Jack Henry & Associates Inc (JKHY) 2012 Q1 法說會逐字稿

Good day and welcome to Jack Henry's first-quarter 2012 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, Ben. Good morning. Thank you for joining us for the Jack Henry & Associates first-quarter fiscal year 2012 conference call. Again, I am Kevin Williams, Chief Financial Officer. With me today are Jack Prim, our Chief Executive Officer and Tony Wormington, our President. The agenda for the call this morning is as follows -- Jack will start with an overview of the quarter, Tony will then provide some operational highlights of the quarter, and then I will provide some additional comments on the press release that we put out after market closed yesterday and provide some additional comments on the financials, and after that we will open it up for Q&A.

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 any statement about the future, these are subject to a number of factors which can cause actual results or events to differ materially from those which we anticipate due to a number of risks or 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 10K 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'm very pleased to announce a strong performance in the first quarter of our 2012 fiscal year. Our revenue increased 6%, all of which was organic. And drove year-over-year increases of 10% in operating income, 15% in net income, and 13.5% in earnings per share. All of these financial metrics were slightly ahead of our internal projections for the quarter.

In spite of the lack of positive economic news in the media, we have seen an improved financial institution spending environment in recent quarters. We believe there are several factors that are contributing to this. For most financial institutions, concern about their own survival are not top of mind at this point. And the reduced number of failed institutions reduces the likelihood of increased insurance premiums or assessments that could further reduce their income.

The general economy appears to be showing signs of stabilization, if not growth, as does the financial health of the institutions themselves. With more financial institutions showing year-over-year quarterly income growth and fewer showing quarterly losses and improving capital levels that should help deal with any additional shocks to the economy. The impact to financial institutions' revenue streams from recent regulatory actions, thus far, appear to be less than expected, at least for institutions under $10 billion in assets.

These points are admittedly hard to reconcile with recent surveys in September showing consumer confidence at the lowest level in more than 30 years. And CEO expectations about the general economy and their industries plunging from already low expectations 90 days earlier. Nonetheless, our sales teams had a strong sales quarter, coming on the heels of very strong sales performances in the June quarter of our last fiscal year. Attendance at our Credit Union Annual Education Conference in September was up 15% from last year. And attendance at our Bank Conference in October was up 27%. As best we can distill from these and other observations, we continue to feel strongly about the current year fiscal year opportunities and the guidance we have provided.

While challenges and uncertainties still exist in the financial institution environment and the economy at large, our 4700 plus associates remain focused on delivering quality products and exceptional support for our customers. And we remain cautiously optimistic that we will see continued improvement.

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

Thanks Jack. We are pleased with the strong contributions in all components of our recurring revenue. 80% of our total revenue is recurring in nature. The largest contributor to this was our Electronic Payments revenue which grew 12% compared to the prior-year quarter and represents 43% of our total revenue. Another large contributor to this line is our software maintenance for our in-house customers which increased 1% and represents 27% of total revenue and our outsourced data and item processing services increased 3% and represents 18% of total revenue for the quarter, which is driven by both new customers who elect this type of service delivery, but also due to the continued movement of our existing in-house customers electing to migrate to this service model.

In addition, our one-time implementation revenues decreased 9% compared to the prior-year quarter and represents 7% of total revenue for the quarter. Even though implementation revenues decreased compared to the prior-year quarter, they were flat sequentially. Additionally, the prior-year quarter was the second-highest implementation revenue recorded in the history of the Company. Our demand for implementations in all areas of the Company is as great as it has ever been.

Our electronic payments transaction volumes continued to experience very solid growth, PassPort ATM and debit card processing volumes increased 14.8% over the prior year quarter, bill payment transaction volumes increased 8.3% over the prior-year quarter. Financial institution merchants installed and utilizing our Enterprise Payment Solution increased to over 36,750 merchants representing a 10% increase compared to the prior year quarter. And merchant related transaction volumes increased 10.3% over the prior-year quarter.

We recently completed our annual survey for our core banking and credit union customers and I'm proud to state our customers continue to be more willing to recommend JHA to their peers and they feel it is important to do so. I want to thank all of our customers for their business and their continued loyalty to JHA, and additionally, I want to thank all 4700 Jack Henry employees for their hard work, dedication, and loyalty to our Company.

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

Thanks Tony. Total revenue for the quarter increased 6% compared to same period a year ago. And just a reminder, this is all organic revenue growth, currently all of our acquisitions hit their anniversary last year. Our license revenue increased by 30% through the quarter compared to same period a year ago. Which this was driven by a very solid quarter for both core delivery and complementary products. It was very nicely spread amongst all of our licensed products, and however, our license revenue only represents 5% of our total revenue now.

So, even though it was a 30% increase, it was not a huge needle mover but it did help our margins for the quarter, slightly. Support and service revenues increased 5% this quarter over the same quarter a year ago and represented 89% of total revenue. To break that down a little bit, our implementation services, which is those one-time services were down 9% for the quarter compared to a year ago, which obviously puts some headwinds -- creates some headwinds for our support and services growth.

As Tony mentioned, our electronic payments increased 12% for the quarter, continued very strong growth in our payments business. Outlink increased 3% for the quarter, in-house maintenance increased 2% for the quarter, both those are line items that continue to see some headwinds from failed institutions but continue to show good solid growth. Our hardware revenue increased 7% for the quarter compared to the prior year and still represents 6% of our total revenue. Recurring revenue experienced total growth of 6% for the quarter compared to the prior year and represents 80% of total revenue for the quarter.

For margins, our consolidated gross margins improved slightly to 42% for the quarter compared to same quarter a year ago. License margins increased to 91% this quarter from 88% a year ago due to a decrease in third-party sales mix this quarter. Support and service margins held steady at 40% consolidated, which is pretty solid considering the 9% decrease in implementation revenue this quarter compared to a year ago, which put some headwinds on that. Our hardware margins decreased slightly to 26% from 27% a year ago, primarily due to sales mix.

To break this down into our 2 reporting segments, our banking segment gross margins held steady at 42% with that of a year ago, and our credit union segment margins increased to 42% from 38% a year ago, primarily due to a strong software quarter in this segment -- in the credit union segment, but also continued growth in our outsourcing and payments businesses in that segment. In the bank segment, license margins increased to 88% from 85%. Support and service margins for the bank segment held steady at 41%. And hardware margins also held steady at 28%.

In the credit union segment, license margins dropped slightly to 95% for the quarter compared to 96% a year ago, just due to sales mix. Support and service margins improvement to 39%, up from 36% a year ago, again driven by a number of things, implementation services, outsourcing and payments within that segment and hardware margins held steady at 23%. We did a very good job controlling costs. Our total operating expenses only increased 5% for the quarter compared to the prior-year. And almost all of this is exclusively due to selling and marketing, which the majority of that is tied to commissions due to the increase in sales, primarily in the license area. And as a percentage of total revenue our operating expenses held steady at 19% of total revenue.

Our operating margin for the quarter improved to 23% from 22% a year ago. As we gave guidance in August, we thought we could get a little leverage there and it is playing out as we kind of laid it out for you all then. Our operating income increased 10% for the quarter compared to last year's first quarter. Our interest expense is down 50% this quarter as I highlighted in the August call that we had paid down $220 million of our debt last year, and our all-in cost of debt was a little over 3%, hopefully you all had that built in your models that way. And our tax rate is down slightly from last year, but not much, it's at 35.4% this year compared to 36.3% for the entire year last year. Again we think that will creep up a little bit during the year, the R&D credit is set to expire at December 31 again this year, and that's the way we have to build it into our tax forecast.

Our EBITDA increased approximately 9% to $81.6 million from $75 million a year ago. Depreciation and amortization expense of $23.7 million this quarter with $11.1 million in depreciation and $12.6 million in amortization and this is compared to $22.2 million in D&A this quarter last year. Included in the total amortization, is the amortization of intangibles from acquisitions, which was $6.3 million for the quarter compared to $6.5 million in last year's quarter. Operating cash flow increased to $78.5 million from $75.4 million a year ago.

Our free cash flow for the year is calculated as net income, less capitalized expenditures, less capitalized software, less dividends, was level with last year at $51 million for the quarter, and this equates to free cash flow per share of about $0.58. In-house backlog, which represents contracts in hand for software and hardware implementation services yet to be delivered was at $73.2 million, which is level with our in-house backlog this quarter a year ago. Our outsourcing backlog, which is for data and item processing contracts only, has increased nicely and is up 13% compared to a year ago.

Total backlog up 10% over that a year ago and up 1% sequentially. As a reminder, there is nothing in our reported backlog numbers for any of our payments businesses, which currently, as Tony pointed out, represent 33% of our total revenue and grew 12% for the quarter. But again, none of that is in our backlog numbers. For guidance, as Jack pointed out, we continue to see trends that look positive for Jack Henry's future performance. The first quarter was right in line with the guidance that we provided for fiscal year 2012 and appears to be a good indicator of what the full year should be. Our revenue growth should continue at about the same pace in the mid-to high mid-single-digit range.

Our gross margins should stay solid with some potential for slight improvement as we continue to grow our payments business, and we also continue to see the trend of existing in-house customers moving to outsourcing, which both of these allow us to leverage our existing infrastructure. We also anticipate some slight leverage to the operating income line. Therefore, conservatively, we expect net income and EPS to both grow in the high single to low double digits for the full fiscal year established by the first quarter as things continue to improve.

This concludes our opening comments, we are now ready to take questions. Ben, will you please open the line for questions.

Absolutely. (Operator Instructions) Kartik Mehta, Northcoast Research. Your line is now open, please go ahead.

Thanks. Kevin, I wanted to start off just with the balance sheet. You've done a great job paying down debt and as you stand today, I think you said you have $108 million in cash and maybe $157 million in debt, but as the year progresses obviously that will increase. I'm wondering your thoughts on what you might do at the end of this year. I don't know if there were acquisition opportunities that were pretty relevant right now? Or your thought is to maybe give that back, to return the capital to shareholders, either in a share buyback or maybe a dividend form.

Well, a couple things, Kartik, first of all, the debt that is on our balance sheet is the term note which our only cost of having that is just roughly 3%. If we were to accelerate paying that off we would have to take a one-time hit for writing off the up-front, so it's kind of hard to get excited about that when the cost of debt is so cheap. Our Board likes us currently to be in the position to have a little dry powder. Yes, we do have $100 million in cash. We have got the full flexibility of our revolver that is currently $150 million which we can expand that to $250 million, so we do have quite a bit of dry powder and we do want to be ready for the right acquisition.

As far as, and just to remind you, Kartik, that the way our cash flow works is, the majority of our free cash comes in our fourth quarter and our first quarter from the billing of our annual maintenance contracts for in-house customers. So, yes, we are flush with cash right now but that cash balance will not increase significantly throughout the rest of the year because our operations pretty much just generate enough cash to run the operations without the in-house maintenance. If we don't do a large acquisition, or a significant acquisition between now and the end of the year, and we bill next year's annual maintenance, which -- it's amazing how times flies because that's only eight months from now. Yes, I'm sure we will evaluate ways to return some of the capital, either though special dividends or whatever, which we've talked with the Board about that in the past. We've still got the stock repurchase authorization in place, which we did not buy any stock the last couple of years because of all the acquisitions we did, but we will continue to look at acquisitions first and then right behind that, to return capital to investors.

Thanks, Kevin. And then, obviously the regulatory environment continues to be a big issue for banks, I'm wondering, maybe your thought and Jack's thoughts on, do you believe there's a minimum asset size that financial institutions need to be to be able to be profitable and continue in this environment,. And if so, the impact to Jack Henry because of it?

Kartik, it's Jack. There's a lot of variables that go into obviously what it takes to run a profitable financial institution. I don't know that I could give you a minimum asset size. I think it certainly is going to be more difficult for smaller financial institutions, particularly banks under, I don't know, $250 million in assets. I think the compliance costs are certainly going to add up.

Consolidation in the industry is nothing new. It's been going on for 25 years, in spite -- even with the bank failures, we haven't really seen an increase in the rate of consolidation, it has still run roughly at historical levels, maybe a little higher but not much. I think that some consolidation, I don't mean massive consolidation, but continuing at current rates or a little more, probably benefits us in that we don't typically sell a lot of new systems to the smallest financial institutions, banks or credit unions. So, but again, we have dealt pretty effectively with industry consolidation for a few decades at this point, and don't see that being a major consideration for us going forward.

Thanks, Jack. I really appreciate it.

Sure.

Thank you. (Operator Instructions) John Kraft, D.A. Davidson. Your line is now open, please go ahead.

Good morning gentlemen. First of all, I guess I just wanted to dig in to the support services line item and the growth in particular. And obviously, we saw a little bit of, at least from recent trends, a decline in the growth. Now, there's a lot of moving parts and iPay, and I guess what I was hoping to do is to sort of dig into what you think that growth has been organically over the last few quarters and if this sort of mid-single digits is a reasonable growth trajectory for the rest of the year?

Well, you got a couple things working there, John. I mean, one thing we've always talked about the implementation services is going to bounce around a little bit and we're comparing our implementation services this quarter to a year ago quarter, which a year ago was the second-highest implementation services revenue in the history of the company. A pretty tough comparable there to calculate growth off of. That was down 9% and created some headwinds. The other thing I'd point out is that we did have some failed institutions this time last year that has created some headwinds to get over, so once we get past this quarter and get easier comparables on implementation services, I think our support and services growth will go back up closer to the 10% range. I think it will be higher than the mid-single digits where we were this quarter just because it's up comparable.

Okay, that's helpful Kevin. Thanks. And then Tony, as I look across the transaction metrics that you gave, Bill Pay looks to have accelerated a little bit sequentially, I guess I was curious if you would characterize that as share gains that you've been able to make or an improving customer same store sales kind of metric?

I would contribute that to a combination of both of those. We have picked up a good number of customers in iPay, but what we've seen is the number of transactions per consumer is slightly up as well. So it bodes for an economic indicator that would indicate that things are a little better.

Okay thanks. And then just lastly Jack, you sort of suggested that the sales bookings n the quarter improved a bit. I guess I was curious if you'd be willing to provide some sort of a bookings growth percent?

Yes. I don't know that I want to get into specifics and frankly, I don't have them here with me. But it was a very solid quarter across all four brands, which again, as I mentioned, followed a very solid Q4 where all four brands were, in some cases, well over 100% of their targets. Of course, we're 80% recurring revenue now, so a lot of the sales that we make we won't necessarily see the revenue impact for a couple quarters or longer. But I think it speaks more to the fact that the environment certainly does not appear to be deteriorating and, in fact, appears to be getting a little bit better. So we're very pleased with where they are at this point.

Okay thanks guys. Encouraging results.

Thank you.

Thank you and with no further questions I'd like to turn the conference back over to Mr. Kevin Williams for any closing remarks.

I'm surprised there's only two questions. But, I guess in summary we want to thank you for joining us today to review our first quarter fiscal 2012 results. We're 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 our customers. Our executive managers and all of our associates continue to focus on what is best for our customers and our shareholders. With that, Ben, would you please provide the replay number?

Absolutely sir. There will be a replay available of this teleconference starting today at approximately 11.45 and lasting through November 9 at midnight. You can dial in to 1-800-642-1687 for your teleconference. This does conclude today's program. Thank you for your participation in the conference and everyone have a wonderful day.