Earnings Call Transcript - JKHY Q3 2025

Operator, Operator

Good day and welcome to the Jack Henry & Associates, Inc. Third Quarter Fiscal Year 2025 Results Conference Call. Please note that this conference is being recorded. I would now like to turn the conference over to Mr. Vance Sherard, the Vice President. Thank you.

Vance Sherard, Vice President

Thank you, Myron. Good morning and thank you for joining the Jack Henry Third Quarter 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 insights and observations on our quarter and year-to-date financial results, operational metrics, and outlook. Mimi will then discuss the financial results 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 turn the call over to Greg.

Greg Adelson, CEO

Thank you, Vance. Good morning, and I appreciate each of you joining the call. I'd like to begin by thanking our associates for their hard work and dedication to our success, consistently going above and beyond and taking care of our clients. Our commitment to a people-first culture, service excellence, technology innovation, and a clear strategy backed by consistent execution continues to differentiate us in the market. I will share three main takeaways from the quarter, and then we'll provide additional detail about our overall business. First, our financial performance. Our third quarter fiscal year 2025 results reflect solid overall performance. Our non-GAAP revenue increased 7% and non-GAAP operating margin was 23%, representing an impressive 207 basis points of margin expansion over last year. In terms of GAAP revenue, we are starting to see an increase in M&A activity, and our Q3 deconversion revenue was $9.6 million. We expect a continuation of increased deconversion revenue in Q4. Thus, we are forecasting a full year deconversion revenue range of $22 million to $28 million. Second, our fiscal '25 guidance. As you saw in the press release, with three quarters now closed, we adjusted our full year guidance for GAAP and non-GAAP revenue, margin expansion, and EPS. Despite revenue guidance revisions, our primary or key revenue consists mostly of processing and cloud, accounting for 76% of total revenue for the quarter and growing at 9.8% compared to a growth rate of 8.8% for Q3 fiscal year '24. The adjusted non-GAAP revenue guidance is primarily due to macroeconomic concerns and the softening of nonstrategic revenue such as hardware purchases and consulting engagements. As most of you know, hardware is sold to our in-house processing clients at a time they desire to add or replace equipment. Similar to hardware purchases, we are seeing some customers delay the start of signed nonrecurring projects. Examples include work orders and the implementation of post-core conversion products in our complementary and payment segments. We are also observing a softening in debit card transactions, which mirrors what the card associations experienced in their U.S. debit businesses. Based on these factors and what we have seen through April, we felt it was necessary to lower our revenue guidance. However, due to our key revenue growth and higher incremental margins as well as our disciplined approach to expense management, project prioritization, and capital expenditures, we have increased our GAAP and non-GAAP guidance on margin expansion and EPS growth. Mimi will provide more details in her comments. Third, we are continuing to win larger competitive core deals. Over the past two years, the aggregate assets of competitive new core takeaways have more than doubled. This is important to note since our core revenue models include asset-based and per account pricing options, both benefiting from larger institution wins. To date, this fiscal year, we have secured 28 new core wins, including 11 in Q3, with financial institutions totaling $30 billion in assets. This compares to 35 core transactions totaling $21 billion in assets at this time last year and 31 core deals totaling $14 billion in assets two years ago. Our core and total pipeline remain very strong, and we will see a significant increase in competitive core wins in Q4 over the previous three quarters. We can expect a win total similar to what we accomplished in Q4 last year, and again, with larger asset financial institutions. In addition to core wins, we are seeing a similar trend in migrations of existing customers for in-house processing to our private cloud. This fiscal year-to-date, we have contracted to migrate 26 clients, including seven in Q3, that totaled $42 billion in assets. That compares to 29 clients with $27 billion in assets at this time last year, representing a 55% increase in assets. We currently have 76% of our clients processing in the Jack Henry private cloud environment. Our success with new core wins and migration aligns well with the core platform survey results published by the American Bankers Association in February. For the first time, the ABA named specific core providers instead of using generic labels like company A, B, and C. The title of the report is All Core Platform Providers Are Not The Same, and we wholeheartedly agree. Jack Henry scored near the top across multiple categories. When respondents were asked what matters most in a core provider, innovation and customer service topped the list, which are definitely two key differentiators for Jack Henry. Turning to specific product and strategy updates, I will comment on the payments and complementary segments, followed by providing updates on technology modernization, our new SMB solutions, and our annual benchmark survey results. In our payments segment, we continue to see strong growth with our faster payment solutions. Over the past year, we've grown the number of FIs using Zelle by 10%, The Clearing House's RTP network by 37%, and FedNow by 96%. We now have 354 clients on the Zelle platform, representing 14% of FIs using Zelle; 384 clients on RTP, representing 43% of FIs using RTP; and 370 clients on FedNow, representing 26% of FIs using FedNow. In our complementary segment, we had 32 contracts in the quarter for the Financial Crimes Defender, or FCD, Faster Payment Fraud Module, a real-time solution designed to mitigate fraud in Zelle, RTP, and FedNow transactions. As of the end of March, we have installed 115 Financial Crimes Defender customers, and have another 83 in various stages of implementation. We also have 69 Faster Payment modules installed at 160 in various stages of implementation. Our Banno Digital Platform continues to experience healthy growth with 29 new Banno Platform contracts in the quarter. At the end of March, we had more than 1,000 Banno Platform clients, including 270 live with Banno Business. We finished the quarter with more than 13.7 million registered users on the Banno Platform. At the end of Q3 last year, we had 11.6 million registered users, which is an 18% increase over the past 12 months. Regarding our technology modernization, we continue to execute very well and ahead of schedule on our core strategy for the new public cloud-native Jack Henry Platform. We are now live in various stages with 15 components. Some of these are only used internally to eliminate duplication of development costs across the company, but most are utilized by our clients and are receiving favorable reviews. As a result of the efforts of our development teams, we remain on track to deliver our public cloud-native consumer and commercial deposit-only core in the first half of calendar year 2026, which will be about six months ahead of what we communicated in February of 2022. Another example of our technology modernization progress is our new enterprise deposit and loan account opening solution. This technology enables banks and credit unions to grow loans and deposits by streamlining processes, automating workflows, and better serving retail and business clients through a single digital deposit and loan account opening experience. We have initiated our closed beta process with two clients and will continue to add more early adopter clients over the coming months. Another area of focus that the industry is excited about is our medium-sized business strategy. A key aspect of our strategy is to only provide the service directly to financial institutions, allowing them to recapture high-value deposits and service the needs of their account holders. Our initial offering, called Jack Henry Rapid Transfers, is in closed beta with three clients. We are currently extending availability to all Banno customers and actively enrolling clients through our digital operations team. Jack Henry Rapid Transfers enables both SMBs and consumers to instantly move funds between external accounts, eligible cards, and digital wallets. We are collaborating with both Visa and MasterCard to facilitate these transactions through their respective debit rails. The second offering is our unique merchant acquiring solution in partnership with Moov. This solution delivers many distinguishing features for merchants, including instant decisioning, tap-to-pay for both iOS and Android devices, the option to receive settlement funds up to eight times per day, and continuous account reconciliation to the accounting platform of their choice. We are on track for a closed beta in June with two Banno clients. We are also currently working on several additional phases to our SMB strategy as we expect to continue to deliver new functionality and solutions over the next 18 to 24 months to both Jack Henry and non-Jack Henry core institutions. We recently released our seventh annual 2025 Strategy Benchmark Survey. While we track many industry surveys, this one stands out because it reflects insights directly from the CEOs of our own bank and credit union clients. The survey indicated that 76% of our bank and credit union clients plan to increase technology spending over the next two years. Of those, the largest segment, 33%, plans to increase investments between 6% and 10%. We also asked where they expect to invest over the next two years. The top three areas identified were digital banking, fraud prevention, and enhancing efficiency through automation, all areas where Jack Henry has been investing and executing with innovative solutions such as the Banno Platform, Financial Crimes Defender, and the digital positive loan account opening solution that I mentioned earlier. It's worth noting that the survey was conducted in January and February prior to April's market volatility. However, we did spend a significant amount of time speaking with our clients about the current environment at our Strategic Insights event last week in Minneapolis. Much of what we learned in the survey still holds true for them today. Banks and credit unions are generally concerned about the impact of tariffs on their commercial clients, especially SMBs. They remain optimistic overall and see expected regulatory relief as a positive as well. Our clients continue to suggest that M&A activity is picking up, and we are also seeing an increase in our clients making acquisitions, which presents additional revenue opportunities in the future. In closing, we remain excited and confident that our unwavering approach to culture, service, innovation, strategy, and execution will continue to enable Jack Henry to drive industry-leading revenue growth and margin expansion through this evolving macro environment. We have a robust sales pipeline and a proven ability to attract and win deals, especially with larger financial institutions. We will continue to evaluate acquisitions that will accelerate or complement our strategy, remain disciplined in our expense management, and continue to rationalize products that fall in our nonkey revenue segment. In short, we remain well positioned for the future. With that, I'll turn it over to Mimi for more detail on the financials.

Mimi Carsley, CFO

Thank you, Greg, and good morning, everyone. I want to open by thanking the dedicated Jack Henry team for their steadfast focus on execution and support of our clients. While the quarter results differed modestly from our fiscal year expectations, it was another quarter of solid revenue and earnings growth. I will discuss the details behind our third quarter and year-to-date results, then conclude with commentary on our updated fiscal '25 guidance. Q3 GAAP and non-GAAP revenue increased 9% and 7%, respectively, with GAAP revenue outperformance driven by a notable uptick in deconversion revenue. Despite strong performance in previously identified key areas, overall non-GAAP revenue growth was tempered by lower nonkey revenue growth, especially from a slowdown in hardware sales and nonrecurring revenue from customer projects. Excluding the hardware impact, Q3 non-GAAP revenue growth would have been 8%. Quarterly deconversion revenue of approximately $9.6 million, which we released prior to our full earnings, increased $8.8 million compared to the same period last year, reflecting an accelerating pace of consolidation in the industry. In light of year-to-date results and fourth quarter pending agreements, we have raised our full-year deconversion guidance to a range of $22 million to $28 million. Financial institution M&A activity will have minimal non-GAAP impact in fiscal '25 but potential for a meaningful impact in fiscal '26. Now looking closer to the quarterly results. In the quarter, GAAP and non-GAAP services and support revenue increased 8% and 6%, respectively. Data processing and hosting continue to dominate services and support growth for the quarter and year-to-date. Hardware revenue was down $4 million in the quarter and $11 million year-to-date, creating headwinds for services and support revenue. As a reminder, hardware revenue is both nonrecurring and has low visibility, making it a part of nonkey revenue. Our private and public cloud offering increased 11% in the quarter, reflecting strong persistent new installs and existing FI growth trend. This recurring revenue growth contributor is 33% of our total revenue and continues to be a double-digit growth engine. Moving to complementary revenue, which is 43% of quarterly revenue and a significant contributor to our long-term growth model. We saw strong performance with 9% growth on both a GAAP and non-GAAP basis for the quarter. Continuing long-term trends, quarterly drivers include increased card, digital, and payment processing revenues. Completing the commentary on revenue, I would highlight quarterly total recurring revenue, excluding deconversion revenue, was 92%. We focus on key revenue, which is comprised of our strategic recurring revenues. Nonkey revenue includes lower-growth and merchant solutions that are typically nonrecurring or not aligned to our future strategic direction yet often support existing operations. Quarterly key revenue was 78% of total non-GAAP revenue and grew a robust 10%. The year-to-date key revenue was 75% of total non-GAAP revenues with continued momentum, producing healthy growth of 9%. Quarterly nonkey revenue makes up the remaining non-GAAP revenue during the quarter and year-to-date has contracted 2%, creating a headwind to total growth. Therefore, Jack Henry is not immune to the broader macroeconomic challenges. The high recurring revenue, long-term contracts, and critical functionality of our products ensure the resiliency of our business model. We are well positioned regardless of economic conditions. Next, moving to expenses. Starting with cost of revenue, which increased 4% on a GAAP basis and 3% on a non-GAAP basis during the quarter. The quarterly increase was due to higher direct costs, internal licenses, and fees, which were partly offset by an increase in labor cost deferrals. For clarification and to assist with the model, the amortization of acquisition-related intangibles was $6 million in the quarter. Next, R&D expense increased 9% on both a GAAP and non-GAAP basis for the quarter. The quarterly increase was primarily related to net personnel costs. Ending with SG&A expense, it increased 7% for the quarter on a GAAP basis and 5% on a non-GAAP basis, also related to an increase in net personnel costs. We remain focused on prioritization, cost efficiencies, and effective utilization of our workforce that will result in annually compounding margin expansion. We are pleased to report that the quarter delivered a 207 basis points increase in non-GAAP margin to 23%. We remain confident in our ability to deliver margin expansion and have increased the full year guide. These solid quarterly operating results produced a fully diluted GAAP earnings per share of $1.52, up 28%. Reviewing the three operating segments, we are pleased with core segment key revenue performance, monitoring payments for consumer sentiment impacts, and continue to benefit from strong complementary performance. Core segment increased 6% for the quarter on a non-GAAP basis due to the headwinds from the license and credit union hardware that rolls up into this segment. On a key basis, the segment revenue grew 11%, a 10 basis point increase over the prior period. Core segment performance primarily came from organic growth in data processing and hosting, partly offset by lower maintenance fee revenue and credit union-related hardware, a result of our core clients continuing to shift from on-prem to private cloud. Non-GAAP segment income margin for core increased 141 basis points from improved operating leverage. Payments segment non-GAAP quarterly revenue increased 7% and saw a non-GAAP segment income margin growth of 59 basis points. Performance was due to continued higher card revenue for volumes, increased payment processing revenue, including FedNow, RTP, Zelle, and elevated EPS. Margins in the payments segment also benefited from ongoing improvement to operating leverage. Finally, complementary segment quarterly non-GAAP revenue increased 10% from a strong product mix with digital and hosting revenues driving growth momentum. Segment margins strongly expanded 164 basis points from the high incremental margin of recurring revenue and the SaaS-like nature of our business model. Now let's turn to a review of cash flow and capital allocation. Third quarter operating cash flow was $108 million, a $10 million increase over the prior year's period. Strong cash flow reflects higher profitability from operations and increased deconversion revenue, partly offset by higher tax payments. Trailing 12-month free cash flow was a hearty $303 million, resulting in a 71% conversion, in line with the full year guidance range. Our dedication to value creation resulted in a trailing 12-month return on invested capital of 20%. This is a nice improvement, and we expect to see this increase returning to historic levels in the near future. For the quarter, we repurchased $18 million of Jack Henry shares, aligning with our constructive outlook for future Jack Henry growth. As we move towards the close of fiscal '25, I will conclude with comments on full year guidance and other operating metrics. Yesterday's press release included adjusted fiscal 2025 full year GAAP guidance along with a reconciliation to our adjusted non-GAAP guidance metric. While the press release also included a fiscal '25 non-GAAP EPS metric, this is not intended to be a new guidance metric. The purpose is to provide additional clarity on our numbers, and it should be noted that a 24% tax rate is used. Given the current dynamic macroeconomic environment, including early signs of softness of consumer-related payments, we are adopting a more cautious stance for the remainder of the fiscal year. Updated full year guidance metrics and outlook include full year deconversion revenue of $22 million to $28 million, up from $16 million; non-GAAP revenue growth of 6% to 6.5%, lowered from 7% to 8%; non-GAAP margin expansion of 60 to 70 basis points increased from 25 to 40; a tax rate of 23% decreased from 24%; GAAP EPS of $6 to $6.09, up from $5.78 to $5.87, representing annual growth of 15% to 17%; the outlook for full year free cash flow conversion is unchanged at 65% to 75%; and the outlook for full year return on invested capital is 21% to 22% based on expected lower debt at the end of the fiscal year. The appropriate performance indicator for our business continues to be the full fiscal year financial results. In conclusion, we are seeing modest headwinds to nonkey revenue items that impact our consolidated results and near-term outlook. Still, we remain confident as the key parts of our business continue to perform strongly and position us for continued growth. Our focus remains on delivering long-term profitable growth at scale through compounding revenue growth and margin expansion. In pursuing these goals, we appreciate the achievement of our approximately 7,200 dedicated associates and our investors for their ongoing confidence. Myron, please open the line for questions.

Operator, Operator

We have the first question from Dan Perlin from RBC.

Dan Perlin, Analyst

So I wanted to get back to the question, obviously, around large capital purchases for hardware being down. I completely understand that. The question is, are you seeing similar restraints when it comes to your more modernized projects and cloud migration? So are you starting to hear elongated implementation cycles in that kind of area? Or is it really just this nonrecurring stuff that we're seeing right now?

Greg Adelson, CEO

Dan, yes, so it's almost all in the nonrecurring stuff. We are seeing a little bit in some of the complementary and payment products that I mentioned, mostly in what we call kind of day two or post-conversion, where clients have a product set that they're either waiting for a contract to terminate with a competitor or they have an existing Jack Henry product, which is the case in most of these, where they're just delaying kind of putting the new one on. For example, Yellow Hammer to our Financial Crimes Defender product, which, by the way, also affects some consulting revenue because the consulting revenue goes hand-in-hand with the Financial Crimes Defender stuff. So there are some examples of that. We're not really seeing any real delays in, like as you described, from somebody going from in-house to outsourced. They usually fill those gaps and want to take advantage of them. But also, I want to remind you that we see delays regularly throughout the year. But because there's only one quarter left and where we are with kind of the environment, especially with pure hardware sales where folks that are in-house wanting to buy hardware are looking to either delay that decision for one of two reasons: one that they want to wait to kind of see timing-wise and see if they have an opportunity to wait as long as they can to make those purchases; but the other side is actually a really good reason, which is several of those folks are evaluating moving to our private cloud. And through that evaluation, they've also made decisions to delay those purchases as well.

Dan Perlin, Analyst

That's interesting. Yes, that's great information. I have a quick follow-up for Mimi. You mentioned that the impacts from M&A this year are minimal, but you also suggested there could be effects on non-GAAP revenue growth for 2026. Could you provide more context or clarify that?

Mimi Carsley, CFO

Thank you, Dan, for your question. As we mentioned, we begin recognizing revenue when clients sign the deconversion agreement, marking the point when they start to leave. We have observed an increase in merger activity, with approximately 30 clients involved, primarily in Jack Henry-to-Jack Henry mergers, mostly among our cloud customers. It's great that we are maintaining that revenue. There may be a slight pricing impact due to tiered pricing. Typically, when a Jack Henry client is acquiring another, we are notified early in the process as they want to secure their spot. However, when a Jack Henry customer is being acquired by another platform, we often learn about it later in the merger process, along with the convert-merge services we provide during that consolidation. This usually occurs a bit later in the approval cycle. Therefore, we do not expect to see much of an impact in fiscal year 2025, but we anticipate more noticeable effects in the longer term as the implementation and closing of these deals progress. We are just a couple of months into the administration, and there hasn’t been a significant change in the timing of approvals. As more deals occur and we move further along in the implementation phase, we expect to see a positive impact on our revenue and any services we provide to them. Additionally, regarding the convert-merge activity related to Jack Henry-to-Jack Henry cloud clients, you shouldn’t expect any noticeable fluctuations since it will be distributed throughout the remaining life of the contract, making it unlikely to see any significant changes in any single quarter.

Operator, Operator

We have the next question from the line of Rayna Kumar from Evercore.

Rayna Kumar, Analyst

It's actually Oppenheimer now. Just in terms of the project delays that you experienced in the third quarter, what are you hearing on a timeline? Like are these projects that could come in later this year? Or is it maybe next year's event?

Greg Adelson, CEO

Yes, you're correct. At the end of the year, we're experiencing some situations that are typically seen throughout the year. We're noticing a few more delays than usual, and some projects are being pushed into the following year. These are delays for products that have already been contracted, so it's not a case of clients abandoning their contracts. It's just that some items are being postponed from the next quarter into the next fiscal year.

Rayna Kumar, Analyst

Understood. That's helpful. And then it was nice to see the strong margin expansion in the quarter. And I know, Mimi, you've spoken about 20 to 40 basis points of margin expansion as a medium-term target. Just given the strength we saw in the high-margin revenue and cost management, is that target too low?

Mimi Carsley, CFO

Cost management is something that is just bread-and-butter for Jack Henry. It's something we've always done from 0 baselining of every head count decision to a rigorous prioritization of our capital spend. I'll note that our R&D spend is 14.5% this year, down a little from last year. Last year was elevated a touch related to the Payrailz acquisition and the integration needed between those two businesses. But we are always very mindful as a leadership team. Certainly, as we've started to see a little bit of the softness related to that nonkey revenue, we've even turned up the dial a little bit more from discretionary spending control. I feel very comfortable in the 25% to 40%, representing the floor of what's achievable from the model from a year-in, year-out basis. That's always just a floor, and we aim for more. It's too early to see from a fiscal '26 perspective given where we stand in the budget timing cycle.

Greg Adelson, CEO

Yes, I want to add that historically, we've excelled at managing our headcount and its timing. With our new leaders, we've elevated this practice by ensuring they are trained to incorporate it into our processes. This will be an ongoing focus. However, our expenses on infrastructure and other areas fluctuate each year. As we continue through the budget process, some of these costs are still to be determined for next year.

Mimi Carsley, CFO

And this year, we're up 1% on headcount.

Operator, Operator

We have the next question from the line of Vasu Govil from KBW.

Vasu Govil, Analyst

I guess the first one, Mimi, just for you to follow up on the change in the revenue guide for the fourth quarter. It sounds like it's mostly hardware and these contract delays. But I think you also mentioned conservatism in the guide. So if you could just break apart the big drivers for the change. And then also if there's a way to size the overall hardware revenue for us so we sort of have a sense for how much that can drive volatility in growth.

Mimi Carsley, CFO

The guidance for the rest of the year is based on a careful approach and conservative assumptions regarding the economy and the trends we observed in the third quarter. Specifically, the hardware outlook is negative. As Greg mentioned, some customers are postponing significant capital expenditures, possibly due to economic uncertainty and their consideration of transitioning to the cloud, which benefits Jack Henry. In fact, financial institutions may be hesitant to invest in costly hardware, which could accelerate their move to the cloud. This trend may ultimately be advantageous for Jack Henry, as 76% of our clients are already in our private cloud environment. The downturn in hardware is approximately $11 million for the year, with 80% impacting the corporate segment and the remainder in the core segment. Additionally, as Gregory noted, we’re observing customers adopting a more cautious approach by delaying some nonrecurring projects, mainly consulting engagements and aspects of their post-core implementation. As Greg reiterated, these are commitments that have already been signed; the delays are more about timing than significant changes in decision-making. Historically, we've seen implementation timelines range from about 18 to 36 months, depending on their readiness and our available resources to support them. We haven’t noticed any substantial changes in our implementation schedule; it's primarily a matter of exercising caution. Regarding the payments impact, we began to see effects in April. The volume of transactions largely depends on consumer spending habits and current preferences for debit versus credit. Therefore, it is prudent to refine our outlook in the current environment. We anticipate reaching what our original expectations were for a strong fourth quarter, and while we don’t expect a drastic drop from current trends, it's relative to our earlier, more optimistic expectations.

Greg Adelson, CEO

Yes. One last point, Vasu, is that historically during tough economic times, people tend to rely more on credit than debit. Based on what we observed in April, and interestingly, we've seen good volumes in May so far, despite it being just a few days into the month. The reality is that historical trends show an increase in credit usage compared to debit during these periods. So, as Mimi mentioned, we're being cautious with our approach and ensuring that we offer appropriate guidance.

Operator, Operator

Great. That's very helpful color. And then, Greg, one high-level one for you. Sort of any change in how you're thinking about your competitive positioning following the announcement from FIS to acquire the issuer business from Global Payments?

Greg Adelson, CEO

Yes, that's a great question. Thank you. I think it's important to note that with their acquisition, they added various credit processing capabilities, which is beneficial for them. However, we already possess credit capabilities, and one of our key differentiators is that we handle both debit and credit processing on a single platform—something that they do not currently offer. It's still too early to assess the competitive landscape, especially concerning that specific competitor, as we haven't encountered significant challenges in their debit processing capabilities compared to ours. We'll have to observe how it unfolds. They continue to operate within the same environment they always have, targeting similar types and sizes of asset customers. We'll keep competing in that market as we have been. As I mentioned earlier, we're optimistic about Q4 regarding core opportunities, most of which come with additional products. I'll leave it at that.

Operator, Operator

We have the next question from the line of Jason Kupferberg from Bank of America.

Jason Kupferberg, Analyst

So it sounds like as we start thinking ahead to fiscal '26, there might be a couple of moving parts we need to consider on the revenue line. You've got the effect of the deconversion revenues that you highlighted as a potential headwind. Now we've got some delays in post-core add-ons being pushed into fiscal '26, which sounds like it could be a tailwind. So I'm just wondering how you think those two dynamics might net out and what the implications could be for revenue growth next year just in the context of the medium-term outlook of 7% to 8%. Is there any risk there?

Mimi Carsley, CFO

So Jason, I’d like to provide a complete overview for fiscal year 2026, but it’s still too early in the process. We’re currently deep into budgeting at Jack Henry, but we won’t finalize it for several more months. Given the current dynamic environment, we can't make commitments about next year at this point. Regarding your comments about tailwinds and headwinds, our sales pipeline remains strong, and we haven't noticed prolonged sales cycles. Greg pointed out that we’ve had multiple account wins, including significant financial institutions that are still making decisions and commitments, so there are no changes in trends from that angle. When it comes to deals being delayed in terms of implementation, as Greg noted, there's always some calendar shifts throughout the year. I’m not certain that this will create a tailwind. We manage implementation closely, and if there is enough demand for another implementation team, we will add one if necessary. However, I wouldn’t characterize that as an addition to our usual flow; it’s just an evolving calendar. Regarding guidance, it's still too early to confirm specifics, but I can say that the range of our revenue guidance will likely broaden, and we will discuss this further in August.

Jason Kupferberg, Analyst

Okay. That's definitely helpful for now. I wanted to revisit the key revenue, which is cloud plus processing, now at 76% of total. There has been an acceleration in growth, nearly 10% compared to 9% in each of the last two quarters. Are we expecting to maintain that 10% level in Q4? Is there any reason to think that this trend could continue into next year?

Mimi Carsley, CFO

I think you're on the right course in terms of the ballpark you're talking about. I feel pretty comfortable those are the long-term strategic growth of the business. You have things like digital, you have things like the new products, the cloud, the continued cloud migration. So all of those have been long sustainable trends for the business, and we fully expect that to continue. What has hurt us is the headwind from the nonkey business that has compressed about 2%. That's been more of the challenge. But as we got more and more as a percentage of the portfolio in that key revenue, we will continue to thrive.

Operator, Operator

We have the next question from the line Darrin Peller from Wolfe Research.

Darrin Peller, Analyst

You mentioned the increase in consolidation you're observing in your end markets. I understand this was touched on in the previous question regarding its potential future implications. There are certainly both positives and negatives to consider. For instance, you could see integration revenue if your customers are the acquirers or part of a merger, yet there are associated risks as well. My first question is whether you believe the current environment of consolidation is significant enough to potentially influence growth over the next 12 to 18 months, or if we are merely experiencing a slight uptick and are still in a monitoring phase. Additionally, aside from the obvious concern of losing a customer, what might be the positive benefits for your business in a heightened M&A environment?

Greg Adelson, CEO

Darrin, I'll take that. It's Greg. So a couple of things. As mentioned, it starts with the size of the institution. As you know, we've continued to grow. Last year, we sold 15 multibillion asset deals, and we've sold eight so far this year, which are much larger ones, totaling up to $30 billion. This means on average, we're selling over $1 billion in assets per deal sold, which historically hasn't been the case. As we continue to target larger-sized institutions, they tend to be the ones making acquisitions. Over the past 40 years, most market shrinkage has occurred in the $500 million-and-below asset size. The larger we get, the more opportunities we see. To answer the second part of your question, yes, it can be both. If a Jack Henry client is buying another Jack Henry client, there are things we can address regarding deconversion fees and conversion fees that can work positively for us. When a competitor buys one of our clients, we typically receive the full conversion fee, deconversion fee, and push. It all depends on how much time is left on the contract at the time of the acquisition. When it comes to Jack Henry clients, not only do we retain the client, but they often purchase additional products based on what each institution has. We experienced this year with a large merger of over $4 billion institutions, where one had our digital platform and the other did not. We successfully transitioned them to Banno for both. However, the outcomes can vary greatly depending on the institutions involved, the products they possess, the timing of their contracts, and related factors.

Mimi Carsley, CFO

I'll just add that while in general over the multiyear period, it tends to be a positive for Jack Henry, as Greg mentioned, more of our clients are the acquirer than the acquired. It can produce some lumpiness, particularly as we moved upmarket. While deconversion revenue is great for free cash flow and EPS, it does represent the loss of future revenue. If for some reason in this environment we were to lose any bulk of larger clients, we would call that out from headwind growth-over problem.

Operator, Operator

Yes. So where do we currently stand? What are you observing? Do you consider it more of a challenge or an opportunity for the next one to two years? Additionally, I'm interested in your insights regarding the project-related non-core revenue items and the cyclical impacts on spending trends, such as on debit. What is the demand environment looking like for your core business areas? If you could prioritize what you're currently seeing the most demand for and compare that to the previous couple of years, it seems promising from the sales pipeline perspective, so I would appreciate more details.

Greg Adelson, CEO

Yes. From a sales pipeline, as we tried to articulate, remains very, very robust. It continues to be strong; not just for core itself but for the products we've created. The level of innovation related to Financial Crimes, PayCenter components, and what I just described as enterprise account origination, many of those key revenue products continue to grow at a nice pace at that 9.8% we referenced and are greatly in demand. The challenge related to what we have tried to describe in the nonkey revenue is, again, really that one-off stuff, the things that we don't control for timing and things that are typically done on more of an as-needed basis than a must-have basis. That's really where a lot of that delay happened.

Mimi Carsley, CFO

I would point to the Strategic Benchmark Survey that Greg mentioned in his opening remarks. That's up on the Jack Henry investor website and available. That talks about the three top priorities for both bank and credit union CEOs continuing to be around gathering deposits, accounts, efficiency. The longer-term trends we've talked about over several quarters now around digital, fraud, and payment continue to be thematically the largest demand we're seeing.

Operator, Operator

We have the next question from the line of Kartik Mehta from Northcoast Research.

Kartik Mehta, Analyst

Greg, I know you talked a bit about the delay, a lot actually. I'm just wondering, has that been reflected at all in your conversations with financial institutions on their core decision? Are they kind of waiting at all to make those decisions? Or is it still business as usual, and it's only really impacting the smaller projects?

Greg Adelson, CEO

Yes. So Kartik, the delays are entirely associated with the smaller, nonrecurring, and non-essential products or hardware purchases, which can be postponed for another quarter due to their evaluation of transitioning to the private cloud. When you consider the core deals, these typically require 12 to 18 months to complete the sales cycle during normal conditions, as most clients are planning several years ahead from when their contracts expire, and these decisions have remained unaffected. I'm very optimistic about our success rates for the next quarter based on what I've observed and what I anticipate is coming. This isn't a significant challenge; the delays we are seeing may not have been as pronounced if it weren't for the end of the third quarter. Some projects will simply move into the next fiscal year, which is where we encounter challenges.

Kartik Mehta, Analyst

And Greg, I know earlier in the call, you talked about the SMB product. And obviously, you have this partnership with Moov. And I'm wondering how that's going. I think you anticipated, hopefully, it would generate some revenue going into next fiscal year. I'm wondering if you're seeing any uptake on the product or any update there?

Greg Adelson, CEO

Yes. So our Jack Henry Rapid Transfers, we've rolled out and have three clients in what we call a closed beta. We are now taking active enrollments from all of our clients. There is a process they have to go through for Jack Henry Rapid Transfers, which goes through our operational team. It's not a contractual thing they have to go through, but there is an operational component. So that's starting to move. We're very excited about it. We got a lot of fanfare and comments at our Strategic Insights meeting last week in particular. Regarding the merchant acquiring side, as I mentioned, the partnership with Moov, we will have two clients and maybe more in a closed beta in June. Our expectation is to try to roll that out to everybody by the end of the first quarter of fiscal year 2026. We're working through that process as well. Again, the interest level from not only our clients but from some of our distribution partners that we compete with, there's a lot of interest there. We've been talking to some large non-Jack Henry clients who are also very interested in the product as well. The interest level is there, and we are on track, as we stated, to roll that out in our space in June of this year.

Operator, Operator

We have the next question from the line of Andrew Schmidt from Citi.

Andrew Schmidt, Analyst

I appreciate your comments about the total level of assets you've secured, as it is an important distinction from the number of financial institutions. I know there have been many questions regarding the demand environment, and I’d like to approach this from a different angle. I recognize these decisions are long-term and involve a lot of confidence regarding near-term conversions. Have you noticed any changes in the mid to upper funnel concerning how financial institutions are making their decisions? I'm curious, though it may be a bit early, if you're observing anything in the earlier part of the funnel.

Greg Adelson, CEO

Thank you for the great question. We believed it was important to share what's actually happening with the asset size. In response to your query, I speak with the sales team and our sales leaders every week, and they have not indicated any slowdown in decision-making, whether it's in the lower, middle, or upper parts of the process. Many decisions regarding installations typically occur over six to twenty-four months, depending on the specifics. We haven't noticed any significant elongation of the sales cycle; it's mostly just the short-term projects that I mentioned earlier.

Andrew Schmidt, Analyst

Got it. That's very useful. When we consider the challenges you're experiencing, much of it is related to timing. However, in past cycles, we've noticed that discretionary projects tend to be postponed, and sometimes they take a while to come to fruition. How significant is the discretionary aspect compared to the nondiscretionary aspect when we analyze the current challenges?

Greg Adelson, CEO

Yes. The interesting thing is that these are contractual arrangements. We have some timelines that trigger when we start billing the customer if the delays extend beyond our expectations. They haven't hit those points yet and will not do so this quarter. Since these are contracted, we can begin billing our customers even if they haven't fully implemented, and that is an option available to us. I don't anticipate any delays or cancellations since these are essential for them. However, there have been some delays with customers using our Yellow Hammer product wanting to transition to Financial Crimes, which requires additional consulting and implementation support. We've been collaborating with these existing clients, which is where some of the delays have occurred. Some delays are also related to our PayCenter products and payment initiatives, as we try to encourage clients to utilize our sending capabilities, among other things. Nonetheless, these challenges are not significant and do not impact our core implementations.

Mimi Carsley, CFO

Andrew, it's Mimi. From a broader perspective, I would like to emphasize that the challenges facing financial institutions today will be addressed through technology, not by simply increasing staff. Whether technology is the main solution or a significant part of it, we are confident in the ongoing demand. The reality is that if there is a strong return on investment, clients are willing to spend. Our recent Strategic Benchmark Survey shows that efficiency is a top priority, so if you can demonstrate the ROI, clients will invest.

Operator, Operator

We have the next question from the line of Andrew Bauch from Wells Fargo.

Andrew Bauch, Analyst

I wanted to revisit how this business operates through different economic cycles. I appreciate the stability and recurring nature of the business, but if we were to enter a more significant recession, how would we assess the potential impact? Would the current trends simply become more pronounced, or would there be adjustments to the core pricing strategy? I'm trying to understand what a recessionary scenario might look like.

Mimi Carsley, CFO

Andrew, I appreciate your question in this dynamic environment. It's very important. First, I want to mention that we are fortunate to have limited exposure to changes in tariff policies. As a company, we are actively monitoring vendor pricing, resource availability, and costs, including prescription costs for our associates. Our direct exposure is quite minimal. The greater exposure seems to lie in the commercial aspect of the business. We are carefully observing the health of U.S. businesses, particularly through our remit and enterprise payments services that support commercial customers, as well as through lending activities like Banno Business and treasury services. This situation is not akin to a global financial crisis. The banks are well-capitalized and have learned from previous experiences with mortgage origination and credit risks. They are navigating various interest rate cycles and we do not expect any widespread closures of financial institutions. As I mentioned earlier, these institutions need to continue serving their clients and members, driving efficiency, and addressing fraud, which is a top concern. The digital experience also remains a priority. Given the competitive landscape with the largest financial institutions, they must keep innovating, regardless of the economic conditions, to retain their clients and emerge from any economic challenges stronger and more resilient.

Andrew Bauch, Analyst

Understood. I have a follow-up question regarding the consolidation activity you've been seeing. Could you provide more details about the activity in terms of bank size and assets under management? Is this activity occurring more within banks compared to credit unions? I'm looking for a bit more specificity on where you're observing this increase in activity.

Greg Adelson, CEO

The activity in the market is widespread and ongoing. We've noticed that credit unions continue to acquire banks, including a recent instance where a competitor's credit union bought one of our banks. This trend appears to be persisting, and its longevity will depend on the strategies they are implementing in relation to credit unions. I believe we are well positioned due to our consistent growth in assets. We have successfully participated in what we call "winner mergers," where competitors have chosen to switch to Jack Henry instead of sticking with their existing core or complementary products because of our technological advancements and innovative offerings. Although we don’t win every opportunity, we have secured more than our fair share, and this trend is expected to continue. The current dynamics in the industry reflect that our competition is re-engaging in this area, having previously stepped back for years. Our commitment and focus on this segment over the past six or seven years are unparalleled. The recent ABA core survey highlights significant differences between our customer perceptions and those of our competitors, which positively impacts our sales pipeline and overall execution. We believe the challenges we are facing are primarily short-term, alongside the macroeconomic factors beyond our control, but we remain confident that the strengths we possess are lasting.

Operator, Operator

We have the next question from the line of James Faucette from Morgan Stanley.

James Faucette, Analyst

I apologize for the background noise. I wanted to follow up on your comment about competition and competitive intensity, Greg. I'm curious about how this has affected your engagements, win rates, or even pricing so far. How do you anticipate this will evolve, particularly with the increased focus from historical competitors?

Greg Adelson, CEO

Yes. James, good to hear from you. I think a couple of things: We continue to see the pricing sensitivity as we've mentioned in other calls and really even other years. That hasn't significantly changed. Our win rates continue to be, by far, the best in the industry. As I mentioned, we're winning larger deals, which means we're winning those from them. So that continues to be a good benchmark for your question. I will say that they get aggressive and many times trying to keep their customers. There are times when we may walk away from a particular deal if that gets to be too rich for our blood. I haven't seen anything strategically change in the market from what they're doing. Obviously, one of them has a brand-new CEO that was just formally announced. The other one has made some strategic decisions to rid themselves of one of their businesses and have indicated they're going to focus more on our space. So time will tell. But I can tell you, as of right now and where we are in our pipeline and where we've received customer feedback and prospect feedback because I do go to a lot of our large prospect opportunities, I haven't seen any level of concern on our part as of today. Yes, we're doing very well in terms of the pipeline dynamics.

Operator, Operator

We have the next question from the line of Andrew Bauch from Wells Fargo.

Andrew Bauch, Analyst

I would like to revisit how this business operates throughout the economic cycle. I recognize the defensiveness and recurring nature of our operations. However, if we were to enter a more significant recession, how should we assess the potential impact? Would the current trends simply become more pronounced, or would there be adjustments to our core pricing strategy? I'm looking to gain a better understanding of the recessionary scenario.

Mimi Carsley, CFO

Andrew, this is indeed a dynamic environment, and that's a great question. First, I want to mention that we are fortunate to have very limited exposure to shifts in policy regarding tariffs. As a company, we are closely monitoring our vendor pricing, resource availability, and costs, such as prescription costs for our associates. On the direct side, our exposure is minimal. However, the broader exposure in our industry lies more on the commercial side of the business. We are keeping an eye on the health of U.S. businesses through our remit business and our enterprise payments services that support commercial clients, as well as indirectly through lending services like Banno Business and treasury operations. It's important to note that we are not facing a global financial crisis; the banks are well capitalized and have learned from past experiences with mortgage origination and credit extension. They are navigating various interest rate cycles and we do not expect any widespread bank closures. As mentioned earlier, financial institutions need to continue serving their account holders and members while striving for efficiency. Fraud prevention is a significant focus for them, alongside enhancing digital experiences. Given the competitive landscape with the largest financial institutions, they must keep innovating, regardless of the economic cycle, to maintain their account holders and come out of economic challenges stronger and healthier.

Andrew Bauch, Analyst

Understood. I have a follow-up question regarding the consolidation activity you've been observing. Could you provide more details about this activity in terms of bank size and assets under management? Is it occurring more with banks compared to credit unions? I'm looking for a bit more specific information on where you're noticing this increase in activity.

Greg Adelson, CEO

The activity surrounding consolidation is widespread. There are still credit unions acquiring banks, and recently, a competitor's credit union purchased one of our banks. This trend seems likely to continue, depending on certain market strategies related to credit unions. We feel well-positioned due to our continued growth in assets. We have been involved in what we call winner mergers, where a competitor has acquired a financial institution but chose to switch to Jack Henry due to our technology, innovation, and product offerings. Although we don't win every case, we have captured a significant share. This trend appears to persist. The current dynamics in the industry show that our competition is rediscovering areas they had overlooked for years, while we have maintained our focus in this sector over the past several years, which is unmatched. The ABA core survey reflects the substantial differences in customer perceptions between us and our competitors, which continues to support our sales pipeline and overall execution. The matters we are addressing now, along with the broader economic challenges beyond our control, are expected to be short-term issues.

Operator, Operator

We have the next question from the line of James Faucette from Morgan Stanley.

James Faucette, Analyst

Apologies for the background noise. I wanted to follow up on your comment about competition and competitive intensity. Have you seen this reflected in your engagements, win rates, or even pricing strategies so far? How do you expect this to change, especially with a noticeable increase in focus from your historical competitors?

Greg Adelson, CEO

Vance Sherard, Vice President

Thank you, Myron. We appreciate all the interest in today's call. In the upcoming weeks, management is planning to attend investor events across the U.S., providing additional availability for in-person meetings. We would like to again thank all Jack Henry associates for their outstanding efforts and dedication, which have contributed to our solid results. Thank you for joining us today. Myron, please provide the replay number.

Operator, Operator

Sure. Thank you very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.