Business context and reporting period
Jack Henry & Associates, Inc. provides banking and credit-union technology, payment processing, software, hardware, and related services. This Form 10-Q covers the three months ended September 30, 2013, the first quarter of fiscal 2014, and compares results with the quarter ended September 30, 2012. Amounts below are in millions unless stated otherwise.
Financial performance and position
- Revenue: $295.7, up 9% year over year. Support and service revenue was $269.5 (+10%) and represented 91% of revenue; license revenue was $11.8 (−8%); hardware revenue was $14.3 (+6%).
- Profit and margins: Gross profit was $128.7 (+11%), with gross margin of 43.5% versus 42.8% (reported as 44% and 43%). Operating income was $77.3 (+15%); net income was $49.8 (+17%). Diluted EPS was $0.58 versus $0.49. Support-and-service gross margin rose to 43% from 41%.
- Cash flow: Operating cash flow was $97.7 versus $101.8. Investing activities used $21.9, including $14.1 of software development and $7.4 of capital expenditures. Financing activities used $21.9, including $17.1 of dividends. Cash increased $53.9 to $181.8.
- Liquidity and debt: Current assets were $430.5 and current liabilities $365.2 at September 30. Total debt, primarily capital leases, was approximately $18.0, including $11.4 current debt; there was no outstanding balance on the $150.0 million revolving facility or $5.0 million bank line. The company reported compliance with credit-facility covenants.
- Other metrics: Backlog was $503.1, up 19% year over year and 1% from June 30, 2013. The effective tax rate was 35.5%, compared with 36.0%. Cash dividends paid were $0.20 per share versus $0.115.
Material changes and management commentary
Growth was led by recurring support and service revenue, especially electronic payment processing and outsourcing. Management attributed improved gross profit to scale, particularly in electronic payments. License revenue declined as customers increasingly chose outsourced delivery instead of upfront software licenses. Operating expenses increased 6%, including higher sales commissions and payroll costs. Interest expense fell substantially following repayment of the term loan in fiscal 2013.
Bank-segment revenue increased 9%, with gross margin steady at 42%. Credit Union revenue also rose 9%; gross margin improved to 47% from 44%, reflecting scale in payment processing. The company reported $386.3 of outsourcing backlog and $116.9 of in-house backlog.
Outlook, risks, contingencies, and unusual items
- Management said it was cautiously optimistic about economic improvement and expected financial institutions to continue investing in efficiency-enhancing products and services. It anticipated continued industry consolidation, fewer bank failures, and increased merger activity.
- Management expects outsourced delivery to support outsourcing revenue over the long term, while license fees may fluctuate and hardware sales may trend lower. No specific revenue or earnings guidance was provided. Fiscal 2014 capital expenditures were not expected to exceed $50 million.
- Management noted that regulation, including Dodd-Frank, could lead financial institutions to defer discretionary spending. The company also faces customer credit risk and interest-rate risk on debt; it reported no variable-rate debt outstanding at quarter-end and does not use derivatives.
- A May 2013 patent-infringement suit by DataTreasury alleges infringement of two patents and seeks damages, injunctive relief, and attorneys’ fees, including treble damages for alleged willful infringement. The company intends to defend itself, but stated it could not reasonably estimate any potential loss or range of loss.
- At September 30, gross unrecognized tax benefits were $4.6, including $0.7 of accrued interest and penalties; the company anticipated a possible $0.1–$0.7 reduction in unrecognized tax benefits within 12 months.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter. Results for the quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether recurring electronic-payment and outsourcing growth continues, and how that affects margins and backlog conversion.
- How the DataTreasury litigation develops; the filing provides no estimable potential loss.
- Cash-flow trends, including the effects of annual maintenance billings and deferred-revenue movements.
- Capital spending against the fiscal 2014 ceiling of $50 million, and future dividend or repurchase activity.
- Potential customer spending delays from regulation and industry consolidation, and developments in tax examinations or unrecognized tax benefits.