Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2018, ended December 31, 2017. Unless otherwise noted, financial amounts below are in millions of dollars. The company provides technology, software, and payment-processing services primarily to banks and credit unions.
Financial performance
| Metric | Quarter ended Dec. 31, 2017 | Prior-year quarter | Six months ended Dec. 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $374.8 | $348.6 | $734.7 | $693.6 |
| Operating income | $95.3 | $88.6 | $187.5 | $180.0 |
| Operating margin | 25.4% | 25.4% | 25.5% | 26.0% |
| Net income | $155.6 | $58.8 | $219.0 | $121.1 |
| Diluted EPS | $2.01 | $0.75 | $2.82 | $1.54 |
| Cash from operations | — | $176.9 | $163.9 |
Quarterly revenue rose 8% (7% as reported for services and support; 8% for processing); six-month revenue increased 6%. Management attributed growth mainly to processing-volume increases, cloud and outsourcing, and product delivery and services. Operating income rose 8% for the quarter and 4% for the six-month period. Costs increased with headcount, direct product and professional-services costs, card-platform initiatives, and software amortization. The company reported cost of revenue at 56% of quarterly revenue, versus 57% a year earlier.
Net income and EPS comparisons are heavily affected by the Tax Cuts and Jobs Act (TCJA): the company recorded a $96.8 million tax benefit in the quarter. Excluding the TCJA and other one-time tax adjustments, management reported quarterly net income growth of 6% to $62.3 million and diluted EPS of $0.80; for the six months, adjusted net income grew 4% to $125.7 million and diluted EPS was $1.62.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $57.7 million at December 31, down from $114.8 million at June 30, 2017, primarily reflecting acquisitions.
- Debt was $100 million, up from $50 million at June 30. The revolving facility permits up to $300 million, with an option to increase to $600 million, and matures February 2020. The company reported compliance with its financial covenants; $200 million of facility capacity remained before any optional increase.
- Operating cash flow was $176.9 million. Investing activities used $202.3 million, including $137.7 million net cash for acquisitions, $46.9 million for developed software, $12.2 million for capital expenditures, and $6.0 million for internal-use software.
- Financing activities used $31.6 million net, including $47.8 million in dividends and $30.0 million for treasury-share purchases, partly offset by $100 million of borrowing. Fiscal 2018 capital expenditures on facilities and equipment are expected not to exceed $70 million.
Material developments and outlook
- Acquisitions: Ensenta, a cloud-based payments and deposits provider, was acquired on December 21 for $134.5 million in cash; the preliminary allocation included $93.5 million of goodwill. Vanguard Software Group was acquired in August for $10.7 million. Management said Ensenta expands payment capabilities and presence in credit unions. Purchase-price allocations remained preliminary.
- Tax: The TCJA reduced the federal statutory rate from 35% to 21%, with a blended rate of approximately 28% for fiscal 2018. The company used provisional estimates under SEC Staff Accounting Bulletin No. 118; further tax effects could be recorded in the March and June 2018 quarters.
- Revenue recognition: Adoption of ASC 606 is planned for the fiscal year beginning July 1, 2018. Management expects a significant effect, including earlier recognition of some license and implementation revenue currently deferred for lack of vendor-specific fair-value evidence. The transition method and quantified effects were not finalized.
- Management outlook: Management cited recurring revenue, a healthy sales pipeline, and customer demand for profitability, efficiency, and security solutions. No specific revenue or earnings guidance was provided. Capital expenditures for fiscal 2018 are expected not to exceed $70 million.
- Reporting changes: The company reorganized from two customer-centric segments to Core, Payments, Complementary, and Corporate & Other; prior segment results were recast. It also consolidated income-statement revenue and expense captions, so historical gross-profit presentation is not directly comparable.
Risks, contingencies, and unusual items
The TCJA tax benefit is material and based on provisional estimates. The company faces execution and estimation risks from ASC 606 implementation and acquisition integration. Its revolving debt carries variable interest rates; management estimated that a 1% rate increase would add approximately $1.0 million to annual interest expense. Routine legal proceedings were not expected by management to have a material adverse effect. No material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How final TCJA accounting changes the provisional tax benefit, deferred taxes, and effective tax rate.
- ASC 606 transition method, quantified revenue and cost effects, and readiness of systems and controls.
- Ensenta and Vanguard integration, final purchase accounting, and contribution to recurring revenue and profitability.
- Whether operating-cost growth, including card-platform spending and higher headcount, affects margins as revenue grows.
- Cash and debt levels after acquisitions, capital spending, dividends, and share repurchases.
- Underlying growth excluding deconversion fees and acquisitions, and the sustainability of reported revenue trends.