Jack Henry & Associates Inc., which sells core processing software and services, has broken away from its longtime strategy.
By adding new products it is trying to develop customers, even outside the banking industry, that do not use its core systems.
The Monett, Mo., company has made 10 acquisitions in the past year. All have been small - the prices total just $119 million. But executives say their business model has changed.
The past strategy of selling non-core processing products only to core-processing customers was too restrictive, they say; to grow, Jack Henry must sell such products to other companies too.
In the past, "if you weren't a core-processing customer, I would say, 'I have nothing for you,' " said Thomas J. Walsh, the company's general manager for marketing, in an interview Wednesday. "I think that kind of limited our options."
But after digesting 10 companies since April 2004, Jack Henry has something to sell to its historical base - credit unions and small banks - and also to the biggest banking companies, Mr. Walsh said.
"With the acquired companies, we can offer products to virtually every financial institution in the country," he said.
Mr. Walsh said that Jack Henry plans to offer these new products to nonbanking companies, though the focus of the acquisitions has been on finding technology it can offer primarily to financial companies.
The deals have added a wide variety of technologies, including online banking, automated teller machine fleet management, remote merchant payment processing, insurance services, digital image archiving, and biometric security
So far there has been "very little" impact on revenue, said David Foss, Jack Henry's general manager of acquisition and business integration. But prospects are strong, he said, and the new acquisitions are "certainly part of our growth strategy."
Mr. Walsh said they will add $50 million in revenue in the current fiscal year, which began July 1.
The two executives discussed strategy Wednesday in a meeting with American Banker editors, shortly after the company reported fourth-quarter results for fiscal 2005, which ended June 30.
In its fiscal fourth quarter, net income grew 23% from a year earlier, to $21.7 million. Per-share earnings of 23 cents met the average of analysts' estimates, but revenue of $141.4 million fell short of their average estimate, $145.2 million.
Kevin D. Williams, the chief financial officer, told analysts on a conference call that fiscal 2005 was Jack Henry's strongest year for core processing sales since before 2000, when many institutions upgraded their systems to guard against a suspected millennium glitch.
The company said it won 60 new banks as core processing customers in the latest fiscal year, and 49 new credit unions.
"We had a very good year in new customer acquisitions in the banking market," said Jack F. Prim, chief executive officer, during the call with analysts. "On the banking side, there's much more interest in outsourced delivery than there is in in-house delivery."
A spokesman said later that 45 of the 60 bank contracts were for outsourcing. He said he did not have a breakout for the credit unions.
David A. Trossman, an analyst at Wachovia Securities Inc., said that Jack Henry's services revenue - including outsourcing, maintenance, and other ongoing contracts - has been growing steadily, while revenue from software licensing has been flat for five quarters.
"You can hear it in their voice; they're selling a lot of new business, but they're selling it in their data centers," Mr. Trossman said. "This is a quarter where it sort of hits you against the side of the head [that] this is where their outsourcing business is really growing."
John Kraft, an analyst at D.A. Davidson & Co. in Lake Oswego, Ore., said the buying spree has been weighing on Jack Henry's stock, but he noted that the acquired companies contributed to earnings this quarter.
"Their strategy makes sense, and it's starting to resonate with investors," Mr. Kraft said. Even though the company missed expectations for revenue, its shares scarcely moved Wednesday. "Investors seem to be more interested in the outlook than the current results."
Robert Hunt, a senior analyst at TowerGroup of Needham, Mass., a market research unit of MasterCard International, said Jack Henry had to broaden its approach to remain competitive in a consolidating market.
"If you just sit there and do nothing - keep your very good core processing and your check processing - you're not going to achieve real growth," Mr. Hunt said. "You've got to have new products to take to the banks."
And Jack Henry's established name can give credibility to obscure specialty vendors, he added. "If it's a good product, it gets traction right away."
Carla N. Cooper, an analyst at the brokerage firm Robert W. Baird & Co., said the new products could improve Jack Henry's profit margins and competitive position.
Ms. Cooper, who rates the company's share "outperform," said she is "enthusiastic about the potential of Jack Henry's recent acquisitions." In a note to clients, she said, "We believe that recent acquisitions into fast-growing areas support solid long-term organic growth."
The December purchase of TWS Systems Inc. of Livonia, Mich., illustrates how Jack Henry's acquisition plan is paying off. TWS offers deposit-imaging technology for use on ATMs. By buying it Jack Henry also acquired a customer list including JPMorgan Chase & Co., PNC Financial Services Group Inc., National City Corp., and ABN Amro Inc. - top-tier institutions that in the past would have been beyond its reach.
Mr. Walsh said that because his sales team is now approaching potential customers with products other than core processing, Jack Henry is retaining the identities of the acquired companies.
It used to jettison such names to absorb the products into its single portfolio. But now Jack Henry wants to be known for something other than core systems.
"We want to maintain those identities so we can get some traction outside our core customer base," Mr. Walsh said.
