Earnings Call
Jack Henry & Associates Inc (JKHY)
Earnings Call Transcript - JKHY Q2 2024
Operator, Operator
Good morning, and welcome to the Jack Henry Second Quarter 2024 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Vance Sherard, Vice President, Investor Relations. Please go ahead.
Vance Sherard, VP, Investor Relations
Thank you, Laura. Good morning, and thank you for joining us for the Jack Henry Second Quarter 2024 Earnings Call. Joining me on the call today is David Foss, Board Chair and CEO; and Mimi Carsley, CFO and Treasurer; and Greg Adelson, President and COO. After my opening remarks, I will turn the call over to Dave for his comments on our business and industry outlook. After Dave concludes his comments, Greg will discuss his transition to CEO, provide commentary on our operations, including updates on our technology modernization strategy and other key initiatives at Jack Henry. Mimi will then provide commentary around the financial results and updated 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 which 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, CEO
Thank you, Vance. Good morning, everyone. We're pleased to report another strong quarter of revenue and operating income growth. 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 second quarter of fiscal 2024, total revenue increased by 8% on both a GAAP and non-GAAP basis. Operating income increased by 11% for the quarter and increased 14% on a non-GAAP basis. Turning to the segments, we again had a solid quarter in the core segment of our business. Revenue was up by 8% for the quarter on both a GAAP and non-GAAP basis. Our payments segment also performed well, posting a 6% increase in revenue this quarter on both a GAAP and non-GAAP basis. We had another strong quarter in our complementary solutions businesses, with a 7% increase in revenue this quarter and a 9% increase on a non-GAAP basis. As I mentioned in the press release, our sales teams again had an outstanding quarter with a number of notable wins. In fact, this was the best second quarter ever for sales bookings and the second highest sales quarter in our history, trailing only our June quarter last year. In the second quarter, we inked 14 competitive core takeaways, with four of them being multibillion-dollar institutions. Additionally, we signed 12 deals to move existing in-house core clients to our private cloud environment. We continue to see success with our card processing solutions, signing 12 new card processing clients this quarter. We also continue to see strong success signing clients to our Banno digital suite with 135 new contracts in Q2, including 56 contracts for our new Banno business offering. We also surpassed 11 million registered users on the Banno platform, which is a 25% increase over a year ago. I mentioned last quarter that our sales pipeline was at the highest level ever. It's logical to assume that it would be depleted after such a strong sales quarter in Q2. However, we continue to add to our pipeline, and we ended the quarter on par with Q1, which projects very well for us for the remainder of the sales year. In late January, Cornerstone Advisors published the results of its annual survey of bank and credit union executives. According to that study, nearly 65% of banks and 75% of credit unions expect to increase their technology spending in 2024. This correlates with information we've seen from other sources, including banks' directors' technology survey last fall, in which a large majority of survey respondents said their bank's technology budget increased over the past year at a median rate of 10%. We are in the midst of conducting our annual Jack Henry strategic benchmark study and we'll share those results on our earnings call in May. We are pleased to have recently received two national workplace awards: Newsweek's Greatest Workplaces for Diversity and Computer World's Best Places to Work in IT. We also were named as one of America's most responsible companies by Newsweek for our corporate sustainability efforts. We are very proud of that recognition because we view corporate sustainability as a strategic investment for our stakeholders. I encourage you to read our 2024 sustainability report which will be published on March 29 on the Investor page at jackhenry.com. As you all know by now, a couple of weeks ago, I announced that I will retire from my current role on June 30 of this year. Greg Adelson will become CEO and President beginning July 1, and I will serve as Executive Board Chair effective on that same day. This transition plan has been carefully considered for some time and we are fortunate to have someone like Greg ready to step into the CEO role. As I said in the press release, it has been my immense pleasure to serve as CEO of this wonderful company for so many years. When I came into this role almost eight years ago, I had a number of large projects I wanted to address, and I'm happy that all of them have now been completed or are well on their way. I'm confident that Greg and the outstanding team we have in place today can continue our trajectory of strong growth, and I'm looking forward to working with them in my new role as Executive Board Chair. Of course, I'll be on the May earnings call, and I have a number of investor meetings scheduled between now and the end of our fiscal year. So, I look forward to speaking with many of you in the coming months. As we focus on the second half of this fiscal year, our sales pipeline is very robust, and we continue to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our clients, our ability to expand client relationships, the spending environment, and our long-term prospects for success. With that, I'll turn it over to Greg for an operational update.
Greg Adelson, President and COO
Thank you, Dave. I'm honored and humbled to become the next CEO of this great company in July. I do want to take a moment to acknowledge the outstanding job that Dave has done as CEO the past eight years. Since Dave became CEO at the start of fiscal year 2017, Jack Henry has experienced outstanding growth with revenue and net income both up approximately 50%. In addition to driving organic growth, Dave has led 26 acquisitions during his 25 years with the company. The legacy Dave is leaving will be remembered for many years to come. On a personal level, I want to thank Dave for his mentorship and guidance over the past 13 years. He has prepared me well for this role, and I will continue to lead this company with an unwavering focus on our employees, clients, and shareholders. As the next CEO, I will continue the strategic journey that we are on today and execute our strategic priorities, which include continuing to enhance our exceptional culture, continuing to advance our tradition of customer service excellence, cultivating a one Jack Henry mindset in all we do, driving technology innovation and execution at the speed and scale, fostering an open ecosystem, and evaluating strategic acquisitions that will provide additional value to our clients and shareholders. Jack Henry has maintained a philosophy for over 47 years that starts with treating our associates as our first priority. Happy associates are more invested in ensuring we have happy clients, and happy clients ensure we reward our shareholders. In short, you can expect continued focus on growing our company and delivering outstanding value to all of our stakeholders. Dave and I will continue to work closely to ensure a smooth transition in July, and I look forward to collaborating with him in his new role as Executive Board Chair. I'm also excited about continuing to work with the other great leaders at Jack Henry and specifically more closely with Mimi and Vance. Mimi has done an outstanding job since becoming CFO in September of 2022, and Vance provides tremendous perspective for all things Jack Henry. Before I speak to our operational performance, I want to revisit Dave's comments regarding our continued strong sales performance. Dave shared our strong success in winning competitive core takeaways as well as our robust sales pipeline. Additionally, we are beginning to see an increase in what has historically been low merger activity among our financial institutions, specifically with our core clients as the acquirers. Due to this increased demand, we are currently adding resources to both our banking and credit union core conversion teams. On the November earnings call, I promised an update on our technology modernization strategy. As a reminder, this strategy is changing how we deliver our solutions through a cloud-native API-first environment, utilizing several key benefits embedded in the Google Cloud platform, including cutting-edge security and business continuity advancements. The premise of this strategy is rebuilding traditional core and non-core functions into a flexible, cloud-native portfolio of services and solutions. Each component will integrate with other Jack Henry solutions and also with third-party fintech companies via the Jack Henry platform. Our clients will be able to access everything they need to run their financial institution in a single platform with all the advantages that the cloud offers, including extremely high system availability, real-time processing, streamlined operations, rapid updates, deployment, modern security standards, and extensive scalability. As we have indicated previously, our approach to technology modernization has created more pipeline activity in the larger community bank segment as well as a couple of introductory calls with regional institutions. Another benefit we will realize over time is the shared services model that is at the forefront of our technology modernization strategy. Features or solutions that were once built several times throughout the organization are now developed once and used in multiple solutions. Our ability to develop and deliver more rapidly to our clients is an important benefit that will reduce development costs for each new or enhanced solution. The technology will allow us to share the same services with outside partners and competitors to create a better overall experience for all community and regional financial institutions. At Jack Henry, we are focused on execution and doing what we say we're going to do. So, everything I'm about to discuss is shared with our clients through six-month road map visibility. Road maps are updated for all products, including the technology modernization strategy, and published every February and August for our clients to view. We hold our teams accountable for road map execution as well. As a reminder, our technology modernization strategy already includes recently launched cloud-native solutions like PayCenter, Banno Business, and Financial Crimes Defender. We now have over 250 clients using the real-time payments network and almost 150 using FedNow in our PayCenter application. For additional context, Jack Henry has approximately 60% of the live real-time payment clients and 35% of the live FedNow clients. We recently announced general availability for Banno Business and continue to add both banking and credit union clients. We now have more than 90 clients live and over 70 clients in various stages of implementation. Financial Crimes Defender is also generally available, and we have seven clients live in more than 150 in the implementation queue. One new offering we haven't spoken about yet is our open banking solution that provides turnkey API access to the largest integrated banking data aggregators across the industry as an immediate answer to the industry and regulatory pressure to remove screen scraping and share credentials. By creating direct API connections with clients, Jack Henry is making it easier for consumers to connect financial accounts securely and reliably without the need to share usernames and passwords. This offering is generally available today and has received a great deal of interest from both Jack Henry core and non-core clients. I also want to update you on some of the key functions we are building on the Jack Henry platform that are already in beta or planned to go into beta in calendar year 2024. I'll start with the incoming and outgoing wires, which we have talked about on previous calls. We plan to be generally available with our domestic wire solution over the next few months and move into beta with international wires by the end of this fiscal year. We are building a general ledger component that will support the common base functions of a financial institution's back office and enable deeper insights on transactions and advanced fraud detection. We plan to be in beta by the end of the calendar year. A key advantage of the Jack Henry platform is our clients being able to easily access their data. Our new data broker solution, which is currently in beta, will enable clients to access all of their Jack Henry data in a single repository with innovative AI intelligence capabilities. To complement the data broker solution, we are creating an executive dashboard with real-time event monitoring to help our C-suite clients make informed dynamic decisions throughout the day based on metrics they customize and update. I will now provide some context to the pricing philosophy that will be used to deploy these components. Our go-to-market strategy centers around bundling key components that complement each other and provide enhanced financial and operational benefits like time to deploy new feature enhancements, enhanced security, improved uptime, etc. For example, a bundle may include wires, general ledger, and data broker. Our pricing model strategy will incorporate elements from our industry-accepted pricing models such as license and/or per seat fees, consumption-based, and per account pricing. We will encourage engagement with any combination of our solutions and further reward those who consume more components. Ultimately, the value proposition becomes evident as clients recognize the benefits of additional modules as well as the compelling features of the Google Cloud Platform. One last topic from our November call is our plan to offer several key solutions outside of the Jack Henry core base by the end of calendar year 2024. We remain on track to begin selling Banno Business, Financial Crimes Defender, various payment solutions, and available components from the Jack Henry platform in our fiscal year '25 sales year. We have targeted several competing cores that we believe bring the best mutual value and have a need for premier digital fraud and real-time payment solutions. I will continue to keep you updated on this strategy. In closing, I am passionate about accomplishing our strategic priorities and moving our company forward through innovation and execution. I am grateful for the opportunity to lead this finest group of talented and dedicated professionals in the industry. I want to thank all of them for their tireless effort and commitment. I will now turn things over to Mimi for some detail on the numbers.
Mimi Carsley, CFO
Thank you, Greg, and good morning. Our continued focus on serving our community and regional financial institution clients, investing in our joint future, and delivering shareholder value led to another quarter of solid revenue and earnings growth. I'll begin with the details driving our as-expected strong second quarter and year-to-date results, then conclude with our full-year guidance update. Second quarter GAAP and non-GAAP revenue increased 8%, a continuation of the strong start to our year and keeping us on track for a tremendous fiscal 2024 as year-to-date growth was 8% on both a GAAP and non-GAAP basis. Deconversion revenue of $4.9 million, which we pre-released last week, was down approximately $1.5 million, reflecting minimal financial institution consolidation. Year-to-date, deconversion revenue is $9 million, $1.9 million less than the prior period. As a reminder, effective September 1 onward, Payroll's results are included in both GAAP and non-GAAP figures. Now let's look more closely at the details. Cap services and support revenue increased a healthy 7%, while non-GAAP increased a more robust 8%. The first half increased 7% for GAAP and 8% for non-GAAP basis. Services and support growth during the quarter was the result of increases in data processing and hosting and the timing of user group revenues. We continue to experience robust growth in our private and public cloud offerings, which again increased 10% in the quarter and for year-to-date. This reoccurring revenue contributor has long been a double-digit growth engine. Shifting to processing revenue, we saw consistently positive performance with 9% growth on both a GAAP and non-GAAP basis for the quarter and first half from this recurring revenue source. Similar to recent results, drivers included a combination of higher card and other payment processing with strong digital demand. Next, moving to expenses. Beginning with cost of revenue, which increased 5% on both a GAAP and non-GAAP basis during the quarter, 7% for GAAP versus 6% non-GAAP year-to-date. Drivers for the quarter included higher direct costs consistent with increases in related revenue and internal license and fees. Growth in cost of revenue was limited to 5% due to active cost control and the timing of merit increases. Next, R&D expense decreased 3% on both a GAAP and non-GAAP basis for the quarter. The decrease was due to lower personnel expense, net of capitalization, and inclusive of benefits. For the first half, R&D expense increased 4% on a GAAP basis and 3% for non-GAAP. And lastly, on a GAAP basis, SG&A rose 24% for the quarter, 21% on a non-GAAP basis, primarily due to the shift in our customer conference from Q1 to Q2 and was higher personnel and related costs. Year-to-date, SG&A expense increased 31% on a GAAP basis and 9% non-GAAP. The primary difference is the $16.4 million in one-time costs related to the voluntary early departure incentive program in Q1. We remain focused on generating compounding margin expansion and the quarter delivered 111 basis points in non-GAAP margin at 21.3%. Non-GAAP margin benefited from operational performance and a one-time shift in our merit increases from Q2 to Q3, offset slightly by the timing of our customer conference. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.26, up 14%. Breaking down the results into the three operating segments, we're pleased by the consistent solid performance achieved. Our core segment revenue increased 8% on a non-GAAP basis, with non-GAAP operating margins increasing 166 basis points, benefiting from private cloud trends and strong cost controls. Year-to-date, non-GAAP revenue growth was 8%, and the associated margin increased 80 basis points. Payments segment revenue increased 6% on a non-GAAP basis. This segment had impressive non-GAAP operating margin growth of 128 basis points. This was due to the strong growth in our EPS business, moderate card growth coupled with our scalable operating model and disciplined cost control. Year-to-date, non-GAAP revenue growth matched the quarter at 6%, with 94 basis points of margin expansion. It should be noted that card revenue growth has been negatively impacted by lower card production among other non-processing revenue items. Excluding these impacts, processing-related revenue increased 8% for the quarter and 9% year-to-date. Finally, complementary segment non-GAAP revenue increased 9%, with flat margin. Year-to-date non-GAAP revenue also increased 9%, with 25 basis points of margin expansion. Growth year-to-date was driven primarily by digital, recently released solutions and overall product mix. Quarterly margins faced headwinds from direct support costs, amortization of new products, and licenses and fees. Now let's turn to a review of cash flow and capital allocation. Year-to-date operating cash flow was $239 million, a $48 million increase over the prior period, producing free cash flow of $129 million, slightly more than the $119 million last year. Excluding asset sale impacts of $1 million and $28 million from the current year-to-date and prior period, respectively, free cash flow was $37 million higher through the first half of our current fiscal year. Additionally, the timing of tax payments this year represented a $15 million headwind to free cash flow. Our consistent dedication to value creation resulted in a trailing 12-month return on invested capital of 20%. Additionally, I would highlight other notable return of capital metrics for the first half of our fiscal year, including $20 million in share repurchases offsetting annual dilution, $20 million in debt reduction, and $76 million in dividends. As we head into the second half of fiscal 2024, I will conclude with guidance highlights. As you are aware, yesterday's press release included updated fiscal 2024 full-year GAAP guidance along with a reconciliation to non-GAAP guidance metrics. As a reminder, we filed an 8-K on August 3. It describes how starting in the current fiscal year, we are using a revised approach for deconversion revenue guidance. Based on current trends, we expect to see similar acquisition levels of our core customers for the second half of the fiscal year. As such, we're reiterating our full-year deconversion revenue guidance of $16 million. Based on positive year-to-date results from strong execution and near-term visibility, we are tightening our revenue growth outlook around the current midpoint. We now expect to generate full-year non-GAAP revenue growth of 7.4% to 8.0% compared to the 7.2% to 8.2% provided on the November call. This corresponds to an increased full-year GAAP revenue guidance of 6.6% to 7.2% for fiscal '24. In tandem with our revenue outlook, we now expect an increase in annual non-GAAP margin expansion of 35 basis points to 40 basis points, compared to the 30 basis points to 35 basis points previously provided. The full year tax rate is now approximately 23.5% with potential bias slightly higher. Incorporating the noted positive updates, full-year guidance for GAAP EPS is revised upwards to $5.09 to $5.13 per share from previous guidance of $4.98 to $5.04 per share. As a reminder, the guidance for deconversion revenue compared to actual fiscal 2023 deconversion revenue, VIP severance-related costs, and nonrecurring gain on asset sales resulted in an approximate $0.37 headwind for fiscal 2024 GAAP EPS. Lastly, some additional modeling commentary. We are comfortable with the current level of huge consensus for revenue growth, operating margin, and GAAP EPS. Our full-year guidance of 60% free cash flow conversion is reiterated. However, the legislation that passed the house last week would have a material beneficial impact on fiscal 2024 free cash flow and beyond. We are monitoring legislative progress and are hopeful for a swift and positive outcome. Based on the current bill language, if passed, our free cash flow conversion would rebound to historical normal levels either in fiscal '24 or fiscal year '25, depending on the timing of certain items. In conclusion, Q2 reflects the strong performance we've seen consistently in the first half and expect the remainder of our fiscal year. We are exceptionally positive about our ability to deliver innovative and in-demand solutions, the resilience of our clients, and our focus on execution and shareholder value creation. We appreciate all the contributions of our hardworking and dedicated associates that drove these strong results. We thank all Jack Henry investors for their continued confidence. Laura, will you please open the call for questions?
Operator, Operator
Our first question will come from John Davis of Raymond James. Please go ahead.
John Davis, Analyst
Maybe just wanted to follow up on the free cash flow comments that you just made. Getting back to historical levels, I'm assuming you mean kind of right around 100%. So that would imply kind of 40 points of headwinds that will get reversed. I thought before it was maybe 25 points or 30 points. So just, a, I just want to make sure when you say historical levels, you're talking in and around 100%. And is it kind of 40 points of headwind this year?
Mimi Carsley, CFO
Great question. I think it's premature to see the timing and the impact as to when to whether that hits 2024 or 2025. That I would say certainly, our historical norm range of 80% to 100% is where we believe we would revert back to. It just depends on the timing.
John Davis, Analyst
Okay. No, that's helpful. And then just on second-half margins, I think the guide implies margins will be down year-over-year after being up over 100% in the first half of the year. So maybe just talk a little bit about some of the headwinds that you do face kind of in the back half of fiscal '24.
Mimi Carsley, CFO
Yes. So, we manage the business on a full year basis, JD. And so, as we think about it, we're pleased to have the additional margin expansion in the guide that we provided yesterday and today. Just in terms of the actual timing and seasonality of it, it just depends on when certain events like personnel-related costs, licensing costs in any particular quarter from a climb over perspective. As you know, our first quarter is usually the highest margin of our year. And then typically, the endpoints are less so. So, I wouldn't say read anything more into the seasonality, and we're just basing it on a full-year guide.
John Davis, Analyst
Okay. Great. And then, Dave, one for you, but also congrats on your retirement, your move to Executive Chair. And Greg, congrats on the CEO role. But Dave, you talked a lot about the competitive environment being fairly favorable. We continue to break records on the sales front, pipeline is robust. Maybe you can talk a little bit about what specific products or is there a segment of the market that you're having outside of success the top line results and the sales have been very, very good over the last 12 months. And just maybe a little bit more color on what exactly is driving that.
David Foss, CEO
Thanks, JD. As I've mentioned before, it's impressive. We're 47 years into our journey as a core provider, and our core offerings remain a significant contributor. I just shared that we secured 14 wins in the quarter, including four multibillion-dollar banks, which puts us well ahead of the competition. Core offerings continue to be essential for us. Additionally, we have various top-notch solutions often linked to our core offerings. We've discussed several of these, including Banno. The retail Banno solution has been a crucial driver for our success, and now with Banno business included, I mentioned the 56 new contracts signed this quarter, indicating strong demand for modern digital banking solutions for both small and larger businesses. I've also highlighted our treasury solution, which is a contemporary digital solution for large commercial clients. This solution has not been a ground-up development, and a digital-first treasury solution has not been created in many years, so it remains impactful for us. Regarding fraud prevention, Greg shared our success with Financial Crimes Defender; we currently have seven live implementations and a significant backlog for this newly developed fraud solution tailored to today's challenges. Each of these innovations has been developed by Jack Henry within the past two years to five years, not acquired or adapted. We invested heavily in development to create these best-in-class, digitally focused solutions, many of which utilize public cloud technology, and there is substantial demand for them. I don’t foresee any slowdown in this trend; we are in a strong position and will continue to innovate as a leading technology provider in our industry.
Operator, Operator
And the next question will come from Nik Cremo of UBS.
Nik Cremo, Analyst
Thank you for taking my question. Congrats, Greg and Dave. First, I just wanted to follow up on the Payments segment. When can this segment get back into the 8% to 9% growth range? I know there were a few puts and takes called out, which is lower card production, but we also have Payrailz, which is supposed to double this year. I'm not sure if that is still on the table, but just be curious to hear your thoughts there.
Mimi Carsley, CFO
Thanks, Nick, for the question. So, I would really point to you on the card within card within payments, the processing related. So that's the reoccurring nature of within that segment, and that grew strongly at 8%. And so that is an indicator of the overall success of that segment and our ability to get back to what we view from the growth algorithm, the prospects for that segment. So, I would say some of the non-processing related, the pass-through of the card production is more temporary and expect that the processing engine will continue to drive the strong growth.
Nik Cremo, Analyst
Thank you. And then for my follow-up, maybe a more medium-term question, but you just discussed the opportunity you see for generative AI on the revenue side, but also, more importantly, on the cost side, just relating to any of the benefits that you could see from increased software engineer productivity with these AI tools and call center automation.
David Foss, CEO
Do you want me to start with that one or would you like to? I'll begin, and then Greg will add his comments because this has been a major topic of discussion for months regarding Jack Henry and the opportunities we have. One thing I want to clarify is that traditional AI, which includes machine learning and robotic process automation, is something Jack Henry has been involved in for years. We've been doing that for a long time. Regarding generative AI, which relates to your question, Nick, there are many opportunities on the development side. The challenge there is that our main value lies in our intellectual property. Therefore, when utilizing generative AI to write code, we need to be extremely cautious to ensure that nothing we create becomes part of the public domain. We are being very careful about our approach and current activities, including our development teams actively using generative AI, especially in customer service offerings. This is an area we are focusing on internally, and Greg will elaborate on that. Additionally, we introduced a generative AI offering for our customers during our client conference in October, which was well received. Moreover, in terms of all the processes we handle at Jack Henry that don't involve customer service or software development, automating our internal operations is another significant area of focus. I'll let Greg share his thoughts on that as well.
Greg Adelson, President and COO
Yes. I think it's important to note that we are ensuring strong governance over our initiatives. We are dedicating significant time to evaluations and collaborating with Google and a few other partners to test various models. We are looking at opportunities not just in the contact center, as David pointed out, but also in other products. I mentioned the AI assist module that we'll use in our data analysis tool designed for C-suite executives. There are several opportunities we are still assessing. However, we want to ensure that we are approaching this correctly, establishing appropriate guardrails and considerations. You'll hear more about our progress in the coming months.
Operator, Operator
Our next question will come from Jason Kupferberg of Bank of America Merrill Lynch.
Jason Kupferberg, Analyst
I wanted to come back to some of the pipeline comments, certainly seems encouraging that you've got some real solid stability in the pipeline despite having a really strong quarter of bookings. So, can you talk about how the composition of the pipeline has changed in recent quarters in terms of, say, customer size, product mix, and if there's any numbers you want to share around that, just in terms of helping us understand the composition of the pipeline, that would be great.
David Foss, CEO
Sure, Jason. I wouldn’t say there’s a significant change in the composition of the pipeline. We have many core deals and have just announced 14 deals, which is not slowing down. The size of these core opportunities, meaning the size of the institution, has increased and continues to rise. We are being recognized as a key player in the larger community and regional bank space. Overall, the size of the institutions we are working with has grown. In terms of the rest of the mix, most of it includes the hot topics I mentioned with JD that are driving our success, primarily our new technology offerings. Two years ago, very few of these technologies were available, except for Banno. Now, we have rolled out several solutions in the last couple of years, which are dominating the sales process today because they are new technologies that people have been eager for, like the Banno fraud solution that utilizes AI. Everyone is eager for that kind of technology. We’ve just launched Financial Crimes Defender, and a lot of our current success stems from these new offerings that have emerged over the past few years. Meanwhile, if we look at our competitors in the space, there hasn’t been any innovative offerings introduced recently. Jack Henry, however, has a long list of brand-new, innovative solutions.
Jason Kupferberg, Analyst
And then on the competitive landscape in core, are you guys seeing a broader range of competitors as you continue to move a little bit further upmarket? Maybe others are trying to move a little bit more down market? Just how are competitive dynamics in core evolving?
David Foss, CEO
Yes, I'd say no change at all. We compete against the traditional players. We've competed against the traditional players forever. There have been upstarts trying to either come into the U.S. internationally or start from scratch, and none of those are really even showing up in RFPs with the exception of once or twice a year. So, I wouldn't say there's any change of any kind on the core side as far as the competitive landscape.
Jason Kupferberg, Analyst
Okay. Just a housekeeping one for Mimi on free cash flow. I know you're maintaining the guide. I'm assuming no changes in legislation. But fair to say that Q3 would be fairly subdued and then followed by a stronger Q4 just based on typical seasonality.
Mimi Carsley, CFO
Yes, I think that's fair to say. And I think if anything, we're reiterating the guide, but there's probably a little bit of upside there, even without legislative change.
Operator, Operator
And next, we have a question from David Togut of Evercore ISI.
David Togut, Analyst
Thank you. Good morning, and congratulations to you both, Dave and Greg. Dave, I know when you initially became CEO eight years ago, one of your major priorities was the card migration platform, moving your kind of back-office processing of debit cards over to the back office of what was then First Data and now Fiserv First Data and then obviously adding the capability to do credit card processing on top of that. Where do we stand overall in this initiative in terms of the cost savings that's delivered to Jack Henry? And then where are you in terms of the uptake of the credit card processing offering?
David Foss, CEO
Yes. So, I'll start, but I'll ask Greg, who's a lot closer to the details as far as where we are today. So, from my perspective, this has been a wildly successful initiative for Jack Henry. And at the time, I've been in this business a long time. And the idea of bringing three companies together to deliver a solution that's going to replace two different platforms all to one platform was a very, very big daunting project. But now looking back on it, it's been incredibly successful for our company as far as hitting the targets that we expected to hit financially for Jack Henry as far as the sales opportunities that it's created, which have been very significant over the past few years. So, I look back on that project as a really significant success. Now the thing I will emphasize before I ask Greg to chime in here, I said all along, you're not going to see the credit card side of this business become anywhere close to what the debit cards had side is we were doing. We were focused on the credit card side because we had certain customers who said, we want to process both debit and credit with the same provider, and we want to make sure that we have that option for them. And so, I'll ask Greg just to kind of talk about where we are today.
Greg Adelson, President and COO
Yes, specifically regarding the credit card, we have a range of options including full-service cards, agent cards, and in-house cards across various institutions. One of the challenges has been with some smaller institutions, which is why we developed an agent program; they were hesitant to adopt a full-service option due to their limited resources and associated risks. The team continues to pitch this product, and while we are seeing deals come in, the volume has not reached the levels seen with debit card growth. Furthermore, we are adding more features and functionalities to our services. As Dave mentioned, we are engaged in a tri-party relationship and are collaborating with the other parties to ensure we remain innovative and competitive. Overall, the relationship is progressing well and has significantly contributed to our growth, both in service and transaction processing.
David Togut, Analyst
And just as a follow-up, Jack Henry outperformed on gross margin versus our model. And I know you initiated a media program a few quarters ago, which Mimi, I think you described. To what extent did VEDIP uptake actually help gross margin in the quarter? So, like stripping out any one-time charge benefit focusing more on sustainable reductions in cost of labor.
Mimi Carsley, CFO
Yes. I wanted to say that it had a significant impact. That was a one-time charge related to kind of severance and the program. As we said, we didn't do it for kind of in-year savings. This wasn't a sneaky kind of design risk plan. This was a very talent-focused plan to ensure that we had the type of talent for the future needs of the organization. And in fact, the majority of those roles have been backfilled with rising talent in the organization, some at lower levels in the organization. As we zero-base budget every position the majority of those roles have been filled. So, I wouldn't say it was a significant reason for the margin expansion or the expense savings this quarter.
Operator, Operator
The next question will come from Vasu Govil of KBW.
Vasu Govil, Analyst
Hi, thanks for taking my question. I want to add my congratulations to Dave and Greg. My first question is on Banno. It seems to have had an outstanding quarter in a number of new wins. And I caught that Banno Business was a contributor there. But even without that, it seems like the number of wins were significantly higher than the quarterly average. Any call-outs on that? And apologies if I missed it, but did you give us the number of customers in millions that you usually give every quarter?
David Foss, CEO
The number of customers that we signed. Is that what you're asking, Vasu?
Vasu Govil, Analyst
Within Banno, I would just note that.
David Foss, CEO
Yes, we surpassed 11 million at the end of the quarter. The number I quoted was for the Banno business wins, and we saw an increase with the regular Banno platform as well. This is likely because some customers were waiting to sign up for both Banno business and the regular Banno platform, which includes retail. Now that Banno business is more widely available, these customers are ready to proceed with both offerings. That's the main point regarding the size of the wins.
Greg Adelson, President and COO
Yes. One important clarification is that Banno Retail is required in order to access Banno Business. Some people have been holding off on Banno Retail because they wanted to wait for Banno Business to become available as well. While it is possible to purchase Banno Retail separately, you must have Banno Retail in order to get Banno Business. Regarding the 2x comment, I don’t view it as a 2x factor; rather, it’s an additive aspect that ensures we secure Retail while continually expanding the fee structures based on our modeling. I wouldn’t categorize it as a 2x.
Vasu Govil, Analyst
Understood. That's helpful. And then a quick one for you, Mimi. I appreciate that the midpoint of the revenue guide didn't change, but it does look like you took off the top end just a little bit. And I know you called out the card production slowdown. Was that the bigger driver or any sort of other callouts on how you see that evolving?
Mimi Carsley, CFO
Good question, Vasu. I think generally, the tightening was more so based on our confidence as we're now halfway through the year with strong results in already banked in the ability to really center around that guide. So, I think it's more that than thinking about the top end coming down, just feeling more and more confident about that midpoint. We still have a second half to do here and a decent amount of growth that we have anticipated in our plans, especially in Q3 and Q4 around processing, around card, around our payments business. So too early yet to say it's going to be higher than that, but very confident in our ability to deliver.
Operator, Operator
The next question is from Kartik Mehta of Northcoast Research.
Kartik Mehta, Analyst
Steve, you've commented a lot on core and obviously, Jack Henry is doing well. But as you look at the market, what would you anticipate in terms of a number of core deals? I know when COVID happened, it’s kind of flipped and then we went back to kind of normal. So, as you look at 2024, what would you anticipate the number of deals that might show up in the marketplace?
David Foss, CEO
Well, it's a pretty predictable number. Every year, it's somewhere around 100 deals in total that happen per year as far as somebody leaving whoever their current provider and going to a different provider. That's not, hey, I'm staying with my same provider and switching to another system. It is going to a different provider. Normally, about 100 deals a year is a good number to use on average.
Kartik Mehta, Analyst
Perfect. And you've talked about, obviously, the sales pipeline being very strong. I think Greg talked about maybe hiring more people. And as you look at your sales pipeline kind of look out forward, how much confidence can you look at that revenue that's going to come up in terms of the number of quarters you feel good that as that revenue converts that you'll be able to put up kind of this high single-digit revenue growth?
David Foss, CEO
Yes. On the core side, we have very accurate predictability. We go through this monthly the chart as far as the core conversions that are slotted, whether it's a new core customer coming in, it's a customer moving from in-house to our private cloud environment, or if it's a customer who's acquiring another institution, and we're merging them in. We have all those things. We have great dashboard tools that we use at Jack Henry. So, it's very predictable for us.
Mimi Carsley, CFO
Kartik, if I can add on. The only add-on I would say, is we look at that on an annual basis. So, in any one quarter, depending on prior year, the comp of the size of the organization that was being implemented or migrated versus this year, the size of an organization still feels confident in that number, but it can vary quarter-to-quarter depending on just the roster of slots and the profile of those customers. So that's the only color I would add.
Kartik Mehta, Analyst
Just one last question, maybe for you. You talked a little bit about free cash flow and let's assume that the legislation doesn't pass, but you still seem confident that maybe there's upside to the original guide on free cash flow conversion. And I'm wondering maybe what's behind that or what's changed since the original guide to give you confidence that maybe it will be better.
Mimi Carsley, CFO
Yes. I think a couple of things that are coming in. One is just the certainty of the results that we have year-to-date. The other is, as we lowered the tax rate as part of the guide, that helps from a cash flow perspective as well. So, there's just a couple of small components as we fine-tune the free cash flow forecast for the remainder of the year that makes me feel comfortable about there being upside there.
Operator, Operator
The next question comes from Cris Kennedy of William Blair.
Cris Kennedy, Analyst
Good morning, and thanks for taking my question. Congratulations to Greg and David. Regarding the technology initiatives, is there a way to think about the revenue opportunity associated with that? And if you could maybe frame it against the private cloud transition that you guys have been going through for the last 10 years or so.
Greg Adelson, President and COO
You need to consider the tech modernization differently from the private cloud transition since the latter was more about pulling a customer completely into a new system, typically resulting in significant revenue increases. In contrast, tech modernization requires looking at the number of components being purchased and the timing of those purchases. It doesn't mean moving everything we have today into the new system, so the expected revenue growth is not as high. However, what excites us is the potential to use these components to strengthen our relationship with both larger and smaller customers, giving them a chance to gradually explore the public cloud. As mentioned before, many of our customers are not ready to make this transition, although some are actively participating in our beta phase. We'll need to continuously assess when we can expect significant revenue from this transition. Based on discussions with larger institutions, we see a willingness to adapt sooner rather than later, suggesting ongoing growth in this area. However, we still require more time before we can provide more certainty regarding the revenue aspects of this initiative.
David Foss, CEO
It's important to note that there are new components being introduced, and this isn't a direct comparison of the old core versus the new core. We need to adjust our mindset as the new platform is not simply a variation of the old one. We will be offering features that have never been available before. For instance, the Data Broker is something the industry has not seen before, presenting a fresh opportunity for revenue. This will be included in the core offering going forward, alongside several other examples that could enhance revenue potential. However, we need to approach this with a different perspective than we have in the past regarding the transition of a core from one platform to another.
Greg Adelson, President and COO
Yes. And I think one thing I do want to add is that we'll get to a point where we talk about platform as really the driver of what sits on that platform. So data broker or executive dashboard or open banking solutions, other things, like we already mentioned, Defender, Banno, all those components are all going to sit on the platform and will drive additional revenue.
Cris Kennedy, Analyst
Understood. Following up on the press release, you mentioned a 28.5% growth in digital revenue for the first half of the year. Can you explain the contribution from digital within the services and support revenue?
Mimi Carsley, CFO
Yes. Let me get back with you on that detail.
Operator, Operator
The next question comes from Andrew Schmidt of Citi.
Andrew Schmidt, Analyst
Dave, Greg, Mimi, thanks for having me on the call. So, a quick question on just the core win side of things. You mentioned the funnel, the number of RFPs being relatively consistent. But I'm curious if there's been any changes in win rates just given what you're seeing in the competitive environment? It seems clearly advantageous from a competitive perspective. So, I'm curious if there's any changes on the win rate front.
David Foss, CEO
Yes, Andrew, I don't see anything particularly notable. With only 100 deals happening each year, we've been around 50 to 55 for a while. We're winning more than half of those opportunities each year. I wouldn't consider reaching 60 as a major milestone for us. While the percentage doesn't seem very significant, our main goal is to maintain that win rate because we are clearly leading the industry. If we continue at this rate, it will support our projections for revenue growth and so forth. So, there's nothing significantly noteworthy to mention.
Andrew Schmidt, Analyst
Got it. Makes a ton of sense. And then if you talk about just the views on acceptance of the public cloud, you're hearing that it's slow, but obviously, attitudes are changing towards more comfort with having things like the general ledger in the cloud. Maybe you could just talk through the process that FIs have to work through for themselves to be comfortable with hosting things like general ledger and broader core components in the cloud, that would be great.
David Foss, CEO
It’s an interesting topic. I’ve been involved in this area for a long time, and when I speak with financial institutions, they all aspire to integrate cloud solutions. However, many are uncertain about how to proceed. The regulatory landscape doesn’t provide clear direction, leaving many organizations cautious and adopting a cautious approach. This is where our Jack Henry platform strategy excels, as it supports a modular approach. For instance, organizations can start with public cloud wire transfers to test the waters without triggering regulatory concerns. Our non-core solutions, such as Savanna and Financial Crimes Defender, are already fully available in the public cloud. Our overall strategy enables institutions to gradually transition, which many find appealing. We believe this will address the concerns you mentioned.
Operator, Operator
And our next question comes from James Faucette of Morgan Stanley.
James Faucette, Analyst
Great. Greg and Dave extend my congratulations to both of you. I want to ask just in terms of the implementation resources. I think you've talked about 150-plus clients in implementation for Financial Crimes Defender and another 70 for Banno business. I'm just wondering if there's any benefit or should we think about potentially increasing committee increasing resources to accelerate those implementations a bit? Or do you feel pretty comfortable with the pacing that you've got right now?
David Foss, CEO
That's a great question. We meet with the team monthly to discuss installation queues. We assess the time required for the implementation of each product and consider whether we can allocate additional resources to expedite revenue generation for the company. We regularly evaluate this for all of our products.
James Faucette, Analyst
Got it. Got it.
Greg Adelson, President and COO
Some of it, James, is also linked to the timing of a lot of sales, as Dave just mentioned. So, some of it is the timing of that as well.
James Faucette, Analyst
Okay. Got it. Got it. But for now, we should think about you feeling like that you're in pretty good shape from what you're spending off from an implementation standpoint, etc.
David Foss, CEO
That's correct.
James Faucette, Analyst
Okay. And then just thinking about the overall environment around M&A, it seems like there continues to be a pull down of private valuations. I'm just wondering what you're seeing in that market and if there are potential assets that are particularly attractive, especially from a technology perspective. What is your take on the potential for M&A?
David Foss, CEO
So, you know well, you followed us for a long time, James. You know well how much we love to be involved in deals and we love to do deals. I will just tell you, we don't have a single deal sitting for review right now at Jack Henry. There are still a slow, slow time. There are certainly companies out there that we'd be interested in, but not a single deal on the table right now.
Operator, Operator
The next question comes from Dave Koning of Baird.
Dave Koning, Analyst
Just a couple of quick ones. First of all, EPS guide, at the midpoint, it was raised by about $0.10. And it looks like maybe $0.01 to $0.02 on EBIT is higher, a few cents on tax, but it seems like there's about $0.05 I can't reconcile, where might that be?
Mimi Carsley, CFO
On the EPS, I would estimate it's around $0.01 or $0.02 for operational performance. The remaining difference is approximately split evenly between the variation in the tax rate and the net interest income we're generating due to higher interest rates.
Dave Koning, Analyst
Got you. I'm sure you know of many banks that will pay good rates. Secondly, regarding January payment volumes, many competitors and industry participants noted that the first two or three weeks were quite slow. It seems like the latter part of January improved, but what have you observed in January and possibly into early February regarding payment volumes?
Mimi Carsley, CFO
Yes. I would say, overall, our volume transaction nears Visa and Mastercard domestic, pretty similarly, we did see the same experiences that they have talked about publicly about January weather and who knows right now is all the rains in California of that. But what we saw typically by the end of January with some rebounding from those very temporary lows.
Operator, Operator
The next question comes from Dominick Gabriele of Oppenheimer.
Dominick Gabriele, Analyst
Thanks for everything, Dave, and looking forward to working with you, Greg. I guess we've been talking to investors in your quarter since the management team change announcement. And Greg, talk about what you've learned under Dave and being a part of the Jack Henry team over the years that should give investors’ confidence that the new management team, including Mimi, who's done a great job, obviously, since her start, we'll continue executing with the same consistency in the years to come.
Greg Adelson, President and COO
I believe it all begins with the culture we've established over the past 47 years, which emphasizes collaboration. We work closely together. During my time with Dave, I was heavily involved in the card initiatives from years ago and the mergers and acquisitions within the payments group, which I led. Philosophically, Dave and I are very much in sync regarding our approach to evaluating our three pillars of success: our associates, clients, and shareholders. Therefore, I don't anticipate significant changes. We will maintain a consistent mindset in how we operate, though there may be slight differences due to our respective backgrounds. I hope to incorporate elements from my experience and Dave's. Having spent 13 years at this company, all of which have been under Dave's leadership, you can expect a great deal of consistency moving forward.
David Foss, CEO
Greg is a snappier dresser than I am.
Dominick Gabriele, Analyst
And then if maybe we could just dive in a little bit deeper on the guidance, I was just looking at the slides from this quarter to last quarter. And it looked like there was a rise in the non-GAAP revenue expectation, but a lowering of the high end of GAAP revenue. I was just curious on what would cause that debt deviation since the deconversion fees are versus stable?
Mimi Carsley, CFO
So, I just want to make sure I understand your question, Dom. You're saying you're seeing a greater change in non-GAAP? Or you're saying you're seeing a greater change in GAAP?
Dominick Gabriele, Analyst
It seems that the expectation for non-GAAP revenue increased slightly, while the high end of the GAAP revenue forecast was reduced. I might not have that completely accurate, but that's my observation.
Mimi Carsley, CFO
Yes. Let me look further into it, but I have nothing that comes to mind. It should be more of a flow-through because we're keeping the deconversion guide for the full year at 16%. So, there's not much that's changing there. So, you should see a similar pattern non-GAAP and GAAP.
Dominick Gabriele, Analyst
Excellent. That's what I would have thought. Okay. Perfect. And then maybe just one last one. If you could talk to us about your business investment strategy in terms of expense dollar allocation looking forward. The expenses were much better than I was expecting for the quarter. I know there's some seasonality, but please discuss the expense investment versus accelerating revenue strategy.
Mimi Carsley, CFO
So, Dom, I want to highlight a couple of points this quarter that will also influence the full year and our guidance. First, the Connect conference not only had a different timing but was even more successful than last year. This positively impacted our profitability by improving margins and reducing expenses. The second point is our decision to change the timing of our merit for our associates, which also positively affected our bottom line regarding expenses. Consistently, we conduct zero-based budgeting and prioritize our investments, focusing on spending for our top projects and products, as well as capitalizing on R&D. You may have noticed that we've maintained a consistent 14% spend on R&D. We're always considering how to invest for the future, assessing business plans, ROI, and organizational capacity. Therefore, I anticipate more consistency in our future spending compared to the past. Additionally, some of the margin expansion can be attributed to our increased focus on cost control and the adjustments we've made with merit timing.
Operator, Operator
And next, we have a question from Ben Varga of Autonomous Research.
Ben Varga, Analyst
I just wanted to echo everyone else's congratulations on the leadership transition. My first question is about Banno Business. It's great to see the initial client interest, I guess. In terms of the implementations that you have in the Q, how long does it typically take until those opportunities start contributing to revenue?
David Foss, CEO
Yes, the timing depends on the client. Implementing Banno Business usually takes less than 60 days. Some of these implementations are linked to core deals, while others pertain to different product launches. Ultimately, the timeline is more about the client’s readiness than Jack Henry’s capabilities. We do our best to encourage clients to move forward, but any delays are typically due to their pace. If they're prepared, the process can be completed in 60 days or less.
Ben Varga, Analyst
Got it. That makes perfect sense. And then as we think about the growth opportunity for Banno Retail, are these wins coming from greenfield opportunities for the most part? Or are you also kind of bumping up against some of the other digital banking providers?
David Foss, CEO
Yes, absolutely. No. We have a lot of competitive takeaways from the other providers. There are some opportunities within both the core base. We've talked about taking it outside of the Jack Henry core base and where we're going with that. But right now, there's probably an equal mix of opportunities from a handful of the larger digital banking providers today that we're winning some deals from and as well as our existing core base.
Greg Adelson, President and COO
And I think it's fair to say there is no such thing as a greenfield opportunity at any point. So, everybody has something. We're displacing something every single time.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Vance Gerard for any closing remarks.
Vance Sherard, VP, Investor Relations
Thank you, Laura. We look forward to speaking further with many of you at investor events in the coming weeks. On behalf of the management team, I would like to express our appreciation to all the Jack Henry associates whose efforts produce these outstanding financial results. Thank you for joining us today. And Laura, will you please provide the replay number?
Operator, Operator
The replay number for today's call is (877) 344-7529 and the access code is 9025867. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.