Jack Henry & Associates Inc Q4 FY2025 Earnings Call

Good morning, everyone. Welcome to the Jack Henry Fourth Quarter and Full Year 2025 Earnings Conference Call. Please note that today's event is being recorded. At this time, I would like to turn the conference call over to Vance Sherard, Vice President, Investor Relations. Please go ahead.

Thank you, Jamie. Good morning, and thank you for joining the Jack Henry Fourth Quarter and Fiscal 2025 Earnings Call. Joining me today are Greg Adelson, President and CEO; and Mimi Carsley, CFO and Treasurer. Following my opening remarks, Greg will share his comments on our quarterly and full year financial results, operational metrics and the outlook for fiscal 2026. Mimi will then discuss the financial results and full year fiscal 2026 guidance provided in yesterday's press release, which is available in the Investor Relations section of the Jack Henry website. Afterwards, we will open the lines for a Q&A session. Please note that this call includes forward-looking statements, which involve risks and uncertainties that could cause actual results to differ materially from our expectations. The company is not obligated to update or revise these statements. For a summary of risk factors and additional information that could cause actual results to differ materially from such forward-looking statements, refer to yesterday's press release and the Risk Factors and forward-looking statements sections in our 10-K. During this call, we will discuss non-GAAP financial measures such as non-GAAP revenue and non-GAAP operating income. Reconciliations for these measures are included in yesterday's press release. Now I will hand the call over to Greg.

Thank you, Vance. Good morning, everyone. I appreciate each of you joining today's call. I'd like to begin by thanking our associates for their hard work and dedication to our success. They consistently go above and beyond to take care of our clients. That, combined with our unwavering focus on culture, service, innovation, strategy and execution continues to differentiate us in the market. I will share three main takeaways from the quarter and fiscal year, and then we'll provide additional detail about our overall business. First, our financial performance. Our fourth quarter and fiscal year 2025 results reflect solid overall performance. In Q4, our non-GAAP revenue increased 7.5%, and our non-GAAP operating margin was 23.2%, representing a strong 146 basis points of margin expansion over last year. For the fiscal year, we again produced record revenue and operating income. Our non-GAAP revenue was $2.3 billion, and our non-GAAP operating income was $541.1 million. As you saw in the press release, we shared guidance for fiscal year '26. We do anticipate some slight revenue headwinds from industry consolidation, the impact of renewal pricing pressure and macroeconomic uncertainty. However, we remain committed and bullish on continuing to realize solid margin expansion growth along with strong free cash flow metrics for the year. We are confident that our technology innovation and execution will continue to drive our sales engine and position us very well for the long term. Mimi will discuss more of the fiscal '26 specifics in her comments. In addition, I want to communicate openly regarding the large bank merger that was recently announced and includes a Jack Henry core payment and complementary solution client. It has been speculated that Jack Henry's technology would not be selected for the combined financial institution. After conversations with both parties, there has been no indication of an intent to terminate any agreements. If contract changes were to take place, they would happen in fiscal '27 and not in fiscal '26. Second, continued industry-leading sales momentum. For Q4, our sales team had an impressive 23 core wins, topping the 22 wins we had in Q4 of fiscal '24. For the full fiscal '25, we signed 51 new core deals, 31 banks and 20 credit unions. Additionally, we signed 37 contracts to move existing in-house core clients to our private cloud, including 11 in Q4. We now host 77% of our core clients in Jack Henry's private cloud environment. Third, we continue to win larger new core deals. Over the past three years, the total assets of new core clients won have nearly tripled. We had 47 wins totaling $19 billion in assets in fiscal '23, 54 wins totaling $39 billion in fiscal '24, and 51 wins totaling $53 billion in fiscal '25. Of the 51 core wins this fiscal year, 16 were institutions that have over $1 billion in assets. In fiscal '24 and '25 combined, we won 31 core deals in this segment compared to only 16 in fiscal '22 and '23 combined. Our strategy is also resonating with the $5 billion to $10 billion asset institutions as well. Of our 16 greater than $1 billion wins, we won 4 in the $5 billion to $10 billion segment after winning only 1 in fiscal year '24 and none in fiscal year '22 and '23. Now for more detail on our overall business, starting with some accolades for the team. We're proud to have recently received recognition in three prominent publications, U.S. News and World Report's Best Companies to Work for, Time Magazine's Best Midsized Companies, and Newsweek's Greatest Workplaces. These awards are important because they reflect our people-first culture and deep commitment to doing the right thing for our employees and ensuring they are valued. I also want to recognize the tremendous effort of our team and our clients on the highly successful migration of Fedwire Funds to ISO 20022 standard on July 14. This was a major industry-wide event for the United States payments infrastructure, aligning it with international standards and enhancing crucial capabilities such as fraud detection and data sharing. Related to the migration, we had 5 clients go live with the new wires component of our cloud-native Jack Henry platform, including one of our largest credit union clients. They did this at the same time as the migration, and it went extremely well. This is a strong validation of our component strategy for easing concerns about large-scale migrations and conversions. Next, I will provide a few updates on specific products and new solutions that are part of our technology modernization and SMB strategies. Within our Payments segment, we now have 376 clients on the Zelle platform, 414 clients using the real-time payments network and 401 clients using FedNow. In our complementary segment, we added 18 new Financial Crimes Defender contracts in Q4 and 47 for the fiscal year. In addition, we signed 66 new contracts for the Financial Crimes Defender Faster Payment Fraud module in Q4 and 149 for the fiscal year. As a reminder, this module is a real-time solution designed to help mitigate fraud in Zelle, FedNow and RTP transactions. As of June 30, we have 136 financial crimes installations completed and another 71 in various stages of implementation. We also have 85 faster payment modules installed and 189 in various stages of implementation. Our Banno digital platform continues to experience high demand. For the quarter, we signed 26 new clients to our Banno retail platform as well as 39 new Banno Business deals. For the full fiscal year, we closed 70 new Banno retail contracts and 106 Banno Business contracts. At the end of June, we had 1,023 clients on the Banno platform, including 344 live with Banno Business. We finished Q4 with 14.3 million registered users on the Banno platform. And when compared to Q4 of fiscal '24, we experienced a strong 17% increase over the past 12 months. With last week's exciting announcement of the launch of Tap2Local, our merchant acquiring solution developed in collaboration with Moov, we are leveraging the Banno platform as the primary source for delivering this innovative solution to the industry. Tap2Local is currently in closed beta testing with several financial institutions and is on track to be rolled out to the 1,023 banks and credit unions on the Banno platform over the next several months. Unlike most other payment solutions for small businesses, Tap2Local is offered exclusively through financial institutions. The cloud-native solution delivers many distinguishing features for merchants, including easy enrollment, the ability to accept debit and credit card payments directly through tap to pay on both iOS and Android devices, thus eliminating the need for traditional point-of-sale hardware and continuous account reconciliation to the accounting platform of their choice. Another solution that we recently launched with Moov is Jack Henry Rapid Transfers. This cloud-native solution enables both SMBs and consumers to quickly move funds between external accounts, eligible cards, and digital wallets to manage day-to-day transactions or personal finances. We are collaborating with both Visa and MasterCard to facilitate these transactions through their respective debit rails. Rapid Transfers is now available on the Banno Digital platform, and we are in the process of enrolling more than 50 new clients. Now that we have closed key feature gaps with several competitors and have added advanced functionality that no other digital provider has today, like Jack Henry Rapid Transfers and Tap2Local, we are winning larger competitive takeaways in the digital banking space than in previous quarters. Another indicator of our progress, Banno Business was recently named the leading small business digital banking platform for strength and capabilities by Datos Insights, a prominent research firm. The ranking highlighted Banno Business' ease of use, open architecture, and excellent support. We also continue to make excellent progress on our technology modernization strategy. We now have 20 components of the new cloud-native Jack Henry platform live in various stages. While some of these are for internal use, eliminating duplicated development efforts across the company, several components are already benefiting our clients. These include the wire solution that I mentioned earlier; DataHub, which provides a centralized hub for reporting and analysis; entitlements, which manages permissions and access rights for users and systems; and a new general ledger. All components are receiving very favorable reviews from our clients. We will promote all of our new technology at the Jack Henry Annual Conference, Jack Henry Connect, in September. This is a great opportunity every year for us to meet with our prospects, clients, and partners. Last year, 20 of our new core wins were with prospects who attended the Jack Henry Connect conference. Before I wrap up, I want to share an update on our stablecoin strategy. While there is a lot of external hype around stablecoins, there are still significant industry hurdles to mainstream adoption, including regulations that must be developed over the next 6 to 12 months to implement the stablecoin legislation that passed in July, known as the GENIUS Act. Our plan is to take a strategic phased approach, supporting stablecoin solutions through our bank and credit union clients and not around them. This allows us to ensure we do the things the right way while regulations are being written. Unlike many of our competitors, we already have the public cloud-native platform and infrastructure needed for a successful stablecoin implementation. Today, our clients can securely integrate with a number of third-party stablecoin providers using our open APIs. We are currently working on enabling stablecoins as a payments rail via our JHA PayCenter. We are also in discussions with regulated stablecoin issuers, digital asset infrastructure providers, and key players to explore additional strategic partnerships. We will keep you informed as we have more updates. In closing, we are very well positioned for the future. Technology spending by financial institutions remains strong, and there's clear demand for our differentiated and innovative technology solutions. We have a robust sales pipeline and a proven ability to attract and win new clients, including larger financial institutions. Our unwavering focus on culture, service, innovation, strategy, and execution continues to set us apart. These pillars will enable us to drive continued industry-leading revenue growth with strong margin expansion, benefiting our associates, clients, and shareholders. With that, I will turn it over to Mimi for more specifics on our financials.

Thank you, Greg, and good morning, everyone. The relentless dedication of our associates in serving our financial institution clients and delivering shareholder value led to another quarter of solid revenue and earnings growth. I will begin with fourth quarter and full year results, then conclude with our fiscal '26 guidance. Q4 GAAP revenue increased 10% and non-GAAP revenue increased 8%, a continuation of consistently solid performance. Full year growth was 7% on a GAAP basis and 6% on a non-GAAP basis. Fourth quarter deconversion revenue of approximately $20 million, which we previously announced, was up approximately $14 million, reflecting the increasing pace of M&A activity among financial institutions. Full year deconversion revenue of $34 million, $17 million more than the prior fiscal year exceeded guidance. Now let's look more closely at the details. GAAP services and support revenue increased 11% for the quarter, while non-GAAP increased 7%. For the year, the increase was a healthy 7% for GAAP and 5% on a non-GAAP basis. Services and support growth during the quarter was the result of volume increases in data processing and hosting revenue, consulting work orders, and release revenue. The full year growth rate for services and support revenue was due to similar drivers, partially offset by lower hardware and license revenue. Private and public cloud offerings continue to drive impressive growth. Cloud revenue increased 11% in both the quarter and the year. This recurring revenue contributor is 32% of our total revenue and has a multi-year track record of double-digit growth. Shifting to processing revenue, which is 43% of total revenue and another strategic component of our long-term growth model, we saw healthy performance with 9% non-GAAP growth for the quarter and GAAP growth of 9% for the quarter and 8% for the full year. Consistent with recent trends, quarterly drivers included increased card, digital, and payment processing revenue. Completing commentary on revenue, I would highlight total recurring revenue exceeded 91%. Next, moving to expenses. Beginning with cost of revenue, which increased 5% on both a GAAP and non-GAAP basis for the quarter and full year. Drivers for the quarter and full year were consistent and included higher direct costs and higher personnel costs. Next, R&D expense increased 7% on both a GAAP and non-GAAP basis for the quarter and 10% for the year for both GAAP and non-GAAP. The quarterly and full year increase was primarily due to the higher net personnel costs, increased internal license and fees. Ending with SG&A expense for the quarter, non-GAAP basis, it increased 8% and 9% on a GAAP base. For the year, the increase was 7% on a non-GAAP basis and 2% under GAAP. The quarterly increase was due to higher net personnel costs, increased professional services and higher deconversion costs, partially offset by gain on assets versus previous loss on assets for the prior year quarter. The full year increase included all of the previous factors plus higher travel and contract labor costs. We remain committed to generating annual compounding margin expansion. Q4 delivered a 146 basis points increase in non-GAAP margin to 23%, resulting in a notable 70 basis point non-GAAP margin for the full year. Non-GAAP margin benefited from a continuing focus on cost management and leveraging the existing workforce. For the year, headcount increased a net 72 positions or 1%. For the last five years, excluding the Payrailz acquisition, we've added less than 1% annually, showing a continued commitment to efficiency. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.75, up 26%. Fiscal '25 fully diluted EPS was $6.24, up 19%, benefiting from strong operational results and higher deconversion activity. Breaking down the results into the three operating segments, we're pleased to see positive performance across the board for both the quarter and the full year. Our core non-GAAP segment revenue increased 7% for the quarter, with operating margin increasing a robust 274 basis points. We continue to gain benefits from private cloud trends and disciplined cost management. Full year non-GAAP core segment revenue growth was 6%, and the associated margin increased 113 basis points. Payments non-GAAP segment quarterly revenue increased 6%. The segment again had strong non-GAAP operating margin growth of 99 basis points. Full year non-GAAP revenue growth was 6% with non-GAAP margin expansion of 109 basis points. Revenue growth was due to the continued growth in our card-related services, EPS and a large percent growth on Faster Payments granted on a smaller dollar amount. Margin benefited from operational efficiencies and disciplined cost management. Finally, Complementary segment non-GAAP quarterly revenue increased an impressive 11% with 155 basis points of margin expansion. Fiscal year non-GAAP revenue and margins strongly increased 9% and 117 basis points, respectively. Both quarterly and full year revenue growth continued to reflect digital solution demand, beneficial product mix sales, sources from both core wins and non-core financial institutions. Now a review of cash flow and capital allocation. Fiscal '25 operating cash flow was a record $642 million, a $73 million increase over the prior fiscal year. Excluding proceeds from the sale of assets in both fiscal years, free cash flow was $410 million, significantly more than the $336 million last year. Full year free cash flow was positively impacted by the timing of certain contract payments and tax payments unrelated to recent tax legislative changes. Free cash flow conversion was an impressive 90%, and I will provide more details when discussing the full year guidance. Our consistent dedication to value creation resulted in a trailing 12-month return on invested capital of 22%. Additionally, I would highlight other notable return of capital metrics for the year, including $35 million in share repurchases, more than offsetting annual dilution, $150 million in debt reduction and $165 million in dividends. We're pleased to announce zero debt at fiscal year-end, providing us with maximum flexibility for future capital deployment. For modeling purposes, our amortization of acquisition-related intangibles was $6 million for the fiscal quarter. Heading into a new fiscal year, I will conclude with guidance. As you're aware, yesterday's press release included fiscal 2026 full year GAAP guidance. Deconversion guidance will continue to follow the conservative methodology introduced in fiscal '24. Fiscal '26 deconversion revenue guidance is $16 million. And as we confirm more activity during the year, we will update the quarter outlook. For the full year, GAAP revenue growth guidance is 4.2% to 5.4%. This is understated due to the conservative deconversion revenue guidance. Non-GAAP revenue growth guidance is 5.8% to 7%. Based on the above revenue growth and our predominantly SaaS-like operations, we expect to again generate sustainable accretive sources of margin. We are guiding for the third year in a row to annual non-GAAP margin expansion of 20 to 40 basis points. All of the above are indicative that our business operations remain healthy and consistent. The full year GAAP tax rate estimate for fiscal '26 is 23.75%. The above guidance metrics result in a full year outlook for GAAP EPS of $6.32 to $6.44 per share, a growth of 1% to 3%. As a reminder, due to the conservative deconversion revenue guidance at the beginning of the year, GAAP EPS growth is understated as a result. Fiscal '26 is expected to have a strong free cash flow conversion due to the recently passed tax legislation. Highlights of the tax legislation include bonus expensing of R&D costs from Section 174, and bonus tax depreciation will have a meaningfully positive impact. We will be making an election in the coming months on how we will implement the tax law changes resulting in one of the following two scenarios. We could see a more significant impact in fiscal '26 with limited nonrecurring impact in fiscal '27, or we could elect to take the benefits spread across the fiscal years '26 and '27. Overall, this legislation will allow for free cash flow conversion of approximately 85% to 100% in future years. Our current view has the cadence of fiscal '26 non-GAAP revenue being strongest in Q1, lower in Q2, and increasing on a reported basis for quarters 3 and 4. Our annual customer conference, Jack Henry Connect, will be held in Q1 this year, partially driving higher revenue during that quarter and the lower performance in Q2. Absent the timing switch of this revenue growth in quarters 1 and 2 would result in the first 3 quarters showing similar growth and Q4 showing moderate sequential increase. Our Jack Henry Connect conference will revert back to Q2 in fiscal '27 and stay in that quarter for several years, ending this occasional timing mismatch. Consequently, Q1 estimation for non-GAAP revenue growth is approximately 7% to 7.5%. As a reminder, we see fluctuations in quarterly results relating to software usage license components along with the timing of implementation. Therefore, the correct performance indicator of our business is a consistently strong fiscal year financial results. In conclusion, Q4 and full year results reflect solid performance and meeting or exceeding provided guidance. We enter fiscal '26 with positive momentum and high expectations to deliver on our full year guidance targets. Demand for our solutions and the fiscal strength of our clients remain strong, which we expect to drive superior shareholder value. We appreciate the contributions of our dedicated associates that achieved these strong results and our investors for their ongoing confidence. Jamie, please open the line for questions.

Our first question today comes from Dan Perlin from RBC.

I wanted to revisit the overall demand situation along with expectations regarding implementation cycles. Clearly, demand is strong, as evidenced by your 51 core wins, which aligns with the expected run rate you've maintained over the years. It appears you are discussing larger wins as well. However, I am curious about how this reconciles with last quarter's comments regarding delays in substantial capital purchases and the implementation cycles for non-core projects. Are those two aspects still at odds, or has the gap between them narrowed?

Yes, Dan, thank you for the question. There are a couple of things to note. First, regarding sales demand and our ability to move upmarket, I hope you heard my earlier comments about that. It is definitely happening and is a major focus for us. In response to your question from last quarter, yes, some of that gap has improved significantly, particularly on the consulting side. Some implementations are still slightly delayed, but they are not at the same level as last quarter. It's also worth mentioning that there were delays in some of our consulting engagements, especially related to our Financial Crimes Defender solution, but those have now caught up. As I pointed out, such situations can occasionally arise throughout the year. Since these delays were more pronounced coming at the end of our quarter, they ended up extending into this fiscal year, which is why I highlighted it.

Got it. Okay. That's great to hear. Mimi, I noticed that the revenue guidance range is a bit wider now, 120 basis points compared to 100 over the past several years. I'm curious about what led to that decision. I don't believe it's related to the deconversion revenue, but I wanted to clarify what factors contributed to the wider range.

Thanks for the question, Dan. Yes, overall, as we plan our budget and consider the macroeconomic factors that we cannot control, along with our growing total revenue, we felt that having a 1% historical spread in our guidance was somewhat limiting. We are committed to achieving our guidance and executing our plans. Therefore, we wanted to allow for a bit more flexibility as we work with sales and operations to evaluate the risks and opportunities ahead. There’s nothing structurally different; it’s simply about providing more operational flexibility.

Our next question comes from Nik Cremo from UBS.

First, I just wanted to circle back to the fiscal 2026 revenue outlook. How should we think about growth between the various segments on a relative basis? I know that the Payments segment was called out to have some headwinds, and it looks like the number of new Banno wins in fiscal '25 versus fiscal '24 was a little bit lower, so maybe a little slower in the complementary segment relative to the core segment.

So as we think about '26, I think some of it is going to be trends that are continuing recently. We expect that certainly core will remain solid again. Payments relative to the long-term growth algorithm, probably slightly below or towards the bottom end of that range of the near-term target. And complementary, we actually expect solid growth for '26, closer to the higher end of that growth algorithm range.

Our next question comes from Vasu Govil from KBW.

I guess just the first one, you guys called out short-term revenue headwinds from bank M&A. Any way to quantify how much that's weighing on the 2026 outlook? And then, Greg, I know you called out the large bank merger you alluded to in your comments, not baked into this year's outlook. So are you saying that that's going to be a headwind the following year, if not this year? And then more broadly, if bank M&A continues at an accelerated pace, are we potentially looking at multiple years of maybe slightly softer top line growth than the 7% to 8% we're used to seeing from you guys?

Let me address the middle question first. I want to make it clear that we haven’t received any guidance on what will happen. We've had positive discussions with both parties, and there’s no indication that Jack Henry won’t have the chance to win the overall deal or to continue providing additional products in our core solution set. So, in short, I do not expect any changes in fiscal year '26, but I cannot predict the future or its impact at this point. Moreover, as we have mentioned multiple times, we do not rely on any single client for a significant portion of our revenue. This particular client is an in-house one, so if they were to leave, the revenue impact would likely be less than that of some of our outsourced clients. Regarding M&A headwinds, we’ve seen a balance between the number of acquisitions and those lost to competitors. The revenue impact of deconversion largely depends on the remaining time on the agreements; not all deals are alike. Some might have less than a year remaining, while others can have five or six years left, which has a more pronounced impact. Even our internal deals may not trigger immediate revenue growth due to pricing or deal size. This may temporarily stunt our growth, but it’s not a long-term concern. People generally view the M&A market in this manner — each deal varies depending on its terms. Our recent activity may result in some short-term revenue changes. Historically, even during times when M&A activity was higher, we have managed to continue growing significantly. Currently, our guidance remains well above that of our competitors, and I believe that we will navigate through these short-term challenges.

And if I could just add on to that relative to the third part of your question, we see no structural change in the long-term opportunities for the company. The company is solid and extremely healthy. We expect if we think about the 3-year CAGR versus the algorithm targets, they're still very much valid and intact. And as Greg talked about, we have a lot of exciting new opportunities before us that we think will leverage to future growth.

Yes. Vasu, if you don't mind me just adding one other point just in case it doesn't come up, I think it's really important that we also talked about some renewals and some of the pricing piece. Just to put this in perspective, from a renewal standpoint, we did a 12% increase in overall renewals for the year. Some of those are actually predicated a little bit earlier than we would originally expect because it is a Jack Henry to Jack Henry conversion or migration, and the particular acquiring entity wants to renew ahead of the game. And so there's some things that become a little bit more unplanned. But what I really wanted to emphasize was that in fiscal year '24, of all the renewals we did, it totaled $94 billion in assets. But for fiscal year '25, it totaled $223 billion in assets. So they were a lot of our larger clients. And so we were able to renew them. Obviously, there's some short-term price compression. We sell them new products, so it takes a couple of years for those to get implemented and things along that line. But that's part of the reason. And I would say that, that's probably a little more prevalent than even the deconversion component.

I appreciate all the color and all the detail. That was very, very helpful. I guess as my quick follow-up, one of the other things you guys mentioned in the release is just this slower account growth, and that is something we've heard from some of your peers as well. So hoping you can give a little bit more color on what kind of change you've seen in the trendline? Any dimensionalization of what the magnitude of that change is and expectations going forward?

Yes, we've seen this trend develop over the last few years in the credit union sector of our market. There are various reports supporting this observation, and some competitors in the banking sector have noted it too. Part of this trend relates to the rise of neobanks and the accounts that are shifting to them. Additionally, as institutions adjust their deposit growth strategies, some may choose to eliminate accounts that are not actively growing, which I would consider dormant accounts. Consequently, many institutions are changing their strategies to avoid the costs associated with maintaining these accounts. This organic growth, along with the movement toward neobanks, has prompted us to concentrate on our small and medium-sized business strategy. Our goal is to retain deposits within our financial institutions, limiting the funds that flow to competitors like neobanks. This focus is a significant aspect of our overall strategy.

Our next question comes from Kartik Mehta from Northcoast Research.

Greg, I know just in the previous question, you talked a little bit about pricing pressure related to renewals. And I'm wondering, is the pricing pressure you're seeing just related to the fact you're renewing and that's just the way business is done? Or are you seeing any incremental pricing pressure on new or renewals?

Good question, Kartik. Yes, it's happening in both areas. I wouldn't say it's significant, but it's a new development. There's always pricing pressure on renewals. We have only about 100 opportunities each year where decisions are truly being made, making the market quite competitive as discussions progress. We're very transparent about sharing our core wins, something you don’t see from our competitors. We do this because we have been successful and continue to move upmarket. However, pricing pressure will always be present, as everyone is looking for lower costs. We've managed this well. This year, we focused on getting more detailed in our approach to renewals, addressing pricing strategy, timing of compression, and our sales team compensation. We implemented changes in the second half of the previous fiscal year and noticed improvements in the fourth quarter, which will persist. This approach will enhance our processes moving forward, but there will always be pricing pressure since everyone is competing for the same 100 opportunities.

And just one follow-up, Greg. Your partnership with Moov, I think it started obviously last fiscal year. And I'm wondering how it's progressing in line kind of as opposed to your expectations? Is it going in line with your expectations? Or is it any different than you expected?

Yes, I appreciate the question because it has actually exceeded my expectations. A year ago, during Investor Day, we were informed that it typically takes companies like Visa, Mastercard, and Apple 18 to 24 months to achieve full certification. However, we accomplished this in just 10 months. Both Visa and Mastercard have stated they have never witnessed such a rapid process. They have seen the transactions and live demos and have been impressed by our capabilities. There is significant interest and excitement, and we will showcase this at Jack Henry Connect with some impressive demonstrations alongside our clients. We are intentionally delaying the rollout until after Connect, but we plan to launch it over the next 2 to 3 months to all 1,000 Banno clients. The initial users have been very enthusiastic, and we are seeing promising figures. It will take a few months to gain real traction and establish a clear understanding of the results, but our development teams have truly exceeded my expectations.

Our next question comes from James Faucette from Morgan Stanley.

I want to just ask quickly on margin expansion for '26. Can you walk us through kind of what the key levers are? I know you guys always highlight maybe including today, how you've been able to drive improved efficiencies through hiring, et cetera. But just wondering if we can get a little more detail on kind of what you think the key components are, et cetera.

Thank you for the question, James. This is a metric that Greg and I closely monitor and highly value. We recognize that it is a crucial aspect of our story to investors, given that the nature of our business naturally supports margin expansion. There are a few factors at play here. One aspect is our ongoing culture of process improvement and efficiency. Greg will likely elaborate on our initiatives in AI. As I highlighted previously, we manage headcount growth through zero-based budgeting and by seeking efficiency opportunities across the organization, not just in shared services, but also in product development. This is a significant factor since one of our biggest expense areas is headcount. By being more cautious with how we open new positions and manage existing ones, we have achieved margin expansion over the past few years. Additionally, there are other structural trends contributing to this. Greg mentioned our success in migration, and continuing our move to private cloud is beneficial. We are also progressing with our public cloud migration, which is helping to stabilize our infrastructure costs after previously having some dual costs due to migrating products to the public cloud. These are some of the overall drivers of margin expansion.

Yes, James, I'll just add just as Mimi mentioned around AI, but we've had a significant focus on process improvement for years around here. Roughly 35% of our staff are green belts and trained and taught in the classroom. So we started that many years ago, and that continues today. We also take a very unique approach, I think, to how we handle both process improvement and AI initiatives by giving a mantra of doing more with the same instead of doing more with less. And that really enables our associates to have more of a focus, not thinking that they're immediately going to lose their job because they came up with a great idea or better utilization of a tool. So that's why we've been able to minimize the amount of headcount that we've had over the last several years with that focus, and that will continue. But we have a lot of things that we have going on, not only in development, but also in things like HR and how we hire, our legal approach, finance. I mean, really, all of our groups have really embraced the AI component. And then lastly, I think I mentioned this in my script, but around the work that we're doing in our tech modernization platform has allowed us to lessen the amount of people we need in certain areas because we're not duplicating efforts anymore in building out the same things. So I mentioned authorization or entitlements. Those used to be built in all the products individually. Now they're built once and utilized across the organization.

Great. And then I wanted to just touch quickly on Banno and just dig in a little bit there. Wondering how has early transactions trended with Banno Business? And can you update us on the go-to-market motion, particularly given some of the implications on the competition front with some of the competing core platforms?

Banno Business recently received an impressive award from Datos Insights. As I mentioned previously, we have been in a catch-up phase regarding key features compared to some of our main competitors, but we are almost at parity. As a result, we are starting to secure deals that we previously couldn't win due to lagging behind in business development. This is positively impacting the growth of the Banno platform and our digital offerings. Additionally, we have developed several add-ons that contribute to this growth, with Banno Business being a significant component. I believe that the features we are incorporating within Tap2Local and Jack Henry Rapid Transfers, in conjunction with the Banno Business application, will help us stand out in the market, as these offerings are currently unique and not available from competitors.

Our next question comes from Dave Koning from Baird.

The change in contract with the third-party provider results in a $16 million headwind, which is significant since most of your clients are under 1%. This is nearly a 1% revenue headwind. Can you elaborate on this? I assume it involves a reseller partner with some revenue share reductions, but please provide more details. Also, can you confirm if we are expecting around $12 million in Q1 and then a $16 million headwind starting in Q2?

Yes, I can provide more detail on that, Dave. In this case, it was a contract renewal. We are the reseller of a product bundle. The net economic impact remains unchanged. The revenues we receive come as a royalty bundle under the contract. You are correct in noting the total of $16 million, with $12 million expected in Q1. For additional context, this falls within the core segment.

Okay. Okay. That's great. And then, I guess, secondly, the gain that you're getting during '26, which quarter is that in just so we get the EPS cadence correct?

It's mostly in Q1, but it's a little bit across the year. We'll give more color as the year goes on. It's around some larger asset sales.

Our next question is from Will Nance from Goldman Sachs.

I wanted to come back to the free cash flow topic. I mean you've had several years where free cash flow was negatively impacted. And as you look out the next couple of years with a better cash flow outlook, just looking for your updated thoughts on capital allocation and if there's anything that's sort of top of mind for you as you kind of come into this new degree of flexibility on the free cash flow side?

Thanks for the question, Will. It's certainly been a journey looking back 3 years when we were at 55% free cash flow conversion and first hit with the legislative change, it's quite the journey back to 90% that we are to get and then guidance of that 85% to 100% in the future. So I think there's no reason that, that 85% to 100% is not going to be where we consistently land year-to-year. So we're just excited to get this new legislative change kind of both from a certainty perspective that it's not just short term, but just a clarity now to move forward and have strong cash flow. As to the second part of your question from a capital allocation, as I said in my comments, having a much stronger free cash flow position and zero debt, which is a pretty remarkable balance sheet from a fortitude perspective, does allow more flexibility. We think that our intention is to be able to increase the size of our share repurchases. We've had to constrain them over the last couple of years as we focused more on accretively paying down the debt. That now as we have zero debt. If I had to say we probably likely have the ability to ramp up share repurchases of at least $100 million, hopefully more and still remain open to M&A opportunities and again, always looking to have strong growth in our internal development efforts as well.

Got it. That's helpful. Greg, I wanted to ask about your priorities since becoming CEO. A significant part of your focus has been on evaluating your assets from the perspectives of divestiture and efficiency. I'm curious if you could provide an update on your latest thoughts about opportunities to enhance efficiencies, any potential asset sales you are considering, or your views on cost savings and margin structure outlook as you approach a couple of years in this role.

Yes, thank you for the question. That is definitely still a priority for us. We are currently considering a few assets that might be part of a sale. We are still evaluating some opportunities in that area. We have announced the discontinuation of nine very small products. However, our NetTeller product, which is larger, is also included in our client communications. We have almost completed the sunset of our very small core products, with just one remaining for specific reasons. We have announced the end of life for our two larger banking cores and our credit union core as well. We are actively looking for opportunities in this regard and have begun communicating with our customers, giving them approximately 24 months for the end-of-life process. We will either transition some of our assets to newer products or discontinue certain functionalities that are no longer viable for investment. This has also been a significant aspect of our budgeting process this year, as we have instructed all teams to consider investing only in products that we believe will have a long-term future with us. I appreciate the question, and we will continue to provide updates on this topic.

Our next question comes from Ken Suchoski from Autonomous Research.

Can we just revisit the quarterly cadence on non-GAAP revenue growth? And maybe we could touch on the cadence in the back half of fiscal year '26 because I think there were some comments that fiscal 1Q would be in that 7% to 7.5% range. I think fiscal 2Q a little softer and then increasing on a reported basis for 3Q and 4Q. So I just wanted to confirm that's on a non-GAAP basis because I think the press release said fiscal 3Q is slightly weaker. So just trying to figure out if that's relative to the full year or fiscal 2Q.

Thank you for the question, Ken, and the opportunity to clarify. It is on a non-GAAP basis, that's the way we manage the business. And you're accurate in your summary of it, Q1 being the strongest, then Q2 a little weaker and then increasing from 3% to 4% for the remainder of the year.

Okay. That's helpful. Can you provide a higher-level overview regarding the pricing dynamics in the industry? I know this has been discussed earlier, but I understand one of your competitors has been more aggressive with their pricing. Could you explain where this competitor is implementing these aggressive pricing strategies, whether it's on the core products or the additional solutions? Additionally, I'm interested in your perspective on what has shifted in the industry to prompt these changes. Historically, Jack Henry has maintained premium pricing relative to its competitors in this concentrated market, so I am curious about your thoughts on this matter.

Yes, thanks for the question. First, I would like to note that both of our main competitors have adopted an aggressive pricing strategy, with one having pursued this approach for a longer time, while the other was temporarily distracted. That distraction has diminished now. Most of the competitive pricing we observe is primarily aimed at retaining their existing customers while we focus on acquiring new core clients. We do experience competitive pricing in our own contract renewals, as I mentioned earlier. However, we possess greater leverage and can highlight the value we've delivered to our clients throughout their engagement with us, allowing us to maintain the highest pricing in the industry. Consultants frequently confirm this. When analyzing the overall pricing of the 51 core wins we discussed, I can assure you we were never the lowest bidder in any of those cases. This situation is a standard aspect of our business. Clients must consider their priorities: whether they value long-term growth and our ability to lead them into the future with our technological advancements and innovative offerings like Tap2Local or if they prefer short-term gains while others sort things out. Naturally, this leads to varied decisions among clients. However, we have successfully secured a significant share of upmarket opportunities and continue to do so. Overall, the dynamics remain largely unchanged, with our competitors primarily focused on defending their current positions.

Our next question comes from Dominick Gabriele from Oppenheimer.

Compass Point. I really appreciate the question. So I just wanted to go back to the account growth at your partners, and you mentioned some neobanks there. Are there any other factors besides just maybe takeaways from what some may say traditional finance companies to neobanks? Are there any other dynamics that play into why account growth could be slowing, say, 1% to 2% versus '23?

Yes, I believe a lot of this is not solely attributed to neobanks. As I mentioned earlier, some small and medium-sized businesses are also shifting their products to other providers that offer various solutions. I pointed out previously, possibly at last year's Investor Day, that only about 16% of individuals with retail accounts at community and regional banks also hold their business accounts there. This is one reason we're actively advancing our small and medium-sized business strategy to retain those deposits and accounts at these institutions. Additionally, the presence of neobanks, digital wallets, and the ability for individuals to maintain funds in various locations, including dormant accounts, plays a role. If customers are paying for an account that shows no activity for a certain period, they may decide to close it. This, in turn, hampers growth compared to what we experienced in previous years. I expect our competitors are facing similar challenges. These are some of the key points to consider.

If I could add on to as well, this is not a Jack Henry specific, but things you'll see across the industry. But until recently, you're not seeing a ton of new car sales, which will lead to new loans and autos, with the housing market kind of being frozen and not seeing a lot of transactions in real estate, and that's been a national issue, again, less mortgages, less account opening. So we're seeing some of that tied to lending volumes as well.

Yes. No, I'm sorry to interrupt you. I just was going to say we also have a mixed bag of clients that have asset-based pricing and some that have per account pricing. So it really depends. But as the customers get larger and really dependent on whether they're more business focused or retail focused, that has a stronger indicator of what type of pricing that we would have in place with them.

Our next question comes from Chris Kennedy from William Blair.

Greg, just wanted to follow up. I mean it's clear you're excited about Banno for Business and Tap2Local. Can you just kind of give an update on the SMB strategy, kind of where you are relative to your initial expectations?

Yes. Thanks for asking, Chris. Yes, like I said, I'm extremely excited, and I would say we're ahead of where I expected us to be just because as we really got into building everything out and we're told it would be an 18- to 24-month process, but our team was able to complete it with move in 10 months. So that is significantly ahead of where we thought we were going to be. And as I mentioned, we're going to start rolling this out in a heavy, heavy way post our client conference in early September. So early indications from the card associations and from the clients that have been in our closed beta have been tremendous. So excited is an understatement. The entire SMB strategy, we actually have a roadmap that we've created that will cover over the next 18 to 24 months of a variety of different activities that we will be adding to the overall solution set. Some are actually kind of point-to-point solutions that we have today at Jack Henry that haven't been positioned as well as maybe we should have in the past to put them in this SMB strategy. Others are things that we're working, again, independently and with Moov that we'll be rolling out. But candidly, my big message to our team is that nobody is going to care about the next solution until the first one is successful. So we are highly focused on making sure that that is the case.

And our next question from John Davis from Raymond James.

Greg, I want to take a step back here. Looking at the revenue outlook for 2026, it's about 100 basis points below what I consider to be normalized growth. You mentioned that you don't see any significant structural changes in the Jack Henry growth rate. You're gaining larger banks, which I believe would boost growth. You also pointed out the industry headwinds. Is there any change in your guidance philosophy, considering you're projecting a little under revenue for the first year? I'm trying to understand the various factors at play. Are these industry headwinds leading to more than a 100 basis points adjustment, which could be counterbalancing the larger bank successes? Is there increased caution in your approach? I'm trying to analyze the guidance for 2026 in relation to your views on normalized growth for Jack Henry.

Yes, that's a great question. There isn't anything structurally different or anything that amounts to a significant concern. We're experiencing some macro uncertainties that we're still cautious about. The main focus is on renewals and M&A activity. While we typically win more deals than we lose, the key issue lies in the timing of these activities and the status of individual contracts. We also need to consider whether acquisitions will be beneficial, as some haven't yet reached the expected pricing levels. All these factors are part of our day-to-day operations. Regarding larger deals, many of those will start to materialize in the latter half of this year based on wins from last year. Significant deal wins have mainly occurred over the past two fiscal years, and it generally takes about 15 to 24 months for core activities to take effect. We'll start seeing results from activities initiated two fiscal years ago in fiscal year '24 in the second half of this year and into fiscal year '25. Therefore, we're optimistic about our trajectory and activities related to SMBs and other areas like stablecoin initiatives. I hope that addresses your question while covering several key points.

Yes. The only thing I want to follow up on a little bit is given a little bit more uncertainty this year, given the M&A environment, given some of the industry slowdown, also, you gave a wider range after missing kind of the initial guide last year, is maybe there a little bit more conservatism given a little bit more uncertainty coming into this year? Just any change in guidance philosophy in year two since you've taken over?

No, there's no real change in our philosophy. We did make a slight extension from a 20 basis points perspective, but we've discussed that. When you consider our company, a 1% change represents $23 million, while a 0.5% change means $11.5 million. There isn't much flexibility within that range. So that's something we have evaluated and will continue to assess in the coming years. We thought it was best to start with this approach. Other than that, as Mimi mentioned, and I've been trying to convey as well, nothing else fundamentally has changed.

Okay. And then just one last quick question about complementary products. Now that Banno has achieved product parity along with Tap2Local and rapid transfers, how are we doing in selling that to customers outside of our existing base? Also, regarding complementary offerings beyond Banno, what are the positive and negative aspects? What is performing well, and what challenges are we facing? I'm trying to understand the growth outside of Banno and our progress in selling Banno to new customers.

Yes. I'm glad you asked that. I was prepared and was hoping somebody would ask me, if not, I was going to bring it up myself. Yes, we're very excited and very focused on continuing to work. As I mentioned before, we've taken a couple of different paths for outside the base. I won't get into all the specifics. There are opportunities like today, we can actually sell and we will sell Tap2Local and rapid transfers outside of the Jack Henry base, but we can do that today. We actually are also going to increase the TAM over the next couple of years by providing some opportunities for even our key digital competitors to sell that and for us to be part of the equation there. But by the end of this calendar year, our teams will start selling opportunities outside of the Jack Henry core base with the belief that we could start implementing the latter part of our fiscal year. So in the May, June time frame, we would hope to have a couple of beta clients that would be live. But that is the approach. We're actually taking two different approaches and kind of doing them both using some of the technology that we've built on the platform as well as technology that we're building through core integrations with some outside providers. But all of that is in play, specifically for Banno, but other products will follow suit as well over time. But Banno will be the first one of the ones that are not outside the base today.

Our next question comes from Rayna Kumar from Oppenheimer.

This is Abigail on for Rayna. I just wanted to talk about hardware revenue, which faced some persistent headwinds in FY '25. What does this outlook look like as we enter FY '26? And what's the impact on guidance, do you think? And then can you help us also look at the size and the decline in hardware revenue from delayed sales and implementations versus just the clients that are migrating to the cloud?

Sure. Regarding the upcoming fiscal year '26, we experienced significant challenges in '25 growth due to lower hardware sales; however, the impact in '26 will be less severe. We do not anticipate a significant rebound in hardware sales, but we expect it to be a smaller headwind since we are starting from a lower base in FY '25, and this is factored into our guidance. As for the latter part of your question, as clients continue to transition from on-premise to private cloud, future hardware purchasing needs will decrease. Most of our current wins are in the cloud, with very few new client wins occurring on-premise. Consequently, we believe that the trends in hardware demand will persist, especially considering that we are now at 77% private cloud.

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

Thank you, Jamie. In the remainder of our first quarter, we will host approximately 3,000 clients at our upcoming Jack Henry Connect conference, and management will be participating in investor meetings across various U.S. cities and internationally at the end of the month. We would like to thank all Jack Henry associates for their efforts and commitment, which contributed to another successful fiscal year. Thank you for joining us today. Jamie, please provide the replay number.

The replay number for today's call is (877) 344-7529, and the access code is 3201054. The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.