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Morningstar | Jack Henry Gets Off to a Fast Start in Fiscal 2019

Wide-moat Jack Henry continues to benefit from banks' desire to improve technology offerings, with pro forma revenue reaching $384.6 million, representing year-over-year growth of nearly 10%. However, we'll be quick to caution this quarter’s revenue benefited from a few one-time items that likely won’t be repeated for the remainder of the year. This quarter’s growth helped lead the company to adjusted margins expansion of more than 130 basis points to 25.5%. We’ll note that GAAP operating margins were down from the previous year. This margin pressure resulted from higher compensation related to performance bonuses and ongoing debit platform migration initiatives. Jack Henry’s growth continues to be broad based. The company’s core, payments, and complimentary segments each grew recurring revenue by 11.1%, 10.3%, and 11.7%, respectively, from the previous year. The only offset to this was corporate revenue fell by 15.7%. For the quarter, the company earned $1.08 per share, modestly above our expected earnings growth for fiscal 2019. Overall, Jack Henry had a fairly decent start to its fiscal year. However, it trades at nearly 35 times our 2019 earnings forecast. We’ll be maintaining our fair value estimate of $107 per share. Despite the recent pullback in markets, Jack Henry remains an expensive stock.

The spending environment for banks remains strong. We find it interesting that Jack Henry has generated substantial growth in its commercial lending products. During the call, the company specifically highlighted banks’ focus on commercial lending as the rationale for its acquisition of Vanguard. We’ll point out that a few banks have warned about overly aggressive lending with commercial loans. It appears Jack Henry might be a beneficiary of this trend. Given the increasing emphasis on tech investment across many banks, we think Jack Henry will continue benefiting from banks continually being forced to match the technology of rival banks.

Finally, we are intrigued by management’s comments that Jack Henry had two competitive takeaways in core processing during the quarter and that the company is working on several other deals with banks with assets greater than $1 billion. This is interesting because historically the switching costs for core processing services is exceedingly high. This could mean one of two things: either switching costs are decreasing or Jack Henry has a significantly better solution. We’ll be doing some investigation around this.