Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2017 (fiscal 2017 Q3). The request metadata says “2016 Q3,” but the filing itself reports fiscal 2017 Q3.
Business context
Jack Henry provides technology, data-processing and payment services to banks and credit unions. Most revenue comes from recurring support, outsourcing and electronic payment services; license and hardware sales are smaller, less predictable sources. Reportable segments are Bank Systems and Services and Credit Union Systems and Services. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended Mar. 31, 2017 | Change year over year | Nine months ended Mar. 31, 2017 | Change year over year |
|---|---|---|---|---|
| Revenue | $353.8 | +6% | $1,047.3 | +6% |
| Gross profit / margin | $147.0 / 42% | +6%; margin unchanged | $447.7 / 43% | +7%; margin up about 1 point |
| Operating income | $88.7 | +11% | $268.8 | +10% |
| Net income | $60.0 | +11% | $181.1 | +10% |
| Diluted EPS | $0.77 | From $0.68 | $2.31 | From $2.06 |
| Operating cash flow | — | — | $198.9 | Down from $207.4 |
Support and service revenue rose 7% for both the quarter and year-to-date period and represented 97% of revenue. For nine months, electronic payment services, outsourcing and bundled services were key contributors; hardware revenue fell 15%. Bank segment revenue grew 6% in the quarter and 8% year to date; Credit Union revenue grew 8% and 2%, respectively.
Management also presented adjusted comparisons excluding deconversion fees and prior-year Alogent revenue and costs: revenue and gross profit increased 4% and net income 4% for the quarter; year-to-date revenue and gross profit increased 8% and net income 7%. These are management’s comparisons, not reported GAAP results.
Balance sheet, cash flow and capital
- Cash and cash equivalents were $42.9 at March 31, 2017, down from $70.3 at June 30, 2016. Net cash decreased $27.4 over the nine months.
- Total assets were $1,687.0 and total liabilities $674.9. Receivables declined to $139.5 from $253.9; current deferred revenue declined to $194.8 from $343.5.
- Debt was $50.0, all outstanding under a revolving facility with a $300.0 limit (expandable to $600.0); no balance was outstanding at fiscal year-end. The company reported covenant compliance. A separate $5.0 line was undrawn.
- Operating cash flow of $198.9 was offset by $103.5 of investing outflows and $122.8 of financing outflows. Investing included $63.8 for software development, $28.2 in capital expenditures and $14.8 for internal-use software.
- Financing included $103.9 of treasury-share purchases, $67.6 of dividends, $30.2 of debt repayments and $80.0 of new borrowings. Fiscal 2017 capital expenditures were expected not to exceed $45.0, funded from operations.
Changes, outlook, risks and unusual items
- Revenue growth was concentrated in recurring support and services. Management attributed quarterly growth partly to deconversion fees, which rose $6.7 versus the prior-year quarter; prior-year comparisons also included Alogent revenue, after that product line was sold in fiscal 2016. Management expects hardware revenue’s overall trend to decline as sales mix shifts toward outsourcing and hardware prices deflate.
- Management cited strong quarterly performance, recurring revenue and a healthy sales pipeline, and said customer regulatory and operational needs support demand. No specific revenue or earnings forecast was provided.
- On May 4, 2017, the company announced a 12-year strategic services agreement with First Data and PSCU for its card platform, with purchase commitments exceeding $550.0 over the term.
- The DataTreasury patent case was dismissed with prejudice on March 30, 2017, following unsuccessful appeals and denial of Supreme Court review.
- The company early adopted share-based payment accounting guidance in fiscal 2017; year-to-date tax benefits increased basic and diluted EPS by $0.03. It expects the new revenue-recognition standard, effective for its fiscal year beginning July 1, 2018, to significantly affect revenue recognition currently subject to ASC 985; the impact and transition method were still under evaluation.
- Variable-rate debt creates interest-rate exposure: management estimated that a 1 percentage-point rate increase would add $0.5 to annual interest expense. Unrecognized tax benefits were $5.5; the company anticipated that statute expirations or examination closures could reduce the balance by $0.5–$1.5 within 12 months.
Most important facts for investors to verify
- Confirm the reporting period: the filing covers fiscal 2017 Q3, despite the request’s “2016 Q3” label.
- Assess how much reported growth reflects deconversion fees and bundled-revenue timing, and how results compare after the Alogent divestiture.
- Review the economics, commitments and implementation terms of the 12-year First Data/PSCU agreement, including the stated purchase commitments above $550.0.
- Monitor cash generation against share repurchases, dividends, software investment and revolving-credit borrowings.
- Track the expected impact and adoption approach for the new revenue-recognition standard.