You Don't Know Jack... or Jerry

the story of JKHY

In Mark Leonard’s 2015 Shareholder Letter, he drops a little tidbit:

We reviewed one of our perennial favourite high performing conglomerates 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.

Mark goes on to cite a book, You Don’t Know Jack… or Jerry, as one of the better introductions to the company.

The book itself is now out of print, there are no synopses on the internet, and it took me a decent amount of time (and money) to procure a copy. Well, I finally have and it seems appropriate to reflect on why Mark Leonard admires the company so much. I’m not going to attempt to reassemble the company’s entire life, but I will try to highlight some of the major milestones and lessons.

Jack Henry & Associates¹ nowadays provides a gamut of technology to small and medium sized financial institutions. What Mark finds particularly remarkable in his letter is that even though this is a shrinking market, JKHY is still one of the top performing conglomerates with especially good organic growth.

And to frame the rest of this piece, it makes sense to dial in on why. From Mark:

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.

To really understand what makes JKHY special, it’s important to grasp their second act: their transformation from a small company out of Monett, Missouri selling their own vertical software into a company that made the leap to become a vertical conglomerate while still retaining their values and roots. To state it differently, it’s the leap that every single vertical company with dreams of remaining independent over the course of 30 years will follow.

And if I could guess why Mark respects the company so much, it has to do with how Jack Henry (the founder) managed to build a massive vertical business that’s good to its employees, gracious in its interactions with everyone, and still be world-class at maximizing value for shareholders.

Some Notes on the Book

At the outset, it’s important to note that the author, Robert Babcock, is an outsider to the company. He was an IBM executive whom was often trying to ensure the IBM-JKHY relationship was running smoothly. And that’s part of what makes the book a fun read. Babcock was so impressed with his dealings with JKHY in the 90s that he felt that someone had to document the company’s history. Given his proximity to the founders and employees, the book contains incredible amounts of history and commentary that otherwise would have been long since lost.

It has also got its own quirks. The IBM-JKHY relationship gets substantial page time at the cost of more anecdotes around JKHY’s second act as an acquirer, it’s fairly non-linear, and of course, with Babcock being a product of the 90s software scene, there’s a decent chunk of anecdotes around Y2K.

But that’s all part of its charm. What you get in the book isn’t a rote list of financials, acquisitions, or really even much in the way of strategy. Instead, you get a glimpse into the actual journey of building Jack Henry & Associates, lumps and all. And you also get some fantastic one-liners from Jack Henry himself. The man was funny.

Babcock came into the IBM-JKHY at a frosty time. Jack looked him in the eye and told him “You won’t be here next year.” Babcock lasted. And Jack and Babcock’s friendship and admiration for each other only grew.

JKHY: The Startup

The late 70s was really when the compute era took off and IBM was busying itself installing new hardware in banks.

However, IBM had a problem. Hardware is no good without software. And much of the software at the time was either terrible or nonexistent. Jack Henry knew this intimately. Jack was in his late 40s and working as an Ops Manager at a small bank. He got the unpleasant tax to figure out how to make the computers the bank bought useful. And so Jack learned to code, gradually realized every other community bank was having issues figuring out what to do, and started to craft the idea for a company to help these banks out.

Jack originally conceived the business as a services company; that’s where the name which is more reminiscent of accounting firms than technology companies comes from. So Jack made his friend, Jerry Hall, his first associate and they went off to to the races going from bank to bank installing software.

They set up shop in Monett, Missouri, which was well off the beaten path. Jack and Jerry liked that though. And soon, as more banks began to need software, Jack and Jerry brought on some other Associates: local high school kids, trying to figure out what was next in life.

As the computer wave boomed, IBM employees were figuring out that they needed software partners to make the system useful. A partnership between IBM and JKHY ensued.

And for much of JKHY’s early life, they simply expanded upon what they were best at: installing the necessary software for banks to take advantage of IBM hardware and finding great employees, often whom were from right around Missouri.

They IPO’d relatively early in the company’s life and proudly took out an advertisement in the local newspaper detailing this:

“We are a “high tech” company. Most such companies are located in Silicon Valley… so it’s pretty common for one of our frequent visitors to ask, “Where do you find all this fine talent to run [JKHY]?”

We thought we’d show you where we found them…

Marguerite Butterworth ———— Monett High School | Monett, MO

Russ Courdin ———— Wheaton High School | Wheaton, MO”

(Far more are listed)

This points to the first reason I think Mark admires JKHY: they were able to build a remarkable talent pipeline from a very untraditional locale. Jack Henry often delighted in this.² When you cross-reference this with Mark’s own philosophy on cultivating human capital, you’re left with the impression that outperformance isn’t contingent upon educational pedigree or geography. It can be cultivated from anywhere.

IBM and Jack Henry

After the IPO, things got rocky. Most of JKHY’s installations happened on IBM hardware and Jack thought that should mean something to IBM. After all, the hardware wasn’t usable without JKHY. But IBM was happy to have a stable of other banking software vendors and didn’t view JKHY as having some special status in their sale.³

So Jack made a bet that almost ruined the company and switched over their primary loyalty to another hardware vendor, Unisys.

None of the expected value came to fruition and soon JKHY was scrambling and in massive litigation with Unisys.⁴ The stock was down the drain and with the business in immense distress, Jack called the company together and told them “We are all going to have to work harder and get paid less.” A winning message to employees for sure! But it actually was. JKHY employees worked harder for less and soon the Unisys mess was behind the company. And because the product, customer service, and team were so good, the banks using JKHY products didn't waver either. Soon JKHY began to grow once more.

Entering the 90s, JKHY had several things to prove. First, they needed to get back in IBM’s good graces. Second, Jack and Jerry were ready to find the next leaders to carry JKHY into the next decade.

It didn’t take long for IBM and Jack Henry to sort things out. JKHY, now humbled, still got a bit more of a lucrative partnership and the two were off to the races once more.

And the partnership was a lot more than that. The teams that interacted with each other generally had great camaraderie and respect for what each was doing, even after the 80s blowup.

Leadership Transition

The leadership transition, however, was a ripening issue. Jack and Jerry were pretty worn out and not confident they had the vision to take the company into its next phase. To do so, they executed a Management Transition Plan in 1991, with the goal of transitioning over the company to key employees: all of whom had worked most of their careers at JKHY.

In 1994, Jack’s son, Mike, whom had joined the company following high school, took the reins as CEO. Mike Wallace, another JKHY faithful, became COO.⁵ Mike and Mike turned out to be great executives and led JKHY into the next era of acquisitions.

If you look at what Constellation has done to decentralize as much responsibility for decision-making across the operating groups, you can quickly grok that Mark has been trying to solve the succession issue too. Like JKHY, they have immense human capital that has been raised throughout the organization and broadly this has allowed Mark to step more and more out of the day to day without transitionary issues inside the org.

Delivering Value through Acquisitions

In the late 80s and early 90s, JKHY had attempted a couple acquisitions. And there were promising signs that this was a viable strategy. There were plenty of banking software companies that didn’t have a solid path forward.⁶

But this didn’t become a strategic mandate until Mike Henry jumped in. Mike had been on the R&D side and was quickly piecing together a core problem common to all vertical software now: if you are the core vendor, every piece of software that augments you has to work or else you’re the one the customer complains to. And if you are going to bear responsibility for these accessorial products, why not take the financial gain too?

Thus, Mike and Mike decided to pursue a swath of acquisitions in an attempt to own the full software stack.

15 acquisitions later, the strategy was not only viable, it was working.⁷ The upshot was similar to what Mark notes as well: JKHY was able to generate great organic growth and grow market share and additional product lines through acquisitions. Revenues in 1991 were around $20.1 million. At the end of 2000 fiscal year, they were at $225.3 million and Wall Street was singing their praises. One year later, annual revenue reached $345.5 million (with no further acquisitions that year).

Post-2007 in Brief

The book leaves off in 2007. Jack Henry passed away that same year.

Since 2007, the company has moved further into SaaS offerings, digitized payments, and more. Given their huge number of products, it’s somewhat hard to pinpoint what is moving the needle and where the growth opps are, but suffice to say, JKHY is looking to enact a playbook familiar to anyone in fintech: equip the banks to thrive in a fully digitized world. To that end, payment processing for these banks makes up about 38% of the current business makeup and it’s expected to grow.

It’s quite an interesting period in the company’s life. Their current CEO thinks it’s the most critical period since the early 2000s. And there’s good reason for that. Credit unions and small banks are facing existential questions. They are trying to chart how to survive in a banking landscape that favors massive banks and with more and more consolidation. And to survive, they will look to their software partners to help them modernize. And if JKHY is able to guide them into the modern age, with better technology infrastructure that allows them to compete with the large banks, JKHY too will thrive.

1. For the sake of sanity in the rest of this piece, “Jack Henry,” the founder, will be referred to by his proper name. Jack Henry (& Associates),” the company, will be referred to by the stock ticker: JKHY.

2. Babcock shares a press release Jack put out in The Monett Times:

“We don’t do much advertising, but last year we had some shirts made to give away to customers…

A slogan on the shirt reads: Monett ain’t the end of the world, but you can see it from here.

The people who wear them away from here understand that the slogan is really a statement of pride in our town, and a good natured “put down” of the people who believe that good things only get done in Chicago or New York or Los Angeles.”

3. More precisely, IBM had a VAR program, and didn’t want to lose out on revenue from other resellers.

4. The drama seems to be over what the partnership contractually meant. Unisys seemed to think that JKHY had to stop performing maintenance and services on their existing IBM install base. JKHY very much disagreed. Or as Jack puts it, “Open marriages just don’t work, I guess.”

5. A great “News from Jack” article detailing the transition:

Unfortunately in many companies I have observed… there is a pervasive reluctance on the part of management at all levels of developing a strong back up guy who can and perhaps will do your job better than you… it’s not been easy for Jeery or me to replace ourselves…

We’ve been very careful, because a lot of our monetary and emotional resources are and will continue to be invested in this company…

There’s been a period of time now during which Mike Henry and Mike Wallace have known that they were to take over the jobs of Jerry and me. But it was a “some day” kind of thing until we summoned them to our office and said, “OK, guys, it’s time.” The panic we saw in their eyes that day has subsided, replaced by education and thoughtful planning and strategizing, both long term and short term…

Mike Wallace earned his job without the benefit of being related to a founder. Mike Henry earned his job in spite of being related to a founder.

My sincere congratulations to them both.

Jack

6. As Jack puts it", “IBM was eating its own children; we waited for the children to starve, and then we bought them.” The same systemic forces that led to JKHY leaving the IBM partnership temporarily (far too many partners), led to JKHY eating the market over time.

7. A lot of this has to do with JKHY’s integration efforts I think. At the same time as Mark notes in his letter, they were navigating the public markets far more effectively, paying out a dividend, and generally doing a far better job of managing investors.