Good day, ladies and gentlemen, and welcome to the Jack Henry & Associates Fourth Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise. But later we will be holding a question-and-answer session after the prepared remarks and instructions will follow at that time. [Operator Instructions]. As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Kevin Williams. You have the floor, sir.

Thank you. Good morning. Thank you for joining us today for the Jack Henry & Associates fourth quarter fiscal year-end 2016 earnings call. I'm Kevin Williams, CFO. On the call with me today is Jack Prim, our Executive Chairman of the Board; and David Foss, our CEO. The agenda for the call this morning, I will turn the call over shortly to Jack, so he can make some opening comments. Then Dave will provide some of his thoughts about the business and performance of the quarter; and then I will provide some additional thoughts and comments regarding the press release we put out yesterday after the market close, provide some initial guidance for FY 2017, and then we will open the lines for Q&A. I need to remind you that remarks or responses to questions concerning future expectations, events, objectives, strategies, trends, or results constitute forward-looking statements or deal with expectations about the future. Like any statement about the future, these are subject to a number of factors, which could cause actual results or events to differ materially from those which we anticipate due to a number of risks and uncertainties and the company undertakes no obligation to update or revise these statements. For a summary of these Risk Factors and additional information, please refer to yesterday's press release and the sections in our 10-K entitled Risk Factors and forward-looking statements. With that, I'll now turn the call over to Jack.

Thanks, Kevin, good morning. I'm happy to join you this morning following another strong quarterly performance, probably worse on one-time events in the quarter all contributed positively to our performance. And Dave and Kevin will discuss in more detail after netting out all the benefits from these one-time events, our quarterly operating performance would have still been very strong. Our previously announced CEO transition took place as planned on July 1. Transition was very smooth. The related organizational changes were made and well received by employees. This acceptance was helped by Dave's 17-year tenure in the organization as it helped employee's rollout, there are unlikely to be major directional changes, our shareholders should have similar expectations. Congratulations to Dave on his new role and I will now turn it over to him for some additional details on the quarter.

Thank you, Jack. Good morning everyone. We're pleased to report another strong operating quarter with record revenue and operating income and I would like to begin today by thanking our associates for all the hard work that went into producing those results for the quarter and for the fiscal year. The fourth quarter provided a nice ending to a good overall performance for the year. Revenue increased 10% for the quarter and increased 7% excluding the impact of deconversion fees from both quarters. Organic revenue growth was also 10% for the quarter because of the impact of our acquisition of Bayside on July 1 last year was not material to our numbers. As discussed on the last call, our payments business is continuing to grow over some significant customer losses in late FY 2015 and early FY 2016, but despite that pressure, we posted an 8% increase in payments revenue and a 5% increase excluding deconversion fees. Our outsourcing and cloud revenue growth for the quarter was 21% and if you exclude the impact of deconversion fees from both quarters, we saw a very solid 14% increase. Although we continue to have a number of large development projects ongoing, we have released several new products in the past few months. So you will know that the capitalized software declined during this quarter over our previous run rate on a sequential basis. Although, I don't expect a continued decline in this area, I do believe that the rate will normalize going forward. As previously announced, we completed the sale of our Alogent Deposit Automation software business to Battery Ventures at the end of May. Obviously this transaction creates some noise in our numbers, so Kevin will provide more detail on the impacts of this transaction in his comments. As a reminder,…

Thanks, Dave. Our support and services line of revenue which represents 96% of our total revenue for the fourth quarter and fiscal year-end continues to drive our revenue growth. To break our support and services down a little bit implementation of service revenue of $14.7 million versus $17.9 million or down 18% for the quarter. As Dave said, electronic payments of $131.5 million versus $121.4 million increased 8% for the quarter. Our OutLink outsourcing division grew to $84.1 million from $69.7 million or 21% increase. Our in-house maintenance increased to $81.4 million versus $76.2 million or 7% increase, and our bundled services grew to $41.7 million from $33.4 million or 25% increase. Our total revenue grew 10% for the quarter and grew 7% if you back out the total deconversion fees of $14.9 million in the quarter and $5 million in year ago quarter. For the fiscal year total revenue grew 8% and grew 7% if you back out total deconversion fees of $37.6 million this year versus $26.9 million last year. Our total operating expenses decreased 21% for the quarter and increased 1% for the fiscal year compared to year ago period primarily to the gain on sale of Alogent, net of related expenses for a net impact of $18.5 million. Without this impact total operating expenses actually increased 12% for the quarter and 9% for the year. Increased personnel expense in R&D and G&A drove the majority of the increase for both the quarter and fiscal year. Disposal of some assets also increased the R&D expense for the quarter. Our operating margin without the impact of Alogent remained level at 27% for the quarter and 25% for the year compared to the prior year. The effective tax rate for the quarter decreased to 27.4% for the quarter from…

[Operator Instructions]. Our first question comes from the line of Kartik Mehta from Northcoast Research. Your line is open.

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

Well it was just timing and then there was some impacts from just the accrual of income taxes and the timing of payment of taxes and different things like that Kartik, there's really nothing unusual on the working capital.

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

Yes.

Okay. And then as you look at your business and you look at the backlog as you talked about in the past, what level of confidence do you have in the recurring revenue or the revenue guidance for FY 2017. Obviously, excluding the one-time stuff with Alogent and the deconversion fees?

Well, I mean, recurring revenues is still about 80%, Kartik, and most of that is tied to either long-term contracts or in-house maintenance contracts, which all those have already been renewed by this time. So that's there in deferred revenue which current revenue was up a little bit. So for that part, we feel extremely good. We've got the backlog of things to be delivered. We've got a very strong backlog, banks and credit units that's assigned to move from in to out. We have a very solid year of contracting those institutions move in and out. So at this time, I feel very confident about the guidance that we just gave on revenue.

And just one last one. As you look at, I know this by quarter-by-quarter, it's difficult, but as you look at the year that just ended and the market share on the credit union side, your thoughts on how you ended up the year with as far as market share and based on what you are, of course, the installations that you're looking forward into FY 2017 what that might do?

Kartik, it's Dave, I'll answer that one. So we had a very solid year on the credit union side. We ended up signing 21 competitive takeaways for the year. The good news for us is when you look at the $500 million and above credit union space and larger credit union, half of the credit union who decided to make a change from their core provider to another core provider, half of them decided to go with our Episys Solution. So we are well-positioned in the credit union space, having really solid success, continuing to have solid success in the credit union space and feel like our Episys Solution, in particular, is positioned really well to compete with anyone in the market.

Thank you. Our next question comes from the line of Brett Huff from Stephens. Your line is open.

Good morning guys. Can you hear me oaky?

Hi, Brett.

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

Yes. I don't know that there's much difference, Brett. I mean, obviously, the bundled revenue is up a little bit this year, but it appears based on the timing of delivery and different things that the bundled revenue should be similar in FY 2017, where it was in FY 2016 at least that's what it looks like right now. So there shouldn't be, I think, we've made may have got a little tailwind this year, but I think, it's going to be relatively flat next year. And then we go into the new rev rules the following year which all bets are off at that point.

Okay. And then, second question is on investment. I know you guys got a number of investments going on. Can you give us an update on the key ones? I know there's a UI change and you guys are going through and a few other things can you just give us the highlight and update on top two or three?

Sure, yes, Brett, it's Dave again. So I mentioned in my opening comments that we rolled out a few of those solutions. So Biller Direct, for example, is one that I've highlighted in the past. We rolled out the first version of Biller Direct in June on schedule. We have another enhanced version coming out later in the year. Our experienced development project, which has been redoing the user experience of the front-end for our core solutions and most all of our integrated complementary solutions that's about done, we rolled that out recently. Our cash management solution, and that's separate from our treasury management initiative, but our cash management solution we rolled out in the quarter. So several of those have been rolled out to customers now. Ongoing, we have the Episys database project that we talked about before our treasury management project that is ongoing that will come out in calendar 2017. And then of course, Banno, which is our mobile platform, our digital platform continues to be a ongoing development project for us.

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

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

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

32.4%, I believe, yes.

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

Yes.

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

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

Those are all -- Pete, this is Dave. Those are all definitely topics of conversation, but I don't see any of those things impacting the number of requests for proposal, for example, the number of deals that we have in place right now or the pace of decision that's going on right now. We closed 19 competitive core deals in the fiscal year. That's around the rate that we've had for quite some time, sometimes little over 20, sometimes little under 20, but that's a consistent rate for us. And then the mid-tier space in particular, we feel that we're very well positioned now. You may or may not have seen we did press release recently about the reintroduction may be of SilverLake as a real-time platform with the new user interface that we referenced earlier, the experienced interface. We got a little bit of good press from Talend where they named SilverLake as the new market leader for mid-sized banks. So I think we're feeling very strong about where we're positioned today. But as far as decision, the request for proposals or RFP requests or the decision pace, it hasn't really changed at all in quite some time.

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

Not a huge amount. As we're predicting there's probably million shares or so in there that we will buy in the first half of the year, so Pete.

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

Yes hey guys, nice job.

Thanks, Dave.

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

Well, part of that, Dave, is what I said, the 23% increase in R&D expense, because we didn't capitalize as much software this quarter. And then I would say you that the G&A expense is up because of all the change in everything. We have hired a bunch of accounting people, internal auditors is staffed up during the year, so just several areas primarily in personnel expense that has impacted the margins.

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

That's a little bit of it, yes.

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

It was little below.

Little below, okay. And then -- where in, I'm assuming it's in support and services, but what part of support and services was Alogent in?

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

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

Yes. It should be back to this year, Dave. I mean like I said in the opening comments. I mean, our annual maintenance billing collections were behind last year about $10 million. So I mean, if you just throw that in there, that's the difference. And then if you figure CapEx or cap software levels off are down slightly in FY 2017 that was a $19 million increase this year over last year. You put those two numbers in there and you're back way above earnings.

Yes. Okay. And then, I guess finally, when you said cap software should be down slightly in fiscal 2017, is that a combination of capitalized software and that internal use software?

Yes.

Thank you. [Operator Instructions]. We have another question in the queue from the line of David Togut from Evercore. Your line is open.

Good morning, this is Rayna Kumar for David Togut. Could you just comment on your expectations for electronic payments growth for FY 2017? It was good to see it pop back up to 8% in the fourth quarter.

Yes. I think we have well, 8% including deconversion fees. So that's 5% excluding deconversion fees. And I think that's a good run rate for us right now. We have three payments businesses, our Debit Switch, our Bill Pay business and our ACH Remote Deposit business, all of them growing in that 5% to 7% range, let's say, for the coming year. Yes, again, we have this headwind that we're trying to grow over that I mentioned in my opening remarks regarding the two significant customers that we lost last year.

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

Understood. That's very helpful. What are your expectations for R&D growth for 2017? It was up 23% in the quarter, should we expect that to be the new normalized run rate as the capitalized software growth slows down?

No. I think, the R&D run rate is -- was a little higher than in Q4 than what you can typically expect the run rate. It's going to level back down a little bit going into FY 2017, Rayna.

Great, okay. And could we just get the end-of-period share count?

I do not have that in my fingertips. I apologize.

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

It's somewhere around 79.5.

79.5, perfect. Thank you.

Thanks.

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

Thank you. Again, I want to thank you for joining us today to review our fourth quarter and fiscal year-end 2016 results. We are pleased with the results from our ongoing operations and the efforts of all of our associates to take care of our customers. Our executives, managers, and all of our associates continue to focus on what is best for our customers and our shareholders. I want to thank you again for joining us today and Andrew, will you now please provide the replay number.