Jack Henry & Associates Inc (JKHY) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Jack Henry& Associates third quarter 2014 earnings conference call. (Operator Instructions). I would now like to turn the call over to your host, Chief Financial Officer, Kevin Williams, Mr. Williams, you may begin.

Thank you, Bridget. Good morning, thank you for joining us on the Jack Henry Associates third quarter fiscal 2014 conference call. I am Kevin Williams, CFO. On the call with us today are Jack Prim, CEO, and Tony Wormingtin, President. The agenda for the call this morning is as follows.

Jack will start with a overview of the quarter. Tony will then provide some operational highlights of the quarter, and then we will provide some additional comments regarding the press release we put out yesterday after market close. Then obviously, we will open it up for some Q and A. First of all, I need to remind you the remarks or responses to questions concerns 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 subjects 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 1o-K entitled, Risk Factors and Forward-looking statements. With that, I will now turn it over to Jack.

Thank you, Kevin. Good morning, and welcome to the call. We are pleased to again announce record revenue, net income, and business backlogs for our third fiscal quarter. Continued strong execution led to organic revenue growth of 7% in the quarter, and solid gross and operating margins even as high margin license fees declined 8% from the year ago quarter.

Although license fees were lower than the year ago quarter, it is worth noting that quarter had the highest license fee revenue in the previous three fiscal years. As we had previously indicated with the strong preference for outsourced processing by new core customers, and the continued movement of current in house customers to outsourcing, the long term trend for license fees will be down. The trade off here is that we receive higher total revenue over the contract term, and stable predictable revenue streams.

We continue to see strong sales performances across all three of our brands and continued market share gains in the credit union segment, including our fifth billion dollar or larger credit union sign during the fiscal year. We closed the acquisition of Bano in the quarter, and the integration into Jack Henry is going well.

We look forward to adding this innovative group to our team, and integrating their mobile and web marketing capabilities into our internet and mobile offerings. Or biennial employee engagement survey again showed strong results as compared to external Company measurements outperforming these purer companies in every measured category,and our customer satisfaction ratings remains at their industry leading levels. We believe these two measurements to be closely related.

Earlier, we announced that Tony Wormington has announced his plan to retire at the end of our current fiscal year. I would like to take this opportunity to thank Tony for his many contributions to the success of JHA during his 34 year career, and wish him all the best in his upcoming retirement. Dave Faust will assume the roll of President effective July 1st, and continue his 15 year career with JHA. We look forward to seeing many of you at our at our analyst conference next weekwhere Tony, Dave, and several others key managers will be in attendance, and several will go into more detail on various parts of the business. With that, I will now turn it over to Tony for a closer look at the business.

Thank you, Jack. We remain very pleased with the contributions from from all components of support and services which increased 8% in the quarter, and 9% year-to-date compared to the prior year. The largest contributor continues to be our electronics payments revenue which grew 6% for the quarter and 11% year-to-date compared to the prior year period. Our outsourced data and item processing services increased 13%, over the prior year quarter, and year-to-date period.

Our in-house software maintenance fees increased 5% for the quarter and 4% year-to-date, over the prior period. In addition, our one-time implementation revenues were up 19% over the prior year quarter and 12% over the prior year-to-date period. Our electronic payments transaction volumes continued to experience solid growth in the quarter.

The JHA payment processing solutions transaction volumes for ATM, debit, and credit processing were up 12% over the prior year quarter. Bill payment transaction volumes increased 9% over the prior year quarter. Financial institution merchants installed and utilizing our Enterprise payment solution increased to approximately 70,000 merchants representing a 51% increase compared to the prior year quarter. Merchant related transaction volumes increased 29% over the prior year quarter.

In closing, as I reflect on my upcoming retirement, I would like to thank our customers, our associates and our shareholders for their continued loyalty to Jack Henry and Associates. I will now turn it over to Kevin for further numbers.

Thank you, Tony. Again, our total revenue growth was 7% for the quarter with some difficult comps in there in both payments and license fee as Jack mentioned. Our license revenue was down 8%due to those tough comps.

Our support and service revenue increased 8% this quarter over the same quarter a year ago, and (inaudible) needs a little more detail our implementation revenue of $24.5 million was up 19%. Our electronic payments of $109.3 million was up 6%.

The tough comps I mentioned are deconversion fees that we had in the same quarter a year ago were down about $3.5 million this year, which obviously was created some headwinds on that line. Our outlink data processing was $59 million or an increase 13%. Our in-house maintenance at $78.1 million which it increased 5% for the quarter.

Hardware revenue increased 2% for the quarter's third prior year and represents 5% of total revenue. Recurring revenue continues to experience nice growth a little over 7% for the quarter and 79% of total revenue for the quarter. Gross margins were steady at 41% for the quarter in last year's quarter. License margins were level at 92%. Forward service margins improved to 39% from 38% for the quarter compared to the prior year quarter, driven a lot by the implementation services.

Our Harbor margins decreased to 25% from 27% a year ago due to sales mix. And our banking segment gross margins remained steady at 40%. Credit union segment margins improved to 44% this quarter compared to 42%, primarily driven by outlink and some payments growth.

In the bank segment , license margins remained level at 90%. Support and service margins for the bank segment were improved to 39% from 38% from last year. And our Harbor margins decreased to 25% from 20% last year, again, due to sales mix.

In our credit union segment, license margins improved to 96% from 95% a year ago. Support and service margins improved to 40%, from 38%. And our Harbor remains - - steady - -to 27% from 24% a year ago. Our total operating expenses increased 9% for the quarter compared to the prior year on a GAAP basis.

However, in the prior year, we had a net impact of about $1.3 million due primarily to insurance settlements in that quarter related to superstorm Sandy event. Excluding these one time events in the previous year's quarter, our operating expenses would have increased 7% in line with revenue growth for the quarter, and our percentage of total revenue would have remained level at 18% compared to the current year's quarter.

Our operating margins for the quarter increased slightly to 24% from 23% a year ago, and our operating income increased nicely 9% for the quarter compared to last year. The effective tax rate for the quarter was 34.3%which is up significantly, from last year's effective tax rate of 29%.

Last year, we had the impact of the R&E credit which was signed back into law in this quarter a year ago which caused 5 quarters of the credit to be reported in that quarter which is about a $0.05 EPS positive impact a year ago. Our EBITDA increased to $98.9 million for the quarter compared to $92 million a year ago. Or an 8% increase.

Depreciation amortization expense of $27.4 million this quarter with $13.4 million depreciation and $14 million amortizationcompared to $26.2 million indepreciation this quarter a year ago. Included in the total amortization, is the amortization of intangibles from acquisitions which remains level at about $5.3 million for this quarter compared to the same quarter last year.

Our operating cash flow increased $161.4 million from $152.4 million a year ago.

Free cash flow year-to-date calculated operating cash flows less CAPEX, of $27.7 million which was down slightly from $20.4 million a year ago. Capitalized software of $44.6 million compared to $37.9 million last year. However this course caps off where it was essentially flat each quarter this year and dividends of $52.8 million this quarter compared to $31 million last year due to the 54% special increase in dividends last spring combined with the more typical 10% increase in February of this year caused our dividends to increase slightly.

Free cash flow decreased to $36.3 million compared to $65.3 million last year. Which (inaudible) the biggest contributor to this decrease in free cash flow was the large increase in dividends. (inaudible) to free cash flow for share of $0.49 this year to date compared to $0.65 last year.

Just a reminder, that our cash flows are significantly skewed to our first and fourth fiscal quarters due to the annual billing and collection of our in house maintenance contract revenues. Our cash balance is down significantly due to the purchase of 1.1 million shares during the quarter and the purchase of Bano. In house backlog which represents contracts (inaudible)hardware and software and implementation services is at $121.4 million which was up 21% from last year.

Outsourcing backlog, which is for the remaining life or current data (inaudible) was at $389.3 million up 8% compared to last year. Total backlog was up 11%.

For FI2014 guidance there is no change in the guidance that we have previously provided for the year. We expect our top line revenue to finish in the high to single digits. Our operating income is going to be somewhere in the mid to upper teens. We think we are going to finish strong for the fiscal year.

Our effective tax rate should remain at about 35% for the full year, since we cannot predict reinstatement of the R & E credit. Also just a reminder, that in our fourth fiscal quarter, revenue comps will be a little difficult as last year we had almost $9 million in one-time deconversion fees and special credits that we disclosed last year on the call that hopefully will not be repeated in this year's fourth year quarter, because that is not how we like to make revenues in termination fees.

I would also like to wrap up by congratulating Tony on his future retirement, and thank him for all his year's of service to our Company. This concludes our opening comments, we are now ready to take questions. Bridget, will you please open the call lines up for questions.

(Operator Instructions). Our first question is from Kartik Mehta with Northcoast Research. Your line is open.

Good morning. Kevin, I know the backlog numbers is a difficult number for you, and it does not truly represent the business you have, but the backlog that numbers that you look at and installations that you know of, how long can you sustain this type of revenue growth, this high single digit or 6% to 8% revenue growth that you have been sustaining?

Well, Kartik, I don't know that it is so much backlog, but obviously the backlog is the biggest drivers in there is the in-house piece is implementation services and software. Both of those are very good guidance. We look at other things. We look at our backlog of installs and what the time line is of those. The biggest drivers in our business continues to be outsourcing which is driven a lot by the end to out, and all the new core customers are going to outsourcing, and our payments business continues to be very strong.

We had nice growth in that if you blackout the one-time deconversion fees in the quarter last year. Those continued to be our good drivers, and the backlog is representative that kind of supports that. So I think for the foreseeable future, we are going to continue to be able to grow our top line revenue in the mid to high single digits.

And then, have you seen any change in competition, at least from an internet banking or bill payment? I think last time you talked a little bit about competition in the bill payment. I am wondering if that has changed at all, and if you are seeing anything on the internet banking side?

Yes, Kartik. This is Jack. I don't know that we have seen anything change. It is pretty aggressive particularly for any of the payments-related business, not just bill pay. But ATM, debit, credit card transaction routing, etc. Somevendors are getting pretty aggressive with some of their bundling tactics and things of that nature, but that is not a new phenomena. So related to internet banking, I cannot say that we have really seen anything different there for the most part.

The same products are still in the market that have been in the market for a while, possibly with new ownership in a case here or two here and there, but essentially the same products. Obviously, that is an area of both internet and mobile where we are continuing to invest heavily and to keep the products fresh and up to date. I do not know that we have seen anything particularly new in either of those areas.

Well, thank you very much. I appreciate it.

Thank you, Kartik.

Thank you.(Operator Instructions). Mr. Williams, I am not showing any further questions at this time, please proceed with any further remarks. Oh, I apologize, it looks like we did have one more that just cued up. I have Brett Huff on the line, with Stephens. Your line is open.

Thank you. Good morning, guys.

Morning, Brett.

Can you guys talk a little bit about the sort of demand that you are seeing across your different product lines. We have heard from a couple of core providers the last couple of weeks, and it sounds like there is more focus on revenue. There is the consistent focus on regulatory and compliance, and fraud. Obviously still not an explosion in discretionary spending, but is revenue becoming more of a focus? Are you hearing that from your smaller and medium size banks as well?

Brett, I do not know that it is more of a focus. Other than in the depths of the financial crisis. For the last year or two, there certainly has been a focus on revenue. There has been a number of studies here lately that indicate that loan demand is growing particularly in some of the smaller banks and that indication that maybe some of the larger banks are pulling back a little bit in some of the lending areas with more of a focus on liquidity with some of the regulatory constraints that they are facing right now.

I do not know that I have heard any banks of our banks saying wow, yeah, loan demand is really great now. But I think there is a number of indications that it is improving. But, again, I think that focus on revenue has been there.

I think maybe the economy is just now -- the economy and or the circumstances I just described, are now maybe coming together to make that little easier to realize. But there has certainly been a strong focus on revenue and trying to figure out to replace in some cases revenues that were impacted by various aspects of the Durbin amendment. That has been a focus for a while.

Okay, and then my second question, is there -- any new entrance into the core space? We have seen Zions make a pick outside the big three folks. Are you seeing any changes or tone in conversation? Are the feets at the table of the final decisions on core changing a lot? Are we seeing changes in that as international folks and other not big three core providers try and enter the space?

No, not really Brett. Not new news to some of the international players would like to be here. I think I would-- it is a lot easier to sell a system for the first time than it is to implement one. So before I attribute too much to that particular implementation that you mentioned probably I would wait and see if it ever got implemented first. I -- international players have wanted to be here for quite a while.

I do not think there is anything new in that. But with -- only the occasional very odd exception, has there been any progress in that area. Will it happen some day? It is inevitable. Some day it will, but not anything we are seeing or terribly concerned about today.

To your point, Brett, where you are going to see those is in the bigger banks which is not really where we go after with our core solutions anyway. It will be a while before we see any of them on the low end of the market.

I figured that, just from a bank size point of view. And then I guess one more question. Is the spending on securing your systems continued a pace? One of the things we have been looking at is a lot of the processors be they merchant, acquirers or core process etcetera have been spending on making sure their systems are hardened. I know that you all have invested in some obviously infrastructure to underground storage and things like that. Should we expect a continuous increase in that kind of spending from you all and cores or has there already been a step function up? Can you give us a sense of how to think about that?

I do not know that we necessarily look for continues increases. It is at an increased level. I do not think I would be looking for that level to drop off any. That will be an area where we will all have do continue to remain vigilant.

At the same time, we are also continuing to spend on our solutions in that regard in terms of security offerings that we can take to our customers. It is definitely going to continue to be an area of emphasis. We certainly are investing more as are our customers in the compliance area,audit area to make sure that we are covering all the bases internally, looking at all the systems, testing all the systems, looking for not only security-related vulnerabilities, but for just risk management, standpoint. There certainly is some elevated spending in those areas, and I would expect it to remain roughly at similar levels for probably forever, if not at least for the foreseeable future.

Yes, Brett, I would add that if you look at historically our total R & D spend which is R&D expense plus Ca software it has remained pretty steady at just over 10%, of non-Harbor revenue. So as our revenue has increased over the years, which we have had some really nice growth in revenues, our R & D expense is pacing right along with that, and I do not see that changing. If the other question is when you are going to see leverage off R & D? The answer is probably never except that is what continues to drive sales for us.

Okay, that's helpful. Looking forward to seeing you guys next week.

Yes.

Thank you. I am not showing any questions at this time.

Thank you, Bridget. We want to thank you all for joining us today to review our third quarter fiscal 2014 results. We are pleased with the results from our ongoing operations and the efforts of all our associations to take care of our customers. Our executives, managers, and all of our associates continue to focus on what is best for our customers and shareholders. We hope to see many of you next Monday afternoon at our annual Analyst Day which is once again being held at DFW Grand Hyatt. The event will begin at 1 PM with presentations from some of our executive team, and all of our national sales managers. Then we will wrap that event up with reception and many check (inaudible) off of a few of our hard products on Monday evening. With that, I would like to thank you again, and Bridget will you please provide the replay number.

I sure will, the number to call for the replay is going to be 1-800-291-4047. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a wonderful day.