Conference Transcript - JKHY 2026-06-04

Dave Koenig, Analyst — Baird

All right. Good morning, everyone. Why don't we get started? My name is Dave Koenig. I'm a senior analyst at Baird covering payments and services and thrilled to have Jack Henry with us today, represented by CFO Mimi Karsley. Jack Henry is a core processor for banks, meaning they run the deposit and loan operations for many of the banks across the U.S. with one of the leading shares. Maybe you can just kind of kick it off with a little overview of what you do and how you've been able to grow really double the industry for not just one or two years, but probably the last 30. So kick it off.

Mimi Carsley, CFO

Yeah. So as Dave was saying, Jack Henry is a technology provider to banks and credit unions in the United States. So we have three main operating segments, then we have a fourth corporate segment. But of those three main operating segments, we have core, which does the critical processing. Think about account opening from account management, posting interest, general ledger, wires, all of the major functions, calculating interest for loans, recording those, all of the major processing. We do that both on premise, but 79% of our customers have it hosted from a subscription model in a Jack Henry data center. And then our payments business, we do card processing, both debit and credit card processing. We're not a merchant acquirer, but we do card processing for our customers. We also do enterprise payments. So think about remittance, check processing, bill payments. And we have a payment hub for around faster payments. So think about RTP, FedNow, Zelle, having all of the payment rails capable for banks, both core banks and non-core banks, and then we have a small business initiative around payments as well, and then we have our complementary segment, and there think about all of the ancillary services that a bank or credit needs to function, So think about lending capabilities, think about fraud capabilities, think about digital capabilities, account opening capabilities. So a lot of different solutions, over 200 solutions. We have been in business. We're just celebrated June 2nd. We celebrated 50 years in business, 40 years as a public company. So a lot of execution. We talk about the five key differentiation points for Jack Henry, and that's culture. We're a very people-first culture. So it's culture, renowned for service excellence. Then it's around strategy, innovation, and execution.

Dave Koenig, Analyst — Baird

Yeah, great. And maybe if we look at the core processing segment, about a third of revenue, there's maybe, what, 9,000 or so banks in the U.S. You work with 1,700 maybe. Every year, only about 100 really flip, right, turn to someone else. And you win half of those. You win 50 almost every year. Why do you guys win so much in the market?

Mimi Carsley, CFO

Yeah, so, and as you say, this is not a one-year phenomenon. For many years, we've been winning about 50 to 55. This year, we said we're confident to be at least at the high end of that, if not exceeding that, with a pipeline that's been stronger than ever. And so part of how we win is that service and innovation. So Jack Henry is not the low-cost provider. It's a very competitive marketplace. There's a lot of formidable competitors in the space and an industry of consultants that are also very influential in the space that kind of keep pricing pressure on all of the players in the space. And yet it's our innovation, it's our service, it's the transparency of where we're moving to. So we have, for the last five plus years now, been talking about our public cloud journey from the core, our tech modernization efforts that we've been talking about it and we now have over 20 components of that either in the market or in the hands of clients uh so that's talking about moving the functionality first of all decoupling the functionality of a core system and then moving it into the public cloud so the regulators aren't fully ready to do the supervalence and compliance today we think that'll take a couple more years to ready them but we've started to put modules out there but just the clarity of that from a roadmap strategy. Dave has really helped especially win larger clients. In the last 10 years, we've really been moving up tier. We announced two weeks ago a great win of a $9 billion institution. And part of the reason they chose Jack Henry in addition to the fantastic service was they knew that Silver Lake would meet all of their needs today, but they knew the tech modernization journey story that could help them in the future.

Dave Koenig, Analyst — Baird

And just to put that into context, maybe the $9 billion bank, I don't know, have you said about how big an average bank is? Like, that's probably worth, what, 10 normal banks?

Mimi Carsley, CFO

So our average is about 1.5, both on the credit union and bank side. Our business model, if they – we sell today primarily in the hosted environment. Very few banks buy on-premise if anyone buys on-premise today. But we're 79% in our private cloud, the Jack Henry private cloud. And that model is based on number of accounts or number of members. So a billion and a half bank average. So a $9 billion bank is big. We've been talking about how many we've won. We've won over 12, over a billion size institutions. Our largest institution to date is about $50 billion on the core side. We serve up to $200 billion institutions on the payments and complementary side. But, you know, and every one of those banks over $10 billion have crossed that threshold. That's a very important regulatory threshold, have crossed that threshold while being at Jack Henry. So we've been able to help support them from that regulatory duress and business model change of crossing that $10 billion demarcation line.

Dave Koenig, Analyst — Baird

Yeah, where debit interchange, all of a sudden they get paid half as much.

Mimi Carsley, CFO

Yeah, it's a big change for a bank.

Dave Koenig, Analyst — Baird

That is, yeah. Now, the public cloud that you discussed, right, for years it was a huge tailwind to go to your own private cloud. Banks used to run their own software that Jack Henry would provide. They'd run it themselves on the private cloud. Now you have 79% on your private cloud. Now this moved to public. What does that do to the financial model? Does it lift revenue? why do banks want to be in the public cloud rather than your hosted solution?

Mimi Carsley, CFO

Yeah, so when a bank makes that change from a revenue model implication, it's about 2x revenue at very, very high margins. And you may say, why would a bank pay you twice as much? And the reality is from a net outflow from them, it's similar. But think about all they have to spend when they manage their own data center. You're talking about million-dollar IBM hardware. you're talking about having all the data recovery all the backup all of the cio work all the cto work done in-house um and it's interesting uh so i've been at jack henry now almost four years um and when i joined i was like we've been on this march for like seven years of watching at a very steady clip around 40 to 50 clients per year making this change to being in the jack henry uh cloud environment and i was like well geez who wants to manage a data center these days like that's not the what they do best right what they do best is serving clients what they do best is creating bespoke lending to support small business um growth you know deposit gathering etc not necessarily like wanting to run a data center but what i think is interesting so the ones that are left we may only get to 30 or 40 this year but the ones that are left are larger institutions which makes sense because to still be running a data center in this day and age you need to be near tech talent so probably near a university um you need to you know be larger to have the economies of scale to be able to still be doing that but the thing i think is pretty interesting is uh i think there might be extra tailwinds to accelerate that shift so we think you ultimately get to around high 90s uh in the jack henry cloud so we've said oh we have seven more years of this great tailwind of 2x the revenue you know this is fantastic for for revenue growth but i think it could accelerate and the reason why i think david could accelerate is think about uh and a lot of people are talking about mythos and frontier models and the vulnerability assessments and a high an increase in patching velocity that's going to come from the exposure of vulnerabilities and infrastructure particularly around infrastructure and endpoints that will make the burden of care even harder of managing your own data center and i think whether it's the institutions themselves or perhaps even the regulators will get to a certain point to say maybe you shouldn't manage your own data center to these institutions and so i think we could see typically what tends to be the tipping point is when they have to make a refresh of hardware purchase or when a cio is at retirement that tends to be the tipping point where they rethink hey do we want to manage our own or do we want to move to a jack henry hosted environment but i think we could potentially see over the next coming years an acceleration of that trend which would be a great catalyst for revenue yeah that's that's interesting and as you go from private cloud to public cloud how does that shift work and what does that do for economics yeah so it's uh about a 25 basis point uplift moving from the jack henry data center to the public cloud um it the mostly because uh it's it's a similar product it's a similar similar delivery mechanism uh so it's not as much okay you're you're giving up all of these costs therefore you would pay more But what you do get is better burst processing capacity. You get better uptime reliability today. We have very strong uptime reliability, but we think you could get to at least four nines, if not maybe five nines of uptime reliability in the public cloud. You get all the DevOps benefits. But if you think about Bano today, everything we've built over the last five years has been digital cloud native, API first. So a traditional core processor, and this is anyone in the industry, you get one, maybe two upgrades a year. So think about more monolithic kind of software releases. But Bano, you could have 10 a week, 10 a month. You know, it's like your iPhone. Whenever there is new functionality, whenever there is an upgrade, it just comes straight through. And you get the same in a DevOps environment in the public cloud. So that's going to allow us in the core side of the house to increase the velocity of functionality and innovation into the hands of our customers. So you get a lot of you get enhanced security. Our security is great. Knock on some fake gold here. But even in a major cloud providers, we're a Google partner. We also have a very strong partnership with Microsoft. they know how to do this even you know at scale and force even more so than a jack henry so moving to the public cloud is is going to be a continued uplift but we also think it'll be an improved margin so we have a project underway internally we call ec 2030 or enterprise compute 2030 which is the journey to get out of the data center ownership ourselves where we're going to move to more of a colo facility so it'll be a public cloud plus colo facility which we think will be you know near term there's going to be a lot of work and spend to move that as part of the r&d efforts but long term is going to be a great margin catalyst as well as we get out of data center ownership yeah and then maybe turn to ai you know clearly the market's looking at any software firm and saying this is going to be a problem how do you see it in what you do maybe describe if regulatory you know impacts help you write an ai that really ai can't come in and you probably save a lot on cost too like how do you see all the different yeah things yeah i think that unfortunately the market right now is grouping everyone together and not seeing differentiation in business model which is unfortunate um i do think that from a jack henry perspective it's more of an advantageous situation there's more opportunity than there is disruption risk um as you say like i think about particularly in the core side of the business um there are 25 core providers that no one in this room has ever heard of right like very small maybe has one customer maybe has five customers um it is not a an easy business to operate in There's a lot of regulatory duress. There's a lot of regulatory update requirements. There's a lot of functionality from a code perspective. And there have been new entrants over the years that have attempted to come in, if you think about the European competitors that have tried to enter the U.S. market and have not been successful. So I don't think it's been a technology challenge. It's an operating challenge. You need to be able to have service quality. You need to be able to have uptime reliability. You need to be able to know how to operate in a highly regulated world. So I don't think that the opportunities that AI presents will be disruptive to that because I don't think it's a technology challenge where all of a sudden you're unlocking compute capabilities or something else. And you really have to know how a banker credit operates. And that is a key knowledge institutional asset that a lot of firms wouldn't know. Like, you have to ask the right questions. Claude is not just going to figure this out for you. So I think it gives us a benefit. We recently put out our annual client strategic benchmarking survey. We've been doing it for, I think this might be our fifth year. talks about it's ceo clients uh answering what are their top priorities it's listed on the jack henry website so for the for the last several years deposit gathering has been a top priority lending has been a top priority efficiency has been a top priority for the first time ai entered that list as a top priority but ai i think will help drive efficiency there's a lot of manual processes at a bank a lot of workflow movement a lot of duplication of tasks a lot of silos of functionality that ai will help but you have to understand the underlying processes under that the human processes that occur in a bank to understand where those opportunities are so we're using ai internally uh our developers have tools uh we're getting over 70 efficiency from a code production velocity. So we're quite excited. We think that there's a ton of knowledge enablement tools and white papers and videos and case data from call centers that we have about our products that we can embed through AI and natural language to make the products easier, more intuitive, more automated steps to drive efficiency. The reality is it helps us to drive efficiency at a bank. nothing in the way we charge from a business model is tied to the number of employees at a bank so we've always been aligned with our customers in helping them drive efficiencies from an institution so i think there there could be potential threats i don't think it's on the core side in the complementary side we compete with every point solution that's out there if you go to our client conference you will see 300 booths of competitors on point solutions so today a vendor or one of our clients could choose a third-party vendor they could choose a jack henry it's a very open architecture approach we have a lot of apis but again we compete with those today so if there's a new incumbent based on ai we will compete with them and on top of which we know banking we know our clients and we have the data to be able to help them. So we're going to use AI to both enhance our products, enhance the efficiency. We have a number of products already using AI, whether that be fraud detection products, whether that be AI ban or assist conversations to help in the customer service area with AI, whether that be exception item processing. There's a lot in financial crimes around SARS reports or government reports that AI can help the bank employee write and automate and save time. So there's functionality that we're releasing that has AI embedded to help the bank or credit union.

Dave Koenig, Analyst — Baird

Yeah, that's all good to hear. If we move to payments, about a third, give or take, of revenue, it's a very stable business in terms of more than half is debit processing, just Visa, MasterCard, debit transactions grow reasonably stable, little bill pay, some enterprise transactions you called out. Is there anything either from a share perspective or from a new product perspective, like the Move Partnership or RTP or some of the newer Zelle, all that stuff, that could accelerate revenue growth?

Mimi Carsley, CFO

Yeah, so we've been selling a lot more credit lately. So our credit sales have been double what they've been in the past. Now, it's not huge numbers. We've been in credit for a handful of years. And typically, a banker credit and wants to do debit and credit through the same provider. So we have a single platform that enables those transactions. But credit's been on the rise, I think, as banks continue to feel comfortable in the tools, the risk tools, the dispute tools to handle that and on the lookout for more diversified revenue streams. So credit has been very strong. The health of the consumer has been, you know, I won't say vibrant, but more stable than I think some of us a year ago would have maybe been nervous about. Some of the areas that are very interesting from catalysts of growth perspective are those faster payments. So if we think we have roughly, call it 500 clients on each of the faster payment rails today, but very little volume is going through send right now on FedNow, but the government could turn it on more aggressively at any point, that's exciting. Zelle has been very strong this year, the adoption and usage of Zelle. So while still modest in terms of the size of the dollars and the faster payments, that's within our pay center hub functionality, it's been great growth rate. So I think that's something you mentioned our partnership with Move. So our small business initiative that we launched just this year, we have two main flagship products. We're the first kind of solutions out the gate. One is rapid transfers, which allows through the debit rails, tapping on your Bano on your phone, both iOS and Apple, to move money. So let's say I could move money from my PNC to my incredible bank account. And it's instantaneous movement. And there's only three institutions in the U.S. that had that functionality today. So empowering community and regional banks and credit unions to have that at their fingertips really helps from an account opening perspective. as well as from a deposit gathering perspective. The second is tap to local. So that's a merchant acquiring, but instead of going around the financial institution, it's giving the tools to the financial institution to hit their underserved business customers. So a lot of small entrepreneurial customers, smaller businesses. I like to think about like if you run a bakery, you may have a toast machine in the cafe, but you're going to work at the farmer's market and you want to collect payments there. Or the piano teacher who comes to your house or your lawn care or your plumber. A lot of those kind of in-home where you don't want to send an invoice, you don't want to call and give your credit card over the phone, they can do tap-to-pay instantaneously. So I think people in that space will be multi-acquirer. They don't have to switch from their existing provider, but it allows them to have an alternative or a backup system. It gets frictionless, very easy to turn on. It's automatically turned on for all of our BANU institutions. So we have 1,000 institutions turned on for that service, and it's a rev share for the bank or credit union. We partner with Visa and MasterCard, so we have yet to turn on the marketing engine behind that. So people have kind of just been self-discovering it through Visa, through Bano, and already using it. And so it's been great to see that start. But we're going to turn on that marketing engine and really excited to see we have over 10,000 merchants using it already.

Dave Koenig, Analyst — Baird

When is the marketing engine going to be turned on, and where does this hit your P&O?

Mimi Carsley, CFO

So today it's a rev share with Move. And so you see that through payments, and you see that in digital. It's not huge dollars today, Dave, and it's just growing. So even in 27, it's going to be modest. But we think over the next five years, it could be the second largest engine in the payment segment.

Dave Koenig, Analyst — Baird

Oh, wow. So debit, obviously, 60%. No, that's not.

Mimi Carsley, CFO

No, so that's an addition to debit. That's just the rev share alone we think could be that large.

Dave Koenig, Analyst — Baird

So move above, like, bill pay or enterprise in terms of percentage of payment.

Mimi Carsley, CFO

The interesting thing on bill pay and enterprise, since you mentioned it, is the payrails acquisition we did about four years ago has really resuscitated that business. You know, you had a pretty mature business in iPay, but the combination of payrails and iPay has been great. We've seen a number of sales this year and just really nice growth. So we're excited about how that acquisition is going. The other acquisition that's helping in the payment space was our acquisition of Victor Technologies. So that's embedded payments capability. So that allows a bank or credit union to offer payments as a service. Again, a revenue diversification opportunity for the bank or credit union. And it allows them to offer to either fintech or to their sophisticated commercial customers through treasury management the ability to do payment servicing. So think about today Victor does a lot of digital asset providers. They do some gaming companies. They do other, I think, high volume end user. They do a lot of sub-ledgering capabilities. So you don't want to have a million users as entry into your core system. So it does kind of a master account with sub-ledgering capabilities. And then it does the KYC, KYB for the institutions. And then the bank or credit facilitates the payments. So that's been really exciting to see the success of that acquisition.

Dave Koenig, Analyst — Baird

And I'll talk about complementary just a little bit. but really just as we think of the business when we think of in the core segment you're winning more in bigger banks yes and some of your competitors have well one of your big competitors has noted some potential they were going to force some conversions they aren't now but i assume you're still winning share there so that's that's all the benefit to core in payments you have the move uh that's going to start to be more material and then i guess in complementary is there something like that and when you put it all together is 28 kind of a breakout year as all this kind of develops yeah so complementary is a collection of a lot of

Mimi Carsley, CFO

products we have over 200 solutions but if I think about some of the anchor capabilities you think about lending products being in complementary fraud products being in complementary and digital And when we say digital, we mean more than just Bano. So we think about anything that an end client user needs to do to open an account, get a loan, any of the services that an FI offers without going into a branch. So that would be digital. So that's a big grower as well, things like treasury management, and now that we have Bano business. But if I think about the other catalysts going outside of the base today, Bano is only available to our 1,700 core customers today, but we're going outside the base with Bano. So that's another catalyst for growth.

Dave Koenig, Analyst — Baird

And would you say, because of how sticky your business is, I mean, you have like 99.5% retention. I mean, it just doesn't change. Your revenue growth doesn't change. It's not 6% to 8% just very consistently. But it seems like a lot of things, while they probably don't immediately impact 27, because it's like a slow progression, 28, it seems like there are so many different catalysts that all collectively could make that just an incredible year.

Mimi Carsley, CFO

Yeah, and I think it's not just 28. I think it'll be setting kind of a new level for the future. And I think it's not just from a revenue catalyst, which is exciting. It's not just one area. So from a perspective of diversification, I think there's several. we talked about just now, but a lot of those are also very attractive from a margin perspective. You continue to get the margin expansion from moving to the private cloud and to the public cloud. The rev share opportunities, the newer products at an upcharge have a better mix blend. So I think there's also a lot of nice catalysts from a margin expansion as well.

Dave Koenig, Analyst — Baird

Yeah, okay. And when we think about margins, I know this year and last year, too, really good margin expansion. Yeah, good years. You have a little bit of a headwind, which you've been way more than offsetting, right, the co-location. How do we think about that the next couple of years? Co-location costs keep going up, but incremental margins are really good? How do we think about that?

Mimi Carsley, CFO

Yeah, I think there were some things this year that we called out as more one-time benefits that are less reoccurring. We have a self-funded medical plan that at the first half of this year we saw less claims around, and we've already started to see that normalized, and we've talked about that on the most recent call. So that was just kind of like a windfall that I don't expect to repeat, but there are others that will. We also have some grow-overs next year because of that, because of hiring, because of some of the infrastructure investments we're making. But I think the base foundation of the model intuitively is a margin expansion story will continue.

Dave Koenig, Analyst — Baird

Yeah, okay. So solid margin expansion continues. And then when co-location costs sort of run out and all of a sudden you just have your single location, you shut down some data centers, how far in the future is that?

Mimi Carsley, CFO

That's a couple of years from now. I think today we have some of the moving loads to the cloud. from products perspective, and then as we move the infrastructure support of the data center into the cloud, that's going to take us a couple of years to handle. But we spend about 14 to 15% on R&D. I don't see that increasing. We've been able to do all of the tech modernization work for the last five years, still under that 14 to 15%. So I see us continuing to be able to innovate at an accelerated pace while spending the same 14% to 15%. So I think by the next couple of years, you're going to continue to get margin expansion every year, but I think it can really start breaking out over the near-term horizon.

Dave Koenig, Analyst — Baird

Nice. Okay. And two quick ones. You have about a minute left. Free cash flow conversion, you're back to close to 100%. Is that sustainable? And then is there anything that is a headwind to growth? Like there's so many growth drivers right now, But law of large numbers, maybe anything else?

Mimi Carsley, CFO

Yeah, so it's a great year for free cash flow. The clarity that we got from Section 174 essentially added excess cash because we had overpaid in taxes in retrospective. That's been a great headwind. But the natural free cash flow, I think it's going to be in that 90 to 100 plus percent. It's enabled us to spend almost $300 million on share repurchases this year on top of dividend growth and reinvestment in the business. So I see apps in M&A continuing to have free cash flow allocation to all of those areas. We'll continue to explore M&A, but in the absence of that, it'll allow for share repurchases.

Dave Koenig, Analyst — Baird

Any headwinds to revenue?

Mimi Carsley, CFO

Yeah, head runs to revenue. First of all, I would encourage everyone to look at us on an annual basis. Then there is, you know, Q4, for example, this year is a little lighter. That is no way indicative of any kind of annualized go forward. It just is the way this year's plan worked out. So please look at us on an annual basis. In any one year, depending on how M&A goes, in general, it tends to be a neutral to slight positive for Jack Henry. But in any one year, while that deconversion or think about the termination exit of a contract is great, it's nice free cash flow, but that creates a pothole of revenue in the future. And so if you had some lumpiness related to those potholes, but our industry has been consolidating for 40 years and we've been growing at seven to eight. So we've been able to overcome those potholes, but that could create lumpiness from a headwind in a particular year if it was all of a sudden concentrated.

Dave Koenig, Analyst — Baird

Yeah, makes sense. Well, that's all the time we have. Please join me in thanking Jack Hunter and Mimi Carson.