Kevin Williams - CFO and Treasurer Jack Prim - Chairman and CEO.

Kartik Mehta - Northcoast Dave Koning - Robert W. Baird Glenn Greene - Oppenheimer Peter Heckmann - Avondale Brett Huff - Stephens Incorporated.

Good day ladies and gentlemen, welcome to the Jack Henry & Associates’ Second Quarter 2015 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. But later we will be conducting a question-and-answer session and instructions will follow at that time.

[Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s program Kevin Williams, sir you have the floor..

Good morning. Thank you for joining us today for the Jack Henry & Associates’ second quarter fiscal 2015 earnings call. I am Kevin Williams, CFO, on the call with me today is Jack Prim, our CEO.

The agenda for the call this morning will follow the way we typically do Jack will start out with his thoughts on the performance of the quarter and some other comments. I will provide some additional thoughts and comments regarding the press release we’ve put out yesterday, 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. Now I’ll turn the call over to Jack..

Thanks Kevin. Good morning. Today’s earnings call would be a bit of a challenge to present because of a number of one-time events that occurred in the quarter including the gain on sale associated with the disposition of a non-strategic product group.

The retroactive reinstatement of the research and experimentation tax credit and a one-time adjustment to revenue based on a new interpretation of revenue recognition policies by our outside accounting firm.

Kevin will attempt to provide some clarity that will allow for an effective apples-to-apples comparison to the prior year quarter, the noise in the numbers this quarter excurse at a glance a solid operating quarter.

In particular without the accounting revenue adjustment and let me repeat without the accounting revenue adjustment we had a quarter in which organic revenue growth was just under 8%, with support and services revenue up 10%, led by a 15% growth in our outsourcing business and a 10% growth in our payments business.

The growth in these businesses offset what would have been a decline of 14% a year-over-year in license fees and we maintained strong gross margins in spite of this lower high margin component of revenue. Business fundamentals remained strong and in a solid and still improving economic environment.

Our clients continue to invest in solutions that can help them drive revenue, reduced cost and improved security. We have solid sales performances across all three brands with strong core and complimentary sales in the Banking and Credit Union segments and are strong outside the core base performance by the ProfitStars team.

In reference to the previously mentioned revenue adjustment for our in-house clients we have historically recognized revenue as the software is delivered and implemented by the client which we believe most accurately represents the intended financial arrangement.

We have recently received guidance from our accounting firm, that if even a single small software product on that contract is not implemented, we should defer all revenue on the agreement.

I would point out that we have followed substantially the same recognition policies for many years adjusted as necessary to accommodate new accounting guidelines as they have emerged. There have been no recent changes to our policies and none during the five year period that was reviewed.

We have not received a satisfactory explanation - previously acceptable recognition policies have now been called into question. While we are confident that our policies have been fully compliant with GAAP and more accurately reflect the intentions of the arrangements with our clients.

We are modifying our policies to comply with this new interpretation. These adjustments related to license fees and associated implementation fees are included in the earnings release. The review of software maintenance is ongoing and unfortunately could not be completed by the time our earnings release.

The first time a question related to maintenance was post to us was Monday night at 11 pm. As I said earlier it was a noisy quarter with a number of puts and takes but when you net that all out it was as solid operational quarter with continued strong organic growth and margins. With that I’ll turn it over to Kevin for some additional details..

Thanks Jack. As Jack mentioned all the numbers disclosed in the press release that I’m going to talk about were adjusted for the revenue recognition just was disclosed in the press release.

The total impact of adjustments in the current quarter was to decrease revenue by $1.2 million and a decreased operating income by $0.06 million compared to the adjustments made for the second quarter last year which again we are going to restate proactively quarters going forward so that the prior year historical numbers be adjusted each quarter.

And adjustment to the second quarter of last year was to increase revenue by $2.4 million and an increased operating income by $1.5 billion, which obviously this changed the comps a little. Without these adjustments as Jack mentioned our revenue would have grown 8% compared to the 6% reported.

And our operating income would have shown growth of 6% versus the 4%. Our support and service line of revenue continues to drive our whole revenue growth, it increased to $299.6 million which is a 9% increase, to break that down between the components our implementation revenue was at $26.9 million for a 16% increase.

Our electronic payments was at $121.5 million for a 10%, our outsourcing, our outlink data processing was $67 million a 15% increase; and our in-house maintenance was at $84.2 million for a 1% increase. The recurring revenue which is based to the payments outlink and in-house maintenance grew at about 8.5% growth for the quarter and represent a 79%.

As Jack mentioned our margins continue to be strong, our consolidated gross margins decreased slightly, they rounded down to 43% for the quarter compared to 44% in last year’s quarter. License margins decreased really at the level of 92%.

And for both this quarter and last year support and service margins with a level of 42% and hardware margins increased to 31% from 29% a year ago due to sales mix. I do have to apologize as Jack mentioned we kind of got here with some things at 11 o’clock Monday night so I did not have any breakdown margins for these segments.

We’ll have to get those to you later, so again I apologize that overall the segments are going to be pretty much in line with where they have been. And our total gross margins continue to be strong, our total operating expenses increased 5% for the quarter compared to the prior year.

Our operating margin for the quarter remained fairly flat at 27% was down less than 1% from last year. Our operating income increased 4% for the quarter, organic operating income increased a little over 5% compared to last year as the acquisition of Banno that we did last March continues to be slightly dilutive to our operations.

The effective tax rate for the quarter was 32.8% compared to 35.2% last year which is primarily due to reinstatement of the R&E credit. Our net income increased 7% for the quarter compared to last year. So EPS of 72% was up 13% over the last year which is impacted obviously positive by our stock buybacks.

To breakdown the noise in the quarter, you start out with the $0.72 that we reported, there was about a 4% impact from the total web product sales. There was about a $0.03 impact from the R&E credit and then there was about $0.02 of one-time expenses in the quarter that went the other way.

And then the revenue recognition impact was a little less than $0.01 in the quarter which is about a $0.04 net take out which gives you down to a write out about a 68% EPS from operations compared to the $0.67 consensus estimate out there.

Our EBITDA increased to $118.3 million for the quarter compared to $110.8 million a year-ago or approximately 7% increase. Depreciation and amortization expense of $59.4 million year-to-date with $27.4 million depreciation and $31.9 million in amortization.

Amortization for intangibles from acquisitions was relatively flat at about $10.5 million compared to last year.

Free cash flow was down slightly this year primarily due to the timing of the annual maintenance billings collections in June of last year compared to last year we collect a lot more before this year started which is the primary impact for our cash flow.

As far as guidance going forward there is no change to our guidance, we continue to expect our top line revenues in the same growth range that we've seen. We expect margins to be relatively flat as they have been year-to-date. They were basically almost exactly flat with last year, was the guidance we gave going into this year.

So that concludes our opening comments. We are now ready to take questions. Andrew will you please open the call lines up for questions..

[Operator Instructions] At this time we're going to be taking our first question from the line of Kartik Mehta from Northcoast Research. Your line is open..

Kevin just a couple questions on your recognition issue, what was the catalyst that forced this change or made the hardest look at it?.

Well I would say Kartik we were notified I believe in October by our IR firm that they were being reviewed by the PCOB. And we had been fortunate enough to be selected for that review. And that’s pretty much when it started and it’s really kind of kicked off about Thanks Giving but I would tell you it really didn’t heat up until last week..

And then how many of the products are included, is it just one product or is it several?.

Well it’s really a couple of different things Kartik and obviously I don’t want to get too deep in the weeds here but the first phase was the recognized review on multi-product contracts.

And so the way we have always looking as revenue in the way us and our legal department have always zeroed contracts that we had multiple contracts with our customers under wiling kind of a general addendum. And what we would do was we would ship software and we would recognize revenue and build that as implemented the software.

So if a piece of software part of that multi product contract was not delivered for two years. We didn’t ship the software we didn’t recognize it and obviously the customer and pay for it under the new interpretation, we are required to, once the contract is signed.

We were required to ship 100% of the software or we can’t recognize any revenue from the software implementation, maintenance or anything until that last piece of software is shipped.

So even if we have a customer that have let’s say our Synapse [ph] solution, they know they’re not going to install for two years under the old methodology we wouldn’t have shipped it because it wouldn’t make any sense because what we were, ship them on the days signed contract, is not the same piece of software we’d have installed two years later anyway.

But under today’s guidelines we couldn’t recognize any revenue for the SilverLake software implementation or anything else until we shipped that last piece of software.

So that’s where it’s come down to, its they said we had to go back and defer all those revenues and put the supports of those winnings and deferred revenue that’d be recognized in the future. And that’s pretty much I’m not sure what it is..

And Kartik just to clarify a little bit there, that relates to software and related implementation fees and that has washed through at this point, those adjustments are reflected in the earnings release that we've put out.

The open item is the software maintenance which again we've had less than 48 hours to work on and so similar kind of concept but again everything Kevin just described has already been adjusted and accounted for the in the financials..

Okay and then just your thoughts on the competition the credit union market, have you seen any change at all or how you view your position?.

We have not Kartik we have in the credit union space 14 new core sales this year which is tracking reasonably in line with last year. And so answer to your question is no the competitive dynamic really is exactly the same, essentially the same in the banking and credit union segments at this point..

Yeah in fact Kartik personally it should just hit through your inbox that we post this morning of the Symitar wins in the first half. We signed 14 new takeaways and actually had 14 in the first half signed contracts to move from in-house outsourcing..

Kevin, what’s going to be tax rate now going forward? I’m assuming that changes a little bit?.

Yeah it’s going to be about 35%for the year Kartik. I mean obviously it went way down this quarter because had to take foreclosure for the impact of the R&E credit but before the year and going forward for the next two quarters you could probably use about 35% to be in the ballpark..

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

Hey guys nice job on the core business. And I’m just wondering the electronic, like the payments business grew 10% I think that’s the strongest in the last fourth quarters.

And maybe you can just talk about kind of what’s happening there with the acceleration?.

Yeah Dave there is I don’t know if there’s any one thing I would call out, we had good growth in our bill payments, businesses, debit card growth rate is little slower but in our ATM transaction processing grew nicely. Certainly there are no deposit capture, continues to grow quite nicely.

Don’t know that there’s any particular items that stand out, it’s just continued, customers being added with various payment processing services..

Good and then how big was TeleWeb about just so we can kind of take those out of the some of the year-ago periods just to get apples-to-apples comparison?.

Yeah Dave don’t hover this with our, the operating income from those products was right at a $1 million. The revenue from that - if knew or read correct it was about $5 million..

Okay.

And those are both the annual?.

Yeah annual revenue was $5 million or $6 million and operating income was a $1 million. Those came through the Audiotel acquisition back in 2007 those were not strategic parts going forward, that’s not why we did the acquisition. And those were just kind of dwindling down because they were not really market products.

So we made the decision that it was best to go ahead and sell them, take - get some cash out of them before we just watched and go to nothing..

And I think that you talked a little bit about the gain I think the last 10-Q you said it was a $3 million gain in and then the one-time expenses about half as big the way you describe it. So those one-time expenses must have been like a $1.5 or something like that..

Yeah just right at $2 million which include some long-time bonuses and just some other comps we just have in the quarter were all one-time cost Dave..

Okay. All right good job..

Our next question is from the line of Glenn Greene from Oppenheimer. Your line is open..

Not to believe where the whole accounting issue but I guess one question first the order of magnitude of the issue on the software maintenance side.

It sounded like the changes in the reinstatements you made very immaterial which is one question really why they even made you do this but just trying to understand the order of magnitude the software maintenance revenue.

And then related to this - is this like new GAAP accounting regulation or just like an interpretation that your orders have?.

Well you asked a whole series of questions here Glenn. So first let me just say that the adjustments, that we already made is clearly just a different interpretation of existing GAAP rules. This is all under SOP 97-2 that’s been in place for a long time.

We have complied with that for years, we have not changed anything we did but apparently our audit firm decided to look differently at it, they brought in different partners. And my understanding is the big for our firms kind of have their own set of interpretations. And that’s the direction they are going, so we're kind of required to comply with it.

And so we will make the changes and I’ll tell you that going forward you’ll have little to no impact on our revenue recognition, we’ll just adhere or pauses though so we can kind of continue to recognize revenues where we have been.

So it’s not a big deal but it’s just a kind of restatement and getting a repaying adjusted going forward for the prior year for comparison purposes. Again there’s going to be a little noise for the next three or four quarters as we restate historical’s on a year-over-year comparison.

As far as the maintenance fees, I honestly believe that’s going to be immaterial going in because really all of doing is looking at the DSOE of maintenance which we are very, very confident that we have DSOE which is kind of term soon out there but it really comes down to the timing of when maintenance is recognized.

So it really relates primarily to the maintenance associated with new license sales in any given year and when that maintenance should be recognized. So in my opinion it’s going to be clearly immaterial but it’s just one thing that we have got to go through and get documented and prove to the audit firm where we are and what it is..

And Glenn I think it’s probably obvious but just for clarity, whatever happens with maintenance, the revenue doesn’t go away, it either gets pushed forward and gets pulled back.

So there’s potentially some movement between quarters or possibly overlapping fiscal years but it’s just where it ends up being allocated to rather than not being allocated anywhere..

Different question, so on the competitor side you talked about this a little bit on the Symitar. And I did see the press release. So just to put it in context the 14 competitive takeaway, is that a similar number to what you had in the first half of ’14 and is roughly distributed across sort of market shares as we would think it would be.

And also the conversions from in-house to outsource that 14 which I think that’s a different independent number.

Is that comparable to what you saw on first half of ’14 also?.

Yeah the new core wins is almost exactly inline Glenn, I think last year we might have had 15 in the first half but it’s pretty much right inline. And just like last year we haven’t lost any. And the conversions from in-house outsource that’s actually accelerated a little bit from what we saw in the first half of last year..

Yeah it’s about the distribution I would just say that 9 of the 14 came from one vendor and rest were scattered out among other vendors..

That’s helpful.

And just finally to clarify the margin guidance were flattish for the year? Does that include all these one-time items in the quarter or how should we think about the impact of these one-time, the net effect of these one-time items to that margin commentary?.

Immaterial..

Our next question is from the line of David Togut from Evercore ISI. Your line is open..

Good morning this is Reena Kumar [ph] for David Togut.

On the TeleWeb gain was that all included in your G&A line?.

Yes..

And cost of support and services, I see that grew 10% above revenue growth.

Were there any one-time items there? And I guess if not what were the drivers of that increase?.

There was a few one-time things, the biggest driver within that increase was personal cost which there was some one-time special bonus type things in there but also depreciation, amortization in the quarter which we've talked about for the last three or four earnings calls from the investments that we've made in our infrastructure, the depreciation, amortization went up.

The other thing I’d point out on G&A is yeah the one-time gains from Teleweb’s in there but also if remember last year there was about a $3 million insurance proceeds from settlement from the Lyndhurst Tobacco from the year before that, so just comparing to apples-to-apples as you kind of get back both those..

That’s helpful.

Are you seeing increased competition from Fiserv’s DNA product?.

No..

Can you provide us an update on your estimate for FY15 capitalized software and internally used software? I think you were saying it was flattish for the year but you were up 26% in the quarter?.

For what?.

Capitalized software?.

For capitalized software I said we're going to be up for capitalized software compared to last year but it has leveled off. And this 2Q was pretty much inline in level with Q1. So we've said all along that it’s going to go up. I mean that’s kind of being the trend because of all the major projects we have gone on..

Did the expected 20% plus increase over the next two quarters in line with the first two quarters?.

Yes..

And just one final question, could you just call up the term fees in the quarter?.

They were up about $2 million over the same quarter last year..

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

I wanted to follow-up on the CapEx side, it looked like CapEx was little bit lower than I expected in the quarter after ramping up a little bit ahead of some of the things you’re doing with infrastructure as a service given three, four, five months since the formal introduction of that service.

Can you give us an update?.

Yeah I mean outside Peter, there was a significant amount of CapEx in Q1 for a couple of things, one obviously we took the estimate of the deferred claim but also we accelerated in the first quarter quite a bit of the new storage capacity that we were putting in place because one of the things that you can’t be half pregnant.

So we went ahead and we put a lot of boxes in. And so we should be good for storage now for sometime. So CapEx will level off little bit, the CapEx is still probably going to be in the 65ish million or so for the year..

And any initial commentary on the infrastructure operations for the effort?.

Just that it’s going quite well and Pete we have greatly expanded the scope of our testing environments. We feel very comfortable that we've accomplished what we set out to do but significantly improving our disaster of avoid and send recovery capabilities..

Great and then in this regard, we've seen a little bit of uptick in M&A and the banking space, anything worth calling out there or is it too soon to tell in terms of potential opportunities or losses from bank consolidations?.

Well obviously one of our larger customer’s Susquehanna Bancshares and Lititz Pennsylvania was one of the acquires announced late last half of 2014, that was not the way we would like to think that transaction going down but again we did not have any single customer that represents more than 0.5% of our total revenue, so it was much, we hate to see those folks go away.

The financial impact would not be there but for the general environment, there clearly a merger activity going on, I don’t know that from what we've seen it is significantly different than what we've seen for the last couple of years.

Our implementation teams particularly on the banking side, they have been full to capacity for probably the last two years. I don’t know that their backlog is any bigger right now than it has been..

And just as a quick follow-up or as a reminder, Susquehanna as an in-house installation correct?.

Yes..

All right I’ll get back in the queue. I appreciate it..

Our next question is from the line of Brett Huff from Stephens Incorporated. Your line is open..

On the license Kevin I don’t know if, Jack I don’t think you talked about this but the license was down but there was some caveat you put on that decline, can you just go over that for me again?.

I don’t know if Kevin put a caveat - or idea Brett my point was that, so obviously there was $2 million adjustment and I think most of that landed in the license. So my comments were taking that out. We would have been down about 14% on license fees as compared to - I don’t have right in front of me at the moment but 26%..

And that’s treating the license the same in both that’s apples-to-apples now?.

Yes..

Okay. And then in terms of buyback and things like that with all the accounting open item on the software maintenance, what can you guys do in terms of buyback and stuff.

Was there any change to what you can do there?.

No there’s no change because once it’s probably acknowledged Brett as long as anybody else can buy, the company can buy back stock.

Obviously we were blacked out until we announced earnings anyway but if we had to remain blacked out for that reason, then obviously we would not have been able to be in the market until that became probably acknowledged..

Okay. And then last question on the infrastructure question follow-up that’s asked before.

I think you - this has been generally available for four or six months is that right?.

Yeah actually Brett I might have misunderstood Pete’s question earlier.

I thought he was referring to the capital investment, so that Kevin had just finished talking about related some of the infrastructure for our own systems or outsourcing processing systems etcetera but related to what I think you’re referring to which is our hosted network solutions that we mentioned a while back, we officially put that in the hands of our sales team in July at the start of the fiscal year.

It has received a significant amount of interest, we've had a number of sales closed, I look at the report every month from the forecast of the number of deals that are in the evaluation stage. And it’s a steep and steady upward to the right climb if you charted out of banks that have shown interest in that.

It is a complex sale just, it’s A, it’s network that’s a pretty significant level of complexity. And other factors make it a fairly complex sale cycle. But we're very pleased with the response that we're saying relatively two quarters into having the service generally available..

And I think, I know it was last quarter or a quarter before that you guys seem to say that, it’d be this fiscal year you didn’t think there would be a whole lot of revenue from this just given that you had started this year. Do you still feel that way and or can you give us a sense of how quickly given the complexity of the sale.

Is that late this year where it’s the kind of thing you could put numbers around from a revenue point of view or is that more of a next fiscal year discussion?.

Well Brett we talked about this last year, I think we talked about at the Analyst Day but I know we talked about at various call last year. And it’s one of those things that it’s going to slowly ramp up because it’s all, some are the outsourced servicing. So it’s one bank at a time, there’s no license fee or anything.

So it’s just layering on and obviously we've got some nice momentum there.

We got some nice contracts in place but it’s also one of those things were bank will listen to this field because of the complexity to say, that’s sound pretty good but you know what? What out of 60 servers here, take three let’s see how it works and then we’ll a year from now.

So we've got some of that going on, so it’s going to be a slow building thing. So it’s kind of like we said, last summer if going into next fiscal year and probably the Analyst Day. We’ll be able to give you a whole lot better idea of what type of revenue we can expect for FY16 than we can now..

Okay, that’s all I needed. Thanks for your help..

[Operator Instructions] And I have follow-up from Glenn Greene from Oppenheimer. Your line is open..

Hey Kevin I know you don’t have the margins for those segments because of the recounting issues but your best guesses what the margins might look like, if you didn’t have those accounting issues? Just wondering sort of get through actual terms there..

Yeah I would tell you Glenn I think - there is some impact from those but it’s not going to be significant but banking was about 42% or 43% for the quarter, so just down slightly from a year-ago because the decrease in license revenues. Credit unions margins were probably about flat at that 45%..

[Operator Instructions] And it looks like we have no questioners in the queue at this time. I’d like to turn the call back over to speakers..

Thanks Andrew. Again we want to thank you for joining us today to review our second quarter fiscal 2015 results. We're pleased with the overall results from our ongoing operations and very pleased with the efforts of all of our associates, that take care of all of our customers.

Our executives, managers and all the associates continue to focus on what’s best for our customers and our shareholders. With that I want to thank you again.

And Andrew would please provide the replay number?.

Ladies and gentlemen, thank you again for your participation in today’s conference. The replay number is going to be 800-585-8367, that’s 800-585-8367. Thank you very much for your participation again. And have a great day..