Kevin Williams - CFO Jack Prim - Executive Chairman David Foss - CEO.

Kartik Mehta - Northcoast Research Brett Huff - Stephens Peter Heckmann - Avondale Dave Koning - Baird Rayna Kumar - Evercore.

Good day, ladies and gentlemen, and welcome to the Jack Henry & Associates Fourth Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise. But later we will be holding a question-and-answer session after the prepared remarks and instructions will follow at that time.

[Operator Instructions]. As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Kevin Williams. You have the floor, sir..

Thank you. Good morning. Thank you for joining us today for the Jack Henry & Associates fourth quarter fiscal year-end 2016 earnings call. I'm Kevin Williams, CFO. On the call with me today is Jack Prim, our Executive Chairman of the Board; and David Foss, our CEO.

The agenda for the call this morning, I will turn the call over shortly to Jack, so he can make some opening comments.

Then Dave will provide some of his thoughts about the business and performance of the quarter; and then I will provide some additional thoughts and comments regarding the press release we put out yesterday after the market close, provide some initial guidance for FY 2017, 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. With that, I'll now turn the call over to Jack..

Thanks, Kevin, good morning. I'm happy to join you this morning following another strong quarterly performance, probably worse on one-time events in the quarter all contributed positively to our performance.

And Dave and Kevin will discuss in more detail after netting out all the benefits from these one-time events, our quarterly operating performance would have still been very strong. Our previously announced CEO transition took place as planned on July 1. Transition was very smooth.

The related organizational changes were made and well received by employees. This acceptance was helped by Dave's 17-year tenure in the organization as it helped employee's rollout, there are unlikely to be major directional changes, our shareholders should have similar expectations.

Congratulations to Dave on his new role and I will now turn it over to him for some additional details on the quarter..

Thank you, Jack. Good morning everyone. We're pleased to report another strong operating quarter with record revenue and operating income and I would like to begin today by thanking our associates for all the hard work that went into producing those results for the quarter and for the fiscal year.

The fourth quarter provided a nice ending to a good overall performance for the year. Revenue increased 10% for the quarter and increased 7% excluding the impact of deconversion fees from both quarters.

Organic revenue growth was also 10% for the quarter because of the impact of our acquisition of Bayside on July 1 last year was not material to our numbers.

As discussed on the last call, our payments business is continuing to grow over some significant customer losses in late FY 2015 and early FY 2016, but despite that pressure, we posted an 8% increase in payments revenue and a 5% increase excluding deconversion fees.

Our outsourcing and cloud revenue growth for the quarter was 21% and if you exclude the impact of deconversion fees from both quarters, we saw a very solid 14% increase. Although we continue to have a number of large development projects ongoing, we have released several new products in the past few months.

So you will know that the capitalized software declined during this quarter over our previous run rate on a sequential basis. Although, I don't expect a continued decline in this area, I do believe that the rate will normalize going forward.

As previously announced, we completed the sale of our Alogent Deposit Automation software business to Battery Ventures at the end of May. Obviously this transaction creates some noise in our numbers, so Kevin will provide more detail on the impacts of this transaction in his comments.

As a reminder, Alogent was a division of Goldleaf, when we completed that acquisition a few years ago.

The Alogent Solution has a strong offering in the Tier 1 financial institution space but this segment of the market which is essentially comprised of the top150 banks is not a focus area for us and we felt the business could be a better fit for another owner.

Once again, all three of our brands, finished the fiscal year ahead of their sales plans which positions us well for FY 2017. We just completed our annual sales pick up, with all of our sales reps and they are already off to a good start. Overall our business fundamentals remain strong and our associates are optimistic about the coming year.

As Jack mentioned earlier, our CEO transition is complete as of July 1. On behalf of our approximately 6,000 associates, our customers, and our shareholders, I would like to thank Jack for his many years of service to our company and congratulate him on his outstanding 10 years as CEO.

I look forward to continuing my working relationship with him on his new role as our Executive Chairman. With that I'll turn it over to Kevin for some detail on the numbers..

Thanks, Dave. Our support and services line of revenue which represents 96% of our total revenue for the fourth quarter and fiscal year-end continues to drive our revenue growth. To break our support and services down a little bit implementation of service revenue of $14.7 million versus $17.9 million or down 18% for the quarter.

As Dave said, electronic payments of $131.5 million versus $121.4 million increased 8% for the quarter. Our OutLink outsourcing division grew to $84.1 million from $69.7 million or 21% increase.

Our in-house maintenance increased to $81.4 million versus $76.2 million or 7% increase, and our bundled services grew to $41.7 million from $33.4 million or 25% increase. Our total revenue grew 10% for the quarter and grew 7% if you back out the total deconversion fees of $14.9 million in the quarter and $5 million in year ago quarter.

For the fiscal year total revenue grew 8% and grew 7% if you back out total deconversion fees of $37.6 million this year versus $26.9 million last year.

Our total operating expenses decreased 21% for the quarter and increased 1% for the fiscal year compared to year ago period primarily to the gain on sale of Alogent, net of related expenses for a net impact of $18.5 million. Without this impact total operating expenses actually increased 12% for the quarter and 9% for the year.

Increased personnel expense in R&D and G&A drove the majority of the increase for both the quarter and fiscal year. Disposal of some assets also increased the R&D expense for the quarter. Our operating margin without the impact of Alogent remained level at 27% for the quarter and 25% for the year compared to the prior year.

The effective tax rate for the quarter decreased to 27.4% for the quarter from 32.1% last year. But again without the impact from Alogent the effective tax rate would have been right in line with last year at 32% for the fourth quarter.

For the year, effective tax rate was 31% with the impact of Alogent and 32.4% without Alogent compared to 33.3% last year.

The net tax rate without Alogent was lower this year due primarily to the reinstatement of the Research and Experimentation Credit as we got an additional half year catch-up; therefore we anticipate next year's effective tax rate to be close to 34% to 34.5%.

Net income was up 39% to $84.3 million from $60.5 million a year ago which led to EPS of $1.06 which was up 42% over last year EPS of $0.75. Excluding the effects of Alogent our net income would have been $66.5 million or $60.5 million a year ago and EPS of $0.84 compared to $0.75 or 12% increase.

So the fiscal year our net income was $240.9 million up 18% from $211.2 million last year which represent EPS of $3.12 up from $2.59. Excluding the effects of Alogent our net income would have been $231.4 million or up 10% from $211.2 million and EPS of $2.90 per share for the fiscal year compared to $2.59 last year or 12.1% increase.

EBITDA for the year-to-date increased to $491.6 million compared to $437 million last year or a 12.5% increase. Without the effects of Alogent gain, EBITDA grew roughly 9%.

Included in the total amortization disclosed in the press release, is amortization of intangibles from acquisitions, which was down to $18.4 million compared to $20 million last fiscal year.

Free cash flow defined as operating cash flow less CapEx and cap software plus the proceeds of sale of assets, was $237.4 million for FY 2016 or $2.98 per share compared to $236.8 million or $2.90 per share in FY 2015.

Free cash flow was impacted this year by increased capitalized software, which cap software for the quarter actually decreased approximately about $5 million sequentially compared to Q3, which -- this was also part of the increase in R&D expense and impact on operating margin in the quarter.

Also we are projecting cap software to be down slightly in FY 2017 compared to FY 2016. Also impacting our cash flow was our annual maintenance billing collections were a little slower this year compared to last year by approximately $10 million at June 30, which those collections are subsequently caught up.

We continue to return investment to our shareholders through dividends of $84.1 million for the year and stock buybacks of $175.7 million for the year. Our return on equity for the trailing 12-months was 25% or 23.3% after backing out the impact of Alogent. So FY 2017 initial guidance.

Revenue growth will be slowed in FY 2017 as we grow over a couple of rather large headwinds. The first is obviously the sale of Alogent, which represent $28.4 million in revenue in FY 2016 or about a 2% headwind. The other is the expected significant decrease in deconversion fees in FY 2017.

We anticipate these one-time deconversion fees to decrease by just under $12 million or approximately 1% headwind compared to FY 2017, which certainly is more in line with what we saw in FY 2017 or FY 2015, I'm sorry. The majority of this anticipated decrease is due specifically to two major deals that we discussed on previous earnings calls.

Close to $5 million from one deal in December, in the December quarter, and $4.6 million from one in the June quarter, which is timing of that and the others in the fourth quarter was a large part of the fourth quarter $0.04 EPSD.

But we do not anticipate losing any of large deals of this significance this year, which is why we're lowering the expectations. However, both of these were created by M&A activity over which we have no control.

So backing these out for an apples-to-apples comparison, the base revenue would be reduced to little over $40 million to a base of $1.314 billion for FY 2016 and based on that revenue growth for FY 2017 would be somewhat in line with this year in the area of about a 7% growth.

So with these headwinds right now, we anticipate actual reported revenue growth to be in the area of 4% for FY 2017. Obviously, the $19.5 million gain on disposal of business during FY 2016 must be backed out of operating expenses to arrive at a comparable operating income for comparison.

Even with a loss of the large electronic payments customer, as Dave mentioned last year, that we talked about previously, this creates large headwinds on our margins. However, we do anticipate a small margin expansion, primarily in the second half of the year.

So from the projected approximately 4% reported revenue growth we anticipate, operating income growth should be approximately 6% or a little better after backing out the gain compared to FY 2016 operating income.

Without the headwinds of Alogent and the expected reduction deconversion fees, our operating income would have actually been projected to grow over 10% FY 2017. So our business operations remain very strong. We just have a couple of unusual items to grow over this coming year.

As mentioned above, the effective tax rate for FY 2017 would be in the range of 34% to 34.5% compared to 32.4% in FY 2016, adjusting for the Alogent gain, which obviously will be a headwind on net income growth.

For EPS guidance, first, you need the back out the gain on the sale of Alogent net of related cost, which was $0.22 of EPS this year, to determine a net base of $2.90 for FY 2016. The change in the effective tax rate represents approximately $0.05 EPS headwind and the anticipated decreased deconversion fees represent approximately $0.10 EPS headwind.

So this is a very large headwind of approximately $0.15 EPS impact. Therefore, at this time, we expect reported EPS to grow 5% to 6% over actual reported FY 2016 after adjusting for the gain on sale of business.

For FY 2017 EPS, should be in the range of $3.04 to $3.06 aided by some planned stock buyback, which was slightly lower than the current consensus estimate of $3.08. Again, our operations of business continue to be very strong. Obviously, we will update these guidance quarterly as we proceed through FY 2017.

This concludes our opening comments, and we are now ready to take questions. Andrew, will you please open the call up for questions..

[Operator Instructions]. Our first question comes from the line of Kartik Mehta from Northcoast Research. Your line is open..

Hi good morning. Kevin, I just wanted to ask a little bit about cash from operating activities.

It just looks like working capital was a little bit more negative and I'm wondering if that's just timing or if there's anything more than that included in that?.

Well it was just timing and then there was some impacts from just the accrual of income taxes and the timing of payment of taxes and different things like that Kartik, there's really nothing unusual on the working capital..

So if that will work itself out, I'm assuming over the next couple of quarters?.

Yes..

Okay. And then as you look at your business and you look at the backlog as you talked about in the past, what level of confidence do you have in the recurring revenue or the revenue guidance for FY 2017.

Obviously, excluding the one-time stuff with Alogent and the deconversion fees?.

Well, I mean, recurring revenues is still about 80%, Kartik, and most of that is tied to either long-term contracts or in-house maintenance contracts, which all those have already been renewed by this time. So that's there in deferred revenue which current revenue was up a little bit. So for that part, we feel extremely good.

We've got the backlog of things to be delivered. We've got a very strong backlog, banks and credit units that's assigned to move from in to out. We have a very solid year of contracting those institutions move in and out. So at this time, I feel very confident about the guidance that we just gave on revenue..

And just one last one.

As you look at, I know this by quarter-by-quarter, it's difficult, but as you look at the year that just ended and the market share on the credit union side, your thoughts on how you ended up the year with as far as market share and based on what you are, of course, the installations that you're looking forward into FY 2017 what that might do?.

Kartik, it's Dave, I'll answer that one. So we had a very solid year on the credit union side. We ended up signing 21 competitive takeaways for the year.

The good news for us is when you look at the $500 million and above credit union space and larger credit union, half of the credit union who decided to make a change from their core provider to another core provider, half of them decided to go with our Episys Solution.

So we are well-positioned in the credit union space, having really solid success, continuing to have solid success in the credit union space and feel like our Episys Solution, in particular, is positioned really well to compete with anyone in the market..

Thank you. Our next question comes from the line of Brett Huff from Stephens. Your line is open..

Good morning guys.

Can you hear me oaky?.

Hi, Brett..

Hi. Two questions for you. One, Kevin is there anything in the numbers right now that you could point out due to the change in accounting you guys had to bundle your revenue, all that kind of stuff? As I recall, it was going to be a little bit of a revenue headwind in the first couple of years and may be switching to a small tailwind in the out years.

Are you seeing any of that? Or do we need to pay attention to that from an order of magnitude point of view as we think about the next few years?.

Yes. I don't know that there's much difference, Brett. I mean, obviously, the bundled revenue is up a little bit this year, but it appears based on the timing of delivery and different things that the bundled revenue should be similar in FY 2017, where it was in FY 2016 at least that's what it looks like right now.

So there shouldn't be, I think, we've made may have got a little tailwind this year, but I think, it's going to be relatively flat next year. And then we go into the new rev rules the following year which all bets are off at that point..

Okay. And then, second question is on investment. I know you guys got a number of investments going on.

Can you give us an update on the key ones? I know there's a UI change and you guys are going through and a few other things can you just give us the highlight and update on top two or three?.

Sure, yes, Brett, it's Dave again. So I mentioned in my opening comments that we rolled out a few of those solutions. So Biller Direct, for example, is one that I've highlighted in the past. We rolled out the first version of Biller Direct in June on schedule. We have another enhanced version coming out later in the year.

Our experienced development project, which has been redoing the user experience of the front-end for our core solutions and most all of our integrated complementary solutions that's about done, we rolled that out recently.

Our cash management solution, and that's separate from our treasury management initiative, but our cash management solution we rolled out in the quarter. So several of those have been rolled out to customers now.

Ongoing, we have the Episys database project that we talked about before our treasury management project that is ongoing that will come out in calendar 2017. And then of course, Banno, which is our mobile platform, our digital platform continues to be a ongoing development project for us..

Okay, that's helpful. And then last question, Kevin, can you just -- you mentioned that there was some I think extra R&D expense because of Alogent. Can you just walk us through why that was the case? If we're selling the business, why is there more R&D? So I just didn't quite understand the math there..

No, that's not what I said, Brett. I said that cap software was down for the quarter, which obviously increased R&D expense for the quarter..

Okay, got you. That's what I needed. All right. And then last question just some housekeeping. Kevin, I missed this early on.

I think you said adjusted ex-Alogent, the tax rate was 32%, was that right?.

32.4%, I believe, yes..

Okay. That's what I needed. Thanks guys..

Yes..

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

Good morning, gentlemen. Just had a few follow-ups.

In terms of bank side on the mid-tier, how do you think the prospects for lower interest rates for longer impacts, the willingness for banks to pull the trigger and decide to upgrade a core or do major projects as well, the election, are you seeing anything in terms of decision cycles, may be lengthening or requests in terms of the demands that the banks are looking for from their core providers in order to go ahead and upgrade, has there been a change in their expectation?.

Those are all -- Pete, this is Dave. Those are all definitely topics of conversation, but I don't see any of those things impacting the number of requests for proposal, for example, the number of deals that we have in place right now or the pace of decision that's going on right now. We closed 19 competitive core deals in the fiscal year.

That's around the rate that we've had for quite some time, sometimes little over 20, sometimes little under 20, but that's a consistent rate for us. And then the mid-tier space in particular, we feel that we're very well positioned now.

You may or may not have seen we did press release recently about the reintroduction may be of SilverLake as a real-time platform with the new user interface that we referenced earlier, the experienced interface. We got a little bit of good press from Talend where they named SilverLake as the new market leader for mid-sized banks.

So I think we're feeling very strong about where we're positioned today. But as far as decision, the request for proposals or RFP requests or the decision pace, it hasn't really changed at all in quite some time..

All right, that's helpful. And then Kevin, just a clarifying comment on your guidance, you provided a good tight range for EPS.

Would there be any material level of buyback implied in that guidance?.

Not a huge amount. As we're predicting there's probably million shares or so in there that we will buy in the first half of the year, so Pete..

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

Yes hey guys, nice job..

Thanks, Dave..

Yes and I guess, first of all, just looking at the margin, if we take out term fees and assume they're 100% margin, it looks like this quarter was I think, the operating margin, a little over 23% and last year Q4, was just under 26% on a ex-term fee basis, so down 240 bps or something like that.

Why would margin be down so much year-over-year?.

Well, part of that, Dave, is what I said, the 23% increase in R&D expense, because we didn't capitalize as much software this quarter. And then I would say you that the G&A expense is up because of all the change in everything.

We have hired a bunch of accounting people, internal auditors is staffed up during the year, so just several areas primarily in personnel expense that has impacted the margins..

Got you. Yes, I can see D&A was up in almost probably about 100 bps or something in G&A up.

It seems like there might be a little bit of core to may be D&A was may be part of it too, just as you're starting to amortize some of the software, I would imagine that's may be a little bit of it too?.

That's a little bit of it, yes..

Okay, okay. And then secondly, just a couple of things on Alogent.

Is the margin -- was the margin at Alogent above or below core Jack Henry?.

It was little below..

Little below, okay.

And then -- where in, I'm assuming it's in support and services, but what part of support and services was Alogent in?.

Alogent was actually a license and implementation and maintenance. It was basically a toolkit that was sold and then you sold much professional services to build it the way the banks want, which is the way that Tier 1 and international banks do business and that's not the way our typical community bank does business..

Got you. Okay. And then I guess and then finally, just over time now, I know for so many years, free cash flow was above earnings, and that's typically the way, it looks like over time things tend to go. This year was a little below because you've been ramping up.

And I know you mentioned to us think of what you're doing right now is instead of buying, making acquisitions, you're investing in your own business and growing really well and everything.

How should we think that over time of free cash flow dynamics? Do you think it will be above earnings again as you leverage some of the spending you've been doing?.

Yes. It should be back to this year, Dave. I mean like I said in the opening comments. I mean, our annual maintenance billing collections were behind last year about $10 million. So I mean, if you just throw that in there, that's the difference.

And then if you figure CapEx or cap software levels off are down slightly in FY 2017 that was a $19 million increase this year over last year. You put those two numbers in there and you're back way above earnings..

Yes. Okay.

And then, I guess finally, when you said cap software should be down slightly in fiscal 2017, is that a combination of capitalized software and that internal use software?.

Yes..

Thank you. [Operator Instructions]. We have another question in the queue from the line of David Togut from Evercore. Your line is open..

Good morning, this is Rayna Kumar for David Togut. Could you just comment on your expectations for electronic payments growth for FY 2017? It was good to see it pop back up to 8% in the fourth quarter..

Yes. I think we have well, 8% including deconversion fees. So that's 5% excluding deconversion fees. And I think that's a good run rate for us right now. We have three payments businesses, our Debit Switch, our Bill Pay business and our ACH Remote Deposit business, all of them growing in that 5% to 7% range, let's say, for the coming year.

Yes, again, we have this headwind that we're trying to grow over that I mentioned in my opening remarks regarding the two significant customers that we lost last year..

Which we should -- those will anniversary in the December quarter..

Understood. That's very helpful.

What are your expectations for R&D growth for 2017? It was up 23% in the quarter, should we expect that to be the new normalized run rate as the capitalized software growth slows down?.

No. I think, the R&D run rate is -- was a little higher than in Q4 than what you can typically expect the run rate. It's going to level back down a little bit going into FY 2017, Rayna..

Great, okay.

And could we just get the end-of-period share count?.

I do not have that in my fingertips. I apologize..

Okay, I'll just shoot you an e-mail. Great..

It's somewhere around 79.5..

79.5, perfect. Thank you..

Thanks..

[Operator Instructions]. And I see no other questioners in the queue at this time. So I'd like to turn the call back over to management for closing remarks..

Thank you. Again, I want to thank you for joining us today to review our fourth quarter and fiscal year-end 2016 results. We are pleased with the results from our ongoing operations and the efforts of all of 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. I want to thank you again for joining us today and Andrew, will you now please provide the replay number..

Thank you. Ladies and gentleman, this conference was recorded for replay purposes. In order to access the replay, you may dial (800) 585-8367 that's (800) 585-8367 using conference ID 63194998, the conference ID 63194998. This now concludes the program. I'd like to thank everyone for your participation. Hope you all have a great day..