Jack Henry & Associates Inc (JKHY) 2007 Q4 法說會逐字稿

Good day and welcome to the Jack Henry & Associates fourth quarter fiscal year 2007 earnings 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.

Thank you, Rachelle. Good morning and welcome to the Jack Henry & Associates fourth quarter and fiscal year end 2007 earnings call. Statements, responses to questions may be made in this conversation which are forward-looking or deal with expectations of 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 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're please to host this call this morning to provide a company update and report our record financial results for our fourth fiscal quarter and fiscal year ended June 30, 2007. With that, I will now turn the call over to Jack Prim our CEO.

Thanks, Kevin. We're very pleased to announce another strong quarter and year-to-date performance. Strong quarterly performances by both the bank and credit union segments particularly in support and services revenue allowed us to again report record revenue and record net income for the quarter and year-to-date. Revenue increased 12% for the quarter to $181 million, and $668 million for the year, a 13% year-over-year increase. These increases were primarily organic in nature and 11% for the quarter and 12% for the year-to-date. We continue to reduce our dependence on license fees as a percentage of total revenue, ending the year at 11% of total revenue compared to 14% in previous year. Nonetheless this was still the second highest quarter for license fee sales in company history. Support services revenue increased 17% for the quarter and 18% for the year. Backlog increased 8% on a year-over-year and a sequential basis and recurring revenue increased to 66% of total revenue for the year.

While the quarter was strong in both the bank and credit union segments, we were particularly please to announce the signing of another billion dollar plus credit union on the Symitar Episys system. The $1.3 billion technology credit union in San Jose become the 500th client to license the Episys system following an extensive review of competitive systems in the market. After having previously won three of the five annual technology best practice awards given out by CUNA at their annual technology Summit, Tech CU has selected Episys as the platform on which to base their aggressive future growth plans. In addition, after the close of the June quarter, we followed this significant win by signing the rapidly growing $1.2 billion Western Credit Unions to implement EPISYS. We continue to lead the industry with more credit unions over a billion dollars in assets and with more credit unions of all asset sizes installed on the Episys system than any other competitive platform. We continue to see excellent customer acceptance of our recently announced products, our Yellow Hammer Bank Secrecy Act product has now been ordered by 91 institutions even though the product was only announced for general availability in May of this year.

In addition, 37 institutions have ordered our Opening Act product for online deposit and loan account openings since it announced general availability last quarter as well. Nearly 100 banks and 1900 additional merchants went live with our enterprise payments remote deposit capture solution during the quarter. This fall we we will release a solution for mobile banking and bill payment for our customers. While the rate of consumer adoption for this product is hard to predict at this time, our customers will have available one of the most comprehensive offerings in the industry and much more affordable prices than competitive alternatives. Our ProfitStars group successfully integrated the U.S. banking alliance acquisition last year, and USBA solution for net interest margin improvement continues to be well received by financial institutions both inside and outside the Jack Henry customer base. We kick off this fiscal year with the announcement of the key acquisition in Gladiator Technology, a company focused on providing true end monitoring and prevention security solutions exclusively to financial institutions. As a long time business partner of J&J, we shared a number of mutual clients and will now be able to offer a much needed core system independent security solution to all financial institutions. Security continues to be a top of mind concern for J&J and our clients, and we intend to use Gladiator as the foundation for expanded security offerings for financial institutions.

Before I turn it over to Tony for additional comments on the business, I would like to thank our 3,700 plus employees for their hard work and dedication during the year which allowed us to again post record revenue and net income, industry leading organic growth and profitability figures while at the same time increasing our already high satisfaction levels from the year ago period. We look forward to another strong year in 2008. Tony.

As Jack mentioned, we're very pleased with our support and service line, especially with the strong contribution in all of the components of our recruiting revenue which includes outsourcing data and item processing, in-house support and maintenance, and our EFT services. Our support and services revenue increased 17% for the quarter and 18% for the year compared to prior year quarter and fiscal year. We are continuing to go see solid increases in all components of our electronic funds transfer transaction processing businesses. Our ATM debit card processing volumes continue to increase nicely compared to prior year quarter, increasing at a rate of 35% and our bill payment transaction volumes increased at a nice pace of 49% in the same period. Compared to last sequential quarter a number of financial institutions installed with our enterprise payment ASP solution from remote deposit processing increased 28% as well as the financial institutions merchants increased by 53% in the same period. We are seeing solid increases in the volume of transactions being processed, transactions increased by 43% in the same sequential period.

As I mentioned in our last quarter call and again this quarter, we experienced strong implementation revenues due to the implementation of mid-tier banks sold in previous quarters and the volume of convert merge activity in the banking market due to the number of bank acquisitions, implementation of our imaging products as well as the large increase in the number of financial institutions and the respective merchant implementations of our Enterprise Payment Solution. Strong demand continues for many of our complementary product and services in both the banking and credit union markets supported by our core processing customers, as well as our non-core customers through our ProfitStars brand. I will now turn it over to Kevin for a further look at the numbers.

Thanks, Tony. As Jack mentioned during the quarter just ended we had revenue growth of 12% to $181.3 million total revenue for the quarter of which 11% of this was organic. This is compared to the consensus estimated revenue of $178.4 million total revenue. Our license revenue did decrease by 5% compared to the year ago quarter and is down 9% for the fiscal year. However, this quarter a year ago was the highest in the history of the Company and had several large mid-tier bank deals. We also feel our sales teams have some very good momentum going into fiscal 2008 under all three of our brands we go to market based on recent successes and based on sales pipelines. Our support and services had an increase in every component as Tony mentioned within the line of revenue. For the quarter and fiscal year implementation revenues increased 24% compared to the respective periods a year ago, which a large portion of this were tied to specific license revenue in the quarter, but a majority was also tied to implementation of recurring revenue type items, such as our outsourcing for data processing and convert mergers of banks that our customers acquired.

Our payments business was up 33% for the quarter and 38% year-to-date. Outlink data and item processing was up 18% for the quarter and 16% year-to-date and our in-house support and other services were up 9% for the quarter and 11% for the year. Hardware revenue increased by 3% for the quarter and 7% for the year compared to a year ago due to very strong sales in sorters for our check imaging products and scanner sales related to our remote deposit capture offering. We also had a very strong quarter and a nice year for our J&J direct forms and supplies business. The products that are marketed under our ProfitStars brand both core and non-core customers tracked pretty much on plan for the quarter and the year and continued to increase their contribution to revenue, gross profit, and our net income. We continue to maintain strong consolidated gross margins of 43% for the quarter and the year.

Our banking segment gross margins did slip a little to 43% this quarter from 45% a year ago, primarily due to the tough comparable for license revenue a year ago because of some of the large banks we delivered in that quarter last year. However, our credit union mergers increased to 44% from 37% going the other way due to very strong license revenue in the quarter in the credit union segment in a number of very nice new core customers. As Jack mentioned one of those was Tech CU, but several other nice core wins and several complementary products. In our bank segment our licensed margins we saw a decrease from 97% to 89% due to higher amount of third-party software sold during the quarter, which was driven by another thing that Jack mentioned, our new BSA solution. Our support and service margins increased to 39% from 36% for the quarter driven in part by the strong increase in our implementation revenue and our EFT revenue. Hardware margins decreased from 27% to 22% this quarter compared to a year ago due to sales mix and lower rebates as the hardware that we're seeing the largest growth in do not drive rebates from those specific vendors. In our credit union segment license margins were 98% for the quarter compared to 100% a year ago due to an increase in third-party product sales this year.

Support and service margins increased slightly from 29% to 30% in the credit union segment and hardware margins increased from 21% to 26% due to sales mix. For the bank segment and credit union segment margins both remain steady at 44% and 38% respectively for the year. We continue to celebrate some of the highest margins in the industry. Our total operating expenses increased 7% for the quarter and as a percentage of total revenue decreased from 19% to 18% for the quarter compared to the prior year. For the year operating expenses have increased 14% but decreased from 20% to 19% of total revenue. Our operating margin remained level at 25% for the quarter compared to a year ago and remained level at 24% for the year compared to last year. Net result of all of this was an increase in pre-tax income of 13% in the fourth quarter and 14% for the year compared to the prior year.

As we have discussed on prior earnings calls this year, the R&D credit which was extended into December of 2006 for the period from January '06 through December 2007 had a significant impact of approximately $3 million or $0.03 per share during our fiscal '07, due to the catch-up that happened in our second fiscal quarter or the December quarter of '07. Because of this and other offsetting factors our effective tax rate for the year decreased from 35.8% last year to 34.7% this year. Without this one-time benefit, our earnings per share would have increased approximately 16% for the year compared to the actual 19% increase. However, the R&D credit is currently set to expire again on December 31 of 2007 which means that we have to assume that it will not be extended and therefore we will have a negative impact on our effective tax rate going forward in fiscal 2008. Our EBITDA increased this year to $212.9 million from $185.2 million last year or a 15% increase. Depreciation and amortization of $51.0 million this year compared to $43.8 million last year included in that EBITDA calculation. Our EBITDA margins improved slightly to approximately 32% this year from just over 31% last year.

At this time we feel comfortable in providing guidance for fiscal 2008 of top line revenue growth in the low double-digit growth similar to what we experienced in FY '07, with some slight margin expansion opportunity to operating margin line to obtain mid-teens growth in operating income. However, based on the R&D credit comparison in the prior year where we had a significant impact of $0.03 per share increase benefit in this year, it appears we may lose the R&D benefit again at mid-year similar to fiscal 2006. It appears that we may offset any leverage to the operating income line due to the increase in the effective tax rate. We predict our gross and operating margins will remain basically level for the next fiscal year with some slight potential for expansion, obviously with some fluctuations from quarter to quarter due to sales mix, but it is hard to predict whether Congress will once again extend the R&D tax credit. This year will be similar to FY '07, with the first quarter down sequentially from the fourth quarter of '07, and then we should have steady increases over the year quarter over quarter. However, it appears that the first quarter consensus estimates that are out there are a little high at this time and probably should be adjusted down slightly, and also remember that the second quarter will probably be our toughest comparison quarter this year because that is where the R&D credit benefit was last year of the $0.03. However, we should see similar increases in EBITDA in fiscal 2008 to those we saw in 2007.

Briefly on our use of cash, we purchased 1.1 million shares during the fourth quarter and 4.3 million shares were repurchased during the fiscal year. In the last two fiscal years we have purchased 7.1 million shares for the treasury. During the year we used approximately $98.4 million for the repurchase compared to $41.8 million last year. Also during the year, our cash use for acquisitions increased by $18.6 million to $39.3 million compared to year ago and $20.7 million. Our CapEx is down compared to the prior year by $11.2 million to $34.2 million and capitalized software is up last year by about $4.7 million. For FY '08, it appears like our CapEx will be somewhere around $40 million to $45 million which will be up from last year. This is due to large projects we have under way. We're going to be building a new office facility in Springfield, Missouri, which we purchased the land in FY '07, so the land is already in CapEx for FY '07, and we have other significant projects under way in Charlotte and Birmingham to expand for our growth. Also, capitalized software should be basically the same in FY '08 as it it was in FY '07.

Our backlog was at $239.3 million with $68.1 million in-house and $171.2 million outsourcing at June 30th which represents an 8% increase over that of a year ago. And also remember that there is no transactional revenue represented by our EFT debit processing, online bill pay or merchant remote deposit capture contracts reflected in the backlog due to the difficulty in conservatively estimated the transactional revenue, especially in such fast growing parts of our business. With that, I will now open the call up for questions. Rachelle, would you please queue up the listeners for Q&A?

(OPERATOR INSTRUCTIONS) Our first question is from Dave Koning with Baird.

Good morning and nice results here.

Good morning, Dave.

A few questions. First of all, support and service continues to be very strong in driving the growth profile here. Is that something that you expect to continue to drive growth in mid-teens or maybe a little better than that in fiscal '08?

Yeah, Dave, I mean that has been our fastest-growing part of our business for the last several years. Every component on that continues to do extremely well. Implementation continues to be strong not only for the additional license sales but also convert mergers, and then as we continue to see the shift to outsourcing -- as we mentioned on previous calls, eight out of ten new customers on the bank side are going for outsourcing, but today we're seeing a lot of our long-term existing in-house customers now going to outsourcing which also drives implementation revenue. Our EFT debit transactional continues to grow nicely as does our bill pay and the remote deferred deposit cash, so EFT should continue to grow at similar level, and we see no slowing in our outsourcing, and the in-houses maintenance just continues to be pretty stable at that 10% level, so we would expect support and service to continue to grow in the mid-teens next year.

Okay. Great. And then I guess with tax rate commentary, first of all, what do you expect the tax rate to be without the credit which is what it sounds like what you're guiding to and what would the tax rate potentially be with the credit and then finally, EPS growth sounds like you're sort of implying kind of low teens type EPS growth.

Yeah, I mean, we think that the operating income is going to be somewhere in the mid-teens similar to this year. But the R&D credit, the challenge is right now we have to assume we have it for half a year, so under the current accounting rules, we have to assume half a year, basically adjust our effective tax rate for the whole year, so it is going to be somewhere around 36.5 or just slightly higher than that. If they extend the credit, then it should go down to about 36, but if we didn't have the credit at all, it would be about 37.5%, Dave. And as far as EPS guidance, yes, if they don't renew the tax credit, then we think that EPS growth will be somewhere in the low teens because we'll lose any leverage factor we get to the operating income line.

Great. One final question. Capitalized software expectations in fiscal '08?

Similar to what they were in FY '07.

Great. Thank you.

Yeah, thanks, Dave.

Next we'll move to Paul Bartolai with Credit Suisse.

Thanks. Good morning, guys.

Good morning, Paul.

Just to clarify on the tax rate, so we should be assuming the 36.5% each quarter for the full year unless we learn anything different on the credit?

Yeah. I would say that for your models you should go ahead and stick 36.5 in there because that's about what it is going to work out with with a half a year of R&D and obviously if they extend it before 12/31, then it has potential of going down slightly.

Got you. Okay. Is there allowance for share repurchases assumed in guidance?

No.

So that would potentially provide some upside?

Yes.

And then you guys finished the quarter with I think about $30 million in net cash, was it or $10 million in net cash?

Yeah, roughly, and that comes down to the timing, Paul, of the our annual maintenance bill length that went out in June to which we collected quite a bit of that cash similar to what we did in the prior year. We had about $70 million in -- drawn down on our revolver at June 30th that we had used for acquisition and the repurchase of treasury shares and I will tell you that the debt was all paid off in the month of June, and currently we're sitting on around $50 million in cash.

Great. And last question, I mean the credit union margins obviously were very strong. It seemed like that was mostly mix with the strong license sales. Just curious any comments in general on the credit union margins and I guess also just the credit union market in general? This is kind of the second quarter in a row where we've seen a little bit of improved momentum on the sales side, so just curious to get thoughts on the credit union market?

Paul, it is Jack. The credit union market certainly first three quarters of the year last year was slower than we had expected. We did see some nice pick-up and a number of nice closed deals in the fourth quarter, continued in the first quarter of this year with a second credit union over a billion dollars in assets, and as you know, our credit union business tends to be more license fee oriented than outsourcing. We just haven't seen the same adoption of outsource preference for core systems on the credit union side yet that we've seen on the banking side. Do expect to see it move more in that direction, but so far it is still predominantly a preference for in-house, so in a quarter where you have a number much those types of signings, certainly can make a big difference in your license fees and, as a result, pretty good difference in the margins in the business unit. But feel like the business is moving certainly better than it did -- was at this time a year ago, and feel good about where we are.

And one more comment on the margins. I think we will continue to see some improved special and support services line within the credit union segment as the EFT continues to grow in that five which obviously carries pretty decent margins, and also as we continue to add new core customers, the in-house maintenance will also grow which will allow us to leverage some of our existing infrastructure and resources.

Thank you.

(OPERATOR INSTRUCTIONS) Next we'll move to Gil Luria with Wedbush Securities.

Good morning. First question is, can you confirm the guidance that you laid out in the analyst day in May that EBITDA margins are going to expand 50 to 100 basis points?

Gil, I think that we will see some expansion on the EBITDA. Will it be 100 basis points, I don't know. This last year we saw about 75 basis points during the year, and so I think we should see something comparable to that in the FY '08 as what we saw in FY '07.

That's great. Could you tell us kind of looking back at 2007 what percent of sales was from ProfitStars?

Roughly 12% of total revenues was ProfitStars products. Now, understand that includes both inside and outside the base of the ProfitStars related products.

Sure.

Which is right on track with where we said we were going to be at the analyst day.

Right. And then last question, can you talk about the absolute numbers for remote deposit captures, how many banks you have, how many merchants, what the transactions were in the most recent period?

We've got that. It will take a second to find it. Jack is looking it up right now.

While we wait, there is some concern regarding the environment in the banking sector and whether the recent events and activities are going to slow down banking spending going forward. Do you see that bank technology spending is going to slow down going forward? Do you see any signs of that?

Gil, it is Jack. We have not seen a slowdown in that regard at this point in time. You know, these things come and go. And I don't think that most of our banks are all that affected by the specific subprime issues that have driven a lot of the issues, interest rate changes certainly do have some impact. But again a lot of the products that we sell help the banks, both Jack Henry core customers and non-core customers, improve their net interest margins and run their operations more effectively. In terms of what we're seeing in the area of core systems sales activity, a lot is driven by new de novo bank startups. I think those will in all likelihood continue. Folks who need to make a core system change -- existing banks that needs to make a change, first of all they're not going to change unless they have a really good reason. If they have got that good reason, it will likely still be there regardless of what interest rates do. So don't anticipate that being a big factor and haven't seen any indications of it at this point. I think Tony was able to beat me to the draw on finding the number of banks and merchants on our enterprise payment offering, remote deposit, and I will let Tony give you those numbers now.

Gil, the number of banks installed at the end of the fiscal year June 30 were 432, and the number of bank merchants installed were 5,489.

And then we also had a little over 400 direct merchants that we sold to that did not go through the bank, and also at June -- at the end of the fiscal year June 30, there were roughly 100 banks in the backlog that we installed on that product.

And still a pretty strong pipeline for banks that are still evaluating.

Great. Thank you very much.

We'll move on to Nik Fisken with Stephens, Inc.

Good morning, everybody.

Good morning.

On the revenue outlook for hardware, should stay at that $23 million, $24 million a quarter?

Nick, we've been predicting for several years that hardware revenue is going to go down, and one of the two main drivers in that right now is scanners for remote deposit capture and sorters for all the check image solutions that we're selling. There will continue to be some nice hardware upgrades. We're seeing right now, IBM just came out with a new upgrade to the I series, so there will be some of that. And as we continue to sell in-house core deals on the credit union side, there will continue to be nice sells of P series, but hardware is going to bounce around a little bit, and it is hard for me to predict that it is going to maintain at that level, but I would guess for the year it may stay flat to '07 because of some of those things I just mentioned.

I think the predictions of the hardware declining would certainly have been accurate if it was not for the remote deposit phenomenon that we've seen here in the last eighteen months which started suddenly and moved at a very rapid rate. We think there is probably still another twelve to eighteen months minimum of rapid growth in that area, but again as that starts to wane, I think we would certainly predict the decline in hardware revenues that we have been expecting.

And as you guys see the shift to outsourced, should the license revenue be basically flat year-on-year?

You know, that's -- we continue to see growth in the pipeline on the credit union side, which a majority of that is in-house deals. We have a lot of complementary solutions on the banking side with our bank (inaudible) product and other things. The ProfitStars group is doing extremely well, and a lot of that is license driven outside the base, so if you you want to model license to be flat FY '08 over FY '07, that's probably reasonable.

And then on the first quarter earnings guidance you just gave, you said that the street is too high at $0.27. How much is that too high?

It is probably not too much high, Nick, probably $0.01 or so high.

Okay. The only other question I've got is on the M&A pipeline given the market turbulence. Have you guys seen properties that have been -- has pricing gotten better? Have you seen bigger deals where you're getting included now?

We haven't seen lot of change there, Nick. We suspect that we will see some change. We've been included in a lot of deals. We haven't been willing to pay what some of the -- particularly the private equity firms have been willing to pay, although there has certainly been strategic buys of late that were pretty aggressive as well, but I don't think as a result of the changes in that marketplace that we've seen a lot of change in the deals that we're seeing at this point, but I do think that it will make a difference on deals here for the next six months or so that we do get engaged in, that I believe they will be more reasonable pricing levels likely to be associated with those deals. Now is the debt environment a temporary? We're looking at a six-month window there or is it something longer term? Don't really have a good feel for that, but I think in the next six months or so some of the pricing is likely to come down on some of these deals.

How about the volume of deals?

I would say it is roughly --

It's roughly the same. I haven't seen a big change, Nick, but there was so much activity there in a twelve to eighteen-month window that a lot of the good properties are gone, but there is still a fairly steady stream but a lot of deals we're seeing now is just -- you just kind of scratch your head and say this doesn't make sense for us in our long-term strategy.

Great. Thanks so much. Congrats on another good quarter.

That will conclude the question-and-answer session. I'm sorry. We do have one more question from Craig Richards with A.G. Edwards.

Good morning, guys.

Good morning, Craig.

Could you give us a breakdown of license revenue between the bank and credit union segment in the quarters during the quarter?

Sure. For the quarter banking license revenue was $17.8 million and credit union was $6.5 million.

Okay. And the two large competitive take aways you got from Fiserv in the credit union space are -- were those reflected in last quarter's license revenue number?

You're probably referring, Craig, to the two billion-dollar credit unions I mentioned. Tech CU was signed in the fourth quarter -- I'll defer to Kevin on how much of that may have converted to actual revenue in the quarter. Western Credit Union was not signed until July, so it would not have been reflected in Q4.

Right. Western is not even in the backlog of June 30th. Tech CU, there was some of the license revenue that would have been recognized as the license would have been delivered, but there is still more license and the majority of the implementation that is sitting in backlog at June 30th.

Great. And then Gladiator Technology, can you provide approximate revenue run rate for '08?

Roughly I think it is somewhere around $6 million gross revenue.

And that will come through primarily support and services.

It will all come through support and services. That's truly a monitoring service. However, that service will marry up well with our existing Matrix product line which is installation of networks and LANs and WANs for banks, and then we'll tie the security right on top of those networks as we install it. So it is a very good cross-sell opportunity for us, but it will all be in support and services.

Lastly, can you repeat CapEx expectations for '08 and basically the majority of the increase coming from the Springfield campus billed out the beginning of that?

CapEx is going to be roughly this time somewhere between $40 million and $45 million depending on when some of these projects get kicked off. We're still trying to finalize plans for the facilities we're building in Springfield, Missouri, but those should be -- ground should be broken on those this fall. We're leasing a new facility in Charlotte which should allow us for growth for the next five years, and there is -- that's a leased facility, but there is a lot of leasehold improvements going into that facility, and then same way with Birmingham which that should start sometime later this fall also.

Great. Nice job.

Thanks, Craig.

That will conclude the question-and-answer session. I will turn the call back over to your speakers for any additional or closing remarks.

Thank you, Rachelle. Again, we want to thank you for joining us today to review our fourth quarter and fiscal year end 2007 results. We're very pleased with the overall financial performance during the quarter and year, and we remain very confident that we're well positioned in and that we have the right products and services to grow both the bank and credit union markets and other financial services markets. We also believe we have the proper resources in both people and technology for these continued future opportunities. We continue to expand and improve our products and services and are committed to build on all of our competitive strengths. Our executives, managers, and all the members of our team continue to focus to do what's right for our customers and you our shareholders. Thank you very much for joining us this morning and with that, Rachelle, would you please provide the replay 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 a.m. eastern time through today through midnight Wednesday August 29th. The dial-in number in the U.S. is 888-203-1112, internationally is 719-457-0820, and the confirmation code is 4295715. Thank you and you may disconnect at this time.