Jack Henry & Associates, Inc. — Form 10-Q Summary
Period clarification: Request metadata identifies “2017 Q3,” but the filing is for the quarter ended March 31, 2018, Jack Henry’s fiscal third quarter of 2018. Unless noted, financial amounts below are in millions; the filing reports them in thousands.
Business context and reporting period
Jack Henry provides integrated software, technology, and payment-processing services primarily to banks and credit unions. Revenue comes mainly from services and support, and processing. This unaudited report covers the three and nine months ended March 31, 2018, with comparisons to the corresponding 2017 periods.
Beginning in fiscal 2018, the company changed its reportable segments from Bank and Credit Union to Core, Payments, Complementary, and Corporate & Other; prior-period segment information was recast.
Financial results
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $384.7 | $353.8 | $1,119.4 | $1,047.3 |
| Operating income | $96.3 | $88.7 | $283.8 | $268.8 |
| Net income | $72.4 | $60.0 | $291.4 | $181.1 |
| Diluted EPS | $0.93 | $0.77 | $3.76 | $2.31 |
| Operating margin | 25.0% | 25.1% | 25.4% | 25.7% |
| Operating cash flow | — | — | $234.9 | $198.9 |
- Q3 revenue increased 9%; management said growth was 6% excluding specified acquisition revenue, higher deconversion fees, and prior-year divestiture revenue. Nine-month revenue rose 7%.
- Q3 services and support revenue grew 8% and processing revenue 10%. Nine-month growth was 6% and 8%, respectively.
- For the quarter, cost of revenue was $221.6 million, or 58% of revenue; R&D was $22.6 million and selling, general, and administrative expense was $44.2 million. Operating income rose 9% in the quarter and 6% year to date.
- Nine-month net income and diluted EPS increased 61% and 62%, respectively, but were substantially boosted by Tax Cuts and Jobs Act (TCJA) tax benefits. Excluding those effects, reported growth is not a clean measure of underlying operating improvement.
- Nine-month investing cash outflow was $239.1 million, including $137.7 million for acquisitions and $72.2 million for software development. Financing cash outflow was $53.2 million, including dividends of $76.4 million and share repurchases of $30.0 million, partly offset by net borrowing.
Financial position, liquidity, and debt
- Cash and cash equivalents were $57.4 million at March 31, 2018, down from $114.8 million at June 30, 2017. Operating cash flow for the nine months was $234.9 million.
- Total assets were $1.905 billion and total liabilities $682.3 million. Current assets were $362.0 million versus current liabilities of $289.2 million.
- Revolving-credit-facility debt was $105.0 million, up from $50.0 million at June 30, 2017. The facility allows borrowings up to $300 million, with an option to increase to $600 million, and matures February 20, 2020. The company reported covenant compliance; no amount was outstanding on its separate $5 million bank line.
- At the reported variable-rate debt balance, a 1 percentage-point increase in borrowing rates would increase annual interest expense by approximately $1.05 million.
Material changes, outlook, and risks
- The acquisitions of Ensenta, a cloud-based mobile and online payments and deposits provider, and Vanguard Software Group contributed to the period’s results. Ensenta was acquired for $134.5 million in December 2017; preliminary purchase accounting included $93.4 million of goodwill. The company reported $8.1 million of Ensenta revenue for the nine months, including only post-acquisition results. Vanguard was acquired for $10.7 million in August 2017.
- The TCJA generated income tax benefits of $96.8 million in the December quarter and $8.7 million in the March quarter. The nine-month effective tax rate was negative 2.9%, compared with 32.5% a year earlier. Tax accounting remained provisional under SEC guidance, and additional effects could be recorded in the quarter ending June 30, 2018.
- Management cited recurring revenue, a healthy sales pipeline, and strong Q3 performance, but provided no specific revenue or earnings guidance. It expected fiscal 2018 capital expenditures on facilities and equipment not to exceed $62 million.
- Management expected adoption of ASC 606, effective for the fiscal year beginning July 1, 2018, to significantly affect revenue recognition, particularly license and implementation revenue in certain bundled arrangements. Transition method and quantitative impacts were still under assessment. The company also continued assessing the future impact of the new lease standard.
- Cost pressures included higher headcount, product costs, software amortization, and investment in a new card-processing platform and faster-payments incentives. Routine legal proceedings were not expected by management to have a material adverse effect. Disclosure controls were deemed effective, with no material change in internal control reported for the quarter.
- On May 4, 2018, the board declared a $0.37-per-share dividend, payable June 7, 2018. The filing does not provide a specific forward earnings outlook.
Important facts for investors to verify
- Confirm the intended filing period: this filing is Q3 FY2018, not Q3 2017.
- Assess earnings growth excluding TCJA tax benefits and the provisional nature of the tax accounting.
- Review the final Ensenta purchase-price allocation, acquisition contribution, and integration costs.
- Track cash conversion, the substantial decline in deferred revenue, acquisition-related borrowing, and the company’s variable-rate debt exposure.
- Monitor the final ASC 606 transition method and its quantified effect on revenue, earnings, deferred balances, and comparative periods.
- Evaluate whether operating-cost growth, platform investments, and announced capital spending affect future margins and cash generation.