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

All right. It is 11:00. Why don't we get started? Good morning, everyone. My name is Chuck Nabhan. I lead the payments and fintech research practice at Stephens. I appreciate everyone joining us today. Joining us from Jack Henry is Mimi Carsley, who is the fairly new CFO. As you can see, Kevin is not here.

And I guess just as a starting point, what led you to Jack Henry about a year or so ago? And what are some of changes for observations you've made since you joined the company?

Sure. Well, first, thanks to Stephens for hosting us, and happy to be here. So I would say what attracted me, first and foremost, to Jack Henry was the culture. There are a lot of companies, I like to say, that have their plaque on the wall of behaviors and ambition and mission. And at Jack Henry, just how authentically I saw it, lived day to day. We really talk about our 3 pillars, treating how we care for our associates. You treat them right. In turn, they will treat their customers right. And the rest just kind of naturally will follow and work itself out from a shareholder perspective. So that was super important to me, a fantastic leadership team. But also just the mission in what we are accomplishing. We serve community and regional financial institutions, really the lifeblood, the backbone of America with a swath of, we'll talk about some of the segments and some of the businesses we're in, but with over 300 solutions. And so to me, that was fascinating. I wanted to get back to a more fintech background. I've always been at that intersection between wealth and finance and technology. And so I really wanted to get back to innovation in a company. And Jack Henry is a unique mix, maybe unique is too strong a word, a rare mix of 46 years of operating history and executional excellence and renowned customer service. But then you mix that with this bold thinking, innovation and investment in technology, and I just really loved that intersection of fueled for growth, not really resting on the laurels but really thinking about fueling for ambitious growth in the future. And then as a CFO, there's a couple of attributes you look for in any CFO gig: one is a really strong team underneath me, so always good to not be walking into a buyer situation, but strong reoccurring revenue, great margins, the magic of software. We are truly a GAAP EPS company. I've worked -- every other company I've worked at, frankly, is -- talks about adjustments. And I looked at the P&L and I kept asking like, "Oh, so what's below the line, what's below?" Like nothing is below the line at Jack Henry. It's like we are really an EBIT -- we don't talk EBITDA, we talk GAAP EPS. We talk net income at Jack Henry, and that's a rarity. A clean, fortress-type balance sheet, very minimal debt, a conservative fiscal mentality. And just all of those things put together are really what attracts me to the company, and I've been thrilled to be here.

Yes. Certainly refreshing to see. One of the themes for anybody that follows the bank space is the emphasis on efficiency among financial institutions. With that in mind, there's been changes in consumer demand that have necessitated investment in certain digital solutions. So could you maybe talk about what you're seeing from an IT spend standpoint as well as how the solutions Jack Henry offer better position your clients for this environment?

Sure. So we do surveys ourselves. A lot of our leadership team talks to CEOs of banks and credit unions. We just hosted our large customer client conference of the year. We also have a track of that, that CEOs only. What we're hearing and some of that is anecdotal, some of that is external survey data, but for the most part, they're feeling pretty strong. They're feeling resilient. And they don't have their head in the sand. Obviously, they're concerned about geopolitical, they're concerned about regulatory, they're concerned -- everyone is always concerned about cyber. That's not going away. But they're feeling pretty good. Everyone's looking for deposits. Everyone's monitoring their credit portfolios and books. But the long-term trends remain the same at Jack, which is people have to have a digital front door presence. Most banks, and I think that Dave just quoted some of these numbers recently on an earnings call, but most banks feel pretty confident in handling baby boomers, for example, and the services and delivery mechanisms are doing it. Now they feel less confident in how they're serving millennials or Gen Z-ers. And that's where the future wealth is going. And that's where the new businesses and small businesses are starting. And so if you cannot open an account, open a loan, open a deposit or CD all remotely, whether it's on your phone or your laptop or your tablet in a compelling way, you are going to lose customers. And so our banks and credit unions know that they need to continue that journey to expand their digital footprint. So that's not just Banno. I mean Banno is a fantastic product. That's all of the solutions. That's account opening, that's in how our loan vantage product is. That's in everything that is client-facing. I would say 10 years ago, Jack Henry was really more of an in-house provider of software. So what we touched may have touched the employees of a bank or credit union but less so the end customers or clients or account members. But today, our products are front and center of that experience that, that bank or credit union is trying to drive. And so the pandemic saw an acceleration of that because branches were closed, no one could go into a branch, but that is not stopping. People today, whether you live in New York or you live in Springfield, Missouri like Vance does, you can bank anywhere in the country, right? There's no geographic territories now for customers. And so you need to be able to have tools and experience and solutions to maintain your client base.

Got it. So that's a good segue into pipeline and bookings activity. So coming out of the quarter, you reported 10 competitive takeaways, particularly strong. I know Q1 is seasonally slow for sales but the momentum seems to have continued from the fourth quarter, which is very positive. Could you maybe touch on some of the drivers of that momentum as well as what differentiates Jack Henry from the competition?

Sure. So Chuck, spot on, we talked about winning about 50 to 55 new core wins a year. We've been talking about that type of level for several years now. And the way -- I want to be specific. When we talk about a new core win, it is completely a new institution to Jack Henry. This is not a switch from one product to another product. They are new to Jack Henry from a core perspective. And so you're absolutely correct, like our fourth quarter was a record. It was a great year. We closed out a great year last year. And so normally, there's this fear that you drained the pond, so to speak, from your funnel in order to get fantastic results in the fourth quarter. But our pipeline is as strong as it's ever been in terms of size. And so that has been a great just indicator of the health and the start to our fiscal year. We're feeling really solid about it. I would say that there are dynamics at play that make Jack Henry an even stronger provider at this point. There's a couple -- we're renowned for our service. I think there's been some shortfalls in others from a service perspective. People know that Jack Henry is so dependable. And most people -- so today, we cover over 900 banks, over 700 credit unions, but we also serve almost 6,000 other financial institutions with a complementary product. So roughly, there's, I think roughly, call it, 9,400 financial institutions in the U.S. We cover over 80%, roughly about 80% of that have a Jack Henry experience using some product of ours. So by the time they're making a core decision, they probably have used some other Jack Henry product or maybe several of them. So they know the service excellence we deliver. They know the streamlined -- how we do billing, how we do customer support, how we hit our road maps from a product delivery and services perspective. So it makes the conversation much easier when you're a salesperson having that conversation because they've had some exposure to Jack Henry. So I would say the dynamics we see for demand for IT is continuing. We feel really good about the pipeline of our banks and credit unions. Now that's account basis. So now in any 1 year, a couple of things to note on core, rarely does that 50 wins turn into revenue that same year. It takes about 12 to 18 months to do an implementation of a core conversion. So that's a nice forward indicator of future success, but it's not in-year revenue that you're seeing on the core side. The other thing is you don't sell core in a vacuum. So typically, when you're selling core, the attach rate is probably around 30-plus other Jack Henry products at the same time. And then as you renew and you continue to be a tenured Jack Henry customer, you can have up to like 70-plus products of ours as you grow and you have other expanded needs and solutions because we're that trusted provider. And as providing the core, you're kind of in that lead pole position for every new solution that the bank or credit need. And like we say right now, if you're a bank or credit union, you have some strategic problem on your plate, whatever it is, technology is either the solution or it's the bulk of the solution that's going to help you do that.

That's great. Your customer base, at least in the core segment, largely skews towards credit unions and smaller community banks. But you've made some inroads moving upmarket recently. Could you talk about how large of an FI Jack Henry is able to support on the core side and some of the traction you've gotten moving upmarket?

Yes. I think a little bit of that is a misnomer in the industry that Jack Henry only plays in the real itty-bitty banks. And even coming out of the whole SVB thing, the definition of what a small bank is it varies widely. I saw some Wall Street Journal articles that called a small bank like a $50 billion institution. Well, that's not really a small bank. And so of those, call it, 1,700 core customers, we run the gamut. Now we intentionally don't play in that top Tier 1 space. We don't find it economically interesting or compelling. So that top, maybe, call it, 15 banks in the U.S., we intentionally kind of don't play in offering them core. Now if they want a different solution, we're happy to offer it but we don't really target those. And we don't aggressively target the very smallest, particularly in credit unions. There's a lot of credit unions out there that are very small-sized asset base. So today, our average size on both the credit union and bank side, it's interesting, it's the same number, is $1.2 billion in assets. Now a year ago, I would have sat here and said it's $1 billion in assets. So our clients were getting there through client growth themselves and also going upmarket and the new logos that we're winning. So today at our Connect conference about a month ago, we had $10 billion size prospects there, which is really remarkable, which shows the faith not only in our products today but in our road map strategy that we talk about of where we're going. Because when you're making a core decision, that's a major decision but it's also a long-term decision in terms of where you want to bet on as a partner for your technology delivery.

Yes. It's a good segue because I did want to ask about the product road map, and you touched on innovation earlier. I think one of the themes coming out of the Investor Day for the past couple of years has been the modularization of the core, the moving of certain solutions to the public cloud. So could you maybe touch on the concept of modularization as well as what's on the product road map going forward?

Sure. So first of all, everything we've been developing in the last, call it, 5 years, is digital cloud-native. So we believe that's the future. We believe that's where it's going. We have products today that are offered. Banno is digital cloud-native, Financial Crimes Defender, LoanVantage, Payrailz, like all of our new innovation, all of our new modernization is happening on digital cloud-native. We really think there's efficiencies there. There's security enhancements. There's bourse processing. There's just continuous release cycle. There's a lot of benefits that you get from operating digital cloud-native. On the core system, where we think it's going, and one thing I should call out is we have one core platform for credit union. That's our Symitar product. And on the banking side, we have 3, but our main flagship product is our SilverLake product. So the other 2 products tend to be if you're a niche smaller bank institution or a very specific need. But most of our clients are on our SilverLake platform for banks, which is quite different than our competitors. So we do not have a whole stable of products. So we are very focused from an investment perspective and our innovation on those very few number of cores. So where we're headed in the future and what we've talked about for about 2 years now but have been developing for over 3 is this tech modernization road map. And we call that the Jack Henry Platform. So it's the idea that you have this kind of base platform and then you'll be able to kind of decouple what a core system is today. So if we talked about a core system, there's probably 30 big bits of functionality that make up a core system, like how to track a loan, how to take in a deposit, how to open an account, your general ledger. There's like big bunches of functionality. So in the future, what we think it's going to be is that's going to be decoupled, and you'll be able to say, "Hey, I'm a deposit-only bank or deposits are super big for me, I want to have the most modern deposit element. I may only want to do an upgrade or a conversion on that." And so what's really fabulous is that really goes hand in hand with our ability to talk to larger institutions because the biggest risk they have is in an implementation because it's a big bank. On a Friday, you shut down. On Monday, you reopen on a whole new system. And that new system touches everything in your institution. Every element of training, every piece of paper, like every documentation, every testing, every procedure in your bank changes over a weekend, right? A lot of risk, all the data conversion. And so we do a great job of helping our clients prepare and handle that migration. But it's a big change. Most banks and credit unions will literally shut down all other strategic initiatives at the bank or credit union while they're going through that migration. It's that big of an overhaul for the institution. And so under the debundling strategy, that helps them. It's not a big bank. They could potentially do it in pieces, which is really appealing to, let's say, if you're a $20 billion size institution, not having to do a huge core conversion all in one time, they can do it over time. So what we think, and we're multiple years away from having people operate at that full new core, what a core will look like, and we think it will probably resemble bundles. It's unlikely someone is going to be like, "I just want deposits." People will probably end up taking all the pieces that look like a core is today from a functionality perspective, but it allows them to test and iterate and then implement in stages if they wanted to.

Got it. That's great. And you touched on Payrailz as well. I wanted to talk about that acquisition, which you closed last year, and specifically, how that enhances your value proposition, what it brings to the overall product suite and just how that integration is going generally.

Yes. So Jack Henry has long been known as a skilled acquirer. We've done over 25 deals in the last 10 years. It's been a way for us to grow and accelerate our technology road maps. Payrailz was our last acquisition we did. It was actually on the day I became CFO, so it was a big day in Jack Henry. They are in the -- it's a bill pay platform but it's much more. So one, it was digital cloud-native, which was super important to us. We had our iPay platform that we knew we had to go down the journey to modernize. So this was a way to accelerate that investment and that engineering effort. But it also has a lot more functionality. So it has account to account. It has P2P. It has a B2B component to it. So it's much more than just a bill pay platform. So we're about a year into the integration. It's going great. The investment thesis has definitely been proving out. There were some little bumps in the road from a sales and implementation and things you learn along the way of the first couple of months of the acquisition, but we're really excited about the future. And we're looking at that group as one now, so that's one combined business. We still have both products, but it will be one product over time.

Got it. Great. Well, I'm going to switch gears to financial, a bit of a financial discussion. And I know margin and free cash flow are two of primary topics of interest for investors.

I don't know. We never get those questions. I don't know what you're talking about.

All right. Well, it starts here, I guess. So well, you raised the full year guide on non-GAAP operating margin by 10 bps. Could you maybe talk about the drivers there?

Sure. And so just for those less familiar with our story, so Jack Henry is one of the few companies I know where non-GAAP is lower revenue than GAAP. So what we take out is deconversion revenue. So when one of our banks or credit unions gets acquired by another bank, that they're -- and they tend to -- whoever tends to be the acquiring bank tends to then put their systems in place. Not always. Sometimes, we have what's called win a merger. But most of the time, the acquirer gets to choose the technology of the acquiree on the combined company. So because we have long-term contracts, 7-year-type contracts in a hosted environment, if they choose to leave Jack Henry, which people rarely choose to leave Jack Henry, and the only real type of attrition we see is through M&A, they pay out the remainder of their contracts. So that's what we call deconversion fee. So our non-GAAP, we kind of take that out. So when we talk about mostly how we think about internally, we are a GAAP EPS reporter, we take that very seriously. But internally, we manage the business on a non-GAAP basis because that's what we control. So we had a great Q1, a good start to the year. We did increase both the revenue numbers, and we increased the guide from a margin expansion story. And I would say Jack Henry is a little bit more of a full year annual picture versus a quarterly type of company. Because we have these long contracts, what tends to happen in driving -- I would look at the trends in each of our segments and the growth algorithm, I would encourage you to look at our Investor Day deck. We break out the growth for each of the 3 segments. In any one quarter, it's really -- it's what companies are coming online, what banks and credit unions are being installed that quarter. And that may really have an increase and bump up versus the annual trend or maybe lower because each bank or credit union may be a different size, a different contributor from a revenue perspective. So I would say one quarter doesn't make a year change in trend. But we felt really strongly about the momentum we're seeing in the year and across all of our business. And we're really doing a lot around expense control and management. And so we felt like we have a good handle on the risk that's in our plan right now and we felt like we could up the guidance.

Got it. So just looking over the more medium to long term, broadening that time horizon, your outlook calls for 20 to 40 basis points of annual margin expansion. And one of the questions we get is what would make the difference between coming in at the low end versus the high end of that guide?

Yes. So one thing to bring up and it was a bit of a surprise, I think, at our Investor Day, when we talked about that 20 to 40, what our intention was, and as a new CFO, my intention was, is I looked at the history, and even though we talked about 50 to 100 on a given year, we haven't produced that on a compounded basis. And so what I wanted to do is establish what could be a dependable, reliable number that obviously we aspire for more, we plan for more, we're going to go after more; but what could you rest assured know that the model generates on a year in, year out basis and what are we planning to deliver on a compounded basis. And so to me, that dependability of our model is super important. We know that margin expansion is a key part of the Jack Henry investment thesis, and we really plan to deliver that in a reliable fashion, in a predictable fashion year in and year out. So that's kind of how we came up with those numbers. In terms of the range, there's some components, for example, what we call in-to-outs, which is when some of our bank and credit union customers go from hosting it themselves in their own infrastructure, data infrastructure, to hosting it in our private cloud environment. That's a much more healthy margin business. And so we get about 2x the revenue. It's attractive margins for us. So we do about 50 of those deals a year as well. We have 70% that's now hosted in our private cloud environment. I probably think it's going to cap out around the 90s, but it's possible people leapfrog straight to public cloud. But that is a nice tailwind for Jack Henry. Well, in any 1 year, for example, that is a bigger year or a lesser year, that may end up for more margin expansion. Work orders, for example. So there's different product mix when you have over 300 solutions in any 1 year, depending on how that mix plays out, is there the opportunity to have an even a bigger year. But I think from our perspective, that's a safe and steady kind of number that we can dependably deliver on.

Got it. Okay. So switching gears to free cash flow, which I'm sure another topic you're not used to discussing. Could you maybe talk about some of the moving pieces in there such as R&D tax credits, whether or not they may be specific to Jack Henry and where you see conversion over the near to medium term?

So I think we are one of the first companies that really started talking about it. We started talking about it on our Q3 call last year, last fiscal year. We're a June filer for those who aren't familiar. There was a change in -- related to the Jobs Act that Section 174 is the tax, if everyone wants to go read some tax law. It's around the deductibility, the timing, the deductibility of development-related expenses. And because Jack Henry does so much internal development and because we're a domestic company, we were impacted maybe more than some others had been. And so if all you do is acquisitions and you have no internal development, not a problem. You don't have a lot of capitalization there. But for us, it was a material difference. Now the federal tax rate does not change. Our tax rate is about 24%. That doesn't change. But it's the cash taxes of that and kind of the time value of that cash tax impact. So we ended up last year, fiscal year '23 for us, paying about $80 million more on a cash tax basis than the prior year. And so you're starting to hear more companies talk about it. Tyler Technologies, I think you were talking about Raytheon. There was a Wall Street Journal article that said I think Raytheon paid $900 million more in taxes. And it's hitting small companies, too, like small startups that have a lot of development are also being hit with cash tax bills that they were not anticipating. So we're hopeful that legislative change happens that reverts that. Now it does work itself out over time so it's not as big of an impact in terms of the materiality of it, but that really reduced the free cash flow conversion. There was a couple of other things that we have been doing some internal investments in infrastructure that was more of like a 1-year kind of cycle, 1- and 2-year cycle when we make investments in our data center, for example. But we are guiding to a 60% free cash flow conversion for this year. And we think over the short term, and I'll call that a handful of years, a single handful of years, you get back to that 80-plus, 80 to 100 free cash flow conversion that Jack Henry is known for. So I don't see it as a long-term structural, "Oh, gosh, we're now in the 50s and 60s kind of level of cash flow." I think we're going to -- it's more of you and we're going to work our way out of that.

Got it. Okay, I want to switch gears a bit to FedNow. It's been a hot topic in the industry recently. Could you talk about the role Fed -- Jack Henry plays in the, I guess, rollout of FedNow, which is still very much in its early stages but is certainly a topic of conversation? I'm interested in hearing how you think about that opportunity.

Sure. So Jack Henry has been working with the FedNow team for multiple years. We were a great partner. We were at beta. We had clients on beta. We had some of the first transactions on their rails. So those not familiar with it, it is a faster rails payment method run by the U.S. government. It is an exciting time. I think it will not be huge numbers overnight, I think the adoption, but I think what we're going to see is a faster adoption curve than we've seen on other rails. And so we have over -- we have a number of institutions. We -- I think we just quoted it on the earnings call as well that have been using it. But most of the banks and credit unions that have turned on FedNow have turned it on to a receive-only. And so what we're encouraging our banks and credit unions to do is turn on receive. Because mostly, the send is coming from the biggest banks. But the federal government could easily start mandating some use cases that say, if you want your VA payment or if you need to make your IRS payment or if you want to sell to the U.S. government or get paid by the U.S. government, it's going to be on these rails. I mean you can just think about all of the use cases that the treasury can start to do. You're talking big dollar flows. So we've had a number of our banks already start to turn it on. We have a lot in queue that we'll be turning it on this year. We're roughly about 30% of the total FedNow volume of institutions on the FedNow platform. And I think you'll see that adoption curve go. What's also interesting is clients that are turning on FedNow, about 50% of those are also turning on RTP, which is interesting as well. So I think it will also have a carry-on effect to other faster rails payments. As people get comfortable with it, they're now turning it on. And banks and credit unions would love alternatives to Zelle. They don't want to be disintermediated by things like Venmo. And so you're seeing a lot of increased interest in these alternative faster rails payment. Now with faster payments comes faster fraud. And so we're doing things with Jack Henry. We launched our Financial Crimes Defender product. We have Financial Crimes Defender components for FedNow, for RTP, for Zelle, some of which are already out and some are coming out in the next couple of months. But we're really trying to do a lot to stop fraud before it happens.

Got it. So if we were to...

One quick clarification, sorry.

Yes, no, no. I was going to...

[indiscernible] audience participation now.

Yes, we are.

Absolutely, yes.

Just maybe talk about the economics of Jack Henry. Do you get paid per transfer? Or is it just you selling software once...

So it's a transactional model, so there might be a small amount of like implementation, but it's really a transactional model. And the way that is pricing is it's going to be between ACH and wire. It's now being a little cheaper, frankly, than the original thought was for the pricing. And so we get a portion of that, which is different than some of the other rails where our banks didn't make any money and neither did we.

But it sounds like it also creates opportunity for cross-sell and demand for solutions like Financial Crimes Defender.

It does. And it's nice because our payment center, we have this approach from a payments hub. So we set up the full -- if you think about a train center is how I think about it. It's like, okay, it's just different tracks, right, but you're going to put it all in. And then it's up to the financial institution what track they want to turn on, but they have the infrastructure as opposed to, "Oh great, you have to lay the piping for each one separately." This is if you have the whole pay center hub in, you have the whole underlying infrastructure, it's much easier to add rails as they come on.

Got it. Why don't we open it up for questions? Anybody in the audience have a question?

I have another supremely simple question. If I look at -- I mean, the company's tremendous track record of growing earnings. And just the last couple of years, we've seen GAAP earnings lag revenue growth. Maybe just talk about the dynamics there and why that may change going forward.

Yes. So one of the big things to think about is that GAAP to non-GAAP. So as a GAAP EPS filer, it has the impact for deconversion each year. So 2 years ago, deconversion revenue was $50 million. Last year, it was $32 million. Right now, we're guiding to $16 million as our new methodology. So that's a big headwind in and of itself. We also did this past -- this year -- sorry, calendar this year in Q1, we had what we called the voluntary early departure incentive program, a little bit of a mouthful, where we had some long-tenure Jack Henry employees. If you think about new development talent and mobility and retention of talent, this was a way to allow folks to maybe leave the organization, retire and have mobility opportunities for others. So that was about $16 million of expense, another headwind from an EPS perspective. So you've had some of these one-off type of situations. The Payrailz acquisition was not accretive out the gate for year 1. That have been a headwind from an EPS perspective relative to revenue growth. But I think we're kind of turning the corner on that, especially if you think that bank M&A may heat up in the later half of FY -- sorry, calendar year '24. And that's something we don't really talk about was M&A landscape. Chuck, if you wanted to talk about that.

That was my next question. You read my mind. Yes, let's talk about capital allocation. I know Dave has always highlighted M&A as a capital allocation priority. But more recently, he's talked about valuations in the private space being more elevated. So can you maybe touch on what you're seeing from a valuation standpoint as well as how you think about the broader M&A strategy? Any areas of focus you might have in particular?

Yes. So a couple of points on that before we get into M&A itself is one is our dividend policy. So we have 35 fiscal years of increasing our dividend. We are committed to our dividend. That is a big capital allocation strategy. We do a lot of internal development for our future growth. We spend about 14% to 15% of revenue on R&D-related spend. And then acquisitions have historically been a great source of value for the company. Banno, for example, came to us through an acquisition and then we did a ton of development and enhancement upon that. That's also how we got our CTO. And in the past, that's how we got other core products, too, not just complementary product solutions. So the one thing I would say is part of that disciplined and experienced investing is we don't chase, like we are not going to be the top dollar bid. We are a value buyer just like we are a value seller on our core products. We're a value buyer when it comes to M&A. And so on times of frothy markets and run-ups, we'll get outbid and we're okay with that because to us, and I'll point to our ROIC numbers, we have over 20% ROIC. It is all about shareholder value creation. And so the last, I'll call it, 3 to 5 years when you've had a bit of froth in the market, we turn ourselves inward and just developed. And that's a nice thing about having the infrastructure like we do at Jack Henry. If the M&A market is not there, we're not dependent on that for future growth. And even when we talk about our growth algorithm of that 7% to 8%, that doesn't include any M&A in that. So it is not -- right now, I don't see a lot of gaps. Maybe 10 years ago, it was easier to see a lot of gaps in our portfolio where M&A could help us. But today, we have a pretty robust portfolio of solutions and products. So I don't see anything that, "Oh, gosh, I could definitely point to these 3 categories we'd likely to have interest in." So it's all opportunistic. Things have to be digital cloud-native. That's first and foremost because that's the way our development road map is leading, and it has to make financial sense to us.

So with that in mind, to what degree are buybacks part of the consideration in the capital allocation framework?

Yes. So we believe in returning excess capital to shareholders. In the past, the company has done some sizable buybacks. We've done some, just over my tenure, that's more of an offset to dilution. The challenge really comes down to interest rates right now. We do have a very modest amount of debt. Most people in the room would not say it's leverage, it's so low. But at Jack Henry, we run a very conservative balance sheet and we say we have debt on our books. And so to pay, call it, 6% interest rates right now doesn't help the accretion dilution math of the situation.

Got it. So the one other question I get is around the go-to-market with Banno in particular and how you think about selling within your core base versus outside of your core base. So could you maybe touch on that?

Yes. So Banno, if you're not familiar, is our leading digital presentation layer. It's our digital banking application. It is the #1 app in the App Store. We have over 10.5 million end users. That's our bank customers' customers using that in a white-labeled fashion. It is only offered to our in-house core customers right now. So the 1,700 core customers we have today are the only people who could buy Banno. Now we have a plan to go outside the base, but it has been such a help in our sales because you could only get it inside the base that we are being really thoughtful as to which cores and when we're going to go outside the base. So we're really excited about that product.

Great. Any other questions from the audience?

Real quick on the share repurchases. Congratulations to you. Your stock is not really cheap, but it's -- why would you -- why would share repurchases, why is that a better allocation? I understand stock [indiscernible] but that's essentially a transfer that's compensation essentially. So just how do you think of that? Because it's a high-class problem to have, but you're buying expensive shares.

So I agree with you 100%. So for us, it's, first, just offset the annual dilution. And then if you don't have excess capital that you need to return to shareholders, then it's what is the best use case for that cash? And so most of the time, the best use case for that cash is internal development. It may be external through an M&A that we think has a great -- but the last straw is usually share repurchase, right?

Just the one last consideration, other high multiple stocks have considered a special dividend, then you're not making a portfolio decision for them. So just throw that out as, has the Board considered or would you take that?

Yes. I think the Board -- that's always on the table for consideration. We are a strong free cash flow generation company. Historically, we've always found attractive acquisitions that have added to our growth rate. A couple of years ago, we would have been talking at 6% to 7% annual growth. And today, we're talking 7% to 8% annual growth at a $2 billion revenue, so off a higher base. So we found through acquisitions as well as organic, ways to grow. So acquisitions have been at the right price, for the right property, a way for us to generate a tremendous amount of shareholder value. But yes, we would consider it, but it's financial engineering. It's -- we are really focused on long-term sustainable growth and value creation.

Maybe walk through the materiality of private cloud -- hosting your private cloud versus public cloud. And to what degree customers gravitating to public cloud in a big way yet?

So right now, you're still seeing the shift from on-premise to private cloud. About 70% of our core customers are hosted in our private cloud environment. We have public cloud products today. So Banno, public cloud; Financial Crimes Defender, public cloud. As I said, everything we've developed in the last 3 years, public cloud. Now that doesn't always have all the PII that the core system has. So putting a core on a public cloud is different than putting some of these more bespoke kind of individual products on the public cloud. And so the regulators feel comfortable. With Banno, for example, we've done a lot to help educate the regulators and get them comfortable in how to test, how to have super balance in a public cloud environment. They're not quite there yet for core, and you haven't seen very many institutions of any size have a public cloud core offering. And they have the regulators in their office all day long, right? And so a lot of that is figuring out when the market will have the appetite. So we've started to build knowing that, that's where the market is going. But the demand is not there today. Most bankers do not want PII in the public cloud today. So we think it's going to get there, we're building -- so it will be there. So in 3 to 5 years, you can have a full core system in the public cloud. But today, it's just really not being done at any scale.

Maybe getting ahead of ourselves but if you think of that future state, does that meaningfully change the economic model of Jack Henry? It's not hosted public cloud versus private cloud?

So the move from on-prem to our private cloud is about 2x revenue, so a really nice tailwind. We're about 70% today. I think you get there to maybe about a 90% over time, so a nice probably 7-, 8-year runway of that. I think there's beneficial economics in a public cloud environment. The revenue, we're going to come out in February and talk more about what that model looks like with the delivery, how we're thinking about tech modernization in the Jack Henry platform in more detail on our February call. But certainly, on a margin basis, I think it's going to be very attractive. If we think about the cost of compute, the cost of security, the cost of capacity, just the frequency of release schedules that you can have, the last QA you need, just all of the dynamics that you get from dev tools and FinOps in a public cloud environment is just more economically attractive. And also our approach from an architecture perspective is much more right once used often model because all of the parts that we're building for our tech modernization in the Jack Henry platform, we're using in Defender today, in LoanVantage. So for example, the first , we have 2 modules out, Jack Henry Wires this year as well domestic wires, and we have entitlements authorization. So if you think about access management module, well, that authorization code is being used in Defender, for example, it's being used in Banno. So the more we can have bits of code used across our 300 solutions, think about the testing, think about the customer support, think about the maintenance, all of that has great benefits of scale in a public cloud environment.

Did you have a question?

Curious your thoughts generally in terms of like digital-first banks or neobanks. Is that an opportunity for Jack Henry?

Yes. So we support neobanks today. They're great customers because they have nothing when they start, right? So they need a whole basket of products as opposed to just existing clients who may have an individual solution needs. So we do that. We also help banks who have a clear strategy niche, so where they may want a digital-only bank under a different brand to go after a particular market. So we have a number of clients, because as we talked about, geographic is no longer your strategy, right? It's ubiquitous in banking. So now what's your strategy? So we have banks that are like, we are the bank for dentist practice. We are the bank who leads RV sales. We are the bank -- all these really interesting niche strategies where they know how to serve, they know how to support. And so we -- sometimes, they open a side bank, if you will, for that niche strategy and so we help them with that. So that's another interesting offering. But I think every bank needs to figure out how to support their user base, their clients and account holders and members in a digital way. And so some of the work we're doing around Conversations, for example, within Banno is a way for -- rather everyone else is saying how do bots, how does AI help us serve our clients in a way that it's like we don't need employees? And to Jack Henry, the difference of a community and a regional bank is that service. When you used to walk into a branch, they knew you. They knew your business when it came to a commercial loan. So that relationship was at the center hub of what made them competitively differentiated. And so what we're trying to do is how to do that in a digital way. So Banno Conversations is an authenticated chat which is with a human being, which helps that service level as opposed to if you try and use a chat with a big bank, like it's not a compelling experience, right? So we're helping, through our solutions, make sure that our banks and credit unions stay competitive and stay at the hub of that fragmented life of their customer.

Well...

Are we at the time check?

I believe we are.

I can do this all day.

I know, I know.

But I'm sure you have others too.

Yes. Well, Mimi, I appreciate your time. This was great.

No, thank you for hosting us.

Thank you for everybody who attended today and listened in online. And have a great day, everyone. Thank you.

Have a great day. Happy Thanksgiving.