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This presentation covers the company overview of Jack Henry & Associates, accounting analysis, industry analysis, economic outlook, competitors, portfolio fit, and valuation.
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Jack Henry & AssociatesPresented April 10, 2008 Jonathan Goh Dan Xu
Agenda • Company Overview • Accounting Analysis • Industry Analysis & Economic Outlook • Competitors • Portfolio Fit & Valuation • Recommendation
Company Overview Business Overview Revenue Breakdown Major Holders
Company Overview • Jack Henry Banking • Banking solutions for business information and financial transactions • Expanded within the De-Novo and Mid-Tier Market • Supports 15% of Mid-Tier Banks • Assets from $1 billion to $30 billion • Capitalized on emerging shift from in-house to out-sourced solutions Source: Jack Henry and Associates, 2007 Annual Report
Company Overview • Symitar • Acquired by Jack Henry & Assoc. in 2000 • Provides core processing solutions for credit unions of all sizes • 6 Corporate Credit Unions • 36 of 123 Credit Unions with assets over $1billion • Market Leader in Core Processing Platforms for Credit Unions • Leader in Credit Unions with assets over $25 million Source: Jack Henry and Associates, 2007 Annual Report
Company Overview • ProfitStars • Risk Mitigation and Control Solutions • Fraud Detection and Prevention • Enterprise Risk Management • Identity Management and Control • Business Continuity and Disaster Recovery Solutions Source: Jack Henry and Associates, 2007 Annual Report
Revenue Streams Source: Jack Henry and Associates, 2007 Annual Report
Revenue Breakdown Source: Jack Henry and Associates, 2007 Annual Report
Revenue Breakdown Source: Jack Henry and Associates, 2007 Annual Report
Management – Executive Committee • John Prim – CEO, Director • Previously served as the President and COO • Tony Wormington – President/COO • Key strengths in operational management and research • Kevin Williams, CPA– CFO, Treasurer • Appointed as CFO in 2001 • Joined as controller in 1998 • Management Assessment • No incumbent founding members • Combination of operational and technological expertise • Maintained very strong financial health historically Source: OneSource Business Browser, Reuters
Management – Board of Directors • Michael Henry – Chairman • Son of late founder; director since 1986 • Former CEO, SVP and Head of Research • Wesley Brown, since 2005 • MD of St. Charles Capital, LLC (Denver, CO) • Craig Curry, since 2004 • CEO of Central Bank (Lebanon, MO) • James Ellis, since 1985 • Managing Partner of Ellis/Rosier Financial Services • Matthew Flanigan, since 2007 • SVP and CFO of a Missourri based manufacturing company Source: OneSource Business Browser, Reuters
Management – Board of Directors • Jerry Hall, since inception • Co-Founder of JKHY, former CEO • John Prim, since 2004 • Current CEO • Marla Shepard, since 2007 • President and CEO of First Future Credit Union (San Diego) • Board of Directors Assessment • 5 out of 8 Independent directors • Diverse experience in consumer banking and operations • Renewal of Directors in recent years Source: OneSource Business Browser, Reuters
Major Shareholders Source: Yahoo! Finance
Accounting Analysis Earnings Quality Analysis DuPont Analysis Cash Flow Analysis Summary of Accounting Analysis
Earnings Quality Analysis Big Picture: Revenue, Assets, Net Income & Stockholder’s Equity have increased steadily in past three years. Diluted EPS & Dividends declared per share have increased steadily in past three years.
Assets • Assets grows steadily • Large and growing cash position
Liabilities & Equity • No debt • Significant Increase in Free Cash Flow in 2006 over 2005, and in 2007, it decreased a little bit, but still acceptable
Income Statement • Steady gains • Profits are generated from Continuing Operations • No non-recurring profits
DuPont Analysis • Ratios are steadily increasing • Asset Turnover is not increasing from2005, but not volatile
Cash Flow Profile • Positive CFO • Negative CFI • Negative CFF in 2006 and 2007 2005, JKHY acquired Tangent Analytics, LLC, (“Tangent”), RPM Intelligence, LLC, with payments $4,000and $6,241 in cash before any earn-out , respectively All numbers are in thousands * Data not available Source: Forbes.com
Cash Flow Analysis Growing Strong
2nd Quarter Earnings Review • EPS GAAP of $0.32 • Inline with Consensus Estimate • Earnings Guidance • Strong growth in Support and Services • Outsourcing • In-house maintenance • ATM/Debit card processing • Improved Cost control • Back Log • Measure of future business and revenue • Current Quarter increase of 1% • Increased 7% from a year ago
Share Repurchase Program • Under authorization of the Board of Directors, the company may repurchase shares with available cash and short term borrowings • On June 30, 2006, there were 2,766 shares in the treasury stock and the company had authority to repurchase up to 2,225 shares • On August 25, 2006, the Board approved an authorization for an additional 5,000 shares • During fiscal 2007, the Company repurchased 4,335 shares for $98,413 • At June 30, 2007, there were 7,101 shares in treasury stock and the Company had the authority to repurchase up to 2,890 additional shares • On Feb 4th, the Board of Directors authorized another 5,000 shares bringing the total authorization to 15,000 shares
Summary of Accounting Analysis • High-quality earnings can be characterized as repeatable, controllable and bankable • Strong Cash Flow • Large and Growing Cash Position • Virtually no debt • Conservatively Capitalize • Minimal off-balance sheet commitments
Industry Analysis & Economic Outlook
Industry Analysis • Industry: Application Software ( GICS Industry Classification 45103010) • JKHY is in an industry with a healthy number1of competitors, and looking at its sales, it is one of the smaller players • Industry peers tend to fall in or around the small-cap growth area • Most stocks in the industry have seen steadily growing revenue and earnings over the past three years • Company Outlook: The economy will finally improve in seeable future, possibly in 2009-20122, which should lead a rise in technology and information spending by banks and credit unions. • Even in the unlikely event of continuing economic downturn, JKHY’s ability to make profits from recurring continuing business operations can provide a cushion of support • Morningstar.com • Valueline.com
Economic Outlook • Tighter consumer spending • More cash in savings and loans and credit unions • Reversion to traditional lending standards • Potential slowdown in the Financial Services sector • Tightening costs and consolidation amongst banks • Shift from licensing software to outsourcing • EFTs still show strong potential growth • Jack Henry’s Position in the Economy • Well positioned in an economic slowdown • Good business mix • Low Financial Leverage
Competitors Past performance comparison SWOT analysis
1. Numbers from Morningstar 2. All the numbers are up to 4-1-2008 5. 5yr ROA and 5yr Average Net margin use fiscal year-end. TTM=trailing 12 months.
5. Numbers from Morningstar • Industry Average is equal-weighted • All the numbers are up to 4-1-2008
Past Performance Comparison Source: Yahoo! Finance
Weakness & Threats • Jack Henry competes with larger firms that have significantly more resources to invest in upgrading their systems • Consolidation in the banking industry is shrinking Jack Henry's customer base, and the surviving banks are larger, potentially giving them greater bargaining power • Margins in Jack Henry's service and support segment are much lower than in its licensing segment. As service and support are accounting for an increasing portion of total revenue, this shift will pressure margins. • Ongoing declines in the price of computer hardware are driving down revenue and margins in Jack Henry's hardware segment • Substantial switching costs mean Jack Henry rarely loses customers, it also makes it difficult to take business from competitors and increase the top line.
Strength & Opportunity • Banks are very reluctant to switch their core processing provider, creating a wide economic moat for the company's business. Customers typically sign five- to seven-year contracts with Jack Henry, and attrition is very low--only about 3% annually--with the bulk of customer losses the result of customers being acquired by another bank • The breadth of Jack Henry's product portfolio and its focus on serving small banks leaves it well-positioned • Margins in the service and support segment, which accounts for 72% of revenue and 60% of gross profit, are much lower but still healthy is recurring and very stable because of low customer attrition • Banks' increasing preference toward purchasing integrated suites of products as opposed to buying products individually should increase cross-selling opportunities for core processors, such as Jack Henry1 • Regulatory changes2 are forcing smaller banks to upgrade their systems, driving demand for Jack Henry's products • Unlike other core processors, Jack Henry has an unlevered balance sheet, giving it greater flexibility to pursue attractive acquisition opportunities as they arise • Below average Business risk • Good history of dividends payment, unlike most peers in the industry • Morningstar • Morningstar
Valuation & Portfolio Fit
Current Portfolio Fit Based on the close price at April 2, 2008
Jack Henry and Associates Overview • Current Price : $ 25.47 1 • DCF price: $29.14 • Fair Opinion: $26.23 - $32.06 • Recommendation: HOLD 1. Closing price on April 7th 2008.
