Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2016, the company’s first quarter of fiscal 2017. The filing’s financial statements are unaudited. Unless otherwise indicated, dollar figures below are in millions; the filing presents most financial data in thousands.
Business context
Jack Henry provides software, technology systems, payment processing, implementation, hosting, and support services to banks and credit unions. Recurring support, outsourcing, and electronic payment services are the main revenue sources. The Bank segment generated $257.8 million of quarterly revenue; Credit Union generated $87.2 million.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Total revenue | $345.0 million | $321.6 million |
| Gross profit / margin | $150.3 million / 44% | $138.0 million / 43% |
| Operating income | $91.4 million | $80.5 million |
| Net income | $62.2 million | $51.4 million |
| Diluted EPS | $0.79 | $0.64 |
| Cash from operations | $133.4 million | $126.8 million |
- Revenue rose 7% and gross profit rose 9%; reported net income increased 21%. Excluding one-time deconversion fees, management said revenue grew 6% and net income 14% year over year.
- Support and service revenue rose 8% to $333.0 million, or 97% of revenue. License revenue fell 57% to $0.7 million and hardware revenue fell 8% to $11.3 million.
- Bank segment revenue increased 9% and gross profit 14%. Credit Union revenue increased 3%, while gross profit declined 4% and margin fell to 47% from 50%.
- Cash and cash equivalents were $84.5 million at September 30, 2016, up from $70.3 million at June 30. Operating cash flow increased 5% year over year. Investing activities used $31.9 million; financing activities used $87.3 million, including $61.3 million for treasury-share purchases and $21.9 million in dividends.
- Working capital was negative $36.5 million, primarily reflecting $295.9 million of current deferred revenue. The company said service-related cash costs are substantially below that deferred-revenue balance and it did not expect a liquidity problem.
- No revolving-credit borrowings were outstanding; the facility provides $300 million of capacity, expandable to $600 million. The company reported covenant compliance. It also had an unused $5 million bank line. No variable-rate debt was outstanding.
Changes, outlook, and notable matters
- Support and service growth reflected increased outsourcing, electronic payment processing, and bundled-services revenue. Outsourcing revenue grew 19% reported, or 14% excluding increased deconversion fees. Management cited customer preference for outsourced delivery and expected that trend to support future outsourcing growth.
- Deconversion fees totaled $13.1 million, up $6.0 million year over year. These are one-time fees related to contracts canceled before their term ends and contributed to reported growth.
- Prior-year results included $6.4 million of Alogent revenue; the product line was sold in fiscal Q4 2016. Excluding it, management reported revenue growth of 9% and gross-profit growth of 11%.
- Management expected fiscal 2017 capital expenditures for facilities and equipment not to exceed $60 million, funded from operating cash. It described the sales pipeline as healthy and emphasized recurring revenue and customer demand for efficiency, profitability, and security solutions.
- Management expects hardware revenue to trend downward over time, citing increased outsourcing and hardware price deflation. Credit Union gross margin was pressured by software amortization and higher salaries and benefits.
- The effective tax rate declined to 31.9% from 36.1%, partly due to early adoption of share-based-payment accounting guidance and recognition of the federal R&E credit. The adoption reduced the quarter’s tax expense by $2.3 million and increased EPS by $0.03.
- The company said the forthcoming revenue-recognition standard, effective for it beginning July 1, 2018, is expected to significantly affect revenue recognition currently subject to ASC Topic 985; it was still evaluating the impact and transition method.
- In the DataTreasury patent case, the PTAB had found relevant patent claims invalid, and the Federal Circuit rejected DataTreasury’s appeal on October 13, 2016. Further appeal remained possible; the company could not reasonably estimate any potential loss.
Important facts for investors to verify
- How much future growth depends on recurring service and payment revenue versus one-time deconversion fees and bundled-revenue releases.
- Whether Credit Union segment gross-profit and margin pressure persists, and whether Bank segment growth continues after accounting for the prior-year Alogent sale.
- The sustainability of earnings growth after the quarter’s $2.3 million share-based-compensation tax benefit and R&E credit.
- The eventual financial-statement effects and transition approach for the new revenue-recognition standard.
- Developments in the DataTreasury litigation and any change in the company’s inability to estimate potential losses.