1. Where Traditional Meets Technology……
Investment Managers: Eric Hoffman Kaidi Wang Xiangyuan (Arthur) Zhong Nov. 13th, 2012

2. Agenda Introduction Macroeconomic Review
Review of Company and its business
Relevant stock market prospect
Financial analysis
Financial Projection
Application of valuation tools
Recommendation

3. Current Position Current share price = $38.37
11/11/1999
Purchased: 200 shares at $36 per share
3/2/2000
2:1 split: 400 shares at $18 per share
3/4/2001
2:1 split: 800 shares at $9 per share
1/15/2007
Sold: 400 shares at $22.53 (realized gain of $5,412)
10/24/2011
Hold: 400 shares at $32.41
Current share price = $38.37
Current holding value = $15,348
Constitutes % of invested holdings(without cash)
Constitutes 4.47% of invested holdings(with cash)
Unrealized gain: $11,748

5. Macroeconomic Review
More than 7,300 commercial banks and savings institutions with up to $30 billion in assets.
Trends ( ):
Number of commercial banks, savings institutions, and credit unions declined 15%.
Aggregate assets increased at a compound annual rate of 5-6%.
According to the FDIC, there were more than 7,300 commercial banks and savings institutions with up to $30 billion in assets as of December 31, 2011.
The FDIC reports the number of commercial banks, savings institutions, and credit unions declined 15 percent from the beginning of calendar year 2008 to the end of calendar year 2011; however, aggregate assets increased at a compound annual rate of 5-6 percent.
Source: 10-K

6. Macroeconomic Review Trends No new banks were chartered in 2011
Revenues decreased for fourth straight year mainly because of low interest rates
Big Banks get bigger
Mergers and Acquisitions
Government dominates consumer credit through big banks
Consumer credit market comprises about $13 trillion in outstanding loans or debt
GDP growth
Source:

7. Major Mergers and Acquisitions
Source:

8. Forecasted GDP through 2015
Source:

9. Macroeconomic Review
Financial Institutions => Technology-Dependent
Accessible, Accurate, and Timely Information
High-Demand Products and Services
Capitalize on New Growth Opportunities
Enhance Customer Relationship
Increase Operating Efficiencies
Implement E-Commerce Strategies
Protect Customers from Fraud Losses
To attract and retain customers/members in today’s highly competitive financial industry, financial institutions realize their performance goals are technology-dependent for the following:
Maximize performance with accessible, accurate, and timely business intelligence information
Offer the high-demand products and services
Enhance the customer/member experience at varied points of contact
Expand existing customer/member relationships
Capitalize on new revenue and deposit growth opportunities
Increase operating efficiencies and reduce operating costs
Implement e-commerce strategies
Protect customers/members from fraud and related financial losses
Ensure full regulatory compliance
Source: 10-K

10. Industry Analysis Threat of Substitutes (Medium)
Barriers to Entry (High)
Power of Suppliers (Low)
Power of Buyers (Low-Medium)
Rivalry (High)
Threat of Substitutes (Medium) - High costs to learn to new system, renewal of outsource contracts
Barriers to Entry (High) - Compliance with regulation, high start-up costs
Power of Suppliers (Low) - Hardware from suppliers accounts for a small portion of revenue
Power of Buyers (Low-Medium) - Clients resistant to change due to switching costs, customer discounts for additional services
Rivalry (High) - Large competitors with resources, highly competitive industry, and high industry consolidation

11. Review of Jack Henry Founded in 1976 Market Cap: 3.35 billion
Banking technology company which provides core processing systems to domestic banks and credit unions
Serves 1500 banks and 700 credit unions
JKHY develops, markets, and installs integrated computer systems for in-house and service bureau data processing to banks and credit unions. JKHY also performs data conversion and software implementation services for its systems and provide customer support services after the systems are implemented.

12. JKHY VS. Industry Average
JKHY is traded at a lower P/E ratio compared to the industry average and also outperforms the industry in EPS Growth rate, Revenue Growth rate and Debt/Equity ratio.
Morningstar classify the company as Mid-cap Growth company.
Source:

13. Business Divisions Jack Henry Banking Symitar
Provides the enterprise-wide automation for banks
Supports 1330 banks, ranging from small banks to mid-tier institutions with up to $30 billion in assets
SilverLake System, CIF 20/20, Core Director
Symitar
Founded in 1985 and acquired by JKHY in 2000
Provides core processing solutions for credit unions with all sizes
Supports more than 750 credit unions
Episys, Cruise
According to the Federal Deposit Insurance Corporation (“FDIC”), there were more than 7,300 commercial banks and savings institutions in this
asset range as of December 31, Jack Henry Banking serves about 18% of the customers in this range.
According to the Credit Union National Association (“CUNA”), there were more than 7,300 domestic credit unions as of December 31, Symitar serves about 10% of all the customers.

14. Business Divisions ProfitStars
Provides highly specialized solutions to financial services organizations
Financial performance, imaging and payments processing, information security and risk management, etc.
Serves approximately 11,000 domestic and international customers
iPay Technologies
Become part of ProfitStars beginning in October 2012
Initially acquired by JKHY in June 2010 with $300 million
Former largest independent provider of bill pay technology which supports more than 3,600 banks and credit unions
Provides highly specialized solutions to financial services organizations which are primarily not core customers of the company

15. Revenue Sources License Hardware Sales Support and Service License
Computer hardware sales, hardware maintenance and related services to customers
Support and Service
Operate systems, enhance/update the software, electronic payment services, outsourced data processing services and implementation services
License
Sale and delivery of application software systems
Hardware Sales
Computer hardware sales, hardware maintenance and related services to customers
Support and Service
Assist the customer in operating their systems and enhance/update the software, electronic payment services, outsourced data processing services and implementation services
License
Sale and delivery of application software systems

16. Revenue Sources
Hardware revenue increased slightly because customers upgraded their hardware systems. JKHY expect there to be an overall decreasing trend in hardware sales due to the change in sales mix towards outsourcing contracts (which typically do not include hardware) and the deflationary trend of computer prices generally.
In-house support and other services revenue increased due to annual maintenance fee increases (as our customers’ assets have grown) and increased revenues from our system conversion services. Electronic Payment Services accounts for most part of the increase.
Electronic payment services continue to experience the largest growth. The revenue increases are attributable to strong performance across our electronic payment products, particularly from debit/credit card processing services, online bill payment services and ACH processing.
Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to show a preference for outsourced delivery of our solutions. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future.
Implementation services revenue increased due mainly to increased Episys® credit union core product implementation revenues as well as higher online bill payment services implementation revenues.
While license fees will fluctuate, recent trends indicate that our customers are increasingly electing to contract for our products via outsourced delivery rather than a traditional license as our outsourced delivery does not require an up-front capital investment in license fees. We expect this trend to continue in the long term.

17. Business Strategy
Organic revenue and earnings growth supplemented by strategic acquisitions
We can see a steady growth trend and then a significant jump in 2010, mainly because JKHY acquired iPay Technologies in 2010 with $300 million, GoldLeaf Technologies, Pempco Technologies.
Source: Bloomberg

18. Acquisition List Fiscal Year Company/Product Products & Services 2010
2008
Company/Product
iPay Technologies
PEMPCO Technology
Goldleaf Financial Solutions
Audio Tel
Gladiator Technology
Products & Services
Online & Tel bill payment
Payment Processing
Docs imaging & E-Banking
IT Security
Historically, JKHY’s acquisition focused on companies which can help the company to expand the base of core financial institution customers and also technologies which are complementary to JKHY’s present products and services. Since 2004, JKHY has completed 19 acquisitions.

19. SWOT Analysis Weakness Strengths Opportunities Threats
Strong cash flow, low leverage
Consistent dividend
Widely accepted brands
Solid business model
Weakness
Relatively small size compared to rivals
Declining revenue from hardware sales
Opportunities
Growth through acquisition
Threats
Consolidation trends in the financial industry
Negative macroeconomic outlook
Competitive industry

20. Competitors Overview
Fidelity National Information (FIS): Offers financial institution core processing, card issuer, and transaction processing services, including the NYCE Network
Financial Solutions
Payment Solutions
International Solutions
Fiserv (FISV): Provide various financial services technology solutions
Payments and Industry Products
Financial Institution Services
Globally focused
1. Fidelity National Information (FIS)
Offers financial institution core processing, card issuer, and transaction processing services, including the NYCE Network
Financial Solutions : core processing software applications to run critical banking processes; retail delivery applications for integrating customer-facing operations and back-office processes
Payment Solutions : electronic funds transfer services comprising settlement and card management solutions; item processing and output services; credit card solutions;
International Solutions: offers payment solutions, such as fully outsourced card-issuer services and customer support, payment processing and switching services, prepaid and debit card processing, item processing, software licensing and maintenance, outsourced ATM management, and retail point-of-sale check warranty services
2. Fiserv (FISV)
Provide various financial services technology solutions : Payments and Industry Products, and Financial Institution Services.
Payments and Industry Products : electronic bill payment and presentment services, and services to meet the electronic transaction processing needs of the financial services industry.
Financial Institution Services : account processing services, item processing services, loan origination and servicing products, cash management and consulting services, and other products and services that support various types of financial transactions
Globally focused

21. Competitors Overview NCR Corporation (NCR)
Offers financial-oriented self service technologies; cash dispensers; software solutions; and consulting services
Provides check and document imaging solutions and support services
Offers various maintenance and support services
Total system services (TSS): Provides electronic payment processing and other services to card-issuing and merchant acquiring institutions
Offers issuer account solutions.
Provides merchant processing and related services.
Globally focused
3. NCR Corporation (NCR)
Offers financial-oriented self service technologies, such as ATMs; cash dispensers; software solutions; and consulting services for financial institutions and retailers
Provides check and document imaging solutions consisting of hardware, software, and consulting, and support services that enable capture, processing, and retaining of check and item-based transactions
Offers various maintenance and support services, as well as site assessment and preparation, staging, installation and implementation, systems management, and managed services
4. Total system services (TSS)
Provides electronic payment processing and other services to card-issuing and merchant acquiring institutions
Offers issuer account solutions, including processing the card application, initiating service for the cardholder, processing each card transaction for the issuing retailer or financial institution, and accumulating the account's transactions.
Provides merchant processing and related services that comprise processing various payment forms, such as credit, debit, prepaid, electronic benefit transfer, and electronic check; authorization and capture of transactions; clearing and settlement of transactions.
Globally focused

22. Relevant stock market prospect 2007-Present
This is our current stock position compared to S&P 500, we could definitely see that since around March 2009, the big fell in the stock market, JKHY began to trade at a higher premium compared to benchmark
Source: Yahoo Finance

23. Stock Price Comparison 2007-Present
Here, we are comparing JKHY’s stock with another 4 competitors, we could see that it have very similar trend with FISV and they both outperformed compared to other three.
Source: Yahoo Finance

24. Financial analysis Profitability Margin
Coming to the ratios, JKHY’s profitability and Margin ratio shows that they got some influence by the financial crisis since however, they’re recovering now and there latest ratios are all doing better than previous year’s

25. Financial analysis Liquidity Capital Structure Dividend: $0.46 (1.20%)
Market Capitalization: 3.30B
No public traded corporate bond
2007
2008
2009
2010
2011
2012
Current Ratio
1.1x
1.0x
0.9x
1.2x
Quick Ratio
0.8x
Avg. Days Sales Out.
106.7
104.2
99.5
87.5
78.5
75.9
Avg. Days Payable Out.
12.5
7.7
6.2
8.1
8.5
8.8
The company constant paying dividend. The dividend amount is increasing 4 cents every year. Right now is 0.46 dollar per share right now at 1.2% yield.
The company have no public traded corporate bond, their debt, nearly 4% of their total capital is coming from the bank loan or privately traded debt.

26. Financial Analysis => Financial Projection
The most important thing tin the financial analysis is their revenue analysis. Our assumption is mainly coming from our analysis of the revenue. The diagram showed the revenue growth rate of 3 different segments, license, support and service, as well as hardware sales. We could see that the growth rate of our support and service segment, the most important revenue drive segment is floating between 6% to 18%. The license segment is back to positive growth rate since 2011 as well as the hardware segment, having positive growth rate since FY 2012.

27. Financial Projection Revenue Growth Rate 8.2% - 8.8%
License
1.5%
Support & Service 10% => 9%
Hardware Sales -8% => -7%
License: license fee is flucated. JKHY showed their trend in recovery. So 1.5% showing offset. COGS is 11.5% of revenue
Support & Service: begin with 10% growth rate, decrease 1% every three years. COGS’s margin is average of previous five year margin, just because their support and service cost is stable
Hardware Sales: -8% begin with average, increase with 1% every 3 years. COGS’s margin is average of previous five year margin
Gross Margin: 40.5% %
Capital Exp: Hurricane Sandy increase 55.69M => 40M (management expectation)
S&A: 7.3%
R&D: 6% =>6.5%
GA: 5.5%
Depreciation: 4.5%
Amortization: average of pervious five years
Receivable Average, payable average
Tax Rate: 33.9% %

28. DCF Analysis Discount Rate: 10.73% Terminal Growth Rate: 2.5%
Intrinsic Value: $36.44
Weighted Average Cost of Capital
Year Ended June 30
2008
2009
2010
2011
2012
2013E
2014E
2015E
2016E
2017E
Sales
742,926
745,593
836,586
966,897
1,027,109
1,113,799
1,209,997
1,316,580
1,422,910
1,539,294
COGS
435,700
446,194
491,466
567,563
603,379
664,208
719,768
780,407
844,617
916,031
Gross Profit
307,226
299,399
345,120
399,334
423,730
449,591
490,229
536,173
578,293
623,263
Operating Expense
143,017
141,513
162,867
183,017
187,495
209,745
227,389
247,222
267,191
297,476
EBIT
164,209
157,886
182,253
216,317
236,235
239,845
262,840
288,952
311,102
325,787
Adjusted Tax
59,139
54,208
62,926
70,041
76,684
80,614
87,730
96,437
103,506
108,565
EBIAT
105,070
103,678
119,327
146,276
159,551
159,231
175,109
192,515
207,595
217,221
Depreciation & Amortization
62,006
64,147
71,508
90,514
94,619
95,403
106,377
118,116
128,502
137,487
Capital Expenditures
(31,105)
(31,562)
(54,509)
(38,105)
(54,929)
(44,552)
(42,552)
(40,552)
(40,000)
Increases In NWC
9,240
(22,474)
10,423
(269)
7,307
58,843
12,096
18,329
19,562
30,472
Free Cash Flow
126,731
158,737
125,903
198,954
191,934
151,239
226,838
251,750
276,535
284,236
Terminal Value
3,823,914
Time
0.67
1.67
2.67
3.67
4.67
PV of Free Cash Flow
141,303
191,397
191,832
190,298
176,642
PV of Terminal Value
2,376,420

29. Multiples Analysis Equal Weight Multiple Price: $34.57 Trailing P/E
Price/Sales
Price/Book
Multiple Price: $34.57
Price
Trailing P/E
17.83
33.33%
Price/Sales
44.14
Price/Book
41.74
Final Price
$34.57
Profitability and Management effectiveness
JKHY
FIS
FISV
NCR
TSS
Mean
Median
High
Low
Profit Margin (ttm):
15.34%
7.50%
12.82%
2.69%
13.05%
10.28%
Operating Margin (ttm):
23.43%
19.44%
24.03%
5.03%
19.23%
18.23%
Return on Assets (ttm):
9.90%
5.20%
7.97%
3.14%
11.73%
7.59%
Return on Equity (ttm):
16.60%
8.02%
18.44%
11.93%
17.96%
14.59%
Revenue (B)
1.05
5.89
4.4
5.84
1.86
3.81
4.40
Revenue Per Share
12.14
20.11
32.6
36.83
9.9
22.32
9.90
EBITDA (M)
340.53
1,720
1,370
446
468.92
869.09

30. Recommendation Buy 100 Shares DCF: $36.44 Market Multiples: $34.57
400 shares => 450 shares
% in the portfolio

31. Recommendation DCF conservative Comparable (FISV) Valuation
Outperformance vs. benchmark
Revenue did not decreased during the financial crisis
Mid-cap growth company
Constant paying dividend
Stock price constant growing up
Great Performance