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

All right. Good morning, everybody. We're going to go ahead and get started. My name is Madison Suhr. I'm the payments and fintech analyst here at Raymond James. I'm happy to be joined by Jack Henry, President and CEO, Greg Adelson. It's great to have you here.

Yes. Good to have you. Good to be here with you.

Awesome. So I wanted to kick things off here and just -- sorry, I have a mic problem. [indiscernible] here for those in the audience that are less familiar with Jack Henry. Can you just give an overview of the company, what you do and customers you serve?

Yes. So we consider ourselves a company that builds technology for banks and credit unions. We do everything from a core processing solution to all types of payment solutions, to all types of complementary solutions. So really, everything that runs the bank from the deposit side to the lending side and everything in between, that's what we do. We operate in 3 segments; core payments and complementary, and that's how we report. We'll actually be our 50th year this year on June 2, 50th year as a company and 40th as a publicly traded company.

Okay. That's great. And I wanted to dive into what's been the most topical debate in the market recently. And of course, that's AI. Would love to just hear your kind of high-level thoughts how you think about AI, both from an opportunity standpoint, but also which risks you're assessing as it relates to AI?

Yes, it's the #1 question that we're being asked for sure. So we actually consider it both. And I'll tell you that we think it's more of an opportunity than a threat. I'll get to the threat component in a second. We've been operating with AI for about 3.5 years at Jack Henry. We built a really strong foundational kind of a baseline of what we call responsibly bold and balanced approach. So getting our Chief Risk Officer, our CISO and the regulators involved with us as we built out the foundation of how we were going to operate in an AI environment. Right now, today, we have over 100 tools that we're using within the company that we've been approved that allows our teams to have a level of flexibility. We change out the LLMs literally quarterly based on the higher performing LLMs and how we operate on those. We have over 500 use cases that we've been working through, a variety of ROIs on a variety of different opportunities there. Things all the way from legal, where we've actually had 58% of our contracts never even touched an attorney in a quarter to HR improvements to customer service improvements to 70% development execution improvements on what we've done since we've incorporated that. And we actually just had a lot of vibe coding that's going on today within the organization. And we just had somebody over the weekend code something in [ Claude ] coding in an hour that used to take several days. So we're using it. We think it's going to be a huge opportunity for us to continue to do what we're pretty proud of is our level of innovation. We drive our company on culture, service, innovation, strategy and execution, those 5 words as a differentiator in the space. From a competitive threat, I'm going to tell you that there's a lot of other industries that people are going to want to pick on than the banking industry to try to get in based on the regulatory scrutiny and the things that you need to do with network certifications and a variety of things that happen with custom that you build into a core component. Could there be things in the complementary segment that maybe get infiltrated? Absolutely. That happens today. There's fintechs every day building out a variety of different solution sets that are trying to infiltrate and get into the distribution channel of a core processor. That's what we bring to the fintech. We bring lots of banks and credit unions out to the open market. Today, Jack Henry embraces that, and we have for the last 50 years. We have 1,100 fintechs that are integrated in some part of our company all the way from the core to the payment side and in between there. So we're going to continue to embrace that, and we'll continue to see things that potentially are opportunities for us to partner with or even acquire as those are built. But the part that I want to tell everybody here is that we are very far down the AI road ourselves. And so I don't see anything that's going to be done or built that we won't be on top of. So it's only going to make us a better company as well.

Okay. Yes, that's very helpful color. And then if you could just touch on kind of your pricing model. What does a typical Jack Henry contract look like? What's the duration? And then just remind investors kind of breakdown between -- or if you have any exposure at all, I guess, to seat-based pricing.

Yes, we don't do any seat-based licensing at all. So there isn't any exposure there. And it really depends on the type of contract. So a core contract typically is 6 to 7 years. Most of the time, those are account-based priced and sometimes asset-based. But most of the time, they're account-based priced. Then you have payment contracts that are typically 3 to 5 years, complementary product contracts that are typically 3 to 5 years. Now, there are a lot of customers that like to have coterminous contracts. So if you sign a 6- to 7-year deal and you throw in -- we typically see 50 different products that go with a bank deal and about 35 with a credit union deal. And you'll see a level of coterminous there where the payment contract may be a 6- or 7-year contract instead of the typical 3 to 5 depending on the particular client and their thing. So as I said before, no exposure to seat-based licensing and typically, everything else is transaction-based or what we call subscriber-based, but there isn't anything that's seat-based.

Okay. And I know, I've been following the company for a little bit maybe behind the scenes until recently, but I've always known you guys as a company that keeps a really good pulse on the customer market trends, do a lot of conferences, surveys, things of that nature. Would love to just hear what you're seeing from overall bank tech spending environment and macro trends.

Yes. So to your point, we actually either sponsor ourselves or cosponsor 3 different surveys throughout the year. Actually, ours is in process right now that we sponsor to go out the bank and credit union CEOs, then we do one with Bank Director and we do one with Cornerstone or Cornerstone just had one that came out. So each year, each milestone throughout 2025, actually, the amount of expectation of spend in our space increased. So during our survey, it was around 5% was the average. The Bank Director one was 6% to 8% and the Cornerstone one that just came out was closer to 10% of an increase in spend in our space. And a lot of that is for the reasons we were talking about. The need to innovate and to drive opportunity inside the bank or credit union is driven by technology. It's not driven by people. And so our banks and credit unions rely on Jack Henry to provide those type of services. A lot of them don't have the same staff that they would need or the larger banks have to be able to go facilitate that. So they rely on Jack Henry to provide those type of solutions to them. So in the survey that just came out by Cornerstone, it was about 84% on the banks and 83% on the credit unions that expected to have an increase in spend in 2026. And again, the average was close to 10%.

Okay. And is that pretty typical in a standard year is about that 10% range?

No, no, great question. So over the last couple of years, it was really more around the 3% to 5% was the average. So it's almost doubled from a year ago. And so -- and we're starting to see that play out in our pipelines and the opportunities that we have really in all 3 of our segments.

Okay. That's great. And I did want to dive in a little bit to each of the segments, starting with core. There's been a very well-documented competitor that's going through a core migration consolidation phase. It's viewed that this could potentially be a tailwind for Jack Henry. I mean, how are you changing the organization to just make sure that you're capturing the potential opportunity that this presents? And what gives you kind of confidence? What are you seeing in the pipeline that makes you think, okay, this could be a real tailwind for us.

Yes. So let's go back to our last quarter reported. We did 22 new competitive core wins compared to 11 last year during that quarter. And 8 of those came from that competitor in question. So -- but none of them were part of the announcement that they made just recently because these take -- to sell a core deal, it takes anywhere from 10 to 12 months on average to win. And then it's another -- depending on the time frame, 12 to 18 months to actually implement. So the time frames of these new core win opportunities will happen in fiscal -- late fiscal '27 or '28 for us, or June 30 fiscal year. So from that standpoint, what are we doing? It's the #1 priority at the company right now. So this particular competitor has announced that they're going to consolidate from 16 cores down to 5, creates a nice opportunity with roughly 1,400 customers in play. And so it is getting attention from all aspects of our business. So our sales, our operations, our legal, our finance teams literally meet once a week to go through various things that we can do to accelerate and create the opportunities that we need and want. Right now, we have over 110 opportunities just in the core pipeline from 90 days ago when the announcement came, and then we have a lot of opportunities in payments and complementary, as I said before. I expect that number to increase as the amount of time kind of lags with announcements that they've made, promises that they've made, which creates some pause from some clients and say, "Hey, I'm going to give them a chance to prove out what they say they're going to do, and that's fine." But our pipeline opportunities are moving fast, and I expect us to -- our typical win rate for a year is about 50 new core wins a year. And this is an important distinction just so for some of you that don't know, these are 100% competitive takeaways. They're not moving from a Jack Henry core to another Jack Henry core. So we have 3 banking cores, 1 credit union. So we don't announce those as competitive wins because they're not. They're already Jack Henry clients. So these are logo changes for us, and we average about 50 a year. We will do north of 50 this year.

Okay. Interesting. And one of the things I often get asked is the market in general, how to think about how many kind of core deals come up in a given year. I think maybe you guys have talked about there's roughly 200, 100 of them end up leaving Jack Henry wins 50. I mean, is that -- how do you think about a typical year within core?

That is on average, right? So every year is different. I will tell you this year, there's less credit union opportunities that are open, more bank opportunities specifically because of the news by the one competitor. So I don't have the exact number, but on average, you're right, 200, roughly 100. We win roughly 50 of those a year and have been for the last 4 or 5 years on that roughly 1 a week kind of mindset.

And have you seen any changes around your typical win rate? I know you just mentioned about 50%. Has that changed at all over the last several years?

So I think the speed of the win rate has changed. So as I said, we will win north of 50% this year. So I'm not ready to sign up with 2 more quarters to go, but I can tell you we will win north of 50%. And so it will depend on that. The other part is the size. So we have made a very concerted effort to move upmarket. So typically, in years past, and I heard the prior presenter talk about this isn't your father's company, and we always say this isn't your father's Jack Henry either because 5 years ago, we made a big decision to get a lot more innovative in the technology that we build, and we are far exceeding others, which is helping us move upmarket. So just to put this in perspective, we won 31 what we call multibillion-dollar opportunities in the last 2 years. The 2 years prior to that, we won 5. So that is creating opportunities for our customers in a consolidated market, which -- because banks and credit unions continue to consolidate at roughly a 4% clip over the last 40 years, accelerating right now to about a 6% clip. And we're still growing in a market that's consolidating because of the number of wins that we have. But that concerted effort is allowing us to now take our average asset size, which was about 6, 7 years ago, $750 million in average assets. It's now $1.4 billion. And so that will continue to grow. We have some nice win opportunities that are in the pipeline right now. And we're also -- during M&A, there's times when the acquirer is buying one of the Jack Henry institutions that are smaller, and we're able to flip and actually get the acquirer to flip to Jack Henry. And those are all happening because of what we've done and the focus we put on the innovation.

Okay. That's very helpful. And then the other thing that you touched on last quarter was, I think what you described as trifecta wins, which is essentially you described an attach rate of 68% versus 45% last year. So not only are you seeing kind of accelerated wins, but you're seeing better cross-sell and attach rates. Maybe just dive into that. What's driving that? Why are you seeing success on attach? And do you kind of expect that to continue with what's in the pipeline?

And so just what you're referencing just for everybody else is that when we win a core, our digital banking, which is called Banno and our card business, we call that a trifecta. Those are the 3 biggest revenue opportunities for the company. And so when you win all 3 of them, it makes a deal look significantly better when you have those 3. So of our 22 core wins, all 22 bought our Banno digital banking product and then 15 of the 22 bought card as well. So it becomes a nice opportunity. Yes. So the reason why there's a level of differentiation is I promised 1.5 years ago that we were going to put a significant amount of effort into our digital banking solution to become more commercially oriented. We were really already known as one of the best, if not the best, retail banking platform based on ratings in the App Store and things like that. But we were lacking in some of the functionality. So we put out a focused effort on that. So we are now winning. We actually had 84 wins in the quarter. 50 of those were the Banno business application, 34 were the retail application. And 12 of those were competitive wins from the names that you know in the space. So that is a proof point that we have -- now we've gotten to a point where we are on par. The other thing I mentioned was taking that product outside of the Jack Henry base and selling it to our competitors' cores, and we needed to get on a competitive landscape with those products. And again, we're now ready to do that. So all of those are indications that our product set is improving. We've added a lot more commercial card capabilities on our card business. We're 98% debit today, 2% credit, and we want to change that dynamic as well. So we had a lot of focused efforts on card. But all of those are byproducts of why we're continuing to win at that pace.

Okay. And I know you mentioned on it briefly before, but just remind investors the sales cycle again, just -- I know the pipeline is very strong. You're seeing these wins, but how long does this take to actually translate to revenue in the P&L?

Yes. So a core deal, like I said earlier, is about 10 to 12 months to sell the core depending on how much time is left on the contract. Most customers and prospects look at about a 24-month to 30-month window before they really start negotiating. And then the longest pole in the tent is really the education because when you change core, it's compared in this industry as heart and lung surgery. And so you're basically taking every single person at the bank or credit union and you're having to get them to learn a brand-new tools and solutions. And that's really where the time is, it's the education and the time it takes. So to your point, a deal that we -- well, I'll give you an example, we're going to close a nice deal this -- in the next week or 2, and their live date will be June of '27. So we will close it this month, but they won't go live until June of '27. So that puts some of that in perspective. Now on the digital and the card, if it isn't tied to a core deal and it's just being sold independently, so the 12 competitive deals I just mentioned for digital, those 12 were already Jack Henry core clients. So all of those could actually be implemented as soon as 90 to 120 days, but it's more again dependent on the customer and the term left on their contract, more realistically, it's 9 to 12 months from contract date because of time there, but that's really how it works.

Okay. And then just remind us on M&A, how it impacts the business. You guys disclosed deconversion revenue ahead of the quarters. But for investors that aren't as familiar with the M&A dynamics in the industry, can you just walk through how it impacts you?

Yes. So some of what I tied before was this 4% consolidated market that's happened for literally 40 years. At that point in time, Jack Henry has, like I said, continued to grow at a 6% to 8% top line growth throughout that entire time frame based on the number of competitive wins and the number of M&A deals that are Jack Henry wins. So either we flip the acquirer to Jack Henry or it's a Jack Henry to Jack Henry win, which happens. So -- and we have a couple of clients, I think, in the room today that are bringing a lot of acquisitions to us on a regular basis with that type of formula. So that's an important aspect of that. The other part is what I said before is our ability at this point in time, while there was a pent-up demand for acquisitions in our market under the former administration, the time frame to get an approval for a deal could be as much as a year or longer. And right now, it's running at 3 to 4 months. And so that's -- there's not only a pent-up demand, but an acceleration. And so it's extremely important for Jack Henry to continue to really taunt the amount of innovation, and that's allowed us to be the winner more than not. So we usually view it as a slight tailwind for Jack Henry, and it has been for many years. Just to give you a couple of quick proof points. In the last 7 years, Jack Henry has grown the banking business by 17% market share, not 17 percentage points, but 17% market share and 40% on the credit union side in a consolidated market that was decreasing at 3% overall. So that puts some numbers to the perspective.

Okay. And then you touched on kind of winning business with larger FIs. I mean, can you just help us understand, are there differences in economics when you sign a core deal with a larger FI versus a smaller one?

Yes. And it really depends. So it's a lot of it's the attach rate. So you're going to pay for accounts. It's going to be whether the bank or credit union, particularly in this case, the bank is more commercially focused than they are retail focused. So more accounts in a retail, bigger assets on the commercial side. So some of that could play into the equation. But most of it is the attach rate. And so that's why it's really important for us to get those trifecta wins because if we can tie those 3 things together, it makes for a really nice win for us. Even a smaller bank or credit union that could be at a $500 million in assets, if they buy those 3 products, it turns out. I will tell you right now, our largest revenue customer is not even in our top 10 in asset size. So -- and it's pretty well known that we lost, and we're working through some things with Synovus on this, but Synovus bought Pinnacle, which was our largest asset size client. But Pinnacle was an in-house client and not an outsourced client. Outsourced clients pay us more because we handle everything for them. And Pinnacle wasn't even in our top 10 in our client base, even though they were our largest asset client.

Okay. That's very helpful color. And then I want to switch gears a little bit to payments. Obviously, that space has continued to evolve. You're seeing strong growth in areas like Zelle, real-time payments, FedNow. Can you just talk about how the landscape within payments has changed over the last few years? And what are some of the key growth drivers that investors should think about moving forward here?

Yes. Just so you all know, from a payments segment, we really have a handful of products. So one is our Bill Pay solution, which is iPay and Payrailz. We acquired Payrailz in 2022. That's a low single-digit growth opportunity. Since we bought Payrailz, it's almost tripled in growth, but it's still low single-digit growth because Bill Pay just isn't a high grower. And then remote deposit capture, we're actually the largest remote deposit capture company for banks and credit unions in the country. And that's kind of a mid-single-digit growth factor. So the big opportunity has always been card, which is the largest business. It's 22% of Jack Henry's revenue today is our card business. And that continues to be kind of a mid- to high single-digit growth and should continue, but you get to law of large numbers and you kind of get some of that as well. So the highest opportunity for us right now in payments is really in threefold. So one is faster payments, as we talked about. Faster payments is Zelle, the Fed and the Clearing House's solutions. We have roughly 500 clients live on all 3 of those. We're roughly 33% to 40% of the total population of FedNow and the Clearing House's network of banks and credit unions today. So an opportunity continues to exist because we have 1,700 core clients and only 500 live on those products. As you mentioned, we're growing at about a 50% clip on transaction growth in those 3 things, and we expect that to continue, specifically because most of those banks are only on receive. So we're only getting transactions if transactions are being sent to them. And we are really promoting and we're trying to get the Clearing House and the Fed to promote much more of the use cases to promote send transactions because those are where pennies become dollars. They replace things like B2B payments and other B2C payments that could be going by check, and they have a chance to replace those and you get real money for that. We've also bought a company in September called Victor, which allowed us to get into embedded finance. So embedded finance will allow us kind of a banking as a service, allow us to do matchmaking between the fintech and the bank and bringing those relationships and using the bank's charter to generate payments, disbursements, cross-border solutions. We have stablecoin solutions that we're using through that as well. So a lot of opportunity in the embedded finance. But I think the largest opportunity for us in payments is something we just rolled out, which is our SMB solution. We were highly focused on creating a differentiator in this space from Stripe and Square to keep deposits within the bank or credit union instead of those deposits leaving the bank through a Stripe or Square relationship. So we created 3 distinct differences in our solution set. Right now, we have 500 customers that are live in 3.5 months on our -- what we call Tap2Local, which is our merchant acquiring solution through banks and credit unions. And then we did a product called Rapid Transfers, which allows you to move money in real time from a local bank or credit union to an external account. So there's only like 6 institutions in the entire country that allow real-time payments to happen from an external account to an internal account and vice versa. So we've rolled that out. We have almost 100 customers live on that in 3.5 months. And I expect that in the next 5 years to be the biggest driver of our payments business from a revenue growth. And here's why, back to quick distinctions. We have -- we created an ability to do a real-time approval. So if anybody has an LLC or a small merchant, we can actually load that merchant onto the system instantaneously on 75% of the applications that come through. Everything is done through the phone. Application is done through the phone. The notification for them to use their phone as a point-of-sale device. So we are certified for iOS and Android to do tap to pay. So we are the first U.S. company to get certified. Stripe and Square both certified in Europe prior to the certification. We became the first company to certify that. It was like 38 certifications to go through to make that happen. And then the second one is that Visa and Mastercard both have 8 settlement windows, but really nobody uses them. So we're actually going to exercise the ability to use the 8 settlement windows for the small business to get their money literally up to 8 times a day, depending on what the bank wants to do. Worst case is they're going to get it next day. And so that's up to the bank or credit union. But the reality is we'll have that capability to do that. Nobody is using those windows today. In fact, we're getting Mastercard to build it out with us. Both Mastercard and Visa have invested in the solution set and partners with us, specifically on the marketing side to help our banks and credit unions to be successful. And the last part and maybe the most important because we're -- it's patent pending is our ability to take all the transactions that occurred for that particular merchant. When the deposit hits the -- their bank account and shows up on their digital app, all the transactions that occurred that equal that deposit show up in their app. So again, if any of you have a small business, you have to go back and manually reconcile those. We've built solution sets that take all of the aggregators that are out there, the Plaids, the Squares, the Finicities, the MX, as you name them, and they all write APIs to our back end for digital. We do no screen scraping, and we can actually go into all of the accounting solutions, 97% of them, with Xero and QuickBooks being the 2 biggest, and we can actually automatically bring all those transactions into their application and with a push button, uploaded all of that into their accounting systems. That's a patent-pending solution that we created, that's really cool. So again, this is bringing deposits and opportunities back to the banks and credit unions instead of having those leave them through Stripe and Square.

Okay. That's very helpful. And I did want to switch gears to complementary. Obviously, Banno has been hot topic lately. I mean you gave some stats around client signs. You now have more than 15 million users. I mean, clearly, the product is resonating. Can you just talk about how sustainable the growth is within Banno, the overall strategy there? And then maybe kind of the mix between retail versus business?

Yes. So I'll make that quick just because we have 1,037 banks and credit unions that are live on Banno since 2018 when we rolled it out. So we went from 0 to 15 million users and 1,000 customers in literally 8 years. And so it is the fastest growing, the mix between retail and Banno business. Every customer is a retail client and about 45% are business. So we have about 430 customers that actually have the business application out of the 1,037 that are on there, and that will only continue to go up for the reasons we talked about before. But absolutely, I view it's very sustainable. Our SMB solution, which is tied to Banno is helping us win a lot of opportunities because today, the only way you can get that solution is through Banno.

Okay. And then I wanted to switch gears here to capital allocation. only have a couple of minutes left. You guys are known for being a skilled acquirer, plenty of capacity. I mean, how are you thinking about capital allocation in this environment right now?

So a couple of things. So one, we've been 51 acquisitions in 50 years. So we have been a serial acquirer. But as of right now, we have 0 debt. And so we have a pristine balance sheet. And absolutely, that $2.4 billion in revenue that's pretty -- we're pretty proud of that. We are taking advantage of what we think is an unappreciated market right now for us. Not only did we have an incredible quarter financially and with the number of core wins, but the AI stink and everything that's in our segment right now is dragging us down. So we're definitely taking advantage of buybacks and we'll continue to be aggressive in that. We had already signaled to the Street that we would do $200 million in buybacks this year compared to $35 million last year. We're already above that. And so we're absolutely making a nice headway into that, and we'll continue. But we will continue to look for acquisitions, the things that fit our sweet spots. They typically have to be public cloud native because we don't want to rewrite anything. But if there's -- we don't have a lot of gaps because we're building a lot of our own technology. But if there's something that can accelerate us, then we will absolutely look for that.

Okay. Sounds good. And we'll go ahead and leave it there, Greg. Thanks so much for being here.

All right. Thank you.

Thank you.