Vance Sherard welcomed everyone to the Jack Henry Fourth Quarter 2023 Earnings Conference Call and introduced the other members of the call. He noted that the call includes forward-looking statements and non-GAAP financial measures. He then turned the call over to Dave Foss, Board Chair and CEO, for his thoughts about the state of the business, financial and sales performance, industry comments, and other key initiatives. Afterwards, Mimi Carsley, CFO and Treasurer, will provide additional commentary on the financial results and fiscal year guidance. The call will then be open for Q&A.

In the fourth quarter of fiscal 2023, David Foss reported record revenue and record sales bookings. Revenue increased 11% for the quarter and 8% on a non-GAAP basis across all segments. Sales teams set a new quarterly and annual record, with 16 competitive core takeaways and 19 deals to move existing on-prem clients to the private cloud environment. Digital suite offerings saw strong demand.

Jack Henry signed a variety of contracts for their various solutions in the quarter, resulting in almost 10 million registered users at the end of the fiscal year. They delivered Banno business into general availability for their bank clients in late July and became one of the first service providers to support live transactions on the Federal Reserve's new FedNow instant payment service. They are also planning to deliver Financial Crimes Defender into general availability for their banking and credit union clients later this year.

Jack Henry recently announced their corporate rebranding to go to market under the name Jack Henry. In the past year they have seen positive results from the rebranding, including a 50% increase in website visits and a 30% increase in social media followers. They have also been recognized as a 2023 Climate Leader and one of America's Greatest Workplaces. Furthermore, their employee engagement scores are above industry benchmarks and their customer satisfaction scores are industry-leading.

The company had a successful year in 2023, with high employee engagement and customer satisfaction scores, and a large sales pipeline entering the next fiscal year. The company recently offered a Voluntary Early Departure Incentive Program to reward long-term employees and give others a chance to move up in the organization. Financial institutions have shown positive growth and sentiment around technology spending for the rest of the year, and the Bank Directors 2023 technology survey will be published in September.

Dave and Mimi discussed the company's strong financial performance in Q4 and for the full year of 2023, with a focus on serving community and regional financial institution clients, growing the business, investing in the future, and delivering stockholder value. Services and Support revenue was positively impacted during the quarter due to deconversion revenue, while product delivery and services increased 27% in the quarter. Despite the headwind of lower deconversion revenue, all other areas resulted in a modest 2% decrease.

In the fourth quarter, the company experienced 10% growth in their public and private cloud offerings, 8% growth in services and support revenue, and 9% growth in processing revenue on a non-GAAP basis. Operating expenses rose 8-15% for the quarter and year due to higher personnel costs and amortization expenses. This led to a 22% increase in net income and a fully diluted earnings per share of $1.34. Despite headwinds, operating cash flow for the full year was $382 million, down from $505 million last year.

The company has committed to a disciplined approach to capital management, resulting in an annual return on invested capital of 21.7%. For the fiscal year 2024, they are guiding to $16 million in deconversion revenue, evenly distributed across the year. Additionally, they will pre-release actual deconversion revenue figures prior to each quarterly earnings release, and update guidance based on actual deconversion revenue.

The company expects to see minimal fiscal institutional consolidation in the first half of fiscal '24 with possible acceleration in the second half. Additionally, there is a one-time impact from a Voluntary Early Departure Incentive Program which will have a negative $0.18 impact on reported GAAP EPS. The company's recent acquisition, Payrailz, has been successfully integrated and they expect it to double revenue and become EBITDA positive in the first half of the year. The company expects 6.3% to 7.3% GAAP revenue growth for fiscal '24 and 7.0% to 8.0% non-GAAP revenue growth.

The company expects non-GAAP revenue to grow in Q2 with sequential increases in Q3 and Q4, resulting in a 20-25 basis point margin expansion for the full year. The company also expects GAAP EPS to be between $4.92 and $4.99 per share, with Q1 and Q4 being the best-performing quarters. Expenses related to a 2023 client conference will be in Q2, and free cash flow conversion is expected to be approximately 60%, impacted by one-time capital expenses, lower deconversion revenue, and higher cash taxes.

David Foss discussed record bookings for the fourth quarter and full year, noting that the fourth quarter was significantly higher than the second quarter, which was a record. He also mentioned that the internal metrics they use to measure success are not external metrics and that the success is driven by their complementary solutions.

Jack Henry is confident in their top-line revenue growth of 7-8% for the foreseeable future due to the visibility they have on the recurring revenue stack. They are also expecting to record the full $0.18 in the first quarter from their early retirement program VEDIP. This program has been successful in the past in rewarding long-term employees and creating opportunities for people to move up in the organization.

Mimi Carsley provided detail on the non-GAAP operating margin guidance for FY '24, explaining that if Payrailz is adjusted for in both years, the margins would be up 20 basis points. She discussed the puts and takes of the 20 basis points, implying that this could be seen as a more normalized margin trajectory.

Mimi Carsley explains that the guidance for FY '24 is around 20-25 basis points, with headwinds from bonus, third-party renewals, and cyber and security compensation. She also notes that free cash flow was down for the quarter, and that the change in tax legislation led to a $90 million cash tax payment which will continue to present headwinds to near-term free cash flow.

Jack Henry is a well-rounded technology provider to financial institutions in the United States and is focused on the needs of their traditional customers, such as community and regional banks and credit unions. They are receiving a lot of attention due to their focus in their space and not being involved in merchant acquiring or other businesses.

Jack Henry has a strong customer service reputation and is rolling out innovative new products. This combined with the technology modernization story has created a credible positioning for Jack Henry among potential and existing customers. However, making a major change in technology is a hard decision, so people are not rushing to their doors. In response to a question about the one-time impact on the early departure incentive program, Mimi Carsley said it is too early to provide specifics on cost-savings and the influence on margin expansion.

Mimi Carsley responds to Vasu Govil's question about long-term margin expansion, noting that the last few years have seen "some ups and downs" and that the current expectation is for 20-40 basis points of expansion. She attributes this to modeling out what is to be expected from the business, as well as continued investment in fiber, wage-related costs, and employee-related benefits. She also notes that there is potential for further margin expansion through the migration to cloud and the introduction of tech modernization products.

David Foss and Gregory Adelson discuss the adoption of AI by community regional banks and credit unions. They note that many are still trying to figure out if it is a good thing or a risk. Jack Henry has been in the business of AI, machine learning, and robotic process automation for a long time and has embedded these technologies in their solutions. They are also investigating ChatGPT for software writing. Jack Henry is using robotic process improvement in their continuous improvement initiatives.

Mimi Carsley discussed the company's free cash flow conversion rate for FY '24, which is at 60%, incorporating the higher cash tax levels due to the Section 174 legislative change. This change will reverse over a five-year period, and the company is doing further analysis to determine the long-term target.

Mimi Carsley explains that the company is transitioning to a SaaS model, which has an effect on their free cash flow. She also notes that Q1 will be lower than the full-year outlook, but Q2 will be in line with the growth for the year and Q3 and Q4 will usually be higher. The fluctuations in quarterly revenue growth are due to the shift to the SaaS model.

Mimi Carsley and Jason Kupferberg discussed the seasonality of the business and John Davis asked Mimi Carsley about the FY '24 margins and the VEDIP program. Mimi explained that the $6 million referenced was a combination of natural annual growth and a lower bonus payment from FY '23, and that there is currently nothing baked-in from a savings perspective into the FY '24 guidance related to the VEDIP program. Dave was also asked about the demand environment and he mentioned that there were 16 new wins this quarter, which is an acceleration.

David Foss states that the competitive environment is currently the best it has been in a while and that Jack Henry did not experience any negative impacts from the disruption in the banking sector. He attributes the current pickup in sales activity to customers looking for technology to help with revenue growth, deposit growth, and efficiency. He also mentions that the benchmark survey is available online on jackhenry.com.

Jack Henry provides technology solutions to help financial institutions grow their loan volume, increase efficiency in the back office, and serve their customers better. They are known for their reputation for service and being a great partner in the competitive environment. Mimi Carsley explains that near-term, cash flow is likely to be around 60%, but over time, it could get closer to the 85% that it was in the previous year. She also dives into employee cost conversations.

Greg Adelson and Mimi Carsley discuss how the company has been modernizing its technology, leading to an increase in development, QA, and project management resources. They have been mindful and thoughtful of headcount increases, with more concentration in development engineering, call center, and client-facing roles. Salaries and benefits have been increasing with the market.

Mimi Carsley discussed the levers that the business has to support the 20 to 40 basis points of annual margin expansion, such as the tailwind of the on-premise to cloud migration. David Foss also mentioned that they have been running at a rate of 1-ish a week for core replacements, which is expected to continue.

The organization is currently at 70% hosted environment and is continuing to migrate to the public cloud, which will lead to margin savings. The company is also investing in cyber and security to fortify its infrastructure and that of its clients. However, some of the costs are out of the organization's control, which may create a headwind in the near-term.

David Foss and Gregory Adelson discussed Jack Henry's potential role in the business-to-business payments market. They highlighted the Payrailz acquisition as one of the reasons for their interest in this market and emphasized that their strategy is to work through customers, rather than compete with them. They are close to releasing key assets that will be part of their strategy.

Jack Henry & Associates offers a cloud-based service that is cost-neutral for financial institutions, but with higher revenues for Jack Henry. The service allows FIs to focus on their core value of engaging with customers, while Jack Henry takes care of the infrastructure, security, and staffing. This results in minimal infrastructure and people costs and healthy margins for Jack Henry.

Mimi Carsley explains that the Voluntary Early Incentive Program (VEIP) is only available to a small percentage of their 7,000 employees, and will not have a significant effect on their headcount. They will still invest in their people and hiring where needed in the business, but there will not be huge growth numbers in the next year.

Jack Henry associates are thanked for their efforts in achieving the company's quarterly results. Vance Sherard announced multiple investor events in September and noted that headcount has increased by 3% in FY '23, with a 2% growth excluding Payrailz. Dave and Mimi Carsley discussed the process of zero-basing roles to determine their value for the future and create opportunities for growth. A replay of the call is available with the access code 7033565.

This summary was generated with AI and may contain some inaccuracies.