Jack Henry & Associates Inc (JKHY) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Jack Henry & Associates Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference may be recorded. I would like to introduce your host for today's conference, Mr. Kevin Williams, Chief Financial Officer. Sir, please go ahead.

Thank you, Mitchell. Good morning. Thank you for joining us for the Jack Henry & Associates Third Quarter's Fiscal 2017 Earnings Call. I'm Kevin Williams, CFO and Treasurer; and with me today on the call is David Foss, our President and CEO.

The agenda for the call this morning is typical. In just few minutes, I'll turn the call over to Dave to provide some of his thoughts about the state of the business, the performance of the quarter. Then I'll provide some additional thoughts and comments regarding the press release we put out yesterday after market closed. I'll update our guidance for the remainder of FY '17, and then we'll open the lineup for Q&A.

First of all, I need to remind you, the 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 statements 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 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're 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 third fiscal quarter.

As we've discussed previously, we divested our Alogent division at the end of last year, so the comparable quarter includes the headwind for revenue growth. Total revenue growth -- total revenue increased 6% for the quarter and increased 7% percent, excluding the impact of deconversion fees from both quarters and excluding Alogent revenue from the prior year quarter. Organic revenue growth was also 6% for the quarter.

All 3 key areas of our payments business were up this quarter, which led to a 10% increase in revenue, and a 7% increase excluding the impact of deconversion fees. Our outsourcing and cloud revenue growth for the quarter was 16%, and if you exclude the impact of deconversion fees from both quarters, we saw a very solid 11% increase.

All of our sales teams had an outstanding third quarter, finishing at a combined 119% of quota. The core teams closed 13 new core deals. And then when we talk about new core deals, there're always competitive takeaways. And as we announced last week, the Symitar team has already set an all-time record for the largest number of new $1 billion plus credit union clients signed in a single year with 6, and we still have a couple of months to go in the year. We also saw a solid success with several of our key strategic solutions like HNS, Banno, CECL, treasury management and our new enterprise risk mitigation solution.

As you should all know, we'll be hosting our annual analyst conference in Denver on Monday of next week. Kevin and I will be your hosts, along with all 3 of the brand presidents and several of our general managers. Additionally, Jack and a couple of our board members will be joining us for the day. We hope to see you in Denver.

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

Thanks, Dave. Our 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: implementation services was $12.4 million versus $15.9 million or down 22% for the quarter, basically due to timing, and also remember the implementation revenue, that majority of it is now included in the bundled revenue line.

Our electronic payments was $133 million versus $121.4 million, as Dave mentioned, up 10% for the quarter or 7% net of deconversion fees. OutLink was up nicely to $88.6 million from $76.5 million. In-house maintenance was essentially flat at $79.8 million compared to $80.6 million. And our bundled services, which again is implementation license and maintenance revenue combined for bundled services related to the multi-element contract, was $29 million compared to $25.3 million, so up a little bit.

Our total revenue grew 6% for the quarter. Backing out the $7.7 million of Alogent revenue in last year's third quarter, along with the impact of the deconversion fees in both periods of $11.9 million this year and $5.2 million last year, our revenue from operations grew 7%, which is consistent with prior year revenue growth.

Our year-to-date revenue is up 6% -- sorry. Our gross margins were relatively level with the prior year, and gross profit grew 6% in line with revenue growth. However, if you back out the impacts of Alogent in the third quarter last year and deconversion fees in both quarters, our gross profit would've grown roughly 4.5%, and if deconversion fees would've remained just level with last year instead of going up, our gross profit would've been -- would've grown at approximately 8%. Our operating margin remained relatively level with the prior year and making the same adjustment for Alogent deconversion fees has about the same impact on operating income growth as it did on gross profit.

The effective tax rate remained relatively flat for the quarter compared to last year, and up just slightly from the year-ago date. Net income is up 11% to $60 million from $53.9 million a year ago, which led to EPS of $0.77 for the quarter, up from $0.68 a year ago. Without the deconversion fee impact increase from a year ago, our EPS would have been relatively in line with consensus assessments.

Our EBITDA for the quarter increased to $124 million compared to $112 million last year. Included in this whole amortization disclosed in the press release is the amortization of intangibles from acquisitions, which is down to $3.6 million this quarter compared to $4.7 million a year-ago quarter.

Our free cash flow, defined as operating cash flow less CapEx and cap software plus proceeds from some sale of assets, was $95.4 million for the first 9 months or $1.22 per share compared to $81.7 million or $1.03 per share last year. We continue to provide a solid return to shareholders through dividends of $22.1 million during the quarter. Year-to-date, we deployed our capital by investing $106.7 million back into our company through CapEx and developing products and returned $171.5 million to shareholders through stock buybacks and dividends. Our return on equity for the trailing 12 months is 26.4%.

Guidance for Q4. Our revenue growth will continue to be slowed in FY '17, as we grow over the headwinds created by the disposition of Alogent, also due to an anticipated significant decrease in deconversion fees for our fourth quarter compared to a year ago.

For the June quarter, we have the $6.1 million of revenue that Alogent contributed last year that we have to grow over. And we anticipate a decline of approximately $8.5 million in deconversion fees from the $15 million we saw in the fourth quarter a year ago.

Therefore, we anticipate reported revenue growth to be roughly 1% to 2% compared to prior year actual, which adjusts for Alogent and the decline in deconversion fees will be in line with previous guidance at approximately 5%. We anticipate our margins will remain solid in the fourth quarter with possibly some slight improvement, and the effective tax rate will increase slightly from last year to approximately 34%.

The EPS estimate currently out there, consensus assessment is $0.85 for the June quarter. Due to the timing of deconversion fees in the third quarter, we think that's probably high. We think that probably needs to be trimmed by a couple of pennies down to $0.83. However, that will still make as at $3.14 for the fiscal year, which is still higher than the current consensus estimate and higher than original estimates going into FY '17.

Also, just a reminder, last year's fourth quarter included the gain from the sale of Alogent. Alogent was caused a $0.22 impact on EPS in last year's fourth quarter.

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

(Operator Instructions) Our first question comes from the line of Brett Huff with Stephens.

Two quick questions. One, Dave, you went through some of the payments numbers. Can you break that down any more? I think you guys -- did you, sometimes give us like Bill Pay versus some of the other different sub lines there? Any detail there?

I don't know that I've gone into a whole lot more detail in the past. But both -- the 3 areas in our payments business, our Bill Pay, our cards business, and then our ACH origination and [processing] capture business. ACH origination and [multi-process capture] being the same business. So both cards and Bill Pay were up around 6% to 7%. And the ACH business was up closer to 13% as far as revenue for the quarter.

And how is the competitive dynamic in that card business? I know sometimes on the debit side things can get kind of competitive depending on which competitor is in there. Have a lot of those renewals and the price compression from that kind of come and gone? Or is that the consistent thing? What should we expect on that front?

Yes, it's always a topic. But I don't think the pressure is nearly as intense as it was a year or 2 ago when it comes renewals on the card side. But it's always a topic. It's always there. It's something that all of us in that space deal with every time a renewal comes up.

And then my other question was on the commercial cash -- treasury management business. That sounds like an exciting piece of software you've got going. I think last call, you gave us a sort of year-to-date or maybe since-inception numbers, and I wondered if you could just go through those, and how many more we maybe have knocked down this quarter.

Well, I think what I talked about in more detail last time was the fact that we were going into beta in March with that product, and that's been a long project. We had originally targeted March of this year for beta. We met that time line. So we delivered that to beta in March. The bank, I believe, is going live. It's probably today or tomorrow. The first beta bank. So I don't know, but I have the exact count in front of me as far as how many we signed in the quarter. I can maybe look while we move on, Brett. And at the worst case, I'll have it for you in Monday at the analyst conference. But we've signed probably 8 or 10 so far treasury management -- new treasury management customers.

Yes. For those of you that will be at the Analyst Day on Monday, treasury services, that new product, is one of the products that will be at the mini tech fair Monday evening. So you'll have a chance -- an opportunity to see it. That, along with our enterprise risk mitigation solution, which is one where we partner with SAS, our Banno digital offering, our Biller Direct offering, and our ARC predictive analytics, will all be there with product specialists to show those products off for those of you that are coming to the Analyst Day. So just another enticement to get you to come to Denver.

And then last question for me. Just Dave, on unseating some of the incumbents in that treasury management, I think that's a difficult sale to sometimes make. What is that -- what are you hearing from banks that are sort of encouraging you to pursue this so aggressively?

Yes. The reason that we pursued it in the first place, and I said to some folks, I would never imagine -- we started this project -- we defined find the project in late 2015, calendar 2015. I said at that time, I never imagined in 2015 that we'd be talking treasury management as a great big opportunity. But what we were hearing, particularly from our mid-tier banking customers, and now this interest has grown, was that most of the treasury management solutions out there had gotten pretty stale. And they felt like there was a big need, a demand for a new fresh new solution taking advantage of newer technologies. So that's why we went down this path in the first place. And the farther we've gone down, the more it's been validated in talking to customers. So it's not every bank or credit union that's going to sign for a treasury management solution. Those are big solutions. You have to have larger commercial customers to do it. But we think among our larger banks, in particular, and now among our larger credit unions, there is a demand out there. And we think that we have a good opportunity. And I'll remind you that this isn't restricted to our core base. We developed this as a ProfitStars solution that we can sell to any core customers, not depending on a Jack Henry core solution.

And the nice thing is we had the talent in-house to develop this.

Yes. Well, the leadership in-house.

Yes.

And our next question comes from the line of Kartik Mehta with Northcoast Research.

Dave, I wanted to get your thoughts on just kind of the spending environment for banks and credit unions, so far. And if there's a change in terms of maybe if banks are spending more or credit unions are spending more.

I think the environment right now, the demand environment is strong. So we just posted 119% of quota for Q3. That's not an easy number for the sales team to hit. So demand is strong. Spending is solid. There's a lot of concern out there among our customers waiting to see what truly comes out of the new administration that's going to impact them. But generally, there seems to be optimism. The spending environment is generally pretty good.

Well the other thing I would say, Kartik, is it amazed me the number of core systems evaluation that continue to go on, like the press release we recently put out that Dave referred to, the 6, billion-plus sized credit unions we have signed. We've had very good success on the banking side. And there's just a lot of activity out there going on, looking at core systems evaluations, which we are winning our fair share of those.

So, Dave and Kevin, when you said that demand is strong, were you referring to core systems, or were you referring to other ancillary products where you're seeing decent amount of demand or maybe both?

All of the above, yes. On the core side, we have a lot of core evaluations going. We're engaged in a lot of core evaluations right now. As I said, we signed 13 in the quarter, which is a very good number. So lots of activity on the core side, but also the add-on complementary products both in the ProfitStars group, meaning outside the Jack Henry base, and inside the Jack Henry base. So just all the way across the board, things are solid right now.

Yes. And just to make sure, that 13 we signed in the third quarter did not clean out the pipeline. Fourth quarter started out very strong as well.

And, Kevin, I apologize for asking you to repeat this. I just didn't write it down quick enough. What you said far -- as term fees were concerned, fourth quarter this year versus fourth quarter last year. Could you just repeat that for me?

Yes. Last year, fourth quarter we had right at $15 million in deconversion fees. And we -- based on what we see today, we anticipate that's going to be down about $8.5 million.

And so for the year, how much would you have had this year compared to last year? And do you think -- what would you think is a normal level?

Well, that's a good question, Kartik. I'm not sure in today's environment what normal would be. But last year, we totaled deconversion fees for the year, for the entire year, was about $38 million. And we're probably going to end up this year somewhere around $37 million or $38 million.

So about the same?

About the same.

And our next question comes from the line of Glenn Greene with Oppenheimer.

I guess, the first one, Dave, can we just go back to the conversation on the core deals, the signings in the quarter, the 13. Is there any way to sort of frame that in a couple of levels? The average size of the deals, or the banks that are doing the core deals? And what's a normal quarter for a number of core deals?

A normal quarter, may be 10 -- somewhere around 10. I don't have the metrics on exactly what, the sizes of everybody who signed. But on the credit union side, as we pointed out, we've signed the, a lot larger deals over $1 billion, have been the trend here this year. And I would say the same is true on the banking side. I -- we've been signing larger banks on the banking side as well. Really, really good success there. So I don't have the exact breakdown, but I would say the trend is to larger banks. We still sign mid-size banks, but the trend has been to larger banks and definitely to larger credit unions.

Yes. That's kind of what I was getting at. And you talked about the quota attainment, that 119%. Was that for the quarter, or was that year-to-date? And then more importantly for me is, is there any way to sort of frame what the sales growth was? We obviously don't know what your quotas are.

So year-over-year for the comparable quarter last year. Is that what you're asking?

Actually, more year-to-date what your bookings would be by the 3 brands.

Year-to-date. I don't have the breakdown by the brands. But I would say, they're up probably 6%. I mean, they're 7 %. Yes, Kevin is thinking 7% year-over-year. Year-to-date, year-over-year, the combined sales group probably up around 7%.

So, Kevin, all else equal, is that a reasonable proxy to think about fiscal '18? Obviously, it's early. But should we still be thinking about that 6% to 7% kind of revenue growth going into '18 all else equal and you don't have the Alogent drag?

Yes, I -- that's probably right in line, Glenn. I mean, I'm not really ready to give firm guidance, because obviously we just started the budget process. I don't see any reason why we wouldn't continue growing at that same pace.

And then just finally, you talked about and highlighted the big credit union deals on the Symitar side. But just broadly, can you kind of update us on what you're seeing competitively on the CU side? I mean, one of your peers always talks pretty optimistically. You do as well. But maybe you could sort of frame for us sort of where you are in sort of net takeaway or loss perspective year-to-date?

Year-to-date, I don't know that I have the net takeaway number year-to-date. I can -- I was going to point this out on Monday. I'll just mention it now. In the past 5 years, just to give you a feel, we have signed well over 100 new credit unions, meaning to competitive replacements, well over 100 on the Episys platform. Our major competitor, or who you guys always reference, has signed 6 new -- brand-new to them customers. So I feel really good about where we are as far as competitive takeaways. And I can have the year-to-date numbers when we get together in Monday. But I just don't happen to have those with me.

And I can count on one hand the number we've lost. On my fingers.

(Operator Instructions) Our next question comes from the line of Dave Koning with Baird.

In my first question, I guess, the term fees have been elevated, but core revenue growth really hasn't changed at all. So is there some level of revenue headwind it would seem from having such a high level of term fees. But is it just that the sales activity has been stronger-than-normal to basically offset those losses, and then you get back to that pretty normalized 7% revenue growth. Is that kind of the formula?

Yes, that's pretty much it, Dave. I mean, sales continued to be strong, and we've continued to install a lot of new products and services. The deconversion fee, we have no control over those. I mean, that's typically when a bank or credit union gets acquired. They're [indiscernible]. We have no control over the timing of that. I mean, the revenue gets recognized based on when they actually deconvert, and we get the check from them is when we have to recognize it. So it's almost a cash basis recognition. So it is what it is. But we do have some visibility going into a quarter. This quarter was a little higher than what we anticipated, which is why we beat consensus assessment by $0.05. But going in next quarter, we don't think that's going to be the case. We think it's going to be down significantly. And based on some of the activity we're seeing, we think that deconversion fees could actually be down in FY '18 at this point. But again, a lot of that depends on M&A activity, depends on the economy. It's just something that's kind of out of our control, and the best we can do is guess at it and try to guide you all the best we can.

Yes, got you. And I guess, the other thing -- most of you and your competitors have been talking about how the new -- the better banking environment or the perceived better banking environment. It's not helping so much this year, because the banks have to kind of react and think first before they make decisions on spending more. But do you think that's actually showing up in sales? Because it seems like you and all your competitors have pretty good sales quarters and it just takes a little while for the sales pipeline to kind of hit the revenue. So are you -- do you think you're seeing the early evidence of it hitting sales already?

Well, as I said earlier, the demand environment today is strong. So there is optimism among our customers both on the banking side and the credit union side. And so I think if I understood your question, I think the answer to your question is yes.

I would say this, David. We've had a pretty strong sales here the entire year. So I don't know that we've seen any huge surge in demand in this quarter compared to Q2 or Q1. I think it continues to be strong. I think the optimism for the bankers based on what they're hearing coming out of the government, and they're trying to ease on regulation, that sort of thing, I think that's all increasing their positive attitudes and optimism. But I don't think we've seen any huge surge. It's just things continue to be solid.

To Kevin's point, you may recall on the Q1 earnings call, I pointed out that, that was a record sales quarter, record Q1 sales quarter for us. And so Q1 is normally a good quarter, but it's not normally huge. But as compared to any Q1 we'd ever had, that was the best sales quarter, the best Q1 we've ever had. And the comps included Alogent. We didn't net out Alogent out of the comps. So it was really a -- it was a very good start of the year. And as Kevin points out, that's what we've been experiencing so far this fiscal year.

And that was following a record Q4.

Yes.

And I'm showing no further questions at this time, and I would like to turn the conference back over to Mr. Kevin Williams for any further remarks.

Thanks, Michelle. As Dave mentioned, I'll repeat it again. I would like to remind everyone that our 2017 Analysts Investor Day is being held next Monday, May 8th at the Westin property at the Denver, Colorado airport. We're doing it there to make it is easy for everyone to fly in and out just like last year. As Dave mentioned, there will be updates by both him and myself. Mark Forbis, our CTO, all 3 of our brand presidents, will be there to present. Our general manager of our payments group will be there. And then all of our directors of sales from all 3 brands, and Steve Tomson, our GM of Sales and Marketing will be there also to give presentations and updates, which will be followed by a mini tech fair with the products that I mentioned earlier. You can still register. It's not too late. You can email me or Vance Sherard, and we'll get you the link to the registration site.

So as a wrap up, I want to thank you all for joining us today to review our third quarter fiscal 2017 results. We're 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 you our shareholders.

With that, I want to thank you again for joining us. And Michelle, would you please provide the replay number?

Ladies and gentlemen, your replay for this conference can be dialed at 800-585-836, and refer to conference 8830220. Ladies and gentlemen, that does conclude today's program, and you may all disconnect. Everyone, have a great day.