Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018, the first quarter of fiscal 2019 (not calendar-year 2018 Q1). Financial amounts below are in U.S. dollars; millions unless stated otherwise. The company provides banking and credit-union software, data processing, payment processing, and related services.
Financial performance
| Metric | Q1 FY2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $392.5 million | $361.3 million | +9% |
| Operating income | $103.2 million | $97.1 million | +6% |
| Net income | $83.6 million | $66.9 million | +25% |
| Diluted EPS | $1.08 | $0.86 | +25% |
| Operating cash flow | $146.7 million | $138.7 million | +6% |
Operating margin was approximately 26.3%, versus 26.9% a year earlier; net margin was approximately 21.3%, versus 18.5%. The effective tax rate fell to 19.2% from 31.1%, primarily due to the reduction in the federal corporate tax rate under the Tax Cuts and Jobs Act and higher excess tax benefits from share-based payments.
Services and support revenue rose 9% to $246.6 million, and processing revenue rose 9% to $146.0 million. By reportable segment, revenue increased 8% in Core, 9% in Payments, and 13% in Complementary; Corporate and Other revenue decreased 16%, largely reflecting lower hardware sales and the prior-year sale of the jhaDirect product line. Ensenta, acquired in December 2017, contributed $8.2 million of revenue and $2.0 million of after-tax income in the quarter.
Cash, liquidity, debt, and balance sheet
Cash and cash equivalents were $114.9 million at September 30, 2018, up from $31.4 million at June 30. Operating cash flow was $146.7 million; investing activities used $52.3 million, including $24.0 million of capital expenditures and $26.7 million for software development; financing activities used $11.0 million. Current assets were $457.8 million and current liabilities $420.2 million, a current ratio of approximately 1.1.
The company had no outstanding borrowings under its $300 million revolving credit facility, which may be increased to $600 million, or its separate $5 million credit line. It reported compliance with credit-facility covenants. Total liabilities were $664.5 million and stockholders’ equity was $1.37 billion. The quarter’s declared dividend was $0.37 per share, payable October 2, 2018; the $28.6 million payment was not a quarter-end cash outflow.
Material changes, outlook, and risks
- Management attributed growth to higher transaction volumes, outsourcing and cloud services, in-house support, new customers, and Ensenta. Excluding lower deconversion fees, management reported revenue growth of 10% and operating income growth of 16% excluding the related deconversion impact and tax-related employee bonuses.
- Operating expenses increased 9%; management cited 6% higher headcount, compensation, increased software amortization, and investment in the card-processing platform and faster-payments incentives. Cost of revenue remained 56% of revenue.
- ASC 606 was adopted retrospectively, changing the timing of software-related revenue recognition. The company recast prior-period results; adoption increased September 2017 reported revenue by $1.4 million and net income by $3.5 million versus previously reported figures. Comparisons should therefore use the recast amounts.
- Management described the quarter’s performance as strong, citing recurring revenue and a healthy sales pipeline, but provided no specific revenue or earnings guidance. Fiscal 2019 facilities and equipment capital expenditures were expected not to exceed $50 million.
- After quarter-end, the company acquired Agiletics for $6.3 million and BOLTS Technologies for $15.0 million, funded with operating cash; purchase accounting was not complete. Management considered their impact immaterial.
- Risks and contingencies include routine legal proceedings, customer credit risk, forward-looking uncertainties identified in the fiscal 2018 Form 10-K, and $11.1 million of gross unrecognized tax benefits. The company expected possible statute-of-limitations or audit-related reductions of $0.5–$1.5 million within twelve months. It was evaluating the future impact of new lease accounting requirements.
Important facts for investors to verify
- Assess underlying growth and margins after separating Ensenta contributions, deconversion-fee changes, and tax-related bonuses.
- Review ASC 606 recast figures and the timing assumptions for $3.78 billion of remaining performance obligations; the company expected about 30% to be recognized within 12 months.
- Monitor investment-related costs and execution in Payments, including the card-processing platform and faster-payments initiatives.
- Confirm fiscal 2019 capital spending against the stated $50 million ceiling and track cash use for dividends, acquisitions, and any resumed repurchases.
- Track tax uncertainties and the accounting and balance-sheet effects of upcoming lease-standard adoption.