Jack Henry & Associates Ends Fiscal 2016 With 8% Increase In Gross Profit

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Jack Henry & Associates Ends Fiscal 2016 With 8% Increase In Gross Profit

Revenue and Profit up 10% over Q4 2015

Jack Henry & Associates, Inc. (NASDAQ: JKHY) today announced fiscal 2016 results.

Revenue for the quarter ended June 30, 2016 increased to $367.0 million, a 10% increase over the fourth quarter of fiscal 2015. Gross profit also increased 10% to $161.7 million, and net income increased 39% to $84.3 million, or $1.06 per diluted share.

For the year ended June 30, 2016, the Company generated $1,354.6 million of revenue, an 8% increase over fiscal 2015. Gross profit increased 8% to $581.0 million, and net income increased 18% to $248.9 million, or $3.12 per diluted share.

According to David Foss, President and CEO, “As we close the books on FY’16 we are pleased to report another year of record revenue and earnings. The sales teams for all three of our marketed brands ended their year ahead of plan which should position us well for next year. Additionally, our employee engagement and customer satisfaction scores both continue to be very solid as we enter FY’17. “

Operating Results

Revenue, cost of sales, and gross profit results for the quarter and fiscal year-to-date periods were as follows:

Revenue, Cost of Sales, and Gross Profit
(Unaudited)
(In Thousands)	Three Months Ended June 30,						% Change		Year Ended June 30,						% Change
	2016			2015					2016			2015
Revenue
License	$	511		$	1,072		(52)	%	$	3,041		$	2,635		15	%
Percentage of Total Revenue	<1		%	<1		%			<1		%	<1		%
Support and Service	353,364			318,635			11	%	1,300,978			1,200,652			8	%
Percentage of Total Revenue	96		%	95		%			96		%	96		%
Hardware	13,095			14,006			(7)	%	50,627			52,903			(4)	%
Percentage of Total Revenue	4		%	4		%			4		%	4		%
Total Revenue	366,970			333,713			10	%	1,354,646			1,256,190			8	%

Cost of Sales
Cost of License	325			185			76	%	1,197			1,187			1	%
Cost of Support and Service	195,878			176,826			11	%	737,108			680,750			8	%
Cost of Hardware	9,067			10,288			(12)	%	35,346			38,399			(8)	%
Total Cost of Sales	205,270			187,299			10	%	773,651			720,336			7	%

Gross Profit
License Gross Profit	186			887			(79)	%	1,844			1,448			27	%
License Gross Profit Margin	36		%	83		%			61		%	55		%
Support and Service Gross Profit	157,486			141,809			11	%	563,870			519,902			8	%
Support and Service Gross Profit Margin	45		%	45		%			43		%	43		%
Hardware Gross Profit	4,028			3,718			8	%	15,281			14,504			5	%
Hardware Gross Profit Margin	31		%	27		%			30		%	27		%
Total Gross Profit	$	161,700		$	146,414		10	%	$	580,995		$	535,854		8	%
Gross Profit Margin	44		%	44		%			43		%	43		%

For the fourth quarter of fiscal 2016, the bank systems and services segment revenue increased 8% to $272.7 million with a gross margin of 43% from $253.7 million with a gross margin of 43% in the same quarter last year. The credit union systems and services segment revenue increased 18% to $94.3 million with a gross margin of 47% for the fourth quarter of fiscal 2016 from $80.0 million and a gross margin of 47% in the same period a year ago.
Bank systems and services segment revenue for fiscal 2016 increased 4% to $996.7 million from $962.7 million a year ago. Gross margins in each period were 41% and 42%, respectively. Credit union systems and services segment revenue increased 22% to $358.0 million with a gross margin of 48% from $293.5 million with a gross margin of 46% last fiscal year.

Operating Expenses and Operating Income

Operating income increased 30% to $116.5 million, or 32% of fourth quarter fiscal 2016 revenue, compared to $89.4 million, or 27% of revenue in the fourth quarter of fiscal 2015.

For the twelve month period ending June 30, 2016, operating income increased 14% to $361.7 million, a 27% operating margin on total revenue, from $317.9 million, or 25% of revenue, in fiscal 2015.

(Unaudited, In Thousands)	Three Months Ended June 30,						% Change		Year Ended June 30,						% Change
	2016			2015					2016			2015
Selling and Marketing	$	23,365		$	23,492		(1)	%	$	90,079		$	89,004		1	%
Percentage of Total Revenue	6		%	7		%			7		%	7		%

Research and Development	23,964			19,501			23	%	81,234			71,495			14	%
Percentage of Total Revenue	7		%	6		%			6		%	6		%

General and Administrative	17,357			14,049			24	%	67,514			64,364			5	%
Percentage of Total Revenue	5		%	4		%			5		%	5		%

Gain on disposal of a business	(19,491)			—			—	%	(19,491)			(6,874)			184	%
Total Operating Expenses	45,195			57,042			(21)	%	219,336			217,989			1	%
Operating Income	$	116,505		$	89,372		30	%	$	361,659		$	317,865		14	%
Operating Margin	32		%	27		%			27		%	25		%

The increase in research and development costs was mostly due to increased headcount and related personnel costs. Disposals of assets during the fourth quarter also contributed to the increase.
In fiscal 2016, the Company sold its Alogent business, resulting in a gain totaling $19,491. Alogent contributed revenue of $28,422 and $27,206 in fiscal years 2016 and 2015, respectively.
In fiscal 2015, we had a gain totaling $6,874 due to the sale of the TeleWeb™ suite of Internet and mobile banking software products. The fiscal 2015 gain was previously included in general and administrative expense.

Net Income

Fourth quarter net income totaled $84.3 million, or $1.06 per diluted share, compared to $60.5 million, or $0.75 per diluted share in the fourth quarter of fiscal 2015, for an increase in net income of 39% and an increase in diluted earnings per share of 42%.

Net income for the fiscal year ending June 30, 2016 totaled $248.9 million, compared to $211.2 million for last year, an increase of 18%. Diluted earnings per share increased 21% to $3.12 from $2.59 for the prior year.

(Unaudited, In Thousands, Except Per Share Data)	Three Months Ended June 30,				% Change		Year Ended June 30,				% Change
	2016		2015				2016		2015
Income Before Income Taxes	$	116,106	$	89,101	30	%	$	360,536	$	316,440	14	%
Provision for Income Taxes	31,836		28,562		11	%	111,669		105,219		6	%
Net Income	$	84,270	$	60,539	39	%	$	248,867	$	211,221	18	%
Diluted net income per share	$	1.06	$	0.75	42	%	$	3.12	$	2.59	21	%

Provision for income taxes increased 11% in the fourth quarter compared to the same quarter in fiscal 2015, but was 27.4% of income before income taxes this quarter compared to 32.1% of income before income taxes for the same period in fiscal 2015. The drop in effective tax rate for the quarter was due primarily to a significant difference in the book versus tax basis in Alogent stock sold in the fourth quarter of fiscal 2016.
Provision for income taxes increased 6% for fiscal 2016, although the effective rate decreased to 31.0% of income before income taxes from 33.3% for the twelve months ending June 30, 2015. The decrease in the effective tax rate was primarily due to the sale of subsidiary stock, as well as the retroactive extension of the Research and Experimentation Credit (“R&E Credit”) to January 1, 2015 during fiscal 2016.

Balance Sheet and Cash Flow Review

At June 30, 2016, cash and cash equivalents decreased to $70.3 million from $148.3 million at June 30, 2015.
Trade receivables totaled $253.9 million at June 30, 2016, an increase from $245.4 million at June 30, 2015.
Current and long term debt decreased from $52.7 million a year ago to $0.2 million at June 30, 2016.
Current deferred revenue increased to $343.5 million at June 30, 2016, compared to $339.5 million a year ago.
Stockholders’ equity increased to $996.2 million at June 30, 2016, compared to $991.5 million a year ago.

Cash provided by operations totaled $365.1 million in fiscal 2016 compared to $373.8 million last fiscal year. The following table summarizes net cash (in thousands) from operating activities:

(Unaudited, In Thousands)	Year Ended June 30,
	2016		2015
Net income	$	248,867	$	211,221
Depreciation	50,571		54,155
Amortization	79,077		64,841
Other non-cash expenses	30,050		30,166
Change in receivables	(13,735)		(21,346)
Change in deferred revenue	4,364		40,565
Change in other assets and liabilities	(34,078)		(5,812)
Net cash provided by operating activities	$	365,116	$	373,790

Cash used in investing activities for fiscal 2016 totaled $136.0 million, compared to $137.0 million for fiscal 2015 and included the following:

(Unaudited, In Thousands)	Year Ended June 30,
	2016		2015
Payment for acquisitions, net of cash acquired	$	(8,275)	$	—
Capital expenditures	(56,325)		(54,409)
Proceeds from the sale of businesses	34,030		8,135
Proceeds from the sale of assets	2,844		182
Internal use software	(11,826)		(14,020)
Computer software developed	(96,411)		(76,872)
Net cash from investing activities	$	(135,963)	$	(136,984)

$8.3 million, net of cash acquired, was used for the acquisition of Bayside Business Solutions.
The $56.3 million in capital expenditures was mainly for the purchase of computer equipment and aircraft.
The $34.0 million of proceeds from the sale of businesses was related to the sale of Alogent. The prior year’s $8.1 millionin proceeds related to the sale of the TeleWeb™ suite of Internet and mobile banking software products.

Financing activities used cash of $307.2 million for fiscal 2016 and $158.9 million in fiscal 2015.

(Unaudited, In Thousands)	Year Ended June 30,
	2016		2015
Borrowings on credit facilities	$	100,000	$	90,000
Repayments on credit facilities	(152,500)		(50,783)
Debt acquisition costs	—		(901)
Purchase of treasury stock	(175,662)		(122,691)
Dividends paid	(84,118)		(76,410)
Net cash from issuance of stock and tax related to stock-based compensation	5,124		1,915
Net cash from financing activities	$	(307,156)	$	(158,870)

According to Kevin Williams, CFO, “Our capitalized software decreased significantly this quarter on a sequential basis, as we wrapped up some major projects and are in the process of starting new ones. We will continue to invest primarily in the areas of electronic payments, mobile offerings and other new products; along with other offerings that will drive additional future revenue and provide a solid return for our investors. The sale of Alogent discussed above did drive a large gain in the quarter and added $.22 to EPS (net of related expenses) for the quarter and fiscal year, however the loss of the revenue will create a head wind for us next fiscal year. Quarterly revenue headwinds will be Q’1: $6,425, Q’2: $8,251, Q’3: $7,657 and Q’4: $6,089 for the total fiscal year impact of $28,422. We continue to have a strong cash position and balance sheet for potential acquisitions, stock buy-backs, dividends, and continued investment in the company.”