Jack Henry & Associates Inc (JKHY) Q1 2027 Earnings Call Transcript

Thank you. And welcome to the Jack Henry First Quarter Fiscal 2027 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please limit yourself to one question. Please note this event is being recorded. I would now like to turn the conference over to Van Sherrard, Vice President, Investor Relations. Please go ahead.

Thank you, Nick. Good morning, and thank you for joining the Jack Henry First Quarter Fiscal 2027 Earnings Call. Joining me on the call today are Greg Adelson, President and CEO, and Mimi Carsley, CFO and Treasurer. Following my opening remarks, Greg will provide a brief summary of our quarterly results, updates on operations, sales performance, and a few strategic products, as well as commentary on our recent annual client conference. Mimi will then discuss the quarterly financial results and updated Fiscal 2027 guidance provided in yesterday's press release, which is available in the Investor Relations section of the Jack Henry website. Afterward, 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 also included in yesterday's press release. Now, I will hand the call over to Greg.

Thank you, Vance. Good morning, and thank you for joining today's call. I also want to express my gratitude for those of you who traveled to our September Investor Day. It was great to connect with many of you in person. Before I begin, I want to thank our associates for their dedication to our clients, our financial performance, and the key differentiators that elevate Jack Henry. Culture, service, innovation, strategy, and execution. I will start by sharing three key takeaways from the quarter and then provide additional perspective on our overall business performance. First, our financial performance. We produced record first quarter financial results, generating non-GAAP revenue of $682 million, up 7% year-over-year. This growth significantly exceeds the outlook and expectations for the quarter from our August call comments. Additionally, our non-GAAP operating margin was 28%, representing a strong 102 basis points of expansion over last year's Q1. Second, our strong sales momentum. As a reminder, the first quarter is typically our lightest of the fiscal year. However, this quarter we secured nine competitive core wins, which is more than double the four we had in Q1 last year and better than the six wins we averaged in Q1 over the past five years. Additionally, our sales pipeline continues to be robust, reinforcing the momentum we're seeing across the entire business. We remain very confident in our early guidance of 58 to 65 new core wins for fiscal year 27. We also continued our trend of winning higher value trifecta deals that include core digital and card solutions. In fact, 63% of our Q1 core wins, excluding one non-traditional bank that does not offer a core card business, were trifectas, compared to 50% in the prior year period. Looking at Bano specifically, all but one, or 89% of our new core deals in Q1 included Bano. That speaks to the increasing strength of our digital solution and the continued momentum we are seeing following our 83% Bano attach rate in fiscal 2026. Third, client engagement at our Jack Henry Connect Conference. In October, we hosted nearly 3,100 clients and prospects in Kansas City, making it our largest event ever. Prospect attendance grew significantly. We welcomed 141 prospect attendees, representing 53 financial institutions, up from 91 attendees and 32 institutions last year. Though each institution represents different stages of our pipeline, that growth is particularly meaningful given that nearly 40% of our 58 competitive core wins last fiscal year came from prospects who attended the conference. We also set record attendance across key stakeholder groups. 64 consultants, 281 third-party fintechs in our technology exhibit hall, and a sold-out CEO forum with 234 financial institution executives, up 11% from last year, along with close to 30 members of Jack Henry's leadership team and board of directors. The conference showcased our continued innovation, including significant advancements in the Jack Henry platform, Tap to Local, Rapid Transfers, Financial Crimes Defender, and AI since last year's event. We also demonstrated emerging technologies and capabilities such as stablecoin, tokenized deposits, and recently announced Move Money. Finally, it was a memorable celebration of our 50th anniversary, highlighted by remotely ringing the NASDAQ opening bell alongside 50 long-time clients, our corporate leadership team, and special guests Brenda Henry and Pat Hall, the wives of our co-founders Jack Henry and Jerry Hall. I will now discuss a few specific sales and operational updates. I want to start with a strong demand for our Gladiator security and infrastructure solutions. As cyber threats become increasingly sophisticated, amplified by the rapid use of frontier AI models, financial institutions are prioritizing advanced protection. In Q1, we sold 367 Gladiator solutions, triple the volume from Q1 last year, and marking our fourth consecutive quarter of sales growth. On the AI front, we are actively executing on the strategy we outlined at Investor Day. We now have 30 AI-enabled products in the market with plans for a large contingent over the next six months. Our focus remains on delivering practical AI solutions that improve operational efficiency, enhance decision-making, and help financial institutions better serve their account holders. As we expand our AI across our portfolio, responsible implementation is critical. Our strategy pairs the power of AI with robust human oversight, enabling financial institutions to boost productivity while continuing to differentiate through trust, relationships, and service. Beyond our product offerings, we are applying AI from the inside out, taking what has worked within Jack Henry and bringing those learnings directly to our clients. From strategy and governance to adoption and coaching, we are using our own experience to help financial institutions accelerate their AI journeys. Internally, our dedicated AI coaches have driven significant adoption across Jack Henry, with more than half of our associates now using at least one AI tool daily. This has unlocked substantial productivity gains, including up to 90% increase in development output for some of our key solutions. Building on this internal success, we are now launching AI consulting services for our clients. This offering will guide financial institutions in establishing AI governance, crafting implementation roadmaps, and driving rapid organizational adoption. Next, I want to highlight the strong momentum with our Tap to Local SMB merchant payment and Rapid Transfers account-to-account money movement offerings. Tap to Local is now available to all 1,000-plus Bano clients, and adoption among both FIs and small businesses continues to accelerate. Tap to Local generated significant interest at Jack Henry Connect, where we highlighted recent enhancements, including AI-generated product catalogs, customer list generation, shopping cart functionality, and invoicing. In addition, we recently partnered with Visa to host a highly successful Tap to Local event in Kansas City for financial institutions and small businesses and plan to do more of these in the future. We are also driving adoption of rapid transfers. The solution is now live at more than 170 banks and credit unions, with an additional 140 institutions in various stages of onboarding. Rapid transfers also continue to receive positive feedback and interest at our client conference. Additionally, we are excited about the March 2027 rollout of MOVE's P2P payment solution called MOVE Money. As we shared at Investor Day, the Bano digital platform will be the first to integrate MoveMoney, enabling consumers to send and receive funds through debit card rails via Visa and MasterCard. Unlike most existing P2P payment solutions, transactions do not require both parties to use the same application. Account holders simply need a debit card and a mobile phone. This gives financial institutions the ability to offer a modern, fast, and secure payment experience under their own brand. Move Money complements our broader, faster payment strategy alongside Zelle, RTP, and FedNow. As demand for real-time money movement continues to grow, we believe Move Money's differentiated approach creates another opportunity for financial institutions to compete effectively, retain deposits, and strengthen primary account relationships. We continue to advance our stablecoin and tokenized deposit initiatives. While adoption among community and regional financial institutions is still in early stages, we believe it's important to provide clients with infrastructure that supports emerging payment rails as the market evolves. Our approach is centered on interoperability and client choice. We are currently beta testing USDC capabilities with clients, and last summer, we joined OpenUSD, an industry initiative focused on advancing open standards for digital assets. We also recently announced plans with Google Cloud to enable tokenized deposits through Google Cloud Universal Ledger, making Jack Henry the first core technology provider to integrate with GCUL. Regardless of how the regulatory environment evolves, we believe financial institutions will increasingly need access to modern payment infrastructure capable of supporting multiple rails, settlement models, and emerging forms of digital value transfer. Underpinning these innovations is the cloud-native architecture of Jack Henry Platform, which gives us the flexibility to respond as new technologies and payment rails emerge. The platform serves as an integrated bridge between our foundational cores and emerging capabilities that community banks and credit unions need to compete with fintechs and large institutions. We now have roughly 30 core components live on the platform, including wires, ledger, and exceptions. More than 100 clients have adopted at least one component, and we continue to see significant interest in the platform, along with positive feedbacks on its differentiation in the market. We are finalizing our approach to include the platform in every new core deal and will share more on our February call. This provides clients a flexible path to modernization, allowing them to adopt cloud-native capabilities at their own pace while simplifying operations and creating more modern experiences for their account holders. Moving on to our operational segments. In payments, I mentioned earlier that we continue to see strong demand for faster payments. Over the past year, our client's adoption of Zelle grew by 25%, RTP by 28%, and FedNow by 30%. In the first quarter, payment transaction volume across these channels increased 42% year over year. We also saw healthy car processing sales activity in Q1, signing 13 debit and or credit card deals up from eight a year ago. In our complimentary segment, we signed 32 new Financial Crimes Defender and Faster Payment Module contracts in the first quarter, and as of September 30th, we have completed 208 Financial Crimes Defender installations, and another 58 are in various stages of implementation. We have also installed 225 faster payment modules, with an additional 255 in progress. The Bano digital platform had another strong quarter, with 13 retail and 12 Bano business signings. The 25 total signings represent an increase of nearly 40% from last year. The Bano platform now serves more than 16.3 million registered users, up 11% from a year ago. Treasury management continues to perform well, with growing traction among commercially focused clients. In Q1, we signed six new Treasury clients with total assets of $16.3 billion. That is nearly 60% higher than the combined assets of the eight Treasury clients signed in Q1 last year. Overall, tech spending and financial services remains very strong. In Bank Director's 2026 technology survey that came out in September, 81% of the respondents reported an increase in their bank technology budget for fiscal year 26, up from 71% a year ago. The median increase in spending was 10% for the second consecutive year. That is more than double the 4% median increase in 2024. These results align with findings from our strategy benchmark published last spring, and that survey, 88% of our own clients said they plan to increase spending over the next two years, with their top priorities being AI, digital banking, and data analytics. Looking ahead, we will hold our annual shareholder meeting on November 19th in Monette, Missouri, which will be webcasted as well. In closing, we are very pleased with our first quarter performance and the continued momentum across our business. The demand for our solutions remains strong, as demonstrated by our quarterly results, robust pipeline, and record attendance at Jack and Reconnect. With continued execution across sales, innovation, and service, we are confident in our strategy and our ability to deliver consistent long-term results. With that, I will hand things over to Mimi to walk through the financial details.

Thank you, Greg, and good morning, everyone. I'd like to begin by thanking our associates who continually deliver tangible value and industry-leading service to our clients. These efforts resulted in another excellent quarter, providing a strong launch into fiscal 27. My comments will begin with the quarterly results, then conclude with a discussion of our updated fiscal 27 guidance included in yesterday's press release. Q1 GAAP revenue increased 9%, while non-GAAP revenue increased 7% for the quarter, a continuation of our consistently strong performance. First quarter deconversion revenue of approximately $18 million, which we previously announced, was up approximately $9 million for the quarter, reflecting M&A activity among financial institutions. As a reminder, the dollar amount of deconversion revenue has little correlation with the number of transactions or the impact to Jack Henry's annual revenue, and the absolute amount of deconversion revenue can vary greatly quarter to quarter. We continue to see industry consolidation as largely neutral to slightly positive for our business. Now, let's look more closely at the details. GAAP services and support revenue increased 7% for the quarter, while non-GAAP increased 5%. Services and support quarterly growth was the result of consistent strength in hosting revenue for cloud services. Cloud services offerings continue to drive robust growth, increasing 11% for the quarter. This reoccurring revenue contributor is 31% of our total revenue. Shifting to processing revenue, which is 42 percent of the total revenue, and another strategic component of our long-term growth model. We delivered healthy performance with 11 percent GAAP and 10 percent non-GAAP growth for the quarter. Consistent with recent results, quarterly drivers included increased card, digital and transaction, and faster payment revenues. Completing commentary on revenue, I would highlight total quarterly reoccurring revenues was 93%. Next, moving to expenses, beginning with the cost of revenue, which increased 8% on a gap and 7% on a non-gap basis for the quarter. Drivers for the quarter include higher personnel costs, direct costs growing consistent with lines of revenue, a planned increased cloud consumption, Higher internal license and fees, and increased amortization of intangibles, partly offset by higher LIBOR cost deferral quarter over quarter. Remodeling purposes, amortization of acquisition-related intangibles was $6 million for the quarter. Next, R&D expense increased 17% for GAAP and 15% on a non-GAAP basis for the quarter. The quarterly increase was primarily due to net personnel costs driven by trailing 12-month headcount growth, ending with SG&A expense. For the quarter, on a gap basis, it was flat year-over-year, and on a non-gap basis, it decreased 6%. Results reflect lower expenses related to the timing of our Connect conference. We remain focused on generating annual compounding margin expansion. Q1 delivered non-GAAP margin at 28%. More importantly, Q1 non-GAAP margin improved 102 basis points. This starts another year that targets our fourth straight year of compounding non-GAAP margin expansion as aligned with our commitment to investors. Non-GAAP margin reflects the inherent leverage in our business model and management's continued focus on creating AI efficiency. Strategic cost management, leveraging our existing workforce, and enterprise process improvement. These strong quarterly results produced a fully diluted gap earnings per share of $2.28, up 16%, with the largest contributor being operations. Reviewing the four operating segments for the quarter, we saw excellent performance across the board. Core segment non-GAAP revenue increased 5% for the quarter, with non-GAAP operating margin decrease of 31 basis points, primarily due to the increased hosting revenue. As we noted in yesterday's press release FAQ section, growth was negatively impacted by lesser non-reoccurring revenue from on-premise implementations and consulting services. Excluding these revenue items, quarterly core segment growth was 8.6%. This is consistent with a significant number of core wins, including upmarket wins over the recent past. Payment segment quarterly non-GAAP revenue increased 8%. The segment continues a strong run of fantastic non-GAAP operating margin growth with quarterly results of 189 basis points. Card and processing revenues showed steady growth. The segment also benefited from continuing large percentage growth from faster payments. The complementary segment and quarterly non-GAAP revenue increased 8% with quarterly non-GAAP margin growth of 209 basis points. Quarterly revenue growth benefits from cloud services and digital processing revenue. Additional positives include beneficial product mix and additional sales sourced from new core wins, existing core customers, and non-core financial institutions. For the quarter, corporate services non-GAAP revenue increased 5%. This is primarily the result of meaningful increases in the traditional segment revenue. Increased on-premise support partially offset by the decrease in user group revenue resulting from the timing of our Connect conference. Since this segment reflects expenses not allocated to the other segment, we will not be discussing non-GAAP operating margins as it provides no meaningful insight. Now, a review of cash flow and capital allocation. Q1 operating cash flow was $161 million, a 34% increase over the prior fiscal year Q1. Quarterly free cash flow of $83 million delivered a 19% increase over the prior year fiscal Q1. This was primarily the result of increased net cash from operating activities, partially offset by larger aggregate capitalized expenditures. Our consistent dedication to driving value for our investors resulted in a trailing 12-month return on invested capital of 23% compared to the 22% in the prior year. We're very proud of the durability of this metric and how it reflects our high-quality allocation of capital. Additionally, I would highlight the following significant quarterly capital decisions resulting from our strong free cash flow generation and cash on hand. We purchased 462,000 shares for $71 million and paid $43 million in dividends. The average purchase price of shares purchased was $153. We ended the quarter with debt of $85 million, consistent with normal course revolver usage. I will now discuss our updated guidance for fiscal 2027. Based on our impressive start to the fiscal 27 and an improved outlook, we are pleased to increase full-year guidance. I will now review the updated metrics from yesterday's press release covering fiscal 27 full-year gap and non-gap guidance. Full-year gap revenue growth guidance is a range of 6.0% to 6.8%. This is due to the improving operational outlook and expected higher deconversion revenue from our outlook at the beginning of the year. Revenue on a non-GAAP basis is expected to be within a range of 6.6% to 7.4%. This represents a significant raise at the bottom of the prior range and a slight adjustment to the top end of our previous range. Deconversion revenue guidance will continue to follow the conservative methodology introduced in Fiscal 24, with Fiscal 27 deconversion revenue guidance updated to $30 million. Full-year non-GAAP margin is reiterated at an expansion of 20 to 40 basis points, and we remain cautiously optimistic that we will increase that range as the year progresses. The cadence of the full-year has been adjusted. We now expect lower non-GAAP revenue growth in the second half, and previously disclosed non-GAAP margin headwinds remain intact for the first half. These are primarily timing-related adjustments, and we remain confident in our ability to achieve the updated and reiterated full-year guidance metrics. As mentioned during the Q4 call, expense comps during the first half of fiscal 27 will reflect pressure from self-insured medical costs returning to historical levels. Additionally, planned increases in cyber and infrastructure investments related to frontier models, AI innovation, and our data center consolidation project, EC-2030, will pressure margins in fiscal 27. 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 the consistently excellent fiscal year financial results. Our business operations remain robust with growth opportunities across all four operating segments. Full year gap tax rate for fiscal 27 is forecasted at 23.25% to 24%. The updated guidance metrics produce a stronger full-year outlook for GAAP EPS of $7.47 to $7.51 per share, growth of 7% to 8%. As a reminder, conservative deconversion revenue guidance potentially understates GAAP EPS growth. Full-year free cash flow conversion outlook is reiterated for 85% to 100% for fiscal 27. In conclusion, our strong start to the fiscal 27 positions us for another fantastic year. We're grateful for the contributions of our focused and dedicated associates that produce these superior results and our investors for their ongoing confidence. Nick, please open the line for questions.

Thank you. We will now begin the question-and-answer session and ask that you limit yourself to one question and return to the queue for any additional questions. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble the roster. The first question will come from Dan Perlin with RBC Capital Markets. Please go ahead.

Thanks. Good morning, and congratulations on a great quarter. I just wanted to ask a question around cybersecurity. One of your competitors, you know, today is actually calling out. They're just getting a lot of pressure from their clients to invest in cybersecurity. Greg, you called out Gladiator, you know, 300 solutions, you know, tripled that of last year. Mimi, you just kind of highlighted it as one of the areas of investment. And I just want to make sure that... You guys are kind of, I guess, in a position such that if that demand were to increase, there's not some sort of investment cycle that would catch you off guard. Thank you.

Yeah, I'll start, and Mimi can add her commentary. So, yes, a good question, and the answer is no. You know, we had been planning for this as part of our annual budget planning. We had been planning. I've been talking about what we thought was going to be an increase in some of our gladiator services for the last quarter and a half and an investor day as well. So, we've been gearing up for this both from an implementation standpoint, an investment standpoint. We've been working with our partners, you know, both on the Frontier model side with Anthropic and with Google and others and continue to do that. You know, the models are changing on a regular basis. Those are not the only two that are out there now with Frontier models. We continue to work in that. And we're managing that cost as part of our ongoing endeavor as well to ensure that we're doing the right things to protect our clients as well as managing our resources.

Yeah, I would just echo Greg's point in terms of the protection of our clients' data is paramount to what we do and the foundation of the trust that they have in us, and therefore their end customers trust in that. And so we take that very seriously. We've been investing for over since my tenure here at Jack Henry pretty strongly in this area to make sure that we've been making the step function changes to create kind of a zero-trust environment and a protected environment for our data and for our clients' data. I don't see that changing. If anything, to Greg's point, I see the opportunity side from the products and services we offer having more demand and potentially even, and this is something we talked about in Investor Day, an acceleration of the shift from on-premise to private cloud.

Excellent. Thank you. The next question will come from Andrew Schmidt with our KeyBank Capital Markets. Please go ahead.

Hey, Greg. Hey, Mamie. Thanks for taking the question, and great to start the fiscal year here. So maybe just start off with an environmental question. I'm just curious if you're seeing anything different in the environment. Obviously, if key competitors are calling out higher retention, just curious what you're seeing broadly in terms of your win rates. And then as we think about just the intermediate term outlook, maybe just remind us what's embedded from a WIN perspective. I understand the implementation timeframes are lengthy, so this may be more of an FY28 question, but just curious, you know, what the assumptions are there. Thank you so much.

Yeah, thank you. I'll take that. And again, Mimi, you can add any comments if you want. But from the perspective of the environment, yeah, I mean, I'll say this directly, I guess. You know, our pipeline continues to grow significantly. Again, referenced by what I mentioned at the number of prospects that showed up at our client conference. A lot of them were with that particular provider you're talking about. And then, you know, a lot of our wins recently have been longtime clients of that particular provider. A couple of them were 28-year clients. So our pipeline continues to grow. It's a lot larger than it was, say, six months ago when we had a deeper conversation about this ourselves, Andrew, and with other investors and analysts. So, you know, I think the thing that needs to be, you know, probably discussed is really just around, you know, percentages and, you know, what percentages mean versus, you know, what actual numbers are. So, from our standpoint, you know, we see a really nice pathway to our 58 to 65 that I continue to reiterate. And again, you know, it's not just from one provider as well. So, you know, honestly, in our first quarter, we didn't have as many as I would have expected from that one provider. They were coming from others. So we continue to be equal opportunity offenders, I guess, is what I would say from that standpoint.

And I think that long-term durable sales success is an indicator of the modernization journey we've been on, the fact that those products are now in the hands of clients, and Greg also mentioned in his prepared remarks, the industry as a whole anticipating increasing spend in the category.

Yeah, and when I look at opportunities, as you mentioned, just kind of looking out, you know, the opportunities are continuing to come not just from the core and the core modernization and all the capabilities that we outline in our Jack Henry platform, but as I mentioned, like treasury management, you know, as we've rebuilt that product, we're able to take that product more upmarket. So it's creating opportunities into larger institutions because Treasury is a key solution set for a lot of those commercially focused solutions, as well as what we're doing on the digital side and card side and other things. So, you know, core itself isn't just sold by, you know, as a core feature or functionality. A lot of times it's sold with the other complementary and payment products.

Got it. Thank you. Noted on the diversified sources of wins, and then also the math on the percentages. I appreciate that. Thank you so much.

Yeah, absolutely.

The next question will come from Vasu Govil with KBW. Please go ahead.

Hi, good morning. This is Yvonne Jang on for Vasu. Thank you for taking my question. Your operating margins came in better than expectations this quarter, and there was some benefit from connect expenses moving to the second quarter, but did you also see strength on an underlying basis? I know the guidance is unchanged, but just trying to get a sense for your ability to outperform. Thank you. Evelyn, thanks for joining and taking Basu's place this morning. We're glad you were able to participate. We know it's a busy day for earnings this season. So thank you for letting me get into this in a little bit more depth. I would say the predominant opportunity from a margin perspective is the fundamental underlying strengths of the business. You saw cloud, you saw payment growth even exceeding our expectation for the quarter. That has really healthy margins that are associated with it. There is some timing shift, as you well point out, from Connect. And just for modeling purposes, giving people a little bit more clarity, roughly call that, you know, $9 million of revenue, roughly around, you know, $5 to $6 million of expense in a given year. The good news is we've committed to the timing of those conferences for the next four years, so there'll be less noise grow over, you know, for next year and beyond. But the main point being, aside from the timing thing, the reiteration of the full year guide reflects the strength of the overall business.

Thank you. The next question will come from Jason Kupferberg with Wells Fargo. Please go ahead.

Hey, good morning, Greg and Mimi. This is Tyler Juppont on for Jason. Thanks for taking our questions. It was great to see core winds continuing to come in strong in the quarter. But if I'm just looking at growth trends within core, we've seen, I think, a few quarters now of decelerating growth. Can you maybe just take a minute to discuss the trends you're seeing in the core segment? You know, where is that potential near-term disconnect between the number of wins and the path towards accelerating growth? Like, is there constraint there in implementation capacity, or is there some customer readiness or pricing or anything there that's causing that disconnect? And just how should we think about growth as we move through the year? That would be super helpful. Thank you.

Welcome to the call, Charlie. So, as we pointed out in the script and in also the FAQ, there is fundamental strength within the core segment, and that's based on the sustainable, you know, record sales we've had, you know, the last number of quarters. There's also some one-times, and so those one-times create some noise. We talked about that related to some work orders, some on-premise implementations, other things that we consider non-key revenue. But if you look at the key revenue within CORE, that strength of 8.6% growth really shows you the sustained engine of that segment.

The next question will come from Chris Kennedy with William Blair. Please go ahead.

Good morning. Thanks for taking the question. I think one of the questions following the analyst day was the level of conservatism regarding the prospects for accelerating growth in the out years. Can you just clarify the visibility and potential levers of upside?

Yeah, I can, Chris. So, we are really optimistic about not just 27, but the two years beyond that we started to talk about. But as we know, in this kind of AI pace of the world, two years from now, which is really two years plus nine months from now, is a long time to forecast. So there's a number of new efforts coming online that we think will start to build the momentum to be meaningful contributors. You have the expectation of continued strength in payments. Greg highlighted the continued faster payments growth. You have a lot of use case scenarios, the small business initiative, the platform itself, and then the coming online of those wins at a higher win rate and a higher asset size. On top of the trifecta. So, those are the things that we kind of have visibility to. There's some others that we talked about in the slide I shared at Investor Day of, like, others that could come online. They're just too early to see. Like, the trends we talked about, if you have a meaningful shift in on-premise to try the cloud, you know, that's 2x revenue for us. If that accelerates, if the spending in fraud prevention continues to accelerate, there are some meaningful parts of our business that could layer on top added growth to what is already hitting the 8% range of growth.

Yeah, and I'd like to add a couple things, Chris. So, one of the things that we did talk heavily about is the continued efforts in our SMB strategy around tap-to-local, rapid transfers, and now adding a component of move money, which really doesn't have anything baked into our immediate plans. But just to put this in perspective, the number of transactions that we did in the month of October was more than we did all of last year in tap-to-local. So that, you know, we're starting to see some of the growth that we've talked about. If that continues at the pace that we expect, that's all baked into that higher performance as we've been talking about. The other one is around the in-to-out stuff. So just to go ahead and put it out there, since somebody will ask, I'm sure, to go ahead and help with that question. So we're targeting 30 to 35 again this year as part of the overall. And to Mimi's point, we're starting to see some larger institutions continue to really want to look at this as an alternative, especially as frontier models and other concerns out in the marketplace with cybersecurity become stronger. And so, you know, whether we get to 30 to 35, still early, we were a little slow out of the gate, but, you know, not concerned about that at all. But the reality is, we're seeing more interest because there's more concern in the marketplace. And I think that's going to help us with kind of moving. We're at 80% right now with private cloud. So we were up a little bit from our last conversation about that. So that continues to grow. Great.

Thank you, guys.

Sure.

The next question will come from Bill Karkash with Piper Sandler. Please go ahead.

Good morning. Thanks for taking my question. Greg and Mimi, you continue to benefit from your decision to stick to your knitting and invest in your core expertise at a time where some of your competitors who pursued other strategies are having to catch up by ramping investments in areas you've been deploying capital into all along. I wanted to follow up, Greg, on your platform comments. Can you give a bit more perspective on how you're turning your platform capabilities into commercial adoption? It would be really helpful if you could just walk through for a Jack Henry client that starts with one platform component, what ultimately leads to greater adoption and incremental recurring revenue. Thanks.

Yeah, thank you, Bill. I think there's a couple things. So just wanted to make sure that everybody understands what platform is. And I don't want to take up a lot of time, but I'll make it very simple. But the platform itself sits on top and is fully integrated into our existing core. So all four of our cores integrate the platform. Platform allows us to build the level of innovation and all the things that we've been talking about. So whether it's the 30 components that have been built on there, they're not all just, quote, core components like general ledger, exception item processing, authorization management, a whole host of things that fall into the core. But there are also a lot of the level of the innovation that we've built. So whether that be stablecoin, tokenized deposits, our S&P strategy with move, all of those sit on top of the platform itself. And so the incremental move of our customers allows them to use domestic wires or wires itself as the easiest to explain, but it happens the same way with any of them. If there is a core solution like wires that sits inside one of our cores, if they want to go to an upgraded public cloud API native solution, we basically literally just turn off the functionality inside of the existing core. Let's just call it Silver Lake to make it simple. And we turn it on in the new platform. And it flows through all of the other work that goes in on the back end of the Silver Lake solution set remains, but just the front end and the processing and the UI and everything that goes all is now on this new platform. But that is enabled for everybody. So to your question, we have a lot of people. We have over 100 contracts now with customers that have at least one. And as they buy one, they see the advantages of what public cloud and the things that we built from a feature functionality. Allow them to enhance, and so with that, they're able to take on the interest in taking on additional platform items, and so the incremental approach to this is very simple for them to add. The one thing that we want to do to make it even easier is what I referenced in my prepared remarks, which is we're going to start including the platform in every new core deal, and we will go to our existing clients about adding it as well, because we want them to have the benefit of having the platform. And, of course, there's a cost to this, but the reality is there's an opportunity for them to have that, be utilizing it in whatever environments they want, and take that incremental approach when they're ready. You know, we're not forcing people to utilize it, but there's a big benefit for them to do so, not just from a feature functionality, but also from an audit compliance, other components along that as well. So that's about as simplistic as I can make it in this type of call, but we'd be glad to answer other questions on it, you know, during our circuit here.

That's really helpful. Thank you. Yep.

The next question will come from Kartik Mehta with North Coast Research. Please go ahead.

Hey, good morning, Greg. Greg, one of the things you've talked about is the new pricing discipline, making sure that the product is priced at the value it's given. And I'm wondering, you know, as you look at the current environment and people getting, maybe your competitors getting more aggressive because what's happening, how has that pricing discipline, have you been able to maintain that pricing discipline? And what is the pricing environment? And is that part of the reason you have confidence in the margins?

Yeah. Yeah, thanks, Cardiff. Short answer is yes. I mean, we've continued to be able to sell on value, and the amount of innovation and differentiation that we have created allows us to do that. So if you're just selling the same thing that you've had before, it's hard to sell additional value if there hasn't been any real innovation built on top of that. And as you know, and others have noted already on this call, we've spent a lot of time and money over the last four or five years building out that level of innovation. So, we're able to, and again, I mean, every deal has its own, you know, variances of merit, and honestly, in some cases, it's how badly somebody really wants to get off of their existing product or platform, and in some cases, they're begging to get off, and others, you know, it's a true negotiation. But, you know, the point is, is that we have really tried, and this goes way before me taking the seat, you know, we've never been the lowest cost provider, and there's no reason for us to have changed that approach when all we've done is continue to add better service and better level of innovation.

And Greg, if I could add on, as it relates to renewals, the changes that we implemented now almost two years ago, we continue to see the benefits from. So that is both on administratively, from a process perspective, the way we're approaching renewals, the timeframe we approach them, and then the rigor of which we ensure the price stability of those have all helped from a growth perspective.

Thank you. The next question will come from Matthew O'Neill with Bank of America. Please go ahead.

Hi, this is Alexa Chan on from Matt. Thank you so much for taking the question. I was wondering if you could talk about the puts and takes behind the deconversion guidance a bit further, like what line of sight do you have into it and what's driving the improvement in retention? Thank you.

Sure, Alexa. So, as reflected in the changes we made a number of years ago to the way we start the year and then kind of build the year from a deconversion perspective, it reflects what we reasonably know and have visibility to at the time. So, that includes signed deconversions that we know of, and as well as some of the ones that we anticipate kind of with a high degree of certainty about to be signed from a deconversion perspective. What we don't know in the M&A perspective, and the bulk, as you know, of the M&A recently has been Jack Henry institutions kind of getting acquired away. We have very little insight into that until the deal is kind of announced. And so, that can create volatility quarter to quarter. That can create year-to-year volatility. But based on the pace of M&A that we've seen thus far this year, we increased the guidance. We still think that there's potential for conservatism in that for the back half of the year. But we have to kind of wait and see how the M&A landscape continues to shape up.

Thank you.

Welcome. Again, if you have a question, please press star, then one. The next question is from Madison, sir, with Raymond James. Please go ahead.

Hey, good morning. Thanks for taking the question here. Mimi, maybe one for you here. I wanted to ask on a metric that probably doesn't get as much attention as it should, and that's ROIC. It's improved meaningfully over the last few years, but as you think about the opportunity for accelerating revenue growth, improving margins over the next few years, how are you thinking about ROIC from these 23% levels or so, and do you feel like there's still room for that metric to move higher? Thanks, guys.

Madison, I'm so happy you brought up that metric because I could talk about ROIC all day. We are so proud of the disciplined allocation of capital that we approach things with here at Jack Henry. The buybacks we did last year obviously have a very positive impact on full-year ROIC. You're starting to continue to see that impact. You know, absent M&A, we will continue to be allocating to our longstanding dividend policy. But if we don't see other M&A, we have never kind of pulled back on R&D or investment because of capital. So therefore, any excess of free cash flow would likely go to more share repurchases. So that will continue to help ROIC, but as you know, it's always a battle to make sure you're continuing to generate value-add relative to the growth of net income.

The next question will come from Brett Health with Stevens. Please go ahead. Good morning, Greg, Mimi, and Vance. It's good to be back on the call. Appreciate the time. Greg, you mentioned a little bit about how banks were making decisions, maybe more cyber focus, things like that. Wondering how the conversations are evolving, and specifically, is the

urgency of digital transformation growing meaningfully more, and or is the pressure to address AI or defend against AI or take advantage of AI, are those things combining to drive technology decisions maybe sooner and bigger than banks have in the past, or are things sort of just steady-eddy?

Well, first of all, Brett, good to have you on the call again and have you back. Great question, and it does really, I mean, hits right in the sweet spot of all the things that we have been focused on. So the short answer is it is absolutely driving decisions, and in some case driving decisions for folks to make faster than normal decisions, especially to move core, which can be a lengthy process depending on timing. But, you know, what we're seeing is that the folks that are actually spending time and attention on this are the ones that truly want to look at growing the institution, whether that be bank or credit union. The ones that are being a little lapsed in their timing and thought processes or even truly thinking about this in a more enterprise way, honestly, they're the ones that you typically see being bought. And so we can see that through our pipeline. We can see that through conversations that we have with institutions and kind of where they are. You know, do they look at maybe keeping status quo and taking some cut in price from somebody? Or are they looking to truly, you know, take advantage of the innovation and the utilization of things that we have created for them? And, you know, the good news for us, it's been the latter, especially lately and especially coming out of Jack Henry Connect, where the amount of feedback and positive feedback that we had on the things that you referenced, so whether that be cybersecurity, AI, tech innovation with a lot of our products and platform, there was a significant interest and excitement coming out of Jack Henry Connect after seeing all that as compared to what they've seen with the rest of the environment.

Great. I appreciate that. Thank you.

Sure.

The next question will come from Dave Coning with Barrett. Please go ahead.

Yeah. Hey, guys. Thanks so much. Good job. I guess just a couple of just segment questions. Payments accelerated best growth in several years on a tough comp. And I guess in that segment, are you already getting some of the benefits you talked to a little earlier about some of the newer payments? Like, are they adding 1% or is there any metrics around that? And then core growth was about the slowest in a few years and just maybe parsing out like why one seems to be doing a little better than normal core and then core just a little bit worse.

Yeah, I can hit that, Dave. So, let's start with payments. So, I think it's a blend of a couple of things. One, you saw very strong growth in CARD and the ancillary services that surround CARD. I think that exceeded some of our expectations regarding the continued health and resilience of consumer spending. The other things that we talked a little bit less about are the other things within the payment segment. So, you have remit, and you've had a resurgence since the payroll's acquisition in bill pay. And so, those really help because they are less of a drag. You know, they are not the growthiest growth parts of the payment segment, but they are resurging. And so, that has also been a fantastic aura. And then on core, I really dive in deeper within core to like key core, what is a reoccurring business, and that is kind of the implementations related to the new sales wins that continue to count growth of existing business, because there was a little bit of noise this quarter on the core segment as it relates to the grow over from last year's implementations related kind of consulting. So, if I think about what is the fundamental engine within CORE, it remains very robust.

Great. Thanks, guys. The next question will come from James Fosheth with Morgan Stanley. Please go ahead.

Thank you very much. Thanks for all the time this morning, guys. Wanted to just quickly see if you can provide any incremental color on implementations in the quarter, particularly because from our reading, it looks like cloud, BANO, card revenue, as you already mentioned, Mimi, all inflected lockstep. And I'm just wondering if that was at all tied to implementation and how should we think about implementation cadence through the balance of the year?

Yeah. Hi, James. It's good to talk to you. I would say there's less – I mean, as you know, there's always quarter-to-quarter noise about what's coming out of the backlog, but I would look more to the increase in this full-year guide as a reflection of the strength of both the backlog, what's being implemented, and the existing customer growth rather than an in-particular quarter. And then I think Greg had some comments as well.

Yeah, no, I think, I mean, I think you nailed this from the implementation standpoint. I think our biggest thing for you and everybody to recognize is that, I mean, we are well-staffed to do what we need to do in each of these groups. There's very, very small backlogs as far as, you know, as far as, you know, the timing of what our typical timeframe is to implement, including some of the things that, you know, that we're selling outside of core, right? It allows us to implement those much more quickly. So I think the cues in each of our groups are working in unison. That's the other thing about One Jack Henry. We're able to work together to ensure that we can get some of these implementations done more quickly when it's not conditioned on CORE itself.

Got it. And then I want to go back to this topic of like how banks are maybe reacting to changing tech environment, etc. One of the things that seems interesting to me is the potential to accelerate even the acceptance from a regulatory perspective of implementations on public cloud because of perceptions around, you know, improved security, et cetera. Can you talk a little bit about, you know, where you feel like your portfolio stands to be able to service that kind of customer, maybe what that landscape of competitive products looks like, et cetera? So, because it feels like there could be a changing opportunity set here relative to what we've seen in the past, but just like to get an update how you're feeling about the product portfolio. Thanks.

Yeah, James, that's an insightful question and very accurate. So I think really we've done a good job at Jack Henry over the years, mainly especially with public cloud because Bano has been in the public cloud since 2018. We've been operating, we have 16 million plus users operating in that today. So there's a comfort level that we have with the regulators and they have with us. In fact, I just had a call with the FBA last week where I actually went through this exact same scenario. The part that we are working on is getting our institutions and the institutions regulators, of which we can't speak to on their behalf, to get comfortable, and that is starting to happen. So, you know, as we started to roll out, as I mentioned, the 100 plus customers that are using some of the modules today, each one of those has public cloud, you know, implications and opportunities. And so they're getting more and more comfortable with that as we roll it out and the institutions get a chance to use it. And so as a byproduct of that, I think we are all going to benefit because they see the value of why being in the public cloud is such an important aspect.

The next question will come from Dominic Gabriel with Loop Capital. Please go ahead.

Hey, good morning, everybody. Good start to the year. I guess if you think about the leverage that you've been seeing on cost of revenue in particular, when we look at the segments, How much of the margin expansion that you have for, you know, 2027's expectations is driven from cost of revenue leverage? And just in general, when you think of your algorithm, Mimi, how much of it is relying on cost of revenue leverage versus kind of the other expenses like research and SG&A? Thanks so much.

Hi, Dom. So, as I think about margin, and we've talked a little bit, some of the – The overperformance, let's say, this, you know, tremendously strong performance we had last year was due to some of the windfall related to health claims being a little lower than typical, as well as some of the just the variability in commissions. So, we talked about had it not been for some of that, you would have had, we wouldn't have exceeded by, you know, 92 basis points from an expansion perspective. Similarly, this year, that headwind from the return of that normalization within head care, we've also talked about the investments we've been making in both AI and infrastructure, tempering the amount of margin expansion we could see for this year. So I think if you normalize both of those years, we continue to show the strong leverage that's inherent in the business model and the leverage we think will continue to expand margin expansion in the future, particularly as we move to public cloud, as we move past the EC 2030 project, as we move to a lot of this new sales and really healthy new product mix coming online. So, overall, I would close it out by saying a very strong outlook for margin expansion, particularly as we get outside of FY27.

The next question will come from Darren Peller with Wolf Research. Please go ahead.

Hey, good morning, guys. Thanks. You know, there's been a competitor calling out this morning, obviously, the shift, an incremental shift they're seeing from generally from licensed to more SaaS, which I think is really a strategy you've intentionally pursued in any case over the past few years with your customer base. So maybe just touch on if you're seeing anything change incrementally from your customers demanding that more so now. And then just if you could add on to that, I'll just put both questions in one, but complimentary, again, continues to be sound. And I'm curious if there is, from a discretionary spend standpoint, anything that's stepped up. or changed, again, there's been some chatter in the industry just over, and this came up a little bit earlier in the calls, you know, focus on spending on cyber, focus on AI, and anything you're seeing that might have changed the path or the trajectory of complementary from what you've seen or expected a few quarters ago? Thanks, guys.

Yeah, thanks, Darren. So, a couple things. So, on the first question related to license versus SAS, yeah, I mean, you know, we made that, started to make that shift, you know, more than 15 years ago. So, you know, we're not seeing any, you know, anything to that degree. You know, there might be, based on some of their larger institutions they have, maybe they're still that type of model. I don't know what they're referencing, but that is not a change for us. You know, we're continuing to do what we've been doing for many, many years on the SaaS side of this. The second part of your question around complementary and really any of the other products that... Do you have some potential tailwinds with what's going on in the market? Yeah, we do. I mean, I referenced some things around AI, so not only with what we're doing with AI in our products, in some cases, we're monetizing that effort. Some cases, we're actually just expecting to have higher and better penetration because of the AI components, but we're also seeing things with we're doing AI consulting now. Those are all some things that will fall into that fold. Anything related to fraud continues to drive, not only with what we're doing with Financial Crimes Defender, but in other things that we're doing around the digital aspects in Bano. We've created some solution sets that help us with account takeovers and really helping, you know, kind of fight that as compared to what some of our competitors, digital-only competitors, are doing in that space. That has been a big opportunity in the complimentary and continues to really differentiate Bano in the market and why I think we continue to see some additional wins with some of our core clients that had competitors' digital offerings before. And then, you know, I think when you look at the stuff I mentioned with Gladiator Services and the significant increase in what we're seeing in there, that all lives in the complimentary segment as well. So I think we'll continue to see those as well as some other aspects of businesses like Synergy and Synapsys and other things that we have that live in complementary that continue to do really well, especially as an attach rate to core deals.

And Greg, if I may, I just want to stress, and Darren, you didn't state this, but there was, I think, some confusion in the marketplace during the height of this apocalypse kind of world. But I just want to be clear, there's nothing we sell that is tied to licenses, tied to the number of employees at a financial institution.

The next question will come from Jeff Cantwell with Seaport Research. Please go ahead.

Hey, thanks, guys, for including me in these calls. I wanted to circle back, apologies if I missed this earlier, and ask you, what's driving the CapEx step up? Is that data center, is that hardware, is that cloud build out, and is that front loaded? And do you still see the 410 to 520 in fiscal year 2027 free cash flow as, you know, the right target, and where are you in that range? Thanks.

So, Jeff, I can take that one. We called out, as part of the data center move that's moving from Jack Henry-owned data centers to co-locations and public cloud, we've called out the temporary over... Increased spend as it related to some of that infrastructure build out and cloud compute. We also called out some of the work we're doing to protect our clients from frontier model vulnerabilities. So I wouldn't say any direction within the year kind of cadence. It's probably a little bit, we talked about that being a first half margin, one of the margin stories of the first half, but that's something pressure you're going to continue to see throughout. FY27, but nothing particular from an elevated CapEx that I would call out.

The next question will come from Timothy Chioda with UBS. Please go ahead.

Great. Thanks a lot for taking the question. I think one of the highlights of the Investor Day was around some of the expense management capabilities that you unveiled during the presentation. I was hoping you could just talk a little bit more about those and then more specifically in terms of the means of monetization, whether there are user fees, SaaS fees, if it's an interchange, revenue share, maybe some fees on some non-carded payments, maybe a mixture of all of the above. I would just appreciate more context on that product. Thanks.

Yeah, so thanks, Tim. Yeah, so the, and that actually had some really rave reviews at our client conference, both in the, our booth and in Moves booth, where we're building that product, you know, with them. So it is a combination of all things that you just said. So it is very similarly set up to what you would see, you know, with a ramp or Mercury or other competitive type solutions where there can be like a flat fee per month, some opportunities for per transaction fees. Obviously, the card side of it from a card issuing component creates opportunities as well. So all of those things are kind of bundled in to your question where there's a whole host of different fees that can be associated with that particular product set. It will start to roll out in the first part of Q1 Calendar 27 along with what we're doing with the P2P, but we're really excited about that product, and again, so were the people at our client conference.

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

Thank you, Nick. Management will be participating in multiple investor events and hosting investor calls through mid-December, and we look forward to those conversations. In conclusion, we extend our appreciation to all Jack Henry Associates for their continuous, exceptional efforts, which resulted in a compelling start to fiscal 2027. Thank you for joining us today. Nick, please provide the replay information.

The replay number for today's call is 855-669-9658, and the access code is 9836250. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.