Business Context and Reporting Period
Company: Jack Henry & Associates, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended March 31, 2006
Business Overview: A leading provider of integrated computer systems, software, and data processing services for banks and credit unions. Operations are divided into Bank Systems and Services and Credit Union Systems and Services segments.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2006 | Nine Months Ended Mar 31, 2006 | Units |
|---|---|---|---|
| Total Revenue | $145,495 | $429,895 | Thousands |
| Gross Profit | $63,682 | $185,720 | Thousands |
| Operating Income | $34,716 | $99,327 | Thousands |
| Net Income | $23,460 | $64,518 | Thousands |
| Diluted EPS | $0.25 | $0.69 | Per Share |
| Cash from Operations | N/A | $113,384 | Thousands |
| Cash and Equivalents | $38,805 | $38,805 | Thousands (Ending Balance) |
| Debt (Note Payable) | $25,000 | $25,000 | Thousands |
| Backlog | $213,300 | $213,300 | Thousands (As of Mar 31, 2006) |
Revenue Composition (Nine Months 2006): Support and Service ($312,008), Hardware ($59,577), License ($58,310).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 8.3% for the quarter and 9.0% for the nine-month period compared to the prior year.
- Profitability: Net income rose 20.7% for the quarter and 19.9% for the nine-month period. Operating income increased 11.9% (quarter) and 16.6% (nine months).
- Revenue Mix Shift:
- Support & Service: Increased 15% (quarter) and 18% (nine months), driven by growth in EFT support and outsourcing services.
- License Revenue: Decreased 2% (quarter) and 7% (nine months) due to a strategic shift toward outsourcing models which do not require upfront software licenses.
- Hardware Revenue: Decreased 10% (quarter) and 12% (nine months) due to lower unit costs and reduced hardware sales accompanying outsourcing deals.
- Acquisitions: Acquired Profitstar, Inc. on November 1, 2005, for $19,182 (cash), adding asset/liability management and risk management software capabilities.
- Share Repurchases: Repurchased 687,200 shares for $12,576 during the nine-month period.
Guidance, Outlook, and Risks
- Outlook: Management expects hardware revenue as a percentage of total revenue to continue decreasing due to industry-wide trends of increasing processing power and decreasing equipment prices. Continued growth is anticipated in outsourcing and EFT support services.
- Backlog: Increased 8% year-over-year to $213.3 million, with outsourcing backlog comprising approximately 70% of the total.
- Accounting Changes: Adopted SFAS 123(R) regarding share-based payment on July 1, 2005. The adoption did not materially impact consolidated financial statements.
- Liquidity: Maintains an unsecured revolving credit facility of up to $150 million (expandable to $225 million) and a $8 million secured line. Outstanding debt on the revolving facility was $25 million as of March 31, 2006.
- Risks: Reliance on financial institutions for revenue; competition in outsourcing and software markets; potential impact of interest rate changes on credit facilities.
Investor Verification Checklist
- Revenue Sustainability: Verify the long-term trajectory of the shift from license/hardware sales to recurring support and outsourcing revenue.
- Acquisition Integration: Assess the integration progress and revenue contribution of the Profitstar acquisition.
- Stock-Based Compensation: Review the impact of SFAS 123(R) adoption on future expense recognition and diluted EPS.
- Debt Utilization: Monitor the utilization of the $150 million revolving credit facility and interest rate exposure.
- Backlog Conversion: Track the conversion rate of the $213.3 million backlog into recognized revenue.