Jack Henry & Associates Inc (JKHY) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Jack Henry & Associates first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Kevin Williams, the CFO of Jack Henry & Associates. Mr. Williams, you may begin.

Thank you, Bridget. Good morning. Again, thank you for joining us for the Jack Henry & Associates first-quarter fiscal 2015 earnings call. I am Kevin Williams, CFO, and on the call with me today is Jack Prim, our CEO. The agenda for the call this morning is Jack will start with his thoughts on the performance of the quarter. Then I will provide some additional thoughts and comments regarding the press release we put out yesterday after the market closed. And then we will open the lines up for some Q&A.

I need to remind you that remarks and responses to questions 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 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 our first-quarter earnings call for fiscal year 2015. We are pleased to again be able to report a strong performance for the quarter. Solid gains in every revenue component, with the exception of hardware, allowed us to show organic revenue growth of just under 8% in the quarter. Outsourcing, payments, and implementation all showed strong growth, and license fees were up nicely with contributions from new core and add-on complementary product sales. The decline in hardware revenue is a reflection of the continued interest in hosted delivery of our products, resulting in fewer sales of new core processing units and reduced upgrades to existing processors, as in-house customers transition to outsourcing.

We held our annual Banking and Credit Union User conferences in recent weeks and observed continued improvement in their outlook on the business environment, citing improved loan demand, even in areas like the southeastern United States, which were hit particularly hard in the recent recession. It was a good start to the year. We look forward to continued progress.

And, with that, I'll turn it over to Kevin for a closer look at the numbers.

Thanks, Jack. Our support and service line of revenue continues to drive our total revenue growth, as it increased to $292.5 million, which is an 8% increase over the same quarter a year ago. Our support and services represented about 92% of our total revenue in the current quarter. To break down the support and services a little bit further into the four primary components: the implementation revenue was $26.3 million this quarter, which increased 16%; our electronic payments was $119.4 million, which is a 9% increase over a year ago; our OutLink data processing was $63.1 million, or an increase of 13%; our in-house maintenance of $83.7 million was an increase of 3% for the quarter. Our recurring revenue, which is made up, obviously, of electronic payment, OutLink, and our in-house maintenance, experienced a growth of a little over 7% for the quarter compared to the prior year, and it still represents 79% of our total revenue for the quarter.

Our consolidated gross margins decreased slightly to 43% in the quarter from 44% in last year's quarter. License margins increased to 90% from 88% last year. Support and service margins decreased a little, to 42%, from 43% a year ago, due to sales mix. And our banking segment -- I'm sorry, hardware was 26%, up from 24% a year ago. Our banking segment gross margins were steady, at 42%. And our credit union segment margins decreased to 46% compared to 47% a year ago.

In the bank segment, license margins increased to 90% from 84% a year ago due to fewer third-party solutions sold in the quarter. Our support and service margins for the bank segment decreased slightly, to 41% from 42%. And our hardware margins increased to 26% from 23% (sic - see press release, 24%) in our bank segment. In our credit union segment, license margins were 90%, compared to 93% a year ago. Support and service margins were steady, at 44%. And hardware margins were also level, at 26%, for both periods.

Our total operating expenses increased 8% for the quarter compared to prior year. Our operating margin remained level at 26% compared to last year. And our operating income increased 7% for the quarter compared to last year. Organic operating income increased about 8% compared to last year, as the acquisition that we did last March continues to be slightly dilutive.

The effective tax rate for the quarter was at 36%, compared to 35.5% last year, obviously because the R&E credit has not been renewed. Our net income increased 6% for the quarter compared to last year. And our EPS of 64% (sic -- see press release "$0.64") was up 10% over last year, which was positively impacted by the stock buybacks.

Our EBITDA increased to $112.1 million for the quarter compared to $103.3 million a year ago, or approximately a 9% increase in EBITDA. Depreciation and amortization expense is $29.5 million this quarter, with $13.6 million depreciation and $15.8 million in amortization, compared to $25.9 million in D&A this quarter last year. Included in the total amortization is amortization of intangibles from acquisitions, which is up slightly to $5.4 million compared to $5.2 million this quarter a year ago.

Our free cash flow year to date was down compared to last year due to our operating cash flows being down slightly, primarily due to net changes in the working capital items. The CapEx increased significantly this quarter due to the timing of some infrastructure upgrades and expansions, especially in the area of our high-capacity storage. We took possession of the third plane in our planned upgrade cycle, which the fourth and final one will be about a year from now. The internal use developed software was up slightly compared to last year. And our cap software increased again as we continue to focus on some significant product development. And then, obviously, our dividends increased once again, which -- all of these related dollar amounts were disclosed in the press release yesterday. So, net of all those adjustments are results in free cash flow of $32.2 million compared to $58 million last year for this quarter.

Our cash balance is down significantly for the quarter -- for the year -- from a year ago, and even from fiscal year end due to the purchase of a little over additional 1 million shares for the treasury this quarter on top of the 3 million shares that we bought last year.

For our ongoing guidance, there is no change in our guidance. We continue to expect top-line revenue in the mid- to high-single digits. As we've discussed on previous calls, we don't anticipate much in the way of margin expansion this year for either gross margins or operating margins, due to the significant investments in increased personnel that we've made in the last 12 months. We do obviously anticipate the usual quarterly fluctuations due to sales mix going forward, but no significant change in the margins.

There should be some leverage to our EPS from the treasury shares we bought back. We currently have 4.1 million shares remaining under authorization to buy back, with no timing or price constraints. That concludes our opening comments. We are now ready to take questions. Bridget, will you please open the call up for questions?

(Operator Instructions)

David Togut, Evercore.

Thank you. Good morning, Kevin and Jack.

Good morning.

It's actually now Evercore ISI. We just completed our combination. Just a couple of quick questions. First, if you could dig into the key drivers of electronic payments' revenue growth -- it was 9% in the quarter. That's down from 15% a year ago but up from 5% in the June quarter. Could you just walk us through the puts and takes behind the 9% and what you see going forward?

Yes, David. It was a pretty solid performance on each of those components. I think bill payment transaction growth was up about 18%. The PassPort debit/credit transaction processing was up a little over 8%. I don't have the remote deposit capture numbers handy, but they were up solidly as well in the quarter. So it was a pretty good performance across the board on the various payment products.

Is this high single digit growth rate in electronic payments sustainable?

Yes. We think so, David.

Got it. And just moving onto the large credit union business. Fiserv has been highlighting its success with DNA, the Open Solutions acquisition. What have you seen with Symitar head-to-head against DNA over the last few months, and what do you see going forward?

Symitar has continued to do quite well, David. We signed in the quarter two credit unions that were over $1 billion in assets. I think we had a total of seven new core footprints in the credit union. All of those were competitive replacements. We don't even put out a press release when we sell something to an existing credit union or bank that moves from in-house to outsourcing, or buys a new license, or whatever. So all of our wins are competitive takeaways.

Got it. Shifting to software capital, it looks like it was up about 28% in the quarter. I thought, Kevin, you were calling that out to be flat for FY15. Did something change?

I will tell you, David, we just continue to focus on some of these major projects. I think we've actually stepped up the pace on some of the projects to get them rolled out quicker rather than later. It's just a matter of timing, of trying to get these products developed and out the door.

What are the biggest products behind the software cap number?

That is going to be any number of products that have significant expenditures. A couple of the larger projects are the Episys product on the credit union side, SilverLake enhancements that we're doing on the banking side. You've got compliance-related development across the board on all of those products. But even your complementary products, whether it's development on the mobile side, Internet banking side, whether it's just an architectural refresh of some product. When you've been in business for 37 years and you've got over 100 products, there's something that's always in need of some development attention in addition to whatever new product development efforts. So it's kind of hard to pinpoint it to any one or two particular items.

Great. Quick final housekeeping question. What were deconversion fees in the quarter? And then the September 30 share count?

Deconversion fees were right at $5 million compared to a little over $3 million a year ago. So about 0.5% of our total revenue growth came from a slight increase in deconversion fees. So even without those, we're still over 7% organic growth. The share count at September 30, roughly 82.5 million, Dave.

Great. Thank you very much.

Dave Koning, Baird.

Hey, guys. Great job.

Thanks, David.

First of all, you've talked the last couple of quarters about starting the new hosting product across your clients. I'm just wondering, I know that's going to take a while to ramp, but was there any benefit yet from that in the quarter?

No financial impact in the quarter, Dave. Has been well received. We had our Banking User Conference about two weeks ago. A lot of discussion around it. A good bit of interest. So we're still pretty optimistic that we will see some solid uptake there. But again, that's something that's going to build slowly. I wouldn't predict anything noteworthy, if even noticeable, in this fiscal year. But I think it's something that will gain momentum and become more of a factor in the near future.

Okay. Great. Secondly, I don't know if your banks are quite as focused as some of the bigger banks on the Apple Pay rollout, but just wondering in your context. To us it just seems like there's no reason for the banks to want to really push that, given it seems that they're giving up a pretty big chunk of their economics at interchange. Just wondering if you've talked to any of your banks about it, and kind of what the context is?

It's kind of across the board, Dave. There are some that just aren't quite sure yet what to make of it, and whether or not they should be interested. There are others that are very interested in it; even if it means giving up some interchange, they feel like it's something that they need to be in a position to offer to meet their customer demand. So we're working very closely with those banks and credit unions and with Apple for those that do want to be first in line, or as soon as they can get in line and blessed appropriately by Apple, going through all their processes.

We're working with those that are interested. Again, I think in some cases it's still trying to understand exactly what the announcement means. And then others, you've got your early adopters that are going to want to be in there early just in case it does turn out to be something of significance.

Okay, great. Finally, you've bought back more shares the last couple of quarters than normal. Is the strategy to keep the balance sheet cash and debt neutral now? And I guess if so, Q2 and Q3 you usually don't cash flow that much. So I'm just wondering, should we expect lighter buybacks the next couple of quarters, given you don't cash flow quite as -- from a seasonal perspective?

I will tell you, Dave, we actually have our Board meeting next week, and that's a topic that comes up every quarter. I think the plans this year is to continue to take a few shares off the table. The use of the revolver is -- doesn't bother us to continue buying shares, because obviously next summer we will have another significant inflow of cash. I don't think you'll see us lever a whole bunch to buy back stock, but I think we will continue to take some off the table.

Okay, great. Thank you.

Thanks, Dave.

Brett Huff, Stephens Incorporated.

Good morning, guys.

Good morning, Brett.

A couple of quick questions. Just to make sure that I understood the last comment that you made on the repo pace, Kevin. I think that you had mentioned at the end of the last call that you guys were thinking maybe 1 million shares through the year. Are you giving us any more clarity on that specific number, or any color on that?

We decided to go ahead and take 1 million this quarter, Brett. I don't know. That was kind of the direction I had from the Board going into this quarter after the Board meeting in August, was to go ahead and take 1 million off. So again, the Board will talk about this next week and give me some more clarification on how much more to take. So I'm sure we'll take some more off the table, Brett. So if you want to assume that we will take another 1 million shares off the balance of the year, that's probably not a bad assumption.

That's helpful. In terms of some of the spending you guys are doing, I think I understand what those items are. As we look out, you've said that you expect the margins to start to go up or expand again once we are through this bolus of some of this spending. Can you tell us about those expectations for free cash flow growth next year, as we're thinking about the impact of maybe moderating spending, or at least not any increases next year on that metric?

As we said on the last call, Brett, I don't think anything has changed. Margins are going to remain relatively flat this fiscal year. I think you'll see some expansion in margin next year. I think we could see some expansion in EBITDA margins even this year as the D&A continues to increase from prior and current CapEx and cap software that we've been spending on. So I think free cash flow should go back to a nice increase next fiscal year.

Some of the CapEx that we spent this quarter -- obviously, the fourth plane, which is not going to have a huge impact on depreciation because we obviously got rid of a plane as we brought this one on. Some of the CapEx, as I mentioned, is some of our shared storage, which a lot of that is driven by the getting ready for the hosted network services and some other things we are doing, all of our document imaging and different things.

These are things that will continue to grow. Again to your point, free cash flow should go back to a nice growth trajectory next fiscal year.

Okay. And then one housekeeping thing. In-house backlog. I think you guys had said last quarter that you were not going to start -- continue telling us the outsource backlog number because it didn't make a bunch of sense. Are you -- have you stopped using in-house backlog as well, or what's the -- could you give us that number?

We're just not going to give backlog because there's so many different things moving in and out of there. And we're just going to give that on an annual basis in the 10-K.

Okay. And then last question. This is more on product. Obviously mobile banking continues to be something that's popular. Jack, I think on the last call you said that the economics can be a little bit variable, and there's a lot of competition. What can you tell us on sort of how you all are thinking about your product development, or how your sales folks, or how your usage is looking on mobile banking relative to use of Internet banking? Are you seeing a shift? Is Internet banking usage declining as mobile banking is picking up? And what's the impact for product development for you all in that?

We're seeing solid growth in mobile banking, Brett, both in the existing mobile apps that we had prior to the Banno acquisition. We kind of put out a refreshed set of applications for our goDough product, which has been very well received by the client base, and sales of that product remain very strong. The Banno mobile product is selling well. We released a tablet application.

But at the same time, there's still a need for a continued investment in the Internet banking solutions. I don't know that I could quote you clear statistics on what's happening to Internet banking usage relative to mobile. I think mobile clearly is on the uptrend. I'm not seeing anything that leads me to believe there's any significant downturn in usage on the traditional Internet banking solutions. And there seems to be a lot of ongoing demand for further enhancement and improvement on some of those systems as well. My gut feel, not supported by any evidence, is that the Internet banking usage is staying very solid and that we're seeing significant growth in usage on the mobile side.

Last question on competition. You talked a little bit about some competitive takeaways. Were those from -- in general, are those from Fiserv or D&H or other sort of smaller platforms? Are you willing to comment on that?

We pretty much take a good cross-section of the industry. So it's going to be -- the contributors are going to be largely weighted to what the market share is in the credit union industry. We'll replace some of everybody's on an annual basis, and certainly some folks have a larger presence in the credit union industry, so will tend to contribute a little bit more to that.

Okay. That's what I needed. Thanks, guys. I appreciate it.

Thanks, Brett.

(Operator Instructions)

Glenn Greene, Oppenheimer.

Thank you, and good morning, guys. I guess the first question, you may have alluded to, I'm sorry I jumped on the call. The credit union growth, a little bit slower 4% or 5%. In the context, it sounds like you feel pretty good about the competitive situation, but maybe give a little bit of color for somewhat slower growth of peers in the credit union market?

I think mainly, Glenn, that we had a very significant growth last year in the credit union space, and it's compared to the year-ago quarter. It's a bit more of a tough comp, but again very steady. Certainly anticipate, as we've been saying for 1.5 years now that we do expect to see more competition from the -- as a result of the Fiserv Open Solutions acquisition. And certainly I think their efforts have been focused on retaining their existing customers. We certainly would have expected that would be the case. I said that from the very beginning. And I think it certainly has been where a lot of their focus has been. But we're still winning our fair share of the new opportunities in the market and still feel good about our opportunities.

Glenn, the support and services line within the credit union segment was still over 7% growth. So it was really just some tough comps in the license and hardware, which were both down quite a bit in the quarter, just because of primarily the timing of delivery. There were some bigger deals delivered last quarter than was this quarter. But the lion's share of the revenue is still support services and still growing very nicely.

Okay. Do you think your competitive win rate's stable, up, or down relative to a year ago?

It's relatively stable at this point, Glenn. Again, as I have said for some time now, I would expect that to moderate some, based on getting some of the kinks worked out on that particular acquisition. But at this point, it's still pretty stable.

Stable? Okay. And then, Kevin, on the full year, just the growth we saw in payments and outsourcing this quarter. Is that reasonable somewhere kind of growth expectations on a full-year basis to be thinking about?

Yes. That's pretty much the guidelines. I think payments will continue to grow in the high single digits, and OutLink should be in the low double digits for the year.

Okay. And then the trends in the in-house to outsource? Is that sort of continue, or any acceleration in that movement toward outsource? Actually, outsource, it looks like it accelerated a bit.

It's pretty stable, Glenn. Just continued going on. It accelerated a little bit, because you remember last year there was some sizable deconversion fees in there that kind of made some tough comps on different things. It's just kind of a steady-as-she-goes now.

Okay. And then on margins, it sounds like you reaffirmed the flattish margin expectation. You've been kind of doing that for a while and over-delivering on your promises. Is there potential for upside to margins for this year? And what would be the catalyst for that?

Glenn, we've always tried to tell you what you think we're going to do, and then we try to do it or beat it. So not much change in that.

Okay. Thanks a lot.

Thanks, Glenn.

I am not showing any further questions. Mr. Williams, please proceed with any further remarks.

Thanks, Bridget. Again, we want to thank you all for joining us today to review our first-quarter fiscal 2015 results. We are pleased with the results from our ongoing operations and the efforts of all of our associates to take care of our customers. Our executives, managers, and all of our associates continue to focus on what's best for our customers and our shareholders. With that, I want to thank you again. And Bridget, would you please provide the replay number?

Ladies and gentlemen, this conference will be available for replay at 11:45 Eastern time today through 11:59 PM on November 12. You may access the remote replay at any time by dialing 800-585-8367, or 440-437-3406 and entering access code 24702132. Those numbers again are 1-800-585-8367 and 404-537-8367. The access code is 24702132.

That does conclude our conference for today. Thank you for your participation in today's conference. You may now disconnect at this time.