Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019, the first quarter of fiscal 2020 (not calendar 2019 Q1). Comparisons are with the three months ended September 30, 2018. Unless stated otherwise, financial amounts below are in millions.
Business context and results
Jack Henry provides software, technology, and payment-processing services primarily to banks and credit unions. Revenue is generated from services and support, processing, product delivery, and related offerings.
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $438.0 | $392.5 | +12% |
| Operating income | $118.2 | $103.2 | +14% |
| Net income | $89.4 | $83.6 | +7% |
| Diluted EPS | $1.16 | $1.08 | +8% |
| Operating margin | 27.0% | 26.3% | +0.7 percentage points |
| Net margin | 20.4% | 21.3% | -0.9 percentage points |
| Operating cash flow | $123.1 | $146.7 | -16% |
Services and support revenue rose 13% to $278.8 million; processing revenue rose 9% to $159.2 million. Excluding the year-over-year increase in deconversion fees and Geezeo revenue, management reported total revenue growth of 9%. The filing attributes processing growth primarily to higher card and remittance transaction volumes.
Liquidity, cash flow, debt, and capital
- Cash and cash equivalents were $96.7 million at September 30, 2019, versus $93.6 million at June 30, 2019. Current assets were $484.1 million and current liabilities $393.1 million.
- Cash from operations was $123.1 million. Investing activities used $75.4 million, including $30.3 million net cash paid for Geezeo, $28.5 million for internally developed software, and $13.1 million in capital expenditures. Financing activities used $44.6 million, primarily for dividends and repurchases.
- No borrowings were outstanding on the $300 million revolving credit facility or the separate $5 million bank line. The company reported compliance with credit-facility covenants. The revolving facility matures February 20, 2020.
- Capital expenditures on facilities and equipment for fiscal 2020 are not expected to exceed $50 million, funded from operating cash flow. The company paid $30.8 million in dividends and repurchased approximately 100,000 shares under its repurchase plan during the quarter.
Material changes and unusual items
- Geezeo was acquired on July 1, 2019 for $37.8 million in cash; its reported-quarter contribution was $2.4 million of revenue and $0.04 million of after-tax net income. The purchase-price allocation was preliminary.
- Cost of revenue rose 12%, in line with revenue growth. Management cited card-platform and faster-payments investment, personnel, hardware, and software amortization costs; cost-control efforts helped offset margin pressure.
- The effective tax rate increased to 24.6% from 19.2%. Management attributed the change primarily to stock-based compensation tax effects: the prior-year quarter included a significant excess tax benefit, while the current quarter had an excess tax deficiency.
- Operating cash flow declined year over year, including a larger reduction in deferred revenue. The filing reports $68.9 million of cash outflow from the change in deferred revenue, partly offset by cash collected from receivables.
- The company adopted lease accounting standard ASC 842 on July 1, 2019, recording $77.4 million of lease liabilities and $74.1 million of right-of-use assets at adoption. At quarter-end, operating lease liabilities were $74.2 million. Adoption did not materially affect income or cash flows.
- At quarter-end, the company had committed to invest an additional $14.9 million in a renewable-energy tax-credit fund, expected to be funded during the remainder of fiscal 2020.
Outlook, risks, and contingencies
Management described first-quarter performance as strong, cited a healthy sales pipeline and recurring revenue base, and expressed confidence in customer demand for solutions addressing profitability, efficiency, and security. The filing provides no specific full-year revenue or earnings guidance. Principal exposures discussed include customer credit risk, interest-rate risk on borrowings, and general forward-looking uncertainties; no variable-rate debt was outstanding at quarter-end. Routine legal proceedings were not expected to have a material adverse effect. Gross unrecognized tax benefits were $11.6 million; management anticipated that lapsing statutes and examination closures could reduce the balance by $3.0–$4.0 million within 12 months.
Important facts for investors to verify
- Whether underlying revenue growth remains strong after accounting for deconversion fees, acquisitions, and the timing of recurring customer contracts.
- Whether spending on the card-processing platform and faster-payments initiatives delivers growth without sustained cost or margin pressure.
- How much of the year-over-year operating cash-flow decline reflects timing, particularly deferred-revenue movements.
- Geezeo’s finalized purchase-price allocation, contribution, and integration results, as well as funding of the $14.9 million investment commitment.
- Renewal or replacement of the revolving credit facility before its February 2020 maturity, and changes in tax exposures or the stated potential reduction in unrecognized tax benefits.