EUR 850.00 For Business Accounts Only

Morningstar | Jack Henry Finishes Its Fiscal 2018 on a High Note

Wide-moat Jack Henry & Associates finished out its fiscal 2018 with strong revenue performance that was mostly in line with our expectations. For the fourth quarter, Jack Henry generated GAAP revenue of $417 million, representing year-over-year growth of 8.7%. After backing out deconversion fees and revenue from acquisitions, year-over-year revenue growth was 5.8%. For the year, pro forma revenue grew by 6.6%, almost perfectly in line with the guidance management gave 12 months ago. For this year, management gave similar to slightly better guidance, expecting revenue to grow in the “high-mid-single digits.” This is comparable to what we have been expecting, and we believe revenue will grow at similar rates in the medium term. Though we will be making some adjustments to our model to incorporate full-year results, we expect only a modest increase to our fair value estimate of $101 per share. Currently, Jack Henry is priced nearly 50% above our fair value estimate. While we expect continued strong performance from Jack Henry, the current share price implies a significant acceleration in revenue growth and profitability.

In addition to Jack Henry’s revenue guidance, management announced that they expect operating margins to decline by 60 to 80 basis points in fiscal 2019. We don’t think is anything investors should find too concerning. The drop in margins will be driven by investment in its new payment platform, but more so, by increases in employee incentive plans. According to the company, these incentive plans will account for about one fourth of the company’s total tax savings in 2019. Overall, we think increasing employee incentives is a good idea and one of the better ways to invest its tax savings, considering Jack Henry’s employee ratings have dipped modestly over the past year. If by increasing employee incentives, Jack Henry can lower turnover and attract better talent, this investment could generate a high return for the company.

Finally, during the earnings call, Jack Henry mentioned it booked 20 competitive core takeaways in the quarter. This is a material acceleration from recent years and a trend that investors should be giving attention. For now, most of these are coming from the company’s credit union business, however, eight takeaways resulted from Jack Henry’s banking segment. To put this in perspective, six months ago, the company booked 16 takeaways. Only two years ago in Jack Henry’s fiscal 2016, the company booked a total of 21 takeaways. We don’t know exactly what’s driving this, but we suspect that as bank profitability improves, banks are more likely to invest in new tech projects, which potentially causes financial institutions to review their core processing relationship.