Jack Henry & Associates, Inc. — Form 10-Q summary
Business context and period. Jack Henry provides software, technology and payment-processing services to banks and credit unions, with both in-house and outsourced delivery. This report covers the three months ended September 30, 2015—the first quarter of fiscal 2016—and compares results with the three months ended September 30, 2014. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Quarter ended Sep. 30, 2015 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $321.6 million | $301.5 million | +7% |
| Gross profit / margin | $138.0 million / 42.9% | $126.6 million / 42.0% | Gross profit +9% |
| Operating income | $80.5 million | $71.6 million | +12% |
| Net income | $51.4 million | $46.1 million | +11% |
| Diluted EPS | $0.64 | $0.56 | +14% |
| Cash from operating activities | $126.7 million | $93.1 million | +36% |
Operating margin was approximately 25.0%, versus 23.8%; net margin was approximately 16.0%, versus 15.3%. Support and service revenue, about 96% of total revenue, grew 7% to $307.7 million. License revenue rose to $1.6 million from $0.5 million, while hardware revenue declined 4% to $12.3 million. The effective tax rate increased to 36.1% from 35.5%, primarily due to a higher applicable state tax rate.
Segments: Bank Systems and Services revenue rose 2% to $236.7 million, with outsourcing services up 13%; gross margin was 40%, compared with 41%. Credit Union Systems and Services revenue rose 21% to $84.9 million, and gross profit increased 34% to $42.3 million; gross margin improved to 50% from 45%, which management attributed mainly to scale in payment processing.
Financial position, liquidity and capital
At September 30, 2015, cash and cash equivalents were $84.5 million, down from $148.3 million at June 30, 2015. Total assets were $1.714 billion and total liabilities were $759.9 million. The company had repaid its $50.0 million revolving-credit balance during the quarter; debt was zero apart from $1.1 million of current capital-lease obligations. The revolving facility provides up to $300 million of borrowing capacity, potentially expandable to $600 million, and matures in 2020. A separate $5 million credit line was undrawn. The company reported compliance with its credit covenants.
Operating cash flow was $126.7 million. Investing activities used $48.6 million, including $23.0 million for developed software, $12.9 million in capital expenditures, $4.4 million for internal-use software and $8.3 million net for an acquisition. Financing activities used $142.0 million, primarily for $69.2 million of share repurchases, $51.6 million of debt and lease repayments, and $20.2 million of dividends. Management expected fiscal 2016 capital expenditures not to exceed $40 million, funded from operating cash flow.
Changes, outlook and notable matters
- Management attributed revenue growth to electronic payment processing and outsourced services, among other support and service offerings. Implementation-services revenue fell 8% because of the timing of work, though management reported a strong backlog. Hardware revenue is expected to trend downward over time as sales mix shifts toward outsourcing and computer prices deflate.
- Cost of sales grew 5%, slower than revenue; operating expenses increased 4%, mainly due to headcount and personnel costs. Management cited recurring revenue, a healthy sales pipeline, and customer needs around profitability and efficiency as positive factors. The filing gives no specific earnings or revenue forecast.
- Effective July 1, 2015, the company acquired Bayside Business Solutions for $10 million cash to expand its commercial-lending presence. Preliminary purchase accounting recorded $5.9 million of goodwill. Bayside contributed $0.7 million of revenue and a $0.4 million after-tax loss in the quarter; management considered the acquisition immaterial to the consolidated results.
- A patent-infringement case brought by DataTreasury remains pending. The Patent Trial and Appeal Board found relevant claims unpatentable and invalid, but DataTreasury appealed. The company said it could not reasonably estimate any potential loss or range of loss.
- Management reported that disclosure controls and procedures were ineffective because of a material weakness involving accounting for multiple-element software arrangements. Remediation was underway, with completion expected during fiscal 2016. Management nevertheless stated that the financial statements fairly present the company’s financial position, results and cash flows. The filing refers readers to the company’s prior Form 10-K amendment for information about restated historical results.
- The company repurchased about 1.018 million shares for $69.2 million during the quarter and declared dividends of $0.25 per share, versus $0.22 in the prior-year quarter. It had authority to repurchase approximately 7.13 million additional shares at quarter-end.
Key facts for investors to verify
- Whether strong growth in recurring support, payment and outsourcing services continues, and whether the reported implementation backlog converts to revenue.
- Progress and effectiveness of remediation for the material weakness in software-arrangement revenue recognition, including any further restatements or disclosure-control findings.
- Developments in the DataTreasury appeal and any change in the company’s ability to estimate potential exposure.
- Bayside’s performance, final purchase-price allocation and contribution to the company’s commercial-lending strategy.
- Cash generation and capital allocation after substantial share repurchases, debt repayment and dividends; the filing provides a capital-expenditure ceiling but no specific earnings guidance.