expense. Our G&A expense increased 8% and percentage of revenue decreased from 6% to 8%. Operating income increased 32% over prior year quarter and percentage of revenue increased from 20% last year. The result is an increase our net income of 32% to 16.3 million and earnings per share increased 28% to 18 for the quarter compared to 14 prior year quarter. Comments on the balance sheet, the majority of significant changes compared to last year were cash. Cash equivalents up 165% primarily due to collection of annual support billings. We have had cash outlays of 33.1 million, payment of acquisitions of 26 million and dividends 8.9 million the first nine months of the year. Increased of 7% with inhouse backlog. Changes in accounts payable is primarily due to timing of payments including estimated tax payments. Deferred revenue which is complete the same times -- payments has increased 12% from last year at this time. Our backlog increased by 9% March 31 compared to this time last year. Total backlog increased to 89.9 million with 56.4 million inhouse and 29 million outsource compared to 172.million with 64.2 million inhouse. Our total backlog increased slightly more than 3% compared to December with inhouse increasing 11% and backlog

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flat at a 1% change. After revenue of our backlog, sales forecast, and sales pipeline, I'm comfortable with the range of the consensus estimate for the next fiscal quarter, which I believe the consensus for next quarter is $.18. Also, backlog should continue to be strong in the next quarter since it is typically our strongest contracting quarter on the banking side.

With me today I have Mike Henry our CEO; Jack Prim, President; and Tony Wormington, COO.

We remain confident that we are very well positioned in that we have the right product and services to approach both the bank and credit union markets, from the smallest institutions [inaudible] to the largest. We also believe we have the proper resources in both people and technology for continued future opportunities.

With that I would like to open it up for Q&A.

Thank you. Today's question and answer session will be conducted electronically. [Operator Instructions]

And we will take our first question from Bryan Keane with Prudential.

Yeah, hi, good morning. I guess my first question is the big strength we saw in the license sales. Do we see that sequentially stay that strong going into the fourth quarter or were there some one-time sales in that number that we should see that decelerate?

Well, Bryan, obviously there was no one-time sale in there of one contract that was real significant enough to cause any changes. I mean, we had quite a bit of core business this year on the credit union side. We continue to see that strength there. There was some decent bank core sales this quarter which obviously there continues to be more in the pipeline and obviously the strength of our complementary product sales continues to be there. So, is it going to stay as strong in the next quarter? If the pipeline proves true, our backlog should stay as strong in the fourth quarter as it did in the third quarter.

Okay. And the other question I had was on G&A cost. It looked like it was lower than I expected. I know you mentioned some lower employee benefit costs. But, does that go back up as a percentage of revenue as it typically does on a seasonal basis in 4Q?

It may go up just a little bit, Bryan. But, like I said at the beginning of the year, I think my G&A dollars for fiscal '04 are going to remain pretty flat with where they were in '03 and that's proving to be true, so I don't see any big spike coming in the fourth quarter for G&A.

Okay. And the final question I had was on deferred revenues. Does that pick back up on a seasonal basis going forward into 4Q?

Yeah, it -- obviously June 30th we will bill our annual maintenance for next year which that number is probably going to be somewhere around $90-95 million so you'll see an enormous spike in both our accounts receivable and deferred revenue June 30.

Okay. Great. Thanks.

You bet.

Our next question from John Kraft from D.A. Davidson.

Good morning, gentleman.

Good morning.

A couple questions. Can you talk about the Yellow Hammer and Classic acquisitions, what sort of contribution will you expect from those two, I think in the press release you mentioned that both should be a neutral to possibly accretive, is that still the assumption?

Let me answer this two ways. One, let me talk about how the financial impact is going to be and then I think we'll let Jack kind of talk about the product and where we are going to fit in. Obviously both of these are fairly small companies. We're working with Yellow Hammer now to get it integrated and it will be accretive. I mean it -- could it add a half a penny or so this fiscal year? Yes. I'm not sure what it's going to add for sure next year. But, eClassics [ph] deal we have not done final close on that yet, we have planned agreements so is it going to be is it going to be accretive this quarter? Yeah, but it's not even going to move the needle.

Yeah, gentleman, this is Jack. Both of these acquisitions kind of follow our pattern of things that make sense for current customers, and/or give us some opportunities to diversify into areas that are of a related but not identical to markets that we've been in. The Yellow Hammer fraud software product solves a big challenge for banks out there today. While fraud in and of itself software will not be a huge contributor, we think it's a differentiating factor, we think we have advantages with this product over some of our competitors and we think that it is a significant enough issue that this has potential to favorably influence some core deals because of the expanded capabilities that it offers. The ATM manager product, as you probably know, we have a pretty solid suite of ATM and EFT switch-related services, we will be looking to adapt this ATM management product, which typically is going to be sold to larger and more diverse organizations who have a need to track on an ATM by ATM basis configuration data software levels, profitability, and individual ATMs, for example independent sales organizations that would use a product like this, so it will -- we will adapt and market a version of this to our installed base so it fits as a solution for our existing customers, but we will also be introduced into some arenas where we did not play before with Jack Henry products, specifically large independent sales organizations and larger banks that typically larger than those that would use our core application. So it's a nice but reasonable diversification for us.

Okay. And just to follow up on the last caller, Bryan's question. You -- I think it was last quarter you talked about four to five big deals that had slipped in the quarter that you had hoped to get -- Is that part of the contribution that you got this quarter in license revenue, were those four to five deals signed this quarter or do you still have some that were kind of pushed out a bit?

Well those -- those were signed, John, but they didn't necessarily contribute to revenue. I have to think that most of those that signed were -- are probably still in backlog because we obviously don't ship the software the same time we sign the contract. But we did sign all those and we still have several more in the pipeline and in this quarter's forecast.

Good enough. Thanks, guys.

We'll take our next question from Glenn Greene with ThinkEquity Partners.

Thank you, I wondering if you could share -- put a little bit of color around the management change that you announced this morning? I guess just sort of a couple of thoughts come to mind -- I guess this is the first Henry to be running the company in a long time, if ever, and I wonder what that may suggest management and board representation going forward and also is Jack going to be moving to Monet?

Yeah, this is Mike Henry, I can handle those. This is a first time that a non-Henry will be running the company. The way we've structured the company, we've certainly done a very good job of succession planning from the top to the middle of our organization. This really isn't a huge change for our company. I mean, we haven't had a change of direction here in our company since we started in '76. Jack has run all areas of the company and he runs about half the company, Tony runs about half the company. They really run the day-to-day operations and it's really a realignment of titles. I've really kind of hung back and worked on the acquisition vision piece of it and let them run the company so it's an alignment of titles. I'm very comfortable with the non-Henry running the company. This gives me some more time to do things that I want to do, so it's a very natural fit, something we've been making sure was available to us for some time now. I'm very comfortable with the change and I think employees will be, too, because the reporting structure really doesn't change around here. The people that reported to Jack and Tony will continue to. Not going to be a big change in direction. Its just a very natural, easy transition for this company. As far as Jack Prim moving to Monet, he travels to not only Monet but several of the other offices frequently now. We're going to let him stay in Charlotte for a couple of years until he gets his son out of High School and his plans are to move to Monet full time so that he will be here at headquarters, but we've always been very flexible with -- with Jack doing his job from Charlotte and he will eventually move to Monet, Missouri, our world headquarters and there really won't be any change on the Board of Directors, either. The board you see today will be the board going forward. Not a lot of big changes in direction or reporting, just a change in titles.

Thank you. That was very helpful. Different direction, just sort of the overall environment. It looks like your -- clearly your hardware and software picked up this quarter. Is there a loosening of the spending by the banks? You get that feel yet or what is sort of the overall environment.

Glenn, its Jack. The banking side we continue to see a lot of interest. We are continuing to see at this point in time more interest in the outsourcing delivering of our core systems than the inhouse, can't predict whether that will continue to be the case or if so, for how long, but that's what we are seeing now. The credit union market remains strong. We will likely get a media release out announcing some of the wins that we had this quarter once we get past the earnings announcement. Had some very nice wins there that we want to report and continue to have a solid pipeline for additional prospects to add in the next quarter. I don't see any dramatic change in this quarter compared to previous quarters, but the market is solid and we feel like we're getting our share.

I would add one thing. On the bank side, we are starting to see the rewards of the realignment sales force nine months ago to the hunter/farmers. Both pieces of the sales force are doing extremely well at this point. The hunters are getting comfortable in their existing territories and the farmers continue to cross sell the complementary add-on products and migrations extremely well.

Thanks, guys.

And we'll go next to Nik Fisken with Stephens Inc.

Hi, good morning, everybody, and congrats to Jack and Tony.

Thanks, Nik.

This morning Metavante [ph] announced the acquisition of Kirtsman [ph] to get into the in-house core processing game. Can you talk about how this would affect you guys?

I guess that remains to be seen. It sounds like a good move for Metavante [ph]. They have a high end outsourcing product and solution, but they've never really been able to do anything inhouse. I know that they acquired EastPointe [ph] and were not successful with that, but Kirtsman [ph] makes sense for them, much more than it would make sense for us. I don't know how much we really see Kirtsman [ph] out in the marketplace. I guess it depends on what they want to do with Kirtsman [ph] going forward. But, I would assume if they get serious about it, than that would put another product a little bit more in the mix than it is now.

Jack, did I hear you right that the bank's interest has gotten incrementally better on the outsource product?

I don't know that it's incrementally better, Nik. We've been seeing -- we've been seeing for a while, I guess, probably since -- you know about the time the economy started to weaken, that there seemed to be more interest in an outsource delivery than an inhouse delivery. That has -- seems to have continued even though the economy is showing little more strength. Again, was it a reaction to the economy? Is it a reaction to the complexity of the technology in this day and age? I don't know. I think it's different things for different customers. We have not seen that on the credit union side at this point. That still tends to be a more predominantly inhouse oriented delivery choice, even though we do know have outsource delivery of both our credit union product and have signed last quarter our first credit union using our [inaudible] product which is geared to the smaller end of the market, down to the $100 million credit union market. Even though we have the credit union products available in an outsource delivery, there is still a preference for inhouse delivery on the credit union side. It's hard to reconcile those two and it's a little difficult to know if we are still seeing a reaction to the economy or more of a move away from owning it, running it all yourself at this point.

If I look at the license pickup and I look at the inhouse backlog pickup, would you still say, like you did, when you reported the December quarter that inhouse core deals are a disappointment?

I would say that the inhouse bank core deals are still weaker than where we would like to see them. Credit union inhouse deals continue to be very strong, but on the bank side they are still little weaker than where we would like to see them.

Okay, last question I've got is, Kevin, deferred rev went from 98 to 74 sequentially and so it decreased at 24 million and, can you walk through that, in light of the fact that if you compare that to the year ago period it only went down about 11?

Well, if you remember, Nik, a year ago we changed our billing cycle for the Peerless and OSG customer base to June 30 so there was a spike a year ago in December so you're really not comparing apples to apples.

I'm talking December '03 to March '04, deferred rev went down 24 million.

That's just rolling out the inhouse maintenance, which is a typical quarterly drop which you see as September, December and March and then you see a big spike up at June 30th.

Okay. Great. Thanks.

[Operator Instructions] And we will go next to Lee Houser with Redship Research.

Good morning, everybody. Wonder if you can talk about the Cap Ex spending. Originally it seemed as though your projections for the year would be 60 million and you're obviously spending a lot lower than that year to date. And I was wondering if that was expected to pick up in the fourth quarter?

I don't think it will pick up in the fourth quarter Lee, and obviously we going to have some more capital expenditures. When we started out the year, we had planned on a facility in San Diego and one in Charlotte. We bought the one in San Diego. In fact, we are planning on moving into that facility the first quarter of next year. The Charlotte facility, however, we had some problems with the building we were looking at out there and we are probably going to go another direction and potentially just extend our lease out there so our Cap Ex for the year is going to be considerably less than what we originally anticipated, but its still going to be probably close to in the high 40s to 50 million.

And shifting gears, could you just provide us with the usual sales metrics that you give us on check imaging, internet banking, and CRM products?

Sure. Imaging products for the quarter, we contracted for 49 deals. Net Teller was 44, which was up nicely from last quarter of 33. And CRM we find two deals this quarter.

Okay great. Thank you very much.

We'll go next to Tim Willi with A.G. Edwards.

Hi, this is probably just a little bit of a follow-up on the previous question. Regarding CRM, were those -- I'm assuming on the lower end product versus Argo [ph]?

Yes those are Synapses [ph] product. The Argo [ph] is doing fairly well in the beta side. We are still waiting to get the loan piece rolled out before we take that to general availability.

Okay. And just going back to the bank pipeline question. I'm not real concerned whether it's outsourcing or software with this question, but do you have any additional color, I guess, in terms of demand within maybe different size segments of the banking industry as you look at it? Is there any noticeable sort of difference or would your comments about being weaker than you would like apply across the spectrum?

Wait a sec. I don't know if I can give you clear trends. We repackaged a solution on the banking side using our core director product that would allow us to compete more effectively at the low end of the market. And we saw more deals that were at that end of the market. The higher end of the market, again we still see interest there, these deals just take time and they move pretty -- pretty slowly. Don't know that I can give you clear direction. We'd obviously love to see more business in general out of the banking segment, again, did well on the low-end, but it takes a lot of the small ones to make any kind of an impact.

Thank you.

And we'll go next to Bryan Keane with Prudential.

Hi. Just a follow-up, Kevin. I think you said expectations should be set around $.18 for next quarter? That looks to be on a sequential basis about flat with the strong quarter you had here. Is there anything in particular that the reason why we wouldn't see that uptick stronger in the -- for the particular fourth quarter?

I mean, obviously we beat expectations this quarter. Bryan, what I said is I'm comfortable with consensus estimate and I think -- I think the estimate is like $.18 or $.19, so is it reasonable that we can come in at $.19 in the fourth quarter? Yes.

Yeah, I just wanted to get the clarity. Thanks.

We'll take our next question from David Trossman with Wachovia Securities.

Thanks. I wants to ask about the support and services revenue. It looks like the sequential growth there was a little bit less than what we've seen in the past. Kevin, I'm wondering if anything came out of that revenue line in the quarter, whether there was any revenue that went away or is that just kind of normal noise that's going on as you put things into them?

First of all, we had growth this quarter over a year ago quarter of 18% and year to date growth year-to-date of last year Dave, 19%. The quarter was tracking pretty much with where we are year to date. So there wasn't anything strange or unusual in there. Everything still grew at each component within that grew. The only one that didn't grow significantly was the installation services because obviously we had some pretty strong installation going on this quarter last year.

Okay. Thank you.

And we'll take a follow-up question from Nik Fisken.

Can you give us an update on the February conversion of U.S. Central to see if that went on time?

Nik, this is Jack. Trying to remember the exact date. We had moved the date from an earlier date. It went on the scheduled date and it went very well. One of the first corporate credit unions that we converted. Conversion went extremely well. Minimal issues and no significant issues after the initial conversion. I'm sorry, the exact date is escaping me at the moment. We had moved it to February and it went in February. I don't think we had moved it again within February. All signs are favorable based on that initial conversion. They are beginning to firm up dates now for the remaining credit unions. Probably don't have them all specifically scheduled, but certainly firming up the next two or three to go.

When's the big ramp in those installations? Is it this quarter? Next quarter?

I believe at this point they're probably looking, Nik, on the next one, I'm trying to think. I hate to give you a date because I'm afraid I'm going to say the wrong date. I'm thinking there's one in July and another in September. Beyond that I don't know that they firmed up any dates at this point. The ramp up there in terms -- if you're asking in terms of the revenue impact probably not going to be a substantial impact to us from those initial implementations. In terms of the install revenues, they'll be kind of normal, but I don't think they'll be anything individually on those corporate credit union conversions that will make a significant impact. Of course, the revenue is outsourced so a monthly recognition of revenue. So, again, I think we'll be building to a very solid operation there by the end of the calendar year. I'm not sure that by the end of the calendar year there'll be significant impacts of financials.

Nik, since this is such a phased approach we are bringing the corporates on in a staggered piece and then U.S. Central itself will come on at a later date. And, like Jack said, since this is all outsourced revenue, you just going to see a nice incremental quarter over quarter growth in that line item.

Okay. And, Kevin, you guided to flat year over year G&A? That implies G&A is going to go from the quarter you just recorded from 6.8 to about 8 million. That's what you're talking about?

Actually, Nik, I think G&A is going to come in less than it did last year.

Less than last year. Okay.

It's not going to have the spike this quarter.

Okay. And then are you prepared to talk about your comfort level with the $.79 first call estimate for fiscal year '05?

Really I'm not, Nik. We just started the budget process for next year and I'm not really comfortable at this point to comment on that. I may -- I may actually be able to give some more color on that at the analyst day.

Okay, great, thanks very much.

We'll take our next question from Valerie Libby with Robert W. Baird.

Good morning. I was wondering if you can discuss your thoughts on Check 21 [ph] opportunities. Seeing any changes on that front?

Valerie, this is Jack. We are, I think, like everybody very closely watching and preparing for Check 21. Its -- its frankly a little difficult to know exactly what you're preparing for. We're seeing strong interest and good sales of our check imaging systems. All of our check imaging sites are ready to go for Check 21. We are continuing to establish additional check image sites that will be able to attract that business as well as the higher margin data processing business that would come along with it. How much revenue is it going to actually generate is difficult if not impossible to estimate at this point in time because it depends on variables we have absolutely no control over and not a lot of insight to, such as what will be the adoption by banks of imaging exchange. The only thing they are required to do with the new legislation is to accept image replacement documents. They are not required to clear imaged checks. How rapidly they will look to exchange image checks, images of checks will have a dramatic increase on the revenues and ultimately profitability from Check 21. We feel like we are as well positioned, if not better positioned, than anybody in the business with fully enabled image sites and we think we have a telecommunications infrastructure that will better support some of the requirements of the Check 21 environment than some of our competition. But again, the factor we just cannot predict is what will be the volume and the adoption by the banks of the actual image exchange.

What we do believe Check 21 doing for us today is generating a lot of interest and and a lot of sales in our check imaging products. We've seen it the last few quarters and we'll see it the next few quarters and that does turn into hard dollars for us, what Check 21 means in the future, I know there's been a lot of people out there hyping it, but we're from the show-me state and want to see what that turns into revenue for us but check imaging continues to be a very hot seller for us.

We've sold almost as many units through the first nine months this year as we did the full fiscal year last year. Last year we sold a 133 and this year year-to-date we sold 117, so it does continue to drive sales of our check image solution.

Thank you, that's really helpful.

And, Mr. Williams, there are no further questions at this time. I would like to turn the call back over to you for any additional or closing remarks.

Okay, first of all, I would like to remind everyone that we are having our annual analyst day in Irving, Texas on May 12th, where the four of us and several of our other management team will be present and doing presentations and doing a Q&A. If you'd like to attend you need to call my Administrative Assistant, Mary Soluka [ph] or our Director of Investor Relations, John Siegert [ph] and get the information and registration forms.

Again, we want to thank you for joining us today to review our third fiscal '04 results. We are pleased with the overall financial performance during the quarter. We continue to expand and improve our products and services and are committed to build on all of our competitive strength. Our executives, managers, and employees continue do what is best for your shareholders.

Again, thank you, and with that Operator we should please give the playback number. Thank you for joining today's conference call. If you would like to listen to a replay of this call it will be available from 11:45 am eastern time today through midnight Thursday April 29. The dial-in number in the U.S. is 888-203-1112. Internationally 719-457-0820 and the confirmation code is 315643. You may disconnect at this time.