Morningstar | Jack Henry's Bet on Banno Is Paying Off; 2Q Results Meet Expectations
Wide-moat Jack Henry continues its strong start to fiscal 2019, with revenue reaching $379.4 million in the second quarter, representing year-over-year growth of 9%. This top-line number excludes deconversion revenue, which are fees charged to customers when contracts are prematurely terminated. These fees are outside company control, and while deconversion revenue is down, this is a positive for the company because it indicates lower customer churn. Revenue in the company’s core, payments, and complementary segments grew by 5%, 14%, and 7%, respectively, from the previous year. Operating margins were down materially both year over year and compared with last quarter, falling to 23%. This doesn’t concern us much because margins are experiencing headwinds related to performance incentives and migrating clients to the newer Banno platform. For the quarter, the company earned $0.88 per share, modestly below our expected earnings growth for the year. Considering updated guidance related to lower deconversions, full-year EPS should come in lower than our forecast. However, we continue to expect recurring revenue growth in the high single digits. We continue to think that Jack Henry’s shares are overvalued, with shares trading at a 25% premium to our fair value estimate of $107.We note that that Jack Henry is uniquely affected by Fiserv’s pending acquisition of First Data. Jack Henry has an ongoing processing partnership with First Data, and Fiserv is both a competitor and a client. Management mentioned on the call that they have spoken to Fiserv and do not expect any changes to the First Data partnership if the acquisition closes. Though Fiserv could undermine the First Data partnership and choose to compete aggressively, we agree with management’s view that this is unlikely because of the existing interconnected relationship between Jack Henry and Fiserv. We intend to monitor Fiserv’s acquisition plans for any changes to this dynamic.
Jack Henry & Associates is a provider of information processing solutions for community banks. The company's range of products and services includes processing transactions, automating business processes, and managing information for financial institutions and corporate entities. The company's proprietary solutions are marketed through three primary business brands: Jack Henry Banking, which is a provider of integrated data processing systems; Symitar, which is a provider of data processing solutions for credit unions of various sizes; and ProfitStars, which is a provider of agnostic products and services to financial institutions that are primarily not main customers of the company
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