Jack Henry

1
Jack Henry Associates

• Radityo Ardi Nugraha
• John Sun

2
RCMP Position

• Purchase Date Nov 11, 1999
• Shares purchased 200
• Stock splits date Mar 3, 2000 and Mar 5, 2001
• Currently owned shares
• shares 800
• Base Price 9.00
• Constitutes 5 of all current holdings

3
Stocks Facts

• Current Shares Price 22.20
• Market Cap 2.01B
• 52wk Range 17.40 - 23.77
• P/E (ttm) 22.59
• Div Yield 0.22 (1.00)

4
Company History

• In 1976, Jack Henry and Jerry Hall found Jack
  Henry Associates in Monet, Missouri
• In 1985, Jack Henry Associates became public,
  traded at NASDAQ
• In 1992 had a mission to expand its customer base
  and breadth of offerings through strategic
  development and acquisition of additional
  technology solutions
• By 1995 Jack Henry offered ATM and imaging
  solutions, and outsourced data processing
  solutions.

5
Company History (cont.)

• Started in 1992, in order to grow, Jack Henry
  began to acquire companies that provided
  complementary products and services to its own
  core customer base and companies that offered
  products and services to a broader range of
  client types and sizes.
• In fiscal year 2005, Jack Henry acquired 8
  companies, which are Tangent Analytics, LLC
  (4M), RPM Intelligence, LLC (6.2M), SERSynergy
  (34.5M), TWS Systems, Inc. (10.9M), Optinfo,
  Inc. (15.1M), Verinex Technologies, Inc. (35m),
  Select Payment Processing, Inc. (12M), and Banc
  Insurance Services, Inc.(6.7M)
• In fiscal year 2006, Jack Henry acquired
  Profitstar Inc (19.3M).
• Jack Henry counts over 8,700 financial
  institutions as customers

6
Company Business

• Provides data processing solutions to small banks
  and credit unions (assets under 30 billion).
• Customers either install systems in-house or
  outsource their operations to Jack Henry.
• 3 sources of revenue
• Software licensing
• Support and Service
• Hardware

7
Business Description

• Core Systems
• Can be used in-house or outsourced.
• Provide core processing functionality deposits,
  loans, etc.
• 5 core systems
• Silverlake System for banks with 500 million to
  30 billion in assets
• CIF 20/20 for banks with less than 1 billion in
  assets
• Core Director for banks with less than 1
  billion in assets (Windows-based)
• Episys for credit unions with greater than 50
  million in assets
• Cruise for credit unions with less than 50
  million in assets

8
Business Description (cont.)

• Complementary Products
• Allow the company to offer custom-tailored,
  integrated suites of software solutions.
• Expose the company to high-growth areas, like
  security, risk management, online bill pay, and
  electronic funds transfer.
• Product offering expanded through acquisitions.

9
Business Description (cont.)

• Examples of complementary products
• Synapsis Relationship management (customer
  profiling, referral tracking, etc.)
• NetTeller Online home banking system with
  real-time account information and transaction
  capabilities.
• Remote Deposit Capture Peforms image capture,
  storage, and processing for paper checks.
• PassPort Drives and monitors ATM networks.
• Biodentify Biometric fingerprint security.
• Centurion Disaster Recovery Disaster recovery
  protection

10
Major Competitors

• Fidelity national Information Services (FIS) with
  6.7B Mkt. Cap
• Fiserv Inc. (FISV) with 7.6B Mkt. Cap

11
Macro Economic Overview

• GICS Sector Information Technology
• Sub-industry Application Software
• Stable industry outlook. Spending expected to
  accelerate slow growth (around 5)
• Commoditization of software industry. Competition
  from international (Indian, Eastern European)
  developers.
• Peer Group Accounting and Financial Software
• Consolidation Number of commercial banks has
  declined by 4 annually over past five years.
  Credit unions have consolidated at the same rate.
• Sarbanes-Oxley compliance a major information
  technology hurdle and source of IT spending.

12
Stock Market Performance
13
Stock Market Performance (cont.)
14
Revenue by Segment

• Hardware comprises a smaller percentage of
  total revenues due to low margins and stiff
  competition from other players
• License Grows as a slowing rate as trends in
  bank consolidation limits new customers
• Support Grows to be a majority of Revenue due
  to higher margins and cross-selling potential /
  higher growth ceiling.

15
Revenue by Segment
16
Profit by Segment
17
Modeling and Forecasting

• 2-tier modeling approach
• Full model from 2007-2011
• Reduced Model from 2011-2015 (8)
• Terminal Growth 4
• 3 Scenarios Upside, Base case, Downside

18
Modeling and Forecasting

• Upside
• No setback, steady revenue growth matching
  highest historical rate
• Overhead costs as of revenue declines at
  historical rate to a resonable terminal rate
• Associated acquisitions and business costs grow
  at a slower rate

19
Modeling and Forecast

• Base Case
• Semi-steady revenue growth some
  setbacks/periods of economic decline
• Overhead costs remain constant as of revenues
• Acquisitions and business costs grow at slowing
  historical rate to a reasonable terminal rate

20
Modeling and Forecasting

• Downside
• 2007, 2008 general economic slow down, marked by
  a period of revenue decline and much lower
  margins
• Recovers by 2009
• Growth rates slow at a faster rate as revenues
  increase YoY.

21
Sensitivity Analysis
22
DCF Valuation

• Final Year (2006) Free Cash Flow 126,682
• Caused by dramatic decline in working capital
• Not likely to continue as a trend

23
DCF Valuation

• Upside - 23-24
• Base Case - 16-18
• Downside - 13
• Fair Value - 15-21

24
Recommendation

• JKHY currently trades at 22.27
• Above high end of DCF fair value projections
• Sell 400 shares at market to recover our
  investment.
• Remain long 400 shares as company is still a
  well-managed, but fully valued opportunity.