Jack Henry & Associates, Inc. (JKHY) Earnings Call Transcript & Summary

All right. Welcome back, everyone. Or welcome back to me. Maybe you guys didn't leave, I don't know. But Lisa Ellis here, back again. And for our 10:00 a.m. Eastern session this morning, I am very delighted to have the opportunity to host for the first time, David Foss, the President and CEO of Jack Henry. One housekeeping item. If you want to ask a question, of course, right under the window with our faces on it, you should see something that says ask a question. And feel free to log those in. I have the screen up in front of me, and so I can see the questions as they come in and layer them in. So David we'll turn it over to you in a minute. I was telling, David, I'm sure we'll get into this, but looking at Jack Henry's stock price year-to-date, you wouldn't have known that there was a pandemic going on, let me put it that way. So I'm sure we'll get into some of the dynamics of what's going on there. But first, of course, David, welcome. Thanks.

Thank you very much. Glad to be here, Lisa.

Excellent. Thank you.

All right. So let's dive in, and we'll come back to the pandemic in a minute. But first, I think, to level set the audience, I probably who have differing levels of detailed knowledge of Jack Henry's business. So through the first 3 quarters of your fiscal year, you've been growing revenues at -- in the high single digits, 9% or so, which is on a clean or adjusted basis. That is double the rate of the addressable market of Jack Henry, which is typically fairly tied to bank IT spending, which is more like usually in the sort of 4% range. What are the major elements of Jack Henry's strategy that has enabled you to outgrow the market like that, literally double on a sustained basis?

Sure. And just to kind of level set for everybody. So for Jack Henry, we are a technology provider to banks and credit unions. That's our primary market in the U.S. So I'll stress that as well. We, by strategy, choose to serve banks and credit unions in the United States. Lots of opportunities for us to go outside the United States, but there is a tremendous amount of growth opportunity in the U.S. So we've continued to focus in the U.S. market. So as Lisa alludes to, the growth algorithm is made up of a few different pieces. First off, we are actively and continuously taking share in the market that we're in, in the core side of our business. And when we talk about the core side, core in our vernacular is the system that provides the primary accounting tools for a bank or credit union to track loans, deposits and general ledger. So you'll hear us refer to a core -- the core system for a bank or credit union, that's what that is. It's that system that's tracking loans, deposits and GL. We wrap the core with all kinds of other stuff, internet banking, mobile banking, check capture and voice response and all kinds of other things. But when we talk about the core, that's what we're talking about, and that's kind of a key relationship when you're in our business with the bank or credit union, and we're actively taking share in that space. So we're winning, on average, a little more than one per week, one new logo per week, and we've been doing that almost 3 years now that we're adding to our base of customers. And every one of those is a takeaway from one of our competitors. There is almost nobody out there anymore who has their own software. They're running their own software in-house that they wrote themselves when you talk about the core system. So we're taking share from our major competitors as far as new core customers. That's one of the key drivers. And that's important because when you win the core, you usually also win a whole bunch of other pieces around the core and they signed a long-term agreement with you, and it's in the hosted environment that can be private cloud almost every time. It's rare for us to sell software anymore. We sell them in our private cloud. So it's a long-term agreement. The revenue is layered in and it's recurring in nature. So that's the first key piece of the strategy. The second key piece is we have a number of customers that were sold over the years at Jack Henry, and we've been in business now 44 years. A number of customers who were sold on the core side as in-house customers who are actively moving from in-house to the cloud environment. So we do around 50, 55 of those per year, banks and credit unions, that are moving from the in-house environment, where the only obligation they have us per year is to pay a license or a maintenance fee, and it's a 1-year obligation. We move them from in-house to the outsourced private cloud environment. Now they're signing usually at least a 7-year contract, and they're paying us usually around double the revenue that they were paying us when they were in-house. But of course, our costs aren't doubling when they do that. And we have many years of runway left. So we're doing around 50 to 55 of those per year. And we still have around 700 or 800 customers in-house, so many years yet to go on that. That's another key driver for us. The third for us is in our payments business. So I regularly say, we are not a payments company at Jack Henry. We are a financial technology company, but we do a lot in payments. And I say that because I want to distinguish on this from some of our major competitors who have really positioned themselves as payments companies. We are not a payments company, but we do a lot in payments. And the payments division for Jack Henry continues to grow nicely because we're adding products, and we're winning share in that as well. And then the last piece of the puzzle is selling all these complementary or ancillary products that we sell that either surround the core for our core customers or we sell to non-Jack Henry core customers. So we are actively selling in our competitive core bases -- our competitors' core bases. These complementary solutions, including a number of new products that we've rolled out in the past 2, 3 years. So we're either clothing, wrapping solutions around the customers that we already have or we're selling new products to new customers who haven't done business with us before. And so when you add all of those pieces together and those very focused defined strategies, that's what's driving the overall growth for Jack Henry.

All right. Well, I want to dive into all of those. Let's start with the competitive takeaways first. So one new competitive takeaway per week. What is it -- what's the value proposition there? What is it about Jack Henry that's enabling you to win those competitive takeaways?

Yes. And it's important to make sure you understand the kind of the environment. Our major competitors will maybe win 10 per year. We're winning something, 52 to 55 per year, new logos. So we really are on a different trajectory there. So a few key things that drive somebody to make a decision to do business with Jack Henry. And by the way, if you're the CEO of a bank or credit union, the most difficult decision you make around technology is this decision right here. You're going to replace your core system which means you're going to rip everything out as far as the key technology infrastructure for your bank or credit union, and you're going to replace it with Jack Henry in this case, why would you do that? Well, first off, a lot of banks and credit unions out there are running older technology, and they're frustrated that their technology with whoever they have it isn't getting enough attention, not getting enough R&D dollars, they're not keeping up as far as the technology infrastructure is concerned. So that's one driver. Number two, we hear it all the time, people will say to us, well, the relationship is broken with whoever they're working with, the relationship is broken. And there can be various reasons for that. But it's a big deal to these customers if that relationship is broken. So that's one driver. Customer service. So one thing you'll hear regularly about Jack Henry, in our space, we're known as the premier provider of customer service. And we are very intentional about that. So I track very closely our customer sat ratings. I publish to all employees every month how we're doing as far as customer sat is concerned, and we're very focused on customer sat. And we're recognized for that. And yes, people do make decisions based on something like customer service. They'll make a decision to leave another provider. And then there's this reputation Jack Henry has, has been really forward-thinking as far as new technology in helping position our customers, community banks, regional banks and credit unions in the United States, helping position them for the future to be competitive. We call it future-ready. We published a lot about helping our customers be future-ready and done studies and so on. And so all of those things together, and sometimes, it's one of those pieces that really gets the attention of a bank or credit union to make a change. Usually, it's several of those things that will get them to talk to Jack Henry. I'll point out, we are never the low-price leader. So they're not coming to Jack Henry because they're going to pay less. That is never the case. We don't win deals based on price. We win based on service and overall the solution that we deliver to our customers. And so it's very common. And obviously, well, today virtually every one of these transactions, there's a consultant involved. These banks or credit unions will hire a consultant to help them do the analysis and make the decision. It's very common when all's said and done, the paperwork is signed, the ink is dry for a consultant to call me and say, do you realize this customer was willing to pay 30% more to do business with you guys than they would with your competitor, you need to know that, that they're really valuing the solution they get from Jack Henry. And so we really do believe we're offering something special, and that has the attention of our market.

All right. The conversions, let's go to #2 on your list, which is the conversions, which is you highlighted you're running also at about 1 per week, 50 to 55 per year. You highlighted the banks are typically paying you almost double the revenue when it comes into Jack Henry. So what is it that drives this transition for them? Like what's the value proposition to them to move to an outsourced model?

Yes, there are several things. And in fact, with this pandemic that's been going on, and I know you want to come back to the pandemic later, but it's going to be interesting to see how much more -- on the back end of the pandemic, how much more interest there is going to be in moving from in-house outsourcing. And by the way, we refer to it as in-to-outs. So in our -- you'll hear me on earnings calls, for example, reference our in-to-out projections. We're to the point now where we have analysts will say, well, where are you at on in-to-out. So it's become a very common phrase to us. But it's in-house customers who decided to move to outsourcing or essentially the private cloud environment. A few drivers. Number one, when I started in this business a long time ago, by the way, you would refresh your hardware once every 10 or 15 years. Today, if you're running in-house, you have to plan to refresh your entire infrastructure as far as hardware is concerned, at least every 3 years. So the capital outlay, if you're running in-house, is on a much faster rate than it used to be in the old days. And so that's a consideration. They're constantly looking at upgrading hardware and trying to keep up. And a lot of bankers are like, get me out of this hamster wheel that I'm on as far as constantly upgrading the technology. Number two, they are under a much heavier regulatory burden if they're running in-house as compared to being outsourced because the regulators know that we take care of a lot of things for our customers if they outsource to us. Whereas if they're running in-house, the regulators are on them pretty hard to make sure that all their i's are dotted and t's are crossed regarding everything from cybersecurity to keeping up with all the technology pieces. And then on the topic of cybersecurity, a lot of banks and credit unions are concerned that they don't have the expertise to make sure that they're protected from a cyber point of view. And they know that Jack Henry does if they outsource to us. But the one that's really become a hot topic recently is the concern that banks and credit unions have about their ability to maintain staff. So if you're a technologist coming out of college today, are you going to go work for ABC bank and whatever town, where your career path is, junior IT guy, senior IT guy and maybe you can be the CIO or are you going to go to work for Jack Henry or Google or Facebook or some company where you have a very broad career path that you can choose. And so for a lot of banks and credit unions attracting the tech talent to come work with them has become a real challenge. And they know that if they outsource to Jack Henry, that they can kind of check that off their list because we're to the point now where they can outsource everything, including their network infrastructure. So they don't even need the network talent on staff if they don't want to, we can take care of all that for them. So all of those different things provide kind of nudges to the bank or credit union to outsource to Jack Henry. And really, the only thing that keeps them in-house is the idea that they want to control the environment. If I'm kind of a control freak, I want to make sure that everything is under my roof. Well, then I'll continue doing it in-house. But many of them now are becoming much more practical about that and saying it's time for us to hand that over to Jack Henry. And as I said when I first started to answer the question, I'm not sure how much that's going to accelerate now as a result of pandemic. They're all working from home now, and I think they've become really concerned about their ability to manage the infrastructure when everybody's remote from the bank or credit union. And so we're getting a lot of increase -- kind of the pace is faster now, people asking about what would it take for us to do that. And we need to set up a meeting when we're back in the bank. We need to set up a meeting with you guys to talk about the future of outsourcing and the Jack Henry private cloud. So I think we're going to see more of that rather than less on the back end now.

And do you expect to get to 100%, over time?

I don't -- no, I don't. I think that's unrealistic. I think we'll get to certainly in the 90% range. We're at about 60% outsourced today, 62% or something. We'll definitely, I think, get into the 90s. But I think it's highly unlikely we'll ever get to 100%, we'll -- ever's a long time, but it's highly unlikely in my life, and then we'll get to 100% outsourced because there are always those people who just want to do it their own way, and that's fine. We support both environments, and we're okay with that.

All right. Let's [Audio gap] which, as you highlighted, you're a financial technology services company that also happens to do business in payments. There, big line, yes -- underlying business lines there include your big debit processing business, you do ACH processing, you do bill pay, et cetera. And then recently, you've added credit processing as well. Just talk about the strategy around the payments business. And what is driving the growth overall in that business?

Sure. Okay. So we've been a debit issuer, and I'll be sure everybody is clear. We are not a merchant acquirer. When we have steered clear that business, and I'm happy to talk about the rationale there, if you want, but we're an issuer today for debit and credit. We don't participate in interchange. So for us, the way we get paid is per transaction. So in times like this, when the economy is challenged, what tends to happen is people's per ticket spend sometimes goes down, but they're still spending. So that's fine for Jack Henry. As long as the transactions are pulling, we get paid because we get paid per transaction, we don't participate in interchange. So the size of the transaction doesn't matter to Jack Henry. So we've been a debit issuer for many, many years. I think we first got into the business late '80s, but we had an aging platform. And so we've been migrating all of our customers, our existing customers over to a new platform. We started that about 1.5 years, 2 years ago, had intended to wrap it up June 30 of this year and had all of our remaining customers scheduled. We were totally on track with that. And then the pandemic hit and everybody started working from home, and we had a bunch of customers say, can you give us a little more time. So I was disappointed to do that, but it was the right thing to do. So we've extended that project. But we're in the process of moving all of our legacy debit customers over to this new platform. And then as you mentioned, we now can offer credit, which we never had before. The thing that's been really interesting is, as we move customers off of our aging platform, and it was old and it was not doing the trick, and we were starting to lose customers on that platform. As we've moved customers over, a, our existing customers' volumes have gone up. And part of that is, I think, because of the additional functionality that we have with this new platform that we're offering. So our existing customers are performing better. But we're starting to win customers. In fact, I think we've signed 92 new debit customers that wouldn't do business with us before have come to Jack Henry to do debit now that we have this new functionality. So that has helped to fuel growth. On top of that, we have this credit offering, and we've been selling -- haven't sold a lot of those, but it is an option for us now. We're still kind of learning how to be successful in that business, but we will be successful in that business. The other thing as we look to the future, so both our debit platform and what we've been doing in credit, we only sold into our core base, our core customers. But we're positioned to be able to offer that to our noncore customers as well. And we have about 7,000 banks and credit unions who do business with Jack Henry, who are not running a Jack Henry core system. So they're running our competitors' core system, but they're doing something with Jack Henry today. And as we get into calendar year '21, we'll be able to start selling our debit and credit offerings outside the Jack Henry core base. And we have not done that at all to date. So that's kind of the debit platform. The ACH platform, much of that volume is through Remote Deposit Capture. And yes, there are still lots of checks happening out there. I mean I thought checks were going away 15, 20 years ago, they are still here and lots of volume in that business. I know you'll be shocked, continues to grow nicely for us. So it's ACH origination Remote Deposit Capture. And then the third piece of our payments business, as you highlighted, is our bill pay business. Bill pay has been around for a long time, not really a big growth business. Everybody who needs bill pay has, bill pay. And it's kind of tough to win new customers when it comes to bill pay, but our same-store sales growth continues to be at kind of a nice single-digit rate. So it's more about getting more volume out of existing customers rather than adding customers to the platform. So those are the 3 pieces of the payments business. Growing -- debit is growing stronger than the others and then ACH and then bill pay, but continues to be on balance, those 3 together, continue to be a really nice business for Jack Henry.

The last piece you highlighted was the -- what you call the complementary solutions, which is a lot of your value-added services that you wrap around these other pieces. And that, at least precrisis, was growing mid-teens or so. What are the major underlying service lines in there that are driving that growth?

Yes, several things that are in the -- it won't surprise you probably to know that the digital piece of our business is in that space. Digital wraps around the core. Digital has been a real growth driver and particularly has been of interest here during the pandemic. So digital is in that space. We have a truly differentiated digital solution, rebranded as Banno. Recently recognized in the -- as being the top-rated mobile banking app in the Apple App Store. So everything that's out there. Our Banno solution was rated at the top. We've been kind of inching our way up. But when we got to March, we hit the top of that list. And so we're thrilled with the solution we have with Banno, and it truly is a differentiated solution. And I'd love to talk about it, but I'll ask you if you want me go down that path because it will take a long time. But anyway, digital is in that bucket and lots going on there. And then next to that, commercial lending. So we rolled out, it's probably been 3 years ago now, what we call our Commercial Lending Center Suite. And originally, it was designed to help compete against the likes of OnDeck and Kabbage. People that were doing online commercial loans funded by PE sources or whatever, rather than a bank, well, our bankers were threatened by that. And so we created a solution to allow our bankers to do the exact same thing online, quick decision, commercial lending. And so that platform has been a solid solution for us. And then treasury management. So a lot of our commercial -- larger commercial banks had expressed to us a few years ago. Nobody has written a new treasury management solution in years. None of them are digital-first. They're all kind of old-fashioned, where you have to be in the bank to approve things. And the commercial customer has to be physically at a PC to approve things. And so we wrote a new ground up treasury management solution that we've rolled out, have had great success with that solution because it is digital-first and really have a great reception from our banks, commercial customers. We have risk and fraud solutions in that bucket, business intelligence solutions. So it's a very broad variety of solutions. Some of them are things we've had for many years and then several are new solutions that we've rolled out in the past 2, 3 years. So it's a really broad suite of solutions, but you add them all together, and they're also, because of all the new sales, helping to add to that growth algorithm.

All right. So I will ask you a question about Banno, and then, I think, get to the next kind of discussion about like the competitive environment with -- for Jack Henry. But yes, just elaborate a little bit on what types of digital, when you say digital, what does that mean for a U.S. credit union or small bank?

Yes. So the idea behind the Banno solution is it's a single platform. So a single consistent experience for the consumer or the business regardless of how they access the platform. So if they're on their PC, if they're on a tablet, they're on their phone, the experience is consistent all the way around. So what I say all the time is the days of mobile banking and internet banking as 2 separate things, those days are gone. And that's historically what you experienced. If you -- on your PC, the experience was totally different from what you got if you were on your phone or on a tablet, we have eliminated that with the Banno solution. So that's point number one. Point number two, one of the things that we've really stressed about our approach is community banks and credit unions forever have differentiated themselves from the Tier 1 banks, BofA and JPMC and Wells and so on. They differentiated themselves on service, okay. So if you walk into a branch, the person across the counter from you knows your name, and they -- it's just a much more of a service-oriented culture in community banks, regional banks and credit unions. Okay, in the digital world, everything is moving digital, how do you get that same level of service? How do you distinguish yourself on service if everything that anybody is doing, they're holding in their hand, where is the opportunity to distinguish yourself on service? And so we thought long and hard about that and really created within the Banno platform, the opportunity for our customers to still offer that differentiated solution or service even though they're doing business on a phone, let's say. Okay, how do you do that? How could that possibly be true? Well, one of the things we built into the platform is what we call Banno Conversations. So let's say that you're the consumer. I'm sitting at home on my phone, and I'm looking at transactions, and I see something that doesn't make sense to me. Okay, I can't -- I'm not going to walk into the branch and say, hey, what's this transaction. I want to interact with you through my phone. Well, built into the application. We have a functionality for me to question this transaction. All I do is hit a button and say, I don't remember this transaction. On the other end, the bank or credit union, that shows up in the call center and the call center, whoever is going to deal with that issue pulls up that request. And now back on my phone, it's going to show the face of the call center agent, right? So now we're having a conversation. It's not live. It's the little photo or the picture that they have associated with their name, but their name and their face is now associated with that transaction. And they say, so what can I help you with? And it's a secure communication now. It's not chat. It's not texting, it's a secure communication. So you can communicate with confidential information through that session. And I, as the consumer say, I don't think I did this transaction, if there is a question about which transaction rather than the call center person sending back saying, well, which transaction are you talking about, they can send back a widget that includes more detail on, let's say, the 3 transactions you did that day, and you say, just click on the one you're talking about. Okay, now we're having a dynamic interactive conversation. I, as the consumer click on the one I'm talking about, and you have this conversation going on with confidential information or let's say, I need to originate a wire. I can, through the app, say, I need to originate a wire. What comes back to me is a wire form that's all filled out. We know who you are. We know your account number. Everything is filled in. All you have to do on your phone is indicate who do you want to pay, and how much do you want to pay. You submit that wire form back in, and it goes into workflow, and we execute the wire with the proper approval. So it doesn't just happen automatically, it's got to go through the approval vetting process, but that's all automated on the back end. So again, rather than here's a form, print this and send it to us or scan it and e-mail it to me, it's all done dynamically through the app. And there are a whole bunch of other things like that, but it's all technology that nobody else in our space is doing. And so a lot of banks and credit unions are figuring out that this truly is a way for them to differentiate themselves, distinguish themselves from all their competitors because we've thought ahead of time thinking about what is it that really distinguishes your service if you're a bank or credit union, a community bank, regional bank or credit union. So that's what's winning us a lot of attention out there from a lot of different people. We just -- we've been again named as a top fintech by American Banker. American Banker names the top 50 fintechs in the country. And as you might expect, 47 of the top 50 are companies with less than $50 million in revenue, fewer than 500 employees. There's one on that list that's larger than Jack Henry. It's Allied Financial. Okay, they're kind of a bank, kind of a technology company, not sure what they are. And you got this 44-year-old technology company on the cool kids list. Why are we on that list because of stuff like that? We're doing really innovative things at Jack Henry, and we're being recognized for it.

Well, that 50 -- top 50 list is exactly translating to my next question, which is we, in payments land, have seen this huge rise in neobanks, digital banks of various forms, whether that's players like Cash App or Chime or Revolut or who have different roles and different functions, but to a certain extent, also provide a digital alternative for a consumer, particularly a consumer who might -- who often has a banking relationship but it might be with a bank that has less well-developed digital tools. So just talk some about how you view Jack Henry's positioning relative to some of those players who aren't exactly competitors per se, but maybe it would be substitutes for some things like your digital platform.

Yes. So it's a good point you made at the end there. We don't view them as competitors. We view them more as potential partners, partners in crime, if you will. We're looking for opportunities to work together with folks like that to help our customers be better. So our job is to serve banks and credit unions. We don't want to compete with our banks and credit unions. And so we have -- for a long time, we've been known -- Jack Henry has been known as the open technology provider for years. And that's been our legacy. Since Jack Henry found -- when Jack Henry was still alive, and he was still running this company, he would talk a lot about the idea that we need to provide the tools to help our customers access the systems that we have at Jack Henry and make it easy for them to access those systems. That legacy has really served us well as we moved into the current age, where there are a lot of fintechs out there, whether they're neobanks or fintechs who are creating these start-up solutions that they're trying to market directly to the consumer. We -- using all these connectivity tools that we have, whether it's APIs or more legacy technology, we've created the infrastructure to help our customers compete in that space and sometimes partner with some of those players. So we're very active with a number of institutions who have -- either they've created their own online banks, separately branded, separately experienced. There are banks out there online but you would think are some cool start-up neobank, they're actually owned by -- operated by a customer of ours. But they've got a separate brand, a separate presence, doing everything differently as an online bank to attract that customer that you're referring to who might be working with Chime, for example. So we are the underlying infrastructure for a number of those institutions. But we also look at this not as just let's create an online presence for our customers and help support them. But where are those opportunities for us to either partner up or help our customers' partner up with some of those providers that can help them differentiate their service. So we're very supportive of that idea. We're very active in that community, if you will, and constantly looking for opportunities to be helpful to our customers to help them compete and help them offer a differentiated service. So we're -- that is not scary to us. We don't view them as competitors. We view that as opportunity, and we always have.

All right. One more on the strategic side, and then maybe we'll transition to some of the pandemic-related dynamics. So Jack Henry regularly conducts this research that you call future-ready, making sure that you are future-ready. What are the major themes coming out of your bank customer, your community banks and credit unions that are helping drive your investment pipeline over the next few years?

Yes. Well, it's several of the things I talked about earlier because, to your point, and that's what's been helping us drive where we're going. So digital, we started out the digital initiative with a little tiny acquisition now 6.5 years ago, I think. We found this little group. We thought they had really outstanding technology. They hadn't developed a whole lot at the time. They only had a few customers live. But we thought they really had created something that was different. And so we acquired the group, and then we've built out around that. But through the future-ready research that you're alluding to, that is absolutely top of mind now, for many. I won't say all, that's one of the things I'm hoping to come out of this pandemic. If there's anything that's good that's going to come out of this, I think a lot of customers who were maybe not really getting it as far as the need for an outstanding digital solution and digital presence, they're getting it now. And so I think that's going to help us. But future-ready, all that work that we did certainly helped to create an interest there. Lending. Every bank out there -- and now credit unions, too, I'll come back to them in a second, but every bank out there is trying to figure out how do I increase my commercial lending presence? And what do I do to offer a better solution on the commercial lending side because that's where they make money, right? Everybody thinks about grabbing consumer deposits is a great thing for a bank. Grabbing consumer deposits, the only reason they want that is they can fund the lending opportunity on the commercial loan side. So they really are anxious to find greater opportunities for commercial lending and tools for commercial lending. Payments. So a lot of customers out there have multiple providers for the different payments things that they offer. And oftentimes, they're not really happy with any of them. And so the fact that we have now this really outstanding platform for debit and credit, a single platform. We have the industry leader as far as Remote Deposit Capture and ACH origination, and we know that because of volumes that are out there, and we can track that. And then we have this outstanding bill pay solution. We have a really nice package as far as payments are concerned. And then the last piece is on services. So back to my point earlier about banks and credit unions trying to ensure they can differentiate on service. A lot of banks and community banks and credit unions, for example, haven't historically offered call center over the weekend. They weren't staffed over the weekend. Well, we, as much as I didn't want to be in the call center business, we did get into the call center business a few years ago because we saw that need for our customers. And so today, we offer a really outstanding call center service for customers after hours and on weekend to help them address that need. But that need was really prominent. And you would think, well, that's an old-fashioned thing, call center, it's been around forever -- it has. But in this day and age, where everybody expects to do everything on weekends and an evening that they can do between 8 and 5, how do you address that? If you're running a community bank and you don't have those employees sitting around who can work every weekend. And so we step in and help them address that need so that they are future-ready, even though it's an old-fashioned concept, they are future-ready because they can offer that broad suite of services to their customers. So -- and then risk and fraud and business intelligence and machine learning, all those things. Most people are still trying to figure out, what am I going to do with these things? What is business intelligence and machine learning going to do to help my institution? I know I should be concerned about it. I know I should be thinking about it. I hope Jack Henry, you will help us figure out what I'm going to do with this technology in the future, but it appears to be something I should be concerned about. And so those are more developing needs as opposed to things that people really understand at this stage.

All right. Let's transition over to the pandemic. Can you talk a little bit about how the pandemic has impacted Jack Henry? Maybe start with -- actually on the delivery side, just -- have there been any disruptions to your ability to deliver services to your clients?

Yes. It's a good topic. This -- we were -- prior to the pandemic, we were 26% full-time work from home, and we felt great about that. We were very supportive of the concept to work from home. And then -- and we had tested -- pretty much every group across Jack Henry had tested work from home with the idea that what if a building got taken out on a tornado or something and everybody had to work from home. So as part of our disaster preparedness, we had tested work from home. We had done it by group. We had never had everybody worked from home for an extended period of time. But I was thrilled that within 3 days, we went from 26% to 96% full-time work from home and didn't really experience any hiccups. The challenge was, as you highlight, for the implementation teams. Many of our implementation teams were used to going on-site to do customer implementations. Why? Because we've always done it that way. The 6 most expensive words in business, and we were certainly guilty of it. As much as we had challenged ourselves, we had continuous process improvement initiatives going on at Jack Henry, many of them centered around the topic of implementation. How can we do these things better? We hadn't really gotten as serious as we needed to get about doing things remote. So in the early days of working full-time remote, we certainly experienced a hiccup in our ability to continue to execute. The thing that was maybe the saving grace for us was our customers were also experiencing hiccups. So they were kind of saying, "Whoa, hold on, I don't know that I want you to do this implementation right now." And so at the same time, we were saying, "Well, that's good because we don't know how to do this remote for a number of our products." But in short order, the teams figured it out and we are back to -- and many of the teams figured it out very quickly. Within a week or 2 weeks, they figured out how to do these things as a 100% remote implementation. So within about a month, I'd say, we were back to our pace, our normal pace of implementation as long as our customers were ready to receive that implementation. I'll give you an example. Last weekend -- the weekend before was Memorial Day weekend. We converted 5 institutions, core conversions on Memorial Day weekend. Two credit unions -- I'm sorry, 5 banks and 2 credit unions, so 7 conversions on Memorial Day weekend. Three of those banks were mergers. So banks of ours who would acquire another bank, we have to merge them in. But 2 of them were brand-new institutions, never done business with Jack Henry. We converted 2 banks and then 2 credit unions. All went flawless. In fact, I had e-mails from 2 of them within the week talking about how great their implementations went. So the teams have really responded well. We're back on track now as far as being able to deliver implementations. And it's been an interesting thing with our customers because we probably have just as many customers saying, "Hey, I don't think I can do this right now. I want to delay because we have people working from home and so on." We have a number of those going on. But then at the same time, we have a whole bunch of them saying, "I'm in your backlog. I'm -- we were supposed to install in September or whatever, but we got to do this now. Is there any way you can move us up in the queue because we want to make sure we get this stuff implemented as quickly as possible." So the biggest challenge for the implementation teams right now is managing that in and out that's happening in the schedules that is really unusual for us. Normally, we're very proficient at scheduling things and executing on those schedules. And you have a customer who says, "We want to move up in the schedule." Our answer normally is, "We'd love to do that, but we can't do that because we operate on a pretty tight schedule." But now it's this moving people in and moving people out. But as far as the actual act of doing the implementations, we are back on track, and virtually all of the teams have addressed those things and changed the way we do implementation, which, by the way, will offer long-term benefits for us. And this was the thing, the catalyst, I guess, that forced us to get serious about changing some of the ways that we do things, and that will definitely offer long-term benefits for us and our customers because it will be more efficient for us. And frankly, it'll be cheaper for our customers. They don't have to pay for travel expenses anymore for a lot of the things that we do.

Yes. Yes. All right. How about on the demand side and on the sales side? So how -- actually, even before we talk about the direct impact on your business, how are your customers faring through the pandemic? Many of these credit unions and smaller community banks serve small businesses in these communities that have been shut down. How are they faring, I guess, first and foremost?

Yes. I've talked to a number of them, and it's been interesting. They -- so we knew going into this. They were better capitalized than they have been in forever. So this isn't 2008, right? In 2008, you had a lot of people who weren't that well capitalized. Their lending practices has gotten a little fuzzy, and we saw many banks go out of business back during the great recession. But since then, they have really improved their standing. So well capitalized, great lending practices as much as CECL was really annoying a lot of them. CECL was a great thing for them to prepare for something like this because it forced them, right, current expected credit loss, so they are really changing the way they thought about projecting for losses and understanding where their commercial customers, in particular, stood. So as I talk to -- normally, I'm talking to CEOs of these institutions, most of them are feeling pretty good, frankly. I mean they're concerned about their friends and neighbors who are running businesses and so on. But as far as the health of the institution, they're generally feeling pretty good. They know that they're going to have some bumpy times here, but I'm not talking to anybody who's thinking we're going to have whole bunch of bank closures or anything like that. The other thing that's been interesting is the PPP program, the Paycheck Protection Program, was a real boom for a lot of banks, in particular, credit unions for sure as well, but a lot of banks. Why? A, they got paid to do these loans, right? So I got one bank who -- their net income on their PPP loans was $30 million. And so they're getting paid to do these loans. So that's been good for them. And then b, a lot of banks, in particular, have picked up commercial customers that didn't do business with them before. So these SMBs would go to their Tier 1 bank, the BofA or JPMC or whoever, and they weren't getting any attention. Why? Because they were busy taking care of their higher-profile customers, those folks who were high on their list of treasury management. And so a lot of SMBs weren't getting the attention. And they would get the attention if they went and talk to one of our customers. So I talked to a CEO, he runs about a $1.2 billion asset bank, talked to him a couple of weeks ago. He estimates he picked up 125 new commercial customers as a result of this because there was a banker, a competing banker in one -- in a community where he has a branch. And that banker couldn't serve their customers. And that banker was saying, if you need help, why don't you go to this branch, one of his competitors, our customer. And we've heard many of those stories. So many of our customers have picked up new relationships as a result of this. So the challenge for them is to hang on to those relationships, make sure that you provide the service, provide the attention and are working with those customers to ensure that they stay with you as a long-term relationship. So that has also been good for our customers. So I think there's a lot of opportunity here for them as a result of PPP. And given the fact that they were pretty well positioned going into this, I think they're going to weather this storm fairly well, knowing what we know today. Now we may hit another peak here in September or something and the whole world may change again, I don't know. But knowing what we know today, they seem pretty well positioned and pretty comfortable that they can be successful throughout this phase.

All right. And then translating that to Jack Henry, how has your business been impacted? And then I'll broaden that out to just say, you're clearly heavily tied to nondiscretionary spending. There's -- I don't know if there's anything less or more nondiscretionary than the core systems out of bank. So how should investors think about how Jack Henry's performance fares through a recession?

Well, so you're right. We are a little over 85% recurring revenue in nature, and so that certainly provides some insulation. We are not immune to all of this. And that is not a virus fund. We are not immune to what's going on out there. But we have a model that really is intentionally, it's really resilient to things like this, the financial impacts. If you look back on our performance during the great recession, you saw revenue kind of flattened and earnings essentially flattened, but we didn't lay anybody off, and we didn't do anything drastic during all that period. And then you saw Jack Henry pick up again after that was over. And same thing here. We haven't laid anybody off. We have no intention of laying people off. We are continuing to sell. We're continuing to deliver. So are there bumps in the road? For sure there are bumps in the road. But I think our team has done really nice job of responding to that. And so I think what you'll see going forward. And we set earnings expectations on the last call for the fourth fiscal quarter. We will provide guidance in August for our fiscal '21, which, of course, July 1 fiscal year. And so we'll provide guidance then. But I think you should expect essentially more of the same out of Jack Henry. We have a good, solid model that's resilient. And we intend to continue to be disciplined in the way we run the company. We are, by the way -- you haven't asked me, but we are very actively looking for acquisitions. We're well positioned to acquire something during all of this. It's one of the first conversations -- Kevin, our CFO, one of the first conversations he and I had when we went full-time remote and really started to understand what was happening was, we have essentially no debt on the books and a good cash position. We're a good, solid acquirer. We know how to do deals. Let's go see if we can find something to add to the Jack Henry portfolio. And now with that said, we are a disciplined acquirer. We don't go overpay for things. We're not just going to do a deal to do a deal, so we can get a headline. But we're actively looking. And so we're going to continue to run the company, I think, effectively and be disciplined in the way we make decisions. And I think on the back end of this, you'll have a solid company, just like you saw on the front end of this.

And on that point, on the M&A point, what areas are you looking? Would this be more on the technology side to expand those services or like scope related international?

Yes. Yes. The challenge that we have is we don't have many holes in our product portfolio, right? We have a very broad suite of products today. So usually, what we're looking for today are those things where we can add something to something we already have and create the "1 plus 1 equals 3" scenario. So as an example, 1.5 years or 2 years ago, we acquired Ensenta. We were the dominant player in Remote Deposit Capture on the banking side of our business. They were the dominant player on the credit union side. We've put them together. It's doing essentially the same thing, but now we are the dominant player in the industry. So things like that, that are additive that can kind of make our offering bigger and better, but probably not things that are some dramatic departure from what we do. Who knows. We might find something that we don't expect right now, but most of the things we're looking at and looking for are things that just make the story that we already have, make it bigger and better in a particular area of our business.

All right. So we only have about a minute left. So I'll go to our wrap-up question for you, which is just how would you frame -- we've covered a lot of ground, and we are obviously in a very difficult and unprecedented time. So how would you frame for investors from here, the investment pitch for Jack Henry, given the current environment and the current circumstances?

Sure. So Jack Henry, and I've touched on a number of these things already today, but long-standing company, successful company, I think we run the company in a responsible manner. So we take very seriously the idea that we are managing our investors' money. We don't want to put that money unduly at risk. That doesn't mean we don't take risks. We're -- we take measured risks, I think, as far as managing our shareholders' money. We are a top-tier service provider. We are a top-tier technology provider. I said earlier, we're never the low-cost leader, and we're committed to that idea. We're offering a better solution, better service for our customers. We are, I think, the most focused provider in our market in that we serve banks and credit unions in the U.S. with technology solutions. And we know our market well. We know what works, and what doesn't work as far as what people will buy, and we're committed to that strategy. We'll continue to get bigger and do more in that space. We're very committed to that strategy and continuing to be a top-tier provider in our space.

All right. Excellent. Well, David, that was fantastic. Thank you so much for joining us.

Yes. Happy to do it.

Excellent. And I hope you're able to escape your office soon. I feel terrible.

No. No, that's fine.

Well, wonderful. Thanks a lot. We look forward to continuing the dialogue over the coming months. And congratulations, and all the best. Stay safe. All right.

Thank you, Lisa. Appreciate it.

Thanks a lot.