Q4 2022 Jack Henry & Associates Inc Earnings Call
[music].
Good morning, everyone and welcome to the Jack Henry <unk> Associates fourth quarter and fiscal year end 2022 earnings conference call.
All participants will be in a listen only mode.
If you need assistance. Please signal conference specialist by pressing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star and then one on your telephone keypad.
So withdraw your questions you May press Star then two.
Please also note today's event is being recorded.
And at this time I'd like to turn the floor over to Mr. Kevin Williams, Chief Financial Officer, and Treasurer, Sir. Please go ahead.
Jeremy Good morning, Thank you for joining us today for the Jack Henry Associates fourth quarter and fiscal year end 2022 earnings call.
Evan Williams, CFO and treasurer and on the call with me today is David Foss Board Chair and CEO .
In a minute I'll turn the call over to Dave to provide some of his thoughts about the state of our business financial and sales performance for the quarter and year comments regarding minister in general if some key initiatives that we have in place then after <unk> comments I will provide some additional thoughts and comments regarding the press release, we put out yesterday after market close and provide commerce.
Regarding our guidance for fiscal year 2023, which was also provided in the press release. We will then open the lines are 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 could 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 Form 10-K entitled risk factors and forward looking statements on this call. We will also 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 and good morning, everyone. So they were very pleased to share details with you for a quarter that produced record revenue and operating income as well as record sales bookings as always I'd like to begin today by thanking our associates for all the hard work and commitments that went into producing those results for our fourth quarter and for the entire fiscal year.
For the fourth quarter of fiscal 2022 total revenue increased 7% for the quarter and increased 8% on a non-GAAP basis.
Conversion fees were down about 37% as compared to the prior year quarter. As a reminder, although a reduction deconversion fees impacts in the quarter negatively it as a long term positive for our business.
Turning to the segments, we had a solid quarter in the core segment of our business revenue increased by 8% for the quarter and increased by 9% on a non-GAAP basis.
Our payments segment performed well posting a 5% increase in revenue this quarter and a 5% increase on a non-GAAP basis.
We also had a very robust quarter in our complementary solutions businesses with a 9% increase in revenue this quarter and a 10% increase on a non-GAAP basis.
As I highlighted in our press release, the fourth quarter was the strongest sales quarter in the history of the company.
Those of you who follow US closely will know that in the fourth quarter of 2021, we set an all time sales record we broke that record in the second quarter of fiscal 'twenty, two and now we broken that new record in the fourth quarter. Additionally, in the third quarter of this year, we exceeded our highest ever Q3 sales of payment by around <unk>.
40%.
All in all this has been a remarkable year for the sales teams.
Can you provide a little detail regarding sales successes in the quarter, we booked 17 competitive core takeaways with five of those being multibillion dollar institutions.
Additionally, we signed 18 deals to move existing on premise customers to our private cloud environment.
Several of our complementary offerings also saw very strong demand in the quarter with as you might guess, our digital suite, leading the pack, we signed 48, new clients to our bandwidth digital platform in the quarter and 21, new clients to our card processing solution.
For the full year, we signed 52 competitive core takeaways with 10 of them greater than $1 billion in assets. Additionally, we signed 54 contracts to move on premise core clients to our private cloud.
<unk> hundred 65, new bandwidth digital customers and 58, new clients for our core processing for our card processing solution.
Of course, we signed a variety of other contracts for many of our other solutions as well, but it's important to note that almost all of these contracts represent long term recurring revenue equipments to Jack Henry for a wide variety of our solutions.
Our annual client conference is scheduled for the end of this month and I'm very happy to say, we already have 56 core prospects signed up to attend and hopefully finalize their decision.
The Jack Henry.
In case, you missed that I'm going to repeat that at our annual client conference at the end of this month, we have 56 core prospects signed up to attend and work with our sales organization.
At our analyst conference in May I shared with the attendees that we had just surpassed $7 2 million registered users on our bandwidth digital banking platform.
As at the end of the fiscal year, we were at roughly $7 7 million registered users as a point of reference on July 1st of 2020, we had about $3 2 million registered users. So in two years, we've seen an increase of almost 150% and our user count.
This is significant because as I've stressed in the past most of the revenue for a business like this is tied to the number of users on the platform.
On August 9th we announced the definitive agreement for Jack Henry to acquire pay rails with an expected closing of the August 31st payout.
They already pay rails accelerates Jack Henry Technology modernization strategy by immediately adding next generation digital payments capabilities to Jack Henry technology stack and payments ecosystem.
<unk> also enhances Jack Henry's payment as a service strategy and neighboring enabling clients to simplify the complexity of payments modernize their existing payment channels and remain at the center of their account holders payment experiences.
Hey, Jack Henry supports the growing demand for payments as a service with a virtual payments hub consolidates money moving solutions and supports numerous payment channels and types.
Real strategically complements this hub with its extensive capabilities for consumer and commercial bill paid real time person to person payments account to account transfers business to customer payments.
And and more.
Firing pay rails will strengthen Jack Henry is positioned in the payment space.
Providing our collective clients with additional functionality optionality and flexibility that enhances their diverse digital and payment strategies.
Hopefully you've all seen the August 1st announcement about our corporate rebranding as we move forward rather than using cemetery profit stars and Jack Henry Banking is unique brands will see US go to market is simply Jack Henry we.
We believe that uniting the brands reflects Jack Henry's role as a well rounded financial technology provider and an advocate for community and regional financial institutions.
Our new brand is the outcome of the work we're doing to modernize our technology streamline operations and operate as one company, which we believe will result in a better client experience.
We now have a platform to speak from a single consistent voice as we continue to help community and regional financial institutions strengthen connections with account holders.
During a full array of solutions and access to a wide network of Fintech partners.
As many of you know Jack Henry is regularly named as the best place to work in various publications around the country.
Recently, we were thrilled to be named by linked in as a top 10 best place to work in financial services or.
Our consistent placement on best place to work list is a testament to the workplace culture, we have the Jack Henry and our employee engagement scores reflect our strong culture.
Additionally, we began a continuous listening strategy. This year together feedback from our associates and I am pleased to share that overall, our participation rate was greater than 65%.
We achieved an engagement capital score of 79% and 87% of our employees save that they believe in Jack Henry's values, all well above industry benchmarks.
As we shared at the beginning of August we have now completed a comprehensive search and have named our new CFO effective on September one.
Minicars Lee joined our finance team on July 1st and has been busy coming up to speed on the Jack Henry story and financials for the past several weeks.
As we stated in the press release, she comes to us with more than 30 years of financial industry experience, but also has a strong technology background.
Mimi will be traveling with our director of Investor Relations Vance Gerard in September to meet with a number of investors and analysts and I expect that she will lead this call in November .
Of course with the addition of <unk>, we are now prepared to wish Kevin and happy retirement.
That's been very accommodating to the search process for delaying as intended retirement date until he was confident that we had found a replacement who could help us build the company for the future.
Many of you know Kevin has been with Jack Henry for almost 25 years, but his association with our company goes back well over 30 years.
During that time, he has had a tremendous impact on our execution and our success.
I'd like to take this opportunity on behalf of all Jack Henry Associates customers and shareholders to thank Kevin for everything he's done make us. So successful for these many years you will be missed Kevin.
As I reflect back on fiscal 2022 I can confidently say it was a very good year for our company our employee engagement scores remain high in our levels of customer engagement and customer satisfaction scores are also very high we have successfully completed several leadership and board level retirements and replacement and expect these new members of our leadership teams to.
Continue our track record of success.
Our sales teams are performing extremely well and have positioned us for another successful year and overall demand for Jack Henry Technology solutions remains high in all segments of our business.
We have a commitment to doing the right thing for our constituents that we believe will continue to serve us well.
We will continue with our disciplined approach to running the company and expect that approach to help provide stability for our employees customers and shareholders.
We began the new fiscal year I continue to be very optimistic about our future with that I'll turn it over to Kevin for some detail on the numbers. Thanks.
Thanks, Dave our service and support revenue increased 7% in the fourth quarter of fiscal 2022 compared to the same quarter a year ago.
With deconversion revenue being down $3 million in the quarter compared to last year's quarter. It was slightly higher than what we thought it would be but still down 37% from a year ago license hardware and invitation revenue combined were actually up $5 million or 12% compared to the prior year quarter.
Our data processing hosting fees in our private and public cloud offerings, which continue to show strong growth in the quarter compared to the previous year growing by 11% for the quarter.
On a non-GAAP basis total support and service revenue grew 8% for the quarter compared to the prior year.
Our processing revenue increased 8% in the fourth quarter of fiscal 2022 compared to the same quarter last year on both a GAAP and non-GAAP basis. The increase is primarily driven by slightly higher card volumes and digital revenue continued to show strong growth as demand for bandwidth digital platform continues to be very strong.
Total revenue was up 7% for the quarter on a GAAP basis and increased 8% on a non-GAAP basis.
Our cost of revenue was up 4% compared to last year's third quarter. This increased primarily due to higher costs associated with customer maintenance and license cost card processing and higher personnel cost compared to a year ago, Our research and development expense increased 18% for the fourth quarter of fiscal 2022 compared to the same.
Prior year quarter, the increase primarily due to personnel and consulting costs and SG&A expense increased 16% in the fourth quarter and this increase was primarily again due to increased personnel costs, which includes commissions and travel related cross compare compared to last year.
Our reported consolidated operating margins were essentially flat at 21, 5% on a non-GAAP basis.
Our operating margin expanded from 21% last year to 29% this year for a nice margin expansion on a non-GAAP basis.
Effective tax rate for the fourth quarter of fiscal 2022 increased to 21, 8% compared to 19, 7% in the same quarter a year ago, primarily due to timing effects of deductions.
Our net income grew 5% to $80 4 million for the fourth fiscal quarter compared to $76 9 million last year with earnings per share of $1 10 for the current quarter compared to $1 four last year.
For cash flow, our total amortization increased two 9% for the year to date compared to last year, primarily.
Primarily due to capitalized software projects being placed into service in the prior year.
Included in the total amortization is the amortization of intangibles related to acquisitions, which decreased to $16 3 million this year compared to $17 7 million last year.
Appreciation actually decreased three 2% compared to the prior fiscal year.
Our operating cash flow was $504 6 million for the fiscal year, which was up from $462 million last year was primarily due to increased net income of $51 4 million compared to the previous year.
We invested $191 4 million back into our company through Capex purchasing capitalized software are.
Our free cash flow, which is operating cash flow less capex and cap software and any net proceeds from disposal of assets was actually $313 3 million.
This represents 86% conversion of net income.
There were two primary working capital items that response for this.
<unk> were up $35 million compared to a year ago. However, a little referred to this is an increase is due to increased average monthly billings for recurring revenue, which our average monthly billings continues to grow and then the balance is due primarily to the timing of collections, especially our annual maintenance, but I will say that our annual maintenance doesn't.
Last Friday is right in line with where it was a year ago. So we did catch up ground in July and August .
Other items working capital item was prepaid expenses and other which increased $26 million, which is 20 million of this increase is due to prepaid commissions related to the strong contracting that we had in the previous year.
Or in this year I'm sorry.
And the other the balances was primarily due to prepaid cost products without the impact of these two working capital items, our free cash flow conversion from net income would have been greater than 100%.
During the year, we spent $193 9 million to purchase one 5 million shares for the Treasury, we paid dividends of $139 1 million for a total return to shareholders of 333 million in fiscal FY 'twenty two.
Couple of comments on our balance sheet as of June 30th cash position of $48 8 million compared to 51 million a year ago pretty much in line, our revolver balance was up a little to a $115 million compared to 100 million a year ago.
Our return on average assets for the trailing 12 months is 15, 1% a return on average equity for the trailing 12 months was 26, 9% and return on invested capital for the trailing 12 months was 24, 9%, which we're very proud of those key metrics.
For FY 'twenty three guidance, we provided both GAAP and non-GAAP revenue guidance in the press release yesterday for fiscal 2023. We also provided a reconciliation of GAAP to non-GAAP revenue in the Reese following the segment information.
However, just to be clear. This guidance is based on today's environment and if things were to change significantly then this guidance will also be revised.
Also just to be cleared this guidance does not include the impact of the recently announced acquisition of payrolls that are scheduled to close later this month. So there was no financial impact in this guidance from that future potential acquisition for.
For GAAP revenue growth for fiscal 'twenty three based on the announcement released yesterday, our revenue guidance reflects revenue growth of approximately seven 2% over fiscal 'twenty, two which this anticipates deconversion revenue will decrease by approximately $18 million from $53 million down to $35 million compared to FY <unk>.
22, and this is based on what we're seeing on the current activity on the M&A front.
For non-GAAP revenue growth our initial guide for FY 'twenty three is approximately 848, 5%, which is down slightly from the non-GAAP revenue growth. We saw in FY 'twenty two of eight 8%, but obviously for many parts of our business implementation convert merge and even payments, we had a little easier comp in FY 'twenty, two compared to FY <unk>.
'twenty. One then we will have in FY 'twenty three so we're very happy to report that we were guiding to close to eight 5% non-GAAP revenue growth.
Initial guide for GAAP operating margin for FY 'twenty three it will decrease from 24, 4% or approximately 23, 7% in.
In 'twenty three and this is primarily due to the anticipated decrease in deconversion revenue, because obviously deconversion revenue has extremely high margins.
Our initial guide for non-GAAP operating margin is projected to be essentially flat at approximately 22, 7% for FY 'twenty three.
Some reasons for this projected flat operating margins because there's been some things have changed since the first week of May when we when we talked about guidance.
<unk> headwinds on license revenue is now 67% of our core customers are in a private cloud or annual Education Conference, which Dave mentioned later this month is going to be in person. So there'll be some significant expense there, but we have not seen in the last few years continued.
Increased cost of third party processors and other vendors continued increase in insurance, especially cyber E N O in health, which I'm sure most of your customers are seeing.
Increased compensation expense to attract and retain talent in this tough environment incur.
Increased facility costs as we now have a returned off state of $96 22.
Cost of cyber security continues to increase to protect our customers employees.
And then just travel costs have increased significantly just for our employees our last month's travel airline tickets on average have increased 58% from February .
Hotel rooms on average last month increased 32% since February and then obviously as we all have noticed increased in both cost and yields and rental cars in China.
Therefore, even though this guidance is less than the 50 bips.
Spansion, we talked about the first week of May the environment has changed and continues to change significantly.
Obviously, we try to be conservative in our guidance as you all know I've always lived under the philosophy to under promise and over deliver and hopefully that's what this guidance is going to provide our effective tax rate for FY 'twenty three is projected to increase to approximately 23, 8%.
Some states have gotten a little more aggressive and the benefits from the tax cuts and job act other than the decrease federal tax rate have now been fully fully utilized over the last four years.
Our FY 'twenty three GAAP EPS guidance is a range of five O five to five O nine.
This now concludes our opening comments, we are now ready to take questions. Jamie would you. Please open the call lines up for questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question you May press Star and then one using a telephone keypad.
If you are using a speakerphone. Please pick up your handset prior to pressing the keys to ensure the best sound quality.
So let's draw your question you May press Star two.
Once again that is star and then one to join the question queue.
Our first question today comes from that to go Bill from K B W. Please go ahead with your question.
Hi, Thanks for taking my question I guess first congratulations on another really strong sales quarter.
David I was sort of interested in joining if to what extent your DUC modernization strategy is sort of contributing to the discussions that you are going to meet with clients now.
Yeah. Good morning, guys, who so it's it's a good point it certainly is a topic, but as I've stressed on prior calls you know we're not we're not talking with customers about delivering the tech monetization technology in the next year or so but I think this has given a lot of prospects the comfort.
And knowing that Jack Henry is leading the way as far as a true public cloud native technology strategy for the future and so that has that has definitely created opportunities for us to be engaged with customers whether or not that's a that's directly contributing to close deals like I don't know that I can say that with any comfort, but it is absolutely opened the door.
As with a lot of prospective customers because they see the future with Jack Henry.
Got it thanks for that color and then Kevin for you.
Thanks for all the color on the sort of change in the margin guide.
You sort of said at the end that you're still sort of looking to be conservative sort of what are the areas, where you think it might be conservative in terms of margins and then for revenue growth any change in trend by segment that we should expect what I'd have to what we saw last year.
Yeah. So I think if if there is conservative and it works, it's probably in our payments area and then obviously in our private cloud as Dave mentioned, we signed to.
Whole bunch customers in Q4 to move over from our on Prem to our private cloud.
And if we continue to move those over obviously that is a nice margin lift when we move those customers over so those would be the two areas and then obviously the continued growth in digital because that's also a nice margin. So those are probably the three areas that if we're conservative its probably in one of those three areas as far as segments.
Core she continued to be strong because of the continued.
Not only movement from from on Prem to private cloud, but also.
Just the new customers that we signed in Q4, the backlog that we haven't installed so I am pretty sure that our install backlog is out at least 12 months now for all of our courses for our flagship core solutions.
And as far as complementary I mean, that's going to continue to be driven by nano digital and also.
The new fraud solution that we're rolling out a treasury and other things. So there's just a huge demand for a lot of our products out there.
And then payments will just continue to grow.
We closed the deal in August that should help us.
Move our our bill pay solution a little bit.
R E T S and Cts or most still showing strong signs of growth.
Great. Thank you for the color.
You bet.
Our next question comes from Rena Kumar from Evercore. Please go ahead with your question.
Hi, good morning.
Yes.
Thanks for taking my question you mentioned, a 56 prospector attending a conference later this month I'm just curious now how that number compares to previous conferences that you ran and if a prospect or using in house or outside corporations right now and then finally, just a potential timeline of conversion.
Thank you.
Alright, thanks, very much. So it is up I don't have an exact number for what would be the most we've ever had but we are all confident this is a record to have 56.
Show up and you know what that was.
I guess the thing that you can intuit from that is not all prospects come to our client Congress. So that means we have a whole bunch more core prospects that we're talking to that are not coming to the client conference, but the reason I stressed that is these are people who are investing the time to come and spend with us they're looking at a move to Jack Henry the other thing that I would correlate there is that normally what I say on these calls is it.
You can do 50 to 55, new core customers in a year. That's a really good year. We had 56 that are signed up to come to the to the client conference to join US there. So a great sign as far as we're concerned when they sign when some of them are at the beginning of the process somewhere at the end of their process. There. You know this is dependent upon anil step in their due diligence to come and spend a little.
Time with us so it all depends on.
On when they sign but as far as core conversions are concerned it's still a good a good measure for our core conversion is to think in terms of nine to 12 months for our core conversion and that's not because we can't slot them in and we don't have the staff or anything like that it's because when you do a CT conversion you use that phrase a lot of times, you're doing heart and lungs.
<unk> all at the same time on a bank or credit Union and they need time to get ready for that there are a lot of prep work to do a lot of training to do and so just a normal core conversion regardless of who the provider is we normally talk in terms of nine to 12 months. After they signed so there's there's not a good way to try and apply this 56 number into what are the projections for the next day.
Full year.
My point in bringing it up it was more to tell you. There is a tremendous amount of interest in Jack Henry as a technology provider right now and that's a really good objected indicator of the level of interest.
That's very helpful and then as a follow up.
Starting with the financial institutions more open clicking through our public cloud infrastructure and are there any regulatory changes in the five states that we should be aware of where up I would be more open.
Calling on Amazon Web services, and Microsoft a door.
Yeah, that's a great great follow up arena. So the answer is no. There's no. There's no great demand today and I've said this on other calls no demand right now for a full stack public cloud.
Solution, there's nobody out there clamoring for that today and there are no providers today, they're doing everything in the public cloud our whole point with this strategy announcement was to make sure that.
Prospective customers and our existing customers know, where we're going and when we expect to get there we believe and I've I've done lots of meetings in the last few months with Ceos, both bank and credit Union.
And there.
There's almost no demand today, but there will be in the future and we believe that the regulatory environment is going to shift along along with that so as the regulators become comfortable with the idea of the full stack being process on the public cloud, you'll see more and more banks and credit unions starting to talk about there.
They are ready ready to make that move so, but it's a it's an evolution and it's something that the regulators need to evolve forward and then of course customer demand will evolve in that same direction.
Thank you.
Okay.
Our next question comes from John Davis from Raymond James. Please go ahead with your question.
Hey, good morning, guys, Kevin just on free cash flow conversion for 2023.
Is there a chance where above 100% given some of the timing items you called out in the fourth quarter, just any kind of color on free cash flow conversion expected this year.
Yeah, I would say J D. I mean, obviously the things that we had this year with the with the huge increase in commissions in the prepaid because of the strong contract and we had especially in the fourth quarter, but some of that is actually a buildup from the strong contract rate in Q2 Q3.
So obviously that that should level out next year.
As we continue to move forward. However, I will say that you know obviously, we have to grow every year. So our quotas are going up so it just depends on the timing and what actually gets sold but.
So I would say that we will get we should be right back at 100% conversion next year, giving those working capital things work out just.
Just the change in receivables should be a positive for next year, because we collected more of our annual maintenance billings now in FY 'twenty three than we did in FY 'twenty. Two so all of those things being said, we should be back 100% or we're going to be above 100%. I mean, it's it's too early for me to make that prediction J D.
Okay, No no fair enough and then just on payments obviously.
5% deceleration a little bit, but you had a really tough comp on a year over year basis.
Have you seen kind of any impact from debit credit mix normalization.
All of the two year stack basis, Youre still kind of low double digits is that the right way to think about.
23.
Payments segment specifically.
Are you asking about revenue growth J D are you talking about payment volume, yeah, sorry, yeah, sorry revenue growth and in payments.
Well I.
Our revenue growth is going to be in the high single digits for FY 'twenty three to FY <unk> compared to FY 'twenty. Two obviously the big drivers of that are EPS in Cps.
Our online Bill pay is going to grow a little bit it's the slowest grower of the of the three buckets and our payments.
What we're seeing is D. P S in Cps and the demand we're seeing we should still be able to see very high single digit maybe even low double digit if everything goes if all the moons align we could get their J D.
Okay, and then last one for me just on capital allocation, obviously, you announced the payrolls acquisition, which closes later this month or isolate it to.
Can you help us at all.
Size wise revenue.
Earnings impact is immaterial I know you didn't disclose the.
Price.
But then you also didn't buyback any stock in the quarter. So should we expect kind of more deals in the pipe you know any color there on capital allocation.
Well, so J D. I mean <unk> heard the definitive agreement we have in place we are not allowed to disclose any financial impacts until after we actually close the end of this month. So it'll be after that before we can give any guidance.
Or the magnitude of the acquisition.
But you know I mean really the reason we didn't buy any stock back this quarter is because our stock performed extremely well in the quarter. I mean, you think about how much our stock went up from from July one to two now and and the fact that we are blacked out from from buying our stock back just like Dave and I are blacked out until when.
Now to earnings from the from the end of a quarter until we actually announce earnings so during that time, our stock jumped up 10%.
Up above $200. So you know would it be a smart my first to jump in with both feet right then.
When we're already have a draw on our revolver when we got an acquisition out there and we obviously want to keep some dry powder.
We continue to look at other potential targets out there.
Let me jump in on the second part of your question about other deals in the pipeline. So obviously, we wouldn't go on an earnings call and talk specifically about anything, but I've stressed over and over and over again, we always have deals in the pipeline, where we've historically been known as a serial acquirer. These past couple three years have been the anomaly for us, but now that things are getting a little more we'll say normal.
When it comes to evaluation expectations, we are absolutely looking at deals.
Today, and we will continue to look look for deals that make sense with our with our strategy, but you know well enough. We are a disciplined acquirer, we don't chase the shiny object.
But we're always looking.
Okay. Appreciate the color thanks, guys.
Yep.
Our next question comes from Peter Heckmann from D. A Davidson. Please go ahead with your question.
Thanks for taking my question so.
Is it possible on pay rail I know you can't disclose any.
Specifics, but is it possible to talk about whether you assume.
It would be dilutive to your current.
Net income guidance or accretive or neutral.
For FY 'twenty, three period will probably be slightly dilutive.
We haven't.
Totally finalized that yet because obviously, we haven't closed yet, but it will be slightly dilutive to FY 'twenty three but it should be accretive.
In FY 'twenty, four and grow nicely from that point on.
Okay. That's helpful and then.
When you think about your guidance any material level of buyback incorporated in your 'twenty guidance.
There is no buyback incorporated into my guidance feet.
Got it.
Two things just to be clear on so I mean anytime I've given guidance past has never assume buybacks and it's never assumed in an acquisition.
Correct, correct, and then as you're thinking about M&A.
What would be the ceiling for net leverage that advantage would be comfortable with.
When you go to three times on a.
Pro forma EBITDA for the right deal.
Yeah for the right deal Pete I mean, I think we can go three times and we've actually I would tell you I mean over the years and obviously as Dave said I mean, we've been kind of out out of the market last three years, because valuations have been so ridiculous, but I will tell you in the past I mean, I've I've had approved financing for deals that would've been three <unk>.
<unk> leverage so the board would be very careful that if it's the right deal for the company.
Just to move US forward I mean, as Dave said Ryan.
And chase shiny objects, but if it's something that will that will help us with our with our laser focus on the EFI industry and it was something that our customers need and will drive the company further than apps absolutely would go three times.
That's helpful. Kevin.
Great timing of your retirement and I appreciate all your help over the years.
You bet Pete.
Our next question comes from Dave Koning from Baird. Please go ahead with your question Oh, Yeah, Hey, guys and thanks, Kevin for all the all the detail on the margins kind of for the guidance.
Is there anything to think about in this year in this base that that would change kind of the long term outlook like basically can we kind of take the the little bit of a downdraft in 'twenty two 'twenty three margin and then just kind of grow it more normally off of off of that base going forward like there's nothing new and incremental that would change kind of the longer term.
Progression right.
No Theres nothing there Peter I mean, you know I mean as everybody on this call knows I mean, we have seen some ridiculous inflation in the in the last four or five months I mean.
If you don't think I'm serious distracted Mcdonald's and buy your Kid a quarter pounder cheese fries and see what you paid for that I mean, just just that so I mean once inflation gets under control and we can grow over that then then absolutely FY 'twenty four.
We should go right back to our typical margin expansion once we can get over these hurdles.
Yeah that makes sense I bought a biscuit Mcdonald's yesterday and had that same experience. So so thank you for that.
[laughter] learnings call has gone on a totally different direction.
And then I guess the second question I, just had I know I know you paid a number of transactions and I just went back and looked at the visa debit transactions and they had a really tough comp in the year ago too, but they they they had like pretty stable growth in the last two quarters I think they were at like 5% both.
Quarters, but I know you decelerated this quarter and I know, there's all sorts of different things you have them and stuff but.
Well I guess why else did did growth decelerate in the payments business.
I don't know if anything specific to call out Dave.
I will tell you that if you remember last year in 'twenty, one we had a huge growth in core and so we had a tough comp.
Our payments segment this year compared to last year.
So okay. So it really just is is is that yeah that makes sense yeah.
Yeah.
Alright, thank you.
You bet Thanks, Dave.
Our next question comes from Charles Nabhan from Stephens. Please go ahead with your question.
Hey, good morning, guys I wanted to get a little color around the timing of our margins over the course of 'twenty three.
I know some of it I know, there's a lot of variables right now, but some of the factors you mentioned, Kevin like the conference and the license headwind are weighted towards the front end of the year, but that being the case is it fair to assume that you know the bulk of the headwind.
B in the front half of the year for 'twenty, three and that we could potentially see something above a flattish margin in the backend all things equal.
Well, yeah, Charles Youre, absolutely right I mean, the the user group meeting as soon education conferences as in Q1, so that is going to have a big impact on margins in Q1. So it youre right I mean, the comps should be a little easier once we get past that the license revenue I mean that spread out.
For the year, because that's based on delivery of the license. So that's lumpy as it always has been so you don't really know which quarters, that's really going to hit.
On a year over year basis, our apps.
Absolutely sure that license revenue is going to be down and.
And then the other things that are in there is just you know.
Cost cost to retain talent is a challenge and you know.
That's not going to get any easier in the short term. So that's that's going to be a challenge for the entire year. Our the way we're seeing it right now so I think you're right I think the biggest headwind will be in Q1.
But I think there's other challenges that I think we're going to have to deal with and get over the balance of the year, but youre right. The margins should be a little better after we get through Q1.
Right I appreciate that and and as a follow up I wanted to drill in the pan out a little bit specifically, if you could give us some color around how much of the new customer wins are coming from the existing base versus outside the base and then secondly.
<unk> business was a topic at the analyst day, and I was wondering if we could get an update on that in terms of your ability to cross sell and and just sort of.
How that's how that's how that's positioned.
<unk> you for new wins.
Yeah. Thanks, Chuck So first of all 100% of the banner wins are happening inside the Jack Henry core base, we've talked about this in the past. The fact that the great resignation did have an impact on the dental business as far as the developers are you know its been commonly reported in the news that hypertext developers have been moving around.
A lot in commanding very high salaries, and and we liked a lot of companies were impacted by that so we've been very transparent with our customers sharing the fact that in our prospects sharing the fact that we've had to move back or a release.
The release date as far as outside the base. We also had to move it back of the release date for panel business into calendar 'twenty.
2023, and so we believe we're hearing from customers and prospects that once we get dental business out there that's really going to light a new fire under the banner.
And old platform, but we're having tremendous success as it is so we're just excited to get dental business out there and we're excited to be able to sell outside the base, but in full transparency that is a line of business that was probably most impacted by the great resignation here over the past year or so.
The thing I'd add is almost 100% of our new core wins takes banner.
And in fact banners probably.
But in this industry for a long time banner was probably the only solution that I have ever known that actually closed a core deal because.
Because we've actually won some core deals because we have so it is it is the top of the line solution out there.
And so they drive we saw 100%.
Inside the base.
That also includes all of those new core customers that were taken away from our competitors.
Got it thank you very much and Kevin. Thank you for all your help over the years and best of luck in the future.
King.
Yeah.
Our next question comes from Dominic Gabriel from Oppenheimer. Please go ahead with your question.
Hey, great. Thanks, so much I just wanted to talk about.
No.
Why would it be possible, let's say.
Medium and small asset size versus large asset size.
All institutions might be willing to take on.
The public cloud solutions that you're you're developing sooner.
And is that and then maybe it moves up market from there is there does that sound correct does that makes sense that it would start in the smaller buys first and they might be more willing to do that and then I just have a follow up thanks.
No I think Dominic I mean, it's possible that that could happen that way I don't expect that to happen I think it's going to be a larger it would be the larger financial institutions that will.
That move because for them, there's more there's more potential benefit to move into the public cloud right, but what they're paying is is more.
Then there's some smaller institutions the demands of their customers generally are greater.
As far as flexibility and new functionality and new releases.
The expectations of their customers are higher so I think it's more likely that it'll be kind of mid size regional banks that will adopt the public the full stack public cloud.
Offering first and I think smaller institutions will follow on now.
We got to wait and see it's never been done before so you got to wait and see what happens, but that's my expectation is that it'll be a you know the one to five 1% to $10 billion banks.
Probably going to be first to adopt and then you'll see smaller banks and the really large regional banks kind of follow along after that as far as moving everything to public cloud and I keep saying everything because we're moving different pieces to the public cloud native and banner as a public cloud solution. So there are pieces that are already public cloud, but when we're talking about a full stack.
I think thats the way youre going to see the progression, but we'll just have to.
See when we get there.
So I'll start from the middle incentive expand out from there as far as out that's what I, that's what I see.
Okay answered I think very interesting I was just curious thank you and.
You know I just you know.
You listed off there's a multi pronged question here so forgive me it right.
You listed a bunch of the different kind of cost pressures that you're seeing from just normalization you listed a whole whole bunch of them.
Is there any way for us to think about the sizing on the various ones just from largest to smallest and then just a follow on to that but sort of separate you know how how are your customers adjusting to this kind of similar environment, where they're probably also see you know some of the various factors as well and.
Do you think that could shift the demand for your products as they think about investing.
And further technology enhancements thanks, guys.
Yeah. So that's a good question and as far as sizing the impact I don't I don't know that there's any one thing that jumps out at me I mean, probably personnel costs.
To attract and retain talent is probably would probably be the biggest one.
You know the other ones are you know insurance I mean, it's just it's it's a hard insurance market out there for E N O in cyber.
Sure everybody is experiencing that I mean, our premiums went up significantly last year and they're going to go up again this year.
And then probably right behind that or maybe ahead of that would be our travel expenses because not only the travel expenses going up but we have more people traveling.
So for example, we have over 300, I believe 300 employees going to the Education Conference next week in San Diego to.
Take care of our you know 20.
2500, plus customers that are going to be there.
So there's the travel costs are just going to be up significantly this year compared to last year and I don't see any end in that the second half of your question. There Dominic So I think the thing to keep in mind with our customers is our customers are in the business of lending money right. So we've all as we all know that rates are going up.
Our customers are continuing to see a net interest margin.
<unk> growth.
And so although their costs are going up and we've talked about previously we've done CPI increases and they are certainly seeing that in other areas. There opportunity to make money has also gone up fairly significantly and they are highly motivated as evidenced by our sales success. They are highly motivated to find technology solutions.
That can increase their efficiency as an organization and provide opportunities to grab new customers, whether that's on the deposit side of the loan side. So there is no slowing down at all in customer demand for for new technology.
They do have that benefit of the the lending side of their business and the increased interest margins that they're seeing.
Great. Thank you.
Sure.
Our next question comes from Nick <unk> from Credit Suisse. Please go ahead with your question.
Good morning, and thanks for taking my question and congrats to Kevin I was hoping just to dig into the 2023 non-GAAP margin expectation, if we can get some color across the segments.
Oh across the segments.
Uh huh.
Well I I don't I.
When I say margins are going to be flat I think they're probably going to be I mean, we're going to see some margin improvement probably in core and payments complementary I I don't know because obviously, we're getting the big pressure and in our R&D and SG&A lines in cost of sales. So so some of that.
Margin is not impacting the segments directly because we don't have SG&A and R&D in those segments. So the margins for the segments themselves.
Should should be solid with some slight expansion.
But it's it's below the line that we don't allocate the R&D and SG&A, that's going to really make it make it would be flat for the year.
Got it thanks for that extra color and then for my follow up I wanted to just ask what Youre seeing from your customer base. Just in terms of the M&A environment are you seeing a big step down in M&A activity relative to 2022 or is like the term fee guidance is more conservative.
Yes, so Nick we absolutely are seeing a slowdown that and you know one of the things. We've stressed on these calls in the past is we have a lot of visibility into when customers are acquiring other customers. They were one of the first calls they make if theyre looking at acquiring another institution because they wanted to get a conversion slot lined up well in advance and so we have a lot of visibility.
We don't necessarily know when one of our customers that can be acquired we have a lot of visibility regarding the overall.
Movement in the market and that's why we have.
<unk> deconversion revenue to be down next year, because we expect M&A overall activity to be down in the coming years now that's reading tea leaves and just trying to.
Understand what's happening in the space, but that's our current expectation is that overall.
M&A among banks and credit unions will be down in the coming year, Yeah. I mean, that's that's like Nick.
Year before last I mean, we did not predict that.
The deconversion revenue would be down $33 million at the beginning of the year, because M&A appeared to be fairly solid.
But we knew it was going to be up this year, but we never drift is gonna be up $33 million. This year. So it was basically up in 'twenty two what it was down in 'twenty. One so it's kind of flat for the two years.
Just on what we're seeing in the pipeline right now it looks like M&A is slowing down a little bit could that be because of the rising interest rates could it be due to inflation I mean, I think there's so many different factors that you'd point to that is having an impact on the M&A environment.
Understood very helpful. Thank you.
Our next question comes from Ken <unk> from Autonomous Research. Please go ahead with your question.
Hi, Good morning, David and Kevin Thanks for taking my questions. This morning, I wanted to follow up on those comments on band now can you just talk about how much opportunity is left.
To go with those core customers and then what does the opportunity look like with those non core customers, how do we try to quantify that opportunity.
Yeah, that's a that's a.
It's kind of a how big is big question, Ken I'll do my best to answer that so first off on inside the base. We have hundreds of customers who are not running banner inside the base today I would guess, it's close to 1000, probably existing core customers that are not running now today, so lots and lots of opportunity inside the core base and then when we get outside the core base. So think about the <unk>.
<unk> that we've had with overall, what we used to refer to as profits cars of course, we don't use that brand anymore, but the whole goal there was to sell to non Jack Henry core customers and we have roughly 7000 banks and credit unions that we've sold a variety of different non core solutions to customers, who are not running a Jack Henry core, but theyre running other things. So we have that base of seven.
<unk> thousand banks and credit unions that are already doing something with that Henry that's noncore.
That we can go and mine they already know us we have a relationship with them. We can go and mine that base with new sales opportunities. Once we have battle ready to go outside the base. So there's a tremendous opportunity. The other thing I'll stress as I've said on the call over and over almost any bank or credit Union in the United States today is running a mobile banking solution and Internet banking.
Solution and they look totally different they function totally different they are not the same system panel eliminates that concerned banner with a single platform. So the user experience is consistent whether you're on your phone or your laptop.
And banks and credit unions wants to move in that direction until Theres, a motivator there for them to want to go in that direction, we just need to get that delivered outside the base.
Okay, Great and then I wanted to ask about consolidating the brands and the opportunity there David I believe you mentioned that you are are you going to operate as one company.
I think your comments, where it leads to a better client experience can you just talk about how you think that might impact your sales performance your revenue growth and I guess retention rates across your customer base.
Sure Yeah. So we're very excited.
Excited about this adjustment we made the announcement on August 1st So just a couple of weeks ago and it ties in a few key points to this number one we now can eliminate any of the marketing expense associated with supporting several different brands. So there's a logical.
<unk> expense cost savings there when you move to one brand.
More importantly, I think we've had this initiative that we call one Jack Henry in play for about a year.
There are two now Greg Adelson, our president talks about it at the at the May Investor Conference and it's been this push that we've had towards delivering a more consistent experience for our customers in the past with three different brands. There's kind of this natural thought that the different brands are almost like different companies and so moving toward.
One brand one company consistent processes consistent experience for our customers and certainly for our prospects. We believe will aid us not only in on the expense side, but on the on the sales side will help when it comes to our customer perception of our company and.
And making sure that any existing customer gives a really positive referral to a prospective customer around doing business with Jack Henry So I would say you know some of your published studies on our customer sat ratings. We report them regularly deck Henry has the highest customer satisfaction ratings in our industry. The one thing that we get knocked down once in a while had been well you've kind of operate like separate company.
Well with this project, we hope to eliminate that concern and then overall, we will have the highest customer sat ratings by far.
Great. Thank you very much David I appreciate the thoughts as always and Kevin Congrats on your retirement.
Thanks Kim.
Once again, if you would like to ask a question. Please press star and one to withdraw your question you May Press Star two.
Our next question comes from James Faucette from Morgan Stanley . Please go ahead with your question.
Hey, good morning, everybody and thanks for all the commentary wanted to go back to tobacco.
And you talked about like how are you.
The great resignation isn't impacting a bit the release states, but also found your commentary around the.
Market and where you think you will see early traction and how that evolved interesting.
How about from a feature and feature development perspective, how much feature development do you think needs to evolve to to address the different market opportunities that you have.
Looking at for that platform and capabilities and how does kind of staffing and those kinds of things impact, adding those features and maturing now.
Yes, it's an interesting question James when Youre in this business you know the the request for new features never stops right. As soon as you get to where you think you bet everybody beat somebody comes up with another idea and sure would be nice if you would do X.
So that's an ongoing our ongoing projects. The good news for US is we know on the consumer side with what we have in market today, we know that we have a.
A tremendous solution that beats pretty much any competitor on.
On the consumer side, the only missing piece has been for commercial customers with annual business. So we're very confident that once we get an annual business and market, we're going to have a a terrific solution to compete with anybody but you can't ever expect that youre going to stop.
Developing new features adding new features and enhancements to our solution like that because not only does our customer demand increase but their customers are demanding more functionality through a platform like that they want to be able to do more things through a platform like that so so that's an ongoing commitment for us.
Sure.
I don't Wanna say forever, but forever is a long time, but you know it will go on for very long time. The really good news is the whole tech modernization strategy that we've been talking about is built on that same platform. The panelists on and so anything that we do in the future with nano and adds to the overall story of the tech modernization offering that we'll have from <unk>.
Jack Henry and so it just continues to bolster what we've been talking about as the future of technology for financial institutions.
And then what is your sense I mean, it's an interesting period in one that a lot of us aren't familiar with in terms of like.
Pricing as price changes and increases in our general inflation, how does that impact.
Or how are you expecting that will impact the pricing discussions and in that part of the selling motion even for your products and and you know obviously, what's the competitive environment associated with that look like.
The competitive environment has not changed and you know we've talked about it before pretty much any large purchase in our space today.
Banks and credit unions will involve a consultant and the consultants role and that engagement is not only to do the comparison of one product to another but it is to negotiate price and so you know regardless of what's happening in the economy. The consultant is there to try and make sure that they squeeze every every opportunity out of the out of the engagements that they can.
I can't say that anything dramatic has changed as a result of what's happening in the general economy. When it comes to customer expectation or consultant expectation and I don't think anything is going to change the opportunity for us when it comes to pricing is by offering an enhanced solution a differentiated solution kind of back to your first question. It's a more.
The more we add to these platforms that are differentiated from our competitors and that's where the opportunity is to charge more.
Because then we're not you know and then it's not just table Stakes, it's not just which which shows solution looks better, it's which wasn't really functions better and today nano has that reputation and so that's our that's our opportunity and our challenge is to make sure that we continue to stay ahead of the pack as head of the pack as far as feature function, because thats where customers.
We'll pay you more.
And our next question is a falloff from Dominic Gabriel from Oppenheimer. Please go ahead with your follow up.
Hey, great. Thanks, So I just.
I just wanted to talk to you about the guidance on the revenue growth and how we should how investors should.
Think about the Investor day, I think there was a slide that said you know the long term revenue growth expectation between eight five and 9% and then we're kind of you know.
Maybe roughly 50 basis points below that 423 is there any way you could help us walk between those two those two points.
New customer sales.
And all of those various waterfall teachers that is creating the delta. Thanks, so much.
Well I mean, you're absolutely right.
At the analyst asked at eight and a half to nine and we're right at the eight and a half so yeah. We're on the low end of that but.
Considering the year that we're coming off of with the with the huge growth we had of almost 9% in 'twenty two I mean, it makes for a pretty tough comp.
So I mean, if we can grow eight 5% are in 23 compared to <unk> 22, I mean, I'm thinking for a company. That's 90 plus percent recurring revenue that's a pretty good feet.
To grow at that pace.
Obviously, Kent can we grow and get back to 9% and 24.
I would hope so, but my Crystal ball is a little little foggy going out that far.
Sure no that makes sense and congrats on all the wins this quarter too.
You bet. Thank you.
And ladies and gentlemen, with that we'll conclude today's question and answer session I'd like to turn the floor back over to Kevin Williams for any closing remarks. Thanks.
Thanks, Jeremy obviously, we're very pleased with the results of our ongoing operations and we are excited for the future.
With everything that all the new deals that we've signed in the previous quarter I want to thank all of our associates for the way. They have 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 our shareholders I want to thank you again for <unk>.
Joining us today and Jamie with that would you. Please provide the replay number.
And ladies and gentlemen, with that we will conclude the conference call today to access the digital replay of this conference you may dial one 870 734475 to nine or.
Or for 123.
<unk> seven.
0088, beginning approximately one hour after the conclusion of today's event.
You'll be prompted to enter a conference number which will be 279.
2074.
Please record your name and company when you on it.
The conference has now concluded.
Thank you for attending the presentation and you may now disconnect your lines.