Business Context and Reporting Period
Company: Jack Henry & Associates, Inc. (JHA)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended December 31, 2006 (Fiscal Year 2007)
Business Overview: JHA provides integrated computer systems, software, and data processing services to banks and credit unions. Operations are divided into two segments: Bank Systems and Services, and Credit Union Systems and Services.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Dec 31, 2006 | 6 Months Ended Dec 31, 2006 |
|---|---|---|
| Total Revenue | $167,244 | $317,859 |
| Gross Profit | $72,988 | $136,295 |
| Gross Margin | 44% | 43% |
| Operating Income | $39,619 | $72,538 |
| Net Income | $27,788 | $49,200 |
| Diluted EPS | $0.30 | $0.53 |
| Cash from Operations (6mo) | $86,078 | |
| Cash & Equivalents (End of Period) | $27,625 | |
| Revolving Credit Facility Balance | $25,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 13% for the quarter and 12% for the six-month period compared to the prior year.
- Support & Service: The primary driver of growth, up 17% (quarter) and 16% (six months), fueled by EFT support and outsourcing services.
- License Revenue: Increased 2% for the quarter but declined 3% for the six-month period, driven by strong bank segment sales offset by a decline in credit union license agreements.
- Hardware: Increased 9% for the quarter and 1% for the six-month period.
- Profitability: Net income rose 28% for the quarter and 20% for the six-month period. The effective tax rate decreased to 33.5% from 37.0% due to the renewal of the Research and Experimentation Credit.
- Segment Performance:
- Bank Segment: Revenue grew 19% (quarter) and 15% (six months) with stable gross margins.
- Credit Union Segment: Revenue declined 7% (quarter) and 3% (six months) as customers shifted toward outsourcing services, which generate lower initial revenue than license agreements.
- Cash Flow: Operating cash flow decreased to $86.1 million (6mo) from $107.2 million in the prior year, primarily due to changes in working capital. Investing cash outflows increased to $60.5 million, largely due to the acquisition of US Banking Alliance ($36.0 million).
Guidance, Outlook, and Risks
- Acquisition: On November 1, 2006, JHA acquired US Banking Alliance (USBA) for $34 million in cash to expand loan and deposit pricing software capabilities. Goodwill of $28.7 million was recorded.
- Capital Allocation: The company repurchased 2.26 million shares of treasury stock for $48.0 million during the six-month period. A cash dividend of $0.065 per share was declared subsequent to the period end.
- Backlog: Total backlog increased 5% year-over-year to $225.3 million, with outsourcing backlog comprising the majority ($159.1 million).
- Capital Expenditures: Expected to not exceed $50 million for fiscal year 2007.
- Risks: Management notes risks related to the shift in sales mix toward outsourcing (lower initial revenue recognition), competition, and the impact of rising equipment processing power on hardware pricing. No derivative financial instruments are used to hedge market risk.
Investor Verification Checklist
- Revenue Mix Shift: Verify the sustainability of the shift from high-margin license revenue to lower-margin outsourcing services, particularly in the Credit Union segment.
- Acquisition Integration: Monitor the integration and revenue contribution of the US Banking Alliance acquisition.
- Share Repurchases: Confirm the remaining authorization for share buybacks ($4.96 million shares remaining) and the impact on earnings per share.
- Working Capital: Review the significant decrease in deferred revenues ($58.2 million reduction in cash flow) and its impact on future revenue recognition.
- Tax Rate: Assess the permanence of the lower effective tax rate (33.5%) driven by the retroactive Research and Experimentation Credit.