JACK HENRY
Gagan Bhatia, Olamide Esan, Alex Florea, Somil Kadakia,
Victor Murthi, Yanyan Xu
Presented on 11/10/2009
DeliveDeliverable Outlinerable
2
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
Company Overview
Company Strategy
Macro-economic Outlook
Industry Analysis
Competitors
Valuation
Client Portfolio
Recommendation
Company Overview
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3
•
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•
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Founded in 1976 by Jack Henry as a provider of core information
processing solutions for community banks, IPO in 1985
Trades on the NASDAQ as JKHY
Headquartered in Monett, Missouri with over 3,800 employees
Array of products and services includes processing transactions,
automating business processes, and managing information for more than
9,800 financial institutions and diverse corporate entities
FY 2009 Annual sales of $745.6 mm, Net Income of $103.1
Source: Jack Henry, Data Monitor, Accessed 11/01/09
Business Description
•
4
Two main business segments: 1) Bank Systems and Services and 2)
Credit union Systems and Services
•
Three marketed brands: Jack Henry Banking, Symitar, and ProfitStars
•
Three primary revenue sources: Software License Fees, Outsourcing
Fees, Transaction/Maintenance/Support Fees
Source: Jack Henry, Annual Report 2008 Accessed 11/01/09
3 Marketed Brands
• Provides integrated data processing to more than 1,500
banks ranging from start-ups to midsize banks. Services
include business intelligence/bank management, retail and
business banking, Internet banking, electronic funds
transfer, risk management and protection.
• Provides core data processing to over 700 credit unions.
Services include business intelligence and credit union
management, member and member business services,
Internet banking and EFT, risk management and protection
•Provides solutions for generating revenue and growth
opportunities, security and mitigating operational risks, and
controlling operating costs to financial institutions that are
primarily not core customers. Diverse and flexible with more
than 7,500 domestic and international customers.
Source: Jack Henry, Annual Report 2008 Accessed 11/01/09
Recent Performance
6
Key Ratios (As of June 30th, 2009)
Company
Current Ratio (MRQ)
1.04
Quick Ratio (MRQ)
1.04
Debt to Equity (MRQ)
0.10
Sales 5 Year Growth
9.79
Net Profit Margin (TTM) %
13.83
Return on Assets (TTM) %
9.95
Return on Equity (TTM) %
16.79
Industry
1.63
1.38
0.28
22.34
-2.80
-4.86
2.83
2 Year Weekly End Price & Volume
Notes
•Acquired major competitor in Goldleaf Financial Solutions
•Recurring revenue increased to 70% from 66%
•Backlog increased by 8%
Company Strategy
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Increase market share by aggressively earning new traditional and
nontraditional clients and cross selling additional products and
services to our existing clients.
•
Add new products and services that enable financial institutions to
capitalize on business opportunities and resolve specific operational
issues.
•
Increase recurring revenue by optimizing outsourcing opportunities,
transaction-based processing fees, and ongoing software maintenance
and support fees.
•
Pursue disciplined acquisitions that complement our internal growth
and continue our focused diversification.
Source: Jack Henry, Data Monitor, Accessed 11/01/09
Recent Acquisition
8
•
Pemco: ATM debit transaction processing, which
currently represents 70% of the revenue of the
payments business, while also inducing new capabilities
in the area of credit card transaction routing.
•
Goldleaf: Remote deposit capture presence which is
the fastest growing component of payment solutions
with 54% year-over-year growth in the last fiscal year.
Recent Acquisition
9
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Recently addition of 2800 new customers and
increase the number of core and non-core
processing customers using one or more of our
products to over 11,000
Employees Addition: 540
By 2005 they made 16 acquisition to add up total
customers of 2300
Opportunities for cost reduction in addition to the increased revenue contribution
Risk Factors
10
• Changes in the banking and credit union industry could reduce demand
for our products
• Consolidation of financial institutions will continue to reduce the
number of our customers and potential customers.
The number of commercial banks and credit unions has decreased because of
mergers and acquisitions over the last several decades and is expected to
continue to decrease as more consolidation occurs
• Our growth may be affected if we are unable to find or complete
suitable acquisitions
Risks focused on banking industry and successful acquisitions
Source: Jack Henry, Annual Report 2008 Accessed 11/01/09
Banking Industry
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• Hit hardest by collapse of sub-prime
mortgage market and financial crisis
• Profit after tax decline by 80.5% over
course of 2008
• Increasing loan loss provisions and rising
cost of funds contributed to profitability
decline
• Loan loss provisions and net charge-offs
expected to continue into 2010
Banking industry continue to be stressed
Source: Banking Industry, IBIS World, Accessed 11/01/09
Credit Unions
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• Delinquencies will continue to increase in 2009 meaning lower operating
profit margins
• Credit Union membership expected to grow due to member satisfaction
• The DJIA, existing home sales, and total motor vehicle registrations are
expected to experience strong growth from 2010 onwards
• Credit Unions are somewhat linked to the above variables and industry
growth is expected to be strongest between 2011 and 2013
Credit Unions will experience early hiccup with recovery starting in 2010
Source: Credit Unions, IBIS World, Accessed 11/01/09
SWOT Analysis (Strengths)
13
•
Comprehensive portfolio of offerings
Provides integrated computer systems and services for financial
institutions. Offers solutions through three core business areas: Jack
Henry Banking, ProfitStars, and Symitar
•
Switching costs fairly high
•
High barriers to entry, regulations are high
Strengths from diversification and industry
Source: Jack Henry, Data Monitor, Accessed 11/01/09
SWOT Analysis (Weaknesses)
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• Lack of scale
Large competitors generated 5-6 times more revenue in 2008.
(Fidelity/Fiserv) Lack of scale could affect its ability to bag large
contracts and makes it a target for acquisition
• Dependence on the financial services
The company derives its revenues from the financial services market.
The current crisis and significant consolidation in the financial services
industry could result in few large customers, there by increasing their
bargaining power. It also enables large organizations to develop IT inhouse
Weaknesses from size and dependence on banking industry
Source: Jack Henry, Data Monitor, Accessed 11/01/09
SWOT Analysis (Opportunities)
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• Entry into virtualization market
The market for server and desktop virtualization software technologies
is forecasted to grow at a compound annual rate of over 30% through
2013. Virtualization generates significant cost and time saving benefits.
JHA formally announced its support for virtualization in March 2009
• Strategic acquisitions
Acquisitions provide cross sell opportunities for the company’s core
bank and credit union customers. On Oct 01, 2009, JHA announced
acquisition of Goldleaf Financial Solutions, Inc and Pemco
Technologies.
Opportunities from acquisitions and virtualization
Source: Jack Henry, Data Monitor, Accessed 11/01/09
SWOT Analysis (Threats)
16
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Challenging business environment
Economic downturn means customers postponed their large capital
investments. Customers elect outsourced delivery rather than a
traditional license arrangement. The outsourced delivery does not
require customers to make a large, up-front capital investment in
license fees or in hardware. As a result, the company has been
experiencing a decrease in license revenue in recent times.
Threats from spending habits of customers
Source: Jack Henry, Data Monitor, Accessed 11/01/09
Technology Threat
17
•
All of JKHY’s products are based on legacy systems
•
The Core banking products are based on either the IBM or Windows
systems
•
Symitar's two functionally distinct core credit union platforms are based on
IBM and Windows
•
So JKHY faces a threat from companies that provide solutions on “open
systems” and not on legacy systems like IBM and Windows in the “long
term”
“Finacle” a solution provided by Infosys Technologies Ltd is based on Open system
Source: Jack Henry, Data Monitor, Accessed 11/01/09
Competitors
I.
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II.
III.
Comparative Descriptions
Comparative Ratios
Comparative Analysis
Recent Developments
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Previously Metavante competed with JKHY’s Jack Henry banking and
Symitar brand .
FIS competed with JKHY’s Symitar and Profitstars brand
Recently FIS acquired Metavante, so now FIS competes with JKHY across
all brands.
With the recent acquisition FIS gains an entry into mid-tier banks, a hitherto stronghold
of JKHY
Competitors
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Jack Henry Banking
Symitar
Profitstars
1.Fidelity National
Information services (FIS)
1. Fidelity National
Information services(FIS)
Array of disparate vendors
that provide niche solutions
to financial services
organizations and
corporate entities.
2. Fiserv
2.Fiserv
3. Open Solutions, Inc.
(*FIS recently acquired
Metavante)
4. Harland Financial
Solutions – Ultradata
JKHY’s competes with FIS and Fiserv broadly across segments.
Source: Jack Henry, Annual Report 2008, Accessed 11/01/09
Publicly traded competitors
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Company
Market Cap
($mm)
P/E
P/S
EPS ($/Share)
1,960
20.0
2.6
1.16
8,207
17.6
3.1
1.26
7,118
15.8
2.5
2.94
JKHY
FIS
FISV
Its Important to note that the FIS and FISV are two of the largest players in
the industry where as JKHY is just around the median mark. Also FISV and
FIS ‘s primary clients are large institutions, where as JKHY targets mid-tier
banks and credit unions.
This table just gives a reference for performance but JKHY’s real competitors are private
companies
Source: Jack Henry, CapitalIQ, Accessed 11/01/09
Valuation
I.
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II.
III.
IV.
V.
Financial Highlights
Assumptions
WACC
DCF Analysis
Multiples
Financial Highlights – Income Statement
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STATEMENT OF INCOME
2005
YEAR ENDED JUNE 30,
2006
2007
2008
2009
REVENUE
License
% of Total Revenue
Support & Service
% of Total Revenue
Hardware Sales
% of Total Revenue
Total Revenue
YOY % Change
82,374
15.37%
364,076
67.94%
89,413
16.69%
535,863
14.6%
84,014
14.22%
424,333
71.81%
82,530
13.97%
590,877
10.27%
76,403
11.46%
501,722
75.28%
88,342
13.26%
666,467
12.79%
73,553
9.90%
580,334
78.11%
89,039
11.98%
742,926
11.47%
58,434
7.84%
614,242
82.38%
72,917
9.78%
745,593
0.36%
COST OF SALES
Cost of License
Cost of Services
% of Support & Service Revenue
Cost of Hardware
% of Hardware Sales
Total Cost of Sales
Total COGS as % of Revenue
Gross Profit
5,547
244,097
67.05%
63,769
71.32%
313,413
58.49%
222,450
2,717
270,485
63.74%
60,658
73.50%
333,860
56.50%
257,017
4,277
309,919
61.77%
65,469
74.11%
379,665
56.97%
286,802
6,698
364,140
62.75%
64,862
72.85%
435,700
58.65%
307,226
6,885
385,837
62.82%
53,472
73.33%
446,194
59.84%
299,399
75,501
89,923
104,681
104,222
103,102
Net Income
Financial Highlights - Balance Sheet
24
BALANCE SHEETS
2005
YEAR ENDED JUNE 30,
2006
2007
2008
2009
Cash and Cash Equivalents
Investments
Trade Receivable
Total Current Assets
11,608
993
209,922
260,293
74,139
2,181
180,295
306,410
88,617
989
209,242
350,385
65,565
997
213,947
329,757
118,251
1,000
192,733
359,646
Property, Plant & Equipment
Depreciation
Property, Plant & Equipment, Net
Goodwill
Tradenames
Customer Relationship, net of amortization
Computer Software, net of amortization
Total Assets
334,536
(91,345)
243,191
191,415
4,010
68,475
29,488
814,153
351,039
(99,407)
251,632
212,538
4,009
63,162
43,840
906,067
366,894
(117,012)
249,882
248,863
4,009
61,248
59,190
999,340
387,308
(148,303)
239,005
289,373
3,999
63,819
74,943
1,021,044
416,505
(178,727)
237,778
292,400
3,999
55,450
82,679
1,050,700
Accounts Payable
Accrued Expenses
Note Payable and Current Maturities
Total Current Liabilities
Off Balance Sheet Debt
Total Liabilities
Total Equity
Total Liabilities & Shareholders' Equity
15,895
24,844
45,000
246,583
14,525
29,012
50,241
263,492
11,481
34,920
70,503
330,477
6,946
35,996
70,177
341,175
296,999
517,154
814,153
330,855
575,212
906,067
400,975
598,365
999,340
419,593
601,451
1,021,044
8,206
34,018
63,461
344,407
50,820
424,194
626,506
1,050,700
DCF - Assumptions
25
DCF ASSUMPTIONS

HISTORICAL
FORECAST
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
Total Growth - YOY
14.64%
10.27%
12.79%
11.47%
0.36%
8.04%
12.31%
18.29%
17.01%
15.99%
License/Revenue
15.37%
14.22%
11.46%
9.90%
7.84%
7.34%
6.34%
5.34%
4.34%
4.00%
Support & Service/ Revenue
67.94%
71.81%
75.28%
78.11%
82.38%
83.88%
85.88%
87.88%
89.88%
91.22%
Hardware Sales/Revenue
16.69%
13.97%
13.26%
11.98%
9.78%
8.78%
7.78%
6.78%
5.78%
4.78%
1. Revenue Growth:
Long Term
-
2. WACC
-
-
-
3.00%
11.00%
11.00%
11.00%
11.00%
11.00%
3. Tax rate
37.00%
35.80%
34.66%
35.97%
34.46%
37.00%
37.00%
37.00%
37.00%
37.00%
4. COGS/Revenue
58.49%
56.50%
56.97%
58.65%
59.84%
60.00%
59.80%
59.80%
59.80%
59.80%
License / COGS
1.77%
0.81%
1.13%
1.54%
1.54%
1.54%
1.54%
1.54%
1.54%
1.54%
Support & Service / COGS
77.88%
81.02%
81.63%
83.58%
86.47%
87.97%
89.47%
90.97%
92.47%
93.97%
Hardware Sales / COGS
20.35%
18.17%
17.24%
14.89%
11.98%
10.48%
8.98%
7.48%
5.98%
4.48%
5. SG&A/Total Revenue
19.29%
19.67%
19.02%
19.25%
18.98%
18.78%
19.25%
19.25%
19.25%
19.25%
6. NWC/Total Revenue
36.39%
28.42%
29.82%
28.00%
24.88%
24.02%
25.01%
25.39%
25.88%
26.37%
7. PPE/Total Revenue
62.43%
59.41%
55.05%
52.13%
55.86%
55.52%
52.11%
46.53%
42.10%
38.51%
8. Capex/Total PPE & Goodwill
11.04%
8.05%
5.55%
4.60%
4.45%
6.45%
4.55%
4.45%
4.35%
4.25%
DCF Analysis
26
(In Millions)
NPV of FCF
Less Debt
Equity value
Number of shares (M)
1,957,511
(2,916)
1,954,595
84,195
Value per share
23.22
Share Price 11/9/09
24.19
Multiples
27
Client Portfolio
I.
28
II.
III.
IV.
V.
Stock Performance Graph
Stock Ownership Profile
Transaction History
RCMP Portfolio Correlation
RCMP Portfolio Weights
Stock Performance Graph
29
JKHY – Jack Henry & Associate
FISV – Fiserv
FIS – Fidelity National
GSPC – S&P 500.
Stock Ownership Profile
30
AEE
AEO
DO
FR
JKHY
KMB
MCD
56.22%
10.20%
2.99%
24.15%
9.66%
7.21%
11.15%
7.18%
-20.69%
-21.07%
8.70%
34.94%
16.28%
-32.20%
-45.87%
0.00%
153.44%
-8.52%
75.32%
-34.87%
-58.02%
99.32%
16.49%
89.64%
45.31%
-24.07%
-22.86%
-2.16%
77.66%
59.86%
-5.22%
79.41%
-44.50%
73.77%
23.72%
350.85%
36.73%
3.13%
-0.46%
35.62%
19.53%
5.64%
28.24%
-21.32%
-75.92%
-18.57%
1.26%
-62.46%
118.45%
-3.79%
-44.26%
68.27%
9.95%
-7.34%
5.64%
15.24%
-19.95%
32.40%
17.46%
158.62%
16.66%
-5.98%
-19.64%
31.03%
16.14%
-6.32%
22.77%
3.02%
-16.56%
22.75%
6.39%
29.16%
5.76%
0.79
9.50%
17.88%
0.69
29.50%
10.36%
1.89
17.09%
11.97%
-0.24
19.75%
9.94%
1.34
16.39%
5.16%
0.43
8.51%
SRCL
WAG
WFR
-8.45% 135.31%
-9.02% 87.67%
-40.01% 13.54%
77.12% 37.84%
26.85%
3.98%
6.23% 14.46%
29.68% 26.30%
36.34% 54.29%
19.39% -12.12%
3.75%
8.67%
14.19% 36.99%
54.60% 1119.27%
50.25%
-17.49%
-19.20%
26.07%
11.66%
4.42%
6.71%
-15.25%
-28.66%
37.02%
5.55%
36.31%
-38.24%
-69.26%
104.59%
18.91%
25.95%
80.24%
36.95%
68.87%
-79.99%
-7.65%
14.04%
4.67%
7.00%
1.43
11.55%
7.13%
0.20
11.76%
24.00%
0.41
39.60%
Annual Return
2000
2001
2002
2003
2004
2005
2006
2007
2008
YTD 2009
Mean
120 Months HPR
Risk Measure
Monthly σ
Sharpe
Monthly VaR (95%)
8.46%
3.88
13.96%
Transaction History
31
AEE
AEO
DO
FR
JKHY
KMB
MCD
SRCL
WAG
WFR
Portfolio Return
YTD
-50.50% 179.40% 37.92% -82.05% 158.33%
-1.24% 11.82% 446.10% 48.36% -36.62%
Annualized
-17.96% 51.21% 40.80% -15.95% 9.99%
1.52% 19.13% 21.79%
4.00% -32.01%
Market Value
$ 5,066.00 $ 45,550.00 $ 4,938.50 $ 4,850.00 $ 9,344.00 $ 24,692.00 $ 11,828.00 $ 5,296.00 $ 19,200.00 $ 7,632.00
11/11/1999
3/2/2000
3/4/2001
12/7/2004
12/6/2005
Nov-06
4/17/2007
11/27/2007
4/10/2008
11/11/2008
4/14/2009
Bought 200 shares at $36 per share
2 on 1 split increase the holding to 400 shares at $18 per share
2 on 1 split increase the holding to 800 shares at $9 per share
Presentation to hold 800 shares
Presentation to hold 800 shares
Presentation to sell 400 shares
Presentation to hold 400 shares
Presentation to hold 400 shares
Presentation to hold 400 shares
Presentation to hold 400 shares and limit sell of 400 shares at $20.40
Presentation to hold 400 shares
Portfolio Correlation
32
CORRELATION TABLE
120 Months Stress
AEE
0.1536
0.4727
AEO
0.1055
0.2731
DO
0.1386
0.0733
FR
0.2710
0.6731
JKHY
1.0000
1.0000
KMB
0.1579
0.3984
MCD
0.2830
0.3571
SRCL
0.2564
0.0987
WAG
0.0859
0.2965
WFR
0.1320
-0.0744
Portfolio Holdings
33
Recommendation
DCF Range (+/- 10%) : $20.89 - $25.54
34Current Price: $ 24.19 as of 11/09/09
Recommendation: HOLD 400 Shares
Strong management

On top of changes in business and revenue streams.

Strategic acquisitions to improve business model.