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

All right. We are going to get started, kicking us off the afternoon session. Greg Adelson, President and CEO of Jack Henry. Greg, thanks for joining us again.

Yes. Thank you for having me.

Taking time being up here, particularly ahead of the upcoming Investor Day. I know that's a big lift for the team. So I appreciate you carving out the time.

Absolutely.

All right. So maybe we will talk about the year that you guys just ended, just reported. You closed the books on a strong year, 7% non-GAAP revenue growth, a record 58 core wins, over 90 basis points of margin expansion, third straight year of 60 basis points or more. And coming out of that, you've set up to 2027, more or less in line with the long-term growth algorithm. As you sit here today, what are the 2 or 3 strategic priorities you're most focused on? And what does the organization need to get right in order to hit them?

Yes. So yes, thanks for that. So we did have a record year. Some of the priorities that we still have today are in place from the day that I took the seat about 2 years ago. So one of them was to go to market and be more strategic and core wins with larger institutions. Over the last 3 years, we've had 45 of those multibillion-dollar win compared to 22 to 3 years prior to that. So that's one example. Our SMB strategy, which we actually came out with 2 years ago at our Investor Day, which we've been very successful at rolling that out, we now have over 900 institutions live on our tab to local and about 150 on our rapid transfers, which is all part of that. We're going to actually talk a lot more about SMB next week at our Investor Day. And then I think the Jack Henry platform itself, which has been an announcement that we made 4 years ago, where we talked about building on top of our existing cores and having full integration that's far different than what anybody else's space has been doing. We built almost 30 components onto that platform today over the last 4 years, all public cloud native API first. And it's created a nice a nice tailwind for us with going up market and the overall success of the company. So those are the 3. There's other ones. But as you know, it's all about execution. And one of the things that we pride ourselves on is doing what we say we're going to do, and we've been very successful with those 3 initiatives.

Yes. So let's maybe pivot to the Investor Day you've got them coming up in Dallas. Maybe you said the 2028 outlook is going to be a big part of that story, along with some live demos, you said publicly that '27 looks a lot like '26, but you're more bullish on '28. So without out running the event too much, what are the main messages you're hoping investors will walk away with?

Yes. The main message is that we are going to kind of put our money where our mouth is, where we talk a lot about culture service, innovation, strategy and execution being the 5 differentiators for our company. We're going to showcase those 5 things. We're going to show live demos of the technology that we have built and again, especially show the progress that we've made since the last Investor Day 2 years ago and to give a strong indication. We're not only just going to show a preview of what '28 looks like. We're going to give a preview into '29 as well at a top line. Those are something we've never done before at an Investor Day. We've never really looked past the current year. So getting back to the excitement that we've had on the year we just had and where we think we're going. And we've been signaling that '27 would be similar to this year, but '28 and '29 would have some step up, so we're going to show that.

Yes. No, sounds excited. Looking forward to that. One of the things that you've been highlighting is the momentum on the core side, 58 competitive core wins. You continue to stress the move up market at the same time. I think you're talking another step-up in core wins this year, 58 to 65, I believe. Given the lag between signing and revenue, how should investors think about when that accelerating backlog starts to show up in the financials that we see?

Yes. So a typical core win is -- usually, there's contract term left. So one of the gating items of even going live is how much contract term left, and it's usually 12 to 24 months or so. And then you actually have to train the bank or credit union's personnel, their staff and everything on what products they're buying. So when we sell a core deal at Jack Henry, it usually comes with about 40 complementary and payment solutions. So it's about a 12 to 24 months lag for those reasons. It has nothing to do with any other thing, other than contract term and training and things like that. We are using AI to speed up some of the data conversion stuff, that's great, but it's necessarily help us make new core win. So you can use the math there to realize that the deals that we're implementing this year were deals that we sold the last year or the year prior to that based on term. So we have good visibility. We know exactly when a core is sold. We know when they plan to go live. And so we can map that out, which, again, part of the reason why we're going to be able to show that level of guidance for the next 2 years. But again, that's just standard. And people ask me all the time, will AI going to help speed some of that out -- up. It doesn't necessarily help speed up the contract term size or the training size, it does help with the data conversion. And where it does help us immediately is in a Jack Henry to Jack Henry merger, where we can actually have a shorter time frame to bring them live with that.

Yes. Makes sense. Okay. Public cloud strategy has also been a big talking point over the last couple of years. It's been deliberately incremental. I think componentize the core, integrate each module back to the existing foundational cores. Could you just provide an update on where you are in the investment cycle and just how you think about the pace of product adoption from here?

Yes. So the investment cycle continues. We -- 4 years ago, we announced it, we had started it roughly a year before that. We've been on track, actually have been building it ahead of schedule and ahead of budget from both of those standpoints, which I think is, again, another strong indication of our level of execution. So we -- as I mentioned earlier, we have roughly about 30 components that are live today. And basically what we're doing is we're decomponentizing the core. So the key things that run the deposit functionality, the lending functionality, we've done what is necessarily on the deposit side. The lending side, which is the more difficult side to build. And if you look in the industry today, nobody has built out the lending side in a public cloud native philosophy. So we'll be talking more about what we are going to do to accelerate the lending side later this year. We actually won't be talking about it next week because we're still finalizing some details, but we will talk about it later this year. And then from a client option standpoint, we have roughly about 100 clients that have adopted some portion of the components. So these are existing Jack Henry customers that have said, I want to replace my wires platform with your new wires platform. I want to use your new general ledger to replace your general ledger. So we have roughly 100 that have done that. But what it has been is a true kind of driver of opportunities with these larger institutions. We're talking to $50 billion institutions and $30 billion institutions because of the incremental strategy that we put in place that allows them to take on changes within their core environment without going through the full heart and lung surgery, which is a core conversion.

Yes. Makes sense. Speaking of some of the ancillary products around the core, you've emphasized the momentum and [indiscernible] this year. So this is core wins that come with both payments and banking. I wanted to -- I was hoping you could talk about how much of that change is coming from improvements in the product versus changes in the distribution and just how you think about continuing that momentum.

It's a combination of both. So I keep going back to Investor Day 2 years ago because that was an important time frame for us, where we actually made an announcement that our digital offering, Banno was lacking in business capabilities. And so we were going to go fill the gap between us and the larger digital-only competitors that are out in the space, and we went and did that. And because we built out the features and we now have feature parity, we've been much more successful in winning digital deals. So our trifecta win rate, which is core, digital and card, our card processing solution went from 39% last year to 59% this year. We're expecting to be on about that range or better for this next upcoming fiscal year. So we changed a little bit of the focus of the teams, and we made a lot more impactful for the sales team to be successful selling the trifecta. But most of it starts -- it always starts with the product itself. If the product is enough to speed, you can't sell it. So we had to build out the feature parity. We've now done that both in card and in digital with the advancements that we made in that product.

Makes sense. There's a lot of investor focus earlier this year on AI as potentially a disruptive force in bank tech, particularly whether banks that historically couldn't manage a long tail of vendors might not have more ability to do that and stitch together different vendors that are on their own. You talked about how you're seeing the opposite, more trifecta wins, more people buying a bundle from Jack Henry. So how do you think about the way that AI could reshape the industry and the way people think about technology decisions?

In our industry, in particular, regulators play a big part in everything that we do. So as AI and public cloud and other things have become more prominent, the regulators have really become much more impactful in decisions for institutions. They're actually looking for institutions to have less vendors than more vendors. So that best of sweet mindset is really starting to come back. And so that's back to my point about -- or your point about trifecta wins. So what we're seeing is that if a core provider like us can provide the AI capabilities, the AI guidance, we're actually doing consulting services now as well. It's enabling them to have more trust in that provider, meaning they don't need to look for other alternatives. And so that makes the regulators happy. It makes the bank or credit union happy as well. So that's a big part of driving that, and we're going to continue to double down on that. And we'll talk more about AI in a minute. But the reality is if we weren't proving those points out, then you would see our customers looking for more third parties to work with.

And how are banks just responding to this desire to invest in AI in a such a regulated environment? What do they look at Jack Henry to do? What do they want to do and what are you helping them accomplish?

Yes. So they're looking to, like everybody, build efficiencies. A lot of our customers don't have large development groups. So it's less out the speed of development, more about building efficiency. Efficiency ratios are really one of the highest-rated things that a bank is measured on. So we're always looking for ways to make them more efficient. So we build kind of automated workflows that they can utilize. We've built our own AI solutions that allow them to utilize those within the institution as well. So things that we can sell, things that are part of our existing product set. And so that's really what they're looking for. So speed and efficiency, opportunities to build out a product set that is a differentiator from -- so if a lot of them compete with the Tier 1s. And so they want to have something that's on par or differentiator from them.

Yes. Makes sense. Let's talk about the opportunity for Jack Henry on the efficiency side. R&D was up 16% in the fourth quarter, mostly on headcount. Maybe as frame some of the benefits as projects taking 2 years instead of 3 rather than an in-year cost takeout. As those gains compound over time, does that change the level of R&D spend needed to fund your existing road map?

Yes. So as of right now, I mean, we've been averaging about 14% to 15% of kind of reinvestment from a top line over the last 7 or 8 years. And that's made up of really 3 components. So pure expense that's in the development side, the capitalized software of that development and then some of the additional internal use software that we have. And that's all aggregated into a single number, which equals to the 14% to 15%. With the speed of innovation and change in our market, in particular, whether that be stable coin, tokenized, deposits, embedded finance, things along that line, in the way that we are building our own technology ourselves, I don't see that number going down, at least not in the next couple of years. What Mimi's point is a really good one, which is -- Mimi, by the way, is our CFO, is that you have the ability to do things faster. So projects that used to take us 3 years now are taking us 2 years or 18 months. That's where the speed and the efficiency is and it allows us to do what we call more with the same. That's the mantra that we have across the organization. It's not about doing more with less, which is why we have such a strong culture and background for our associates to fill empowered to come up with great AI ideas because they don't feel like they're going to lose their job because they came up with the idea. So I think the way the advancement of our industry is the components that we need to do, it's going to speed up the time but not necessarily change the dynamic of how much we're investing.

Got it. And then as it relates to how AI can reshape the products that you mentioned having 22 AI-enabled products in market more on the way. How do you measure what AI-enabled products do for the business from a monetization perspective? Like do banks get enough value for these features to pay a premium? Are they table stakes? Is it an engagement and a sales momentum?

It's a little bit of all 3. So of the 22 that are already in market, a large majority of those are embedded in the product to make it a more palatable product and a differentiator in the space. This isn't necessarily becoming an accelerator of cost or revenue, but a differentiator in penetration. So our ability to penetrate more of the product, obviously, will drive longer-term revenue. There are other products and features that we are able to necessarily upcharge. A lot of those live in the platform that I mentioned earlier, whereas we're building a core modules, all of the 30 core modules that we built all have AI built into them. So some of them as big differentiators from what we offer today. So if you -- let's just take our general ledger, if you're replacing our existing general ledger with our general ledger that has AI built in, we can sell that into a premium. So it's going to show up as a core module ad and not necessarily AI generated. But the reason why we're able to upcharge is because of the AI component. So it's a mix of all those and will continue to be. But what we're trying to do is make sure -- the one differentiator I will say, is that I mentioned AI consulting. So we are going in as a separate line item to sell AI consulting services to our institutions, whether it be governance or building the efficiencies. We've been doing AI for 4 years. We've built a really strong framework with the regulators. And so we're able to kind of pass that on to our institution.

Yes. Okay. I wanted to shift over to card and payments. Payments grew 6% in the fourth quarter, still at the low end of the 7% to 9% range, I think, driven largely by a little bit slower card growth. What gets payments back to that historical range? And which of the pieces of that business is going to do the most work looking ahead?

Yes, a lot of that came from some onetimes that happened with -- that happened with -- we talked about incentive dollars and other stuff that we get from the card associations. So some of that driver of growth and differences came on onetime. We're seeing back to our normal transaction growth this year or at this point. We think consumer sentiment has actually remained pretty strong. If you look at our overall card business, about 98% of the transactions are debit based. And so debit continues to be very strong. All you have to do is look at Visa and Mastercard's analysis of that. But where we think the growth is going to come from is the differences we've built into our credit side of our business. So as I mentioned on the earnings call, we had our best year ever selling credit actually by double of any other year. And that continues because of feature functionality we've added. So I think a lot of the growth in the card side of our business will come from the additive credit versus the debit. Payments in general will be driven by a lot of things in master payments world. So if you look at Zelle real-time payments through The Clearing House, FedNow, things along that line, they're all truly drivers today of what we call receive-only transactions. And as the government and others start to change the mindset of use cases for send transactions and there's a better balance on the risk mitigation of that, which we're working on as well. I think that's where you're going to see another lift in growth. So between card, between the faster payments, between what we're doing in SMB that I mentioned earlier that's where I think you're going to see -- and you'll start to see some of that this year, but you'll definitely see more of it in '28 and '29.