Jack Henry Built a Wide Moat Through a Steady Approach

Senior Equity Analyst

Brett Horn

Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically and remains squarely focused on the bank tech space. Overall, we think this approach has allowed Jack Henry to develop a wide moat, and we think the company will continue to modestly outperform its larger peers.

The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which we believe was essentially a worst case for the industry from a macro perspective. However, Jack Henry has seen some ups and downs as a result of the pandemic. Early in the pandemic, growth stalled a bit as banks looked to reduce spending and Jack Henry saw a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. A recovery on this front has led to relatively outsized growth, but more recently this turned into a headwind, as stress on the banking industry has stalled M&A. We expect results to start to normalize going forward.

Jack Henry has generally outperformed its larger peers in terms of growth, and we expect this to continue. The company's growth suggests that it continues to pick up incremental share, although the high switching costs around its main core processing offering make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. We think Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins have started to rebound now that this initiative is complete.

Business Strategy & Outlook

Overall, while we believe the competitive positions of the company’s segments differ, we believe Jack Henry deserves a wide moat rating, based primarily on switching costs surrounding its core processing and complementary services, with scale benefits and the resulting cost advantage playing a supporting role.

Jack Henry’s foundational product is core processing systems, the most basic and mission-critical system for banks. This business is contained in the company’s core segment, which makes up about one third of its revenue. Core processing is the nuts-and-bolts system that banks need to maintain their deposit and loan accounts and to post daily transactions. Given the integral nature of core processing to their operations, banks very rarely switch systems. Besides the potential for business interruptions, converting to a new system would require the banks to retrain their employees. Customers typically sign multiyear contracts, and customer retention approaches 99% annually, excluding customers lost because of acquisitions by another bank. 

While Jack Henry is a smaller player compared with peers such as Fiserv and FIS, we believe its patient approach to growth has bolstered its moat. Fiserv and FIS are essentially roll-ups, and while building a leading position through M&A in an attractive industry is not a negative, it has left these companies with multiple acquired platforms that they must maintain or risk voiding their switching cost advantages. In contrast, Jack Henry has grown organically and has utilized acquisitions only sparingly. As a result, it has built unified platforms for banks and credit unions. Its slimmed-down product set allows it to focus its resources and maintain operating margins on par with its larger peers.

Over time, the product set of bank technology companies has widened significantly, as technology has come to play a greater role in banking operations. Jack Henry now has more than 140 complementary products for its bank customers and over 100 for its credit union clients. Revenue from these products are contained in the company’s Complementary segment, which accounts for a little over one quarter of revenue. On a stand-alone basis, we believe most of these products don’t benefit from the immense switching costs that surround core processing. However, we view this expansion as additive to the company’s moat, not dilutive. These products are a natural extension for Jack Henry, and cross-selling multiple products strengthens its client relationships. We believe the ability to offer a full suite of services increases overall switching costs, especially for small banks and credit unions, which are more likely to depend on a single bank technology provider.

Jack Henry also offers payment processing services, with the Payments segment accounting for about one third of revenue. Here, we think Jack Henry’s relative smaller size is a bit of negative, as payment processing of any type tends to be highly scalable. We believe there are some switching costs for this side of the business but that scale and the resulting cost advantage is the dominant competitive factor. In this respect, we believe Jack Henry is at a bit of a disadvantage relative to its larger peers, and this is Jack Henry’s lowest margin segment. Still, on an absolute basis, the economics appear to be attractive, suggesting this segment has enough scale to enjoy a moat, albeit not as wide as the rest of the company’s operations. 

With solid margins and limited capital needs, Jack Henry consistently produces strong returns. Over the past five years, ROIC averaged 19%, well in excess of any reasonable estimate of the company’s cost of capital.

Wide

Economic Moat

Jack Henry & Associates

Jack Henry & Associates, Inc. is a technology company, which engages in the provision of technology solutions and payment processing services primarily for financial services organizations. It operates through the following segments: Core, Payments, Complementary, and Corporate and Other. The Core segment provides core information processing platforms to banks and credit unions, which consist of integrated applications required to process deposit, loan, general ledger transactions, and maintain centralized customer or member information. The Payments segment focuses on secured payment processing tools and services, such automated teller machine, debit and credit card processing services, online and mobile bill pay solutions, and risk management products and services. The Complementary segment offers additional software and services that can be integrated with its core solutions or used independently. The Corporate and Other segments include hardware revenue and costs, as well as operating costs not directly attributable to the other segments. The company was founded by Jerry D. Hall and John W. Henry in 1976 and is headquartered in Monett, MO.

Earnings data Q4 2021

Earnings data Q1 2022

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Earnings data Q4 2022

Earnings data Q1 2023

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Jack Henry reports 6% revenue growth, poised for FedNow rollout

Jack Henry's Q3 2023 earnings call showcased strong revenue growth in core, payment, and complementary solutions businesses, despite challenges in deconversion revenue and cost drivers. The company's focus on capital allocation, resilience, and commitment to new product offerings positions it for future growth. The rollout of FedNow and a robust sales pipeline present significant opportunities for revenue growth and customer benefit.

Jack Henry achieves record revenue and sales bookings in Q4 2023

Jack Henry reported strong financial performance, with record revenue and sales bookings. The company's focus on AI, machine learning, and robotic process automation positions it well for future growth, despite challenges related to cloud migration and seasonality of revenue.

JKHY reports 8% revenue growth, plans capital allocation discussions

JKHY reports strong Q3 performance with revenue growth and new product releases. Challenges include potential legislative impact and implementation delays. Opportunities lie in new solutions and focus on selling outside the core.

JKHY reports 8% revenue growth, eyes AI-driven opportunities

JKHY reports solid revenue growth and strong performance in core and payments. Challenges include subdued free cash flow and slow public cloud acceptance. Opportunities lie in increased technology spending and new AI-driven solutions.

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Jack Henry & Associates, Inc. is a financial technology company, which engages in the provision of technology solutions and payment processing services. It operates through the following segments: Core, Payments, Complementary, and Corporate and Other. The Core segment provides core information processing platforms to banks and credit unions which consist of integrated applications required to process deposit, loan, and general ledger transactions, and maintain centralized customer and member information. The Payments segment includes secure payment processing tools and services including ATM, debit, and credit card processing services, online and mobile bill pay solutions, ACH origination and remote deposit capture processing, and risk management products and services. The Complementary segment focuses on additional software, hosted processing platforms, and services including call center support, network security management, consulting, and monitoring. The Corporate and Other segment offers hardware and other products. The company was founded by Jerry D. Hall and John W. Henry in 1976 and is headquartered in Monett, MO.

MONETT, Mo., Jan. 18, 2022 /PRNewswire/ -- Jack Henry & Associates, Inc.® (NASDAQ: JKHY) announced today that IncredibleBank is improving its online account opening with personalized, dynamic content, same-day decisioning and fast, easy funding.

IncredibleBank Selects Jack Henry to Compete with Same-Day Decisioning and Funding

Jack Henry & Associates (JKHY) announces that its lending division has collaborated with Bank of Charles Town for automating the latter's commercial lending.

Jack Henry's (JKHY) Lending Platform Gets Selected by BCT

CHARLES TOWN, W.Va., Jan. 5, 2022 /PRNewswire/ -- (OTC:PTBS) – BCT-Bank of Charles Town , also known as The Community's Bank, today announced it will digitize its commercial lending experience through a collaboration with Jack Henry & Associates, Inc. (NASDAQ:JKHY).

BCT-Bank of Charles Town Automates Commercial Lending with Jack Henry

MONETT, Mo., Jan. 5, 2022 /PRNewswire/ -- Jack Henry & Associates, Inc.® (NASDAQ: JKHY) announced today that Old Missouri Bank (OMB) selected Jack Henry to provide a modern and open banking platform as part of the bank's expansion.

Old Missouri Bank Selects Jack Henry to Power New Growth and Digital Brand

MONETT, Mo., Jan. 4, 2022 /PRNewswire/ -- Jack Henry & Associates, Inc. (NASDAQ: JKHY) announced today that Bank of Charles Town (BCT) is collaborating with Jack Henry Lending to digitize its commercial lending experience.

Bank of Charles Town Automates Commercial Lending with Jack Henry

Jack Henry & Associates (JKHY) announces that its digital lending platform has embedded tax return spreading in a bid to expand its reach to banks and credit unions.

Jack Henry (JKHY) Boosts Lending Division With New Capability

MONETT, Mo., Dec. 8, 2021 /PRNewswire/ -- Jack Henry & Associates, Inc. (NASDAQ: JKHY) announced today that  Jack Henry Lending has embedded tax return spreading into its digital lending platform to streamline and automate the process, increasing efficiencies and reducing loan turnaround time for banks and credit unions.

Jack Henry Lending Automates Tax Return Spreading, Streamlining the Loan Process

MONETT, Mo., Dec. 2, 2021 /PRNewswire/ -- Jack Henry & Associates, Inc.® (NASDAQ: JKHY) is a leading provider of technology solutions and payment processing services primarily for the financial services industry.

Jack Henry Collaborates with Envestnet | Yodlee to Improve Financial Data Access

MONETT, Mo., Nov. 24, 2021 /PRNewswire/ -- Jack Henry & Associates, Inc.® (NASDAQ: JKHY) is a leading provider of technology solutions and payment processing services primarily for the financial services industry.

Jack Henry to Present at Upcoming Investor Conferences in December 2021

MONETT, Mo., Nov. 23, 2021 /PRNewswire/ -- Jack Henry & Associates, Inc. (NASDAQ: JKHY), a leading provider of technology solutions and payment processing services primarily for the financial services industry, announced today that its clients represent the majority of financial institutions live on The Clearing House's RTP® network.

Jack Henry's Clients Represent 67% of Financial Institutions on the RTP® Network from The Clearing House

Jack Henry (JKHY) has become technically an oversold stock now, which implies exhaustion of the heavy selling pressure on it. This, combined with strong agreement among Wall Street analysts in revising earnings estimates higher, indicates a potential trend reversal for the stock in the near term.

Down 11.9% in 4 Weeks, Here's Why Jack Henry (JKHY) Looks Ripe for a Turnaround

MONETT, Mo., Nov. 17, 2021 /PRNewswire/ -- Jack Henry & Associates, Inc. (NASDAQ: JKHY) today announced its Board of Directors declared a regular quarterly cash dividend of $.46 per share.

Jack Henry & Associates Announces Regular Quarterly Dividend

MONETT, Mo., Nov. 11, 2021 /PRNewswire/ -- Jack Henry & Associates, Inc. (NASDAQ:JKHY) is a leading provider of technology solutions and payment processing services primarily for the financial services industry.

Jack Henry to Present at Upcoming Investor Conferences

Jack Henry's (JKHY) first-quarter fiscal 2022 results reflect strength across Core, Complementary, Corporate and Payments segments.

Jack Henry (JKHY) Q1 Earnings Beat, Revenues Increase Y/Y

Jack Henry & Associates, Inc. (JKHY) CEO David Foss on Q1 2022 Results - Earnings Call Transcript

Jack Henry (JKHY) delivered earnings and revenue surprises of 2.99% and -0.42%, respectively, for the quarter ended September 2021. Do the numbers hold clues to what lies ahead for the stock?

Jack Henry (JKHY) Beats Q1 Earnings Estimates

Jack Henry & Associates (NASDAQ:JKHY) reported its Q1 earnings results on Monday, November 8, 2021 at 04:00 PM. Here's what investors need to know about the announcement.

Recap: Jack Henry & Associates Q1 Earnings

MONETT, Mo., Nov. 8, 2021 /PRNewswire/ --  First quarter summary: GAAP revenue increased 8% and operating income increased 14% for the quarter compared to the prior-year quarter.

Jack Henry & Associates, Inc. Reports First Quarter Fiscal 2022 Results

MONETT, Mo., Nov. 3, 2021 /PRNewswire/ -- Jack Henry & Associates, Inc.® (NASDAQ: JKHY) is a leading provider of technology solutions and payment processing services primarily for the financial services industry.

Jack Henry & Associates Announces Executive Leadership Retirements

Jack Henry is growing revenues by 8% a year, along with growing margins, as the adoption of private cloud core banking continues. The company operates in the perfect niche for them, medium to small banks, and credit unions, giving them a wide moat for their niche.

Jack Henry: A Big Player In A Small Pond

MONETT, Mo., Nov. 2, 2021 /PRNewswire/ -- Jack Henry & Associates, Inc. (NASDAQ: JKHY), a leading provider of technology solutions and payment processing services primarily for the financial services industry, announced today that it is partnering with Early Warning Services, LLC, the network operator behind Zelle®, to make faster payments more readily available for minority-owned depository institutions (MDIs).

Jack Henry and Zelle® Make Faster Payments More Accessible to Minority Communities

MONETT, Mo., Oct. 26, 2021 /PRNewswire/ -- Jack Henry & Associates, Inc.® (NASDAQ: JKHY) a leading provider of technology solutions and payment processing services primarily for the financial services industry, announced today that it will host a live Webcast of its first quarter fiscal year 2022 earnings conference call on November 9, 2021.

Jack Henry & Associates To Provide Webcast Of First Quarter Fiscal Year 2022 Earnings Call

MONETT, Mo., Oct. 26, 2021 /PRNewswire/ -- Jack Henry & Associates, Inc.® (NASDAQ: JKHY) is a leading provider of technology solutions and payment processing services primarily for the financial services industry.

Two Jack Henry Financial Institutions Win 2021 WebAwards

MONETT, Mo., Oct. 12, 2021 /PRNewswire/ -- Jack Henry & Associates, Inc.® (NASDAQ: JKHY) is a leading provider of technology solutions and payment processing services primarily for the financial services industry.

Jack Henry Partners with Open Banking Providers to Enhance Digital Platform

Jack Henry & Associates (JKHY) extends collaboration with Crews Banking for leveraging its lending, digital and core to modernize as well as streamline technology across the organization.

News for Jack Henry & Associates Stock (JKHY)