Jack Henry & Associates, Inc. (JKHY) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Jack Henry & Associates Third 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, 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. Kevin D. Williams - Jack Henry & Associates, Inc.: Thanks, Michelle. Good morning. Thank you for joining us for the Jack & Associates Third Quarter 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 a 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 2017, and then we'll open the line up 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 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 - Jack Henry & Associates, Inc.: 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 a headwind for revenue growth. Total revenue growth – total revenue increased 6% for the quarter, and increased 7% 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 three 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, when we talk about new core deals, they'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 six, and we still have a couple of months to go in the year. We also saw 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 of the three 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. Kevin D. Williams - Jack Henry & Associates, Inc.: Thanks, Dave. Our support and service line 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 (3:55) revenue, the 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 (4:27) 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, (5:18) our gross profit would've been – would've grown approximately 8%. Our operating margins 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 estimates. 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 sold assets, was $95.4 million for the first nine 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 development 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 2017, as we grow over the headwinds created by the disposition of Alogent, also due to an anticipated significant decrease in deconversion fees for the 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 probably that (08:07) needs to be trimmed by a couple of pennies down to $0.83. However, that will still make us at $3.14 for the fiscal year, which is still higher than the current consensus assessment and higher than original estimates going into FY 2017. Also, just a reminder, last year's fourth quarter included the gain from the sale of Alogent, which 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?

Thank you. Our first question comes from the line of Brett Huff with Stephens. Your line is open. Please go ahead.

Good morning. Thanks for taking my questions, guys. David B. Foss - Jack Henry & Associates, Inc.: Morning. Kevin D. Williams - Jack Henry & Associates, Inc.: Morning.

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 gives like Bill Pay versus some of the other different sub lines there? Any detail there? David B. Foss - Jack Henry & Associates, Inc.: I don't know that I've gone into a whole lot more detail in the past. But both – the three areas in our payments business, our Bill Pay, our cards business, and our ACH Origination remote deposit capture business – ACH Origination remote deposit 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, or kind of what – what should we expect on that front? David B. Foss - Jack Henry & Associates, Inc.: Yeah, it's always a topic, but I don't think the pressure is nearly as intense as it was a year or two ago when it comes renewals on the cards 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.

Okay. And then my other question was on the Commercial Cash Management and 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? David B. Foss - Jack Henry & Associates, Inc.: 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 – it's been a long project. We had originally targeted March of this year for beta. We met that timeline. 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. And so, I don't know that 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 on Monday at the Analyst Conference. But we've signed, it's some – probably 8 or 10 so far, Treasury Management – new Treasury Management customers. Kevin D. Williams - Jack Henry & Associates, Inc.: Yeah. 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 partnered with SAS, (11:37) our Banno digital offering, our Biller Direct offering, and our ARC (11:44) 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 from me. Just, Dave, unseating some of the incumbents in that treasury management, I think that's a difficult sale to sometimes make. What is the – what are you hearing from banks that's sort of encouraging you to pursue this so aggressively? David B. Foss - Jack Henry & Associates, Inc.: Yeah, the reason that we pursued it in the first place, and I said to some folks, I never imagined – we started this project, we defined the project in late-2015, calendar 2015. I said at the 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 it felt like there was a big need, a demand for a new – a fresh, new solution taking advantage of newer technology. So that's why we went down this path in the first place. And the farther we've gone down, the more that's been validated in talking to customers. So, not every bank or credit union that's going to be signed 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 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 dependent on a Jack Henry core solution. Kevin D. Williams - Jack Henry & Associates, Inc.: And the nice thing was, we had the talent in-house to develop this. David B. Foss - Jack Henry & Associates, Inc.: Yeah. The leadership in-house. Kevin D. Williams - Jack Henry & Associates, Inc.: Yeah.

That's great. Thanks for your help.

Thank you. And our next question comes from the line of Kartik Mehta with Northcoast Research. Your line is open. Please go ahead.

Hey, good morning, Dave and Kevin. 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? David B. Foss - Jack Henry & Associates, Inc.: 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. Kevin D. Williams - Jack Henry & Associates, Inc.: Well, and the other thing I'd say, Kartik, is it amaze me, the number of core system evaluations that continue to go on, like the press release we recently put out that Dave referred to, the six $1 billion-plus sized credit unions we 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 system 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? David B. Foss - Jack Henry & Associates, Inc.: All of the above, yeah. On the core side, we have a lot of core evaluations – 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 on 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. Kevin D. Williams - Jack Henry & Associates, Inc.: Yeah. Just to make sure, that 13 we signed in the third quarter did not clean-up 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. You said, as term fees were concerned, fourth quarter this year versus fourth quarter last year, could you just repeat that for me? Kevin D. Williams - Jack Henry & Associates, Inc.: Yeah. 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? Kevin D. Williams - Jack Henry & Associates, Inc.: Well, that's a good question, Kartik. I'm not sure in today's environment what normal would be. But last year, we – total 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? Kevin D. Williams - Jack Henry & Associates, Inc.: About the same.

All right. Thank you very much. Kevin D. Williams - Jack Henry & Associates, Inc.: You bet.

Thank you. And our next question comes from the line of Glenn Greene with Oppenheimer. Your line is open. Please go ahead. Glenn Greene - Oppenheimer & Co., Inc.: Thanks. Good morning, guys. Kevin D. Williams - Jack Henry & Associates, Inc.: Morning. (17:04) Glenn Greene - Oppenheimer & Co., Inc.: 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 was a normal quarter for a number of core deals? David B. Foss - Jack Henry & Associates, Inc.: A normal quarter, maybe 10, somewhere around 10. I don't have the metrics on exactly the sizes of everybody that signed. But on the credit union side, as we pointed out, we've signed 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 that's, but the trend has been larger banks and definitely to larger credit unions. Glenn Greene - Oppenheimer & Co., Inc.: Yeah. 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. David B. Foss - Jack Henry & Associates, Inc.: So, year-over-year for the comparable quarter last year, is that what you're asking? Glenn Greene - Oppenheimer & Co., Inc.: Actually, more year-to-date what your bookings... David B. Foss - Jack Henry & Associates, Inc.: Oh. Glenn Greene - Oppenheimer & Co., Inc.: ...would be by the three brands. David B. Foss - Jack Henry & Associates, Inc.: Year-to-date, I don't have the breakdown by the brand. But I would say, they're up probably 6% – 7%. Kevin's thinking 7% year-over-year. Year-to-date, year-over-year, the combined sales grew probably up around 7%. Glenn Greene - Oppenheimer & Co., Inc.: So, Kevin, all else equal, is that a reasonable proxy to think about fiscal 2018? Obviously, it's early, but should we still be thinking that 6% to 7% kind of revenue growth going into 2018, all else equal, with the Alogent drag? Kevin D. Williams - Jack Henry & Associates, Inc.: Yeah. That's probably right knowing Glenn. (18:58) I mean, I'm not really ready to give firm guidance because obviously, we just started the budget process, but I don't see any reason why we wouldn't continue growing at that same pace. Glenn Greene - Oppenheimer & Co., Inc.: And then, just finally, you talked about and highlighted the big credit union deals on the Symitar side, but just broadly, can you sort of update us on what you're seeing competitively in 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 a net takeaway or loss perspective year-to-date? David B. Foss - Jack Henry & Associates, Inc.: 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. So, in the past five years, just to give you a feel, we have signed well over 100 new credit unions, meaning competitive replacements, well over 100 on the Episys platform. Our major competitor, who you guys always reference, has signed six 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 on Monday, but I just don't happen to have those with me. Kevin D. Williams - Jack Henry & Associates, Inc.: And I can count on one hand the number we've lost. Glenn Greene - Oppenheimer & Co., Inc.: Okay. All right. Thanks a lot. David B. Foss - Jack Henry & Associates, Inc.: On the fingers. (20:22) Glenn Greene - Oppenheimer & Co., Inc.: Thank you.

Thank you. Our next question comes from the line of Dave Koning with Baird. Your line is open. Please go ahead. David J. Koning - Robert W. Baird & Co., Inc.: Yeah. Hey, guys. Thanks. 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? Kevin D. Williams - Jack Henry & Associates, Inc.: Yeah, that's pretty much it, Dave. I mean, sales continue to be strong, and we continue to install (21:12) products and services. The deconversion fees, we have no control over those. I mean, that's typically when a bank or a credit union gets acquired or – depends on economy. (21:24) 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 the quarter. This quarter was a little higher than what we anticipated, which is why we beat consensus estimate 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 2018 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. David J. Koning - Robert W. Baird & Co., Inc.: Yeah. 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 (22:44) it seems like you and all your competitors had pretty good sales quarters, and it just takes a little while for the sales pipeline to kind of hit the revenue. So, do you think you're seeing the early evidence of it hitting sales already? David B. Foss - Jack Henry & Associates, Inc.: 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. David J. Koning - Robert W. Baird & Co., Inc.: Yeah, okay. Kevin D. Williams - Jack Henry & Associates, Inc.: I'll say this, Dave. We had 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. David B. Foss - Jack Henry & Associates, Inc.: 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've ever had, that was the best sales quarter, the best Q1 we've ever had. And the comps included Alogent, we didn't net that 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. Kevin D. Williams - Jack Henry & Associates, Inc.: And that was following a record Q4. David B. Foss - Jack Henry & Associates, Inc.: Yeah. David J. Koning - Robert W. Baird & Co., Inc.: Yeah. You guys kind of do well no matter what it seems like every quarter pretty much. So, congrats on that. Kevin D. Williams - Jack Henry & Associates, Inc.: Thanks. David B. Foss - Jack Henry & Associates, Inc.: Thank you.

Thank you. 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. Kevin D. Williams - Jack Henry & Associates, Inc.: Thanks, Michelle. As Dave mentioned, I'll repeat it again, I would like to remind everyone that our 2017 Analyst/Investor Day is to be held next Monday, May 8, at the Westin Property at the Denver, Colorado Airport. We're doing it there to make it 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 three of our brand presidents will be there to present. Our general manager of repayments group will be there; and then all of our directors of sales from all three 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 executive 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 a 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.