Jack Henry & Associates Inc (JKHY) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Jack Henry & Associates first quarter 2008 conference call. As a reminder today's call is being recorded.

At this time I would like to turn the conference over to Mr. Jack Prim. Please go ahead, sir.

Thank you, Jennifer. Good morning. I'd like to start off by reminding you that statements or 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 on our recent SEC filings. There can also be other factors not included that could potentially cause results to differ materially. We are pleased to host this call this morning and report the financial results for our first quarter of fiscal 2008 ended September, 2007. Kevin Williams is unable to join us today as he is in the hospital with pneumonia. He is doing fine, but hopefully you can understand why he is not joining us on the call today.

I will begin the call with some opening comments followed by Tony Wormington, our President, with some further comments, and then I will do a financial overview. At that time we will open up the call for questions related to the general business outlook. We will not go into detail financial questions today since Kevin is not here. He has pneumonia. We don't need to give him heart failure on top of that. Appreciate your indulgence on that for the call today. We're please to announce another solid quarterly performance with record revenues and net income and an overall performance in line with expectations. While the first quarter of the fiscal year is traditionally our most challenging, we saw strong overall revenue growth of 16%, of which 15% was organic in nature. A combination of the continuing trend towards outsource system delivery and some deal slippage in the banking segment led to license fee revenue that was down significantly in the quarter.

However, this was more than offset by 20% growth in Support and Service and Hardware revenue compared to the year ago quarter. The combination of higher Support and Service revenue and lower license fee revenue pushed recurring revenue to 70% of the total. Revenue growth was solid, both the banking and credit union segments, increasing 16% in banking and 19% in credit union. Poor system delivery preference continues to strongly favor outsourcing in the banking segment and in-house in the credit union segment, which is reflected in gross margin performances of both groups in the quarter, down 10% for banking and up 14% for credit union compared to the year ago period. Earnings per share came in at $0.26, an increase of 12%. Backlog increased 7% compared to the year ago quarter and was flat sequentially.

Our National User Group meeting in Dallas last week had nearly 1,500 bankers in attendance and a strong level interest in several recently announced new products and partnerships. There was strong interest in our new mobile banking and payment solution and in our partnership with LifeLock for identity theft prevention services. While Gladiator Technology had offered their internet security services as a long time business partner of JHA, they saw increased interest in their solutions now that they're owned by JHA. The integration of Gladiator Technology into our ProfitStars group is complete and we're now focused on broadening the range of security services this group can provide to our customers. We announced the acquisition of AudioTel in the quarter. AudioTel provides voice response, check imaging, and internet banking solutions, typically to the smaller institutions in the banking market that we have been less successful in reaching with our traditional offerings.

Their longstanding emphasis on customer service brings solid relationships with over 1,200 financial institutions, who will now be easier to reach with additional ProfitStars products. In addition, AudioTel brings a remittance processing product that has been very successful in helping commercial, government and utility companies to automate their payment processing and electronic check conversion capabilities and aligns closely with our enterprise payments offering. At this point I will turn it over it Tony Wormington for some additional details on the business.

As Jack mentioned, we're very pleased with our Support and Service line, especially 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. Our Support and Services revenue increased 20% for the quarter compared to a year ago quarter. We are continuing to 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 32%. Our bill payment transaction volumes increased at a nice pace of 33% 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 12% and compared to the prior year increased 145%.

Financial institutions merchants installed and utilizing the ASP delivered solutions increased by 24% compared to the last quarter and 453% compared to the same quarter a year ago. Along with signing new institutions in our merchants, we saw solid increases in the volume of transactions being processed. Transactions increased by 22% compared to last sequential quarter and 234% compared to the same quarter a year ago. 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 our non-core customers through our ProfitStars brand. In addition to our Banking National User Group meeting Jack mentioned earlier, we held our annual Symitar Educational Conference in September in San Diego where we had nearly 700 credit union attendees. There was significant interest in many of the same new complementary products and services as was experienced during the banking meeting. I will now turn it back over to Jack with at this point.

Thanks, Tony. During the quarter just ended we had solid revenue growth of 16%, with growth of 20% in Support and Services revenue and Hardware revenue. The net effect of which was $175.3 million in total revenue for the quarter. This compares to the consensus recorded estimate by our analysts of just under $170 million in revenue, which was also slightly ahead of our internal projections for the quarter. License revenue decreased by 13%, which as we've discussed in prior years, this is typically our most challenging quarter for contracting due to a number of variables. Support and Services had an increase in every component within that line, which includes -- implementation; EFT; debit, switch, payment processing; OutLink, our data and item processing services; and in-house maintenance. Hardware revenue continues to exceed our expectations this year with scanner sales for remote deposit capture, servers for Check 21 and branch capture and for I series and P series upgrades.

The products that make up our ProfitStars brand sold to non-core customers are tracking on plan and continue to contribute to both revenue, gross profit, and net income growth. We continue to see strong gross margins with a decrease this year to 40% compared to the prior year of 42%. Banking gross margins declined from 43% last year to 39% this year, due to a 29% decrease in license revenue. However, our Credit Union segment gross margins improved from 35% this quarter a year ago to 40% in the current quarter, due to a 57% increase in license revenue this quarter compared to last year in this segment. Total operating expenses increased 11% for the quarter and as a percentage of revenue decreased slightly from 20% to 19% of total revenue for the quarter compared to the prior year. Selling and margin expenses increased by 17% and remained level at 8% this year compared to last year as a percent of total revenue.

R&D increased 17% and remained level at 6% of total revenue, as we have significantly increased headcount from the prior year to continue enhancing our existing product and to develop new products for our customers. G&A decreased by 1% and as a percentage of total revenue decreased to 6% of total revenue from 7% this period a year ago. Our managers continue to do a very good job of controlling the respective operating costs while focusing on improving procedures and continuing to improve customer service. Our operating margin went down from 22% last year to 20% this year due to the changes in gross margin components. The effective tax rate used for our provision for income taxes decreased this quarter to 36.8% from 37.5% a year ago, due to the termination of the Research and Experimentation Credit, which impacts our effective federal tax rate. Our net income increased 10% for the quarter compared to last year.

Regarding backlog, contracting continues to be strong for our product and service offerings. Contracting is somewhat reflected in the backlog both in-house, which is for signed contracts for licensed, installation services and Hardware only, and outsourcing, which reflects only a fraction of the remaining minimum guaranteed provisions for data and item processing contracts. No EFT debit processing, bill pay or select payment merchant capture contracts are included in the backlog due to difficulty in conservatively estimating transactional revenue, especially in such fast-growing parts of our business. Our backlog has grown to $237.7 million with $64 million in in-house and $173.6 million outsourcing at September 30th, which represents a 7% increase over that of a year ago and relatively flat with last quarter. Jennifer, with that we will open up the call for questions.

(OPERATOR INSTRUCTIONS) We'll take our first question from Tim Fox with Deutsche Bank.

Thank you, good morning.

Good morning.

Quick question on the slipped deals that you mentioned in the quarter in the banking segment. Can you just discuss in terms of whether there is any particular product segment or customer profile or is this something that you consider more macro related?

Yes, Tim, not any particular individual deal that would have made a significant difference. We saw a few deals that were kind of licensed oriented that slipped into the second quarter, but given the numbers that we put up a little bit of additional license revenue on top of that goes a long way. So nothing systemic, nothing trend-wise that we're seeing in the industry, just a couple of folks that were not in as big a hurry as we were to get some things done.

Got it. Okay, thanks. Secondly, just around, try not to get too detailed on the cost side, but on the R&D ramp up that we've seen here, did you expect to continue to add there or is this a little bit of a ramp up ahead of the rest of the year?

Well, it is probably a little bit of a ramp up ahead of the rest of the year, Tim. Our business is a technology business. It is built around developing solutions and it is important for us not only to maintain the existing solutions that we have, but to continually look for new products and services that we can sell to our customers. Large part of that growth going forward is from cross-sales of additional products and those kinds of things. So we will likely continue to invest at roughly comparable levels from an R&D standpoint for the foreseeable future. I don't see us leveraging that number down substantially as a percentage of total revenue in the near term.

Okay, that's helpful. Lastly, as far as guidance, are you just staying away from that right now until Kevin returns or are you endorsing your previous guidance ranges?

I think we're still comfortable with the previous guidance ranges. I don't anticipate that we'll be updating guidance from quarter to quarter to quarter, but unless there is some significant change that we foresee, but I think we're still pretty comfortable with the guidance we've given at this point.

Great. Thank you very much.

Thank you.

Our next question comes from Nik Fisken with Stephens Inc.

Good morning, everybody.

Good morning.

Should we see the seasonal pickup in G&A sequentially as we look out into the December quarter?

Nik, I don't know that I would have expected that we necessarily have a seasonal pickup in G&A. I am guessing you're looking at the trend line there that I am not focused on, but I don't know of anything that would be causing an uptick in G&A going forward, Tony, unless you can think of anything.

The only thing I can think of it our user group meetings, typically, especially for the banking meeting is going to be in the second fiscal quarter along with a holiday bonus that's paid in that second quarter, so we would still have those same numbers that would have a bit of seasonal up lift.

Okay. And then following that last question are you guys seeing any signs of a spending slowdown on the license product or any of the products?

No, Nik, we really haven't. Again, the macro issue with licenses, I think, is two things about it are consistent. One is the trend in preference for outsource delivery and the other is our inability to predict how rapidly it is continuing to trend in that direction. We keep lowering our expectations and still coming in under those, so that's the bad news. The good news is we've been able to offset it in other ways. But I don't think it is in any way related to a slowdown in spending. I think it is more of a just a preference for delivery in the banking segment primarily. If anything, I think that in terms of additional add-on product sales there is strong interest, continues to be strong interest in solutions that can help banks run their operations more efficiently. So I think for a number of our add-on products, the market is as strong as it has been if not stronger.

You're not seeing any signs of weakness as a lot of these banks are having some issues?

Not really, Nik. I think some of the credit unions may be somewhat impacted by some of the subprime issues out there, simply because of the fact that they do so much percentage of their lending is real estate related. I don't think they're doing the subprime kinds of things, but there is the trickle down effect that tends to affect the whole segment there. So I think some of the credit unions there maybe in terms of core system decisions. I certainly don't anticipate seeing them replace core systems at a more rapid rate in the next year than they did in the past. But even there, I would tell you, we haven't seen a lot of slowdown yet in decisions being made. And again, I think there would be the same incentive for relatively smaller add-on products that can help them improve their operations, which would bode well for us with a pretty good segment of the credit union industry on our systems.

Last question, are you seeing any big banks, let's say $5 billion plus asset size that have traditionally done things in-house, looking at going to more of a -- or looking to go to an outsourced solution?

Have not seen that as much, Nik. There is a point, you kind of cross the threshold there somewhere in the $2 billion asset range where the economics of doing it in-house, provided that you can run an effective operation in-house, the economics tell you it just makes a lot more sense financially to do it yourself. We have not seen any shift at that end of the market. It is pretty much the $1 billion, $2 billion and under marketplace where there is more of a preference for outsource.

Great. Thanks.

We'll take our next question from Paul Bartolai with Credit Suisse.

Thanks, good morning.

Good morning, Paul.

Just a follow-up on the license deals that were delayed a bit, have those been signed so far already in 2Q?

A couple of them have, still working some. Again, no individual deals on their own that are going to -- it is not, for example, a mid-tier banking deal where a single transaction on an in-house basis would be particularly noteworthy, but continuing to work a couple and a couple have come in.

Great. And just as you look at the organic growth, obviously very strong this quarter at 15%. Can you give us some sense of where you think that's coming from? Is it still just kind of the same mix of the payments and the ProfitStars stuff growing more quickly? Do you think you're doing a better job taking share? If you could just give us a little more color around the organic growth?

Paul, I think it is largely just continue to see really strong growth in our payments business. The ProfitStars business continues to do very well and then we're doing very well in the traditional core systems business to banks and credit unions. Credit union marketplace the last couple of quarters has bounced back very nicely. We talked on the last call about a couple of $1 billion plus credit union transactions that we did. We're also seeing some really good activity in the under $1 billion credit union market as well. So feel good about where we are in the credit union space and continue to feel good about where we are in the the banking space. So from the core standpoint, again, continuing to win our fair share, but a lot of the growth coming from the continued strong growth in our payments business and also continued acceptance in the market of our ProfitStars strategy.

Okay, great. And as you look at the acquisition environment things have kind of settled down as far as the private equity folks out there. Do you notice any sense on what you're seeing in that environment and, I guess, also as a follow-up to that your competitors have been pretty active doing things. Does that change your thinking at all as you look at the marketplace?

Well, I don't know that our thinking has ever changed, Paul. We've continued throughout all of the shifts in the business to look for deals that make sense and deals that are reasonably priced and we continue to look for those. Again, there is no reluctance to do larger transactions. It is just that the larger transactions we've seen out there didn't hit the criteria that I just mentioned, either making sense or making sense at a reasonable price. So we continue to look for those. I think we're certainly hopeful that with the issues in the debt market that maybe private equity will be calmed down a little bit and we're hoping a couple of our competitors, who are digesting a couple of large recent acquisitions, have got enough to do to keep them busy for awhile so that there will be some opportunities. We continue to see a lot of deals, look at a lot of deals.

The good news and the bad news is that we've got a very complete product line. There are no obvious holes or gaps in the product line that we can look at and say, wow, we really need to go out and buy one of these. So finding the deals that look like reasonable, sensible diversification kind of plays are a little more challenging out there, but we're still in the market.

Great. Thank you.

Thank you.

We'll take our next question from Dave Koning with Baird.

Hi, guys, nice quarter.

Thanks, Dave. Good morning.

First of all just on the license again, should we expect a seasonal kind of bounceback in Q2? I know the last few years I think Q2 has been quite a bit stronger than Q1. Is that fair to say?

I think that's fair to say, Dave, Q2 looks -- we've got some pretty strong forecasts that I think it should shape up pretty nicely.

Okay, good. And then I guess secondly on the Support and Service line, 20% growth. Again, I think a couple of quarters ago you did a little over 20, but certainly a little above the trend line there in payments is kind of continuing to drive this. Is there another line item there? I know you talked about all four of the subsegments generated nice growth. Was implementation services or the in-house line quite a bit stronger than kind of the normal trend line?

I will defer to Tony on the implementation. While he is looking at that I will comment on the payments business. The payments business certainly continues to be very strong, really across all segments. The merchant capture, we talked about that a lot, it just continues to ramp. Bill pay, frankly, is doing a little better than we would have expected it to be doing at this point. Our Check 21 business is getting a little better traction. And to our somewhat surprise, I think our ATM debit card transaction processing continues to show growth rates that we expected to have moderated somewhat by this point in time. So a good bit of it, I think, is coming from that area. Tony, you got any insight on the implementation?

Yes. I would just state that implementation, as well as our maintenance, our data centers, and other areas are all pretty much in line with what we've done in the past. The line that stands out the most is our EFT support line, which is all of our electronic business, our payments and et cetera that continuing to grow and out pace the rest of the business. So that's the primary line that continues to ramp up Support and Services.

Great. It sounds like we might be able to expect kind of 15% plus growth from this kind of for the foreseeable future at least over the next few quarters.

I think so, David. I certainly would not want to steer you to 20%, but I think 15% at this point looks doable.

Great. Thanks a lot.

Thank you.

At this time we have one question remaining in the queue. (OPERATOR INSTRUCTIONS) We'll take our next question from John Kraft with D.A. Davidson.

Hi, Jack, hi, Tony.

Good morning.

Just a couple questions left. You recently switched your bill pay vending partner. Is that in effort to save money and if so, what do you expect you might be able to save for that?

John, ultimately that is a long-term strategy that we think will help us save some money. I want to be clear in stating that we did not switch from ORCC for any performance related reasons. They did a nice job for us and that was not a factor. We are switching for a couple of reasons. There won't be any near-term significant reduction in price. It may be a little bit. We believe that we'll have an opportunity to increase our electronic penetration percentages. That may take us until probably the end of first calendar quarter to kind of see that roll through, but we believe there is some opportunity there.

More significantly, John, in terms of what it does for us long-term is help position us for more of a lease-cost routing approach to the business. We believe for a variety of reasons that we will be able to get our warehouse in such shape that it would be much easier for us to send payments to various vendors instead of following them through a single vendor as we were doing before and as we will be doing now. But we feel like that this will position us for two to three years down the road to be able to go to multiple end points wherever we can find lower cost transactions. And at that point in time we do believe that there will be some more substantial reduction opportunities in the cost per transaction. So some modest near-term benefit that, again, likely end of calendar, first calendar quarter of next year we could see. But again, the bigger play here is to position ourselves for three years down the road.

Okay. That's fair. That's helpful. And then is there a way to breakout from your Hardware revenue what percent was due to remote deposit scanners?

There is probably a way, but I don't know that I've got that handy, John. I think I'd probably defer that to Kevin and I know we got some numbers on a number of scanners sold, but unfortunately I just don't happen to have that handy.

Okay, that's fair. Give Kevin our best. Thanks, guys.

I will, thank you.

(OPERATOR INSTRUCTIONS) Mr. Prim, there appear to be no further questions. Sir, I would like to turn the conference back over to you for any additional or closing remarks.

Great. I know that a number of folks typically like to call in and chat a little more detail with Kevin, even after he has been on the call. Understandably, he is going to be somewhat limited for the next day or two in his ability to respond to some of those questions, but certainly we'll be glad to do that when he returns. Again, we want to thank you for joining us today to review our first quarter fiscal 2008 results. We're pleased with the overall financial performance during the quarter. We remain confident that we're well-positioned and that we have the right products and services to approach 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 executive managers and all members of our team continue to do what is best for you, our shareholders. Again, thank you very much for joining us and with that, Jennifer, will you please provide the replay number?

Sir, we do not have a replay number available.

All right. I am going to give you what I think it is and hopefully it will work. I am showing the replay available from 11:45 a.m. That number would be, hopefully, 719-457-0820. Also have a toll-free number 888-203-1112 with a replay pass code of 6847246.

And pardon the interruption. I apologize, sir, I was able to locate those numbers and you're absolutely correct, those are the correct numbers.

Great. Thank you for calling. Good-bye.

This does conclude today's teleconference. We thank you for your participation. Have a great day.