Jack Henry & Associates, Inc. ($JKHY)

All right. Thanks, everyone, for joining us today, both in person and online. My name is Cris Kennedy. I'm a research analyst at William Blair, covering the fintech and payment space. For a complete list of research disclosures and/or potential conflicts of interest, please visit our website at williamblair.com. Next up, we have Jack Henry & Associates. From the company, we have the CFO, Mimi Carsley. And in the audience, we have Vance Sherard from IR. Jack Henry is a leading provider of technology solutions to banks and credit unions. At the core, they help their customers evolve with emerging technologies. And clearly, we're in that cycle today. This company has been doing this for 50 years. It's important to remember that this is a very complex, highly regulated industry. So with that, let me pass it over to Mimi.

Cris, thanks for having us. So we're going to do some prepared presentation slides. This is the only conference we do a presentation. So it will be posted on our website. I encourage you guys to see it. We also have a shareholder and Investor Day meeting on September 15. We'll have a deck at that one as well. So with that, I'm going to, I guess, stand. So I appreciate the introduction, and it's funny because you use the word core, which is really hard to not use the word core. But when you're a core provider, it's part of the main thing you do, you have to learn not to say core when you mean just like the fundamental part of our business because it is tricky. So I'm going to assume I can see things. Lawyer talk, blah, blah, blah. I'm not going to read it. You all know it, but we are going to include some non-GAAP measures. And at the end of the presentation that will be posted, there are a lot of the backups to those non-GAAP measures. So if anyone wants to see all the small fonts. So basically, when I think about Jack Henry and for those who know the company less, this was a picture of us at the NASDAQ bell with our directors a little less than a month ago, celebrating 50 years as a business. We also celebrated 40 years as a public company on NASDAQ, which is a rarity these days to be, but it really started from a foundation, and I'll talk a lot about the service, culture and the people-first culture at Jack Henry. But -- so we were quite excited. In fact, yesterday, we had a town hall with probably about 1,000 of our associates to kick off the 50th year of Jack Henry doing business. And there was a man named Jack Henry. He founded the company with Jerry Hall, his partner and a lot of their principles of how to do business and how to do right by your customers are still very much the foundation of our culture at Jack Henry. So that was a great day. If we think about Jack Henry, as I talked a little bit about that culture of doing the right thing, being in business to serve your customer and that, therefore, if you treat your associates well and then they, in turn, will treat your customers well, it will work out for shareholders and employees alike. So a very strong foundation from a culture perspective. We address a sizable and growing marketplace. There are over 9,500 banks and credit unions in the U.S. And while that number has been shrinking for over 4 decades at approximately 4% a year, if you looked at the number of institutions declining in the U.S., but you saw the number of assets, they're growing. And nothing that we get paid on has to do with the number of financial institutions at a bank. I'll also say that nothing we get paid on has to do with the number of employees at a bank. So while we are a SaaS model, we'll talk a lot about AI and what it's like to be a SaaS model in this current environment, nothing we do is counter to driving efficiency at a bank. So if we get to have our customers become more efficient, which is a lot of the focus of our products and solutions, and that, in turn, drives employment down or enables them to redirect their efforts to other areas of their business, that's a win-win for us and our customers. So a sizable market. As Cris mentioned, while we are a technology company at our heart, we serve a clientele that is a highly regulated business. We ourselves are highly regulated. We go through a lot of IT audits on behalf because we run software in data centers on behalf of our customers. This is not an easy entry point. This is not an easy operating environment to that duress or burden from being a regulated industry and being a key system of record. And we'll talk about why we think AI is more of an advantage and an opportunity for us than a disruptor. But a lot of that comes down to that mission-critical functionality, the importance of that integrity of the system of record data and the durable moat created by being a highly regulated industry. So we'll talk a little bit about that. Jack Henry is a conservatively run company. We have little to no debt on our balance sheet. We have strong free cash flow. We'll talk about that, but it's 90 to 100 plus of free cash flow conversion that has allowed us to reinvest in our business for growth. That has allowed us to have a very long-standing dividend policy and allowed us to both do M&A opportunistically as well as repurchase a significant amount of our shares this year. Part of that allocation is being a disciplined capital allocator. And so over time, we have very high ROIC, we'll talk about. It's a metric we take great pride in. We're a very selective acquirer, although we've done over 51 acquisitions in our history. We are certainly not a chaser of acquisitions, but it has been a great tool for us to augment and accelerate some of our own solution development efforts. And the last is just around that investing for growth. We'll talk about that in a little bit, but we spend and redeploy about 14% to 15% of our revenue back into R&D innovation to continue to expand on the solutions we have. So we offer over 200 solutions today, and I'll talk about the segments that those solutions are in. So it really all starts with the Jack Henry way and those 3 pillars that we've talked about a little bit before, being a people-centric culture, doing right, whether that's up front on talent acquisition, retention, development, that leads to great service quality from our service, whether that be technology or actually customer service agents, helping banks and credit unions with their day-to-day problems. And that translates to customer loyalty. We have over 99% reoccurring customer retention ex M&A and over 55% of our customers have been with us for over 20 years. So that service, that loyalty, that knowing that you're going to get innovation has really led to us being viewed as a partner rather than a vendor to our banks and credit unions. And we have some great long-standing relationships. So just a quick couple of highlights. I could have put a lot of logos on this page, but we win a lot of awards, Best Place to Work, Best Innovation. We have an engagement score of over 83%. We have great customer service scores. I don't know about you, but I tend not to fill out surveys when I'm happy. I tend not to fill out surveys in general. But when I -- the only time I do it is when I'm not happy. And so to, on average, get 4.6 and 4.7, and this has been consistent, tends to say like you have to get a lot of 5s mathematically. I know there's a lot of numbers of people in the room. You have to get a lot of 5s on a reoccurring basis to average of 4.76 in terms of customer service. So we have extremely satisfied customers. And there was recently the ABA, the American Banker Association puts out a survey comparing the larger core providers in the marketplace. This year, they named those core providers in their stock ranking. I'd recommend that people go look at that survey, and they will see that Jack Henry is really differentiated in our service quality. If I think about Jack Henry from an innovation perspective, this is one of the areas where we have really spent over the last decade a tremendous amount of resources, intention to step up our game on innovation. We were always known as a service provider. But probably 20 years ago, we probably had satisfactory technology, but not leading-edge technology. But as we've thought and thought about in the words you see at the bottom of the page in terms of culture, service, innovation, strategy and execution that we needed to step up our game from an innovation perspective. The banks and credit unions we serve, if we think about the community and regional banks and credit unions need Jack Henry more and more as we shifted from being a very back-office technology provider to being a very front forward technology provider that touches the hands of their customers every day. So if you think about moving from back-office operations of account settlement, posting interest, doing the general ledger type of activities to having apps on your phone -- I just turned on my flashlight. That was pretty cool. Turning -- working with your customers every day in how they interact with the bank or credit union, especially if we think about Gen Z and Gen I, the next generation, they don't walk into branches very often. They want to open account online. They want to get a loan online. They want to check their balances online. So having the tools and service offerings that allow our banks and credit unions to open new accounts, gain deposits, do lending in a technology way requires innovation. And they need the weight of a Jack Henry to be able to compete with the larger institutions, whether that be the mega banks or the fintechs, they need the weight of our R&D innovation center to keep them up to speed. So let's talk a little bit about who we do serve. This data is as of the end of '25. But we have 27% market share in the $1 billion to $10 billion size banks and 47% market share of the $500 million to $10 billion banks. And in credit unions, in particular, there's very few banks -- credit unions above that $10 billion demarcation. And even in banks, once you get above the super regional, there's really kind of a line of demarcation, if you will, if you think about above $50 billion in size, there's very few -- you start to get to very few number of banks. So we very intentionally don't serve the Tier 1 banks in the U.S. We choose not to by strategy, and we really focus on helping the community and regional sized institutions in the U.S. And we think that that's where the sweet spot is. I should be clear, we serve U.S. banks primarily. We have some Caribbean banks that we help as well, but we do not serve core banks outside the U.S. So every year, we do a technology survey. We just launched the most recent Jack Henry strategy benchmark about 1.5 months ago. It's on the Jack Henry website. But you'll see a consistency of what are the top priorities of banks and credit unions. And so the top priority for many years has been growing deposits. That's still a top priority at 41% growing loans, a top priority as well. Driving operational efficiency is another top priority. And then this year, will come as no surprise to anyone in the room. AI was high on the list on the top 5 as well. So we take that information also coming out of this same survey, we asked banks and credit unions. This was CEOs only. So this was 193 bank and credit union CEOs fielding this information for us. And they all talked -- over 88% talked about increasing the IT spend over the upcoming year with the majority in that 6% to 10% increase in spend. And that's consistent with what we have seen from bank director survey and other third-party surveys. So banks and credit unions in the U.S. are feeling healthy. They're on the other side of some of the challenges that people questioned around real estate bubbles, around secondary car loan, potential over lending, the impact from tariffs, they're feeling healthy and clean balance sheets, which is great. So we take this information on what is on the minds of banks and credit union leaders, and we take that and inform that with what are the key priorities from us. And then the next slide I'll talk about is the actual -- that drives some of our prioritization from an actual development work. So these are the key strategic priorities from Jack Henry, and it's around things like our tech modernization journey, really driving new solutions in the small and medium-sized business that we talked about over the last 2 years, driving AI innovation, continuing to move upmarket, continuing to improve the security and compliance, growing and how we think about delivering -- continuing to deliver solutions. So these are our priorities. When we talk about that redeploying revenue into R&D, we spend about roughly, call it, $300 million to $400 million a year in R&D. So over the last 5 years, that's accumulated to roughly $1.5 billion or 14% to 15% of revenue every year. So what are some of the top priorities, taking that information from our client strategic benchmark survey into what is our road maps. We do 6-month road maps that we publish for our clients. Some of the items on those road maps around digital, continuing to expand the Banno platform we have, Banno Business capabilities, a lot in the AI space that Cris and I, I think, are going to be talking about in a moment. Treasury management, things that are very impactful to large commercial clientele, fraud and our Financial Crimes Defender solutions, things like stablecoins, tokenized deposits, and a lot around account opening, easing the account opening and lending world. So we're in those spaces in addition to the general tech modernization journey that we're on for our core platforms. So let's talk about that tech modernization journey and how we approach the platform. So we're about 5 years in on this journey. We are now -- have over 20 of the components. If you think about an ERP system, if you will, a core system for a bank or credit union, there's about 30 big components of functionality within that. We have 20 either in market today or in the hands of beta customers using that. So big things around -- this year, we've talked about the commercial and retail deposit-only core will be available. So the last big remaining step on that tech modernization journey will be the lending and lending is the most complicated part of a core system. So we have wires out already. We have entitlements. But the way we think about the core journey is if you took those 30 big bits of functionality of a core system, how do you modularize that? How do you put that in components so that derisks making a switch. So it allows people to innovate at their own pace, and it allows customers to be able to take components they need to supplement the core they might have today. So it is not a transition where you're leaving SilverLake, which is our flagship banking core and you have to go to the new Jack Henry platform. It's an and. It's an on top or an around kind of strategy. So you can stay on SilverLake but use Jack Henry wires. You can stay on SilverLake but use the general ledger of this new tech modernization if you want to do stablecoin. So it's having components that extend the modern elements of the core and -- but continue to have the robustness and the stability of the underlying core. So the Jack Henry platform will all be digital cloud native. Google is our lead cloud provider, but we work with Microsoft and AWS as well. And the Jack Henry tech modernization will all be in the public cloud arena. The regulators aren't ready for full public cloud consumption of the core because it has a lot of PII information. But we expect that the regulators will be comfortable with people operating in a public cloud environment within the next couple of years. And so to us, there's no force migration. We're allowing our customers to use the components as they're ready, and it's able to extend capabilities we have today. So the things we're doing, particularly around the small business initiative, the things we're doing around stablecoin today, the things we're doing around Data Hub are all taking advantage of the work we've put in through the Jack Henry's platform. So really excited that more and more of that functionality is in the hands of customers today. And as we talk about that technology and we talk about innovation, pretty much the first question we get from most people in the one-on-ones today is around AI or the competitive landscape. And I know Cris and I are going to probably talk about both of those in a moment. But we think that Jack Henry, there's a lot of naysaying out there. There's a lot of scared around what's the impact to SaaS. I think there's a lot of people growing technology providers into a broad bucket. And I would say from Jack Henry, our perspective is that we believe it is more of an accelerator and a positive than it is a disruptor for us. Now part of that is because of the highly regulated nature, the mission-critical nature of being a core system provider. And the other is the uptime reliability. You have to have your system of record be compliant. You have to have it be trackable. You have to have uptime reliability and scale. You have to have it past all of the regulatory hurdles and you cannot have downtime, you cannot have hallucinations. So we think that all the work we've done on the Jack Henry platform, the work we've done on Data Hub to migrate data for clients will allow people to take advantage of AI, will allow Jack Henry to take advantage of AI. We believe that AI will be an expectation for all enterprise software, will be embedded throughout the functionality of our products, but then there will be certain products that are AI-specific on top. So our developers are using AI. We're getting around 70% efficiency gains and velocity from that development work. We're able to -- we've had machine learning and other variations of AI, not Gen AI in our products for years in things like our algorithms for our fraud detection systems. We have a great product called Banno Conversations with AI Assist that lets a bank or credit union talk to an end customer with a human, not a chatbot answering their questions, but serves up the next answer to that customer service rep. So driving 40-plus percent efficiency in their call handling time and still getting that high trust service reliability that, that bank or credit union is known for. So certainly, we have a whole team within Jack Henry within our data and AI team. We've been doing over 1,000 touch points and programs with our AI coaches throughout all of our different product groups. We have a lot of betas in place for case studies and use cases. We've been very clear on taking a responsible yet bold approach to that being a highly regulated industry. So there's a lot of risk and governance around AI usage. We believe in human in the loop as kind of a pillar of that governance model. But we really think that our clients are going to be looking for Jack Henry to help them, whether that's on having their data in a way that allows them to work with the army of vendors and consultants that want to help them generate AI or whether that's AI through our systems as well. So we're quite excited about it. This is just a quick overview of our segments. We have core. We talked a lot about core systems here today. That's about 30% of Jack Henry. Payments, we do card processing, both debit and credit on behalf of the FI. We do enterprise payments. So think about a lot of remittance type of payments. We have faster payments, so Zelle, FedNow, RTP, ACH that we do on behalf of both end customers, commercial and fintechs as well as the banks and credit unions. And then complementary and the easiest way to think about complementary is it's not core and it's not payments, it tends to be complementary. So in our complementary, that's where Banno falls and the digital products, that's where treasury falls. That's where our fraud solutions fall, account opening, data management fall into that. And then our fourth is corporate services, which think about shared infrastructure, our hardware sales that go to support clients fall into that segment as well. So just kind of wrapping up here a little bit. We believe here at Jack Henry that we serve our clients with the capabilities they need to run their institutions today and in the future. So whether that's helping them grow and transform, whether that's helping them think about conversions, whether that's helping them think about conversions, whether that's helping them acquiring other institutions, whether that's helping them think about growth go-to-market strategies, helping them with security and risk and compliance and fraud detection, whether that's helping them embed payments capabilities, both directly for day-to-day transactions or as an alternative source of revenue through embedded payments or payments as-a-service capabilities and then strategic enablement, which is research, help around -- helping them around developing and executing on their strategies. And last, just in terms of attractiveness of shareholders and capital allocation, we have 22 years of a consistent dividend policy growth. We have a strong free cash flow conversion. I talked about earlier, about 90% to 100-plus percent free cash flow, which has allowed us to buy over almost $300 million worth of shares this year. And we just recently upped our authorization. So if we think about allocation priorities, it's reinvesting for future growth in the business. It's thinking about our consistent dividend plan. It's opportunistically looking at M&A and it's share buyback. And then just kind of closing out on some numbers that put some things into perspective. We talked about the size of our business. We are growing at 7.4% CAGR over the last 3 years. FY '26 guidance 6.6% to 7.1%. We have less than a month left to our fiscal year. We're a June 30 filer for those who are less familiar with us, over 90% reoccurring revenue, and we talked earlier about that 99-plus percent client retention ex M&A with over 15 million digital subscribers. So think about on that Jack Henry platform that's public cloud native is where Banno sits, and we have over 15 million active users on that platform today. So it's a growth story. It's a margin expansion story. It's an AI accelerating story, and it's a story that has 50 years of execution behind it. So -- we think it's our mission to help the regional and community institutions to help them strengthen and be able to kind of fight and win, especially against the people kind of above their weight class. And so to help -- we think the U.S. is better served by having a robust community banking system in place. And so we feel very lucky and empowered to be able to help those institutions continue to win, especially in a very dynamic market. So with that, Cris, why don't we kind of open it up to some questions by you or the audience?

Yes. Any questions from the audience?

[indiscernible]

Yes. It's disappointing. I think at the moment, the market is not differentiating quality and execution from everyone, and they're putting all software and tech in an AI-exposed bubble together. And I think that's not the case, particularly not for Jack Henry. We are expecting very strong sales momentum growth. We've talked about in an average year, we win 50 to 55 new logos a year. And when we win a new core, it comes with around 40 other products at the same time. We've talked about that our pipeline is stronger than ever, aided by, we think, an even more advantageous situation competitively against some of our peers. And we think we'll be at the high end or exceeding that this year. So there's definitely opportunities. There's always some headwinds from M&A and pricing each year, but we think we're on a trajectory. We also are really excited about some of the newer areas that can fuel growth over the next couple of years. We'll be talking about that at the Investor Day meeting in September. But if you think about the traction of faster payments, it's small dollars today, but could be quite large. Our SMB initiative could be one of the more sizable areas of our payments business over the next several years. So there's definitely upside, we think, from a revenue perspective.

Great. I think we're going to have to end it there. There is a breakout upstairs.

Okay, then we'll be moving.

All right. Thank you.