The last two of the top five core processing vendors to report profits this season reported healthy revenue growth but divergent earnings.
Jack Henry & Associates Inc. of Monett, Mo., reported low double-digit gains on both its top and bottom lines from a year earlier. Open Solutions Inc. of Glastonbury, Conn., said its revenue doubled, to $107.3 million, but its operating profits fell short of analysts’ expectations.
Open Solutions said Monday that its third-quarter net income fell 4% from the same quarter last year, to $3.7 million, largely because of expenses related to two major deals.
It roughly doubled its revenue base in March by purchasing Bisys Group Inc.’s bank-processing business for $470 million. And last month Open Solutions agreed to sell itself to a pair of private equity funds, Carlyle Group and Providence Equity Partners Inc., for $1.3 billion, or $38 a share. That deal is expected to close next quarter.
Excluding the charges, Open Solutions said its adjusted third-quarter earnings before interest, taxes, depreciation, and amortization more than tripled, to $28.5 million. Even so, non-GAAP earnings — the statistic that Wall Street watches most closely — of 24 cents a share fell short of the average estimate of analysts by 4 cents.
Open Solutions reported 25 sales of core systems during the quarter, and Louis Hernandez, its chairman and chief executive, told analysts on a conference call Monday that he expects such sales to grow in the coming years.
“We are confident that financial institutions around the world are, for reasons that differ by region, all facing issues with old technologies that our solutions can address,” he said.
Executives did not take questions during the call, and analysts speculated that the report probably would be the company’s final one before it goes private.
Christopher F. Penny, an analyst at Friedman, Billings, Ramsey & Co. Inc., who has a “market perform” rating on the stock, wrote in a note issued Tuesday that he saw no competing offers for Open Solutions. “We consider this earnings announcement a nonevent and believe the $38 offer to be firm.”
Jack Henry, which provides core processing software and services to more than 2,400 banks and credit unions, reported that its net income for its first fiscal quarter, which ended Sept. 30, grew 10% from a year earlier, to $21.4 million, or 23 cents a share, which exceeded the average Wall Street estimate by a penny. Revenue also grew 10%, to $150.6 million.
Kevin D. Williams, the chief financial officer at Jack Henry, said that its ProfitStars division had generated more than $50 million of revenue from noncore customers last year, and that the company is targeting 25% growth for the unit’s overall sales, both core and noncore. “We are on target. We’re exceeding that at this point,” he said.
Jack F. Prim, the company’s CEO, said it continues to seek acquisitions but risks being outbid by financial investors. “It really doesn’t make a lot of sense for our shareholders” to try to outbid a private-equity fund, “which is why we have stepped up our stock repurchase,” Mr. Prim said. Mr. Williams said Jack Henry repurchased almost a million shares in the quarter.
The company, which historically sold ancillary products only to its core-processing client institutions, does not break out results for its operating units. It set up ProfitStars in February to provide a common brand identity for more than a dozen vendors that it has acquired in the last two years.
David J. Koning, an analyst at Robert W. Baird & Co., wrote in a note to clients that Jack Henry’s revenue growth slowed from 15% in the fiscal fourth quarter, and that results from the relatively volatile software licensing and hardware businesses came in lower than expected.
Gil B. Luria, an analyst at Wedbush Morgan Securities of Los Angeles, who has a “hold” rating on the stock, wrote in a note to clients that Jack Henry had strong results in its transaction businesses, such as automated teller machine and debit processing, where revenue grew 32%, and bill payment, where revenue grew 65%.
But with limited prospects in its primary bank segment, which provided 83% of the quarter’s revenue, “Jack Henry will struggle to grow much beyond its top-line growth rate over the next few years,” Mr. Luria wrote.
