Jack Henry & Associates Inc (JKHY) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Jack Henry and Associates first-quarter 2017 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Kevin Williams, CFO. Sir, please go ahead.

Thank you, Abigail. Good morning. Thank you for joining us today for the Jack Henry and Associates first-quarter FY17 earnings call. I'm Kevin Williams, CFO; and on the call with me today is Dave Foss, our President and CEO.

The agenda for the call this morning -- in a minute I will turn the call over to Dave, and he will provide some of his thoughts about the business and the performance of the quarter. After that, I will provide some additional thoughts and comments regarding the press release we put out yesterday after market close. Then I will update our guidance for FY17 and for Q2. 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, or result 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. 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 Dave.

Thank you, Kevin. Good morning, everyone. We are pleased to report another strong operating quarter, with record revenue and operating income. As in the past, I'd like to begin today by thanking our associates for all the hard work that went into producing those results for our first fiscal quarter.

I'm particularly pleased with the results of the quarter, because the prior-year quarter included some fairly significant head winds for us to grow over. Our Q1 and FY16 included both Alogent, which we sold last quarter, and a full quarter of revenue associated was Susquehanna, as we've discussed on prior calls. Despite these head winds, total revenue increased 7% for the quarter, and increased 6% excluding the impact of de-conversion fees from both quarters. Organic revenue growth was also 7% for the quarter.

Our payments businesses performed well, despite the pressure we highlighted last quarter. We posted a 7% increase in payments revenue, or a 6% increase excluding de-conversion fees. Our outsourcing and cloud revenue growth for the quarter was 19%. If you exclude the impact of de-conversion fees from both quarters, we saw a very solid 14% increase.

Despite an extremely strong sales quarter in Q4 of FY16, our sales teams finished Q1 in excess of 100% of quota, and booked more business than any previous first quarter. This is significant, not only because they set a sales booking record, but because they did it without the benefit of any Alogent sales in this quarter. Additionally, all three of our brands continued to work robust sales pipelines.

As I mentioned in the press release, we hosted our two largest client conferences of the year in September and October for our Scimitar and JJ Banking brands. Between the two conferences, we hosted more than 44 prospect institutions represented by almost 100 people. I was overwhelmed at both conference by the levels of customer satisfaction expressed to me by our customers, which in a reference-selling business like ours is obviously very helpful.

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 97% of our total revenue for the quarter, continues to drive our revenue growth. Our support and services break-down for the quarter compared to the prior year: Implementation services of $15.6 million, versus $17.1 million was a slight decrease of 9% for the quarter. Electronic payments was $135.8 million versus $126.5 million, which was a nice 7% increase, as Dave mentioned.

OutLink revenue, $83.8 million versus $70.7 million, again increased 19% for the quarter. In-house maintenance, $84.8 million versus $84.3 million, which was a slight increase for the quarter compared to last year. Our bundled services of $12.9 million versus $9.1 million, which is made up of implementation, license, and maintenance, was increase of $3.8 million for the quarter.

As Dave pointed out, total revenue growth was 7% for the quarter, and grew 6% for the quarter if you were to back out total de-conversion fees of $13.1 million this quarter, versus $7.1 million in the year-ago quarter. If you back out the increase in de-conversion fees of $6 million over the last year, revenue was still above consensus estimate for the quarter.

To look at just current operations and back out the $6.4 million of Alogent revenue in last year's quarter, our revenue from operations grew 9%. If you adjust for both total de-conversion fees and the Alogent grow-over, revenue grew 8%, which was right in line with the prior-year revenue growth.

Our de-conversion fees were just slightly higher than we anticipated for the quarter, due to a couple of unknown de-conversions that occurred in the quarter. But the big decrease in these fees compared to the prior year that we discussed on the last earnings call is projected to be in the second and fourth quarters, as that is when we had the large one-time de-conversion fees from Susquehanna and CIT last year.

Our gross and operating margins both improved slightly as reported, and remained relatively level if you back out the de-conversion fees for both years. The effective tax rate decreased to 31.9% for the quarter, from 36.1% last year. This decrease is primarily due to the reinstatement of the R&E credit, which we got the benefit of this year, but we did not have the benefit of in the prior-year quarter.

And, we had the early adoption of ASU 2016-09, which allows you to recognize the benefit of stock-based compensation through the P&L as an adjustment to taxes, which previous to this ran through retained earnings. The impact from this early adoption was approximately $0.03 EPS. We anticipate the effective tax rate to return to a more normal 34.5% in the second quarter, and wind up for the year between 33.5% and 34% with the impact of this early adoption.

Our net income was up 21% to $62.2 million, from $51.4 million a year ago, which led to EPS of $0.79, which was up 24% over last-year EPS of $0.64 for the quarter. Excluding the increase in de-conversion fees this quarter compared to a year ago, net income would still be up 13%, and EPS up 16%. Therefore decreased taxes contributed $0.03 of EPS, and the increase in the de-conversion fees contributed just a little less than $0.05. Our true adjusted EPS from operations without these impacts was still a little above $0.71 compared to the $0.70 consensus.

EBITDA for the quarter increased to $125.7 million, compared $111.9 last year, or a 12.3% increase. Included in the total amortization disclosed in the press releases is the amortization of intangibles from acquisitions, which was down to $3.7 million this quarter, compared to $4.8 million last year.

Our free cash flow, defined as operating cash flow less CapEx and cap software, plus proceeds from total assets, was $101.5 million for the first quarter this year, or $1.29 per share, compared to $86.4 million, or $1.07 per share last year.

We continue to provide solid return to our shareholders, through both dividends of $21.9 million for the quarter, and stock buy-backs $61.3 million for the quarter. Our return on equity for the trailing 12 months was a solid 26.8%. For guidance, our revenue growth will continue to be slowed in FY17, as we continue to grow over the head winds created by the disposition of Alogent, and loss of the two large customers last year that got acquired, and the huge increase in de-conversion fees that we will grow over this year.

For the December quarter, we had $8.2 million of revenues that Alogent contributed in prior year, and we had our largest payment processor that was acquired last year contributing revenue through the end of November in the prior year that we have to grow over both of those. We anticipate de-conversion fees to be down $3 million to $5 million in the December quarter compared to previous year -- again, because last year we had the large one-time de-conversion fee from Susquehanna.

We anticipate revenue growth in the December quarter of roughly in line with the 4% to 4.5% we previously provided on the last earnings call. However, if you were to adjust for the Alogent and back out the de-conversion fees from both periods, our revenue growth through operations would continue to be the 7% to 8% range in Q2.

We anticipate margins will be essentially flat with the same quarter a year ago. The effective tax rate obviously will be up to 34.5% in the December quarter, up significant from the 29.9% in the quarter last year. However, with all that, we are still comfortable with the EPS consensus of $0.74 for the December quarter at this time.

That concludes our opening comments, and we are now ready to take questions. Abigail, will you please open the call lines up for questions?

Thank you.

(Operator Instructions)

Brett Huff, Stephens.

Good morning, guys.

Good morning.

One question. Kevin, I think you said the OutLink was up 19%. Is that a reflection? Is that where the de-conversion fees would show up?

I think Dave mentioned in his comments if you back out the de-conversion fees it was still up 14% for the year, which is actually pretty much in line with where it was all of last year. Last year it was at 13% backing out de-conversion fees, Brett.

Okay. Remind us again. You called out one more one-time item. I think the large payment processor year-over-year growth. What was that one-time item again that we need to make sure we're good with in December? Can you reiterate that?

Yes, that was Susquehanna. There was a one-time fee when they de-convert at the end of November of $5 million, which is why I say that our de-conversion fees for December quarter's going to be down $3 million to $5 million from where it was last year.

Okay. Can you give us a sense of how the conversations, Dave, you mentioned being able to talk to some of the 40 prospects, I think, or customers and prospects at the recent conferences. As you're talking to those folks and the bankers, any change in tone of what they're looking for? Are they still looking for compliance or cost reduction or revenue enhancement? What are the top things on their lists these days?

Yes, and I talked to most of them, I would say, at those two conferences. I don't know that I got to every one of them. Generally, it's around improving functionality in the core systems, certainly focused on compliance and efficiency.

One of the new solutions we released last year that we've talked about is enterprise work flow. That's gaining some traction, because it helps a bank or credit union improve efficiency. Normally it's around improved overall solution, improved customer service, and then compliance and efficiency.

Okay. Then last question for me. Any update on the new digital banking products that are rolling out that I think were associate with Banno, are some of that functionality? How is that going, and what's the feedback so far?

Feedback has been solid. We signed, I think not in the quarter, but in the past 12 months we've signed around 90 customers. I don't have an exact number in front of me, but around 90 customers on the Banno platform. Feedback is good. That is the solution that we're building around as far as a digital platform for mobile and web hosting, and the entire customer experience. Customer reaction is very solid to that solution.

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

Peter Heckmann, Avondale.

Good morning, gentlemen.

Good morning, Pete.

You've had two consecutive quarters where term fees were much higher. I'm not seeing a whole lot activity in the market places regards M&A. Would you characterize that as just an unlucky coincidence?

I would say, Pete, that we knew going into this quarter, like I said in my opening comments, the de-conversions this quarter were just slightly higher. We knew some that were going to happen this quarter. There was a couple that surprised us that happened. The payments came in, the paperwork work came in that we weren't really anticipating.

Like I said, we've got pretty good visibility next quarter. Obviously, you can always be surprised, but we don't see anything coming up the next quarter, even through the balance of the year that's going to surprise us. We still think our de-conversion fees for the year are going to be down quite a bit from last year, primarily because of those two large ones from the Susquehanna CSC that got acquired last year, which those two made it $10 million.

We still think it's going to be down for the year. We knew it was going to be a little up this quarter. It's just a matter of timing, which we have no control over that. We have to recognize revenue when the checks come in, Pete.

Yes, sure enough. That's good, though, that you expect term fees to be down for the year, and you talked about the second quarter, so that's a positive. Can you give us an update on the M&A pipeline? Are you seeing anything there that looks interesting in terms of allocating some capital towards some smaller growth companies that you could use to complement your core solution?

Yes, I'd say, this is Dave, Pete. I would say the story right now on M&A is pretty much the same story we've been experiencing for the past 12 months. We are always looking. There are always deals that we have our eye on. It's tough to find a deal that really fits, A, because we have such a broad suite of solutions today. Finding something that we don't have that fits who we are and what we're trying to do as a Company can be a challenge.

Then B, valuations are still difficult to get something that really fits as far as valuation. There are deals that are out there. We're looking all the time. Just haven't found one recently that fit the profile we're looking for.

Got it, okay. I'll get back in the queue, thanks.

Dave Koning, Baird.

Yes, hi guys, thanks. My first question, the payments business. On an ex-term-fee basis, most of last year was around 4% growth; in Q1 it's at 6% now. Is there anything changing on the underlying basis that's getting better? Are you starting to partially anniversary some stuff from Susquehanna or anything else, because it just seems like momentum is getting better there on an underlying basis?

Dave, it's Dave. No, no anniversary as for is Susquehanna is concerned. I think your high-level assessment is correct. The payments business is performing well, performing better frankly than I had expected. It's really across all three areas.

As a reminder, we have three aspects of our payments business. We have our card- processing business, our bill-pay business, and then our remote deposit capture ACH business. All three of those lines of business are performing well, and better than we had anticipated.

Do you think, is that a function of market share wins, or do you think in part that's a function of a pick-up in economic activity, or just banks really pushing more for electronic? How do you parse that?

I think it's market share wins, and it's, I don't know if it's banks pushing more or us helping them push more. We track pretty closely subscriber adoption, for example, and bill pay. Same-store sales growth is a key metric for us, and same-store sales growth is up this year.

We are active in helping our bank and credit union clients with their adoption within -- customers that are already signed with us, we help them with adoption for their customers. I think there's an up-take across the board, not only in competitive signings, but in us helping our customers get to more of their consumers with our payment solutions.

Yes, Dave, I think we mentioned on the last call we continue to have a very solid pipeline in all three of those lines, which surprised me on remote deposit capture. The sales we have there that product still continues to sell so well. We've still got quite a bit of runway in our customer base for the card business. iPay, obviously we sell that as much outside the base as we do inside the base.

There's still some nice runway. What you're seeing, I think, is some of the sales that were made last year that are now getting converted, because everybody has those. One you convert them, you're actually bringing some nice volume on.

Okay, got you. Thank you. Secondly, the guidance comments you made, I think they were fiscal Q2 when you said 4% to 4.5% revenue growth, and margins flat year over year. First of all, am I right about that? Then full year, is it still 4% reported, and then with maybe mild margin expansion?

Yes. That's exactly what I said.

Okay, got you. Finally, on that tax rate, the adjustment to your tax-rate guidance, is it still somewhat -- are there moving parts around some of the new accounting, where depending on the stock movement the actual tax rate could still move around a little bit outside your range, or do you feel pretty good now about the full-year range?

I feel good about it, Dave. The reason is because most of our stock-based compensation benefit happened in this -- in Q1. That's when the long-term comp, restricted stock vests for the executives and GMs. The vast majority of any stock-based benefit is going to happen in Q1. There will be a little bit the rest of year, but not near as much.

Going into this quarter, we didn't know exactly what the benefit could be. Until we knew that, which was actually in mid-September, that was when we made the decision to go ahead and early adopt to get the benefit. But up until September 10, to be quite honest, we weren't sure if we were going to early adopt or not. Very comfortable with the tax rate for the balance of the year on the guidance I gave, because the stock-based benefit is not going to have much impact the balance of the year.

Got you. All right, great. Well, thank you, nice job.

Yes, thanks, Dave.

Glenn Greene, Oppenheimer.

Thanks, good morning. Kevin, I want to go back to the FY17 guide, also. Back in August, you called out two major headwinds was lower de-conversion fees, which I think was going to be a $0.10 drag; and the tax rate grow-over, which I think was a $0.05 drag.

That obviously drove the up side of the quarter this quarter, the $0.08 that you called out, meaning the de-conversion fees I'm pretty sure, and I think you acknowledged, came in higher than you would have thought in the quarter. Then you got the benefit from the tax rate in the quarter. How should we be thinking about the flow-through of this quarter's up-side into the full-year guide?

Yes, obviously the $0.03 tax impact for this quarter is going to take the whole year guidance up, Glenn. There were a couple of de-conversion fees that came in this quarter that we kind of anticipated next quarter. We're still going to have an overall decrease for the year in de-conversion fees, probably not quite the drag that I anticipated in August; but it's still probably going to be a $0.07 or $0.08 drag for the year.

All else equal, we're probably looking at $3.10 on EPS kind of thing?

Probably about right.

Then on the de-conversion fees, it certainly sounded like it was somewhat unexpected, and it seemed like a pretty big de-conversion fee. What happened, and how should we be thinking about when that potential revenue drag is going to hit you?

Actually, Glenn, the Q1 de-conversion fee wasn't that much of a surprise. I tried to get that across in my comments. We knew de-conversion fees this quarter were going to be up compared to last quarter. The surprise was only like $1 million or $1.5 million of the total de-conversion fees for the quarter that came in unexpectedly. We knew it was going to be up this quarter, but we also knew it was going to be down quite a bit next quarter.

Okay, so in your mind, this was nothing incredibly unusual in the quarter as it relates to the term fees?

No, absolutely not.

And not going to be a meaningful headwind that you're going to be calling out at some point within the next three or four quarters kind of thing?

No.

The credit union business, which had been humming along, and all of a sudden slowed to 3% growth. Anything that explains that? Conversely, banking got a lot better.

A couple things there, Glenn. If you look at last year, the comp we had, credit unions had a 32% increase last year in Q1, so pretty tough comp to grow over. There was nothing really unusual. Everything keeps trucking along.

Our bundling revenue was down a little bit this quarter compared to a year ago just because of the timing of delivery. Some of the implementation was down, again due to timing of billing and revenue recognition. License and hardware both down slightly. That's again due to timing of delivery. There's nothing really unusual in credit unions, other than a very tough comp a year ago.

Banking, everything continues to truck along, especially in the out-sourcing, which is relevant to the end-to-out business that we continue to talk about, and continue to see a very good momentum there. We see that shift of our existing announced customs using outsourcing. I think we're going to continue to see that nice growth, especially in the out-sourcing and payments businesses in both sides of the business.

All right, great. Thanks a lot.

Thanks, Glenn.

David Togut, Evercore ISI.

Good morning, this is Rayna Kumar for David Togut. It's good to see the capitalized software down for the quarter. Can you talk about your expectations for FY17 as a whole? Separately, could you talk about any major product investments you're making currently?

Well, I talked about this a little bit on the last call that CapEx is down a little bit and cap software is down a little bit, and I expect cap software to run at that same rate going forward.

As far as the new products that are in process or maybe capitalized software projects that are in process, we have the ongoing emphasis technology development that we've talked about on several calls in the past. That goes on through 2018, but it's being rolled out in phases. It's not that it's a big bang at the end, but it's an ongoing project for us.

We've highlighted our treasury management project that's been going on that is released next year. We have a financial crimes solution that we have been working on that we have talked about previously. Then other ongoing projects with our payments business, for example, and with Banno that was already asked about today. So a number of large [felton] projects that are ongoing. But with that said, as I said earlier, I expect cap software to run at the same rate that you're seeing now.

I also say, we rolled a lot of products out in the June quarter and into live production and started amortization, which drove to the increase in amortization that you see in the press release that went through the cash flow statement this quarter. Our percentage of cap software that's still in development that is not being amortized is running pretty much where it has been historically. As Dave said, our cap software for the year as we guided last quarter is going to be down for the year.

That's very helpful. Could you discuss your business pipeline for electronic payments and your expectations for revenue growth for the year?

Sure. I think I set the expectation on the last call that we would be in the 5% to 6% range. If you look at this quarter, excluding de-conversions, we were right at 6%. I think that's a good number going forward, in the 5% to 6% range. The payments business, as I talked about earlier with one of the questions, is performing nicely for us right now. We have some grow-over that we're dealing with from last year; but the payments of all three lines of the payments business are performing well right now.

With the strong top-line growth and EPS gains, I was a little surprised to see your operating cash flow up only 5%. Was there any one-time items or anything in the cash flow that we should be aware of, maybe, in working capital?

No, not really. Nothing unusual. Obviously deferred revenue is up quite a bit from a year ago. That's probably the biggest change right there that caused the increase not to go up any more. That was a $12 million increase, which is actually a good thing.

Got it. One final question for me. Can you discuss the competitive environment in the large credit union space? Specifically, are you seeing any increased competition from Pfizer's DNA product?

I would describe the competitive environment as intense, as it has been in the large credit union space, intense, and it has been for quite some time. No, we are not seeing any increased level of competition nor reason to be concerned, when it comes to any particular core provider. We're all competing.

Like Dave said, we had a large number of core prospects at our Symitar Education Conference. I believe it was 28 and half of those were over $1 billion in assets.

Let me point out, too, that in last fiscal year, I don't have the number for this quarter, but in the last fiscal year for us, so July 1 to June 30, there were 12 credit unions that made a competitive decision. Over $500 million in assets, 12 credit unions that made a competitive decision, meaning leave their current core provider. 50% of those went with our Symitar solution. I think that's a good indicator of how we're positioned today as a core provider against any of the cores that are out there.

Thank you.

Thank you.

(Operator Instructions)

Kartik Mehta, Northcoast Research.

Hi. Good morning, Dave and Kevin. Dave, you talked a little bit about how sales have been fairly strong. I know, Kevin, you don't give backlog numbers any more. But if you look at the visibility based on what you have already in the pipeline, how far can you see out? Is demand strong enough that over the next two fiscal years you feel fairly good that you'll be able to maintain a fairly decent organic growth rate?

Let me touch on that first, and then I'll turn it over to Kevin. I think it depends on the product line that you're looking at. You sign a new core deal today. Well, that core deal isn't going to install for 12 to 14 months. You never know what their conversion time line is, but it's a long-term project.

Whereas you sign a bill pay customer today, they may convert in 60 days. It really depends on the product line that you're talking about. Given the fact that we're pretty diverse today when it comes to product signings, I think that's a difficult question for me to answer. Now Kevin may have a better response.

Yes, I guess Kart what I would say is with our recurring revenues at 80%, with the backlog of conversions that we know we have out there for not only payments, but also the customers that have signed contracts to move from in to out. We know the conversion time lines for those, and what that benefit's going to do to revenue.

We've got very good visibility for at least 12 to 18 months out. Barring any large M&A activity where we lose another customer just like we did last year, barring that, we've got extremely good visibility, probably 95% plus of what we're going to have for the next 12 to 18 months.

Kevin, you and Dave have talked about core systems. Are you seeing, has demand increased for banks and credit unions looking at core systems potentially replacing them, or doing some kind of analysis?

I don't know that I would characterize it as any significant increase. There are a lot of deals in play right now. As always, our biggest competitor is no decision. People go out and look, and then they decide to not make a move for whatever reason. I don't know that there's some great big increase overall. At this point in time, there are a lot of deals that are in play.

I will say this, the good indicators is having record attendance at your education conferences, record number of prospects. We even had a record number of CEOs at our CEO forum at our banking education conference.

Those are all really good indications. I will tell you that it was surprising because there was a large number of CEOs that actually stuck around this year and went to the technology fair to look at some of our products. To me, those are all very good indications that we're going to continue to do well.

Then just last question. Your use of cash, Kevin. I think Dave you said that on the M&A side, really there hasn't been any product that you've been really attracted to. Maybe the multiples are too high from a use of cash. Is it Kevin going to be buying back shares like you have, or are there other things you are thinking about?

Yes, obviously we're going to continue to look at M&A activity (inaudible), as Dave said. There's not a lot out there, which is why we continue to re-invest in our products and develop products. We have our annual shareholders meeting this week on Thursday and our Board meeting. Just like every Board meeting, we're going to discuss the use of cash, but I anticipate we'll probably continue to use it to buy back stock and continue to evaluate increasing dividends.

Thank you very much.

Thank you. We have a follow-up from David Koning with Baird. Your line is open.

Yes, hi guys. Thanks for taking my second one. You talked a little bit about, I know capitalized software down this year. I know you talked about that. CapEx, did you say what you expect? I know that year it was $56 million. That's also going to be down this year?

As of now, with think it is, Dave. It's subject to change depending on upgrades to hardware and some different things. We don't have any large unusual CapEx other than maintenance really planned for this year. In the following year it's very possible. We're going to have to add another building in Springfield, because we are out of space there. We're back to leasing almost as much space as we did before we built the two buildings in 2010. More to come on that, but the CapEx should be flat to down slightly for the year.

Got you. What it seems like is happening, I know last year was a little different than the norm, that free cash flow was a little below earnings after what, 10 years in a row I think it was above. It feels like given CapEx going down despite the overall growth to your business, it just seems like you might revert and catch up this year, not only be above earnings, but pick up the little bit of gap that you had last year, so be more above earnings than normal. Does that seem like a fair statement?

I don't know how excited I get about confirming that, but I think it will be back above earnings, yes.

Okay, great. Well, thank you for that.

Thanks, Dave.

Thank you. I'm showing no further questions. I'd like to turn the call back to Kevin Williams for further remarks.

Thank you. Again, I want to thank you all for joining us today to review our first-quarter FY17 results. We are very pleased with the results from our ongoing operations, and the efforts of all of our associates to take care of our customers. Our executive 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.

Abigail, will you please provide the replay number?

Ladies and gentlemen, this conference will be available for replay after 11:45 AM Eastern Time today through November 15, 2016, at 11:59 PM Eastern Time. You may access the replay at any time by dialing 855-859-2056, and entering access code 8367060. International participants may dial 404-537-3406, and access code 8367060. Those numbers again are 855-859-2056 and 404-537-3406, access code 8367060.

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