Q1 2023 Jack Henry & Associates Inc Earnings Call
Good day and welcome to the Jack Henry first quarter earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad and Swift.
Your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Vance Girard, Vice President of Investor Relations. Please go ahead Sir.
Sure.
Good morning, and thank you for joining us for the Jack Henry first quarter earnings call. Joining me on the call today is David Foss Board Chair, and CEO , <unk>, <unk>, CFO , and Treasurer, and Greg Adelson, President and C O O.
After these opening remarks, I will turn the call over to Dave for his thoughts about the state of our business financial and sales performance for the quarter industry comments and other key initiatives.
After this concludes his comments Mimi will provide additional commentary regarding the financial results and fiscal year guidance included in the press release issued yesterday. It is available from the Investor Relations section of the Jack Henry website.
We'll then open the lines for Q&A.
As a reminder, 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 multiple factors that could cause actual results or events to differ material materially.
From those which we anticipate due to multiple risks and uncertainties.
We undertake 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.
On this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income the reconciliations for non-GAAP financial measures are in yesterday's press release, I will now turn the call over to Dave.
Thank you Vince and good morning, everyone before we get started today I'd like to welcome the other folks in the room with me is introduced a moment ago by Vance.
Again, I'd like to welcome <unk> to her first quarterly call with Jack Henry Mimi has been sitting in the CFO chair for a couple of months now and I've spent a good bit of time immersing herself in the details of our business of course, you'll hear from her in a bit I'm happy to have the opportunity to introduce her for the first time to all of you.
Additionally, I'd like to welcome our President and Chief operating Officer, Greg Adelson to his first earnings call. Many of you know Greg from our Investor day and other events.
It will be a participant in these calls going forward, but today he will primarily focus on answering any questions regarding our recent payrolls acquisition.
And last I'd like to welcome to answer or to his first earnings call.
As you probably know Vance was recently promoted to vice President of Investor Relations and he will host these calls every quarter going forward.
With that let's move to the update section of our call as I noted in the press release I'm very pleased to report another strong quarter of revenue and operating income growth for our company 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 the quarter.
For the first quarter of fiscal 2023 total revenue increased 8% for the quarter and also increased 8% on a non-GAAP basis deconversion fees were up slightly as compared to the prior year quarter.
Turning to the segments, we had another solid quarter in the core segment of our business revenue increased by 6% for the quarter and also increased by 6% on a non-GAAP basis.
Our payments segment again performed very well posting an 8% increase in revenue this quarter and a 7% increase on a non-GAAP basis.
We also had another strong quarter in our complementary solutions businesses with an 8% increase in revenue this quarter and an 8% increase on a non-GAAP basis.
As Ive discussed previously our first quarter is normally our lightest sales bookings quarter, because our fourth quarter tends to be extremely strong and the sales pipeline is depleted as a result as you may recall the June quarter was the strongest sales quarter in the history of the company. So we certainly expected that historical trends hold true.
This year, however, although sales bookings didn't set a record they were up by double digits over the prior year quarter with many notable wins.
In the quarter, we booked six competitive core takeaways and five deals to move existing in house customers to our private cloud environments.
As some of you may recall, we started last year with six core wins and ended with a total of 52 per year.
Although I can't predict our full year performance with any certainty.
Pipeline gives us optimism that we're likely to see that kind of trend this year as well.
We continue to see success with our card processing solution, signing nine new debit processing clients this quarter and one new credit clients. We also continue to see remarkable success signing clients to our banner digital suite with 60, new contracts in Q1.
Speaking of our digital suite at the end of Q1, we were hosting approximately $8 3 million registered users on the platform and that number is now growing at almost 200000 users per month at.
At the end of Q1 last year, we had about 6 million registered users on the platform. So we've experienced more than a 38% increase in the intervening 12 months, yes.
Currently expect them to have the mental business offering generally available in early 2023, providing another avenue to increase the number of animal users.
Our digital suite continues on the path to becoming the industry, leading digital banking solution in our markets.
The continued success, we've seen with sales and adoption of our digital suite is consistent with the expectations coming out of the bank director of Technology Survey published in August as.
As they do every year Bank records, serving hundreds of their subscribers during June and July regarding a variety of technology prioritization and spending topics.
More than 50% of the responses. They received were from bank Ceos and board members and more than 80% of the responded banks were greater than $500 million in assets.
Although this survey didn't predict spending for 2023.
I'd highlight that the median increase in expected technology spending this year was 11% as compared to the prior year one.
One of the interesting items from this year's survey with the analysis of technology in use by responded banks as it relates to their ability to serve different generational groups.
Fully 93% of the respondents said they had the technology in place to serve baby boomers, but only 25% said they have the necessary technology in place to affect leaves effectively serve Gen Z years.
Of course, it's the younger generations that expect to conduct all banking services without ever entering a branch.
Clearly the initiative for all banks to get to a digital presentation layer has a long way to go.
All of this bodes well for the future of our digital suite as well as the other innovative solutions offered by Jack Henry which helped facilitate an improved customer experience through a digital front door as a financial institution.
On August 9th we announced a definitive agreement for Jack Henry to acquire pay rails and we completed the deal on August 31st.
<unk> accelerates Jack Henry's technology modernization strategy I immediately, adding next generation digital payment capabilities to our public cloud native technology stack and payments ecosystem.
<unk> also enhances Jack Henry's payments as a service strategy, enabling clients to simplify the complexity of payments modernize their existing payments channels and remain at the center of their account holders payment experiences.
Acquiring payrolls has strengthened our position in the payment space.
Providing our collective clients with additional functionality optionality and flexibility that enhances their diverse digital and payment strategies.
To that end in mid October we announced the launch of a standalone person to person payments solution and further supports our real time payment strategy.
This offering is available for standalone implementation or as a strategic component of the full payroll and payments platform.
In addition to the Payrolls acquisition, we recently announced the release of our new financial crimes defend your application and expanded partnership with Mastercard and a new relationship with Google.
We're excited about these key relationships with Mastercard in Google and look forward to continuing the rollout of financial crimes defender.
All of these announced solutions and relationships support our ongoing mission to supply our community and regional financial institution clients with leading edge public cloud native financial technology offerings.
As many of you know we normally conduct our two largest client conferences in the fall each year.
This year, we combined those conferences into one in person event in San Diego called Jack Henry connect we hosted thousands of attendees at the conference, giving us the opportunity to interact directly with many of our existing clients and prospects.
Of course events like this not only presents a wonderful opportunity for our relationship building and education.
Also generate a significant number of new sales leads.
During the connect conference I hosted our annual CEO Forum attended this year by more than 200 clients Ceos.
Although we did not conduct a formal survey during the meeting the general feedback was that the attendees are concerned about the general economy, but committed to using technology to position their businesses for the future.
Last month, we were proud to be included in Newsweek's list of top 100, most loved workplaces Jack.
Jack Henry ranked 17th overhaul and second in the financial services category.
Ranking came as a result of a survey conducted by Newsweek I've, almost one 5 million employees at thousands of companies large and small.
The list recognizes companies that put respect carrying in that book and appreciation for their employees at the center of their business model.
This is an incredible honor for us in no small part because this first focused on several qualities to which we aspire everyday collaboration and teamwork.
<unk> for advanced advancement transparency corporate citizenship and how our company lives up to its own stated values.
In addition to understanding the need to treat our employees well, we recognize that business risks, resulting from climate change constitutes a key component of our risk management responsibility or <unk>.
CFT align disclosure is included in Jack Henry is 2022 sustainability report and details our assessment of Jack Henry's climate related risks from acute and chronic critical risks the transition risk like greenhouse gas emissions and regulation.
I encourage you to visit our corporate responsibility website via the Investor Relations tab for more information about our ESG efforts and to review our published sustainability reports.
As Mimi will highlight on her comments, we recently sold one of our facilities in San Diego.
This sale was the result of our ongoing efforts to analyze what our facility requirements will be in the future.
We continue to evaluate the best operating model for our company as it relates to remote versus in office work.
As a result, we are not anticipating any significant reduction in our physical physical footprint at this time, but instead plan to make slower incremental changes that align with our go forward workforce strategy.
Next week, we will conduct our annual shareholder meeting and we will again be hosting this meeting in person in moment.
We are excited to be able to meet with our shareholders in person, but we're also very aware of the ongoing pandemic related concerns that arise when you assemble a group of people.
With this in mind, we will once again offer an option to observe remotely for those who wish to listen without attending the meeting.
Despite the uncertainty caused by the economic challenges, we're all dealing with today.
Mind, you of a few of the fundamentals about our company.
On the rentals, we emphasize regularly in our discussions with investors and analysts first slightly more than 90% of our non-GAAP revenue is recurring in nature and most of it is tied to long term contracts for critical processing systems.
Second we have a very manageable amount of debt on the balance sheet and we continue to operate with a solid cash position.
Third we have paid quarterly dividends since 1991, increasing them 33 times over that same period, and we continue to be committed to our dividend policy moving forward.
Fourth we have an extremely engaged workforce as we've seen in our employee engagement survey results and place best place to work Awards.
Our clients are generally well capitalized and as evidenced by the survey I cited earlier, we're continuing to increase their investment in modernizing their technology infrastructure.
And finally remember that we weathered the financial crisis, <unk> 15 years ago, with very few bumps or bruises and it's highly unlikely that any near term economic uncertainty results in a similar level of financial institution impacts.
As we move forward I remain extremely optimistic regarding our levels of sales activity and customer responses to the solutions, we're delivering and the strategies we're executing.
We will continue with our disciplined approach to running the company and we expect that approach to continue to provide stability and solid performance for our employees customers and shareholders with that I will turn it over to Mimi for some detail on the numbers.
Thanks, Dave Good morning, I appreciate this opportunity to speak with everyone for the first time as Jack Henry CFO .
At my career at the intersection of enhancing technology I'm thrilled to be at such a highly regarded company.
And delivering shareholder value.
As highlighted by Dave's comments, Jack Henry has had a successful first quarter now I'll share some color on the financial details driving this result.
Total revenue was up 8% for the quarter that was on a GAAP and non-GAAP basis.
Let's jump into the detail.
Services and support revenue increased 8% and acquire.
Conversion revenue was about 800000 for the quarter consistent with previous guidance, we expect approximately $35 million in deconversion revenue this fiscal year.
I couldn't be heavier in the second half however, forecasting daycare conversion revenue, it's always challenging.
Our private and public cloud offering showed robust growth in the quarter growing 10%.
Product library and services revenue.
7% in the quarter impacted by the return of our in person user group conference and higher consulting activity.
I slightly lower implementation revenue.
non-GAAP total support and services revenue grew 7% this quarter.
Processing revenue increased 10% on a GAAP basis, and 9% on a non-GAAP basis in the quarter.
The increase was primarily driven by higher card volume.
Additionally, digital revenue continues to show rapid growth led by strong demand for our <unk> digital platform.
Now turning to costs.
Cost of revenue was up eight first at the hard costs in line with card revenue higher personnel license and amortization expense, partly offset by a decrease in labor cost deferrals.
Research and development expense increased 23%, primarily due to higher personnel costs.
SG&A rose, 12% driven by increases in travel personnel consulting professional services and meeting related expenses, partly offset by the gain on the sale of assets.
The increase in meeting expands.
With each of our first in person user group conference since that's what 'twenty and the consolidation of our two user group event.
And then the consolidated conference were solely in the first quarter instead of over the first two quarters and this will be the norm going forward.
We can clearly Q1 with strong results delivering net income growth of 4% and fully diluted earnings per share I think dollar 46.
For transparency impact from the gain on sale of asset payrolls acquisition and <unk>.
Conversion fees are shown as part of the non-GAAP adjustments in the press release.
Now turning our attention to cash flow.
Operating cash flow increased to 137 million for the quarter, primarily due to a higher collection of accounts receivable.
As a reminder, our cash flow is impacted by the collection of annual maintenance in Q1 and Q4.
So the conversion accelerate beginning and end of the bed.
Yeah.
Currently total R&D spending it's slightly elevated due to the integration of pay rail it should normalize by the end of the fiscal year.
Free cash flow, which is operating cash flow less capex and cap software.
In fact, net proceeds from disposals out, but with $116 million or one 9% 109% conversion.
Jack Henry has been.
Ansible steward of our investors' capital and as the new CFO I can assure you our capital allocation strategy will remain fundamentally convinced that we.
We're committed to maintaining ample operating liquidity.
Investing for grass evaluating strategic acquisitions paying dividend and Opportunistically repurchasing our stock.
This strong dedication to value creation resulted in a trailing 12 months.
Turn on invested capital of 23, 2% or 170 basis point increase.
To provide some extra color on the quarter's acquisition as Dave mentioned, the strategic <unk> acquisition closed on August 31st no.
The current quarter includes one month of results.
The purchase price was $230 million and Paypal is expected to contribute approximately $12 million in revenue.
Jack Henry fiscal 'twenty three.
The 'twenty twos that Yak dilutive impact 'twenty, three is driven by operation incremental interest and amortization.
As previously mentioned the acquisition is expected to become accretive in fiscal 'twenty four.
Well good thing ahead, let me share updated guidance.
We provide a transparent GAAP and non-GAAP full year guidance in the press release, the GAAP guidance is now inclusive of the payrolls acquisition and.
The gain on asset in addition to deconversion rabbit.
GAAP revenues for.
Fiscal 'twenty three is now expected to be 7.7% to 8%.
And by the acquisition of Pei Route as there is no change in our D conversion fee outlook.
Guidance for non-GAAP revenue guidance remains unchanged at eight eight.
Eight 6%.
Outlook for the full year GAAP operating margin of approximately 23%.
<unk> by both the gain on sale of asset and the acquisition.
Full year non-GAAP operating margin guidance remains unchanged at relatively flat year on year.
We remain very focused on returning to margin expansion in fiscal 'twenty four.
Full year GAAP EPS guidance is now a range of $4 90.
At $4 94 as that.
Our sequential quarterly cadence for non-GAAP revenue growth is expected to decelerate slightly in the second quarter when compared to current analyst.
And then rebound with sequential increases in both the third and fourth quarters.
Our full year guidance targets.
The trend is similar for non-GAAP operating margin, while the second quarter, we'll see a decrease on a year on year basis.
It will not be the same level seen in the first quarter, allowing us to achieve our full year guidance targets.
Based on our solid first quarter results.
<unk> disciplined execution and near term visibility of continued momentum we are on track to meet our non-GAAP revenue growth and operating margin guidance.
So in closing we delivered another quarter of strong business and financial results.
As we look forward, we remain excited about the opportunities we see to continue investing.
Serve our financial institutions and their clients.
Grow our business.
<unk> long term shareholder value.
We thank all of our investors for their continued confidence in Jack Henry.
Jack would you please open the call for questions.
Yes, ma'am, we will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys and twist. Your all your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Okay.
And the first question will come from base, who gabel with K B W. Please go ahead.
Hi, Thanks for taking my question.
My first question for you a meanie, it's nice to speak with you and welcome to your first earnings call.
Couple of questions on the guide first I guess was the 6 million gain on sale already contemplated in the guide when you guys got it three months ago.
And then if I think about the change in guide it seems like non-GAAP margins Youre, not really expecting a change so there's all of the dilution pretty much related to the acquisition.
And then the third part of my question I think last quarter. If you go back even had sort of highlighted the margin guidance being conservative with some areas of potential upside.
Is that still the same or has anything changed on your expectation there. Thank you.
Thanks, Todd and thanks for participating today.
To your question the real estate was not contemplated at the time, we reconfirmed our guidance at the close of the acquisition.
Relative to I believe your second question was around guidance.
David the only changes that impacted our guidance with the acquisition and the gain on sale.
And then your third question regarding margin outlook.
It's still early in the year, we're optimistic.
We are facing inflationary headwinds.
We feel optimistic.
We will deliver as to our guidance targets.
Great. Thank you and Dave if I could squeeze in one for you I sort of got your comments on the seasonal softness in new core wins.
But you know some of your peers have called out some softness in new signings and larger deals over 50 million. So just wanted to get your sense. If you were seeing any change in sort of appetite and signing deals in any of your cohorts that would concern you at all.
Thank you Vanessa I would've been I would've felt left out if you hadn't asked me a question. So thank you for that.
As far as the cadence of deals there is no no change the pipeline that we have right now of potential deals as well as.
By far larger than it's ever been.
The cadence of deal signings is consistent with what we saw last year as I tried to highlight in the call today.
Ill point out to you with respect to larger deals and you might not be surprised to learn this but you know I personally am involved oftentimes in larger deals I don't certainly I have been involved in every deal, but I'm involved in larger deals just in the next two weeks.
Let me think about this so we go.
Holder meetings next week so the week after that we have three different institutions coming in here at the Dallas over the course of two days, so I'm hosting three different.
Three different financial institutions here in Dallas over the course of two days and then the week after that we have another one coming in then I'm hosting in Dallas and again I only get involved in larger deals. So I'll just tell you that from my perspective.
And I've I've heard all the same things you've heard about the cadence of deals or the pace of deals slowing down Jack Henry is not experiencing that our pipeline is robust and there is a lot of activity as far as the.
Deals that we're working on both on the core side and with regard to the other products in our suite and I just highlighted for you. We just signed 16, new nano deals in the quarter and that pace isn't slowing down either.
We'll see.
And by the way I haven't seen a single thing about the election I got up and came right. Here. This morning. So I have no idea what happened as far as the election is concerned, but we will see what the election results what impact that has on people's sentiment around the economy, we will see what what makes out here over the next few weeks as far as the general economy, but what we're seeing right now there is no slowdown in activity.
Understood. Thank you for the color.
Certainly.
The next question will come from <unk> Kumar with UBS. Please go ahead.
Good morning, Congratulations Mimi inbound.
Can you talk a little bit about how your technology modernization strategy is progressing I think I heard earlier that you said you have five new wins on thier private cloud offerings I was wondering if you're seeing anything on the public cloud.
You know just how your discussions with banks and credit unions are going on some of these new products.
Sure Good morning, Ryan.
No.
First off there were six new core wins that I highlighted in my in my update and again that was exactly the same number that we had last year for the first quarter. So that's on pace for what we normally see after a huge fourth quarter as far as the core side is concerned.
So still lots of activity with regard to our traditional offerings on the.
The second monetization strategy. So as you can probably imagine lots of customers engaged with us on most discussions trying to understand what the future looks like but as I stressed regularly on these calls this was all about a strategy and so we have we have a couple of modules in production today wires being the first we have customers using those module.
But this is a several year strategy before youre going to see anybody quote unquote signing for the whole.
The whole stack of.
Components that are on the stack modernization strategy and I firmly believe and I've said this on the call before because we have such a unique strategy because it's such a forward looking cloud made truly cloud native strategy as compared to what some of our competitors have done we're getting a lot of attention a lot of people talking to us about potentially signing with R. R.
Our current offerings with the anticipation that they will be able to move to the public cloud offering in the future. So.
We're on pace, we have I will point out we have published for our <unk>.
<unk> customers, we've published now the roadmap for them to see we haven't published anything externally yet because.
As as I've as I witness now we have some competitors out there that are trying to figure out how to do with Jack Henry is doing so we're probably going to slow roll a little bit the public publication, but for our customers to consume we have published Roadmaps now our customers are aware of kind of what's the cadence is and where we're going as far as the delivery of the tech monetization strategy.
The other thing I would emphasize is tech modernization is not just focused on core and so a big part of the payrolls acquisition was to build out that strategy for the payments for part of the payments offerings that we have.
Public cloud native we're also.
Our financial crimes defender solution that I, just alluded to finish grants defender is a public cloud native solution built on that platform that we've been talking about it and so this is truly a modernization for everything we do at Jack Henry not just the core solutions at Jack Henry.
Thanks, Dave that was really helpful. And then just a question here for me your adjusted payment segment revenue that was up 7% in the quarter. If you guys break out the drivers rosson, how should we think about payment as revenue for the remainder of the year I think I'm on.
In the fourth quarter call, we would think the.
Our guidance was high single digits is that.
Still the right way to think about it. Thank you.
Thanks, Ryan for your question.
So as we reported payments grew 8% this quarter you roughly think about that about 60% from cards about 22% from the EPS business, both of which are growing quite strong and then about 18% from bill pay so and I I would say that that estimate up high single digits is still intact.
Thank you.
Youre welcome.
The next question will come from David <unk> with Evercore ISI. Please go ahead.
Thank you good morning could.
Could you give us a preliminary view of how you see margins trending in fiscal 'twenty for you given the substantial pressure you've called out in 'twenty three in other words, how much of the inflationary pressure in FY 'twenty three is simply related to pay rails necessary investments related to that.
Versus pressures that might be more persistent and push into FY 'twenty four.
Hey, Dave This is maybe I'll take that.
So I would say that we're still very early in 'twenty three so FY 'twenty four is a long way away in it in a very uncertain global contacts.
But we remain quite vigilant in our focus on expanding margin growth in FY 'twenty four and some of the headwinds that we've seen in FY 'twenty three some of them are onetime in nature like Java payment in terms of the year on year impact and others, we're starting to see some loosening of inflationary pressure or is it.
<unk> T is personnel cost.
I think the thing that I would add to that Dave.
The things we've highlighted in the past and Mimi just alluded to Delta for example, youre going from zero to actually and this is impacting all companies not just Jack Henry but havent going from zero to having to pay for for that technology.
The travel the uptick that we've seen in travel so that will normalize now so when you think about FY 'twenty for the travel uptick will have been baked into the FY 'twenty three comps so.
So that should provide the opportunity for margin expansion as we look into 'twenty four and then on the wage side, we like everybody have seen wage inflation, but that is really starting to normalize as well and so I think that is baked into will be baked into the 23 numbers when you get to comparing us bringing 24, so I think a lot of those things that we have.
Highlighted in most companies have highlighted.
Stuff is really starting to normalize for Jack Henry and I think it provides opportunity for us to get back to margin expansion again next year.
Thanks for that and just as a follow up.
Could you update us on your capital allocation priorities, maybe you underscored you're a responsible approach to capital allocation.
How is your approach to capital allocation, perhaps different.
You know from from Kevin's and then maybe more broadly what are you seeing in terms of the acquisition pipeline.
Businesses that fit into your strategic priorities and which might also meet your kind of valuation thresholds.
Thanks, Dave Great question I'll take the second part, but you go out.
First part the first part.
I said I would expect it to be fundamentally can fitbit.
Right, what I look for as I said is strategic fit cultural fit and the opportunities for organic growth through investment as well as potential acquisition.
And then returning capital to shareholders.
So we'll explore all of those I didn't quite impressed at Jack Henry has been very disciplined in a serial acquirer and the history with a very robust diligence and evaluation process.
And so I would expect looking at all exploring all of those options to continue.
Just to add David.
No that all of you who have listened to me talk no that for.
Early months of this calendar year I was very optimistic that as the year progressed, they were going to be some really nice opportunities as far as acquisition was concerned.
I'll, just say that the pipeline of potential good companies to acquire is not nearly as robust as what I thought it was going to be we are very bullish on payrolls and what that does for us and for our customers the opportunity that presents long term for us and for our customers, but there aren't a lot of payrolls.
Companies sitting out there. So we're looking we're always looking at potential deals, we're always looking at opportunities but.
It isn't it isn't the market that I was hoping it was going to be as far as the opportunity for additional acquisition.
Thanks, so much.
The next question will come from Nick Criminal with Credit Suisse. Please go ahead.
Hey, good morning. Thanks for taking my question just wanted to ask you about the nano business offering being rolled out early next year is there any way for us to think about the potential revenue uplift uplift for that product on a standalone basis or on a per customer basis.
Yes, Nick it's Dave I wish that I could give you some really good.
Expectations as far as building a building a model the thing too the thing to know is many of our customers who have purchased Vandal and have implemented mental already on the retail side and of course, it's only been serving retail customers. So far many of them have either signed four or indicated that when nano business rolls out they want to implement.
Business for their business customers. So we already have a pretty rich.
We will say backlog pipeline.
Customers, who want to put that into production.
The tougher thing for me to project for you is how many business customers will adopt that and at what pace. So I wouldn't want to go too far in trying to trying.
Trying to predict what the revenue uplift will be but we know that it will be there we know that over time it will be significant because we are aware of any customers who have a large number of business clients because they want to put into production, but I think it's too early for us at this point to try and project for you.
What that might look like I will point out that that we haven't baked anything significant into the financials at this point for the remainder of the fiscal year, because we want to see you know as well we are a disciplined conservative organization, we want to see how this rollout goes and make sure that adoption is what we think it's going to be but we haven't gone out on a limb.
As far as projecting revenue our adoption with that solution, we're not going to do that until we get into get into general availability and ensure that the adoption is what we think it's going to be.
Understood. Thank you very much for all the color and then for my follow up I wanted to just get an update and see what youre hearing from your customers in terms of the M&A pipeline and just the overall M&A environment.
As it pertains to your customer base, and if you're still seeing.
The same type of slowdown that you called out last quarter. Thank you.
Yeah, and we are nothing has really changed in that regard.
Why.
The interesting thing about the conversion revenue and of course as it happens when one of our customers gets acquired and I know that many of you know that but just to make sure everybody on the call understands deconversion revenue happens when one of our customers gets acquired and they essentially buy their way out of their existing contract.
We know that has slowed as compared to the prior year, we're comfortable with the guide that we've provided but as I say all the time. That's that's revenue you don't want to trade. It's the revenue that comes when our customers, leaving because they've been acquired.
On the other side on the flip side, our customers acquiring other customers, we have great visibility into that and we know that's happening we're involved in some of those deals but that is also.
Slowed and so I think the overall M&A environment because of what's happened to the valuation on bank stocks and what's happened just in.
The general economy, and people wondering what's going to happen.
The whole market for bank M&A has has slowed and we're continuing to see what I highlighted last quarter.
The next question will come from Kartik Mehta with Northcoast Research. Please go ahead.
Good morning, Dave I know you referenced the recent survey for bank spending, but I'm just wondering from your conversations and what's happening in the interest rate environment with net interest margins going up.
You feel about what banks spending will look like in calendar 2023.
Yes, it's a good it's a good question and then I was a little frustrated normally bank director does project forward into 'twenty three the other survey I always quote on these calls is the cornerstone advisor survey, which will come out, but I think the end of the mid December if I remember correctly. So normally I would highlight that on the February call. So everything that I know right now is anecdotal here, let's be talking to.
Two our bankers I will highlight again I said it in my opening comments, but I'll highlight again, we had more than 200 bank Ceos and I am just starting with Ceos in the CEO Forum. This hosted by me.
In San Diego with Us about a month ago, and they're generally pretty optimistic group I mean, they are they've seen of course interest rate rise on the lending side on the loan side have not had to raise rates.
Quickly on the deposit side, although that's coming and they know it.
For the first time in years, they have a spread on interest margin spread to work with and they are generally pretty upbeat generally feel like they are pretty well capitalized don't have a whole lot of risky credits on the balance sheet and so generally feeling like things are going to be okay and of course for them them.
Spending on technology.
All of them are continuing to focus on what technologies, we need to compete in the future and Thats, where not only the tech modernization story that we have with Jack Henry but the digital banking offerings that we have both for consumers and now for our commercial customers, we're lending as well as deposits remember, we do a complete online.
Loan origination digitally through Jack Henry So all of those things are topics today for for our customers and again, they're generally upbeat now as I stated earlier I don't see anything about the election results. So that all may change day after tomorrow I don't know, but.
As of a month ago pretty optimistic about their opportunities and they are.
Interest in spending money on technology.
And then Greg I wanted to ask a question on payrolls.
Maybe just your thoughts on if this helps you differentiate your product or how it helps you differentiate or maybe it provide some other benefits just to understand how this acquisition will benefit Jack Henry.
Yes. Thanks Carter good good to hear from you. So a couple of things I think from a from a standpoint of differentiation.
One of the things that you need to remember is that this is not a bill pay solution. It is a payments platform. So it is different than our IP offering from a standpoint that it actually drives all different kinds of payment solutions.
Can integrate directly and because of its API base into our pace center offering as well so theres a lot of opportunity to utilize.
Various components of that as part of our overall payments as a payment.
Payments as a service type of strategy. So I think there's components that we were going to build out that we don't have to build out there's things that they've already created Dave alluded to the stand alone PDP solution, which is.
It was actually an open loop solution. So it creates the ability for both the the receiver and the sender don't have to be in the same network.
Something that again, we'll provide complementary opportunities to existing <unk> solutions that are out there today.
And alternatives for our customers.
Theres, a very slick account to account transfer solution that that actually will create some opportunities within our existing base.
But when you look at the overall landscape of payment players, especially ones that have multiple features.
We really think that this one gives us the opportunity to to access.
Accelerate what we were doing in the payment as a service strategy and our technology modernization strategy. Thanks.
And maybe just one last question I think you might have already said this and if you have I apologize the acquisition cost.
Is that in a certain quarter or is that over the next few quarters.
Thank you Jackie.
Without the impact to our guidance, it's embedded within the full year.
Yes.
Yeah Yeah.
Yes.
As I mentioned the impact will be positively obviously on the revenue contribution and then from an EPS perspective, that's ongoing.
Operation amortization.
As well as the interest expense.
Alright, Thank you very much.
Okay.
The next question will come from Peter Heckmann with D. A Davidson. Please go ahead.
Great I think most of my questions have been answered, but just a few little follow ups that onetime gain related to the sale was that was that in SG&A.
Okay.
Okay, and then in terms of pay rails.
The I guess in terms of the.
I guess, we can estimate what the per share impact was of the gain but in terms of isolating kind of a dilutive impact.
Hey rails to fiscal 'twenty three.
Somewhere along the lines of 10.
Forgive me if you have already answered it but how do you see that tracking to breakeven into profits.
The next year or two.
Thanks for the question Peter as I said in my prepared remarks, it's 22 for the full year impact.
Yesterday, I reiterate again, the only changes in our guidance are the impact from the sale as well as payroll acquire business remains guidance remains.
James.
Great and then the thoughts on just getting the business to breakeven and beyond or.
Yes, we fully expect it to be accretive in fiscal 'twenty four.
Great great.
Okay. Thanks, Thanks for clarifying on those.
Youre welcome.
The next question will come from Don Gabriel with Oppenheimer. Please go ahead.
Hey, congratulations on everybody's new roles and thanks for taking my questions.
If we just you know it feels like the real economy is starting to change could you just talk about the levers that you will have to pull to protect ROIC.
You know in a more challenging revenue environment, obviously as you mentioned, Jack Henry as a lot of contract revenue, but but any any extra.
Extra detail there would be great and then I just have a follow up.
Hi, John Thanks for the question.
We're not concerned we feel good as Dave alluded to the health of our clients the underlying credit quality of their loan portfolios.
Positive net interest margin says.
The sales pipeline is very robust so we're not concerned here.
To your question on levers I would look to the strong free cash flow generation and the reoccurring high reoccurring revenue.
Per cent for the business.
And then I also would highlight some of our exposure is different from our competitors in terms of high debit card.
It's it's transactional not interchange so I wouldn't look to some of those in terms of the resiliency of our underlying business model.
Let me add to that.
You know my last or one of my comments my opening was to highlight that 15 years ago 14 years ago whenever the financial crisis that was driven by financial institutions, 100% driven by financial institutions. What we're going through today is not driven by financial institutions to think back to the 14 years ago, Jack Henry Yes, we hit.
But the model that we built then is the model that we have today, we did not though.
Like our major competitors did we did not pursue merchant acquiring we have stayed true to our business model and that business model has proven to be very resilient as the economy kind of goes up and down. So it's not that we're not bulletproof, but we have a pretty darn good model here with predictability with more than 90% recurring revenue.
And that revenue coming from mostly necessary systems at our customers customer sites that are not discretionary spend and so that provides a pretty good layer of protection against changes in the economy.
Great. Thank you and then maybe just you know.
Dave If you can talk about maybe update us on your ancillary product attach rate on average for new wins, so the extra.
Products that you attach after a win.
How that maybe has changed over the last year or two and how that.
Catch rate of extra products could change for public cloud.
Thanks.
Yes.
As you know for our core deals whenever we sell a core DLR attach rate is pretty high and we sell a number of solutions along with the core system.
As we move to public cloud I think because we're going to have a number of these complementary solutions also public cloud native like financial crimes depended that I've just highlighted like payrolls and we have other solutions that are already on the public cloud because we are been pretty forward thinking about ensuring that our complementary solutions fit that same profile.
Of being public cloud native taking advantage of all the all the positives of our public cloud offering I think that the attach rate will remain relatively consistent maybe greater I think it's too early for me to predict anything like that but I think what we've built and the way. We've gone about this is to try and ensure that the attach rate remains at least the same as what we've seen in the <unk>.
If we had not modernized the complementary solutions. If we had not made the moves to bring them along with the core I think you would see our attach rate dropped significantly because people would say well you've got this public cloud core, but nothing else Youre doing is public cloud why would I use something that's hosted in a private cloud or that after run in house and my back office.
But that's not what we've done we've been very thoughtful and diligent about making sure that our complementary solutions are coming along with the strategy either they've been rewritten or written new or acquired like payrolls. So that we have a complete stack offering for our customers when they get to the public cloud.
Point in their evolution.
Excellent maybe actually maybe I could just sneak in one more here.
Could you just help us on the growth rate of payrolls that you're expecting on revenue and then maybe just the full year tax rate that you expect for the total company for 2023. Thanks, so much.
I think we will do tax rate I don't know that were prepared to do.
To share what the growth rate is going to be on payrolls. At this point, we don't call out individual products when it comes to the growth rate.
Product, but as far as tax rate is concerned medium. He had done I would recommend you think 'twenty four.
Or is that.
Perfect. Thank you. Thank you all bye bye very welcome.
The next question will come from James <unk> with Morgan Stanley . Please go ahead.
Hey, good morning, everybody just a couple of quick follow up questions for me first.
And me both express confidence in kind of your deconversion fee revenue and understanding the nature of that revenue, but just wondering just from a modeling perspective.
Where is your sense of confidence in getting to that target or that level for this year is.
Have you already had notifications and that kind of thing or just wondering kind of where that comes stems from.
Yes, a good portion of that is known today. So we know of okay, Here's who have already been acquired we know with the deconversion revenue is going to be it's certainly not 100% is known but a good chunk of that is known to us today.
Okay got it I suspected as much but just wanted to be sure and then the second thing I wanted to ask about is you know.
On <unk> and just some of the things that we've seen I'm not an aerospace specifically, but in more.
More generally it's been interesting because.
We've seen some shifting around between C versus usage based models et cetera, and ban on my understanding is it's primarily.
Is priced on user count basis, how does that stack up against your competitors, there's a lot of times, they're using usage or transaction based models.
That something that gives you an advantage right now or what is your sense on on pricing type and the impact on market and ability to win with panel.
So you are correct in that oil pricing is tied to registered users. So it's essentially activity because it's people that have signed up and are using the platform on a regular basis.
So I think.
I think the concept of registered users and usage are completed because the registered user who has never using the system.
I forget what the metric is six six months, if somebody isn't using it for six months the financial institution doesn't get charged so registered users and usage was inflated a little bit because there is this active component than in the way that customers pay for our solutions.
We're not we don't win deals today because of the way we price. This we're winning deals because of the technology and the strategy in the forward looking nature of what analysts doing this compared to anybody else in the market. That's what's really driving success for us. So I wouldn't say that our pricing is I don't think our solution is.
It's cheaper than other people or anything like that it's the technology and the offering that is helping us win in continuing to grab great reviews from all corners of our market.
Thanks for those things Dave.
Sure.
The next question will come from John Davis with Raymond James. Please go ahead.
Hey, good morning, guys, they've got a lot of your some of your peers and a lot of other enterprise software companies have talked about elongated sales cycles longer decision, making obviously you reiterated your guide.
It doesn't sound like you're seeing any of that but just curious if you could comment just on what you are seeing any changes in the landscape whatsoever from a sales cycle perspective, any color there would be helpful.
Yes, I've read those reports J D. I have read the transcripts I, we are not seeing that that is not what Jack Henry is experiencing.
You have ups and downs all the time when it comes to individual decisions on individual deals where something may creep into an individual deal, but as far as the overall sales.
Sales activity at the level of activity the speed of deals nothing has changed.
Okay, and then maybe just a quick one for you corporate and other was was pretty strong. This quarter. Just curious is that something kind of one time in there that does that kind of the run rate. We should expect we'll just update year over year.
Thanks, Jamie for the question nothing that I would say.
It's worthy of a call out.
Okay, that's a fair kind of run rate run rate.
So that one has been relatively consistent historically.
Throughout the year. So that's how we should think about this year.
Yes, I would agree.
Okay.
And then maybe one for Greg.
<unk> I just want to understand a little bit more obviously it looks like you paid about 15 times revenue for a business thats, losing a decent amount of money. So clearly you see a huge opportunity here. So I just want understand like how you ramp this.
And how like why this is so valuable to Jack Henry.
And like how you can kind of get to.
And the ROI that that made sense you guys have historically been very conservative on what you paid for acquisitions. So clearly there is something huge here. So maybe just a minute or so on what you guys see the potential for payroll and Jack Henry.
Yeah sure. Thanks for the question.
I think a couple of things.
Alluded to a little bit earlier. So again, there is an acceleration of what we were doing already in our tech modernization strategy.
You know kind of driving towards the ability to utilize again this payments platform to drive transactions in a variety of different areas. So.
He mentioned the open loop PDP, which is very significant again when you look out in the in the PDP space and look at the alternatives and the cost of those return alternatives. It creates a really great option for our clients our core clients, but also noncore clients to utilize an open loop solutions. So we have some some stress.
<unk> that we're going to be using around that.
Things that we're going to be able to do related to business to consumer payments and BTB payments that we're driving as part of that platform a lot of lease cost routing options that we didn't have in our old platforms to be able to drive things around there.
I think one of the other big ones is that they have a pretty sophisticated fraud solution that does real time PDP fraud. So we're going to be able to utilize that not only into what we're doing with PDP, but also as David mentioned couple of times on this call related to financial crimes defender.
There's going to be some ability to leverage some of that data, but not only the data, but also the technology. The AI technology into some of the components of that were building. There. So there's a whole host of things that drive into our strategy in general.
That makes this acquisition very appealing and accelerates things that would've taken us a lot longer to do.
Okay. No appreciate all the color thanks, guys.
Sure.
The next question will come from Dave Koning with Baird. Please go ahead.
Yeah, Hey, guys, Thanks, and I had a few more on payroll. So I guess first of all it's in the payments segment right.
Correct.
Okay Yeah.
And then.
Secondly, in the $23 million of acquisition cost. This year is some of the nonrecurring stuff or is that more of the ongoing normal cost base.
But mostly reoccurring Dave we can provide a follow up on the breakout for you.
Okay.
Kind of in the reason, partly that I'm asking to get accretive next year like if we just assume let's say, let's just say $20 million of revenue and 50% margins you know so you've got $10 million of EBIT.
EBIT.
But then between amortization and interest expense it would it would just seem like it would be really hard to make that accretive and I'm. Just wondering how you're like what what kind of the formula is to get to accretion or maybe youre not including interest expense because you have enough cash over the next year to pay for it any way or maybe just give us a little like on how how you get to accretion.
Yes got it yeah I mean, it's a good question I would say we are very focused from our robust diligence models, we feel confident in the ability they've got accretive and it will grow we're doing a lot with the platform.
So I think and let me add this so I think not only from a revenue growth standpoint, but there also there is some very substantial cost takeouts that can be part of our overlapping.
Overlapping contracts related to vendors.
And the scale that Jack Henry brings to driving opportunities with those we've already negotiated several of those to be able to to the lower cost components for them.
There is a lot of opportunity within our resource allocation and what we're doing across those businesses as well. So no. All of those were modeled out to be able to get to the point, where we feel that we'll be able to be accretive next year. It's a combination of revenue growth and cost takeout that leads to that accretion it's not strictly based on revenue.
Growth.
And we are highlighting are creating a line item or highlighting a line item or what are the cost synergies, but just know there are clearly significant synergies in this.
Yeah, No I can imagine no that's great. Thanks, guys.
Sure.
The next question will come from Charles Meade with Stephens. Please go ahead.
Hi, Good morning, and thank you for taking my question I wanted to get your comments on a couple of specific products. The first being bill pay which has been highlighted as an area of weakness by some of your peers and competitors and the second being fraud and I know you touched on that the new platform, but I wanted to just get a better sense for how you are differentiated in that area given the.
A number of companies chasing that opportunity.
Yes, so first off on the.
Bill pay I know exactly which report you're referring to and I was surprised at that because we have not seen any slowdown or change now the thing I've highlighted several times on these calls is the bill pay isn't growing very fast, but it certainly is not dropping off or shrinking or anything like that and so I was.
Prior to that but that is not what Jack Henry saying, our bill pay is steady.
<unk> continuing to grow.
Essentially low single digits.
A fast grower, but it's certainly not dropping off as far as.
The overall opportunity for bill pay.
And then the second part of your question.
Remind me.
Oh, yeah, so fraud defend or financial crimes defender is.
It's built on this.
Public cloud native platform that we've been talking about it is using the latest technology when it comes to fraud detection and it is built with these integration opportunities. So that you can run a lot more.
Different types of transactions through the same broad engine and see different transactions for the same customer coming through a whole a whole.
A bunch of different <unk>.
Presentation.
Since our presentation layers and so it truly is a differentiated solution not only of the technology that is built on but the offering there.
The breadth of the offering is different from what we already have and we feel strongly different from what anybody else has in the market and so.
This will time will tell if we have what we think we have but we have.
We think a truly differentiated offering with this new solution.
Got it and just as a quick follow up I'm curious does the guidance for 'twenty three assume any impact from CPI escalators.
Thanks, Chuck so within our normal construct of our our sales cycle in our renewals we have CPI increases that happened throughout the year. So that's part of our organic plan.
Nothing that I would call out specifically.
Got it thank you very much.
Welcome.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks. Please go ahead.
Thank you Chuck.
We will have an additional investor interaction available.
Management's participation in the following upcoming Investor events Northcoast Research fall Forum.
November 14th RBC capital markets Global Technology Conference on November 16th Stephen's Annual investment conference on November 17th.
Credit Suisse, 26th annual Technology Conference on November 29th.
Finally, nasdaq's, 47th Investor Conference on December six.
We are pleased with the results from operations and remain enthusiastic and focused on our future.
Thank all Jack Henry Associates for their efforts to produce these results.
We appreciate you joining us today and Chuck will you. Please provide the replay number.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Okay.
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Uh huh.
Okay.
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