Magazine article American Banker

Outsourcing Trend Takes A Bite out of Jack Henry

Magazine article American Banker

Outsourcing Trend Takes A Bite out of Jack Henry

Article excerpt

Byline: Steve Bills

A shift by a significant number of customers from licensing software to outsourcing processing tasks is holding down Jack Henry & Associates Inc.'s revenue growth.

The Monett, Mo., vendor said Tuesday that revenue from software licensing plunged in its fiscal fourth quarter, which ended June 30, and would likely be flat this fiscal year.

The news prompted a downgrade from Credit Suisse Group Inc., and Jack Henry's stock fell sharply Wednesday.

The core processing software and services provider said its fiscal fourth-quarter licensing revenue fell 25% from a year earlier, to $18.3 million. During its most recent fiscal year, 27 banks switched from in-house processing to Jack Henry's outsourcing services, the vendor said, including 14 that switched in its fourth quarter.

"The significant shortfall in license fees created headwinds we could not overcome," Jack F. Prim, the vendor's chief executive officer, said on an earnings call with analysts Wednesday.

Executives said some large banking companies have become more cautious about technology spending as they struggle with difficult economic conditions.

Kevin D. Williams, Jack Henry's chief financial officer, said that as more bankers move to outsource their processing, generating monthly service fees rather than one-time licensing contracts, the vendor's revenue will become more predictable.

Jack Henry has priced its outsourcing contracts so that banks pay about the same in the first year as they would for maintenance contracts on in-house software, Mr. Williams said.

Mr. Prim said the trend could also help Jack Henry generate more revenue in the future, because outsourcing clients "commonly implement two to three additional complementary products."

Revenue from the payment processing business, a bright spot for Jack Henry, increased 23%, and electronic payment growth was especially strong. …

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