Jack Henry & Associates Inc (JKHY) 2011 Q4 法說會逐字稿

Good day, and welcome to today's Jack Henry fourth-quarter 2011 earnings call. This call is being recorded. For opening remarks and introductions, I would like to introduce Kevin Williams, Chief Financial Officer. Please go ahead.

Thanks, Stephanie. Good morning. Thank you for joining us for the Jack Henry & Associates fourth quarter and fiscal year-end 2011 conference call. I'm Kevin Williams, CFO. With me today are Jack Prim, CEO, and Tony Wormington, President.

The agenda for the call this morning is as follows -- Jack Prim will start with an overview of the quarter; Tony will then provide some additional operational highlights; and then I'll provide some additional comments on the Press Release that we put out yesterday after the market closed; and then finally we will try to answer any questions that you have.

I need to remind you that remarks or responses to questions today concerning future expectations, events, objectives, strategies, trends, or results constitute forward-looking statements 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 or events to differ materially from those which we anticipate due to a number of risks and uncertainties, and the Company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's Press Release and the sections in our 10-K entitled Risk Factors and Forward-Looking Statements.

With that I'll now turn the call over to Jack.

Thanks, Kevin. Good morning, and welcome to the call. I am very pleased to announce record revenues and record earnings for the fourth-quarter and fiscal-year 2011. Total revenue increased 9% for the quarter, and 16% for the year. The organic component was 6% for the quarter and the full year. Operating income grew 18% for the quarter, and 19% for the year. Both measures exceeded our guidance for the year.

This performance was delivered in an economic environment that we had expected would be considerably better by this point in time than it has turned out to be. In spite of that, we have seen improved (inaudible) from our customers, with all 4 JHA brands -- Jack Henry Banking, Symitar, ProfitStars, and iPay, over 100% of their assigned quotas for the year, contributing to a record backlog of business and a 9% increase in the backlog from a year ago.

Our managers' and associates' strong focus on expense management was a significant contributor to our success this year. As evidenced by the fact that while license fees, by far our highest margin revenue item, were substantially below our expectations for the year, we still managed to exceed our operating income targets.

At the same time, we continue to see improvement in our customer service ratings from customers throughout the year. We believe this is largely attributable to our approach to cost control during the last 2 years, which left our workforce intact to meet customer needs as the economic environment gradually improves and business picks up.

While the general economic news may remain mixed for the next year, we see trends that continue to bode well for our performance. The slowdown in the number of bank failures will continue to reduce the headwinds on growth. The continued trend to outsourcing, including our existing in-house customers who make that transition, further builds our recurring revenue, currently 80% of the total, and adds to our support and service revenue, which is now 88% of the total.

Our Payments business showed strong revenue growth at 43% for the year, of which 14% was organic, and now generates over $300 million a year in revenue. Our relatively modest amount of debt has been even further reduced, and allows us significant flexibility as we see opportunity in the market.

Before I turn it over to Tony, I'd like to thank the 4,703 JHA employees who deliver for our customers and ultimately for our shareholders everyday. Your efforts, attitudes, and loyalty are critical to our continued success.

With that, I'll ask Tony to provide some additional information on the business.

Thanks, Jack. Good morning. We are very pleased with the strong contributions in all components of support and services. Support and services revenue grew 11% for the quarter, and 18% for the year compared to last year. The largest contributor to the growth within this line was our electronic payments revenue, which grew 26% compared to the prior-year quarter, and increased 43% for the year compared to last year. Electronic payments represent 33% of our total revenue for the quarter, and 32% for the fiscal year.

Another large contributor to this line is our OutLink or outsourcing services, which grew 6% for the quarter and 10% during the fiscal year, which is driven by both the new customers electing this type of service delivery, but also due to the continued movement of our existing in-house customers electing to migrate to this model. Both of these contributed to the overall increase of 10% for the quarter and 17% for the year in our recurring revenue compared to the prior-year period.

In addition, our 1-time implementation revenues for the year grew nicely at 9% compared to prior year, and represented 7% of total revenues for both the quarter and the fiscal year. This year was a very strong performance considering that prior-year implementations were up significantly as well. These implementation revenues are fueled by both competitive takeaways and M&A activity due to the closures and resulting acquisitions in the banking market, as well as forced mergers in the credit union market.

Along with the nice increase in revenue, our electronic payment transaction volumes continue to experience good growth. PassPort ATM and debit processing volumes increased 15.1% over the prior-year quarter. Bill payment transaction volumes increased 7.2% over the prior-year quarter. Financial institution merchants, installed and utilizing our enterprise payment solution, increased to nearly 36,000 merchants, representing a 10.3% increase compared to prior-year quarter.

Merchant-related transaction volumes increased 13.7% over the prior-year quarter. We continue to be well positioned to take on increasing volumes in all outsourcing and payment areas with a minimal additional investment required due to the existing infrastructure and the nature of these electronic processing solutions.

I would echo Jack's comments regarding our employees. In addition, I would like to thank all of our clients for their continued loyalty and ongoing business.

I'll now turn it over to Kevin for a further look at the numbers.

Thanks, Tony. As Jack mentioned, our total revenue increased 9% for the quarter and 16% for the year compared to the same periods a year ago. And, again, our organic revenue growth was approximately 6% for both the quarter and the year.

License revenue in the quarter increased 22% compared to prior year, which is primarily due to a fairly solid [quarter-and-core] delivery, but more so, a very strong quarter in our [Company] products, and represented 6% of our total revenue. This also allowed for our license revenue to be up by 2% for the full fiscal year.

Our support and services revenue increased 11% this quarter over the same quarter a year ago, and this line increased 18% for the full fiscal year. To break down our support and services, implementation services was down 9% for the quarter, but was up 9% for the full year. Electronic payments increased 26% for the quarter and 43% for the year. OutLink was up 6% for the quarter and 10% for the full year, and our in-house maintenance was up 4% for the quarter and 6% for the full year.

Hardware revenue decreased 13% for the quarter compared to the prior year, and represents 6% of our total revenue. Hardware also decreased 4% for the full fiscal year. As Tony mentioned, our recurring revenue experienced growth of 11% for the quarter compared to the prior year, and represents 80% of total revenue for both the quarter and fiscal year.

Our consolidated gross margins held steady at 42% for the quarter compared to the same quarter a year ago. License margins increased to 88% this quarter from 85% a year ago, due to a decrease in third-party software delivered during the quarter.

Support and service margins dropped slightly to 40% compared to 41% a year ago, primarily due to the 9% decrease in implementation revenue this quarter compared to that of a year ago. And hardware margins increased to 27% from 24% a year ago, primarily due to the sales mix. To break this down into our 2 reporting segments, our Banking segment gross margins held steady at 43% with that of a year ago; and our Credit Union segment margins decreased slightly to 37% from 38% a year ago.

In the Bank segment, license margins increased to 86% from 82% a year ago. Support and service margins for the Bank segment decreased slightly to 41% from 42% a year ago, again, primarily due to the decrease in implementation services in the quarter. And hardware margins improved to 29% compared to 24% a year ago. In our Credit Union segment, license margins dropped slightly to 91% for the quarter compared to 92% a year ago. Support and service margins remained level at 34%, and hardware margins decreased to 22% from 26% a year ago, again, primary due to sales mix.

Our total operating expenses increased 1% for the quarter compared to that of a year ago, and as a percentage of total revenue, decreased to 19% of total revenue from 20% a year ago. This is primarily due to the 1-time, acquisition-related charges incurred in the fourth quarter a year ago in relation to the iPay acquisition, but also due to our continued focus on cost controls. Total operating expenses for the year were up 12%, and remained level as a percentage of total revenue for the full year at 19%. Our operating margin for the quarter improved to 23% from 22% a year ago, and remained level at 22% for the full year compared to last year. The net result with operating income increased 18% for the quarter and 19% for the year compared to the prior-year periods.

Interest expense is up this quarter compared to the year-ago quarter, primarily due to the credit facility put in place last June. So, there was only 1 month of interest expense in the prior-year quarter compared to a full quarter this year. However, we have roughly $154 million in total debt this year at June 30, compared to $379 million a year ago. We paid down about $220 million of our debt in the last fiscal year.

The effective tax rate for the quarter was 34.9%, compared to 37.8% last year, primarily due to the continued impact of the R&D credit that was put in place last December, and other tax incentives that were not in place last year.

Our EBITDA increased approximately 18% to $81 million from $68.9 million a year-ago quarter. For the year, EBITDA increased by 21% to $307 million from $253.9 million a year ago. Depreciation and amortization expense of $22.9 million this quarter, with $10.5 million in depreciation and $12.4 million in amortization, and this compares to $19.5 million in D&A in this quarter last year.

For the full year, depreciation and amortization was $90.5 million, with $41.9 million in depreciation and $48.6 million in amortization, compared to $71.5 million a year ago. Included in the total amortization is the amortization of intangibles from the acquisitions, which was $6.2 million for the quarter and $25.5 million year-to-date.

Operating cash flow increased to $240.1 million from $218.7 million a year ago, or a 10% increase. Free cash flow for the year, calculated as net income less CapEx and less dividend, increased to $173.7 million for the fiscal 2011 from $133.7 million last year, or a 30% increase. Approximately 0.5 of this increase is tied directly to our net income increase, and the other 0.5 due to decreased CapEx during the fiscal year compared to the prior year. This equates to free cash flow per share of approximately $2 a share this year versus $1.57 a year ago.

In-house backlog, which represents contracts in the hand for software, hardware, and implementation services yet to be delivered, is at $79.1 million, which is 1% higher than a year ago and up 3% sequentially. Our outsourcing backlog, which is for data and item processing contracts only, has increased nicely, and is up 8% sequentially and up 12% compared to a year ago.

Total backlog was up 9% over that of a year ago, and up 7% sequentially. Both in-house and outsourcing backlogs were at all-time highs as of June 30. Also, just a reminder, there is nothing in our reported backlog numbers for any of our Payments business.

Guidance for FY '12, which we are now in -- we continue to see trends that look positive for our future performance; therefore, we anticipate our revenue growth, which at this point is all organic, since the iPay anniversaried last June, we expect our revenue growth to continue at about the same pace as we saw it this last year in the mid-single-digits range of approximately 6%. Considering some continued improvement in license and a continued decline in hardware revenue, we expect and we anticipate our gross margins should stay solid with some potential improvement as we continue to grow our Payments business, and as we continue to see the trend of existing in-house customers moving to outsourcing, which both of those allow us to leverage our existing infrastructure. We also anticipate some slight leverage to the operating income line.

Barring additional draws on our revolver, our all-in, total cost of debt for FY '12 should be about 40% less than it was for FY '11. However, we do expect to have a slightly higher effective tax rate this year, which we anticipate to be approximately 36% for the year, as the R&D credit is set to expire again at December 31 of this year. Bottom line, conservatively, we expect net income and EPS to both grow in the higher single digits for FY '12, and potentially as low as the low double digits if things continue to improve.

This concludes our opening comments, and we are now ready to take questions. Stephanie, will you open the lines for questions, please?

(Operator Instructions) Kartik Mehta from Northcoast.

Hi, good morning, Kevin and Jack. I wanted to ask you a little bit about the Durbin Amendment. I know that now the regulations seem to be in place. I wonder if you've talked to your credit union customers and some of the smaller banks customers and see how they're feeling about the potential for them to have a 2-tier interchange system and what that could mean for you in terms of spending?

Yes, Kartik, it's very much a mixed bag of expectations out there around the 2-tiered structure. I think everybody has joined the chorus trying to get changes made to Durbin, and certainly indicating that they did not believe that they would receive any benefit from the 2-tiered structure.

Now that it's a little more firm, I think some of them are somewhat optimistic that they will continue to benefit from the current levels of interchange, although even those folks predict that that's a 12- to 18-month advantage, if that, because they feel like the market will eventually bring them in line with the larger institutions. And then, there's probably half of them that for whatever reason don't believe they are going to see or will see very minimal benefit from it.

But, even in the worst-case scenario, if they had to pay the same interchange rates that the over-$10 billion institutions have to pay, that's still considerably better than what they were led to believe they were going to have to pay. So, from $0.12 a transaction to $0.21 a transaction, plus 0.05 times the purchase price, it's not as good as what they had, but it's considerably better than what I think they had already come to grips with, was likely to be the outcome. So even there, there is somewhat improved sentiment at this point.

Thanks, Jack. Kevin, on your guidance for EPS, you said high single digits to possibly low double digits. And, I'm wondering, where do you need to see the improvement to get to low double digits? Is it that you need license revenues to be better than you thought or is there something else within the business mix you would need to see to get to that low double digit EPS growth?

Primarily, Kartik -- you hit the nail on the head -- just improved license contributions to get there, which obviously we had a very strong quarter in the fourth quarter, and all indications from the sales pipeline continue to look pretty solid. As Jack mentioned, all 4 brands were in excess of 100% of quota this year. I will tell you that several of those got there through services other than software, but the sales pipeline continues to look good. And that's really what we'd take to get there because, obviously, Jack Henry as a company has always ran pretty lean. We've always maintained very solid margins, so there's not a whole lot of other tweaking within the business that we can do to really impact the margins other than improved license sales.

And, then just a final question, Kevin. The $154 million you have left in debt -- as the cash comes in, are you looking to repay that? Or is it that the cost of the debt is so low that you'd just rather keep that on the balance sheet?

Well, a couple of things, Kartik, 1, the debt that is left is the $150 million term loan. We've got a zero balance on our revolver right now. Our all-in cost of debt is roughly 3%, so you tax-effect that, it's pretty cheap debt to have on the book.

We could accelerate it and pay it down, but then I'd also have to take a hit and write off a percentage of the upfront. So the debt is pretty cheap. The Board has decided that they would like for us to have some dry powder, so we'll probably keep some cash on hand. So now we've got roughly $100 million in cash today. We've got the full utilization of $150 million, which I could expand the revolver to $250 million to do the right acquisition if it comes up, or if our stock price would become more attractive, we could step in and do more stock buybacks, because we've still got about 5.5 million shares under the current authorization.

Thank you very much.

Dave Koning from Baird.

Yes, hi, guys. Good job. First of all, just in the last week or two just talking to banks, has there been much of a change in tone just given the stock market volatility or do most of the banks just view it more as a one-off stock market event, but the business itself at the banks you talk to is still going pretty much as normal?

Dave, I don't think we've seen anybody pull back as a result of the market activity. I think it certainly adds to concerns, and I guess if there's any good news for the fact that we've seen all of this back and forth in Washington and in the stock market fluctuations.

The point is, it's been going on for long enough now that I think people are getting somewhat jaded to it. So I think given the fact that the markets came back somewhat, unless we see significant economic indicators pointing in the wrong direction or something that looks like it's going to be much longer term in nature, at this point in the last week I don't think we've seen anybody change their spending plans.

Okay, good. Second, free cash flow has been above earnings now for 6 years in a row. Is that something you'd expect to continue? It seems like with the intangible amortization and a couple of things like that, non-cash items, that free cash would just remain strong. Should we see that again this year?

Absolutely.

Okay. And just the last 1. Hardware usually it's flat to up sequentially in Q4. You mentioned it was weak, but I think this quarter it was actually down 13% sequentially. What part of the business or maybe what's just happening there?

Well, Dave, we've been saying for years that Hardware revenue is going to start going down, continue going down, and we've had a couple of things the last 2 years that have inflated a little bit. We had Check 21. We were selling a lot of reader/sorter hardware for a few years. Then Remote Deposit Capture got real big for a few years and we were selling a tremendous amount of scanners, and that's kind of run its course a little bit. The market is getting somewhat slightly saturated.

In the last 5 years, we've moved 150 or so customers from in-house to outsourcing, that those customers are no longer buying hardware upgrade. 87% of the new core deals this last year on the bank side went outsourcing instead of in-house. 52% of the credit unions went outsourcing instead of in-house.

So it's just a constant shift of not only existing but also new customers choosing an outsource or a [SaaS] delivery that doesn't require hardware. So I think hardware, we're going to stick to what we've been saying for years, Hardware is eventually going to continue to decrease as a percentage of revenue and probably even in total dollars.

Okay, great. Thank you.

Glenn Greene from Oppenheimer. Your line is open.

Thanks, good morning and good results. I guess a few questions, the first 1, Kevin -- as we go back to your analyst event in May and just referencing your guidance comments that you made today relative to what you said in May, is the primary difference just being conservative on the R&D credit on the tax side?

That's a big part of it, Glenn. Because obviously, I have no idea what's going to happen with the taxes out there, but that is going to be basically a 1.5% difference going forward than what we actually had this year if they don't renew it. Obviously, we continue to look at some other tax structuring and things that we can do to keep our rates as low as possible, but at this point, we have to build into our budgets at least what we believe the tax rate is going to be for the year.

Okay. Would it be reasonable to think that your EBITDA growth for fiscal '12 will be in that high single digit range, too?

Yes, it should be there too, Glenn.

What's that?

Yes.

Okay. And then you referenced in your response to 1 question, that you have $150 million in cash today. Is that just recognizing the collections on the deferred revenue balance and your billings at the end of June?

Actually, I said we've got $150 million on a term loan. We've got about $100 million in cash. And yes, the difference between the $64 million reported at June 30 and where we are at today is continued collection of the annual maintenance billing.

Okay. And then, just your visibility to the organic growth, the 6% or so range for fiscal '12, do you feel like you have pretty good visibility given the trend in outsourcing and your payments growth? Maybe just a little bit of color and walk through how you are thinking about that.

Yes, obviously, with 80% of our revenue being recurring and given the in-house backlog being where it is, and we know when that's going to roll out. Also the backlog of the payments customers and outsourced customers yet to be installed throughout the next fiscal year, we've got over 90% visibility of our growth for next year.

The offsetting factor would be bank failures, particularly of large outsourced or large payment processing customers where we -- right now sitting here today, think we've got excellent visibility to that revenue, but if they fail next month, it stops that day. So it would take a pretty good customer or a combination of some pretty good-sized customers for that to make a big impact. But, that is a somewhat offsetting factor in visibility.

Got it. I'll just throw one more quick 1, an update on the trends you saw for iPay for the year, maybe from a revenue and EBITDA perspective?

I would say improving, particularly the sales improved. They had a very strong sales performance for the year. Even more noteworthy, the fact that for the first 6 months of the fiscal year, they were well behind sales plan, which I would attribute entirely to integration efforts; the first 6 months being part of Jack Henry and everybody understanding and getting comfortable with new roles and responsibilities. Very strong second half performance that got them well ahead of plans for the year.

Now, we did have some anniversary of a very large conversion that they had done about a year prior in the fall, which was 700-plus credit unions that we converted from another bill pay provider. And so, we did anniversary that, which did have some impact on the revenue growth rates in the last half of the year, but again they are tracking pretty nicely.

All right, terrific. Thank you.

John Kraft from DA Davidson.

Nice work, guys, on the steady progress. Kevin, I just wanted to reconcile a couple of things. You obviously paid down a lot of debt and now have a slug of cash. You said that your Board said that they were hoping just to keep some dry powder around, but you also suggested that current prices, or that you'd be more interested in buying the stock if the prices came down. Are we to assume that you would not be a buyer at current levels? And the dry powder that the Board is looking for, is that simply acquisitions?

Well, I didn't say that we wouldn't be in the market at today's prices. I just said obviously if our prices fell back down to where it was a couple of weeks ago, we'd be even more excited about jumping back in. But, John, nothing has really changed.

Our philosophy for use of cash has always been -- the top priority would be the right acquisition at the right price, that's accretive and helps us grow and gives a higher return to our shareholders. Second use would be stock buybacks. And then third would be, continue to do increases and dividends. Nothing has changed there. It's just the fact that from the main meeting with our Board that they thought it would be a good idea for us to have some dry powder, because we all think that there will be some acquisition opportunities coming around, and why have to go back to the credit market if we've got the cash available and we've got the current facility at 3% all-in cost.

Okay, that's helpful. I just wanted to clarify. And just a couple of housekeeping, you didn't see a seasonal increase in G&A. In fact, it ticked down for Q4. Was there something going on there out of the normal? Or maybe we won't see those seasonal increases anymore?

Well, I mean it ticked down a little bit, if you're talking sequentially, John.

Right.

And, that's really just continued efficiencies and continuing to clean up some things from all the acquisitions we did a year ago. Compared to a year ago fourth quarter, there was a few million dollars in last year's quarter for 1-time acquisition costs.

Okay, and just lastly on CapEx for 2012. Any thoughts on the material changes from this year?

CapEx for next year is probably going to go up a little bit. At this point I would guess that CapEx is probably going to be around $40 million for next year, as we've got some infrastructure updates and different things that we are getting ready to do next year to help us become more efficient long-term.

Fair enough. That's all I've got, thanks, guys.

(Operator Instructions) Brett Huff from Stephens.

Good morning, can you guys hear me okay?

Yes, sure.

Congrats on a nice quarter. Just 1 margin question. Versus our model, you guys were a little bit higher in OpEx than we had modeled, not much. But I wondered if there is any stuff around the edges on the sales and marketing and development line that were going to go up or down materially as we head into the next fiscal year?

There shouldn't be anything material go up on selling and marketing. In fact our selling and marketing was up a little bit this quarter because, as Jack mentioned, all 4 brands hit their sales quota so there was some year-end bonuses that got accrued in there for all of our sales associates. Hopefully that happens again next year. So there shouldn't be much happening there. As far as R&D, Brett, the only thing there is timing of large projects that are being capitalized, as some of those roll off and the expense comes back, so that does cause some [loppiness] in the R&D line, but there's nothing really out there that should cause much of a change.

Okay, and when you guys are thinking about longer-term as you face fewer bank failures or forced sales in some of your customer base, how would that change your outlook on organic growth and/or margins, or how that might impact your margins going forward, once the bank failures and the forced M&As subside?

Well, considering that approximately 20% of the bank failures in the last 3 years have been our customers, which has created anywhere in a given quarter or year from 2% to 4% revenue headwinds that we had to grow over. If the bank failures would stop, obviously, it's going to take a while to replace all that. But we should see a nice uptick in year-over-year revenue growth and margin expansion just if the bank failures would stop, Brett.

Do you have a macro view on that? I'm sure it's a little murky in terms of how that's going to play out, but do you have a sense of when you feel like those will taper given the conversations you have with your banks?

Well, I think it's going to be somewhat slow, Brett. It's tapering off. I think it will be lower this year than it was last year. I think it will be lower next year than it will be this year, but there is still are some underlying issues out there for a number of banks, as far as their existing loan portfolios and balance sheets. And we have not seen material improvement in the employment situation and, as a result, consumer spending, so all of those factors are at work. But again I think, based on what we know today, that the worst of it is behind us; and it's going to continue to be a slow moderation going forward, is our best view right now.

In the conversations you're having with your banks now, I know there's a market sentiment change and maybe an economic sentiment change. But of the conversations you're having with the banks that aren't in regulatory or capital trouble -- I've seen those that are buying -- has the conversation shifted at all in the last 3 weeks or a month from offense to defense, or have the products that have been interesting remain the same group of products now as then?

I think it's pretty much the same group of products. As we've said before, the core system evaluation and spending on the Credit Union side has continued through the entire recession to be very strong. We had 37 new core system sales in the Credit Union space last year -- all of those competitive replacements. And they continue to move forward with major implementation projects.

We see some of that as well on the banking side, but modernization of electronic delivery channels, internet banking and, in many cases as well, bill payment continue to be of interest, CRM-related solutions. It's pretty much the same kinds of things that we've been seeing for a while.

Okay, that's what I needed, thanks for your time this morning.

And I'm showing no further questions at this time. I would like to turn the call back over to Kevin Williams for closing remarks.

Thanks, Stephanie. In summary, we would like to thank you all for joining us today to review our fourth-quarter and fiscal 2011 results. We are very pleased with the results and the efforts of all of our associates to help control costs and at the same time continue to take care of our customers and improve our customer satisfaction. Our executives, managers and all of our associates continue to focus on what is best for our customers and our shareholders. With that, Stephanie, would you please provide the replay number?

Ladies and gentlemen, this call will be available for replay at 800-642-1687 and your replay number and is 87442683. Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.