Jack Henry is expected to report slower quarterly revenue growth and a lower operating profit margin during its fiscal second quarter earnings call next week, despite executives asserting demand for its services remains steady.

Although rivals might be experiencing a slowdown in demand, Jack Henry CEO David Foss repeatedly said in the latter months of 2022 that the company’s pipeline is robust and it’s not seeing the pace of deals slow for its payment and technology services as others in the industry have. With its core processing and payments services, Jack Henry caters to mid-sized banks and credit unions. 

Still, Jack Henry is likely to report “a sequential deceleration” in non-GAAP revenue growth for the fiscal second quarter ended Dec. 31 when it reports earnings Feb. 7, wrote RBC Capital Markets analyst Daniel Perlin in a Jan. 30 note to investor clients. 

During the earnings call, analysts are likely to zero in on whether the appetite remains healthy for Jack Henry’s services, since it’s been “an outlier” among its peers who are seeing reduced demand, Perlin noted. The “sustainability of high demand for technology modernization across core and digital banking” will be a focus area this quarter, he wrote.

Additionally, the company’s operating profit margin is projected to be lower sequentially and year-over-year “as costs relating to wages, investments, vendors, facilities, and travel have normalized from the pandemic,” Perlin wrote. 

Jack Henry executives expect revenue growth to accelerate in the second half of the year for the company to meet its fiscal 2023 targets, and they aim to grow profit margins in fiscal year 2024, Perlin wrote.

“We remain very focused on returning to margin expansion in fiscal ‘24,” Jack Henry Chief Financial Officer Mimi Carsley said during the company’s fiscal first quarter earnings call in November. She also said non-GAAP revenue growth would “rebound with sequential increases in both the third and fourth quarters.” 

In the fiscal first quarter, the Monett, Missouri-based company’s net income rose four percent to $106.5 million, and its revenue climbed eight percent to $529.2 million, according to a news release.

As Jack Henry’s employee travel patterns and wage inflation settle in, the normalization of those trends should bolster profit margin expansion in FY2024, Foss said in November. “We, like everybody, have seen wage inflation, but that is really starting to normalize as well,” he said.

The overwhelming majority of the company’s revenue is recurring and tied to long-term contracts for processing systems, Foss has said at that time.

That recurring revenue has allowed the company to experience a “steady 6-8% organic growth pattern in recent years” when it comes to revenue, Baird Equity Research analyst David Koning wrote in a Jan. 11 note to investor clients. Jack Henry has gained market share, especially with credit unions, “in a very stable industry," Koning wrote.

However, bank consolidation, bank spending fluctuations and pricing pressure do pose risks for the company, Koning said in Jan. 17 note.

By Caitlin Mullen on Jan 31, 2023
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