Jack Henry & Associates, Inc. — Form 10-Q
Reporting period: Three months ended September 30, 2020 (fiscal 2021 first quarter; unaudited). The filing metadata labels this “2020 Q1,” but the report itself covers the quarter ended September 30, 2020. Dollar amounts below are in millions unless otherwise noted.
Business context
Jack Henry provides software, technology solutions, and payment processing services primarily to U.S. banks and credit unions. Revenue is generated mainly from services and support and processing. The company reports Core, Payments, Complementary, and Corporate & Other segments.
Financial results
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $451.8 | $438.0 | +3% |
| Operating income | $117.6 | $118.2 | -1% |
| Net income | $91.2 | $89.4 | +2% |
| Diluted EPS | $1.19 | $1.16 | +3% |
| Operating cash flow | $114.5 | $123.1 | -7% |
Operating margin was approximately 26.0%, versus 27.0% a year earlier; net margin was approximately 20.2%, versus 20.4%. Cost of revenue rose 7% to $262.9 million, including higher card-platform and personnel costs. R&D increased 6% to $26.1 million; SG&A fell 9% to $45.2 million, mainly reflecting lower travel and event costs.
Services and support revenue rose 1% to $281.0 million, or 4% excluding deconversion fees. Processing revenue increased 7% to $170.8 million, led by card and digital activity. Segment revenue growth was 2% in Core, 5% in Payments, and 6% in Complementary; Corporate & Other declined 24%.
Cash and cash equivalents were $195.3 million at September 30, down from $213.3 million at June 30. Current assets were $574.5 million and current liabilities $407.4 million (current ratio approximately 1.41). The balance sheet showed $0.3 million of financing-lease debt and no revolver borrowings. The company had a $300 million revolving credit facility, expandable to $700 million, and a separate $5 million bank line; it reported compliance with facility covenants. Operating, investing, and financing cash flows were $114.5 million, negative $31.2 million, and negative $101.3 million, respectively. Financing outflows included $65.9 million of share repurchases and $32.8 million of dividends.
The effective tax rate was 22.4%, compared with 24.6%, primarily due to differences in the impact of vested share-based compensation. The company declared dividends of $0.43 per share, compared with $0.40 a year earlier.
Material changes and unusual items
- Reported revenue growth was 3%; excluding the year-over-year decline in deconversion fees, management said revenue would have grown 5%. Operating income was down 1%, but management said it would have risen 7% excluding deconversion-fee effects.
- Operating cash flow declined despite higher net income, with changes in other assets and liabilities contributing to the decline.
- The company repurchased 400,000 shares for $65.9 million during the quarter; 2,597,713 shares remained authorized for repurchase.
- Adoption of the expected-credit-loss standard (CECL) on July 1 reduced opening retained earnings by $0.493 million, an immaterial adjustment. Goodwill impairment guidance adoption had no material impact.
- The prior-year quarter included the Geezeo acquisition; there were no acquisitions in the current quarter. Current-quarter revenue and after-tax income attributed to Geezeo were $3.2 million and $1.3 million.
Outlook, commentary, and risks
Management expressed optimism after the quarter, citing recurring revenue, an encouraging sales pipeline, and strong liquidity, but provided no specific revenue or earnings forecast. Fiscal 2021 facilities and equipment capital expenditures were expected not to exceed $63 million, funded from operating cash.
COVID-19 had limited overall operating and financial impact to date, but management noted delayed product installations and continued delays in migrations to the new card-processing platform. Core-customer migrations were complete; the revised target for non-core migrations was March 31, 2021. Management cautioned that delayed installations could defer license, hardware, installation, and pass-through revenue, and that future pandemic effects remained uncertain. Most employees were working remotely, with remote work and suspension of non-essential travel extended at least through January 4, 2021.
COVID-19’s possible economic effects could affect credit-loss estimates and asset valuations in future periods. The filing reported $10.969 million of gross unrecognized tax benefits and anticipated that statute expirations or examination closures could reduce that balance by $3.5–$4.5 million within 12 months. Routine legal claims were not expected by management to have a material adverse effect. No subsequent events were reported.
Investor verification points
- Assess whether processing growth can offset continued weakness or delays in product delivery, hardware, installations, and deconversion fees.
- Track card-platform costs and non-core customer migration progress against the March 31, 2021 target.
- Review operating cash-flow conversion, deferred-revenue movements, and cash use for repurchases and dividends.
- Monitor the COVID-19 impact on customers, credit-loss estimates, and future revenue timing.
- Verify the expected timing and resolution of uncertain tax benefits and any changes in legal contingencies.