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

Great. Thanks to everybody for joining us here at the 2025 Morgan Stanley TMT Conference, those joining us both in person as well as online. Very pleased today to have Mimi Carsley, CFO and Treasurer of Jack Henry & Associates. Before we get started with Mimi, as a quick introduction, I'm James Faucette, senior fintech analyst here at Morgan Stanley, and I have a quick disclosure I need to read. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep.

So Mimi, great to have you back at our TMT conference. Maybe for those that aren't completely familiar with your business, can you provide just a quick overview of the 3 core businesses that Jack Henry as well as the cohort of bank and credit union customers that you serve?

Sure. And firstly, thanks, James, for having us. So Jack Henry is a well-rounded financial technology firm. We operate in 3 primary segments, plus the core segment, roughly, call it, about 1/3 each from a sizing perspective of contribution. We have the core system that provides the critical processing functionality that a bank or credit union needs to do day-to-day transactions. So think about being able to have your account holder information or post interest to a loan, et cetera, essentially the ERP system for a bank or credit union. We have our payments business. So there, we have debit and credit processing. We have Enterprise Payment Solutions. We also -- that's where the real-time payments and a lot of the new payment rails business is going into. So just everything around payments is there. And then we have our complementary business. So that's kind of the catchall, if you will, for a host of products and solutions, think around capabilities of lending and loan origination and account opening and our digital -- our mobile banking and digital applications, fraud solutions, just a host of solutions that complement what the needs -- to meet the needs of a bank or credit union.

Got it. Got it. So I appreciate that, Mimi. So let's talk about demand environment. This is always a good place to start. How would you characterize right now the overall demand environment for Jack Henry solutions? And what are some of the key dynamics that you're seeing in the environment that you would flag as the most prominent upside drivers or potential downside risks in demand?

Yes. So one call-out is we are U.S.-centric, so the banks and credit unions we serve. So our eyes very much on the U.S. economy, the health of the U.S. consumer. And the banks and credit unions we serve run the gamut from, call it, $50 billion all the way down to the smaller-sized areas. But the average is about $1.3 billion. So we're talking about a nice, decent-sized community or regional institution. And so as we think the demand and the services that they're looking for at the moment, they're feeling pretty healthy. You've seen continued survey after survey talking about an increased expectation in spending. We have been operating in that 6% to 10% increase over the last several years. And that spending is -- it's not all obviously going to go towards software. But there's a lot that they need because of the pace of innovation, the velocity of services and the expectation for how they communicate with their customers, the type of offerings they have, they need to keep investing in innovation to support their strategies of growth and to help them win and stay competitive against the megabanks.

Got it. So another key question that we get, especially since the election and as people are trying to temperature check, have there been any anecdotal conversations that you've had with your customers and/or relevant third-party data that you've seen regarding the outlook for bank tech spending, particularly since the change in administration?

Yes. I think it's a little early to see -- from an administration, we can talk about the impact maybe to regulatory there. But I think overall, people are continuing to spend. You're talking about the execution of a multiyear strategy that most of these banks or credit unions, and they need that technology to really help them better understand their organization, understand member account holder trends to manage risk and fraud that's ever pervasive in the industry. And so they're less sensitive to maybe what you would think in terms of like a pullback to the economy. Obviously, they're still going to make good ROI decisions for them, but they need to drive that efficiency in their organization. So as I said, I think it's a little premature to know the full impact from a regulatory. We think it's going to be more constructive is what we're hoping for more clarity and transparency. There was a bit of maybe an overreach and a complexity in the regulatory environment. And so we're hoping that comes back to more of a soundness level. We do think people have higher expectations for being a positive and conducive M&A environment in the current regulatory administration, and we're starting to see that. Last calendar year, there was, call it, roughly 270 M&A deals. I'll also call out within that, there was about 11 that were banks that were acquired by credit unions, which is kind of a newer trend. This year, and we're only 3 months into it, we've already seen 40% of that volume of last year. So not all of those have closed yet. But between the deals that have been announced and the deals that have already closed, you're on pace to see a really healthy M&A environment.

Right. Right. So I want to ask about that. So historically, when there has been an active M&A environment among your customers is that, that had been an important source of deconversion fees, which was always helpful from a cash flow perspective in any given year. But it also represented a bit of a headwind to growth in subsequent years from a revenue perspective, et cetera. How do you feel, if at all, that your positioning in the market has changed versus those previous periods of higher M&A? And is it still too early to tell? Or should we expect if we were to return to previous levels of M&A, that you might see similar to deconversion fees? Are they going to be less or more? Just love to hear your assessment of the world.

Yes. So those who are less familiar, deconversion fees -- because we're a multiyear long-term contract, SaaS basis, so when a client leaves around M&A and deconverts, typically, it's around M&A because we're 99% retention ex M&A. So it tends to be when people leave us, it turns to be M&A related. They pay the remaining life of that contract. So it really can vary. You can have a large institution that has 6 months left on their contract, deconversion fees are going to be pretty minimal. You can have a smaller institution that just signed a year ago didn't think they were going to be an M&A candidate, all of a sudden are, and there could be a significant, a meaningful amount of revenue still tied to the remaining life. So hard to say. I will say, over the last 4 years, as we've seen a 30% increase in the size of our institutions. And so the average size is about $1.3 billion for both banks and credit unions today. We think -- and we have more exposure from a market share, if you talk about the $1 billion to $50 billion category. We have 25% market share in banks and almost 50% market share in credit unions. We think our customers are more likely to be the acquirers than the acquiree. And so we're certainly coming off the last 2 years of very low historical levels of M&A. But we think relative to the last cycle that you saw more activity in the marketplace, our customers are more likely to be the winners of that. I think the other thing is through the tech modernization, through the transparency we have in our road maps and strategies, we're more likely to win what we call merger of equals. And we've already seen a couple of those been announced this year, and we've been really successful on a couple. So that's where you might have 2 $10 billion-size organizations merge to become a $20 billion. That could be meaningful in terms of that step-up in size. But as we play more in the larger tier, regional, superregional, should one of our clients get merged away, it could be more impactful than when we were average size of $700 million-size institutions.

Got it. So one, just as a quick follow-up there. So historically, like I said, and this really goes back to pre-COVID. But when we thought about, as you said, is if there was M&A, and if one was a -- the customer was a Jack Henry customer and one was a customer of somebody else, we tended to default to the idea that Jack Henry's business was -- or Jack Henry's customer was the one being acquired. And so as a result, we try to figure out the deconversion fees and then how much, like I said, to adjust that revenue headwind for future growth, now you're saying it seems like it's more likely to be the opposite of that on a go-forward basis. So help us think through of the incremental revenue opportunity. So if you're not going to get deconversion fees, is there incremental revenue opportunity if we do see an uptick in M&A and so your customers end up being the acquiring banks more frequently?

Yes. I do think so. I think whether it's our customers being acquiring banks or us having a shot at those merger repo situations, you have a couple of sources of what we call convert-merge revenue. So you have the consulting to assist them during that transition period. They also -- because we're now 75% hosted from our solutions versus on-premise, when they do convert and do that migration instantly, then you have more account holders and more members. And so we charge by account holders and members. So you don't have to wait until the next renewal cycle. We'll automatically have that increased revenue at that larger organizational side tier. So it could be a nice boost and something we haven't seen, unfortunately, in a couple of years, really strong convert-merge revenue.

Got it. Got it. All right. So implicit within deconversion or conversions and these kinds of things are the competitive dynamics of the industry. And previously, you've mentioned that you are seeing increased opportunity in the $5 billion to $15 billion range. So I think you mentioned $1.5 billion, kind of the average, up to $50 billion. So bigger than average, but not at the highest end. What are the competitive dynamics that you're seeing in that $5 billion to $15 billion asset size segment? And what's changed in that market that you feel like you've got a better opportunity?

Yes. I think this trend really started in a meaningful way over the last 5 years. As we've talked about our tech modernization, as we've had increased transparency in our road maps, that has opened up the table to conversations with much larger-sized institutions. As our Banno product got to be more on a parity with some of the others in the space, as we released Banno Business, just the level of innovation we've had, we've been having really fantastic conversations with institutions of a much more meaningful size than we typically have ever talked to Jack Henry from a core perspective. So it's now that holistic package of solutions that can really support institutions of any size that are really bringing us to the table there. And so I think that's been reflective in the wins. Last year, we had 57 wins. We had over -- 15 of those were multibillion-dollar institutions. This year, we've talked about -- in Q2, we talked about we had 3 wins that were large. One of them we called out was over $7 billion-size institution. So continuing to have great traction with that $5 billion-and-up-size organization.

So if you're seeing good traction and response and success there, what are you doing -- specifically, what's the Jack Henry doing specifically in that market through pricing and product differentiation? Where is -- where are you separating yourself from the competition there?

I think it comes down to our reputation for culture, service, innovation on a well-defined strategy. And that combination of characteristics we're just not seeing from the competition. So the competition is tending to lean more on the price lever than other levers. They are not known for the service quality that Jack Henry was. In fact, the ABA just came out with their core survey. And I don't think it couldn't have a better title to the survey than Not All Cores Are The Same. And they talked about the likelihood of referring, the likelihood of renewing, the service overall satisfaction. And our numbers not only were fantastic numbers in and of themselves, but the meaningful was the difference in our numbers versus the industry as a whole. And Jack Henry has always been renowned for our service quality. But what we're hearing from the ABA and others is service is now one of the major drivers of a core change.

Right, right, right. Got it. So let's talk about cloud and cloud migration. Cloud offerings are growing at around 11% and now represent around 1/3 of Jack Henry's revenue. What are your expectations regarding implications on the business as you continue the migration and the impact of those migrations on profitability and margins?

Yes. It's really interesting, James, because you would think -- we've been seeing this shift for decades now. And I always joke, like who wants to run a data center these days, right? But yet, it's still at 75% roughly hosted today, we're still changing that at like 40 to 50 customers a year. There are some -- at this point in this cycle, there's a mix -- a handful of mix. There are some larger customers who need to get to a scale at this stage to want to run your own data center. But we see and expect that continuation probably over the next 7 to 9 years. I think you probably tap out in the mid- to high 90s. But there's a chance that some people just leapfrog private cloud altogether and go straight to public cloud. So I think at roughly 2x revenue, that shift from on-premise to private cloud is going to be continued for quite some time as a nice positive tailwind to growth.

So let's talk about public cloud. You guys obviously have been building public cloud solution. I think in -- you've talked about and Greg has talked about like that, that has the opportunity for incremental uplift as you move to public cloud. On the other hand, regulators have been fairly slow in permitting banking and financial institutions to move their stacks, if you will, to public cloud. What are you thinking in terms of timing? And when can we start to see that contribute as a driver as well?

Yes. So we have about 10 modules out in some level of production today. We have several that are live with customers like the wires, both domestic and international, the entitlements and others. I think the next big significant from a road map milestone perspective will be the first half of next calendar year. So calendar year '26, we will have the digital and commercial deposit-only retail and -- sorry, retail, not digital, retail and commercial deposit-only core out and available. And we think the full core is probably about 2 years thereafter. So from a road map perspective, we are at a pace that's not limited and constrained excessively from financials or bandwidth. We think we're on pace to deliver it at a point in time that we think the demand will be ready and that the regulators will be ready. To your point, it's around teaching them, and this is something we did with Banno back in the day when that was the first public cloud-native digital banking application was helping the regulators be ready for what it means to do oversight and compliance and supervision in the public cloud setting. And so there is a chance in the current administration. I think it's a little bit more public cloud-friendly, if you will, maybe a little less PII concerned, that if we do see an acceleration, that's not a problem from a Jack Henry perspective. We could certainly increase our pace if we feel like our customers are going to have an appetite sooner.

Got it. Got it. Mimi, you and I have been chatting now for about 20 minutes, but I want to make sure that if there are any questions from the audience, that you raise your hand, we can get you a microphone. So let's continue on. I think that's a -- I think that public cloud product is a good transition to talking about product more specifically. Let's start with product rationalization strategy. This is something you've talked about. But maybe can you talk about what the idea is there? And in particular, I would love to hear some emphasis from you on what products have a higher importance to the product suite than their revenue contribution was suggesting as a result, like maybe getting some extra love and attention.

Yes. So we've always had a strong discipline for product life cycle management. So rationalization is just one component of that. And as a company that is fixated on driving innovation, driving expanded experiences for our clients and driving experience -- expansion from a solution perspective, we're always innovating. And we don't -- we're very deliberate with how we encourage and foster people migrating from one product to another. But at some point, we do sunset, right, which is part of that rationalization is. And Banno is a perfect example. We now have less than 50 clients still needing to make a decision to move off NetTeller, the older product. So at some point, when you get to such a small base, it doesn't make sense to operate that product. We give a very long lead time notice to our clients, but eventually, you sunset products. So there part of rationalization could be sunsetting, part of it could be more cash cowing, part of it may be a divestiture. But in general, you're talking about businesses that are $5 million to $20 million size. So other than a divestiture, it may not be noticeable from a surface perspective, but it's really about focusing on those that are slower growers or lower margin that are still taking up resources as an organization. And the more we have disciplined focus, the more we can put our resources to things that are going to be meaningfully driving the future.

Got it. So let's talk about adoption trends in your digital platform, particularly Banno, and the dynamics you are looking to capitalize on to further push the growth of that product in 2025. Maybe just a quick overview of what Banno is and then how it's growing and what we should expect there.

Yes. So Banno is, I would say, part of the anchor tenant of digital. Digital is more than just Banno. If you think about any experience as an end consumer, an account holder at a bank, it's anything you could do without walking into the actual physical location of a bank. So Banno, I don't -- I didn't bring my phone to the stage. But if you think about today, a very slick, intuitive user experience and UX/UI of your digital banking application. And so that allows you to make payments, to open accounts, to process loan origination. It's the full kind of front end, if you will, the pane of glass is the front end to that bank or credit union. And that's also how we're going to be delivering our partnership with Moov is through Banno. So today, Banno, we released Banno Business last year. We have roughly 1,000 Banno retail customers today. We have roughly, call it, 200-plus business customers with another 100 in the queue, so maybe around total 30% penetration. And we see that continuing to grow.

Got it. So you mentioned the partnership with Moov. Why don't you describe for people what that is, how you look at that as an incremental opportunity? And it seems fairly interesting and exciting to me, but I would love to hear your description of it.

Yes. No, we're really excited. So first of all, Moov is a payments -- it's the newest payments platform company. They are the first to have new rails. And so with us, the founder of Moov is Wade Arnold. Wade and Ben, our CTO, founded Banno back in the day. So it's kind of getting the band back together, if you will, from a partnership perspective. But it is using the pieces from origin, from our tech modernization core through Banno as a distribution and a UX perspective to allow small businesses and consumers to do merchant acquiring. So the first element of that will be rapid transfer. So if you think about moving money between your accounts regardless of where that financial institution is over payment rail, so very fast movement. That could be around setting up an account and pulling money from somewhere else, that could be pushing money. And then the second phase of that -- so that first phase will be this spring. The second phase will be around merchant acquiring. And so a lot of others in the space have gone into merchant acquiring but in a very different way. To us, we were very deliberate that, that is not what we wanted because that circumvented the FI. And while the small business space is an extremely underserved and valuable demographic cohort for the financial institutions, they have larger deposits. It's -- there's a lot of commingling between individual business and personal accounts. But the great thing is through the Moov and Banno relationship, we're empowering the FIs to substantiate that relationship. The FI is still at the hub center of this experience. So as a small business, it will allow you to open an account faster and then get set up so that you're going to be able to, through the rapid transfers, you're going to be able to fund that account. And then it will allow you to take payments, credit card both on Android and iOS. So today, most only have one or the other. So it's ubiquitous of your phone factor. The phone now is the device. You don't need a dongle or a specialized hardware device. The phone is the device. And I think the other important point where we've now gotten is I think people are going to be multi-acquirer. So you may have -- let's say, you're a bakery, and you may have a hardware device in your actual storefront. But you want to sell at the farmers market on weekends or do delivery service or something else. You can take that payment through Banno, through Moov on your phone. You don't have to switch from a verticalized software player or somewhere else. You can also take money through this. So we don't require switching for product adoption, and some of the functionality is really differentiated. So we're trying to take this -- the burden, the administrative burden off of small businesses. A ton of small businesses or if you do volunteer work for a charity, you know the bookkeeping on the back end is, nightmarish, mostly because you get bulk transfer. So you may do 300 sales totaling $25,000, but you have no detail in the middle. Well, through our open banking connection points and APIs into all of the back-end systems and all the data that resides within core and within the payments that Jack Henry has, we'll be able to do like an instantaneous and continuous account reconciliation. So that's really going to free up the small business owners' time to do what they should be doing, which is being passionate about their small business. So that's a really big point of differentiation. And the last huge point of differentiation is 8 settlement windows for payment a day. So as a small business, cash is king, right? And so if you're able to get payments direct to your account, again, back to that FI as that hub on a multi times a day, we think it's going to be a great point of differentiation.

Yes. Absolutely. And like I said, just the go-to-market through the financial institution partners and customers as well as like the ability to hit, especially new businesses just as they're forming. And as you said, some with differentiation around clearing times and receipt of cash is really compelling. But it's really early days. How should we think about time until this initiative can really start to move the needle for the business?

Yes. So we will be out with the first step of the program. We've talked about and announced the partnerships with Visa. We have a partnership with Mastercard as well. That first part of the solution will be out this spring and testing with our customers. It's not meaningful revenue obviously in '25. We expect it to start producing revenue in '26, but it's going to be a great long-term catalyst to longer-term growth. So if the numbers hit the projections we think over the next kind of 5 years, it could be a meaningful contributor to the payments segment.

Got it. So let's talk financials really quickly here as we're getting down to the last of the -- our time. What is the kind of -- so just remind us what your targeted growth rates are, margins. But then one of the things that people pay very close attention to is free cash flow conversion and how we should expect that to evolve over the next little while.

Yes. So I like to think that there's 5 major metrics for the Jack Henry business. The first is non-GAAP revenue growth. So we talk about 7% to 8% in an annualized kind of average year revenue -- non-GAAP revenue growth. The next is margin expansion. We talked about 25 to 40 bps of non-GAAP margin operating expansion, and we're really focused on compounding that every year, delivering and compounding on margin expansion. The next is we're a GAAP EPS filer, so thinking about double-digit GAAP EPS expansion. The next is, as you mentioned, James, free cash flow conversion. So on a trailing 12, we're back in that 70% range -- 70% to 75% range. We've talked about guidance for 65% to 75% this year. Even without legislative aid, I think we're back to that 80% to 100%, which is historical free cash flow. And then the last is around ROIC, return on invested capital, and we're a 20-plus percent return on invested capital company.

So if we start like with that top line of 7%, 8% is quite a bit faster than your competitors or at least your public competitors. What are the puts and takes there? And what's the potential for -- what would be the upside drivers versus what kind of risks should we be keeping in mind?

Yes. So 90% reoccurring revenue plus. It's around same-store sales growth of how our institutions are growing and winning. It's around how that pipeline of our 50 to 55 new core wins add to new footprint every year. And no one just takes core. They take core plus 30 to 50 other ancillary products. So it's a new implementation. It's that continued tailwind from on-premise to private cloud. And then it's transactions, new footprints as well as just consumer sentiment from the card processing, and then exciting new use cases that we're starting to see in the real-time payment rails. And we called that out on the last call is that's starting to be a meaningful trend. And then you have exciting new areas like Moov that could have meaningful revenue contribution.

Got it. Got it. And then finally, you guys have always been very, very good allocators of capital. And how are you thinking about capital allocation now? There's obviously buybacks that can be supportive of your EPS growth. On the other hand, historically, you've also done really good acquisitions, especially in the technology space. What's the prioritization now? And what are you seeing in terms of opportunities either place?

Yes. I think it's been pretty stable. The first is always in-house innovation. So the 14% to 15% of revenue, we invest every year towards software development so that we have exciting products like Banno Business and the AI investments we're making and new products like Financial Crimes Defender and others all come out of that R&D investment. So that would be the first and foremost, to keep the long-term growth momentum through innovation. The second is we have a 21-year calendar year dividend increase, so a very tenured dividend program. The next is M&A, should it be interesting. Hopefully, we've been promised now for a year that M&A will pick up, and we are starting to see more interesting properties come to market. But it has to be public cloud-native. It has to be a cultural fit. It has to be accretive within a reasonable amount of time. So we will look at a lot of things. But we really don't need M&A to go fulfill on our strategic road map. So it would be more of an accelerant opportunistic. And then the last would be share repurchases. We do have a little bit of debt right now, roughly $150 million worth of debt, but at a very fast pace to pay off. So where interest rates still are today, it doesn't make sense to go do a levered...

Right, buyback.

Capital is not 0 anymore from a [indiscernible] capital. So at minimum, we're going to offset dilution and then we're going to be opportunistic. But pretty quickly and the potential for either a divestiture or deconversion could really augment the amount of excess cash that we have, which would allow for either M&A or larger share repurchase.

Got it. Well, Mimi, that's all the time we have. Really great talking to you again.

Always a pleasure.

Jack Henry obviously has a lot of investor fans and has had for a long time, so I always love having you here at Morgan Stanley.

Thank you.

Thank you.