Jack Henry Q2 Results: Steady Boat In Stormy Waters

| About: Jack Henry (JKHY)

Summary

Jack Henry continues to deliver strong organic growth.

Company remains in a net cash balance with significant financial flexibility.

However, multiple remains high relative to Fiserv.

Jack Henry (NASDAQ:JKHY) reported another consistent quarter of revenue and earnings growth. Revenue increased 7% while earnings per share increased 13% to $0.74 from $0.66 last year. The company actively repurchased shares in the quarter and continues to be in a net cash position. Results were $0.07 above consensus estimates.

Key Takeaways

The company delivered 7% organic growth in the quarter and commented that full year revenue growth should be similar. Support and service revenue (95% of total) grew 8% and continues to be relatively predictable quarter after quarter. Management commented that the growth outlook remains positive, buoyed by outsourcing and mid-single digit increases in IT spending at financial institutions.

The Credit Union Segment continues to do the bulk of heavy lifting increasing 28% in the quarter at a 49% gross margin while the Bank Segment increased 1% at a 41% gross margin. Jack Henry continues to hold its own against Fiserv's (NASDAQ:FISV) DNA product. Management elaborated on the Q2 conference call:

"There were a larger number of larger go-lives on the credit union side than what we had on the bank side. The bank side also was somewhat impacted by one of our larger customers being lost in an acquisition."

Management expects to see 20%-plus growth for the next couple quarters in the Credit Union Segment before starting to lap some tougher comparables. With only 50% of the core customers outsourced, management still sees a long road of conversions ahead to support sales growth.

With cost of sales increasing only 5% year-to-date, the company continues to reinvest in the business and see some operating leverage. Margins increased modestly and ongoing share repurchases boosted EPS growth as well. Management remains hopeful that ongoing outsourcing and increasing penetration of ProfitStars products will continue to inch margins slowly higher. From the conference call:

I mean it's going to come from the continued growth in our outsourcing and payments groups, I mean that's going to be the drivers because those are the highest margin business. And we'll continue to leverage the existing infrastructure. But having said that, as Jack pointed out, security and compliance and other things are big issues. So, I don't know if there's going to be the same margin expansion that we've seen in the past, but I think there's still some opportunity. And I think going forward that we'll continue to see some opportunity for operating margin expansion on the G&A line and possibly selling and marketing.

Jack Henry also recently announced a CEO change promoting current President Dave Foss, who has been with the company for 17 years and was instrumental in building the ProfitStars division. He'll continue to emphasize growing ProfitStars, adding features to improve user interaction and acquiring more technology. From Bank Innovation:

Foss also said acquisitions would be on Jack Henry's road map in 2016. "We haven't been shy about acquisitions," he said. "We've acquired 23 companies in 10 years. We're acquisitive." But recently, the company has tempered its acquisitiveness. "We weren't seeing the things we really wanted to bring new solutions to customers."

Look for that to change under Foss. "We're constantly looking at early stage companies," he said, but noted that the company tends to find more mature companies a better fit, because they can "help move the needle more quickly; but we're patient. We will look at moves that may not bring immediate revenue." But with so many startups out there and the explosion of interest by entrepreneurs in fintech, the landscape has certainly gotten more complex, with more companies to consider. "The challenge is weeding through," Foss said.

Competitor Results

Fiserv, Jack Henry's primary competitor, reported Q4 results delivering organic growth of 5% and EPS growth of 13%. Payments growth was 6%, slightly lower than JKHY at 7%. Fiserv continued to be active, repurchasing shares and 2015 capped 30 years of consecutive double digit adjusted EPS growth. FISV 2016 guidance forecasts 5-6% revenue growth and 12-15% EPS growth

Smaller bank software competitor Computer Services (OTCQX:CSVI) reported much weaker results in January. M&A among smaller sized banks lowered recurring service fees. Revenue was down 3.3% while earnings down nearly 14%. Management still forecasts another year of steady growth in 2016 and signed two larger contracts after Q3 ended.

Concluding Thoughts

The company delivered another solid quarter of sales and earnings growth. Unfortunately, its success is well known by the market with Jack Henry trading at 25x forward earnings compared to Fiserv at 19x. It is hard to imagine further multiple expansion driving the stock price higher.

As detailed in my ealier article, my view on further upside is it is likely to come from using their financial flexibility for an acquisition. This requires patience and a continued long-term focus on by both management and shareholders.

Disclosure: I am/we are long JKHY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.