Jack Henry & Associates Inc (JKHY) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Jack Henry & Associates' fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Kevin Williams. You have the floor, sir.

Thank you. Good morning. Thank you for joining us today for the Jack Henry & Associates fourth-quarter FY16 year end earnings conference call. I'm Kevin Williams, CFO. On the call is with me today is Jack Prim, Executive Chairman of the Board, and David Foss, our CEO. The agenda for the call this morning, I will turn the call over shortly to Jack so he can make some opening comments. Then Dave will provide some of his thoughts about the business and the performance for the quarter. And then I will provide some additional thoughts and comments regarding the press release we put out yesterday after market close, provide some initial guidance for FY17. And then we will open the lines for Q&A.

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

Thanks, Kevin. Good morning. I'm happy to be joining you this morning following another strong quarterly performance. While there were some one-time events in the quarter, all contributed positively to our performance. And as Dave and Kevin will discuss in more detail, after netting out all benefit from these one-time events, our quarterly operating performance would have still been very strong.

Our previously announced CEO transition took place as planned on July 1. The transition was very smooth. The related organizational changes were made and well received by employees. This acceptance was helped by Dave's 17-year tenure in the organization, as it helped employees realize there were unlikely to be major directional changes. Our shareholders should have similar expectations. Congratulations to Dave on his new role. And I will now turn it over to him for some additional details on the quarter.

Thank you, Jack. Good morning everyone. We're pleased to report another strong operating quarter with record revenue and operating income. And I'd like to begin today by thanking our associates for all the hard work that went into producing those results for the quarter and for the fiscal year. The fourth quarter provided a nice ending to a good overall performance for the year. Revenue increased 10% for the quarter and increased 7% excluding the impact of deconversion fees from both quarters. Organic revenue growth was also 10% for the quarter because the impact of our acquisition of Bayside on July 1 last year was not material to our numbers.

As discussed on the last call, our payments business is continuing to grow over some significant customer losses in late FY15 and early FY16. But despite that pressure, we posted an 8% increase in payments revenue and a 5% increase excluding deconversion fees. Our outsourcing and cloud revenue growth for the quarter was 21%. And if you exclude the impact of deconversion fees from both quarters, we saw a very solid 14% increase. Although we continue to have a number of large development projects ongoing, we have released several new products in the past few months. So you will notice the capitalized software decline during the quarter over our previous run rate on a sequential basis. Although I don't expect a continued decline in this area, I do believe that the rate will normalize going forward.

As previously announced, we completed the sale of our Alogent deposit automation software business to Battery Ventures at the end of May. Obviously this transaction creates some noise in our numbers, so Kevin will provide more detail on the impact of this transaction in his comments. As a reminder, Alogent was a division of Goldleaf when we completed that acquisition a few years ago. The Alogent solution is a strong offering in the Tier 1 financial institution space. But this segment of the market, which is essentially comprised of the top 150 banks, is not a focus area for us. And we felt the business could be a better fit for another owner.

Once again all three of our brands finished the fiscal year ahead of their sales plans, which positions us well for FY17. We just completed our annual sales kickoff with all of our sales reps and they're already off to a good start. Overall our business fundamentals remain strong and our associates are optimistic about the coming year.

As Jack mentioned earlier, our CEO transition is complete as of July 1. On behalf of our approximately 6,000 associates, our customers and our shareholders, I would like to thank Jack for his many years of service to our Company and congratulate him on his outstanding tenure as our CEO. I look forward to continuing my working relationship with him in his new role as our Executive Chairman. With that, I'll turn it over to Kevin for some detail on the numbers.

Thanks, Dave. Our Support and Services line of revenue, which represents 96% of our total revenue for the fourth quarter and fiscal year end, continues to drive our revenue growth. To break our Support and Services down a little bit, implementation of service revenue of $14.7 million versus $17.9 million, or down 18% for the quarter. As Dave said, our electronic payments of $131.5 million versus $121.4 million increased 8% for the quarter. Our OutLink outsourcing division grew to $84.1 million from $69.7 million, or a 21% increase. Our in-house maintenance increased to $81.4 million versus $76.2 million, or a 7% increase. And our bundled services grew to $41.7 million from $33.4 million, or a 25% increase.

Our total revenue grew to 10% for the quarter and grew 7% if you back out the total deconversion fees of $14.9 million in the quarter and $5 million in the year-ago quarter. For the fiscal year total revenue grew 8% and grew 7% if you back out total deconversion fees of $37.6 million this year versus $26.9 million last year. Our total operating expenses decreased 21% for the quarter and increased 1% for the fiscal year compared to year-ago periods, primarily to the gain on sale of Alogent net of related expenses for a net impact of $18.5 million. Without this impact total operating expenses actually increased 12% for the quarter and 9% for the year. Increased personnel expense and R&D and G&A drove the majority of the increase for both the quarter and fiscal year. Disposal of some assets also increase the R&D expense for the quarter.

Our operating margin without the impact of Alogent remained level at 27% for the quarter and 25% for the year compared to the prior year. The effective tax rate for the quarter decreased to 27.4% for the quarter from 32.1% last year. But again without the impact from Alogent, the effective tax rate would've been right in line with last year at 32% for the fourth quarter. For the year the effective tax rate was 31% with the impact of Alogent and 32.4% without Alogent compared to 33.3% last year. The net tax rate without Alogent was lower this year due primarily to the reinstatement of the Research and Experimentation Credit, as we got an additional half-year catch-up. Therefore we anticipate next year's effective tax rate to be close to 34% to 34.5%.

Net income was up 39% to $84.3 million from $60.5 million a year ago, which led to EPS of $1.06, which was up 42% over last year EPS of $0.75. Excluding the effects of Alogent our net income would've been $66.5 million, or $60.5 million a year ago, and EPS of $0.84 compared to $0.75, or a 12% increase.

For the fiscal year our net income was $248.9 million, up 18% from $211.2 million last year, which represents EPS of $3.12, up from $2.59. Excluding the effects of Alogent our net income would've been $231.4 million, or up 10% from $211.2 million. And EPS of $2.90 per share for the fiscal year compared to $2.59 last year, or a 12.1% increase. EBITDA for the year to date increased to $491.6 million compared to $437 million last year, or a 12.5% increase. Without the effects of Alogent gain EBITDA grew roughly 9%. Included in the total amortization disclosed in the press release is amortization of intangibles from acquisitions, which was down to $18.4 million compared to $20 million last fiscal year.

Free cash flow, defined as operating cash flow less CapEx and cap software plus the proceeds of sale of assets, was $237.4 million for FY16, or $2.98 per share, compared to $236.8 million, or $2.90 per share in FY15. Free cash flow was impacted this year by increased capitalized software, which cap software for the quarter actually decreased about $5 million sequentially compared to Q3, which this was also part of the increase in R&D expense and impact on our operating margin in the quarter. Also we are projecting cap software to be down slightly in FY17 compared to FY16. Also impacting our cash flow was our annual maintenance billing collections were a little slower this year compared to last year by approximately $10 million at June 30, which those collections have subsequently caught up.

We continue to return [investments] to our shareholders through dividends of $84.1 million for the year and stock buybacks of $175.7 million for the year. Our return on equity for the trailing 12 months was 25%, or 23.3% after backing out the impact of Alogent.

So FY17 initial guidance. Revenue growth will be slowed in FY17 as we grow over a couple of rather large headwinds. The first is obviously the sale of Alogent, which represented $28.4 million in revenue in FY16, or about a 2% headwind. The other is the expected significant decrease in deconversion fees in FY17. We anticipate these one-time deconversion fees to decrease by just under $12 million, or approximately a 1% headwind compared to FY17, which this is more in line with what we saw in FY17 -- for FY15, I'm sorry.

The majority of this anticipated decrease is due specifically to two major deals that we discussed on previously earnings calls. Close to $5 million from one deal in December and -- the December quarter and $4.6 million from one in the June quarter, which the timing of that and the others in the fourth quarter was a large part of the fourth-quarter $0.04 EPS beat. But we do not anticipate losing any large deals of this significance this year, which is why we're lowering the expectations. However, both of these were created by M&A activity over which we have no control.

So with backing these out for an apples-and-apples comparison, the base revenue would be reduced a little over $40 million to a base of $1.314 billion for FY16. And based on that, revenue growth for FY17 would be somewhat in line with this year in the area of about a 7% growth. But with these headwinds right now, we anticipate actual reported revenue growth to be in the area of 4% for FY17.

Obviously the $19.5 million gain on disposal of business during FY16 must be backed out of operating expenses to arrive at a comparable operating income for comparison. Even with the loss of the large electronic payments customers Dave mentioned last year that we talked about previously, this creates large headwinds on our margins. However, we do anticipate a small margin expansion, primarily in the second half of the year. So from the projected approximately 4% reported revenue growth we anticipate, operating income growth should be approximately 6% or a little better after backing out the gain compared to FY16 operating income. Without the headwinds of Alogent and the expected reduction in deconversion fees, our operating income would have actually been projected growth over 10% FY17.

So our business operations remain very strong. We just had a couple of unusual items to grow over this coming year. As mentioned above, the effective tax rate for FY17 will be in the range of 34% to 34.5% compared to 32.4% in FY16, adjusting for the Alogent gain, which obviously will be a headwind on net income growth.

For EPS guidance, first you need to back out the gain on the sale of Alogent net of related cost, which was $0.22 of EPS this year to determine a net base of $2.90 for FY16. The change in the effective tax rate represents approximately a $0.05 EPS headwind and the anticipated decrease deconversion fees represent approximately a $0.10 EPS headwind. So this is a very large headwind of approximately $0.15 EPS impact.

Therefore at this time we expect reported EPS to grow 5% to 6% over actual reported FY16 after adjusting for the gain on sale of business. For FY17 EPS should be in a range of $3.04 to $3.06 aided by some planned stock buybacks, which is just slightly lower than the current consensus estimate of $3.08. Again, our operations of business continue to be very strong. Obviously we will update this guidance quarterly as we proceed through FY17.

This concludes our opening comments. And we are now ready to take questions. Andrew, will you please open the call up for questions?

(Operator Instructions)

Kartik Mehta, Northcoast Research.

Hey, good morning. Kevin, I just wanted to ask a little bit about cash from operating activities. It just looks like working capital was a little bit more negative. And I'm wondering if that's just timing or if there's anything more than that included in that?

It was timing, and there was some impacts from just the accrual of income taxes and the timing of payments of taxes and different things like that, Kartik. So it's really nothing unusual in the working capital.

So that will work itself out, I'm assuming, over the next couple quarters?

Yes.

Okay. And as you look at your business and you look at the backlog as you've talked about in the past, what level of confidence do you have in the recurring revenue, or the revenue guidance for FY17, obviously excluding the one-time stuff with Alogent and the deconversion fees?

Well, I mean, (inaudible) recurring revenue is still about 80%, Kartik. And most of that is tied to either long-term contracts are in-house maintenance contracts, which all of those have already been renewed by this time. So that's sitting there in deferred revenue, which current deferred revenue is up a little bit. So for that part we feel extremely good.

We've got the backlog of things to be delivered. We've got a very strong backlog bank and credit union that has signed to move from in to out. We had a very solid year of contracting those institutions, move from in to out. So at this point, I mean, I feel very confident that the guidance that we just gave on revenue.

And just one last one. As you look at -- I know this by quarter by quarter, it's difficult. But as you look at the year that just ended and the market share on the credit union side, your thoughts on how you ended up the year as far as market share? And based on what you for the installations that you're looking forward into FY17, what that might do?

Kartik, it's Dave. I'll answer that one. We had a very solid year on the credit union side. We ended up signing 21 competitive takeaways for the year.

The good news for us is when you look at the $500 million and above credit union space, the larger credit unions, half of the credit unions who decided to make a change from their core provider to another core provider, half of them decide to go with our Episys solutions. We well positioned in the credit union space, having really solid success, continuing to have solid success in the credit union space. And feel like our Episys solution in particular is positioned really well to compete with anyone in the market.

Thanks, Dave. Appreciate it.

Brett Huff, Stephens.

Good morning, guys. Can you hear me okay?

Hi, Brett. Yes.

All right. Two questions for you. One, Kevin, is there anything in the numbers right now that you could point out due to the change in accounting? You guys had to bundled your revenue and all that kind of stuff. As I recall, there was going to be a little bit of a revenue headwind in the first couple of years, and maybe switching to a small tailwind in the out years. Are you seeing any of that, or do we need to pay attention to that from an order of magnitude point of view as we think about the next few years?

Yes. I don't know that there's much of a difference, Brett. Obviously the bundled revenue is up a little bit this year. But it appears based on the timing of delivery and different things that the bundled revenue should be similar in FY17 to where it was FY16, at least that's what it looks like right now. So there shouldn't be -- I think we may have got just a little tailwind this year. But I think it is going to be relatively flat next year. And then we go into the new rev rec rules the following year, which all bets are off at that point.

Okay. And then second question is on investments. I know you guys have a number of investments going on. Can you give us an update on the key ones? I know there's a UI change that you guys are going through and a few other things. Can you just give us highlights, an update on the top 2 or 3?

Sure, yes. Brett, it's Dave again. So I mentioned in my opening comments that we rolled out a few of those solutions. So Biller Direct, for example, is one that I've highlighted in the past. We rolled out the first version of Biller Direct in June on schedule. We have another enhanced version coming out later in the year.

Our experience development project, which has been redoing the user experience, the front end for our core solutions and most all of our integrated complementary solutions, that's about done. We've rolled that out recently. Our cash management solution, and that's separate from our treasury management initiative, but our cash management solution, we rolled out in the quarter.

So several of those have been rolled out to customers now. Ongoing we have the Episys database project that we've talked about before. Our treasury management project design going that will come out in calendar 2017. And then of course Banno, which is our mobile platform, our digital platform, continues to be a ongoing development project for us.

Okay. That's helpful. And then last question. Kevin, you mentioned that there was some, I think, extra R&D expense because of Alogent. Can you just walk us through why that was the case? If we're selling the business, why is there more R&D? I didn't quite understand the math there.

No, that's not what I said, Brett. I said the cap software was down for the quarter, which obviously increased R&D expense for the quarter.

Okay. Got you. That's what I needed. All right. And then last question, just some housekeeping. Kevin, I missed this early on. I think you said adjusted ex-Alogent the tax rate was 32%. Was that right?

32.4%, I believe. Yes.

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

Yes.

Peter Heckmann, Avondale.

Good morning, gentlemen. Just had a few follow-ups. In terms of the bank side on the mid tier, how do you think the prospect for lower interest rates for longer impacts the willingness for banks to pull the trigger and decide to upgrade a core or do major projects as well, the election? Are you seeing anything in terms of decision cycles maybe lengthening, or requests in terms of the demands that the banks are looking for from their core providers in order to go ahead and upgrade? Has there been a change in their expectations?

Pete, this is Dave. Those are all definitely topics of conversation. But I don't see any of those things impacting the number of requests for proposals (technical difficulties) number of deals that we have in play right now, or the pace of decisions that's going on right now. We closed 19 competitive core deals in the fiscal year. That's around the rate that we have had for quite some time. Sometimes we're a little over 20, sometimes a little under 20. But that's a consistent rate for us.

And in the mid tier space in particular, we feel that we're very well positioned now. You may or may not have seen, we did a press release recently about the reintroduction, maybe, of Silverlake as a real-time platform with the new user interface that we referenced earlier, the Xperience interface. We got a little get bit of good press from [Sellent] where they named Silverlake as the new market leader for midsized banks.

So I think we're feeling very strong about where we are positioned today. But as far as decision -- the request for proposals or the RP requests or the decision pace, it hasn't really changed at all in quite some time.

All right, that's helpful. And Kevin, just to clarify and comment on your guidance. You provided a good, tight range for EPS. Would there be any material level of buyback implied in that guidance?

Not a huge amount. We are predicting there's probably 1 million shares or so in there is that we'll buy in the first half of the year or so, Pete.

Okay. That's helpful. Appreciate it.

You bet.

Dave Koning, Baird.

Hey guys, nice job.

Thanks, Dave.

Yes. And I guess first of all, just looking at the margin, if we take out turn fees and assume they are 100% margin, it looks like this quarter was, I think the operating margin a little over 23% and last year Q4 was just under 26% on an ex-turn fee basis. So down 240 bps, or something like that. Why would margin be down so much year over year?

Well, part of that, Dave, is what I said the 23% increase in R&D expense because we didn't capitalize near as much software this quarter.

Okay.

And then I would tell you that the G&A expense is up significantly because of all the changes in rev rec and everything, we have hired a bunch of accounting people, internal audit has staffed up during the year. So just several areas, primarily in personnel expense, that has impacted the margins.

Got you. Yes. I can see D&A was up almost -- probably almost 100 bps or something and G&A up. It seems like there might be a little bit of a core, too. It may be D&A was maybe part of it, too, just as you are starting to amortize some of the software, I would imagine that's a little bit of it, too?

That's a little bit of it, yes.

Okay. And then secondly, just a couple things on Alogent. Is the margin -- was the margin at Alogent above or below core Jack Henry?

It was a little below.

A little below, okay. And then I'm assuming it's in Support and Services, but what part of Support and Services was Alogent in?

Alogent was actually a License and implementation and maintenance. It was basically a toolkit that was sold, and then you sell a bunch of professional services to build it the way the banks want it, which is the way the Tier 1s and international banks do business. And that's not the way our typical community bank does business.

Got you. Okay. And then I guess and then finally, just over time now, I know for so many years free cash flow was above earnings, and that's typically the way it looks like over time things tend to go. This year was a little below because you have been ramping up. And I know you have mentioned to us, think of what you're doing right now as instead of buying -- making acquisitions you are investing in your own business and growing really well and everything.

How should we think, though, over time of free cash flow dynamics? Do you think it will be above earnings again as you leverage some of the spending you've been doing?

Yes, it should be back there this year, Dave. Like I said in the opening comments, our annual maintenance billing collections were behind last year by about $10 million. So if you just throw that in there, that's the difference.

If you figure CapEx or cap software levels off or down slightly in FY17, that was a $19 million increase this year over last year. Put those two numbers in there and you're back way above earnings.

Yes, okay. And I guess finally, when you said cap software should be down slightly in FY17, is that a combination of capitalized software and that internal use software?

Yes.

Okay. Great. Well, thank you.

(Operator Instructions)

David Togut, Evercore.

Good morning this is Rayna Kumar for David Togut. Could you just comment on your expectations for electronic payments growth for FY17? It was good to see it pop back up to 8% in the fourth quarter.

Yes, I think we have, we have three payments businesses, Our debit switch, our bill pay business, and our ACH remote deposit business. All of them growing in that 5% to 7% range, let's say, for the coming year.

And again, we have this headwind that we're trying to grow over that I mention my opening remarks regarding the two significant customers that we lost last year.

Which we should -- those will anniversary in the December quarter.

Understood. That's very helpful. What are your expectations for R&D growth for FY17? It was up 23% in the quarter. Should we expect that to be the new normalized run rate as the capitalized software growth slows down?

No, I think the R&D run rate was a little higher in Q4 than what you can typically expect the run rate. It's going to level back down a little bit going into FY17, Rayna.

Great. Okay. And could we just get the end of period share count?

Rayna, I do not have that at my fingertips. I apologize.

Okay. I'll just shoot you an e-mail. Great. Thank you.

It's somewhere around 79.5 million.

79.5 million, perfect. Thank you.

(Operator Instructions)

I see no other questioners in the queue at this time. So I'd like to turn the call back over to management for closing remarks.

Thank you. Again, I want to thank you for joining us today to review our fourth-quarter and FY16 year end 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 is best for our customers and our shareholders.

I want to thank you again for joining us today. And Andrew, will you now please provide the replay number?

Thank you. Ladies and gentlemen, this conference was recorded for replay purposes. In order to access the replay you may dial 800-585-8367, that's 800-585-8367, using conference ID 63194998. Conference ID is 63194998.

This now concludes the program. I would like to thank everyone for your participation. Hope you all have a great day.