Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2019 (fiscal 2020 second quarter). The company provides software, technology solutions, and payment processing services primarily to banks and credit unions. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless noted.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Year-over-year change | Six months ended Dec. 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $419.1 million | +9% | $857.1 million | +10% |
| Operating income | $93.7 million | +6% | $211.9 million | +11% |
| Net income | $72.1 million | +6% | $161.5 million | +6% |
| Diluted EPS | $0.94 | +7% | $2.10 | +7% |
| Operating margin | 22.4% | Prior year: 22.8% | 24.7% | Prior year: 24.6% |
Services and support represented 61% of quarterly revenue and 62% year to date; processing accounted for the balance. For the quarter, services and support grew 8% and processing grew 10%. Management said adjusted revenue growth, excluding deconversion fees and Geezeo revenue, was 8% for the quarter and 9% year to date. Quarterly costs of revenue rose 10%, while operating expenses overall increased 9%.
For the six months, operating cash flow was $215.0 million, up 12% from $192.0 million. Investing activities used $125.4 million, including $57.9 million for software development, $30.8 million for facilities and equipment, and $30.4 million net for the Geezeo acquisition. Financing activities used $110.7 million, including $61.5 million of dividends and $51.2 million of share repurchases. Cash declined to $72.5 million from $93.6 million at June 30, 2019.
Balance sheet, liquidity, and capital allocation
- Total assets were $2.187 billion and stockholders’ equity was $1.487 billion at December 31, 2019. Current assets were $427.7 million versus current liabilities of $343.2 million.
- No borrowings were outstanding on the $300 million revolving credit facility or the separate $5 million bank line. The company was in compliance with facility covenants.
- Operating lease liabilities were $71.0 million at quarter-end. The company adopted the lease accounting standard in July 2019, recording $77.4 million of lease liabilities and $74.1 million of right-of-use assets at adoption.
- The company repurchased 350,000 shares during the six-month period. The board declared a subsequent quarterly dividend of $0.43 per share, payable March 19, 2020.
Material changes and management commentary
- Revenue growth reflected increased processing volumes, hosting and data-processing fees, and implementation and consulting activity. Deconversion fees were higher by $1.1 million in the quarter and $8.1 million year to date versus the comparable periods.
- Management attributed higher costs mainly to the new card-processing platform, faster-payments initiatives, increased personnel costs, and depreciation and amortization. Payments segment cost of revenue grew faster than segment revenue: 22% versus 10% in the quarter and 19% versus 11% year to date.
- The effective tax rate was 23.2% for the quarter versus 22.9% a year earlier, and 24.0% year to date versus 20.9%. Management cited lower tax benefits from stock-based compensation compared with prior-year periods.
- Geezeo was acquired on July 1, 2019 for $37.8 million in cash. It contributed $2.0 million of quarterly revenue and $4.4 million year to date; management considered the acquisition’s financial impact immaterial.
- Management described performance as strong, cited a healthy sales pipeline and continuing recurring revenue, and said customer regulatory and operational needs support demand. The filing provides no specific revenue or earnings forecast. Fiscal 2020 capital expenditures on facilities and equipment were expected not to exceed $50 million.
Risks, contingencies, and unusual items
- The existing revolving facility was scheduled to terminate February 20, 2020; management anticipated a new five-year facility before then. Renewal was not yet completed as of the filing.
- The company reported $11.5 million in gross unrecognized tax benefits and $1.9 million of accrued interest and penalties. It anticipated that statute expirations and examination closures could reduce unrecognized tax benefits by $3 million to $4 million within 12 months.
- Routine legal proceedings were not expected by management to have a material adverse effect. The company reported no outstanding variable-rate debt and no use of derivative instruments.
- Future revenue associated with unsatisfied or partially unsatisfied performance obligations was $3.902 billion; approximately 27% was expected to be recognized over the next 12 months. This is an estimate, not a guarantee of revenue.
Important facts for investors to verify
- Whether the anticipated replacement revolving credit facility was completed on expected terms and timing.
- Whether processing revenue growth can continue while the new card platform’s costs pressure Payments segment margins.
- How much reported growth depends on deconversion fees, acquisition contributions, and other non-recurring or variable items.
- Conversion of the $3.902 billion remaining performance obligations into recognized revenue, and the effect of deferred revenue movements on operating cash flow.
- Developments in the company’s tax positions, including the expected reduction in unrecognized tax benefits.