Earnings Call Transcript - JKHY Q1 2023

Operator, Operator

Good day, and welcome to the Jack Henry First Quarter Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Vance Sherard, Vice President of Investor Relations. Please go ahead, sir.

Vance Sherard, Vice President of Investor Relations

Good morning, and thank you for joining us for the Jack Henry first quarter earnings call. Joining me on the call today is David Foss, Board Chair and CEO; Mimi Carsley, CFO and Treasurer; and Greg Adelson, President and COO. After these opening remarks, I will turn the call over to Dave for his thoughts about the state of our business, financial and sales performance for the quarter, industry comments and other key initiatives. After Dave concludes his comments, Mimi will provide additional commentary regarding the financial results and fiscal year guidance included in the press release issued yesterday that is available from the Investor Relations section of the Jack Henry website. We will then open the lines for Q&A. As a reminder, this call includes certain forward-looking statements, including remarks or responses to questions concerning future expectations, events, objectives, strategies, trends or results. Like any statement about the future, these are subject to multiple factors that could cause actual results or events to differ materially from those we anticipate due to multiple risks and uncertainties. The company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our 10-K entitled Risk Factors and Forward-Looking Statements. On this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income. The reconciliations for non-GAAP financial measures are in yesterday's press release. I will now turn the call over to Dave.

David Foss, Board Chair and CEO

Thank you, Vance, and good morning, everyone. Before we get started today, I'd like to welcome the other folks in the room with me as introduced a moment ago by Vance. To begin, I'd like to welcome Mimi Carsley to her first quarterly call with Jack Henry. Mimi has been sitting in the CFO chair for a couple of months now and has spent a good bit of time immersing herself in the details of our business. Of course, you'll hear from her in a bit, and I'm happy to have the opportunity to introduce her for the first time to all of you. Additionally, I'd like to welcome our President and Chief Operating Officer, Greg Adelson, to his first earnings call. Many of you know Greg from our Investor Day and other events. Greg will be a participant in these calls going forward, but today, he will primarily focus on answering any questions regarding our recent Payrailz acquisition. Lastly, I'd like to welcome Vance Sherard to his first earnings call. As you probably know, Vance was recently promoted to Vice President of Investor Relations, and he will host these calls every quarter going forward. With that, let's move to the update section of our call. As I noted in the press release, I'm very pleased to report another strong quarter of revenue and operating income growth for our company. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for the quarter. For the first quarter of fiscal 2023, total revenue increased 8% for the quarter and also increased 8% on a non-GAAP basis. Deconversion fees were up slightly as compared to the prior year quarter. Turning to the segments, we had another solid quarter in the core segment of our business. Revenue increased by 6% for the quarter and also increased by 6% on a non-GAAP basis. Our payments segment again performed very well, posting an 8% increase in revenue this quarter and a 7% increase on a non-GAAP basis. We also had another strong quarter in our complementary solutions businesses, with an 8% increase in revenue this quarter and an 8% increase on a non-GAAP basis. As I've discussed previously, our first quarter is usually our lightest sales bookings quarter because our fourth quarter tends to be extremely strong, and the sales pipeline is depleted as a result. As you may recall, the June quarter was the strongest sales quarter in the history of the company, so we certainly expected that historical trends would hold true. This year, however, although sales bookings didn't set a record, they were up by double digits over the prior year quarter with many notable wins. In the quarter, we booked six competitive core takeaways and five deals to move existing in-house customers to our private cloud environment. As some of you may recall, we started last year with six core wins and ended with a total of 52 for the year. Although I can't predict our full year performance with any certainty, the pipeline gives us optimism that we're likely to see that kind of trend this year as well. We continue to see success with our card processing solution, signing nine new debit processing clients this quarter and one new credit client. We also continue to see remarkable success signing clients to our Banno digital suite with 60 new contracts in Q1. Speaking of our digital suite, at the end of Q1, we were hosting approximately 8.3 million registered users on the platform, and that number is now growing at almost 200,000 users per month. At the end of Q1 last year, we had about 6 million registered users on the platform, so we've experienced more than a 38% increase in the intervening 12 months. We are currently expecting to have the Banno Business offering generally available in early 2023 and providing another avenue to increase the number of Banno users. The Banno digital suite continues on the path to becoming the industry-leading digital banking solution in our markets. The continued success we've seen with sales and adoption of our digital suite is consistent with the expectations coming out of the Bank Director Technology survey published in August. As they do every year, Bank Director surveyed hundreds of their subscribers during June and July regarding a variety of technology prioritization and spending topics. More than 50% of the responses they received were from bank CEOs and/or Board members, and more than 80% of the respondent banks were greater than $500 million in assets. Although this survey didn't predict spending for 2023, it did highlight that the median increase in expected technology spending this year was 11% compared to the prior year. One of the interesting items from this year's survey was the analysis of technology and use by respondent banks as it relates to their ability to serve different generational groups. Fully 93% of the respondents said they had the technology in place to serve baby boomers, but only 25% said they have the necessary technology in place to effectively serve Gen Z-ers. Of course, it's the younger generations that expect to conduct all banking services without ever entering a branch. Clearly, the initiative for all banks to get to a digital presentation layer has a long way to go. All of this bodes well for the future of our digital suite as well as the other innovative solutions offered by Jack Henry, which help facilitate an improved customer experience through a digital front door at the financial institution. On August 9, we announced a definitive agreement for Jack Henry to acquire Payrailz, and we completed the deal on August 31. Payrailz accelerates Jack Henry's technology modernization strategy by immediately adding next-generation digital payment capabilities to our public cloud-native technology stack and payments ecosystem. Payrailz also enhances Jack Henry's payments-as-a-service strategy, enabling clients to simplify the complexity of payments, modernize their existing payments channel, and remain at the center of their account holders' payment experiences. Acquiring Payrailz has strengthened our position in the payment space by providing our collective clients with additional functionality, optionality, and flexibility that enhances their diverse digital and payment strategies. To that end, in mid-October, we announced the launch of a stand-alone person-to-person payment solution that further supports our real-time payment strategy. This offering is available for stand-alone implementation or as a strategic component of the full Payrailz payments platform. In addition to the Payrailz acquisition, we recently announced the release of our new Financial Crimes Defender application, an expanded partnership with Mastercard, and a new relationship with Google. We're excited about these key relationships with Mastercard and Google and look forward to continuing the rollout of Financial Crimes Defender. All of these announced solutions and relationships support our ongoing mission to supply our community and regional financial institution clients with leading-edge public cloud-native financial technology offerings. As many of you know, we normally conduct our two largest client conferences in the fall each year. This year, we combined those conferences into one in-person event in San Diego called Jack Henry Connect. We hosted thousands of attendees at the conference, giving us the opportunity to interact directly with many of our existing clients and prospects. Of course, events like this not only present a wonderful opportunity for relationship building and education, but they also generate a significant number of new sales leads. During the Connect conference, I hosted our Annual CEO Forum, which was attended this year by more than 200 client CEOs. Although we didn't conduct a formal survey during the meeting, the general feedback was that the attendees are concerned about the general economy but committed to using technology to position their businesses for the future. Last month, we were proud to be included in Newsweek's list of top 100 most loved workplaces. Jack Henry ranked 17th overall and second in the financial services category. The ranking came as a result of a survey conducted by Newsweek of almost 1.5 million employees at thousands of companies, large and small. The list recognizes companies that put respect, caring, and appreciation for their employees at the center of their business model. This is an incredible honor for us in no small part because this list focused on several qualities that we aspire to every day: collaboration and teamwork, opportunities for advancement, transparency, corporate citizenship, and how our company lives up to its own stated values. In addition to understanding the need to treat our employees well, we recognize that business risk resulting from climate change constitutes a key component of our risk management responsibility. Our TCFD-aligned disclosure is included in Jack Henry's 2022 sustainability report and details our assessment of Jack Henry's climate-related risks from acute and chronic physical risks to transition risks like greenhouse gas emissions and regulation. I encourage you to visit our corporate responsibility website via the Investor Relations tab for more information about our ESG efforts and to review our published sustainability reports. As Mimi will highlight in her comments, we recently sold one of our facilities in San Diego. This sale was the result of our ongoing efforts to analyze what our facility requirements will be in the future. We continue to evaluate the best operating model for our company as it relates to remote versus in-office work. As a result, we are not anticipating any significant reduction in our physical footprint at this time. We instead plan to make slower incremental changes that align with our go-forward workforce strategy. Next week, we will conduct our Annual Shareholder Meeting, and we'll again be hosting this meeting in person in Monett. We are excited to be able to meet with our shareholders in person, but we're also very aware of the ongoing pandemic-related concerns that arise when you assemble a group of people. With this in mind, we will once again offer an option to observe remotely for those who wish to listen without attending the meeting. Despite the uncertainty caused by the economic challenges we're all dealing with today, let me remind you of a few of the fundamentals about our company, fundamentals we emphasize regularly in our discussions with investors and analysts. First, slightly more than 90% of our non-GAAP revenue is recurring in nature, and most of it is tied to long-term contracts for critical processing systems. Second, we have a very manageable amount of debt on the balance sheet, and we continue to operate with a solid cash position. Third, we have paid quarterly dividends since 1991, increasing them 33 times over that same period, and we continue to be committed to our dividend policy moving forward. Fourth, we have an extremely engaged workforce as we've seen in our employee engagement survey results and Best Place to Work awards. Fifth, our clients are generally well-capitalized and, as evidenced by the survey I stated earlier, we're continuing to increase their investment in modernizing their technology infrastructure. And finally, remember that we weathered the financial crisis 15 years ago with very few bumps or bruises, and it's highly unlikely that any near-term economic uncertainty results in a similar level of financial institution impacts. As we move forward, I remain extremely optimistic regarding our levels of sales activity and customer responses to the solutions we're delivering and the strategies we are executing. We will continue with our disciplined approach to running the company, and we expect that approach to continue to provide stability and solid performance for our employees, customers, and shareholders. With that, I'll turn it over to Mimi for some details on the numbers.

Mimi Carsley, CFO and Treasurer

Thanks, Dave. Good morning. I appreciate this opportunity to speak with everyone for the first time as Jack Henry's CFO. Having spent my career at the intersection of finance and technology, I'm thrilled to be at such a highly regarded company with a focus on delivering shareholder value. As highlighted by Dave's comments, Jack Henry has had a successful first quarter, and I'll share some color on the financial details driving those results. Total revenue was up 8% for the quarter, both on a GAAP and non-GAAP basis. So let's jump into the details. Services and support revenue increased 8% in the quarter. Deconversion revenue was up $800,000 for the quarter. Consistent with previous guidance, we expect approximately $35 million in deconversion revenue this fiscal year and is expected to be heavier in the second half. However, forecasting deconversion revenue is always challenging. Our private and public cloud offerings showed robust growth in the quarter, growing 10%. Product delivery and services revenue grew 11% in the quarter, impacted by the return of our in-person user group conference and higher consulting activities, offset by slightly lower implementation revenue. Non-GAAP total support and services revenue grew 7% for the quarter. Processing revenue increased 10% on a GAAP basis and 9% on a non-GAAP basis in the quarter. The increase was primarily driven by higher card volumes. Additionally, digital revenue continues to show rapid growth led by strong demand for our Banno digital platform. Now turning to costs. The cost of revenue was up 8% with card costs in line with card revenue, higher personnel, license, and amortization expense, partly offset by a decrease in labor cost deferrals. Research and development expense increased 23%, primarily due to higher personnel costs. SG&A rose 12%, driven by increases in travel, personnel, consulting, professional services, and meeting-related expenses, partly offset by the gain on the sale of assets. The increase in meeting expense was due to both our first in-person user group conference since fiscal '20 and the consolidation of our two user group events. Expenses for the consolidated conference were solely in the first quarter instead of over the first two quarters, and this will be the norm going forward. We concluded Q1 with strong results, delivering net income growth of 4% with fully diluted earnings per share of $1.46. For transparency, the impact from the gain on sale of assets, the Payrailz acquisition, and deconversion fees are shown as part of the non-GAAP adjustments in the press release. Now turning our attention to cash flow. Operating cash flow increased to $137 million for the quarter, primarily due to a higher collection of accounts receivables. As a reminder, our cash flow is impacted by the collection of annual maintenance in Q1 and Q4, so the conversion accelerates at both the beginning and end of the fiscal year. Currently, total R&D spending is slightly elevated due to the integration of Payrailz that should normalize by the end of the fiscal year. Free cash flow, which is operating cash flow less CapEx and capital software, adding back net proceeds from disposal of assets was $116 million or 109% conversion. Jack Henry has been a responsible steward of our investors' capital, and as the new CFO, I can assure you that our capital allocation strategy will remain fundamentally consistent. We are committed to maintaining ample operating liquidity, reinvesting for growth, evaluating strategic acquisitions, paying dividends, and opportunistically repurchasing our stock. This strong dedication to value creation resulted in a trailing 12-month return on invested capital of 23.2% or a 170 basis point increase. To provide some extra color on the quarter's acquisition, as Dave mentioned, the strategic Payrailz acquisition closed on August 31. Thus, the current quarter includes one month of results. The purchase price was $230 million, and Payrailz is expected to contribute approximately $12 million in revenue to Jack Henry's fiscal '23. The $0.22 GAAP dilutive impact for fiscal '23 is driven by operations, incremental interest, and amortization. As previously mentioned, the acquisition is expected to become GAAP accretive in fiscal '24. Focusing ahead, let me share updated guidance. We provided transparent GAAP and non-GAAP full year guidance in the press release. The GAAP guidance is now inclusive of the Payrailz acquisition and the gain on asset in addition to deconversion revenue. GAAP revenue growth for fiscal '23 is now expected to be 7.7% to 8%, driven by the acquisition of Payrailz, as there is no change in our deconversion fee outlook. Guidance for non-GAAP revenue growth remains unchanged at 8.2% to 8.6%. Outlook for the full year GAAP operating margin is approximately 23% impacted by both the gain on the sale of assets and the acquisition. Full year non-GAAP operating margin guidance remains unchanged at relatively flat year-on-year. We remain very focused on returning to margin expansion in fiscal '24. Full year GAAP EPS guidance is now a range of $4.90 to $4.94. Our sequential quarterly cadence for non-GAAP revenue growth is expected to decelerate slightly in the second quarter when compared to current analyst estimates and then rebound with sequential increases in both the third and fourth quarters to achieve our full year guidance targets. The trend is similar for non-GAAP operating margin, but while the second quarter will see a decrease on a year-on-year basis, it will not be the same level seen in the first quarter, allowing us to achieve our full year guidance targets. Based on a solid first quarter results, continued disciplined execution, and near-term visibility of continued momentum, we are on track to meet our non-GAAP revenue growth and operating margin guidance. So in closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we see to continue investing to best serve our financial institutions and their clients, grow our business, and create long-term shareholder value. We thank all of our investors for their continued confidence in Jack Henry. Chuck, will you please open the call for questions?

Operator, Operator

And the first question will come from Vasu Govil with KBW.

Vasundhara Govil, Analyst

My first question is for you, Mimi. It's nice to speak with you, and welcome to your first earnings call. A couple of questions on the guide. First, I guess, with the $6 million gain on sale already contemplated in the guide when you guys guided three months ago. And then if I think about the change in the guide, it seems like non-GAAP margins, you're not really expecting a change. So is all of the dilution pretty much related to the acquisition? And then a third part to my question, I think last quarter, if you go back, Kevin had sort of highlighted the margin guidance being conservative with some areas of potential upside. Is that view still the same? Or has anything changed on your expectation there?

Mimi Carsley, CFO and Treasurer

Thank you for the question. To clarify, the real estate aspect was not included when we reconfirmed our guidance after the acquisition. As for your second question about guidance, the only factors that influenced our outlook were the acquisition and the gain from the sale. Regarding the margin outlook, it's still early in the year. We remain optimistic; however, we are encountering some inflationary challenges as a business, but we believe we can achieve our guidance targets.

Vasundhara Govil, Analyst

And Dave, if I could squeeze in one for you. I sort of got your comments on the seasonal softness in new core wins. But some of your peers have called out some softness in new signings in larger deals over $50 million. So I just wanted to get your sense if you were seeing any change in sort of appetite in signing deals in any of your cohort that would concern you at all?

David Foss, Board Chair and CEO

Thank you, Vasu. I would have felt left out if you hadn't asked me a question, so I appreciate that. There is no change in the cadence of deals. Our current pipeline of potential deals is significantly larger than it has ever been. The rate of deal signings remains consistent with last year, which I highlighted earlier in the call. Regarding larger deals, it may not surprise you that I personally get involved in many of them. In the next two weeks, we have our shareholder meeting next week, followed by three institutions visiting Dallas over two days where I will be hosting their CEOs. The week after that, I have another meeting in Dallas that I will also host. Again, I only engage with larger deals. From my perspective, despite what you may have heard about a slowdown in deal activity, Jack Henry is not experiencing that. Our pipeline is strong, and there is a lot of ongoing activity with both core products and other offerings. We recently signed 60 new Banno deals this quarter, and that pace is not slowing. As for the election, I haven't followed any news about it today because I came straight here. I'm not sure what impact the election results will have on economic sentiment, but currently, we don't see a slowdown in activity.

Operator, Operator

The next question will come from Rayna Kumar with UBS.

Rayna Kumar, Analyst

Congratulations, Mimi and Vance. Can you talk a little bit about how your technology modernization strategy is progressing? I think I heard earlier that you said you have five new wins onto your private cloud offerings. Just wondering if you're seeing anything on the public cloud yet, and just how your discussions with banks and credit unions are going on some of these new products?

David Foss, Board Chair and CEO

Sure. First, there were six new core wins that I mentioned in my update, which is the same number we had last year for the first quarter. This aligns with our typical performance following a strong fourth quarter in terms of core activity. We continue to see significant engagement with our traditional offerings. Regarding the tech modernization strategy, many customers are involved in discussions with us to envision the future. As I have previously emphasized, this is centered around a strategy, and we currently have a few modules in production, with wires being the first. Customers are already using these modules, but it will take several years before anyone commits to the entire stack of components in this tech modernization strategy. I am convinced that our unique, forward-looking cloud-native strategy sets us apart from some competitors, generating considerable interest from those considering our current offerings and looking toward a future transition to public cloud offerings. We are on track, and we have released a roadmap for our existing customers to review. However, we have not made any external announcements yet, as some competitors are trying to replicate what Jack Henry is doing. Hence, we will be cautious about public disclosures, but our customers now have access to the roadmaps, allowing them to understand the delivery cadence of the tech modernization strategy. Additionally, I want to highlight that tech modernization is not limited to core solutions. A significant aspect of the Payrailz acquisition was to enhance our public cloud-native payment offerings. Furthermore, the Financial Crimes Defender solution, which I've mentioned, is also built on this cloud-native platform. This reflects a comprehensive modernization effort across all areas of Jack Henry's business, not just core solutions.

Rayna Kumar, Analyst

That was really helpful. And then just a question here for Mimi. Your adjusted payment segment revenue that was up 7% in the quarter. If you could just break out the drivers for us? Then how should we think about payments revenue for the remainder of the year? I think on the fourth quarter call, we thought the guidance was high single digits. Is that still the right way to think about it?

Mimi Carsley, CFO and Treasurer

Thanks, Rayna, for your question. We reported that payments grew 8% this quarter, with approximately 60% coming from cards, about 22% from the EPS business, both of which are experiencing strong growth, and around 18% from bill pay. I would say that the estimate of high single digits is still valid.

Operator, Operator

The next question will come from David Togut with Evercore ISI.

David Togut, Analyst

Could you give us a preliminary view of how you see margins trending in fiscal '24, given the substantial pressure you've called out in '23? In other words, how much of the inflationary pressure in FY '23 is simply related to Payrailz necessary investments related to that versus pressures that might be more persistent and push into FY '24?

Mimi Carsley, CFO and Treasurer

Dave, this is Mimi. I'll take that. So I would say that we're still very early in '23. So FY '24 is a long way away in a very uncertain global context. But we remain quite vigilant in our focus on expanding margin growth in FY '24. Some of the headwinds that we've seen in FY '23, some of them were onetime in nature, like the Java payment in terms of the year-on-year impact. Others, we're starting to see some loosening of inflationary pressure as it relates to personnel costs.

David Foss, Board Chair and CEO

I want to add that, Dave, we've mentioned before how technology costs, particularly with Java, have shifted from not having any costs to now incurring these expenses. This affects all companies, not just Jack Henry. The recent increase in travel expenses is also something that will stabilize moving forward. As we consider fiscal year 2024, the increased travel costs will be reflected in the fiscal year 2023 comparisons, which should create opportunities for margin growth next year. On the wage front, we've experienced wage inflation like everyone else, but that is also beginning to stabilize. This will factor into fiscal year 2023 when we compare it to fiscal year 2024. Overall, many of the issues we’ve discussed are beginning to stabilize for Jack Henry, which gives us a chance to regain margin expansion next year.

David Togut, Analyst

And just as a follow-up, could you update us on your capital allocation priorities? Maybe you underscored your responsible approach to capital allocation. How is your approach to capital allocation, perhaps different from Kevin? And then maybe more broadly, what are you seeing in terms of the acquisition pipeline, businesses that fit into your strategic priorities and which might also meet your kind of valuation threshold?

Mimi Carsley, CFO and Treasurer

Thanks, Dave. Great question.

David Foss, Board Chair and CEO

I'll take the second part, but you go ahead if you want to do the first part.

Mimi Carsley, CFO and Treasurer

I will handle the first part. As I mentioned, I expect it to remain fundamentally consistent. What I'm looking for is a strategic fit, cultural alignment, opportunities for organic growth through investments, potential acquisitions, and returning capital to shareholders. We will consider all of these aspects. I have been very impressed by Jack Henry’s disciplined approach to acquisitions, which includes a strong diligence and evaluation process. I expect to continue exploring all of those options.

David Foss, Board Chair and CEO

I want to add that I was previously very optimistic about the prospects for acquisitions this year. However, the pipeline of potential companies to acquire is not as strong as I had anticipated. We were excited about Payrailz and its long-term benefits for us and our customers, but there aren’t many similar companies available. We are continuously exploring potential deals and opportunities, but the market is not what I had hoped for regarding additional acquisitions.

Operator, Operator

The next question will come from Nik Cremo with Credit Suisse.

Nik Cremo, Analyst

I just wanted to ask about the Banno Business offering being rolled out early next year. Is there any way for us to think about the potential revenue uplift for that product on a stand-alone basis or on a per customer basis?

David Foss, Board Chair and CEO

Yes, Nik, it's Dave. I wish I could provide some concrete expectations regarding building a model. It's important to note that many of our customers who have already acquired and implemented Banno for retail are eager to adopt Banno Business when it launches for their business clients. We have a substantial pipeline of customers ready to implement that. The more challenging aspect for me is estimating how many business clients will adopt it and the speed of that adoption. So, I wouldn't want to venture too far in predicting potential revenue increases, but we are confident that they will materialize over time and become significant, especially since we know many customers have numerous business clients they intend to onboard. However, it's too early for us to accurately project what that will look like. I should mention that we haven’t included significant projections in our financials for the rest of the fiscal year because we need to observe the rollout closely. As you know, we are a disciplined, conservative organization, and we want to ensure that the adoption aligns with our expectations before making revenue or adoption forecasts. We plan to wait until we reach general availability and confirm that adoption meets our projections before moving forward.

Nik Cremo, Analyst

Understood. And then for my follow-up, I wanted to just get an update and see what you're hearing from your customers in terms of their M&A pipeline and just the overall M&A environment as it pertains to your customer base and if you're still seeing the same type of slowdown that you called out last quarter.

David Foss, Board Chair and CEO

Sure. Yes. Nothing has really changed in that regard. The interesting thing about deconversion revenue is that it occurs when one of our customers is acquired, which many of you are aware of. To clarify, deconversion revenue arises when a customer is bought out of their existing contract. We know that this has slowed compared to the previous year, but we feel comfortable with the guidance we've provided. However, that’s the kind of revenue you don’t want, as it indicates a customer is leaving due to an acquisition. On the other hand, we have good visibility into our customers acquiring other customers, and we know that is happening, but that has also slowed. Overall, the M&A environment has reduced due to the impact on bank stock valuations and the general economy, with many people uncertain about future developments. Consequently, the market for bank M&A has slowed, and we continue to observe the trends I highlighted last quarter.

Operator, Operator

The next question will come from Kartik Mehta with Northcoast Research.

Kartik Mehta, Analyst

I know you referenced the recent survey for bank spending. But I'm just wondering from your conversations and what's happening in the interest rate environment with net interest margins going up. How do you feel about what bank spending will look like in calendar 2023?

David Foss, Board Chair and CEO

Yes, that's a good question. I was a bit frustrated. Typically, Bank Director projects forward into 2023. I often mention the Cornerstone Advisors survey during these calls, which should be released around mid-December. So right now, my insights are mainly anecdotal, based on conversations with bankers. I want to emphasize, as I mentioned earlier, that we had over 200 bank CEOs at the forum I hosted in San Diego about a month ago. They generally appear to be quite optimistic. We have observed interest rate increases on the lending side, though they haven't had to raise deposit rates as rapidly, but they are aware that it is coming. For the first time in years, they have an interest margin spread to work with and feel overall well-capitalized, with not many risky credits on their balance sheets. They generally feel positive about the future. Additionally, all of them are focused on technology investments to stay competitive. This aligns with our tech modernization efforts at Jack Henry and our digital banking solutions for both consumers and commercial clients, including complete online commercial loan origination. These are important topics for our customers, who seem generally optimistic. However, I want to note that I haven't seen any updates on the election results, which could change things unexpectedly. But as of a month ago, they appeared hopeful about their prospects and their willingness to invest in technology.

Kartik Mehta, Analyst

And then, Greg, I wanted to ask you a question on Payrailz. Maybe just your thoughts on if this helps you differentiate your product or how it helps you differentiate or maybe it provides some other benefits. Just to understand how this acquisition will benefit Jack Henry.

Greg Adelson, President and COO

Thanks, Kartik. It's great to hear from you. Regarding differentiation, it's important to note that this is not merely a bill pay solution; it is a comprehensive payments platform. This distinguishes it from our iPay offering as it supports a variety of payment solutions and seamlessly integrates with our PayCenter offering through its API capabilities. There are numerous ways to leverage different components of this platform within our payments-as-a-service strategy. We have elements that we plan to develop, but many features have already been established, such as the standalone P2P solution, which operates on an open-loop system. This allows senders and receivers to interact without being on the same network, enhancing our current P2P offerings and providing additional options for our clients. Additionally, there is an efficient account-to-account transfer solution that will create new opportunities within our existing customer base. When considering the overall payment industry landscape, particularly those with various features, we believe this acquisition will significantly enhance our payments-as-a-service approach and support our technology modernization efforts.

Kartik Mehta, Analyst

And Mimi, just one last question. I think you might have already said this, and if you have, I apologize. The acquisition cost, is that in a certain quarter or is that over the next few quarters?

Mimi Carsley, CFO and Treasurer

Are you talking about the impact on our guidance? It's embedded within the full-year guide.

Kartik Mehta, Analyst

Yes. Yes.

Mimi Carsley, CFO and Treasurer

Yes. So as I mentioned, the impact will be positively on the revenue contribution. And then from an EPS perspective, the ongoing operations, the amortization as well as the interest expense.

Operator, Operator

The next question will come from Peter Heckmann with D.A. Davidson.

Peter Heckmann, Analyst

Great. I think most of my questions have been answered, but just a few little follow-ups. That one-time gain related to the sale, was that in SG&A?

Mimi Carsley, CFO and Treasurer

Yes.

Peter Heckmann, Analyst

Okay. In terms of Payrailz, we can estimate the per share impact of the gain. However, when isolating the dilutive impact of Payrailz for fiscal '23, it's around $0.10. Apologies if you've already addressed this, but how do you anticipate this tracking towards breakeven and profitability over the next year or two?

Mimi Carsley, CFO and Treasurer

Thanks for the question, Peter. As I said in my prepared remarks, it's a $0.22 for the full-year impact. And just to reiterate again, the only changes in our guidance are the impact from the sale as well as Payrailz. The core business guidance remains unchanged.

Peter Heckmann, Analyst

Great. And then the thoughts on just getting the business to breakeven and beyond or...?

Mimi Carsley, CFO and Treasurer

Yes, we fully expect it to be accretive in fiscal '24.

Operator, Operator

The next question will come from Dom Gabriele with Oppenheimer.

Dominick Gabriele, Analyst

Congratulations on everyone's new roles. It seems like the real economy is beginning to shift. Could you discuss the measures you have in place to maintain ROIC in a more challenging revenue environment? As you noted, Jack Henry has significant contract revenue, but any additional details would be appreciated. I also have a follow-up.

Mimi Carsley, CFO and Treasurer

Thank you for the question, Dom. We're not worried. We feel confident about the health of our clients, the credit quality of their loan portfolios, and the positive net interest margin. The sales pipeline is very strong, so we have no concerns. Regarding the levers available, I would emphasize our strong free cash flow generation and the high percentage of recurring revenue for the business. Additionally, it's worth noting that some of our exposure differs from our competitors, particularly with high debit card transactions, which are not interchange-based. These factors contribute to the resilience of our underlying business model.

David Foss, Board Chair and CEO

Let me add to that. One of my comments in my opening was to highlight that 15 or 14 years ago, during the financial crisis, it was entirely driven by financial institutions. However, what we're experiencing today is not driven by financial institutions. Reflecting on 14 years ago, Jack Henry had some challenges, but the model we established is the same one we rely on today. Unlike our major competitors, we did not pursue merchant acquiring. We have remained committed to our business model, which has demonstrated significant resilience as the economy fluctuates. While we're not invulnerable, we do have a solid model that offers predictability, with over 90% of our revenue recurring, primarily from essential systems at our customer sites, which do not involve discretionary spending. This structure gives us a strong layer of protection against economic changes.

Dominick Gabriele, Analyst

Great. Dave, could you provide an update on the average attach rate of your ancillary products for new wins? Specifically, how has that rate evolved over the last year or two, and what changes might we see in the attach rate for public cloud wins?

David Foss, Board Chair and CEO

Yes. So as you know, for our core deals, whenever we sell a core deal, our catch rate is pretty high. We sell a number of solutions along with the core system. As we move to public cloud, I think because we're going to have a number of these complementary solutions also public cloud native, like Financial Crimes Defender that I just highlighted, like Payrailz, and we have other solutions that are already on the public cloud. Because we have been pretty forward-thinking about ensuring that our complementary solutions fit that same profile of being public cloud-native, taking advantage of all the positives of a public cloud offering. I think that attach rate will remain relatively consistent, maybe greater. I think it's too early for me to predict anything like that. But I think what we've built and the way we've gone about this is to try and ensure that the attach rate remains at least the same as what we've seen in the past. If we had not modernized the complementary solutions, if we had not made the moves to bring them along with the core, I think you would see our attach rate drop significantly because people would say, “Well, you got this public cloud core, but nothing else you're doing is public cloud. Why would I use something that's hosted in a private cloud or that have to run in-house in my back office?” But that's not what we've done. We've been very thoughtful and diligent about making sure that our complementary solutions are coming along with the strategy; either they've been rewritten or written new or acquired like Payrailz so that we have a complete stack offering for our customers when they get to the public cloud point in their evolution.

Dominick Gabriele, Analyst

Excellent. Actually, maybe I could just sneak in one more here. Could you just help us on the growth rate of Payrailz that you're expecting on revenue? And then maybe just the full year tax rate that you expect for the total company for 2023?

David Foss, Board Chair and CEO

I think we'll do tax rate. I don't know that we're prepared to share what the growth rate is going to be on Payrailz at this point. We don't call out individual products when it comes to the growth rate of a product. But as far as tax rate is concerned, Mimi...

Mimi Carsley, CFO and Treasurer

Yes, Dom. I would recommend using 24%.

Operator, Operator

The next question will come from James Faucette with Morgan Stanley.

James Faucette, Analyst

Just a couple of quick follow-up questions from me. First, Dave and Mimi may both express confidence in kind of your deconversion fee revenue and understanding the nature of that revenue. But just wondering, just from a modeling perspective, if where your sense of confidence in getting to that target or that level for this year is? Have you already had notifications and that kind of thing? Or just wondering kind of where that stems from?

David Foss, Board Chair and CEO

Yes. A good portion of that is known today. So we know of customers who have already been acquired. We know what the deconversion revenue is going to be. It's certainly not 100% is known, but a good chunk of that is known to us today.

James Faucette, Analyst

Okay. Got it. I suspect it as much, but I just wanted to be sure. And then the second thing I wanted to ask about is on Banno and just some of the things that we've seen and not in your space specifically, but in IT more generally. It's been interesting because we've seen some shifting around between fee versus usage-based models, etc. And Banno, in my understanding, is it primarily priced on a user count basis. How does that stack up against your competitors that a lot of times are using usage or transaction-based models? And is that something that gives you an advantage right now? Or what is your sense on pricing type and the impact on market and ability to win with Banno?

David Foss, Board Chair and CEO

Yes, you are right that our pricing is linked to registered users, which essentially reflects activity, as it pertains to individuals who have signed up and regularly use the platform. There tends to be some confusion between registered users and actual usage because a registered user who hasn't engaged with the system for six months doesn't incur any charges for the financial institution. Therefore, there’s an active element in how our customers pay for our solutions. However, our ability to secure deals today is not primarily due to our pricing model. We are winning deals because of our technology, strategy, and the innovative approach that Banno is taking compared to our competitors. This is truly what fuels our success. I wouldn’t suggest that our pricing is lower than that of others. Rather, it is the quality of our technology and offerings that enable us to win and earn positive feedback from all sectors of our market.

Operator, Operator

The next question will come from John Davis with Raymond James.

John Davis, Analyst

Dave, many of your peers and various enterprise software companies have mentioned longer sales cycles and extended decision-making processes. However, you have reaffirmed your guidance, which suggests you are not experiencing these issues. Could you share your observations regarding the sales cycle landscape and whether you've noticed any changes? Any insights would be appreciated.

David Foss, Board Chair and CEO

Yes. I've read those reports, JD. I have read the transcripts. We are not seeing that. That is not what Jack Henry is experiencing. I mean you have ups and downs all the time when it comes to individual decisions on individual deals where something may creep into an individual deal. But as far as the overall sales activity, the level of activity, the speed of deals, nothing has changed.

Operator, Operator

The next question will come from Mimi Carsley with D.A. Davidson.

Mimi Carsley, CFO and Treasurer

Thanks, JD, for the question. Nothing that I would say is worthy of a call out.

John Davis, Analyst

Okay, that's a fair kind of run rate. That line has been relatively consistent historically throughout the year. So that's how we should think about it this year?

Mimi Carsley, CFO and Treasurer

Yes, I agree.

John Davis, Analyst

Okay. I have a question for Greg about Payrailz. I want to understand more about the acquisition. It seems like you paid about 15 times revenue for a business that is currently losing a significant amount of money, indicating that you believe there is a large opportunity here. How do you plan to ramp this up? Why is it considered valuable to Jack Henry, and how do you foresee achieving a reasonable return on investment? Historically, your company has been quite conservative regarding acquisition costs, so there must be substantial potential here. Could you share your thoughts on the opportunities for Payrailz within Jack Henry?

Greg Adelson, President and COO

Yes, sure. Thanks for the question. I think a couple of things, and we alluded to a little bit earlier. So again, there's an acceleration of what we were doing already in our tech modernization strategy, kind of driving towards the ability to utilize again this payments platform to drive transactions in a variety of different areas. So I already mentioned the open-loop P2P, which is very significant. Again, when you look out in the P2P space and look at the alternatives and the cost of those alternatives, it creates a really great option for our clients, our core clients, but also noncore clients to utilize an open-loop solution. So we have some strategies that we're going to be using around that. There's things that we're going to be able to do related to business-to-consumer payments and B2B payments that we're driving as part of that platform. A lot of lease cost routing options that we didn't have in our old platforms to be able to drive things around there. And then I think one of the other big ones is that they have a pretty sophisticated fraud solution that does real-time P2P fraud. So we're going to be able to utilize that not only into what we're doing with P2P, but also, as Dave has mentioned a couple of times on this call related to Financial Crimes Defender, there's going to be some ability to leverage some of that data, but not only the data but also the technology, the AI technology, into some of the components that we're building there. So there's a whole host of things that drive into our strategy in general that makes this acquisition very appealing and accelerates things that would have taken us a lot longer to do.

Operator, Operator

The next question will come from David Koning with Baird.

David Koning, Analyst

And I had a few more on Payrailz. I guess, first of all, it's in the payments segment, right?

David Foss, Board Chair and CEO

Correct.

David Koning, Analyst

Okay. Yes. And then secondly, in the $23 million of acquisition costs this year, is some of that nonrecurring stuff? Or is that more of the ongoing normal cost base?

Mimi Carsley, CFO and Treasurer

Mostly recurring, Dave. We can provide a follow-up on the breakout for you.

David Koning, Analyst

Okay. The reason I'm asking about getting to accretion next year is if we assume, let's say, $20 million of revenue with 50% margins, that gives us $10 million of EBIT. However, considering amortization and interest expense, it seems challenging to achieve that accretive result. I'm curious about your approach to reaching accretion. Are you not factoring in interest expense because you have sufficient cash to cover it next year? Could you clarify how you achieve accretion?

Mimi Carsley, CFO and Treasurer

Yes, and it's a good question. I would say we are very focused from our robust diligence models, and we feel confident in the ability to get accretive and it will grow. We're doing a lot with the platform.

David Foss, Board Chair and CEO

I believe that not only are we focused on revenue growth, but we also see significant cost reductions from our overlapping contracts with vendors and the advantages that Jack Henry provides in creating opportunities. We have already negotiated several agreements that will help us lower costs. Additionally, there is substantial potential for improving resource allocation across our businesses. All of these factors have been carefully modeled to ensure that we can achieve accretion next year. It's important to note that this is driven by a mix of revenue growth and cost reductions, not solely by revenue increases. While we are not emphasizing a specific line item for cost synergies, it's important to recognize that there are considerable synergies involved.

Operator, Operator

The next question will come from Charles Nabhan with Stephens.

Charles Nabhan, Analyst

I wanted to get your comments on a couple of specific products. The first being bill pay, which has been highlighted as an area of weakness by some of your peers and competitors. And the second being fraud, and I know you touched on the new platform. But I wanted to just get a better sense for how you're differentiated in that area, given the number of companies chasing that opportunity.

David Foss, Board Chair and CEO

Yes. Chuck, regarding bill pay, I'm aware of the report you mentioned, and I was taken aback by it because we haven't experienced any slowdown or change. I've pointed out multiple times on these calls that while bill pay isn't experiencing rapid growth, it definitely isn't declining or shrinking. So, I was surprised by that report, but that isn't what Jack Henry is observing. Our bill pay remains stable, steadily growing at a rate of low single digits. It's not a high-growth area, but it certainly isn't falling off regarding the overall potential for bill pay. Now, what was the second part of your question?

Mimi Carsley, CFO and Treasurer

Fraud.

David Foss, Board Chair and CEO

Fraud Defender, our Financial Crimes Defender, is built on the public cloud-native platform that we've discussed. It utilizes the latest technology for fraud detection and offers integration opportunities, allowing a variety of transactions to be processed through the same fraud engine. This enables different transactions for the same customer to be presented in various ways. It is truly a distinctive solution, not just because of the technology it’s built on, but also due to the unique breadth of the offering compared to what we currently have and what other companies offer in the market. We believe this new solution represents a truly differentiated offering.

Charles Nabhan, Analyst

Got it. And just as a quick follow-up. Curious, does the guidance for '23 assume any impact from CPI escalators?

Mimi Carsley, CFO and Treasurer

Thanks, Chuck. So within our normal construct of our sales cycle and our renewal, we had CPI increases that happened throughout the year. So that's part of our organic plan. Nothing that I would call out specifically.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Vance Sherard, Vice President of Investor Relations

Thank you, Chuck. We will have an additional investor interaction available from management's participation in the following upcoming investor events: Northcoast Research Fall Forum on November 14; RBC Capital Markets Global Technology Conference on November 16; Stephens Annual Investment Conference on November 17; Credit Suisse 26th Annual Technology Conference on November 29; and finally, NASDAQ's 47th Investor Conference on December 6. We are pleased with the results from operations and remain enthusiastic and focused on our future. We thank all Jack Henry associates for their efforts to produce these results. We appreciate you joining us today. And Chuck, will you please provide the replay number.

Operator, Operator

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