Jack Henry & Associates, Inc.
Q1 2017 Earnings Call Transcript

Published: 8 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Jack Henry & Associates First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. 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.

[Kevin D. Williams:]

Thank you, Abigail. Good morning. Thank you for joining us today for the Jack Henry & Associates first quarter fiscal year 2017 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 the call over to Dave. 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 closed, and then I'll update our guidance for FY 2017 and for Q2. And then, we will open the line up for Q&A. 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 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'll now turn the call over to Dave.

[David B. Foss:]

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 first fiscal quarter. I'm particularly pleased with the results for the quarter because the prior-year quarter included some fairly significant headwinds for us to grow over. Our Q1 in FY 2016 included both Alogent, which we sold last quarter, and a full quarter revenue associated with Susquehanna as we've discussed on prior calls. Despite these headwinds, total revenue increased 7% for the quarter and increased 6% excluding the impact of deconversion 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, and we posted a 7% increase in payments revenue or a 6% increase, excluding deconversion fees. Our outsourcing and cloud revenue growth for the quarter was 19%. And if you exclude the impact of deconversion fees from both quarters, we saw a very solid 14% increase. Despite an extremely strong sales quarter in Q4 of FY 2016, 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 have set a sales bookings record but because they did it without the benefit of any Alogent sales in this quarter. Additionally, all three of our brands continue 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 Symitar and JHA Banking brands. Between the two conferences, we hosted more than 44 prospect institutions represented by almost 100 people. I was overwhelmed of both conferences 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.

[Kevin D. Williams:]

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 prior year

[Operator:]

Thank you. Our first question comes from Brett Huff with Stephens. Your line is open.

[Brett Huff:]

Good morning, guys.

[Kevin D. Williams:]

Good morning, Brett.

[Brett Huff:]

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

[Kevin D. Williams:]

I think Dave mentioned this on his comments. If you back out deconversion 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 13% back out deconversion fees, Brett.

[Brett Huff:]

Okay. And then remind us again, you called out one more one-time item. I think the large payment processor year-over-year growth. What was that sort of one-time item again that we need to make sure we're good within December? Can you just reiterate that?

[David B. Foss:]

Yes, that was Susquehanna, and there was a onetime fee when they deconverted in November of $5 million, which is why I explained there are deconversion fees, but December quarter is going to down $3 million to $5 million from where it was last year.

[Brett Huff:]

Okay. And then 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 those bankers, any change in tone of what they're looking for? Are they still looking for compliance or cost reduction or revenue enhancement and kind of what are the top things on their list these days?

[David B. Foss:]

Yeah. And I've talked to most of them I would say at those two conferences. I don't know that I got to every one of them, but generally, it's around improving functionality in the core system, certainly focused on compliance and efficiency. And one of the new solutions we released last year that we've talked about is (11

[Brett Huff:]

Okay. And then last question from me. Any update on the new digital banking products that are rolling out that I think were associated with Banno or some of that functionality, kind of how was that going and what's the feedback so far?

[David B. Foss:]

Yeah. Feedback has been solid. We've signed, I think not in the quarter but in the past 12 months, we've signed around 90 customers, and 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 webhosting and the entire customer experience, and customer reaction is very solid to that solution.

[Brett Huff:]

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

[David B. Foss:]

Yeah. Thanks.

[Operator:]

Thank you. Our next question comes from Peter Heckmann with Avondale. Your line is open.

[Peter J. Heckmann:]

Good morning, gentlemen.

[David B. Foss:]

Good morning, Pete.

[Kevin D. Williams:]

Good morning.

[Peter J. Heckmann:]

Great. So, you've had two consecutive quarters where term fees were much higher, and that's seeing a whole lot of activity in the marketplace as regards M&A. Would you characterize that as just kind of an unlucky coincidence?

[Kevin D. Williams:]

Well, I would say, Pete, that we knew going into this quarter, like I said in my opening comments, the deconversion this quarter were just slightly higher. We knew of some that were going to happen this quarter. There were a couple kind of surprises that happen as the payments came in, the paperwork came in that we weren't really anticipating. But like I said, we got pretty good visibility next quarter. Obviously, you can always be surprised, but we don't see anything coming up the next quarter even for the (12

[Peter J. Heckmann:]

Yeah. Sure enough. Sure enough. So, 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?

[David B. Foss:]

Yeah. This is Dave, Pete. I'd say that the story right now on M&A is pretty much the same story that we've been experiencing for the past 12 months. We are always looking. There are always fields 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; and then, B, valuations are still difficult to get something that really fits as far as valuation. So, there are deals that are out there, and we're looking all the time. Just haven't found one recently that fit the profile that we're looking for.

[Peter J. Heckmann:]

Got it. Got it. Okay. I'll get back in the queue. Thanks.

[Operator:]

Thank you. Our next question comes from Dave Koning with Baird. Your line is open.

[David J. Koning:]

Yeah. Hey, guys. Thanks. Yeah. Hi. I guess, my first question just the payments business on an ex-term fee basis, most of the last year kind of was around 4% growth. In Q1, it's at 6% now. Is there anything changing on an underlying basis that's just 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.

[David B. Foss:]

No. And, Dave, it's Dave. No, no anniversary as far as Susquehanna is concerned. I think your kind of high-level assessment is correct. The payments business is performing well, performing better frankly than I had expected, and 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.

[David J. Koning:]

And is that a function of market share wins or do you think in part that's just a function of – I don't know – a pickup in economic activity or just banks really pushing more for electronic like, I guess, how do you, I guess, parse that?

[David B. Foss:]

Yeah, I think it's market share wins, and I don't know if it's banks pushing more or us helping them push more. So, we track pretty closely subscriber adoption, for example, in bill pay. And same-store sales growth is a key metric for us, and same-store sales growth is up this year. And we are active in helping our bank and credit union clients with their adoption within – so, customers that were already signed with us, we help them with adoption for their customers. So, I think there is an uptake across the board, not only in competitive signings but in us helping our customers get to more of their consumers with our payment solutions.

[Kevin D. Williams:]

Yeah, Dave. I think we mentioned on the last call we continue to have a very solid pipeline in all three of those lines. (16

[David J. Koning:]

Okay. Got you. Thank you. And then I guess secondly, just 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. I guess, first of all, am I right about that and then, full year, is it still 4% reported and then with maybe mild margin expansion?

[Kevin D. Williams:]

Yes. That's exactly what I said.

[David J. Koning:]

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

[Kevin D. Williams:]

I feel good about it, Dave. And the reason is because most of our stock-based compensation benefit happened in Q1, that's when the long-term comp restricted stock vests for the executives and GMs, in that (18

[David J. Koning:]

Got you. All right. Great. Well, thank you. Nice job.

[Kevin D. Williams:]

Yeah. Thanks, Dave.

[Operator:]

Thank you. Our next question comes from Glenn Greene with Oppenheimer. Your line is open.

[Glenn Greene:]

Thanks. Good morning. Hey, Kevin. I want to go back to the fiscal 2017 guide also. So, back in August, you called out two major headwinds was lower deconversion fees, which I think was going to be a $0.10 drag, and the tax rate sort of grow over, which I think was a $0.05 drag. That obviously drove the upside of the quarter, this quarter, sort of the $0.08 that you sort of called out, meaning the deconversion fees, I'm pretty sure, and I think you acknowledged, came in higher than you would have thought in the quarter, and then you got the benefit from the tax rate in the quarter. So how should we be thinking about the flow-through of this quarter's upside into the full-year guide?

[Kevin D. Williams:]

Yeah. I mean, obviously, the $0.03 tax impact for this quarter is going to take the whole year guidance up, Glenn. I mean, there are a couple of deconversion fees that came in this quarter that we kind of anticipated next quarter. So, we're still going to have an overall decrease for the year in deconversion 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 to the year.

[Glenn Greene:]

So, all else equal, we should probably looking at $3.10 in EPS kind of thing?

[Kevin D. Williams:]

That is probably about right.

[Glenn Greene:]

And then on the deconversion fees, it certainly sounded like it was somewhat unexpected, and it seemed like a pretty big deconversion fee. So, what happened, and how should we be thinking about when that potential revenue drag is going to hit you?

[David B. Foss:]

Actually, Glenn, the Q1 deconversion fees wasn't that much of a surprise, and I tried to get that across (20

[Glenn Greene:]

Okay. So, in your mind – (21

[David B. Foss:]

No, absolutely not.

[Glenn Greene:]

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

[David B. Foss:]

No.

[Glenn Greene:]

And the credit union business, which had just been humming along and all of a sudden slowed to like 3% growth, anything that explains that, and kind of (21

[Kevin D. Williams:]

Well, a couple of things there, Glenn. I mean, 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. I mean, everything kind of 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, just again due to timing of billing and revenue recognition. License and hardware, both down slightly and that's again just due to timing of delivery. So, there is nothing unusual in credit unions other than a very tough comp a year ago. Banking, everything is continuing to track along, especially the outsourcing, which is relevant to the in and out business that we continue to talk about and continue to see a very good momentum there as we see that shift of our existing (22

[Glenn Greene:]

All right. Great. Thanks a lot.

[Kevin D. Williams:]

Thanks, Glenn.

[Operator:]

Thank you. Our next question comes from David Togut with Evercore ISI. Your line is open.

[Rayna Kumar:]

Good morning. This is Rayna Kumar for David Togut. It's good to see the capitalized software down for the quarter. Could you just talk about your expectations for FY 2017 as a whole? And separately, could you just talk about any major product investments you're making currently?

[David B. Foss:]

So, I talked about this a little bit on the last call that we expect that CapEx is down a little bit, the 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 Episys technology development that we've talked about on several calls in the past that goes on through 2018 but is being rolled out in phases. So, 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 crime solution that we've been working on that we have talked about previously and then other ongoing projects with our payments business, for example, and with Banno that was already asked about today. So, a number of large development projects that are ongoing. But with that said, as I said earlier, I expect cap software to kind of run at the same rate that you are seeing now.

[Kevin D. Williams:]

And I'll also say we rolled a lot of products out in the June quarter and into live production (24

[Rayna Kumar:]

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

[David B. Foss:]

Sure. I think I said the expectation on the last call that we'd be in the 5% to 6% range. And if you look at this quarter, excluding deconversions, we are 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, all three lines of the payments business are performing well right now.

[Rayna Kumar:]

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 onetime items or anything in the cash flow that we should be aware of maybe in working capital?

[David B. Foss:]

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

[Rayna Kumar:]

Got it. Okay. And one final question from me. Could you just discuss the competitive environment in the large credit union space, and specifically, are you seeing any increased competition from Fiserv's DNA product?

[David B. Foss:]

I would describe the competitive environment as intense as it has been in the large credit union space, intense as it has been for quite some time. No, we are not seeing any increased level of competition or reason to be concerned when it comes to any particular core provider. We're all competing.

[Kevin D. Williams:]

And like Dave said, we have a large number of core prospects at our Symitar Educational Conference. I believe there was 28 (26

[David B. Foss:]

28 and half of those were over $1 billion in assets. Let me point out too that in the last fiscal year, so 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. So, 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.

[Rayna Kumar:]

Thank you.

[Operator:]

Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open.

[Kartik Mehta:]

Hey. Good morning, Dave and Kevin. Dave, you talked a little bit about how sales have been fairly strong, and I know, Kevin, you don't give backlog numbers anymore, but if you look at the visibility based on what you have already in the pipeline, how far can you see out? I mean, 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?

[David B. Foss:]

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. So, 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 timeline is, but it's a long-term project. Whereas you sign a bill pay customer today, they may convert in 60 days. So, it really depends on the product line that you're talking about, and 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.

[Kevin D. Williams:]

Yeah. I guess, Kartik, what I'd say is, with our recurring revenue 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, so we know the conversion timelines for those and what that benefit's going to do to revenue. So, we got very good visibility for at least 12 months to 18 months out, barring any large M&A activity where we lose another customer just like we did last year, but barring that, we got extremely good visibility, probably 95% plus of what we're going to have for the next 12 to 18 months.

[Kartik Mehta:]

Hey, Kevin. You and David 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?

[David B. Foss:]

I don't know that I would characterize it as any significant increase. There are a lot of deals in flight (29

[Kevin D. Williams:]

Yeah. I would say this, the good indicator is having record attendance at your education conferences, record number of prospects, and we even had a record number of CEOs at our CEO forum, at our Banking Education Conference. So, those are all really good indications. And I would say that's surprising, because there was a large number of the CEOs actually stuck around this year and went to the technology fair to look at some of our products. So, to me, those are all very good indications that we're going to continue to do well.

[Kartik Mehta:]

And then just last question, just 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, and maybe the multiples are too high. From a use of cash, is it, Kevin, going to be just buying back shares like you have, or are there other things you're thinking about?

[Kevin D. Williams:]

Yeah. I mean, obviously, we're going to continue to look at M&A activity (30

[Kartik Mehta:]

Thank you very much.

[Kevin D. Williams:]

Sure.

[Operator:]

Thank you. And we have a follow-up from the line of David Koning with Baird. Your line is open.

[David J. Koning:]

Yeah. Hey, guys. Thanks for taking my second one. So, 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 last year was $56 million. That's also going to be down this year?

[Kevin D. Williams:]

I mean, as of now, we think it is, Dave. (31

[David J. Koning:]

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 10 years in a row, I think it was above. It feels like given CapEx going down despite the overall growth of your business, it just seems like you might revert and kind of catch-up this year, not only be above earnings but kind of 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?

[Kevin D. Williams:]

I don't know how (32

[David J. Koning:]

Okay. Great. Well, thank you for that.

[Kevin D. Williams:]

Thanks, Dave.

[Operator:]

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

[Kevin D. Williams:]

Thank you. Again, I want to thank you all for joining us today to review our first quarter fiscal 2017 results. We're very pleased with 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. And, Abigail, will you please provide the replay number?

[Operator:]

Ladies and gentlemen, this conference will be available for replay after 11