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

Thanks. We have Mimi Carsley, who is the Treasurer and CFO. And Mimi is quickly finishing her first year as CFO of the company, so a bunch of firsts here. Mimi, thank you for being with us. We greatly appreciate it.

So given the fact that you are coming up on your 1-year anniversary, tell us a little bit about your background before Jack Henry. What attracted you to the opportunity?

Yes. Well, first of all, thank you for sponsoring us and for launching coverage. We're really excited about that. So as you mentioned, I'm coming up on about a year anniversary here being the CFO at Jack Henry. Delighted to be a part of the firm. It's really a remarkable organization. I've spent my career at the intersection of finance and technology. I consider myself to be a true CFO kind of geek. I love data and reporting and capital markets and the like. But what's really important to me was culture, and I don't think I could have found a better home than Jack Henry. It's this unique blend of a 46-year-old executional excellence type of company mixed with innovation and a customer mindset. And we like to say at Jack Henry, our motto is do the right thing, do whatever it takes and have fun. And we really live that day to day. When I was growing up, I'm a bit of a book nerd as well, and I love business books. And one of my first business books that I remember and just even to this day, it's so distinct in my memory, is In Search of Excellence, which -- I don't know if you know the book, Jason, but it profiles these unique companies, differentiate based on service and culture. And I really feel that led to their success, and I really feel like I've joined one of those organizations.

Sounds like it's been a great fit so far.

It has. And it might make sense, Jason, before we jump into a lot of the questions, for those who aren't as familiar with Jack Henry, for me to just kind of give a super high level about what we do. Jack Henry is -- we like to consider ourselves a well-rounded financial technology firm. We operate in 3 main segments. One is core. That is kind of your lifeline of a credit union or bank that every night, the ERP system that operates the institution. Payments, we do a lot in payments. We're not a payments company, but we do, do a lot in payments. And then complementary, which is about 200-plus solutions. So it's really around delivering mission-critical risk management, revenue efficiency type of technologies for primarily domestic financial institutions.

Right. You really are kind of the beating heart of the technology portion of these financial institutions, particularly the community banks, right, the credit unions. And so I guess it's interesting, right? So you started, I think, September 1. It was officially your start date as CFO. Six months later, we see this banking sector turmoil emerge, which hadn't seen since '08, '09. So reflect back, I guess, now in the last 3 months since all of that started. What has changed for Jack Henry? What hasn't changed? There's been a lot of speculation in the market around buyer behavior, obviously, in this sector in the wake of all that turmoil, which, hopefully, the worst is past us.

Yes. Well, Vance and I were in a conference like this that week in March, that fateful week of March. I think every question -- everyone was like trying to digest live in New York like what was going on. And the reality is once you move outside of the coast, it really is not impacting Main Street American institutions. And we like to say that we serve Main Street America financial institutions. And what we've seen is, I think, a completion between creditworthiness and liquidity. What happened -- and it was an unfortunate situation because some of these have been unfolding for quite some time. You had Silvergate, which had a crypto problem; Credit Suisse, which had been having issues for a number of years; and then you had SVB; and then First Republic since. And some of that was just a run-on liquidity of public market companies, and some of it was driven by a really particular niche strategy. And those aren't the institutions we serve. So at the time, our CEOs and CIOs did outreach to their customers, ensuring them of their financial health, but they really have not seen a lot of ramification. Since that, we have not seen deposit churn. If anything, the way Jack Henry bills on a lot of our software is on number of accounts and number of members. So as people have diversified and saying, oh, I don't want to have just one financial institution as my primary bank or credit union, we've actually benefited from some of those diversification efforts. So I think there'll be some open questions as to the lingering implication. We've already seen some implications from lower valuations in some of the start-ups, less funding for start-up technologies and layoffs in the technology section. And then there's some questions around what happens on regulatory. Will there be legislation that comes out of Washington that addresses some of these? But even Congress has been very favorable to smaller regional. They know the importance that these institutions, community banks and regional banks play in the U.S. economy and in these markets. And I think most of their focus will be towards the larger institutions. If the proposed special assessment from FDIC is any indication, they're really focused on those larger Tier 1 banks. And most of our clients have been exempt from that.

So I guess what -- so what are the top, I don't know, 2 or 3 challenges that your core customer base really is facing now, right? If we take sort of liquidity out of the equation, right, they run those banks pretty conservatively, right, and didn't have this asset liability mismatch situation, right? And so what is top of mind for them? Is there anything that is top of mind that is introducing any more hesitancy into their decision-making process around, let's say, embarking on a new core replacement or even some ancillary complementary offerings to surround the core? Have you seen any of that in your pipeline data or your sales cycles?

So we just hosted our Investor Day just a couple of weeks ago, and I recommend that anyone come to our IR website because we just published a benchmark survey. We reached out to 180 bank and credit union CEOs to talk about just that, what are their priorities. And I would say that their top 3 priorities, while they've shifted in kind of some of the ranking, there are some of the priorities that they've been working on for many years now. It's around how do they build digital offerings, how do they lend and finding lending opportunities. And their #1 priority at the moment is around deposit and new account and gathering new deposits and particularly the gap on Gen X and Gen 1 and that newer generation in ensuring that gap from a customer base.

Right, right, right. So based on those priorities, how is that translating to your business? And maybe as part of that, can you touch on Banno a bit, which is your digital product? You've been talking a lot more about it in recent quarters. Maybe just level set with the group on what Banno is, how it helps your clients enhance their service to their end customers.

Yes. So the first is we've seen no change from an IT demand behavior, either from the data we presented at our Q3 just recently. Pre-SVB, post-SVB, there was no material change in the number of new contracts signed. So a lot of these decisions are multiyear in the making, particularly on the core side. It may be a 1-year process around the RFP, around the strategic decision. It's about a year on the implementation. So these aren't decisions people take lightly. In fact, the joke we like to say that has been told to us from CIOs and CEOs of banks and credit unions is they would rather die or retire, which is pretty strong language, to rather die or retire than to change out their core system. So these are not kind of like a quick decision, take lightly. And if you think about the breadth of the offerings we have, it's around helping them gather those deposits that they so critically need right now. It's about helping them with revenue generation opportunities. It's around fraud, which is going nowhere but up in terms of concerns around cyber and fraud. It's around operating efficiency to help them maintain margins and expand. It's about helping them diversify revenue streams, not just around that NIM spread, which has been compressing. So the things we do, I don't consider discretionary-type products and services. These are really helping, which is why we haven't seen any drop-off in demand from our pipeline.

Excellent. Excellent. Yes. So let's go a little deeper into Banno.

Yes. Let's talk about Banno. So we're super excited. So for those who aren't as familiar, Banno is our digital offering. We like to think about it as anything that allows an end customer to open an account, to make a deposit, to put a check into their account, to apply for a loan, pretty much any service they would get from their bank or credit union without walking into a branch, which was critically important during the pandemic when branches were closed. But it's not just a short-term need. Most people are reliant on being able to do things without walking into a branch. And so Banno really makes sure that our credit unions and banks stay at the forefront or the hub of that customer experience, so they don't get disaggregated or disintermediated from all of the financial fintechs you have. You probably have 30 apps on your phone right now, multiple relationships across different providers. Banno acts as that hub that allows the FI to decide what they want to embed into that. So they could decide to embed a fintech that helps them with crypto or they could decide to embed another offering. Or -- and this is not through screen scraping. We have agreements with all 4 big data aggregators that allows -- an open API architecture that allows the FI to decide what will be in that digital offering.

I see. So Banno is sort of the brains behind the bank's app essentially, enabling all of these different use cases.

Yes. So it's like a white-label solution that essentially is a digital bank in their pocket. So it allows them to do anything that they would want to do. We have over 9 million active users, and that's on Banno retail only. Banno retail came out before Banno Business. We have over 700 customers -- FI customers leading over 9 million active users on Banno retail. Banno Business is about to be launched shortly. We have over 300 -- roughly 350 customers, ready, signed contracts. And we have about 40 or so in beta today. So we're really excited that we now have a complete solution at both the retail and the business side and the offering in the marketplace.

How do you price Banno? And can you dimension revenue contribution? I mean as you -- I mean your fiscal '24 is starting very soon, in a few weeks. Does Banno move the needle on revenue this coming fiscal year?

It does. It is -- it helps as a driver a lot. Most of the time when we get a new core win, Banno comes along with it.

And so it's a bundle, essentially?

It's not bundled, but it is kind of a lead from a pull-through perspective. But also when we win a new core, they also take over 30 other complementary solutions. So it's a really key stake hold to help drive that win.

Is it considered part of complementary?

Yes, it is in the complementary segment. But we don't give product-specific revenue numbers. But if you think about it from a contribution perspective, it certainly is an anchor tenant in our complementary segment. And Banno Business, those 350 contracts that I mentioned, most will go live in FY '24 off of a base of nothing in FY '23. So it's a good tailwind in and of itself, and it's also a nice pull-through for the greater pipeline.

And so Banno Business is really for the SMB customer of the FI who might have different needs than the retail customer of the FI?

Yes. So today, we would all be Banno retail users individually for our private homes. Let's say I have a landscaping business. I may need 3 or 4 of my employees to have access to Banno Business. And because our model is on a per active user basis, you're going to have more active users through business on an institution-by-institution basis than retail. So not every customer -- every FI customer will take Banno Business. Those who don't do a lot with commercial businesses, obviously, will not have as much Banno Business as Banno retail. But on a per basis of those businesses, I think it will drive a lot of active users and revenue.

So Banno -- how long does, I guess, the implement -- you said you have 350, right, Banno Business contracts. Kind of they're signed, right? I mean the product is ready. It's just a matter of, I guess, kind of slotting them into an implementation schedule. Is that sort of the plan?

So we go GA this summer. So we have about 40 that are in active live today in a beta situation, and then we'll go GA this summer. And the bulk of that 350 will get implemented this year, this upcoming fiscal year.

Okay. How long does it take to implement?

It varies depending on the institution, but it is nowhere as long as like a [ core to us ].

Right. Thankfully. Right. Exactly. So I want to talk a little bit about competition because it's a question that comes up a lot. There's obviously different ways to segment the market. I think Jack Henry has traditionally talked about, what, 1 to 2 wins per week, which is kind of an interesting way to frame it. So maybe take us through that in terms of like what percent of those are outright competitive takeaways versus an in-source to an outsource type of situation just so we can understand -- unpack. I have a few follow-ups on competition, but let's start there.

So we try and be as transparent and clear as we can be. When we say a new core win, it is just that. It's a completely new logo to Jack Henry. So this is not switching from one product to another. This is completely new organization to our network. As you stated, it's about 50 to 55 per year. When it says it, it's even as one per week because it certainly depends. And we get a lot towards year-end, both our year-end and the calendar year-end. But it's been about 50 to 55 per year for the last several years. COVID, we saw a very brief pause in RFP activity. But by and by, it's been about 50 to 55 per year. Now that's different than that shift you mentioned from on-premise to the cloud. So we host our own private cloud environment. We have about 69% of our core customers in that private cloud environment today. That's been growing similarly at about 50 a year conversion. And why they're doing that is many of those financial institutions, if you're not in a town that maybe has a nice tech college nearby where you have access to talent and you're a bank or a credit union, you then need to have a CTO. You need to have your own cyber insurance. You need to be running BCP. You're managing a whole data infrastructure, and not every bank and credit union wants to be in that business. They want to be in the business of serving their account holders and members, not running a data center. So we've seen that migration. There's probably at that healthy clip of 50 a year. We probably have another 7 years roughly to go. I think you probably get to the 90s percent eventually. But also within that time frame, you're going to have people leapfrog to the public cloud environment.

Right. So is that revenue accretive to Jack Henry when they go from on-prem to private cloud? And it sounds like, right?

Extremely, yes. The FI spends about the same dollars, but it's shifting those dollars. So instead of doing all those activities I just mentioned, they're spending that money with us, who are managing that data set on their behalf.

It's just a matter of spending internally versus externally, right?

Yes. So to them, it's about the same spend, a lot less headaches. But to Jack Henry, it can be 2x the revenue. And because we're SaaS, multi-tenant, it's really a healthy margin.

Right, right, right. So let's come back to a little bit more on the competitive landscape. I mean what's the lay of the land right now? Because I think sometimes it's easy for the investment community to sort of conflate. Like competition for true core versus more, I'll call it, complementary because that's what you guys call it. There's a lot of point solution providers out there. So how do you segment it? How would you encourage us to think about it?

Yes. I think the core decision because it is such a significant one for an institution is something that will -- and it also depends on when they are coming up for renewal. We'll kind of keep going. If a bank or a credit is making that momentous of decision, it's not really going to change. That's a strategic decision for a bank or a credit union. And oftentimes, they are -- if they're not a Jack Henry core and it's a new core competitive takeaway win, they may be on a core that they're not seeing a lot of innovation on, or they may not be getting the best service, or it may not have a product like Banno to help them with their digital. So we're seeing a lot of demand on the core side. On the complementary side and payment side, it's a portfolio theory approach, right? We have over 200 products. We have a lot that are new or modernized right now, our Financial Crimes Defender product, our LoanVantage product, our Treasury Management product. So it's a really exciting time from a portfolio perspective, and that's been generating a lot of interest. But the most part, these are tools, as I mentioned, that help a financial institution gain revenue, drive cost out of their system, efficiency and manage risk.

So how do you frame kind of the remaining core market opportunity? I mean you guys have been around for almost 50 years. Others have been doing something similar for decades, too.

Yes. So today, we have -- call it, in that $500 million to $10 billion space, we have about 25% market share of banks and about 48% market share of credit unions. So still revenue -- still upside to go from a market share perspective in those markets that we intentionally target. And those institutions are also growing. So while the number of institutions in the U.S. has been going down for over a decade, the number of assets in the U.S. financial system has been going up. So we've been there supporting our customers as they grow both organically and inorganically and feel like there's a lot of growth across the 3 segments.

I want to make sure we spend some time on payments. I think it's a little bit less understood, right? But frame that up for us. How big is it in the scheme of overall Jack Henry? Talk about where you've operated traditionally in that segment. And I think you're kind of expanding your focus a little bit within payment processing. So [ focus on that ].

So our payments business has 3 main segments or pieces of functionality. One is our cards business, and we can talk a little bit of that, but we are both a credit and debit provider to financial institutions. We have something we call our EPS, our enterprise payments business. You can think about that as remote deposit capture, ACH business. And then we have our bill pay business, which is a bit more mature business. And that's also where our Payrailz and most recent acquisition is, in that payment space. So a lot of exciting stuff going on there, both through the acquisition of Payrailz, which is not just a modern bill pay. It's a platform. It has account-to-account. It has a B2B. It has an open-loop P2P. So some really exciting -- and it's digitally cloud native, which is something that really accelerated the tech modernization work that we would have to do on our own product.

Right. The iPay product that you add into the cloud environment.

Yes. Which is pretty saturated at this point. And then the exciting new stuff happening around FedNow, that's also exciting for us.

Yes, yes. And I think we'll save some time for that. But I wanted to delve in a little bit more on the card part of the payments business. I think historically, it's been pretty debit-centric vis-a-vis credit. But maybe you can give us some numbers around that. How should we think about kind of the profitability profile between debit and credit? I think you guys have been talking more recently about trying to push the credit side a little bit more. So maybe you can talk about how you're actually executing on that.

So we've been a debit provider for many years now. We have over 900 institutions that we provide debit services for and about 50 that we provide credit for. So we've only re-stepped back into credit over the last couple of years. And most people may think, oh, they're the same. The cards look the same. They're quite different.

Yes, for sure.

Especially at the back end. So we've been building capability from a sales force perspective, from an operation perspective, a lot of fraud and risk management to help credit. A lot of the banks and credit unions we serve didn't want to come in credit. People either are in credit today, in which case they have a long-term contract, or they didn't want to play in credit and in part because until very recently, monitoring fraud was something that only the larger players like a BofA could do cost efficiently. It was quite prohibitive for a smaller institution. But through the new technologies that are out there, the smaller institutions we serve, call it, that $500 million to $10 billion institutions can now manage fraud as well as a Tier 1 player. So we've seen a lot of interest. Banks and credit unions have been looking for new different sources of revenue. Credit is an opportunity for them to enter into this space. And through the new tools, we've had some interest. But you won't see something dramatic happen like in any one quarter where all of a sudden the mix shift. Most people want to have the same service provider for debit and credit. So it will take people having their renewals come up, then thinking about making switches or getting a new -- someone who is a new entrant into the credit space to come along.

Okay. So some longer sales cycles there. One of the interesting themes just in general in the banking sector for decades has been consolidation, M&A. It happens every year. Jack Henry is always very transparent about the deconversion revenue that you might be expecting in a given fiscal year. I guess historically, what percent of the time do you come out on sort of the right side versus the wrong side of the M&A?

Yes. So for those a little less familiar, we call deconversion revenues -- we have long-term SaaS contracts with the bulk of our core customers. Deconversion happens when one of our customers gets acquired by someone else, and it's essentially a termination fee, the remaining value of their contract. The challenge part, Jason, is you never know when it's going to come. We're not the first call when a bank gets acquired. We're probably the last call. And it also is not correlated with either the size of the bank necessarily. It tends to be more so how much life remains on that contract because if you're a larger institution but you're about 6 months up from renewal, like there's not a lot of remaining life in that. But if you're an institution that just signed with us on a 7-year contract, there's a long tail there. So it's really hard to predict. And it's the revenue -- I mean it's nice from a cash flow perspective, don't get me wrong, as a CFO, but it's the revenue you don't want. It means you just lost a customer. Now on the other side of M&A is when our customers acquire, which is a great means for growth for a lot of our customers. When our customers acquire another, we're one of the first calls that happen because they want us to come -- they need us to help them put our software into their newly acquired bank or institution. So we call that convert merge that tends to be some consulting implementation as well as because of the SaaS model, the next -- very next month, the number of accounts or members now just got escalated and we're able to bill on that higher level. So by and by, we tend -- over the longer term, even though deconversion can be upfront larger sums, over the longer term, we benefited from the growth our customers have gone out and acquired firms.

Okay. Net positive for you, right?

It is a net positive. And this has been a hard year. It's been a tough year.

Yes. Hard to predict.

Yes, it has been very hard. And we try and be very much a transparent reporter, which is why we have deconversion taken out from a reporting perspective as we look at non-GAAP. We have to be, I think, one of the only companies where non-GAAP is lower than GAAP revenue. So...

Yes. That's pretty conservative. So speaking of conservative, in about a couple of months, you're going to be giving guidance for the first time as CFO of the company for fiscal '24. And what are just some of the puts and takes investors should be thinking about as they start to sharpen their pencils on the models for F '24 in the P&L?

Okay. I thought you were going to try and trick me into saying FY '24 details. It's too early. I know we disappointed people by not saying it at our May conference. And Vance and I are really strategizing on when to have that conference so that we can have a meaningful discussion around it.

For sure.

But I think the beauty of the SaaS model is you're layering on these long-term contracts. So a couple of years ago, we would have said we grow at about 6% to 7%. And today, we're talking about growing at 7% to 8% on a $2 billion. So off of a bigger base, we've increased the growth rate. So part of the job and our teams are hard at work today, we're at what we call the most wonderful time of year. We call that budget season. And we are thinking about what products are launching when, what the implementation calendars look like, so we can try and predict those revenues. But a lot of -- the harder part is really on the cost side.

Yes. What's your philosophy there?

Yes. Having those really detailed, hard, challenging conversations about trade-offs and prioritization. There's no shortage of ideas. It's just a question of a rigorous prioritization because we know margin expansion is a key part of our investment story. And in recent years, we've all seen inflationary headwinds, and we're trying to offset that as much as possible.

I mean is margin expansion like a commitment you would say Jack Henry has and it's just a matter of magnitude in a given year? Or theoretically, could there be a year where you go -- you lean in more heavy on investment and margins are down a little bit?

Yes. I would say 100% it's a commitment. We believe that margin expansion is a strong part of our investment thesis, and we believe that the model is completely capable of it. The beauty of being a SaaS multi-tenant strategy is as revenue grows, it's kind of the right ones and repeat kind of often in theory. And that's kind of the magic of software, and so we very much are focused on it. That being said, we have a lot of third-party costs. We have a commitment to our people. We're all trying to think about, one day, people are talking about merit increases of 3% to 4% in the industry, and then Microsoft said they're doing 0. So we're all trying to think about what the right thing is for the long term of the company.

About to juggle. All right. 20 seconds on capital deployment strategy. Or 30 is fine, too.

So I think more will stay the same than will change. We're a conservative company. We are committed to our dividend policy. We have increased the dividend over 34 fiscal years. I can't say calendar years. Fiscal years. We believe in reinvesting in the business. We spend about 14% a year on R&D to reinvest, and we're rare breed in that we can either build or buy. We have that capability in-house. So we really very much believe in internal development. We are a skilled and experienced acquirer. And hopefully, the market will present itself with some opportunities there. But we are disciplined in terms of the valuations that we're looking to pay. And then we would be happy to return capital to shareholders if we don't see other opportunities.

A lot to be said for the consistency. Thank you. Really appreciate the thoughts. Okay.

Thank you, Jason. Thank you, everyone.