Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2016 (the second quarter of fiscal 2017). The company provides software, processing, implementation, and support services to banks and credit unions. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Quarter ended Dec. 31, 2016 | Six months ended Dec. 31, 2016 |
|---|---|---|
| Revenue | $348.6; up 5% | $693.6; up 6% |
| Gross profit / margin | $150.4 / 43% | $300.7 / 43% |
| Operating income | $88.6 | $180.0 |
| Net income | $58.8; down 1% | $121.1; up 9% |
| Diluted EPS | $0.75, versus $0.74 | $1.54, versus $1.38 |
| Operating cash flow | Not separately reported for the quarter | $163.9, up 11% |
Support and service generated 97% of revenue in both periods. For the quarter, support and service revenue rose 5%, while hardware revenue fell 15%; license revenue remained below 1% of total revenue. The six-month support and service increase was 7%, while hardware declined 12% and license revenue declined 31%. The reported overall gross margin was unchanged at 43% for both comparison periods.
Balance sheet, cash flow, and liquidity
- At December 31, cash and equivalents were $64.2, down from $70.3 at June 30, 2016. Total assets were $1,718.1 and stockholders’ equity was $971.4.
- Debt was $50.0 under the revolving credit facility, compared with no revolver balance at June 30. The facility allows borrowings up to $300.0, with capacity to increase to $600.0; the company reported covenant compliance and more than $250.0 of remaining credit availability.
- Working capital was negative $4.9, primarily reflecting $245.2 of current deferred revenue. Management said the cash cost to provide the related services is substantially below the recorded liability and did not anticipate liquidity problems.
- Six-month investing cash outflow was $69.7, including $41.7 for software development, $17.4 for capital expenditures, and $11.5 for internal-use software, partly offset by asset-sale proceeds. Financing cash outflow was $100.3, including $103.9 of share repurchases and $43.6 of dividends, partly offset by $50.0 of borrowing.
Changes, outlook, and notable items
- Quarterly revenue grew 5%, but net income fell 1%, primarily because the effective tax rate increased to 33.5% from 29.9%. The prior-year quarter benefited from the retroactive extension of the federal Research and Experimentation Credit. For the six-month period, the effective tax rate was 32.7%, versus 32.9%.
- Management attributed growth mainly to outsourcing, electronic payment processing, and bundled services. Excluding prior-year Alogent revenue of $8.3 million, sold in fiscal 2016, management said quarterly revenue growth would have been 7% and gross profit growth 9%.
- Bank segment revenue increased 8% for the quarter and 9% year to date; credit union segment revenue declined 4% and 1%, respectively. Management cited lower credit-union deconversion fees and EMV card manufacturing revenue.
- Management described its sales pipeline as healthy and expects the shift toward outsourced delivery to support recurring revenue. No specific revenue or earnings guidance was provided. Fiscal 2017 capital expenditures on facilities and equipment were not expected to exceed $60.0 million.
- The company repurchased 1.2 million shares for $103.9 million during the six months and declared dividends of $0.56 per share. It had authorization to repurchase up to approximately 4.58 million additional shares at December 31.
- A patent-infringement case brought by DataTreasury remains pending: patent claims had been found invalid in PTAB proceedings, and the Federal Circuit affirmed; DataTreasury petitioned the Supreme Court for review on January 11, 2017. The company said a possible loss could not then be reasonably estimated.
- The company expects the new revenue-recognition standard, effective for its fiscal year beginning July 1, 2018, to significantly affect revenue currently accounted for under ASC 985; its assessment and transition-method decision were ongoing. The IRS completed its examination of fiscal 2014 and 2015 returns without a material financial statement change.
Important facts for investors to verify
- Whether outsourcing, payment-processing, and bundled-services growth continues, and whether credit-union segment weakness persists.
- How revenue recognition changes affect timing and comparability of reported revenue and earnings when the new standard is adopted.
- Future cash generation relative to substantial repurchases and dividends, and the use and cost of revolving-credit borrowings.
- Developments in the DataTreasury litigation and any changes to the company’s ability to estimate potential exposure.
- Whether the company meets its stated fiscal 2017 capital-expenditure expectation of no more than $60.0 million.