Where Traditional Meets Technology

Investment Managers:Eric HoffmanKaidi WangXiangyuan (Arthur) ZhongNov. 13th, 2012

AgendaIntroductionMacroeconomic ReviewReview of Company and its businessRelevant stock market prospect Financial analysisFinancial ProjectionApplication of valuation toolsRecommendation*

Current PositionCurrent share price = $38.37Current holding value = $15,348Constitutes 11.74 % of invested holdings(without cash)Constitutes 4.47% of invested holdings(with cash)Unrealized gain: $11,748

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Macroeconomic ReviewMore than 7,300 commercial banks and savings institutions with up to $30 billion in assets.Trends (2008 -2011):Number of commercial banks, savings institutions, and credit unions declined 15%.Aggregate assets increased at a compound annual rate of 5-6%.*Source: 10-K

Macroeconomic ReviewTrendsNo new banks were chartered in 2011Revenues decreased for fourth straight year mainly because of low interest ratesBig Banks get biggerMergers and AcquisitionsGovernment dominates consumer credit through big banksConsumer credit market comprises about $13 trillion in outstanding loans or debtGDP growth*Source: http://blogs.reuters.com/great-debate/2012/03/13/three-disturbing-trends-in-commercial-banking/

Major Mergers and Acquisitions*Source: http://www.motherjones.com/politics/2010/01/bank-merger-history

Forecasted GDP through 2015*Source: http://www.businessinsider.com/fed-gdp-forecast-2012-9

Macroeconomic Review*Source: 10-K

Industry Analysis*

Review of Jack HenryFounded in 1976Market Cap: 3.35 billionBanking technology company which provides core processing systems to domestic banks and credit unionsServes 1500 banks and 700 credit unions*

*JKHY VS. Industry AverageSource: www.morningstar.com

Business Divisions*

*Business Divisions

Revenue Sources*

Revenue Sources*

Business StrategyOrganic revenue and earnings growth supplemented by strategic acquisitions

*Source: Bloomberg

Acquisition List*

SWOT Analysis*

Competitors OverviewFidelity National Information (FIS): Offers financial institution core processing, card issuer, and transaction processing services, including the NYCE NetworkFinancial Solutions Payment Solutions International Solutions

Fiserv (FISV): Provide various financial services technology solutions Payments and Industry Products Financial Institution Services Globally focused

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Competitors OverviewNCR Corporation (NCR)Offers financial-oriented self service technologies; cash dispensers; software solutions; and consulting servicesProvides check and document imaging solutions and support servicesOffers various maintenance and support services

Total system services (TSS): Provides electronic payment processing and other services to card-issuing and merchant acquiring institutionsOffers issuer account solutions. Provides merchant processing and related services.Globally focused

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Relevant stock market prospect2007-Present *Source: Yahoo Finance

Stock Price Comparison 2007-Present*Source: Yahoo Finance

Financial analysisProfitability

Margin

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Financial analysisLiquidity

Capital StructureDividend: $0.46 (1.20%)Market Capitalization: 3.30BNo public traded corporate bond

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200720082009201020112012 Current Ratio1.1x1.0x1.0x0.9x0.9x1.2x Quick Ratio0.9x0.8x0.9x0.8x0.8x1.0x 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

Financial Analysis => Financial Projection*

Financial Projection*

DCF AnalysisDiscount Rate: 10.73%Terminal Growth Rate: 2.5%Intrinsic Value: $36.44

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Weighted Average Cost of CapitalYear Ended June 30Year Ended June 30200820092010201120122013E2014E2015E2016E2017ESales742,926 745,593 836,586 966,897 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 Profit307,226 299,399 345,120 399,334 423,730 449,591 490,229 536,173 578,293 623,263 Operating Expense143,017 141,513 162,867 183,017 187,495 209,745 227,389 247,222 267,191 297,476 EBIT164,209 157,886 182,253 216,317 236,235 239,845 262,840 288,952 311,102 325,787 Adjusted Tax59,139 54,208 62,926 70,041 76,684 80,614 87,730 96,437 103,506 108,565 EBIAT105,070 103,678 119,327 146,276 159,551 159,231 175,109 192,515 207,595 217,221 Depreciation & Amortization62,006 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)(40,000)Increases In NWC9,240 (22,474)10,423 (269)7,307 58,843 12,096 18,329 19,562 30,472 Free Cash Flow126,731 158,737 125,903 198,954 191,934 151,239 226,838 251,750 276,535 284,236 Terminal Value3,823,914 Time0.67 1.67 2.67 3.67 4.67 PV of Free Cash Flow141,303 191,397 191,832 190,298 176,642 PV of Terminal Value2,376,420

Multiples AnalysisEqual WeightTrailing P/EPrice/Sales Price/Book Multiple Price: $34.57

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PriceTrailing P/E17.8333.33%Price/Sales 44.1433.33%Price/Book 41.7433.33%Final Price$34.57

Profitability and Management effectivenessJKHYFISFISVNCRTSSMeanMedianHigh LowProfit Margin (ttm):15.34%7.50%12.82%2.69%13.05%10.28%12.82%15.34%2.69%Operating Margin (ttm):23.43%19.44%24.03%5.03%19.23%18.23%19.44%24.03%5.03%Return on Assets (ttm):9.90%5.20%7.97%3.14%11.73%7.59%7.97%11.73%3.14%Return on Equity (ttm):16.60%8.02%18.44%11.93%17.96%14.59%16.60%18.44%8.02%Revenue (B)1.055.894.45.841.863.814.405.891.05Revenue Per Share 12.1420.1132.636.839.922.3220.1136.839.90EBITDA (M)340.531,7201,370446468.92869.09468.921720.00340.53

Recommendation*

Recommendation*

*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.

*To attract and retain customers/members in todays 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 informationOffer the high-demand products and servicesEnhance the customer/member experience at varied points of contactExpand 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

*Threat of Substitutes (Medium) - High costs to learn to new system, renewal of outsource contractsBarriers to Entry (High) - Compliance with regulation, high start-up costsPower of Suppliers (Low) - Hardware from suppliers accounts for a small portion of revenuePower of Buyers (Low-Medium) - Clients resistant to change due to switching costs, customer discounts for additional servicesRivalry (High) - Large competitors with resources, highly competitive industry, and high industry consolidation

*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. *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.*According to the Federal Deposit Insurance Corporation (FDIC), there were more than 7,300 commercial banks and savings institutions in thisasset range as of December 31, 2011. 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, 2011. Symitar serves about 10% of all the customers. *Provides highly specialized solutions to financial services organizations which are primarily not core customers of the company

*Hardware SalesComputer hardware sales, hardware maintenance and related services to customers

Support and ServiceAssist the customer in operating their systems and enhance/update the software, electronic payment services, outsourced data processing services and implementation services

LicenseSale and delivery of application software systems

*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.

*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.*Historically, JKHYs 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 JKHYs present products and services. Since 2004, JKHY has completed 19 acquisitions.*

1. Fidelity National Information (FIS)Offers financial institution core processing, card issuer, and transaction processing services, including the NYCE NetworkFinancial Solutions : core processing software applications to run critical banking processes; retail delivery applications for integrating customer-facing operations and back-office processesPayment 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 services2. 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

*3. NCR Corporation (NCR)Offers financial-oriented self service technologies, such as ATMs; cash dispensers; software solutions; and consulting services for financial institutions and retailersProvides 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 transactionsOffers 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 institutionsOffers 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

*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*Here, we are comparing JKHYs stock with another 4 competitors, we could see that it have very similar trend with FISV and they both outperformed compared to other three.*Coming to the ratios, JKHYs profitability and Margin ratio shows that they got some influence by the financial crisis since 2008. however, theyre recovering now and there latest ratios are all doing better than previous years *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.*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.*License: license fee is flucated. JKHY showed their trend in recovery. So 1.5% showing offset. COGS is 11.5% of revenueSupport & Service: begin with 10% growth rate, decrease 1% every three years. COGSs margin is average of previous five year margin, just because their support and service cost is stableHardware Sales: -8% begin with average, increase with 1% every 3 years. COGSs margin is average of previous five year marginGross Margin: 40.5% - 40.7%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 yearsReceivable Average, payable averageTax Rate: 33.9% - 34.4%

*400 shares => 450 shares% in the portfolio

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