Jack Henry and
Associates
RCMP Recommendation
James Falkoff
12/6/05
RCMP Position
 Purchased 200 shares at $36/share on
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December 10, 1999.
After two stock splits, RCMP now owns 800
shares at a cost basis of $9/share.
Current share price: $19.13
13.3% CAGR, vs. 12.0% for the S&P MidCap
400 and -0.7% for the S&P 500.
Constitutes 5.7% of the RCMP portfolio (after
AEOS & DELL sales).
Company Overview
 Corporate History
 1976. Jack Henry and Jerry Hall found Jack Henry &
Associates. The company develops software systems for
small banks.
 1985. JKHY is listed on the NASDAQ.
 1992. JKHY sets out on a mission to become a one-stop
shop for all the technology needs of small banks. The
company begins making acquisitions of complementary
technology solutions.
 2005. One third of the nation’s small- and mid-size banks
rely on Jack Henry solutions. Jack Henry and Jerry Hall still
sit on the Board of Directors, as does Mike Henry, Jack’s
son.
Company Overview
 Business Description:
 Provides data processing solutions to small banks
and credit unions (assets under $30 billion).
 Customers either install systems in-house or
outsource their operations to Jack Henry.
 3 sources of revenue:
 Software licensing
 Support and Service
 Hardware
Macroeconomic Review
 GICS Sector: Information Technology
 Sub-industry: Application Software
 Neutral industry outlook. Spending expected to accelerate in a few
key areas such as security while others experience slower growth.
 Commoditization of software industry. Competition from
international (Indian, Eastern European) developers.
 Peer Group: Accounting and Financial Software
 Consolidation: Number of commercial banks has declined by 3%
annually over past five years. Credit unions have consolidated at
the same rate.
 Sarbanes-Oxley compliance a major information technology hurdle
and source of IT spending.
Macroeconomic Review
 Competition:
 Major competitors:
 Fiserv Inc.: Closest competitor. Focuses on financial data
processing services. (Mkt. Cap $8.5B)
 Marshall & Ilsley Corp.: A multibank holding company
that offers financial technology services through its
Metavante unit. ($10.2B)
 Automatic Data Processing Inc. ($27.1B)
 First Data Corp. ($31.8B).
Stock Facts
 Price: $19.13
 52wk Range: $15.35 - $21.96
 Mkt. Cap: $1.75B
 P/E (ttm): 22.89
 Div & Yield: $0.18 (0.90%)
Date
6/10/2005
12/10/2004
6/10/2004
12/10/2003
6/10/2003
12/10/2002
6/10/2002
12/10/2001
6/10/2001
12/10/2000
6/10/2000
12/10/1999
Adjusted Share Price
Stock Market Performance
Five-Year Share Price History
35
30
25
20
15
10
5
0
Stock Market Performance
Business Description
 Core Systems
 Can be used in-house or outsourced.
 Provide core processing functionality: deposits, loans, etc.
 5 core systems:
 Silverlake System: for banks with $500 million to $30
billion in assets
 CIF 20/20: for banks with less than $1 billion in assets
 Core Director: for banks with less than $1 billion in
assets (Windows-based)
 Episys: for credit unions with greater than $50 million in
assets
 Cruise: for credit unions with less than $50 million in
assets
Business Description
 Complementary Products (around 100)
 Allow the company to offer custom-tailored,
integrated suites of software solutions.
 Expose the company to high-growth areas, like
security, risk management, online bill pay, and
electronic funds transfer.
 Product offering expanded through acquisitions of
small companies providing specialized technology
solutions. 17 Acquisitions since the start of FY02.
Business Description
 Examples of complementary products
 Synapsis: Relationship management (customer profiling,
referral tracking, etc.)
 NetTeller: Online home banking system with real-time
account information and transaction capabilities.
 Remote Deposit Capture: Peforms image capture, storage,
and processing for paper checks.
 PassPort: Drives and monitors ATM networks.
 Biodentify: Biometric fingerprint security.
 Centurion Disaster Recovery: Disaster recovery protection.
Business Description
 Strategy
 Expand existing customer relationships to garner
more revenue with little marketing expense.
 Expand customer base.
 Increase sales outside core customer base.
 Build recurring revenue through service and
outsourcing contracts.
 Maximize economies of scale to increase margins.
Recent Trends
Revenue by Segment FY03-FY05
400,000
350,000
300,000
250,000
License
200,000
Support and Service
150,000
Hardware
100,000
50,000
0
2003
2004
2005
Recent Trends
Gross Margins by Segment FY03-FY05
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
91.9%
92.4%
93.3%
License Margin
31.6%
27.9%
33.3%
28.4%
33.0%
28.7%
2003
2004
2005
Support and Service
Margin
Hardware Margin
Recent Trends
 Q1 FY06 Results:
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License revenue down 13.5%
Support and Service revenue up 18.8%
Hardware revenue down 1.1%
License margin up to 95.0% from 91.8%
Support and Service margin up to 35.4% from
33.0%
 Hardware margin up to 25.8% from 23.9%
Forecasting Assumptions
 Support and Service: Fairly constant sales growth on
stable margins.
Rationale:
 Historical stability of performance in this segment.
 Management’s emphasis on this segment in conference
calls and the 10K’s description of business strategy.
 Hardware: Flat sales on declining margins.
Rationale:
 Falling P and rising Q should offset one another.
 Macro trend toward lower margins on computer hardware.
Forecasting Assumptions
 License: ???
 Historically volatile segment.
 Unexpected dropoff in Q1 license revenue.
 Management anticipates a ramp-up as the
year progresses. Estimates 20% yoy
revenue growth.
 Unbroken upward trend in license margins.
Volatility of License Segment
License Revenue - Historical
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2000
2001
2002
2003
2004
2005
Volatility of License Segment
2001
 Q1 107.6%
 Q2 192.9%
 Q3 77.8%
 Q4 21.7%
2004
 Q1 7.4%
 Q2 -10.2%
 Q3 46.9%
Q4 83.0%
2002
 Q1 -9.3%
 Q2 -6.0%
 Q3 -3.9%
 Q4 -1.7%
2005
 Q1 50.9%
 Q2 78.6%
 Q3 36.7%
 Q4 -9.9%
2003
 Q1 -18.3%
 Q2 -13.8%
 Q3 -40.8%
 Q4 -34.0%
2006
 Q1 -13.5%
Scenario Analysis
License Revenue Scenario - Bad 2006, 2007
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2005
2006 2007
2008
2009 2010
2011 2012
2013
Scenario Analysis
License Revenue Scenario - Recession 2007-2008
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
Scenario Analysis
License Revenue Scenario - Tapered Growth, No
Setbacks
250,000
200,000
150,000
100,000
50,000
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
Valuation
 Given the established
forecasting assumptions for
the service and hardware
segments, and assuming
license margins remain strong
for the next few years before
slowly tapering off, here are
the DCF valuations for three
license revenue scenarios.
Bad FY06
and FY07
$17.17
Recession $18.99
2007-2008
Tapered
Growth
$21.53
SWOT Analysis
Strengths
 Industry knowledge.
 Customer relationships.
 Provides custom-tailored,
integrated solutions.
Weaknesses
 Little control over when customers
purchase licenses.
Opportunities
 Potential to increase market
share.
 Shifting product mix.
 Market for complementary
products outside base of core
systems customers.
Threats
 Integration of acquisitions may fail.
 Bank consolidation could lead to
cancelled contracts.
 New competitors always a threat.
Recommendation
 Recommendation: Hold
 Management is following through on its
strategy.
 Stock’s price reflects uncertainty in the
license segment.
 Potential for positive surprises to lift the
stock price.