Jack Henry & Associates, Inc. — Form 10-Q Summary
Period: The filing covers the fiscal third quarter and nine months ended March 31, 2016, compared with the periods ended March 31, 2015. The request metadata says “2015 Q3,” but the filing itself is for fiscal 2016 Q3. Dollar amounts below are in millions unless noted otherwise.
Business context and financial performance
Jack Henry provides software, payment processing, implementation, hosting, and support services to banks and credit unions. Recurring support and service revenue represented 96% of revenue in both comparison periods.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $333.2, up 8% | $987.7, up 7% |
| Gross profit / margin | $138.9 / 42% (prior-year margin 43%) | $419.3 / 42% (unchanged) |
| Operating income | $79.8 | $245.2 |
| Net income | $53.9, up 6% | $164.6, up 9% |
| Diluted EPS | $0.68, versus $0.63 | $2.06, versus $1.84 |
| Cash from operations | Nine months: $207.0, versus $182.5 |
Quarterly support and service revenue grew 8% to $319.6 million; hardware revenue rose 8% to $13.2 million, while license revenue fell 49% to $0.3 million. Year-to-date support and service revenue increased 7%; hardware declined 4%. Cost of sales rose 9% in the quarter and 7% year to date. Operating expenses increased 8% in both periods, with higher staffing and personnel costs cited as a main driver.
The Credit Union segment was the stronger growth contributor: quarterly revenue rose 21% and nine-month revenue 24%. Bank segment revenue increased 3% in the quarter and 2% year to date; its gross margin declined from 41% to 39% in the quarter. Management attributed pressure in the Bank segment to lower deconversion fees, two large customer losses in the first half, and ongoing price compression. Credit Union margins improved with transaction-volume growth and scale benefits.
Financial position and liquidity
- At March 31, 2016, cash and equivalents were $54.0 million, down from $148.3 million at June 30, 2015; total assets were $1.703 billion and stockholders’ equity was $948.9 million.
- Total debt was $100.2 million, principally $100.0 million drawn on a revolving facility with a $300 million commitment. The company reported compliance with financial covenants. A separate $5 million credit line was undrawn.
- Nine-month investing cash use was $133.6 million, including $74.7 million for software development, $43.3 million for capital expenditures, and $8.3 million net for the Bayside acquisition. Financing cash use was $167.7 million, including $155.1 million of treasury-stock purchases and $62.0 million of dividends, partly offset by $100.0 million of borrowings.
- Management expects fiscal 2016 capital expenditures on facilities and equipment not to exceed $60 million, funded from operating cash flow.
Outlook, developments, and risks
- Management cited strong quarterly performance, a healthy sales pipeline, and continued demand for recurring and outsourced services. It expects the outsourcing trend to support revenue growth, while anticipating an overall decline in hardware sales over time. No specific revenue or earnings guidance was provided.
- Deconversion fees were $4.2 million lower in the quarter than a year earlier; these fees arise when customer agreements are cancelled before contract end. Management noted that lower fees tempered reported growth in certain service categories. Bundled revenue also benefited from contract terminations that allowed previously deferred revenue to be recognized.
- On April 19, 2016, the company announced an agreement to sell its Alogent division. The transaction was expected to close by May 31; final purchase price and gain or loss were not yet determined. Assets held for sale were carried at $37.1 million and related liabilities at $28.0 million at March 31.
- The company acquired Bayside Business Solutions for $10 million in cash in July 2015. Its included nine-month results contributed $2.9 million revenue and an after-tax net loss of $0.3 million; management considered the acquisition immaterial to consolidated results.
- A patent infringement case remains pending. The Patent Trial and Appeal Board found all relevant asserted patent claims unpatentable, but the plaintiff appealed; the company said a possible loss could not be reasonably estimated.
- Management reported disclosure controls were not effective because of a previously identified material weakness in accounting for multiple-element software arrangements. Remediation was in progress, with completion expected during fiscal 2016. Management stated the filed financial statements fairly present the company’s results and position.
- The effective tax rate was 32.1% for the quarter and 32.7% year to date, down from 33.8% and 33.7%, respectively, primarily due to the extended federal R&E credit. The company early adopted the accounting change presenting deferred taxes as non-current; prior periods were not retrospectively adjusted.
Most important facts for investors to verify
- Whether recurring service growth can offset Bank-segment customer losses, price compression, and lower deconversion fees.
- The final Alogent sale price, closing, and resulting gain or loss.
- Progress and independent validation of remediation for the material weakness in revenue-recognition controls.
- Cash generation after significant repurchases, dividends, software investment, and facility spending; also monitor revolving-credit borrowings and covenant compliance.
- Developments in the DataTreasury appeal and the outcome of the IRS examination of fiscal 2014 returns.