Jack Henry & Associates Inc (JKHY) 2007 Q3 法說會逐字稿

Good day, everyone, welcome to the Jack Henry & Associates third quarter fiscal year 2007 earnings conference call. Today's 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.

Thank you and welcome to the Jack Henry & Associates third quarter fiscal '07 earnings call. Statements or responses to questions may be made in this conversation, which are forward-look or deal with expectations about the future. Like anything about the future, these are subject to a number of factors, which could cause actual results to differ materially from those which 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.

Again, good morning. We are pleased to host this call this morning to provide a Company update and report the financial results for our third quarter and fiscal nine moths of '07, ended March 31, 2007. Before we begin, I would like to remind everyone that our Analyst Day is next week, next Monday and Tuesday in Chicago. We will kick that off with a mini tech fair of some of our Profitstars products on Monday evening. And then the formal presentation by the executives, our national sales managers and our operational GM's will be on Tuesday, 15 beginning at 8 A.M. If you can not attend in person, the entire day of presentations on Tuesday will be provided via WebEx. With that, I'll now turn it over to Jack Prim, our CEO.

Thanks, Kevin. Good morning. We are pleased to announce another quarter solid performance with record revenue and net income. Total revenue growth for the quarter was 16%, of which 15% was organic. Support and services again led this revenue growth of 23% increase, more than offsetting the significant drop in license fees from the same quarter a year ago. Hardware and OutLink showed significant growth at 24% based largely on the continued success of our remote deposit product.

The decline in license fees was due to several factors, most of which we have discussed before. First, the continued shift in preference for outsource delivery of core systems, which impacts near-term revenues but clearly offers long-term advantages. Additionally, in our credit union segment, we continue to see fewer core systems decisions from large credit unions with the associated larger license fees. We are optimistic that we'll see a strong performance from our credit union segment this next quarter as we close out our fiscal year.

Finally, we saw a depth in sales of our Yellow Hammer fraud solutions, which we believe is attributable to our preannouncement of our Bank Secrecy Act product last October. As we have previously discussed, we preannounced this product due to strong interest from our customer base. While the two products address different issues for the financial institution, we believe there may be some confusion around the overlap of the two products, particularly in the area of anti-money laundering. We believe this confusion will be cleared up with the release of the BSA product, And on a positive note, the BSA product is now in general availability on the originally committed time frame.

Over 45 financial institutions previously gave us a down payment to get into the installation queue without knowing the complete product functionality or cost. We are now reconfirming those orders and expect to begin to see revenues from this product in the next quarter increasing in subsequent quarters. In a recent APA Banking Journal survey, nearly 30% of the banks responding to the survey who had already implemented a remote deposit solution indicated they saw it, "as an essential survival strategy." We are pleased that well over 400 Jack Henry and non-Jack Henry core system users have seem fit to entrust our Profitstars enterprise payments product to meet such a critical business need. And we believe that we continue to lead the industry in remote deposit sales to banks as a solution for their business customers.

Our banking segment performed well in the quarter with a 18% overall increase in revenue, with solid contributions in software and services and hardware. The credit union segment saw revenues increase 6% over the comparable period. While we are disappointed with the license fee sales in both segments in the quarter and continue to look to improve performance in that area, we are very pleased to be able to more than offset that shortfall with support and services revenue built on the more stable and recurring nature of those revenues.

The 16% growth in revenue allowed us to generate an increase in earnings per share of 16%. Pretax income grew 18% year-over-year. With net income growth at 12% due to a favorable one-time tax event in the year ago comparison quarter. We continue to look for the most effective ways to deploy cash for shareholder value.

We continue to monitor the acquisition environment for opportunities to grow revenue at higher rates than the low double digits we had indicated at our nonacquisition growth target. This acquisition environment remains pretty heated at the moment and until prices return to more reasonable levels, we will continue to acquire our own stock opportunistically. We continued to buy our stock during the last quarter, purchasing just over 1.1 million shares. With the remaining outstanding authorization to purchase just under 4 million shares.

In closing, I would like to add we were all deeply saddened by the passing of one of our founders, Jack Henry. Jack was one of the legends of our industry and he will be greatly missed. Jack Henry and Jerry Hall built this Company on a rock-solid foundation and we will continue to carry on the legacy that they established over 30 years ago. With that, I will turn it over to Tony for some more detail on the business.

Thanks, Jack. Good morning, all. We continue to be very pleased with the strong contribution in all the components of our recurring revenue, which includes outsourcing, data and item processing, in-house support and maintenance, and our EFT services. Support and services revenue increased 23% for the quarter and 19% year-to-date compared to the prior quarter. We are continuing to see strong increases in all components of our electronic funds transfer transaction processing businesses.

Our ATM and debit card processing volumes continued to increase nicely compared to prior year quarter, increasing at a rate of 32%. And bill payment transaction volumes increased at a very nice pace of 54% in the same period. Compared to last sequential quarter, the number of financial institutions installed with our enterprise payments ASP solution for remote deposit processing increased 35%, as well as the financial institutions merchant installed in utilizing this ASP delivered solution has increased by 52% in the same period.

We are seeing solid increases in the volume of transactions being processed. Transactions increased by 32% in the same sequential period. As we continue to increase both the number of financial institutions, their respective merchants, and those merchants that we sell to directly, we expect to see these transaction volumes continue to increase at comparable or a better pace. We are well positioned to continue to take on increasing volumes in all of our outsourcing areas of both core processing and EFT services, with minimal required additional investment due to the existing infrastructure and the nature of these electronic processing solutions.

We have strong implementation revenues due to the implementation of mid-tier banks sold in previous quarters, numerous bank denovos, credit unions and a significant convert merge activity in the banking market, along with a significant number of implementations of our enterprise payment solution. Strong demand continues for many of our complementary products and services in both the banking and credit union markets, supported by our core processing customers, as well as noncore customers through our Profitstars brands. I will now turn it over to Kevin for a further look at the numbers.

Thanks, Tony. As Jack previously mentioned, during the quarter just ended, we had revenue growth of 16% to $168.9 million in total revenue for the quarter. Of which, 15% was organic. This is compared, I believe, to the consensus estimate by our sell-side analysts of $164.6 million in total revenue. License revenue did decrease by 25% compared to the year ago quarter and is down 11% for the first nine months, which is due primarily to all the factors that Jack mentioned. Our support and services had an increase in every component within the line of revenue, especially in our recurring revenue items as highlighted.

For the the quarter though, implementation revenues increased 41% compared to the prior year and 23% year to date compared to the prior year. With a large portion of these were not tied to specific license revenue for the quarter but rather for the implementation of recurring revenue sized items, which will give us long-term recurring revenue. Our payments business is up 34% for the quarter and 41% year-to-date. The quarter was 34% growth, compared to a very solid quarter last year. We had a fairly tough comparison but we still experienced 13% sequential growth over the December quarter. So we are extremely pleased with the growth in our payments business.

Our OutLink data and item processing was up 17% for the quarter and 15% year-to-date. Continued strong growth as we continued to see that shift to the outsourcing model delivery and continued to have very nice success winning our share of denovo new banks. In-house support services were up 17% for the quarter and 11% year to date. The products that are marketed in our Profitstars brand, to both our core and noncore customers, continued to track on plan for the first nine months of the year and continued to increase their contribution to our revenue and gross profit and net income growth.

We are very pleased with how these products and the companies that we've acquired in the last three years continue to add to the overall growth of the Company. We continue to maintain strong consolidated gross margins of 42% for the quarter and 43% year-to-date. Our banking segment continues to have very strong margins of 44%. However, our credit union segment margins dipped a little compared to prior year due to the lower license revenues Jack mentioned.

In the bank segment, our license margin, we did see a decrease from 99% to 94%, due to a slightly higher amount of third-party software sold during the quarter compared to last year. Our support and services margins increased to 41% from 37% for the quarter. Driven in part by the nice increase in implementation revenue previously mentioned. And the hardware margins decreased from 29% to 25% during the quarter due to sales mix of the components within the hardware line.

In our credit union segment, license margins were 100% for both this quarter and the prior year. Support and services margins remained level at 28%. As they continue to work on the infrastructure to leverage that infrastructure, margins remain fairly solid at support and services. And our hardware margins increased slightly from 24% to 25% in the credit union segment, again due to sales mix.

Total operating expense increased only 7% for the quarter compared prior year. And as a percentage of total revenue, decreased nicely from 20% to 18% of revenue compared to the prior year. Year-to-date operating expenses increased 10%, and have decreased from 20% to 19% of total revenue. Again, we continue to leverage both our gross and operating margins. Our operating margin remained level though at 24% this quarter compared to a year ago and remained 23% year-to-date due to the sales mix, especially the shortfall in the license revenue.

Our net result was an increase in pretax income of 18% leveraged from a 16% increase in revenue. As we have discussed on our prior earnings calls, the R&D credit, which was reinstated in December 2006 for the period -- or for the entire calendar year had a significant impact on our effective tax rate for year-to-date in the December quarter. The current quarter tax rate has been adjusted to reflect where we estimate our actual tax rate will be for the fiscal year.

As I stated on the last earnings call, it would be up this quarter and next to adjust the full year to where we think we will ultimately end out. In the prior year during this quarter, we adjusted our effective tax rate, as of March 31, to reflect the new manufacturing deduction and its impact on our Federal tax rate. And we had completed our evaluation of our effective state tax rate in the prior year, which we made the year-to-date catch-up adjustment during that quarter, which resulted in an effective tax rate for our third quarter last year of 32.7% compared to our effective tax rate in this year's quarter of 35.6%. All in all, our effective tax rate year to date is 34.3% this year, compared to 35.5% last year, which is a difference in these two year due rates is primarily due to the catch-up of the R&D credit that we made in the December quarter for the second half of last calendar -- last fiscal year.

At this time, we feel confident that we are on track for our predicted low double-digit revenue growth, as we have discussed for several quarters. We are getting there a little different than we had anticipated due to continued higher demand for outsourcing and the continued increase in our electronic payments business, which now represents in excess of 15% of our total revenue. Initial indications booked by license revenue will be back in the fourth quarter more in line with what we saw in the December quarter with some potential upside. But we don't believe that there is any way that we can get the last year's fourth quarter levels.

Our gross and operating margins should remain fairly stable for the remainder of the year and for three lines of revenue. Obviously, with some sequential quarterly movement but overall should be able to maintain the current combined levels. Jack mentioned the stock buyback. During the quarter, we purchased just over 1 million shares. Shares we've repurchased year-to-date is 3.26 million. Also right at the end of the quarter, we purchased another 144,000 shares, which did not settle until the fourth quarter.

In the last 12 months, we have purchased just over 4.9 million shares of our stock back. And during the first nine months of this fiscal year, we purchased $71.4 million, compared to $12.6 million in the first nine months of last year. Also during the first nine months, our cash used for acquisitions increased by $18.6 million for the U.S. Banking Alliance acquisition and also included some payments for earn-outs on some of our prior acquisitions compared to a year ago.

Our CapEx is down compared to the prior year by 34% or about $11.1 million compared to the prior year and capitalized software is slightly ahead of last year's date by $3.6 million. Our depreciation and amortization expense year to date of $37.4 million is $4.8 million higher than last year. Our EBITDA increased 18% for the quarter compared to the prior year quarter and EBITDA increased 15% year to date.

Our backlog was at $221.2 million, with $61.4 million in-house and $159.8 million outsourcing at March 31, which represents a 4% increase. Remember that there is no transactional revenue represented by our EFT debit processing, our online bill payment or our remote deposit to capture contracts, reflecting the backlog due to the difficulties in conservatively estimating transactional revenue. Especially in such fast growing parts of our business. With that, I will open the call up for questions.

Thank you. (OPERATOR INSTRUCTIONS) And we'll go first to Bryan Keane with Prudential.

Hi, gross margins were down year-over-year but you were able to make that up with lower operating expenses. I think selling and marketing only rose 2% and R&D grew only 7%. So, my question is, how much leverage there still left on the operating expenses? Can you continue to grow selling and marketing and research development below revenue growth?

Bryan, there's still some leverage there but remember in the selling and marketing line, the biggest cost component in that is commissions. So in a quarter that our license revenue is down, the commission expense will also be down. But there is still some additional leverage as we've talked about especially in the ProfitStars sales organization as we grow that recurring revenue, which we do not pay commissions on. That growth, there will be continued leverage there.

I think there is still some small, slight leverage to the R&D but we are going to continue to grow R&D at a similar pace to what we have the last few years because our customers demand it. I think there is some continued leverage on the G&A line. We put the new PeopleSoft Back-Office in last year, which we had a huge increase in personnel costs, maintenance and just amortization of the new system. Those costs are fully in now in this quarter, so there should be some forward leverage to those. So, yes, there should be some continued leverage to the operating margin line.

And to your point about the gross margin line, that's very much due to the decrease in license revenue this quarter compared to year-ago. Our margins and our support and services are very strong. In fact, they are about the highest they have ever been in the history of the Company, which goes right in hand with the recurring revenue growth and the leverage to the infrastructure we have been talking about for both our OutLink, our data processing and our payments business.

Okay. And it sounds like you have a pretty good pipeline for credit union license sales, that you are expecting to get some of that in the fourth quarter?

Yes, Bryan, we have a number of deals that we are working on. The pipeline looks pretty solid for the fourth quarter. We do have a couple of larger transactions where we are working on. Those contract negotiations can be torturous. So, we hope and believe that they will fall into that quarter but some slippage wouldn't surprise me. But even with that being the case, we feel like we've got a pretty solid pipeline for the quarter we are in.

Okay. And Kevin, the U.S. Banking Alliance acquisition, I have it at about $1.5 million in revenue, maybe something like that. What line item does that fall under? Does that fall in license or support and services?

That is all primarily in support and services at this point, Bryan.

Okay and then finally -- I might have missed it.

And you are pretty close on the revenue.

Okay. Yes. And then I might have missed it, but I think -- I don't know if you said that you were comfortable with consensus at $0.32 for the fourth quarter. I know you gave a couple of components on the revenue and some on the profit but is $0.32 -- are we in the right ballpark there, Kevin?

You are in the right ballpark. As Jack mentioned, we've got some nice credit union business, it looks like. And the pipeline on the banking side looks pretty solid also going into this quarter. We will continue to focus on cost control. So I think at this point $0.31to $0.32 is the right ballpark.

Great. Thanks a lot.

We'll go next to Paul Bartolai with Credit Suisse.

Thanks, good morning. Just a follow-up, Jack, on Bryan's question regarding the credit union space. The pipeline looks like it's picking up. Is this something that you think is a broader trend or is this just something a couple deals hitting at one time? Are you finally seeing a little bit of pick up in the credit union space?

I think we are seeing a little bit of pickup. It's been relatively slow the last couple of quarters, as we have talked about, from both the standpoint of not seeing as many large transactions as we were used to seeing, or -- and frankly that not being a surprise. The only real surprise being we also have also seen fewer transactions in general than what we have been used to seeing. The Callahan research data from last year hasn't been published yet. We are probably 60 days away from that. I believe that when that data is published, it will show, again, that we had more competitive takeaways in the credit union space than anybody else out there. But having said that, even though that is probably a true statement, it's still fewer than we expected. So, we are seeing some increased activity and a fair amount of it appears to be shaping up pretty nicely for the next quarter or so

The other thing I would add, Paul, Jack is talking about primarily the core potential customers out there. We've got some complementary products that look like they are getting some nice traction on that side of the business. And, also, we've got some newer third-party relationships that should drive some decent license revenue, even though it will have a impact on our license margins.

Great. And then switching to the services margin. Obviously, very strong in the quarter. You talked about the implementation being a driver. Just trying to get some sense of maybe the outlook for margins going forward. How much of this should we think of as just kind of core improvement in margins and how much is more kind of one-time from some of the mix issues?

Well, as I mentioned, Paul, I think you're going to see some bouncing around the margin. But as we've talked about the last three quarters, we think there is, has been, and continues to be some potential slight improvement. Could it bounce around 100 basis points or more in any given quarter? Absolutely. But I think we should continue to see a slight trend upward over time.

Okay. And then just the last question. I apologize if you gave this. But did you give CapEx for the quarter? And also I was just wondering if you could talk a little bit about CapEx for this year and probably more importantly, what you see for CapEx next year?

Our total Cap Ex year-to-date is $21.1 million. We have been very focused on controlling that. We do have capital expenditures coming in here in the fourth quarter that could potentially drive that up to the low to mid-$30 million range. We should probably end up the year at about $33 million, $35 million. And we are pretty preliminary in next year's budget but we are going to try really hard to keep the budget -- next year's CapEx pretty much in line with this year.

Okay, great, thank you.

We will go next to Dave Koning with Baird.

Hi, guys. Nice quarter.

Thanks.

On the support and revenue growth, I think it was the first time in several years when you've had a component other than EFT growing the fastest. I think you mentioned implementation is growing a little faster than 40%. Is that recurring? Should we think of that type of growth recurring in that line item or should we think the next couple of quarters reverting back to the strongest component being EFT?

I think you can just fully count on EFT being the strongest grower. Implementation is not a recurring revenue. That's the one component within support and services that is not of a recurring revenue nature. Those are the one-time install fees for both license and denovos. There's a small implementation fees for denovos. But there's a lot of convert merge revenue in there, invitation revenue as our bank customers are buying other banks. So, that number is going to bounce around a little bit. But what we have in the installed pipeline and backlog, I don't see it going down a whole lot

I think the other line item in there, Dave, is the remote deposit implementation. Again, as Kevin mentioned convert merge activity, as well as the remote deposit implementation. And both of those would appear that they are going to stay pretty strong for the next quarter or two anyway.

And there were a number of implementations that we've finished up that were in the mid-tier banking space that improved the SilverLake implementation revenue as well in this particular quarter.

Great. And then just one another one. On the tax rate, it was a little lower this quarter. Is there any way to think about next year? Are we still 36.5% or have there been any development that might make it a little lower next year?

For next year, we should be somewhere in the 36% to 36.5% rate, Dave. But remember, the challenges -- the R&D credit expires again next 12/31. So if that doesn't get renewed, then our tax rate could go up to 37.5% for the second half of the year.

Okay. Great, thank you.

(OPERATOR INSTRUCTIONS) We will go next to Gil Luria with Wedbush Morgan utilities.

Thank you. For remote capture, are you seeing -- it seems like the growth there is very rapid at this point. Does that seem like it is coming more from the smaller banks, mid-sized banks, or all just across the board? Is it something that the bigger banks are starting with and pulling the smaller banks or is that different this time?

Gil, it is all the way across the board. The quote that I mentioned in my opening comments was from the ABA Banking Journal survey they do every year. And 30% of the banks that had implemented this said they saw it as an essential survival strategy, and I believe that is absolutely correct. The folks that are not offering this in the vast majority of the country, if they don't have it at least as a defensive mechanism, are likely to lose business customers to banks that do offer it.

Business customers love this solution and the efficiency that it brings to their business. So unlike anything that frankly I've seen in my career, this thing is moving very quickly. And it, is in my opinion, a must-have for the vast majority of banks, including the small banks and the large banks. I don't believe that the large banks have any particular advantage over the credit unions. I think that our product is easier to implement and more fully featured than what some of the largest banks in the country are currently offering. Which again, in keeping with the our check image systems and other Internet banking systems and other things that we've offered for years, they have at least as much, if not more, capability than what the large bank systems offer.

So, it's a very competitive product. And these products in general, the various surveys that are out there, the ABA Banking Journal, Western Independent Banker, the Grant Thornton, all of them appear to indicate that within the next three years somewhere in the neighborhood of 70% of all banks will have some type of solution in place to address this need. So, that is going to encompass an awful lot of banks.

The other thing I would add to that is a lot of banks are looking for ways to increase deposits or deposit demand is significant. And the reach of this product allows them to go outside their general geographic area. And typically the accounts that are using remote deposits are going to have higher balances, from a deposit perspective, than those who do not. So, this is certainly a product that is very significant for us right now.

Got it. In terms of last year or so, you've had to slow down the rate of acquisitions. I imagine because they look more pricey than they used to. Is that changing or is that getting worse at this point.

I don't think it is getting worse, Gil. We did a flurry of acquisitions in 2004 and we needed to take a breather, to be quite honest. And at the same time is when the private equity funds grew all their funds to go out and you are right, the valuations have gone completely ridiculous. We continue to look at them and for the right one, we will try to stretch and get them but they have to give a good return to our shareholders or it doesn't make any sense.

Got it, thank you.

We will go next to Pete Heckmann with A.G. Edwards.

Good morning, [Craig Richard] in for Pete. Guys, could you comment on the -- provide a little color on the strong hardware revenue number reported for the quarter and the approximate revenue contribution from scanners related to the remote deposit capture offering?

Well, we actually had some very nice hardware contributions across the board. That was one component of the credit union segment that had a nice increase quarter over quarter. We had some nice P Series sells in there, some upgrades and new boxes for implementations that were going on. The remote deposit capture scanners did add a nice piece to the hardware. And we also had a very nice quarter in our JHA Direct, which is our forms and supplies business. So we had a very solid hardware quarter from just about every component that sells hardware within the organization.

Okay. Great. And then in -- for cash flow modeling for the coming fourth quarter. I know in the year-ago fourth quarter, you guys saw some success in advanced collection for annual maintenance billings. Do you expect some of that to occur in this current fourth quarter?

Well, if you'l;l remember what happened last year, we put the new PeopleSoft system in, and we sent the annual in-house maintenance billings out about two weeks early. And our customers love us, so they went ahead and paid the bills even though they weren't due. We will probably send the billings out about the same timing this year, but I have no idea if we will get the same inflow of cash in the fourth quarter or if they will wait and pay those bills in the first fiscal quarter of next year.

All right, thank you.

It appears we have no further questions at this time.

Okay. Thank you. We do want to thank you for joining us today to review our third fiscal quarter '07 results. We are very pleased with the overall financial performance during the quarter. Once again, I would like to remind everyone about our Analyst Day next Monday and Tuesday in Chicago. And if you have not yet registered and would like to, either send myself or John Seegert an e-mail and we will give you the link sent to you for registration. Again, thank you very much for joining us. And operator, would you please provide the playback number.

Once again thank you for joining today's conference call. If'd like to listen to the replay of this call, it will be available from 11:45 Eastern Time today through Midnight, Wednesday, May 16. The dial-in number for the U.S. is 888-203-1112. Internationally, 719-457-0820. And the confirmation code is 5440436. Thank you. You may disconnect at this time.