Jack Henry & Associates Inc (JKHY) 2017 Q2 法說會逐字稿

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

(Operator Instructions)

As reminder, this call is being recorded. I would now like to turn the call over to Kevin Williams. You may begin.

Thanks, Michelle. Good morning. Thank you joining us today for the Jack Henry & Associates second-quarter FY17 earnings call. I'm Kevin Williams, CFO, and on the call with me today is David Foss, our President and CEO.

The agenda for the call this morning, in a minute I'll turn it over to Dave to provide some of his thoughts about the business industry and performance of the quarter, and then I will provide some additional thoughts and comments regarding the press release we put out yesterday after market close. And I'll update guidance for FY17 and then we will open the lines up for questions.

I need to remind you that the remarks, responses, questions concerning future expectations, events, objectives, or 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.

I'll now turn the call over to Dave.

Thank you Kevin good morning, everyone. We are pleased 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 second fiscal quarter.

As we discussed in the previous call, we divested our Alogent division at the end of the last fiscal year and we still have Susquehanna in the mix through November, so the comparable quarter includes a slight headwind for revenue growth. Despite that headwind, total revenue increased 5% for the quarter. Organic revenue growth was 7% for the quarter.

In line with the guidance we have provided on previous calls, our payments businesses posted a 5% increase in revenue, excluding the impact of deconversion fees. Our outsourcing and cloud revenue growth for the quarter was 17%, and if you exclude the impact of deconversion fees for both quarters we saw a very solid 13% increase.

Our sales team saw good success in the quarter with a few of the strategic solutions we've discussed in the past. They signed 11 new hosted network services, or HNS deals, in the quarter which is almost as many as they signed in all of FY16. Additionally, they signed 27 (inaudible) mobile contracts and secured the first agreements for our new treasury management solution and our new enterprise risk mitigation solution.

As I mentioned in the press release, 2016 was our 40th anniversary year and we host a number of events throughout the year to celebrate that milestone with our associates, customers and partners. We capped that year of celebration with a bell-ringing event at NASDAQ in November. Thank you again to all those who helped us celebrate this significant anniversary.

With that, I will turn it over to Kevin for some detail on the numbers.

Thanks, Dave. Support and service line of revenue which represents 97% of our total revenue for the quarter continues to drive our revenue growth. Our support and services breakdown for the quarter compared to the prior year was; our implementation services was $13.7 million for the quarter versus $15.9 million, or a decrease of 13% for the quarter; electronic payments was $131.5 million versus $130.5 million, an increase of 1% or as Dave mentioned a 5% net of deconversion fees; our outlink or outsourced delivery model was $84.6 million versus $72.1 million, which is a 17% increase for the quarter and again 13% very strong growth, net of deconversion fees; our in-house maintenance was $83.8 million versus $83.4 million, or just a slight increase; and then bundled services, which is the implementation of license and maintenance revenue combined with those bundled products, was $23.8 million versus $18.4 million a year ago.

As Dave pointed out, our total revenue grew 5% for the quarter and close to 6% if you were to back out deconversion fees of $8.5 million this quarter versus $10.4 million a year ago quarter. Backing out the $8.2 million of Alogent revenue in last year's second quarter, along with the impact of these deconversion fees, our revenue for operations actually grew 8% which is consistent with prior-year revenue growth.

Also, the banking segment revenue grew 8%, but if you back out deconversion fees and Alogent revenues in last year's quarter in the banking segment, revenue in that segment grew 11%. Credit union segment was down 4% this year, however if you back out the deconversion fees revenues are up slightly and this is compared to a very tough comp last year when revenue in the credit union segment was up 28% in last year's quarter.

Year-to-date banking segment revenue is up a little over 10% and backing out the impact of deconversion fees and Alogent was up 2% against, again, a very tough comp last year when the CU segment was up 25% for the first half of FY16. Our growth and operating margins remained relatively level with prior year.

The effective tax rate increased to 33.5% for the quarter from 29.9% last year. This increase is primarily due to the reinstatement of the R&E credit in the second quarter of FY16, which included four quarters of the R&E credit. Because of the change in the tax rate our net income was down 1% to $58.8 million from $59.3 million a year ago, which led to EPS of $0.75 for the quarter.

So look at true operations by backing our the impacts of Alogent, deconversion fees and the change in the tax rate, our net income would have increased 10% and EPS 12% for the quarter. EBITDA for the quarter increased $124 million compared to $116.7 million last year. Included in the total amortization disclosed in the press release is amortization intangibles from acquisitions which was down to $3.6 million this year compared to $4.7 million last year.

Free cash flow, defined as operating cash flow less CapEx and less Cap software, plus proceeds from selling assets was $94.2 million for the first six months, or $1.20 per share compared to $62.1 million or $0.78 per share last year. We continue to provide a solid return to our shareholders through dividends of $21.9 million and stock buybacks of $61.3 million during the quarter. Year to date, we have deployed our capital by investing $70 million back in our company through CapEx and developing products and we've returned $147 million to shareholders through stock buybacks and dividends. Our return on equity for the trailing 12 months has been 26.8%.

A little update on guidance, our revenue growth will continue to be slowed in FY17 as we grow up the headwinds created by the disposition of Alogent and the loss of two large customers during FY16 that we will grow over this year. Remember we lost another large customer in May of last year.

For the March quarter, we have the $7.7 million of revenue that Alogent contributed last year that we will have to go over. We anticipate revenue growth in the March quarter of roughly in line with the 4% to 4.5% we previously provided on the last earnings call. We anticipate the margins will be essentially flat with the same quarter a year ago and the effective tax rate should approximately be the same as last year. We're comfortable with the EPS consistent estimate of $0.72 for the March quarter at this time.

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

(Operator Instructions)

Brett Huff, Stephens Inc.

Good morning, guys, congrats on a next quarter.

Good morning.

Quick question on the banking segment. Obviously really good performance there. Can you just will deconstruct that for us and was there a particular driver or a big win, a go live or anything like that, that drove that particularly strong performance?

Not really, Brett. A couple of things. One, obviously outsourcing continues to be extremely strong. 18% for the quarter in the banking segment, which if you back out the deconversion fees it was still 13% or 14% and that's become a larger part of our business.

Payments in the banking side was up nicely. It was up 8% or 9% for the quarter, just good performance. Just overall strength. And then obviously bundled services was up a little bit in the banking segment and that just comes from the delivery of the final product in a bundled arrangement.

Okay that's helpful. Dave, you mentioned that it sounds like you guys have been obviously working developmental-wise on your cash management or your treasury management solution. You called that out at your analyst day. And it sounds like you are having deep enough conversations with folks that you are already starting to sign some contracts.

Can you give us how those conversations are going number one and what it is that people are finding appealing about your offering? Then number two can, you just give us your thoughts about that market in particular? How you think it grows. What you think the competition looks like.

Sure. We actually highlighted two different solutions at the Analyst Day. We have a cash management solution and a treasury management solution. Our corporate cash management solution designed for midsize businesses, treasury management designed for larger businesses, pretty different as far as functionality and pricing model and all that kind of stuff.

We rolled out the cash management application six months ago or so. I think we have 29 or 30 contracts signed there already on the cash management solution. Again, designed for midsize businesses.

Treasury management is a big deal for us because we started that from scratch. We were trying to figure out how to address the needs of the larger customers out there, not just our core customers but this will be a profit store solution so we can go sell to any of the larger core customers. And what drove us to do that was a recognition in the mid tier banking space, meaning $1 billion to $30 billion space, that there weren't great solutions out there to be had and there is a demand for that type of industry-leading kind of newer technology solutions.

So we started that initiative a couple of years ago. As I mentioned, we just signed our first customer. We won't go live for a few months here but we are getting some very good feedback and a lot of discussions going on around that product today.

So I think there is definitely demand out there. There are several products out there in the treasury management space. Most of them have been around for quite a while and that's where this demand is coming from with banks focusing more intently on developing commercial customer relationships, particularly larger commercial customers. There is a demand for that solution.

Okay. Great. As you guys talk to banks, this is a bigger picture question, as you talk to banks and Trump has been elected and banks are all hoping for some deregulation, what are hearing from them on that front? Kind of what is their temperature and have you seen them change their discussion topics with you or spending priorities with you as a result of that?

The conversations have definitely been interesting lately. I don't know that we've seen any significant changes yet as far as indications on spending. I will point out that just yesterday I got the latest cornerstone advisors note, I forget the title -- what's going on in banking. In that they serve 301 banking credit union executives in December so it's new news, it's post-election. They highlighted exactly what we've been hearing, that the banks in particular and credit unions for that matter perceiving an improving economy in 2017, rising interest rates. Which I think everybody is tuned into.

Regulatory rollbacks are expected. How extreme or how deep those will go, nobody knows. I think that the focus of the conversation right now has been around bankers' desire for just some clarity. There's so much speculation. So much debate about what might happen.

They are looking for some clarity right now. But generally the feeling is pretty good about 2017 and what the impact of the new administration will have on banks in general.

Great. That's what I needed. Thanks guys.

Kartik Mehta, Northcoast Research.

Good morning, Dave and Kevin.

Good morning.

Just maybe an add on to what you were saying about 2017 and banks feeling better. Any thoughts on what that might mean in terms of consolidation or implication to consolidation? Would you anticipate consolidation increasing or do you anticipate kind of staying where we are, the rate where we going right now?

There's two sides to that coin. It's a good question and it's one that we kind of debate a lot with different bankers out there because on the one side if there is a reduction in regulation and interest rates go up it's maybe more fun to be a banker in 2017. And so you may see some bankers continue to stay who maybe were thinking about selling.

The other side of that coin is bank stocks are up overall and this idea that it's a good time to be in banking may drive more acquisition on the flipside of that, just because bank stocks are up. I'm looking to cash in, sell my bank and there are plenty of acquisitive mid-tier banks in particular out there. I don't know that I expect any great change in 2017 on the M&A front, but it is an interesting time right now because of this perception that it will be a better year to be in banking in 2017.

The other interesting part, is depending upon which regulations get in, if it becomes less burdensome for a bank to break the $10 billion threshold, there's a lot of mid-tier banks out there that have held back because they didn't want to cross over the threshold unless they could jump way over it. So depending on the regulation, it could change some of that thought process out there, too.

Kevin, as of now, what kind of impact has consolidation had on your revenue, and if you look over the last maybe 10 years is it about the same or is it less?

It's probably about the same, Kartik. Our banks are buying just like other vendors are buying ours. We have gotten pretty good at winning some mergers, even though we were not the incumbent from the acquirer, which that has helped, especially on some mid-tier deals.

And then also as we've got more and more -- our FIs that are now outsourced when they are acquirers that's a nice uptick in revenue, where if an in-house customer buys another FI, we don't see much impact. It's kind of been net neutral. I mean obviously the two large ones we lost last year that we felt both of those, but all in all it's pretty much just business as usual.

Kartik, let me highlight one thing that Kevin said there. I don't recall that we've talked about this in the past but he referenced winning a merger, we actually call win a merger, but that's been a successful strategy for us.

You have an acquirer who is running somebody else's core acquiring one of our banks and we get into the mix and convince the acquirer to convert to the acquiree's core system, which is a Jack Henry Core System. So that helps us offset some of those potential losses when we can win a merger.

Just one last question, Kevin. Just use of cash. Obviously don't have much debt on the balance sheet. Think in the past you've said acquisitions have been expensive. I don't know where you stand today in terms of acquisition versus buyback versus increasing dividend or just keeping the money on the balance sheet?

Obviously, Kartik, we would love to do an acquisition. We continue to look for them out there. I actually talked to a banker earlier this week, an investment banker and he thinks that there is probably going to be some properties come out this year.

Obviously we'll continue to look for those. We think that's the best way to get return for our shareholders due to the right acquisition. Barring that, we'll continue to look at the stock buybacks when it makes sense and we'll also look to continue increasing dividends, which I'm sure this will be a topic for our board meeting later this week.

Thank you very much. Really appreciate it.

Thanks, Kartik.

Tim Willi, Wells Fargo.

Thanks and good morning and two questions. First, and I apologize if you said this in the comments. Any update around the network management solution? I know it still is probably relatively small part of the story but I know it's had some pretty good traction initially. Just any updates there?

I actually talked about it in my opening comments. We signed 11 in the quarter and I compared that to all of FY16, so we signed almost as many in the quarter as we signed in all of FY16. Definitely some uptick there. And in fact we signed two non-Jack Henry core record customers, so like we've done with some other solutions we start out inside the Jack Henry core base with the intent of delivering what eventually is a ProfitStar solution. Mean we sell to any core customer, so we signed two non-Jack Henry cores in the quarter and nine Jack Henry cores in the quarter.

We have 30 FIs live, so a combination of banks and credit unions and what we're finding is, it's been really interesting. A lot of our customers will sign with part of their network infrastructure and kind of see how it goes and get used to the idea of outsourcing. Then they'll come back and say now we want to add the rest or we want to add another component. So good traction on that front.

Great. Thank you. Just another question. I know there was a question earlier about bank spending and product discussions.

Could you talk about I guess margin profiles within just broad sort of descriptions of your products. I know there is sort of regulatory focused products, security, retail banking stuff you might call growth orientated, spending decisions. If bankers start to reallocate how they spend that IT dollar, is there potentially a margin shift that would occur one way or the other based upon what they start buying over the next couple of years?

I don't know that you'd see much of margin shift. One thing I think they're going to continue to spend more on digital and on mobile which obviously there's some good margins there. One of the byproducts of ease in regulations is our R&D resources can be used to develop products that we can actually sell and make revenue rather than spending all of our time making sure we are compliant with new regulations.

That can potentially drive some margin down the road. It won't immediately, as we have additional products to sell, but I don't know that we'll see much of a shift. Maybe a little as they move into different areas but I just don't see -- I don't think you'll see it in our financials.

Okay. Last one. I apologize if this was made in your opening comments. I caught the tail end of the discussion around payments, but I know you guys do your user group meetings, get a lot of feedback from your various groups you work with.

Could you gauge or sort of just sort of what the response to the payment strategies, treasury management has looked like versus maybe other internal initiatives that were several years in the making. Is this more enthusiastic? Sort of in line with those other successes or is there something here that you sense may be a stronger response than you'd seen with other types of situations like this?

Depending on the product that we roll out, Tim, the buyer for the product we rollout can vary dramatically sometimes right? So the buyer for a treasury management solution is very different for the buyer for HNS for example. So it's a little bit hard to kind of compare and contrast. But specific to treasury management, there is some -- 2017, treasury management has been around forever. I never imagined that I'd be sitting here talking about a newly developed treasury management solution, but there is this, angst or concern out there that most of the solutions have been around for quite a while.

Technology is a little aged which means it's not making it -- the technology they are running today isn't making it easy for the commercial business. And so our bankers in this day of everything, everywhere on every platform, our bankers are looking for solutions that they can put in the hands of their larger commercial customers that will make their life easier, the commercial customers' life easier. And they believe, just knowing what is going on in technology today, there are opportunities to do that will help them solidify those commercial customer relationships. And of course for banks that are in the commercial lending an so on, that's a key part of their strategy.

I think it's being driven around the fact that most of the solutions out there have been around for quite some time and people are just looking for something new and fresh that they can demonstrate to their commercial customers they have the new shiny object, and something that will deliver them a lot more functionality than what they've have had in the past. I will say Tim that there is something about our Banno offering.

For sure.

They're a lot out there. Mobile has been around for a while and so to come out with this new solution and to see the excitement we've seen around that has been very exciting.

The key on that is, that is a single platform. As opposed to just being a mobile banking deliverable, it's a platform. It includes marketing, it includes bill pay, it includes mobile check capture. It's a complete suite of solutions as opposed to 8 point solution that only does mobile banking. That's what's really creating the enthusiasm around Banno.

Sounds great. Thank you so much.

Eric Coldwell, RW Baird.

Nice job this quarter. First on payments revenue growth. Now that we've kind of lapped the client loss of Susquehanna can I start to accelerate again into that high single-digits?

I think the guidance -- first off Susquehanna was a significant player for us across the board. Not strictly on the payments side of our business. They were a major customer for us across the board.

If you specifically talk about payments, they guidance that I've provided the past in somewhere in the 5% range. I think that's still a good number to go for. Susquehanna wasn't that huge a contributor that it's going to all of a sudden bump our payments comp by 2% or something like that. So I still think 5% in that range is a reasonable expectation.

Let me just point out. When we talked about Susquehanna not only were they a good stream of revenue, but we also had a huge early deconversion fee from them in this quarter last year which is why we predicted deconversion fees will be down for the quarter. Susquehanna, their total revenue was less than 1% which is spread across a lot of different revenue lines. For them to just lose and then see a significant uptick in payment, you're not going to see it. It was just kind of overall drag on our revenue.

Okay. Thanks. Secondly, in the credit union segments term fees were down but gross margins are actually up slightly year over year, so I guess what was the driver of that?

There's a couple of things. One, very good cost control on that side and very good -- we got rid of some contractors and did some different things over there. But then also probably one of the biggest things was our card pass through costs were significantly lower this quarter than they were a year ago quarter. And that's the E&B cards that we've passed through which obviously we have very little margin on those, so that was one of the big drivers.

Great. Thanks, guys.

(Operator Instructions)

Glenn Greene, Oppenheimer.

Thanks. Good morning. I missed the beginning of the call so I apologize for some of these questions, but Kevin what did you say on the outlook in terms of revenue and earnings growth?

No change. Basically Glenn, revenues going to grow because of the headwinds of Alogent, it's going to grow 4% to 4.5% for Q3 and we're comfortable with the consensus estimate of $0.72 out there right now.

Okay did you comment for the full year as well?

No.

Are you comfortable with --

I don't see much change for the full year from what we've talked about, Glenn.

Can you just give us an update on where you are for conversions year to date and takeaways that you've done year to date, in both banking and CU?

I don't know that I have end outs for the quarter. I know that we did seven year to date, I don't think I have that number handy. It's in my office. 12 year to date.

To out?

Yes.

And what about competitively on the takeaways?

6 in the quarter 18, 19 year to date competitive takeaways.

Okay on the deconversions, I guess it was pretty small in the quarter for the term fees, but anything we should be thinking about or that you're aware of going forward in upcoming quarters? Any specific headwinds?

Biggest headwind would still be Alogent revenue that we had in the second half of last year that is not there this year. Then also the loss of CIT in May of last year. We lost that revenue and also the deconversion fees from that, that was in Q4.

But nothing new beyond those two?

No.

Okay. Great. Thanks guys.

There are no further questions. I would like to call back over to Kevin Williams for any closing remarks.

Thanks Michelle. First of all like to mentioned that our 2017 analyst investor day event will be held on May 8 at the Westin property at the Denver, Colorado airport similar to what we did last year, which makes it very easy for everyone to fly in and out. Presentations will be given by all of the executives, our division presidents. Those will be on Monday afternoon like we did last year, followed by a reception and a mini tech fair to highlight some of our products.

Also in attendance Jack Prim, our Executive Chairman of the Board, and potentially a couple of the board members will also be there, so they will be there to visit with you. If you would like to attend, email myself or Vance Sherard and we will get a link to the registration site sent to you.

I want to thank you for joining us today to review our second-quarter FY17 results. We're 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 shareholders. I want to thank you again for joining us today and Michelle will you please provide the replay number.

Thank you ladies and gentlemen, for a replay of today's call you may dial 1-800-585-8367. Local 404-537-3406, conference ID number 522. I apologise, conference ID number 58359189. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.