Jack Henry Earnings: Still Some Headwinds, but Adjusted Growth Normalizes

Jack Henry & Associates JKHY continued to face some headwinds in its fiscal third quarter, but the source of the issue does not concern us, with adjusted results showing the company tracking roughly in line with our long-term expectations. We will maintain our $174 fair value estimate for the wide-moat company, and we see the shares as slightly undervalued.

Reported revenue increased 6% year over year during the March quarter. A falloff in deconversion fees remained a headwind, with deconversion fees down 65% year over year as bank M&A has stalled. Excluding deconversion fees and acquisitions, revenue increased 8%, with this growth about evenly spread across all three areas of the business. While lower deconversion fees reduce near-term revenue, this also means Jack Henry is losing fewer customers to M&A, which is a positive in the long run.

Operating margin declined to 21.3% from 23.3% last year. The primary culprit again was lower deconversion fees, which fall almost completely to the bottom line. Excluding deconversion fees and the impact of acquisitions, operating margin improved slightly year over year during the third quarter. We continue to believe the scalable nature of Jack Henry’s business will allow for margin improvement over time.

Management provided some commentary on the potential impact of the recent stress in the U.S. banking system. The company has surveyed its customer base and believes that few of its bank customers have seen any material impact. Given that Jack Henry’s customer base skews toward small banks and credit unions, this is not surprising. Further, Jack Henry’s business, with a high percentage of recurring revenue tied to necessary services, has proved its resilience through previous banking crises.