Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2016 second quarter and six months ended December 31, 2015; comparisons are with the corresponding 2014 periods. Financial statement amounts below are in millions of dollars unless stated otherwise. The company provides banking and credit-union software, payment processing, outsourcing, implementation, and support services.
Financial performance
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Revenue | $332.9 vs. $311.3; up 7% | $654.5 vs. $612.8; up 7% |
| Gross profit / margin | $142.4 / 42.8%, vs. $131.0 / 42.1% | $280.4 / 42.8%, vs. $257.6 / 42.0% |
| Operating income | $84.8 vs. $79.7 | $165.3 vs. $151.3 |
| Net income | $59.3 vs. $53.9; up 10% | $110.7 vs. $100.0; up 11% |
| Diluted EPS | $0.74 vs. $0.66 | $1.38 vs. $1.22 |
| Operating cash flow | $147.0 for six months, vs. $126.9; up 16% |
Support and service revenue, about 96% of total revenue, rose 8% for the quarter and 7% year to date. Hardware revenue fell 14% and 9%, respectively. Six-month operating expenses increased 8%; general and administrative costs rose 20%, including comparison against a prior-year quarter that benefited from a gain on sale of the TeleWeb product suite. The effective tax rate was 29.9% for the quarter and 32.9% year to date, versus 32.1% and 33.7%; the company attributed the decrease primarily to the retroactive, permanent extension of the R&E credit.
Segments, cash, and capital
- Bank Systems and Services: revenue was $241.0 million for the quarter, up 1%; six-month revenue was $477.7 million, up 1%. Gross margin was 41% in both periods.
- Credit Union Systems and Services: quarterly revenue was $91.8 million, up 28%, and six-month revenue was $176.7 million, up 25%. Gross margin increased to 49% from 45%, with management citing payment-processing volume and scale.
- Cash and cash equivalents were $55.1 million at December 31, down from $148.3 million at June 30, 2015. Six-month investing cash use was $93.1 million, including $31.5 million for capital expenditures, $47.9 million for software development, and $8.3 million net for the Bayside acquisition.
- Six-month financing cash use was $147.0 million, including $155.1 million of share repurchases and $40.0 million of dividends, partly offset by $100.0 million of revolving-credit borrowings. Debt was $100.3 million, primarily the revolving facility; the company reported compliance with its covenants.
- Working capital was negative $13.7 million, but current liabilities included $246.3 million of deferred revenue. Management said the cash cost to fulfill those obligations is substantially below the recorded balance and reported access to more than $200 million of remaining credit capacity.
Outlook, risks, and notable items
- Management cited recurring revenue, a healthy sales pipeline, and demand for solutions addressing customers’ operational and regulatory challenges. It expects outsourcing trends to support outsourcing revenue and hardware sales to continue declining over time. No specific revenue or earnings guidance was provided.
- Fiscal 2016 capital expenditures on facilities and equipment were expected not to exceed $50 million, funded from operating cash flow.
- The company acquired Bayside Business Solutions on July 1, 2015, for $10 million cash to expand commercial-lending capabilities. Its six-month contribution was $1.7 million of revenue and a $0.3 million after-tax loss; management considered the acquisition immaterial to the financial statements.
- In the DataTreasury patent case, the Patent Trial and Appeal Board found all relevant claims unpatentable and invalid; the plaintiff appealed. The company could not reasonably estimate any potential loss or range of loss.
- Management reported a material weakness related to accounting for multiple-element software arrangements and concluded disclosure controls were not effective. Remediation was underway, with completion expected during fiscal 2016. The CEO and CFO nevertheless stated that the financial statements fairly present the company’s results and position in all material respects.
- Gross unrecognized tax benefits were $8.4 million; the company anticipated a possible $1.5–$2.5 million reduction within twelve months. A 1% increase in variable borrowing rates would raise annual interest expense by approximately $1.0 million.
Important facts for investors to verify
- Progress and testing of remediation for the revenue-recognition material weakness, and whether disclosure controls have been determined effective in subsequent filings.
- Trends in electronic payments, bundled services, outsourcing, and credit-union growth, alongside continued hardware and implementation revenue declines.
- Cash generation and liquidity after substantial repurchases and dividends, including credit-facility borrowings, covenant compliance, and remaining capacity.
- Developments in the DataTreasury appeal and any change in the company’s ability to estimate potential exposure.
- Final purchase accounting for Bayside and the timing and impact of adoption of the new revenue-recognition standard.