This discussion and analysis should be read in conjunction with the condensed
consolidated financial statements and the accompanying notes to the condensed
consolidated financial statements included in this Form 10-Q for the quarter
ended September 30, 2020.
OVERVIEW
Jack Henry & Associates, Inc. ("JKHY") is a leading provider of technology
solutions and payment processing services primarily for financial services
organizations. Its solutions are marketed and supported through three primary
brands. Jack Henry Banking® is a top provider of information and transaction
processing solutions to U.S. banks ranging from community banks to
multi-billion-dollar asset institutions.  Symitar® is a leading provider of
information and transaction processing solutions for credit unions of all
sizes.  ProfitStars® provides specialized products and services that enable
financial institutions of every asset size and charter, and diverse corporate
entities outside the financial services industry, to mitigate and control risks,
optimize revenue and growth opportunities, and contain costs. JKHY's integrated
solutions are available for on-premise installation and outsourced delivery in
our private cloud.
Our two primary revenue streams are "services and support" and "processing."
Services and support includes: "outsourcing and cloud" fees that predominantly
have contract terms of five years or longer at inception; "product delivery and
services" revenue, which includes revenue from the sales of licenses,
implementation services, deconversion fees, consulting, and hardware; and
"in-house support" revenue, composed of maintenance fees which primarily contain
annual contract terms. Processing revenue includes: "remittance" revenue from
payment processing, remote capture, and ACH transactions; "card" fees, including
card transaction processing and monthly fees; and "transaction and digital"
revenue, which includes transaction and mobile processing fees. We continually
seek opportunities to increase revenue while at the same time containing costs
to expand margins.
All dollar amounts in the following discussion are in thousands, except per
share amounts.
COVID-19 Impact and Response
In March 2020, the World Health Organization declared the outbreak of COVID-19
as a pandemic and the President of the United States declared the outbreak as a
national emergency. As COVID-19 has rapidly spread, federal, state and local
governments have responded by imposing varying degrees of restrictions,
including widespread "stay-at-home" orders, social distancing requirements,
travel limitations, quarantines, and forced closures or limitations on
operations of non-essential businesses. Such restrictions have resulted in
significant economic disruptions and uncertainty.
The health, safety, and well-being of our employees and customers is of
paramount importance to us. In March 2020, we established an internal task force
composed of executive officers and other members of management to frequently
assess updates to the COVID-19 situation and recommend Company actions. We
offered remote working as a recommended option to employees whose job duties
allow them to work off-site. This recommended remote working option is currently
extended until at least January 4, 2021, and our internal task force will
continue to evaluate recommending further extensions. Based on guidance from the
U.S. Department of Homeland Security's Cybersecurity and Infrastructure Security
Agency, the Company was designated as essential critical infrastructure because
of our support of the financial services industry. As of October 26, 2020, the
majority of our employees were continuing to work remotely. Our internal task
force considers federal, state and local guidance, as well as employee-specific
and facility-specific factors, when recommending Company actions. At such time
that our internal task force recommends that our remote employees begin to
return to our facilities, we have prepared procedures to assist with a safe,
gradual and deliberate approach, including a return-to-office training, enhanced
sanitation procedures and face mask requirements, which are currently being
utilized by our employees who are required to be on-site to perform their
required job functions.
We have suspended all non-essential business travel until at least January 4,
2021, and our internal task force will continue to evaluate the need for further
extensions. We have put additional safety precautions into place for travel that
is essential. We have also updated the health benefits available to our
employees by waiving out-of-pocket expenses related to testing and treatment of
COVID-19. Despite the move to a principally remote workforce, we honored our
2020 summer internship program through virtual methods.
Customers
We are working closely with our customers who are scheduled for on-site visits
to ensure their needs are met while taking necessary safety precautions when our
employees are required to be at a customer site. Delays of customer system
installations due to COVID-19 have been limited, and we have developed processes
to handle remote
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installations when available. We expect these processes to provide flexibility
and value both during and after the COVID-19 pandemic. However, we have
experienced delays related to continuing customer migrations to our new card
processing platform. We completed the migrations of our core customers and are
on track for the revised schedule for non-core customers by March 31, 2021. We
continue to work with our customers to support them during this difficult time,
and, to that end, have waived certain late fees in connection with our products
and services. We have also enhanced our lending service offerings to support the
Paycheck Protection Program that was introduced by the Coronavirus Aid, Relief,
and Economic Security (CARES) Act, which was signed into law on March 27, 2020.
Even though a substantial portion of our workforce has worked remotely during
the outbreak and business travel has been curtailed, we have not yet experienced
significant disruption to our operations. We believe our technological
capabilities are well positioned to allow our employees to work remotely for the
foreseeable future without materially impacting our business.
Financial impact
We have seen delays in certain product installations due to COVID-19 with the
associated revenue pushed from the current period to future periods. These
headwinds may continue to impact our license, hardware, installation and
pass-through revenues throughout fiscal 2021. Despite the changes and
restrictions caused by COVID-19, the overall financial and operational impact on
our business has been limited and our liquidity, balance sheet, and business
trends remain strong. We experienced positive operating cash flows during the
first quarter of fiscal 2021, and we do not expect that to change in the near
term. However, we are unable to accurately predict the future impact of COVID-19
due to a number of uncertainties, including further government actions; the
duration, severity and recurrence of the outbreak; the speed of economic
recovery; the potential impact to our customers, vendors, and employees; and how
the potential impact might affect future customer services, processing and
installation-related revenue, and processes and efficiencies within the Company
directly or indirectly impacting financial results. We will continue to monitor
COVID-19 and its possible impact on the Company and to take steps necessary to
protect the health and safety of our employees and customers.
RESULTS OF OPERATIONS
In the first quarter of fiscal 2021, total revenue increased 3%, or $13,795,
compared to the same quarter in the prior fiscal year. Adjusting total revenue
in both periods for deconversion fee revenue, which decreased $9,004 to $5,882,
total revenue would have increased 5% for the quarter compared to the same
period a year ago.
Operating expenses increased 5% compared to the first quarter of fiscal 2020,
due to increased direct costs and higher personnel costs partially offset by
travel expense savings. The increased direct costs were primarily related to our
card payment processing platform. Higher personnel costs were primarily related
to a headcount increase of 4% at September 30, 2020 compared to September 30,
2019.
Operating income decreased 1% for the first quarter of fiscal 2021 compared to
the first quarter of fiscal 2020. Adjusting operating income for both periods
for the effect of deconversion fees of $5,219 in the current fiscal quarter and
$13,649 in the prior fiscal year first quarter, would have resulted in an
increase of 7% for the first quarter of fiscal 2021 compared to the same period
a year ago.
The provision for income taxes decreased 10% compared to the prior fiscal year
first quarter, primarily due to a decreased effective tax rate mainly
attributable to the difference in impact of share-based compensation that vested
during each of the periods. The effective tax rate for the first quarter of
fiscal 2021 was 22.4% compared to 24.6% in the same quarter a year ago.
The above changes led to an increase in net income of 2% for the first quarter
of fiscal 2021 compared to the first quarter of fiscal 2020.
We move into the second quarter of fiscal 2021 with optimism following strong
performance in the first quarter, but with limited visibility of the future
impact of the COVID-19 pandemic. Significant portions of our business continue
to come from recurring revenues and our sales pipeline also remains encouraging.
Our customers continue to face regulatory and operational challenges which our
products and services address, and in these uncertain times, we believe they
have an even greater need for our solutions that directly address institutional
profitability, efficiency, and security. Our strong balance sheet, access to
extensive lines of credit, the continued strength of our existing lines of
revenue, and an unwavering commitment to superior customer service should
position us well to address current and future opportunities.
A detailed discussion of the major components of the results of operations for
the three months ended September 30, 2020 follows. Discussions compare the
current fiscal year's three months ended September 30, 2020 to the prior year's
three months ended September 30, 2019.
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REVENUE
Services and Support                                                                       %
                                              Three Months Ended September 30,           Change
                                                                          2020            2019
Services and Support                                                  $ 280,997       $ 278,808        1  %
Percentage of total revenue                                                  62  %           64  %


Services and support revenue increased 1% in the first quarter of fiscal 2021
compared to the same quarter a year ago. Adjusting services and support revenue
for deconversion fee revenue from each period, which was $5,882 in the current
fiscal year quarter and $14,886 in the prior fiscal year quarter, this revenue
line would have grown 4% for the quarter compared to the same quarter last
fiscal year. Services and support revenue growth was primarily driven by data
processing and hosting fees and software usage fees reflecting customer
favorability of our term license model, partially offset by a decrease in
product delivery and services revenue, particularly deconversion fee revenue,
quarter over quarter.
Processing                                                                                 %
                                              Three Months Ended September 30,           Change
                                                                          2020            2019
Processing                                                            $ 170,803       $ 159,197        7  %
Percentage of total revenue                                                  38  %           36  %


Processing revenue increased 7% in the first quarter of fiscal 2021 compared to
the same quarter last fiscal year. The increase was primarily driven by higher
card and Jack Henry digital revenue due to expanding volumes, complemented by
increases in the other processing components, quarter over quarter.
OPERATING EXPENSES
Cost of Revenue                                                                            %
                                              Three Months Ended September 30,           Change
                                                                          2020            2019
Cost of Revenue                                                       $ 262,929       $ 245,791        7  %
Percentage of total revenue                                                  58  %           56  %


Cost of revenue for the first quarter of fiscal 2021 increased 7% over the prior
fiscal year first quarter and increased as a percentage of total revenue. The
increase was primarily due to higher costs associated with our card processing
platform and higher personnel costs related to increased headcount at
September 30, 2020 compared to a year ago due to organic growth within our
product lines. The increase in costs was partially offset by travel expense
savings as a result of COVID-19 travel limitations.
Research and Development                                                                   %
                                              Three Months Ended September 30,          Change
                                                                          2020           2019
Research and Development                                               $ 26,057       $ 24,591        6  %
Percentage of total revenue                                                   6  %           6  %


Research and development expense increased 6% for the first quarter of fiscal
2021 over the prior fiscal year first quarter. The increase was primarily due to
higher personnel costs related to increased headcount at September 30, 2020
compared to a year ago. Research and development expense for the quarter
remained consistent compared to the prior fiscal year quarter as a percentage of
total revenue.
Selling, General, and Administrative                                  Three Months Ended            %
                                                                        September 30,             Change
                                                                                2020               2019
Selling, General, and Administrative                                        $  45,226          $  49,436               (9) %

Percentage of total revenue                                                        10  %              11  %


Selling, general, and administrative expense decreased 9% in the first quarter
of fiscal 2021 over the same quarter in the prior fiscal year. Personnel cost
increases for the quarter were more than offset by travel expense savings as a
result of COVID-19 travel limitations and lower expenses related to both our
national sales meeting and Symitar Education Conference being held virtually
this year (see "COVID-19 Impact and Response" section above). Selling,
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general, and administrative expense decreased as a percentage of total revenue
this fiscal year quarter versus the prior fiscal year quarter.
          INTEREST INCOME (EXPENSE)                                                                %
                                                        Three Months Ended September 30,         Change
                                                                                      2020        2019
          Interest Income                                                           $   68      $  508       (87) %
          Interest Expense                                                          $ (117)     $ (156)      (25) %


•Interest income fluctuated due to changes in invested balances and yields on
invested balances during the first quarter of fiscal 2021 compared to the same
quarter a year ago. Interest expense decreased when compared to the prior fiscal
year period due to interest rate fluctuations and length of borrowing time.
There was no outstanding balance under the credit facility at September 30, 2020
and no outstanding balance at September 30, 2019.
   PROVISION FOR INCOME TAXES                                                                 %
                                                 Three Months Ended September 30,          Change
                                                                             2020           2019
   Provision for Income Taxes                                             $ 26,323       $ 29,169        (10) %
   Effective Rate                                                             22.4  %        24.6  %


The decrease in effective tax rate for the three months ended September 30, 2020
compared to the prior fiscal year quarter was primarily due to the difference in
impact of share-based compensation that vested during each of the periods.
NET INCOME
Net income increased 2% to $91,216, or $1.19 per diluted share, for the first
quarter of fiscal 2021 compared to $89,370, or $1.16 per diluted share, in the
same period of fiscal 2020, resulting in a 3% increase in diluted earnings per
share. The increase in net income was primarily driven by the above factors and
a decrease in effective tax rate compared to the prior fiscal year quarter.
REPORTABLE SEGMENT DISCUSSION
The Company is a leading provider of technology solutions and payment processing
services primarily for financial services organizations.
The Company's operations are classified into four reportable 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/member information. The Payments
segment provides 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 provides additional
software, processing platforms, and services that can be integrated with our
core solutions or used independently. The Corporate and Other segment includes
revenue and costs from hardware and other products not attributed to any of the
other three segments, as well as operating costs not directly attributable to
the other three segments.
Core
                                   Three Months Ended September 30,         % Change
                                                               2020           2019
Revenue                                                     $ 159,030      $ 155,896       2  %
Cost of Revenue                                             $  67,589      $  63,306       7  %


Revenue in the Core segment increased 2% and cost of revenue increased 7% for
the three months ended September 30, 2020 compared to the three months ended
September 30, 2019. Adjusting Core revenue for deconversion fee revenue in both
periods, which totaled $2,332 for the first quarter of fiscal 2021 and $7,133
for the first quarter of fiscal 2020, Core segment revenue would have increased
5% quarter over quarter. The increase in Core revenue was primarily driven by
the growth in data processing and hosting fee revenue, as well as customer call
support revenue. Cost of revenue increased 2% as a percentage of revenue for the
first quarter of fiscal 2021 compared to the same quarter of fiscal 2020.
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Payments
                                  Three Months Ended September 30,         % Change
                                                              2020           2019
Revenue                                                    $ 156,733      $ 149,746        5  %
Cost of Revenue                                            $  86,328      $  76,624       13  %


Revenue in the Payments segment increased 5% for the first quarter of fiscal
2021 compared to the equivalent quarter of the prior fiscal year. Adjusting
Payments revenue for deconversion fee revenue in both periods, which totaled
$1,847 for the first quarter of fiscal 2021 and $4,970 for the first quarter of
fiscal 2020, Payments revenue would have increased 7% quarter over quarter.
Payments revenue growth was primarily due to increased card and remittance
revenue within the processing line of revenue. Cost of revenue increased 13%
quarter over quarter primarily due to increased costs related to our credit and
debit card processing platform. Cost of revenue as a percentage of revenue
increased 4% for the first quarter of fiscal 2021 compared to the same quarter
of fiscal 2020.
Complementary
                                            Three Months Ended September 30,         % Change
                                                                        2020           2019
Revenue                                                              $ 124,480      $ 117,195       6  %
Cost of Revenue                                                      $  48,325      $  46,674       4  %


Revenue in the Complementary segment increased 6% for the first quarter of
fiscal 2021 compared to the equivalent quarter of the prior fiscal year, and 7%
after adjusting Complementary revenue for deconversion fee revenue from both
periods, which totaled $1,721 and $2,768 for the quarters ended September 30,
2020 and 2019, respectively. The increase in Complementary revenue was primarily
driven by increased hosting fees and higher Jack Henry digital revenue. Cost of
revenue decreased 1% as a percentage of revenue, quarter over quarter, due to
ongoing cost control efforts.
Corporate and Other
                                                  Three Months Ended 

September 30, % Change


                                                                               2020          2019
Revenue                                                                     $ 11,557      $ 15,168       (24) %
Cost of Revenue                                                             $ 60,687      $ 59,187         3  %


Revenue in the Corporate and Other segment decreased 24% for the first quarter
of fiscal 2021 compared to the equivalent quarter of the prior fiscal year. The
decrease was primarily due to lower other revenue and hardware revenue. Revenue
classified in the Corporate and Other segment includes revenue from other
products and services and hardware not specifically attributed to any of the
other three segments.
Cost of revenue for the Corporate and Other segment includes operating cost not
directly attributable to any of the other three segments. The increased cost of
revenue in the first quarter of fiscal 2021 of 3% compared to the equivalent
quarter in the prior fiscal year was primarily related to increased personnel
costs related to an increase in headcount over the prior fiscal year quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $195,320 at September 30,
2020 from $213,345 at June 30, 2020.
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The following table summarizes net cash from operating activities in the
statement of cash flows:
                                                Three Months Ended
                                                  September 30,
                                               2020           2019
Net income                                  $  91,216      $  89,370
Non-cash expenses                              50,602         47,308
Change in receivables                          77,439         77,123
Change in deferred revenue                    (67,113)       (68,939)

Change in other assets and liabilities (37,667) (21,810) Net cash provided by operating activities $ 114,477 $ 123,052




Cash provided by operating activities for the first three months of fiscal 2021
decreased 7% compared to the same period last year. Cash from operations is
primarily used to repay debt, pay dividends, repurchase stock, and for capital
expenditures.
Cash used in investing activities for the first three months of fiscal 2021
totaled $31,188 and included: $31,451 for the ongoing enhancements and
development of existing and new product and service offerings; capital
expenditures on facilities and equipment of $4,478; and $1,374 for the purchase
and development of internal use software. This was partially offset by $6,115 of
proceeds from completed and pending dispositions. Cash used in investing
activities for the first three months of fiscal 2020 totaled $75,425 and
included $30,285, net of cash acquired, for the acquisition of Geezeo; $28,475
for the development of software; capital expenditures of $13,101; $2,424 for the
purchase and development of internal use software; and $1,150 for the purchase
of investments. This was partially offset by $10 of proceeds from the sale of
assets.
Financing activities used cash of $101,314 for the first three months of fiscal
2021, including $65,873 for the purchase of treasury shares, dividends paid to
stockholders of $32,815, $2,598 net cash outflow from the issuance of stock and
tax withholding related to stock-based compensation, and $28 for payments on
financing leases. Financing activities used cash in the first three months of
fiscal 2020 totaled $44,576, which included $30,771 for the payment of
dividends, $14,145 for the purchase of treasury shares, and $340 net cash inflow
from the issuance of stock and tax withholding related to stock-based
compensation.
Capital Requirements and Resources
The Company generally uses existing resources and funds generated from
operations to meet its capital requirements. Capital expenditures totaling
$4,478 and $13,101 for the three months ended September 30, 2020 and
September 30, 2019, respectively, were made primarily for additional equipment
and the improvement of existing facilities. These additions were funded from
cash generated by operations. Total consolidated capital expenditures on
facilities and equipment for the Company for fiscal year 2021 are not expected
to exceed $63,000 and will be funded from cash generated by operations.
The Board of Directors has authorized the Company to repurchase shares of its
common stock. Under this authorization, the Company may finance its share
repurchases with available cash reserves or borrowings on its existing
line-of-credit. The share repurchase program does not include specific price
targets or timetables and may be suspended at any time. At September 30, 2020,
there were 27,393 shares in treasury stock and the Company had the remaining
authority to repurchase up to 2,598 additional shares. The total cost of
treasury shares at September 30, 2020 is $1,247,546. During the first three
months of fiscal 2021, the Company repurchased 400 treasury shares. At June 30,
2020, there were 26,993 shares in treasury stock and the Company had authority
to repurchase up to 2,998 additional shares.
Revolving credit facility
On February 10, 2020, the Company entered into a five-year senior, unsecured
revolving credit facility. The credit facility allows for borrowings of up to
$300,000, which may be increased by the Company at any time until maturity to
$700,000. The credit facility bears interest at a variable rate equal to (a) a
rate based on a eurocurrency rate or (b) an alternate base rate (the highest of
(i) 0%, (ii) the Prime Rate for such day, (iii) the sum of the Federal Funds
Effective Rate for such day plus 0.50% and (iv) the eurocurrency rate for a
one-month interest period on such day for dollars plus 1.0%), plus an applicable
percentage in each case determined by the Company's leverage ratio. The credit
facility is guaranteed by certain subsidiaries of the Company and is subject to
various financial covenants that require the Company to maintain certain
financial ratios as defined in the credit facility agreement. As of
September 30, 2020, the Company was in compliance with all such covenants. The
revolving credit facility
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terminates February 10, 2025. There was no outstanding balance under the credit
facility at September 30, 2020 or June 30, 2020.
Other lines of credit
The Company has an unsecured bank credit line which provides for funding of up
to $5,000 and bears interest at the prime rate less 1%. The credit line was
renewed in May 2019 and expires on April 30, 2021. At September 30, 2020 and
June 30, 2020, no amount was outstanding.


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