Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 31, 2018 (quarterly filing filed February 7, 2019). The company provides technology and payment-processing solutions to banks and credit unions. Unless noted otherwise, amounts below are in millions of dollars; prior-year comparisons reflect the company’s retrospective adoption of ASC 606.
Key financial results
| Metric | Three months ended Dec. 31, 2018 | Year-over-year change | Six months ended Dec. 31, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $386.3 | +8.1% | $778.8 | +8.4% |
| Operating income | $88.2 | +4.0% | $191.4 | +5.3% |
| Operating margin | 22.8% | Down from 23.7% | 24.6% | Down from 25.3% |
| Net income | $68.1 | −57.8% | $151.6 | −33.5% |
| Diluted EPS | $0.88 | Down from $2.08 | $1.96 | Down from $2.94 |
| Cash from operations | — | — | $192.0 | Up from $176.9 |
Quarterly revenue growth was led by processing (+11%) and services and support (+6%). For the six-month period, processing grew 10% and services and support grew 8%. Management said revenue growth excluding deconversion-fee declines and fiscal 2019 acquisitions was approximately 9% for both periods.
Cost of revenue rose 10% in the quarter and 9% year to date. Management attributed expense growth to higher headcount and compensation, bonuses, amortization (including Ensenta-related costs), and investment in a card-processing platform. Cost of revenue was 59% of quarterly revenue versus 58% a year earlier; the six-month proportion remained 57%.
Cash, balance sheet, debt and capital allocation
- Cash and cash equivalents were $26.2 million at December 31, 2018, down from $31.4 million at June 30, 2018. Operating cash flow was $192.0 million for the six months.
- Investing activities used $109.7 million, including $54.1 million for software development, $33.0 million of facilities and equipment capital expenditures, and $20.0 million net cash for the BOLTS and Agiletics acquisitions. Financing activities used $87.7 million, including $57.1 million of dividends and $21.3 million of treasury-stock purchases.
- Total liabilities were $579.8 million, down from $714.4 million at June 30, 2018; stockholders’ equity was $1,392.0 million. Current assets were $362.6 million and current liabilities $340.1 million.
- No borrowings were outstanding on the $300 million revolving facility or the separate $5 million credit line. The company reported compliance with its credit-facility covenants; the revolving facility matures February 20, 2020.
Material changes, outlook and notable items
- Tax-related comparison: Net income fell sharply primarily because the prior-year periods included large tax benefits from the Tax Cuts and Jobs Act, including a $97.5 million deferred-tax remeasurement benefit. The effective tax rate was 22.9% for the quarter and 20.9% year to date, versus prior-year effective rates of (90.4)% and (25.5)%, respectively. The current-year tax provision therefore does not indicate a comparable deterioration in operating income.
- ASC 606: The company adopted the revenue standard retrospectively from July 1, 2018. It said the change generally accelerated recognition of certain software-related revenue and reduced deferred revenue; prior-year figures shown here were recast.
- Acquisitions: The company acquired BOLTS Technologies for $15.0 million and Agiletics for $7.6 million in October 2018. Their reported post-acquisition contributions were immaterial. Purchase-price allocations were preliminary.
- Management outlook: Management described the quarter as strong, citing recurring revenue, a healthy sales pipeline, and customer demand for solutions addressing profitability, efficiency and security. No specific revenue or earnings guidance is provided in the supplied filing text. Fiscal 2019 facilities and equipment capital expenditures were expected not to exceed $50 million.
- Risks and contingencies: The filing refers investors to risk factors in the company’s fiscal 2018 Form 10-K. Management said routine legal proceedings were not expected to have a material adverse effect. The company reported customer credit risk, but no variable-rate debt outstanding and no current interest-rate exposure. It also disclosed $10.7 million of gross unrecognized tax benefits.
- Other accounting outlook: The company expected adoption of the lease standard in fiscal 2020 to add right-of-use assets and lease liabilities, without a significant effect on income before taxes. The impact of the internal-use software implementation-cost standard was still being evaluated.
Important facts for investors to verify
- How much of revenue growth is recurring and organic after accounting for deconversion-fee declines, acquisitions and ASC 606 timing effects.
- Whether expense growth, especially card-platform investment, compensation and amortization, moderates enough to stabilize or improve operating margins.
- That prior-year tax benefits explain most of the sharp reported net-income and EPS declines, and how the ongoing effective tax rate affects future comparisons.
- Whether capital spending, software development and acquisitions translate into durable growth while preserving cash generation and liquidity.
- The final purchase-price allocations for BOLTS and Agiletics, and the effects of lease-standard adoption and any changes in tax contingencies.