Jack Henry & Associates

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Jack Henry & Associates, Inc. is a well-established financial technology company specializing in software solutions and related services primarily for community and regional financial institutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Jack Henry & Associates, Inc. (JKHY) operates in the financial technology sector, providing a range of software and services primarily to community and regional financial institutions. Its offerings include:

  • Core Software Systems: These systems are designed to automate essential banking functions, like deposit processing, loan origination, and general ledger accounting. These systems are the backbone of most banks’ infrastructure.
  • Payment Solutions: JKHY offers various payment processing solutions, including online and mobile banking, credit card processing, and payment network integration.
  • Complementary Solutions: These products and services include risk management, security, and data management tools. They are designed to integrate with JKHY’s core systems, enhancing the overall functionality of its offerings.
  • Services and Support: JHKY also provides various services to its clients including consulting, implementation, training, ongoing support, and data migration services.

JKHY’s main client base consists of community and regional banks, credit unions, and other financial institutions that prioritize integrated and reliable software systems. The company has built its business through decades of providing dependable solutions, and a focus on customer support and long-term relationships.

The company operates four reportable segments: Core, Payments, Complementary, and Corporate and Other.

  • Core: Provides comprehensive software processing systems and related services for banking operations.
    • Core segment accounts for more than 50% of revenue.
  • Payments: Provides payment processing solutions and related services.
  • Complementary: Provides solutions that complement the core systems, such as security and data management.
  • Corporate and Other: Includes all other revenue and expenses not attributable to the previous segments, including overhead costs.

Financials Deep Dive:

JKHY’s latest earnings reports and quarterly filings provide a comprehensive view of its financial health. Here’s an in-depth look:

  • Revenue Trends:
    • JKHY continues to show a steady growth in total revenue.
    • In fiscal year 2023, total revenues came in at $2.177 billion which was a 12% increase from the $1.943 billion for fiscal year 2022.
    • For the nine months ending March 2024, revenue increased 7.4% to $1.656 billion compared to $1.542 billion for the first nine months of fiscal year 2023. The revenue increase was driven primarily by growth in core and processing lines of business.
    • Recurring revenues play a major role in generating revenues, with steady or rising trends.

  • For example for the three months ending March 31st, the revenues from the services and support segment are predominantly recurring (97%) and are also trending up in the year over year comparison.

  • For core and processing segment, revenues are also trending up, with core showing a smaller yearly increase than processing. The processing segment had a large boost in the past three quarters.

  • This suggests a reliable revenue stream due to long-term contracts and client relationships.
    • Growth in recurring revenues implies high customer stickiness.
    • Most new clients are acquired through the core segment and expanded services are then sold to them, boosting processing and complementary sales
    • Total revenue growth continues to increase.

  • However, this is not entirely organic growth, with acquisitions contributing.

  • It’s important to note that as the company has increased its revenue, operating expenses also increase, reducing operating margins.
  • Profitability:
    • Net income has remained solid, with a slight improvement in the latest results for fiscal year ending 2023 and nine months ending March 2024.
    • For fiscal year 2023, net income is at $362 million, and for the nine months ending March 2024, net income comes in at $380 million.
    • Despite increases in revenues, the net income has decreased YoY for fiscal years 2022 to 2023, while a slight increase is seen for the nine months ending March 2024 YoY. This could be because the operating expenses are rising at a higher rate than the revenue increases.
    • Gross profit margins and operating margins remain fairly high but could be improved by trimming operating expenses.
    • Operating margin for the most recent quarter was ~25% showing that the company is profitable and stable.
  • Cash Flows:
    • The company’s cash flow from operations has seen fluctuations, showing a reliance on cash from debt and financing activities.
    • Net cash from operating activities increased from $388 million in 2022 to $504 in 2023, but decreased to $336 million for the first nine months of fiscal year 2024 compared to the same period in the prior year.
    • Free cash flow is used to fund acquisitions, share buybacks and dividends.
  • Balance Sheet:
    • The company has seen a steady increase in assets as it continues to acquire companies and develop its products.
    • The Company has a conservative Debt/Equity ratio of 0.72, and this shows that JHKY is using moderate amount of leverage.

    • However, the long-term debt is growing.

    • The company has a moderate level of cash and cash equivalents.
  • Guidance:
    • JHKY expects a strong growth in revenue in its core and processing segments, driven primarily from organic growth as well as acquisitions.
    • They expect their adjusted revenue growth rate for FY24 between 6.4% to 7.4% from 2023.
    • They expect growth in total revenue to also continue at a strong rate in the coming quarters.
    • They intend to maintain a moderate level of leverage and keep a conservative capital structure.

Moat Analysis:

Based on the provided information and analysis, JKHY has a narrow moat with a rating of 3 out of 5. The main reasons include:

  • High Switching Costs: Banks often implement their core technology systems, which means data migration and setup of new software takes significant effort from an institution. Switching systems can lead to data loss, additional training expenses, or general business disruption for their clients. This is one of JHKY’s most important forms of moat, because their clients tend to stick with them for longer periods of time, meaning higher recurring revenues.
  • Scale-Based Cost Advantages: The company’s long history and large client base provide certain economies of scale in the development of software, implementation services, and data support. These scale advantages however are only narrow, because smaller firms with newer technologies may be able to compete more effectively with legacy clients with old tech.
  • High Regulatory requirements- High compliance and regulations mean that the industry has significant barriers to entry which help reduce the competitive forces. But these barriers don’t protect profits as much as they create stability.

Reasons against a wide moat rating:

  • Technological Disruption: Companies in Fintech and related industries are prone to constant technological change. This means that new software and technologies could make legacy solutions less efficient and eventually obsolete, despite the fact that those solutions can be tightly integrated into banking infrastructure.
  • Competitive Landscape: There are a decent number of competitors in the fintech industry that may steal market share. Competitors include but are not limited to: Fiserv, Fidelity, and Global Payments. Most competitors tend to be much larger companies than JHKY which gives them additional bargaining power.
  • Lack of Product Differentiation: While JKHY’s offerings are critical to banks, they are often perceived as commodity products. It can be hard for a company like JHKY to truly distinguish themselves, which reduces their ability to command price premiums.

Risks to the Moat & Business Resilience:

  • Technological Obsolescence: Changes in banking technology are rapid, and a faster competitor could develop more desirable platforms and services, leaving JHKY behind.
  • Increased competition could force JKHY to lower prices, or increase expenses to remain competitive and upgrade current products and platforms.
  • Regulatory Changes: Shifts in financial regulations could impact how companies approach data security, which could disrupt current business.
    • Regulatory compliance adds cost to a company. And a failure to implement new regulations can severely damage a company’s reputation.
  • Acquisition Integration: The company relies heavily on M&A to drive growth, which poses a challenge for integration and synergy realization. Failing to effectively integrate acquired companies could diminish revenue synergies and increase costs.
  • Concentrated Customer Base: Many of JHKY’s clients are community and regional financial institutions. A shift in regulatory or business conditions that affects this group of companies could impact JHKY negatively.
  • For instance consolidation of these banks can lead to reduced demand.

  • While JHKY has a strong long-term relationships with clients, it doesn’t completely shield them from client-side disruption.

    • Despite these risks, JHKY has shown some resilience in the past and in its capacity to adapt to change. Its decades long history is a testament to this.

Understandability:

The business model is moderately complex to understand, which we give it a rating of 2 out of 5. Reasons for this include:

  • The different segments can be hard to understand, as many different services are interwoven with one another.
  • The technical details behind financial software systems can be difficult to fully understand. * The company provides specialized software solutions that cater to a highly specialized client base. Therefore, not everyone is aware of the industry dynamics.

However, a general understanding of the business is possible because the primary driver of profit is dependent on recurring revenue from stable banking customers. Thus it can be understood by a moderately sophisticated investor.

Balance Sheet Health:

JKHY has a relatively healthy balance sheet that I would give a rating of 4 out of 5. Here’s why:

  • Debt Management: They have moderate leverage and a reasonable debt-to-equity ratio that allows for financial flexibility but a debt burden that has increased in recent years.
  • Liquidity: The company’s cash position is reasonable, however could be improved by reducing the amount of cash used for buybacks.
  • Solvency: With a positive working capital and a strong current ratio, JHKY is in a strong position to meet its financial obligations and future contingencies.

The company’s assets are a decent size, reflecting it’s strong operational capacity. While a small amount of long-term debt might pose a potential risk in the future it is not that material currently.

Recent Concerns and Management’s Perspective:

  • Increased competition: In recent earnings calls, the management has acknowledged concerns about increased competition and is taking steps to aggressively win new customers, especially from larger financial institutions.
  • Inflationary pressures: the rising cost of operation is a growing concern, which is putting some downward pressure on operating margins.
  • Tech Upgrades: The management is focused on upgrading legacy software and products in the coming year.
  • Acquisition Synergies : The company plans on leveraging acquisitions to further expand into the financial services space, with a renewed focus on achieving operational synergies from the combined entities. This indicates a focus on long-term value creation.