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Jack Henry & Assoc.

Jack Henry & Assoc. Analyst: Lauren Currie. Company Basics. Sector: Information Technology Industry: Business Software Jack Henry & Assoc. has been in business since 1976

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Jack Henry & Assoc.

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  1. Jack Henry & Assoc. Analyst: Lauren Currie

  2. Company Basics • Sector: Information Technology • Industry: Business Software • Jack Henry & Assoc. has been in business since 1976 • Core product: integrated computer systems providing data processing and management information for small and mid-size financial institutions • 2 primary customer groups: • Commercial banks (80% of revenues) • Credit unions (20% of revenues)

  3. Company Basics • Other products & services: • Outsourcing services (24/7 support) • Supplemental software (100 products or services) • Internet banking • Document imaging • Customer-relationship management • 60% of firm’s revenue is recurring • Monthly fees from outsourcing (main source) • In-house software licensing fees • Support fees • Maintenance fees • Business strategy: To provide high-quality, value-added products and services

  4. Industry Information • Highly competitive industry • High level of outsourcing • 2 % decline in financial institutions as a result of consolidation –asset growth remains @ about 7-8% • Heavy regulation • Business software • Financial institutions • Rapid speed of technological changes • Industry as a whole does not have a reputation for providing the largest returns on shareholder capital

  5. Jack Henry’s position within the industry • Industry leader – 2nd to Fiserv • Dominant provider of processing solutions to credit unions • High economic moat because high switching costs = less frequent changes by banks • Profit margins are greater than the industry average • ROE is slightly lower than the industry average • Asset turnover of .7 is higher than the industry average and = to Fiserv • ROA, & ROIC are greater than the industry average • JKHY seeks acquisitions to expand its portfolio of supplementary products

  6. LWF Company Rationale • Evidence of growing markets / market share • Credit union growth potential • Maintenance fees are linked to client’s assets • Economy is expected to grow, which leads to greater spending by financial institutions • High ROE, ROA, and profit margins • Strong financial condition • ROIC much higher than cost of capital • Healthy free cash flow & excess cash • No long-term debt & very little short-term debt • Understandable products • Diverse industry compared to LWF companies

  7. Risks & Cautions • Continued consolidation of financial institutions may decrease the customer base • Acquisitions may become harder to find and more expensive • The cyclical patterns of the economy influence the growth of the company • License fees are showing signs of shrinkage as a percent of revenue • Service revenues are increasing as a percent of sales (lower margins) • Company history of aggressive accounting • Bringing future expenses forward to make future earnings look better • Executive bonuses tied to net income increases of 20% in 2006 • Officers & Directors own 15.8% of stock

  8. Valuation • Growth is expected to continue at 10-12% • Jack Henry’s fourth quarter results exceeded analysts expectations • Current price = $21.79 Current P/E = 22

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