Jack Henry & Associates, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended June 30, 2016, compared primarily with FY2015. The filing also presents FY2016 fourth-quarter results; despite the request metadata, this is an annual report for FY2016, not FY2015.
Business context
Jack Henry provides core banking and credit-union systems, payment processing, outsourcing, software, hardware, and related services. Its brands are Jack Henry Banking, Symitar, and ProfitStars. The company served more than 10,500 financial institutions and other customers. Recurring support, outsourcing, and electronic payment services represented the substantial majority of revenue.
Financial highlights
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $1,354.6 million | $1,256.2 million | +8% |
| Gross profit / margin | $581.0 million / 42.9% | $535.9 million / 42.7% | +8% |
| Operating income | $361.7 million | $317.9 million | +14% |
| Net income | $248.9 million | $211.2 million | +18% |
| Diluted EPS | $3.12 | $2.59 | +20% |
| Operating cash flow | $365.1 million | $373.8 million | -2% |
| Cash and cash equivalents at year-end | $70.3 million | $148.3 million | -$78.0 million |
| Long-term debt at year-end | None | $50.1 million | Repaid |
Support and service revenue rose 8% to $1,301.0 million and accounted for 96% of revenue. Hardware revenue fell 4% to $50.6 million; standalone license revenue remained below 1% of total revenue. Net income margin increased to approximately 18.4% from 16.8%. The effective tax rate declined to 31.0% from 33.3%, reflecting the Alogent sale’s tax-basis difference and the extended research credit.
Cash used in investing was $136.0 million, including $96.4 million of capitalized software development, $56.3 million of capital expenditures, and $8.3 million for the Bayside acquisition, partly offset by $34.0 million in Alogent sale proceeds. Financing used $307.2 million, including $175.7 million of share repurchases, $84.1 million of dividends, and net repayment of revolving-credit borrowings. The company reported negative working capital of $11.8 million, largely because current liabilities included $343.5 million of deferred revenue; management said the related service cash outlays are substantially below the recorded balance. It reported more than $300 million of remaining credit availability and compliance with credit-facility covenants.
Changes and material developments
- Revenue growth was led by outsourcing, bundled products and services, and electronic payments. Outsourcing revenue increased 13%; bundled products and services increased 50%, including $26.6 million released from deferrals following termination of certain minor pending deliverables.
- The credit-union segment grew faster than the bank segment: revenue increased 22% to $358.0 million, versus 4% growth to $996.7 million for banking. Credit-union gross margin rose to 48% from 46%; banking margin was 41% versus 42%.
- The company sold its Alogent business, recording a $19.5 million gain, and acquired Bayside Business Solutions for $10.0 million. The Bayside acquisition added $4.3 million in FY2016 revenue and $0.3 million in after-tax income.
- Dividends declared per share increased to $1.06 from $0.94. FY2016 share repurchases totaled $175.7 million.
- Backlog increased to $620.6 million from $527.8 million, including $525.0 million of outsourcing backlog. About $406.0 million of that outsourcing backlog was not expected to be recognized in FY2017.
Outlook, risks, and unusual items
Management described itself as cautiously optimistic about continued customer investment and stated that recurring revenue, a healthy sales pipeline, a strong balance sheet, and product capabilities positioned the company for opportunities. It expected outsourcing demand to support growth and hardware sales to trend downward. The filing does not provide quantified FY2017 revenue or earnings guidance.
Key risks include cybersecurity incidents, outages or failures at outsourcing facilities, payment-processing errors or fraud, regulatory changes and compliance costs, competition and pricing pressure, financial-institution consolidation, contract-renewal terms, technology changes, acquisition execution, and dependence on key employees. Goodwill and intangible assets represented 38% of total assets. A patent lawsuit remained pending; the Patent Trial and Appeal Board had held relevant patent claims invalid, but the plaintiff appealed, and the company could not estimate a potential loss.
The company disclosed a prior-period restatement for errors in accounting for certain bundled software arrangements and said the related material weakness was remediated as of June 30, 2016. Management and the auditor concluded that internal control over financial reporting was effective at year-end; the auditor issued an unqualified opinion. The Alogent gain and related tax effects were notable non-recurring items. The company also reported an ongoing IRS examination of FY2014 and FY2015 returns, with no material financial-statement change anticipated at that time.
Investor facts to verify
- How much of future growth and margin depends on recurring outsourcing and payment-processing revenue, and how renewal pricing and customer retention are developing.
- The sustainability of FY2016 earnings growth after excluding the $19.5 million Alogent gain and considering the lower effective tax rate.
- Whether the bundled-revenue deferral and recognition practices remain effective following the prior restatement and remediation of the material weakness.
- Cash conversion, working-capital trends, and capital allocation given lower year-end cash, significant buybacks and dividends, and ongoing software-development investment.
- Developments in the DataTreasury litigation and the IRS examination, as well as the eventual impact of new revenue-recognition and lease-accounting standards.