Overview
"In a traditionally slow seasonal quarter, the continued slow down in the capital goods market further hampered sales of our core in-house systems and reduced revenues from software licenses and installations, down 18%, as well as hardware, down 3%. These lower sales and installation revenues in our highest margin business also reduced overall margins for the quarter," said Michael E. Henry, Chairman and CEO. "We've been through tough markets before, and remain confident that when the market recovers we will be in a great position to generate strong growth in revenues and profits. In the meantime, the company remains solidly profitable, with a debt-free balance sheet and a growing backlog."
The strongest contributors to the company's revenue growth in the first quarter of fiscal 2003 were our OutLink service bureaus and our ATM and debit card processing services. There was also solid contribution from the Symitar family of products for credit unions. In addition, sales of complementary products and services were strong. "Our sense of the market is bankers are waiting for signs of economic recovery before making sizable new capital commitments, especially for new in-house core products," said Terry W. Thompson, President. "Furthermore, while in this 'wait and see' mode, they are performing more due diligence on technology investments to ensure new technology purchases can deliver acceptable returns on investment, generate efficiencies and produce incremental revenue."
"We think these market dynamics work in our favor due to the tight integration between core and complementary technologies and because of the solid reputation we have with our customers for delivering value for their dollar," noted Jack Prim, Chief Operating Officer. "We continue to invest heavily in developing new products and enhancing existing products to meet our customers' needs.
"The other area we see these dynamics in operation is in the outsourcing area, where the combination of lower initial capital outlay and increased complexity of technology makes using a service bureau more attractive to some institutions rather than operating the systems in-house, particularly for small community banks and newly formed (denovo) banks," Prim continued. "Since entering the service bureau market seven years ago, we've expanded our item capture centers to 14 locations and plan to further expand that network by adding up to ten new centers over the next three years. The strength in outsourcing revenues has been a major contributor to our overall growth over the past few years and provides a stabilizing influence to our revenue stream, particularly in difficult markets."
Non-hardware revenue, which includes licensing and installation, support and services and customer reimbursements generated revenues of $72.4 million, or 77% of total 1Q03 revenues, and increased 3%, compared to $70.3 million, or 76% of total 1Q02 revenues. First quarter licensing and installation dropped 18% to $18.3 million, or 20% of total revenues, compared to $22.3 million, or 24% of total revenues in the first quarter a year ago.
Revenues from support and services partially offsets the decline in licensing and installation, growing 14% for the quarter to $47.6 million, or 51% of 1Q03 revenues, compared to $41.6 million, or 45% of 1Q02 revenues. The growth in support and services revenue reflects the increase in all areas of recurring revenue; in-house support contracts, outsourcing and ATM and debit card processing.
Revenue Analysis
First quarter hardware revenues decreased 3% to $21.6 million, accounting for 23% of 1Q03 revenues, compared to $22.3 million or 24% of 1Q02 revenues. "The softness in new in-house system sales contributed to the bulk of the decline in hardware revenues. As we continue to build outsourcing business, we expect hardware sales to become a smaller component of overall revenues over time," said Kevin D. Williams, CFO. Customer reimbursements (now reported as both revenues and as cost of sales) were flat at $6.5 million compared to $6.4 million in the first quarter a year ago.
First quarter sales to the banking segment totaled $80.7 million, contributing 86% to total revenues, compared to $79 million, or 85% of first quarter revenues a year ago. Credit union sales totaled $13.3 million, contributing 14% of first quarter revenues compared to $13.5 million, or 15% of first quarter revenues a year ago.
Backlog and deferred revenues, both measures of future business, continued to improve at quarter end compared to last quarter and the same quarter a year-ago. At September 30, 2002, backlog increased to $146.5 million ($53.2 in-house and $93.3 outsourcing) compared to $141.7 million ($52.8 million in-house and $88.9 million outsourcing) at June 30, 2002 and $128.9 million ($49.8 million in-house and $79.1 outsourcing) at September 30, 2001. Deferred revenues increased 11% to $87.8 million, compared to $79.2 million at September 30, 2001.
Margin and Operations Review
Gross margin was 37.4% for the first quarter compared to 42.2% in 1Q02. Gross profit fell 10% to $35.1 million compared to $39.0 million in the first quarter a year ago. Non-hardware margin was 41% in 1Q03 compared to 45% in 1Q02, due primarily to lower software revenues. Hardware margin was 25.1% in 1Q03 compared to 33.1% in 1Q02 and 24.8% in 4Q02. "As was the case last quarter, the continued effect of reduced incentives from hardware suppliers (based on thresholds that were established from much higher sales volumes in the prior year) impacted hardware margin," stated Williams.
Operating expenses rose 3% in the first quarter to $17.5 million compared to $17.0 million in the first quarter a year ago. Selling and marketing increased 10% to $7.2 million, primarily due to personnel costs related to increases in the sales force. Research and development increased 22% to $3.6 million, as the company continues to invest in product improvements. "Our continuing efforts to control expenses contributed to a 10% decrease in general and administrative expenses this quarter," explained Williams. First quarter depreciation and amortization expense, which is included in both cost of sales and operating expenses, was $7.3 million compared to $6.3 million in fiscal 2002.
Net income totaled $11.3 million, or $0.13 per diluted share in the first quarter of fiscal 2003, compared to $14.6 million, or $0.16 per diluted share, in the first quarter of 2002. Due to the company's ongoing stock repurchase program (recently increased to 6 million shares) and the impact of the reduced price of our stock, the diluted weighted average shares outstanding during the quarter dropped to 89.6 million compared to 92.7 million during the first quarter a year ago.
About Jack Henry & Associates
Jack Henry & Associates, Inc. provides integrated computer systems and processes ATM and debit card transactions for banks and credit unions. Jack Henry markets and supports its systems throughout the United States and has over 2,800 customers nationwide. For additional information on Jack Henry, visit the company's web site at www.jackhenry.com. The Company will host a conference call today to discuss fiscal first quarter 2003 results at 7:45 a.m. CDT. The call can be accessed live and for one week thereafter at www.jackhenry.com.
Statements made in this news release that are not historical facts are forward-looking information. Actual results may differ materially from those projected in any forward-looking information. Specifically, there are a number of factors that could cause actual results to differ materially from those anticipated by any forward-looking information. Additional information on these and other factors which could affect the Company's financial results are included in its Securities and Exchange Commission (SEC) filings on Form 10-K. Potential investors should review these statements. Finally, there may be other factors not mentioned above or included in the Company's SEC filings that may cause actual results to differ materially from any forward-looking information.
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