Jack Henry & Associates, Inc.

Good morning, and welcome to the Jack Henry Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Vance Farrar, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Jack Henry Fiscal 2023 Second Quarter Earnings Call. Joining me on the call today is David Foss, Board Chair and CEO, Mimi Carsley, CFO and Treasurer, and Greg Adelson, President and COO. After these opening remarks, I will turn the call over to Dave for his thoughts about the state of our business, financial and sales performance for the quarter, industry comments, and other key initiatives. After Dave concludes his comments, Mimi will provide additional commentary regarding the financial results and fiscal year guidance included in the press release issued yesterday that is available from the investor relations section of the Jack Henry website. We will then open the lines for Q&A. As a reminder, this call includes certain forward-looking statements, including remarks or responses to questions concerning future expectations, events, objectives, strategies, trends, or results. Like any statement about the future, these are subject to multiple factors that could cause actual results or events to differ materially from those which we anticipate due to multiple risks and uncertainties. The company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release in the sections in our 10-K entitled Risk Factors and Forward-Looking Statements. On this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income. The reconciliations for non-GAAP financial measures are in yesterday's press release. I will now turn the call over to Dave.

Thank you, Vance, and good morning, everyone. Today, we're pleased to report another strong quarter of revenue and operating income growth. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our second quarter. For Q2 of fiscal 2023, total revenue increased 2% for the quarter and increased 6% on an on-gap basis. This variance was primarily due to a reduction in deconversion revenue, which I'll detail in a few minutes. Turning to the segments, we again had a solid quarter in the core segment of our business. Revenue was flat for the quarter, but increased by 6% on an on-gap basis. Our payment segment also performed well, posting a 3% increase in revenue this quarter and a 6% increase on an on-gap basis. We had a very strong quarter on our complementary solutions businesses, with a 4% increase in revenue this quarter and an 8% increase on an on-gap basis. Yesterday's press release included revised guidance, which Mimi will outline in her comments. One of the key drivers behind this change in guidance was the actual and forecasted reduction in deconversion revenue for the year. As we disclosed yesterday, deconversion fees are down $20 million year-to-date, and this was the primary driver of the variance in GAAP versus non-GAAP revenue and operating income performance for Q2. As a reminder, we receive deconversion revenue when one of our clients is acquired by another institution and is required to pay us a fee to terminate their contract prior to the end date. I normally reference this as the revenue you don't want to see because it indicates we've lost a client to M&A. This lack of consolidation by financial institutions is also impacting our services revenue associated with convert and merge activities. Because of the impacts to bank stocks and valuations, M&A is down overall in the banking space, and the experts in the industry don't see any significant rebound for at least a couple of quarters. Of course, consolidation is outside of Jack Henry's control, and we normally update guidance for deconversion revenue as we become aware of pending M&A activity. The other primary item impacting our guidance is the recent change in consumer spending behavior. Due to economic conditions, consumer card usage is slowing and transactions are shifting from debit to credit. Our card processing business is significantly weighted to debit processing, So we are revising guidance to reflect what we believe to be a temporary economic trend. As I've said many times in the past, our financial model is very resistant to significant swings resulting from changes in the overall economy, but we're not completely bulletproof. Despite these external factors, our primary businesses remain strong and continue to perform very well. As I mentioned in the press release, our sales teams again had an outstanding quarter with a number of notable wins. In fact, Q2 set a new quarterly sales record for Jack Henry, breaking the record we set in the June quarter last year. In the second quarter, we inked 12 competitive core takeaways and an additional 15 deals to move existing in-house core clients to our private cloud environment. December 30th was a particularly memorable day for us at Jack Henry, as we signed three core takeaways of multi-billion dollar financial institutions on the same day. We continue to see good success with our new card processing solution, signing 12 new card processing clients this quarter. We also continue to see great success signing clients to our Bano digital suite with 36 new contracts in Q2. Speaking of our digital suite, our Bano business solution is scheduled to go into general release next quarter. We already have 18 institutions live in early adopter status, with the feedback being extremely positive from those users. We have 308 clients under contract for this solution, and we're positioned to bring them into full production at a very rapid pace once we achieve general availability. We are also continuing to implement new financial institution clients on the retail Banno platform at a similar pace to recent quarters. At the end of Q2, we surpassed 8.8 million registered users on the platform, and Banno continues to hold one of the highest consumer ratings in the App Store. Normally in January, I share with you the results of bank spending survey projections from the publications we follow closely. Unfortunately, this year, none of those major publications provided forward-looking projections around the topic of expected tech spending in the banking segment. I have received a number of smaller surveys, and we conducted our own informal survey at a banking CEO roundtable last month, with the results being all relatively consistent. The average increase appears to be settling at around 7% for calendar 2023, with the most popular range being a 5% to 10% increase. I'll continue to watch for firm, objective data and will share as it becomes available. As you may have noticed last month, we took a major step forward with our environmental efforts by signing a commitment letter indicating our intention to set science-based climate targets with the Science-Based Targets Initiative, or SBTI. Science-based targets are aligned with the level of decarbonization necessary to meet the goals of the Paris Agreement to limit global warming to 1.5 degrees Celsius above pre-industrial levels. Jack Henry will pursue validation for near-term greenhouse gas emissions reduction targets through SBTI. This commitment follows extensive analysis and discussion and is supported by our Low Carbon Transition Plan, which outlines several mitigation tactics to reduce our greenhouse gas emissions. More information regarding this plan will be disclosed in our next sustainability report, which will be released on March 31st through the investor site on jackhenry.com. As you will recall, it was on this call last year that we announced our new technology modernization strategy. We developed this multi-year strategy to help us deliver public cloud native capabilities to community and regional financial institutions, allowing them to innovate, compete, and meet the evolving needs of their account holders. We are continuing to make great progress on the strategy's four main objectives. First, we're redefining the core processing system by unbundling services that traditionally would be in the core and building them as standalone modules on the public cloud. In September, we announced plans to build these services on the Google Cloud, and we've been testing our wire processing and authorization management services modules on the Google Cloud since that time. We currently have six clients live in early adopter status with domestic wires and plan to offer general availability for this solution in July. We expect to launch the international wire solution for early adopters in April and expect that module to be generally available late in the fourth calendar quarter this year. Second, we're working to provide multiple data integration options utilizing our open philosophy and technology. Our newest offering in this area is real-time data streaming, simultaneous constant streaming of necessary data to all systems on the platform. We're currently in beta with real-time data streaming, which is essential to support real-time payments and fraud detection. We expect this functionality to go into live production later in this calendar year. Delivering industry-leading capabilities across a single next-generation platform is the third objective. BANU is a key element in this part of the strategy, but we're working on several other additional solutions to build upon this commitment. As an example, in September, we added PayRails, a public cloud native digital payments platform, to our suite of payment solutions. Additionally, this summer, we're launching Financial Crimes Defender, our next-gen financial crimes platform with enhanced capabilities, including machine learning and artificial intelligence. This new fraud solution has been built entirely on our public cloud native platform. The last step in the strategy is to move from acting as a core processor to offering a full banking ecosystem. This includes our own capabilities plus access to leading FinTechs through a single platform that prioritizes openness, agility, speed, and optionality. A year ago, I announced that we had more than 850 FinTech providers in our ecosystem. Today, it's closer to 950 and the number continues to grow. We're also the only platform provider that has relationships with all four major financial data aggregators, Finicity, Plaid, Yodlee, and Akoya. Through these companies, financial institutions can give account holders a complete financial picture in a safe, secure manner that eliminates screen scraping. We've seen strong interest in this strategy from both prospects and customers. Anecdotally, I can tell you that we are currently in conversations with a number of prospects who have indicated that the technology modernization strategy I just described is the primary driver for them to engage with Jack Henry to help develop their technology strategy for the future. Community and regional financial institutions are the lifeblood of Main Street America. Many of them, however, are at a crossroads. The personal service and experience they are known for is being disrupted and by technology as non-traditional financial service providers have entered the market and the way people bank has fundamentally changed, especially for the younger generation. As a well-rounded financial technology company, Jack Henry is in a unique position to provide modern technology and services to help community and regional financial institutions capitalize on this opportunity and strengthen connections with their account holders. The key takeaway is that while we're successfully meeting the needs of our clients today, As shown by our performance results, we're also preparing them for the future. We're pleased with the progress we've made on this exciting strategy and we'll share more updates at our investor day in May. As we begin the second half of our fiscal year, our sales pipeline is very robust and we continue to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our clients, our ability to expand client relationships, the spending environment, and our long-term prospects for success. With that, I'll turn it over to Mimi for some detail on the numbers.