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

Yes, yes. And I think it starts with what you described. So system of record is a big component. We've also talked about regulators. You're not getting an AI bot to talk to a regulator, right? So when you look at things that you're going to disintermediating the space of a variety of different industries, I think somebody would pick something besides banking to try to disintermediate at the core level in particular because there is so much complexity that goes into building that out and things along that line. The one thing that I'll talk about is that even as Agentic AI and other agents are built, they're just another point of reference to working within a system of record, right? You can point the agent to building some level of technology, but you still have to go through the system of record to get there. They're not the system of record. As we give AI functionality to our banks and credit unions, it's creating more opportunity for that bank or credit union to be more efficient as we talked about. Maybe they're replacing people. In a lot of cases, they are. In other cases, they're replacing mundane tasks that allows their people just to be more productive and spending more time with their customers and creating that level of atmosphere. What is a banker credit union, specialty community bank or credit union have as a true differentiator, it's service relationship and trust. You don't build that through AI, right? So that's what community banks have. So I don't think that's going to go away. So the ability to utilize the agents or the things that you need to do to build out the technology still has to go through all of the foundational things that we control, which is, again, the system of record and the regulatory. So UIs may end up being maybe less important in the future. We'll see where that goes. APIs are absolutely going to be important because that's what you're calling to be able to drive that level of innovation. And then one thing that we've talked about before is service in general. So Jack Henry is known and has been, this is undisputed that we're known as the best service provider in the industry. And when you look at that level of service, we didn't get it by accident, right? We did it through a variety of white glove types of approaches. So we're using the AI to do the exact same thing that our banks and credit unions are, which is we're building a level of efficiency that allows us to worry less about mundane things and spend more time with our customers and their customers to make things successful. So I just don't see that being something that will disintermediate us. Because, again, you got to get -- you got to be able to get through the regulators and you got to be able to provide the service, you got to be able to handle the diligence to even get approved that some outside company is going to get approval from a bank or credit union to allow them to enter their infrastructure.

Yes. I'm glad you brought up service because you are known for that. Every survey we've ever looked at third party or otherwise, you guys have been right at the top. And a lot of, I think, people who are at the lower rungs of those surveys are suggesting that agents will help neutralize that process. But what I'm hearing you say is no way.

I -- like -- well, they may have their own philosophy. So I'm just going to say, from our standpoint, I think agents will help improve service functionality, but a lot of that's going to be self-service functionality. So -- which, again, that is a part of service. But I will tell you, I mean, we spend a lot of time with Gen Z and other trying to find ways to continue to really promote and work with the Gen Zers and others. But when you look at where the opportunity, again, for a community bank to thrive, it's not going to self-service. That's not what's going to thrive. Larger institutions, yes, that's where they make the difference and where they can spend their money doing it. Customer service isn't necessarily at the top of their perspective. But for community banks and credit unions, that's what drives it.

Yes. So let's spend a moment on tokenization, deposits, assets. It's a growing topic of interest. What are you seeing from your clients? Are there opportunities for that to be an enhancement that you can provide to them? Or is there a threat in any way, shape or form to what you're providing to clients today?

Yes, I want to provide both context. So both tokenization and stable coin because we're spending time on both. So the interesting thing with stablecoin, back to the platform that we built and the speed of innovation. We actually built a proof of concept in stablecoin to move, to send and receive USTC in 2 weeks, in 2 weeks. So we actually had 3 customers that were ready to go live. We're waiting on the regulators to approve it. But the reality is we built the technology in 2 weeks. The other side of that is stablecoin is going to create opportunities by the fintechs to compete with our banks and credit unions or tokenization will be more embedded into the bank or credit union as an inherit. That's why they're very interested in tokenization. There are several big bank coalitions that are coming together. The carry network is one that's being formed. There's a couple of others. So we're spending time with all of them. And so we believe that tokenization is very important and will be an augmentation to our overall strategy related to, again, to combating the stablecoin piece. So one of the things that we do really well -- and again, differentiated from our competition is we do not compete with our customers. So they've had some acquisitions through the years where they've actually competed with their customers as well. And our big mantra is, in fact, our #1 strategy as a provider is and it's as simple as this, we enable our clients to win in the markets that they serve. And so one of the things that goes back to our founder, Jack Henry, that he used to say that I love the quote is that "Our clients are not in business to make Jack Henry successful. We are in business to make them successful." And that resonates when you're going after and building a relationship with a potential prospect or client. So back to my point about tokenization, organization is something we need to deliver to our clients because that's what we do. And so by the end of this calendar year or first part of '28 we will have a solution in place through either a third party or some things that we're working on with Google that we think will allow us to do that more quickly.

That's great. In that same vein of that quote -- let's talk about your SMB strategy because it's perfectly like developed for that, right. How do you help enable your banks competing against these fintechs and that's kind of the road map that you guys are mapping out. So maybe spend a little bit of time on that. Obviously, local is part of that, but yes.

So I might go a little longer on this just because there's a little differentiation that I want to point out. So original premise of what we were doing in our SMB space was we wanted to create a solution that would allow our banks and credit unions to compete with Stripe and Square. So they partner with Stripe and Square but some of the things that they were missing is that Striping Square take their deposits away. And once they take your deposits away, they start to lend and provide other services. So it became a level of disintermediation and that they were kind of letting happen -- and we said, you know what, we can create a solution that we can build that we think is candidly better than some of the things. It's still early stages, but I'm going to talk to you about some of that level of differentiation in a second. But we built a really cool solution. It took us 9 months. We went to Mastercard and Visa, and actually, they both were so interested. They both have invested into the solution set from a marketing standpoint. So that kind of started. We got through the process. They told us it would take 2 years. We built it in 9 months. We launched it in November. And it's -- just since November, we have 900 customers already live on our merchant acquiring what we call tap to local. I'll give you some distinction about that in a second. And a secondary product that we call rapid transfers, which less than 10 institutions in the country have today, including the Tier 1. And that is a real-time money movement using the Visa and Mastercard debit rails to move money inside to the bank account, so a Jack Henry client to an outside account, whether that be E-Trade coin-based RBC, whoever it is. And those are real-time transfers. So think about today, wherever you bank, if you're not at one of those 10 institutions, when you do a real-time transfer from an external account, it goes through ACH. So it takes several days for it to actually hit your account. What we created is real time. So we are seeing a significant -- by the way, it's the #1 feature used at Chime today is to move money in and outside of the account. So we've now enabled 128 community institutions with another 180 in the queue to go live on this really cool technology that we've been able to create. And it creates deposit opportunities because more of what we're seeing are transfers from larger institutions like one of yours into these community institutions. So it now becomes deposit gathering for using that. So it's a great solution for that. I'll go back to tap to Local, which is our merchant acquiring. So again, Stripe and Square create these solutions for all different size customers. Our focus initially with sole proprietors. Why? Because sole proprietors make up 80% of all small businesses in the country today. So we wanted to attack something that we thought would have some girth and had a real challenge. And here's what we did. So because we have all the data on our core, we're able to instantaneously approve 75% of everybody that goes through the process to be -- that wants to be a merchant. If you think about against Stripe and Square it usually takes a couple of days, sometimes a week to get approved as a merchant. We can instantaneously approve you. As soon as we instantaneously approve you, we send you a message that says you're now eligible to take payments. I'll get back to that in a second. The second part is -- and the only -- the other 25% are candidly gun dealers or marijuana dispensaries or whatever, right? So they go through a whole host of additional scrutiny. But we do this all in app, by the way. Everything that they fill out and complete is all in our digital application. So really cool technology. Second part is, is that once they're approved, they get a notification that they can start taking the payments on their phone. So we're fully certified for iOS and Android devices. So we're one of the only companies in the country that's certified on both of those devices, which creates -- again, you don't have a bifurcated group. And then once they're actually taking payments, we have a couple of really cool features. One, so today, they get next-day settlement of their funds. So is that -- is there certain companies that give next day, not everybody but most of the Stripes and Squares for so proprietors, they keep their money for several days. So next day is a big benefit. But coming in 2027, we're going to have 8 settlement windows a day, meaning that our small businesses can get their money up to 8 times a day based on the bank's preferences. That is unique, and nobody is doing that. And actually, we push Mastercard to build out the 8 windows because Visa already had them. So we'll be able to launch that in 2017. The other big one is this, and we actually have patented this process. So when you get your money again next day or 8 times a day, in the Banno application you will get deposit amount, and that deposit will have every single transaction that occurred for you that equaled that deposit amount directly in your Banno application. So if any of you have a small business today, today, you have to go back and manually reconcile all of those transactions back to the deposit amount to see if they really equal. Well, we have it all in the application for you. So once you actually validate it in the application, we give you a button to push and it automatically uploads to QuickBook 0, whatever your accounting package is. And we built all this out about 5 years ago. So if you think about -- if you know anything about 1033 and trying to actually get rid of screen scraping in the applications, we eliminated screen scraping in the digital application. So Platt, Finicity, Ecole, MX, all of them directly right to our APIs so that you can't screen scrape our Banno application, which allows us to be able to pull those transactions seamlessly in for the customer. So that's why we patented it with the things that we built there. So that's the distinction there. I think this is going to be the fastest-growing part of our payment segment for the foreseeable future based on the early returns that we have in the growth. We've already added additional features. So not only can you pay with your phone, we have QR codes. We have payment links. We have the ability to add some other features. We do cataloging. We have a whole bunch of things. So we have an 18-month road map that we're going to be rolling out over the coming months that we'll have a bunch of new features. So as I like to say is that this is the worst the product is going to look. So...

That's great. Now I know it was a super exciting topic for you. So I'm just -- I just wanted to wind you up.

Yes, you did SP1 So it didn't take it left to wind me up. But the other part is just understanding that we're doing this all for our banks and credit unions. We're not competing against them. We're helping them sell -- we're providing tools to help them sell. We're pushing notifications out to the merchants to help them sell. And we're not going around them and taking things away from them like Stripe and Square.

Yes. So it leads me to the next kind of expansion here, which is taking the Banno digital asset and banking solution, and starting to push it a little bit more outside the core.

Yes. So today, we have roughly 130 of our 1,700 core clients take Banno today. So we still have about a 40% opportunity within our own core base. But as we built out feature parity, as I mentioned a couple of years ago, where we put that into play, it's now given us an opportunity to go compete with the larger digital-only players out in the market. So even if one of our competitive -- competitors core is not ready to make a change, they might be ready to make a digital change. And so that creates an opportunity for us to sell that product. So we're targeting a few specific cores. I'm not giving anybody any insight into those yet, but we're already targeting and we already have a team that's out there focusing. So I think the good news for us is that it will provide incremental opportunity for us within the digital space, while we continue to build out additional features that will grow our existing that we still have 40% penetration.

Yes, just all incremental. Yes. Let's talk about M&A and banking. You have a unique lens from which you can see that. Oftentimes when these transactions, it sounds like are in the works. They have to come to the technology providers first and kind of get in queue because that implementation cycle takes so long. So what are you seeing in that context today given the fact that there is this expected heightened M&A activity? And then how does that play into your business?

Yes, good question. So just for those who don't know, over the last 40 years, you've seen some level of consolidation in the banking industry. Those of you that are old enough know that there was 20,000 banks and credit unions 30 plus years ago and now there's roughly about 8,000. And so as that starts to happen, again, about 4% over the last 40 years, we're seeing about 6% right now. A lot of it is the speed. The Trump Administration definitely allowed for faster approvals. So under the Biden Administration, it was going anywhere from 8 to 14, 15 months, and now it's around 3 to 6 months to get an approval. So you're seeing that level of speed. To your point, we do get early notifications from our clients and say, "Hey, they won't tell you who it is, but they'll tell you the size, who they're coming off." Things along that line. So we prepare. We've actually added 2 new merger and acquisition teams as a byproduct of that over the last year to make sure that we have all the slots that we need to satisfy that. Answer your question about how and what it means to us, typically, over the years, if you just think about 40 years of consolidation, and we've been growing at an average of anywhere from 5% to 7% over those 40 years or even greater in the early years of Jack Henry we're continuing to grow at a very nice pace in a consolidated market and don't see that changing because we typically win more of these deals than we lose. We do lose some. Some of them can be, but we win some, and some of them can be of size. The level of differentiation for us is this through the innovation that we've been talking about throughout, we're now -- we just had a $45 billion institution that was on a competitive core by our $5 billion institution, and we're in talking to that now $50 billion institution about a whole host of things. That would not have happened several years ago. So that's a thing -- but overall, it's a positive.

So we've outlined all of these great opportunities, new incremental markets, technologies that are going to come to bear over the next couple of years. And the question that I get a lot from investors is, can Jack Henry's growth rate, its actual algorithm accelerate or are we looking at a company that is going to just be able to run at these levels for longer? Which one is it?

Well, Candidly, we think I'm not up here giving guidance yet, but I will tell you that structural. Structurally, I can tell you right now, the things that we are building and where we have seen the amount of wins and opportunities. We believe that right now, we're averaging right around 7% half for the last couple of years and believe even though we guided lower than that this year, we've already upped our -- raised our guidance all 3 quarters so far. And so based on the SMB story based on going up market based on a couple of our competitors struggling and opportunities in there. We do see an incremental opportunity. I've used that word a lot today. I apologize, but an opportunity for getting closer to that 8% growth. And is that going to happen in '27? I don't see it happen in '27. I do see some nice opportunity for us. But could it happen in '28 and '29 and beyond, I do believe that -- and we're very highly motivated to make that happen.

Yes. I can definitely foresee that happening and also lengthen the duration of that growth as a result. So Greg, thank you so much. It's a pleasure. Congratulations on the 50 years I've covered you for not that many, but it's been a while. So I really very much appreciate your time today.

Thanks for having me today.

Appreciate it.

Thanks.