Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2020. The supplied filing is for 2020 Q3, notwithstanding the request metadata specifying 2019 Q3. Unless noted otherwise, amounts below are in millions of dollars.
Business context and results
Jack Henry provides software, technology systems and payment-processing services to banks and credit unions. Revenue is reported as Services and Support and Processing.
| Metric | Three months ended March 31, 2020 | Year-over-year | Nine months ended March 31, 2020 | Year-over-year |
|---|---|---|---|---|
| Revenue | $429.4 | +13% | $1,286.5 | +11% |
| Operating income | $91.9 | +20% | $303.8 | +13% |
| Net income | $73.9 | +25% | $235.3 | +12% |
| Diluted EPS | $0.96 | From $0.77 | $3.06 | From $2.72 |
Quarterly Services and Support revenue rose 15% to $270.2 million; Processing revenue grew 9% to $159.2 million. For the nine-month period, the respective increases were 12% and 9%. Management said growth reflected higher data-processing and hosting fees, software usage, implementation and consulting activity, and processing volumes. Deconversion fees increased to $22.8 million for the quarter and $45.4 million year to date. Excluding deconversion fees and the fiscal 2020 acquisition, management reported adjusted revenue growth of 9% for both periods.
Approximate operating margin was 21.4% for the quarter (20.1% prior year) and 23.6% year to date (23.1% prior year). Approximate net margin was 17.2% for the quarter (15.6% prior year) and 18.3% year to date (18.2% prior year). Quarterly effective tax rate was 19.7%, versus 22.4%; the year-to-date rate was 22.7%, versus 21.3%.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $276.5 million, up from $233.4 million. Investing activities used $153.4 million and financing activities used $107.2 million.
- Cash and cash equivalents were $109.5 million at March 31, 2020, versus $93.6 million at June 30, 2019. Current assets were $479.7 million and current liabilities $298.4 million.
- Debt included $55 million outstanding on a new $300 million revolving facility, with capacity subject to increase to $700 million; the facility matures in February 2025. The company reported compliance with its covenants. A 1 percentage-point rise in the variable borrowing rate would increase annual interest expense by an estimated $0.55 million.
- Nine-month dividends paid were $94.5 million and treasury-stock purchases were $71.5 million. Fiscal 2020 capital expenditures on facilities and equipment were not expected to exceed $62 million.
Material changes and unusual items
- Quarterly operating expenses increased 11%, driven by direct costs, personnel and depreciation and amortization. Research and development expense rose 21% in the quarter. Payments segment cost of revenue increased 18%, principally due to card-processing platform costs.
- The company acquired Geezeo on July 1, 2019 for $37.8 million in cash. Geezeo contributed $2.4 million of quarterly revenue and $6.8 million year to date.
- Net disposal losses were $3.2 million for the quarter and $3.1 million year to date. These included a $7.5 million write-off of the Enterprise Risk Mitigation Solution, partly offset by gains on sale of facilities, primarily the Houston facility.
- Current deferred revenue fell to $160.3 million from $339.8 million at June 30, 2019; the filing reports the balances but does not provide a clear explanation for the full change.
- Remaining performance obligations were estimated at $3.95 billion; the company expects to recognize approximately 26% within 12 months and 20% in months 13–24.
Outlook, risks and contingencies
Management said COVID-19 had not yet caused significant operational disruption, but card-processing transactions declined in the second half of March, pressuring third-quarter processing revenue and expected to affect the fourth quarter. The duration and financial impact were uncertain. Customer installation delays had been limited; the company offered remote work and installation options and waived certain customer late fees. Management described recurring revenue, its sales pipeline, balance sheet and credit access as strengths, but provided no specific revenue or earnings guidance.
The company assessed COVID-19 effects on accounting estimates, including receivables and goodwill, and reported no material financial-statement impact as of the quarter end; future periods could be affected. It expected adoption of the credit-loss standard to accelerate recognition of losses and potentially increase reserves. Unrecognized tax benefits were $9.8 million; statute expirations and examination closures could reduce that balance by $3–$4 million within 12 months. Management said routine legal matters were not expected to have a material adverse effect. No subsequent events were reported.
Important facts for investors to verify
- Whether lower card-processing volumes and COVID-19 effects persisted beyond the quarter and how they affected fourth-quarter results.
- How much reported growth depended on elevated deconversion fees, and whether underlying growth trends continued.
- The drivers of the significant decline in current deferred revenue and the conversion of remaining performance obligations into revenue and cash.
- Whether the new revolving facility, variable-rate exposure, buybacks and dividends affected liquidity or covenant headroom.
- Whether the ERMS write-off, Geezeo integration and expected credit-loss accounting had further material effects.