Though Jack Henry & Associates Inc. says demand for its core processing technology is growing, revenue for the segment is not keeping pace as customers move to an outsourced model.
Jack Prim, the company's chief executive, said Wednesday during a conference call on its fiscal third-quarter earnings that there has been a "continuing shift in preference for outsourced delivery of core systems."
The migration from the licensing model, which generally has large up-front fees, will likely mean weaker near-term revenue, Mr. Prim said. However, outsourcing deals "offer long-term advantages," he said, because customers tend to pay Jack Henry recurring fees to handle all their core systems.
"We continue to see fewer core system decisions from large credit unions, with the associated larger license fees," Mr. Prim said. But "we will see a strong performance from our credit union segment" in the current quarter "as we close out our fiscal year."
The Monett, Mo., company reported a backlog of $221.2 million in contracts at the end of the quarter, which ended March 31, up 4% from a year earlier. Of that, $61.4 million was for software to be installed in-house at financial companies and $159.8 million was for outsourcing deals. The backlog was down 2% from the previous quarter.
Gil Luria, a research analyst for Wedbush Morgan Securities of Los Angeles, said many core processing providers are in a similar position.
Banks and credit unions are aware their core systems probably need to be overhauled, but because the technology can change and evolve, they do not want to do a core upgrade now and have to go through another one in a few years, Mr. Luria said. "Banks are realizing that the rate of change of technology is so fast that it really makes sense to outsource," he said.
Robert Hunt, a research director at TowerGroup Inc., an independent research firm owned by MasterCard Inc., said "we're seeing a slight trend to outsourcing" for small and midsize financial institutions. "Typically it's when you have to go through an upgrade."
"That's great for Jack Henry," Mr. Hunt said, "because it's a recurring revenue stream rather than this up-and-down cycle of new software licensing sales."
Jack Henry's net income rose 12% year over year, to $26.4 million, in its third quarter. Revenue rose 16%, to $168.9 million.
Licensing brought in less revenue than in the past. At $15.3 million, it was just 9% of Jack Henry's total revenue in the three months; a year earlier it was $20.6 million, or 14%.
The payments business reported the best revenue growth: 34%, to $7.1 million. This included automated teller machine and debit card processing, bill payment, remote capture, and check imaging.
Mr. Luria called the third-quarter results strong. Jack Henry "as usual, had a good quarter," he said. "They were able to hit their target and stay on track."
The shifting revenue from core processing contracts is affecting the entire industry, and that is hindering growth, Mr. Luria said. The core business is "looking at mid-single-digit growth for the whole industry," he said, and vendors "are now getting their growth elsewhere."
In Jack Henry's case, the growth is in its electronic payments and services operations. "They're having a tremendous amount of success with remote capture," Mr. Luria said.
This technology, spurred by the Check Clearing for the 21st Century Act, lets banks accept deposits from businesses electronically — the customer can scan checks at its office, saving a trip to the branch. "Banks are starting to capitalize on that," Mr. Luria said.
At midday Wednesday, Jack Henry's stock was up 1.37%, to $24.42.
