Morningstar | Jack Henry’s Fiscal Third Quarter Is a Bit Weak but Not as Weak as Headline Numbers Suggest
Jack Henry’s headline results were weak, with reported revenue up only 2% year over year and the company seeing a substantial decline in operating margins. The primary driver behind the soft numbers is actually a positive from a long-term perspective, but even excluding this factor, the quarter was underwhelming. We will maintain our $107 fair value estimate and wide moat rating.The primary driver behind the weak revenue result was a decline in deconversion fees, which customers pay when they exit their relationship with Jack Henry. A fall off in these fees means Jack Henry is actually retaining more customers, which we view as a positive from a longer-term perspective. Further, the company had warned that this would occur in the third quarter and believes it will carry into the fourth quarter, as well. Still, even excluding deconversion fees, year-over-year revenue growth was a little light at 5%, below the level we expect for Jack Henry in the near term, although the differential is not large enough to materially impact our valuation, and the company’s recent results have been a little lumpy due to some changes in revenue recognition.
Margins are also under some pressure, with operating margins in the quarter falling to 20% from 24% last year. This, again, is largely due to the decline in deconversion fees, which essentially fall straight to the bottom line. Still, even after adjusting for this, margins appear to have fallen modestly. Management pointed to, among some other factors, costs related to its effort to expand its credit and debit card platform. Over time, Jack Henry’s margins have expanded due to the scalability of the business model, but this process has not been smooth, and the company might be in a bit of an investment cycle. Still, overall, the quarter supports our long-term forecast, which calls for more modest growth and somewhat stalled margins over time.
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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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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