Jack Henry & Associates: A VMS “Gold Standard

Bernard Anzarouth, CIO of Constellation Software considers Jack Henry & Associates to be a “gold standard” among Vendor Management Software (VMS) companies due to its consistently superior performance. In fact, I’d assume it very challenging to find a more consistent 35-year revenue and EBIT performance at rates at or above the 15% Compounded Annual Growth Rate (CAGR) mark.

Jack Henry & Associates revenue and EBIT growth

As you might guess, shareholders of JKHY have been truly rewarded during this period. $1,000 invested in the company's 1985 IPO would as of December 2023 be worth over $440,000 – excluding dividends. Now, let’s look at what JKHY actually does.

Headquartered in Monett, Missouri, JKHY sells software, hardware, and services to small and medium sized financial institutions. The company went public in 1985, at the time with less than 50 employees and a modest $12 million in revenue.

JKHY’s early business was based on services for small regional banks that couldn’t afford their own computers. But as hardware prices began to decrease and processing power increased, the banks demanded in-house systems to gain more independence. A trend JKHY spotted early on.

Today JKHY operates primarily through three main business segments, and these are:

Core Banking Solutions: Providing integrated computer systems for in-house and outsourced data processing to banks, like transaction processing, customer account management, and deposit and loan record management.

Payment Processing Solutions: Offering services related to electronic payment processing and charging fees on each transaction processed, and through subscription or service fees.

Complementary Solutions: Including about 200 add-on solutions such as digital banking, fraud prevention, and risk management. This segment was born out of the idea that there’s many other banks and credit unions beyond JKHY’s 1,700 core customers that still need the JKHY software.

At the 2023 UBS Global Technology Conference, Mimi Carsley, CFO and Treasurer at JKHY touched upon how broadly used the company’s solutions really are:

Conference call transcript from 2023 UBS Global Technology Conference

JKHY employs almost 7,000 people as of December 2023, and does more than $2 billion in revenue. They’re one of three main scale providers in the U.S. for outsourced core processing, the other two being Fidelity National Information Services and Fiserv. Together they hold a market share over 70% in the U.S according to FedFis.

JKHY’s products and services are integral for banks daily operations, and switching from them involves substantial costs and complexities. For example, a medium-sized bank could face costs exceeding $50M for integrating a new system, while the costs for larger banks can be upwards of $400M. Regulatory factors also make banks reluctant to switch systems, especially those that form the backbone of their operations.

All in all, this makes JKHY’s products and services very sticky. Often, a change in its customer base is more likely due to bank mergers or acquisitions, where systems are switched to the parent company’s operating system, rather than a direct switch initiated by the customers themselves​​.

As a big fan of Mark Leonard and Constellation Software, I’d like to wrap things up with what he wrote in his 2015 shareholder letter about what investors could learn from JKHY:

“There was a ten year period during which JKHY’s shares both underperformed the S&P 500 (2000-2010) and didn’t make any money for shareholders. The underperformance vs the S&P 500 was minor, approximately 1%. JKHY’s revenues per share and [adjusted net income] per share had compound average annual growth rates of 14% and 21%, respectively during that decade.

Why did stock results and operating results diverge so widely for such a long period? It had to do with shareholder expectations and market exuberance. The general mania that gripped the market in 2000, and the more specific enthusiasm for JKHY’s stock which then traded at well over 60 times [adjusted net income], left shareholders incredibly vulnerable. When the market “corrected” the JKHY stock had no margin of safety. When really good companies start trading at 5 and 6 times revenues, it’s time to start worrying.”