JKHY - Jack Henry & Associates: It's Worth Sitting On The Sidelines For Earnings

2023-08-08 14:00:14 ET

Summary

• Jack Henry & Associates is expected to announce financial results for Q4 of its 2023 fiscal year, with analysts predicting positive performance.
• The company has seen revenue growth, driven by its services and support operations and processing activities.
• However, profitability has worsened, with net income and operating cash flow declining, and the stock is considered pricey. Investors should exercise caution.

After the market closes on August 15th, the management team at information processing company Jack Henry & Associates ( JKHY ) is expected to announce financial results covering the final quarter of the company's 2023 fiscal year. So far this year, financial performance has been rather mixed. Revenue has risen nicely, but costs have taken a step back. The good news is that analysts are of the opinion that the final quarter will be positive across the board. But obviously, this does create the chance that the firm could fall short and disappoint shareholders in response. Leading up to that time, the business does look to be rather pricey. So with the uncertainty of earnings and how pricey the stock is at the moment, I believe that investors would be wise to exercise caution until additional data comes out.

A difficult year

In December 2022, I found myself struggling over the question of whether Jack Henry & Associates would make for an attractive opportunity or not. At its core, the company seemed to me to be a quality operator. This was based on a history of growth over an extended window of time. At the same time, however, shares of the business looked expensive, both on an absolute basis and relative to similar firms. At the end of the day, I ended up rating the business a 'hold' to reflect my view that shares should more or less match the broader market moving forward. In retrospect, that assessment was too optimistic. Since the publication of that article, shares have decreased by 0.9% at a time when the S&P 500 has jumped 17.3%.

Part of the problem besides the fact that shares looked pricey seems to be that financial performance has become rather mixed. Let's start with the good news first. And that is that revenue continues to climb. For the first nine months of the 2023 fiscal year, revenue came in at $1.54 billion. That's 5.7% above the $1.46 billion the company reported one year earlier. Some of this revenue came from the company's services and support operations. This part of the company includes private and public cloud fees under contracts, and product delivery and services revenue such as revenue derived from sales of licenses, implementation services, deconversion fees, consulting, and more. Revenue under this portion of the company increased by roughly 3% from $876.6 million to $902.8 million. That increase, according to the company, was driven largely by growth in the firm's data processing and hosting fees, software usage and subscription fees, and hardware revenue. Growth would have been even more impressive at 7% had it not been for changes in deconversion fee revenue and acquisition-related revenue.

The real driver for growth was on the processing side of the business. Revenue under this includes activities such as remittances from payment processing, remote capture activities, ACH transactions, credit card processing, and more. Sales under this part of the company jumped 9.7% from $583.6 million to $640.3 million. Management attributed this to higher card processing and payment processing transactions. Much of this increase seems to relate to two additional users that are utilizing the company's offerings. Banno, its digital banking product, for instance, reported a 28% year-over-year increase in monthly users. Total active user accounts for it totals 9.5 million.

When it comes to profitability, on the other hand, the picture has worsened. Net income fell from $282.5 million in the first nine months of last year to $268.9 million at the same time this year. Some of this pain stems from the fact that the company's cost of revenue inched up from 57.6% of sales to roughly 59%. Though this may not seem like a significant difference, it does translate to $19.3 million of reduced pre-tax profits for the company year over year. This increase, according to management, was driven by higher direct costs such as an increase in personnel expenses such as benefits and pay. Higher internal licenses and fees, as well as greater amortization for intangible assets, also played a role. An increase in the company's R&D costs from 6% of sales to 6.75% translated to another $11.8 million in reduced pre-tax profits. This uptick was driven by the same increase in personnel costs that impacted the cost of revenue, with the company suffering from a 10% headcount increase on a year-over-year basis. Naturally, other profitability metrics followed suit. Operating cash flow declined from $301.4 million to $207 million. In fact, the only profitability metric to improve during this time was EBITDA. It increased from $460.7 million to $479.7 million.

When it comes to the 2023 fiscal year in its entirety, management is forecasting revenue of between $2.050 billion and $2.057 billion. Earnings per share, meanwhile, should come in at between $4.85 and $4.87. At the midpoint, that would translate to net profits of $355.1 million. If we annualize other profitability metrics, we would expect operating cash flow of $346.6 million and EBITDA of $630.6 million. Using these figures, we can easily value the company. As you can see in the chart above, the stock does look rather pricey, irrespective of which metric we utilize. Though it is the cheapest when it comes to the EV to EBITDA multiple. In the table below, meanwhile, I decided to compare the company to five similar firms. Using both the price to operating cash flow approach and the EV to EBITDA approach, I found that it is the most expensive of the group. Though when it comes to the price to earnings approach, three of the five companies I compared it to are cheaper than it.

Keep an eye on upcoming results

One of the biggest mistakes investors make is to become married to the idea that they are right and to maintain this thought process even as the data changes. This is a hard habit to break. But it's necessary if you want to have the best chance of getting attractive returns over the long haul. One thing that does help is to continue to re-evaluate a company as new data comes out. And there is no better time to do so than when the company in question reports financial results. As I mentioned earlier, after the market closes on August 15th, management will be reporting financial results covering the final quarter of 2022. Leading up to that time, there are a couple of items that investors should be paying attention to.

First and foremost will be revenue. The current expectation set by analysts is for a sales figure of $512.7 million. This represents an increase over the $482.7 million in sales that the company reported in the final quarter of 2022. Even though this may not be a surprise, the earnings picture might be. The current expectation is for the company to report profits per share of $1.18. That should translate to a net income of $86.2 million. This would represent an improvement over the $80.4 million, or $1.10 per share, that the company reported in the final quarter of 2022. Other profitability metrics should also be looked at. In the table above, you can see both operating cash flow and EBITDA for context. Naturally, another thing that investors should be watching for would be guidance for next year. That will probably be the primary factor in determining how shares perform following earnings. Continued revenue growth and some improvements on the bottom line might go a long way toward justifying the premium that shares are trading for.

Takeaway

At this time, I have a neutral to slightly negative opinion of Jack Henry & Associates. But that opinion is based really on the price at which shares are trading. At the present moment, shares do look very expensive, both on an absolute basis and relative to similar firms. But I also recognize that this is a quality operation that we are dealing with. Because of that, I have decided to keep the business rated a 'hold' for now. But my stance on the matter could change based on what data comes to light when management reports financial results later this month.

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