Previewing Jack Henry & Associates' (NASDAQ:JKHY) fiscal 2007 earnings report last week, I promised to focus on two indicators that I've found to be key to the fortunes of firms in the online payments business: (1) licensing revenue, and (2) recurring revenue. We'll check those two out in a moment. But first, an overview of the fiscal year:

  • Revenue for the year came to $668 million, up 13% from fiscal 2006.
  • Profits per share amounted to $1.14, a 19% improvement.
  • Free cash flow proved the laggard metric, rising just 10% to $119.3 million.
  • Free cash flow did, however, exceed net income reported under GAAP, which came to just $104.7 million.

Now, on to the (even more) important numbers.

Licensing
Licensing revenues declined 9% in comparison to fiscal 2006, composing just 11% of total revenues, as opposed to last year's 14%. CEO Jack Prim painted this trend in a positive light, reassuring investors that "the increase in support and services and hardware revenue continued to offset any shortfall" in licensing. Still, let me illustrate how important getting a high proportion of revenue from licensing is to Jack Henry's business. In fiscal 2007:

  • Licensing revenues brought with them a 94% gross margin. That's down from 97% last year, but still exceedingly lucrative.
  • In contrast, support and services revenue grossed just 38%, up from last year's 36%.
  • Hardware sales grossed a mere 26%, down from last year's 27%.

So you see, it's a matter of quality, not quantity. Prim's assertion that higher support and services revenue can truly "offset any shortfall" in licensing is a bit disingenuous. "Mitigate," yes. "Offset," no.

Now, I don't want to overdramatize this point. Jack Henry's monster 23.7% operating margin still handily beats those of rivals like Online Resources (NASDAQ:ORCC), CheckFree (NASDAQ:CKFR), and Fiserv (NASDAQ:FISV). Still, had Jack Henry managed to bring in a higher proportion of high-margin licensing revenues, I expect it would have widened that lead even more.

Recurring revenues
The second factor I suggested you keep an eye out for -- the rate at which Jack Henry's clients renewed their contracts -- went missing. Unlike last quarter, when CFO Kevin Williams made a point of highlighting the firm's 90%-plus retention rate, he kept mum this quarter. Make of that omission what you will.

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Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.