Jack Henry & Associates, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended December 31, 2022. Dollar amounts are in thousands unless otherwise noted. Jack Henry provides financial technology, data-processing and payment services, primarily to financial institutions.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $505,314 | $493,896 | $1,034,516 | $981,952 |
| Operating income | $107,376 | $125,662 | $248,100 | $259,257 |
| Net income | $80,775 | $95,670 | $187,324 | $197,783 |
| Diluted EPS | $1.10 | $1.30 | $2.56 | $2.68 |
| Operating margin | 21.3% | 25.4% | 24.0% | 26.4% |
Q2 revenue grew 2% year over year; six-month revenue grew 5%. Operating expenses rose 8% in Q2 and 9% year to date, including higher personnel costs, direct costs and intangible amortization. Management reported that, after adjusting for deconversion fees, acquisition effects and asset-disposal gains, operating income increased 4% for Q2 and 3% year to date, and net income increased 5% and 3%, respectively. These are management-presented adjusted comparisons, not GAAP measures.
- Revenue mix: Q2 services and support revenue was $290,700, down 2% reported but up 6% excluding deconversion and acquisition revenue. Processing revenue was $214,614, up 9% reported and 7% excluding acquisition revenue. Six-month processing revenue rose 9%.
- Cash flow: Six-month operating cash flow was $190,711 versus $197,351. Investing cash outflow was $301,192, including $229,628 for the Payrailz acquisition and $81,046 for software development. Financing provided $87,457, including $365,000 in facility borrowings, partly offset by $205,042 in repayments and $71,454 in dividends.
- Liquidity and debt: Cash was $25,763 at December 31, compared with $48,787 at June 30, 2022. Revolver debt was $275,000, up from $115,000; the company also had a $600,000 unsecured revolving facility, expandable to $1 billion, maturing August 2027. The company reported compliance with its covenants. A 1% increase in variable borrowing rates would add an estimated $2,750 to annual interest expense.
- Other metrics: Six-month dividends were $71,454, or $0.98 per share. Capital expenditures for fiscal 2023 were expected to be approximately $57,000.
Material changes and significant items
- Management attributed weaker reported profit comparisons in part to a sharp slowdown in financial-institution mergers and acquisitions, which reduced deconversion-fee and conversion/merger-services revenue. Excluding specified items, management reported underlying revenue growth of 6% for Q2 and 7% year to date.
- Jack Henry acquired Payrailz on August 31, 2022, for a final purchase price of $230,205, funded with cash from operations and borrowings. The acquisition added $117,339 of goodwill and $119,868 of identifiable intangible assets. Payrailz contributed Q2 revenue of $2,578 and an after-tax net loss of $5,387.
- Interest expense increased to $3,406 in Q2 from $447, and to $4,982 for six months from $696, reflecting higher rates and increased borrowing. Management expected higher interest expense during fiscal 2023 until debt balances are reduced.
- Cash was also affected by lower deferred revenue balances; six-month deferred revenue cash-flow change was a $125,433 outflow. No share repurchases occurred in the first six months of fiscal 2023.
Outlook, risks and contingencies
Management cited an encouraging sales pipeline, recurring revenue streams, customer demand for solutions addressing profitability, efficiency and security, and the company’s balance sheet and credit access as supports for its outlook. The filing does not provide specific revenue or earnings guidance. Fiscal 2023 capital expenditures were expected to be about $57 million.
- Variable-rate debt exposes the company to higher interest expense; the filing quantified the effect of a 1% rate increase as $2.75 million annually.
- New contractual commitments included $16.35 million with Twilio through September 2027, and Microsoft commitments of $20 million for Azure and $49 million for server and application licenses through June 2026.
- The company had $10.214 million in gross unrecognized tax benefits; management anticipated that statute expirations and examination closures could reduce the balance by $1.5 million to $3.5 million within 12 months.
- Management said routine legal proceedings were not expected to have a material adverse effect. No subsequent events were reported, and management stated the COVID-19 pandemic had no material financial-statement impact for the quarter, while future effects remained uncertain.
Important facts for investors to verify
- How much revenue and earnings growth persists after deconversion fees and acquisition-related effects, particularly if financial-institution M&A activity remains subdued.
- Payrailz integration, profitability and final purchase-price allocation; the reported allocation remained subject to evaluation of tax implications.
- Debt reduction plans and the sensitivity of earnings and cash flow to variable interest rates.
- Execution of software-development investment and the expected returns from new digital and payment offerings.
- The timing and cash-flow implications of deferred revenue movements, capital spending and the disclosed Twilio and Microsoft commitments.