Jack Henry & Associates Inc. of Monette, Mo., said Thursday that income and revenue both grew last quarter as gains in its support and services unit offset declines in hardware and licensing.
Net income rose 22% from a year earlier, to $21.6 million, in the quarter that ended Dec. 31. Revenue rose 8%, to $147 million.
Support and service revenue leaped 21%, to $106.5 million, but hardware revenue fell 23%, to $20 million, the banking technology company said. The quarter was the second of its fiscal year.
“Our hardware is going to continue to become a smaller percentage of revenue,” chief financial officer Kevin Williams said in a conference call with analysts. “Software licensing and installation services in the backlog continue to be extremely strong.”
License revenue dropped 6%, but chief executive Jack Prim said the $20.8 million total was “the third-highest in our 30-year history, and the comparison quarter from a year ago was our highest.”
The news boosted Jack Henry’s stock. At midafternoon, it was trading at $21.79, 6.71% higher than at Wednesday’s close. Investors tend to like the stable revenue stream that comes with service contracts.
But analysts questioned the long-term prospects of the company’s service business, a big part of which is processing paper checks. Check volume has declined for years as more people began using credit and debit cards at the point of sale and paying bills online.
Mr. Williams said that some banks and credit unions are handling their declining volume by outsourcing check processing to companies like his. “The number of paper checks per institution is decreasing, but our volumes at all our item centers continues to grow, because we are adding customers,” he said. “As far as exposure, even if paper checks were to go away tomorrow, we have very little capital costs that we could not redeploy.”
Nor does Jack Henry see a threat from check imaging technology, which a growing number of banks are using to process checks electronically instead of as paper. “To turn a check into an electronic item, there still has to be an entry point into the system somewhere,” Mr. Prim said. The imaging can be outsourced to Jack Henry or done with a scanner it sells, he said.
John Kraft, an analyst with the Great Falls, Mont., investment firm D.A. Davidson & Co., said Jack Henry’s numbers demonstrate healthy improvement after several “ho-hum” quarters.
Mr. Kraft agreed that Jack Henry’s customers are likely to outsource their check processing, because for individual banks “the price per item goes up as your [check] volume goes down if you’re going to do it in-house.”
Much of Jack Henry’s extra licensing revenue has come from companies it has bought — including 10 bought from April 2004 through last August.
The acquisitions enabled it to change its business model. The company used to focus on selling core processing products; its other products and services were offered only to its core customers.
But last summer it began selling to others too. It has said the change should increase its revenue by $50 million in the current fiscal year.
Mr. Kraft said he was impressed with the strength of its licensing revenue. The small banks and credit unions on which Jack Henry has long concentrated tend to favor outsourcing instead of software licensing, Mr. Kraft said, so licensing had been “somewhat of a plaguing issue” in the past.
In addition, hardware prices have been declining, and hardware sales volume tends “to go hand in hand” with license sales, Mr. Kraft said.
