Business Context and Reporting Period
Company: Jack Henry & Associates, Inc. (JHA)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended March 31, 2010
Business Overview: JHA is a leading provider of integrated computer systems and services for banks and credit unions. Operations are divided into two segments: Bank Systems and Services, and Credit Union Systems and Services. The company provides software licenses, hardware, implementation services, and outsourced data processing.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Mar 31, 2010 | 9 Months Ended Mar 31, 2010 | 9 Months Ended Mar 31, 2009 |
|---|---|---|---|
| Total Revenue | $215,549 | $608,741 | $553,710 |
| Gross Profit | $86,513 | $249,984 | $220,140 |
| Gross Margin | 40.1% | 41.1% | 39.8% |
| Operating Income | $43,659 | $132,959 | $114,280 |
| Net Income | $31,635 | $87,886 | $75,296 |
| Diluted EPS | $0.37 | $1.03 | $0.89 |
| Cash from Operations (9mo) | $91,831 | ||
| Cash & Equivalents (Mar 31, 2010) | $35,779 | ||
| Revolving Credit Facility Balance | $70,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 19.5% for the quarter and 9.9% for the nine-month period compared to the prior year. This growth was primarily driven by the acquisitions of Goldleaf Financial Solutions, Inc. (GFSI) and PEMCO Technology Services, Inc. (PTSI).
- Net Income: Net income rose 27.5% for the quarter and 16.7% for the nine-month period. The increase is attributed to higher revenues and cost control measures, partially offset by increased operating expenses related to acquisitions.
- Acquisition Impact:
- GFSI: Acquired Oct 1, 2009. Added $31,359 in revenue and $1,163 in net income for the nine months ended March 31, 2010.
- PTSI: Acquired Oct 29, 2009. Added $20,659 in revenue and $1,880 in net income for the nine months ended March 31, 2010.
- Backlog: Increased 17% to $325,000 at March 31, 2010, from $277,000 a year ago, reflecting a shift toward outsourced delivery solutions.
- Segment Performance:
- Bank Systems: Revenue up 14% (quarter) and 8% (nine months). Gross margin improved to 41% (quarter) and 42% (nine months).
- Credit Union Systems: Revenue up 48% (quarter) and 19% (nine months). Gross margin decreased slightly due to a lower mix of high-margin license revenue.
Guidance, Outlook, and Risks
- Outlook: Management remains "cautiously optimistic" despite the challenging economic environment and the US financial crisis. The company expects continued growth in recurring revenue and outsourcing services as customers delay capital investments in hardware and software licenses.
- Capital Expenditures: Total consolidated capital expenditures (excluding acquisitions) are not expected to exceed $65,000 for fiscal year 2010.
- Subsequent Event: On May 7, 2010, JHA announced a definitive agreement to acquire iPay Technologies Holding Company, LLC for $300,000 in cash, expected to close in June 2010. Funding will come from new debt facilities.
- Liquidity: The company reported negative working capital of $20,136 at March 31, 2010, primarily due to $110,307 in deferred revenues. Management states this does not indicate a liquidity problem as the cash outlay for these services is significantly lower than the recorded liability. The company maintains access to $150,000 in revolving credit (with an option to increase to $225,000) and is in compliance with all covenants.
- Risks: Risks include the impact of the financial crisis on customer demand, the integration of recent acquisitions, and the potential for changes in tax benefits related to the Domestic Production Activities deduction (IRC Section 199).
Investor Verification Checklist
- Acquisition Integration: Verify the realization of cost synergies and revenue growth from GFSI and PTSI in subsequent quarters.
- Deferred Revenue: Monitor the conversion rate of the $110,307 deferred revenue balance into recognized revenue and cash flow.
- Debt Levels: Track the utilization of the revolving credit facility, which increased to $70,000, and the impact of the new $300,000 iPay acquisition debt.
- License Revenue Trends: Assess whether the decline in organic license revenue (due to customer preference for outsourcing) continues to impact long-term growth rates.
- Tax Benefits: Confirm the sustainability of the tax benefits recognized under IRC Section 199, which contributed to a lower effective tax rate in the current quarter.