Jack Henry & Associates, Inc. ($JKHY)

Yes. Anyway, we'll get started here. Thanks, everybody, for joining us here at Morgan Stanley, and we're joined by Greg Adelson, CEO of Jack Henry. Before I get started with Greg, I'm James Faucette, Senior FinTech analyst at Morgan Stanley. And I do have a quick disclosure 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 representative. So Greg. Great to have you back. .

Good to see you again, James.

So maybe for investors that are newer to the story, and it's just kind of hitting some of the critical screens, et cetera. Can you quickly frame Jack Henry across at least the way we think about the business, core payments and complementary. And then maybe take that opportunity to explain what has changed most in the business over the last 5 years as you've moved from back office infrastructure into more basing customer facing, particularly on digital payments and fraud.

Sure. So let's start off just kind of the segmentation. So we segment our business, as you described. So core is about 31% of our overall revenue payments is about 37%, complementary is 28% and then there's roughly 2% or 3% that's left that goes into a corporate bucket of a variety of things, mostly hardware, things along that line. So just to give you a quick description -- so in payments, we run a big card issuing business. So that has debit and credit in there. We run faster payments, so everything from Zelle to TCH, the clearinghouse to Fed Now. We run our bill pay business. and we run a lot of the things that we're doing with our new acquisition called Victor, which does embedded finance. In the core business is what you would think it's all the core solution sets that we sell directly to support the bank or credit union, and then everything else is complementary. So really all of our digital and fraud and other things. What's kind of changed in the last 5 years really is more about -- less about what we've done in the back office versus the front of the house type stuff. It's more about our kind of getting back to our roots of how Jack Henry was started. So our founders. By the way, this is our 50th year in we just celebrated last year our anniversary. And our founders were very innovative, and we got back to really back to our roots of being innovative. So we're building a lot of our own technology, less on partnerships, less on acquisitions. We've been much more vigilant in making sure that we are being more of a leader in the industry than being a close follower and so I think that's really what you've seen in some of the technology that we might be talking about today. But what we've been able to do in stable coins and SMB strategies what we've done in a lot of our digital applications in general are kind of examples of that.

That's pretty exciting, and I appreciate the overview. So let's talk about some of the places where you've had historical success and continue to do so. And I know we were chatting beforehand that this last year, in particular, has been a great run financially for Jack Henry. But let's talk about like the drivers of that. So core sales momentum, you are tracking above kind of your normal 50 to 55 annual core win range with more larger institutions and more product attached. As you look at the pipeline, what is changing most, whether it be number of RFPs, Jack Henry's win rate, size of institutions or breadth of products with which you win? Just help us understand like how you're winning more than you have historically.

Yes. I think it's a great question. I think, honestly, it's a little bit of all of those. There are more RFPs than typically. If you look in a traditional year, there's roughly about 200-ish RFPs that go out about 100 folks actually make a decision to leave their incumbent and that includes folks that are on Jack Henry's platforms as well. That number has inched up a little bit. So we're probably more at around $225 million to $230 million this year, which has helped us, but where our win rate has actually gone up as well. So when you look at where we are today, so our fiscal year ends in here about 20 days, so June 30 is our end of our fiscal year. So we reported Q3 back in May, we had already closed 43 new core deals for the year compared to '28, the year before. And to your point about larger deals, we had closed 11 multibillion-dollar institutions compared to '28, the year before. To put that even to kind of expand upon that, -- we just did a press release a couple of weeks ago where we announced Jack Henry's largest core banking deal ever that we won -- it was a $9.2 billion institution. Now we have institutions that are far greater than that, but we had never bought we had never acquired 1 at that size. And more importantly, they had 1.5 million accounts and so that's about 30% bigger than any Jack Henry Bank client today. So very large win came from 1 of our competitors and a great opportunity there. So that kind of gives you a little bit of a flavor of not only the number of wins, the type of wins, the type of opportunity. Candidly, there are some things and disruption going on in the industry with our competitors a little bit. Some things that have been said, some things have been walked back, but that's created an opportunity. Lastly, it's back to what I said before, innovation. So if you ever hear me talk, whether it's on an earnings call or in a customer or prospect meeting, I talk a lot about our 5 differentiators, culture service, innovation, strategy and execution. We believe that we're doing those 5 things as well as anybody in the industry regardless of whether it's in the banking industry or not. So we do what we say we're going to do. We build a great strategy, and we've built some really cool technology. All of that has helped us win larger deals and be involved in some larger deals that we haven't even talked about yet that are in the $50 billion range as well.

Wow. So I want to go back to the RFP count. It seems like it might be up around 10% from what we normally see. Like what do you think has been the motivating driver there? Like is there a common thread that you can draw through that?

Yes. I mean, look, I don't want to say anything negative about our competition. That's not what I do. But the reality is there's been disruption. And so 1 of our competitors made an announcement that they again have walked back that they were going to consolidate their course from 16 to 5. They've now said they're not going to do that, but that opened up the kimono a little bit for folks to start thinking, well, if I'm going to be 1 of these that's going to be kind of replaced is will start looking, so we have a very large pipeline of opportunities that are specifically in that particular competitor's base, and we've seen RFPs in that particular competitor's base open up to a greater number.

So you feel like in a lot of ways beyond just like I think most people felt like there was going to be an okay investment year from a bank perspective. But it seems like you're saying that, that announcement actually immediately catalyzed an increase in RFP activity.

Absolutely. And to your point about spend in the banking space, so there's been a multitude of surveys over the last 12 months that we are part of, 1 that we run ourselves, a couple that we co-sponsor that have shown that about a 6% to 10% plan for spend from the banking world. And honestly, I think that's going to go up. When you look at the challenges with opportunities in AI in the community bank space. You've got Mythos out now from a data and cyber security folks are going to be making sure that they got the right vendor to keep them protected because most community banks just don't have the wherewithal to do either 1 of those things without the support of folks like Jack Henry.

So let's talk about that incremental pipeline and opportunity you have there. Like how should we think about as investors those at bats, if you will, that increased frequency of -- or higher RFP number turning into signed deals? And then when can those sign deals show up in revenue? Kind of what's that time frame look like? .

Yes. So typically, a -- from a core standpoint, and again, when you're selling outside of the core, there's time lanes -- or time frames are a lot shorter. But typically, in a core, it takes about 9 to 12 months -- so the 1 I referenced the very large one. We actually started that process last June, closed it in April, and that was a very large deal, but it took about 9 or 10 months, and that's about average. So it takes about that long to close the deal. Depending on how much contract term is left on their existing provider, that also has a big bearing of when they will go live. So we typically say that when we close the deal, it's usually 12 to 24 months before it becomes revenue for the company. And that's pretty accurate based on a lot of factors. The 2 biggest factors are contract term. And also, these institutions have other projects going on. So they got to get their staff all trained up on the new technology, and that takes time, so you typically see 12 to 24. Now it's much different in an M&A environment, which we can talk about later. But in core itself, that's kind of the time frame.

Got it. Got it. So you mentioned also opportunity in upmarket, et cetera. You've had some larger wins recently, including -- you mentioned institutions well above $1 billion in assets. And 1 with meaningful more accounts than your current largest customer. So you just talked about the size of that. But as Jack Henry moves up market what becomes the gating factor to continue to win there? Is it sales credibility, implementation capacity, referenceability, integrated support product breadth, just help us understand like what additional things you need to add to the capability of Jack Henry to continue to move upmarket. .

Yes, it's a great question. Honestly, with where we've been playing right now, it's 100% a credibility. It's not any capability, scalability, any of those things. And I'll give you some examples. But from a credibility standpoint, as I just said, this $9.2 billion institution is the largest institution that Jack Henry has ever won. We have 40 institutions that are over 9 billion today that have grown up with us and built over the years. So again, it isn't the ability in our largest $53 billion, and we have several in the $30 billion. But the reality is when you're going after these types of opportunities, you have to be able to build that level of credibility I actually just had an inbound from a $12 billion institution who said they weren't -- we weren't even on their radar, but somebody actually referred them based on their experiences with us. And so those are things that we have to overcome. To give you some examples from a product standpoint, we don't -- we have everything that we would need other than 1 particular thing as you go really upmarket as well. So we don't really have a great wealth management solution. We partner with some folks on wealth management, but we haven't built that out just because it hasn't been a need -- but as you go further and further upscale, you need a better wealth solution. And so we're working through and thinking through how we're going to manage that as we go further up scale. Everything else we're fine. And then from a scalability standpoint, we actually run annual tests on all of our products in our core. And just this last year, we ran at $200 billion in assets. So -- and we ran just fine. It's an independent test run by IBM. And we do have some customers. We have a $200 billion credit union that we have products with. We have $70 million banks that we have products with. So again, we have examples of that already.

Got it. So -- let's talk about Trifecta attach and how that impacts contract lifetime value. It seems like your core wins increasingly come with digital banking and card, but how much does lifetime value of a contract change when you win core, ban on car together? And how much of the attach typically happens at signing versus later as kind of third-party providers own their own contracts roll off? .

Yes. So just to explain what we call a trifecta is, again, core digital and card and those are really the 3 most complicated conversions you have to go through. So it's really important if you can win those 3 at the same time, somebody is making a big bet on the technology that you have bought. So to answer your first question, it's about -- well, there's a couple of reasons why. So let me tell you why. One is when it's sold with the core directly a typical digital and card contract is 3 to 5 years. But if it's sold with core, a typical core contract is 6 to 7 years, so it becomes coterminous with the core. So you've added a couple of years of value in that particular relationship. So that's extremely important. The second part of that is because of that extra value and the value of a digital and card deal to Jack Henry, it's about 60% additional total contract value to the company when we're able to sell that at the same time. So 60% increase. So what had happened in years previously is you would see folks that would maybe make that at what we call a day 2 item where they would purchase core, say, "I got x amount of years left on my digital contract. I'll come back and talk to you again later on. A lot of them are making decisions to end their digital contract at the same time they're doing their core. And again, a good indication that we're building out great technology to allow that to happen.

Got it. So let's talk about probably 1 of the noisiest things I've run into in a while, and that's Pismo. Pismo is a core and issuing platform that Visa acquired. They had an announcement recently that Wells Fargo had selected Pismo and that continues to be a common line of questioning for investors. So let's talk a little bit about what, from your perspective, Pismo is and isn't. I think you've said that Pismo has ledgering capability, but lacked full deposit and lending functionality. What capabilities maybe would you think Pismo would need to add before you would view it as a true competitive core and how closely are you watching edge use cases? And maybe you could just help us understand why not necessarily well or, but you might say, "Hey, I want a limited use core versus what most institutions might want.

So I think there's a lot to unpack. Let me give you a couple of components here. So first of all, I'll give you this perspective. We have not seen PSMO in a single deal that we have done of all the cores I just named or all the opportunities we want. We haven't seen them in a single deal. Now we see them in card, which, again, they're bringing DPS and Pismo together to bring a single platform for debit and credit definitely have seen them in there, and that's going to happen. I'll talk specifically about the Wells deal. So when you look at the wells opportunity, so Pismo has a general ledger that was built as part of their commercial card platform, which is supposedly pretty good, more modules or componentized, which allows somebody like a wells who's got a wherewithal of tons of dollars and people to build on top of. So my guess is, and I don't know this for a fact, but my guess is, is that they decided to take the general ledger capabilities and replace some general ledger capabilities inside of their existing core because it didn't do what they wanted it to do. Again, I don't know that for a fact. What I do know for a fact is that it only has a couple of deposit features. It isn't a full deposit-only core. So it does have a general ledger and it may have a feature of being able to send an ACH or sending some other things or a wire or things along that line. But when you look at the full functionality of a deposit-only core, there's a much more that has to go in there. I don't know if that's their plan to build out more of a full core or offer this component ties to folks that could build it out themselves. I don't know that for a fact. One thing I know they don't have is full lending capabilities. Candidly, there's very few people in the entire environment that have built lending capabilities into their core. One of the advantages that Jack Henry has is that we are 1 of the only providers that's ever built a full core. So even if you look at our 2 biggest competitors, they've only acquired cores, they haven't built them. So we built them from scratch, and we built out lending capabilities. So until somebody has the full core capability, we don't see them as a competitor in that environment. And I'll answer your last question was why would somebody pick somebody with just a module or to build out and this is what I would say. Again, if you have the ability and good for Pismo, they have the ability to be componentized just like we built out all of our new core modules, and we're actually replacing some with existing clients and eventually with nonexisting clients, so that gives you the advantage to take advantage of new public cloud technology and have it integrated into your existing core and run through that. The difference is we've already built all the integration, so for Pismo and wells, they're going to have to build the integration themselves to have it actually operate as a single core. If it operates as a stand-alone core of what we call a side core, you have to operate that separately with separate compliance, separate people, everything else, and that could be a royal pain for your regulators. So until all of that comes together to answer your question, I don't know of a lot of people that are interested when you have other options that would be fully integrated.

Got it. Got it. So I'll take a brief breath here. I mean we spent quite a bit of time on the core products, competition, et cetera, but see if there are any questions from the audience before we move on to other areas. So let's keep going then. So let's talk about Banno, the platform, modernization and et cetera. So maybe I'll start with Banno, just maybe 20 seconds quick refresh on what Banno does and where it fits. But more importantly, I want to ask about Banno outside the core base. Benno's more than about 15 million users in and has historically grown inside the Jack Henry base. Are you beginning to push an outside the base? And what are those proof points that investors should watch to see if it's going to be able to become a real independent growth driver?

So for those that don't know Banno, so it is our digital application that we have built, so online banking, if you consider from that standpoint. So online banking application that we built from the ground up, public cloud native in 2018 and launched it, excuse me, 2018, we have now, as you said, over 15 million users. So it is the fastest-growing platform in the digital space today. to your point, only been sold to Jack Henry clients. We have roughly 130 of those clients live today out of 1,700 core clients that we support. So we still have about a 40% runway inside of the base. But because we're getting to the point where we think that we have done a good job of building feature functionality to be on par with some of our larger digital-only competitors. So I won't give them their names for their -- the justice but the reality is there are some good ones out there. But the good news is that as we built out the feature functionality, and I think you were at our Investor Day 2 years ago, when I said that was going to be a focus, so we are now winning deals from our competitors because of the Banno business application that we built that needed to be. We were really good on retail. We lacked a little on business. So just in the last 2 quarters alone, we have won 19 deals that were existing Jack Henry clients that were on competitive digital platforms. So just in the last 2 quarters. And then back to your Trifecta, we've won 39 new cores just in the last 2 quarters. And of those 39, 80% had Banno attached to it. So again, numbers that we hadn't typically seen. So we're starting to take it outside the base as we built the competitive differentiation. We are targeting a handful of cores that make sense based on disruption as we were talking about earlier, an opportunity where somebody may not be interested in moving their core tomorrow, but they may be interested in moving their digital application. So again, when I talk about the 3 hardest things to do in a conversion core digital and card, a lot of people call core heart lung surgery. I call digital appendectomy and I call a -- called a root canal, right? So you're trying to get all of those done. So this is a good way for us to jump start an opportunity to build a relationship with this particular customer. .

Got it. So let's talk about the platform itself. I think it's pretty interesting, especially since you spent roughly the last 5 years componentizing the offering and making it cloud native. And you've got, I think, at last count, 20 or 30 major components in market or beta at least. And lending still being the largest remaining piece what's the critical path from modernization work to getting visible and evident revenue acceleration? And when does the platform become more than an architecture story for investors .

Yes. It's -- so the part that I want to make sure I explained and hopefully, just I'll take enough time to do this. But the way we have built the platform, it isn't -- people view it as a public cloud core. It is way more than a public cloud core. It is -- as I described earlier, it's fully integrated into our existing foundational core, which is different than what anybody else has built. So as we replace a module like a wires platform, we literally turn it off in the core day on that day and turn it into the new platform, and it flows through the existing core that they're on today without any -- almost a seamless. In fact, we had 5 of those happen in a single day and the CEO said it was boring, right? Because that's the way it should work, right? It should be very seamless as long as you built the integration. So to your point, we built 25 different modules. Not all of them are core specific. So what's important is the platform has been the foundation for Jack Henry to build all of our innovation. We built a stable coin proof-of-concept to move USDC, both send and receive in 2 weeks. We're getting ready to have 3 clients go live. We're waiting on the regulators to approve it, but we built it in 2 weeks on the platform. We talked about -- well, we're getting ready to talk about tap to local and remove relationship. And that move relationship was built on top of the platform as well. So there's modules that sit on top of the Jack Henry platform that aren't core specific, but they've allowed us to innovate much more quickly than we could otherwise. So back to monetization. So to your point, some of the core modules in particular, we have some customers in beta, some and -- we have about 75 customers that are using some pieces of the core modules today. So a limited amount of revenue today. But as I mentioned before, the larger deals we're winning -- the number of deals we're winning, they're all because of the tech story. So we're able to show what we've built and not just talk about, right? It's not a PowerPoint, it's full demos of things that we've already built, and that gets us to win. So we're actually monetizing more than people give us credit for because it's actually part of our wins and the things that we're doing there and our SMB story and all of that kind of stuff. Now, there is some other things that will be coming to your point, that we'll be calling out in '27 and '28. But we do believe, based on where we are the lending piece of this, which is, as I already said, is the hardest, is still a couple of years away, but we are actively building that out today.

Got it. So I want to talk quickly about public cloud readiness and the regulatory path. Certainly, it seems like the strategy assumes clients can adopt cloud native components now, but full public cloud core consumption likely takes more time. What specifically needs to change across regulators, bank boards, auditors and client risk before we can really start talking about public cloud for core adoption.

I think there's a couple of things, and they're happening as we speak. So 1 of it is AI. So being in the public cloud is going to allow the data consumption and the ability to use AI to be greater. You've heard the term no data, no AI. Well, you need to be able to have that and being in the public cloud is the way to be. I can't speak for others, but I'll speak from a Jack Henry perspective. I mentioned earlier about Banno being in the public cloud since 2018 and now almost 16 million users. So based on that fact, we've been working with regulators for a long time about operating in the public cloud and how we operate. We've actually written documents that sit in Washington, D.C. because of our experience as being in the public cloud. So we have a really good relationship with the regulators, and we have confidence that have been built with our customers because of how much time we spend in there and the number of applications that we moved to the cloud. I think from an incremental approach that we have taken with our components is also helping customers get more comfortable in CEOs. Candidly, sometimes it's the age of the CEO that's got the level of comfort. But a lot of that is part of what we've been kind of working through. So as we've gotten regulators more comfortable with how we operate and we've been able to do this in an incremental approach, like I said, everybody that moved to our wires platform, they're not working at least 1 component in the uber -- so that's helping them get comfortable, and that's what I think needs to continue to happen. But with what's going on with AI, what's going on with the cyber security and vulnerabilities and other things, being in the public cloud is absolutely the way to go.

Got it. So you mentioned some of the payments applications you've been able to build on your platform. So let's talk about those. That growth in that segment is still around mid-single digit, while faster payments, rapid transfers, tap to local and embedded payments always potential drivers are still really early. What milestones would give you confidence that the payments can accelerate over the next couple of years?

Yes. So we're -- we typically have seen payments range in the 7% to 9%. We're kind of at the lower end of that this year. We're kind of at the top end of 6%, lower end of 7%. And there are some reasons for that, that we've called out on earnings call, a lot of them are onetime things that -- so we expect payments to get back into its normal range next year, in fact, and what we've been able to see related to each of the groups that you talked about. The ones that I think have an opportunity to juice it a little bit more, is the tap to local, which is our merchant acquiring solution that we have inside of banks and credit unions as well as rapid transfers. We're seeing roughly 45% to 50% growth in our pay center business, which is all faster payments initiatives, we've actually seen a resurgence in our bill pay business, which is interesting. It's still low single digits, but it's a lot higher, low single digits than they were before after we bought the payrolls acquisition. And then you mentioned embedded finance with the Victor acquisition in 6 months or, I guess, it's about 8 months now that we've owned it. We have a very large pipeline of banks and fintechs that we're lining up and already closed some of those deals. So I think all of those point to the fact that as you look into '27, we should be inching up into to a more of a normal range. But looking at 28, we feel pretty confident that you're going to see much more of an impetus of the driver above the normal ranges.

Got it. I like to hear that. So I know you've peppered the conversation thus far with mentions of AI and some of the things that you're -- the benefit you're getting and where you see some opportunity. But let's spend the last few minutes talking specifically about AI and what Jack Henry is doing and I want to kind of come at it from 2 directions, productivity and the fraud overlay and how you're improving products there. First, is it -- is AI already driving internal productivity gains for you? And what kinds of applications or uses are you finding to find the productivity gains. .

Yes. So I'll just give you a quick backdrop. So about 3.5 years ago, we started our AI governance. So I was COO at the time, and we worked with our CISO, our Chief Risk Officer, our CTO and myself, and we built out a really strong governance framework. And it really was built around the fact that we wanted to see how we were going to use tools within the organization and how we were going to govern that. Candidly, AI is much faster growth than anybody thought at that point in time. But as of today, we have almost 100 tools that we're using within Jack Henry. We have limitations on who can use it, the number of licenses that we offer, but we're experimenting. There's going to be winners and losers in this and so we're not putting all of our eggs in a certain basket. As a byproduct of that, we have over 500 use cases that we built for internal efficiencies, including 100 bibcoding cases that we built including ones I've done regulation. Yes, exactly. So we have 9 AI coaches that we've hired in Jack Henry, and they're going across the organization, helping us build the level of efficiencies or by coding opportunities I think we trained over 1,200 of our employees already on AI. And our message to our associates is this. we don't -- we never over hire. So we -- if you look at our headcount over the last 5 years, it's averaging about 1% on 7% growth and because we've always been building efficiencies, whether it's process improvement and now -- so there isn't a bunch of people to go lay off. So our message to our team is, you're not going to lose your job because of AI, you're going to lose your job if you're not using AI because we need you to be more productive in the rules that you are. So the opportunity here has been really, really great. So back to some of the examples we've seen anywhere from 70% to 90% improvement in development, whether that's accuracy or speed of development. Customer service, we've been able to take like 3,000 cases and condense the time frame that we have, where people get questions that are the same and they are able to access that via AI. Legal, we had almost 50% of our renewal contracts never touched our attorneys. HR, you name it across the board. I mean we're using it in everything. So we have a group that kind of evaluates the ROI and which ones we're going to get the biggest bang for the buck. And we're doing a great job of building all that efficiency. On the product side, our AI coaches and our Chief Data Officer, who we hired are really pushing the product development. So we have 2 products that are live with AI today. One is in our Banno application and 1 is in our financial crimes application. One is SAAR. So suspicious activity reports. We can do all that. We just rolled that out last month. And in Banno, there's some things that we've done to build efficiency inside the bank or the credit union that they're utilizing. But we have 14 proof of concepts that we have just finalized that all will have the ability to either be monetized or will be included in the product set, but should help drive more adoption of the product set or we may end up building kind of a model where we can build efficiency into the bank or credit union, and we take a cut of that efficiency. So we have different models that we're going to experiment with. But we've been extremely active building out a genic AI agents and utilization. So we've been doing all this ourselves. We have a very talented staff that we've hired all around the country to help build that out. So that's ..

So last question here. I think there's at least among some of the investment community, some apprehension that whether it be AI labs or the hyperscalers or AI native-based solutions could start to bring in fraud and AML identity and detection solutions and overlay that at the bank and that, that could adversely impact Jack Henry. How do you think about that and any potential impact to your bundling strategy? And how important is it to have that core system as a natural distribution layer? How do you think about that? .

Well, I mean, the core system itself and really any system of record is really what the key is. So whether somebody is going to build a genetic AI agents to come in, they still have to call the same APIs that any human has to call to be able to have access. So the real importance is the API side. So the way that you can control the access to the system of record is through API. So we've built out a full catalog. We charge for those APIs. So I don't see any disintermediation plus regulators are really difficult. You can't have an AI conversation with the regulator, right? So that's a real protection from a core. Now are there complementary products that might make sense that somebody is going to come in and build something more quickly? Absolutely. But as I already mentioned, we're using AI to build all these solutions out as well. We have 1,100 fintechs that are integrated with us today because there are solutions out there that are better than Jack Henry's. We're not going to be the best at 300 products. We're just not, right? So what we've done is it's given us an opportunity to embrace whether that's somebody that we might want to acquire, somebody that we may want to integrate with, somebody that we might want to do a rev share with things along that line. But -- it is not the point that we believe any level of disintermediation into the core parts of our business, not just core, but digital payments, fraud, account opening and lending is what we call our 6 anchor capabilities. And we'll either augment that with AI partners, we'll build it out ourselves, but we don't see a level of disintermediation there.

That's great. Greg, that's all the time we have today. Thanks for joining us. .

Appreciate it. James. Good to see you .