Q1 2020 Earnings Call

Yeah.

Good morning, ladies and gentlemen, and welcome to the Jack Henry at Associates to first quarter fiscal year 2020 earnings Conference call.

This time all participants are in a listen only mode. Later, we'll conduct a question answer session and instructions will follow at that time, if anyone should require assistance teleconference. Please press star zero on your Touchtone telephone as a reminder, this conference call is being recorded.

The conference over to your host Mr. Williams. Please go ahead.

Thanks, Wendy good morning. Thank you all for joining us for Jack or Surgeons first quarter fiscal year 2020 earnings call.

Kevin <unk>, CFO and treasurer and on the called me today as Dave Foss, Our President CEO .

Now I'll turn the call today to provide some this box about several business performance for the quarter and then I'll provide some additional thoughts and comments regarding the plus was put out yesterday after market closed update our guidance rep or 20.

Well I get the Q and a.

First I need to remind you the remarks, the responses to questions concerning future expectations to dance objectives strategies trends result constitute forward looking statements or deal with expectations about future like anything about the future. These are subject to a number factors, which could cause actual results were 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 some of these risk factors and additional information. Please refer to yesterday's press release and the sections in our 10-K entitled risk factors and forward looking statements.

I'll turn the call overnight.

Thank you Kevin and good morning, everyone. We're pleased to report another quarter with record revenue and earnings as always 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.

For Q1 fiscal 2020 total revenue increased 12% for the quarter and increased 9% on a non-GAAP basis deconversion fees were up about $7 million over the prior year quarter, which accounts for a portion of the significant revenue increase over last year, but even excluding deconversion fees. This was a very strong quarter.

As a reminder, we generally received deconversion fees when one of our clients with a long term contract in place as required by another institution and buys out the remaining obligation in their agreement.

Turning to the segments, we again had an extremely solid quarter in the core segment of our business revenue increased by 12% for the quarter, an increased by 10% on a non-GAAP basis.

Our payments segment also performed very well posting a 12% increase in revenue this quarter and a 10% increase our non-GAAP basis. We also had a strong quarter in our complementary solutions businesses with an 11% increase in revenue this quarter, 90% increase on a non-GAAP basis.

Our sales teams again had a solid quarter with to about three brands exceeding their sales quota we.

We booked five competitive core takeaways and five deals to move existing in house customers to our private cloud environment.

We also saw very strong bookings in our payments and complimentary solutions segments several of our newer solutions, including our bound digital suite or new card processing solution and Treasury management saw strong demand.

Regarding our new debit and credit processing solution. We now have 604 customers live on the new platform. This count includes 63 customers installed as new debit clients rather than as migrations and 11, new full service credit claims.

We have approximately 370 of our debit clients you have to migrate but we've hit a comfortable stride now and our program continues to progress very well.

As we did last year, we will spend not migrations during the holidays, because banks and credit unions don't like to implement changes to their card programs. During this high volume time of year.

We expect to start the next large waves the migrations in January and remain on track to complete the migration process during calendar 2020.

You probably noticed that we distributed a press release last week in coordination with the clearing house announcing our plans to bring 15 clients live with the real time payments network in the near future.

We currently have 47 clients signed to implement Bell and 15 clients ready to implement looked a clearing house.

I'm very happy with the approach our team has taken in this regard because our pay center solution allows us to connect clients to the real time payments network in groups rather than one on a time.

Additionally, we provide connectivity through the single platform to multiple providers, which facilitates a more logical any krishnan approach for our clients than any other prices are in the market today.

Since our last earnings call, we've completed our two largest client conferences or the year, our FCC conference for our Symitar core clients and R.J.C. conference for our Jack Henry Bank and Profitstars clients.

Many prospects at each conference and as I mentioned in the press release or customers continue to be happy with our performance an extremely engage with our prospective clients.

Additionally, they continue to be optimistic about the coming here and their prospects for success.

In addition to all the exciting developments with sales and our newer product offerings. You should also note that we've announced a few organizational changes recently.

Several weeks ago, Mark for bus, our long time, Chief Technology Officer announced publicly that he will retire effective on November 15.

Mark and I've been working for sometime with had built our current symitar president to position tend to move away from the day to day responsibilities run your credit Union Division and back to this technical roots in the technology area.

That will assume the role of Chief Technology Officer on Merck's departure.

Santa Mclaughlin, a well known industry veteran and a current member of the Jack I mean leadership team will move into the role as president of Symitar.

Unrelated to the Mou with Mark and Ted I announced that were promoting Greg adelson to become our new Chief operating officer, Greg and I had been working on positioning him to make this transition for many months, Greg has demonstrated outstanding leadership qualities and an ability to handle more responsibility. So he will be leading the primary operating units of our company going forward as a direct reports.

Me.

Of course, I'm sad to see markley, but if anyone has earned the right to kick back and relax a bit it's mark.

No extend my heartfelt thanks to him for his years of service and a congratulations to Ted Greg and Shannon as they move into their new roles.

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

The services portion of revenue increased 13% compared to the prior year license hardware limitation revenues up a little this quarter, but it was really due to some nice hard work orders during the quarter, which obviously has lower margins than than license that mutation. We continue to have web headwinds from decreased license an on premise imitation revenue.

Due to almost all of our core installs are watching our private cloud model, which is actually did for us and our shareholders long term.

Our outsourcing their cloud services were up nicely again, this quarter and an increase of 12% compared to last year.

However, as Dave mentioned deconversion fees were up 7 million heard a year ago, but we still had nice overall growth considering.

Paul says why revenue with which is all transaction remittance card and digital grew 9% compared to prior year total revenue up 12% and on a non-GAAP basis exclusion, excluding deconversion fees and the impact of acquisitions was up 9% for the core.

Our reported consolidated operating margins were up from 26% last year to 27%. This year due primarily to the increase deconversion fees and on a non non-GAAP basis, our margins were flat with last year's first quarter or just under 25%.

We will continue to see some operating margin headwind this year.

I think from continued decrease in license revenue is almost all of our new customers elect to go into a private cloud and just a reminder, license revenue is our highest margins livable also the additional cost of processing or debit card customers transactions until we get them all migrated suneet platform and eliminate a lot of the additional costs that we haven't processing.

Well segment's operating margins continue to be extremely solid with small fluctuations. Our payment segment will continue to have increased margin headwind going forward again as additional cost continues to increase as we migrate our existing customers to the new payment platform.

The effective tax rate for the quarter was 24.6% this year compared to 19.2% last year.

Which at the entire difference in these two rates was related to stock based compensation deductions that we had last year, but we did not get the same impact in this year's first quarter.

So cash flow included in total amortization, which is disclosed in the person was yesterday amortization intangibles related to acquisitions increased to 5.5 million. This year to date compared to 5.1 million last year.

Depreciation was also up for the quarter, primarily due to the datacenter Capex. We did in Q1 last year, which is now on production.

Non acquisition amortization was that due to more of our internally developed products and software being placed into production.

Our operating cash flow was 123.1 million for the quarter, which was down compared to last year.

But this very explained was all due to timing <unk> working capital items first a our was up quite a bit and and all settled it by deferred revenue, which this is caused by the shift from our in house customers outsourcing. So we have more monthly billings than we have historically, that's going to continue to shift but the biggest difference here was last year.

We did not pay Q1 dividends in Q1, we actually pay those October 1st so our accruals were about $30 million higher last year, because the accrued dividends. So if you take that out our cash so operating cash flow would have actually been up from last year, and so would it free cash flow. So by the end of next quarter that should all balance.

Wow.

I wouldn't be back to a nice conversion of net income to free cash flow during the quarter, we invested 44 million back intercompany through capex and developing products, which that is down from 52.3 million a year ago, which much of that decreases cap ex relate to the datacenter upgrades in Q1 last year.

So now we'll update guidance for F. R. 20. Currently we are projected de conversion revenue to be up slightly enough watch warning, but again those are totally unknown. It depends on when the dates are when they actually do convert and we get the check and we have no control were very little control the timing of the.

Revenue from all processing customers will continue to grow nicely. Therefore, total GAAP revenue continued to be projected to grow at around or slightly above 7% enough watch warning.

Projected decreased license revenue additional cost headwinds from or payments platform migration.

Operating income will grow a little above 6% on a GAAP basis at around 5% to 5.5% on a non-GAAP basis, we'll continue to experience revenue and operating income fluctuations between our fiscal quarters due to license imitation payment platform migrations and software subscription usage operating income margins, where the high.

So in Q1 due to software subscription revenue being recognized and then we'll drop off for the next three quarters very similar to F 119, and all this is due to new assay six so six revenue recognition rules were put in place last year, we anticipate GAAP operating margin for the year to be mostly in line with F. why 19 at approximately 22 cents of.

Here as we feel like we can get some margin improvements helped offset the margin headwinds of the migration.

Our effective tax rate for the year will be 23% to 23.5%.

We project Q2, EPS to be in the 80% to 92% range and our projected full year F. why 20 bps continues to be in range of Threesix due to 364.

Therefore in summary on a non-GAAP basis revenue should grow approximately 7%.

Operating income will grow in the 5% to 6% range and EPS for the year, we'll be in the range of 360 364 pretty much in line with consensus estimate today.

As Dave mentioned, we are still on plan to have all of our core customers that we process or debit payments on our systems to be migrated by June 2020 at all noncore customers to the new by November 2020, There've been no changes plans. We're on course to get that Dan and therefore, there are no changes to the distance to the reduction in costs were timing a coffee.

Actions from what we've provided on the last call.

This concludes our opening comments and with that we're now ready take questions. Whitney. We please open the lines up for questions.

Ladies and gentlemen, if you have a question at this time. Please press the star and then be number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the Q first the pound key.

Your first question is from Peter Heckmann.

Hey, good morning, everyone. Thanks for taking my question.

Talk a little bit about your.

Asian capacity.

Any change in the relative timing of the backlog or some of these nucor implementation.

No I wouldn't say theres any significant change we did add a we added the team last year I think it was four to help customers our core customers who are acquiring other institutions because there was a good bit volume last year as far as to our customers, adding banks on the banking side.

Not an Italian side, but in the banking side. So we did add a team last year have not added any teams. This year don't have a need for that and we're managing the backlog.

Well, we've been running at a pretty consistent pace as far as a core conversions for quite some time on the banking side on the credit Union side. We did recently added team to help with the in house customers migrating to the private cloud environment and they can also help with Newport customers that are coming into the private cloud environment. So we did I.

The team recently on the credit Union tied but we are well positioned well to manage that backlog.

And don't see US you know don't see.

A push there right now.

Good good here and then as Youve gotten continued success.

Credit issuing product 11 life can you talk about your backlog there and then.

It's about.

Your core customers.

What percentage of those.

We're currently in that market or would be interested in the credit issue product.

Yes, so we don't have a huge backlog on the credit side, we've been managing that as we go here. So we have several that are in the queue, but no. The challenge for both new debit and credit deals is.

Virtually any bank or credit Union is any long term agreement today, if they're a debit.

Almost everybody has debit so they have a long term debt would contract those that are in a credit programs have some kind of long term credit program if they're in the if they're offering those services already so there's a timing issue. There was almost every customer where you have to work it out to make sure that youre deal kicks in when their existing agreement is a is up for renewal on the credit side as we.

Talked about on previous calls.

A number of customers out there. However, we don't have their own credit portfolios and so those customers feel it's a matter of working with them to determine whether or not they want to get into the cloud business. We saw a lot of demand a couple of three years ago. That's why we decided that's part of the reason why we decided to do this.

This deal that we have recently rolled out but for those customers that don't currently have a credit offerings. They have to go through the process of justifying it to make sure. They have the internal staff to manage the program. So we're working both sides of that coin.

Customers, who are looking to move and those who are looking to start the ER or bring their program in house and you know, but not a not a current backlog concern I would say.

I don't know what percentage of our customers are active with US right now, but we have a number of deals in the ER and the sales pipeline right now for both debit and credit and Pete. This is also kind of slow role because obviously, our focus was to get all of our debit customers migrated over to new platform.

That was we wanted to make sure that plan was solid in place. So we we met our obligations to our customers into the to our shareholders.

And then also with us credit card offering be a being a new offerings.

You kind of have to prove yourself and now that we have 11 live we've got referenceable customers and it makes a whole lot easier to sign additional customers when you have referenceable customers.

Just to give you a field. So we signed 16, new debit customers just in this quarter there is continuing to be interest and demand.

Those are not a correction. So those are people who have not done dealt with us in the past that signed in the quarter.

Okay. Thank you.

Thanks Pete.

Your next question is from David Togut.

Hi, Thank you good morning, John on behalf of David Togut. So the first question is in the September quarter Research and development only grew 2% year over year compared to 9% organic revenue growth excluding contract deconversion fees.

Are there any unusual factors slowing the rate of R&D growth that will persist through I fight 2020. For example, what was the year over year growth in suffered capitalization during the September quarter.

For 2020, what are you budgeting for R&D group on the income statement.

So we are we're obviously, we don't disclose our budget, but our R&D is going to stay pretty much in line with total revenues print percentages. It has in prior years from quarter to quarter, what you're going to see if some flopping around because as we roll major projects that are in develop them being capitalized and were role.

Those projects off.

Her into production than our R&D expense will go up in that quarter or could be department along these products, we actually have contractors come in.

To do a lot of work for us Nick Retiming of shifting between development of different product. So you really can't base R&D expense growth on on a given quarter you almost have to look at is trailing 12 months to get real feel for.

Got it and the second question is among the new contract wins for the September quarter, but where the top three drivers of new bookings growth from a product standpoint.

Are you talking about four core customers, who find what drove that or are you talking it would be.

[noise] customers.

Yes, generally <unk> core customer signings are first off they're looking for a new technology solution provider, there probably running on an old core solution with whoever they are providers today. So they're looking for new technology, Secondly, oftentimes they will say to us that the relationship is broken with whoever it is that they're working with a working.

Currently and so and that's that encompasses customer service and then encompasses just the overall confidence in the direction of that organization or that product and then thirdly. The digital strategy is becoming a big part of the conversation with almost every new core customer and so we get a lot of great feedback from prosper.

It's about the digital strategy the Jack Henry has in place you've seen us do a good bit of investment in the past few years not only in our Bantle digital platform, but when we acquired Vulcan, We acquired Geo those were both acquisitions to help round out digital strategy that digital story I talked about on several calls in the past Jack Henry today is alive.

With innovative technology as far as digital banking that nobody else in our space is doing and we're getting a lot of recognition for that and that helps wincor deals because oh every customer every bank upgrading and out there knows that for them to be successful in the future. They have can that be really.

Solid digital experience for their their customers yen as Dave mentioned in his opening comments, we are a little different because we had a number of core prospects both of our national education courses and we live we turn those prospects loose. They go to eight track any breakout session. They talk to any customers.

And we even had a special breakout we invited the.

Industry consultants to come in to our J.C. and actually had a separate tracks for them as separate four day track.

To help them understand better who we are and how we approach perhaps world. So I think all those helped contribute to.

So just sat was our culture and how we take care where customers in that were just a little bit different.

Thank you.

Your next question is from car T coming here.

Hey, good morning, Kevin and Dave.

You know I looked at your revenue growth and the revenue growth was excellent this quarter and Kevin your guidance still looking for on 7% revenue growth and deep I was wondering.

With that do you think is just strength in the marketplace and thanks spending versus Jack Henry taking market share.

[noise] that's a good question Kartik, because I think as you know for Jack Henry as both we have we're certainly taking share we've talked about it many times in the past.

The core side, we're taking share and.

When we do lose a customer its acquisition normally it's a smaller customers. So the milk you compare the ones, where we're taking on as compared to the ones that we lose because they've been acquired.

The ratio is is in Jack Henry is favor significantly so and all that not only are we taking share but but there is this continued focus on spending in our space a lot of it around digital which I just emphasize a lot of rent lot of it around people kind of repositioning their their payments of infrastructure to make sure that they can.

Facilitate the needs of their customers going forward and then just looking for solutions that help them with efficiency. So.

Any.

First and efficiency, our big topics for our customers. So it really is a combination of the too.

Easy answer from either we would be to say 50 50, what happens with this I was taking share half of it as the fact that theres. So much continued the good news in the market, but I would say, it's more heavily weighted toward us taking share because when we went a core customer they tend to surround that with a lot of other Jack Henry.

Products and as I mentioned earlier, when we are taking share we tend to be within uptake larger customers than those that are being acquired out from under US first fit I'll also add card I mean.

With with us being at 85 or 86% return revenue I mean, it's not like we're going to have just adding on whole Brady bunch customers could we have today. We have had the same number pressures this quarter than we did a year ago Justice maintained growth. So the growth is really all the cross sell of all the products that we've rolled out as Dave mentioned 60.

Plus new debit card customers that are on the on the system. The 11, new credit card. That's all new revenue growth all the Banno platform customers that were zone. The Treasury management customers. I mean, there's just an enormous amount of cross sell which which now we're starting to reap the rewards of of the first for labor of the cap software, but we've been doing to last for five years.

Sure as these new products are really start get traction I think that's what's going to you're going to see continued to help drive revenue goes as we layer that revenue on top.

And then given just as an add on to that yeah. If you look at I know you stepped long time ago give a backlog number in that became a little bit more difficult, but kind of as you look at fit your backlog or implementation schedules, but what kind of revenue visibility do you have I realize you know 85 present recurring.

But you still have that other 15% to kind of add so I'm just wondering.

How far you are seeing visibility for your revenue.

So kartik I mean, we've got we've got installed backlog on the vast majority of our products.

So we and most those go almost 12 months out or longer so going into a given quarter.

Were 98% visible on what that quarter is gonna be for revenue I mean, obviously you've had some fluctuations you can have transaction changes.

Within the debit cards are different things are you could actually have a customer delighted delivery, which under the new Rev. Rec rules, if that happens in ERCOT.

To delay as a final conversion then that could push all the software recognition and invitation revenues out into next quarter. So you're going to still have a little lumpiness. There. The we have 90 plus percent going into youve, given any given quarter and if not far from that going into a given year anymore Kartik I mean, because with all the backlog.

We have and again, 85% recurring revenue we've got a lot of visibility, it's a whole lot easier to to forecast and give guidance that was 10 years right machinery that.

Well. Thank you guys I really appreciate it.

Sure.

Your next question is from John Davis.

Okay.

Hey, Good morning, guys, Kevin just wanted to dig in a little bit on EPS Guide I guess, a little bit surprised to see.

You flow through the at least the upside from deconversion fees on to the full year guys that just conservatism given its first quarter the year.

Are there any kind of offset some of my thinking about and then also just how should we think about the the cadence of revenue growth. Obviously really strong first quarter are similar to last year should we see a similar cadence and revenue growth as we did last year.

Sorry throughout the year.

I mean, if again, sorry, a little bit through the year because of all software subscription everything we've taken first quarter, but yeah. I think John is there risk there were some actually some.

Some of that de conversion revenue they've got pulled in from Q2 that we thought was going to having to do that actually happened in Q1. So we think you know so I'm not sure exactly or deconversion fees is going to fall out for the for the quarter next quarter or the year to be quite honestly. So is there a little conservatism built into that guidance absolutely.

I mean I've been doing this long Tom I'd much rather.

Under promise and over deliver than the other way around.

No that makes sense and then they just obviously the accounting changes we've now lapped so the 11% core growth ex deconversion fees I think it's probably better than most people expected if not everyone. Maybe just talk about what's driving that obviously talk a little bit about market share gains.

At the result of kind of the last year Plaxo record new wins and we're finally, starting to see that hit the revenue and just trying to understand why that would outsized subscription would start decelerating throughout the rest of the year for the core business.

Now that you've nailed it right there that's exactly it so we've talked about before on the call. When we sign a customer. It's generally 912 months before you start to see that revenue coming in on the core side, because there's a lot of work that goes into a preparing for that conversion and once you are once you leave that customer him again, almost every customer we signed these days assigned.

As a as a private cloud hosted customers. So once you start to layer that revenue and then it starts to continue to be additive to the numbers you've seen in the past and so for this quarter.

This is a quarter that reflects not only the bank customers that we've added in from last year, but now credit Union customers that are being added in more on the private cloud side than in house, whereas in the past we would sign them usually as an in house customer you'd see the revenue pop more quickly because we were selling a license fee rather than the hosting.

Model, but now most of the credit unions, we signed our also on the host of models. So once you get them layer, Dan that revenue just starts to build and you're really seeing that.

That result, now in this quarter strong and John Let me just I mean, I know you're familiar with it the the revenue build slide that I've got my Investor presentation effort to go for years ago that slide has not changed and so if you think about it our outsourcing and cloud just like that slide shows is about 25 or twice or several revenue.

It is caught continuously growing at roughly 12% right. That's what it's done on average the last three or four years I don't see that changing you've got our payments business, which is but basically 35% for revenue. That's grown you know in the seven or 8%. This year I think that could accelerate.

So you got 60% of your business, which is all very nice margin business. This growing basically double digits. So.

You cross sell some additional products and add on some additional products, it's pretty easy to get to that seven 8% growth that we've been guiding to.

Okay and last one for me, Dave maybe just talk a little bit about the macro backdrop, both from a bank tech spending any impact or changing behavior from now that we've kind of had a few months than I think lower rates of kind of set into People's mindsets.

Have you seen impact there and then also any noticeable change competitive landscape.

Good or bad I wouldn't assume is probably potentially a positive from the recent kind of big deals out those are closed and.

Some of your peers, our integration mode is bigger deals.

Sure. So first off for the first part of your question.

Mentioned at briefly in my opening comments.

One of the good bellwethers for US is every year in the fall when the host our Symitar client conference and our GE Si conference, which is a banks and credit unions at both conferences I almost a CEO break out so let me see yields and presidents are invited to a two day.

Question, where we can talk about what's going on in the industry and we get a good opportunity one on one to get feedback from them regarding what they're seeing and how they're feeling and so on and it's a it was very uplifting coming out of both of those conferences. How there is no hand wringing. There is no major concerns that the banking industry is in trouble or and.

And like that or a recession is on the horizon I. In fact, it was the opposite a lot of interest and new technology solutions, what can we do to either improve the customer the end customer experience or introduce efficiency into the bank or credit Union. So I don't see any slowdown as far as interest in.

Technology, Jack Henry Technology solutions or.

Their willingness to spend for those things that can help healthier institution. So.

Nothing changing there still are still very solid as far as the competitive environment.

Yes, you're right major acquisitions have been happening in our space nothing significant changing as far as the competitive environment for us on a day to day basis.

In fact several of you have speculated on this call in the past about will this creates opportunities for Jack Henry in the long term I'm still not ready to say that but.

It's feeling that way and there are a number of customers out there prospects who were at our client conferences. This fall that we mentioned earlier, we are expressing that that they're they're interested in Jack Henry because they can see that we're very focused on on them as banks and credit unions, providing outstanding technology solutions to banks and credit unions.

And ensuring that their underlying core infrastructure is solid and best of breed. So.

So as far as the competitive environment no negatives for us.

So far but it's early days since these major acquisitions will continue to keep an eye on it.

Okay. Thanks, guys.

Yes.

Again to ask a question of press Star one on your telephone keypad.

At this time there no further questions.

Thanks Whitney.

We're pleased with results for our ongoing operations efforts evolve 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 shareholders with that I want to thank you again for joining us today and when would you. Please now provide replay number for the call.

Thank you. Thank you for participating in todays Jack Henry and Associates Conference call. This call will be available for replay beginning at 11 45 am Eastern standard time through 11, 59, P.M. Eastern standard time on Tuesday November 12, 2019, the conference I'd number for the replay is 35.

Three one for nine again the conference I'd number for the replay is 35 931 for nine the number today for the replay is one 805 858 36 seven.

One more 045373 406, thank you.