Jack Henry & Associates

How 2 guys from the Ozarks shook up the financial industry

The idea of standing in front of an ATM that suddenly starts spitting out cash sounds pretty good, right? What sounds like a sweet dream was a very real nightmare for some banks for years. From 2013 to 2018, the hacker gang Carbanak swindled around one billion US dollars from more than 100 banks. To do it, they didn't have to violently crack open vaults or take hostages - they simply sent plain phishing emails to bank employees from the comfort of home. As soon as the email attachment was opened, they were inside the bank's operating system and could even control ATMs remotely. But why was any of this even possible? Well, the bitter truth is that countless banks still use totally outdated technology today and are therefore easy victims for cyberattacks.

This is exactly where the IT systems house Jack Henry & Associates comes in: with its software solutions it serves more than 9,000 financial institutions, paving the way for digitalization. Of course, you should still be careful about which email attachments you open!

The history and business model of Jack Henry & Associates Inc.

As the headline already hints, the origins of today's Jack Henry & Associates Inc. go back to two friends from the Ozark Mountains. More precisely, it was the picturesque small town of Monett in Missouri where John W. Henry was born on June 30, 1935. After finishing school, Jack, as he was usually called, started working as a bookkeeper. A bit later he got a job as data processing manager at Gillioz Bank & Trust. There he took care of managing customer-specific data. Back then, only the largest banks could afford their own computer system, and things looked pretty bleak on the software side too. Jack remembered that there were exactly two software packages for banking. He bought one of them, but no matter what he tried, he couldn't get it to run. When his bank was bought by United Missouri Bancshares in 1976, his position was eliminated because it was more profitable to have the data managed externally.

Jack's friend Jerry D. Hall, eight years younger, was also already gaining his first experience in the newly emerging software industry. He also worked as a data processing manager, at a shoe company called Jumping Jacks, a subsidiary of the U.S. Shoe Company. Together with his buddy Jack, he often drove to nearby Springfield to check out the latest software solutions. In fact, it was once claimed that Jack and Jerry were the only two computer nerds in the area back then. Now that Jack was looking for a new job, he was spoiled for choice: should he get hired somewhere again, or should he turn his passion into a career? He really enjoyed data processing, and he was also a clever programmer who recognized the countless possibilities of software programs early on. Without hesitating for long, he decided to start his own company together with his friend and business partner Jerry to help smaller banks with data management - Jack Henry & Associates was born.

For $40/month they rented a small office in an engine repair shop, borrowed a computer, and started writing their own software program. CIF 32 was the name of the first finished bank automation system, which they soon installed on the IBM mainframes of a few community banks. The system worked so well that word quickly got around. In its very first fiscal year, Jack Henry & Associates achieved impressive annual revenue of 115,222 US dollars (roughly 508K in today's money). Of that, however, only 9,360 US dollars could be booked as profit. They hired their first employees and set up new offices in an unused storage space of the Friend Tire Company. They also replaced the borrowed computer with an IBM System/32, which they shared with the First State Bank of Prudy. Since storage space was extremely limited, they regularly had to delete the bank's data at night and set it up again before the bank opened the next morning. The two software pioneers had a clear vision and worked tirelessly to make it happen.

Over the years, Jack Henry & Associates Inc. developed into the leading provider of software solutions for banks and other financial institutions. Its extensive range of products and services runs from transaction processing to business process automation to information management.

How could Jack Henry & Associates develop in the future?

Before I get into this question in more detail, I'd like to briefly sum up the business model once more. Jack Henry & Associates Inc. is a technology company that specializes in software solutions and services for the financial industry. It serves its more than 9,000 customers through three core brands:

• Jack Henry Banking: the leading provider of integrated data processing systems, used by about 1,000 banks (from small community banks to multibillion-dollar institutions).
• Symitar: the leading provider of core data processing solutions for about 840 credit unions of all sizes.
• ProfitStars: a leading provider of highly specialized software solutions and services for about 8,600 financial institutions that are primarily not core customers of the company (6,800 of them non-core customers). Its products cover areas such as information security, risk management, and digital and mobile applications.

Now let's take a look at the results from the most recently published figures for the first quarter of 2021 (ended September 30, 2020). Revenue rose to 451.8 million US dollars, an increase of 3 percent over the prior-year quarter. Due to higher personnel costs and higher spending on a card processing platform, operating income fell by one percent to 117.6 million US dollars. Net income, on the other hand, rose by 2 percent to 91.2 million US dollars, or 1.19 US dollars per share.

Over its corporate history, Jack Henry & Associates has already completed more than 50 different acquisitions. Of course, that brings huge opportunities, but also some risks. On the one hand, targeted and fitting acquisitions push your own growth forward enormously, but on the other hand you can also miscalculate and, in the worst case, get one wrong. Here, though, I'm quite confident - after all, they've proven their skill multiple times in the past. Most recently, they took over the fintech Geezeo, which now expands their offering of digital financial management solutions.

Given the fact that many banks still use outdated technology and we're still in our infancy when it comes to digitalization, I'm very confident about Jack Henry & Associates' future. In fact, it goes so far that banks complain about a shortage of skilled workers because nobody knows the technology anymore that no one has learned in decades. Just let that sink in for a moment. We can really be glad that a lot more money hasn't already been swindled through cyberattacks.

And what about the dividend?

Since 1990, Jack Henry & Associates shareholders have been sharing in the company's profits in the form of dividends. On top of that, the IT pro has managed to raise the dividend year after year since then, which makes it a Dividend Aristocrat. Over the last 10 years, the average dividend growth rate is a remarkable 17 percent. With that kind of growth and such a phenomenal stock chart, I'm happy to accept the current dividend yield of a little over one percent. Last but not least, the payout ratio of 44.2 percent still leaves enough room to grow.

Conclusion:
Jack's decision to go into business for himself was definitely the right one. With its software products and services, Jack Henry & Associates has built up a considerable moat over the years. I'm confident the technology company will bring long-term investors a lot of joy in the future too.