Business Model in Banking Industry - PowerPoint

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Business Model in Banking Industry - PowerPoint Powered By Docstoc
					Jack Henry & Associates
Presented November 11, 2008

 Yan Huang
 Shuang Cheng
 Guang Lu
 Chien-Lung Chiang
Part 1: Company Overview
Company Overview
Business Model and Revenue Model
Industry Analyst and Main Competitors
SWOT Analysis
RCMP Position
Company Overview
• Founded in 1976
• John W. “Jack” Henry visualized and wrote the
  company's first core banking software package
• Provides integrated computer systems and data
  processing solution for commercial banks
• Publicly traded in 1985 (NASDAQ:JKHY)
• Headquarters in Monett, Missouri
• 1.53 Billion market capital
Three divisions
Jack Henry Banking
• Provider of the integrated automation banks
  need to process business information and
  financial transactions
• Supports approximately 1,700 banks
• Two key markets:
  chartered de novo banks
   • Continued expansion

  mid-tier banks
   • supporting approximately 20 percent of mid-tier banks with assets
     ranging from $1 billion to $50 billion
Jack Henry Banking
Jack Henry banking solutions encompass :


                              More than 100
                 Three
                                integrated
              functionally
                              complementary
              distinct core
                               products and
                systems
                                 services




              In-house and    Contemporary
               outsourced     technology and
                operating            the
               alternatives    infrastructure
Jack Henry Banking
Three functionally distinct core banking platforms

   SilverLake       • A highly customizable, IBM® System and
   System®            i™-based solution for commercial banks


                    • A parameter-driven, IBM System i-based
 CIF 20/20®           solution


 Core Director      • A Windows®-based, client/server solution
SYMITAR
• Founded in 1985
• Acquired in 2000
• Provide core information and transaction
  procession solutions for credit unions
• More than 700 credit unions
• approximately 50 integrated complementary
  products and services
SYMITAR
• Functionally distinct core processing solutions
  are:

    Episys®      • A highly customizable, IBM System p™-based solution




    Cruise®      • A Windows-based, client/server solution for smaller
                   credit unions
PROFITSTARS
• Launched in 2006
• Two Functional segments:
               Mitigate and control operational risks
                                                                                     net interest
  business         sales        enterprise         enterprise         insurance        margin           insurance
intelligence    automation     profitability       payments          distribution                      distribution
                                                                                    improvement




                                           Control costs
                                                                                                    ATM channel
check and document    enterprise content       identity management
                                                                       regulatory reporting         management
      imaging           management                  and control
                                                                                                     solutions
Business Model by Section


       credit                                                     banking
       union                    solutions
                                                                 platforms
     platforms


                      security and
                       mitigating       operating                             Core
Episys       Cruise                                 SilverLake   CIF 20/20
                      operational         costs                              Director
                         risks
   Business Model by Function

                      electronic                                                   Software
                        funds                                                      systems
                       transfer

                                                                                                         maintain
                                                                                            general     centralized
 software                                  ongoing             process                       ledger     customer/
                data                                                        loan
implement
             conversion      training      support             deposit                    transactio     member
   ation                                   services                                            ns       informatio
                                                                                                             n




                                                    hardware
                                                     systems


                                 Dell
               Lenovo          servers
 IBM power                                                                             NCR check
              workstatio         and       Unisys              RDM       Unisys                        BancTec
  systems                                                                               scanners
                 ns           workstatio
                                  ns
Business Model by Diverse Clients


                      Credit unions   • >8,200 diverse
 • 1,600 banks
 • 3 systems                            customers
                   • 700 credit       • Top 15 domestic
 • >100 products     unions             banks
                   • 50 products
   Commercial                              Financial
     banks                                institutions
Revenue Model
Growth by Acquisitions (1)
Date    Company                 Capital Size       Service
2004    Banc Insurance          $6.7Mn in cash +   Turnkey outsourced insurance agency
 9/1    (bank)                  earn-out payment   solution for FIs

2004    Select Payment                             Innovative electronic payment
                                $12Mn in cash
10/1    Processing                                 processing solution for FIs

2004    Verinex                                    Leading developer and integrator of
                                $35Mn in cash
10/1    Technologies(bank)                         biometric security solutions

                                $12.93Mn in cash   Leading provider of enterprise
2004
        Optinfo (bank)          + $2.2Mn vested    exception management software and
11/23
                                options            services

        TWS System and
2004                                               Leading provider of image-based item
        three affiliated corp   $10.89Mn in cash
12/1                                               processing solution for CU
        (Credit Union)

2004                                               Market leader for intelligent document
        SERSynergy (bank)       $34.47Mn in cash
12/17                                              management
Growth by Acquisitions (2)
Date    Company              Capital Size         Service
                             $6.24Mn in cash,
2005    RPM Intelligence                          Customer and product profitability
                             earn-out payments
 1/1    (bank)                                    solutions for FIs(Stratika)
                             $0.25Mn in 06
                             $4Mn in cash, 5.01
2005    Tangent Analytics                         business intelligence software
                             Mn earn-out
 3/2    (bank)                                    systems
                             payments
2005                                              Leading provider of software to
        Profitstar (Bank)    $19.32Mn in cash
 11/1                                             banks and CUs
                                                  Leading provider of Loan and deposit
2006    Margin Maximizer                          pricing software and
                             $34Mn in cash
 11/1   Group (bank)
                                                  services to banks and CUs (USBA)
        Gladiator                                 Technology security services for FIs
2007
        Technology           $17.43Mn in cash     Enterprise Security Monitoring
 7/1
        Services (bank)
                                                  Remittance, merchant capture, check
        AudioTel
2007                                              imaging, doc imaging and
        Corporation (bank)   $32.09Mn
10/1                                              management, and telephone and
                                                  internet banking solution
Industry Analysis
Financial Software Service
Sustainable competitive advantage:
• Leading technology in security and operation
• High quality maintaining service
• License and renewed contracts

• Industry Composite 631
• Jack Henry ranks 9th
Main competitors
Main competitors
                     Capital Size                   Business


                                    • Electronic payment services
                                    • Card outsourcing services
    Enronet           504.02M
                                    • Electronic financial transaction software
   Worldwide
                                    •Bill payment services



                                    • Title insurance
 Fidelity National                  • Specialty insurance
                        2.37B
    Financial                       • Claims management
                                    • Information services

   Metavante
                        1.95B       • Banking and payments technologies
  Technologies
S
•Good history of dividends payment
•Sustainable growth rate
•Wide products and services, risk diversi
fied well                                     systems
                                                                            W
                                              •Jack Henry’s capital size and revenue
                                              ranked 9th among its competitors
                                              •Less resources to invest in upgrading

                                              •Margins in Jack Henry's service and
                                              support segment are relatively low




•Banks and Credit Unions relies on core       •Downward trend banking industry is
processing systems provided by Jack &Henry    shrinking Jack Henry's customer base
•High liquidity, low debt, ability to catch   •Ongoing declines in the price of computer
acquisition opportunities                     hardware
                                              •Huge Switching cost makes Jack Henry
•Leading research team to maintain




O                                                                             T
                                              difficult to compete for new business
sustainable competitive advantages
•Regulatory changes2
Stock Performance
RCMP Position
• November 11, 1999 entered position
   ▫ 200 shares at $36 per share
• March 3, 2000
   ▫ Stock split 2:1
• March 5, 2001
   ▫ Stock split 2:1
• January 15, 2007
   ▫ Sold 400 shares at $22.53
• Current position
   ▫ Own 400 shares
   ▫ Stock price $18.03 as of November 10th, 2008
Part 2: Accounting Analysis
Balance Sheet
Income Statement
Cash Flow
DuPont Analysis
2009 1st Quarter Earning Review
Asset
Liability
Equity
Revenue
 100%
 90%       21%     17%     14%      14%      12%
 80%
  70%
  60%
  50%      66%                                     Hardware
                   68%
                           72%
  40%                              75%      78%    Support and Service
  30%
                                                   License
  20%
   10%     13%     15%
   0%                      14%
                                   11%
                                            10%
         2004
                 2005
                         2006
                                 2007
                                          2008
Growth Rate over past 5 years
                License   Support and Services      Hardware
40%

30%              31.60%
       29.64%

20%    19.52%                              18.24%
                 16.96%     16.55%                      15.67%
10%                                                              10.00%
                                           7.04%
                             1.99%                      0.79%
 0%                                                              -2.00%
       -2.46%                                           -3.73%
                 -4.41%
                            -7.70%         -9.06%
-10%

-20%
                                                                 -24.00%
-30%
       2004      2005       2006           2007          2008    09 Q1
Growth Profit Margin over past 5 years
                   Liicense    Support and Service       Hardware
120.00%


100.00%                           96.77%
          92.43%      93.27%                    94.40%                 92.00%
                                                              90.89%
80.00%


60.00%


40.00%                32.95%      36.26%        38.23%        37.25%   37.00%
          33.27%
                      28.68%      26.50%        25.89%        27.15%
          28.40%                                                       25.00%
20.00%


 0.00%
          2004        2005         2006          2007          2008    09 Q1
Income Statement
Financial Health
                     2008     2007     2006     2005     2004
ROA % (Net)          10.29    10.99    10.45    10.29    10.34
ROE % (Net)          17.33    17.84    16.46    15.73    15.38
ROI % (Operating)    24.43     24.5    24.39     24.8    24.39
EBITDA Margin %      30.45    31.36    30.92    29.48    28.31
Gross Margin        41.35%   43.03%   43.50%   41.51%   40.22%
Operating Margin    22.10%   24.01%   23.83%   22.22%   21.14%
Pre-tax Margin      22.13%   24.25%   23.95%   22.36%   21.33%
Net Profit Margin   14.03%   15.71%   15.21%   14.09%   13.33%


Quick Ratio           0.82      0.9     0.97      0.9     1.29
Current Ratio         0.97     1.06     1.16     1.06      1.5
DuPont Analysis
       ROE               ROA             Equity Multiplier
2008   17.33%           10.21%                 1.70
2007   17.49%    =      10.47%       X         1.67
2006   15.63%            9.92%                 1.58



        ROA          Profit Margin        Asset Turnover
2008   10.21 %           14%                    0.73
2007   10.47 %   =       16%         X          0.67
2006   9.92 %            15%                    0.65
 Cash Flow
Period Ending                                    2008       2007       2006

Net Income                                    104,222    104,681     89,923

Total Cash Flow From Operating Activities     181,001    174,247    169,438

Total Cash Flows From Investing Activities   (102,148)   (92,911)   (77,190)

Total Cash Flows From Financing Activities   (101,905)   (66,858)   (29,717)

Change In Cash and Cash Equivalents           (23,052)    14,478     62,531



Cash flow at the beginning of the year         88,617     74,139     11,608

Cash flow at the end of the year               65,565     88,617     74,139
1st Quarter Earning Review
• 5% increase in revenue
• Strong growth in support and services revenue
 ▫ grows at 10%
 ▫ One time implementation revenues decreased
 ▫ Electronic payments revenue increased 16%
• Other revenue
 ▫ License revenue decreased 2 %
 ▫ Hardware sales decreased 24%
Part 3: Valuation
Assumptions
Discounted Cash Flow Model
Relative Valuation Model
Assumptions on Growth Rate
                             Growth Estimation
 15.0%

 10.0%

 5.0%

 0.0%
         2009E   2010E   2011E   2012E     2013E    2014E   2015E   2016E   2017E   2018E
 -5.0%

-10.0%

-15.0%
          Revenue Growth         License           Support and Service      Hardware


         Sustainable Growth Rate: 3.2%
Assumptions on Margin

GPM (License)                  90.9%
GPM (Support and Services)       37%
GPM (Hardware)               25-27.3%
Operating Expense/Sales        20.2%
Interest Expense/Debt        3.5-7.5%
Other Assumptions

CAPEX/Sales                                              5.7%
Depreciation Rate                                        8.3%


Acquisition
                                                     In USD Thousands
2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
10,000 10,988 60,419 69,192 79,533 91,713 84,354 69,536 49,460 27,141
WACC
Capital Structure   Market Value (USD Mn)             Weight
      Equity                  1,571                    98.7%
       Debt                     20                      1.3%

 Cost of Capital        Value                  Source
                                          1998-2008 average of
  Risk Free Rate        4.74%            10-y treasury bond yield

  Risk Premium           6%                 Historical data
                                      Calculation of data from Yahoo
       Beta             1.058          Finance (5-y weekly return)

   Cost of Debt         3.11%              2008 Annual report

   Effective Tax        36.2%           2004-2008 Annual report

    WACC              10.97%
DCF Valuation
                                 (In USD Mn)


Discounted Operating Cash Flow       1,576
Add: Non-Operating Assets               26
Firm Value                           1,602
Value of Debt                           20
Value of Equity                      1,582
Outstanding Shares                  86.05
Value per Share                   $18.39
Sensitivity Analysis

                     Sustainable Growth Rate
              1%        2%      3%      4%      5%

       9%    20.76     22.83   25.58   29.44   35.23

       10%   17.84     19.31   21.21   23.74   27.29

       11%   15.60     16.70   18.07   19.83   22.19
WACC
       12%   13.70     14.52   15.52   16.76   18.37

       13%   12.20     12.83   13.58   14.50   15.65

       14%   10.96     11.44   12.02   12.71   13.56
Relative Valuation
                                     P/E        P/E
 Competitors        Market Cap.                          P/S    M/B
                                  (trailing) (leading)

   Enronet
                     504.02M        13.58      7.57      0.51   0.8
  Worldwide
Fidelity National
                       2.37B        9.41      20.8       0.63   0.84
   Financial
  Metavante
                       1.95B        11.69     10.34      1.09   4.5
 Technologies

     JKHY              1.53B        14.23     12.91      1.95   2.45

   Average                         11.56      12.90      0.74   2.05
Multiples Calculation
JKHY
EPS                                              1.16
Sales per share                                  8.63
Book value per share                             6.99
Diluted shares (Mn)                             86.05


                          P/E          P/E
      Multiple                                          P/S   M/B
                       (trailing)   (leading)
  Value per share        13.41        14.97         6.42      14.31
Triangulation
                           Value per share   Weight

     DCF Valuation              18.39         70%

 P/E Multiple (Trailing)        13.41         10%

 P/E Multiple (Leading)         14.97         15%

      P/S Multiple              6.42          2%

     M/B Multiple               14.31         3%

     Triangulation                            17.01
Part 4: Recommendation
Holdings Position
                    AEE           CPRT
                          AEO      4%
                    5%     5%
                                   DO FR
                                   3% 3%
                                         JKHY
                                          3%
                                          KMB
      Cash                                 6%
      58%


                                         SRCL
                                          8%
                                  WAG
                                   4%
                            WFR
                             1%
Correlation
                              CORR
       JKHY CPRT AEE      AEO DO        FR     KMB     WFR     SRCL WAG
JKHY     1.00
CPRT     0.42 1.00
 AEE     0.65 0.36 1.00
AEO      0.45 0.42 0.38   1.00
 DO      0.44 0.41 0.48   0.19   1.00
 FR      0.71 0.48 0.63   0.42   0.63   1.00
KMB      0.71 0.36 0.74   0.39   0.39   0.59    1.00
WFR      0.46 0.50 0.36   0.25   0.50   0.49    0.35    1.00
SRCL     0.62 0.41 0.57   0.39   0.47   0.63    0.56    0.45    1.00
WAG      0.60 0.47 0.64   0.56   0.45   0.61    0.59    0.45    0.57   1.00
Recommendation
• DCF model price: $18.39
• Price range from sensitivity analysis:
  Min=$14.52, Max=$23.74
• Triangulation: $17.01

• Current price: $18.03 as of 11/10/08

• Recommendation: HOLD 400 shares with a
  limit sell at $20.40 before 12/19/08.
Recap
• Current Market Price VS Fair Value
      $17.75              $17.01

• Our goal:
 ▫ Hold the 400 shares at current market price
 ▫ Sell the 400 shares when overvalued by 20%
Three Options
1. Buy Put Option
2. Sell Call Option
3. Limit Sell
1. Buy Put Option
 Option Type      Expiration Date        Ask Price
  Put (20.00)        Dec 19,08               3
  Put (22.50)        Dec 19,08              5.1
  Put (25.00)        Dec 19,08              7.7
  Put (20.00)        Nov 21,08             2.55
  Put (22.50)        Nov 21,08               5

 Disadvantage: Option Premium is too high.
2. Sell Call Option
 Option Type      Expiration Date         Bid Price
 Call (20.00)       Dec 19,08                0.4

  Benefit
  Earn $160 (0.4*400) option premium

  Cost
  Administration cost
  Account maintenance fee
  Margin requirements
  Risks (potential margin call)
  Only share price on Dec 19,08 matters
               16
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                                                       Share price since Sep 4th,08




24-Oct-08
 27-Oct-08
28-Oct-08
29-Oct-08
                                                                                      3. Limit Sell at $20.40 good thru 12/19/08




30-Oct-08
 31-Oct-08
  3-Nov-08
  4-Nov-08
  5-Nov-08
  6-Nov-08
  7-Nov-08
10-Nov-08
11-Nov-08
12-Nov-08
Final Recommendation

Limit Sale at $20.40 good thru 12/19/08
The End
Thank You!

				
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Description: Business Model in Banking Industry document sample