Economic Meltdown Puts Pressure on Jack Henry

Published: May 11, 2009

by Timothy Prickett Morgan

One of the bellwethers of the financial services industry as well as the IBM midrange is Jack Henry and Associates. And as you might expect, the company's third quarter of fiscal 2009 was not a particularly good one. But JHA did no worse than a lot of other software companies, and compared to some, it has managed to do better considering the downturn in the global economy in general and in the banking sector in particular.

For the quarter ended March 31, JHA reported license sales declined by 31 percent to $12.7 million, and hardware sales (which includes Power Systems i boxes as well as specialized equipment used by banks and other financial services firms) fell by 22 percent to $15.8 million. But as is the case at many software houses these days, there has been a relatively stable supply of support and services money, and in the case of JHA, the increase in services revenues, which rose by 2 percent to $151.8 million, almost made up for the declines in software license and hardware sales. I said almost. Despite the herculean effort, JHA's overall sales still fell by 4 percent to $180.4 million in the quarter. And even with lots of belt-tightening across the board, the company's net income still fell by 7 percent to $24.8 million. Considering the magnitude of the drop in software and hardware sales, it is a testament to JHA that its profits were not slammed, like so many other IT firms have been.

JHA has eaten into its cash, however, which is now at $26.4 million, down from $40.6 million a year ago. And as far as I am concerned, this is no big deal because a pile of cash is just for what JHA is using it for: to get through the rough spots and to make strategic investments when the economy goes into a slump. JHA spent $3 million making acquisitions so far in fiscal 2009 and capitalized software development to the tune of $18.9 million with its cash. The company also bought 3.1 million of its own shares so far in the nine months, for $58.4 million, shelled out 12.2 million on a revolving line of credit, and paid $19.8 million in dividends.

"We continued to see significant headwinds during the quarter on discretionary spending related to hardware and license fees," explained Jack Prim, chief executive officer at JHA, in a statement accompanying the financial results. "The cost controls that we implemented at the end of the fourth quarter with the full participation of our employee base helped buffer these shortfalls to some extent and allowed us to maintain strong gross and operating margins. We indicated last quarter that we had additional potential cost control measures available and we are moving forward to implement some of these additional measures. While the near term economic outlook remains cloudy we will continue to manage the business in what we believe to be the best long term interests of stockholders, customers, and employees."

In economic weather like this, sometimes that is all that you can do.

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