Jack Henry's Profits Hit by Hardware Sales Slump

Published: May 19, 2008

by Timothy Prickett Morgan

As one of the few relatively large and public companies that sells lots of hardware, software, and services into OS/400 and i5/OS shops, Jack Henry & Associates is something of a bellwhether for the i ecosystem, even if it is doing business exclusively in the financial services sector. In the fiscal third quarter of 2008, Jack Henry was able to boost sales quite a bit considering the adversity right now in the financial sector, but profits came under pressure.

In the third quarter ended March 31, Jack Henry's total revenues rose by 11 percent to $187.9 million, but gross profits rose by 7.4 percent to $77 million and net income rose by 8/10ths of a percent to $26.6 million. That is still a remarkable level of profit--14.2 percent of revenue, in fact--and that is why Wall Street seems to have cut Jack Henry some slack. For the nine months of fiscal 2008, Jack Henry booked $555.5 million in revenues, up 14.1 percent; gross profits were $231.3 million, up 11.2 percent; but net income was $79.3 million, up only 4.9 percent.

"Our results for the quarter showed continued steady gains in revenue, particularly in support and services," explained Jack Prim, the company's chief executive officer, in a statement accompanying the financial report. "License and hardware revenue continue to be a challenge to predict and this will most likely continue to be the case. However, as our recurring revenue continues to increase as a percentage of the total revenue, having reached 71 percent for the quarter and 69 percent year to date, this should help to alleviate this challenge in the future."

Prim said that support and services revenues rose by 15 percent in the quarter, to $142.9 million, and have been up 17 percent over the nine months of fiscal 2008. In-house support and maintenance are key drivers of this services business at Jack Henry, and were up 13 percent in the quarter and are up 15 percent for the year. But electronic payment services, a relatively new (and still small) business for the company, was up 28 percent in the quarter and 32 percent for the nine months. Software license sales were $18.4 million in the quarter, up 20.3 percent. Hardware sales fell, however, down 12.9 percent to $20.3 million, and were probably not helped by IBM's Power Systems transition, which arguably got started last July and is taking until September of this year to be truly complete.

The company said that its overall results were lower than expectations for the quarter because of the lower-than-expected software license and hardware sales, and that the product mix adversely impacted profits. Still, Jack Henry has $40.6 million in cash on hand and a market capitalization in excess of $2 billion. The wonder is that the company has not been snapped up by a big application software or private equity player long since, really.

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