Jack Henry & Associates Inc Q4 FY2022 Earnings Call

Good morning everyone and welcome to the Jack Henry & Associates Fourth Quarter and Fiscal Year End 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Mr. Kevin Williams, Chief Financial Officer and Treasurer. Sir, please go ahead.

Good morning. Thank you for joining us today for the Jack Henry & Associates fourth quarter and fiscal year-end 2022 earnings call. I'm Kevin Williams, CFO and Treasurer and on the call with me today is David Foss, Board Chair and CEO. In a minute, I'll 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 and year, comments regarding the industry in general, and some 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 close and provide comments regarding our guidance for fiscal year 2023, which was also provided in the press release. We will then open the lines up for 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 also 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, and good morning everyone. Today we are very pleased to share details with you for a quarter that produced record revenue and operating income as well as record sales bookings. 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 fourth quarter and for the entire fiscal year. For the fourth quarter of fiscal 2022, total revenue increased 7% for the quarter and increased 8% on a non-GAAP basis. Deconversion fees were down about 37% as compared to the prior year quarter. As a reminder, although a reduction in deconversion fees impacts the quarter negatively, it is a long-term positive for our business. Turning to the segments, we had a solid quarter in the core segment of our business. Revenue increased by 8% for the quarter and increased by 9% on a non-GAAP basis. Our Payments segment performed well, posting a 5% increase in revenue this quarter, and a 5% increase on a non-GAAP basis. We also had a very robust quarter in our complementary solutions businesses with a 9% increase in revenue this quarter, and a 10% increase on a non-GAAP basis. As I highlighted in our press release, the fourth quarter was the strongest sales quarter in the history of the company. Those of you who follow us closely will know that in the fourth quarter of 2021, we set an all-time sales record. We broke that record in the second quarter of fiscal '22, and now we've broken that new record in the fourth quarter. Additionally, in the third quarter of this year, we exceeded our highest-ever Q3 sales attainment by around 40%. All-in-all, this has been a remarkable year for the sales teams. To provide a little detail regarding sales successes in the quarter, we booked 17 competitive core takeaways, with five of those being multi-billion dollar institutions. Additionally, we signed 18 deals to move existing on-premise customers to our private cloud environment. Several of our complementary offerings also saw very strong demand in the quarter with, as you might guess, our digital suite leading the pack. We signed 48 new clients to our Banno digital platform in the quarter and 21 new clients to our card processing solution. For the full year, we signed 52 competitive core takeaways, with 10 of them greater than $1 billion in assets. Additionally, we signed 54 contracts to move on-premise core clients to our private cloud, 165 new Banno digital customers, and 58 new clients for our card processing solution. Of course, we signed a variety of other contracts for many of our other solutions as well, but it's important to note that almost all of these contracts represent long-term recurring revenue commitments to Jack Henry for a wide variety of our solutions. Our annual client conference is scheduled for the end of this month, and I'm very happy to say we already have 56 core prospects signed up to attend and hopefully finalize their decision to move to Jack Henry. In case you missed that, I'm going to repeat that. At our annual client conference at the end of this month, we have 56 core prospects signed up to attend and work with our sales organization. At our analyst conference in May, I shared with the attendees that we had just surpassed 7.2 million registered users on our Banno Digital Banking platform. As of the end of the fiscal year, we were at roughly 7.7 million registered users. As a point of reference, on July 1, 2020, we had about 3.2 million registered users, so in two years we've seen an increase of almost 150% in our user count. This is significant because, as I've stressed in the past, most of the revenue for a business like this is tied to the number of users on the platform.

Thanks, Dave. Our service and support revenue increased 7% in the fourth quarter of fiscal 2022, compared to the same quarter a year ago. With deconversion revenue being down $3 million in the quarter compared to last year's quarter, it was slightly higher than what we thought it would be, but still down 37% from a year ago. License, hardware, and implementation revenue combined were actually up $5 million or 12% compared to the prior quarter. Our data processing, hosting fees, and 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 service revenue grew 8% for the quarter compared to the prior year. Our processing revenue increased 8% in the fourth quarter of fiscal 2022 compared to the same quarter last year on both a GAAP and non-GAAP basis. The increase was primarily driven by slightly higher card volumes, and digital revenue continues to show strong growth as demand for the Banno Digital platform continues to be very strong. Total revenue is up 7% for the quarter on a GAAP basis and increased 8% on a non-GAAP basis. Our cost of revenue was up 4% compared to last year's third quarter, primarily due to higher costs associated with customer maintenance and license costs, card processing and higher personnel costs compared to a year ago. Our research and development expense increased 18% for the fourth quarter of fiscal 2022 compared to the same prior year quarter. The increase was primarily due to personnel and consulting costs. SG&A expense increased 16% in the fourth quarter, and this increase was primarily again due to increased personnel costs, which includes commissions and travel-related costs compared to last year. Our reported consolidated operating margins were essentially flat at 21.5% on a non-GAAP basis. Our operating margins expanded from 20.1% last year to 20.9% this year for a nice margin expansion on a non-GAAP basis. The effective tax rate for the fourth quarter of fiscal 2022 increased to 21.8% compared to 19.7% in the same quarter a year ago, primarily due to timing effects of deductions. Our net income grew 5% to $80.4 million for the fourth fiscal quarter compared to $76.9 million last year, with earnings per share of $1.10 for the current quarter compared to $1.04 last year. Our cash flow and total amortization increased 2.9% for the year-to-date compared to last year, primarily due to capitalized software projects being placed into service in the prior year. Included in the total amortization is the amortization of intangibles related to acquisitions, which decreased to $16.3 million this year compared to $17.7 million last year. Depreciation actually decreased 3.2% compared to the prior fiscal year. Our operating cash flow was $504.6 million for the fiscal year, which was up from $462 million last year, primarily due to increased net income of $51.4 million compared to the previous year. We invested $191.4 million back into our company through CapEx, purchase, and capitalized software. Our free cash flow, which is operating cash flow less CapEx and capitalized software and adding back net proceeds from the disposal of assets, was actually $313.3 million. This represents 86% conversion of net income. There were two primary working capital items that were responsible for this. Our receivables were up $35 million compared to a year ago. However, a little over a third of this increase is due to increased average monthly billings for recurring revenue, which our average monthly billings continues to grow. The other item, the working capital item was prepaid expense in other, which increased $26 million, of which $20 million of this increase is due to prepaid commissions related to the strong contracting that we had in the previous year. In the other, the balance was primarily due to prepaid cost of products. Without the impact of these two working capital items, our free cash flow conversion from net income would have been greater than 100%. During the year, we spent $193.9 million to purchase 1.25 million shares for the treasury. We paid dividends of $139.1 million for a total return to shareholders of $333 million in fiscal FY '22. A couple of comments on our balance sheet as of June 30, our cash position was $48.8 million compared to $51 million a year ago, pretty much in line. Our revolver balance was up a little to $115 million compared to $100 million a year ago. Our return on average assets for the trailing 12 months is 15.1%. Our return on average equity for the trailing 12 months is 26.9%, and return on invested capital for the trailing 12 months is 24.9%, which we are very proud of those key metrics. For FY '23 guidance we've provided both GAAP and non-GAAP revenue guidance in the press release yesterday for fiscal 2023. 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 is based on today's environment and if things were to change significantly, then this guidance will also be revised. Also, just to be clear, this guidance does not include the impact of the recently announced acquisition of Payrailz that is scheduled to close later this month. So there is no financial impact in this guidance from that future potential acquisition. For GAAP revenue growth for fiscal '23, based on the announcement in the release yesterday, our revenue guidance reflects revenue growth of approximately 7.2% over fiscal '22, which anticipates deconversion revenue will decrease by approximately $18 million from $53 million down to $35 million compared to FY '22. And this is based on what we're seeing on the current activity on the M&A front. For non-GAAP revenue growth, our initial guide for FY '23 is approximately 8.4% and 8.5%, which is down slightly from the non-GAAP revenue growth we saw in FY '22 of 8.8%, but obviously for many parts of our business, implementation, convert, merge, and even payments, we had a little easier comp in FY '22 compared to FY '21 than we will have in FY '23. We are very happy to report that we are guiding to close to 8.5% non-GAAP revenue growth. Initial guide for GAAP operating margin for FY '23, it will decrease from 24.4% to approximately 23.7% in '23 and this is primarily due to the anticipated decrease in deconversion revenue, because obviously deconversion revenue has extremely high margins. Our initial guide for non-GAAP operating margin is projected to be essentially flat at approximately 22.7% for FY '23. Some reasons for this projected flat operating margins, because there's been some things that changed since the first week of May when we talked about guidance. Just for our employees, our last month travel airline tickets on average have increased 58% from February. Hotel rooms on average last month increased 32% since February. And then obviously, as we all have noted, there's been an increase in both costs of meals and rental cars. Therefore, even though this guidance is less than the 50% expansion we've talked about in the first week of May, the environment has changed and it continues to change significantly. Obviously, we try to be conservative in our guidance. As you all know, I have always lived under the philosophy and the promise to over deliver, and hopefully that's what this guidance is going to provide. Our effective tax rate for FY '23 is projected to increase to approximately 23.8%. Some states have gotten a little more aggressive and the benefits from the Tax Cuts and Jobs Acts, other than the decreased federal tax rate, have now been fully utilized over the last four years. Our FY '23 GAAP EPS guidance is a range of $5.05 to $5.09. This now concludes our open comments. We are now going to take questions. Jamie, will you please open the call lines up for questions?

Our first question today comes from Vasundhara Govil from KBW. Please go ahead with your question.

Hi, thanks for taking my question. I guess first congratulations on another really strong sales quarter. And David, I was sort of interested in learning if, to what extent your tech modernization strategy is sort of contributing to the discussions as you go in to meet with new clients now?

Yes, good morning, Vasu. So it's a good point. It certainly is a topic, but as I've stressed on prior calls, we're not talking with customers about delivering the tech modernization technology in the next year or so. But I think this has given a lot of prospects the comfort in knowing that Jack Henry is leading the way as far as a true public cloud-native technology strategy for the future. And so that has definitely created opportunities for us to be engaged with customers, whether or not that's directly contributing to closed deals, I don't know whether I can say that with any comfort, but I just absolutely opened the doors with a lot of prospective customers because they see the future with Jack Henry.

Got it. Thanks for the color. And then Kevin for you, I mean, thanks for all the color on the sort of change in the margin guide. You sort of said at the end that you were still sort of looking to be conservative, so what are the areas where you think your guide might be conservative in terms of margins? And then for revenue growth, any change in trend by a segment that we should expect relative to what we saw last year?

Yes, so I think if there's concern anywhere, it's probably in our payments area and then obviously in our private cloud. As Dave mentioned, we signed a whole bunch of customers in Q4 to move over from our on-prem to our private cloud. And if we continue to move those over, obviously that is a nice margin lift when we move those customers over. So those would be the two areas, then obviously the continued growth in Banno digital because that's also nice margins. Those are probably the three areas that if we're conservative, it's probably in one of those three areas. As far as segments, core should continue to be strong because of the continued, not only movement from on-prem to private cloud, but also just the new customers that we signed in Q4, the backlog that we have in install. So I'm pretty sure that our install backlog is out at least 12 months now for all of our core, well, for our flagship core solutions. And as, as complimentary, I mean, that's going to continue to be driven by Banno digital and also the new fraud solution that we're rolling out and treasury and other things. So there's just a huge demand for a lot of our products out there. And then payments will just continue to grow as we close the deal in August that should help move our bill pay solution a little bit. But our EPS and CPS are most still showing strong signs of growth.

Great. Thank you for the color.

You bet.

Good morning. It's actually UBS. Thanks for taking my question. You mentioned 56 prospects are attending your conference later this month. I'm just curious to know how that number compares to previous conferences that you've had and if the prospects are using in-house or outsourced core solutions right now and then finally just a potential timeline of conversion? Thank you.

Thank you, Rayna. I don't have a specific number for our highest attendance, but we are all confident this is a record with 56 attendees. It's important to note that not all prospects come to our client conference, so this indicates we have many more core prospects that we are engaging with who are not attending. These individuals are choosing to invest their time to evaluate a transition to Jack Henry. Typically, I mention that achieving 50 to 55 new core customers in a year is a solid outcome. With 56 signed up for the conference, we view this as a very positive sign. Some of these prospects are at the early stages of their decision-making process, and attending the conference represents a crucial step in their due diligence. The timeline for core conversions usually runs between nine to twelve months after signing, not due to a lack of capacity or staffing, but because a core conversion requires significant preparation and training for banks or credit unions. Therefore, it's difficult to translate the number 56 into projections for the upcoming fiscal year. My key point is to highlight the strong interest in Jack Henry as a technology provider at this time, which serves as a positive indicator of demand.

That's very helpful. And then as a follow-up, David, are you starting to see financial institutions more open to switching to a public cloud infrastructure? And are there any regulatory changes in the FI space that we should be aware of where FIs would be more open to going onto Amazon Web Services or Microsoft Azure?

Yes, that's a great follow-up Rayna. So the answer is no. There's no great demand today. And I've said this on other calls, no demand right now for a full-stack public cloud solution. There's nobody out there clamoring for that today and there are no providers today that are doing everything in the public cloud. Our whole point with this strategy announcement was to make sure that prospective customers and our existing customers know where we're going and when we expect to get there. We believe, and I've done lots of meetings in the last few months with CEOs, both bank and credit union, and there's almost no demand today, but there will be in the future and we believe that the regulatory environment is going to shift along with that. So as the regulators become kind of comfortable with the idea of the full stack being processed on the public cloud, you'll see more and more banks and credit unions starting to talk about they are ready to make that move. So, but it's an evolution and something that the regulators need to evolve forward and then of course, customer demand will evolve in that same direction.

Thank you.

Our next question comes from John Davis from Raymond James. Please go ahead with your question.

Hey, good morning guys. Kevin, just on free cash flow conversion for 2023, is there a chance we're above a 100% given some of the timing items you called out in the fourth quarter or just any kind of color on free cash flow conversion expected this year?

Yes, I would say JD, I mean, obviously the things that we had this year with the huge increase in commissions in the prepaid because of the strong contract that we had, especially in the fourth quarter, but some of that's actually built up from the strong contract we had in Q2 and Q3. So obviously that should level out next year as we continue to move forward. However, I will say that obviously we have to grow every year, so our cores are going up. So it just depends on the timing and what actually gets sold. But so I would say that we'll get, we should be right back at a 100% conversion next year given those working capital things work out, just to change in receivables should be a positive for next year because we collected more of our annual maintenance billings now in FY '23 than we did in FY '22. So all those things being said, we should be back to 100%. Are we going to be above 100%? I mean, it's too early for me to make that prediction JD.

Okay. No, no, fair enough. And then just on payments, obviously 5% deceleration a little bit, but you had a really tough comp on a year-over-year basis. So have you seen kind of any impact from debit and credit mix normalization, is this on a two-year stack basis you're still kind of low double digits? Is that the right way to think about '23 in the payments segment specifically?

Well, I think our revenue growth is going to be in the high single digits for FY '23 compared to FY '22. Obviously, the big drivers of that are EPS and CPS. Our online bill pay is going to grow a little because it's the slowest grower of the three buckets in our payments. But what we're seeing with EPS and CPS and the demand we're seeing, we should still be able to see very high single digit, maybe even low double digit if everything goes, if all the moons align, we could get there JD.

Okay. And then last one from me just on capital allocation, obviously you announced the Payrailz acquisition which closes later this month, or slated to. Can you help us at all size-wise, revenue, earnings impact is immaterial, I know you didn't disclose the price when you announced it. But then you also didn't buy back any stock in the quarter. So should we expect kind of more deals in the pipeline? Any color there on capital allocation would be helpful?

According to the agreement we have in place, we're unable to share any financial impacts until after we complete the closing at the end of this month. Therefore, we won't be able to provide guidance on the magnitude of the acquisition until then. The main reason we didn't repurchase any stock this quarter is due to our stock performing exceptionally well. From July 1st to now, our stock rose significantly, and we were restricted from buying back shares, just as Dave and I cannot buy shares until we announce earnings after the quarter ends. During this period, our stock increased by 10% above $200. It wouldn't be wise for us to jump in and buy shares while we are already drawing on our revolver, considering we have an acquisition in progress and want to maintain some liquidity for other potential opportunities. Regarding your question about other deals in the pipeline, we typically wouldn’t discuss specifics on an earnings call, but I want to emphasize that we always have potential deals lined up. We have a history as regular acquirers, and the last few years have been an exception for us. Now that valuations are becoming more normalized, we’re actively looking at deals and will keep pursuing opportunities that align with our strategy. We are disciplined in our acquisitions and do not pursue every opportunity that seems appealing, but we are constantly searching for the right fit.

Okay. I appreciate all the color. Thanks guys.

Yep.

Our next question comes from Peter Heckmann from D.A. Davidson. Please go ahead with your question.

Thanks for taking my questions. So is it possible on Payrailz, I know you can't disclose any specifics, but is it possible to talk about whether you assume it would be dilutive to your current net income guidance or accretive or neutral?

For FY '23 Peter, it will probably be slightly dilutive. We haven't totally finalized that yet, because obviously we haven't closed yet, but it will be slightly diluted to FY '23, but it should be accretive in FY '24 and grow nicely from that point on.

Okay, that's helpful. And then when you think about your guidance, any material level of buyback incorporated in your '23 guidance?

There is no buyback incorporated into my guidance fee.

Got it and I assume not…

Two things just to be clear on. So I mean, anytime I've given guidance, past has never assumed buybacks and it's never assumed an acquisition.

Correct, correct. And then as you're thinking about M&A, what would be the ceiling for net leverage that the management would be comfortable with, would you go to three times on pro forma EBITDA for the right deal?

Yes, for the right deal Pete, I mean, I think we would go three times and we've actually, I would say, I mean over the years, and obviously as Dave said, I mean, we've been kind of out of the market the last three years because valuations have been so ridiculous, but I will tell you in the past, I mean, I've had approved financing for deals that would have been three times leveraged. So the boards would be very comfortable that if it's the right deal for the company to move us forward. I mean, as Dave said, we're not going to out and chase the shiny objects, but if it's something that will help us with our laser focus on the FI industry and it was something that our customers need and will drive the company further, then absolutely we'd go three times.

Okay, that's helpful. Well, Kevin, have a great time in your retirement and I appreciate all your help over the years.

You bet Pete.

Our next question comes from Dave Koning from Baird. Please go ahead with your question.

Oh yes. Hey guys. And thanks Kevin for all the detail on the margins kind of for the guidance. Is there anything to think about in this year, in this base that would change kind of the long-term outlook, like basically, can we kind of take the little bit of downdraft in 2023 margin and then just kind of grow it more normally off of that base going forward? Like there's nothing new and incremental that would change kind of the longer-term progression, right?

No, there's nothing there, Pete. I mean, as everybody on this call knows, I mean, we have seen some ridiculous inflation in the last four or five months. I mean if you don't think I'm serious, try going to McDonald's and buy your kid a quarter pounder and fries and see what you pay for that. I mean, just that. So, I mean, once inflation gets under control and we can grow over that, then absolutely FY '24 we should go right back to our typical margin expansion once we can get over these hurdles.

Yes, that makes sense. I bought a biscuit at McDonald's yesterday and had that same experience. So, thank you for that.

This earnings call is going in a totally different direction.

And then I guess the second question I just had, I know you're paid on number of transactions and I just went back and looked at the Visa debit transactions, and they had a really tough comp in the year ago too. But they had a pretty stable growth in the last two quarters. I think they were at like 5% both quarters, but I know you decelerated this quarter and I know there's all sorts of different things you have in them and stuff, but I guess, why else did growth decelerate in the payments business?

I don't know of anything specific to call out Dave.

Well, I will tell you that if you remember last year in '21, we had a huge growth in core. And so we had a tough comp in our payments segment this year compared to last year.

Okay. So it really just is that, yes that makes sense.

Yes.

Hey, good morning guys. I wanted to get a little color around the timing of margins over the course of '23. I know some of, I know there's a lot of variables right now, but some of the factors you mentioned Kevin, like the conference and the license headwind are weighted towards the front end of the year. So that being the case, is it fair to assume that the bulk of the headwind would be in the front half of the year for '23, and then we could potentially see something above a flattish margin in the back end, all things equal?

You're correct, Charles. The user group meeting and education conference in Q1 will significantly impact margins during that quarter. Once we get past that, the comparisons should become a bit easier. The license revenue will be inconsistent throughout the year as it depends on when licenses are delivered, so it's hard to predict which quarters will be affected. However, I can confidently say that year-over-year, license revenue will decline. Additionally, retaining talent poses a challenge, and that is unlikely to improve in the short term, making it a challenge throughout the year. I agree that Q1 will present the most significant headwind, but we will also face other challenges as the year progresses. After we navigate through Q1, margins should improve slightly.

I appreciate that. As a follow-up, I wanted to focus on Banno a bit more. Could you provide insights into how many of the new customer wins are coming from the existing customer base compared to outside it? Additionally, Banno was discussed during the Analyst Day. Can we get an update on your ability to cross-sell and how that has positioned you for new wins?

Yes, thanks Chuck. So first off, 100% of the Banno wins are happening inside the Jack Henry core base and we've talked about this in the past, the fact that the great resignation did have an impact on the Banno business as far as developers. It's been commonly reported in the news that high-tech developers have been moving around a lot and been commanding very high salaries and we like a lot of companies were impacted by that. So we've been very transparent with our customers, sharing the fact that, and our prospects sharing the fact that we've had to move back our release date as far as Banno outside the base. We also had to move back the release date for Banno business into calendar 2023. And so we believe, we're hearing it from customers and prospects that once we get Banno business out there, that's really going to light a new fire under the Banno platform. But, we're having tremendous success as it is. So we're just excited to get Banno business out there, and we're excited to be able to sell outside the base, but in full transparency. That is the line of business that was probably most impacted by the great resignation here over the past year or so.

I would like to mention that nearly all of our new core wins are taking Banno. In fact, Banno is probably the only solution I’ve encountered in this industry that has successfully closed a core deal, as we have won some core deals thanks to Banno. It is the leading solution available. Dave is correct; we are selling entirely within our existing customer base, which includes all those new core clients that we have attracted from our competitors.

Got it. Thank you very much. And Kevin, thank you for all your help over the years and best of luck in the future.

Thank you.

Our next question comes from Dominick Gabriele from Oppenheimer. Please go ahead with your question.

Hey, great. Thanks so much. I just wanted to talk about, why would it be possible let's say medium and small asset size versus large asset size financial institutions might be willing to take on the public cloud solutions that you're developing sooner and is that and then maybe it moves upmarket from there, does that sound correct? Does that make sense that it would start in the smaller FIs first and they might be more willing to do that? And then I just have a follow-up, thanks.

No, I think it's possible but I don't expect that to happen. I believe the larger financial institutions will be the ones to make that move to the public cloud because they stand to gain more from it compared to smaller institutions. Their customer demands are generally higher in terms of flexibility, new functionality, and new releases. Therefore, it's more likely that mid-size regional banks will be the first to adopt the full stack public cloud offering, followed by smaller institutions. We'll have to wait and see, as this has never been done before. My expectation is that banks in the $1 billion to $5 billion or $1 billion to $10 billion range will be the early adopters, with smaller banks and larger regional banks following suit. I want to clarify that while we're moving different components to the public cloud today, such as Banno, which is a public cloud solution, the full stack adoption is what we need to focus on for future progression. We'll have to wait to see how that evolves.

So start from the middle and kind of expand out from there as far as out…?

That's what I think.

Thank you for your insights. I have a multi-part question, so I apologize in advance. You've mentioned various cost pressures arising from normalization. Could you provide us with an idea of the scale of these pressures, ranked from largest to smallest? Additionally, how are your customers adapting to this similar scenario, where they are likely experiencing some of the same factors? How do you foresee this affecting their demand for your products as they contemplate further investments in technology enhancements? Thank you.

Yes, that's a good question. In terms of assessing the impact, there's not one specific factor that stands out. Personnel costs to attract and retain talent are likely the most significant. Following that, we face challenges in the insurance market for errors and omissions and cyber insurance, which has seen our premiums increase dramatically over the past year and is expected to rise again this year. Additionally, our travel expenses are also on the rise, not only because costs are increasing, but due to more employees traveling. For instance, we have around 300 employees attending the education conference next week in San Diego to support our over 2,500 customers who will be present. As a result, travel costs will be significantly higher this year compared to last, and this trend shows no signs of reversing. Regarding your second question, it's important to remember that our customers are primarily in the lending business. With interest rates climbing, they're experiencing growth in net interest margin spreads. Although their costs have increased, as we've previously mentioned, they've implemented CPI increases and are witnessing similar trends in other areas. Importantly, their potential to generate profits has also risen considerably. This strong financial position has driven them to seek technology solutions that enhance their operational efficiency and attract new customers, whether for deposits or loans. Therefore, there's no slowdown in customer demand for new technology, especially given the added benefit of higher net interest margins in their lending operations.

Great. Thank you.

Sure.

Our next question comes from Nik Cremo from Credit Suisse. Please go ahead with your question.

Good morning, and thanks for taking my question and congrats to Kevin. I was hoping just to dig into the 2023 non-GAAP margin expectations and see if we can get some color across the segments?

Oh, across the segments. Well, I don't, when I say margins are going to be flat, I think they're probably going to be, I mean, we're going to see some margin improvement probably in core and payments, complimentary. I don't know because obviously we're getting the big pressure in our R&D and SG&A lines and cost of sales. So, some of that margin is not impacting the segments directly because we don't have SG&A and R&D in those segments. So the margins for the segments themselves should be solid with some slight expansion. But it's below the line that we don't allocate the R&D and SG&A that's going to really make it be flat for the year.

Got it. Thanks for that extra color. And then for my follow-up, I wanted just to ask what you're seeing from your customer base, just in terms of the M&A environment, are you seeing like a big step down in M&A activity relative to 2022 or is like the term fee guidance just more conservative?

Yes, so Nik, we absolutely are seeing a slowdown on that, and one of the things we've stressed on these calls in the past is, we have a lot of visibility into when customers are acquiring other customers and we're one of the first calls they make if they're looking at acquiring another institution because they want to get a conversion slot lined up well in advance. And so we have a lot of visibility. We don't necessarily know when one of our customers is going to be acquired. We have a lot of visibility, regarding the overall movement in the market. And that's why we have projected the conversion revenue to be down next year because we expect M&A overall activity to be down in the coming year. Now that's reading tea leaves and just trying to, understand what's happening in the space, but that's our current expectation is that overall M&A among banks and credit unions will be down in the coming year.

Yes. I mean, that's like, Nik, year before last, I mean, we did not predict the deconversion revenue would be down $33 million at the beginning of the year because M&A appeared to be fairly solid. But we knew it was going to be up this year, but we never dreamt that it was going to be up $33 million this year. So it was basically up in 2022, what it was down in 2021. So it's kind of flat for the two years. But based on what we're seeing in the pipeline right now, it looks like M&A is slowing down a little bit. Could that be because of the rising interest rates, could it be due to inflation? I mean, I think there's so many different factors that you could point to that's having an impact on the M&A environment.

Understood, very helpful. Thank you.

Our next question comes from Ken Suchoski from Autonomous Research. Please go ahead with your question.

Hi, good morning, David and Kevin. Thanks for taking my questions this morning. I wanted to follow up on those comments on Banno. Can you just talk about how much opportunity is left to go with those core customers? And then what does the opportunity look like with those non-core customers? How do we try to quantify that opportunity?

Yes, that's a kind of a how big is big question, Ken, I'll do my best to answer that. So, first off inside the base, we have hundreds of customers who are not running Banno inside the base today. I would guess it's close to a thousand, probably existing core customers that are not running Banno today, so lots and lots of opportunities inside the core base. And then when we get outside the core base, think about the success that we've had with overall, what we used to refer to as Profit Stars, of course, we don't use that brand anymore, but the whole goal there was to sell to non-Jack Henry core customers. And we have roughly 7,000 banks and credit unions that we've sold a variety of different non-core solutions to, customers who are not running a Jack Henry core but they're running other things. So we have that base of 7,000 banks and credit unions that are already doing something with Jack Henry that's non-core that we can go and mine. They already know us. We have a relationship with them. We can go and mine that base with new sales opportunities once we have Banno regs to go outside the base. So there's a tremendous opportunity. The other thing I'll stress is, I've said on the call over and over, almost any bank or credit union in the United States today is running a mobile banking solution and internet banking solution and they look totally different. They function totally different. They are not the same system. Banno eliminates that concern. Banno is a single platform, so that the user experience is consistent, whether you're on your phone or your laptop, and banks and credit unions want to move in that direction. So there's a motivator there for them to want to go in that direction. We just need to get that delivered outside the base.

Yes, there is plenty of opportunity.

That's absolutely true.

Okay, great. And then I wanted to ask about consolidating the brands and the opportunity there, David, I believe you mentioned that you’re going to operate as one company. And I think your comments for it lead to a better client experience. Can you just talk about how you think that might impact your sales performance, your revenue growth, and I guess, retention rates across your customer base?

Sure, yes. So we're very excited about this adjustment. We made the announcement on August 1, so just a couple of weeks ago and it ties in, so a few key points to this. Number one, we now can eliminate any of the marketing expense associated with supporting several different brands. So there's a logical expense cost savings there when you move to one brand. But more importantly, I think we've had this initiative that we call One Jack Henry in play for about a year or two now. Greg Adelson, our President, talked about it at the May Investor Conference. And it's been at this push that we've had toward delivering a more consistent experience for our customers. In the past with the three different brands, there was kind of this natural thought that the different brands are almost like different companies. And so moving toward one brand, one company, consistent processes, and a consistent experience for our customers and certainly for our prospects, we believe will aid us not only on the expense side but on the sales side will help when it comes to customer perception of our company and making sure that any existing customer gives a really positive referral to a prospective customer around doing business with Jack Henry. So I would say, some of you published studies on our customer satisfaction ratings. We report them regularly. Jack Henry has the highest customer satisfaction ratings in our industry. The one thing that we get knocked on once in a while had been, well, you kind of operate like separate companies. Well, with this project, we hope to eliminate that concern and then overall, we'll have the highest customer satisfaction ratings by far.

Great. Thank you very much, David. I appreciate the thoughts as always and Kevin, congrats on your retirement.

Thanks, Ken.

And our next question comes from James Faucette from Morgan Stanley. Please go ahead with your question.

Good morning everyone and thank you for the insights. I wanted to revisit Banno and how the great resignation is affecting release timelines. I'm also intrigued by your thoughts on the market and where you anticipate early traction and its potential evolution. From a feature development standpoint, how much progress do you think is necessary to address the various market opportunities for that platform and its capabilities? Additionally, how do staffing and related factors influence the addition and maturation of those features?

Yes, it's an interesting question, James. When you're in this business, the request for new features never stops, right? As soon as you get to where you think you've got everybody beat, somebody comes up with another idea and sure it would be nice if you would do X. So that's an ongoing project. The good news for us is, we know on the consumer side with what we have in market today, we know that we have a tremendous solution that beats pretty much any competitor on the consumer side. The only missing piece has been for commercial customers with Banno business. So we're very confident that once we get Banno business in market, we're going to have a terrific solution to compete with anybody. But you can't ever expect that you're going to stop developing new features, adding new features, and adding enhancements to a solution like that because not only does our customer demand increase, but their customers are demanding more functionality through a platform like that. They want to be able to do more things through a platform like that. So that's an ongoing commitment for us for, I won't say forever, but forever is a long time, but it will go on for a very long time. The really good news is, the whole tech modernization strategy that we've been talking about is built on that same platform that Banno is on. And so anything that we do in the future with Banno and adds to the overall story of the tech modernization offering that we'll have from Jack Henry, and so it just continues to bolster what we've been talking about as the future of technology for financial institutions.

And then what is your sense. I mean, it's an interesting period and one that a lot of us aren't familiar with in terms of like prices, price changes and increases and general inflation, how does that impact or how are you expecting that will impact the pricing discussions in that part of the selling promotion, even for your products and obviously what's the competitive environment associated with that look like?

Yes, the competitive environment has not changed. And, we've talked about it before, pretty much any large purchase in our space today, customers, banks, and credit unions will involve a consultant and the consultant's role in that engagement is not only to do the comparison of one product to another, but it is to negotiate price. And so, regardless of what's happening in the economy, the consultant is there to try and make sure that they squeeze every, every opportunity out of the engagement that they can. So I can't say that anything dramatic has changed as a result of what's happening in the general economy when it comes to customer expectation or consultant expectation and I don't think anything is going to change. The opportunity for us when it comes to pricing is by offering an enhanced solution, a differentiated solution, kind of back to your first question, right? The more we add to these platforms that are differentiated from our competitors, that's where the opportunity is to charge more. Because then we're not, then it's not just table stakes. It's not just, which solution looks better. It's which one really functions better. And today Banno has that reputation and so that's our opportunity and our challenge is to make sure that we continue to stay ahead of the pack as far as future function, because that's where customers will pay you more.

And our next question is a follow-up from Dominick Gabriele from Oppenheimer. Please go ahead with your follow-up.

Hey, great, thanks. I just wanted to talk to you about the guidance on the revenue growth and how we should, how investors should think about, in the Investor Day. I think there was a slide that said, the long-term revenue grows expectation between 8.5% and 9%. And then we're kind of, maybe roughly 50 basis points below that for 2023. Is there any way you could help us walk between those two points, new customer sales and all those various waterfall features that is creating the Delta? Thanks so much.

You're correct. At the Analyst Day, I mentioned a growth expectation of 8.5% to 9%, and we're currently at the 8.5% mark. While that places us on the low end, we need to consider the significant growth we achieved in 2022, which was nearly 9%. This creates a tough comparison for us. Achieving 8.5% growth in 2023 compared to 2022 is a commendable feat for a company with over 90% recurring revenue. Of course, I hope we can return to 9% in 2024, but I can't predict that with certainty right now.

Sure. Now that makes sense. And congrats on all the wins this quarter too.

You bet. Thank you.

And ladies and gentlemen, with that, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to Kevin Williams for any closing remarks.

Thanks, Jamie. Obviously, we're very pleased with results of our ongoing operations and we are excited for the future with everything that, all the new deals that we've signed in the previous quarter. I want to thank all of our associates for the way they have handled these challenges by taking care of themselves and our customers, and continue 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 our shareholders. I want to thank you again for joining us today. And Jamie, with that, would you please provide the replay number?

And ladies and gentlemen, with that, we will conclude the conference call today to access the digital replay of this conference. You may dial 1 (877) 344-7529 or (412) 317-0088, beginning approximately one hour after the conclusion of today's event. You'll be prompted to enter a conference number, which will be 279-20-74. Please record your name and company when joining. The conference has now concluded. We do thank you for attending the presentation and you may now disconnect your lines.