The Story of Jack Henry & Associates


#1

Here is a modified excerpt from our new book, Intelligent Fanatics: Standing on the Shoulders of Giants:


JHA

Small Town Software Giant: Jack Henry & Jerry Hall

Jack Henry & Associates

“Our motto was always, ‘Do the right thing, whatever it takes.’ That was the attitude. Fortunately, if you do that, the other things will work out. Like Jack and Jerry always said, if you do the right things, the financials and measurements will take care of themselves.”
—Mike Wallace, in You Don’t Know Jack . . . or Jerry

“One of the profound lessons I have learned . . . [is] that even when you have an organization brimming with talent, victory is not always under your control . . . There is no guarantee, no ultimate formula for success . . . However, a resolute and resourceful leader understands that there are a multitude of means to increase the probability of success . . . namely, intelligently and relentlessly seeking solutions . . . When you do that, the score takes care of itself.”
—Bill Walsh, in The Score Takes Care of Itself

Costco, Southwest Airlines, Nucor, Les Schwab Tires—nearly any of our intelligent fanatic case studies—all focus(ed) on the process, not the prize. Jack Henry & Associates (JKHY) is another fantastic example of this. The company has intelligently and relentlessly sought solutions for its customers by following the motto “Do the right thing, whatever it takes.”

Jack Henry was the visionary and Jerry Hall implemented the vision. The two men, who grew up on farms, created the foundations of a sustainable technology organization 1,900 miles away from Silicon Valley. Jack Henry & Associates dominated its niche, and it has thrived as it expanded into other niches. JHA’s results are stunning. The founders focused on doing the right thing, and their financial results did take care of themselves.

Jack Henry & Associates would grow from a side project, in 1977, with $115,000 in sales and $9,000 in profits, into an organization with $1.35 billion in sales and $250 million in profits in 2016. The company is now public, with a market capitalization over $7 billion. Obstacles would surface, but the two founders and their team would overcome them. In the process, they have built a reputation that is rarely matched in the information technology sector. Other information technology companies have not followed JHA’s winning operational philosophy and have suffered. Those companies, such as Unisys Corporation, have focused too much on the prize and too little on the process. Unisys’s history and philosophy will be compared to JHA’s.

Few outside the small town of Monett, Missouri, or the banking industry have heard of Jack Henry & Associates. Mark Leonard, founder of Constellation Software – one of the top diversified software companies in Canada and compounders in the last decade (growing shareholder value at a +35% CAGR), looked to Jack Henry & Associates as a perennial favorite conglomerate to study. In Mark’s 2015 President’s Letter to Shareholders, he incorporated their learnings from JHA and encouraged everyone to familiarize themselves with Jack Henry & Associates’s history. The company’s unique story and transition from founder-led organization to nonfounder-led mid-cap company was well executed.

The story of Jack Henry & Associates starts with its two founders. Both Jack Henry and Jerry Hall were born and raised in the southwestern corner of Missouri, only a few miles away from each other. Jack Henry, born on June 30, 1935, was raised on a farm five miles west of the small town of Monett. Jerry Hall, born on March 15, 1943, was raised on a farm ten miles south of Monett.

The two men would not cross paths until much later in their lives. After taking a few basic accounting courses from Springfield College of Commerce, Jack Henry worked a string of jobs, each lasting about five years. These jobs consisted of accounting positions at various firms, a stint taking over the accounting firm Jarvis Tax Service, and then becoming the controller of G&R Machine Works, where he helped the firm go public. After five years at G&R Machine Works, in 1974, he left to work for Gillioz Bank in Monett. By that time, Jerry Hall had been working at Jumping Jack Shoes, in various roles, for sixteen years.

As an operational manager at Gillioz Bank, Jack Henry set up the bank’s first computer, an IBM System/3. In those days, software was scarce for a community bank such as Gillioz, so Jack had to learn to code his own programs for the bank. Prior to the 1970s, banks had no system to connect all of their banking relationships with each customer. In other words, if a customer had multiple relationships with the bank—a car loan, a mortgage, and others—the bank had no centralized system to collect all of that data. Before there was customer relationship management software, Jack created CIF/32 to solve that problem.

Jerry had been appointed data processing manager for Jumping Jack Shoes. In that role, he successfully taught himself how to code. Jack and Jerry would eventually connect with each other. Jumping Jack Shoe Company had been acquired by U.S. Shoe Corp. in 1965, and Jerry Hall had disliked the ensuing corporatization of the company. Jack Henry was soon feeling the same way, when Gillioz Bank was acquired by United Missouri Bank, in 1976. As the only individuals in town who could program computers, the two men would commiserate about their situations over coffee. Jack and Jerry saw no future for themselves with their employers, and their distaste for their jobs was getting unbearable.

Fortunately, Jack Henry had set up a deal with Gillioz Bank. During the development of the bank’s software, Jack convinced the bank’s president to allow him to own the rights to his code, instead of the bank retaining it as proprietary software. Jack and Jerry decided to team up and start their own business on the side, working nights and weekends selling and installing the software for other banks in the area. Once they had enough cash flow coming in, they would quit their jobs and focus on their business full time. That was the start of Jack Henry & Associates, in 1977.


You can read Jack Henry & Jerry Hall’s story in our latest book, Intelligent Fanatics: Standing on the Shoulders of Giants. Become a Member and we’ll send you the eBook-Kindle version for Free. [Join Today]


#2

Here are all the learnings/notes from Mark Leonard’s letter to shareholders, mentioned above:

We reviewed one of our perennial favourite HPCs this quarter, Jack Henry and Associates, Inc. (“JKHY”). The company’s values are those to which we aspire and their multi-decade performance is remarkable. Their shares have outperformed the S&P 500 Index by 11%, 9% and 10% per annum over the last 30, 20 and 10 years, respectively. Best of all, JKHY is in the vertical market software business like CSI, so there are sector-specific lessons in their history from which we can draw. I encourage you to familiarise yourself with JKHY. Their financial history is easily accessible because they went public very early in their development (i.e. in late 1985). At that time they had less than 50 employees and revenue of $12 million. They now have over 6,000 employees and revenue of $1.3 billion. There’s also a lovely company history “You Don’t Know Jack… or Jerry”, written by a retired IBM executive. The book covers JKHY’s founding years through to the end of 2007. It provides many first-hand accounts by employees, customers, competitors and partners about the business practices, strategy, and culture of the company.

During the last decade, the HPCs struggled to increase their ANI per share by more than 15% per annum. JKHY’s annualised growth in ANI was only 12% over that period. This drove much higher appreciation in JKHY’s shareholder value because they also made significant dividend payments and share repurchases (jointly averaging 10% of Average Invested Capital per annum). If CSI is not successful in finding attractive acquisitions, we could pursue a similar strategy of returning capital to shareholders.

JKHY’s EBITA Return for the last decade was 24%. They performed better than the other HPCs on this metric because they had strong organic growth and did not invest as much of their FCF in acquisitions.

Most of the HPCs have operated with ROIC’s in the mid to high teens during the last decade. JKHY was in the middle of the ROIC range at 18%. CSI was the second highest in the group, with a 30% ROIC average for the decade. I anticipate that we will deploy larger amounts of capital on investments each year. We are using a lower hurdle rate for larger transactions, but have retained our original hurdles for most of our acquisitions. Unless we use increasing amounts of financial leverage, increased acquisition investment and lower hurdle rates on large transaction will likely drive down our future ROIC. Interestingly, half of the HPCs have begun to acquire vertical market software businesses.

CSI’s Organic Net Revenue Growth (“OGr”, column 5, Table 1) was negative in 2015 for the first time since the last recession. The Maintenance analysis in Table 3 below, shows that much of the decline vs 2014 was due to shifts in foreign exchange rates. Nevertheless, when we compare CSI’s organic revenue growth to that of the other HPCs, we rank amongst the poorest performers and JKHY ranks amongst the best. Are we doing something systematic that leads to low OGr, and if so, is it a mistake? It is worth comparing JKHY and CSI to get some ideas.

JKHY sells software, hardware and services to small and medium sized financial institutions. The number of potential customers in these markets has been shrinking for decades. In the early years, JKHY acquired a number of competitors for reasonable prices, which reduced some of the rivalry in their market, and gave them a larger installed base for which to develop add-on products.

Significant technology change (ATM’s, internet banking, mobile banking, and proliferating electronic payment methods) in conjunction with rapidly growing regulation and compliance requirements, drove demand for add-on products and services. During the 2005 to 2015 decade, JKHY’s revenue growth has been 2/3rds organic and 1/3rd acquired, with acquisitions primarily being add-on products and services businesses. JKHY deployed approximately one third of their FCF on acquisitions during the decade.

Unlike JKHY, CSI serves a multitude of end markets. We deployed far more (>90%) of our FCF on acquisitions during the last decade. As of December 31, 2015 we had 182 BUs serving more than 75 verticals, run by 158 BU managers that rolled up into CSI via 6 Operating Groups. We usually organise each BU around a single vertical, although there are a few of our BUs that serve more than one vertical, and a many verticals served by more than one of our BUs.

The variations between each of our vertical markets is enormous. Some markets are consolidating, some not. In some we have high market share, in others we are a niche player. Some markets have compliance and technology drivers, while others rarely change their systems. Some have rapidly churning clients while others have long-lived clients. Some clients spend their own money buying systems, and some are spending an employer’s. Some buy enterprise-wide systems with significant customisation, while others buy departmental SaaS products with no customisation. Some markets have rabid venture-backed competitors with a grow-at-any-cost ethos, while others have a few rational competitors intent on making a decent living. All of these factors impact the organic growth potential of our businesses. Taking the particular industry and company factors into account, our BU managers work to develop an appropriate strategy.

A number of our businesses have strategies similar to JKHY i.e. they have built high market share in core systems via acquisition and organic growth, after which they’ve purchased and built add-on products to serve their clients better and drive up switching costs. JKHY appears to be willing to pay high prices for some third party add-on product businesses that might sell well into their installed base. We have tended to be more sceptical of such cross-selling synergies, perhaps because the investment decision-making has not historically been at the BU manager level. A lesson from JKHY, is that we may have been overly cautious regarding cross selling synergies.

The HPCs averaged 9% per annum revenue per share growth over the last decade. JKHY averaged 10%.

There’s one last lesson from JKHY that I’d like to share. It relates to you as shareholders. There was a ten year period during which JKHY’s shares both underperformed the S&P 500 (2000 until 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 ANI 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 which gripped the market in 2000, and the more specific enthusiasm for JKHY’s stock which then traded at well over 60 times ANI, left shareholders incredibly vulnerable. When the market “corrected” the JKHY stock had no margin of safety.