Jack Henry & Associates, Inc.

Welcome to the Jack Henry Third Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by 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 Sherard, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Jack Henry Fiscal 2023 Third 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 my 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 and 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. Good morning, everyone. We're very pleased to report another strong quarter of revenue growth and an overall solid performance by our business. 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 third fiscal quarter. For Q3 of fiscal 2023, total revenue increased 6% for the quarter and increased 8% on a non-GAAP basis. Consistent with our prior comments regarding the reduction in bank M&A this year, Deconversion revenue was down approximately 65% as compared to the prior year quarter. Turning to the segments, we again had a good quarter in the core segment of our business. Revenue increased 4% for the quarter and increased by 8% on an on-gap basis. Our payment segment performed very well, posting a 6% increase in revenue this quarter and a 7% increase on an on-gap basis. We also had a strong quarter in our complementary solutions businesses, with a 6% increase in revenue this quarter and an 8% increase on an on-gap basis. As I highlighted in the press release, our sales professionals posted an extremely strong quarter led by the core sales team. On our last quarterly call, I mentioned that the sales team set an all-time sales booking record in our fiscal Q2. Although we didn't break that record this quarter, we did set a record for the strongest Q3 in history. During the quarter, we inked 13 competitive core takeaways, so we continue at the approximately one deal per week run rate I've discussed in the past. In addition to our success signing new core clients, we signed 13 existing on-prem core customers to move to our private cloud environment. In addition to the tremendous success we've experienced in our core business this quarter, we continue to attract new clients to our digital banking suite. During the third quarter, we signed 39 new clients to our Bano retail platform, with another 35 clients signed up for Bano Business. Regarding our Bano Digital Suite, as of March 31st, we now have just over 9.3 million users live on the Bano platform. We continue to enjoy the highest consumer rating in the App Store, and we are regularly recognized as the fastest application in the industry. The feedback from our 30 Bano Business beta testing clients has been outstanding and we remain on track to deliver Banno Business into general availability later this quarter. Let me take a moment to address the banking landscape related to the liquidity challenges experienced by a couple of large regional banks in March and earlier this week. Although I'm not aware of any Jack Henry Core clients who have tapped into the Federal Reserve's new bank term funding program, I think the announcement has had a positive effect on the overall concern in the market regarding bank liquidity and I applaud the Fed on their swift and decisive action. Since those events grabbed the headlines, members of our team have spoken with hundreds of our clients, and I personally have visited with a large number of CEOs at our client banks. I'm pleased to say that our banking clients have indicated they have been largely unaffected by these events, with the exception of several who have reported an influx of new accounts as business clients look to diversify their deposit balances. Our clients typically have a diversified customer base, serve small and medium businesses, and consumers in their local communities, and have longstanding and loyal customers. So I think it's logical that they wouldn't see an adverse impact as a result of a few extreme scenarios. Also remember that a large part of our business is focused on the credit union industry, with approximately half of all credit unions with more than $1 billion in assets partnered with Jack Henry as their primary technology provider. Those clients also report being largely unaffected by the challenges in the banking sector. In late April, Intrify conducted a survey which generated responses from more than 550 bank CEOs, presidents, and CFOs, primarily at banks with less than $10 billion in assets. Approximately 77% of the respondents saw no significant inflows or outflows of deposits. 14% said they saw deposits decline by 2% or more. and 9% said they saw an increase of at least 2% in deposits. I think these results are consistent with what we've heard anecdotally from our clients. We have seen no hesitation on the part of our clients to move ahead with technology decisions since the middle of March, and as I mentioned earlier, this was the largest third quarter in terms of sales bookings in the history of our company. What's more, our sales pipeline is now larger than at any other time including a recognizable uptick in opportunities since our last quarterly call in February. I'm well aware of the challenges bankers face in today's economy and understand that things could change. But as we speak today, our clients are generally performing well, and banks and credit unions are continuing to prioritize modernization of their technology stack to remain competitive and serve the evolving needs of their account holders. Hopefully you've all seen the new corporate sustainability report that we published on March 31st. I think it's an excellent representation of the key initiatives and accomplishments we've been working on since we published our last report. In this new version, we've provided a more detailed review of Jack Henry's demographic makeup, a summary of the results of our annual employee engagement survey, an overview of our data privacy and cybersecurity practices, and an outline of our commitment to setting science-based targets through the Science-Based Targets Initiative, or SBTI, to address the reduction of greenhouse gas emissions. Additionally, the report highlights some of the public recognition we've received from organizations like Newsweek, Computer World, and LinkedIn's top companies list. As we look toward the end of the fiscal year, our sales pipeline is much larger than it's ever been, and we continue to be optimistic about the strength of our technology solutions our ability to deliver outstanding service to our customers, our ability to expand our customer relationships, and our long-term prospects for success. I look forward to seeing and chatting with many of you at our Investor Day in Denver in a couple of weeks. With that, I'll turn it over to Mimi for some detail on the numbers.

Thanks, Dave. Good morning, everyone. As Dave shared, Jack Henry had a successful third quarter, and I will call out the details driving those results and our outlook for the remainder of the year. For both the third quarter and first nine months of our fiscal year, total revenue is up 6% on a gap basis and solidly up 8% on a non-gap basis. Now, on to the third quarter detail. On a gap basis, services and support revenue increased 3% in both the third quarter and year to date. Consistent with trends over the past two quarters, services and support were negatively impacted as deconversion revenue decreased. $11 million for the quarter, and $31 million year-to-date. This remains in line with the limited broader market activity, acquisition activity in our space. With only a couple of months left, we are projecting approximately $20 million in deconversion revenue this fiscal year. However, forecasting deconversion activity is always challenging given the limited advance notice and general uncertainty of M&A. Our private and public cloud offerings show robust growth this quarter, growing 11% and 10% year-to-date. Product delivery and services decreased 10% in the quarter, 11% year-to-date, impacted by lower deconversion revenue and convert merge activity, offset by higher license and hardware revenue. On a non-GAAP basis, services and support revenue grew 8% for the quarter, and 7% year-to-date, which serves to highlight the consistent strength of our business model. Processing revenue increased 11% on a gap basis for the quarter and 10% year-to-date. On a non-gap basis, the growth was 10% for the quarter and 9% year-to-date. The increases were driven by the higher card volumes in services plus robust digital demand. Now reviewing costs. Cost of revenue was up 9% for the third quarter and 8% year-to-date. Quarterly drivers included increased card processing costs consistent with card revenue, growth, higher personnel cost, and amortization expense. These drivers are consistent across our year-to-date results. Research and development expense increased 13% during the quarter, mostly due to higher personnel costs and license fees furthering innovation. Year-to-date, these expenses increased 19% based on the same factors. SG&A rose 9% for the quarter, driven by increases in personnel-related costs. Year-to-date, the increase was 8% driven by personnel, travel, professional services costs, partly offset by the gain on sales assets earlier this year. We remain focused on actions involving facility rationalization, headcounts and travel controls, procurement wins, and other expense management. Collectively, these efforts are helping offset inflationary pressures and driving positive operational results. Despite a decline in net income, primarily related to deconversion revenue and partially offset by a lower tax rate, we delivered fully diluted earnings per share of $1.12 for the quarter. Thanks to our hardworking and dedicated associates, GAAP and non-GAAP results for the third quarter were and nine months of the year are consistent with internal expectations and set us up for a strong conclusion to FY23. As a reminder, for transparency, the impact from the gain on sale of assets, the pay rails acquisition, and deconversion revenue are shown as part of the non-gap adjustments in the press release. Turning our attention to cash flow. Year-to-date operating cash flow was $207 million down from $301 million in the same period last year due to lower deconversion revenue and the timing of taxes. The tax payments were a significant outflow at $64 million in the quarter related to a change in the timing of the deductibility of development expenses. Free cash flow, which is operating cash flow, less CapEx and CapSoftware, plus proceeds from the sale of assets was 82 million year-to-date. Excluding the previously discussed tax payments and keeping year-to-date deconversion revenue flat, free cash flow would have been approximately 163 million. While balancing repurchase activities with maintaining a conservative balance sheet, we repurchased 151,000 shares during the quarter. We also returned capital to shareholders through a dividend of 52 cents per share, representing a 6% increase. Our capital allocation priorities remain consistent. We're focused on maintaining ample liquidity, investing in our business to fuel growth, evaluating acquisitions, paying dividends, and opportunistically repurchasing our stock. This consistent dedication to value creation resulted in a trailing 12-month return on invested capital of 20.1%. With that, let's review our outlook for the completion of our fiscal year. The press release included updated full-year GAAP guidance. The GAAP guidance remains inclusive of the payrolls acquisition, gain on asset sales, and deconversion revenue. We expect the year-to-date trends to continue for the remainder of the fiscal year, impacting GAAP results. Most significantly, assuming continued minimal consolidation in our customer base, deconversion revenue will remain muted. Considering year-to-date activity, we expect approximately $20 million of annual deconversion revenue representing a $5 million increase from our previous guidance provided on the last call. To be transparent, on our August full-year earnings call, we will outline our new approach to providing guidance for deconversion revenue. While the integration of payrolls continues to meet expectations, there has been third-party implementation delays impacting FY23 revenue, amounting to a shortfall of $3 million. This revenue remains in our pipeline. We remain confident in the strategic value and financial performance trajectory. We expect full-year GAAP revenue growth for fiscal 23 to be between 5.5% to 5.9%. With respect to full-year GAAP EPS, we expect $4.85 to $4.87 per share, with improvement driven from positive impacts from a modestly higher expected deconversion revenue, lower tax rate, partly offset by a slight increase in payroll dilutions. Non-GAAP guidance remains unchanged due to the continued impressive and consistent performance of our business model. So in closing, we delivered another quarter of strong operational and financial results and remain solidly optimistic about the conclusion of this fiscal year. We thank all of our investors for their continued confidence in Jack Henry. Debbie, will you please open the call for questions?

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from Raina Kumar with UBS. Please go ahead.

Good morning, David. In the past, you've spoken about having the ability to sell Bano to non-Jack Henry core customers. How is that progressing? And in general, are you seeing the opportunity to sell your core processing services to larger financial institutions?

Yeah, good morning, Raina. So two questions in there. First off, as far as Bano is concerned, and I think I talked about this on the last earnings call. I know I've talked about it in some of the prior side chats that I've done with some of you. We had, in fact, a plan to start selling Bano outside the base here in the fall of this past year. And what we learned, much to our surprise, was that some of our competitors had identified that as an opportunity for them to hang on to their core customers. The fact that their core customer was going to be able to use Bano, they were essentially using that as a selling point for those customers to retain their legacy core system because they would get the best of breed digital banking system without having to change out the cores. And that certainly was not part of our strategy. And so we kind of backed off on that. We were prepared in the fall to start selling outside the base. We backed away from that now. We're really reworking that strategy with a more targeted approach. And so you'll hear more about that from us, I think, later this year as far as how we're going to go to market with Bano outside the core base. As far as the – now you'll have to remind me the second part of your question. Oh, selling up. Yeah, sorry, selling up market. Good thing I have help here in the room. Selling up markets. First off, we're having great success with Silver Lake in the banking side. Of course, we're the dominant player on the credit union side already of markets. Approximately 50% of the credit union industry with assets over a billion are already Jack Henry core customers. So we're already the dominant player on the credit union side of the business. On the banking side, we've had great success here in the past few years moving up market, particularly with our Silver Lake core system. What's been interesting now with the tech modernization strategy, we are engaging with a number of customers now that are significantly larger than you would normally think of as a Jack Henry core customer who are very interested in what we're doing and are now seeing Jack Henry as the the very probable technology partner that they want to partner up with going forward. So more to come on that. You know, it's early days for us with some of these very large customers that we're talking to, but the prospects, I think, are pretty bright, and much of that being driven by the tech modernization strategy that we've been talking about lately.

Very helpful. And then if I can fit one in for Mimi. Mimi, could you just comment on the debit processing volume in the quarter and seconds Secondly, if you can just give us your preliminary thoughts on how FY24 revenue and operating margin could pan out, given that you're close to your fiscal year end. Thank you.

Thanks, Reena. Yeah, so we continue to see the trends that have happened for the first nine months of the year and are consistent with the broader market data that you're getting from other industry players in terms of Slightly slower as it relates to consumer sentiment impacting those trends and a little bit more going to the credit side than the debit side. And as you know, we have a much bigger profile on debit in our business. So our guidance incorporates the continuation of that trend. And then to your second question, unfortunately, it's a little premature at this point to talk about FY24. Our teams are still heads down, collaborating on the budgeting process, and we'll probably share that more on the August call than we will today.

And can I add one comment on the debit trend? So I think there was a bit of a misunderstanding after the last call. You know, we attributed a part of our guide change to the fact that the debit volumes we saw going forward were going to slow just a little bit, and certainly that's true, but That doesn't mean the debit business is underperforming. The debit side of our business has been a real solid performer for us this year. We just had a little higher expectation for the remainder of the year than is reality, and that's why we made the adjustment. But the debit business is performing extremely well at Jack Henry.

Thank you.

The next question comes from Dan Perlin with RBC Capital Markets. Please go ahead.

Thanks. Good morning. Dave, I had a question, you know, going back to the demand environment. I feel like there's this huge disconnect in the market with the stocks and kind of what we hear from the banks versus what you're seeing. I'm just wondering if maybe we're getting it wrong a little bit. Like is the pressure that the banks are feeling right now driving more, you know, tech demand to you as opposed to maybe the converse, which is I think what most people are expecting?

Yeah, it's an insightful question, Dan, and I think what you're saying is generally correct. So if you're running a bank or credit union in the United States today, You know, they've been performing pretty well and we all know the challenges that they're under and rate increases and, you know, cost of capital and that kind of stuff. But if you're running a bank or credit in the United States today, you, for almost all of them, they need to continue to focus on modernizing their technology stack for one of two reasons. One, you're trying to attract new customers to your institution and customers aren't coming into the branch anymore, right? They're expecting to do things through some type of digital presentation layer and So for most banks and credit unions, that requires them to continue on this modernization track and make sure that they have the tools to attract not just consumers but business customers. Small, medium, and business customers are the lifeblood of our customers and how they operate on the banking side. And so there's that driver. But then the other side of the equation is efficiency. So for most bankers, they can quote their efficiency ratio immediately to you without looking at any piece of paper. They can quote it off the top of their head. because they are all focused on efficiency and trying to figure out where are those areas where we can drive efficiency through the operation. Well, generally, technology is at the crux of where they're going to find efficiency. And so there too, Jack Henry is in the mix, having those conversations with our customers. And then you throw into that, on top of that, fraud and cybersecurity and all those kinds of things, all of that stuff is driven by technology. And so, yeah, I think there is a bit of a disconnect in this in this sense that because there's some turmoil in the industry, Jack Henry's sales are going to be negatively impacted. They're just not. The businesses continue to run, and they need to continue to find technology solutions to help them with all those things that I just highlighted.

No, it sounds somewhat counterintuitive, but it clearly makes sense in the current context. The quick question or follow-up on margins here is, I know you don't want to go out to next year, but I would appreciate if you could maybe talk about some of the key drivers and levers that you're going to be able to have here, whether it be expense control specifically, kind of mixed to the business, just as we start to think about the margin expansion story again. Thank you.

Sure, Dan. Great question. So as we talked about previously, we continue to see margin expansion throughout the year. We knew it would be a modest amount this year. Earlier in the year, our original guidance was for flat for the year. We're hopeful that we're on track for a small increase in margin expansion. I would say the things we're working on are consistent. We do a ton around efficiency, continuous improvement. We've done a lot on internal automization. And procurement has been a huge win for us as we think about streamlining partnerships and really prioritizing that spend. So we're being really thoughtful on controllable spend like travel, headcount additions, really thinking about each position from a zero-based perspective. But there's nothing structurally that concerns me in terms of the ability to, once again, continue back now that we have the normalization of of some of the headwinds we've seen past years and return out of COVID environment that will return back to a margin expansion story.

That's great to hear. Thank you.

The next question is from Nick Cremo with Credit Suisse. Please go ahead.

Hey, congrats on the strong results. Thanks for taking my question. I was hoping to get some more color on the performance in the payment segment in the quarter just across the various business lines. And if you received any one-time benefits related to the banking turmoil like some of your competitors. And just as my follow-up, are you still expecting payroll to be modestly accretive in FY24? Thank you.

So let's do payrolls first. Greg's prepared to give you an overview of payrolls, and then we'll talk about the rest of the payments business.

Yeah, and I think, you know, so I'll go ahead and start with payrolls, but a couple things. So one, you know, Mimi alluded to the fact that in her opening comments around we do have some challenges with a couple of third parties. And I think some of it's headcount related and other constraints that they have to get some of the work done to allow some of our contracts that are already done and in the implementation queue to be brought into the production queue. So there's a few of those constraints and things that we're working through. But the good news is that since September when we made that acquisition, we've actually sold 48 new new contracts and 17 add-ons. Add-ons are things like the P2P solution, we have a loan payment solution, things like that. So the sales engine is starting to move and a lot of the sales that were done previously before we acquired PayRails were really predominantly done through that third-party channel. So of course we have a much larger sales force and folks that are focused on selling more direct deals. So we're very optimistic on what's happening in the sales side of this. We just need a couple of the integration partners to be able to get some of their work done that will help us accelerate the revenue in fiscal year 24. And I can start on the payment side too. So I think, and Mimi alluded to what was going on on our card business, which continues to go very, very strongly as far as growth. But when you look at the rest of our payment businesses, there's a nice mix of growth, maybe not to the same level that we had. Remote deposit capture in our EPS business was significant during the pandemic. Obviously, folks were not going into branches at all, though that continues for the most part. That business is not growing at the same pace it did, but still in a double-digit growth in our portfolio. So Things that we're doing in our pay center business around general payments and preparation for FedNow, which we can talk about at some point too, but in our clearinghouse business and what we've done with Zelle, we continue to have about 60% of all the clearinghouse customers available. that are out there. There's only about 300 clearinghouse, and we have over 180 that are live on Jack Henry today. That continues to grow nicely, and so that business continues to have a lot of upside.

Yeah, I would just add that there's consistency. To Greg's point, there's consistency across remit, cards, payments, also led by things like the fraud and other risk management solutions that are add-ons. So I would say that trend from a consistency of growth will continue, then added by the benefit of payroll.

Okay, the next question comes from David Togut with Evercore ISI.

Thank you. Good morning. You've called out your new sales pipeline at a record level. Could you walk through what are the biggest drivers of that? Is that new tech modernization modules? Is it Bano Business, Silver Lake? What are the underlying components of that strength?

Sure, Dave. And, you know, one thing I'll highlight as I go through this, you know, when I talk about pipeline, I know there's been some confusion in the past. I'm not talking about individual deals, you know, how many core customers are in the pipeline or anything like that. I'm talking about the, you know, the dollar amount essentially. And this is a non-GAAP number, but it's the dollar amount that we track as far as the value of each contract. So it's, you know, in theory, that all converts into revenue at some point after deals are signed and they're implemented. As far as the drivers, so core continues to be king for us when it comes to a driver. We have just a tremendous amount of core activity right now, both banking and credit union, as far as customers that are talking to Jack Henry about trading out their existing technology. Some of that is certainly driven by tech modernization, but I don't think it's as much driven by, you know, I want to sign tech for the tech modernization module right now today. It is more about Jack Henry has a strategy that makes sense to us as bank and credit union executives. Their strategy makes sense. We need to look at them now and get to Jack Henry now because we want to be partnered with them as they continue to evolve. And so there's a lot of that that's driving interest in our existing core customers, Silver Lake primarily on the banking side and, of course, Scimitar on the credit union side. But then on top of that, Bano continues to be – A driver, and that's why I call it out on these calls almost every time. There's a tremendous amount of interest in BANL. Our new financial crimes defender solution that we've talked about on this call, that's rolling out here very soon. We have a lot of customers that are looking at financial crimes defender because it's the first brand new ground up public cloud native solution. fraud solution in the industry in many years. And so lots of interest, not only inside our core base, but outside the core base in that solution. Our treasury management solution is getting great reviews today. So continued interest in treasury management. Certainly cards, we've talked about the number of customers that we've been adding to the cards business. So continuing to drive interest there. Our online commercial lending solution, tremendous amount of interest in that. So it's just a broad variety of solutions I think the common thread in all of that is almost all of those non-core solutions have been written and rolled out within the past two, three, four years. So it's a new technology that people are interested in. And then, of course, on the core side, you know all about our tech modernization initiative there. And so you put all those things together. Much of what's driving this is the recognition in the industry that Jack Henry is has put a tremendous amount of investment into brand new technology and new solutions to help our customers solve problems. And so that's what's getting us a lot of attention.

This is Greg. I'd like to add a relevant example. So we actually just got an inbound request from a large regional that hadn't talked to us since 2010. And they came to us and said, hey, we'd like to renew conversations based on what we've heard about you in the industry, the tech modernization story, and things in general. And that's a relevant example because, you know, these are larger institutions that we typically wouldn't have seen in the past that, again, that are inbound to us because of the things that we're doing and the stuff that Dave just described.

What's the asset size of that large regional bank, Greg?

It's greater than 50. Billion. And we're engaged today, Dave, with a number in the mid-20 billion space. Several banks in the mid-20s are talking to us today, and I think a lot of it is because of what they've seen with tech modernization, but they're not talking about moving right to that platform. They're talking about Silver Lake and then evolving to that platform.

Understood. And just as a follow-up, what's your latest view on timing of rollout of FedNow and Jack Henry's role and how material could FedNow be to Jack Henry over the next 12 plus months?

Yeah, this is Greg. I'll take that question as well. So good insightful question. We are absolutely ready. We're already fully certified. And on July the 19th, when the first transaction takes place, we will be part of that transaction process. We have 20 institutions that will be going live between the July 19th timeframe and sometime in late August based on just rollout with those institutions. We can go as fast as they want to go. We have 51 contracts that are already sold and a significant number of others that are in process just based on interest. I think to your point about significance of where this is in our portfolio, Time will tell. A lot of it's going to be based on use cases, and there's a lot of rumors that the Fed in general will be mandating several use cases that will be important for institutions to be set up on the receive now, at least aspect of the equation, allowing them to receive payments if one comes to them. So we are having very detailed conversations with a lot of our institutions about the importance of at least being set up on the receive aspect, even if they're not ready to go to the send aspect. But again, we're very bullish on this. The clearinghouse, there had been some challenges just because some institutions that we work with were a little leery of working with the larger you know, conglomerate that owns the clearinghouse versus the Fed being a part of this. So we think we're going to see a little more uptick in the FedNow solution than maybe that we saw so far in the clearinghouse one.

Just to emphasize, Dave, the level of our involvement with the Fed on this project, I was just in Washington, D.C. on Monday, so two days ago, meeting with some of the Fed presidents and the FedNow team, and the president of our payments division was with me, talking strategy, talking rollout. This was a Jack Henry-only meeting with these Fed presidents, so we are very engaged with the Fed, and it's top of mind for us to make sure that we're helping our customers take advantage of this opportunity.

Understood.

Thank you. The next question is from Vasu Govil with KBW. Please go ahead.

Hi, thank you for taking my question. I guess first one, I know you will share more on your investor day, but just thinking about revenue growth next year, what are some of the puts and takes that we should consider?

Hi, Vasu. Well, I appreciate the question. We're still in the midst of planning. In fact, this afternoon we'll be spending the whole afternoon with the sales team on their planning for next year. I would say overall, as Dave mentioned, a continuation of both the transition and implementation from a great pipeline from the last two years, plus the continued interest in some of these new products. Bano Business wasn't in the year numbers for FY23, will be in 24, so that's a nice bump as well. But I would say it's going to be a continuation of a diverse portfolio growing very well.

That's helpful. And then just to follow up on the complementary segment, clearly Bano is a big driver there. Maybe, David, you could talk about what are some of the other products that rise to the top in terms of growth drivers. And then as we think about growth in that segment long term, is mid-single digits sort of the right base going forward, or do you see that accelerating?

I'm sorry, I missed the last part of your question. Is what? Mid-single. Oh, mid-single digits? Okay.

Yeah.

Sorry, yeah. So, you know, as you know, Vasu, the complementary segment is a little bit of a challenging one to talk about because there are so many solutions in there. But I understand your point, trying to figure out what are the key drivers. So there are several. I already highlighted the Financial Crimes Defender solution that we're just now rolling out. So we definitely expect that to be a key driver for us in the coming year. BANO is in that segment. And so BANO will, of course, continue to be a driver as we're rolling out BANO business. Treasury management that I called out a little while ago, Treasury is in that segment that will continue to be a driver for us. Most of the fraud solutions that are not specific to payments, so the payments fraud pieces show up in the payments segment, but the other fraud type things, security solutions, for example, those are all in that segment that is always top of mind for our customers. So that continues to be a driver for us as well. So it's It's just a lot of different things. And then as I mentioned earlier, our online commercial lending solution, that has really picked up here in the past several months. We've had that solution in market for probably four years now, but in the past few months, it's really picked up as far as the level of engagement with customers and prospects. And so a bunch of... a bunch of different pieces. And so to the second part of your question about, you know, mid-single digits, I think that is a good assumption because with so many solutions in there, you have some that are growing quickly and some that are kind of, you know, just steady performers. And so I think that's a good assumption for that segment for the long term.

Great. And just on that online commercial lending solution, sort of any drivers why you think that's gaining more traction now?

Yeah, well, I think it's because it's an interesting thing when you work with banks. In banks, most bank CEOs grew up in the bank as a commercial lender. That's their background for most of them. Commercial lenders, they're the moneymakers in the bank, right? You can talk all day long about all the consumers and what wonderful relationships you have with your consumers, but what really makes money for a bank is the commercial lending business. And so that's small, medium business customers, and then, of course, even larger customers. Commercial lenders tend to have a process that they follow. They're the moneymakers. They're the people who have a process that they follow. They have tended traditionally to be averse to using more technology. But now with so many people, particularly on the backside of the pandemic, so many people not wanting to go to the branch, they've gotten used to this idea of being able to do everything through some kind of a digital layer. Commercial lenders are getting a lot more comfortable with the idea, and I don't say they like it, but they're accepting it. They're getting more comfortable with the idea that their customers, small, medium businesses, expect to be able to apply for a loan and interact with the bank using a commercial presentation layer. That's exactly what our solution does. It's a complete commercial lending solution that is hosted online where the borrower can do everything they need to do through that presentation, and then the lender can interact with them, again, through that technology. So I think it's a result of the backside of the pandemic, customer expectation has changed, and lenders are kind of oftentimes grudgingly accepting the fact that their customers want to do things differently, and they're now thinking about how do we adopt different technology to make sure we take care of our customers.

Great. Thank you very much.

Certainly.

The next question is from Peter Heckman with D.A. Davidson. Please go ahead.

Hey, good morning. Most of my questions have been answered, but I wanted to follow up on FedNow. I guess, is it your impression that with FedNow that the primary use case is going to be enterprise B2B and likely replacing same-day ACH? And related to that, are you aware of any other use cases that might involve the consumer or other sort of niche processes that you think are going to – be strong right out of the gate.

Yeah, Pete, actually, I think that could be one example. I think what we have seen even with some of the other solutions that are out there that we think will be the primary use case is with the gig workers. The gig workers taking the payments that they're getting and moving them using – and remember, the FedNow solution actually is truly real-time. The Clearinghouse solution still has kind of a batch settlement on the back end, and so the ability – though they have access to their funds immediately, the process is different. But using the gig workers to move those funds into their FI accounts – We see that today with a lot of the stuff that we have with the clearinghouse, and the Fed believes that to be a big one. The other one is having the FI customers, the financial institution customers, actually moving money from external wallets into the depository accounts as well. So there's a whole host of use cases that are being built out of those two scenarios, as well as, and Dave was just there, there's going to be some, I don't know if I would call them mandates, but there's going to be some strong requests for things to be done through the FedNow account for people stuff like various tax payments. And one of the things we talked about Monday was VA benefits. Yeah, yeah. So there's going to insurance payments, things like that. Things that the Treasury and the Fed can control, they're going to be pushing that. So, you know, that's why it's important for processors like Jack Henry, who can really kind of help get to that last mile thing. of institutions to get that received now turned on. So regardless of where that payment is being initiated from, it has a place to land.

Okay, that's helpful. And just to clarify, though, again, with that now, it doesn't sound as if there's a lot of applications that are currently either cash-based or card-based that will be replaced with real-time payments. It's primarily cash. some form of ACH or interbank transfer.

Is that how you see it? No. I do see some reasonableness to some of the card products. There's various things that happen today in the B2B world that where transactions that typically would have gone out paper maybe would have gone out through a virtual card program or things like that where there's interchange. And some of those programs could be disintermediated because of this type of solution. So I think there's going to be some heavy focus on B2B solutions as well because there's so much paper in the process today. and other types of card payments maybe at a merchant level, where depending on how the merchant is set up, could those transactions to them or from them end up going through that channel as well. So yet to be determined, but I think the card part of this, specifically on merchant side and specifically in B2B payments, could have some chances for disintermediation.

Okay, good. That's helpful. Thanks.

Sure. The next question is from Kartik Mehta with North Coast Research. Please go ahead.

Hey, Dave. I know you and I have talked about this a little bit, but, you know, one of the things I think that gets misunderstood is how strong your pipeline is and how much visibility you have on revenue. And I'm wondering if you could just talk about, you know, Just looking at the pipeline and what kind of visibility you have and what kind of confidence that gives you over the next 12 to 18 months.

Yeah, thanks, Cardick. So, you know, it's an interesting thing in the business that we're in with the recurring model, recurring revenue model that we've built. So first off, you know, when it comes to the contracts that we already have signed, we, of course, have a tremendous amount of visibility because we're, you know, almost 90% recurring revenue as far as the contracts that we have in-house and the kind of watching the revenue build on those contracts. And then you know that once we sign a customer, oftentimes, depending on the product, it can take one month to 12 months, depending on what they purchased from us, for that revenue to start layering in. So we have visibility into that. And then as far as the pipeline is concerned, so when you've been doing this as long as I have, and I've been doing this a long time, we have a very predictable model. So I can I'm not going to quote numbers here, but I can tell you with a pretty high degree of accuracy, if the pipeline is X, then Y percentage of the pipeline is very likely to close because we have years and years and years of history doing this. And so we know that that's going to translate into Z dollars of revenue over time. And so we can kind of do that math and predict pretty accurately what the impact is going to be. Now, the challenge, again, is some of those solutions, you sign a contract today, and we won't see the first dime, practically, of revenue for 9 to 12 months. Some of them you sign a contract today, and you have revenue flowing in in one month. And so, you know, there's some art to this, but there is a lot of science to it as well, just based on all the experience that we have doing this for as long as we have and understanding the way these contracts work and the way customers make decisions.

Well, sometime you'll have to give us X, Y, and Z, Dave. Nope, not going to happen. And then just thinking about, I don't want to call it a banking crisis, just the issues that are out there and looking at Jack Henry when the last crisis happened and kind of how you looked at the business then and what happened and if there's any lessons you could take from that and what's happening today. I know they're very different, but just trying to get a feel for maybe what we could clean.

Yeah, it is a very different environment today from 2007, 2008 for sure. And, of course, if you go back in time and look at Jack Henry's performance during the period of the Great Recession, we performed really well, even though there were hundreds of banks that were being shut down at that time. And, of course, many of them were our customers that were being shut down So I think the major difference, if you look specifically at Jack Henry between then and now, is at that time we were still very dependent on license fees and maintenance revenue. So when customers kind of pulled their arms in and said, we're not spending on anything, our revenue had the potential to drop significantly because we were so dependent on license fees. And whenever you sell a license, you see the impact in the quarter as opposed to being spread like we do today. Today, of course, so back then we were maybe 50%, 60% hosted today or recurring revenue. Today we're 90% recurring revenue. So very different from a Jack Henry perspective as far as the predictability of revenue because if a bank is challenged, unless they shut down, They don't quit spending money with us. They don't decide all of a sudden we're just going to quit processing loans. You have to still process loans, which means you still have to pay Jack Henry for that service. And so today I would draw a significant contrast as far as our business and the resilience of our business as bankers are going through what they're going through right now. That does not say we're bulletproof. It doesn't say we're totally immune to any challenges out there. But I think we have a much more resilient model than we had during the Great Recession at that time. And again, if you go back and look at how we performed during that period, we performed pretty well. And so my expectation is that we should be able to weather this storm right now. And of course, much of this storm is the result. I mean, these are runs on the banks that are happening, right? So you get some headline somewhere that says this bank has a liquidity challenge. And by the way, liquidity and capitalization, those have been conflated over and over in these conversations. Two totally different topics, and yet, you know, the run on the banks are happening because, you know, wildfire, the spreads like wildfire through social media that there's some challenge at a bank. Everybody uses their digital banking solution to withdraw money from the bank, and all of a sudden they're in trouble. And so I just view this as two totally different scenarios, but if I look specifically at our company, we're in a much better position to weather the storm than we were even in 2008, and we performed really well in 2008.

Perfect. Thanks, Dave. I really appreciate it.

Certainly.

The next question is from John Davis with Raymond James. Please go ahead.

Hey, good morning. Mimi, I just wanted to follow up on Dan's question around margins. I think the guide implies about a 250 basis point year-over-year improvement in the fourth quarter. So anything to call out from a timing perspective or what kind of gives you confidence in that ramp in 4Q margins?

Yeah, thanks, Judy. Great question. Yeah, I think that 250 is a good estimation. I think we feel good about that. We always knew that it would be a grow as the year continued kind of situation, and we're seeing that transpire. So I feel good with that estimation.

Okay, and then you called out tax payment timing for the free cash flow in the quarter. So how should we think about free cash flow conversion for the full year? Obviously, 4Q is always a huge free cash flow conversion quarter. So just curious, I think you did guys in like mid-80s conversions last year. Just any sort of guide rails for us for the full year?

Yeah, great question. And JD, I love that you're looking at it on an annual basis versus a quarterly just because of the lumpiness that any one quarter can have. And this quarter in particular between the deconversion and then the larger tax payments and just kind of going into that, You know, we were waiting for some legislative clarity around IRC 174, like a lot of companies that impacted, you know, the capitalization, the deductibility of that capitalized labor. Unfortunately, with lack of legislative clarity, you know, we had to make a payment. So you wouldn't normally have seen that kind of maybe spread over a couple of quarters. That's a timing thing. It doesn't impact our tax rate. That will reverse over several years and kind of normalize. So I think that obviously will not be part of Q4. As you said, we have a large inflow, so you'll certainly see an uptick. I think the reality is because of deconversion revenue, we also have a couple of larger renewals of some third-party expenses in third quarter. I think we'll be light of our target of the 100% free cash flow conversion that we target, but I think it'll definitely be an uptick from third quarter.

Okay, and the last one for me, Dave, you talked about some of the impacts from all the banking turmoil has been kind of increased in account growth. So maybe how should we think about your business? Like what percentage of revenue ballpark is priced on kind of a per account basis versus transaction or anything else, just to kind of help us understand what the account growth can mean from a revenue perspective?

Boy, I don't know that I know the answer to that question. Anybody want to give me a guess? I mean, the payment businesses, but he's talking about account-based, so it's the core business, essentially. Yeah, 25%. Okay, we'll go with 25%, JD. Okay.

All right, thanks, guys.

Sure.

The next question is from Dave Koenig with Baird. Please go ahead.

Yeah, hey, guys, thanks. Maybe I guess first of all, just on Q4, kind of the implied guide is for somewhere around 6%, I think, kind of non-GAAP revenue growth, which the rest of the course of the year, I think we're kind of six to eight and a half. So it's a little slower. What's the reason for the slower in Q4?

Yeah. Hi, Dave. Morning. I would say, if anything, I think there's a little bit of conservatism in that. I would expect us to maybe be a slightly biased towards the higher side of that range You know, I think with a little bit of uncertainty still in the consumer sentiment, you know, we just wanted to think about a little bit conservative. But the trends, I feel, are still quite strong for the year in terms of getting us to our full year number or better.

Okay. Okay. And then I guess on pay rails, I think year to date, you add back the loss from acquisition to non-GAAP margin, I believe, And I think it's trended like around 10 million year to date loss. So probably a little more by the end of the year. Is that all going away in 24? And basically, is that, you know, why you can get to accretion in 24? Like, is that just the, you know, the main what just kind of goes away?

So it will not be part of non-GAAP in 24 for sure, so that will be one component. But I also think it's just a question of having let some of those inflationary pressures like the great resignation, the wage inflation we saw, some of the third-party one-time costs like Java are now in our normalized base rate.

but he was specifically talking about payrolls.

He was talking about the impact on margin. So I think we're still set for margin expansion in 24 because of the base now running through the 23 numbers where it wasn't in the 22 numbers. So I think we're still in good shape as well as some of the efficiency measures that we're continuing to focus on internally.

Gotcha. Thank you, and I appreciate it.

The next question is from James Fawcett with Morgan Stanley. Please go ahead.

Hey, good morning, everybody. Thanks a lot for taking some time. I think most of the questions around demand and sales cycle, et cetera, you guys have at least addressed a little bit. I wanted to ask quickly on capital allocation. I think Dan Berlin raised the ability to change in sentiment in the market, and clearly that's impacted your stock. At the same time, we continue to wonder about M&A. Any comments on how you're thinking about capital allocation and what looks attractive to you right now and how you'd prioritize?

Yeah, so nothing has changed there, James, as far as capital allocation is concerned. We're committed to our dividend policy, and Mimi emphasized that in her comments. As we've said many times before, M&A is always at the top of our list. We do share buybacks when it makes sense for us, and Mimi highlighted that, of course, in her comments as well. But M&A is You know, we are a, I've said it many times, we're a solid acquirer. We know how to do integration well of companies once we acquire them. We're very disciplined in only pursuing acquisitions that we think are really going to be additive to our business in the long term. I think payrolls is a great example of that. You've seen that it's a little challenged in the short term, but when we look at what we're doing with that business in the long term, I think it's going, I'm absolutely convinced it's going to be a real home run for Jack Henry in the long term. And that's the way we think about doing M&A. We're always looking for those things that we believe we can take advantage of as a long-term solution for our customers to help our customers perform better. Now, you know, I was hoping, and I've said this in many forums, that by this time and even several months ago, that there would have been a lot more interesting M&A opportunity for Jack Henry. We have been looking at some companies. We continue to look at some companies to acquire, but there just hasn't been anything that has kind of jumped over that bar for us so far here, even though the deal flow hasn't been particularly strong. We have been looking at some deals, but nothing's jumped over the bar here recently, but we're going to continue to look.

Dave, the only thing I would add to that is just to add one more thing, which is consistent with our priorities. is paying down the debt through our normal cash flow from operations. And so you would expect to see that over the next, you know, several months, years, that we're going to continue to decline the debt balance.

Thanks for that, Mimi. And then, you know, Dave, we've seen a lot of headlines around technology layoffs and headcount reductions, et cetera. How is that impacting your ability to go out and hire and advertise? talent to the Jack Henry pool and maybe even that of your customer. Anything you can talk about there?

Yeah, so it's been an interesting time since the great resignation. You know, we went from the great resignation where everybody was resigning their jobs and going to find the pot of gold at the end of the rainbow to, you know, within about three months, all of a sudden companies were doing these massive layoffs. And so, you know, a lot of heads were spinning, I think, among employees at a lot of these companies. So for us here in the recent past, we have picked up some really good new hires, and we've had some wonderful, what we refer to here as boomerangs, people who left because they wanted to chase the pot of gold, and then they realized the pot of gold wasn't there, and they called us up and said, can we come back? And those are great additions to us because they already know our company, they know how we do things, and they're oftentimes really talented folks. We've had a number of boomerangs come back. We are attracting some great talent from some other companies in our space that have been challenged, and so they understand the industry, they understand what we do, may not understand the Jack Henry products completely, but we found some really good talent, people that were a little shaken by what's happening at other companies in the industry who are looking for a steady provider, and so they've joined Jack Henry. But we're not just hiring left and right. We're being very judicious about when we hire and where we hire, And so we're trying to be very selective about who we choose to join the Jack Henry team, but I think the overall message would be we've had some great additions to our team in the last two, three, four months.

That's very great color there, Dave. Sure.

The next question is from Dominic Gabriel with Oppenheimer. Please go ahead.

Hey, great. Good morning, everybody. David, I don't know the best way to ask this, so I'm just going to go ahead and ask. I guess you're the sole survivor of the big four companies in core platform as far as CEOs go from pre-pandemic. You know, a lot of our clients actually do ask about, you know, what is, you know, the long-term future? succession plan, if there even should be one, you've had a major contribution to this enterprise. And so I do get questions about, you know, if a succession plan ever came, would it be someone inside, outside? How do we think about, you know, that, you know, not thinking about timing, but what does a succession plan look like in the past for Jack Henry in general for CEO? And I'm not saying you should leave.

That's the most polite way anybody has ever described me as old. You're old, Dave, so what's the plan? No, so, Dom, it's a reasonable question. Obviously, I can't share specifics about either my timing or succession planning at Jack Henry, but I will tell you. And, of course, I'm also board chair at Jack Henry, and so this is a real focus for us is making sure that we have a solid succession plan in place as a matter of fact, So next week is our quarterly board meeting, and the board meeting in May is when I always review with the governance committee my personal succession plan. I also review with the entire board the succession plans for the entire leadership team. So I'll have all the members of the leadership team with their successors or what the plan is. So if it's an internal candidate, I'll highlight that for the board. If it's a plan to do a search, then we I'll highlight that as well. And so, you know, all of those options are on the table. What I normally do is I walk into the governance committee meeting with some suggestions of internal candidates and also external candidates. I know a lot of people in the industry, and I know people who might be a decent fit for a role like this, and so I try to give the board a good kind of overview of who potential candidates might be, and then ultimately, of course, it's the board's decision to hire or fire someone the CEO. And so, but we have a very rigorous exercise that we go through around the topic of succession, not just for me, but for all members of the leadership team at Jack Henry.

Excellent. Excellent. Thanks so much on that one. And Mimi, you know, you've mentioned in the prepare remarks a few times about personnel-related costs increasing year over year. And this was kind of talked about in the last question, but not exactly. Is there a way to kind of break up new hires versus wage inflation versus tech talent demand in those growth rates? Or just to kind of parse out, you know, largest factor, least important factor as we think about the go-forward growth and expenses for personnel? Thanks so much.

Yeah, good question. You know, I would say, you know, the headcount on account basis has been modest. We're about 3% increase in headcount. from a number of positions year on year, which is a much lower percentage than obviously the fully baked cost of that. As Dave mentioned, we're being very judicious on where those heads go. We've been focusing on customer-facing roles like service roles as well as R&D roles. And then we look at every role on a zero-based budgeting perspective when we're thinking about that. I can't really give you a lot of breakout in terms of, because we just don't provide that level of detail in terms of vacancies versus new and rollovers, but I would just say we're being really judicious about it.

Great, thanks.

The final question is from Mark Feldman with William Blair. Please go ahead.

Hi, guys. This is Mark on for Chris. Thanks for taking the question here. So just wanted to ask on Bano, do you guys have any information regarding the asset size of the institutions that you're seeing, you know, the primary uptake from Bano and any interest in it? And I guess additionally adding on to that, what does Bano for Business do for your sales forces' ability to close Bano signings that they didn't have before without the offering?

Yeah, so we have about 700-ish clients that are live today on Bano, and they are all over the board as far as asset size. I would say that the primary adopters have been a little bit on the larger side, so let's say averaging closer to a billion dollars probably as opposed to something smaller than that. So that's been the primary adoption, but we continue to see great demand across asset sizes. And as I highlighted earlier, most banks and credit unions need to modernize their technology presentation to consumers and business customers through a digital presentation. As far as Bantam Business, So if you think about traditional Banno, it is designed for the retail consumer, so you or me, and all the functionality is retail in nature. Banno Business provides a similar functionality but for business customers, so specifically things like cash management and the ability within the application for the, let's say, the CFO of the small-medium business and the CEO to communicate about financial transactions within the application. So it's a really interesting and robust application designed specifically to help a business manage their business and communicate about financial transactions and decisions within the business but in the financial application. So it's a revolutionary new solution and we have a lot of anchors that are very excited about the rollout of this platform.

Great. Thanks. And if I can ask just one more on cards with credit cards. I know in the past you originally didn't have the sales force that could go out and the infrastructure to go out and sell the product. Do you have any update on where that is today? And, you know, once we can, when we can start seeing some deals getting signed with credit cards? Thank you.

Hey, Mark, this is Greg. I can take that one. So, yes, we have a dedicated sales force. We also have dedicated install and operational folks that now all have the experience. So that is starting to ramp up. We also added, if you saw a press release we did a couple months ago on an agent program that we've added, we now have a lot of interest in that agent program. And that's typically... for smaller institutions that they themselves don't have the folks or the infrastructure to really support that type of full-service credit solution. So that's given us another angle to sell the credit side of our business. We already have, I think, two or three now in the pilot phase of that, and we have a pipeline of about ten or more just in the last two to three months. So that's starting to grow. But all of those products will continue to accelerate growth over time.

Great. Thank you.

Sure.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, Debbie. We have additional upcoming investor engagement opportunities with management at multiple investor events. The first one is going to be our Annual Investor Day, which will be held in Denver on the afternoon of Monday, May 15th at 1 p.m. Mountain Time. The agenda includes presentations from a wide selection of the Jack Henry Management Team and a reception that will include demos of some of our newest solutions. We look forward to hosting those attending in person and via the webcast. We are pleased with the quarterly results and thank all Jack Henry associates for their efforts in producing these results. Thank you for joining us today, and Debbie, would you please provide the replay number?

Yes, the replay number for today's call is 877-344-7529. And the access code is 145-2467. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.