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JACK HENRY Gagan Bhatia, Olamide Esan, Alex Florea, Somil Kadakia, Victor Murthi, Yanyan Xu

JACK HENRY Gagan Bhatia, Olamide Esan, Alex Florea, Somil Kadakia, Victor Murthi, Yanyan Xu. Presented on 11/10/2009. Company Overview Company Strategy Macro-economic Outlook Industry Analysis Competitors Valuation Client Portfolio Recommendation. Delive Deliverable Outline rable. 2.

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JACK HENRY Gagan Bhatia, Olamide Esan, Alex Florea, Somil Kadakia, Victor Murthi, Yanyan Xu

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  1. JACK HENRYGagan Bhatia, Olamide Esan, Alex Florea, Somil Kadakia, Victor Murthi, Yanyan Xu Presented on 11/10/2009

  2. Company Overview Company Strategy Macro-economic Outlook Industry Analysis Competitors Valuation Client Portfolio Recommendation DeliveDeliverable Outlinerable 2

  3. Company Overview • Founded in 1976 by Jack Henry as a provider of core information processing solutions for community banks, IPO in 1985 • Trades on the NASDAQ as JKHY • Headquartered in Monett, Missouri with over 3,800 employees • Array of products and services includes processing transactions, automating business processes, and managing information for more than 9,800 financial institutions and diverse corporate entities • FY 2009 Annual sales of $745.6 mm, Net Income of $103.1 3 Source: Jack Henry, Data Monitor, Accessed 11/01/09

  4. Business Description • Two main business segments: 1) Bank Systems and Services and 2) Credit union Systems and Services • Three marketed brands: Jack Henry Banking, Symitar, and ProfitStars • Three primary revenue sources: Software License Fees, Outsourcing Fees, Transaction/Maintenance/Support Fees 4 Source: Jack Henry, Annual Report 2008 Accessed 11/01/09

  5. 3 Marketed Brands • Provides integrated data processing to more than 1,500 banks ranging from start-ups to midsize banks. Services include business intelligence/bank management, retail and business banking, Internet banking, electronic funds transfer, risk management and protection. • Provides core data processing to over 700 credit unions. Services include business intelligence and credit union management, member and member business services, Internet banking and EFT, risk management and protection • Provides solutions for generating revenue and growth opportunities, security and mitigating operational risks, and controlling operating costs to financial institutions that are primarily not core customers. Diverse and flexible with more than 7,500 domestic and international customers. Source: Jack Henry, Annual Report 2008 Accessed 11/01/09

  6. Recent Performance Key Ratios (As of June 30th, 2009) Company Industry Current Ratio (MRQ) 1.04 1.63 Quick Ratio (MRQ) 1.04 1.38 Debt to Equity (MRQ) 0.10 0.28 Sales 5 Year Growth 9.79 22.34 Net Profit Margin (TTM) % 13.83 -2.80 Return on Assets (TTM) % 9.95 -4.86 Return on Equity (TTM) % 16.79 2.83 2 Year Weekly End Price & Volume Notes • Acquired major competitor in Goldleaf Financial Solutions • Recurring revenue increased to 70% from 66% • Backlog increased by 8%

  7. Company Strategy • Increase market share by aggressively earning new traditional and nontraditional clients and cross selling additional products and services to our existing clients. • Add new products and services that enable financial institutions to capitalize on business opportunities and resolve specific operational issues. • Increase recurring revenue by optimizing outsourcing opportunities, transaction-based processing fees, and ongoing software maintenance and support fees. • Pursue disciplined acquisitions that complement our internal growth and continue our focused diversification. 7 Source: Jack Henry, Data Monitor, Accessed 11/01/09

  8. Recent Acquisition • Pemco: ATM debit transaction processing, which currently represents 70% of the revenue of the payments business, while also inducing new capabilities in the area of credit card transaction routing. • Goldleaf: Remote deposit capture presence which is the fastest growing component of payment solutions with 54% year-over-year growth in the last fiscal year.

  9. Recent Acquisition • Recently addition of 2800 new customers and increase the number of core and non-core processing customers using one or more of our products to over 11,000 • Employees Addition: 540 • By 2005 they made 16 acquisition to add up total customers of 2300 • Opportunities for cost reduction in addition to the increased revenue contribution

  10. Risk Factors • Changes in the banking and credit union industry could reduce demand for our products • Consolidation of financial institutions will continue to reduce the number of our customers and potential customers. • The number of commercial banks and credit unions has decreased because of mergers and acquisitions over the last several decades and is expected to continue to decrease as more consolidation occurs • Our growth may be affected if we are unable to find or complete suitable acquisitions Risks focused on banking industry and successful acquisitions Source: Jack Henry, Annual Report 2008 Accessed 11/01/09

  11. Banking Industry 11 • Hit hardest by collapse of sub-prime mortgage market and financial crisis • Profit after tax decline by 80.5% over course of 2008 • Increasing loan loss provisions and rising cost of funds contributed to profitability decline • Loan loss provisions and net charge-offs expected to continue into 2010 Banking industry continue to be stressed Source: Banking Industry, IBIS World, Accessed 11/01/09

  12. Credit Unions 12 • Delinquencies will continue to increase in 2009 meaning lower operating profit margins • Credit Union membership expected to grow due to member satisfaction • The DJIA, existing home sales, and total motor vehicle registrations are expected to experience strong growth from 2010 onwards • Credit Unions are somewhat linked to the above variables and industry growth is expected to be strongest between 2011 and 2013 Credit Unions will experience early hiccup with recovery starting in 2010 Source: Credit Unions, IBIS World, Accessed 11/01/09

  13. SWOT Analysis (Strengths) 13 • Comprehensive portfolio of offerings • Provides integrated computer systems and services for financial institutions. Offers solutions through three core business areas: Jack Henry Banking, ProfitStars, and Symitar • Switching costs fairly high • High barriers to entry, regulations are high Strengths from diversification and industry Source: Jack Henry, Data Monitor, Accessed 11/01/09

  14. SWOT Analysis (Weaknesses) 14 • Lack of scale • Large competitors generated 5-6 times more revenue in 2008. (Fidelity/Fiserv) Lack of scale could affect its ability to bag large contracts and makes it a target for acquisition • Dependence on the financial services • The company derives its revenues from the financial services market. The current crisis and significant consolidation in the financial services industry could result in few large customers, there by increasing their bargaining power. It also enables large organizations to develop IT in-house Weaknesses from size and dependence on banking industry Source: Jack Henry, Data Monitor, Accessed 11/01/09

  15. SWOT Analysis (Opportunities) 15 • Entry into virtualization market • The market for server and desktop virtualization software technologies is forecasted to grow at a compound annual rate of over 30% through 2013. Virtualization generates significant cost and time saving benefits. JHA formally announced its support for virtualization in March 2009 • Strategic acquisitions • Acquisitions provide cross sell opportunities for the company’s core • bank and credit union customers. On Oct 01, 2009, JHA announced acquisition of Goldleaf Financial Solutions, Inc and Pemco Technologies. Opportunities from acquisitions and virtualization Source: Jack Henry, Data Monitor, Accessed 11/01/09

  16. SWOT Analysis (Threats) 16 • Challenging business environment • Economic downturn means customers postponed their large capital investments. Customers elect outsourced delivery rather than a traditional license arrangement. The outsourced delivery does not require customers to make a large, up-front capital investment in license fees or in hardware. As a result, the company has been experiencing a decrease in license revenue in recent times. Threats from spending habits of customers Source: Jack Henry, Data Monitor, Accessed 11/01/09

  17. Technology Threat 17 • All of JKHY’s products are based on legacy systems • The Core banking products are based on either the IBM or Windows systems • Symitar's two functionally distinct core credit union platforms are based on IBM and Windows • So JKHY faces a threat from companies that provide solutions on “open systems” and not on legacy systems like IBM and Windows in the “long term” “Finacle” a solution provided by Infosys Technologies Ltd is based on Open system Source: Jack Henry, Data Monitor, Accessed 11/01/09

  18. Competitors • Comparative Descriptions • Comparative Ratios • Comparative Analysis 18

  19. Recent Developments • Previously Metavante competed with JKHY’s Jack Henry banking and Symitar brand . • FIS competed with JKHY’s Symitar and Profitstars brand • Recently FIS acquired Metavante, so now FIS competes with JKHY across all brands. • With the recent acquisition FIS gains an entry into mid-tier banks, a hitherto stronghold of JKHY

  20. Competitors 20 JKHY’s competes with FIS and Fiserv broadly across segments. Source: Jack Henry, Annual Report 2008, Accessed 11/01/09

  21. Publicly traded competitors 21 This table just gives a reference for performance but JKHY’s real competitors are private companies Its Important to note that the FIS and FISV are two of the largest players in the industry where as JKHY is just around the median mark. Also FISV and FIS ‘s primary clients are large institutions, where as JKHY targets mid-tier banks and credit unions. Source: Jack Henry, CapitalIQ, Accessed 11/01/09

  22. Valuation • Financial Highlights • Assumptions • WACC • DCF Analysis • Multiples 22

  23. Financial Highlights – Income Statement

  24. Financial Highlights - Balance Sheet

  25. DCF - Assumptions

  26. DCF Analysis (In Millions)

  27. Multiples 27

  28. Client Portfolio • Stock Performance Graph • Stock Ownership Profile • Transaction History • RCMP Portfolio Correlation • RCMP Portfolio Weights 28

  29. Stock Performance Graph 29 JKHY – Jack Henry & Associate FISV – Fiserv FIS – Fidelity National GSPC – S&P 500.

  30. Stock Ownership Profile 30

  31. Transaction History 31

  32. Portfolio Correlation 32

  33. Portfolio Holdings 33

  34. Recommendation DCF Range (+/- 10%) : $20.89 - $25.54 Current Price: $ 24.19 as of 11/09/09 Recommendation: HOLD 400 Shares Strong management • On top of changes in business and revenue streams. • Strategic acquisitions to improve business model. 34

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