Banking consolidation can be a curse for some technology vendors, but it has helped Jack Henry & Associates Inc. cushion declines in spending on some of its product lines.
The Monett, Mo., company said Wednesday that mergers and other consolidation activity involving its clients has helped expand its support and services revenue, which was up 35% in its first fiscal quarter from a year earlier, to $210.6 million.
The increase offset a 17% drop in license revenue and a 2% dip in hardware sales, which fell to $14.8 million in the quarter ended Sept. 30. Though spending appetite overall is returning among financial institutions, "cautious optimism is still the order of the day for our customers," Jack Prim, the company's chief executive, said during a conference call Wednesday.
Weak economic conditions as well as uncertainty regarding new regulations had caused most banks and credit unions to scrap or postpone their technology investments.
Also, more banks and credit unions have considered outsourcing the operation of their core processing and other systems. The decision to move from installing systems in-house to doing so in an outsourced environment produces more recurring revenue for a vendor like Jack Henry but also leads to pauses in revenue as banks evaluate their options, Prim said.
Bank failures and mergers also have affected vendors, which have seen some clients disappear as a result.
In Jack Henry's case, recent merger activity has produced integration work involving the migration of one bank to the other bank's systems.
There is a "very significant amount of merger activity going on right now," Prim said.
Such implementation revenue may "not be sustainable for the remainder of the year" because this revenue flow can be "lumpy," Greg Smith, a managing director at Duncan-Williams Inc., said in a research note Wednesday.
Overall, quarterly revenue grew 29%, to $234.8 million, and net income rose 21%, to $31.8 million.
Earnings were 37 cents per diluted share, up from 31 cents per diluted share a year earlier.
A string of acquisitions the company completed during the last fiscal year, including that of the online bill-pay company iPay Technologies Inc. in June, has also helped expand its payments processing revenue, which rose 87% year over year.
Peter Heckmann, a senior research analyst at Avondale Partners LLC, called the processing figure the "standout item in the quarter."
Though the competing core systems vendors Fiserv Inc. and Fidelity National Information Services Inc. last week also reported improved bank spending outlooks, Heckmann noted that all three companies indicated they do not expect a significant jump during this quarter.
"What we may have seen is some deferral [of] decision-making in the June quarter due to concerns over European sovereign debt difficulties," Heckmann said. "Some decisions [delayed] in the June quarter may have occurred in the third quarter."
Jack Henry "was pretty clear that they still view the appetite for discretionary spending as fairly modest," he said.
Though Jack Henry and its competitors have said interest is high in offering consumer technologies such as mobile remote deposit capture and mobile banking in general, this may not result in significant financial benefit to the vendors.
Jack Henry's ProfitStars subsidiary announced the availability of a mobile remote deposit capture service in September, but Prim said he doubts the technology will be a significant revenue generator for the industry.
The service "gets a lot of press, it's a cute application, but nobody's going to make any money with that," Prim said in response to an analyst's question. Mobile RDC "is not a needle-mover for anybody," he added.
Heckmann said he was not surprised by the Prim's comment about the technology.
"I think mobile deposit has become one of those buzz items," he said. Though "it's a must-have, it's a must-have because there is a cool factor attached to it, but the actual adoption by consumers remains quite low."
