Business context and reporting period
Jack Henry & Associates, Inc. (JHA) provides banking and credit-union software, outsourced processing, payment services, and related solutions. This is its Form 10-K for the fiscal year ended June 30, 2018—not a report for calendar 2017 Q4. Comparisons are primarily with fiscal 2017.
JHA serves more than 9,000 financial institutions and other customers through its Jack Henry Banking, Symitar, and ProfitStars brands. Revenue is predominantly recurring services, support, and transaction processing; many outsourced customer contracts run five years or longer.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $1,536.6 million | $1,431.1 million | +7% |
| Operating income | $392.4 million | $367.7 million | +7% |
| Operating margin | 25.5% | 25.7% | Down about 0.2 percentage points |
| Net income | $376.7 million | $245.8 million | +53% |
| Diluted EPS | $4.85 | $3.14 | +54% |
| Operating cash flow | $412.1 million | $357.3 million | +15% |
| Cash and equivalents at year-end | $31.4 million | $114.8 million | Down $83.3 million |
| Long-term debt at year-end | None | $50.0 million | Repaid |
Services and support revenue grew 7% to $978.4 million (64% of revenue); processing revenue grew 9% to $558.2 million (36%). Cost of revenue was $873.6 million, or 56.8% of revenue, leaving an implied margin before R&D and SG&A of 43.2%. R&D was $90.3 million, up 7%; selling, general, and administrative expense was $182.1 million, up 12%.
Net income included a $118.4 million net tax benefit from the Tax Cuts and Jobs Act (TCJA), including deferred-tax remeasurement. Excluding that benefit, management reported net income growth of 5% and diluted EPS growth of 6%. The reported 3.7% effective tax rate compares with 33.0% in FY2017.
At June 30, 2018, total assets were $2.05 billion and stockholders’ equity was $1.27 billion. Working capital was negative $19.4 million; current liabilities included $355.5 million of deferred revenue, which management said requires substantially less cash to fulfill than its recorded balance suggests. The $300 million revolving facility had no outstanding balance, with capacity to increase to $600 million; JHA reported access to more than $300 million in remaining credit availability and compliance with covenants.
Material changes and notable items
- Revenue increased 7%; management said growth remained 7% after excluding acquisition and divestiture effects and deconversion-fee changes. Cost growth broadly tracked revenue, but SG&A rose faster.
- FY2018 acquisitions were Ensenta, a mobile and online payments/deposits provider, and Vanguard Software Group, a commercial-loan underwriting and decisioning provider. Their purchase prices were $134.4 million and $10.7 million, respectively.
- Acquisitions contributed $17.1 million of FY2018 revenue. Ensenta contributed $15.8 million of revenue; its reported after-tax income included a large TCJA benefit, and was $0.5 million excluding TCJA effects. Vanguard contributed $1.4 million of revenue and a $0.9 million after-tax loss.
- Operating cash flow rose, but deferred revenue declined by $63.3 million, compared with an $8.8 million decline in FY2017. Investing cash use increased to $291.8 million, including $137.6 million net acquisition spending and $96.6 million in developed software. Financing cash use was $203.6 million, including $105.0 million of dividends, $49.0 million of share repurchases, and net debt repayment.
- Backlog increased to $676.2 million from $630.3 million, including $599.9 million of outsourcing backlog. Management estimated $464.0 million of that outsourcing backlog would not be realized during FY2019 because of the long-term contract schedule.
- JHA changed from two customer-centric reporting segments to four product-centric segments: Core, Payments, Complementary, and Corporate and Other. Prior periods were recast. FY2018 segment revenue was $555.3 million, $517.3 million, $412.0 million, and $52.0 million, respectively.
- JHA plans to adopt ASC 606 revenue recognition beginning July 1, 2018 using the full retrospective method. It expected a significant effect on certain software arrangements, but had not completed its quantitative assessment of prior and current periods when the filing was issued.
Outlook, risks, and contingencies
Management was cautiously optimistic about continued economic improvement, expected customers to keep investing in technology, and cited a healthy sales pipeline, recurring revenue, and a strong balance sheet. It provided no specific numerical revenue, earnings, or margin guidance in the supplied filing text. Management expects industry consolidation to continue and noted that regulation can affect customers’ discretionary spending.
Key risks include cybersecurity incidents or data breaches; outages or failures at JHA’s processing facilities or third-party providers; payment-processing and settlement failures; regulatory change and compliance costs; economic weakness or lower transaction volumes; competition and pricing pressure; customer contract renewals; financial-institution consolidation; retaining key employees; acquisition integration and goodwill impairment; and dependence on key technology suppliers. The First Data/PSCU card-processing agreement carries $559.4 million of purchase commitments over its term. Total off-balance-sheet contractual obligations were $656.5 million, including operating leases and purchase commitments. Routine legal proceedings were not expected by management to have a material adverse effect.
Management and the independent auditor concluded that internal control over financial reporting was effective as of June 30, 2018; Ensenta was excluded from that assessment because it had been acquired during the year. The auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- How much future earnings growth is supported by operations rather than the one-time $118.4 million TCJA benefit, and what the normalized tax rate will be.
- The final quantitative effects of ASC 606 adoption, including any retrospective changes to revenue, deferred balances, and related costs.
- Whether acquisition integration and the Ensenta/First Data/PSCU card-platform investment produce durable growth and acceptable returns.
- How operating cash flow and liquidity evolve given acquisition spending, dividends, repurchases, deferred-revenue movements, and the substantial card-processing purchase commitment.
- Whether outsourcing backlog converts to revenue as expected and whether contract renewals remain favorable.
- Exposure to cybersecurity, operational outages, payment-processing losses, regulatory changes, and dependence on critical third-party providers and suppliers.