The Jack Henry Third Quarter 2024 Earnings Conference Call began with an introduction from the operator, followed by remarks from Vice President of Investor Relations Vance Sherard. CEO David Foss, President and COO Greg Adelson, and CFO Mimi Carsley also provided updates on the company's business, industry, and financial results. The call included forward-looking statements and the company's 10-K should be referenced for more information.

The speaker begins by acknowledging the recent passing of a board member and expresses condolences to their family. They then transition to discussing the company's quarterly results, thanking their associates for their hard work. The total revenue increased by 6% and operating income increased by 3%. The core segment saw a 7% increase in revenue, while the payments segment had a 5% increase. The complementary solutions businesses also had a solid quarter with a 5% increase in revenue.

The company had a successful third quarter with record sales bookings, including deals with large institutions and for their new Financial Crimes Defender solution. They also saw success with their card processing and Banno digital banking platform. The company remains optimistic about the industry and their prospects for success. The Annual Strategy Benchmark survey showed that 80% of bank and credit union CEOs plan to increase technology spending in the next two years.

In the next two years, the largest segment of investors (35%) plans to increase investments between 6% and 10%, with a focus on fraud detection, digital banking, data analytics, and automation. Jack Henry has been investing in and implementing innovative solutions in these areas, including the recently launched cloud-native AI-powered Financial Crimes Defender fraud detection platform. The company also has a strong presence in the digital banking market, with over 11.6 million registered users and a new Banno business solution for small and medium-sized businesses. In terms of data analytics, Jack Henry is making progress on its data broker and executive dashboard solutions, and is also developing a new online deposit and loan account opening solution as part of its automation technology platform.

Jack Henry is planning to launch an integrated digital account opening solution in early 2025. This solution will streamline processes and automate workflows for both retail and commercial loan clients. According to a survey, 96% of clients plan to add payment services in the next two years. Jack Henry currently offers a range of payment solutions, including Zelle, RTP, and FedNow. The survey and the Annual Strategic Initiative Symposium showed a general feeling of optimism among financial institutions, with less concern about an economic slowdown. At the Symposium, Jack Henry discussed their approach to incorporating artificial intelligence (AI) into their solutions, with a focus on data privacy and security. They plan to use AI to enhance client solutions and optimize internal processes.

About 18 months ago, Jack Henry rebranded to retire the Symitar, ProfitStars, and Jack Henry banking brands and now goes by a single brand name. This has resulted in a 9-point increase in brand equity, particularly with larger financial institutions and millennials. The company has also published a corporate sustainability report showcasing their initiatives and accomplishments in supporting local communities and promoting diversity and inclusion. They have also received recognition as a Best Place to Work from various organizations.

Jack Henry announced the promotion of Shannon McLaughlin to Chief Operating Officer, effective July 1st. McLaughlin has been with the company for nine years and has extensive experience in the banking and credit union industry. The current CEO, Dave, has been praised for his leadership and mentorship and will be succeeded by Greg on July 1st. The company has seen strong revenue and earnings growth in the third quarter and year-to-date, with a focus on serving their clients and delivering shareholder value. Deconversion revenue was down due to minimal consolidation of their clients, but year-to-date growth remains strong.

In this paragraph, the details of the company's revenue and expenses are discussed. GAAP services and support revenue increased 4%, while non-GAAP increased 6%. The growth was driven by increases in data processing and hosting revenues, particularly in the private and public cloud offerings. Processing revenue, which makes up 43% of total revenue, also saw positive performance with 8% growth. Total recurring revenue exceeded 91%. On the expense side, cost of revenue increased 7%, R&D increased 4%, and SG&A increased 7% for the quarter. For the year-to-date, expenses increased across the board, with SG&A seeing a 23% increase on a GAAP basis.

The primary differences between GAAP and non-GAAP results for the quarter are related to one-time costs and gains. Non-GAAP margins increased by 30 basis points due to process improvements and cost control. All three operating segments showed positive performance, with the core segment seeing the highest increase in revenue and margin. The payments and complementary segments also saw growth in revenue and margin, driven by trends in private cloud and digital solutions. However, there were some headwinds in the form of direct support costs and license and fees. Overall, non-GAAP revenue and margins increased for all three segments year-to-date.

The company's operating cash flow has increased significantly compared to the previous year, and they have been able to reduce their cash tax payments through legislative clarity and internal efforts. They have also maintained a strong dedication to creating value for shareholders, with a high return on invested capital and notable metrics for the year-to-date period. The company has updated their fiscal year guidance, including a revised approach for deconversion revenue and a potential bias towards the lower end of their revenue growth range. They also expect an increase in non-GAAP margin expansion due to positive operational results and cost management.

The full-year tax rate estimate remains unchanged at 23.5%, but the full-year guidance for GAAP EPS has been revised upward. The company expects a solid finish for the remainder of the fiscal year and is confident in its ability to deliver innovative solutions and create shareholder value. The current CEO, Dave, will be transitioning to Executive Board Chair on July 1st and is praised for his leadership and guidance.

The speaker reflects on their career at Jack Henry, expressing gratitude for the opportunity to lead the company and confidence in the team's ability to sustain success. They thank investors and clients, and express appreciation for the dedication of the company's associates. The speaker then opens the floor for questions and a question about backlog is asked. The speaker mentions that this was the best third quarter sales quarter for the company.

The sales pipeline at Jack Henry has been replenished to a record level, indicating a positive outlook for future sales. The company has had great sales success this year, but the revenue from these deals will not be seen until future quarters. All three operating segments are performing well and the company is confident in hitting its revenue range for the year. There is potential for Jack Henry to use AI internally, which could potentially lower costs.

The speaker, Gregory Adelson, discusses the implementation of AI in their organization and the upfront cost associated with it. They are prioritizing internal operational efficiency and have approved some utilizations for Microsoft copilot and GitHub codeveloper. Mimi Carsley adds that their approach is "responsibly bold and balanced" and they are using existing policies and processes to prioritize and develop business cases for the use of AI, which will still fall within their planned budget and R&D expenses. The next speaker, Andrew Schmidt, congratulates Dave on his transition and asks about the company's margins, to which Mimi responds that they have performed well and she provides more details on their margin performance.

The speaker discusses the factors that drove operational efficiencies and improved margins in the current year, including strong execution, product mix, and cost control. They also mention that they are still in the early stages of budget planning for the next year, but are focused on delivering shareholder value. Additionally, they mention that it is difficult to determine an average contract size due to the variety of solutions they offer, but attach rates have increased for their core clients.

The company's solutions range from small to large ticket prices and are mostly hosted. The average length of the contracts is difficult to determine, but the fact that Q3 was the best quarter ever is a good indicator of sales success. The company has used the same measurement approach for many years. The next question is about free cash and the factors driving its fluctuation. The company experienced periods of strength and weakness, but it is now back to over 70%. The fluctuation was due to uncertainty in legislation.

On the previous quarter's call, the company expressed optimism about Congress addressing the Section 174 R&D-related impact on cash taxes, but even without this, they have been able to discover savings from a cash tax perspective, resulting in a benefit last year and potentially this year. The biggest driver of this is the potential $29 million impact from last year alone. The company is hopeful that this legislation will be addressed, but even if it is not, they are in a better position than previously thought. The demand for core commercial use order remains strong, with deposit growth and operational efficiency being key drivers. The company is also seeing success in products focused on fraud and tech modernization.

The company has had success with their execution and will continue to discuss it in future calls. They are excited about their new products and believe they will contribute to the advancement of their technology. The demand for deposits, fraud opportunities, and operational efficiency has been strong. It is too early to provide specific targets for next year, but the company expects stable or accelerating revenue growth. The payment segment has performed slightly softer than expected, but the company is still experiencing high sales pipeline success. The growth algorithm is a good framework to consider for next year.

The speaker discusses slower growth in debit transactions this year and reiterates the full-year guidance. They also express confidence in the 7-8% growth algorithm. In response to a question about the competitive landscape, the speaker mentions the challenge of new Fintech players entering the market and trying to provide better user experiences, but they often struggle with regulatory and operational complexities. The speaker does not see this as a significant change from previous years.

The company is aware of potential threats in the banking industry and is actively monitoring them. They have been working on rolling out complementary solutions, such as business financial tenders, and will begin selling them in Q4 of this year. Planned implementations will take place in the second quarter of 2025, and the company is currently focused on working with one competitive course. Cooperation is necessary to successfully implement these solutions.

The company is working on making three new products available outside of their core customer base. This may take some time to have a significant impact, but the company has a history of successfully selling other solutions to non-Jack Henry core customers. The company clarifies that they have experience selling outside the base, but their current focus is on the new solutions.

The speaker is asking for an update on the company's success in the mid-market financial institutions sector. The company has had several multibillion-dollar signings in the past few quarters and has three more in the pipeline. The main drivers of success are the company's technology modernization strategy and its proven execution. The company expects to continue seeing opportunities in the $5 billion to $15 billion range. The next question is from Dave Koning of Baird, who congratulates Dave and asks about the lower than normal corporate revenue.

The speaker discusses the increase in corporate costs due to the annual merit increase and mentions that the revenue may have been impacted by hardware or the previous quarter's conference. They also mention a one-off situation where a customer was recruited away by a competitor but ultimately came back to Jack Henry due to a failed conversion. The speaker has not seen this type of situation before.

The speaker expresses gratitude to Dave for his hard work and asks for his thoughts on customer sentiment and the impact of increased regulatory scrutiny. Dave confirms that regulatory scrutiny is a frequent topic of conversation among customers, but it has not affected bookings. He also notes that technology is often the solution to challenges faced by banks and credit unions.

The speaker believes that technology is essential in today's world and can be used to help with various issues such as growing the franchise, mitigating risk, and dealing with fraud. They have not seen any decrease in spending on technology and there is an expected increase in tech spending for the coming year. The other speaker agrees and adds that technology is crucial for smaller banks to stay relevant. The implementation of technology is going well, but there may be a trade-off between margin expansion and allocating resources to speed up implementations.

The company regularly reviews its finances and business cases to determine if additional resources are needed to accelerate the implementation queue. They also look for ways to improve processes, such as using AI. The company is constantly evaluating both sides, but will add people if it makes sense to move the queue forward. Charles Nabhan thanked the company and wished the departing executive all the best.

The speaker, Gregory Adelson, is answering a question about the progress the company has made in the middle market and how it compares to larger banks in terms of product consumption and ARPU. He explains that the company has won six deals with multibillion-dollar banks this year, and there hasn't been a significant alternative to their solutions. He also mentions that their strategy for the future and execution in the present, specifically in Financial Crimes, Banno, and payments markets, have been driving opportunities. As they target larger banks, they may face competition from existing relationships and may not sell as many products to them.

The speaker discusses the dynamics of three larger opportunities for Jack Henry, as well as the potential for one-off and two-off opportunities from larger institutions outside of the Jack Henry base. They also mention having complementary and payment products in institutions as large as $200 billion. The speaker then addresses the topic of M&A and consolidation in the bank and credit union space, stating that they have added staff to handle these opportunities but regulatory challenges have caused delays in completing some acquisitions. It is unclear if this trend will continue.

The speaker is discussing challenges in the market and the impact on their company's revenue. They mention a decrease in convert merge revenue and a potential headwind for the year. They also mention the interest in M&A opportunities among their clients. When asked about capital allocation, they defer to another speaker who mentions the possibility of buying back stock and the focus on improving free cash flow.

The company is always looking for ways to accelerate growth, including investing in technology and paying down debt. They plan to pay off a term loan and shift some debt to the revolver. The Banno Business segment is off to a good start and the company plans to add it as an add-on for registered users, regardless of their business use. This creates opportunities for both retail and business customers.

The speaker discusses the success of Banno Business and the potential for its adoption by banks in the future. They believe that a 60-70% adoption rate among their current base would be a reasonable target, with potential for further expansion into larger institutions. They also mention the benefits of the product being applied to all active registered users of an institution, not just those allocated to a business application. They express confidence in the opportunities for growth on the credit union side and express gratitude for Dave's contributions to the company.

In this paragraph, Gregory Adelson discusses the various opportunities and initiatives that Banno Business has to capture the commercial banking market, specifically within small businesses. He mentions their treasury management solution, lending and account opening services, small business application in Bill Pay, and remote deposit capture services. Adelson also mentions their focus on building a cohesive SMB strategy. In response to a question about the status of their credit card processing initiative, outgoing CEO David Foss states that it is not a major consideration for banks of any size.

The decision to use a core processor is independent from the decision to use debit and credit services. Some competitors have falsely claimed that using a certain core processor guarantees winning the card business. Jack Henry has signed three new credit customers in the quarter, but it is not expected to be a significant part of their revenue. However, it is a necessary offering for customers who want both debit and credit services from the same processor.

The speaker, Ken Suchoski, asks a question about the company's non-GAAP revenue growth for the full year. The speaker, Mimi Carsley, confirms that it will be towards the lower end of the projected range due to slower card transactions, but this is not a concern for the future. Suchoski also asks about the slowdown in complementary revenue growth, to which Carsley responds that Banno and Crimes Defender are performing well and the slowdown is not significant.

The speaker discusses the growth of digital solutions and their strong demand. They also mention their upcoming Investor Day in September and congratulate the retiring CEO for his contributions to the company. The call concludes with the replay number for those who missed the presentation.

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