Jack Henry & Associates Inc (JKHY) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Jack Henry & Associates second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Kevin Williams, Chief Financial Officer. Sir, you may begin.

Thanks, Chelsea.

Good morning. Thank you for joining us today for the Jack Henry & Associates second-quarter FY16 earnings call. I'm Kevin Williams, CFO. On the call with me today is Jack Prim, CEO. Also in the room with us is Dave Foss, President.

The agenda for the call this morning is Jack will start with some of his thoughts about the business and on the performance of the quarter, then he will give it back to me. I will provide some additional thoughts and comments regarding the press release that we put out yesterday after market close, and then we will open up the lines for some Q&A.

I need to remind you that remarks or response 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 will now turn the call over to Jack.

Thanks, Kevin. Good morning.

We are pleased to report other strong operating quarter with record revenue and operating income. Outsourcing and payments again showed solid growth, as did in-house maintenance, based primarily on new credit union core system implementations. This is in spite of the continued movement of existing in-house customers to outsourcing, with 12 current in-house bank and credit union customers signing to make that transition during the quarter.

Despite the recent noise level in the stock market, in our view, business fundamentals remain strong and our clients continue to invest in solutions that can help them drive revenue, reduce costs, and improve security. We have solid sales performances with all three brands finishing ahead of plan year to date, and sales pipelines remain strong.

Last month, we announced a CEO transition that will transition that will take place July 1 at the start of our fiscal year, when Dave Foss will assume that role. This is a planned transition that the Board and I have been working towards for several years. Dave will bring to the position over 30 years of financial industry experience, including his 17 years of experience at Jack Henry.

During his career, Dave has had experience in literally every aspect of the financial institution core processing industry, as well as the experience of having built our successful profit stars, non-core processing business. He is well-positioned to take JHA to the next level.

I will remain Chairman of the Board, residing in Monet, and working full-time in that role. I'll keep our enterprise risk-management group as a reporting entity to assure that our company maintains its strong focus on, and that the Board has good visibility to, our risk management activities in this critical area. It has been an honor to serve as a CEO of the company for this last 12 years and I am excited to watch the continued success of Jack Henry and Associates under Dave's leadership.

With that, I will turn over to Kevin for a closer look at the numbers.

Thanks Jack, during the quarter our license revenue represented less than 1% of our total revenue, as the vast majority of our license revenue is now included in with bundled services and included in the support and services line of revenue. Our support and services line of revenue continue to drive our total revenue growth, and it increased to $320.2 million, which is an 8% increase over the same quarter a year ago and represented 96% of total revenue.

To break down our support services for the quarter, implementation services of $15.9 million versus $19.4 million, which decreased 18%, which is primarily due to just timing of the efforts and also because of the bundling. Electronic payments of $130.5 million versus $121.5 million was up 7%, OutLink at $72.1 million was up 7%, in-house maintenance at $83.4 million was up 5%, and bundled services was $18.4 million, up 97% for the quarter.

Reminder that bundled services contain license, implementation services, and maintenance revenue related to these multi-element contracts. Related to this revenue, I would like to point out that our deferred revenue on the balance sheet increased $27.1 million, or 7%, compared to last years quarter. Hardware decreased 14% for the quarter at $12 million from $13.9 million last year.

Consolidated gross margins improved 43% for the quarter compared to 42% last year's second quarter. Support and service margins were steady at 43%, and hardware margins improved to 34% from 31%. Our operating expenses increased 12% for the quarter compared to a year ago, which is primarily to the gain in the year ago quarter in our G&A for the sale of the Teleweb products that were part of the Audiotel acquisition we did several years ago. Our operating margins decreased slightly, also due to this gain last year. That's 25% compared to 26% a year ago.

The effective tax rate for the quarter decreased a little to 30.0% from 32.1% the second quarter a year ago, primarily due to the reinstatement of research and experimentation credit in the fourth quarter or for our second fiscal quarter. Net income was up 10% to $59.3 million from $53.9 million, which led to EPS of $0.74 per share, which was up 13% over last year. EBITDA for the year to date increased to $228.5 million, compared to $210.8 million last year, or an 8% increase.

Depreciation and amortization expense of $63 million, with $26 million in depreciation and $37 million amortization, compared to $59.4 million last year. Included in total amortization is amortization of intangibles from acquisitions, which was down slightly to $9.5 million compared to $10.5 million last year, as some of those acquired intangibles have now fully amortized.

Operating cash flows were up $20.1 million, or 16%, to $147 million for the year to date. We continue to invest in our company through CapEx for computer equipment, facilities, and airplanes, which we took possession of our last new airplane during the fourth quarter, so our fleet is now fully upgraded, which is a two-year process. And we continue to invest in development and new and existing products to help continue our revenue growth in the future.

We also continue to return investment to our shareholders through dividends of $40 million and stock buybacks of $155 million year to date. Our return on equity for the trailing 12 months is 24.2%, our total shareholder return on stock price appreciation dividends for the trailing 12 months ended December 31 was just over 27%. We purchased 1.1 million shares during the quarter and 2.1 million shares year to date.

For guidance for the remainder of the year, our revenue is still projected to grow in the upper-mid-single digits for the year, similar to the first half. To assist you with your modeling, the projected effective tax rate for Q3 FY16 will be about 33.5%, down slightly from 33.8% last year. So not a huge difference. The difference is primarily due to the full year of the R&E credit this year, compared to only six months spread over last year. The tax rate in Q4 is expected to be 34%, giving a full-year effective tax rate of about 33.5%.

For EPS guidance for the third fiscal quarter, we are projecting our deconversion fees or early termination fees to be down significantly from last year's third quarter. With an estimated reduction in these termination fees of a little over $6 million in third quarter, or about $0.05 EPS impact.

Therefore, based on this, it appears the current consensus assessment of $0.68 for Q3 is probably a little aggressive, probably by a couple of pennies. So we're probably going to be coming in around $0.66 for the third quarter because of this decrease in termination fees, and also because we had a couple million in this quarter over what we had last year. The fourth quarter consensus assessment out there at this time of $0.80 appears to be in the ballpark and pretty reasonable.

That concludes our opening comments, and with that we're now ready to take questions. Chelsea, will you please open the call lines up for questions?

(Operator Instructions)

Peter Heckmann, Avondale.

Good morning, everyone.

Good morning, Pete.

Just a few housekeeping things. So, term fees in the fiscal second quarter, how did those compared year-over-year?

Essentially, the term fees were up $2.8 million compared to the second quarter last year, Pete.

You said up $2.8 million?

Yes.

And I know the acquired revenue was small, but about how much did Bayside contribute in the quarter?

Less than $1 million. Our organic revenue growth was still 7%.

Got it. Got it, and then just last question, and maybe just a little bit of a background. For the second quarter in a row we are seeing the credit union segment continue to really outperform nicely with very, very strong growth. But being offset somewhat by a slowdown in the bank side. Can you talk about some of the gives and takes that account for that dynamic?

This is Jack. It was a couple things. There where a number of larger credit union implementations, go-lives, that certainly helped. Most of them being from an in-house standpoint, the revenue impact of course under the new recognition -- revenue recognition guidelines that we are operating under, a lot of that's going to show up in the bundled area.

But basically, there were a larger number of larger go-lives on the credit union side than what we had on the bank side. The bank side also was somewhat impacted by one of our larger customers being lost in an acquisition. So there was some revenue impact in the opposite direction on the banking side from that, as well.

Yes, the other thing, Peter, I'd say is we continue to see really strong growth in both outsourcing and payments on the credit union side.

Great, that's helpful, thanks.

Yes.

Kartik Mehta, Northcoast Research.

Good morning. Jack, can you just talk about maybe the banks' spending environment right now? If you are seeing any changes, either up or down?

Yes, Kartik, it is pretty steady. Different banks are going to be investing in different things. Some are doing projects in and around the mobile or online banking implementation or a refreshment. Core systems, there certainly continues to be movement in that area. Somewhat less aggressively on the banking side than on the credit union side, and possibly a little less than what we have seen in some previous years, but spending in and around security and related products. There is no one product that I would point to that people are rushing to adopt, and it's going to vary from institution to institution as to what their focus area is.

And, there's been a lot of talk about mobile, obviously. Have you seen any pricing pressure in that, or is your model allow you to take advantage of a greater click that banks are seeing because of use of mobile?

We haven't really seen any recent pressure. I would tell you that probably 18 months ago we were seeing a fair amount of pressure on some of them. Particularly on some of the mobile offerings as some of the low-cost options became available out in the market. I think we've adjusted accordingly.

We have an opportunity to provide for the very price conscious that what a pretty fully featured system, but they're more price-sensitive. We have got a solid offering there with a low price point on it. For somebody that wants a little more sophisticated mobile offering, we have that option, as well. That's going to be priced a little bit higher. As I've said, I think 18 months ago, we were seeing more pricing pressure than what we're seeing today.

And then Kevin, just tax rate going forward. Is 34% -- or 33.5% a reasonable tax rate to look at going forward, because of the R&D tax credit?

Like I said in my opening comments, 33.5% is the right rate to use for the third quarter. Fourth quarter it's going to be about 34%. But for FY17, it's probably going to be between 35% and 35.5% now that they've made the R&D credit permanent.

Perfect. Thanks, I appreciate it.

Thanks.

Glenn Greene, Oppenheimer.

Thank you, good morning.

Good morning.

The first one, just going back on the credit union versus the bank growth. A couple of things. So we have had a couple of quarters now of credit union growth in sort of this 20% range, and there's a few conversion. It's been a nice pipeline of conversions that have been happening. Any reason to think you will continue at this 20% plus growth for another couple of quarters?

And then on the bank side, if you could of directionally quantify how much of a drag there was from that bank loss, so that we can get a better idea of core growth, ex that bank loss?

Well, Glenn, from the credit union side, yes, I think we should continue to see very good growth the next couple of quarters. Obviously, when we get into next fiscal year, we are going to start hitting some tougher comps. But I think we're going to continue to see very strong growth on the credit union side, at least this fiscal year.

On the bank side, I am not sure if I have the numbers right in front of me that tell you what the drag was. It was, obviously, a couple of percentage points of revenue in the quarter for not just the one bank, but there was two or three of them got acquired, or due to repricing, that had an impact on payments primarily, but it also impacted maintenance and other things.

Do you mean 2 points drag to the banking business or to the overall total revenue?

Banking.

And just to be clear on the -- you sort of gave the 3Q and the 4Q EPS expectations. Including what we've got year to date. You're suggesting mid $2.80's for the year, just to be clear?

Yes, I think that's where we are going to wind up, Glenn. We are $1.38 year to date. I think third quarter is going to be in the $0.66-ish range. And right now, we are pretty comfortable with that consensus assessment at $0.80 out there in the fourth quarter, and that gets you to about $2.84 or something like that.

And the outsourcing, if I heard it right, it sounded like it decelerated to 7%? Is that for the same reasons that some of those -- the bank losses or pricing?

No, actually, Glenn. The outsourcing, if you net-out the deconversion fees on outsourcing, is actually more like a 12% growth year-over-year, so it's pretty much in line with where it has been.

The real pressure came in the payments line, if you net-out the deconversion fees on the payments line, payments was only about 4% growth. If you net that out, that's where the real tough grow over is from the drag from some of the repricing and loss of customers.

And then the share buyback. You've been pretty consistent, a million or so a quarter. Any reason to think you would change that or perhaps get more aggressive?

I do not know that we would get more aggressive at this point, Glenn, and obviously that's driven by the Board and we have in our quarterly Board meeting next week. So, that will be a discussion at the Board meeting, just like it is every quarter and we will decide where we go.

But you're right. We said going into this year that we were going to be a little bit more aggressive. We bought 2.2 million shares year to date, which is about the guidance I gave at the from that we were going to buy for the year. So, will be by some more, probably, but I do not know that we will keep the same pace that we had in the first half.

Okay, great. Thanks a lot.

Thank you.

Brett Huff, Stephens Inc.

Good morning, Jack, Kevin, and hello Dave.

Good morning.

Quick question on the pipeline. Jack, you were talking a little bit about that? This is tied to a sub-question of long-term growth outlook. You have been kind of peer-leading among your peers for awhile on growth. And Kevin, you just commented, at least for this year, that the credit union pipeline looks really good. Can you give us a sense of what are the components of the pipeline that you look at most earnestly, and how does that translate into how you think about long-term growth, combined bank and credit union business over the next few years?

I tend to focus more on the total backlog. At this point, with license fees representing 0% of our total revenue support and services being 96%, hardware on a steady decline. I tend to just focus more on the total backlog, which, by and large anymore, is almost support and services.

So on the heels of a strong sales quarter, as I mentioned, all three brands were over 100%. I think the lowest performance was 105% or 106% from one of the three brands. In spite of that, pipelines remained flattish even with closing that volume of business. So, I'm not sure if I actually got to the point that you were looking to get to. Kevin, if you would add anything to that?

Yes, the other thing I would add is one of the things that we obviously continue to focus on is the in-to-out movement, because obviously that's a very good thing for our business long-term. And currently, we are right at the 50% of our existing core customer base that are now outsourced. So we still got a long road ahead of us to continue those conversions.

Through the first half, we are right on track to do basically what we did in the previous year. I think we did [23] in the first half, we did [46] last year, so you're right on track to continue that same path. That's something that I really watch.

And then also, we continue to look at the payments business, and the opportunities that we have there. Not only just in bill pay, but also in passport and PPS in all of our different payment groups. Remote deposit capture, we've still got a pretty good runway there. So those are the sort of things that I look at to look at the future. Because obviously, as Jack said, those are our big drivers. Those are all in support and services, and that's what's going to drive us going forward.

Okay, any update on the -- I can't remember the name of the product -- where you are helping folks outsource more of even their front office IT systems?

Hosted network services.

Yes, thank you. Any update on that? You didn't mention that as one the major growers, but is that still something that could be a part of that growth system?

I will tell you it is growing nicely, Brad, but as we said originally, this is one of those -- going to be slow growing things because it's a complicated sale. It's a big decision for an FI to make to give us all of their servers, but it is growing. It is actually ahead of plan, and growing very nicely. And is it contributing? Yes. Is it a huge contributor at this point? No. But it's, like I said, ahead of track.

And if I could just add to that, Brad, we're continuing to have increased go-lives, very good success from the institutions that have implemented it. So the reference base is building out there as to the advantage of this approach. And the average contract values that we are seeing continue to increase. So a lot of good trends happening, there.

It is just, again, the percentage growth is very solid, but in terms of being to a point where it makes a meaningful impact from a revenue standpoint, not really there yet. But again, with the security environment and the talent acquisition and retention environment, particularly for technically-oriented talent that we are all seeing right now, again, we believe that this is a very solid solution that is going to be a nice long-term contributor.

And then last question, just thinking about margins over the medium-term, as well. You have had good margin performance and nice gross margins this quarter. You already have very high margins. Where do we go from here and what are the levers, if there are any, that we should be paying attention to?

Brad, is there some opportunity for additional expansion? Yes. I mean, it's going to come from the continued growth in our outsourcing and payments groups. That's going to be the drivers, because those are the highest margin business. And we will continue to leverage the existing infrastructure, but having said that, as Jack pointed out, security and compliance and other things are big issues.

So, I don't know that there's going to be the same margin expansion that we've seen in the past, but I think there is still some opportunity. And I think, going forward, that we will continue to see some opportunity for operating margin expansion on the G&A line and possibly selling and marketing. It won't come from the R&D line, because we have to continue to reinvest in our product as we continue to grow and move upstream into the larger FI's.

Great, that's what I needed. Thanks.

Thanks.

Dave Koning, Robert W Baird

Yes, hello. Nice job.

Thanks, Dave.

Yes, and just a couple, really. The termination fees I know you said would be down year-over-year in Q3, which makes sense. Is that mostly in payments or in outsourcing, or a mix?

It's a mix. It's across the board, Dave.

Okay. I just wanted to make sure.

Last year in the third quarter, we had right at $9.5 million in termination fees, and this year we think that's going to be about under $3 million.

Okay. But if we just take a few out year-over-year from each, like it's down --

Yes.

Okay. And then the other one, hardware. You maybe mentioned this a little earlier, too, but hardware was down 14% year-over-year. I know it's immaterial now. Is it like accelerating its declines, or should we just expect kind of 5% to 10% declines for a long time?

I think you can just expect that Dave. The deal with hardware is it's hard for us to predict, because that's driven by IBM and other hardware providers, and when they come out with new upgrades, and what they are going to force the customers to have. And as we continue to move customers from in-to-out, they are not going to be buying hardware upgrades. It's going to be a continual decrease in hardware.

Now, the hardware margins should stay really solid, because the non-hardware parts of that hardware line of revenue, which is our higher margin business, like our JHA Direct in the form supplies of different things. That's going to continue to become a larger percentage of that line, which will help maintain the margins in the hardware line of revenue.

Okay. Okay, good.

And then lastly, like, do the small banks ever ask you about block-chain. Quite honestly, I don't really even understand it very much, at all. But, is this more of a bigger bank thing? That they are looking at it, or do the small banks every once in a while ask you about it, or is it just a non-issue?

That's a great question, Dave, and I would say that today, small banks are not really asking about it. I fully expect that they will be, simply because there's so much noise in the media about it. We've got a number of folks that are looking at it and looking at potential applications, which it sounds like that's what the whole world is doing right now is trying to figure out where, if anywhere, the block-chain technology might fit.

It's -- the first line of thought tends to be in-and-around the payments area, because of it's original affiliation with Bitcoin. It's possible. Certainly some types of payments, they talk about an average potential transaction time, settlement time of around seven minutes. Well that's pretty quick if you are talking about something like a cross-border money transfer or a business-to-business payment, relative to payment options that are out there today. Relative to an ATM transaction or relative to a debit card transaction at Target, seven minutes is probably going to be a little long for that to be the best application.

And then there's a whole potential other areas of non-payment oriented chart like land deed transactions, smart contracts, and other things. So, there's an awful lot of people trying to figure out where, if anywhere, this might fit. And I would include us is in that category, at this point.

But, we are not getting, frankly, questions from any of our customers at this point. But I fully expect that, given how much discussion continues to take place around the technology, that that will change and they will want to know more about what it means once they come to understand it a little bit better.

Yes, okay. That's great. Thank you.

Thanks, Dave.

(Operator Instructions)

Glenn Greene, Oppenheimer

Thanks.

Just a couple follow-ups, and that was probably one of the best block-chain answers I've heard in a while. Jack, you alluded to that each of your segments were trending ahead of quota, year to date, in terms of sales and bookings. Could you directionally give us some sense what your sales growth looks like year to date across the segments?

I don't know that I know that on a year to date basis. I think -- there's three brands, and you know, I think I've said the lowest was about 105% of quota, one was 120% of quota, and I think the third one was somewhere in between those two, 115%-ish.

So, it was a strong sales quarter. Now, I will tell you that first quarter, two of them were at plan, one was well behind. The overall average was right about 100%. So we were right around 100% for first quarter, strong fiscal second quarter, and expectation would be [4 plus] year-over-year.

Yes, the numbers Jack's giving you, Glenn, are a percentage of quota, and I will tell you that the quota for all three brands went up. So, it's kind of -- I don't know that any of us in this room actually calculate that. But I would guesstimate that it's probably 4% or 5% growth over last year in total bookings.

Year to date? Okay. And then Kevin, this is a question for you on your favorite topic, the bundled services. But the question really is, when does the bundled service accounting turn to a revenue and profit tailwind? Meaning, I was under the impression that this was sort of a neutral impact, and perhaps FY17 you actually get a benefit from the accounting as you recognize some that deferred revenue faster than you refill the deferred revenue funnel?

One of the things I will tell you, Glenn, and I made sure to point that out in my opening comments, our preferred revenue went up 7% this year over last year, which is kind of unusual. And my point there is, because of the new rev rec rules, we're actually continuing to defer faster than we are recognizing revenue passing through the bundling. So, we are continuing to defer a lot of revenue. Could there be some tailwinds come out of that in 2017 as we do some things? Yes.

I will tell you, Glenn, with the rev rec rules coming out in -- they keep changing the dates. It's either 2018 or 2019, now. We are going to have to do some things to try to wrap up some of those contracts and get the revenue out. The timing of that, some of that is not up to us. Some of that is up to the customers, when they will actually either accept the products or whatever. So, could there be some tailwinds in 2017? Yes. But right now, we're still deferring faster than we are recognizing.

Okay, great. Thanks.

Yes.

I am not showing any further questions at this time. I would now like to turn the call back to Mr. Kevin Williams for closing remarks.

Thanks, Chelsea. First of all, I would like to remind everyone that we are going to hold an analyst event this year, analyst day 2016. We're going to hold that on the afternoon of May 9, and we are going to change the venue a little bit. We are going to have it at the Westin property at the Denver, Colorado, Airport.

It will be easy for everybody to fly in and fly out, similar to what we have done at Dallas for the last few years. Presentations by all the executives and division presidents will be Monday afternoon, and then we will follow that with a reception and mini tech fairs to highlight some of our products that evening. If you like to attend this, just shoot me an email and I'll get you a link to the registration site.

With that, I would like to thank you all for joining us today to review our second-quarter FY16 results. We are pleased with the results from our ongoing operations and the efforts of all our associates 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 our shareholders. With that, I want to thank you all again, and Chelsea, will you please provide the replay number now?

Certainly. Ladies and gentlemen, this conference will be available for replay after 11:45 AM Eastern Standard Time today, February 3, 2016 through 11:59 PM Eastern Standard Time on February 10, 2016.

You may access the replay system at any time by dialing 855-859-2056 and entering the conference ID number 34525105. International participants may dial the number 404-537-3406 using the same conference ID number, 34525105. Again, those numbers are 855-859-2056, and 404-537-3406. Conference ID number 34525105.

Thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.