Good morning ladies and gentlemen, thank you for standing by and welcome to Jack Henry and Associates Second Quarter Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today to Kevin Williams, Chief Financial Officer and Treasurer. Please go ahead, sir.

Thank you, Olivia. Good morning. Thank you for joining us for the Jack Henry & Associates second quarter fiscal 2022 earnings call. I am Kevin Williams, CFO and Treasurer, and on the call with me today is David Foss, Board Chair and CEO. The format for our call this morning will be a little different from our normal format we have typically used in the past. But just as a warning, the opening comments will take a little longer than normal. In just a minute, I will turn the call over to Dave to provide some of his thoughts about the state of our business, financial and sales performance for the quarter, comments regarding the industry in general, and some other key initiatives that we have in place. Then after Dave concludes his comments, I will provide some additional thoughts and comments regarding the press release we put out yesterday after market closed and provide comments regarding our updated guidance for our fiscal year 2022, provided in the release. At that point, Dave will have some additional comments and updates that he will make on the press release that we put out Monday morning. Then at the conclusion of those comments, we will open the lines up for a traditional Q&A. First, I need to remind you that this call includes certain forward-looking statements, including remarks or responses to questions concerning future expectations, events, objectives, strategies, trends, or results. Like any statement about the future, these are subject to a number of factors that could cause actual results or events to differ materially from those which we anticipate due to a number of risks and uncertainties. The Company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our 10-K entitled risk factors and forward-looking statements. On this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income. The reconciliations for historical non-GAAP financial measures can be found in yesterday's press release. With that, I'll now turn the call over to Dave.

Thank you, Kevin, good morning everyone. I am pleased to report another strong quarter of revenue and operating income growth. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our second quarter while also continuing to deal with the impacts of the ongoing pandemic. As Kevin mentioned in his opening remarks, we're going to conduct today's call a little differently from the cadence of past calls. I'll start with comments regarding the performance of the business in the quarter, then Kevin will share detailed financial results. Instead of moving to Q&A after Kevin's comments, however, I'm going to come back and conduct a detailed review with you of our exciting new product technology modernization strategy for our company. This is an important update for you as we believe this strategy, which we've been working on for more than two years, will fundamentally define the evolution of our company and our industry. We will address questions after that strategy review. With that, let's shift our focus to look at our performance for the quarter we completed in December. As of the end of the quarter, we continued to operate with well over 90% of our employees working full-time remote and continue to evaluate options regarding an appropriate return to office target date. At this time we have no published date, but we have proven that our business can perform well in a remote capacity, so we don't feel any significant pressure to change that. For Q2 of fiscal 2022, total revenue increased 17% for the quarter and increased 11% on a non-GAAP basis. Consistent with our previous guidance, the deconversion revenues were up almost $25 million over the prior year quarter, which led to the extremely strong GAAP revenue performance. But you should note that even without the increased deconversion revenue, this was a very strong quarter. Turning to the segments, we again had a solid quarter in the core segment of our business. Revenue increased by 15% for the quarter and increased by 7% on a non-GAAP basis. Our payment segment also performed very well, posting an 18% increase in revenue this quarter and a 13% increase on a non-GAAP basis. We also had a strong quarter in our complementary solutions businesses with a 17% increase in revenue this quarter and an 11% increase on a non-GAAP basis. As I mentioned in the press release, our sales teams again had a very solid quarter as they booked the largest sales quarter in the history of the company. Those of you who follow us closely will note that our last quarterly sales record was set only six months ago. In the second quarter, we incurred 15 competitive core takeaways and an additional 15 deals to move existing in-house clients to our private cloud delivery system. As we have discussed on prior calls, our convert/merge backlog is a good indicator of what to expect with coming mergers and acquisitions within our base of customers. Our contract volume in this area continues to grow to the point that we have now added one new conversion team on the banking side of our business. Additionally, we will be adding another team next quarter on the credit union side of the business, and we're evaluating adding one or two more teams in the near future based on ongoing demand. We continue to see good success with our new card processing solutions, signing 13 new debit processing clients this quarter and six new credit clients. We also continue to see great success signing clients to our panel of digital suite with 44 new contracts in Q2. Speaking of our digital suite, we are continuing to implement new financial institutional clients on the Banno platform at a similar pace to recent quarters. At the end of Q2, we surpassed 6.6 million registered users on the platform, and our Banno platform continues to hold one of the highest consumer ratings in the app store. A couple weeks ago, we announced a significant promotion for a key member of our leadership team. After more than 10 very successful years with our company, Greg Adelson has been promoted to President and Chief Operating Officer. As I noted in the press release, Greg will retain all of his prior responsibilities as COO but will now be responsible for leading the recently formed digital and technology office headed by Ben Metz. I would like to congratulate Greg on this well-deserved promotion and congratulate Ben on his move to his new position. Both will play a major role in our success going forward. As some of you know, we've continued to make major advances with our environmental, social, and governance initiatives, and the Board has established a quarterly cadence to discuss industry matters. Jack Henry’s next sustainability report will be published on March 31st and will highlight our major advances in this area during the past year. We will be able to access this new report through the sustainability website link from our Investor Relations site. In January, Cornerstone Advisors published results of their annual survey of bank and credit union executives. According to that study, 84% of financial institutions in our target market expect to increase their technology spending in 2022, with 24% of them indicating an increase of greater than 10% year-over-year. This correlates with the information we're receiving from other sources which puts the average expected increase in tech spending for 2022 in our markets at greater than 5%. I think that pent-up demand is reflected in the continued influx of RFPs we are receiving and the ongoing interest in Jack Henry Technology Solutions. As we begin the second half of our fiscal year, our sales pipeline is very robust and we continue to be optimistic about the strengths of our technology solutions, our ability to deliver outstanding service to our clients, our ability to expand our customer relationships, the spending environment, and our long-term prospects for success. With that, I will turn it over to Kevin for some detail on the numbers.

Thanks, Dave. During the quarter, services support revenue increased 18% compared to the prior year quarter. As Dave mentioned, deconversion rate was up $24.7 million for the quarter compared to last year. License, hardware, and invitation revenue combined were actually up 10% compared to the prior year. Our data processing and hosting fees on our private and public cloud offerings continue to show strong growth in the quarter compared to the previous year, growing by 11% for the quarter. On a non-GAAP basis, total support and services grew 8% for the quarter compared to the prior year. Our processing revenues increased 15% in the second quarter of fiscal 2022 compared to the same quarter last fiscal year on both a GAAP and non-GAAP basis. The increase was primarily driven by higher card volumes from new customers installed last year and increased debit and credit card usage from existing customers. Our Jack Henry digital revenue continues to show strong growth as demand for a manual digital platform continues to be very strong. Total revenue was up 17% in the quarter compared to last year and on a reported GAAP basis. I'm getting reports that it is really hard to hear because of feedback. Olivia, can you hear us?

Yes, sir we can hear you but there is some feedback in the background.

So Olivia, should I dial in on a different line?

Yes, you can try that or would you like me to dial out for you?

That's fine, dial me.

Okay. You are now back in.

Yeah, but we are still getting feedback, so it must be your end.

Yes, I am still hearing feedback from that line. Maybe try from a different line.

Now that is you; we're on a different line. So Olivia can you hear us?

Yes, your voice is clear, but when you speak it does have a lot of background sound.

But when you speak it also has that. What are you doing to address this?

Yes, I am not hearing the background sound anymore. You are now pretty clear.

Okay. So services support revenue increased 18% in the second quarter of fiscal 2022 compared to the same quarter a year ago. As Dave mentioned, deconversion was up $25 million as we guided for the quarter compared to last year's quarter. License, hardware, and invitation revenue combined were actually up 10% compared to the prior year. Our data processing and hosting revenue and our private and public cloud offerings continue to show strong growth in the quarter compared to the previous year, growing by 11%. On a non-GAAP basis, total support and service revenue grew 8% for the quarter compared to the prior year. Our processing revenue increased 15% in the second quarter of fiscal 2022 compared to the same period last year on both a GAAP and non-GAAP basis because all the non-GAAP items are up in support and services line. The increase was primarily driven by higher card volumes from new customers installed last year and increased debit and credit card usage from existing customers. Our Jack Henry digital revenue continues to show very strong growth as demand for our Banno digital platform continues to be very strong. Total revenue was up 17% for the quarter compared to last year on a GAAP basis, an increase of 11% on a non-GAAP basis. Our cost of revenue was up 10% compared to last year’s second quarter. The increase was primarily due to higher costs associated with customer maintenance of license cost, increased hardware cost, card and transaction processing increase in line with related revenue growth, and also higher personnel costs compared to a year ago. Research and development expense increased 12% for the second quarter of fiscal 2022 compared to the same quarter last year. This increase was primarily due to personnel costs. Our SG&A expense increased 26% in the second quarter of fiscal 2022 compared to the same quarter. The increase was due primarily again to increased personnel costs and travel costs compared to last year, and last year we also had a gain on sale of assets which made for a tough recall. Our reported consolidated operating margins increased from 22.2% last year to 25.4% in the current year for a 320 basis points increase. On a non-GAAP basis, our operating margins expanded from 23.3% last year to 21.7% this year for 40 basis points expansion. The effective tax rate for the second quarter of fiscal 2022 increased to 23.6 compared to 23.1 in the same quarter a year ago. Net income grew 33% to $95.7 million for the second fiscal quarter compared to $72 million last year with earnings per share of $1.30 for the quarter compared to $0.94 last year for a $0.36 or 38% increase year-over-year. For cash flow, our total amortization increased 2% for the quarter, I'm sorry, year-to-date compared to last year due to capitalized software projects being placed in the service. Included in total amortization is the amortization of intangibles relating to acquisitions which just decreased to $8.3 million year-to-date compared to $8.9 million last year. Depreciation expense actually decreased 3% compared to the first six months of the prior year. Operating cash flow was $197.4 million for the year-to-date which is up from $194 million last year, which is primarily due to increased net income during the first half compared to the previous year and the timing and change of various operating assets and liabilities considered in the calculation of operating cash flow. We invested $101.1 million back into our company through CAPEX, purchased and capitalized software. Our free cash flow, which is operating cash flow less CAPEX and CAPS software and then adding back net proceeds from the disposal of assets, was $96.3 million for the first six months of fiscal year. During the first six months, we also spent $193.9 million to purchase 1.25 million shares of stock through the treasury, and we paid dividends of $67.7 million in the first six months for a total return to shareholders of $261.6 million in the first half of fiscal 2022. A couple of comments on our balance sheet as of June 30th. Our cash position of $29.1 million is compared to $147.8 million a year ago. Our revolver balance has bounced to $240 million compared to zero a year ago. With the change in cash and debt balance primarily related to the 4.1 million shares purchased in the last 18 months. Our return on average assets for the trailing 12 months is 15.2%. Our return on average equity for the trailing 12 months is 24.6% and our return on invested capital for the trailing 12 months is 22.6%. Also, yesterday we provided a GAAP and non-GAAP updated revenue guidance in the press release. We also provided a reconciliation of GAAP to non-GAAP revenue in the release following the segment information. However, just to be clear, this guidance continues to assume that the country continues to be open and the economy continues to improve. Obviously, if things were to go differently, then this guidance will be revised. For GAAP revenue growth for fiscal 2022 based on the amounts of the release yesterday, our revenue guidance has been updated to reflect a higher than a little over 10% growth over fiscal 2021, which we now anticipate deconversion revenue to be approximately $49 million to $50 million for the full year. And right now it appears the Q3 deconversion revenue will be approximately half of the deconversion revenue we saw in Q2. If you remember, on the last call we said that the big percentage of the deconversion fees we saw coming were in Q2 and Q3. For non-GAAP revenue growth, we have updated our guide to be just under 9% for the fiscal year. Obviously, these will be updated during the year. We continue to anticipate GAAP and non-GAAP operating margins to improve a little in FY 2022 compared to last year. But I continue to be somewhat cautious on guidance, guiding too much of a non-GAAP operating margin expansion as we will continue to have headwinds on license and hardware revenue as we continue to move core customers from on-premise to private cloud. Also, personnel costs and travel costs continue to increase significantly compared to last year. However, we're still confident that full year non-GAAP operating margins will expand approximately 50 basis points or a little higher, but also a reminder that the highest margin quarter is now our Q1 quarter due to software subscription revenue under ASC 606. Our effective tax rate for FY 2022 continues to be projected to be slightly higher than 23% compared to the prior year rate. However, significant change in the corporate tax structure could change this guidance. Our updated FY 2022 GAAP EPS guide is a range of $4.75 to $4.82, which is an increase from the previous guidance of $4.64 to $4.73, which is a 15% to 17% increase over prior year actual EPS.

I will now turn the call back over to Kevin for some detailed comments regarding the technology modernization press release that we put out on Monday morning of this week. Thank you, Kevin. In this third section of today's call, I would like to provide all of you with an outline of our product technology modernization strategy. This is not a product announcement; it's a strategy discussion designed to set an expectation regarding the evolution of our company. I won’t be sharing any specific sales, revenue, or profitability numbers with you today, and I probably won't be able to answer all of your questions. I want to be clear about that upfront: I'm sharing this with you today because it is important for you to understand how Jack Henry plans to innovate and remain a leader in our industry for many years to come. Many of the recent innovations we have made, and we will continue to see are directly tied to this multi-year strategy and we have got developers working behind the scenes on this new technology for more than two years. The strategy we're sharing today further expands upon Jack Henry’s highly successful Open API digital banking platform. Before we get into the details, let me first set some context for this strategy. You heard me say many times that we are a well-rounded financial technology company focused on serving the technology needs of community and regional financial institutions. That is our primary audience, and we've been focused on that market for the last 45 years. Today, we serve close to 8,500 financial institutions through approximately 300 different solutions, and we have more than 850 Fintech providers currently connected into our ecosystem. While other providers in our space have shifted direction over the last few years, we continue to be 100% focused on serving the full and complete financial technology needs of community and regional financial institutions. The reason we and our clients have been successful for so long is that we have continued to evolve our business in a measured and thoughtful way to help our clients meet the changing needs of their account holders. In the early days of our company, when people visited branches for their financial needs, our focus was on automating everything that was being done on paper. We reported that as the first generation of financial technology solutions. Then the internet came along and it caused disruption as people began to move away from visiting local branches due to a desire to conduct more business online. What did we do then? We made more services available via the internet to ensure a seamless experience between online, mobile, and branch banking. That was the genesis for this second generation of financial technology. Today we are at a pivotal point similar to when the internet was introduced. Things are changing to the point that our industry requires someone to innovate a next-generation solution. Many non-traditional banks have entered the market, blurring the lines between traditional and non-traditional providers, and people have learned how to manage their finances digitally. At the same time, a new hybrid monetary ecosystem has emerged as new currencies like crypto have become more mainstream and are actively traded through platforms like Coinbase. It is also becoming more clear that Central Bank Digital Currencies or CBDCs are likely on the near-term horizon and our clients will need a strategy and technology solutions to address customer demand for these options. So why does all this matter? The simple answer is these dynamics are fundamentally changing how people want and expect to bank, especially with the younger generation. A recent Javelin report shows that non-banks now provide 65% of financial relationships for Gen Ys and 69% for Gen Zs. Fewer are going into the branches or calling customer service; they expect to do everything digitally. The emergence of new financial apps has created an unprecedented level of financial fragmentation. It's not uncommon for someone to use between 30 and 40 different financial applications and services to address their financial needs. This may be great for some people, but this fragmentation also impacts the ability of people to make informed financial decisions, and that can lead to poor management of their finances. For community and individual financial institutions, this digital transformation poses both upside opportunities and downside risk. To capture the opportunity, our clients need a clear growth strategy focused on the customers and customer niches they will serve. They need a product and services strategy that enables them to provide the best solutions to their customers while delivering service in a customer's moments of need and relevance. And they need a technology modernization strategy that makes all of this possible, even as additional changes occur in the future. That's where we come in. Let's talk about what Jack Henry is doing to help our clients capitalize on this opportunity through our product technology modernization strategy. Let me start with our end goal here and then I'll talk about how we're going to get there. At the highest level, we are focused on developing a single, modern open banking platform that enables easy access to a broad ecosystem of Jack Henry solutions and high-grade third-party FinTech offerings. What do we mean by next-generation technology? Essentially, it is technology that is component-based, services are isolated, and able to run independently giving community and regional financial institutions the ability to customize and build platforms that work best for them and their account holders. It's technology that is cloud-native, which means it's built on the cloud and not just hosted on the cloud. This is a really important distinction from other public cloud offerings because it enables greater flexibility, faster upgrades, and efficient scale. It's technology that is open to allow our clients to have the best of both worlds. They have access to our best-of-breed capabilities, and they can embed Fintechs of their choice into the Jack Henry ecosystem. It's technology that is not tightly coupled to any legacy products, databases, or other technologies. And it is technology that is digitally centric, which puts the financial institution at the center of their customers' financial lives. Over time, we will be applying the same next-generation technology approach to virtually all of our services across the Jack Henry platform. There are four parts of our technology modernization strategy; these parts are related but they are not linear. First, we are redefining the core processing system. Second, we're providing multiple integration options supported by our open philosophy and technology. Third, we're delivering industry-leading capabilities across a single next-generation platform. And fourth, we will operate as more than a core processor by providing a full banking ecosystem. Let's talk about each of these four areas of focus. The first is to redefine the core processing system and what the core processing system is. Essentially, we are unbundling services that traditionally would be in a core processing system and making them discrete services that can be customized and re-bundled. Examples of services that we would unbundle in place of the public cloud are new account opening via our processing, deposit processing, and account servicing. Since these services will be housed in a safe, secure cloud environment, we can easily make updates so that they can stay current independent of the other services used by our client. This benefits our clients in that they will have greater flexibility, options to choose which services make the most sense for them, and speed to market. We already have several clients running in a beta testing environment with the first of these unbundled services. I want to be clear that re-bundling core services in the public cloud is a longer-term strategy. We plan for this to happen in stages over the next few years, and we expect no immediate impact on our existing core processing systems. Over time, Jack Henry clients will be able to choose if they want to use cloud-native services, and they will not be faced with what we have today as a full core conversion. Meanwhile, we will continue to invest in and service our existing cores at the same rate as in the past. The second part of our strategy is to provide multiple integration options supported by our open philosophy and technology. You've heard me say before that Jack Henry has always operated with an open philosophy, and we are continuing to expand on this. A key part of this is integrations and the flow of data between them. We have several data integration options, some of which we've offered for a long time. The newest one is real-time data streaming, which is constant data streaming to all systems on the platform at the same time. Those systems are updated in real-time; there is no waiting for information to flow through overnight or for someone to respond to a request. This is essential to support the real-time nature of services like payments and fraud detection. The third part is delivering industry-leading capabilities across a single next-generation platform. We've made significant innovations to our capabilities in many key areas of focus for our clients. You've heard me talk about our success with several of these in the past, including digital banking, our pay center payments hub, our lending suite, and our new financial crime solution. This third part of our strategy brings all of our best breed capabilities into a single technology platform that has the same look and feel and the same underlying technology infrastructure. This is a big deal. None of the single-point solution technology providers can capitalize on the use of this next-generation technology like we can. The fourth part of our strategy is operating as more than a core processor by providing a full banking ecosystem. This is what pulls it all together. We just talked about creating a single technology platform that contains our best-of-breed solutions. This ecosystem goes beyond that by also providing access to leading Fintechs and third parties such as Dell, Finicity, Autobooks, and Alloys, all through a single platform. We have a significant head start on building this ecosystem because we have over 850 integrations completed and are adding more each day. Additionally, we are the only platform provider to have relationships with all four major financial data aggregators, Finicity, and others. These companies enable financial institutions to provide their account holders a complete financial picture in a safe and secure way that eliminates screen scraping. Additionally, we currently have relationships with all of the major public cloud providers and are running workloads with all of them today. We will be offering a broad range of selection and/or optionality with each provider, as well as private cloud options, bringing the best technology to bear for our clients. I know this is a lot of new information, so let's use an analogy to tie all of this together. Think of any traditional core solution as a sport utility vehicle, an SUV. Regardless of who you're buying your SUV from, it's still an SUV; it's not a pickup, it's not a luxury car. You can hook a trailer to the back, you can put a luggage carrier on top, you can tint the windows and repaint the exterior, and you have a very nice, very functional SUV, but it's an SUV. All of the core providers in the industry have been in the business for years of selling really nice SUVs. At Jack Henry, for clients to choose to adopt our next-generation technology strategy, this new approach will enable them to choose how they want to customize their vehicle. We'll sell them the frame with a pre-established wheelbase, but the buyer can choose whether they want a V8, V6, or a plug-in hybrid engine. For us, that might mean AWS, Azure, or private cloud. Additionally, they can decide if they want an SUV, a pickup, or a luxury sedan built on that same frame. They can buy the components if they're built correctly from Jack Henry or from another supplier because the components, if they're built correctly, will fit in our vehicle without any modification. In this scenario, Fintech solutions are aftermarket add-ons; they can be built right into our ecosystem, leveraging reusable components to give the Jack Henry client a tightly integrated, purpose-built, and efficient solution, even as some of the components aren’t purchased from Jack Henry. This, of course, is an extension of the open philosophy Jack Henry has supported for most of our history. Although we will offer the flexibility for our clients to configure their offering in any number of ways, we believe that because we offer that flexibility and many best-of-breed solutions, most clients who are charting their strategies for the future will want to buy most of the components in a bundle from Jack Henry. If the client wishes to purchase a bundle, just like what we refer to as a core solution today, we will certainly offer them that option. This strategy puts the community and regional financial institution at the center of their customers' financial lives. And it helps address the financial fragmentation I talked about earlier. In the end, our clients will benefit from all of this because they will be able to build, customize, and evolve digital experiences and products. They can offer access to leading-edge services and capabilities, whether through Jack Henry or a third party through a single platform to create unique value that their competitors simply can't deliver. And they'll offer personal service in moments of need and moments of relevance, so they can sustain their competitive advantage of service and trust. I know your first questions will be how much will this cost and what additional revenue will it generate, so let me address those. On the cost question, we continue to invest about 14% of our revenue in research and development and technology. That will not change. In fact, I mentioned that we've been investing in this strategy for more than two and a half years. And we've continued to invest in existing systems while maintaining our 14% spend. We've been able to do that because that 14% commitment is based on a rising revenue number. This is important for our existing loyal base of clients because it means we can continue to support all of our current core and complementary solutions at the same rate as before, even as we invest in this new strategy. As to additional revenue, it's really too early to say. As I said, this is a long-term strategy for us, and it will not happen overnight. That said, there are certain things that we are doing now, such as building out our own capabilities and rolling out new services based on this strategy. And I can tell you that we have already won some new deals because of this strategy and we expect that to continue. Why? Because most financial institution CEOs know they need modern technology and they want it procured from a company like ours, that has a 45-year track record of delivering and supporting a broad set of capabilities and solutions in a manner that is responsive to their evolving need for banking as a service options to their customers. Community and regional financial institutions are the lifeblood of main street America. As we've discussed, however, many of them are at crossroads. Personal service and experience they are known for is being disrupted by technology as non-traditional financial service providers have entered the market. The way people bank has fundamentally changed, especially for the younger generation. This has created fragmentation as consumers and businesses try to manage their finances across multiple providers. As a well-rounded financial technology company, Jack Henry is in a unique position to provide modern technology and services to help community and regional financial institutions capitalize on this opportunity and strengthen connections with their account holders. I believe that 2022 is the most significant year for our company since the early 2000s, when we executed our ProfitStar strategy, and that strategy turned into a game changer for us. I sincerely believe that the strategy is right and the long-term opportunity will be significant for our company and our clients. You should expect to hear a lot more about our work around this strategy as we move forward. With that, I'll turn it back to Kevin to introduce Q&A.

Thanks, Dave, what a great update on our strategies, and we are so excited about this. And as Dave mentioned, after all that information, you probably have more questions than we have answers. But again, as Dave said, this is not a short-term thing. This is a long-term strategy for Jack Henry. So with that, this now concludes our opening comments. We're now ready to take questions regarding the quarter or our strategy of day-to-day provided. Olivia, will you please open the call lines up for questions?

Our first question is from Rayna Kumar with UBS. You may ask your question now.

Good morning Dave and Kevin. Thanks for all the details on your technology modernization program. Just a few questions on that, is there any change in your competitive environment that has prompted you to alter your strategy? And second, if you can talk about your pricing strategy tied to the technology modernization, that would be very helpful?

Sure, thank you, Rayna. I wouldn't say that this was driven by something we saw as far as competitors are concerned; again, we've been working on this for years. We first started developing this strategy four years ago. We started; coders started programming about two and a half years ago, as I mentioned earlier. So this wasn't as much driven by anything that we saw our competitors doing specifically; it was driven by the things that I outlined there, the disruption that's happening among financial services and the concern that we had for our customers being positioned to compete effectively in the future. And so the question for us is, how do we ensure that those customers are enabled with great technology so that they can compete going forward? As to your second question, I started my comments by saying, I know there will be questions that you will ask that I won't be positioned to answer today. This is a long-term strategy. But you know us well enough to know that we deliver solutions today in a cloud environment; we know how to price those solutions effectively in a cloud environment. This is us moving on to the public cloud as opposed to private cloud with this strategy. But we will price our solutions in a similar manner to what we've done in the past. It's just that the solutions will be unbundled as compared to selling a Big Bang core solution; it will be an unbundled offering to our customers, but the long-term strategy as far as pricing will be similar to what you've seen us do in the past.

That's very helpful. And a question on the quarter, so your adjusted payments segment revenue that was up 13% in the quarter, very strong. Can you break down some of the drivers of that growth and how we should be thinking about the payments revenue growth in the back half of this year or the back half of your fiscal year 2022?

Well, I'll take the first and then I'll let Kevin chime in here. So the drivers really things that we've highlighted in the past: the payments segment is made up of three different components; it is our bill pay business, our card business, and our business we refer to as enterprise payment solutions, which is what has captured an ACH origination. As we piloted many times, the bill pay business, although it's a very successful business, it's not a ton of growth in bill pay; it's a slow grower. But really, the cards business and the enterprise payments business, both of them have continued to post real nice growth in those two areas of the payments business. So it's those two that are driving the continued growth; we're adding new customers in both areas, and so it's new customer additions, plus organic growth, same-store sales growth from the customers that we already have. And as far as the look forward, I'll ask Kevin to comment on that.

Yeah, so I agree. I mean, our enterprise payment solutions continue to be the fastest-growing of the three and continues to become a larger percentage, which both, actually all three of those components have a very nice margin to them. And we think we'll continue to see nice margin expansion in our payments as we continue to add new debit and credit and EPS customers. So I think those are going to change these drivers, right? And I think that growth is sustainable for the foreseeable future.

Thank you.

Hi, thanks for taking my question. Dave, first one for you on the new technology initiative, a lot of good info. And I know you've sort of characterized it as a long-term strategy, but what time frame are we looking at for you to realize this and the vision of having a customizable core, and what will be the strategy around converting existing clients to this new core? And then just to follow-up on that, I know it's too early to comment on revenue contribution, but help us think about how much of this initiative is to drive incremental revenue opportunity versus upgrading existing customers to preserve share in the market?

There's a lot included in this update. As I mentioned, we currently have customers in beta testing some traditional core components. These customers will be live later this calendar year with various components. When considering a core system, it's important to note that it includes many different functions, all of which are being unbundled and rewritten for the new platform. This process will take years, but in the near term, customers will start implementing what the industry calls a side core, which is a digital-only core that can operate with a different brand. We plan to launch this with customers in the near future, while additional functionality will follow over time. The positive aspect is that we already have a robust platform in place, complete with the necessary connections. We've established ties with 850 Fintechs already, which might raise questions about how we accomplished this so quickly. The answer lies in our prior integrations with various technologies that linked Fintechs to our legacy systems. We successfully ported these connections over by updating the Jack Henry gateway to operate on the new platform, all without disrupting existing partnerships. This means that our Fintech partners can seamlessly access the new platform without additional effort on their end, enhancing their ability to connect with our systems. As we transition customers, regardless of whether they are currently using a Jack Henry core, they will be able to access and utilize these new services. This allows for a smoother conversion process that doesn’t require a massive overhaul all at once. In the future, we won't need to discuss core conversions as customers will begin adopting services and transitioning to the new platform at their own pace. If they prefer a more immediate switch, that's an option too. The timing of revenue generation will depend on the model each customer selects when working with Jack Henry. To address the final part of your question regarding whether this strategy aims solely to retain existing customers, the answer is definitely not. We have shared our future plans with some clients already, and the feedback has been overwhelmingly positive. We believe existing customers appreciate that we are safeguarding their future and protecting their investment in Jack Henry solutions. Additionally, we have seen a number of new core deals signed recently, with 15 agreements made just last quarter. Some of these clients are choosing to partner with us because they see how our strategy positions them for the future and helps them connect easily with various Fintechs. Overall, the response has been very encouraging from those who understand our direction, and we are excited about the opportunities ahead.

Thank you, that's a lot of great color. And just two quick ones for Kevin. First, on just the margin guide of flight expansion year-on-year. Just wondering if we've seen sort of solid trends in the first half of this year, and the guide would then imply that there's some margin contraction that might happen in the back half. And just curious if there are any incremental items that will weigh on margins in the back half versus what you had previously expected? And the follow-up I have is on just free cash flow. I know there's typically some seasonality in the second quarter, but even on a trailing 12-month basis, it seems like it's lagging what it historically has been. So maybe if you could talk about what's driving that trend and what you expect for free cash flow conversion going forward?

Yes. Regarding margins, we might be a bit cautious for the second half of the year. It's important to remember that in the first quarter, under the new revenue recognition rules and ASC 606, our margins were exceptionally strong. However, it becomes challenging to sustain that level since we recognized a significant amount of revenue without incurring related expenses in the first quarter. I anticipate our margin expansion for the year will be around 50 basis points. Additionally, as mentioned earlier, our travel and personnel costs are continuing to rise, which presents challenges in retaining talent. Although we're taking a conservative approach, I'm optimistic that we can maintain a margin expansion of over 50 basis points this year and see how things progress. Regarding free cash flow, our strong orders and free cash flow are influenced significantly by our annual maintenance billing that occurs on June 1st, which is projected to be between $240 million and $245 million this year. We collect this amount primarily in the first and second quarters, which significantly boosts our free cash flow. We are a bit behind last year's pace, and while I doubt we will fully catch up to last year's conversion rate of net income to free cash flow, I believe we will make considerable progress by the fourth quarter.

Great, thank you very much.

And our next question comes from the line of Kartik Mehta with Northcoast Research. Your line is open.

Hey, good morning. Dave, just on your core new strategy, do you think that will mean that you'll have more partnerships, so maybe more partnerships at a customer?

Yes, I hesitate to use the word partnership because I think there's a lot implied in that, that people assume there's rev share and our sales reps are reselling somebody else's technology. So I usually shy away from the word partnership. Will there be more third parties involved in our customers? Maybe, maybe not. The thing that Jack Henry has already known for is for being the most open provider out there on the core side as far as our willingness and ability to easily connect into our systems. And so it will depend on the financial institution deciding what is their strategy for them, what's the right strategy, and what do they need to connect into our infrastructure to enable that strategy. So I don't know that I would say that just on its surface, because, again, many of our customers already take advantage of the open solutions that we've been providing for years.

Okay, I guess I was trying to get to, do you think that if there are more third parties involved, that changes the revenue dynamics for Jack Henry?

I don't think there's any negative in that for Jack Henry. I think there is a tremendous amount of positive in that because of all the technology solutions that will be living in the same environment, living on the same platform that will be offered by Jack Henry; certainly no negative in that as far as I'm concerned.

Yes, Kartik, as Dave said, we're tied into 850 Fintechs, so I mean that's a very large number already in there. So will that number go up? Maybe, but on a per-customer basis, right, it will depend on the customers' needs.

And then just on the contracts that you have, obviously, inflation having a big impact. Are you able to get increases, annual increases because of the contracts you have or is there any limitations to what you can do with your customers?

Yes, there are CPI accelerators included in almost every contract. While it's not true for every single contract, most of them have these CPI accelerators incorporated. We are conducting the same assessment that I mentioned in the previous call, evaluating on a product level and across the company to identify the right opportunities to engage with or take advantage of those CPI options.

And then just one last question. Dave, I think you talked about adding a conversion team to your banking platform and then eventually one to your credit union platform. And I'm wondering is that because of what's happening with COVID and there's an increased demand for banks wanting to outsource or is there another reason that that's making you add these conversion teams?

The main factor we refer to as convert/merge revenue is driven by financial institutions acquiring other financial institutions and then approaching us for assistance in integrating them onto the Jack Henry platform. Our conversion teams are involved in this process, and we’re consistently adding 12 to 15 new customers each quarter, which I report on regularly. Most of the conversion activity is initiated by Jack Henry customers who are bringing on new clients and require help transitioning to our systems. We've already established a banking team, and the credit union team will be operational this quarter. We're also considering the addition of two more teams due to the high demand from Jack Henry customers looking to integrate new customers onto our platforms.

And just a reminder, Kartik, to convert a new customer or a new logo, it takes an enormous amount of time than a convert/merge, as Dave said, to convert a bank that is being acquired onto an existing core customer because they've already got basically the system in place that they need.

Got it. Thank you both very much; appreciate it.

Our next question comes from Ian Swanstrom. Your line is open.

We're not hearing anything, Olivia.

Please check your mute button. Would you like me to go to the next person?

Yes.

Our next person in queue coming from the line of Dominick Gabriele with Oppenheimer. Your line is open.

Thank you for the detailed information on the new strategy. I want to clarify whether you are developing a banking product marketplace where an executive could easily access the Jack Henry software and quickly onboard any chosen product. Is this rapid onboarding feature a key part of the appeal for them, allowing access to almost any Jack Henry or third-party product?

Yes, I understand your point, Dominick. However, that's not the focus of our announcement. We're revealing that this is a much larger platform than what you've mentioned. Essentially, it encompasses all banking functions that people consider to be part of the core system and related complementary systems, all of which will be available in the long term. To clarify, this is not a product launch; it won't be available immediately. This is about our strategy, and it means that all services related to a core system and its complementary solutions will exist on a single platform in the public cloud through Jack Henry. This applies whether the technology solutions are provided directly by Jack Henry or through a fintech solution chosen by the bank or credit union. Now, while a marketplace option will indeed be available in the future, that's not the primary focus of our discussion at this point. Our emphasis is on constructing this platform and enabling the capability to support such a marketplace in due course.

Great. And when considering the functionality for the end user and how it might surpass the strong capabilities you offer today, what are the key benefits they will experience once everything is implemented on their end? Will it be speed, a variety of product options, ease of use for their users, cost savings, or a competitive advantage? Any insights on what they will visibly gain once they start using these solutions? Thanks.

Yes. I will address this with two different audiences in mind: our customer, which is the bank or credit union, and their customer, the consumer or small business. First, let’s discuss our customer. A key advantage of our strategy involves security. We currently have relationships with the four primary financial data exchanges, which benefits banks and credit unions by eliminating the need for screen scraping, an insecure and unreliable method that has existed for many years. I've been in this industry for 36 years, and screen scraping was prevalent when I started. Most players in the industry still use it, but we are committed to removing screen scraping for all our customers. This focus on secure data exchange between financial institutions and fintechs is crucial; our customers benefit from enhanced security, speed, and scalability—key features that come with running solutions on the public cloud. Moreover, a significant advantage for Jack Henry clients, especially banks and credit unions, is their ability to customize their offerings for their customers. They can define specific market segments to target and employ Jack Henry or third-party technology on the same platform, providing a unified experience for end users. This creates a substantial opportunity for our customers to leverage the disruption in the industry and convert it into market opportunities. Now, regarding the end consumer or small business, the experience can be visualized as follows: instead of just viewing their bank's website, imagine using the bank's mobile app not only to see all their banking information but also their crypto balance—all within the same application. This means no need to switch from one app to another on your phone; instead, you would have access to your crypto balance, banking details, and retirement accounts all in one place, presented seamlessly. That’s our goal: to create a platform that facilitates interconnectivity and secure exchanges of financial data between various applications. It would be incredible for users to open their digital banking app and view the full spectrum of their financial information from different providers in one cohesive presentation. That's the direction we're headed in.

That’s so exciting, and great quarter.

Our next question comes from the line of Ken Suchoski with Autonomous Research. Your line is open.

Hi good morning David and Kevin. Thanks for taking the question. I appreciate the update on the long-term strategy. I just wanted to ask about your cloud-native digital-first offering. And I was wondering if you can give us a sense for how your offering compares to peers because we see FIS talk about its modern banking platform. We saw Fiserv announce this week the acquisition of Finxact. So are there areas where you think your offering is superior versus those providers and are there areas where maybe you need to catch up to bring your offering up to par with theirs? It would just be great to get your thoughts on kind of where you're differentiated?

Yes. Ken, I won’t detail what our competitors are providing during this earnings call. However, I can assure you that we are very familiar with those solutions and have been evaluating them for years. Our focus is solely on delivering technology solutions to banks and credit unions. I am confident that the technology solution Jack Henry is providing is completely distinct. Notably, it isn't a core solution; the examples you mentioned are core solutions. We are unbundling the core and redefining our understanding of what core means. Importantly, there is no reliance on a legacy database for what we are discussing. You do not need a legacy database to support the core solution we are offering. This approach is fundamentally different from those you mentioned. We have a strong belief in the solutions we've developed and our capacity to disrupt the market. However, this isn’t an immediate rollout; it’s part of a strategic discussion about the long-term direction of our company and how we intend to differentiate ourselves in the market.

But as Dave said earlier, the platform is in place; or in this example, the chassis to the vehicle is in place. And so now, as Dave mentioned, we've already got some solutions out in beta. That's not the core, but it's pieces and parts of the core that are already on the platform beta that will be rolled out later this summer in general availability.

That's really insightful. I appreciate the car analogy, as it simplifies things for us. My next question is about your approach to unbundling these solutions, which allows clients to integrate fintechs of their choice. It seems that this means they're not tied to any legacy products, and you are separating those functionalities. How confident are you that this won't lead to a revenue decline in the future, given that these customers may not be as locked into your offerings as they have been in the past? Or do you believe you are quite flexible at this point?

I feel like we're being quite transparent today. The question arises about why Jack Henry continues to embrace open connectivity and facilitate these connections without imposing a hefty fee for integration into our solutions. The answer lies in our philosophy, which is focused on helping our customers succeed. We are genuinely committed to their success, and as such, we aim to make the process straightforward and affordable. Our customers appreciate this, and it's a key reason why they choose to work with us, knowing we will provide that connectivity. This approach is not new; it's always been part of Jack Henry's ethos. While it may seem counterintuitive to some to reduce barriers for collaboration within the industry, we believe that making it easy to connect encourages businesses to partner with us and explore more of our solutions. Ultimately, our mission is to ensure our customers thrive, and this commitment is a natural extension of our core philosophy.

That's really helpful, David. And then maybe if I could just sneak one last one here. I think you mentioned that you've been working on this strategy for the last couple of years and that this is a long-term strategy. Does this increase the CAPEX requirements or the operating expense requirements at all going forward to really build this out, or do you still feel comfortable with the 50 to 75 basis points of margin expansion in 2023 and beyond?

Yes. We have consistently communicated our commitment to investing 14% of revenue back into R&D, and we will continue to adhere to that figure. All the guidance Kevin has shared is reflected in the numbers we've released. The important takeaway is that with a rising revenue stream, that 14% investment generates an additional $20 million annually for R&D initiatives. This allows us to maintain our current operations without slowing down the excellent work our teams are doing in supporting our existing core and complementary solutions. As we uphold the 14% investment on increasing revenue, we create extra funds for vital R&D efforts without needing to alter our CAPEX or impact earnings negatively. We can keep executing our successful strategy. It's worth noting that we've been developing this strategy for several years, with developers coding for the past two to two and a half years, indicating that our planning stage extends back further than just the last couple of years.

And in that 14%, the team that is focused on this new strategy has been growing and in place. We have not taken developers from any of our other products, and we won't because we have to keep those other products continue to increase their feature functionality. So it's not going to take away from any of our existing development. It's just this long-term strategy that's been put in place over the last few years.

Okay, got it. Makes a lot of sense. Thank you very much; I look forward to following the progress.

I am showing no further questions. I will now turn the call back over to Mr. Kevin Williams.

Thank you. We are obviously very pleased with the results from our ongoing operations and extremely excited for the future with the new strategy that they've rolled out. I want to thank all of our associates for the way they have handled the challenges that we are currently endeavoring by taking care of themselves and our customers and continuing to work hard to improve our company to continue moving forward for the future. All of us at Jack Henry continue to focus on what is best for our customers and shareholders. I want to thank you again for joining us today. And Olivia, will you please provide the replay number?

Ladies and gentlemen, today's replay number is 1-800-585-8367, again, it is 1-800-585-8367, entering access code 9874774. Again, the replay access code is 9874774. That does conclude our conference for today. Thank you for your participation. You may now disconnect.