The operator introduces the Jack Henry Second Quarter 2024 Earnings Conference Call and turns the call over to Vance Sherard, Vice President of Investor Relations. Sherard introduces the speakers, including Board Chair and CEO David Foss, President and COO Greg Adelson, and CFO and Treasurer Mimi Carsley. The call will include forward-looking statements and discussion of non-GAAP financial measures. The speakers will provide updates on the company's business, industry outlook, operations, technology modernization strategy, financial results, and guidance. The call will conclude with a Q&A session.

In the second quarter of fiscal 2024, the company saw an 8% increase in total revenue on both GAAP and non-GAAP basis, with operating income increasing by 11% and 14% respectively. The core, payments, and complementary solutions segments all performed well, with notable wins in sales bookings and new contracts for digital solutions. The company also saw success in signing new card processing clients and surpassing 11 million registered users on their Banno platform.

Despite a strong sales quarter in Q2, the company's sales pipeline remains on par with Q1, indicating a positive outlook for the rest of the year. A recent study by Cornerstone Advisors shows that a majority of banks and credit unions plan to increase their technology spending in 2024. Jack Henry has also received multiple workplace awards and was recognized as one of America's most responsible companies for their sustainability efforts. The CEO will retire on June 30 and the current President, Greg Adelson, will take over as CEO on July 1. This transition has been carefully planned and the company is fortunate to have someone like Greg ready to step into the role.

The current CEO expresses gratitude for his time leading the company and announces his transition to the role of Executive Board Chair. He praises the incoming CEO and highlights the company's growth under his leadership. The incoming CEO thanks the current CEO for his mentorship and promises to continue prioritizing employees, clients, and shareholders.

The next CEO of Jack Henry will continue the company's strategic priorities, including enhancing their culture, advancing customer service, driving technology innovation, and evaluating strategic acquisitions. The company's philosophy of prioritizing happy associates, happy clients, and happy shareholders will remain a focus. The current CEO and incoming CEO will work closely to ensure a smooth transition, and the company's strong sales performance and increased demand for core conversions are mentioned. An update on the company's technology modernization strategy will also be provided.

Jack Henry's cloud-native API-first strategy is focused on rebuilding traditional core and noncore functions into a flexible portfolio of services and solutions. This will allow clients to access all they need to run their financial institution in a single platform with the benefits of the cloud. The strategy has created more pipeline activity and has the potential for shared services with outside partners and competitors. This will lead to reduced development costs and a better overall experience for community and regional financial institutions. The company is committed to execution and provides clients with a six-month roadmap visibility.

Jack Henry regularly updates road maps for all products, including their technology modernization strategy, which are published twice a year for clients to view. They hold their teams accountable for executing these road maps. Recently, they have launched cloud-native solutions such as PayCenter, Banno Business, and Financial Crimes Defender. They also have a large number of clients using their real-time payments network and FedNow. They have also announced general availability for Banno Business and have clients using Financial Crimes Defender. They have a new open banking solution that provides secure API access to financial data aggregators and has received a lot of interest. They are also building key functions on the Jack Henry platform, such as incoming and outgoing wires, which are currently in beta or planned for beta testing in 2024.

Jack Henry plans to make their domestic wire solution available in the coming months and move into beta with international wires by the end of the fiscal year. They are also developing a general ledger component and data broker solution, both currently in beta, to provide clients with easy access to their data and advanced fraud detection. Their pricing strategy involves bundling key components and incorporating industry-accepted pricing models. They also plan to offer additional solutions outside of their core base by the end of 2024.

The company remains on track to sell Banno Business, Financial Crimes Defender, and other solutions in the upcoming fiscal year. They are targeting competing cores with a need for digital fraud and payment solutions. The CEO is passionate about executing their strategic priorities and leading the team. The CFO reports a strong second quarter and year-to-date results, with 8% growth in both GAAP and non-GAAP revenue. Deconversion revenue was down due to minimal financial institution consolidation. Payroll's results are now included in both figures. Cap services and support revenue increased by 7%, while non-GAAP increased by 8%.

The first half of the year saw an increase in revenue for both GAAP and non-GAAP basis, with services and support growing due to cloud offerings. Processing revenue also showed positive growth. Expenses, including cost of revenue, R&D, and SG&A, also increased, but with active cost control measures in place. The quarter delivered a 111 basis point margin expansion for non-GAAP at 21.3%.

The company's non-GAAP margin improved due to operational performance and a shift in merit increases. GAAP earnings per share increased by 14%. The core segment had a revenue increase of 8% and the payments segment had a revenue increase of 6%. The complementary segment had a revenue increase of 9%. Year-to-date, operating cash flow was $239 million and free cash flow was $129 million.

The company's free cash flow increased by $37 million, excluding asset sale impacts and the timing of tax payments. The return on invested capital for the past 12 months was 20%, and the company also returned capital to shareholders through share repurchases, debt reduction, and dividends. The company is reiterating its full-year deconversion revenue guidance and tightening its revenue growth outlook. The non-GAAP margin expansion is expected to increase by 35-40 basis points, and the full-year tax rate is approximately 23.5%.

The company has revised their full year guidance for GAAP EPS upwards and is comfortable with the current level of consensus for revenue growth, operating margin, and GAAP EPS. They reiterate their full year guidance for 60% free cash flow conversion and are hopeful for a positive outcome from recent legislation that could have a material beneficial impact on free cash flow in fiscal 2024 and beyond. The strong Q2 results reflect consistent performance and the company is positive about their ability to deliver innovative solutions, the resilience of their clients, and their focus on execution and shareholder value creation. The company thanks their hardworking associates and investors for their continued confidence.

Mimi Carsley discusses historical levels and headwinds for the company, stating that they expect to revert back to their norm range of 80% to 100%. John Davis asks about second half margins and Carsley explains that they manage the business on a full year basis and the timing and seasonality can impact margins. Dave and Greg are congratulated on their new roles and Dave mentions the favorable competitive environment and success in sales and pipeline, but does not specify any particular products or market segments.

David Foss, CEO of Jack Henry, explains that the company's core solutions continue to be a strong driver for their success, with 14 wins in the quarter, four of which were with multibillion-dollar banks. He also mentions other best-of-breed solutions, such as Banno and Financial Crimes Defender, which have been recently developed and are in high demand. Foss emphasizes that all of these solutions were written by Jack Henry in the last two to five years, showing their commitment to modern and innovative technology.

Jack Henry has invested a lot in developing innovative solutions centered around digital and the public cloud, which are in high demand. This trend is expected to continue, and the company is well positioned as a key technology provider in its space. In terms of the Payment segment, the recurring nature of processing related revenue is expected to drive strong growth, while temporary factors like lower card production may impact non-processing related revenue. In the medium-term, the company sees potential for generative AI to not only increase revenue but also improve software engineer productivity and automate call centers.

Jack Henry has been using traditional AI for a long time, but they are also exploring opportunities with generative AI. They are being careful with their IP when using generative AI for code writing. They have rolled out a generative AI offering for their customers and are also using it to automate processes within the company. They are working with partners to test models and have strong governance in place.

The company is seeing opportunities in multiple areas, including the contact center and AI assist modules. They are evaluating these opportunities carefully to ensure they are successful. The composition of the pipeline has not significantly changed, but the size of institutions in the pipeline has increased. The company's success is driven by their new technology offerings.

The company has recently released several new technologies, including an AI-powered fraud solution, which has been driving sales and strengthening their pipeline. This puts them ahead of their competitors, who have not released any major innovations in the last few years. The competitive landscape in the core market has not changed much, with traditional players still dominating and few upstarts appearing in RFPs. The company maintains their free cash flow guidance, but Q3 may be subdued with a stronger Q4 due to seasonality.

David Togut of Evercore ISI asked about the progress of Jack Henry's card migration platform, which was initiated by CEO Dave eight years ago. Dave and Greg both agreed that it has been a successful initiative, delivering cost savings and creating sales opportunities for the company. However, they also noted that the credit card side of the business is not expected to reach the same level as the debit card side.

The company was focused on providing credit card processing services to customers who wanted to process both debit and credit with the same provider. They have seen growth in this area, but it is not as significant as their debit processing services. They have also implemented a media program to reduce costs, which had a significant impact on their gross margin in the quarter. This was not a short-term plan for cost savings.

The company had a talent-focused plan to ensure future success and most roles have been filled with rising talent. Banno had an outstanding quarter with a significant number of new wins, including surpassing 11 million customers. The regular Banno platform also saw an increase in wins, likely due to customers waiting for the Banno business platform.

Greg Adelson clarifies that Banno business is now available in the market, and some customers were waiting to purchase both Banno business and regular Banno at the same time. He also clarifies that Banno Retail is a prerequisite for Banno business. When asked about the revenue opportunity for Banno business compared to Banno retail, he does not believe it is a 2x opportunity. Mimi Carsley explains that the slight adjustment in the revenue guide was based on their confidence in meeting the midpoint of the guide, rather than any specific factors.

The speaker discusses the company's plans for growth in the second half of the year, particularly in the area of processing and payments. They are confident in their ability to deliver, but it is too early to say if it will be higher than expected. The next question is about the number of core deals anticipated for the year, and the speaker explains that there are typically around 100 deals per year. The speaker also mentions the strong sales pipeline and the predictability of core conversions.

The speaker discusses the revenue potential of the company's technology initiatives and compares it to the revenue generated from their private cloud transition over the past decade. They also mention factors that contribute to their confidence in exceeding their original free cash flow guidance.

The transition to the new tech modernization is different from the private cloud transition, as it is not a complete replacement of the current system. However, it presents an opportunity for growth by providing new components and services, such as Data Broker, which have not been offered before. While the exact timing and revenue impact is uncertain, larger institutions are showing interest in this new technology.

The company is seeing growth opportunities in its core offerings, but there are also other revenue opportunities that require a different approach. The digital revenue has grown by 28.5% in the first half of the year, but the exact contribution to services and support revenue is not available at the moment. The company's win rates for core deals have remained consistent, with no notable changes.

David Foss, CEO of Jack Henry, discusses the company's challenge of maintaining their leading rate in the industry and how this will positively impact their revenue growth. He also addresses the slow acceptance of public cloud by financial institutions, citing regulatory concerns as a major factor. However, their Jack Henry platform strategy allows for a modularized approach, allowing institutions to ease into the public cloud environment. Several of their noncore solutions are already fully in the public cloud.

The company's strategy of allowing people to walk before they run is appealing to many potential clients and is expected to help with the implementation process. The company regularly evaluates their resources to see if they can accelerate implementations. The timing of sales also affects implementation. The company is in good shape with their current implementation resources. There has been a pull down of private valuations in the M&A market.

The speaker, David Foss, is asked about potential mergers and acquisitions in the market and responds that while there are companies they are interested in, there are currently no deals on the table. The next question is about the company's EPS guide, and the speaker, Mimi Carsley, explains that there is about a $0.05 difference due to operational and tax factors. The question then shifts to January payments volumes, and Carsley responds that overall, the company's volumes have been similar to Visa and Mastercard, but there may have been some impact from weather.

Dominick Gabriele of Oppenheimer asks about the new management team at Jack Henry and Associates and what gives investors confidence in their ability to continue executing consistently. Greg Adelson, who has worked closely with Dave Foss for 13 years, explains that the team's collaborative culture and alignment in philosophy will remain consistent. He also mentions that his background and experience will bring some new opportunities, but overall, there will be a lot of continuity under his leadership. Dave Foss adds a lighthearted comment about Greg's snappy dressing.

Dominick Gabriele asks about the changes in guidance for non-GAAP and GAAP revenue, and Mimi Carsley explains that there should be a similar pattern between the two. He also asks about the company's business investment strategy and expense allocation, and Carsley mentions that the successful Connect conference has positively impacted profitability and lowered expenses for the quarter and full year.

The paragraph discusses two decisions made by the company, one being a change in timing for merit increases for employees and the other being investments in future projects and products. The company also mentions their focus on cost control, which has contributed to margin expansion. The implementation of Banno business is dependent on the client and typically takes less than 60 days.

The speaker discusses the growth opportunities for Banno Retail and mentions that they have won some deals from other digital banking providers. They also mention that there are no true greenfield opportunities and that they are displacing something every time. The speaker thanks the Jack Henry associates for their efforts and provides the replay number for the call.

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