Earnings Call Transcript - JKHY Q1 2026

Operator, Operator

Good morning, and welcome to the Jack Henry First Quarter and Fiscal Year 2026 Earnings Conference Call. This event is being recorded. I would now like to turn the conference over to Vance Sherard, Vice President of Investor Relations. Please go ahead.

Vance Sherard, Vice President, Investor Relations

Thank you, Jeannie. Good morning, and thank you for joining the Jack Henry First Quarter Fiscal 2026 Earnings Call. Joining me today are Greg Adelson, President and CEO; and Mimi Carsley, CFO and Treasurer. Following my opening remarks, Greg will share his comments on our quarterly results, operational metrics and the outlook for the remainder of fiscal '26. Mimi will then discuss the financial results and updated fiscal '26 guidance provided in yesterday's press release, which is available on the Investor Relations section of the Jack Henry website. Afterwards, we will open the lines for a Q&A session. Please note that this call includes forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from our expectations. The company is not obligated to update or revise these statements. For a summary of risk factors and additional information that could cause actual results to differ materially from such forward-looking statements, refer to yesterday's press release and the risk factors and forward-looking statements sections in our 10-K. During this call, we will discuss non-GAAP financial measures such as non-GAAP revenue and non-GAAP operating income. Reconciliations for these measures are included in yesterday's press release. Now I will hand the call over to Greg.

Gregory Adelson, President and CEO

Thank you, Vance. Good morning, and I appreciate each of you joining today's call. I'd like to begin by thanking our associates for their hard work and unwavering commitment to our key differentiators, culture, service, innovation, strategy and execution. I will share 3 key takeaways from the quarter and then provide additional detail about our overall business. First, our financial performance. We produced record first quarter financial results with non-GAAP revenue of $636 million, up an impressive 8.7% over last year's first quarter. That significantly exceeds the 7% to 7.5% increase we anticipated in August. Our non-GAAP operating margin was 27.2%, representing a robust 227 basis points of margin expansion over last year's Q1. Second, our sales performance, starting with migrations from in-house processing to our private cloud. In Q1, we signed 7 contracts to move existing clients to our private cloud, including an $11 billion asset credit union and an $8 billion asset bank. Notably, the asset size of clients migrating to our private cloud was 60% higher over the past 12 months, $43 billion versus $69 billion, while the number of deals has remained consistent with previous years. As a reminder, we earn on average approximately 2x more revenue from clients in the private cloud compared to those on-premise. Today, 77% of our core clients are operating in the Jack Henry private cloud. Turning to new core sales. As many of you know, the first quarter is typically our lightest of the year. In Q1, our sales team earned 4 competitive core wins, including 1 financial institution with over $1 billion in assets. For context, last year, we started with 6 competitive core wins in Q1 and finished the year with 51. We remain confident that we will be within that range again this year as we are off to a very strong start in Q2. I also want to comment on the new sales procedures we implemented for the contract renewals about 6 months ago, which has resulted in a healthier balance between new sales and renewal contracts as well as improved pricing procedures. Our Q1 fiscal year '26 deal mix was 44% new core sales and 56% renewals compared to 35% new sales and 65% renewals in Q1 last year. We expect this trend to continue throughout the fiscal year. Third, our annual client conference. In September, we hosted another highly successful Jack Henry Connect conference in San Diego, drawing a record 2,651 clients. This is our largest event of the year and a major driver of new business opportunities. We had a record 91 prospects from 30 banks and credit unions. This is important to note because 20 of last year's new core wins came from prospects who attended Jack Henry Connect, underscoring the strategic value of this event. Additionally, the conference drew 48 consultants and our technology showcase featured 266 third-party fintechs, both all-time highs. We also had a record attendance at our annual CEO Forum, hosting 211 CEOs. Overall, attendees expressed less concern about the macro economy than last year and plan to continue investing in technology to enhance their digital capabilities, strengthen fraud protection, improve efficiencies and modernize their businesses. Next, I'd like to highlight several important announcements we made in the quarter. I'll start with our acquisition of Victor Technologies, which closed on September 30. We're excited to welcome the Victor associates to the Jack Henry family. We are equally excited about this technology as we leverage the capabilities to create new opportunities for our clients and the many fintechs serving the financial industry. As you've heard me say, our acquisition strategy targets companies that have great teams, are cloud-native, API-first and accelerate our product road map; Victor fits that strategy perfectly. Victor's modern innovative platform with direct-to-core connectivity enables financial institutions to embed payment capabilities into third-party nonbank brands such as fintechs and commercial customers. This helps financial institutions grow deposits, diversify fee income and maintain compliance controls. For Jack Henry, Victor provides a highly scalable solution that creates diverse revenue streams, enhances our payments-as-a-service capabilities and accelerates the delivery of emerging services like stablecoin. Victor was already integrated with our SilverLake core banking system and our Jack Henry PayCenter prior to the acquisition. We plan to extend its capabilities to serve our Symitar credit union and treasury management clients and to integrate directly with the new cloud-native Jack Henry platform. I will now provide an update on stablecoin as we've been actively developing and executing our strategy. We just completed a proof of concept in less than 2 weeks to allow financial institutions to send and receive USDC. We continue to work with key vendors and emerging fintechs on other aspects of our strategy, which includes the development of wallet, custody and settlement services for our clients to service their account holders. Furthermore, the new Jack Henry platform supports 9 decimal places, well above the 6 required for USDC, positioning us very well for both stablecoin and tokenized deposits. By contrast, most, if not all, existing core support only 2 decimal places. This advancement has already enabled us to facilitate cross-border stablecoin transactions for third parties through Banno. Another key development this quarter was the launch of our cloud-native Tap2Local merchant-acquiring solution. Tap2Local is offered exclusively through banks and credit unions, giving them a powerful way to win back deposits from small- and medium-sized businesses that have shifted their card acceptance activities to other providers. Tap2Local primarily targets the 82% of SMBs that are sole proprietors. Today, only 16% of sole proprietors keep both their retail and commercial accounts at the same community financial institution, largely due to the lack of SMB-focused services. Built in partnership with Moov, Tap2Local delivers differentiated capabilities for SMBs, including easy enrollment, tap to pay on both iOS and Android devices without additional hardware and continuous account reconciliation to the accounting platform of their choice. We showcased a live demo of Tap2Local at Jack Henry Connect and received fantastic feedback. We are currently rolling it out in phases to our Banno clients. We rolled out the initial phase of 40 clients on Monday of this week. We also did a live on-stage demo of Jack Henry Rapid Transfers at the conference. In partnership with Moov, we conducted more than 1,000 additional demos of this solution in the technology exhibit hall. Rapid Transfers enables both SMBs and consumers to instantly move funds between external accounts, eligible cards and digital wallets to manage day-to-day transactions and personal finances. There are only a handful of institutions offering this service today; none were community financial institutions until now. We are collaborating with both Visa and Mastercard to facilitate these transactions through their respective debit rails. Rapid Transfers is receiving strong initial reviews with 48 clients now live and 126 more in various stages of implementation. These unique solutions are all powered by the cloud-native API-first infrastructure we've built through our technology modernization strategy and are part of the Jack Henry platform. This strategy has enabled us to accelerate our innovation at speeds not typically seen in our industry, especially from a core provider. We developed our Tap2Local and Rapid Transfers solutions in less than 10 months, including close to 40 external certifications. We developed a full proof concept of USDC in only 2 weeks, and we will be launching our public cloud native deposit-only core in only 3 years, still on schedule for the first half of calendar 2026. The new Jack Henry platform is integrated with all of our existing cores. Unlike most of our competitors, it's not a side core, which is a separate parallel system that runs alongside the primary core. Side cores do not integrate directly with nor do they extend existing cores to enable new and enhanced use cases in the way the Jack Henry platform does. This integration delivers significant advantages to our clients, including real-time processing, streamlined operations, open API connectivity, enhanced security and immediate continuous upgrades. Next, I'll provide a few updates on specific products. In our payments segment, we continue to experience outstanding growth in our faster payment solutions. Over the past year, the number of financial institutions using Zelle has grown by 20%, the Clearing House's RTP network by 25% and FedNow by 32%. In Q1, payment transaction volume through these channels increased by 55% over the prior year Q1. In our complementary segment, we signed a total of 38 new Financial Crimes Defender and faster payment module contracts in the quarter. As of September 30, we have 148 financial crimes installations completed and another 66 in various stages of implementation. We also have 113 faster payment modules installed and 205 in various stages of implementation. Speaking of Financial Crimes Defender, we are proud that our solution recently won a silver medal from Datos Insights for Best AML and Fraud Transaction Monitoring Innovation. Continuing with our complementary segment, we continue to see success with our Banno Digital Platform. For the quarter, we signed a total of 18 new clients to the Banno platform. We currently have 1,026 Banno retail clients and 390 live with Banno Business. We finished the quarter with 14.7 million registered users on the Banno platform. At the end of Q1 last year, we had 12.7 million registered users, a 15% increase over the past 12 months. We are confident that tech spending will remain strong based on recent surveys, direct feedback from our clients and our robust sales pipeline. In Bank Director's 2025 Technology Survey that came out in September, 71% of respondents reported an increase in their bank's technology budget for fiscal year 2025 with a median increase of 10%. These results align with findings from our strategy benchmark published last spring. In that survey, 76% of our own clients said they plan to increase spending over the next 2 years with their top priorities being digital banking, fraud prevention, automation, cybersecurity and AI. Speaking of AI, we continue to focus on numerous product and internal use cases to help our clients and our staff improve back-office efficiency. Our new solutions are built with a human-in-the-loop approach. And while reviews are still early, feedback has been extremely positive. We have created over 100 internal AI use cases; while we continue working through prioritization, these efforts have already enabled us to control headcount additions from the improvements we have seen across all lines of business. As a reminder, we do not sell any of our products utilizing a seat license model. So factors such as the number of branches or employees at the bank do not have a bearing on our revenue stream. Looking ahead, we will hold our Annual Shareholder Meeting next week in Monett, Missouri and offer a webcast for remote viewers. We're also proud to recognize the 40th anniversary of our IPO this month and will commemorate the milestone with a bell ringing at NASDAQ on November 21. In closing, we are extremely pleased with our overall Q1 performance and remain highly optimistic about the rest of the year. I will now hand things over to Mimi to walk through the financial details.

Mimi Carsley, CFO and Treasurer

Thank you, Greg, and good morning, everyone. Our associates remain steadfast in serving our financial institution clients, delivering shareholder value, leading to another quarter of solid revenue and earnings growth. I will begin with our healthy first quarter results, then conclude with our updated fiscal '26 guidance. Q1 GAAP revenue increased 7% and non-GAAP revenue increased 9%, a continuation of consistently solid performance. Non-GAAP revenue growth was positively impacted by the shift of our Connect client conference into Q1 from Q2. Even without this timing shift, quarterly revenue growth would have been a robust 8%. First quarter deconversion revenue of approximately $9 million, which we previously announced was up approximately $5 million, reflecting a steady pace of M&A activity among financial institutions. Now let's look more closely at the details. GAAP services and support revenue increased 6% for the quarter, while non-GAAP increased 8%. Services and support growth during the quarter was primarily driven by strength in data processing and hosting revenue for both private and public cloud, revenue from our Connect conference and solution implementation. Private and public cloud offerings continue to drive strong growth. Cloud revenue increased 7% in the quarter. This recurring revenue contributor is 30% of our total revenue. Shifting to processing revenue, which is 42% of total revenue and another strategic component of our long-term growth model. We saw a healthy performance with 10% GAAP and non-GAAP growth for the quarter. Consistent with recent results, quarterly drivers included increased card, digital and payment processing revenues. Completing commentary on revenue, I would highlight total recurring revenue exceeded 91%. Next, moving to expenses. Beginning with the cost of revenue, which increased a modest 1% on a GAAP basis and 4% on a non-GAAP basis for the quarter. Drivers for the quarter included higher direct costs consistent with revenue growth, higher personnel costs, partially offset by lower benefits and increased amortization of intangible assets. For modeling purposes, amortization of acquisition-related intangibles was $6 million for the quarter. Next, R&D expense decreased 1% on both a GAAP and non-GAAP basis for the quarter. The quarter decrease was primarily due to tempered net personnel costs. And ending with SG&A expense for the quarter on a non-GAAP basis, it increased 14% and 9% on a GAAP basis. The quarter increase was primarily due to the timing of our Connect client conference, increased personnel service costs, higher net personnel costs, partly offset by lower commission and benefit costs. Without the Connect client conference costs, SG&A would have increased 12% on a non-GAAP basis and 7% on a GAAP basis. Aided by our consistent revenue growth, we remain focused on generating annual compounding margin expansion. Q1 delivered a 227 basis point increase in non-GAAP margin to 27%. Non-GAAP margin benefited from inherent leverage in our business model, strategic cost management and leveraging existing workforce as we continue to focus on enterprise process improvement and AI utilization. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.97, up 21%. Reviewing the 3 operating segments, we are pleased to see positive performance across the board. Core segment non-GAAP revenue increased 6% on the quarter with operating margins increasing a robust 114 basis points. We continue to gain benefits from private cloud trends and disciplined cost management. The payments segment quarterly non-GAAP revenue increased 8%. The segment again had outstanding non-GAAP operating margin growth with quarterly results of 170 basis points. Revenue growth was due to resilience in our card-related services, consistent growth in the EPS business and continuing large percentage growth on faster payments, albeit on a smaller dollar base. Margins benefited from operational efficiencies and disciplined cost management. Finally, complementary segment quarterly non-GAAP revenue increased an impressive 9% with healthy 75 basis points of margin expansion. Quarterly revenue growth continued to reflect digital solution demand, beneficial product mix and sales sourced from both new core wins and non-core financial institutions. Now a review of cash flow and capital allocation. Q1 operating cash flow was $121 million, a $4 million increase over the prior fiscal year. Quarterly free cash flow of $69 million delivered by a $10 million increase was positively impacted by the collection of remaining annual maintenance billings and full tax depreciation and development expenses related to recent tax legislation. Our consistent dedication to value creation resulted in a trailing 12-month return on invested capital of 22% compared to the 20% in the first quarter of the prior year. We're very proud of the durability of this metric performance. Additionally, I would highlight the following significant capital allocation decisions: $100 million in share repurchases year-to-date through October, the asset acquisition of Victor and $42 million in dividends paid. We ended the quarter with a minimal amount of debt consistent with normal course revolver line usage but expect to end the year debt-free, barring acquisitions or other opportunities. I will now discuss the updated increased full year guidance. As you're aware, yesterday's press release included updated increases to fiscal '26 full year GAAP guidance. Deconversion guidance will continue to follow the conservative methodology introduced in fiscal '24. Fiscal '26 deconversion revenue guidance has been increased to $20 million. Aligned with guidance methodology, we will update the outlook as we confirm more activity throughout the year. Full year GAAP revenue growth guidance increased to a range of 4.9% to 5.9%. This is driven by the deconversion revenue increase, expected revenue contribution for the remainder of the year from the Victor acquisition. I will emphasize GAAP revenue remains almost certainly understated due to the conservative deconversion revenue guidance. Based on our strong first quarter results and expected continued momentum, we have increased the lower end of the non-GAAP revenue annual growth rate guidance, resulting in a new outlook of 6% to 7%. As a reminder, fiscal '26 and the first quarter of fiscal '27, Victor acquisition-related financial impacts will be excluded as part of non-GAAP reporting. Based on the above revenue growth and our resilient financial model, we expect to again generate sustainable accretive sources of margin. We are increasing full year guidance for non-GAAP margin expansion to a range of 30 to 50 basis points. All of the above are indicative that our business operations remain healthy and sound with near-term growth opportunities. The full year GAAP tax rate estimate for fiscal '26 is 23.75%. The above increased guidance metrics result in a stronger full year outlook for GAAP EPS of $6.38 to $6.49 per share, a growth of 2% to 4%. And as a reminder, updated conservative deconversion revenue guidance almost certainly understates EPS GAAP growth. Fiscal '26 is expected to have superior free cash flow conversion due to recently passed tax legislation, and we have elected to take the accelerated election. Full year free cash flow conversion outlook is for 85% to 100% for the fiscal '26, matching our expected target but with a bias to the higher end of the range. As a reminder, we see fluctuations in quarterly results relating to software usage license components along with the timing of implementation. Therefore, the correct performance indicator for our business is the consistently strong fiscal year financial results. In conclusion, Q1 results reflect outstanding performance leading to increased guidance. We're pleased by the start to our fiscal year and remain positive on the outlook. Demand for our solutions aligned with continued technology spend by our clients and prospects will drive superior shareholder return and value. We appreciate the contributions of our dedicated associates that achieve these superior results and our investors for their ongoing confidence. Jeannie, please open the line for questions.

Operator, Operator

The first question comes from Rayna Kumar with Oppenheimer.

Rayna Kumar, Analyst

Nice results here. We saw some solid margin expansion in the quarter. And as you mentioned, Mimi, R&D was down 1%. Can you talk about how sustainable this type of margin expansion is going forward? And maybe how margin could look for the remainder of the year by quarter?

Mimi Carsley, CFO and Treasurer

Thanks for joining us this morning, Rayna, and your question. I think R&D has the same profile that you've seen in SG&A and other areas consistent with across our expense, which is the thoughtfulness in which we planned this year's budget being modestly conservative out the gate. We're being very disciplined around headcount increases while still investing for growth. So as we look to the remainder of the year, some of that is timing related. Some of that is things that we're expecting to kind of reverse, if you will, some benefits-related net personnel costs and the timing of some of the spending we have for projects. But overall, I would say there's consistency that's going to drive the full year margin expansion, which is our general control of spending, our limited headcount growth for the year and efficiencies in AI.

Operator, Operator

Your next question comes from the line of Will Nance with Goldman Sachs.

William Nance, Analyst

I was wondering if you could expand a little bit on the pricing and competitive environment out there. And in particular, there's been a lot of focus around some of the core consolidation happening at the competitors. Are you guys seeing an increased willingness to explore converting cores in the market? And how are you feeling about your chance of maybe shaking loose a couple of those opportunities?

Gregory Adelson, President and CEO

Will, thanks for the question. I think we're not seeing anything more significant. I know, obviously, there were some recent announcements on collapsing the number of cores for one of the providers and things along that line. It's still early. I think our pipeline remains very significant. As I mentioned in my script, we've already seen some nice wins for the quarter. And so I anticipate that will continue to be at a fairly normal pace. I haven't seen anything out there that has seen any more intense competitive pressure than I would have said 6 months ago, though, at this point in time.

Mimi Carsley, CFO and Treasurer

I think, Will, the only other add I would say to the point that Greg made in his prepared remarks, the changes we've made operationally around limiting the impact from pricing compression to your first half of your question around pricing, we're starting to see the fruits of the labor paying off. So we're seeing stabilization from that headwind. We're quite excited by the collaboration between our sales, operational teams around that and going after that, and that's reflected also in the sales mix numbers that Greg talked about.

Operator, Operator

Your next question comes from the line of Dan Perlin with RBC Capital Markets.

Daniel Perlin, Analyst

I just wanted to maybe revisit the sales momentum here and the conversions into private cloud. So I think you said you signed 7 clients to convert to private cloud. You're at 77% today. So you're getting pretty high on the penetration rate there, which is clearly a positive for the revenue uplift. I guess what I'm ultimately getting at is, as you think about the strategy to increasingly sell outside the core, can you just maybe update us on where that progress is? I know you've got a lot of initiatives underway, but it would be helpful to kind of refresh that strategy here.

Gregory Adelson, President and CEO

Sure. Thanks, Dan. We're currently at 77%. As we've previously discussed, we anticipate 5 to 6 more years of growth at our current rates, with migrations averaging between 35 and 45 annually over the past several years. We expect to maintain that pace this year. Some larger customers are hesitant to make changes, which is why we see variability in the results. Regarding our efforts to expand beyond our existing customer base, we're focused on the new components of the Jack Henry platform, all of which are designed to be agnostic to core systems. This opens up sales opportunities outside our existing base, facilitating larger deals. We've discussed this in recent years and had significant regional clients at our conference in September exploring potential collaborations. Our team will begin selling Banno, targeting external markets as of January 2026, and we already have a few leads lined up. Banno is anticipated to continue opening doors for us. Additionally, our ongoing platform development includes initiatives like Tap2Local and Rapid Transfers, providing companion applications that can be marketed to competing digital providers, establishing new revenue streams. We'll initially focus on our Banno clients before targeting a broader market. This strategy will enable us to connect with opportunities beyond our core offerings, as well as complementary payment products. Also, the Victor acquisition will enhance our prospects with clients who are not currently part of the Jack Henry core.

Operator, Operator

Your next question comes from the line of Kartik Mehta with Northcoast Research.

Kartik Mehta, Analyst

Greg, I think you and Mimi both talked about the consolidation and obviously, the increase in deconversion fees. Just a 2-part question on that. One is, what type of impact do you expect that to have on your recurring revenue into next fiscal year? And as we go into calendar 2026, do you think we'll have the same amount of core activity? Or do you think that slows down because there's all this M&A activity and banks will want to wait to see how that plays out before committing to converting a core?

Gregory Adelson, President and CEO

Thank you, Kartik. I’ll address your first question. We mentioned during the August call that we typically win more deals than we lose, although we faced some timing issues due to larger deals, which we identified as a headwind. However, we’re starting to see some stabilization, particularly in what we refer to as convert merge activities, where our clients are acquiring other clients. In our banking segment, we’re already observing nearly double the number of convert merge activities scheduled for this year compared to last year, indicating that things are leveling out. The challenges we experienced this year were mainly concentrated in the first quarter, but we have begun to adjust our approach accordingly. Regarding core activity, based on our pipeline and historical success rates, I expect we’ll be around our usual target of 50, and the team shares this confidence. There may be further opportunities arising from a recent announcement concerning one provider’s consolidation of their cores, but that just came out, and we’re still in the process of building activity around it. While this potential could increase our numbers, many of those deals are likely to be smaller, so we’ll have to assess where they land, particularly if they occur before making any core changes.

Mimi Carsley, CFO and Treasurer

If I could add a little more context, you might find this metric interesting, Kartik, as it highlights the real resilience and appeal of our FI segment. Looking at the last decade from 2014 to 2024 within the M&A context, there has been significantly less activity in the segments that make up the majority of our customer profile. For credit unions in the $100 million to $10 billion segment, there was a contraction of 13%, compared to a total market contraction of nearly 30%. In banks, the trend was even clearer, with that market segment actually growing by 4%, while the total market contracted by 30%. This clearly demonstrates the health and attractiveness of our segment, as well as the limited overall impact from ongoing industry consolidation over the past four decades. Historically, we have viewed this consolidation as a growth engine for many of our clients.

Gregory Adelson, President and CEO

Yes. I want to add an important point that I mentioned in my opening remarks regarding our platform. Our platform strategy and our ability to innovate quickly are helping us maintain opportunities even amidst institutional acquisitions. We are being included in discussions. There have been multiple instances where we've been invited to present our developments and future direction, despite knowing that the acquiring institution plans to continue with their existing competitive offerings. There are significantly more opportunities for Jack Henry in these deals compared to a few years ago.

Operator, Operator

Your next question comes from the line of Jason Kupferberg with Wells Fargo.

Tyler DuPont, Analyst

Greg and Mimi, this is Tyler DuPont on for Jason. I just wanted to ask not to pile on core banking, but I just want to ask about the trends you're seeing. I heard in the prepared remarks you guys signed 4 takeaways, and you're comfortable with the 50 to 55 target. But just from an asset size perspective, could you maybe clarify the average size of the wins you're seeing in the quarter? And how that sort of coincides with your longer-term strategy to move upmarket and to claim those larger wins?

Gregory Adelson, President and CEO

Yes. So I appreciate the question. Yes, I mean, we closed 4 deals for the quarter. One was a multibillion-dollar deal. If you go back to last year, we closed 16 multibillion, 4 over $5 billion, and we're on track to do that or better this year. So based on what our forecasts are and what's in the pipeline, the first quarter results fall directly in line with what our expectations would be.

Operator, Operator

Your next question comes from James Faucette with Morgan Stanley.

James Faucette, Analyst

Greg, you mentioned the Bank Director survey and the median growth in tech spend. I'm curious, just given where we are in the deposit cycle and the prospect of accelerating loan growth next year with a change in interest rates. I was hoping you could help us stratify the differences in demand from your customers for deposit attraction versus retention versus lending and how you are allocating resources to one side or the other, whether it would be to lending or the ledger side?

Gregory Adelson, President and CEO

Sure. I'll share a few thoughts, and I believe Mimi has some insights as well. From my perspective, there's a growing interest in our loan portfolio, which continues to expand alongside new opportunities. However, the primary concern for most institutions right now is ensuring that deposit growth keeps pace to support lending opportunities for customers. When we consider the current market dynamics—such as neobanks, stablecoins, and the trends we're observing in the small and medium business sector—it’s crucial to note that many smaller clients and sole proprietors are choosing to bank elsewhere, outside of community banks for their SMB needs. This is a significant issue as it results in lost clients for us if we don't offer the right solutions to retain them. While there is clear interest in exploring lending opportunities, the immediate priority for us is enhancing efficiency and growing deposits at this moment.

Mimi Carsley, CFO and Treasurer

And the only add I would say is that we consistently see through our own survey that we do that both deposit gathering as well as lending remain in the top 4 priorities in the last 3 years. Sometimes they horse trade in terms of which is outpacing the other, but both are certainly top of mind. I would say in Q1, James, we started to see a little bit of the signs of an increasing pace of lending activity, whether that was some enthusiasm regarding the overall economy, inflation coming down, the expectations of the Fed starting to move, but we are starting to see a small uptick in the pace of lending, which is a very encouraging sign.

Operator, Operator

The next question comes from Dominick Gabriele with Compass Point.

Dominick Gabriele, Analyst

I think you all sound quite enthusiastic on this call during the prepared remarks. One notable aspect of Jack Henry is the revenue growth. It appears that you are managing pricing pressures and stabilizing that challenge. I'm curious, considering your current guidance for this year compared to past years, could you provide any details on the pricing pressures you have experienced over the last 12 months and how they might have influenced your current guidance? Additionally, what are the specific mitigation strategies in place within the business? Are there changes in sales tactics or similar adjustments?

Mimi Carsley, CFO and Treasurer

Sure, Dom. We began noticing that impact last year, which is why we highlighted it, and we're now seeing it reflected in our financials this year. On a positive note, we've observed a stabilization in our operational activities and collaboration between sales, alongside the initiatives the leadership team has implemented. We're definitely seeing that headwind lessen, but we need to assess the overall impact as the year progresses. While I can't provide a specific expectation, that was one of the main reasons for the lower guidance this year compared to our long-term growth plan. Another factor is a modest outlook on consumer sentiment and spending. So far, we've seen solid consumer spending, particularly with card transactions, which contributed to our strong performance in Q1 as it exceeded expectations. Although we still have much of the year ahead, we feel optimistic about a gradual continuation of that spending trend.

Gregory Adelson, President and CEO

Yes, Dom, I'll add a couple of comments around kind of process stuff. Just yes, I mean, we took a very detailed approach with sales operations and finance. It took us several months to get it to where we wanted it to be. And we actually started to see the processes come together at the end of fiscal year '25, so in the fourth quarter, where we saw performance improve, and we've continued to see it through the first quarter. But we still, as Mimi had mentioned, we still had some deals that were already done, especially some larger deals. As I noted last year, we did a lot of renewals than we did the year previously and a lot larger clients. So some of the impact was already felt. But the new processes that we put in place, the structure and the rigor of communication and collaboration amongst all of the teams to ensure that everybody was in sync was a big part of what we were focused on. And honestly, it's exceeded my expectations this early. So we're very optimistic that things will continue down that path as well as having less renewals than we had last year by about 20-something percent. So that's another component of this. But again, a lot of what was baked into the original guidance was because it was already baked into the deals that were done in fiscal year '25.

Operator, Operator

The next question comes from Dave Koning with Baird.

David Koning, Analyst

Good job. And I guess my question, card processing revenue accelerated about 2%, which was nicely better than industry trends, which were pretty stable to maybe a little acceleration, but 2% is a lot better. And I know you called out a lot of the newer types of payment services growing really well. And I guess the question is, is that sustainable, like this higher level of growth now? Are those other things contributing enough to kind of keep this at a higher pace?

Mimi Carsley, CFO and Treasurer

Dave, I would say it's a combination of a number of factors within the payments segment. One is, as we talked about, the U.S. consumer spending at a better clip than I think we were concerned about last year as an economy as a whole. So you're seeing a healthy pace. I want to say it's a crazy pace of exuberance, but a healthy pace of the U.S. consumer spending. The other is the ancillary services surrounding card have been very healthy. So we have a number of services that complement the payments card business. We've seen a healthy uptick in growth in those businesses. The stabilization and positive performance from the EPS business really helps. That's still a large segment portion of the payments segment. And then on the faster payments, even though it's off of small base numbers, we think there's a lot of upside from the solutions that are going to drive adoption and volume on the faster payments. So we're quite positive on the momentum there.

Gregory Adelson, President and CEO

And Dave, I'd like to add one other component. We are actually starting to see a lot of the value of our Payrailz acquisition coming into play now. We're starting to see a nice uptick in Payrailz/iPay Bill Pay opportunities. We're seeing less compression. We're seeing less deconversion. We're seeing all kinds of things that are generated as what we expected out of that acquisition starting to come to fruition now. So that's another key component based on the size of that business helping to help drive some of that as well.

Operator, Operator

The next question is from Darrin Peller with Wolfe Research.

Darrin Peller, Analyst

It was a strong quarter. Just to clarify a few points, I know there were some items highlighted when we wrapped up last quarter. You mentioned some of the progress in areas like bank M&A, pricing renewals, and overall account growth at credit unions having a slight impact on your initial guidance. Clearly, you're experiencing solid outperformance, particularly on the card side. However, when we consider your confidence in newer areas like faster payments, the Moov partnership, Tap2Local, and Rapid Transfers, do you believe these will be significant enough to potentially add 50 basis points or more by the end of the fiscal year, compensating for the headwinds you're facing this year? Are these developments substantial in your opinion? Additionally, could you provide a quick update on how these areas are performing?

Gregory Adelson, President and CEO

Yes, that's a good question. The focus is specifically on Tap2Local and Rapid Transfers, which we are just starting to roll out. We have high long-term expectations for these initiatives. Based on feedback from our recent client conference and initial customer enthusiasm, we feel optimistic. However, whether this will result in a 50 basis points increase is uncertain. We expect to have more clarity on this in the coming quarters. For long-term growth, everything we are doing in the SMB space is just the first phase, with multiple phases planned to enhance our digital offerings and payment solutions. Regarding faster payments, after a recent call with the Fed, it seems they are serious about promoting various treasury activities and creating more opportunities for quicker payments, which could boost revenue. We are also noticing improvements in renewals and, considering the current market environment with a 10% spend on core opportunities, all these factors will help mitigate the headwinds we initially anticipated. However, since we are in Q1, it’s still early to fully assess the impact of these developments.

Mimi Carsley, CFO and Treasurer

Darrin, I would echo Greg's commentary. There's a lot of reasons to be pleased by the initial reaction and even the momentum we've seen from the uptake and the waves of installations that we have targeted. But I think at this point, the reason for sharing them is really as an indicator and a validation of our investment for growth and the level of innovation, less so the in-year impact from them. But as we think about what they could grow to be over the imminent next few years, it gives us great optimism around being within the range and to the upside of that range and opportunities to start thinking about the next new range possibility.

Darrin Peller, Analyst

All right. That's helpful. Can I quickly follow up on the competitive landscape for a moment? I know this was discussed earlier, but the core consolidation at one of your competitors has been talked about a lot. Considering your expectations for core additions, have you noticed any changes in the market regarding the volume and level of RFPs in the last 6 to 12 months? Are you hearing any indications of further changes coming? Additionally, regarding capacity, if we were to receive another 20, potentially increasing to 50, 60, or 70, do you believe you would be able to manage that effectively?

Gregory Adelson, President and CEO

Yes, that's a great question. Regarding the time frames you mentioned, a lot of recent news has emerged, including the announcement at their client conference about consolidating the cores, which has become more pronounced recently. However, I wouldn't say that the activity has significantly increased beyond what we've seen. I do expect some uptick whenever core consolidations are announced. As for capacity, we are fully prepared and can scale up as needed. We regularly manage this based on our mergers and acquisitions and new core wins. We're proficient at bringing on teams and have no concerns about that. Additionally, we've made significant advancements in AI for handling RFP responses, so we are confident in managing an increased volume of RFPs. The sales team is actively working on this, and I believe we are on the right path. I want to emphasize that we're starting Q2 strong with competitive core wins. It's also worth noting that we are the only company that announces our number of core wins, whereas others reference increases without releasing specific figures, which puts us under a different level of scrutiny.

Mimi Carsley, CFO and Treasurer

If I could add to Greg's insightful comments, our sales team excels at engaging with prospects. I agree that we are likely to experience an increase in interest and opportunities due to our competitors' core consolidation announcement. Their long-standing lack of innovation has already created demand for us to present our innovative solutions. This represents a potential acceleration. Many clients may wait until the end of their contract to change, but it presents an exciting opportunity as it reinforces our message that a change is necessary. They cannot continue with a non-innovative core to serve their financial institutions. We are enthusiastic about the long-term potential, and it brings consistency to our sales efforts.

Operator, Operator

The next question comes from Cris Kennedy with William Blair.

Cristopher Kennedy, Analyst

Can you just talk a little bit more about Victor kind of who the target customer is for that? And what type of interest and opportunity you're seeing with that asset?

Gregory Adelson, President and CEO

Thank you, Cris. There are a few key points to discuss. First, this creates opportunities for banking as a service in the banking and credit union sectors. We currently have SilverLake integration and several Jack Henry core clients using the service. We are already partnered with Victor in this endeavor and connected to our PayCenter offering, which will support our credit union business. Additionally, we're seeing opportunities in our treasury management platform, such as embedded finance payments and the ability to introduce various payment types like integrated payables. We have the potential to collaborate directly with fintech companies to facilitate their payments. Several fintechs are already integrated into the Victor solution, and we are processing their payments. In just 30 days, our pipeline has grown significantly. We are preparing to close our first new bank soon, with several more expressing interest, along with a long list of interested fintechs. This development presents a chance for us to diversify our revenue streams and also offers banks the same opportunity. We are very optimistic about the prospects this will bring, including opportunities related to our stablecoin strategy, leveraging relevant technology. Overall, I see this acquisition as a significant chance for Jack Henry to engage in a space projected to more than double in the next 2 to 3 years.

Operator, Operator

The next question is from Ken Suchoski with Autonomous Research.

Unknown Analyst, Analyst

This is JD on for Ken. I wanted to ask about margins. The first quarter margin looked really strong, and while there is some seasonality, you exceeded the full year range. You mentioned that some of it is timing, and you feel confident about the full year. However, considering that Connect has moved to September from October last year, how should we view margins for the next quarter? Additionally, could you provide some insights on the remainder of the year? I want to ensure we’re not overlooking anything.

Mimi Carsley, CFO and Treasurer

I encourage you to evaluate our performance on an annual basis. Each quarter can have varying rhythms due to implementation factors or year-over-year comparisons. While we are pleased with our strong Q1 performance and optimism for the full year, there are several factors at play. There is a slight conservatism due to the nature of some savings tied to personnel-related benefits and the timing of certain projects. We anticipate some catch-up in this regard, along with opportunities for investments in our growth plans. Our modest forecast still allows for the possibility of enhancing or accelerating our activities in AI and platform projects. Looking ahead to the full year, I am happy to see an increase in our guidance, which reflects the natural dynamics of our business. The continued improvement in margin expansion is encouraging, but I advise against focusing too much on any single quarter; instead, it's important to consider the overall strong expectations for the year.

Unknown Analyst, Analyst

Great. And maybe if I can sneak one more in. I think you mentioned 56% of renewals in deal mix. I think that implies renewals were down quite a bit from last year. I guess is it fair to say that you'll see lower renewals this year compared to last year? And maybe if you could talk a little bit about how retention rates are trending.

Gregory Adelson, President and CEO

Yes. And I apologize, but part of your, first part of your question broke up. So could you repeat the first part, please?

Unknown Analyst, Analyst

Yes. I think you mentioned in your prepared remarks how 56% of renewals were part of the deal mix, and I think that implies renewals are down year-over-year. So I just wanted you to comment on that.

Gregory Adelson, President and CEO

Yes. So as I mentioned, last year, we had a significant number of renewals from even greater, I think it was 12% more than the year previous to that and much larger institutions that we renewed. It was $94 billion in assets versus $224 billion in assets. So just even last year, we had much larger renewals and a number 2. So we have a smaller number of renewals this year and a smaller number of very large customers. But the processes that we put in place, part of it was to focus on ensuring that we were going after a larger number of new deals and not relying on the renewal process, pulling in any renewal sooner than it should be and things along that line. So the team has done a great job of adhering to those things, focusing on the new opportunities, and managing the relative price compression that we typically see much better than we have in years past.

Mimi Carsley, CFO and Treasurer

I would like to add that we have not seen any change in the historically high retention rate at Jack Henry. Without considering mergers and acquisitions, our retention remains over 99%. We are not only achieving great success with acquiring new customers and products, but we are also maintaining our existing customers without any departures.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Vance Sherard for her closing remarks.

Vance Sherard, Vice President, Investor Relations

Thank you, Jeannie. As Greg mentioned, our Annual Shareholder Meeting is on Wednesday, November 12, at noon Eastern Time. We look forward to hosting those who attended our headquarters in Monett, or those who joined the webcast. Management will present in person at multiple investor events, both domestically and internationally prior to the calendar year-end, and we thank all Jack Henry associates for their outstanding efforts and commitment, which contributed to the start of another successful fiscal year. Thank you for joining us today. Jeannie, please provide the replay number.

Operator, Operator

The replay number for today's call is (877) 344-7529 and the access code is 3613183. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.