A shift by a significant number of customers from licensing software to outsourcing processing tasks is holding down Jack Henry & Associates Inc.'s revenue growth.
The Monett, Mo., vendor said Tuesday that revenue from software licensing plunged in its fiscal fourth quarter, which ended June 30, and would likely be flat this fiscal year.
The news prompted a downgrade from Credit Suisse Group Inc., and Jack Henry's stock fell sharply Wednesday.
The core processing software and services provider said its fiscal fourth-quarter licensing revenue fell 25% from a year earlier, to $18.3 million. During its most recent fiscal year, 27 banks switched from in-house processing to Jack Henry's outsourcing services, the vendor said, including 14 that switched in its fourth quarter.
"The significant shortfall in license fees created headwinds we could not overcome," Jack F. Prim, the vendor's chief executive officer, said on an earnings call with analysts Wednesday.
Executives said some large banking companies have become more cautious about technology spending as they struggle with difficult economic conditions.
Kevin D. Williams, Jack Henry's chief financial officer, said that as more bankers move to outsource their processing, generating monthly service fees rather than one-time licensing contracts, the vendor's revenue will become more predictable.
Jack Henry has priced its outsourcing contracts so that banks pay about the same in the first year as they would for maintenance contracts on in-house software, Mr. Williams said.
Mr. Prim said the trend could also help Jack Henry generate more revenue in the future, because outsourcing clients "commonly implement two to three additional complementary products."
Revenue from the payment processing business, a bright spot for Jack Henry, increased 23%, and electronic payment growth was especially strong. Tony L. Wormington, the vendor's president, said debit card processing volume increased 17% from a year earlier, and bill payment volume increased 35%.
Bryan Keane, an analyst at Credit Suisse, downgraded the stock late Tuesday to "neutral," from "outperform," citing weak software licensing revenue.
"Due to Jack Henry's dependence on license sales, we believe it has a higher risk of missing estimates than other bank processors that rely more heavily on recurring outsourcing revenue," Mr. Keane wrote in a note to clients.
As of midday Wednesday, Jack Henry's stock had dropped 7% from Tuesday's close, to $20.71 a share.
Its fiscal fourth-quarter net income fell 14% from a year earlier, to $24.9 million. Total revenue grew 4%, to a record $188.7 million, a record.
Earnings of 28 cents per share missed Wall Street's average estimate by 4 cents.
Executives, citing economic uncertainties, did not offer a forecast for this quarter and would provide only general projections for this fiscal year. They predicted that software and hardware revenue would be relatively flat, and that services revenue would grow in the high single digits or low or mid-teens.
The number of financial companies using Jack Henry's hosted remote deposit service grew 65% from a year earlier, and the number of merchants using the service grew 142%.
But Jack Henry's image exchange revenue fell 10% as more customers continued to go directly to the Federal Reserve Banks to clear checks electronically.
"We were actually doing that as a convenience to our customers," Mr. Williams said, and the service did not generate high profits. "That was a business that was growing 46% a year ago, and now it's going the other way."