The paragraph is the opening segment of the Jack Henry & Associates Third Quarter Fiscal Year 2025 Earnings Call. The operator introduces the call and hands it over to Vance Sherard, the Vice President, who thanks participants and introduces CEO Greg Adelson and CFO Mimi Carsley. Greg will provide insights on financial and operational results and outlook, while Mimi will discuss financial details from the recent press release. The call will conclude with a Q&A session. They mention that forward-looking statements will be discussed, accompanied by non-GAAP financial measures, with reconciliations available in the press release. Greg Adelson then thanks the company's associates for their hard work and dedication.

The paragraph discusses a company's quarterly performance and future guidance. They highlight a solid financial performance in the third quarter of fiscal year 2025, with a 7% increase in non-GAAP revenue and a 23% non-GAAP operating margin, showing significant improvement from the previous year. The company's GAAP revenue is seeing growth, partly due to increased M&A activity and deconversion revenue. They expect deconversion revenue to continue rising in the fourth quarter. Moreover, the company has adjusted its fiscal 2025 guidance, with revised expectations for GAAP and non-GAAP revenue, margin expansion, and EPS due to macroeconomic concerns. The core revenue, primarily from processing and cloud, grew by 9.8%. However, nonstrategic revenues like hardware purchases and consulting are softening, with delays in some customer projects and a decrease in debit card transactions.

The company has adjusted its revenue guidance downwards but increased its GAAP and non-GAAP guidance for margin expansion and EPS growth, driven by key revenue growth and effective expense management. They are excelling in securing larger competitive core deals, with significant growth in aggregate assets over the past two years. This fiscal year, they have secured 28 new core wins totaling $30 billion in assets, and anticipate more significant wins in Q4. Additionally, there is a notable increase in migrating existing clients to their private cloud, with a 55% increase in assets compared to last year. Currently, 76% of their clients use Jack Henry's private cloud. Their strategies align with the American Bankers Association's recent core platform survey results.

The report titled "All Core Platform Providers Are Not The Same" highlights Jack Henry's strong performance, particularly in innovation and customer service. The company has experienced significant growth in its payments segment, increasing the number of financial institutions using Zelle, The Clearing House's RTP network, and FedNow. Additionally, Jack Henry has made progress in its complementary segment with contracts for the Financial Crimes Defender and Faster Payment Fraud Module. The Banno Digital Platform also shows robust growth, with an increase in clients and registered users over the past year.

The paragraph discusses Jack Henry's progress in technology modernization, highlighting the development of their public cloud-native platform and enterprise deposit and loan account opening solution. They are ahead of schedule with the platform, with 15 components already live, and plan to launch a deposit-only core by early 2026. The new account opening solution aims to streamline processes for banks and credit unions and is currently in closed beta with two clients. Additionally, their medium-sized business strategy includes Jack Henry Rapid Transfers, a service in closed beta with three clients, which allows instant fund transfers and is being expanded to all Banno customers in collaboration with Visa and MasterCard.

The paragraph discusses a merchant acquiring solution developed in partnership with Moov, offering features like instant decision-making, tap-to-pay, multiple daily fund settlements, and continuous account reconciliation. A closed beta with two clients is set for June, and more phases for the SMB strategy are underway, aiming for new functionalities over the next 18 to 24 months for both Jack Henry and non-Jack Henry institutions. The seventh annual 2025 Strategy Benchmark Survey revealed that 76% of bank and credit union clients plan to boost tech spending in the next two years, focusing on digital banking, fraud prevention, and automation efficiency. Despite market volatility, these investment plans remain relevant, though banks are concerned about tariff impacts on SMBs, as discussed at a recent event.

The paragraph discusses Jack Henry's optimistic outlook, highlighting expected regulatory relief and increased M&A activity as positive factors for future revenue opportunities. The company is confident in its strategy involving culture, service, innovation, and execution to drive growth and maintain a strong sales pipeline, particularly with larger financial institutions. The focus remains on strategic acquisitions, disciplined expense management, and product rationalization. Mimi Carsley then reviews the financials, noting that despite modest deviations from expectations, the quarter saw solid revenue and earnings growth. Q3 GAAP revenue increased by 9%, driven by deconversion revenue, while non-GAAP revenue grew by 7%, impacted by lower growth in nonkey revenue and a slowdown in hardware sales. Excluding the hardware impact, non-GAAP revenue growth would have been 8%.

The paragraph discusses the company's financial results and updates on revenue guidance. Quarterly deconversion revenue rose to approximately $9.6 million, up $8.8 million from last year, due to increased industry consolidation. Consequently, the company updated its full-year deconversion guidance to $22 million to $28 million. Financial institution M&A activity is expected to minimally impact fiscal '25 but could significantly impact fiscal '26. GAAP and non-GAAP services and support revenue grew 8% and 6%, respectively, driven by data processing and hosting. However, hardware revenue declined, posing challenges. The private and public cloud offerings grew by 11% this quarter and remain a robust growth area, accounting for 33% of total revenue. Complementary revenue, which represents 43% of quarterly revenue, grew by 9%, driven by card, digital, and payment processing. Total recurring revenue, excluding deconversion revenue, was 92%, emphasizing the focus on strategic recurring revenues.

The paragraph discusses Jack Henry's revenue and expenses, noting that key revenue grew by 10% in the quarter and 9% year-to-date, while nonkey revenue contracted by 2%, indicating some economic challenges. Despite this, the company's high recurring revenue and long-term contracts contribute to its business resilience. The cost of revenue increased by 4% on a GAAP basis due to higher direct costs and internal licenses, but was partly offset by increased labor cost deferrals. R&D expenses rose by 9%, mainly due to net personnel costs, and SG&A expenses increased by 7% on a GAAP basis, also related to personnel costs. Jack Henry aims for cost efficiency and workforce utilization to drive annual margin expansion and reported a 207 basis point increase in non-GAAP margins to 23%. The company remains confident in its ability to continue expanding margins and has raised its full-year guidance.

The paragraph reports solid quarterly financial results, highlighted by a 28% increase in fully diluted GAAP earnings per share to $1.52. The core operating segment experienced a 6% rise in non-GAAP revenue and an 11% growth on a key basis, driven by organic growth in data processing and hosting. The payments segment's non-GAAP revenue grew 7%, with improved margins due to higher card revenue and increased payment processing, including FedNow, RTP, and Zelle. The complementary segment saw a 10% non-GAAP revenue increase, with strong margins boosted by digital and hosting revenues. Overall, operating cash flow for the third quarter was $108 million, up $10 million from the previous year, reflecting higher operational profitability and increased deconversion revenue, despite higher tax payments.

The summary of the paragraph is as follows:

Jack Henry's trailing 12-month free cash flow was $303 million with a 71% conversion rate, aligning with annual guidance. The return on invested capital improved to 20%, and the company repurchased $18 million worth of shares. For fiscal year 2025, a press release outlined adjusted GAAP guidance, though the non-GAAP EPS metric is not a new guidance measure. Given the uncertain economic environment, the company is taking a cautious approach for the rest of the fiscal year. Updated guidance includes higher deconversion revenue, slightly reduced non-GAAP revenue growth projections, increased margin expansion, a reduced tax rate, improved GAAP EPS, and stable free cash flow conversion. The full year return on invested capital is projected at 21% to 22%, with lower debt expected by year-end, emphasizing the importance of full-year results as the primary performance indicator.

The article concludes by addressing concerns about large capital purchases for hardware being down, while highlighting strong performance in key business areas and a focus on long-term profitable growth. During a Q&A session, Dan Perlin from RBC asks about potential delays in modernized projects and cloud migration. Greg Adelson responds, stating that most restraints are nonrecurring, with some delays occurring in complementary and payment products, typically related to version upgrades or transitions. He notes that there are no significant delays in clients moving from in-house systems to outsourced solutions.

The paragraph discusses the dynamics affecting hardware sales and mergers within the company. Customers are delaying hardware purchases either to time their purchases better or because they're considering moving to the company's private cloud, leading to postponed hardware investments. Dan Perlin asks about the impact of mergers and acquisitions on non-GAAP revenue growth for 2026. Mimi Carsley responds by saying that while M&A impacts this year are minimal, merger activities are accelerating, particularly Jack-Henry-to-Jack-Henry cloud customer mergers. This retention of revenue is positive, although there may be slight pricing impacts. The company is informed early when a Jack Henry client conducts an acquisition, allowing them to secure their position in the merger cycle.

The paragraph discusses the impact of client acquisitions on Jack Henry's revenue and services, particularly in the context of client migrations to new platforms. For Jack Henry, these impacts are expected to be seen later in the cycle and are anticipated to manifest more significantly in the long term, rather than in FY '25. This is because the changes related to acquisitions and convert-merge services typically occur post-approval and continue over the contract's life. The paragraph also briefly addresses project delays experienced in the third quarter, suggesting these delays are pushing some projects into the following year, but emphasizing that these are already contracted projects, meaning clients are not withdrawing but merely postponing.

The paragraph discusses Jack Henry's cost management strategies and margin expansion. Rayna Kumar notes the strong margin growth, and Mimi Carsley explains that cost management is fundamental for the company, referencing a slight decrease in R&D spending due to last year's Payrailz acquisition. Carsley feels confident in achieving a margin expansion of 25% to 40% annually, seeing it as a baseline with potential for more. Greg Adelson highlights the company's diligent headcount management and training of new leaders to continue this focus. The paragraph also mentions that infrastructure and other spending needs can fluctuate annually.

The paragraph discusses the financial outlook and factors affecting revenue guidance for the fourth quarter, focusing on hardware and contract delays. Mimi Carsley explains that the company is taking a conservative approach due to economic uncertainties and trends noticed in the third quarter. Hardware revenue is expected to decline, partly because customers are delaying large capital purchases, which may eventually push them towards cloud solutions, benefiting Jack Henry as most clients are already using its private cloud. The hardware revenue shortfall is estimated to be $11 million for the year, affecting mainly the corporate segment. Additionally, customers are cautiously delaying nonrecurring projects and consulting work.

The paragraph discusses the timing and nature of contractual commitments, noting that while implementation usually occurs between 18 to 36 months, the schedule has not significantly changed. The impact on payments began to be noticeable in April, influenced by consumer spending behaviors and preferences between debit and credit cards. The discussion highlights cautiousness in financial outlooks, given the current economic environment, where consumers historically prefer credit over debit in tough times. Despite a robust forecast for the fourth quarter, the expectation is adjusted more conservatively, acknowledging the trends in April and early May. Greg and Vasu acknowledge the importance of this guidance to help navigate the situation.

In a discussion about competitive positioning following FIS's acquisition of the issuer business from Global Payments, Greg Adelson expresses confidence in their own company's positioning. He highlights that their unique selling point is processing both debit and credit on a single platform, unlike their competitor. Despite this acquisition, he does not foresee significant challenges from this particular competitor and remains optimistic about their market stance and upcoming opportunities, particularly in Q4, with a focus on core opportunities and add-on products. In a subsequent question from Jason Kupferberg of Bank of America, there is an inquiry about potential revenue dynamics in fiscal '26, considering both deconversion revenue headwinds and potential tailwinds from delays in post-core add-ons. There's a query about the net impact of these factors on future revenue growth within a medium-term 7% to 8% outlook, questioning any associated risks.

Mimi Carsley discusses the current state of budgeting and revenue expectations at Jack Henry. While the FY '26 budget isn't finalized due to ongoing processes, she notes a robust sales pipeline with no elongation in the sales cycle. Account wins, including large financial institutions, indicate stable trends. The implementation calendar may shift but is tightly managed, with potential for adding a team if needed. Looking ahead, Carsley hints at an expanded revenue guide to be detailed in August. Jason Kupferberg questions revenue from cloud and processing activities, which have grown to represent 76% of total revenue, showing accelerated growth. Carsley agrees with sustaining growth around the 10% mark, indicating comfort with the forecast.

The paragraph discusses the long-term strategic growth of a business, focusing on areas like digital products and cloud migration, which are expected to continue positively. The company faces challenges from a non-key business segment that has compressed by about 2%. The discussion then shifts to a question from Darrin Peller of Wolfe Research regarding the impact of market consolidation on growth, particularly through mergers and acquisitions (M&A). Greg Adelson responds, noting that the size of the institutions involved is significant, with recent deals averaging over $1 billion in assets per transaction. Despite challenges, the company has sold a number of multibillion-dollar assets, suggesting that M&A activities could offer positive opportunities even amid potential risks.

The paragraph discusses how the company, Jack Henry, benefits when its clients are involved in acquisitions, particularly when larger institutions are the acquirers. When a Jack Henry client acquires another Jack Henry client, they usually retain the client and often purchase additional products. In contrast, if a competitor buys a Jack Henry client, the company usually receives full conversion and deconversion fees. The company's strategy to move upmarket presents opportunities but also challenges, such as potential revenue loss when losing clients, despite deconversion revenue being beneficial for cash flow and earnings per share. The company acknowledges the complexities of maintaining client relationships during mergers and acquisitions.

The paragraph discusses the current and future demand environment for Jack Henry's core business and associated products. Greg Adelson explains that the sales pipeline remains robust for both core offerings and innovative products like Financial Crimes, PayCenter, and enterprise account origination, which are experiencing demand growth. He distinguishes between key revenue products that are essential and consistently needed versus nonkey revenue items that are irregular and less critical, leading to delays. Mimi Carsley references a Strategic Benchmark Survey highlighting banks' and credit unions' top priorities, which include gathering deposits, accounts, and improving efficiency. Longer-term demand trends focus on digital transformation, fraud prevention, and payment solutions.

In this paragraph, Kartik Mehta from Northcoast Research asks Greg Adelson about the impact of delays on financial institutions' core decisions and whether these delays are affecting business as usual. Greg Adelson responds that the delays are predominantly affecting smaller, non-essential product or hardware purchases, often due to evaluations related to moving to the private cloud. However, major core deals, which usually take 12 to 18 months to finalize, remain on track. He expresses optimism about success rates for the next quarter. Additionally, Kartik inquires about the SMB product and the partnership with Moov. Greg Adelson mentions that their product, Jack Henry Rapid Transfers, is in a closed beta phase with three clients, and they are now accepting active enrollments.

The paragraph discusses the progress and interest in Jack Henry's Rapid Transfers and merchant acquiring services. An operational process is underway, with client and partner interest growing, including from non-Jack Henry clients. A closed beta with the partnership with Moov is expected in June, with a wider rollout planned by the end of 2026's first fiscal quarter. The interest level is significant, and they are on track for the planned launch. The conversation then shifts to Andrew Schmidt from Citi, who inquires about demand and any changes in the decision-making process of financial institutions (FIs) in the mid- to upper sales funnel. Greg Adelson acknowledges the question and notes the importance of asset size.

The paragraph discusses the company's sales cycle, emphasizing that there has been no significant slowdown in decision-making for installations scheduled 6 to 24 months out. While short-term projects have experienced some delays, the sales leaders have not reported concerns about prolonged decision-making. The company has contractual agreements allowing them to start billing customers after a certain time, even if implementations are delayed. Despite potential headwinds, discretionary projects haven't been significantly impacted, and the company doesn't anticipate cancellations since these projects are necessary for customers.

In the paragraph, the discussion focuses on delays in customers transitioning from using the Yellow Hammer product to Financial Crimes, along with related consulting needs. There are also minor delays in adopting PayCenter products and payment initiatives, specifically in transitioning to send capabilities. Mimi Carsley adds a macro perspective, emphasizing that challenges faced by financial institutions will be solved through technology rather than increasing manpower, regardless of economic conditions or interest rate environments. She highlights the importance of demonstrating a compelling return on investment (ROI) to ensure continued demand. Andrew Bauch from Wells Fargo then questions how the business might operate through an economic recession, wondering if the current trends would intensify and if there would be changes in core pricing strategies.

The paragraph features a discussion between Mimi Carsley and Andrew Bauch about the impact of economic conditions on their company and the broader financial industry. Mimi explains that the company has limited exposure to tariff changes and is carefully monitoring vendor pricing and resource costs. The primary risk lies in the commercial side, such as their remit and enterprise payments businesses. Mimi emphasizes that this is not a global financial crisis, as banks are well-capitalized and learning from past lessons. There is no expectation of widespread bank closures. Instead, banks need to maintain efficiency, address fraud, and continue innovating to retain customers amid competitive pressures. Andrew then asks about consolidation activity, particularly regarding bank size and assets under management (AUM).

The paragraph discusses the ongoing trend of credit unions acquiring banks and its implications in the market. Greg Adelson notes that while this trend continues, Jack Henry has been well-positioned due to its strong focus on growth, technology, and innovation. The company has benefited from "winner mergers," where institutions acquired by competitors choose to switch to Jack Henry's products due to their superior offerings. Adelson emphasizes that unlike its competitors, Jack Henry has maintained consistent focus and dedication to this space over the past several years, which is reflected in positive customer feedback and a strong sales pipeline. Adelson also suggests reviewing the ABA core survey, indicating a significant difference in customer satisfaction between Jack Henry and its competitors.

In the paragraph, Greg Adelson responds to a question from James Faucette of Morgan Stanley about competitive pressures. Adelson acknowledges ongoing pricing sensitivity but states that their win rates remain strong and are the best in the industry, indicating success in acquiring larger deals. While competitors may aggressively try to retain customers, sometimes leading them to walk away from deals that aren't financially viable, there hasn't been a major strategic shift in the market. He notes that one competitor has a new CEO, and another is focusing more on their sector after divesting a business.

The paragraph is a discussion between James Faucette, Greg Adelson, and an operator about the performance and strategic direction of Banno Business, a product by Jack Henry. Greg Adelson highlights that over 270 clients are currently using Banno Business, with over 1,000 on the platform, and that they are working towards achieving feature parity expected by the summer. This advancement is seen as crucial for expanding their client base beyond Jack Henry's core customers. Adelson mentions a strategic and timed approach for marketing to competitors' core bases planned for later in the fall, and emphasizes its significance in their SMB strategy. Additionally, John Davis from Raymond James raises a query about core wins and ACV (Annual Contract Value), seeking more direction on it.

The paragraph is a discussion between Greg Adelson and John Davis about the correlation between asset size and Annual Contract Value (ACV) in financial deals. Greg explains that each deal has unique nuances, and the assets’ size doesn't necessarily correlate directly to revenue proportionality due to factors like timing, product offerings, and customer focus (retail vs. commercial). John suggests that asset size might be more important than the number of deals. Additionally, Mimi is asked about the margin implications of nonstrategic revenue runoff, questioning whether it impacts margins positively or negatively throughout the quarter and year.

In the article paragraph, Mimi Carsley discusses the nature of non-core and non-strategic revenue, noting it generally has lower margins due to components like hardware and less software-oriented consulting. John Davis inquires about the free cash flow projection for the fiscal fourth quarter, noting it would be below historical levels. Carsley responds by emphasizing the importance of evaluating free cash flow on an annual basis and mentions the company is on track to meet its guidance, with ongoing efforts to rebuild R&D expenditures and gain tax clarity. Despite prior year tax payment benefits and increased current capital expenditures, the company expects to stay on track with its full-year guidance. The session concludes with Vance Sherard thanking participants for their interest in the call.

The paragraph announces that management will attend investor events in the U.S. soon, offering more opportunities for in-person meetings. It also extends gratitude to Jack Henry associates for their hard work, contributing to strong results. The paragraph concludes with acknowledgment of the conference's end and an invitation for attendees to disconnect.

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