Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017 (fiscal 2018 first quarter; unaudited). The filing compares results with the three months ended September 30, 2016. Unless indicated otherwise, financial amounts below are in millions of dollars.
Business context and results
Jack Henry provides technology systems, software, and payment processing services primarily to banks and credit unions. Its revenue is generated mainly from services and support and processing. Beginning this quarter, the company reported four product-based segments—Core, Payments, Complementary, and Corporate & Other—and recast prior-period segment information to match.
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $359.9 | $345.0 | +4% |
| Operating income | $92.3 | $91.4 | +1% |
| Operating margin | 25.6% | 26.5% | Down 0.9 percentage points |
| Net income | $63.4 | $62.2 | +2% |
| Diluted EPS | $0.82 | $0.79 | +3% |
| Cash from operating activities | $138.7 | $133.4 | +4% |
Services and support revenue rose 3% to $224.3 million, primarily on outsourcing and cloud growth; processing revenue increased 6% to $135.6 million, with growth in all three processing components. Cost of revenue grew 5%, R&D expense 6%, and selling, general, and administrative expense 12%. The effective tax rate was 31.2%, compared with 31.9%.
Management said revenue grew 6% excluding deconversion fees, which declined $5.8 million year over year; on that basis, net income increased 9% and diluted EPS 12%. The filing does not provide a clear dollar reconciliation of those adjusted growth rates.
Segments and material changes
- Core: Revenue increased 10% to $128.9 million; growth reflected product delivery and services revenue recognized after certain bundled-product terminations and a 5% increase in outsourcing and cloud revenue.
- Payments: Revenue increased 1% to $123.2 million, or 4% excluding deconversion fees, supported by remittance and card processing.
- Complementary: Revenue increased 3% to $93.8 million, driven by outsourcing and cloud services and transaction and digital processing.
- Corporate & Other: Revenue fell 5% to $14.1 million, primarily because the jhaDirect product line was sold during the quarter. Management expected this segment’s revenue to be lower in FY2018 as a result.
During the quarter, the company acquired Vanguard Software Group for $10.7 million in cash. The acquired business contributed $0.1 million of revenue and an after-tax net loss of $0.1 million in the quarter; purchase-price allocations were preliminary. The company also sold jhaDirect, recording a $1.7 million gain.
Cash, debt, and liquidity
- Cash and cash equivalents were $104.0 million at September 30, down from $114.8 million at June 30, 2017. Operating cash flow was $138.7 million. Investing activities used $40.3 million and financing activities used $109.2 million.
- Financing cash uses included repayment of $50.0 million on the revolving credit facility, $30.0 million of share repurchases, and $23.9 million of dividends. No revolving-facility or other credit-line borrowings remained at quarter-end; $50.0 million was outstanding at June 30.
- The revolving facility permits borrowings of up to $300 million, with capacity expandable to $600 million, and matures February 2020. The company reported compliance with its financial covenants. It also had an unused $5 million bank credit line.
- Working capital was negative $10.9 million and the current ratio was approximately 0.97. Deferred revenue of $324.5 million was the largest current liability; management said the cash cost of providing the related services is significantly less than the recorded balance and did not anticipate liquidity problems.
- Management expected FY2018 facilities and equipment capital expenditures not to exceed $60 million, to be funded from operating cash flow.
Outlook, risks, and notable items
Management described the quarter as strong, citing recurring revenue, a healthy sales pipeline, and customer demand for solutions addressing profitability, efficiency, and security. The filing provides no numerical revenue or earnings guidance. It cautions that quarterly results are not necessarily indicative of full-year results.
The company expected ASC 606, effective for its fiscal year beginning July 1, 2018, to significantly affect revenue recognition for arrangements currently subject to ASC 985, particularly license and implementation revenue in multi-element contracts. The company was assessing transition methods, opening balances, quantitative effects, disclosures, and control changes. It was also assessing the impact of the new lease standard, effective for its fiscal year beginning July 1, 2019.
At September 30, gross unrecognized tax benefits were $5.7 million, including $4.2 million that would affect the effective tax rate if recognized. The company expected statute expirations and audit closures could reduce that balance by $0.5 million to $1.5 million within 12 months. Management said routine legal proceedings were not expected to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How recurring services, processing growth, and deconversion-fee trends develop in subsequent quarters.
- The margin impact of rising operating costs and whether revenue growth translates into improved operating profitability.
- The finalized Vanguard purchase-price allocation, integration progress, and contribution to results.
- The timing and magnitude of ASC 606 changes to revenue, deferred revenue and costs, and reported comparability.
- Cash conversion and liquidity trends, including deferred-revenue movements, planned capital expenditures, dividends, and share repurchases.
- Developments in unrecognized tax benefits, examinations, and routine legal proceedings.