Jack Henry & Associates, Inc.

Good morning and welcome to the Jack Henry second quarter 2024 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 Vance Sherrard, Vice President, Investor Relations. Please go ahead.

Thank you, Laura. Good morning, and thank you for joining us for the Jack Henry Second Quarter 2024 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 comments on our business and industry outlook. After Dave concludes his comments, Greg will discuss his transition to CEO, provide commentary on our operations, including updates on our technology modernization strategy, and other key initiatives at Jack Henry. Mimi will then provide commentary around the financial results and updated 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 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 the quarter. For the second quarter of fiscal 2024, total revenue increased by 8% on both a GAAP and non-GAAP basis. Operating income increased 11% for the quarter and increased 14% on a non-GAAP basis. Turning to the segments, we again had a solid quarter in the core segment of our business. Revenue was up by 8% for the quarter on both a GAAP and non-GAAP basis. Our payment segment also performed well, posting a 6% increase in revenue this quarter on both a GAAP and non-GAAP basis. We had another strong quarter in our complementary solutions businesses with a 7% increase in revenue this quarter and a 9% increase on an on-gap basis. As I mentioned in the press release, our sales teams again had an outstanding quarter with a number of notable wins. In fact, this was the best second quarter ever for sales bookings and second highest sales quarter in our history, trailing only our June quarter last year. In the second quarter, we inked 14 competitive core takeaways, with four of them being multi-billion dollar institutions. Additionally, we signed 12 deals to move existing in-house core clients to our private cloud environment. We continue to see success with our card processing solutions, signing 12 new card processing clients this quarter. We also continue to see strong success signing clients to our Banno Digital Suite with 135 new contracts in Q2, including 56 contracts for our new Banno business offering. We also surpassed 11 million registered users on the Banno platform, which is a 25% increase over a year ago. I mentioned last quarter that our sales pipeline was at the highest level ever. It's logical to assume that it would be depleted after such a strong sales quarter in Q2, However, we continued to add to our pipeline and we ended the quarter on par with Q1, which projects very well for us for the remainder of the sales year. In late January, Cornerstone Advisors published the results of its annual survey of bank and credit union executives. According to that study, nearly 65% of banks and 75% of credit unions expect to increase their technology spending in 2024. This correlates with information we've seen from other sources, including Bank Director's Technology Survey last fall, in which a large majority of survey respondents said their bank's technology budget increased over the past year at a median rate of 10%. We're in the midst of conducting our annual Jack Henry Strategic Benchmark Study, and we'll share those results on our earnings call in May. We were pleased to have recently received two National Workplace Awards, Newsweek's greatest workplaces for diversity, and Computer World's best places to work in IT. We also were named as one of America's most responsible companies by Newsweek for our corporate sustainability efforts. We are very proud of that recognition because we view corporate sustainability as a strategic investment for our stakeholders. I encourage you to read our 2024 sustainability report, which will be published on March 29th on the investor page at jackhenry.com. As you all know by now, a couple of weeks ago we announced that I will retire from my current role on June 30th of this year. Greg Adelson will become CEO and President beginning July 1st, and I will serve as Executive Board Chair effective on that same day. This transition plan has been carefully considered for some time, and we are fortunate to have someone like Greg ready to step into the CEO role. As I said in the press release, it has been my immense pleasure to serve as CEO of this wonderful company for so many years. When I came into this role almost eight years ago, I had a number of large projects I wanted to address, and I'm happy that all of them have now been completed or are well on their way. I'm confident that Greg and the outstanding team we have in place today can continue our trajectory of strong growth, and I'm looking forward to working with them in my new role as Executive Board Chair. Of course, I'll be on the May earnings call, and I have a number of investor meetings scheduled between now and the end of our fiscal year, so I look forward to speaking with many of you in the coming months. As we focus on the second half of this 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 Greg for an operational update.

Thank you, Dave. I'm honored and humbled to become the next CEO of this great company in July. I do want to take a moment to acknowledge the outstanding job that Dave has done as CEO the past eight years. Since Dave became CEO at the start of fiscal year 2017, Jack Henry has experienced outstanding growth with revenue and net income both up approximately 50%. In addition to driving organic growth, Dave has led 26 acquisitions during his 25 years with the company. The legacy Dave is leaving will be remembered for many years to come. On a personal level, I want to thank Dave for his mentorship and guidance for the past 13 years. He has prepared me well for this role and I will continue to lead this company with an unwavering focus on our employees, clients, and shareholders. As the next CEO, I will continue the strategic journey that we are on today and will execute our strategic priorities, which include continuing to enhance our exceptional culture, continuing to advance our tradition of customer service excellence, cultivate a one Jack Henry mindset in all we do, drive technology innovation and execution at the speed and scale, foster an open ecosystem, evaluate strategic acquisitions that will provide additional value to our clients and shareholders. Jack Henry has maintained a philosophy for over 47 years that starts with treating our associates as our first priority. Happy associates are more vested in ensuring we have happy clients, and happy clients ensure we reward our shareholders. In short, you can expect continued focus on growing our company and delivering outstanding value to all of our stakeholders. Dave and I will continue to work closely to ensure a smooth transition in July, and I look forward to collaborating with him in his new role as Executive Board Chair. I'm also excited about continuing to work with the other great leaders at Jack Henry, and specifically more closely with Mimi and Vance. Mimi has done an outstanding job since becoming CFO in September of 2022, and Vance provides tremendous perspective for all things Jack Henry. Before I speak to our operational performance, I want to go back to Dave's comments regarding our continued strong sales performance. Dave shared our strong success in winning competitive core takeaways and as well as our robust sales pipeline. Additionally, we are beginning to see an increase in what has been historic low merger activity among our financial institutions, specifically with our core clients as the acquirers. Due to this increased demand, we are currently adding resources to both our banking and credit union core conversion teams. On the November earnings call, I promised an update on our technology modernization strategy. As a reminder, this strategy is changing how we deliver our solutions through a cloud-native, API-first environment, utilizing several key benefits embedded in the Google Cloud Platform, including cutting-edge security and business continuity advancements. The premise of this strategy is rebuilding traditional core and non-core functions into a flexible, cloud-native portfolio of services and solutions. Each component will integrate with other Jack Henry solutions and also with third-party fintechs via the Jack Henry platform. Our clients will be able to access everything they need to run their financial institution in a single platform with all the advantages that the cloud offers, including extremely high system availability, real-time processing, streamlined operations, rapid update deployment, modern security standards, and extensive scalability. As we have indicated previously, our approach to technology modernization has created more pipeline activity in the larger community bank segment, as well as a couple of introductory calls with regional institutions. Another benefit we will realize over time is the shared services model that is at the forefront of our technology modernization strategy. Features or solutions that were once built several times throughout the organization are now developed once and used in multiple solutions. Our ability to develop and deliver more rapidly to our clients is an important benefit that will reduce development costs for each new or enhanced solution. The technology will allow us to share the same services with outside partners and competitors to create a better overall experience for all community and regional financial institutions. At Jack Henry, we are focused on execution and doing what we say we're going to do. So everything I'm about to discuss is shared with our clients through six-month roadmap visibility. Roadmaps are updated for all products, including the technology modernization strategy and published every February and August for our clients to view. We hold our teams accountable for roadmap execution as well. As a reminder, our technology modernization strategy already includes recently launched cloud-native solutions like PayCenter, Banno Business, and Financial Crimes Defender. We now have over 250 clients using the real-time payments network and almost 150 using FedNow in our PayCenter application. For additional context, Jack Henry has approximately 60% of the live real-time payment clients and 35% of the live FedNow clients. We recently announced general availability for Bano Business and continue to add both banking and credit union clients. We now have more than 90 clients live and over 70 clients in various stages of implementation. Financial Crimes Defender is also generally available, and we have seven clients live and more than 150 in the implementation queue. One new offering we haven't spoke about yet is our open banking solution that provides turnkey API access to the largest integrated banking data aggregators across the industry as an immediate answer to the industry and regulatory pressure to remove screen scraping and share credentials. By creating direct API connections with clients, Jack Henry is making it easier for consumers to connect financial accounts securely and reliably without the need to share usernames and passwords. This offering is generally available today and has received a great deal of interest from both Jack Henry core and non-core clients. I also want to update you on some of the key functions we are building on the Jack Henry platform that are already in beta or plan to go in beta in calendar year 2024. I'll start with the incoming and outgoing wires, which we have talked about on previous calls. We plan to be generally available with our domestic wire solution over the next few months and move into beta with international wires by the end of this fiscal year. We are building a general ledger component that will support the common base functions of a financial institution's back office and enable deeper insights on transactions and advance fraud detection. We plan to be in beta by the end of the calendar year. A key advantage of the Jack Henry platform is our clients being able to easily access their data. Our new data broker solution, which is currently in beta, will enable clients to access all of their Jack Henry data in a single repository with innovative AI intelligence capabilities. To complement the data broker solution, we are creating an executive dashboard with real-time event monitoring to help our C-suite clients make informed, dynamic decisions throughout the day based on metrics they customize and update. I will now provide some context to the pricing philosophy we will use to deploy these components. Our go-to-market strategy centers around bundling key components that complement each other and provide enhanced financial and operational benefits like time to deploy, new feature enhancements, enhanced security, improved uptime, et cetera. For example, a bundle may include wires, general ledger, and data broker. Our pricing model strategy will incorporate elements from our industry-accepted pricing models, such as license and or per-seat fees, consumption-based, and per-account pricing. We will encourage engagement with any combination of our solutions and further reward those who consume more components. Ultimately, the value proposition becomes evident as clients recognize the benefits of additional modules as well as the compelling features of the Google Cloud platform. One last topic from our November call is our plan to offer several key solutions outside of the Jack Henry core base by the end of calendar year 2024. We remain on track to begin selling Bano Business, Financial Crimes Defender, various payment solutions, and available components from the Jack Henry platform in our fiscal year 25 sales year. We have targeted several competing cores that we believe bring the best mutual value and have a need for premier digital fraud and real-time payment solutions. I will continue to keep you updated on this strategy. In closing, I am passionate about accomplishing our strategic priorities and moving our company forward through innovation and execution. I am grateful for the opportunity to lead this finest group of talented and dedicated professionals in the industry and want to thank all of them for their tireless effort and commitment. I will now turn things over to Mimi for some detail on the numbers.

Thank you, Greg, and good morning. Our continued focus on serving our community and regional financial institution clients, investing in our joint future, and delivering shareholder value led to another quarter of solid revenue and earnings growth. I'll begin with the details driving our, as expected, strong second quarter and year-to-date results, then conclude with our full year guidance update. Second quarter gap and non-gap revenue increased 8%, a continuation of the strong start to our year and keeping us on track for a tremendous fiscal 2024 as year-to-date growth was 8% on both a gap and non-gap basis. Deconversion revenue of 4.9 million, which we pre-released last week, was down approximately 1.5 million, reflecting minimal financial institution consolidation. Year-to-date deconversion revenue is $9 million, $1.9 million less than the prior period. As a reminder, effective September 1st onward, PayRail's results are included in both GAAP and non-GAAP figures. Now, let's look more closely at the details. GAAP services and support revenue increased a healthy 7%, while non-GAAP increased a more robust 8%. The first half increased 7% for GAAP, and 8% for non-GAAP basis. Services and support growth during the quarter was the result of increases in data processing and hosting and the timing of user group revenues. We continue to experience robust growth in our private and public cloud offerings, which again increased 10% in the quarter and for year-to-date. This reoccurring revenue contributor has long been a double-digit growth engine. Shifting to processing revenue, we saw consistently positive performance with 9% growth on both the GAAP and non-GAAP basis for the quarter and first half from this reoccurring revenue source. Similar to recent results, drivers included a combination of higher card and other payment processing plus strong digital demand. Next, moving to expenses. beginning with cost of revenue, which increased 5% on both a GAAP and non-GAAP basis during the quarter, 7% for GAAP versus 6% non-GAAP year-to-date. Drivers for the quarter included higher direct costs consistent with increases in related revenue and internal license and fees. Growth in cost of revenue was limited to 5% due to active cost control and the timing of merit increases. Next, R&D expense decreased 3% on both a GAAP and non-GAAP basis for the quarter. The decrease was due to lower personnel expense, net of capitalization, and inclusive of benefits. For the first half, R&D expense increased 4% on a GAAP basis and 3% for non-GAAP. And lastly, on a GAAP basis, SG&A rose 24% for the quarter, 21% on a non-GAAP basis, primarily due to the shift in our customer conference from Q1 to Q2, plus higher personnel and related costs. Year-to-date SG&A expense increased 31% on a GAAP basis and 9% non-GAAP. The primary difference is the $16.4 million in one-time costs related to the Voluntary Early Departure Incentive Program, VDIP, in Q1. We remained focused on generating compounding margin expansion and the quarter delivered 111 basis points in non-GAAP margin at 21.3%. Non-GAAP margin benefited from operational performance and a one-time shift in our merit increases from Q2 to Q3 offset slightly by the timing of our customer conference. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.26 up 14%. Breaking down the results into the three operating segments, we're pleased by the consistent, solid performance achieved. Our core segment revenue increased 8% on a non-GAAP basis, with non-GAAP operating margins increasing 166 basis points, benefiting from private cloud trends and strong cost control. Year-to-date non-GAAP revenue growth was 8%, and the associated margin increase 80 basis points. Payment segment revenue increased 6% on a non-GAAP basis. This segment had impressive non-GAAP operating margin growth of 128 basis points. This was due to the strong growth in our EPS business, moderate card growth, coupled with our scalable operating model and disciplined cost control. Year-to-date non-GAAP revenue growth matched the quarter at 6% with 94 basis points of margin expansion. It should be noted that card revenue growth has been negatively impacted by lower card production among other non-processing revenue items. Excluding these impacts, processing-related revenue increased 8 percent for the quarter and 9 percent year-to-date. Finally, complementary segment non-GAAP revenue increased 9 percent with flat margin. Year-to-date non-GAAP revenue also increased 9 percent with 25 basis points of margin expansion. Growth year-to-date was driven primarily by digital, recently released solutions, and overall product mix. Quarterly margins faced headwinds from direct support costs, amortization of new products, and licenses and fees. Now let's turn to a review of cash flow and capital allocation. Year-to-date operating cash flow is $239 million, a $48 million increase over the prior period, producing free cash flow of $129 million, slightly more than the $119 million last year. Excluding asset sale impacts of $1 million and $28 million from the current year to date and prior period respectively, free cash flow is $37 million higher through the first half of our current fiscal year. Additionally, the timing of tax payments this year represented a $15 million headwind to free cash flow. Our consistent dedication to value creation resulted in a trailing 12-month return on investors' capital of 20%. Additionally, I would highlight other notable return of capital metrics for the first half of our fiscal year, including $20 million in share repurchases offsetting annual dilution, $20 million in debt reduction, and $76 million in dividends. As we head into the second half of fiscal 2024, I will conclude with guidance highlights. As you are aware, yesterday's press release included updated fiscal 2024 full-year GAAP guidance, along with the reconciliation to non-GAAP guidance metrics. As a reminder, we filed an 8K on August 3rd that described how, starting in the current fiscal year, we are using a revised approach for deconversion revenue guidance. Based on current trends, we expect to see similar acquisition levels of our core customers for the second half of the fiscal year. As such, we're reiterating our full-year deconversion revenue guidance of $16 million. Based on positive year-to-date results from strong execution and near-term visibility, we are tightening our revenue growth outlook around the current midpoint. We now expect to generate full-year non-GAF revenue growth of 7.4% to 8.0% compared to the 7.2% to 8.2% provided on the November call. This corresponds to an increased full-year GAAP revenue guidance of 6.6% to 7.2% for fiscal 24. In tandem with our revenue outlook, we now expect an increase in annual non-GAAP margin expansion of 35 to 40 basis points, compared to the 30 to 35 basis points previously provided. The full year tax rate is now approximately 23.5% with potential bias slightly higher. Incorporating the noted positive updates, full year guidance for GAAP EPS is revised upwards to $5.09 to $5.13 per share from previous guidance of $4.98 to $5.04 per share. As a reminder, the guidance for deconversion revenue compared to actual fiscal 2023 deconversion revenue, VDIP severance-related costs, and non-recurring gain on asset sales resulted in an approximate 37-cent headwind for fiscal 2024 GAAP EPS. Lastly, some additional modeling commentary. We are comfortable with the current level of Q3 consensus for revenue growth operating margin, and gap EPS. Our full year guidance of 60% free cash flow conversion is reiterated. However, the legislation that passed the House last week would have a material beneficial impact on fiscal 2024 free cash flow and beyond. We are monitoring legislative progress and are hopeful for a swift and positive outcome. Based on the current bill language, If passed, our free cash flow conversion would rebound to historical norm levels, either in fiscal 24 or fiscal year 25, depending on the timing of certain items. In conclusion, Q2 reflects the strong performance we've seen consistently in the first half and expects the remainder of our fiscal year. We are exceptionally positive about our ability to deliver innovative and in-demand solutions, the resilience of our clients, and our focus on execution and shareholder value creation. We appreciate all the contributions of our hardworking and dedicated associates that drove these strong results. We thank all Jack Henry investors for their continued confidence. Laura, 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're 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. And our first question will come from John Davis of Raymond James. Please go ahead.

Hey, good morning, guys. Hey, Mimi, just wanted to follow up on the free cash flow comments that you just made. Getting back to the historical level, I'm assuming you mean kind of right around 100%. So that would imply kind of 40 points of headwind that will get reversed. You know, I thought before it was maybe 25 or 30 points. So just, A, we just want to make sure when you say historical levels, you're talking in and around 100%. And is it, you know, kind of 40 points of headwind this year?

Judy, great question. I think... premature to see the timing and the impact as to when, so whether that hits 2024 or 2025, but I would say certainly our historical norm range of 80 to 100 percent is where we believe we would revert back to. It just depends on the timing.

Okay, no, that's helpful. And then just on second half margins, I think the guide implies margins will be down year over year after being up over 100 in the first half of the year. So maybe just talk a a little bit about some of the headwinds that you do face kind of in the back half of fiscal 24.

Yeah, so we manage the business on a full year basis, J.D., and so as we think about it, we're pleased to have the additional margin expansion in the guide that we provided yesterday and today. Just in terms of the actual timing and seasonality of it, it just depends on when certain events like personnel related costs, licensing costs in any particular quarter from a climb over perspective. As you know, our first quarter is usually the highest margin of our year. And then typically the end points are lesser. So I wouldn't say read anything more into the seasonality and we're just basing it on a full year guide.

Okay, great. And then Dave, one for you, but also congrats on your retirement and your move to executive chair. And, Greg, congrats on the CEO role. But, Dave, you talk a lot about the competitive environment being fairly favorable. We continue to break records on the sales front, pipelines robust. Maybe you can talk a little bit about what specific products or is there a segment of the market that you're having outside of success? You know, the top line results in the sales have been very, very good over the last 12 months. And just maybe a little bit more color on what exactly is driving that.

Sure. Thanks, JD. So as I've said previously, it's amazing. We're 47 years into our run as a core provider, and yet core continues to be a really strong driver. I just quoted to you 14 wins in the quarter, four of them multibillion-dollar banks. That definitely leads the industry by far as compared to anybody else in the industry. So core is still a key driver for us. But then, you know, oftentimes tied to the core, but sometimes not. And we have these other best-of-breed solutions, and we've talked about many of them on the call before. Bano, you know, the retail Bano solution has been a key driver for us. Well, now we have Bano Business in the equation, and you heard me quote the 56 contracts that were just signed in this quarter for Bano Business. There's a real demand for a solution like that, a modern, digital, brand-new digital banking solution like that for small business clients. I've talked in the past about our treasury solution. Again, a modern digital treasury solution for large commercial clients. So, of course, it's not the bank that uses that. It's their large commercial customer that uses that. There hasn't been a brand new ground up treasury solution and certainly no digital first treasury solution written in many, many years. So that continues to be a driver for us. Fraud, Financial Crimes Defender, Greg just quoted the numbers to you as far as Financial Crimes Defender. We have seven live, but we have a whole bunch of them now in the backlog because it's a brand new, ground-up, developed fraud solution to deal with fraud in today's environment. And so it's many of those things. And the correlation I think you need to make is every one of those that I just talked about has been written brand new in the last five years by Jack Henry. So these are not things that we acquired that we had to try and figure out how to make them modern. These are things that Jack Henry has innovated. Yes, we paid a lot to do the development work, but when you get done with that, you have something that is a best-of-breed solution centered around digital, many of them centered around a public cloud. And there is a huge demand today for those types of offerings. And so I don't see this slowing down at all. We're really well positioned today, and we're continuing to innovate as a key technology provider in our space.

Okay, great. Appreciate the color.

Sure.

And the next question will come from Nick Cramo of UBS.

Hey, guys. Thanks for taking my question, and congrats to Greg and Dave. First, I just wanted to follow up on the payment segment. I mean, when can this segment get back into the 8% to 9% growth range? I know there was a few puts and takes called out, such as lower card production, but we also have pay rails. It's supposed to double this year. I'm not sure if that is still on the table, but just be curious to hear your thoughts there.

Thanks, Nick, for the question. So I would really point to, on the card, within card, within payments, the processing related. So that's the reoccurring nature within that segment, and that grew strongly at 8%. And so that is an indicator of the overall success of that segment and our ability to get back to what we view from the growth algorithm, the prospects for that segment. So I would say some of the non-processing-related, the pass-through, the card production is more temporary and expect that the processing engine will continue to drive the strong growth.

Thank you. And then for my follow-up, maybe a more medium-term question, but you just discussed the opportunity you see for generative AI on the revenue side, but also, more importantly, on the cost side, just relating to any of the benefits that you could see from increased software engineer productivity with these AI tools and call center automation. Thank you.

Do you want me to start with that one? Okay, so I'll start and then Greg will chime in here because this has been, as I'm sure you can imagine, a big topic of conversation for months around Jack Henry and lots of opportunities for us. So on the first side, so one thing I should be clear about, so traditional AI, so machine learning and robotic process automation, Jack Henry's been in that business for years. So traditional AI, we've been doing that for a long time. Generative AI, which is specific to your question, Nick, Lots of opportunities there on the development side. The trick on the development side is our primary value is through our IP, our intellectual property. And so when you're using generative AI to write code, you have to be really, really careful that nothing that you're doing becomes part of the public domain. And so we're being very careful about what are we doing and how are we doing it. But we are active today with our development teams using generative AI. You pointed out customer service offerings. So that is an area that we're focused on internally. And I'll let Greg touch on that. But we also rolled out at our client conference in October a generative AI offering for our customers to serve their customers. and that was well received at our client conference here in the fall. And then if you think about all the processes that we do within Jack Henry that are not customer service and are not software development, just automating things we do within the company is another big area of focus, and I'll let Greg add his thoughts.

Yeah, no, I think the other thing I would add is that we're also making sure we have strong governance around what we do, and so we're taking a lot of time to make sure that we're evaluating. We're partnering with Google and a couple of other folks that we have some solutions with to kind of test some models. We're using opportunities here not only in the contact center, as David mentioned, but also in a couple of other products. I did mention the AI assist kind of module that we would use in some of our data analysis that we call executive dashboard for the C-suite folks. And so there's several opportunities that we're still evaluating, but again, we want to make sure that we get this right and that we're building it with the right guardrails and things along that line. But you'll continue to hear more about where we're going with that in the coming months.

Our next question will come from Jason Kupferberg of Bank of America, Merrill Lynch.

Hey, thanks, guys. I wanted to come back to some of the pipeline comments. It certainly seems encouraging that you've got some real solid stability in the pipeline despite having a really strong quarter of booking. So can you talk about how the composition of the pipeline has changed in recent quarters in terms of, say, customer size, product mix, and You know, if there's any, you know, numbers you want to share around that just in terms of helping us understand the composition of the pipeline, that would be great.

Sure. Sure, Jason. I wouldn't say that there's a significant notable change in the composition of the pipeline. We have a number of core deals. So, again, we just signed 14 or announced 14 deals here. That is not slowing down. I would say that the size of those core opportunities, meaning the size of the institution, has gone up and is continuing to go up. So we're being recognized among the larger community and regional bank space as being a real player. And so I think the overall size of the institutions, bank and credit union, has gone up. But then, you know, if you look at the rest of the mix, most of it are the things that I highlighted when I was kind of going through with JD, the hot topics today, you know, what's driving that success. It's this There's all this brand new technology that we're offering today. So two years ago, almost nothing of those except Bano was on the list. But now all these things have been rolled out in the last couple of years. And they are dominating the sales process today because they're brand new technology. People have been hungry for these things. You know, a brand new fraud solution that uses AI. I mean, everybody's dying for that type of technology. And so here we are. We've just gone live with Financial Crimes Defender. And so much of it is because of these brand new things that have been rolled out in the last year or two or three. That's what's dominating a lot of the sales conversations today. And that's what's driving a lot of the strengths in the pipeline, because you look at what's happening with our competitors in the space. You know, there's really nothing innovative that's been coming out in the last couple of years. And here, Jack Henry has a long list of brand new innovative solutions.

And then on competitive landscape in core, are you guys seeing a broader range of competitors as you continue to move a little bit further up market? Maybe others are trying to move a little bit more down market. Just how are competitive dynamics in core evolving?

Yeah, I'd say no change at all. We compete against the traditional players. We've competed against the traditional players forever. There have been upstarts trying to either come into the U.S. internationally or start from scratch and none of those are really even showing up in RFPs with the exception of, you know, once or twice a year. So I wouldn't say there's any change of any kind on the core side as far as the competitive landscape.

Okay, just a housekeeping one for Mimi on free cash flow. I know you're maintaining the guide, assuming, you know, no changes in legislation. But fair to say that Q3 would be fairly subdued and then followed by a stronger Q4 just based on typical seasonality?

Yeah, I think that's fair to say. Okay. And I think, if anything, we're reiterating the guide, but there's probably a little bit of upside there, even without legislative change.

Okay. Well, thanks for that.

And next, we have a question from David Tuget of Evercore ISI.

Thank you. Good morning, and congratulations to you both, Dave and Greg. Dave, I know when you initially became CEO eight years ago, one of your major priorities was the card migration platform, moving your kind of back office processing of debit cards, you know, over to the back office of, you know, what was then First Data, now Fiserv First Data, and then obviously, you know, adding the capability to do credit card processing on top of that. You know, where do we stand overall in this initiative in terms of the cost savings that's delivered to Jack Henry? And then where are you in terms of the uptake of the credit card processing offerings?

Yeah, so I'll start, but I'll ask Greg. Greg's a lot closer to the details as far as where we are today. So from my perspective, this has been a wildly successful initiative for Jack Henry. And at the time, you know, I've been in this business a long time. And the idea of bringing three companies together to deliver a solution that's going to replace two different platforms, you know, all to one platform was a very, very big, daunting project. But now looking back on it, it's been incredibly successful for our company as far as hitting the targets that we expected to hit financially for Jack Henry as far as the sales opportunities that it's created, which have been very significant over the past few years. So I look back on that project as a really significant success. The thing I will emphasize before I ask Greg to chime in here is I said all along, you are not going to see the credit card side of this business become anywhere close to what the debit card side is. We were focused on the credit card side because we had certain customers who said, we want to process both debit and credit with the same provider, and we wanted to make sure that we had that option for them. And so I'll ask Greg to kind of talk about where we are today.

Yeah, specifically on the credit card. So we roughly between full service card, agent card, in-house card, we have roughly over 100 institutions. And so I think part of the challenge is some of the smaller institutions, which is why we came out with an agent program, They really didn't want to go in with the full service just based on resources and some of the risk and things like that. So I think we have done – the team continues to sell it. We continue to have the number of deals come in, just not to the same level as debit continues to grow. But also we're continuing to add feature functionality to the services as As Dave mentioned, it is a tri-party relationship, and we continue to work with the other two parties to make sure that we stay innovative and ahead of the game. So the relationship has actually gone well, which has actually contributed to the fact that the growth has been significant as well, so both from a service side and a transaction processing side.

Thanks for that. And just as a follow-up question, Jack Henry outperformed on gross margin versus our model. And I know you initiated a VDIP program a few quarters ago, which Mimi, I think you described. To what extent did VDIP uptake actually help gross margin in the quarter? So like stripping out any one-time charge benefit, focusing more on like sustainable reductions in cost of labor?

Yeah, I wouldn't say that it had a significant impact. That was a one-time charge related to kind of severance and the program. As we said, we didn't do it for kind of in-year savings. This wasn't a sneaky kind of design RIF plan. This was a very talent-focused plan. to ensure that we had the type of talent for the future needs of the organization. And in fact, the majority of those roles have been backfilled with rising talent in the organization. Some at lower levels in the organization as we zero-based budget every position, but the majority of those roles have been filled. So I wouldn't say it was a significant reason for the margin expansion or the expense savings this quarter. Understood. Thank you. Welcome.

The next question will come from Vasu Govil of KBW.

Hi. Thanks for taking my questions, and I want to add my congratulations to Dave and Greg. My first question is on Bano. It seems to have had an outstanding quarter in the number of new wins, and I caught that. Bano Business was a contributor there, but even without that, it seems like the number of wins were significantly higher than the quarterly average. Any call-outs on that? And apologies if I missed it, but did you give us the number of customers in millions that you usually give every quarter?

The number of customers that we signed? Is that what you're asking, Alessia?

Within Bano, we were just using users.

Yeah, $11 million. Yeah, we surpassed $11 million at the end of the quarter, so I quoted that $11 million. And so, no, there's nothing. I think part of what happened here is, you know, I quoted the number for the Bano business wins, and then beyond Bano business with the regular Bano platform, that number was up. I think the reason for that is because there were people out there waiting for Bano business before they would also sign to go to the regular Bano platform, which includes retail. And so that's the significant point. Now that bano business is in market, generally available, we had customers who said, okay, I've been holding off because I want to do both at the same time, both bano business and regular bano. That would be the only call-out that I would have as far as the size of the wins.

And just in terms of relative revenue opportunity, if you're just selling bano regular versus bano plus bano premium, Is it a 2X opportunity? Is it greater on the Baino business side?

Yeah, so I think one thing that just to make sure that we clarify, so you have to have Baino retail to have Baino business. So one of the things that Dave was just alluding to is that some of the folks who were waiting to get Banner Business or Banner Retail is because they were waiting on Banner Business and they wanted them at the same time. You can buy Banner Retail without buying Banner Business, but you have to have retail to get the business side. So back to the 2X comment, I don't think it's a 2X component. It is an additive component to ensuring that, one, that we get the retail and we continue to add fee structures to that based on how we model that. But I wouldn't call it a 2X.

Understood. That's helpful. And then a quick one for you, Mimi. I appreciate that the midpoint of the revenue guide didn't change, but it does look like you took off the top end just a little bit. And I know you called out the card production slowed down. Was that the reason? bigger driver or any sort of other call-outs on how you see that evolving?

Good question, Basu. I think generally the tightening was more so based on our confidence as we're now halfway through the year with strong results and already banked in the ability to really center around that guide. So I think it's more that than thinking about the top end coming down, just feeling more and more confident about that midpoint We still have a second half to go here and a decent amount of growth that we have anticipated in our plan, especially in Q3 and Q4 around processing, around card, around our payments business. So too early yet to say it's going to be higher than that, but very confident in our ability to deliver.

Thank you very much.

The next question is from Kartik Mehta of North Coast Research.

Hey, good morning. Dave, you know, you've commented a lot on core and obviously Jack Henry's doing well. But as you look at the market, what would you anticipate in terms of number of core deals? I know when COVID happened, it kind of slipped and then we went back to kind of normal. So as you look at 2024, what would you anticipate the number of deals that might show up in the marketplace?

Well, it's a pretty predictable number. You know, every year it's somewhere around 100 deals in total that happen per year. As far as somebody leaving whoever is their current provider and going to a different provider. That's not, hey, I'm staying with my same provider and switching to another system. It is going to a different provider. Normally about 100 deals a year is a good number to use on average.

Perfect. And you've talked about, obviously, the sales pipeline being very strong. I think Greg talked about maybe hiring more people. And as you look at your sales pipeline and kind of look out forward, how much confidence can you look at that revenue that's going to come up in terms of the number of quarters you feel good as that revenue converts that you'll be able to put up kind of this high single-digit revenue growth?

On the core side, we have very accurate predictability. We go through this monthly, the chart as far as the core conversions that are slotted, whether it's a new core customer coming in, it's a customer moving from in-house to our private cloud environment, or if it's a customer who's acquiring another institution and we're merging them in. We have all those things. We have great dashboard tools that we use at Jack Henry, so it's very predictable for us.

The only add-on I would say is we look at that on an annual basis. So in any one quarter, depending on prior year, the comp of the size of the organization that was being implemented or migrated versus this year, you know, the size of an organization, we still feel confident in that number, but it can vary quarter to quarter depending on just the roster of slots and the profile of those customers. So that's the only color I would add.

That helps, isn't it? Just one last question, Mimi, for you. You talked a little bit about free cash flow, and let's assume that the legislation doesn't pass, but you still seem confident that maybe there's upside to the original guide on free cash flow conversion. And I'm wondering maybe what's behind that or what's changed since the original guide to give you confidence that maybe it will be better?

Yeah, I think a couple of things that are coming in. One is just the certainty of the results that we have year-to-date. The other is as we lower the tax rate as part of the guide, that helps from a cash flow as well. So there's just a couple of small components as we fine-tune the free cash flow forecast for the remainder of the year that makes me feel comfortable about there being upside there.

Thank you very much.

The next question comes from Chris Kennedy of William Blair.

Good morning, and thanks for taking the question, and congratulations to Greg and David. Regarding the technology initiatives, is there a way to think about the revenue opportunity associated with that, and if you could maybe frame it against the private cloud transition that you guys have been going through for the last 10 years or so?

Yeah, I think you have to think about it differently than the private cloud transition because that was truly pulling, as Dave has alluded to many times, pulling a customer out and it was typically a 2x kind of thing. I don't think that when you look at the tech modernization, Because depending on the number of components that are purchased and really the advent of the timing of some of that, it isn't a take everything we have today and move it over. So it isn't that same level of, I think, revenue growth. But the part that is exciting for us is the ability to take these components, drive, again, an additional wedge into the relationship and create that opportunity for larger customers or smaller customers to to dip their toe into the public cloud. And as Dave has said many, many times, I mean, you know, there's a lot of our customers that aren't ready to do this. There are some that are ready and, you know, part of our beta process today. So that's going to be a constant evaluation of the timing of when that, you know, big hit comes. But, you know, we do know that it's coming based on The feedback that we're getting from some of the larger institutions that we've been speaking to because they're more apt to, you know, to do this sooner than later. And so just continued growth in that path. But, you know, there's still some time to be taken before, you know, we can give much certainty or what I would say certainty on some of the revenue parts of this.

The other thing I'll add to this, Chris, that's important to keep in mind, there are components that will be offered now. This is not an apples-to-apples comparison of the old core versus new core. The way we used to think of core, and now it's just the same thing. It's on a different platform. There are components that we'll be offering with this that nobody has ever offered before. And Greg alluded earlier to Data Broker. That has not been an offering. That has not been a thing as far as the industry is concerned. That's brand new opportunity, brand new revenue. It's part of the core offering, if you will, in the future, but there are several other examples like that that create a revenue upside opportunity, but you just have to think about it differently than the way we've thought previously about converting a core from one platform to another.

Yeah, and I think one thing I do want to add is that we'll get to a point where we talk about platform as really the driver of what sits on that platform. So data broker or executive dashboard or open banking solutions, other things, like we already mentioned, Defender, Bano, all those components are all going to sit on the platform and will drive additional revenue.

Understood. Thank you for that. And then just following up on in the press release, you talked about 28.5%. growth of digital revenue in the first half of the year. Is there a way to think about the contribution from digital within the services and support revenue? Thanks for taking the question.

Yeah, let me get back on with you on that detail.

Okay, the next question comes from Andrew Schmidt of Citi.

Hey, Dave, Greg, Mimi, thanks for having me on the call. So quick question on just the poor wind side of things. You mentioned the funnel, the number of RFPs being relatively consistent. But I'm curious if there's any changes in wind rates, just given what you're seeing in the competitive environment. It seems fairly advantageous from a competitive perspective. So I'm curious if there's any changes on the wind rate front. Thanks a lot, guys.

Yeah, Andrew, I don't think there's anything notable. Again, with only 100 deals happening per year, we're in the 50 to 55 or have been now for a while, 50 to 55. So we're winning more than half of those opportunities per year. I don't know that there's anything... You know, getting to 60 is a big deal for us, but, you know, from a percentage basis, that doesn't look real huge. So I don't think I would call out anything as being significant. Our challenge and our job is to make sure we maintain that rate because, as I said before, we are by far leading the industry. And as long as we maintain that rate, that bodes well for us as far as our algorithm, forward-looking algorithm of revenue growth and so on. So nothing significantly notable there.

Got it. Makes a ton of sense. And then if you talk about just the views on acceptance of the public cloud, you were hearing that it's slow, but obviously attitudes are changing towards more comfort with having things like the general ledger in the cloud. Maybe you could just talk through the process that FIs have to work through for themselves to be comfortable with hosting things like a you know, a general ledger and, you know, broader core components in the cloud. That'd be great.

Thanks a lot. Yeah, it's an interesting question, interesting topic, frankly. You know, I've been doing this for a long time and kind of listening to and talking to all the financial institutions that we talk to. They all want to get there. They're all trying to figure out how do we get there. Many of them are not quite sure how to get there. And with the regulatory environment that we live in, You know, regulators are not saying, hey, we think you should go do this. So there's a lot of walk before you run happening where people, and that's part of where our Jack Henry platform strategy really, really positions us well because what our strategy allows people to do is adopt a modularized approach. I'm going to do wires in the public cloud and kind of see how that goes and make sure I don't have a regulator knock on my door and say, what are you guys doing? so they can kind of ease into the public cloud environment. But we have several of our non-core solutions today, fully public cloud. So BANA was there, Financial Crimes Defenders, some that we've talked about today. But as far as the core functionality, this whole strategy allows people to walk before they run, and that is appealing to a lot of folks that we're talking to. And so we think that's going to help with the question that you're asking.

Thank you very much, Thomas.

And our next question comes from James Fawcett of Morgan Stanley.

Great. Thank you very much, Greg and Dave. I extend my congratulations to both of you. I want to ask just in terms of the implementation resources, I think you've talked about 150-plus clients and implementation for financial crimes defender and another 70 for bando business. I'm just wondering if there's any benefit or – Should we think about potentially increasing committee, increasing resources to accelerate those implementations a bit, or do you feel pretty comfortable with the pacing that you've got right now?

No, that's a great insightful question. So we do that on a regular basis. So we meet with the team on a monthly basis based on installation queues. So we do look at kind of what the time is to do an implementation for a particular product. Can we add resources that will add value in getting that revenue into the company faster? So to your point, we do that on a regular basis for all of our products. Got it, got it. Some of it, James, is also tied to just the timing of this. Like Dave just mentioned, a lot of sales. So some of it's the timing of that as well.

Okay, got it, got it. But for now, we should think about you feeling like that you're in pretty good shape from what you're spending from an implementation standpoint, et cetera.

That's correct.

Okay, and then just thinking about, I know... topic that's been talked about for a long time. But, you know, any change in the overall environment around M&A and, you know, it seems like there continues to be at least some pull down of private valuations, et cetera. But I'm just wondering what you're seeing in that market and if there are potential assets that are particularly attractive, especially from a technology perspective, just taking your temperature on potential for M&A.

So you know well, you've followed us for a long time, James, you know well how much we love to be involved in deals and we love to do deals. I will just tell you, we don't have a single deal sitting for review right now at Jack Henry. It's It is still a slow, slow time. There are certainly companies out there that we'd be interested in, but not a single deal on the table right now. Got it.

Well, always look forward to the future. Appreciate that, Dave. That's right. We're hopeful.

The next question comes from Dave Koenig of Bayer.

yeah hey guys thanks so much just a couple quick ones first of all eps guide at the midpoint it was raised by about 10 cents it looks like maybe one to two cents on ebit is higher a few cents on tax but it seems like there's about five cents i can't reconcile what where might that be hi dave um so on the eps i would say it's about a penny or two for operational and then the remaining split is about 50 50 the difference in the tax rate

plus net interest income that we're earning based on a higher interest rate.

Gotcha. I'm sure you know of many banks that'll pay good rates. And then I guess, secondly, just on January payments volumes, many, many kind of competitors and industry participants called out the first two or three weeks being pretty slow. It sounds like maybe the Back part of January got better, but what have you seen kind of through January and maybe even into early February just in payments volumes?

Yeah, I would say overall our volume transaction mirrors Visa and MasterCard, Domestic pretty similarly. We did see the same experiences that they've talked about publicly about January weather, and who knows right now with all the rains in California. But what we saw typically by the end of January was some rebounding from those very temporary lows.

Yep, gotcha. Well, thanks, guys. Good job.

The next question is from Dominic Gabriel of Oppenheimer.

Hey, good morning. Thanks for everything, Dave, and looking forward to working with you, Greg. I guess, you know, we've been talking to investors since your quarter, since the management team change announcement, and Greg, Talk about what you've learned under Dave and being a part of the Jack Henry team over the years that should give investors confidence that the new management team, including Mimi, who's done a great job obviously since her start, will continue executing with the same consistency in the years to come.

Yeah, that's a great question. I think it just starts with a culture that we've built for 47 years here, and it's a very – collaborative approach. We work, you know, very tightly together. And, you know, between my time with Dave, you know, I've done a lot of, you know, I was heavily involved in the card work that happened, you know, years ago. Obviously, some of the M&A that we've done in the payments group when I led the payments group. And, you know, and just I think from a philosophy standpoint, Dave and I are very much aligned on how we look at things, how we evaluate what we do for, you know, our three pillars of success that we always talk about, our associates, clients, and shareholders. And so I don't think you're going to see very much change at all, a lot of the same level of consistency on how we think and operate. You know, there'll be some nuances and opportunities where you know, some things that I have in my background and, you know, what Dave had in his background. So I'm hoping that those will all be things that we can add to. But the reality is, is that, you know, I've spent 13 years at this company and all 13 have been working for Dave directly. So I would say there's a lot of consistency that you should look forward to.

Greg's a snappier dresser than I am. Thanks so much for that, both of you. And then If Mimi, if we could just drive in a little bit deeper on the guidance. I was just looking at the slides from this quarter to last quarter, and it looked like there was a rise in the non-GAAP revenue expectation, but a lowering of the high end of GAAP revenue. I was just curious on what would cause that deviation since the deconversion fees are so stable.

So I just want to make sure I understand your question, Dom. You're saying you're seeing a greater change in non-GAAP, or you're saying you're seeing a greater change in GAAP?

It looks like from what I saw that the range was a little higher on the growth in non-GAAP revenue, but then you took down the high end of the GAAP revenue. Maybe I don't have that right, but yeah.

Yeah, let me look further into it, but Nothing that comes to mind. It should be more of a flow through because we're keeping the deconversion guide for the full year at 16. So there's not much that's changing there. So you should see a similar pattern on non-gap and gap.

Excellent. That's what I would have thought. Okay, perfect. And then maybe just one last one. You know, if you guys could just talk to us about your business investment strategy in terms of expense dollar allocation as you look forward. We've obviously, at least versus my models, the expenses were much better than what I was expecting for the quarter. And I know there's some seasonality. But talk about the expense investment versus accelerating revenue strategy. Thanks so much.

You're welcome. So Dom, I would say a couple of things this quarter and that will also impact the full year and therefore the guide. Two things. One is not just the timing of the Connect conference, but the Connect conference was even more successful than last year. So from a profitability perspective, that helped from margins and expenses being lower. The other is the decision we made around a one-time change in the change in timing of our merit for our associate population. And so that also helps, you know, from a straight through to the bottom line from an expense perspective. As always, and with consistency, we not only zero-based budget, but we look and think about the investments, the amount of spend going to our top projects and top products, the amount from a capitalization in R&D. You saw the consistency of the 14% of R&D spend. So we're always thinking about how to invest for our future, thinking about what those business plans look like and what that ROI looks like and the bandwidth of the organization. So I think there'll be more consistency from, you know, ascending towards future that you've seen in the past. And I think some of the margin expansion was just due to a heightened focus on cost control and that some of the changes that we've made from the merit timing.

Great, thanks so much. It was nice to see the ROIC pretty much remain stable this quarter, too. So thanks for all the answering my questions. Appreciate it.

Of course. And next we have a question from Ben Varga of Autonomous Research.

Hey, guys. Thank you for taking the question. You know, just wanted to echo everyone else's congratulations on the leadership transition. My first question is about Bano business. It's great to see the initial client interest, I guess, In terms of the implementations that you have in the queue, how long does it typically take till those opportunities start contributing to revenue?

Yeah, it's really a timing thing based on the client themselves. Honestly, an implementation of Bano business is less than 60 days. So some of those are tied to core deals. Some of those are tied to other product implementations. So really it's dependent more on the client than it is on Jack Henry. And kind of back to the question earlier that James had related to that. So some of that is really, you know, we try to push the clients along, but it's not necessarily a Jack Henry lag as it is waiting for the client. But it's 60 days or less if they're ready to go.

Got it. That makes perfect sense. And then as we think about the growth opportunity for Bano Retail, are these wins coming from greenfield opportunities for the most part, or are you also kind of bumping up against some of the other digital banking providers? Thanks again.

Yeah, absolutely. No, we have a lot of competitive takeaways from the other providers. There are some opportunities within both the core base. We've talked about taking it outside the Jack Henry core base and where we're going with that. But right now, there's probably an equal mix of opportunities from a handful of the larger digital banking providers today that we're winning some deals from and as well as our existing core base.

And I think it's fair to say there is no such thing as a greenfield opportunity anymore. So everybody has something. We're displacing something every single time. Yeah, that's a fair point.

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

Thank you, Laura. We look forward to speaking further with many of you at investor events in the coming weeks. On behalf of the management team, I would like to express our appreciation to all the Jack Henry associates whose efforts produced these outstanding financial results. Thank you for joining us today, and Laura, will you please provide the replay number?

The replay number for today's call is 877-344-7529, and the access code is 902-5867. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.