Dive Brief:

• A slowdown in bank merger and acquisition activity is cutting into revenue for technology provider Jack Henry & Associates. Along with higher costs, the reduced revenue from that business will hamper profit margin expansion in the company’s new fiscal year, executives said on an earnings call last week.
• Rising costs include those for recruiting and retaining employees, especially for technology talent, as well as for insurance premiums and travel, Jack Henry executives said during the Aug. 17 call with analysts to discuss the company’s fiscal fourth-quarter earnings results.
• Nonetheless, Jack Henry’s fiscal fourth-quarter net income rose 5% to $80.4 million and its revenue rose 7% to $482.7 million for the fiscal fourth quarter that ended on June 30, according to an Aug. 16 news release.

Dive Insight:

Jack Henry & Associates, which provides technology and payments processing services to banks and credit unions, had been expecting to expand profit margins next year, but the company’s executives said they now expect them to contract for the new fiscal year now in progress.

The Monett, Missouri-based company is forecasting an operating margin of 23.7% for the new year, compared to an operating margin of 24.4% for the year that just ended, analysts said in reports regarding the earnings report.

The company’s executives said a slowdown in bank merger and acquisition activity was having a negative impact on revenue, in light of services Jack Henry provides when those companies merge, and they noted that would likely continue to have an adverse impact in the current fiscal year.

The biggest expense increase impacting the company is the cost of recruiting and retaining talent, the company’s chief financial officer, Kevin Williams, said during the call.

“Cost to retain talent is a challenge and that’s not going to get any easier in the short term so that’s going to be a challenge for the entire year as we’re seeing it right now,” Williams said, noting the “biggest headwind” would be in the first quarter of next year with improvements expected in subsequent quarters.

As far as rising insurance premiums, Williams cited increases for errors and omissions insurance as well as cybersecurity. On the travel front, he said costs are climbing not only because prices are higher, but also because the company has more of its workforce traveling now.

As the COVID-19 pandemic eases, companies, including Jack Henry, have been putting more workers on the road again for conferences and other meetings. “Travel costs are going to be up significantly this year compared to last year, and I don't see any end in that,” Williams said.

Jack Henry executives said they expect their customers are grappling with the same rising expenses. 

RBC Capital Markets Analyst Daniel Perlin summarized the Jack Henry outlook this way in his Aug. 17 report on the the fiscal fourth-quarter results: “Demand environment remains, but cost pressures keep margins flattish in FY23.” He also noted that the operating margin in the fiscal fourth quarter contracted to 21.5%, versus 23.3% in the prior third quarter and even higher margins in the first half of the fiscal year.

Another report on the same day from Baird Equity Research also noted Jack Henry’s lost high-margin revenue from the decrease in banking mergers and acquisitions taking place.