Q3 2022 Jack Henry & Associates Inc Earnings Call

May 4, 2022

Okay.

Welcome to the Jack Henry <unk> Associates third quarter fiscal year 2022 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw.

Yourself from the question queue Press Star then two.

I would now like to turn the conference over to Mr. Kevin Williams, Chief Financial Officer and Treasurer. Please go ahead. Thanks.

Thanks, Tom Good morning, and thank you for joining us for the Jack <unk> Associates third quarter fiscal 2022 earnings call.

Kevin Williams, CFO and treasurer and on the call with me today is David Foss Board Chair and CEO .

In just a minute I will turn the call over to Dave. So he can provide some of his thoughts about the state of our business financial and sales performance for the quarter. Some comments regarding the industry in general and some other key initiatives that we have in place then after Dave's concludes his comments I will provide some additional thoughts and comments regarding the press release, we put out yesterday after market close.

And also provide comments regarding our updated guidance for the remainder of our fiscal year 2022. We will then open the call open the lines up for Q&A.

First I need to remind you that this call includes certain forward looking statements, including remarks or responses to questions concerning future expectations events objectives strategies trends or results.

Like any statement about the future. These are subject to a number of factors that can cause actual results or events to differ materially from those which we anticipate due to a number of risks and uncertainties.

Company undertakes no obligation to update or revise these statements for a summary of these risk factors and additional information. Please refer to yesterday's press release and the sections in our 10-K entitled risk factors and forward looking statements.

Also on this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income the reconciliations for historical non-GAAP financial measures can be found in yesterday's press release with that I'll now turn the call over to Dave.

Thank you Kevin Good morning, everyone. We're very pleased to report another quarter of revenue and operating income growth and an overall solid performance by our business as always I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our third fiscal quarter for Q3 of fiscal 2022 total revenue increased 10.

10% for the quarter and increased 7% on a non-GAAP basis as projected on our last call deconversion fees were up more than $13 million over the prior year quarter.

Turning to the segments, we again had a good quarter in the core segment of our business revenue increased 12% for the quarter and increased by 7% on a non-GAAP basis.

Our payments segment performed very well posting a 10% increase in revenue this quarter and a 9% increase on a non-GAAP basis. We also had a strong quarter in our complementary solutions businesses with a 10% increase in revenue this quarter and a 7% increase on a non-GAAP basis.

As I mentioned in the press release, our core sales teams again had an extremely solid quarter and we continue to see core activity consistent with our pre pandemic run rate.

During the quarter, we inked 14 competitive core takeaways. So we continue with the approximately one deal per week run rate I have discussed on recent calls.

In addition to our success signing new core clients, we signed nine existing on Prem core customers to move to a private cloud environment in.

In addition to the tremendous success, we experienced in our core business. This quarter, we continued to sign new clients to our digital banking suite during the third quarter, we signed 38, new clients to our <unk> platform and we continue to see increased interest in this offering as well as the rest of our digital suite.

On our last quarterly call I mentioned that the sales team set an all time sales booking record in our fiscal Q2.

Although we didn't break that record in Q3, we did set a record for the strongest Q3 in history with sales bookings coming in almost 40% higher than the same quarter last year.

This extraordinary sales performance in a quarter that is normally lighter than others is reflective of the interest in our company and demand for Jack Henry Technology solutions in our market.

Regarding our banner digital suite as of March 31, we have just over $7 1 million users live on the <unk> platform. We continue to enjoy the highest consumer rating in the App store and we are regularly recognized as the fastest application in the industry.

As I've said before I expect our success in this area to grow as we continue to add new functionality and features to the platform.

On our last quarterly call I shared an announcement regarding our technology modernization strategy and how we believe it will help position our clients for greater success in the future.

As many of you know that announcement has been received very positively by many experts in our industry and our strategy has been highlighted in a wide variety of publications.

Several pieces are still in production, but so far we have been interviewed for close to 40 different articles podcast interviews and video podcasts for publications with a combined subscriber subscriber base of more than 53 million people.

Hopefully you've all seen the new corporate sustainability report that we published on March 31.

I think it's an excellent representation of the key initiatives and accomplishments we have been working on since we published our last report more than a year ago. In this new report we provided more detail on the demographic makeup of our workforce a summary of our employee engagement survey results more information about our data privacy and cybersecurity practices and a.

<unk> enhanced update on climate related risks.

This year's report also includes an appendix with detailed disclosures aligned with the sustainability accounting standards board or <unk>.

And the task force on climate related financial disclosure or Tc FD.

We continue to make great strides in the key areas of ESG and are committed to providing more detailed information about our progress overtime.

Although you regularly see Jack Henry recognized as the best place to work in various context around the country. We received two new designations last quarter, the recognize us as a company that isn't simply an outstanding employer.

Inc magazine recognized us as one of America's Best led companies and Newsweek recognized us as one of America's most responsible companies.

Both awards are great recognition for our ongoing commitment to do the right thing for all of our Jack Henry stakeholders.

As we announced a few months ago, Ted <unk> will be retiring at the end of June after 17 years with our company.

Ted ran the Scimitar division for many years, but shifted to become our Chief Technology Officer, a few years ago to help us define and finalize our technology modernization strategy.

Our monetization strategy benefited significantly from Ted's years' of experience speaking directly with our customers about their technology wants and needs I'd like to thank Ted for his many years of leadership and for helping us to drive consistent success for our customers and shareholders.

As you are also aware we've been working to find a new CFO . So Kevin can enjoy a much deserved retirement.

That process has been slower than I had hoped but we expect to name a new CFO in the near future.

Kevin has graciously agreed to stay with us until we're ready to make the transition. So we still have no formal departure date for him.

Today. However, we are announcing that Renee swearingen has been named senior Vice President and Chief Accounting Officer for Jack Henry Rene.

<unk> has been with the company for more than 25 years and is a key leader on our management team Youll.

You will see a press release with this announcement later today, but I want to take this opportunity to congratulate Rene and thank her for her partnership for these many years.

As we look forward to the end of our fiscal year. Our sales pipeline is very strong and we continue to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our customers our ability to expand our customer relationships, the spending environment and our long term prospects for success.

Look forward to seeing in chatting with many of you at our Investor Day in Dallas next Monday with that I'll turn it over to Kevin for some detail on the numbers. Thanks, Dave.

Our services Port revenue increased 11% in the third quarter of fiscal 2022 compared to the same quarter a year ago.

As Dave mentioned, our deconversion revenue was up $13 1 million for the quarter compared to last year's quarter.

License hardware and implementation revenue combined were essentially flat compared to the prior year and our data processing hosting fees in our private and public cloud offerings, which continue to show strong growth in the quarter compared to previous year growing by 11% for the quarter on a non-GAAP basis total support and services revenue grew 6% for.

The quarter compared to the prior year and just a reminder, that that non-GAAP essentially the only difference is backing out the deconversion revenue that was recognized in the quarter.

Our processing revenue increased 9% in the third quarter of fiscal 2022 compared to the same quarter last year on both a GAAP and non-GAAP basis. The increase was primarily driven by higher card volumes and digital revenue continues to show strong growth as demand for our banner digital platform continues to be very strong.

Total revenue was up 10% for the quarter compared to last year on a reported GAAP basis and increased 7% on a non-GAAP basis.

Cost of revenue was up 5% compared to last year's third quarter. The increase was primarily due to higher costs associated with customer maintenance and license cost card and transaction processing increased in line with the related revenue growth and also higher personnel cost compared to a year ago.

Research and development expense increased 12% for the third quarter fiscal 2022 compared to last year. The increase was primarily due to increased personnel costs. This year compared to last and SG&A expense increased 13% in the third quarter compared to the same quarter.

Last year again. This increase was due primarily to increased personnel costs and also increased travel related costs compared to the prior year.

Our reported consolidated operating margins increased from 21% last year to 23, 3% in the current year quarter for a 220 bps increase on a non-GAAP basis, our operating margins expanded from $20 three last year to 29. This year for 60 bps expansion the.

The effective tax rate for the third quarter fiscal 2022 increased to 23, 6% compared to 21, 5% in the same quarter a year ago, which is in line with the guidance we provided for the year.

Net income grew 19% to $84 7 million for the third fiscal quarter compared to $71 4 million last year with earnings per share of $1.16 for the current quarter compared to <unk> 95, since last year for 21 or 22% increase over the previous year quarter.

Okay.

Some comments on cash flow, our total amortization increased two 6% for the year to date compared to last year due to capitalized software projects being placed in service included in total amortization is amortization of intangibles related to acquisitions, which decreased to $12 $4 million. This year to date compared to 13.

<unk> 3 million last year's first three quarters of the fiscal year.

Depreciation actually decreased three 7% compared to the first nine months of the prior fiscal year.

Operating cash flow was $301 4 million for the year to date, which is up from two $266 3 million last year, which this is primarily due to increased net income during the first nine months compared to the previous year and the timing and change of various operating assets and liabilities considered in the calculation of operating cash flow.

We invested $145 1 million back into our company through Capex purchases and capitalized software our free cash flow, which is operating cash flow less capex and cap software and then adding back net proceeds from disposal of assets was $156 4 million for the first nine months of the fiscal year.

Also during the first nine months, we spent $193 9 million to purchase one 5 million shares for the treasury, none in the current quarter and we paid dividends of $103 4 million for a total return to shareholders of $297 3 million in the first nine months of fiscal 2022.

Couple of comments on our balance sheet as of June 30, our cash position was $39 8 million compared to $70 1 million a year ago, our revolver balance was $225 million compared to $200 million, a year ago, which the change in cash and our debt balances primarily related to the $4 1 million.

Shares we purchased in the last 24 months.

Our return on average assets for the trailing 12 months was 16% our return on average equity for the trailing 12 months was 27.2 and a return on invested capital for the trailing 12 months was 23, 4% all very solid returns.

Forget for updated guidance in the press release yesterday, we provided both GAAP and non-GAAP revenue guidance. We also provided a reconciliation of GAAP to non-GAAP revenue in the release following the segment information. However, just to be clear. This guidance continues to assume that the country continues to open and the economy continues to improve.

For GAAP revenue growth for fiscal two based on the amounts in the release yesterday, our revenue guidance continues to reflect a little higher than 10% growth over fiscal 'twenty, one, which we still anticipate deconversion revenue to be approximately $49 million to $50 million for the entire fiscal year.

And as we thought some some of the Q4 actually pulled into Q3. So we're not anticipating very much deconversion revenue in Q4 for non-GAAP revenue growth. We continue to guide to be just under 9% growth for the fiscal year.

We continue to anticipate GAAP and non-GAAP operating margins to improve a little in FY 'twenty two compared to last year.

But again I continue to be somewhat cautious on guiding too much of a non-GAAP operating margin expansion as we continue to have headwinds on license and hardware revenue as we continue to move more core customers from on premise to a private cloud.

Also our travel cost continued to increase significantly compared to the prior year.

However, we are still comfortable that full year non-GAAP operating margins will expand approximately 50 bps or higher but also reminder of the highest margin quarter as our Q1 due to software subscriptions in that quarter.

Our effective tax rate for the year continues to be projected to be slightly higher than 23% compared to the prior year rate.

And our updated FY 'twenty to GAAP EPS guidance is now a range of $4 80 to $4 85, which is an increase from the previous guidance of $4 75 to $4 80 a share.

That concludes our opening comments and we are now ready to take questions. Tom will you. Please open the call lines up for questions.

We will now begin the question and answer session if.

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We will pause momentarily to assemble the roster.

And our first question comes from <unk> Kumar with UBS. Please go ahead.

Good morning, David and Kevin.

Yes Ravi.

Salary in fourth quarter versus the third quarter against more difficult comps what gives you confidence rajiv can accelerate from here.

Well I mean, as Dave mentioned, our sales continues to be very strong our pipeline is strong.

And all of our primary drivers continue hit on all cylinders, which is primarily our.

Our private cloud we continue to have good movement of our on Prem customers private cloud our card.

<unk> and digital businesses, all continued to grow extremely well.

And so yes, we're very comfortable that we're going to have a little higher growth in Q4 compared to the previous year.

Got it and then can we have some early thoughts on FY 'twenty in terms of what Youre seeing out there.

Demand and pricing and how that translates to revenue and margin opportunity.

Yes, so I mean as far as the demand I mean, Dave mentioned several times openings comments that we continue to see a very very robust demand for our products and sales organization with record sales in just about every quarter for last three quarters.

We look to be very good pricing I mean, obviously this is a very mature market. So I don't see much change in pricing Rana.

Obviously, we're very early in our budget process for next year.

I would just go out on the women's side I see no reason why we can't continue to grow top line non-GAAP revenue on that eight 5% to 9% similar to this year.

For FY 'twenty, three and also get some leverage to the operating margin line on a non-GAAP basis of at least 50 bps or so so I think FY 'twenty three.

Forget about the deconversion revenue because again, we can't predict that but I think FY 'twenty three is probably going to look a lot like FY 'twenty two.

Got it very helpful and if I can sneak one final question here.

Are the key milestones, we should be looking out for as you progressed in your technology modernization strategy in the near term.

Ryan it's Dave so.

We will have releases this summer so as I mentioned on the call last time, we have customers in beta right now and so this summer we will announce customers going live they will come out of beta that will go live with the first module. So sometime this summer and I don't know exact date to give you but sometime this summer you'll hear me talk about.

Customers are going live with the first modules on the.

The new platform.

Later this year and we will talk about this on the at the Investor Day on Monday, but later this year, we will provide roadmap to our customers and to you. All so you can kind of track our progress more more specifically as far as things that we're planning to rollout, but I think the first indicator for you will be this summer when we talk about customers going live with the first modules in the.

Tech modernization strategy.

Perfect. Thank you.

Sure.

The next question comes from Kartik Mehta with Northcoast Research. Please go ahead.

Good morning, Dave.

Both you and Kevin have talked about the strong demand environment and how well Jack Henry is doing I'm wondering are you running any capacity issues.

I think Kevin you talked about maybe eight 5% to 9% in FY 'twenty three.

The demand continues could you good revenue grow faster or are you at a point, where now you have to push people out further yes.

Yes, no also I would say neither so is revenue going to grow faster. It might go just a little bit faster. The thing you always have to keep in mind is almost everything we signed today is a hosted contracts. So it's a long term commitment where we're layering revenue in as opposed to something that gives us a revenue pop in the quarter.

And that just continues to be true. So almost all of the sales success are with contracts that are long term commitments layered in over time, but.

As I mentioned, a couple of calls ago I think we have we were facing capacity issues as far as doing core conversions and so we stood up another team on the banking on the banking side of our business. So a few months ago. We did another team on the credit Union side now we've done another one on the banking side. So we are slowly, but surely adding teams to make sure that.

Our backlog that doesn't get stretched out with any of our product lines and so we're having good success in adding capacity as we need to add capacity. So our customers don't get frustrated that theyre looking at a year or two before they can go through a conversion, but it's a constant.

The process of measuring what do we have in the backlog, what's customer expectation, what's coming from the sales pipe and as I. Just mentioned, we set an all time sales record in Q2, Q3 normally a lighter sales quarter, 40% higher bookings than last year's Q3 end and more than any other Q3 and history and so.

There is a great deal of demand, but we are.

Our teams are doing well I think in managing the implementation implementation side of that equation and making sure that we get these contracts into production at a reasonable rate.

Hey, Kevin gave a little bit of a look into FY 'twenty three you talked about maybe margins upfront 50 basis points and I'm wondering from an inflation standpoint, how much that might be the <unk>.

<unk> are maybe being held back by some of the costs that you are.

Having to assume because inflation or are you able to push prices enough that the offset is.

Negligible.

Yeah. The answer is pretty negative <unk>. So yes, I mean there is.

There is some inflation impact primarily in personnel costs, and especially in different different areas and pockets within the company.

Going to be facing I mean, obviously, if it wasn't for that any inflation.

I would probably predict that we could get more expansion than that so there is there is some headwinds on the margin from those things, but at this point and again, we are very early in the budget process, but I think we're pretty comfortable that we can get that margin expansion, even in lieu of the inflation and everything else that's going on in the world today.

Okay. Thank you very much really appreciate it.

The next question comes from David <unk> with Evercore ISI. Please go ahead.

Thank you good morning, David Kevin.

Dave could you give a little more detail on the new bookings you called out 38, New banner platform signings I didn't hear you call out new core wins in the quarter.

Yes. It was 14, so I definitely called it out 14, new core wins in the quarter.

And I think three of them were multibillion dollar banks, if I remember correctly, but 14, so as I said in my opening statement. We are absolutely continuing on this run rate of one a week again, it's lumpy, but continuing to see great success and as I sit here well into the fourth fiscal quarter I can tell you that has not slowed down since the end of March.

Got it.

Kevin maybe you could just give a little more detail on the preliminary FY 'twenty three guide you called out.

An initial view of eight 5% to 9% non-GAAP revenue growth of approximately how might that breakdown at the segment level.

At the segment level.

That's a good question.

Obviously, our payments segment is going to continue to be the strongest growers. So payments same is probably still going to be with you on our payments segments now David 38% of our total revenue.

And it's probably going to grow again, we're still early in budget process, but I'm going to guess, it's going to grow 9% to 10%.

And corn comp minerals will both be in there at seven to eight 5% right behind it.

Got it just a quick final question.

Could you unpack.

Kind of the three major sub segments within payments Bill pay card and enterprise payments in terms of their growth.

In the March quarter, and how would you see them trending going forward.

Well the strongest growth.

Has been of course over time as our as our EPS lineup.

Your line of business and I don't see that slowing as we continue to add merchants, even though the number of number of checks per merchant.

<unk> decreased slightly we continue to add more than enough merchants.

Each quarter to continue to have that very strong growth in the mid teens.

Right behind that is card now that we're a year past the migration to the new platform, we're adding a lot of new customers, both debit and full service credit.

So that's going to continue to grow.

In the high single low double digits, and then the slowest growers online bill pay.

We pretty much saturated the market, we've got 3500 fives on our online bill pay so it's growing but.

Low single digits.

I don't see I don't see any of those changing in FY 'twenty three Dave.

I appreciate that.

Yep.

The.

Question comes from Boston Global with Kw. Please go ahead.

Hi, Thank you for taking my question.

First question just the complementary segments.

Thought that was a little bit later.

While we were expecting on a non-GAAP basis, a deceleration from last quarter, just anything any call outs on what products might have been a little bit weaker I thought the comments on bandwidth still being pretty strong.

But any other comment the other product suites, and what you're expecting for the fourth quarter.

I don't know that there was anything significant that I would call out.

That impacted as more just a matter of timing of different revenue coming in.

But there is no specific <unk>.

Products or services that I would call out that there was a drag.

Understood and then on the sales booking 40% with very impressive number I caught the comments I'm sorry at the core and banner wins any other areas sort of the composition of where all the strength is coming from besides those two areas.

Nova so its an across the board so Kevin highlighted that our EPS enterprise payment solutions business is growing nicely, we're signing a lot of contracts in that area and I don't normally highlight it on this call, but that's one that was a little bit larger than the normal run rate. This quarter. We had good success with our debit signing new customers coming to the debit platform.

<unk>.

Credit we're continuing to add customers was it was just across the board.

Just a really solid performance from the sales the sales team this quarter.

And listen if I could sneak in a last one for you Dave.

It seemed like the director CFPB made some comments that the banking industry recently about.

Not enough competition in the industry anti competitive contracting practices, just sort of any comments from you on how you would respond to that.

So it's interesting and I've certainly have read through the script of the directors' comments and other follow on presentations by other people in the CFPB we are.

We are highly regulated that Jack Henry and so we deal with the regulatory bodies regularly CFPB has also been engaged with us as they've been engaged with all the other players in our space.

The challenge that we have sometimes I think is that we get lumped in with everybody else Jack Henry gets lumped in with everybody else as far as business practices and I think Jack Henry has distinguished ourselves for years is doing business differently very.

Bank and credit Union friendly I think in our approach and so I think if and when there is some more requests from the CFPB for us to be engaged with them I think they will learn more about how Jack Henry does business and how it's different I will say that we've been through this with EMEA. For example, EBITDA at one point was kind of lumping, Jack Henry in with everybody else.

And Jack Henry does things the same way and then once we really got into those detailed discussions with EMEA committees. They realized and stated that we now recognize Jack Henry is doing things differently and is much more kind of supporting the community and regional financial institution environment with our business practices. So we are we're prepared.

If if there is something that comes.

Some requests that come with us to engage more directly.

Great. Thank you for the color sure.

Okay.

The next question comes from Peter Heckmann with D. A Davidson. Please go ahead.

Thank you good morning, gentlemen, Im wondering as you work with.

Third on the upcoming fed now release.

Any updated thoughts on real time payments.

Maybe you can correct. Some of the first use cases that we'll see in the U S and how.

How you think.

That could change your parts of your business I know Jack.

Barry.

Innovative and kind of forward thinking in terms of real time payments, but.

I'd be curious to see if you think that's going to be a big splash or.

On a very gradual increase in volumes, yes. It's a good question Pete It's one that we've continued to talk around about around here in fact, I just talk to that.

Governor from Kansas City is responsible for the fed now program and I talked to her just a month ago or so about the program and the status and are they going to hit their dates and right now they're mid 2023 calendar 'twenty three for a release date and right now they are still on track to hit that release date, and we hope that happens with respect to real time payments just in general.

I want to emphasize again, Jack Henry today more than 60% of the financial institutions in the U S who use the real time payments network through the clearinghouse so more than 60% are Jack Henry customers, they're doing that through Jack Henry So we are the dominant player today in real time payments as far as number of financial institutions that are.

We're using the RTP network through through the clearinghouse. So we're very very involved in RTP or pay center solution has been.

Highly adopted and of course fed now is supported in our <unk>.

Pay center application that Jack Henry So when fed now comes live we're ready for it obviously, because we've been working with a pen for a long time the pace of adoption is that's going to be interesting to see the win wenzel first rolled out.

The thing that I said back years ago was as long as zelle is kind of the really easy to use application. It poses a real threat to venmo, while it wasn't the easy fund use application and Thats kind of a clunky application, but we all supported those of us in the financial technology space, We supported but it was never any real threat to venmo, because it's kind of.

A clunky application as far as I'm concerned okay, what what happens with that now is it going to be really user friendly and kind of easy for people to adopt or not we'll see I think most banks and credit unions are planning to adopt and support that now I hope it's a.

Really easy to use application and it will receive wide adoption because I think that'll be good for us we have a number of use cases that we've built out that we think will be really good for banks and credit unions to adopt but it's got to be something that people want to use you can't force them to use it.

Definitely and then any early thoughts on just kind of the revenue model or how the pricing now might compete.

Compare to two other existing real time networks in the U S. R. Sandy.

Yes, there is a lot of discussion on that topic right now so.

Im not going to predict publicly where thats going to end up because that's that's a real key to this whole equation is.

Does the fed and the pricing and how competitive do they want to be as compared to other offerings out there. So I don't know where that's all going to end up but that is a that is a big topic of discussion right now.

Alright, well stay tuned I appreciate it yeah you bet.

The next question comes from Dominic Gabriel with Oppenheimer. Please go ahead.

Hey, thanks, so much for taking my questions.

Have you heard about rising tech talent costs, putting an accelerant on.

<unk> services.

For companies to outsource their core.

Or other processes to the cloud is there any.

Is there an area of the business were rising wages would put a particular set of products and higher demand and then I just have a follow up. Thanks, Yes. It's an interesting question Domino impact is something that I was just talking about this week with a couple of our customers and with.

Internally with our team so.

It's less about rising costs and more about banks and credit unions challenged to find the talent that they need. So we all know the great resignation, we all talk about it.

Most companies are experiencing higher turnover than they normally experience and in lot of cases, it's hard to find the talent you need and banks and credit unions are experiencing the same thing and so that is certainly creating some demand to.

To come to companies like Jack Henry to provide.

Services that we've done for a long time the interesting thing that's happening now is they are also more requests for us too.

<unk> more kind of back office assistance back office guidance, because they have lost talent in the back office with a bank or credit Union and that I can't decide if that's a blip or if its a long term.

Opportunity, that's going to create opportunities for us to sell more technology more workflow technology. As an example, you can use workflow technology. When you don't have the people to do the manual work.

So we're trying to figure out if that's a short term opportunity our long term opportunity, we don't really want to be in the business of being a consultant a body shop as far as consulting we certainly do a lot of that but that's not our core competency. We're a technology provider. So we're trying to weigh all of that and kind of figure out Where's the opportunity and is it a short term opportunity or long term opportunities.

It is certainly a topic.

Great Great and then.

Maybe just one more given the strong demand for your products and given the sales growth.

Do you think we're seeing not only just really strong execution given the strategy shift in the demand for your current products, but also perhaps the next.

Celebrating overall banking and credit Union industry Tech demand for software a leading the pandemic on top of that so we could see even higher than 9% revenue growth maybe in core.

So I think we have built in the first half on Monday at the Investor Day, I'm going to share with you some charts specific to industry projections and I intend on these calls to share our surveys come out I tried to share with you all what we're hearing about <unk>.

<unk> in the industry generally and so I'm going to give you some more information about that on Monday at the Investor Day.

But yes definitely the spa.

Lending is up in the overall in the industry.

<unk> is clearly a beneficiary of that but that is baked into all the comments that Kevin made earlier about what we're looking at for FY 'twenty three what we're experiencing today and what we're looking at for FY 'twenty. Three so that's not new news to US we really started to see that being telegraphed to us with those first surveys that come out what came out last September I think if I remember correctly.

And everything we've seen since then has supported that idea. So we've baked that into everything that we're working on right now as far as budgets for FY 'twenty three.

Great excellent execution this quarter. Thanks, so much thank you Dominic.

The next question comes from Dave Koning with Baird. Please go ahead.

Hey, guys, great great job and maybe if I can kick it off on the payments segment, David Toga kind of asked about the breakdown but.

David I think decelerated in general across the industry. So no surprise that did a little bit, but what was kind of interesting last year year's accelerated a ton in Q4 and I actually don't know if that creates a tough comp for Q4. This year or if that was just the normalization you can actually still grow 910% Q4. This year I just want to kind of under.

And that.

Well a couple of things today, so last year was a little more rapid growth coming out of Covid.

Compared to the previous year, because remember the previous year.

Q4 was our Q4 was very weak just like everybody else in the industry. So it is a little tougher comp, but with the backlog of sales that we're having.

Still feel we're going to have really solid growth in all of our lines of payments in Q4 compared to last year, even with a little tougher comps.

That's what it look like now that's great.

And then and then secondly.

There is a lot of like just comp issues for other companies that have either stimulus benefits or wallets that all kind of tie in with stimulus you seem to have none of that but is there actually a almost a benefit that you get.

We kind of went through this cycle, where a lot of people got these wallets and cash App and all this stuff and maybe come back now and say, okay that work for a little bit, but I just want a bank now.

That you might benefit from some consumer demand that way.

That's a good question.

I don't know I don't.

No that I could say, yes, that's happening or yes, we're going to benefit from that I believe there is.

There is there has not been a slowdown in demand or interest in the services from our customers. We don't have customers that have lost a bunch of share or something like that as a result of the of these people experimenting with with new applications or fintech.

<unk> type solutions, and so I don't know that I would say Oh, there's some big opportunity here because people will kind of revert back to working now that their bank or credit Union has is cooler technology theyre going to revert back to work, primarily with a bank or credit Union I don't know that they stopped working with their bank a credit Union and remember that we get paid on when it.

Comes through our primary businesses, it's on number of customers that we're supporting number of accounts number of assets and of course, there is the transaction volume, but since we're not an acquirer were an issuer. We normally are getting that anyway. So I don't think that I would want to hang my hat on that as a big opportunity, but I might be missing something.

Alright, thanks, guys good job.

Yes.

The next question comes from John Davis with Raymond James. Please go ahead.

Hey, good morning, guys, Kevin just wanted to start on.

Outlook for the payments.

Business segment for next year, the 9% to 10% and I realize it's really early so not trying to nail you down on this but have you contemplated further kind of debit mix normalization in that and are you guys seeing much of an impact at all from it was a little bit of a follow up to Dave's question, just credit becoming a bigger part of the mix as we kind of.

The pandemic.

We have not seen a lot of that J D.

Obviously, the other thing I would say is we're now offering full service credit, which we werent, even offering that a year ago. So so even as it moves to credit we've got that opportunity in front of US now. So I mean, I think we're going to see some shift from debit to credit, but so far we've not seen much of an impact on our business.

Okay and then.

Dave maybe switching to capital allocation for a second no buybacks in the quarter.

You guys have a great currency thoughts on M&A as some of these valuations have come in should.

Should we read it read into anything with no buybacks. This quarter. Despite obviously, a very very healthy balance sheet, just any comments there would be helpful.

So I've said in many forums here in the past few months that.

Im pretty optimistic about calendar 'twenty, two as a year, where Jack Henry can get back into the game as far as M&A is concerned we say all the time that the acquisitions are at the top of our list always we know that were a good acquirer were a disciplined buyer, we know how to integrate companies and well and so what I've said for the last several months as several companies who went public last.

Year.

Probably <unk>.

Nicley Shouldnt have gone public and now.

Their evaluation has dropped significantly they have shareholders that are kind of wondering what the future looks like and so there may be opportunity there, but I think the greater opportunity is there are a lot of companies in our space who were on the sidelines, who were kind of prepping to go public given the frothiness of the market and now that is all stopped and so if you're running a nice little company in your <unk>.

On the sideline thinking you were going to IPO and now that is not going to happen and youre contemplating a capital raise or find a really nice strategic partner like Jack Henry.

Think.

You would look seriously talking to Jack Henry So we are prepared for those opportunities and I am very hopeful that we're going to see some of those here this calendar year.

Okay, and I'm going to squeeze one more in if I can just theres been a lot of talk.

Lots of investors around CPI escalators.

The industry just broadly.

I think most management teams have kind of talked down the impact just given that there's caps, but obviously with inflation running as hard as it is right now just curious on how you guys think about the CVI and flavors are escalators how material are they.

Any color there would be helpful.

So we do have CPI escalators in.

I always say virtually all of our contracts keeping in line, we've acquired a lot of companies here over the last years and some of those contracts are still in place I cant say absolutely that every single contract has a CPI escalator opportunity but.

Virtually all of them have escalators, we have we have already in several cases, we have deployed those already this year, we have others that are coming up with our annual billings that happened here now and next month I guess it is or this month.

So they are happening, but the thing I always remind everybody our business our customers our bankers their banks and credit unions, they understand what's going on in the economy right. They understand what's reasonable and what's not and at Jack Henry We've always taken the position that just because we could do X percent of the CPI accelerators, if thats not a reasonable number.

We're not going to go up to X and so we have taken a position that I think is reasonable. It supports the business model that we have it's also been taken as reasonable by our customers and so I think it offsets.

Much of what we see happening.

The.

In the market, but it's.

The approach that we're going to continue to take we'll do reasonable escalations using the CPI opportunity where it makes sense.

Okay I appreciate it guys.

Yes.

The next question comes from 10, two Koskey with Autonomous research. Please go ahead.

And ask about the fiscal <unk> margin guide it looks like there is.

There is some implied margin pressure next.

Next quarter, we are estimating about 150 basis points year over year impact from lower deconversion fees.

But I was thinking you would have some margin expansion ex that impact. So maybe you could just.

Can you give us your thoughts there on what what's impacting the margin and maybe you could also touch on the Capex and expense expectations related to the Nextgen type strategy that you guys are pursuing.

Well as far as Q4 margins for on a non-GAAP basis, we expect to have some slight margin expansion probably not as what we've seen in the first three quarters, but we expect to see some but youre right theres going to be on a GAAP perspective, with only predicting that we're going to have $1 million or $2 million in deconversion fees compared to last year there is going.

Be some margin pressure on a GAAP basis going forward in Q4.

Overall, we feel like the margins on it, especially on a non-GAAP basis will still be strong I'll, let Dave handle the capex on the new Tech. So can you rephrase that part of the question Ken.

Yes.

Wondering what type of Capex.

That you guys are penciling in and then anything on the expense side that you would expense through the P&L that.

That you would have to make just two to pursue this next gen Tech strategy. So yeah. So keep in mind, we've been absorbing both the expense line in the Capex line, we've been absorbing for more than two and a half years as I stressed on the last call. So this isn't something new it's been baked into the P&L. The numbers have been flowing through the P&L for two and a half years, we just had.

We called it out as as part of the P&L and so that rate is going to continue essentially at the same rate I said on the last call and I'll say it again, we are committed to 14% of revenue as an R&D investment that includes this technology monetization strategy. You. If you look back five years or so youll see us running at roughly.

14% of revenue that we're putting back into.

Into R&D and we're going to continue at that rate going forward, including this this tech modernization strategy. So you won't see any great big Spike in either the cap side of the equation or the P&L impact the direct expense side of the equation because of this.

Strategy.

And this is very similar to everything we've done for years. This is not a big Bang approach.

As we get the various components done.

Like for like the ones that are in beta right now those will be rolled out in production and the amortization will begin at that time. So it's not like we're going to wait until the whole thing is done in 10 years and then starting to expense in the whole thing they will be rolled out as components go into general availability.

Okay that makes a lot of time and then the bookings were really strong in the quarter.

You just talk about what's driving that that sales success I mean, how much of that is driven by the offering you have in the overall environment versus something Youre doing that's unique in your go to market strategy.

And then maybe you could touch on the full service credit offering that you now have I mean, how are sales progressing there.

Yeah. So it's.

Those aren't mutually exclusive.

If it was what's going on in the industry or is it something specific that Jack Henry is doing I would say, it's both the industry.

<unk> tide raises all boats and that is definitely happening in the spend environment in our space has has increased has improved in the past year. So Jack Henry is definitely a beneficiary of that but I think the.

The product mix that we have all these new things that we've been rolling out here in the past couple of three years.

And the.

The announcement that I alluded to this on the last call and I'll just say it very specifically, although we just publicly announced the tech modernization strategy on the last earnings call. We had taken cover customers under the covers with NDA for several months customers, who were thinking about do I want to do business with Jack Henry what is your future look like if we sign with Jack.

Henry and where are you guys going as far as technology is concerned we had taken customers under the covers for months before the public announcement and so I think virtually every one of them that we took under the covers they said we want to go with you guys because we see the future with Jack Henry So I think that is a unique.

Piece, but pretty much everything else is the combination of the improved spending environment and then this recognition that Jack Henry has received broadly for doing a lot of innovative things rolling out new products and really focusing on taking care of.

Community and regional financial institutions in the United States. The fact that we're not we didn't pursue the merchant acquiring business.

Customers know that we're focused on them and their success and that's continuing to drive new opportunities for Jack Henry.

So maybe I could sneak one more in just the free cash flow conversion I mean, it's still a little bit below a 100% on a trailing 12 month basis.

But ticked up a little bit versus last quarter can.

Can you just provide your expectations on.

And how you expect that to trend in Q fiscal year 'twenty three.

Well I think it's going to trend back right at a 100% if not better I mean again, Ken you got to remember our Q4 and Q1 of our strongest free cash flow quarters because of the annual maintenance billings for all of our on Prem customers, which goes at the first of June So our both our operating cash flow and especially free cash flow.

Are the highest in Q4 and Q1, so and so a lot of that if you look at it year over year basis on a fiscal basis. Some of that can depend on when we actually collect those quite close fees from our customers whether we collected in Q4 Q1, because its just a matter of timing on that but it's been on a trailing 12 months, we should be back up to the close to.

100% conversion.

Great. Thank you guys.

Yes.

The next question comes from Charles novel before we get to him. Just a reminder, if you'd like to ask a question Press Star then one Charles not under your line is now.

Hi, Good morning, and thank you for taking my question, it's good to see the normalization in and core wins over the past couple of quarters and I know you alluded to a couple of.

Multibillion dollar banks in that 2014, this quarter, but I'm curious just looking back.

Would you say that the average size of the bank or credit Union that Youre, winning is is larger than it has been over the past couple of years and secondly.

If we think about the <unk>.

Systems that those banks or credit unions may be running.

Could you speak to.

The nature of the systems that you're displacing.

Within your within your takeaways.

Sure Chuck and intuitive question on your part definitely tell you that so absolutely the size of institutions that were winning has gone up and in some cases fairly significantly we just had.

Our sales budget planning meeting was last week for preparing for FY 'twenty three so financial budgets. We're just starting but you have to do the sales budget planning before you can do financial budgets and that was a big topic of conversation with our sales leaders. So is that in the past couple of years the size of institution that we're winning overall has definitely gone up and like I say in some cases.

Fairly fairly significantly and so.

So that's so that is absolutely true and then.

What was the second half of your question sorry, Kevin do you have it.

Chuck would you repeat that.

The types of systems that youre seeing whether its first gen and house et cetera, yes, so not.

Certainly winning some in house customers away and people who are running in house on Prem today.

But we are winning it's interesting most of our wins if you'd asked me. This question two or three years ago. Most of the wins would have been from competitors who.

Who are supporting older systems and they are there.

Our customers were frustrated because they werent putting enough investment into these older systems today its across the board. There are still lots of older systems out there where people are frustrated that they don't think there is enough.

<unk> and we are winning those opportunities, but we are winning the flagship customer.

Customers, so customers, who are running the flagship solution from some of our competitors, we are winning those deals today as well so.

It's been an interesting shift I think because it used to be really difficult to displace somebody off of our flagship solution from one of our major competitors and today, that's happening more than it did in the past.

Okay.

I guess as a follow up and I would think this is going to be a topic of conversation next week at the analyst day, but I wanted to get a little color around your product road map and.

I guess, how you think about <unk>.

M&A versus organic organic product development, and secondly, whether you see.

Whether that product roadmap is mainly focused on augmenting existing solutions or <unk>.

Perhaps branching out into an area that youre not youre not currently has deepened.

Yes, so if.

If you look back at our company 15 years ago, we were doing a lot of M&A too.

<unk> innovative technology into the company. So we did it.

It was one year, we did six acquisitions in one year all different products in the past couple of years, it's been almost impossible to get a deal done because valuations were crazy and so we've focused heavily on an organic.

<unk>.

Development efforts, but today and just before the pandemic I think we were really good at doing the build by partner analysis at Jack Henry So when we see an opportunity. We went through this process. So do we build it ourselves is there something we can acquire or is there a partnership that makes the most sense for us too.

To pursue and I think we have a healthy balance of that today and now with the environment changing a little bit as far as valuations I think we can really get back into that mode again, the challenge as far as are the good news and the bad news as far as our product portfolio is we don't have many holes in our product portfolio. It's not like we're desperate to go get a solution to fill a hole.

Because customer demand is so strong we're really pretty complete as far as our product suite. So most of the acquisitions. We look at are things that would we can connect to something we already have and create one plus one equals three type scenario for Jack Henry customers and so we're always looking for those opportunities.

And then as far as the new development, we're creating new solutions.

Regularly we have the new fraud solution, that's under development right now that we'll talk about a little bit on Monday.

And that those efforts continue as well so it's a good healthy mix I think for our company today when it comes to what things do we acquire when we look at acquiring versus what things should we write ourselves.

Great. Thank you sure.

Ladies and gentlemen, this concludes our question and answer session I will turn the conference back over to Mr. Kevin Williams for any closing remarks.

Thanks, Tom again, as Dave mentioned, we do look forward to hosting many of you on the call next Monday in Dallas at our annual Investor Day, which is being held at the Hyatt DFW Dallas Fort Worth Airport.

At one P M with registration beginning about 11, a M and.

And again after the after the presentations, we will have a mini tech fair ensure some of I think five of our newer higher products that are out there and with that were pleased with results from our ongoing operations and we are excited for the future I want to thank all of our associates for the way they've handled these challenges by taking care of themselves and our customers.

And continuing to work hard to improve our company to continue moving forward for the future all of US at Jack Henry continue to focus on what is best for our customers and shareholders I want to thank you again for joining us today and with that Tom will you. Please provide the replay number.

Yes, the phone number you dial is for United States toll free one 870 734475 to nine in the United States local toll number being one for 12317.

0088, when prompted to enter a code please enter 420351.

Again that replay code is <unk> 03516. Thank you all very much for attending this conference has now concluded you may now disconnect.

Okay.

[music].

Welcome to the Jack Henry and Associates third quarter fiscal year 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.

After todays presentation, there will be an opportunity to ask questions.

Ask a question you May press Star then one on your Touchtone phone to withdraw yourself from the question queue Press Star then two.

I would now like to turn the conference over to Mr. Kevin Williams, Chief Financial Officer, and Treasurer. Please go ahead.

Thanks, Tom Good morning, and thank you for joining us for the Jack <unk> Associates third quarter fiscal 2022 earnings call I'm, Kevin Williams, CFO and Treasurer and on the call with me today is David Foss Board Chair and CEO and.

In just a minute I will turn the call over to Dave. So he can provide some of his thoughts about the state of our business financial and sales performance for the quarter. Some comments regarding the industry in general and some other key initiatives that we have in place then after David concludes his comments I will provide some additional thoughts and comments regarding the press release, we put out yesterday after market close.

And also provide comments regarding our updated guidance for the remainder of our fiscal year 2022, We will then open the call and open the lines up for Q&A.

Any statement about the future. These are subject to a number of factors that can cause actual results or events to differ materially from those which we anticipate due to a number of risks and uncertainties.

10% for the quarter and increased 7% on a non-GAAP basis as projected on our last call deconversion fees were up more than $13 million over the prior year quarter.

Turning to the segments, we again had a good quarter in the core segment of our business revenue increased 12% for the quarter and increased by 7% on a non-GAAP basis.

As I mentioned in the press release, our core sales teams again had an extremely solid quarter and we continue to see core activity consistent with our pre pandemic run rate.

During the quarter, we inked 14 competitive core takeaways. So we continue with the approximately one deal per week run rate I have discussed on recent calls.

In addition to our success signing new core clients, we signed nine existing on Prem core customers to move to a private cloud environment and.

On our last quarterly call I mentioned that the sales team set an all time sales booking record in our fiscal Q2.

Although we didn't break that record in Q3, we did set a record for the strongest Q3 in history with sales bookings coming in almost 40% higher than the same quarter last year.

This extraordinary sales performance in a quarter that is normally lighter than others is reflective of the interest in our company and demand for Jack Henry Technology solutions in our market.

As I've said before I expect our success in this area to grow as we continue to add new functionality and features to the platform.

On our last quarterly call I shared an announcement regarding our technology modernization strategy and how we believe it will help position our clients for greater success in the future.

As many of you know that announcement has been received very positively by many experts in our industry and our strategy has been highlighted in a wide variety of publications.

Hopefully you've all seen the new corporate sustainability report that we published on March 31.

<unk> enhanced update on climate related risks.

This year's report also includes an appendix with detailed disclosures aligned with the sustainability accounting standards board or <unk>.

And the task force on climate related financial disclosure or Tc ft.

We continue to make great strides in the key areas of ESG and are committed to providing more detailed information about our progress overtime.

Inc magazine recognized us as one of America's Best led companies and Newsweek recognized us as one of America's most responsible companies.

Both awards are great recognition for our ongoing commitment to do the right thing for all of our Jack Henry stakeholders.

As we announced a few months ago <unk> will be retiring at the end of June after 17 years with our company.