Jack Henry & Associates Inc (JKHY) 2015 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded. I would now turn the call over to your host, Kevin Williams. Please go ahead.

Thank you, Stephanie. Good morning and thank you for joining us for the Jack Henry & Associates fourth-quarter and fiscal year-end 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 will follow the typical call, Jack will start with some thoughts about the business and on the performance of the quarter and then I'll follow that up with some additional comments and thoughts about the press release that we released after market closed yesterday. And then we will open the line up for Q&A.

I need to remind you that remarks or responses to questions concerning future expectations, events, objectives, strategies, trends, 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 risk and uncertainties. And the Company undertakes no obligation as 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. We are pleased to again announce record revenue and earnings for the fourth fiscal quarter and FY15. We had another strong financial performance and returned over $199 million in cash to our shareholders in the form of dividends and share repurchases, in spite of being blacked out of trading for over half the fiscal year. We continue to receive strong satisfaction ratings from our employees and our customers throughout the year, measurements that we consider important to assure we do the right thing for all of our major constituent groups.

Our sales teams continued their strong performances, and for the fifth consecutive year, all of our brands Jack Henry Banking, Symitar and ProfitStars, finished ahead of their sales targets for the year. Our banking team saw a balanced performance of core and complimentary product sales. Symitar was once again the credit union industry leader in new name core system sales. ProfitStars again had strong cross sales to it's non-core customer base of almost 9000 institutions with over half of their product sales to non-JHA core customers.

Our payments products had strong sales and transaction growth throughout the year and corresponding revenue grew 9% for the year. Revenue growth remained strong at 6% in the quarter and 7% for the year even with the revenue recognition challenges we addressed during the year. OutLink and cloud revenue and payments growth for the year at 15% and 9% respectively were among the larger contributors to this growth.

We saw improvement in operating margins in the quarter and year to date even with the impact of bundling our license fees, implementation services and maintenance on multi element contracts. Because of the additional audit-related time required to address the revenue recognition issues earlier in the year, the start of the year end audit process was somewhat delayed. Although our staff and our outside audit firm are working hard to complete the year-end audit, this late start is likely to cause another short delay in our year-end SEC filings due to the time needed to finish their audit procedures. If that delay should become necessary, we will file the appropriate Form 12b-25 with the SEC, and we are confident that our auditors will be finished so that we can file our Form 10-K within the 15-day grace period provided by that filing.

Again it was a solid performance for the year and we look forward to a new year without some of these distractions. As I turn it over to Kevin for a closer look at the financials, I'd like to express our appreciation to our over 11,000 customers for their continued business and our over 5,900 associates who continue to take care of those customers every day. Kevin.

Thanks, Jack. With the change in revenue recognition obviously our license revenues reported is now clearly immaterial as it represents less than 1% of our total revenue. Remember that the vast majority of what used to be considered license revenue is now included in with bundled services which is included in our support and service line of revenue. Our support and service spread of revenue continues to drive our total revenue growth at an increase to $318.6 million, which is 6% increase over the same quarter a year ago and represents 95% of our total revenue. Both the year this line of revenue increased 8% to $1.201 billion this year from $1.112 billion a year ago. Solid growth in our support and services which based the head contributions for the year from all of the lines within support and services.

For the quarter implementation services were down slightly to $18 million from $18.3 million. Our electronic payments was up nicely 7% for the quarter to $121.4 million from $113.9 million same quarter year ago. Out Link was up 14% for the quarter to $69.7 million. In-house maintenance was down slightly to $76.2 million. And bundled services, which again is the items related to multi (inaudible) contracts was up 11% for the quarter to $33.4 million this year versus $30.1 million last year.

As I said, all the components were up nicely for the year, implementation was up 13% to $74.8 million. Our electronic payments business was up 9% to $481.6 million. OutLink was up 15% to $269.4 million. In-house maintenance was up slightly 1% to $311.9 million. And the bundled services was up 4% to $62.9 million from $60.7 million last year.

Our hardware decreased 2% for the quarter to $14 million from $14.2 million last year. And for the year hardware decreased 10% to $52.9 million from $58.7 million. As we've talked about for several quarters, hardware will continue to become a smaller number and a smaller percentage of our total revenue.

Our consolidated gross margins improved to 44% for the quarter compared to 43% in last year's fourth quarter. License margins increased to 83% from 74%. Support and service margins improved to 45% from 44% for the quarter. And hardware margins also improved to 27%.

For the year our gross margins improved to 43% from 42% last fiscal year. License margins decreased slightly from 58% down to 55%. Remember the large percentage of this license revenue now called licenses third-party software that we are reselling which is why the margins look lower than they have historically. Our support and service margins were steady at 43% for both fiscal years. And our hardware margins improved slightly to 27% from 25% a year ago due to sales mix.

Our total operating expenses increased 7% for the quarter and 6% for the full fiscal year compared to a year ago periods. Operating margin for the quarter increased to 27% compared to 26% a year ago, and for the year remained level at 25% for both fiscal years.

The effective tax rate for the quarter decreased to 32% for the last quarter -- because this is the last quarter that we get the benefit of the R&E credit and we also had some favorable state law tax changes that impacted the quarter which caused this lower effective tax rate for the quarter, which compared to 36.4% in the fourth quarter last year. And for the year, our effective tax rate was 33.3% compared to 35.1% for the full year last year. Obviously the current year lower tax rate contributed nicely to our net income and EPS as pretax income was up 10% for the year and our taxes only increased 4% in relation to that. This decrease in our effective tax rate for the year was primarily due to the R&D tax credit which is now once again expired.

Our EPS at $0.75 was up 20% over last year's EPS of $0.62 for the fourth quarter. And full-year EPS was $2.59, or up 18% increase over last year. EBITDA for the year increased to $437 million compared to $420.1 million last year.

Depreciation amortization expense of $119 million was $54.2 million in depreciated and $64.8 million in amortization compared to $107.8 million in D&A last year. Included in the total amortization is the amortization of intangibles from acquisitions which was down slightly to $20 million compared to $21.2 million a year ago.

Operating cash flows was up $32.1 million, or 9.4% to $373.8 million for the year. As we continue to invest in our Company through CapEx and cap software on new and existing products and we continue to return to our share holders through dividends. We also purchased 150,000 shares for the treasury in the fourth quarter and we purchased a little over 2 million shares for the fiscal year.

For FY16 guidance, our total revenue is projected to grow for FY16 in the upper mid-single digits similar to the last couple years or in the 6% to 7% range, even considering the anticipated headwinds from lower early termination fees that we experienced in FY15. I do want to highlight the change in our revenue flow under the new revenue recognition method, which the ratably recognized revenue from the bundling of licensed, implementation and PCS or maintenance, from the date of last installed product which grows and compounds throughout the year.

If you look at the last three years, average bundling for the three years grew from 2% of total revenue in the first quarter to an average of 10% of total revenue in the fourth quarter which also impacts operating margin as the average operating margin grew from an average of 23.4% in the first quarter to an average of 26.5% in the fourth quarter on average for the last three respective years. This needs to be considered for your models and quarterly estimates as that flow of bundling and margins will continue for the foreseeable future.

With some slight leverage, our operating income and operating cash flows should both continue to outpace the revenue growth similar to this year. However, our effective tax rate as I mentioned for FY16 is projected to be 36%, which is up from the 33.3% this year since we cannot assume that the R&D credit or the other benefits received this year will be reinstated or repeated. Which, not to point out the obvious, that this difference in tax rate would have been approximately $0.10 impact on EPS for FY15 if we would have at a higher rate. Which obviously this creates a very tough comparable and headwind for next year.

This increase in tax rate will most likely more than offset any positive impact of stock repurchase during the year. Therefore with some margin improvement offset by the impacts of the increased effective tax rates, we should see and EPS growth slightly ahead of our projected revenue growth for the fiscal year. Which this is below the current consensus estimate for FY16, which we need to have adjusted accordingly. Obviously if the R&D credit is reinstated then we will revise our guidance accordingly.

At this time we believe that if we are able to buy back the 2 million to 3 million shares we planned of stock for the treasury subject to the NASDAQ trading limits during the year to help offset this tax increase, that our full-year FY16 EPS will be in the range of $2.74 to $2 78, which adjusted for the tax rate on an apples-to-apples basis would still be a 10% to 12% increase in EPS. Remember that due to the bundling of services this will be back end loaded.

That concludes our opening comments, we are now ready to take questions. Stephanie, will you please open the call line for questions?

(Operator Instructions)

David Togut with Evercore ISI.

Could you elaborate a little bit on demand trends? Give us a better sense of what your customers spending intentions are for the year ahead let's say for core processing and for payments.

Yes, David I think generally speaking the demand trends remain solid and consistent. I don't know that there's any particular spikes or areas that they're looking to significantly increase spending. Core is going to be I think a steady progression in line with what we have seen. Similarly with payments. But again I think there's a -- the environment I think has continued to improve and at some point interest rates will get raised and given some time to adjust balance sheets following that raise, I think that bodes well for earnings for financial institutions. And again I think that certainly holds well. I think it's likely that there will be increased focus on security-related spending just general environment as regards security plus I believe the regulatory agencies are probably going to put more of an emphasis on that in the not too distant future. So certain product offerings there could benefit from that increased scrutiny. But beyond that and that potential uplift I think most of it is pretty consistent with what we've been seeing.

Understood. And then you highlighted 7% growth in electronic payments in the quarter. About a year and a half ago electronic payments was growing in the mid to high teens. Can you just walk us through some of the underlying demand drivers behind electronic payments? What are the key trends you're seeing in that line item?

Well depending on exactly what was going on in the period that you're comparing us to, we had for example one large bill payment conversion that consisted of I want to say I think it was about 800 small to medium-sized credit unions that came across in that transaction. So that's probably about the timeframe that you might have saw that considerably larger. But you're seeing modest growth in most of your traditional payment areas like electronic bill payment and ATM debit card transaction processing higher growth rates in some of your mobile payment offerings. So I think that there's certainly increased emphasis and spending related to mobile. Although compared to the more established payment method, that's still a very small percentage of total payments-related revenue. But that certainly is the area where most of the growth is. And while our growth rates for debit card and electronic bill payment are generally above the industry averages, they're still going to be more moderate growth rates than what we're seeing in the mobile area.

Understood. And just a couple of quick housekeeping questions. Kevin you mentioned contract term fees, what were contract term fees in the fourth fiscal quarter versus the year earlier quarter, and how should we think about term fees in the year ahead?

Yes David, term fees for the quarter were actually almost a $5 million number which were up from about $4.2 million the same quarter a year ago. Our term fees for the year as we've talked about throughout the year were up significantly. I'm trying to find the number. For the year our term fees were actually about $26 million, up from $13 million a year ago. We think that this next year those term fees are going to go back down more in line with where they were in probably 2014, maybe not quite that low. But we don't foresee another year near as high as this year. So for the quarter we were up about $800,000 versus a year ago, but for the year it was up significantly over FY14.

Got it and then do you have a software cap forecast for 2016 of external and then software cap for internal use?

Software cap David for next year is going to be pretty level with where we ended up this year. We've got everything in line. It's obviously going to bounce around a little bit but a lot of the projects are continuing to go right along. So we're probably going to be in the $78 million or maybe even right at $80 million cap software next year. For internal software it should probably be right in line somewhere in the $14 million to $15 million range for FY16.

Great and then just finally, do you have a June 30 share count?

I do not have that in front of me David, I'm sorry.

Okay, thank you very much.

Dave Koning with Robert Baird.

Nice job and I guess my first question, the bundled services line I get the seasonal progression. But the last couple years it was about double, so up about 100% sequentially from Q3 to Q4. And I get that. This year though it was up 150% sequentially, so 2.5 times instead of double. So that's an extra whatever that is $4 million or $5 million maybe relative to what it would have been if the historical pattern held up. But I don't know is there a historical pattern to fully bake in or can that just move around $4 million or $5 million, $6 million a quarter and it's just a little tough to forecast?

It is tough to forecast and it's going to bounce around obviously this depends on the last product within a [multi deal] contract that gets delivered, the timing of that, the size of the contract. So if you have a quarter where you have the last element of a whole bunch of small contracts put in place versus a quarter where you have the last element of some large core implementations goes with that, that's going to fluctuate significantly.

Okay and that is high margin right?

It is a little higher margin than our traditional core margin, yes.

Okay. And then also you made what looked like a really small acquisition I think July 1, how much about revenue do you expect from that this year?

Yes David it's going to be a pretty small contributor to revenue. As you may recall with the Goldleaf acquisition that we did a number of years ago, we picked up accounts receivable financing business. The base of that acquisition that you're referring to really kind of rounds that offering out nicely. With additional asset based lending capabilities factoring inventory and asset lending, there's no overlap in the offerings of the two. They didn't do what we did with our lending solutions business and we didn't do what they did with their business. So it brought us a number of new customers. A very nice fit, good cross sell opportunities of both products between both basis. We've consolidated that end and we think there's some nice leverage and some good uptake opportunities but it's pretty small probably on the order of $5 million to $6 million in revenue.

Yes, David. The total purchase price was $10 million, so it was a very small acquisition.

Okay, cool. And then I guess the last one, normally term fees are lower like you said. Is it enough -- is it big enough the clients that left this year and gave you the term fees that it makes a mild impact on revenue? I know normally it really has no impact, but was this enough that you can actually feel like 0.5% impact to revenue this year because of those that left or is it not near that much?

I don't think you're going to feel it David. Because it's baked in our normal operations. Yes, it was higher and it gives us a little more headwinds to have to grow over, but it is what it is and we budget for the loss of those within our, so gets baked into the guidance that we're giving.

I meant it more from a standpoint of did the -- I understand the term fees jumping around a little bit but the actual normal revenue stream of the clients that went away, that's not an overly big number probably.

No. You hate ever lose a customer, David and obviously you got to go replace that revenue when that happens. But I think if you really look at the total revenue generated even by the larger customers on an annual basis it's not going to be a significant issue.

Okay. Good well thank you. Good job.

(Operator Instructions)

Brett Huff with Stephens.

Can you give us, Kevin you mentioned a little bit that the projects you guys were -- have been working on are going to continue for a little while, can you just enumerate those for us again, the big chunk so we can make sure to keep track of those?

Well Brett so some of the larger projects we've got a significant redevelopment effort on our core, our primary credit union offering on the Symitar side. We've done a number of things on the banking side for not so much an architectural change as much as some efficiency enabling capabilities that we're bringing to the customer base. Those are probably further along or closer to completion, we're still continuing on a multi year effort on the credit union development side. All of those are going very well.

The thing to keep in mind though Dave as even as these projects begin to roll off, other projects are going to come up. When you've been in business for 38 years and you've got couple hundred products out there, something is always going to be in need of a refresh if not a very significant revamping of the offering. So those are some of the larger transactions but we've got payments related development efforts and other related efforts that are probably ramping up as some of these begin to ramp down. So I don't look for any dramatic changes in that area in the near term.

Okay, that's helpful. And then can you give us an update on the selling process or the demand for the new product where you're helping folks outsource their non application servers where you're helping the email servers and things like that? I know that was something you all have been working on.

It's going very well, Dave. We've officially launched that offering the start of the fiscal year. We've got probably around 25 customers at this point that have elected to hand us some or all of their server-related offerings to manage for them. We're very pleased with that, it's a nice contributor to recurring revenue. In this -- last fiscal year or this next fiscal year it's not going to be a meaningful number that shows up. But again, it's a nice contributor to recurring revenue and it will tend to compound over time. So I think it's a timely offering. It's been well received in the market. It is not a simple sale. You're dealing with networks and infrastructure and telecommunications and a lot of things that require some engineering talent to be able to go in and assess properly in order to do a proposal. So it's not a simple sale and some of the sales cycles tend to be a little bit longer. But again I think with some of the growing emphasis that we are seeing and are going to see even more in the future related to cyber security threats, I think there's going to be increasing interest in reasons for financial institutions to look at this type of an offering.

Okay and then last question for me. You all mentioned that you thought the security compliance and fraud would be a driver this year. Can you give us a rough idea of how much revenue is in that bucket? And I guess security compliance and fraud are the three main pieces or how do you parse it that you might be able to give us a ballpark percentage?

Brett -- that's revenue that goes into so many different buckets it's hard to pull them all out and say yes this is what's related to security and fraud because we've got so many different products within banking, Symitar and ProfitStars that deal with those in various ways that I've never taken the time to try to pull it all into one bucket.

Okay, that's what I needed. Thanks guys.

And I'm showing no further questions, I will now turn the call back over to Kevin Williams for closing remarks.

Thanks, Stephanie. Again we want to thank you for joining us today to review our fourth quarter and fiscal year end 2015 results. We are very pleased with the results from our ongoing operations and the efforts of all our associates to take care of our customers. Our Executive Managers and all of our associates continue to focus on what is best for customers and our shareholders. With that, I want to thank you again and Stephanie will you please provide the replay number?

Thank you, this call will be available for replay after 11:45 AM today through August 28, 2015 at 11:59 PM. You may access the replay by dialing 1-800-585-8367 or 404-537-3406 and entering access code 8190584. That does conclude today's conference, you may all disconnect and everyone have a great day.