Jack Henry & Associates Inc Q3 FY2024 Earnings Call

Good morning, and welcome to the Jack Henry Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Vance Sherard, Vice President, Investor Relations. Please go ahead.

Thank you, Alan. Good morning, and thank you for joining us for the Jack Henry third quarter 2024 earnings call. Joining me on the call today is David Foss, Board Chair and CEO; Mimi Carsley, CFO and Treasurer; and Greg Adelson, President and COO. After my opening remarks, I will turn the call over to Dave for his comments on our business and the industry. After Dave concludes his comments, Greg will discuss our recent strategic benchmark survey, recent success metrics for multiple solutions, our strategic focus on AI plus other key initiatives. Mimi will then provide commentary around the financial results and updated guidance included in the press release issued yesterday that is available from the Investor Relations section of the Jack Henry website. Concluding our prepared remarks, Dave will add some closing comments. We will then open the lines for Q&A. As a reminder, 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 multiple factors that could cause actual results or events to differ materially from those which we anticipate due to multiple 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 non-GAAP financial measures are in yesterday's press release. I will now turn the call over to Dave.

Thank you, Vance. Good morning, everyone. I'd like to begin today's call by remembering Jack Henry Board member, Laura Kelly, who passed away unexpectedly on March 15. Laura served on our Board for over a decade and was a cherished colleague and friend to all who had the privilege of working with her. With over 30 years of experience in senior leadership roles, she brought invaluable insights, wisdom and financial expertise to our organization. Beyond her remarkable professional achievements, Laura was known for her kindness, generosity and unwavering dedication to making a positive impact. Our thoughts and deepest condolences go out to John and Jake and the rest of Laura's family during this incredibly difficult time. Let's now transition to our quarterly results. We're very pleased to report another strong quarter of revenue growth and overall business performance. As always, I'd like to thank our associates for all the hard work and commitment that went into producing those results for the quarter. For the third quarter of fiscal 2024, total revenue increased by 6% for the quarter and increased 7% on a non-GAAP basis. Operating income increased 3% for the quarter and increased 9% on a non-GAAP basis. Turning to the segments. We again had a strong quarter in the core segment of our business. Revenue was up by 7% for the quarter and increased 8% on a non-GAAP basis. Our payments segment performed very well, posting a 5% increase in revenue this quarter and a 6% increase on a non-GAAP basis. We also had a solid quarter in our complementary solutions businesses, with a 5% increase in revenue this quarter and an 8% increase on a non-GAAP basis. As I highlighted in the press release, this was our best third quarter ever for sales bookings. During the quarter, we inked 11 competitive core takeaways with one of them being a multibillion-dollar institution. For the year, we've now signed six multibillion-dollar institutions, topping last year's full-year total of five. Additionally, we signed seven deals to move existing in-house core clients to our private cloud environment. We are seeing strong interest in our new Financial Crimes Defender solution with 11 new contracts in Q3. Additionally, we signed 45 new contracts for our Financial Crimes Defender fraud module for the Zelle, FedNow and RTP payments networks that uses artificial intelligence and machine learning to detect fraud and money laundering in real time. We continue to see success with our card processing solution, signing 14 new card processing clients this quarter. Our Banno digital banking platform remains very popular with 69 new signings in Q3 including 37 contracts for Banno Business. We now have over 11.6 million users live on Banno and we're continuing to add approximately 200,000 users per month. Even with our strong sales success in Q3, we continued to replenish our sales pipeline and keep it near an all-time high. As we look towards the end of our fiscal year, we remain very optimistic about the industry, the demand for our solutions, our ability to deliver outstanding service and our long-term prospects for success. With that, I'll turn it over to Greg for more detail on our solutions and businesses.

Thank you, Dave. As some of you have seen, we recently released the 2024 results from our Annual Strategy Benchmark survey. This survey offers insight into concerns, opportunities and technology priorities from bank and credit union CEOs. The survey indicated that 80% of bank and credit union CEOs plan to increase technology spending over the next two years. Of those, the largest segment, 35%, plan to increase investments between 6% and 10%. We also inquired where they plan to invest over the next two years. The top four areas for planned investment were fraud detection, digital banking, data analytics and automation, all areas where Jack Henry has been investing and executing with innovative solutions through our technology modernization strategy. As previously announced, we recently launched our cloud-native AI-powered Financial Crimes Defender fraud detection platform. We now have 16 clients live and another 175 clients in the implementation queue. In addition, we announced in March the Financial Crimes Defender was named the best fraud prevention platform by FinTech Breakthrough, an independent market intelligence organization. Dave mentioned earlier that we have more than 11.6 million registered users on our cloud-native Banno digital banking platform. We continue to see strong interest in our recently launched Banno Business solution that provides a modern banking experience for small and medium-sized businesses. As of March 31, we had 124 clients live and about 70 additional clients in various stages of implementation. In terms of data analytics, we continue to make progress on our data broker and executive dashboard solutions. Both are part of the cloud-native API-first Jack Henry platform. Data Broker, which is currently in beta, will eventually provide access to all of a client's Jack Henry data in a single repository with innovative AI intelligence capabilities. To complement the Data Broker solution, we are developing an executive dashboard with real-time event monitoring to help executives at our financial institutions make informed dynamic decisions throughout the day based on metrics they customize. Related to automation technology, one new Jack Henry platform offering we haven't spoken much about yet is our cloud-native online deposit and loan account opening solution. This integrated solution will provide a seamless digital account opening experience for our clients that enables them to streamline processes, automate workflows and better serve both retail and commercial loan clients. We plan to begin the beta phase with clients in early calendar year 2025. The survey also found that 96% of our clients plan to add payment services over the next two years. We continue to offer a full range of payment solutions in our pay center application as well as other areas of our payments groups. As of March 31, we had 312 clients using Zelle, 275 clients using RTP, the real-time payments network, which represents 48% of the live RTP clients and 190 clients using FedNow, representing 29% of the live FedNow clients. One final point on the survey findings. They were consistent with what we heard from our clients at our Annual Strategic Initiative Symposium in late April. While financial institutions are concerned about the increasing cost of deposits and impact to interest margins, there is a general feeling of optimism and less concern about an economic slowdown this year versus what we heard a year ago. One topic we spent a lot of time discussing at the Strategic Initiative Symposium is artificial intelligence. We presented in detail Jack Henry's framework for building the necessary guardrails, education, training, use of acceptable tools, et cetera. We continue to actively identify opportunities to leverage AI, aiming to enhance client solutions and optimize internal processes and work streams. Incorporating AI into select client solutions like Financial Crimes Defender, Data Broker, Executive Dashboard and Banno Conversations is part of that strategy. We are approaching AI deployment thoughtfully, ensuring it benefits our clients and associates and aligns with our commitment to data privacy, protection and security. Our strategy ensures we are responsibly bold and balanced. It's been about 18 months since our corporate rebranding initiative to retire the Symitar, ProfitStars and Jack Henry banking brands as we now simply go-to-market as Jack Henry. As we said at that time, uniting the brands reflects Jack Henry's role as a well-rounded financial technology provider and enables us to speak from a single consistent brand voice, one Jack Henry. We recently received results from an independent brand study that showed that Jack Henry's brand equity has increased by nine points in just 18 months. We specifically saw significant improvement with large regional financial institutions and millennials. This is important as we continue to execute on our strategy to provide innovative technology solutions to larger financial institutions beyond what we already provide today through both our payments and complementary groups. And millennials are a critical audience because they are taking on larger leadership roles at these financial institutions and having more influence in technology buying decisions. Speaking of brand equity, hopefully, you all have seen the new corporate sustainability report that we published on March 29. We believe the 2024 report is an excellent representation of the key initiatives and accomplishments we've been working on over the past year. This year's report details how we are supporting local communities with a focus on financial wellness through both our investments and innovative technology in a variety of philanthropic efforts. We also continue to further our commitment to valuing people with disabilities with the launch of a new associate-led business innovation group focused on awareness of visible and invisible disabilities. The report also highlights some of the public Best Places to Work recognition we received from organizations like Newsweek, Computerworld and USA Today. As part of our planned organizational changes, we recently announced the promotion of Shannon McLaughlin, who is currently President of Jack Henry Credit Union Solutions, to Chief Operating Officer effective July 1. Shannon has been with Jack Henry for nine years but has close to 30 years working with both banks and credit unions in senior technology and operational roles. Shannon is a strategic visionary leader who has significantly contributed to our company's overall success, and she'll continue to do so as the next Chief Operating Officer. I want to close by recognizing Dave for the exceptional job he has done as CEO over the past eight years. Under Dave's leadership, Jack Henry has experienced outstanding growth both organically and through strategic acquisitions. I also want to thank Dave for his mentorship and guidance. He has prepared me well as I step into the CEO role on July 1, and I'm honored to continue leading our company with an unwavering focus on our associates, clients and shareholders. With that, I will turn it over to Mimi for more details on the numbers.

Thank you, Greg, and good morning. Our continued focus on serving our community and regional financial institution clients, delivering shareholder value led to another quarter of solid revenue and earnings growth. I'll start with the details driving our third quarter and year-to-date results, then conclude with our full-year guidance update. Q3 GAAP revenue increased 6% and non-GAAP revenue increased 7%, a continuation of consistently solid performance and keeping us on track for a strong fiscal 2024. Year-to-date growth was 7% on a GAAP basis and stronger on non-GAAP at 8%. Deconversion revenue of approximately $800,000, which we pre-released last week, was down approximately $5.3 million, reflecting minimal financial institution consolidation of our clients. Year-to-date deconversion revenue is $9.9 million, $7.2 million less than the prior period. Now let's look more closely at the details. GAAP services and support revenue increased 4%, while non-GAAP increased a more robust 6%. Year-to-date, the increase was 6% for GAAP and 7% on a non-GAAP basis. Service and support growth during the quarter was the result of increases in data processing and hosting revenues. We continue to experience robust growth in our private and public cloud offerings, which again increased 10% in the quarter and for the year-to-date. This recurring revenue contributor is 32% of our total revenue and has long been a key to our double-digit growth engine. Shifting to processing revenue, which is 43% of total revenue and another key component of our long-term growth model, we saw positive performance with 8% growth on both a GAAP and non-GAAP basis for the quarter and year-to-date delivered 9% for both. Consistent with recent results, drivers include positive demand for our digital solutions, card processing, other payment processing and other processing revenues. In closing out revenue commentary, I would like to highlight total recurring revenue exceeded 91%. Next, moving to expenses. Beginning with cost of revenue, which increased 7% on both a GAAP and non-GAAP basis for the quarter and 7% for GAAP versus 6% for non-GAAP year-to-date. Drivers for the quarter included higher direct costs consistent with increases in related revenue, higher personnel costs and increased internal license and fees. Next, R&D increased 4% on both a GAAP and non-GAAP basis for the quarter. The increase is primarily due to cloud consumption costs net of capitalization. For the year-to-date, R&D increased 4% on a GAAP basis and 3% for non-GAAP. And lastly, on a GAAP basis, SG&A rose 7% for the quarter and 8% on a non-GAAP basis primarily due to higher personnel costs. Year-to-date SG&A expense increased 23% on a GAAP basis and 9% on a non-GAAP basis. The primary GAAP differences are the $16.4 million in one-time related costs related to the voluntary early departure incentive program, VEDIP in Q1, and the prior period $7.4 million gain on asset sales. For non-GAAP, the difference is primarily due to higher personnel costs and the absence of gain on sale of assets. We remain focused on generating compounding margin expansion and the quarter results delivered 30 basis points of increased non-GAAP margin, which was 20.8%. Non-GAAP margin benefited from focused process improvements and disciplined management of our workforce, while retaining key talent. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.19, up 7%. Separating results into the three operating segments, we're pleased to see across-the-board positive performance. Our core segment revenue increased 8% for the quarter on a non-GAAP basis, with non-GAAP operating margins increasing 216 basis points. We continue to benefit from private cloud trends and strong cost control. Year-to-date, non-GAAP revenue growth was 8% and the associated margin increased 124 basis points. Payments segment revenue increased 6% on a non-GAAP basis. The segment had impressive non-GAAP operating margin growth of 121 basis points. This was due to continuing growth in our EPS business, and moderate card growth consistent with U.S. consumer spending trends and a slightly tough comp combined with focused cost management. Year-to-date, non-GAAP revenue growth matched the quarter at 6% with 103 basis points of margin expansion. And finally, the complementary segment: non-GAAP revenue increased 8% with 33 basis points of margin expansion. Year-to-date, non-GAAP revenue also increased 8% with 28 basis points of margin expansion. Growth year-to-date reflects digital solution demand and beneficial overall product mix. Segment quarterly margins were impacted by moderate headwinds from direct support costs and license and fees. Let's now turn to a review of cash flow and capital allocation. Year-to-date operating cash flow was $336 million, a $129 million increase over the prior period. Excluding proceeds from the sale of assets, free cash flow was $172 million, significantly more than the $54 million last year. Our base case entering the year included an elevated level of cash tax payments based on the Section 174 impact. Based on legislative clarity and internal efforts, we were able to meaningfully lessen the impact. The net result was lower cash taxes equating to an approximately $29 million overpayment last fiscal year, as well as improved cash tax outlook this fiscal year. Our consistent dedication to shareholder value creation resulted in a trailing 12-month return on invested capital of 19%. Additionally, I would highlight other notable return on capital metrics for the year-to-date period, including $20 million in share repurchase offsetting annual dilution, $25 million in debt reduction and $116 million in dividends. With three quarters of the year complete, we're nearing the conclusion of our fiscal year, and therefore, I'll conclude with guidance changes. As you're aware, yesterday's press release included updated fiscal 2024 full-year GAAP guidance along with a reconciliation to non-GAAP metrics. As a reminder, we filed an 8-K on August 3 that described how starting in the current fiscal year, we're using a revised approach for deconversion guidance. While we reported third quarter deconversion revenue of approximately $800,000, we are reiterating our full year deconversion guidance of $16 million. We are reiterating both GAAP and non-GAAP revenue growth and expect non-GAAP growth to potentially have a bias towards the lower end of our 7.4% to 8.0% growth range. Due to the continued positive operational results and a focus on cost management, we now expect an increase in annual non-GAAP margin expansion of 45 to 50 basis points compared to the 35 to 40 basis points previously provided. The full-year tax rate estimate remains at 23.5%. Incorporating the noted positive update, full-year guidance for GAAP EPS is revised upward to $5.15 to $5.19 per share from the previous guidance of $5.09 to $5.13 per share. As a reminder, the guidance or deconversion revenue compared to actual fiscal 2023 deconversion revenue, VEDIP, severance-related costs and nonrecurring gain on asset sales results in approximately a $0.37 headwind for GAAP EPS for fiscal 2024. Due to the better-than-initially-anticipated cash tax payments, improved margins and contributions from favorable net interest, our full-year guidance for free cash flow conversion has increased to 70% to 75% from the previous commentary of 60%. In conclusion, Q3 results reflected continued momentum of the strong execution we've seen thus far this year and we expect a solid finish for the remainder of the fiscal year. We remain exceptionally positive about our ability to deliver innovative and in-demand solutions, the resilience of our clients and our focus on execution and shareholder value creation. We appreciate the contributions of our diligent and dedicated associates that drove these strong results and Jack Henry investors for their continued confidence. Before I turn the call back over to Dave for closing remarks, while I haven't had the pleasure of working with Dave as long as others, I cherished our time together. I want to thank Dave for giving me the opportunity to work for this amazing company, for being so incredibly generous with his wisdom and support for so many small and meaningful pieces of guidance over the past two years. He is a role model of service, leadership and doing the right thing. We are fortunate to have him lead the Jack Henry Board, and I look forward to this continued journey together. Dave?

Well, thank you, Mimi. As you are all undoubtedly aware, this marks my final earnings call as CEO before my transition to Executive Board Chair on July 1. Reflecting on my career at Jack Henry, this has been an incredibly humbling journey for me, both personally and professionally. And I'm beyond grateful to have had the opportunity to lead this great company for the past eight years. As we move forward, I have the utmost confidence in Greg and the rest of our exceptional team to sustain our reputation for great technology and service as well as our strong financial performance. I've cherished the opportunity to get to know all of you over the years and appreciate your insightful questions and thorough analysis. I thank our investors for their trust in Jack Henry and our clients for allowing us to serve their needs. And lastly, I want to express my heartfelt appreciation to our associates. It is their dedication and unwavering commitment to supporting our clients and each other that drives our success and makes this company special. With that, we'll open up the floor for questions. Alan, if you would, please open the line.

We will now begin the question-and-answer session.

Well, Dave, it's been good talking on these calls. We'll miss speaking with you in the future, at least on the calls anyway. Dave, I wanted to get your perspective on maybe just the backlog. I know Mimi said you might be expecting maybe the lower end of the non-GAAP revenue for fiscal '24, and maybe backlog is a wrong word to use. But just your perspective based on what the sales pipeline looks like, how good you feel about, as we move forward, the ability to predict revenue and maybe why the lower end of the guidance.

I'll give you my perspective, and then I'll ask Mimi to comment. First off, I mentioned in the release and in my comments that this was the best sales third quarter we've ever had. I also highlighted the fact that the sales pipeline has been replenished almost to that same record level that it was at last quarter. So as I see what's going on in the sales pipeline, and even more importantly, as I see what's happening here in the quarter that we're in right now, which, of course, we're not here to announce, I feel really bullish about the future opportunity as far as sales at Jack Henry and our ability to continue to deliver. So that's a sales perspective. Mimi, did you want to add to that?

Let me just add this. We've had unbelievable sales success this year. But as we've highlighted many times, the deals that we're selling this year, for the most part, don't actually become revenue opportunities until future years and future quarters. So part of this is yes, there are some things that are in an implementation queue and we're working through all those as we always do. But there isn't really anything that is signaling anything other than hopefully future success based on what we've seen. I just want to make sure that you understand that all of the sales success we're seeing now will be reflected in future quarters.

The only thing I would add, Kartik, is that we feel really good about all three operating segments' revenue. Total revenue is still very much in line with our long-term algorithm and what we thought about at the beginning of the year. There is a part of our business that does relate to economic factors in U.S. consumer spending trends — that's the card business. So I think as we look out for the year, we feel really confident about our ability to hit that range.

Perfect. And then, Greg, you talked about AI and opportunities there. I'm wondering for Jack Henry, is there an opportunity for you to use it internally and could that lower cost? And if so, is there an upfront cost you're dealing with in an effort to implement that?

Yes, it's a great question, Kartik. The short answer is we are spending a lot of time on internal operational efficiency opportunities throughout our entire organization. In fact, we most recently had a corporate leadership team meeting where each of the individual business units and nonoperating business units all presented their ideas for utilization of AI and specifically generative AI. We're going through prioritization. We've done a really good job of spending time making sure that we're focused on building the efficiencies first and getting the learnings. We've just approved a couple of utilizations for the Microsoft Copilot for internal use and the GitHub Copilot for our developers. We're actually in the process of implementing those and looking for ways to continue to build efficiency and effectiveness, while we're also doing other things within some of our products that I announced earlier.

The only thing I would add there, as Greg said, responsibly bold and balanced is our approach, and that covers both the usage as well as the investment. That covers the internal policies and processes to prioritize, to develop business cases, to think about the benefits. This isn't just a curiosity. There have to be business cases. All of that will sit within our planned budget, R&D and internal expense policies.

Perfect. Thank you very much. Appreciate it.

The next question comes from Andrew Schmidt of Citi. Please go ahead.

Hi, Dave, Greg, Mimi. Thanks for taking my questions. And Dave, congrats again on the transition.

Thank you.

I want to start on the margin front. Good performance here. Mimi, maybe you could put a finer point on this. You mentioned some operational efficiencies that drove this and maybe some mix factors as well. But could you put a finer point on that? And then as we think about the go-forward margin trajectory, it seems like you're above this year what you've outlined for the longer term. How does this year's margin performance inform the view on the longer-term margin progression? Thanks a lot.

Andrew, I would say for this year it came down to strong execution and operational focus. It's a bit of product mix as well, but we're being very diligent around headcount and spending for the year. There's also some timing around products and how that amortization impacts us, which is something we'll be thoughtful about for next year. It's really early in our budget planning, but our teams are getting together and thinking about prioritization. At this point, we're still thinking about the long-term range we've given versus an elevated state, but we're always trying to deliver shareholder value and that's going to always be a focus for us.

Perfect. And then maybe just digging into the average contract size of recent cohorts. I know attach rates have gone up over the past few years, but can you put a finer point in terms of what you're seeing in terms of complementary product adoption and average contract sizes perhaps recent periods versus a year or two years ago? Thank you very much.

Andrew, one of the challenges is there is no such thing as an average with our contracts. You're correct that attach rates tend to be high with our core clients, but we sell many solutions outside the core base, roughly 300 different solutions. They range from very small ticket prices to very large ticket prices. Most of the solutions we sell today are hosted. So it's rare for us to sell a licensed version of a solution. The hosted contracts can be three years or 10 years, so talking about an average is challenging. The best indicator is the fact that we've used the same measurement approach for sales quota attainment for many years now, and Q3 was the best Q3 we've ever had. That's the most significant indicator of sales success. Sales overall are up, and that's a good relative performance indicator for our sales organization.

No, it makes sense. A lot of different shapes and sizes. Congrats again, Dave. Thank you very much.

Thank you.

The next question comes from Darrin Peller of Wolfe Research. Please go ahead.

Thanks. And Dave, I want to also extend my congrats as well. I appreciate the help over the years. Maybe start off on free cash discussion. It obviously has gone through periods of strength above 80% and below 60%. Now you're saying back to 70% plus. Could you revisit and give a sense of the driving factors and the sustainability of it, and whether we're back to 80% going forward in the next couple of years?

Darrin, it has been a bit of a roller coaster ride, and in part that was due to a lack of clarity from a legislative front. We were hopeful progress on Congress addressing the Section 174 R&D-related impact on cash taxes would go through. Even in the absence of that, the clarity we've achieved with the Treasury, IRS, our outside consultants and our tax team has helped us discover savings from a cash tax perspective that impacted last year and means less cash tax paid this year. That represents over $29 million in last year's impact alone, let alone some additional for this year. So that's the biggest driver for free cash flow. I think that's a sustainable improvement relative to where we thought earlier in the year, and we're still hopeful that the legislative issue will be addressed, but we're in an improved position regardless.

Okay, that's helpful. Greg, maybe if you could talk about what you're seeing in the market around demand for core, commercial, and the cloud discussion. Any inflections you're seeing for specific products or offerings or anything weaker? Any color would be great. Thanks.

A couple of things from our survey and regular conferences and conversations with clients: deposit growth continues to be a big driver and operational efficiency continues to be important. That's why we highlighted fraud detection, digital banking and data analytics as key products. We're continuing to see nice pickup in those. Regarding tech modernization and our modules, we're seeing a lot of success on the execution side. We'll talk more in future calls, but we're excited about Data Broker and Executive Dashboard. We think those products are not widely available in the space today and will showcase our cloud-native technology and use of generative AI. All of those tie into demand around deposits, fraud opportunities and operational efficiency as the three big drivers.

Great. Thanks, guys.

Our next question comes from Vasundhara Govil of KBW. Please go ahead.

Hi, thanks for taking my questions. First, a quick one for Mimi. I know it's a little too early to talk about the '25 outlook, but based on the new sales momentum you've had this year, it seems like you're setting up for stable, if not accelerating revenue growth into next year. Any reason to think that may not be the case? And then Mimi, could you specifically comment on the payment segment trending slightly softer than expected, how it performed relative to internal expectations and what you're expecting for the go-forward trend line there?

Vasu, I wish I could give more precision for next year, but it's early in the budget process. There's no reason to expect anything other than growth per our algorithm. There are things that present challenges each year from a year-over-year perspective, like lower convert-merge activity that impacted this year. But the growth algorithm is a pretty good framework for next year. Regarding payments, we saw slower transaction growth—broadly slower growth in debit—which is in line with trends seen by major card network providers and U.S. consumer behavior, and we had a tough comp. We're reiterating the full-year guide and feel comfortable that the 7% to 8% growth algorithm is an appropriate level.

Thank you. Dave, I've enjoyed working with you over the last few years, and you'll certainly be missed. One high-level question: three big players have the majority share in the industry, but the number of fintechs going after the opportunity is larger today than a few years ago. How do you see the competitive landscape evolving over the next three to five years?

Thank you, Vasu. It's interesting—new entrants trying to come into the U.S. market and provide competing services has been happening for quite a while. The challenge for many is they approach it from a technology point of view rather than a banking point of view. They may deliver a modern user experience but underestimate the heavy lifting behind the scenes—the regulatory environment and the back-office work required to keep a bank operating. We've seen many try and then back away or focus on narrower digital offerings. I don't view today's environment as fundamentally different from five years ago. There are smart competitors, and we watch many companies closely, but the complexity of what we do for financial institutions is often overlooked. We have our eyes wide open and follow many potential threats, but it's very difficult to replicate the full set of capabilities and services that we've built.

Thank you for the color.

The next question comes from Tyler DuPont of Bank of America. Please go ahead.

Hi, good morning. This is Tyler on for Jason. Thanks for taking the question. I wanted to start by asking about the progress in rolling out some of the complementary solutions such as Banno Business and Financial Crimes outside the core. Can you level set where we are today with that rollout? If I remember right, the target was some sort of implementation by the end of FY '24 and when you think this might be needle moving going forward? Any clarity there?

This is Greg. As far as execution, we're moving forward. We had talked about being able to sell it at the end of this calendar year, and we'll be able to start doing that in Q4. Planned implementations will be in the fourth quarter of our fiscal year '25, which corresponds to the second quarter of calendar year 2025. We'll take this in a very strategic fashion, going after a handful of competitive cores. We're focused on working through one right now, and you need some level of cooperation to do some of what we're doing. Some of that gets into documentation and idiosyncrasies you need to work through. As far as our plan is on track to have Banno Business, our CPS card product and Financial Crimes Defender—all three of those products that today do not go outside of the Jack Henry core base—available at the same time and offer them to the first specific core that we're targeting. Then we'll work through other cores. It will be a little while before this becomes needle-moving, but we think the stickiness of these products will help us sell other solutions.

One clarification, Tyler, just to ensure we're on the same page. We've been selling outside the core base for many years—thousands of deployments of other solutions to non-Jack Henry core customers. For example, we have more customers running our bill pay solution who are not Jack Henry core customers than who are. So we know how to sell outside the base. What Greg was discussing are these brand-new solutions that we're rolling out outside the core base, and that's where the strategy and timing come into play.

Understood. I appreciate the clarity. As a follow-up, can you discuss any signs of success or trends you're seeing with moving into the mid-market financial institutions? Have you needed a different go-to-market approach? I know you mentioned a couple of multibillion-dollar signings; any update there?

As we've mentioned, we have three $20 billion-plus opportunities in our current pipeline, and we continue to work those. In the multibillion space—say $5 billion to $15 billion—we're seeing more opportunities. The biggest drivers are our technology modernization strategy and the execution we've already done. Most buyers want to see execution, not just a sales pitch. That has helped us move forward in the sales pipeline with many larger opportunities. You'll continue to see our technology and service strengths create those opportunities.

Great, thanks Greg. That is very helpful.

The next question comes from David Koning of Baird. Please go ahead.

Hey guys, congrats, Dave. Great career. Two cleanup questions. Corporate revenue was lower than normal relative to last quarter, I think because the conference wasn't in the quarter, but corporate costs were higher than usual as well. What's the dynamic there? Do those go back down in the coming quarters?

I wouldn't read too much into a one-quarter change. Relative to last quarter, the annual merit increase hit in Q3, and that's where you saw personnel costs go up. Revenue differences could be timing or hardware or the conference being in another quarter. I wouldn't read too much into a one-quarter variance.

Okay. Also, I think you had a negative term fee in complementary and a small EBIT loss on term fees. Both are unusual. Can you describe how that happens and if that's one-off?

This was a one-off. For deconversions, we get notice once the file transfer process starts. We were informed that a financial institution planned to deconvert and then later postponed the timing and delayed, so there was a reversal on that transaction.

I've been doing this a long time and I don't remember seeing this: a customer recruited away by a competitor had a failed conversion and decided to back out and come back to Jack Henry. I haven't seen a failed conversion in our industry for many years, so this was a unique situation.

That's great to hear. Thanks guys.

The next question comes from James Faucette of Morgan Stanley. Please go ahead.

Great, thank you very much. Dave, congrats on your tenure and thank you for your work. I wanted to dig into your commentary about customer sentiment. I'd like your thoughts on the regulatory scrutiny banks are going through, which seems to be picking up as several banks have discussed plans to adjust capital, liquidity and CRE concentrations. That doesn't seem to be impacting your bookings, but is greater regulatory scrutiny coming up with customers, and how are you thinking about helping them deal with that?

Greater regulatory scrutiny is absolutely in the conversation regularly since the events of last May. The regulatory environment has changed for many of our customers. Interestingly, that hasn't had an impact on bookings. Technology is part of the solution for almost any challenge a bank or credit union faces today—mitigating risk, growing the franchise, fraud detection, operational efficiency. Because technology is central to those solutions, there's an opportunity for us to help clients regardless of regulatory pressure. At our client conference in Kansas City three weeks ago, there was no discussion of backing off technology spending; indeed, our survey shows expected increases in tech spending. So while scrutiny is a factor, it often drives demand for technology solutions.

To add, the technology component is the driver. More institutions recognize they need technology to remain relevant, especially community banks, and that's why our focus on execution and these products resonates. Technology helps them punch above their weight.

Got it. And then, Greg, on implementation: you mentioned implementation queues. How are those trending broadly, and how are you thinking about the balance between margin expansion versus allocating more resources to speed up implementations? What's current demand like?

Great question. We review this monthly with detailed financial analysis and variance reviews. We take a business case approach: if adding resources accelerates the implementation queue and provides value, we add them. We've added resources multiple times this year to accelerate queues and improve processes. We're also exploring AI to assist with implementations. We constantly evaluate both sides and will add people as needed when it makes sense.

Great. Thanks for that, Greg.

The next question comes from Charles Nabhan of Stephens. Please go ahead.

Great, good morning. Thanks for taking my question, and congratulations, Dave—it's been great working with you. I wanted to follow up on progress in the middle market and get a better understanding of how to think about larger banks from an ARPU standpoint and their product consumption relative to smaller banks. What are they buying, what are they not buying, and what's helping you win those deals?

As far as deals we've won—the six multibillion that Dave mentioned—there hasn't been a significant alternative to the solutions we typically sell. What's helping is the strategy for the future and what we've executed in the present around Financial Crimes, Banno and Banno Business, and payments. Those complementary products especially help drive core decisions. For larger institutions, they tend to buy fewer products from a single vendor and might not do everything with one vendor. We're seeing one-off and two-off opportunities from larger institutions as we take products outside the Jack Henry core base. We already have complementary and payment products in institutions as large as $200 billion, so serving larger institutions is not foreign to us.

Great. As a follow-up, your thoughts on M&A and consolidation in the bank and credit union space? There have been a handful of deals announced; regulatory scrutiny could be a catalyst for consolidation. How do you think about M&A over the next year or two?

We continue to see interest in M&A. We've added some staff to support that, especially on the credit union side. We're seeing more on the banking side than a few months ago. The timing of completions is a challenge—regulatory approvals can delay deals five to six months. So while interest remains, timing is uncertain. We'll continue to support customers through their strategies.

I would add that this creates a headwind for us this year. We talked about lower deconversion revenue of people leaving, which also impacts convert-merge revenue. In Q3, we saw approximately $3.5 million less year-over-year in convert-merge revenue.

One final comment: interest in looking at M&A opportunities is very relevant in our conversations with institutions and at our events.

Got it, thank you.

The next question comes from John Davis of Raymond James. Please go ahead.

Hey, good morning. Dave, congrats—you'll be missed. Before you go, or maybe Greg can comment: thoughts on capital allocation. You're talking about free cash flow conversion going up. It looks like you haven't bought back stock in a couple of quarters. The balance sheet is in good shape. Broader thoughts on capital allocation, specifically buybacks?

We continue to look at opportunities to buy back shares. Mimi has done a great job presenting use cases and timing. We're focused on free cash flow and improving that, and opportunities for buybacks are closer than they were in the past.

J.D., we always evaluate investments within our business to accelerate growth. We've been at about 14% R&D for some time, but we're open to ways to accelerate strategy and serve clients through technology investments. That's always a priority. We're also planning to pay down debt substantially. For modeling purposes, you'll see next quarter a reclassification of our debt. The Term Loan A goes current in May in a couple of weeks. We intend to pay that down and shift some to the revolver. We're mindful of our current ratio and plan to pay it off.

Okay, great. And then, Greg, Banno Business seems off to a good start. Longer term, how do you see the mix of Banno Business versus retail? I know we're early, but thoughts over three to five years on that mix?

We built the revenue model so that Banno Business is an add-on to registered users. The 11.6 million registered users means any institution that buys Banno Business pays an add-on applied to all registered users, not only those using business features. Many small business owners are hidden in retail presences today, so this creates the opportunity to serve them. For our benefit, institutions can get the add-on applied broadly. We see a huge opportunity on the credit union side and expect continued success. As we take the product outside the Jack Henry base, we think we'll reach larger institutions beyond those we support today.

Maybe a better way: what percentage of banks adopting Banno Business from your current base would you consider a success over the next three to five years? 30%, 40%, 80%? Any guidepost?

Roughly, it's in the 60% to 70% range because many of our institutions are commercially focused. Anything north of 60% would be a fairly decent target.

I won't be here anymore—can I vote for 100%?

Okay, appreciate it. Thanks for the color.

The next question comes from Cris Kennedy of William Blair. Please go ahead.

Good morning. One last from me, following up on Banno Business. Can you talk about other initiatives to capture commercial banking opportunity, especially within small businesses?

We have several point solutions: a treasury management solution, small business lending and account opening initiatives, small business bill pay, remote deposit capture for businesses and more. We also focus on building a cohesive SMB strategy to bring together our existing products and planned enhancements. We'll provide more detail over time on both existing products and our overarching strategy.

Great, thanks for fitting me in.

The next question comes from David Togut of Evercore. Please go ahead.

Thank you. Good morning and congratulations, Dave. Perhaps you could give a final update on the status of your credit card processing initiative. Also, how important is credit processing to the bigger banks compared to smaller FIs which tend to be more debit focused?

I don't think credit processing is a decisive factor based on bank size; it depends on the institution's strategy and relationships. Decisions about core and card processing are largely independent. Some competitors have conflated the two. You have to offer great service and product on the card side to win that business. Regarding our credit progress: we signed three additional credit customers in the quarter and continue to make progress. When I first discussed moving into credit, I said it would be a slow grower. It's not a fast-growth part of our revenue, but it's a necessary offering for customers that want both debit and credit with a single provider. We have a complete offering and partnerships to support agent programs, so we're in a good position. It has matched our expectations: not a large immediate revenue contributor, but a meaningful option for certain customers.

Understood, thanks so much, and congrats again, Dave.

The next question comes from Ken Suchoski of Autonomous Research. Please go ahead.

Hey, good morning. Thanks for taking the questions. Maybe I heard you say that for the full year on non-GAAP revenue growth you might come in toward the low end of the 7.4% to 8% range, which implies Q4 non-GAAP revenue growth maybe slightly below 7%. Is that right? Is there anything driving a slight deceleration, and is that the right jumping-off point for FY '25 assumptions?

Ken, I think that's just the way FY '24 will play out. We're still within our long-term algorithm of 7% to 8% and expect to hit within that range. Payments saw a little slower card transaction growth, which is in line with industry trends, but we continue to see positive growth in card-related recurring businesses and other monthly services. I wouldn't treat this as a signal for next year's starting point being problematic; it's just how the segments played out for Q4.

Okay, that's helpful. And it sounds like momentum behind Banno and Financial Crimes Defender is strong. Any reason to call out a slowdown in complementary revenue growth given those strengths?

Digital has been a great growth engine and continues to be demand-driven. Complementary is a portfolio of products; the numbers are strong and in line with expectations year in and year out for the segment. I wouldn't characterize it as a slowdown.

Okay, great. Thanks so much. And Dave, congrats to you.

This concludes our question-and-answer session. I would like to turn the conference back over to Vance Sherard for any closing remarks.

Thank you, Alan. Our Investor Day has historically been an annual May event. But starting this year, we are moving our Investor Day to September. The meeting will take place on Thursday, September 5, in Dallas. We hope you'll be able to join us and if interested in attending in person, please let me know. Executives will be traveling in the coming weeks, and we look forward to attending various investor events. On behalf of the entire management team, I would like to express our appreciation to all the Jack Henry associates whose efforts produced these outstanding results. Finally, I, too, would like to congratulate Dave on his upcoming retirement as CEO, thank him for his constant willingness to do anything requested on behalf of investors and for our 25-year friendship while working in this great company. Thank you for joining us today. Alan, will you please provide the replay number?

The replay number for today's call is 877-344-7529 and the access code is 2714678. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.