Q1 2021 Jack Henry & Associates Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to Jack Henry and I talk to each.
First quarter, Aflac, 2001, and Inc. conference call.
At this time, all participants are leaving only mode. After the speakers for temptation there will be a question and answer session. It'll look like to ask a question during that session. She was depressed star one on your telephone.
Be advised that todays call is being recorded.
Every quarter and if for instance that the spread Sars you I would now like to hand, the conference over to your Speaker today, Kevin Williams, Sir you may begin.
Good morning, Thanks for joining us today for MAGEC and associates first quarter fiscal 2014, water muscle or Kevin Williams, CFO, and treasurer and on the coldness warrants, David Farr, President CEO and a minimal for the call today to provide some of his thoughts about the state of her business.
First for the quarter and some comments relating to the impacts of Tobin banking and other key initiatives that we have in place then after that I will try to provide some additional thoughts and comments regarding the press release, we put out.
Cyrus.
HR team is working closely with all the groups around our company to be sure anyone who has affected is receiving the care and accommodations they require.
We continue to operate with well over 90% of our employees working fulltime remote and with a current returned to office date of January 4th.
Because of the success, we've had with our remote work initiatives and because of the ongoing concerns about the pandemic.
We expect we will extend our returned office date further into 2021, but that decision hasn't yet been made.
Most of our customers now have at least a few members of their staff working in their offices full time.
As we moved into the fall several of them have requested that we come on site to work with them on sales engagements and system implementations and we are normally able to accommodate those requests with no trouble.
With that said our sales teams are now routinely doing sales presentations and executing contracts with no onsite presence at the customer location.
That said however, the sales teams had several notable successes in Q1.
[laughter].
In the quarter, we again booked seven competitive core takeaways.
With two of them in the multibillion dollar asset space.
We also booked three deals to move existing in house customers to our private cloud environment.
We continue to see good success with our new card processing solution spanning six new debit processing clients this quarter and three new credit clients.
All of the deals I, just mentioned represent new customers and new revenue to our company.
We also continue to see great success, signing clients to our Banno digital suite with 29, new contracts in Q1.
And the financial institution.
[noise] regarding our new card processing platform as of the end of September we have successfully completed the migration of our approximately 800 core clients in accordance with the plan. We have highlighted on these calls for the past three years.
We still have the small group of approximately 80 non-core clients left to migrate but we fully expect to hit our fiscal Q3 target with that group as previously announced.
I'm very proud of our team and thankful to our partners and clients for working with us to achieve such a successful outcome.
Although it didn't impact our queue one numbers in any way you undoubtedly saw the announcement of a recent divestiture of our cruise in that business.
The cruise core solution was used by approximately 140, very small credit unions to perform core processing functions.
And we expect that approach to continue to provide stability and solid performance for our employees customers and shareholders.
With that I'll turn it over to Kevin for some detail on the numbers.
Thanks, Dave.
Our service and support revenue increased 1% in the first quarter fiscal 21 compared to the same quarter a year ago, adjusting service and support revenue for the deconversion fee revenue for each period, which was $5.8 million in the current fiscal year compared to $14.9 million in the prior fiscal year or a little over $9 million decrease.
Decreased 9% in the first quarter of fiscal 21 over the same quarter and the purpose of the year and this decrease was mainly due to travel with Smith's savings as a result of COVID-19 travel limitations with there was also a decrease in revenue tied to the savings expense due to our user group being.
And a virtual nature of this year.
Ah reported consolidated operating margins decreased from 27% last year, 26%, which is primarily due to the various revenue headwinds or a discuss and the increased costs on non-GAAP basis. However are operating margins increase from 24, 7% last year to $25, 2% this year.
Here, primarily due to the items already mentioned our payments segment continues to be impacted by the additional costs related to our card processing platform migration is Dave discussed in his comments and our core segment operating mortgage decreased slightly during the quarter compared to last year, just primarily due to revenue mix, while count many set in the margins accident.
Proved compared to last year quarter heavily driven by our digital sales.
Effective tax rate for the quarter decreased to 22, 4% this year compared to 24, 6% last year. The decrease in effective tax rate compared with prior fiscal year quarter was primarily due to the difference and the impact of share based compensation under the long term incentive plan that vested during each of the pier.
<unk>, which create a larger permanent tax deduction this year compared to the prior year quarter net income $91.2 million for the first quarter compared to $89 4 million last year with earnings per share $1.19 compared to $1 16.
For cash flow total amortization increased 3% year to date compared to last year due to capitalize projects being placed into service included in the total amortization is the amortization of intangibles related to acquisitions, which decreased to four 4 million year date, this fiscal year compared to five $5 million last.
Year depreciation expenses up 5% of the year, primarily due to capex in the previous year and those answers being placed into service.
We also purchased 400000 shares for the Treasury in the quarter for 65 $9 million.
Are operating cash flow was $114 $5 million for the first quarter, which is down from $123 1 million or 7% compared to last fiscal year, we invested $37.3 million back into our company through Capex and cap software for evolving our products, which the total amount capitalize is down 15%.
From 44 million compared to year ago quarter are free cash flow, which is operating cash flow less capex and cap software and then adding back net proceeds from pending sale of assets was $83 $3 million for the quarter.
Highlights on our balance sheet cash position of $195 $3 million down slightly from $213 $3 million of June 30th there is nothing drawn on a revolver, which has again has maximum capacity of 700 million and we had no. Other long term dead on a balance sheet other than leases, which is primarily due to the new lease account.
Rules adopted in the previous year.
Some updates on guidance as you noticed we updated both gap and non-GAAP revenue guidance in the press release yesterday.
Just to be clear this guidance continues to be based on the assumption that the country continues to open up and the economy continues to improve obviously if countries forced to shut down again due to the pandemic and the economy stalls are actually reverses when this guidance will be revised.
In the first half of the year therefore.
Therefore for your models for non-GAAP revenue.
I would suggest using a 4.5% to 5% revenue growth in the first half of the year and a 7% to 8% revenue growth in the second half to get you to our guidance of 6% to 6.5% revenue growth for the entire fiscal year again on a non-GAAP revenue basis we.
We anticipate GAAP operating margins for all of our 21 to be down slightly so the 20% to 21% range for all the reasons previous mentioned and non-GAAP margins to send to be in line to slightly up from last year for the entire fiscal year.
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Yes today, so there's couple of things one.
Even though we had a nice increase in software subscriptions this quarter compared to year ago quarter. It wasn't nearly as large a percent and part of that was due to some delayed invitations in the second half of last fiscal year, which as you remember under assay six so six you recognize 100% of the revenue. So any imitation is in software subscription.
It would have been installed second half that would that would have basically been on.
So that's that's just that's just part of assay six or six and there is no way to avoid that so there's going to be a little slowdown in Q2.
Compared to Q1 as far as growth, but then in Q3. If you look on a GAAP basis is going to be even a little slower because of the huge decrease in deconversion fees that we are predicting in Q3, and then obviously some really nice growth in Q4.
Gotcha Thats helpful and one just really quick one that this is kind of immaterial nobody's ever asked the question on a call about your corporate line before I think it was down a lot I mean, it's only 3% of revenue is that is there something in that line that that just this quarter was kind of one off.
No there's no there's nothing really there to highlight Dave.
It's just small okay. Thank you guys. Thanks.
Thanks.
Your next question comes from the line of Matt.
Huff from Stephens.
Sure Your line is open.
Good morning, Dave and Kevin how are you guys if I grow.
As far as the other components you asked about the treasure management continuing to sign.
New customers and Treasury management in the quarter link.
I think we signed four or five we have about 50.
Financial institutions live now and Treasury management, and continuing to enhance that product and continuing to roll that out so.
So good success all around when it comes to digital.
That's helpful and then Kevin I want to make sure that I get the revenue acceleration in the back half I know some of it is ft. Six so six something but it sounds like it's just timing of delayed implementations that maybe happened last year that maybe now will slow not into one half up more into second half.
Are those the two primary drivers or am I what.
Bernard all as people focus on digital any kind of change in that dialogue at all yes interesting. So another thing I highlighted was the fact that in the bank Director survey here with 64% of the respondents in the survey with most of them being over 500 million and assets, 64% of the respondents had set their technology spending budgets or increase their technology.
Pending budgets by 5% to 50% as compared to their pre pandemic and Thats what were seeing now the flow of RFP is has picked up recently, particularly on the core side. So we have a bunch of RFP is we're working right now on the core side continuing to sign new customers, but the rate of interest is is increasing and I think what's has.
Running so not only having good solid success on digital and certainly with our payments platform with customers. We're signing there, but just overall I think people are kind of settling in now to be doing business in the cobot world and they're finding those those.
As to the actual signing process, but as I just mentioned in the conversation with Brett the.
The RFP pipeline is very solid we are it's amazing the number of our fees that are coming in on the core side. So thats I am not just talking about other products Im talking about interest in Jack Henry core solutions. So.
They are little slower right now than they have been in the past, but we're still seeing deals and we're still getting deals done.
Understood and just as a follow up Kevin you called out $195 million in cash on the balance sheet.
Really got a lot of potential to allocate capital now whether it be acquisitions dividends buybacks, how do you rank your capital allocation priorities give.
Concept and have been since the founding of the company before before the term API was a term the concept of Jack Henry has always been to be open we've always been committed to the idea of making our platforms available to others through easy connectivity, we don't set up artificial walls to keep people out and you know a lot of people over the.
Here's the view that is being very counterintuitive, but I think the philosophy at Jack Henry has always been that we're here to make our customers successful, they're not here to make us successful and so we're going to help make them successful we should provide the tools that enable them to connect to whoever they want to connect to I think the best example of this in in something.
You can see is for people who go to our client conferences and this has been true forever at Jack Henry you're going with the secondary client conference you go into the exhibit Hall and you will see hundreds of exhibitors in there and almost every one of them competes with Jack Henry We don't allow court vendors in there, but other than that pretty much anybody else's allowed in and so you've got digital vendors and <unk>.
Payments vendors, everybody under the Sun and our space has a bug in the exhibit hall and they will all tell our customers that they love working with Jack Henry because we are the the ones that have always been truly committed to the idea of opened connectivity. So today.
Eyes are the preferred tool, but prior to that we had point to point.
Integration that we supported readily and made available to our customer.
Understood Thanks very much.
Your next question comes from the lineup.
Hi, Thank NASA from my calls.
These days and your line.
An experience that.
Comes close to the same experienced the consumer would have if they were in the branch, meaning direct personal service.
Which is what community banks of cranes have always used to differentiate themselves from from.
From their major competitors, we've created that similar experience through the digital channel and so it truly has differentiated us on our platform and I think as customers really start to understand that whether there Jack Henry core customers are not as they really start to understand that and that need to differentiate themselves in the digital environment. They will really.
Look seriously at our platform.
And then Kevin I know you've talked about that just I'm wondering on long term margins. Obviously this year you are being impacted by COVID-19 are being impacted by the fact that you are transitioning your credit and debit platform, but as.
As you finished that and we go into next fiscal year I'm wondering what you think long term margin prospects or medium term margin prospects look like.
Well I mean, you say targeting any we're going to see a lift in Q4.
As weve been stating that for the last two and half three years as we go through this payment migration.
So we'll get we'll get a lift in Q4, and then from from that and just the increased sales and implementations of our card platforms, both debit and credit and digital we should continue to see margin per month. The continued shift of customers from our in house to outsourcing, which also drives margin improvement.
And so on.
I mean, I haven't sat down and just try to put a fence around its fair exactly what that margin is going to look like in F. R 22, kartik, but.
It's going to be up nicely from FBR 21, again, depending on the pandemic uncoated and all that but if everything remaining equal we'll see a nice margin uplift in 22 compared to full year 21.
And then just one last question, Dave obviously, theres some conversation about Google partnering with banks to have its own branded checking account than theirs.
The stories about maybe Amazon doing something similar activity concerns from your customers as to how that might impact them or is there anything you can do to help them that could benefit Jack Henry.
Anything we could do to help our customers are helped Google.
[laughter] help your Guy's Burger, even Google if you looked at it.
Make sure you are [laughter].
Your friend pickup conversation.
So yes, we have talked.
Looking at some of our customers interestingly enough on Google solution. They are partnering with a couple of credit unions and.
They're they're trying this in several different ways.
So we've talked with some of our customers no immediate threats that they perceive with with what's happening there as as.
Also I think they've seen with all the.
The other Neal bank experiences that are available in the United States today, but we're keeping a close on it I on that we're trying to make sure that we are ahead of the game to help our customers. If there are opportunities. It is again I'll go back to our.
Complete online digital lending platform that we rolled out a couple three years ago, we did that because we saw what was happening with ondeck and cabbage and the potential for those solutions to disintermediate. The commercial borrower from our customers. So we were very successful with that and helping those customers who needed to to fend off those competitors and will do similar things here.
As we see those opportunities.
Thank you very much appreciate it.
Your next question comes from the line of Dominic.
From Oppenheimer Your line.
Great guys. Thanks, so much for taking my question.
If you have you talked to your bank or credit Union partners.
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Perhaps excess capital that they may have on the balance sheet is now.
Net charge offs don't.
Materialized in the same magnitude for which the reserves.
And what they may do with this.
Sequentially large amount of excess capital they talked about increased tech investments with a portion of that was it. Thanks.
So I wouldn't say, they specifically said, we expect to have excess capital and we're going to use that for technology. I think is the discussion about increasing technology spending is more about their their requirement there need to remain relevant as customers are moving away from doing business in branch and moving more toward.
An online experience. So I think it's pretty premature for most to our customers to be thinking about.
The idea that they may have excess capital most of them are ensuring that they are in a good capital position to fend off any losses that may happen as the pandemic continues to continues to unfold. So I view those conversations that kind of two separate conversations there is that making sure you're well capitalized in case there are.
Issues on the loan side and then this need for increased spending.
And apart from that to ensure that you remain relevant to your to your consumer and.
They want to continue to do business with you in a digital environment.
Okay, great. Thanks, a lot of sense and.
And then if you just think about the implementation.
Of the core products and then.
Youre, a complimentary products as well and cross sell opportunity one of the core partner to just go over again on what perhaps that.
That time period is between implementation of your core and then the kind of a tale of these thanks.
Hi, Wayne.
Add ons or cross selling opportunities and how long do those typically kind of Cana last the add ons. After a win thanks. So much I really appreciate it sure. That's an interesting question normally when somebody is choosing to do business with us on the core side, so they're coming to Jack Henry as a new core customer normally they will wrap the core.
With a whole bunch of other solutions at the same time, so it's rare for somebody to say I'm going to come and bring my core business to Jack Henry but nothing else normally they will if they are going to do that major technology upgrade on the core they look at a lot of other solutions. They have and say we want to upgrade our technology on all these other things at the.
Same time and go through that integration experience once so that would be my first point.
Point and answering your question is normally they are buying the core and maybe 20 or 30 other Jack Henry solutions at the same time and then once they are in place and start to experience working with our our group. It's it maybe a month after they go live they realized Oh, we really should have included this.
And they add something else or it may be a year. After they go live but the good news is we have a very good long history of continuing to cross sell products, we have such a broad suite of products.
Over the life of the relationship we just continue to sell more and more and more to those customers. If we're doing our jobs correctly, we continue to sell more and more of those customers. So so I think thats the best way to think about those situations.
Great. Thank you.
Next question comes from the line of John.
From Raymond James Your line.
Hey, guys good morning so.
So I really just wanted to start on.
On on Q1 results specifically on topline I think last quarter you guys guided for the full year said first half adjusted net revenue to be 3% to 5%. It did actually just slightly north of five so what went better in the quarter was installations are implementations rather just.
What kind of exceeded your expectations relative to your guide.
Yeah, Katy is primarily card and digital world, where that went to the exceeded our expectation so.
Is primarily on the processing line.
And to be quite honest, the headwinds and support service line for a little stronger than we thought they were going to be so but all all the uplift was was in the processing line of revenue.
Okay and then the other revenue was down 23% core.
Quarter or just curious.
Is that kind of the new run rate, how should we think about that going forward.
Little bit surprising so JD that that's primarily in the in the corporate segment and this is to answer actually years and David coatings question from earlier.
The big part of that is related to our education conference Slash user.
Was the biggest chunk of that and then the other part of it is just pass through costs from our travelers not being being out for go out for billable travel to pass through so those are the two primary drivers of other being down as our travelers pick backup that will level out obviously as Dave mentioned is only opening comments.
Our education conscious scimitars normally the first quarter J C, which is bank the profitstars ship in the second quarter. So there will be some revenue impact in the other line in Q2, just like it was in Q1 actually be a little larger 'cause J.C. is typically larger than the FCC.
And then Q3 and Q4 for other revenue should kind of level out with previous year.
Okay, and then last one for me just on the on the M&A front, just curious as we kind of obviously.
Obviously, we're still in the middle of pandemic, but it didnt noticed any meaningful changes whether its valuation expectations.
Assets for sale, just just anything from a private market perspective.
Are you more encouraged less encouraged what do you think the pipeline looks like from M&A perspective, as he goes over the next call. It three to six months. So JD just to be clear you are talking about M&A from us acquiring not not within correct like industry correct correct, Yes, correct. Your acquisitions, yes, yes, I'd say.
So valuation expectations have they changed yes.
It's been interesting with the few of the Fintech and ensure tech ipos that have happened recently I think there is a lot of companies out there with stars in their eyes thinking that they're going to get those those same valuations. So weird, we're seeing that oil companies that are that are potential that maybe in the past wouldn't have ever really thought about an IPO now they're thinking.
They're thinking Oh, my gosh look at that valuation or the spec concept of course is alive and well out there too. So so if it's a little.
Challenging as far as valuation expectations right now we are.
Seeing deals I think on the last call somebody asked about what we were seeing and I was I was frustrated frankly at the time, because we had seen so little and we assumed depend nemec would drive some people to put their companies for sale and we were really seen very little now theres more of a normal deal flow coming through so we're looking at deals but.
To your point expectations evaluations have definitely increased and you know us well, we're a disciplined acquirer, we don't chase after the shiny object when it comes to acquisitions and so.
We haven't to have been bid on any of them yet, but we are actively looking at deals.
All right. Thanks, guys appreciate it.
Again, ladies and gentlemen, I wanted to ask a question. Please press star one.
There are no follow session at this time.
Okay.
Thank you I appreciate it.
Again, we're pleased with the overall resorts results from our ongoing operations I want to thank all of our associates for the way. They have handled these challenges by taking care of themselves and our customers and continue to work hard to improve our company on all fronts for the future all of US at Jack Henry continue to focus on what is best for our customers and shareholders.
With that thanks, again for joining us and operator can we please provide the replay number for the call.
Okay.
Ladies and gentlemen, this concludes on this conference call. Thank you for participating.
Okay.
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