JACK HENRY & ASSOCIATES INC annual report, FY2017

Business context and reporting period

Jack Henry & Associates, Inc. (JHA) filed this Form 10-K for the fiscal year ended June 30, 2017—not a standalone 2016 fourth-quarter filing. JHA provides core banking and credit-union systems, payment processing, outsourcing, and related technology services through Jack Henry Banking, Symitar, and ProfitStars. It served more than 9,000 customers. Most revenue is recurring support, outsourcing, and payment-services revenue.

Key financial results

Amounts below are in millions, except per-share data and percentages.

MetricFY2017FY2016
Revenue$1,431.1$1,354.6
Gross profit / margin$612.1 / 43%$581.0 / 43%
Operating income$367.7$361.7
Net income$245.8$248.9
Diluted EPS$3.14$3.12
Operating cash flow$357.3$366.4
Cash and equivalents at year-end$114.8$70.3
Long-term debt at year-end$50.0$0
Total assets / stockholders’ equity$1,908.9 / $1,032.1$1,815.5 / $996.2
  • Revenue increased 6%; support and service revenue rose 6% to $1,384.3 million and represented 97% of revenue. Hardware revenue fell 12% to $44.4 million; standalone license revenue fell 22% to $2.4 million.
  • Within support and service, outsourcing revenue increased 13%, electronic payment services 5%, and bundled products and services 24%. Implementation services declined 14%.
  • Cost of sales rose 6%, in line with revenue; the gross margin remained 43%. Operating expenses increased 11%, partly because the prior-year period included a substantially larger Alogent sale gain.
  • Net income declined 1% despite higher revenue and operating income, reflecting the prior-year Alogent gain and lower prior-year effective tax rate. The effective tax rate rose to 33.0% from 31.0%.
  • Bank segment revenue was $1,055.8 million, up 6%, with a 41% gross margin. Credit Union revenue was $375.4 million, up 5%, with a 49% gross margin.
  • Operating cash flow decreased 2%. Investing activities used $141.6 million, including $89.6 million for software development and $41.9 million for capital expenditures. Financing activities used $171.3 million, including $130.1 million of share repurchases and $91.7 million of dividends, partly offset by net borrowing.
  • The company declared $1.18 per share in dividends for FY2017, versus $1.06 in FY2016. It repurchased 1.452 million shares during the year.

Material changes, outlook, and risks

  • Management described FY2017 as a strong performance, cited a healthy sales pipeline and recurring revenue base, and was cautiously optimistic about continued economic improvement and customer investment. The filing provides no numerical FY2018 revenue or earnings guidance.
  • Year-end backlog was $630.3 million, up from $620.6 million. It included $551.4 million of outsourcing backlog; $426.0 million of that amount was not expected to be realized in FY2018.
  • The revolving credit facility had $50.0 million outstanding against a $300.0 million commitment, with capacity to increase the commitment to $600.0 million. The company reported compliance with covenants. The facility matures in February 2020 and bears variable interest.
  • A strategic services agreement with First Data and PSCU includes a $559.4 million purchase commitment over the contract term. The filing reports total off-balance-sheet contractual obligations of $633.5 million, while its contractual-obligations table totals $683.6 million including debt; investors should reconcile these presentations.
  • JHA expects the new revenue-recognition standard, effective for its fiscal year beginning July 1, 2018, to significantly affect revenue recognition for certain software arrangements. Management expects license and implementation revenue in multi-element arrangements to be recognized at installation completion rather than over the maintenance period; other specified revenue streams are expected to remain substantially unchanged.
  • Key risks include cybersecurity incidents, outages or failures in outsourced and payment-processing operations, regulatory and compliance costs, technology change, competition and pricing pressure, customer consolidation, and unfavorable renewals of long-term outsourcing contracts. The company also depends on third-party technology suppliers, including IBM and Microsoft.
  • Unusual items included a $3.3 million impairment related to water damage at a facility and a $3.3 million total gain on business disposals. The prior year included a $19.5 million gain on the Alogent sale. Routine legal proceedings were not expected by management to have a material adverse effect.
  • JHA announced a change in reportable segments beginning in FY2018, moving from Bank and Credit Union to Payments, Core Software, Complementary Software, and Corporate/Other. Management said the change reflects a product-centric management approach.
  • Management and the independent auditor concluded internal control over financial reporting was effective as of June 30, 2017; the auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

  1. Reconcile the $633.5 million narrative obligation figure with the $683.6 million total in the contractual-obligations table, and assess the timing and terms of the First Data/PSCU commitment.
  2. Track recurring revenue growth, outsourcing and payment transaction volumes, contract renewals, and the effect of lower hardware sales and declining standalone license revenue.
  3. Assess the earnings impact of the higher FY2017 tax rate and the prior-year Alogent disposal gain when comparing reported profit.
  4. Review the adoption impact and transition method for the new revenue-recognition standard, particularly for bundled software license and installation revenue.
  5. Monitor variable-rate debt, liquidity and capital returns, alongside cyber, operational-continuity, regulatory, and customer-concentration risks.