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

Welcome back, everyone. My name is Dan Perlin. I head up the payments processing and IT services practice here at RBC. I'm delighted to have Jack Henry joining us today. And from the company, we have David Foss, who is the Chairman and CEO. So thank you so much for being here.

Yes, glad to be here.

It's been a long, tenured relationship, so we appreciate your support. I don't know how many years it's been, but I think it starts in decades. So you got to earn this.

So they say.

Nothing comes cheap, right.

[indiscernible] with you.

Yes. The first question I'm asking everybody is the demand environment. What I thought I would start with you is that we just kind of did a round robin, kind of a 1-liner, we don't have to go into a deep dive. But what you're seeing in terms of each one of the segments, so take it from core to payments to kind of complementary services, and then we'll just kind of continue to dig in from there.

Sure. Yes. So one of the things that I stressed on the earnings call here last week or maybe that was 1.5 weeks ago was that our current pipeline is larger than it's ever been at Jack Henry. And that [ surprisedly ] set a record as far as sales in our fiscal fourth quarter, which was the June quarter. Normally, Q1, which is our September quarter is a little bit lighter than Q4. It was lighter, but it was -- our actual sales production was double digits higher than last year's production in Q1. And we came out of Q1 with the largest pipeline we've ever had. So the overall demand for Jack Henry solutions, I can't speak to anybody else in the industry, but Jack Henry solutions is tremendous right now. So to walk through by segments. So first off on the core side of our business. So on the core side, we have a large pipeline of new core prospects in the pipe. I said on the earnings call that normally, in a given year, we signed around 50 to 55 new core customers. Looking at the pipeline, and of course, I'm projecting forward here, but looking at the pipeline right now and comparing it to past year's performance, I think the pipe supports that, that somewhere in that range is probably where we'll be for this year as far as new core sales. And the demand that we're seeing on the core side is being driven primarily by customers who are dissatisfied with whoever they're partnered with today. Everybody out there, every bank and credit union has a core system. That's what they -- that's the heart and soul of their bank or credit union. So they have something today and making a change on the core side is what we refer to as heart and lung surgery. So you're replacing the vital infrastructure of the bank or credit union. So it's a big decision for anybody to make a move like that. And yet the demand for Jack Henry technology is tremendous right now. So I'd say that, that piece of our business looking solid, looking forward. The payment segment of our business, really 3 primary components of the Payments segment. So we have our bill pay business. We have our card business, where we do both debit and credit. And then we have our, what we refer to as Enterprise Payment Solutions, which is Remote Deposit Capture and ACH origination. All 3 of those segments are performing. I think the best way for me to describe them is they're performing and the demand for those solutions is consistent with what we've seen in the past. So it's not that we've seen any great big uptick in demand, but we're certainly not seeing a slowing in demand. The bill pay business is the slowest grower of those 3, and we've talked about that -- I've talked about that in a lot of earnings calls. Most -- everybody has a bill pay solution. They're not switching bill pay very quickly. And so it's the slowest grower but still it's growing. And then demand for card and our EPS solutions are growing nicely. Then the third segment is kind of this catch-all, we refer to as complementary solutions. So we have around 300 solutions or so that we sell at Jack Henry technology solutions. So there are 5 in the core segment. There are, let's say, 15 in the payment segment. So what that tells you is there's more than 200 in the complementary bucket, a lot of different solutions. So that includes our digital banking technology. It includes all of our solutions for banks and credit unions to do budgeting and the asset liability management, it includes fraud solutions. So it's a big bucket. It's kind of difficult to lump them all together and say, here's the demand, but I will tell you for the newer platforms in that bucket, tremendous demand. So in the fraud area, treasury management, digital banking, I have highlighted in the earnings call, all the success we're having with digital banking. So the newer platforms, the things that are really fresh and have been developed with some of these really cutting-edge technologies, demand there is very strong, but then we have hundreds of other solutions that are -- they're kind of nice, steady growers, but I can't tell you that every one of them is lighting the world on fire.

Yes. No, completely understood. You have great exposure to the financial markets in understanding what banks and credit unions are looking for right now. And the question I have is really at a high level, which is given where rates are and how there's questions about macro headwinds and uncertainties. What is the health of your end market? And if there's distinctions that you could draw between your banks versus your credit unions.

Yes. So most of what I would share with you is anecdotal. I mean I keep of track of surveys, industry surveys and so on, and I report on those on the earnings calls. I just shared information from the Bank Director survey in the last earnings call in February. I'll share with you the Cornerstone Advisors survey results. But as far as the end market question, the best indicator I have is we just hosted our large annual client conference about a month ago. And in that client conference, I hosted a separate track for CEOs only. So I'm the host about 200 -- a little over 200 CEOs with me, and we talk about strategic topics and one of those is what you're getting at, how are they feeling about the market today. So this information is about a month old. It's anecdotal. But it's me talking with a whole bunch of CEOs that are running, generally, midsized banks and credit unions. So we don't serve the little tiny banks and credit unions. We also, by strategy, don't serve BofA and Chase and Wells, and we're not in that space. But all those middle-market banks and credit unions, that's our target. And most of the attendees in the CEO forum are -- they're running billion-dollar institutions or somewhere in that range. I think on the banking side, they're well capitalized today. That came out of the Great Recession. There was a real pressure on bankers to capitalize, make sure that they were well capitalized. They have reworked their lending practices since the Great Recession. And so I think as you talk to them today, they don't feel like they have a bunch of risky credits on the balance sheet. They've seen, finally, a net interest margin spread, right? So they've raised their loan rates here pretty consistently over the past year or so. Deposit rates have gone up just minimally. So they have a nice spread that they're working with today. And they're generally optimistic. They know there are challenges in the economy. They know there's stuff going on out there. But they weren't ringing their hands saying, oh my gosh, we got another great recession upon us because they see the health of their businesses, and they feel like they're in a pretty strong position. Credit unions, much more consumer focused than banks. So banks generally focus on the commercial side. Certainly, they're serving individuals, but have a heavy book of business on the commercial side. Credit unions, not so much. They're very retail-focused, very focused on serving their individual members. But most credit unions, I think, have a similar feel to what the bankers have. They're in a bit of a different business because they're not for profit. They share their results with their members. And so they're not as challenged to produce the results generally that the banks are challenged by. So they're also really pretty optimistic about their ability to work through this whatever is going on right now and come out the other end in a pretty good spot. So -- and by the way, the FDIC watch list today as far as the challenged banks is very small.

Yes, very small. Yes. That's pretty amazing really to think about where we were not so long ago.

It is. But I think it's the result of everything that came out of the Great Recession, right, everybody putting a focus on running their business more effectively. So we don't -- what's happening today is not caused by banks. What happened in 2007, 2008 was caused by banks. That is not what we're experiencing today. So it's an entirely different environment.

Yes. Now this was in conjunction with the Jack Henry Connect conference, right, so you hosted your forum for the -- or CEOs, excuse me, but then you also had kind of the bigger event. And I think this was one that you hadn't had live maybe for a couple of years. what you're hearing from that? What kind of buzz, obviously, there's a big difference.

It was fun, I'll tell you that. I mean, people were so excited. We had around 4,000 people there, I think, in total, people were excited to be back in person, lots of interest in new technology solutions, specifically from Jack Henry, but we had a wide variety of other vendors there in the technology showcase. But a real interest in new technology, where is the industry going? How are we going to compete if we're running bank or credit union, what technology can we use to compete. So the survey responses have been overwhelmingly positive, but just a really upbeat by -- it was really -- frankly, it was really fun to be there with all these folks.

No, I suspect as it is today when we're back in person here. We hear in the industry from some folks, but not all and certainly not from you, but I'd like to get your perspective. Some have been talking about some elongated sales cycles. Others haven't, but some are. And I'm just wondering, it sounds like, obviously, you're not seeing that, but I'm wondering what you also hear in the industry. You talked a little bit about these core switches as dissatisfaction, right? And so obviously, you could guide some of these things maybe lost share, and we'll call it elongated sales cycle. But like I'd be interested to know your perspective on all of that.

Yes. So it's interesting. I'm not oftentimes able to listen to all the earnings calls, but I read the transcripts for mostly everybody in our space. And so some of the commentary this quarter was unusual to me, because we're just not seeing some of those same things. But specifically to the topic of elongated sales cycles, we are not seeing that. That's just not happening. I mean there are normal kind of ups and downs when you're running a large sales organization and your nationwide coverage. But there's nothing that I would call out on an earnings call certainly and say, oh my gosh, we're experiencing a slowdown in interest in Jack Henry technology. The good news for us is there is a lot of dissatisfaction out there in the industry with some of the current solutions offered by other providers. And so the demand environment isn't really changing for Jack Henry because people are looking for newer technology and they're looking to move to solutions that they know the provider, Jack Henry in this case, is committed to serving them long term. Now there are a lot of platforms out there that are just kind of languishing, right? They're just running, but they know that the provider isn't really committed to their long-term success and committed to delivering new updates, new releases, kind of exciting new things. And so that creates opportunity for us because our strategy is very focused, we're very specific and public about the solutions that we're focused on. and the fact that we try not to have solutions owned by Jack Henry to compete with each other, right? If you buy this solution from Jack Henry, you know that it's the go-forward solution because we're very specific about our product strategy. And so I think well that's created demand partly because of that dissatisfaction, but also the demand. We have this reputation that continues as being the best service provider in the industry. There are some analysts in our space who even go and interview customers and say, who is your provider and tell me about the service experience and then they publish results about that. And every time, Jack Henry ends up at the top of that list as far customer sat is concerned. That is a big deal. If you're running a bank or credit union and you're doing really bad service from one provider and you know that Jack Henry, as told by a whole bunch of other peers, in the industry, if you're running a bank or credit union and all your peers are saying, these guys offer the best service, that's a big deal to those customers, and that also inspires them to move to Jack Henry. So I think a combination of all those things continues to create opportunity for us to sell new technology solutions.

So in that same vein, when we think about -- I'm not going to ask you who the competitors are, or you taking it from, but I'm interested to know maybe a little more deeply what are the characteristics? So service is one you highlighted very clearly. I suspect there's others though...

Well, one of the biggest ones, and I alluded to it earlier. So there are a number of different solutions out there that customers know are not the go-forward strategic solutions that those vendors are committed to.

Is that because they have other businesses that are utilizing other capital and competing for that?

Generally, yes. And so their customers know that, that they're not getting attention on those solutions. And their response is, hey, I've been paying -- I've been a good customer. I've been paying you for years. And what about me? and they feel like they're being ignored. And so then they -- when they talk to their peers who tell them about doing business with Jack Henry, I think that creates opportunity for us. So -- and it's people tend to think only of us as a core provider. And so they say, oh, well, you only compete with 2 companies out there. Keep in mind, we have more than 300 solutions. We're competing with pretty much everybody in our space. And certainly, we have a couple of large competitors, but there are a whole bunch of other competitors for Jack Henry. And to varying degrees, this story holds true in a lot of those cases with other providers, not just in the core segment of our business.

Yes. I think that's a very common misconception is that it's kind of the big 3 maybe and then they don't think about the other components to that.

Right. That's a very good point.

That's incremental in terms of how we think about sales volume that's coming to you guys.

For sure. I mean just digital alone. So on the earnings call, I highlight the success we're having with Banno today. I mean we are having tremendous success in digital banking. There are companies out there that only offer that, right? So they're perceived as being the industry leader. Look at what Jack Henry has done with Banno and the number of customers that we're signing, the share that we're taking with that solution, that was a stand-alone business on its own, we could sit up here for an hour and talk about just that business, right? But that's just a piece of the Jack Henry business. But we're seeing tremendous success in that area.

Well, you jumped to Banno, so let's stay on Banno's topic. We can float anywhere you want to go. So 8.3 million plus users, your run rate is $200,000. I think you said...

[indiscernible] per month, yes.

[ Which is ] up per month, 38%, I think you said on the call. That's a pretty astounding stat considering, again, the competitive backdrop and when we think about what that's serving, because today, that's kind of your just existing book, right?

It is. And it's only retail customers today, right? So we don't have the business side rolled out yet, that comes out early '23.

Yes. So how do we frame that just in our mental model. And I know it's a big TAM, but like help us kind of whittle that down a little bit.

So and that's the exciting thing about that segment of the business -- sorry that it's not a segment, that piece of the complementary segment, mostly any bank or credit union in the United States today has a digital banking or an Internet banking solution and a mobile banking solution. And they're 2 different solutions. They're 2 different experiences. Every banker knows we got to get to one experience. Consumers don't want to go online on their PC and have one set of experiences and be able to do one set of things. And then they get their phone out and it's an entirely different experience. And I can't do this on my phone, but I can do it on my PC. Those days are gone. People do not want that environment. And yet most banks and credit unions, that's what they deliver. The Banno platform is a single platform regardless of form factor, whether you're on your phone, your PC or your tablet, it's the same user experience. You have the same functionality. It looks and feels the same, that what bankers need to get to. So the opportunity is significant because most banks or credit unions, I'm not just talking about Jack Henry core customers, I'm talking about the industry. Most banks and credit unions need to get to that. So they're trying to figure out how they can move in that direction. So enter Jack Henry, we've got this public cloud native digital banking solution with features and functions that are unique as compared to anybody else in the industry that really helps the banker engage with their customer who is not walking into the branch anymore, right? They want to be able to serve them, give that same service experience when they don't walk into the branch, I got to figure out how to do that through a digital presentation layer, Banno offers that today. So that's why we're winning so many customers today. The only knock on our solution has been, yes, but you don't have the business side. I can't serve my business customers with Banno. So I have to have a different piece for the business side. Yes, you're right. So even with that kind of impediment, we've been growing this business tremendously with all these users as you highlighted, around 200,000 users that we're adding per month. Now we get Banno business in market. I believe we're positioned to beat anybody and I mean anybody in the market as far as digital banking is concerned. We already have somewhere around 150 customers signed to go to Banno business as soon as we bring that on. So now we'll start adding those users, business customers that will be using the platform. And I'll start reporting those numbers on the earnings calls and share with you how we're progressing in that area. But we see -- I mean, there's years of opportunity with this because although most banks or credit unions want to get to that environment, I described earlier, they can't necessarily, a, afford to do it right now, or b, it's very disruptive to their customers. When you change digital banking, it's disruptive to your customers. And so it requires a lot of planning, a lot of communication to your customers. The app is going to change on your phone. Just think about that. If it goes from looking like this, to looking something totally different, you got to make sure that you communicate with your customers. So it's an involved process for our customers to make that move. But we see many years of runway just with that platform alone.

And I forget, when you go GA? That's -- did you say...

Q1 of '23, Calendar '23.

Calendar, right. Yes. So pretty soon?

4 months or so.

Yes, pretty soon. That's great. You mentioned the sales bookings trend that you've seen. I mean it's kind have been record after record, and I know maybe this quarter was just kind of close to it. The question there is that it's not 1 quarter. It's been building for some time. And I'm wondering where all of that pent-up demand is coming from. We talked to a lot of companies kind of during the pandemic, and there was this big pull forward of digital so they had these compression cycles. But this is still happening with your business, it didn't kind of tail off.

Yes. It has not tailed off. And I didn't -- we didn't see a significant shift in what was happening during the pandemic other than -- so if you think back to, it was 2020, right?

Yes.

[indiscernible], become blur. So if you think back to Q1 of 2020, I guess, March of 2020, when everybody kind of went, okay, we've got to shut things down. That next quarter, so our fiscal fourth quarter, the second quarter, calendar quarter of '20, things really came to a screeching halt as far as customers signing contracts in that -- or initiating new RFPs, I'll put it that way, initiating new RFPs during that period. But there wasn't a shift in what they were looking for. They just kind of stopped because if you think about banks and credit unions prior to the pandemic, they didn't run virtual, right? They were in branch. They had people in their offices. They weren't used to running virtual. They all had to make the shift to running virtual. So it wasn't that they changed a lot about what they were focused on. It was they had to figure out how to run their business in an entirely different environment. Once we got through that quarter, things really kind of returned to normal, and the demand was pretty much the same. There was already good demand on the digital side. It accelerated a little bit because of the pandemic, but it wasn't some gigantic shift but it moved that along a little bit. And then they were getting back to, okay, we need technology to automate things just like they've been pre -- before the onset of the pandemic. And we've just kind of continued that now since early 2020. And so the continuation of demand, the acceleration that we've seen, I think, is driven by those things. You and I talked about at the beginning of this call there's dissatisfaction out there. People that are concerned about whether or not my solution is going to be supportive for the long term. I know at Jack Henry, what their strategy is. I know what solutions they're focused on and that helps drive people to our company.

Yes. So let's talk for a second about the input cost to your business because they are -- again, as we look across the space and we listen to everybody reporting, there are some that seem like they're on the wrong side of history right now in terms of their cost structure. In other words, they have long duration contracts, but the input costs are so great initially that it's kind of outweighing their ability to reprice anytime soon. That doesn't seem to be happening to you. So here again, it's a little anomalistic. So help us understand, and maybe it's not to you, but it sounds like, as an outsider looking at it.

And so it's interesting because you're right. We have -- so I've had questions for years about CPI escalators. Well, how much of your revenue growth is dependent on CPI escalators? And my answer always was 0. We would never do CPI escalators. Even though they're in the contracts, we never did them unless there was really a reason. Our customers are bankers. And so we are respectful of the fact that they're smart people, they know how to manage money. And we wouldn't go to them with a CPI increase unless there was really something that we could base that on. So for years, our increases in those contracts were nominal or 0. But then as the economy started to change here and everybody could foretell what was happening as far as rising labor costs and other inputs, we started to do CPI escalators really across the board. And pretty much any of our contracts allows an annual shift in rates based on CPI. We have limits in those contracts, but we started to take advantage of those, not to the max but what was reasonable for us to protect our business. And I think our customers respect that about the way we do business. They like the fact that we explain what we're doing. We've had virtually 0 pushback. We've done across the board increases, almost every product line. We've had almost 0 pushback because our customers know how we do business. They know that we're not trying to just take advantage of the opportunity to gauge somebody. We're trying to run the business like businesspeople and raise rates where we need to raise rates but not just take advantage of what's in the contract. And so I think that creates that long-term commitment. Our retention rate is high 90s, 98%, 99%, customers don't leave Jack Henry because of that relationship that we have. They know that we're going to treat them respectfully when it comes to running the business. And as costs go up, we got to share those costs. And 2 years from now, if we're not -- CPI is back down to nothing, they know that we're not going to continue to jab them with CPI increases because we're not experiencing those on our side.

Interesting. Interesting. Well, we're at a tech conference. So let's talk about the cloud for just a second. And the bigger picture that you've talked about now for several quarters is kind of modularity, modernization of the tech stack. And the questions that I hear my peers ask you and others is where are we in the public cloud journey. So I'd be interested to know kind of the evolution that you think will be required to take place in order to get to a comfort zone for a lot of financial institutions.

Yes. And I could talk for hours on this topic. So you may have to rein me in here just a little bit. But it's a really exciting time right now. So we started several years ago building solutions on the public cloud. So you've heard us talk for years about the private cloud, which is Jack Henry owned and we own the entire infrastructure. We started building solutions on the public cloud several years ago. The challenge in the public cloud environment is the regulators have not been comfortable. So our customers didn't want to buy a lot of public cloud solutions because they couldn't get past their regulators to say, yes, thumbs up, we're good with the solution. But there were some things that were totally fine to have in the public cloud, things that didn't involve PII data. So for example, one of the first things we rolled out in the public cloud was our budgeting and asset liability management technology, no PII in that. It's all numbers that are unique to the financial institution, regulators adopted that pretty easily. And then over time, we've rolled out more and more solutions on the public cloud. But the core was not one of them because core is the heart and soul of the bank or credit union. So the good news is we have several of our technology solutions already in the public cloud environment. And we're in AWS, Azure, and most of you probably know, we just announced a big relationship with Google. They're already turning into a wonderful partner for us. So we're moving everything in that direction. We have several solutions on public cloud. What we announced in February was, okay, now it's time to start moving the core solution to the public cloud. Not much demand today for public cloud core, again, because of the regulatory environment, regulators are accepting it kind of here and there, but most bankers are still nervous about the idea of moving the crown jewels to the public cloud. But we started telegraphing in February. This is where we're going. And we're going to -- we want you all as prospective customers of Jack Henry or existing customers of Jack Henry, we want you to know where we're going and how are we going to get there so that you can plan to move along with us because in the end, you're going to want to live in the public cloud for your primary technology solutions. The other thing I told everybody in February is we didn't just start in February. We started writing this solution about 2.5 years ago. So we're well down the path. We already have components in beta today and this public cloud layer getting ready for this rollout. But it will take years. And customers will kind of evolve with us under the public cloud stack. The interesting thing about the approach Jack Henry has taken and nobody else is doing this, by the way. We're leading our industry. We decided -- as we were working through the strategy on this, we decided rather than just writing a core on the public cloud, let's kind of rethink what core is. And so the modules you alluded to, we've kind of redefined core and said, okay, the average core system, you can think of it in terms of about 30 to 35 kind of key modules. So loan processing is one. Account onboarding and management is one. Deposit processing is one. Transaction processing is one. Wires is one, right? So 30 to 35 key things that a core system does. Let's break those apart into modules. And so the customer now has options when we get to the public cloud environment about what do they want their bank to look like or Credit Union and who are their customers they're trying to serve? What do those customers need. So if you have a bank, for example, a digital-only bank that's only trying to serve customers with deposits, they could buy the transaction processing module, the deposit module, the wires module, but they don't need the lending pieces because they're not in the business of lending, right? So they can define what they want that solution to look like. So all of this done on the public cloud, all API enabled, and we already have this very large API layer sitting there, on the public cloud. So we have this platform with all these components, all the complementary solutions I've been talking about, they sit on the public cloud with this really nice API wrapper. And now the banker says, okay, I want to get all these things from Jack Henry, but I want to integrate in this wire solution from somebody else. I do the API connection. It's also sitting on the public cloud and makes it a really nice experience for the banker and ultimately, for their customers. And so it's a differentiated approach. It's a differentiated solution. Customers and particularly, prospects seem to really be loving this idea, we're hearing from larger institutions. If you talk to large -- if you're running a $100 billion bank today, you got a lot of duct tape and baling wire probably because there's a lot of older technology behind the scenes and they've put wrappers on the top. And most CIOs of those larger institutions are trying to figure out how do I get to public cloud. Well, if you look at what Jack Henry is doing, you can do it in modules. I can adopt Jack Henry's deposit processing platform first. I can continue running whatever I'm running over here. I can do deposit processing first. And then I can do wires and then I can do -- and so they minimize the risk of going through a core conversion because they can do it in components, all sitting on this public cloud with this -- all these other connectivities. So we're hearing from larger prospects. Okay, you guys have figured out what we were hoping somebody would figure out how to help minimize risk and get us over to a modern tech stack.

Yes. No, that's actually smart. The question that we would have for that is, is there risk to the long-term economics that you get in totality?

So that's -- I get that question a lot. And usually...

And you should.

Well, and the reason I'm getting the question is, hey, you guys are opening yourselves up to a lot of people connecting in and they may not buy your bill pay solution or whatever. We've always been run at. The counterintuitive to people -- the counterintuitive thing to people is, that's the way we've run our business historically. We've made it really easy for people to connect third-party solutions into the platform and we're not punitive pricing. We don't try to stand up Chinese walls, we make a really easy connectivity option. We've done that historically. So today, it is really easy for you to connect some third-party solution into Jack Henry stack. But because people have that option because they -- it's easy for them to do, they tend to buy more from us because we're making it easy for them. They say, okay, we want to do more business with you guys. We believe all those years of experience we have over here translates directly to what we're talking about on the public cloud offering. We expect most people will buy a bundle -- most people will not buy individual products, they're going to buy a bundle. That bundle is going to look an awful lot like a core system, and so that's what's going to happen. And then they're going to buy complementing products from us just like they have in the past. But I think the fact that it's all sitting on this very modern public cloud, where we practice DevOps where we have all the design options that you have in a public cloud environment, you've all the security infrastructure in a public cloud environment. And, by the way, the security infrastructure that the public cloud providers have is better than anybody else. I don't care what everybody says, it is phenomenal. And so we're helping our customers get to all of that really modern technology and a modern offering for their customers.

That's awesome. Can you believe we just went through 30 minutes.

Did we really.

So we're out of time. But we could go on for another 30, but thanks so much.

Thanks, everybody.

Thank you.