Kevin D. Williams - Chief Financial Officer and Treasurer John F. Prim - Chairman & Chief Executive Officer.

Glenn E. Greene - Oppenheimer & Co., Inc. (Broker) Timothy Wayne Willi - Wells Fargo Securities LLC Kartik Mehta - Northcoast Research Partners LLC David J. Koning - Robert W. Baird & Co., Inc. (Broker) Rayna Kumar - Evercore Group LLC.

Good day, ladies and gentlemen and welcome to the Jack Henry & Associates First Quarter 2016 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, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Kevin Williams. Sir you may begin..

Thank you. Good morning and thanks for joining us for the Jack Henry & Associates first quarter fiscal 2016 earnings call. I'm Kevin Williams, CFO; and on the call with me today is Jack Prim, our CEO.

The agenda for the call this morning is Jack will start with some his thoughts about the business and the performance of the quarter, then I will provide some additional comments regarding the press release and the earnings we put out yesterday after the market closed, and then as normal we will open the lines up 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 can cause actual results or events to differ materially from those which we anticipate due to a number of risk and uncertainties, and the company undertakes no obligations to update or revise these statements.

For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our 10-K entitled Risk Factors and Forward-Looking Statements. With that, I'll now turn the call over to Jack..

Thanks, Kevin. Good morning and welcome to our first quarter earnings call for fiscal year 2016. We are pleased to again be able to report a solid performance for the quarter.

Revenue growth was strong at 7% although direct year-over-year comparisons to specific revenue components, especially license fees, are less meaningful due to the prior-period restatements and new revenue recognition procedures.

Perhaps the most noteworthy takeaway regarding revenue is that license fees now have a minimal impact on our revenue, making up less than 1% of the total in the last quarter, while our largest revenue category, support and services, represented 96%, and recurring revenue represented 83% of the total.

Outsourcing and payments again showed strong growth as did in-house maintenance based primarily on new credit union core system implementations even with the continued movement of existing in-house customers to outsourcing.

We held our annual banking and credit union user conferences in the quarter and had record combined attendance with over 2,200 bank and credit union executives in attendance, including representatives from 30 prospective core customers.

Customers were excited to see the progress on our various core product enhancement initiatives and the influence of the recently acquired Banno team on our mobile and electronic delivery channel solutions.

They were also appreciative that the new TILA-RESPA regulatory changes related to mortgage loan disclosures were delivered on time for all JHA systems for the required October implementation date. This was a massive development and deployment initiative that had to be delivered on a very short timeline.

Our sales team finished the quarter right at 100% of sales plans. Pipelines look solid and combined with the user sentiment at the conferences we look forward to continued progress. With that I'll turn it over to Kevin for a closer look at the numbers..

Thanks, Jack. As Jack mentioned with the change in revenue recognition our license revenue as reported is now clearly immaterial as it represents less than 1% of our revenue.

Remember that the vast majority of what used to be considered license revenue is now included in the bundled services, which is included in the support and services line of revenue.

Support and services line of revenue continues to drive our total revenue growth as it increased to $307.7 million, which is a 7% increase over the same quarter a year ago of $288.2 million, and again represented, 96% of our total revenue in both years.

Support and services breakdown for the quarter compared to the prior year – implementation services of $17.1 million compared to $18.6 million was a decrease of 8% for the quarter compared to a year ago. Our electronic payments was $126.5 million compared to $119.4 million, which is an increase of 6% for the quarter.

OutLink which is our – OutLink data services was $70.7 million compared to $63.1 million or a 12% increase for the quarter, pretty much in line with what we did last fiscal year. Our in-house maintenance was $84.3 million versus $80 million, or an increase of 5%, and bundled services was up slightly to $9.1 million versus $7.2 million last year.

Our hardware decreased 4% for the quarter to $12.3 million from $12.8 million last year. Our consolidated gross margins improved to 43% for the quarter compared to 42% in last year's fiscal year. License margins were 89% for the quarter.

Support and service margins were steady at 43% compared to prior year quarter and our hardware margins improved slightly to 29%, from 26% a year ago due to sales mix. Our total operating expenses increased 4% for the quarter compared to a year ago and our operating margin for the quarter increased slightly to 25% compared to 24% a year ago.

The effective tax rate for the quarter increased to 36.1% from 35.5% the first quarter year-ago, which this increase primarily was due to an increase in effective state rate for the quarter compared to a year ago. Net income was up 11% to $1.4 million, which led to EPS of $0.64 per share, which was up 14% over last year's EPS of $0.56.

EBITDA for the year to date increased to $111.9 million compared to $101.1 million last year, or an 11% increase, right in line with net income growth. Depreciation and amortization expense of $31.2 million with $13 million in depreciation and $18.2 million in amortization compared to $29.5 million last year.

Included in total amortization is the amortization of intangibles from acquisitions which is down slightly to $4.8 million compared to $5.4 million a year ago. Operating cash flows were up $33.5 million to 36% – or a 36% increase to $126.7 million for the year to date, primarily due to the timing of collections of our annual maintenance billings.

We continue to invest in our company both through CapEx and cap software on new and existing products and we continue to return to our shareholders through dividends and stock buybacks. Our return on equity for the trailing 12 months is right at 23% return. We also purchased just over 1 million shares for the treasury in the first quarter.

As far as guidance, our guidance has not changed from that that we gave at the beginning of the year on the last call. Revenue is still projected to grow in the upper mid-single-digits for the year.

But remember to consider the impact of the revenue and margins for the quarter is due to the change in the revenue recognition and the impact of bundling services, which drove the compound revenue during the year, impacting the total revenue and margins in each of the quarters.

We continue to anticipate a slight leverage on operating margin for the year. However, remember the projected effective tax rate for FY 2016 is 36%, up from 33% last year, since we still can assume that the R&E credit will be reinstated or repeated.

This increase in tax rate will be mostly offset by any positive impact on stock purchase during the year. Obviously if the R&E credit is repeated then we will revise our guidance accordingly.

Also I would like to remind you for the second fiscal quarter that we end now, last year had a one time-gain on sales from assets that came from the Goldleaf acquisition.

Combine that with the effective tax rate in our second quarter last year was 32%, compared to the expected 36% for this year, and adjusting for just those tow items an apples-to-apples basis, we would have reported $0.60 EPS last year against the current consensus estimate of $0.68 this year, which is probably a little aggressive.

Also considering we had a couple of pennies' positive EPS impact in the first quarter this year that we anticipated to happen in the second quarter from term fees which are total term fees for the quarter was $7 million this quarter compared to 5 million last year. That concludes our opening comments. We are now ready to take questions.

Juliana, will you please open the call lines up for questions?.

Thank you. And our first question comes from the line of Glenn Greene from Oppenheimer. Your line is now open..

Hi, thanks. Good morning, guys. Could you just sort of help delineate the very, very strong growth and margins on the credit union business and were the term fees part of that? And conversely the banking business looked a little bit soft, and then I had a couple of follow-ups..

Yeah, Glenn, I think primarily the credit union numbers are just a result of we had some – several, very strong sales years. I think in the fiscal year we implemented six credit unions there were $1 billion and assets so we continue to have good momentum.

I think the credit union progress was one of the reasons that you saw our software maintenance numbers grow even though again we continue to see a steady progression of existing in-house customers moving to outsourcing. So I think it's just basic fundamental business on the credit union side that's continued to grow.

Do you have anything you'd add to that?.

Yes, other thing I would add, Glenn, is part of it is impacted a little bit by the bundling of services which just comes down to kind of the timing of delivery of the last products that we have talked about in the last couple of calls. So it had a nice impact on that which the opposite happened to the banking.

The bundling services for banking was down about $2.5 million and the bundling for services for credit unions is up is a little, $4 million. But even if you back that out our credit union revenue growth was still a little over 15%, but still extremely solid growth on a year-over-year basis..

And if you think about it for the year, sort of talk about the revenue growth of the upper mid single digits, how would you sort of so we know the deal with accounting for the bundling services, on a full year basis how would you think about the growth for credit union versus banking?.

I think credit union is going to outpace banking by little bit but the timing of billing sources is just hard to predict, Glenn. It is what it is, just comes down to when that last product is delivered and it's tough to anticipate what impact that's going to be.

I stand behind the guidance of our revenue in the mid – upper mid single digits, and credit unions is going to outpace banking just a little bit..

Okay, then....

I wouldn't think that certainly, Glenn, that it would be at a 15% in apples-to-apples growth rate rest of the world..

No, absolutely no..

Okay and then the bigger picture question, maybe just broadly the spending trend you are seeing, the booking trend you had in the quarter and pipeline going forward and one of your peers talked about somewhat slowdown in discretionary spending maybe from bigger banks but have you seen anything like that?.

We have not, Glenn. Again, as I mentioned the sales team were right at 100% and they just finished their fifth consecutive year of all three brands making – obtaining 100% of their assigned quota and this is usually a pretty challenging quarter, as first quarter of our fiscal year.

So there is a certain amount of rushing to close everything if you can in the fourth quarter but – so to come up with 100% performance in Q1 is certainly I think a good sign.

I think the other thing is that the pipelines were up not only compared to where they were a year ago, they were also up compared to where we were at the start of the fourth quarter. So to be up after again that big push in Q4 is a little unusual, and it won't – again it went up a tremendous amount but I would have been happy with flat.

So I think generally the fundamentals look pretty solid at this point..

The other thing to remember, Glenn, is Jack mentioned the two user education conference we just had for JHA Banking and Symitar. We had record attendance at the Symitar meeting. We had close to record attendance on the banking side, it was the highest in years, actually the highest I believe since the recession.

And the number of prospects that we had at both the user meetings was close to record.

So that is always a good indication when people are willing to send their people to an education conference to get more exposure to our product, that's always a good thing for us to come out of there, and also to have a large number of prospects attend both of those..

And then just a final one and I'll jump back in the queue, but do you guys have any impact from any big bank M&A that's been announced? I mean there has been a couple of notable ones, but I don't know if you were on either side of those equations?.

No, nothing new, Glenn. The ones that I've seen in the last several months are – I mean certainly we have some banks that are involved with M&A but we talked about Susquehanna, we talked about CIT (14:04) a year or so ago. But certainly....

So nothing like First Niagara, KeyBank, any of those kind of things?.

No, none of those are impactable to us..

Okay, great. Thanks guys..

Thank you. And our next question comes from the line of Tim Willi from Wells Fargo. Your line is now open..

Hi, thanks, good morning. I apologize, since I'm talking here a bit late. So if I ask something that was covered just tell me to take it offline. But could you talk a bit about just sort of again the whole network hosting solution that you guys have rolled out? And I know you've just got a handful of customer there.

But any color around interest levels or anything along that nature and then also just I know it's a multi-year type of outlook, but maybe you could just talk a bit about the scalability of that, if momentum builds and it takes off?.

Yeah Tim, we are continuing to see strong interest there, number of implementations are growing. It's going to be a compounding effect before that comes in meaningful revenue line item, but we are seeing good growth.

I would tell you that thus far year to date, in terms of the number of units, number of institutions that we had expected from (15:28) behind what we thought we would be but actually the size some of the institutions has been larger than we expected it would be.

So if you look at the sales margin dollars that we expected to book, we are actually ahead of where we expected to be even though the number of actual units, number of actual financial institutions is less than we thought that it might be at this point. But we see very good interest.

There was a lot of discussion around those topics at the user conference. The emphasis on regulatory agencies, on cyber security is continuing to ramp up and that's, again, we think going to be a tailwind for this type of service.

So again probably a little – a year or two away from this becoming a noteworthy line item in terms of how it shows up in the financials but we're very pleased with where it is at this point..

Great. And then just on capital, and again, if you hit on this in Glenn's questions I missed it, I apologize.

But just any thoughts around how the M&A environment looks like? I mean it looks like in the tech world lots of – it seems like people are trying to scramble for exits of sales, there's maybe talk of the cost of capital going up and the valuations in the marketplace obviously continuing to expand.

Have you seen any change around books coming across your desks and/or seller valuations continuing to stretch out, are they starting to flatten out in terms of what they are looking for versus a year ago?.

We have not seen any change in expectations of what properties should sell for, Tim. I think deal flow books coming across our desk, nothing noteworthy to mention there. We don't take the approach of let's just bolt on revenue and buy something just because it's available for sale et cetera.

If it's a good strategic fit, if it fits with our sales distribution channel, if it's a product that that is something our customers need and we can leverage it through those channels, then certainly we would give it a look.

But most of what we are seeing continues not to meet those guidelines and frankly the few that we have seen in recent history that did fall into those guidelines, the other challenge there was the expectation around selling price. And I don't know that has moderated yet..

Okay. And then....

Having said that, Tim, we have an untapped credit facility that we would love to find the right acquisition. So we will continue to look for them..

Yes, no, obviously you guys have a great balance sheet versus the industry, which is not in bad shape, but you obviously are about as pristine as it gets right now. Just a last one and I'll hop off.

In the payment business and sort of tying into EMV and I guess more broadly security, I mean we do hear a lot around the payments companies finding some uptick in not just EMV revenue which might be sort of transitory but also just enhanced security around their payment business, their payment cards et cetera.

Are you seeing any of that? Is that something that's picked up or do you think that could pick up in that payment business? I don't know if it would be in that line item or a different line item, but just any thoughts there? Thanks..

Tim, the EMV numbers – there is – first of all we are not in the card production business. So there is no card production or no meaningful card production revenue. I mean, we work with outside card manufacturers and while there may be a little bit of a market there, it's not a meaningful number, so from the EMV card production, nothing there.

There may be some very slight upticks in some of the processing fees around EMV. But again I don't think that it would be noteworthy. Security – for your basic payment processing businesses, I think it's difficult to get paid more for security.

I mean I think the kind of security product that we get potentially paid additional for would be like a hosted network services or some of the monitoring intrusion prevention services that we offer to our customers. Our customers had always expected that their payments are processed securely.

And that I don't think they are willing to pay us anything else, for something they already expect to be included. If anything, I would tell you that we continue to invest significant amounts of money in and around the security area to make sure in fact that we do deliver on that expectation that our customers have.

So other than the security-related products and services that we've offered for some time, I don't know that I see a lot of upside in terms of existing businesses based on security considerations..

Great, thanks very much. That's all I had..

Thank you. And our next question comes from the line of Kartik Mehta from Northcoast Research. Your line is now open..

Hi, Good morning Kevin and Jack.

Hey, Kevin, as you – as I listen in your comments and you talk about the second quarter and based on you saying maybe a couple of pennies pulled into the first quarter, would you expect year-over-year growth or is that going to be difficult considering the tough comparisons you have and kind of what happened in the first quarter?.

I think it's going to be tough to have much, if any, growth, Kartik. I think if I was going to guide you to something I'd probably guide you to basically flat with last year. And then like I said all along, with the billing service, everything, our year is going to be more backend-loaded than you all are historically used to.

So we are anticipating a very sizable fourth quarter. So second quarter is not going to be much, if any, growth.

Obviously if Congress puts the R&E credit in before December 31 then all bets are off because then that changes the effective tax rate considerably and then obviously we would have growth but that's about the only way I can see that happening..

And Kevin, as you look at kind of where the balance sheet is and the amount of free cash you were going to generate this year and where the stock price is, do you, will you remain aggressive in buying back shares or is this a point in time where you are more comfortable kind of building cash on the balance sheet and waiting for an opportunity either for an acquisition, or if something happens in the marketplace, taking advantage of buying back stock at that point in time?.

Well, Kartik, I don't know about being aggressive. We've said for the last couple of quarters that we plan to be more systematic in just buying shares back rather than trying to chase the price. So, I anticipate that we will continue to be in the market. Obviously, we have a board meeting next week and that will be one of the topics we discuss.

But I don't see any need and I don't think the board, based on previous conversations, sees a need for us to build cash on the balance sheet.

We've got basically a $600 million revolver that's untapped and with our balance sheet and cash flow if we find an acquisition that's bigger than that we can get financing pretty quickly to satisfy that but I don't really see any need to keep a whole bunch of cash on the balance sheet..

Yeah, it's like we're going to work really hard not to create buying opportunities..

And then, Jack, just one last question here.

You talked about the pipeline being really strong and the success you've had on the credit union side, are you seeing – if you look at the pipeline and kind of spending trends, any changes and how banks or credit unions are spending? Are you seeing more growth in one area or another?.

That's a good question, Kartik. Our sales have been pretty solid across board, there is not any one area, on previous earnings calls and I'd say essentially the same thing today, that I would call out as being an exceptional area. Again, we are continuing to see growth and momentum in some of the new services like the hosted network services.

Some of the core activity is probably a little slower than what we like to see right now but that's in terms of in the quarter itself but it was offset by sales of other products and I don't necessarily think that observations on a particular quarter represent a trend at this point.

So it's been more of kind of across the board or a number of different areas that nothing I would call out as being particularly unique or different.

There is a lot of interest in some of our electronic delivery initiatives and the internet banking and mobile and tablet functionality that we are bringing to market, a lot interest in seeing what we are doing there. But that – again nothing I would point to as being a substantially bigger contributor..

The one thing I would add that, Kartik, is our trend of existing in-house customers moving to outsource continues at a very nice pace. I think we had 11 in the first quarter that made that move, so that trend continues very nicely for us..

All right. Thank you very much. I appreciate it..

Thanks, Kartik..

Thank you. And our next question comes from the line of David Koning from Robert W. Baird. Your line is now open..

Yeah, hey guys. Nice job again. Yeah, and I guess I'm just wondering if we look back for the last probably 20, 30 years, there has been kind of always a little bit of fear that when the M&A environment kind of picks up for banks that it will hurt your spending.

And the last couple of years now you and, Fiserv is like you too, have pretty high term fees but yet growth is pretty much as good as ever. And I mean is this just kind of the thesis again playing out that it really does – consolidation, it just doesn't matter that much. Maybe you can just comment on that a little bit..

Well, Dave, it is certainly a factor that we have all dealt with for the last 20 or 30 years and managed, as you indicated, to continue to find ways to grow the business, additional products and services and kind of rounding out our offering. That is certainly our expectation.

It does seem – and I haven't done the math to actually check this but it sort of feels like some of the industry consolidation has picked up a little bit here in the last six months or so, but again when you look at it on a full-year basis will that amount to a 5% shrinkage instead of 4% shrinkage? Maybe.

But again I think it's just there are opportunities there, we continue to find them, and take advantage of those and we think we can continue to grow in the current environment..

Yeah, and Dave as the slides in our investor presentation has shown for many years, the vast majority of the consolidation is happening at the low level, the lower tier of asset-size bank and credit unions which is not really our playground anyway..

Okay..

And actually – our target market has actually been pretty stable if not actually growing in some of the larger segments..

Yeah. Okay. That's good and then the in-house maintenance revenue stream you mentioned there, I mean that growth I think was 5%, the strongest in several quarters now.

Is that sustainable or was there anything in there that was a little bit one-off or is there just a new core replacement cycle with some of the credit unions that just allows that to stay high for a while?.

Well, I would tell you, Dave, that the majority of that increase in our sales came from the credit union side and that is just because we continue to install a lot of in-house credit unions on that side of the business..

Yeah, as I mentioned, David, last year we converted six credit unions that were over $1 billion in assets and so that was throughout the year, so you were only seeing partial maintenance from those folks throughout the year.

So this was – would be the first quarter that would have reflected all six of those for that full period and then again that's just the six that were over $1 billion. We had 31 credit union sales last year and I think some of those are probably being implemented this year.

But anyway, it has just has been a solid contributor and I don't think there are any unusual one-times in there that led to that..

Okay. That's good. And I guess just the last thing, the payment segment has been growing kind of high-single digits for a while, I think it was 6% this quarter. I mean, it's pretty much nothing, I mean it hasn't changed much.

It decelerated just a touch but you are not seeing change really there either, right?.

No, it's – there certainly, there has been, we've talked about this on previous calls, there has been price compression, continues to be price compression particularly on renewals.

It's a competitive business and lots of people trying to break into that area so – but no, beyond just kind of normal competitive activities that we've seen for a while, nothing particularly new..

Okay. Great, thank you..

Thanks, Dave..

Thank you..

And we have the question from the line of David Togut from Evercore. Your line is now open..

Good morning, this is Rayna Kumar for David Togut. Can you go into more detail as to why you anticipate flattish EPS growth for the second quarter? Is it just a tough tax rate comparison or is there more to it? Thank you..

Well, there's two things.

Like I said in the opening comments, Rayna, one, in the second quarter last year we had a one-time gain from sale of some products that came through the Goldleaf acquisition, the Tellerware (30:06) product which I think that gain was about $5 million in the quarter and then also the effective tax rate last year was 32% versus 36% this year.

So those combined makes for a pretty tough comparable and a hurdle to get over just to be flat with last year..

Got it, that's really helpful.

And can you provide us an update on your estimate for FY 2016 capitalized software and internally software and maybe just go over what your largest investments are this year?.

Well, so the areas that we are investing in and Kevin can probably give you better insight on the actual numbers but the areas that we are investing in, continue investing in are a number of product – architecture refreshments on the credit union side which we've talked about before.

We've had a number of improvements that we made on the banking side. The larger types of investments in terms of the percentage of those dollars are going more towards payments-related products and mobile and electronic delivery solutions that we offer. Kevin, I don't know if you've got guidance on....

Yeah, right, I mean, the internal software – I mean obviously we've got a lot of progress going there. As Jack mentioned a lot of that is security-related and other things we just have to continue to invest in our infrastructure. And that's probably going to end up being $12 million to $14 million for the year.

For computer software developed, which all of the areas that Jack just mentioned, payments of mobile and everything else with a lot of these products that are going to be driving future revenue, as my quote says, certainly in the earnings release, the vast majority of our investment is on these additional products, the new products and services there are going to be rolled out in the future but that's probably going to be somewhere in the $90 million to $95 million for the total year for cap software..

Got it. Okay. You mentioned pricing compression in your electronic payments business.

Should we think of mid-single digit growth as the new normalized revenue growth for that business?.

Right, that's probably the right way to think about it..

Got it.

Could you talk about head-to-head win rates for Symitar versus Fiserv DNA in the quarter?.

I don't have that against that specific product. We continue to gain market share from a variety of competitive products. Our win rates are very solid.

A lot of times when a financial institution, bank or credit union, goes through an evaluation process they may end up making the decision to stay with their current provider, usually after receiving a deep discount to do so.

But I would tell you that our win rates remain very strong among those financial institutions who go through an evaluation and do decide to make a change from their current vendor and that's going to be anywhere from 50% to 60% plus win rate among those who will actually go through with a change from their current provider.

In terms of breaking it down among which of the 15 different core solutions we see on the credit union side versus – or for that matter the number that we see on the banking side, I don't really track them product versus product..

Got it.

Could you call out the term fees in the second quarter of 2015 and your expectation for the second quarter of 2016?.

Rayna, honestly I don't have that on – with me right now..

Okay..

I don't have the company's last year second quarter..

Okay.

And just one final question, if you can just give us the end-of-period share count?.

80.7 million roughly, 80.5 million..

Thank you very much..

And I'm showing no further question at this time. I would like to turn the call back over to Kevin Williams for closing remarks..

Thank you. Again, we want to thank you for joining us today to review our first quarter fiscal 2016 results. We are very pleased with the results from our ongoing operations and the efforts of all our associates to take care of our customers.

Our executives, managers and all of our associates continue to focus on what is best for our customers and our shareholders.

With that, I want to thank you again, and Lauren, will you please provide the replay number?.

Ladies and gentlemen, thank you for participating in today's conference. A replay of today's presentation will be available later today. To access the replay please dial 855-859-2056; the pin number is 66570196. You may all disconnect. Everyone have a great day..