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.
| Metric | FY2017 | FY2016 |
|---|---|---|
| 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
- 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.
- Track recurring revenue growth, outsourcing and payment transaction volumes, contract renewals, and the effect of lower hardware sales and declining standalone license revenue.
- Assess the earnings impact of the higher FY2017 tax rate and the prior-year Alogent disposal gain when comparing reported profit.
- Review the adoption impact and transition method for the new revenue-recognition standard, particularly for bundled software license and installation revenue.
- Monitor variable-rate debt, liquidity and capital returns, alongside cyber, operational-continuity, regulatory, and customer-concentration risks.