TMCnet News
HENRY JACK & ASSOCIATES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q. OVERVIEW Jack Henry & Associates, Inc. (JHA) is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Our solutions are marketed and supported through three primary brands. Jack Henry Banking® supports banks ranging from community to mid-tier, multi-billion dollar institutions with information and transaction processing solutions. Symitar® is a leading provider of information and transaction processing solutions for credit unions of all sizes. ProfitStars® provides specialized products and services that enable financial institutions of every asset size and charter, and diverse corporate entities outside the financial services industry, to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. JHA's integrated solutions are available for in-house installation, outsourced services and hosted delivery. A significant proportion of our revenue is derived from recurring outsourcing fees and transaction processing fees that predominantly have contract terms of five years or greater at inception. Support and service fees also include in-house maintenance fees on primarily annual contract terms. Less predictable software license fees and hardware sales complement our primary revenue sources. We continually seek opportunities to increase revenue while at the same time containing costs to expand margins. RESULTS OF OPERATIONS In the first quarter of fiscal 2015, revenues increased 8% or $23,158 compared to the same period in the prior year, with strong growth continuing in our support & service revenue component. Cost of sales increased 8%, in line with revenue, operating expenses increased 8% for the quarter due mainly to increased headcount and related salaries, and provision for income taxes increased slightly over the prior year first quarter. The increased revenue and above changes resulted in a 6% increase in net income for the quarter. We move into the second quarter of fiscal 2015 following strong performance in the first quarter. Significant portions of our business continue to come from recurring revenue and our healthy sales pipeline is also encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these times they have an even greater need for our solutions that directly address institutional profitability and efficiency. Our strong balance sheet, access to extensive lines of credit, the strength of our existing product line and an unwavering commitment to superior customer service position us well to address current and future opportunities. A detailed discussion of the major components of the results of operations for the three months ended September 30, 2014 follows. All dollar amounts are in thousands and discussions compare the current three months ended September 30, 2014 to the prior year three months ended September 30, 2013. REVENUE License Revenue Three Months Ended September 30, % Change 2014 2013 License $ 13,610 $ 11,779 16 % Percentage of total revenue 4 % 4 % License revenue increased due mainly to an increase in license revenue from both our core and complementary products. While license fees will fluctuate, recent trends indicate that our customers are increasingly electing to contract for our products via outsourced delivery rather than a traditional license as our outsourced delivery does not require an up-front capital investment in license fees. We expect this trend to continue in the long term. 14 -------------------------------------------------------------------------------- Table of Contents Support and Service Revenue % Three Months Ended September 30, Change 2014 2013 Support and service $ 292,454 $ 269,544 8 % Percentage of total revenue 92 % 91 % Qtr over Qtr $ Change % Change In-House Support & Other Services $ 2,177 3 % Electronic Payment Services 9,920 9 % Outsourcing Services 7,244 13 % Implementation Services 3,569 16 % Total Increase $ 22,910 There was growth in all support and service revenue components in the first quarter of fiscal 2015. In-house support and other services revenue increased due to annual maintenance fee increases for both core and complementary products as our customers' assets grow and due to maintenance fees associated with new software implemented since September 30, 2013. Electronic payment services continue to experience the largest dollar growth. The revenue increases are attributable to strong performance across debit/credit card transaction processing services, online bill payment services and ACH processing. Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to show a preference for outsourced delivery of our solutions. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. Revenues from outsourcing services are typically earned under multi-year service contracts and therefore provide a long-term stream of recurring revenues. Implementation services revenue increased, particularly for our online banking and imaging solutions products. Hardware Revenue % Three Months Ended September 30, Change 2014 2013 Hardware $ 12,755 $ 14,338 (11 )% Percentage of total revenue 4 % 5 % Hardware revenue decreased due to a decrease in complementary hardware products. Although there will be continuing quarterly fluctuations, we expect there to be an overall decreasing trend in hardware sales due to the change in sales mix towards outsourcing contracts, which typically do not include hardware, and the general deflationary trend of computer prices. 15 -------------------------------------------------------------------------------- Table of Contents COST OF SALES AND GROSS PROFIT % Three Months Ended September 30, Change 2014 2013 Cost of License $ 1,389 $ 1,412 (2 )% Percentage of total revenue <1% <1% License Gross Profit $ 12,221 $ 10,367 18 % Gross Profit Margin 90 % 88 % Cost of support and service $ 169,697 $ 154,583 10 % Percentage of total revenue 53 % 52 % Support and Service Gross Profit $ 122,757 $ 114,961 7 % Gross Profit Margin 42 % 43 % Cost of hardware $ 9,385 $ 10,941 (14 )% Percentage of total revenue 3 % 4 % Hardware Gross Profit $ 3,370 $ 3,397 (1 )% Gross Profit Margin 26 % 24 % TOTAL COST OF SALES $ 180,471 $ 166,936 8 % Percentage of total revenue 57 % 56 % TOTAL GROSS PROFIT $ 138,348 $ 128,725 7 % Gross Profit Margin 43 % 44 % Cost of license consists of the direct costs of third party software. Sales of third party software products decreased slightly compared to last year, causing a slight increase in gross profit margins. Gross profit margins in support and service remained fairly consistent with the prior year. The increase in cost is primarily due to increased personnel costs and depreciation and amortization. In general, changes in cost of hardware trend consistently with hardware revenue. For the fiscal year, margins are slightly higher due to increased sales of higher margin hardware upgrade products. 16 -------------------------------------------------------------------------------- Table of Contents OPERATING EXPENSES Selling and Marketing % Three Months Ended September 30, Change 2014 2013Selling and marketing $ 22,408 $ 21,458 4 % Percentage of total revenue 7 % 7 % Selling and marketing expenses for the year increased mainly due to higher commission expenses and a general increase in sales headcount and related personnel costs. This is in line with increased sales volume of long term service contracts on which commissions are paid as a percentage of total revenue. Research and Development % Three Months Ended September 30, Change 2014 2013 Research and development $ 16,791 $ 15,673 7 % Percentage of total revenue 5 % 5 % Research and development expenses increased primarily due to increased headcount and related personnel costs of 9%. General and Administrative % Three Months Ended September 30, Change 2014 2013 General and administrative $ 16,510 $ 14,250 16 % Percentage of total revenue 5 % 5 % General and administrative expenses increased mainly due to additional headcount and related personnel costs. In addition, there were small gains on asset disposals in the prior year reducing the prior year expense. INTEREST INCOME AND EXPENSE % Three Months Ended September 30, Change 2014 2013 Interest Income $ 57 $ 131 (56 )% Interest Expense $ (266 ) $ (280 ) (5 )% Interest income fluctuated due to changes in invested balances and yields on invested balances. Interest expense was low in both periods as there were no outstanding balances on our term loan or revolving line of credit in the current or prior periods. PROVISION FOR INCOME TAXES The provision for income taxes was $29,668 or 36.0% of income before income taxes for the three months ended September 30, 2014 compared with $27,407 or 35.5% of income before income taxes in the three months ended September 30, 2013. The prior year income tax rate was slightly lower primarily due to the effect of the Research and Experimentation Credit ("R&E Credit"), which expired effective December 31, 2013. NET INCOME Net income increased 6% for the three months ended September 30, 2014. For the first quarter of fiscal 2015, it was $52,762 or $0.64 per diluted share compared to $49,788, or $0.58 per diluted share in the same period last year. REPORTABLE SEGMENT DISCUSSION The Company is a provider of integrated computer systems that perform data processing (available for in-house installations or outsourced services) for banks and credit unions. The Company's operations are classified into two reportable segments: bank systems and services ("Bank") and credit union systems and services ("Credit Union"). The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue. 17 -------------------------------------------------------------------------------- Table of Contents Bank Systems and Services % Three Months Ended September 30, Change 2014 2013 Revenue $ 240,830 $ 221,009 9 % Gross profit $ 102,095 $ 93,821 9 % Gross profit margin 42 % 42 % Revenue in the Bank segment increased 9% compared to the equivalent quarter last fiscal year. This was primarily due to growth support & service revenue, particularly electronic payment transaction processing services revenue and outsourcing services revenue which both grew 11% over the prior year quarter. Gross profit margins remain consistent for the quarter compared to the same period last year. Credit Union Systems and Services % Three Months Ended September 30, Change 2014 2013 Revenue $ 77,989 $ 74,652 4 % Gross profit $ 36,253 $ 34,904 4 % Gross profit margin 46 % 47 % Revenue in the Credit Union segment increased 4% from the same quarter last year driven mainly by a 7% increase in support & service revenue as Credit Union continues to grow in in-house maintenance, outsourcing and electronic payments. Gross profit margins for the Credit Union segment for the three month period decreased less than 1% compared to the same quarter last year primarily due to a decrease in license revenues, which achieve higher margins relative to the other components of revenue. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased to $39,402 at September 30, 2014 from $70,377 at June 30, 2014, primarily due to ongoing purchases of treasury stock. The following table summarizes net cash from operating activities in the statement of cash flows: Three Months Ended September 30, 2014 2013 Net income $ 52,762 $ 49,788 Non-cash expenses 29,317 26,663 Change in receivables 64,931 78,489 Change in deferred revenue (51,418 ) (52,165 )Change in other assets and liabilities (2,444 ) (5,085 ) Net cash provided by operating activities $ 93,148 $ 97,690 Cash provided by operating activities decreased 5% compared to last year. Cash from operations is primarily used to repay debt, pay dividends, repurchase stock and other capital expenditures. Cash used in investing activities for the first quarter of fiscal 2015 totaled $42,881 and included capital expenditures on facilities and equipment of $21,485, which mainly included the purchase of aircraft and computer equipment. Other uses of cash included $17,999 for the development of software and $3,455 for the purchase and development of internal use software. Cash used in investing activities for the first three months of fiscal year 2014 totaled $21,908 and included capital expenditures on facilities and equipment of $7,351, which included spending on our outsourcing data center infrastructure and computer equipment. Other uses of cash included $14,076 for the development of software and $3,183 for the purchase and development of internal use software. These expenditures were partially offset by $2,702 proceeds received primarily from sale of an aircraft. Financing activities used cash of $81,242 during the first three months of the current fiscal year. Cash used was mainly $60,544 for the purchase of treasury shares, dividends paid to stockholders of $18,042 and $2,486 net cash outflow from the issuance of stock and tax related to stock-based compensation. Financing activities used cash 18 -------------------------------------------------------------------------------- Table of Contents of $21,900 during the first three months of last year, including dividends paid to stockholders of $17,054, repayments of capital leases of $2,798, and $2,048 related to stock-based compensation. At September 30, 2014, the Company had negative working capital of $87,033; however, the largest component of current liabilities was deferred revenue of $260,552, which primarily relates to our annual in-house maintenance agreements. The cash outlay necessary to provide the services related to these deferred revenues is significantly less than this recorded balance. In addition, we have not experienced any significant issues with our current collection efforts and we continue to have access to unused lines of credit in excess of $150,000 and continue to generate substantial cash inflows from operations. Therefore, we do not anticipate any liquidity problems arising from this condition. Capital Requirements and Resources The Company generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures totaling $21,485 and $7,351 for the three months ended September 30, 2014 and 2013, respectively, were made primarily for additional equipment and the improvement of existing facilities. These additions were funded from cash generated by operations. Total consolidated capital expenditures for the Company for fiscal year 2015 are not expected to exceed $70,000 and will be funded from cash generated by operations. The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or short-term borrowings on its existing credit facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At September 30, 2014, there were 20,843 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,147 additional shares. The total cost of treasury shares at September 30, 2014 is $638,325. During the first quarter of fiscal 2015, the Company repurchased 1,049 treasury shares for $60,544. At June 30, 2014, there were 19,795 shares in treasury stock and the Company had authority to repurchase up to 5,196 additional shares. Capital leases The Company has entered into various capital lease obligations for the use of certain computer equipment. Long term capital lease obligations were entered into of which $6,365 remains outstanding at September 30, 2014 of which $5,324 will be maturing within the next twelve months. The Company also has short term capital lease obligations totaling $4,640 at September 30, 2014. Other lines of credit The long term revolving credit facility allows for borrowings of up to $150,000, which may be increased by the Company at any time until maturity to $250,000. The credit facility bears interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the greater of (a) the Federal Funds Rate plus 0.5%, (b) the Prime Rate or (c) LIBOR plus 1.0%), plus an applicable percentage in each case determined by the Company's leverage ratio. The credit facility is secured by pledges of capital stock of certain subsidiaries of the Company and also guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of September 30, 2014, the Company was in compliance with all such covenants. The revolving loan terminates June 4, 2015 and at September 30, 2014, there was no outstanding revolving loan balance. The Company renewed an unsecured bank credit line on March 3, 2014 which provides for funding of up to $5,000 and bears interest at the prime rate less 1%. The credit line was renewed through April 30, 2017. At September 30, 2014, no amount was outstanding. |