Q2 2023 Jack Henry & Associates Inc Earnings Call
Good morning, and welcome to the Jack Henry <unk> second quarter earnings Conference call.
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The conference over to Mr. Vance Girard, Vice President Investor Relations. Please go ahead.
Good morning, and thank you for joining us for the Jack Henry fiscal 2023 second quarter earnings call.
Joining me on the call today is David Foss Board Chair, and CEO , Mimi, Carsley, CFO , and Treasurer, and Greg Adelson, President and C O O S.
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 David concludes his comments Mimi will provide additional commentary regarding the financial results and fiscal year guidance included in the press release issued yesterday.
That is available from the Investor Relations section of the Jack Henry website. We will 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 materially.
From those which we anticipate due to multiple risks and uncertainties. The company undertakes no obligation to update or revise these statements for a summary of these risk factors and additional information. Please refer to yesterday's press release and the sections in our 10-K entitled risk factors and forward looking statements.
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 Vance and good morning, everyone. Today, we're pleased to report another strong quarter of revenue and operating income growth as always I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our second quarter for.
For Q2 of fiscal 2023 total revenue increased 2% for the quarter and increased 6% on a non-GAAP basis. This variance was primarily due to a reduction in deconversion revenue, which I'll detail in a few minutes.
Turning to the segments, we again had a solid quarter in the core segment of our business revenue was flat for the quarter, but increased by 6% on a non-GAAP basis.
Our payment segment also performed well posting a 3% increase in revenue this quarter and a 6% increase on a non-GAAP basis, we had a very strong quarter in our complementary solutions businesses with a 4% increase in revenue this quarter and an 8% increase on a non-GAAP basis.
Yesterday's press release include a revised guidance, which Mimi will outlined in her comments one of the key drivers behind this change in guidance was the actual and forecasted reduction in deconversion revenue for the year.
As we disclosed yesterday deconversion fees are down $20 million year to date and this was the primary driver of the variance in GAAP versus non-GAAP revenue and operating income performance for Q2.
As a reminder, we received deconversion revenue when one of our clients is acquired by another institution and is required to pay us a fee to terminate their contract prior to the end date.
I normally referenced this is the revenue you don't want to see because it indicates we've lost a client to M&A.
This lack of consolidation by financial institutions is also impacting our services revenue associated with the convert and merge activities.
Of course consolidation that's outside of Jack Henry's control and we normally update guidance for deconversion revenue as we become aware of pending M&A activity.
The other primary item impacting our guidance is the recent change in consumer spending behavior due.
Due to economic conditions consumer card usage is slowing and transactions are shifting from debit to credit.
Our card processing business is significantly weighted to debit processing. So we are revising guidance to reflect what we believe to be a temporary economic trend.
As I've said many times in the past our financial model is very resistant to significant swings, resulting from changes in the overall economy, but we're not completely bulletproof. Despite these external factors. Our primary businesses remained strong and continued to perform very well.
As I mentioned in the press release, our sales teams again had an outstanding quarter with a number of notable wins.
In fact, Q2 set a new quarterly sales record for Jack Henry breaking the record we set in the June quarter last year.
In the second quarter, we inked 12 competitive core takeaways and an additional 15 deals to move existing in house core clients to a private cloud environment.
December 30th wasn't particularly memorable day for us at Jack Henry as we signed three core takeaways of multibillion dollar financial institutions on the same day.
We continue to see good success with their new card processing solution, signing 12, new card processing clients. This quarter. We also continue to see great success, signing clients to our banner digital suite with 36, new contracts in Q2.
Speaking of our digital suite, our banjo business solution is scheduled to go into general General release next quarter. We already have 18 institutions live in early adopter status with the feedback being extremely positive from those users.
We have 308 clients under contract for this solution and we are positioned to bring them into full production at a very rapid pace once we achieved general availability.
We are also continuing to implement new financial institution clients on the retail banner platform at a similar pace to recent quarters.
At the end of Q2, we surpassed $8 8 million registered users on the platform and ban continues to hold one of the highest consumer ratings in the App store.
Normally in January I shared with you the results of bank spending survey projections from the publications we follow closely.
Unfortunately, this year none of those major publications provided forward looking projections are on the topic of expected tech spending in the banking segment.
I have received a number of smaller surveys and we conducted our own informal survey of banking CEO Roundtable last month with the results being all relatively consistent.
The average increase appears to be settling at around 7% for calendar 2023 with the most popular range being a 5% to 10% increase.
Continue to watch for firm objective data and we'll share as it becomes available.
As you May have noticed last month, we took a major step forward with our environmental efforts by signing a commitment letter, indicating our intention to set science based climate targets with the science based targets initiative or S. P. T I.
Science based targets are aligned with the level of de carbonization necessary to meet the goals of the Paris agreement to limit global warming to one five degrees Celsius above preindustrial levels.
Jack Henry will pursue validation for near term greenhouse gas emissions reduction targets through S. P. T I D.
This commitment follows extensive analysis and discussion and is supported by our low carbon transition plan, which outlined several mitigation tactics to reduce our greenhouse gas emissions.
More information regarding this plan will be disclosed in our next sustainability report, which will be released on March 31st through the Investor site on Jack Henry Dotcom.
As you will recall it was on this call last year, we announced our new technology modernization strategy.
We developed this multi year strategy to help us deliver public cloud native capabilities to community and regional financial institutions, allowing them to innovate compete and meet the evolving needs of their account holders.
We are continuing to make great progress on the strategies four main objectives.
First we're redefining the core processing system by unbundling services that traditionally would be in the core and building them as standalone modules on the public cloud.
In September we announced plans to build these services on the Google Cloud and we've been testing our wire processing and authorization management services modules on the Google cloud since that time.
We currently have six clients live in early adopter status with domestic wires and plan to offer general availability for this solution in July we.
We expect to launch the international wire solution for early adopters in April and expect that module to be generally available late in the fourth calendar quarter. This year.
Second we're working to provide multiple data integration options utilizing our open philosophy and technology.
Our newest offering in this area is real time data streaming simultaneous constant streaming of necessary data to all systems on the platform.
We're currently in beta with real time data streaming, which is essential to support real time payments and fraud detection.
We expect this functionality to go into live production later in this calendar year.
[laughter] delivering industry, leading capabilities across a single next generation platform is the third objective.
<unk> is a key element in this part of the strategy, but we're working on several other additional solutions to build upon this commitment.
As an example in September we added payroll so public cloud native digital payments platform to our sweet suite of payment solutions.
Additionally, this summer we're launching financial crimes defender, our nextgen in financial crimes platform with enhanced capabilities, including machine learning and artificial intelligence.
This new fraud solution has been built entirely on our public cloud native platform.
The last step in the strategy is to move from acting as a core process as a core processor to offering a full banking ecosystem.
This includes our own capabilities plus access to leading Fintech <unk> through a single platform that prioritizes openness agility speed and Optionality a.
A year ago, I announced that we had more than 850 fintech providers in our ecosystem.
Today, it's closer to 915 and the number continues to grow.
We're also the only platform provider that has relationships with all four major financial data Aggregators municipal Plaid Yodlee and the Korea.
Through these companies financial institutions can give account holders a complete financial picture and a safe secure manner.
That eliminates screen scraping.
We've seen strong interest in this strategy from both prospects and customers anecdotally I can tell you that we are currently in conversations with a number of prospects who have indicated that the technology modernization strategy. I. Just described is the primary driver for them to engage with Jack Henry to help develop their technology strap.
<unk> for the future.
Community and regional financial institutions are the lifeblood of main Street America. Many of them. However are at a crossroads the personal service and experience. They are known for is being disrupted by technology is non traditional financial service providers have entered the market and the way people bank has fundamentally changed especially for the younger generation.
As a well rounded financial technology company, Jack Henry is in a unique position to provide modern technology and services to help community and regional financial institutions capitalize on this opportunity and strengthen connections with their account holders.
The key takeaway is that while we're successfully meeting the needs of our clients today as shown by our performance results were also preparing them for the future.
We're pleased with the progress we've made on this exciting strategy and we'll share more updates at our Investor day in May.
As we began in the second half of our fiscal year. Our sales pipeline is very robust and we continue to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our clients our ability to expand client relationships, the spending environment and our long term prospects for success.
With that I'll turn it over to me for some detail on the numbers.
Thanks, Dave Good morning, everyone.
Ladies by Dave's comments, Jack Henry He had a successful second quarter and I will discuss the details driving those results.
Revenue was up 10% for the quarter on a GAAP basis, and solidly up 6% on a non-GAAP .
Fiscal year to date, GAAP revenue was up 5% and non-GAAP revenue increased 7%.
Let's jump into the detail.
On a GAAP basis services and support revenue decreased 2% in the second quarter, but increased 3% year to date.
Services and support were negatively impacted as the deconversion revenue decreased 21 million for the quarter 20 million year to date. This is consistent with the broader market lack of acquisition activity in our space.
We now anticipate approximately 15 million and he conversion revenue this fiscal year.
However, forecasting deconversion revenue remains challenging given the limited advance notice and then general uncertain nature of M&A.
Our private and public cloud offerings, yet robust credit this quarter growing 11% and 10% year to date.
Product delivery and services decreased 26% in the quarter impacted by lower deconversion fees and convert merge activity offset by slightly higher implementation related revenue.
As a reminder, user group conference related to our major customer conference shifted into Q1 this year contributing to the year over year Q2 revenue decline.
Year to date product delivery and services revenue decreased 11% influenced by similar drivers as the quarter.
On a non-GAAP basis services and support revenue grew 6% for the quarter and 7% year to date, which serves to highlight our consistent fundamental business stress.
Processing revenue increased 9% on a GAAP basis for both the quarter and year to date.
On a non-GAAP basis, the growth was 7% for the quarter and 8% year to date.
The increases were largely driven by higher card volumes, despite a slight increase in the rate of growth.
Additionally, internal revenue continues to show rapid growth led by robust demand for our banner digital platform.
Now turning to costs.
Cost of revenue was up 8% for both the quarter and year to date.
Quarterly drivers included increased card processing costs consistent with card revenue growth.
Higher personnel costs and amortization expense.
These drivers are consistent across our year to date results.
Research and development expense increased 22% for the quarter, mostly due to higher personnel costs and licensing fee.
Year to date these expenses increased 23% based on the same factors.
SG&A rose, 2% driven by increases in personnel travel professional services, partly offset by the gain on sale of assets.
Year to date, the increase was 7% influenced by similar drivers.
The quarter and the remainder of the year benefited from disciplined.
And actions involving.
The rationalization headcount and travel control procurement wins and other expense management.
These collective efforts helped to offset inflationary pressures and mitigate lower revenue.
As we previously mentioned.
Compensation and travel related cost increases result from the lower cost comparison from our first half of fiscal 2022.
He had a previously mentioned management rigor on cost controls, we concluded Q2 with strong operational results.
Despite net income declining 16%, primarily due to lower deconversion fees and increased interest expense the Qatar the quarter saw fully diluted earnings per share of a dollar tab.
Our GAAP and non-GAAP results for the quarter and year to date are consistent with internal expectations and set us up for a strong finish to fiscal year 'twenty three.
As a reminder for transparency the impact from the gain on the sale of assets, including this quarter sale of in Albuquerque property Yodlee.
One $2 million gain it patriot's acquisition and deconversion fees are shown as part of non-GAAP adjustments in the press release.
Turning our attention to cash flow.
Operating cash flow was 191 million.
Year to date down from 197 million for the same period last year, essentially due to lower deconversion revenue.
Total R&D investment remains slightly elevated but it should normalize by next fiscal year.
Free cash flow, which is operating cash flow less capex and cap software plus proceeds from the sale of assets was $119 million.
We remain committed to maintaining ample operating liquidity reinvesting for grass evaluating financially sound strategic acquisition paying dividend and Opportunistically repurchasing our stock.
This consistent dedication to value creation, resulting in a trailing 12 month return on invested capital of 21, 4%.
Focusing ahead, let me discuss updated guidance.
The press release include a revised GAAP and non-GAAP full year guidance.
The GAAP guidance remains includes separate payrolls acquisition gain on asset sales and deconversion fees.
We expect the trends impacting Q2 results to continue for the remainder of the fiscal year impacting both GAAP and non-GAAP results.
Most significantly assuming minimal industry consolidation deconversion fees will likely remain muted at approximately 15 million or so.
Fiscal year, representing a $20 million decrease from our previous guidance.
Second <unk> well.
Languishing bank M&A related consolidation negatively impacted our outlook or our convert merge services revenue for the fiscal year.
As a reminder, this revenue is driven by our clients acquiring it and implementing Jack Henry solution at their newly purchased institution.
Finally in line with announced payment network activity, we're experiencing a slower rate of growth than anticipated for debit transaction volumes in our card processing business, primarily driven by a combination of lower consumer spending and the spending shift to credit card as a reminder card Prost.
The thing is approximately 22% of our total revenue and as Dave highlighted more heavily weighted to debit card business.
As a result of these impacts GAAP revenue growth for fiscal 'twenty. Three is now expected it to be high.
I 0.4 to five eight first apps yeah.
Guidance for non-GAAP revenue growth is now 7% to seven 3%.
Outlets full year GAAP operating margin is now approximately 22, 9%, which was negatively impacted by the expected lower deconversion fees and is inclusive of the impacts from both gain on sale of assets and the payrolls acquisition.
Full year non-GAAP operating margin guidance due to strong management expense control is now expected to deliver slightly margin improvement for the fiscal year compared to previous guidance of flat to slightly down.
The management team remains focused on returning to margin expansion in fiscal 'twenty four.
Full year GAAP EPS guidance is now a range of $4 79 to $4 83 at the midpoint of $4.81 is an 11% decrease from previous guidance, even though it does lower deconversion fees drive the 20th that reduction.
The headwind caused by lower deconversion fees is mitigated by the teams collaborative and disciplined cost control gain on sale of assets and lower net income.
We expect the remainder of fiscal year 'twenty, three quarterly non-GAAP revenue growth momentum to deliver increases in both in the third and fourth quarters to achieve our revised full year guidance targets.
We anticipate similar growth patterns for non-GAAP operating margin delivering the revised increased full year guidance.
So in closing we delivered another quarter of strong operational.
Result, and remains solidly optimistic about the success of our business model.
We thank all of our investors for their continued confidence in Jack Henry.
Keith would you please open the call for questions.
Yeah. So thank you we will now begin the question and answer session.
First 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 to.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from Investor.
W.
Hi, Thank you for taking my questions I guess the first question on just the non-GAAP revenue weakness. It seems like most of that is basically related to the payments ackman weren't more shift from debit to credit spending any changes anticipated in any other segments based on what you were thinking before and then Dave.
Just for you any update on macro I know you're sort of still seen good momentum in new client signings, but has anything changed in the quarter in terms of bank decision, making for new deals whether it's taking.
And more time to close deals of that size of deals that you were seeing just any update that would be super helpful.
I'll take the second part first Vasu and then I'll turn it over many as far as the overall macro environment I would say things are continuing to look very strong our pipeline I just mentioned in my prepared remarks that we set another sales record in Q2, which I was not expecting given the huge performance. We saw in Q4 the June quarter last year.
So to set another overall sales performance record was a surprise to me, but the environment is very strong the pipeline is larger than it's ever been.
I would say that on the core side of the business. We are trending larger so I highlighted we signed three multibillion dollar institutions on December 30th alone.
Core takeaways on December 30th and I think the if you look at the core side of the business. The accounts that we're currently involved in are definitely trending larger bigger institutions coming to Jack Henry looking to make a change I certainly believe part of that is driven by the technology modernization strategy. There, they're looking for that partner that'll really help them modernize but I think the other.
Driver for that is just the reputation Jack Henry has for delivering great technology, and and Great service. So I would characterize the overall environment for us as far as sales as a very strong right now and as I said in my prepared remarks, although we don't have any of the big surveys that I can quote because nobody has published results. So I have a whole bunch of.
More anecdotal of bits of feedback and that.
CEO Roundtable that I hosted two weeks ago in Phoenix, and they're the kind of average spend increase for calendar 'twenty three and this is you know them knowing that their budgets are in place for 23 already so it's them quoting to me what they have planned the average was around 7% as far as an expected spend increase and by the way. This CEO Forum that I hosted was not just Jack Haire.
Record customers. This was a variety of Ceos from a variety of who are running a variety of different different solutions. So that would be my comment on the overall and I'll turn it over to Mimi to answer your first part of your question. Thanks, Betsy for the question I would say on the non-GAAP revenue change.
Yes, I think you're you're right in terms that predominantly is around card with it you know based on that.
We were optimistic in terms of now the slowing consumer is a little bit slower than we anticipated and so I think that's led to a modest deceleration of growth its still an attractive growth rate I would call out and so it's predominantly around cards, yes, I think that's important to emphasize that our growth rate year over year is for the payments business.
There is very strong now we've backed off a little bit because of what's happening in consumer behavior, but we should not lose sight of the fact that the payments business is up significantly year over year as far as as far as overall growth.
That's super helpful and if I may ask a follow up on banjo I know there are a number of sort of new players out there that are trying to sell digital banking until banks all of them who might be our core customers, but was just curious when you go to sell a banner. When you know it's a competitive deal like what sort of win rate do you see that the key for your product.
And then have you started to sell outside of your core base of clients already and if not what's the road map for that.
Yeah. So I don't think I can quote you accurately on what our win rate is I think pretty much every deal where we're selling digital banking as a competitive deal so but I couldnt quote you an accurate.
Percentage as far as what our win rate win rate as I just know it's very high because banner has this outstanding reputation as far as selling outside the base. So were from a technology point of view, we're prepared to do that right now its a strategy point of view that has kind of prompted us to back off a little bit and I think I've talked about this on our previous call.
Al.
We are we see opportunities outside the base as I said from a technical point of view ready to deliver outside the base, but we have learned that for some of our competitors are selling into their base. They perceive to be a real positive a real win because it gives them a better solution overall and so were weighing the.
The opportunity for us to sell ban or versus the potential negative for us in selling the core side you know if if a competitor says Oh my gosh, we finally, our banner and our base now so our customers won't be as likely to leave us on the core side of the business that's not necessarily a good thing for Jack Henry So we're being very strategic about how we position this and.
Which core basis, we go after and I'd, rather err on the side of making sure. The strategy is right and rather than just chasing after a few dollars that might damage us long term from a strategic point of view.
Understood that makes sense. Thank you very much.
Certainly.
Thank you and the next question comes from David <unk> with Evercore ISI.
Thank you good morning, Dave.
Giving you completed the transition of processing over to first data at least using their backend for debit and credit card processing are you able to leverage their capability at all to build out your credit card processing.
Capacity to offset some of the shift from debit to credit.
Yeah, certainly we're able to use that platform and we already have customers in production on the credit side and customers that we've signed but as ive highlighted and others settings.
It's not a matter of going to a customer and saying Hey, we have credit now you want to sign up they have if they're in the credit space. They already have an agreement with somebody and so normally they need to oh allow that agreement to anniversary or else. They have to buy the contract out the other thing that I've been pretty transparent about on these calls is we've been building up our expertise in the credit.
Space and a credit is a different business from debit we needed to literally hire people to sell higher people to service that.
That side of the business and so we've been building up that capability over over time. So it's a combination of those things that has been kind of a slow roll for us as far as being in the credit space, but as far as being positioned today to offer credit when a when a customer is ready to get into the credit space. We have the programs. We have the sales organization we have the.
Technical abilities to deliver and so it's a it's a matter of us finding those customers and converting them.
Understood and then on the Tech modernization strategy do you have specific timelines to rollout some of the key initial modules to clients.
Yes, we do and so and we've published that for our clients. We have a roadmap out on our customer portal. So our clients can go and see what the roadmap looks like and so we're being very transparent with our clients and with our with prospects.
Initially I had hoped to publish that for everybody to see but we've realized that again competitors are very very eager to see what Jack Henry is doing they're trying to figure out how to compete with this strategy and so we backed off on being quite that transparent, but we're being very transparent with our existing customers and with prospects who are looking.
At Tech modernization to help define their strategy for the future.
Since we don't have access to the client portal I mean can you kind of share in any broad brush strokes, what we should be expecting in terms of rollout of tech modernization strategy.
Yeah, I'll I'll deal Atlanta, So I'm going to turn it over to Greg here just to give you a couple of highlights again, we're not going to go into great detail at this point, but Greg can give you a couple of highlights of what to expect I did I will point out that in the my prepared remarks here Island to the fact that we have some of these things rolling out we have our domestic wire solution coming into full production here in <unk>.
Just a couple of months, we have our international wire solution coming into full production. Later this year. So I've already highlighted a few of those things, but I'll turn it over to Greg for a little more color. Yes. There's a few other things we're doing so we basically have planned out for the next three years. So we have various targets that we've assessed but things around operate authorization man.
<unk> is a big one David actually mentioned that as some of the testing that we're doing already in the Google Cloud that's a big one theres a lot of components that we're doing with real time to help us with some solutions that were going to look to rollout over the next 18 months or so that we're not prepared to talk about publicly but components of that.
And then of course, a lot of the other key modules, our general ledger itself other components that will be done but each of those is as I already bracketed by year for what we plan to get done over the next three years.
Got it and just finally, the three big core wins, you signed on December 30th Dave.
Yeah, what were the key to those wins like what what particular capability drove those wins and how big were those banks, where they above $10 billion in assets.
None of them were above 10 billion. My recollection is they were mostly been in the three ish range three to five somewhere in there and I'm I'm not I'm, just doing that off top of my head, but somewhere in that range.
For those customers and I think it's the same story that you've heard from US time and time again, they've you know it's a combination of great technology, a great reputation for service a very focused strategy. So if you come to do business with Jack Henry you know, which core the core side, we're gonna be supporting for for the go forward there.
No question about what our strategy is regarding core so I think it's all of those things rolled together plus this reputation we have for openness and the you know today, most banks and credit unions want to connect.
To Fintech solutions, and they want a partner who embraces that idea of open connectivity and so you roll all those things together. It's the same same things that we've been talking about for a long time those are the primary drivers for us in these wins.
Understood Thanks very much.
Certainly.
Thank you and then last question Kartik Mehta with Northcoast research.
Hey, good morning.
Dave you know in the past we've talked about maybe the backlog in the business I know you don't report that but the one way I know you kind of look at revenue and your ability to kind of projected backlog of install teams and it seems as though you've been winning a lot.
If you kind of look at that metric.
Over the next maybe 12 to 18 months is that still look very good and give you confidence oh from a revenue standpoint.
Yeah, we actually have a report kartik, but I look at every month that shows the number of we referred to in our slots. So the number of conversion slots. The number of conversions that we're prepared to do in any given.
<unk> and it shows how many of those slots are already booked how many of them are being held because theres a deal that's in process, where a customer who said hey, I want to convert to nine months as opposed to 18 months and then how many are open and our backlog on the core side is as well into the next fiscal year.
As far as those slots being being held now once in a while when I say things like that people will say well hey, you ought to just go hire more people and speed that up the thing you have to remember is this isn't this isn't about hiring more people and we can do a conversion in a month conversion when youre doing the entire core conversion normally you plan for 12 months and that's not because Jack Henry sold.
Slow we can't do it any faster it's because there is so much to be absorbed on the customer side, they're trying to run the bank or credit Union at the same time. They are learning all new systems, and all new processes and they're validating data to be converted and then it's just a very large massive project and so so we manage our.
Our backlog really well I think our conversion teams manage the backlog well, we do a similar exercise for every other product that we have the core backlog is the one that normally gets a lot of attention, but every product. We have we have that that exercise in our reporting and so we can staff up and staff down as we need to generally fairly easily certainly.
There are some rules that are very specialized and you can't can't simply move people from one group and not to another based on demand, but generally we can do that pretty easily and manage our backlog effectively.
And then just.
One of the issues that you always hear banks talk about especially maybe community banks and credit unions is having to deal with fraud, whether it's fraud related to PDP payments or fraud related to the ATM business or checking accounts and I'm wondering you know from Jack Henry's perspective, how you might be able to help your customers and how that might help.
Jack Henry in terms of selling products.
Yes, Kartik. This is Greg I'll take that one so a couple of things so even in the <unk> acquisition. You know we have a fraud module that we're actually rolling out with our open loop PDP.
So again it provides an extra layer of of a fraud protection for that actually there's a unlike cell which is irrevocably in a couple of the other faster payment solutions. There's an option is when the receiver gets it to designate how they want to receive the payment and as part of that process, we have an extra.
Kind of fraud later, there the other thing as Dave mentioned, our financial crimes defender product that one is going to be specifically tailored for the opportunity to help with bolt zelle fraud.
Other faster payments fraud, because it's got real time components to it and so those will be two things were actually in beta right now with the financial crimes defender product.
And it is getting significantly real really good fanfare from from our clients in the beta process. So we're pretty excited but those are just two of several other things we actually have a a committee here at Jack Henry that we kind of aggregate all of our kind of defense projects in our broad products and.
We have a team that is looking to kind of consolidate some of that and drive the right strategy for our customers.
Thanks, Greg I appreciate it thank you.
Mhm.
Thank you and the next question comes from John Davis with Raymond James.
Hey, good morning, guys, maybe just on the updated EPS guide it looks like the better margin on a non-GAAP basis kind of offset a little bit weak.
Our revenue.
And then the deconversion fees it looks like it would be about 20 hits EPS, but you only took down the midpoint by <unk> 11, So just curious that our tax rate or anything below the line or anything else that drives that kind of smaller EPS. It.
Yeah. Thanks for the question J D. You're right in terms of the deconversion revenue driving about 20 cents. If it were to stand on its own them. A couple of things one just follow on to my prepared remarks, and a disciplined focus on expense controls in the second half is driving part of that upside.
Additionally, we are seeing because of the higher interest rates, we are seeing some positivity from an interest income perspective, that's helping as well.
And then I.
GAAP basis, you had the Albuquerque sale as.
As well so that's just you know not a lot of changes on the tax rate, but just between management control and in a little bit of interest rate savings I would tell you.
Mary drivers of that change I'm glad you called that out the J D. Because I think the as Mimi just detailed there are several things in there, but the primary driver of that difference between the 20 and the 11 cents is management expense control. We have a team here, who has really dug in to make sure that we're doing the right things on the expense side and so if it were just.
If it were just for the the slowdown in deconversion revenue, we'd see a 20 cent hit but the team has really put in the extra effort to make sure that we're doing the right things here and I think that's a significant call out for the for the management team at Jack Henry.
Okay. Thanks, and then.
The second half implied guide is a little very modest stubhub implies growth of little over 7% anyway, any callouts Mimi <unk> versus <unk> should be relatively consistent.
Trying to think about cadence of revenue growth in the back.
Back half of the year.
Yeah, It's a good question J D.
And similar to our comments last quarter.
First half is slower and we see a pick up as the year goes on but from a revenue with Q2 expected to have been our lowest quarter and growing as the year continues.
And I'd say that Theres, a dramatic difference between three two in Q4, but just a second half favorability versus first half.
Okay. Thanks, and then.
David on the debit card revenue I think you guys called out it's about 22% of revenue can you help us think about what's an account on file fee versus per transaction I'm, just trying to understand if macro slows further gets better how sensitive that card businesses to spending levels.
Yeah that type of detail is not something that we've disclosed I think the best way for US to go for you all to track what are what's happening in our business is just the overall macro environment kind of following what's happening in the overall macro environment. You know this is not unique to Jack Henry This is whats happening overall, it's consistent with what's been reported by the mayor.
Your card vendors of Mastercard, and visa and I think that's the best way to kind of anticipate what's happening at Jack Henry is what's happening overall in the industry because we followed the industry when it comes to things like debit volume and any kind of shift between debit and credit.
Okay, well I'll sneak one last one in here free cash flow conversion trailing 12 months is down a little bit relative to history for Jack somewhere in the <unk> versus the 100.
A percent or so target any thoughts there on timing, you're still comfortable with getting back to a 100% for the full year for free cash flow conversion.
Yeah, I think youre right J D. In terms to look at it on a longer cycle I wouldnt recommend looking at it on a quarter, but rather on a year to date and so on a Q1 because of the timing of Q1 versus Q2 year.
Year to date this year, we're at about 119 versus prior year $96 million, that's with asset sales you know without hurting comparable like you wouldn't adjust for deconversion revenue, we'd be pretty comparable on a six month basis. So I.
I I think all in all I think not a lot to kind of call outs in the second half there I think trends will kind of continue to normalize.
Okay. Thanks.
Okay.
Thank you and the next question comes from <unk> with Autonomous research.
Hi, Good morning. This is Ben Fargo on for Ken. Thanks for taking my questions. So firstly I wanted to ask about payrolls. It looks like the asset about two and a half million dollars in revenue in the second quarter.
Guiding to $12 million for the year, So I would love to get an update on the performance in the quarter and kind of what drives the assumption behind the implied step up in the second house.
Yeah. So from a sales perspective were starting to really see some some nice wins.
A little bit slower than we had hoped to kind of start out the first few months, but we're starting to pick that up. We're also through the integration efforts that we've been doing we're able to sell some separate modules.
So some of those components that we bought from pay rails, we can actually sell into our existing IP business. So the the open loop P to P that we mentioned the Ada a components and even the fraud module, we're able to sell so we're starting to get that geared up we're completing some integration. So so we're we're pretty you know pretty.
You know bullish that we're going to have an opportunity to continue to sell into the IP space as well as what we have in the prospect list for the pay rail customers are pre acquisition and post.
Got it that makes that makes sense and secondly, just as we think about your guidance how should we expect the updated targets to really flow through the segment results in <unk> is it expected to spread out evenly or where are you expecting.
Biggest impact relative to the prior guide.
I can take that one Ben so I would say year to date trends that we've seen you know a core being up about sex driven mostly by cloud strength payments up about 7% growth in complementary about eight.
For the full year and that's on a non-GAAP basis for the full year, we're seeing some consistency in this right. So I would say, particularly around core and payments consistently full year versus kind of year to date and our complementary I think growing slightly in the second half.
It's kind of land is a little bit there. So that's kind of the direction I would call out.
Got it. Thank you so much for taking my questions.
Of course.
Thank you and the next question comes from Reena Kumar with UBS.
Good morning. This is a detour kulkarni filling in Corina Kumar Thanks for taking my question.
I guess to start.
I appreciate the details on the tech modern strategy, but can you touch on how this is progressing and particularly if there are any notable developments on this front within the payments business since the acquisition of payroll and then I have a follow up.
So well check minus so payroll is part of the strategy. The idea was that by acquiring payrolls, we acquire a public cloud native bill pay and overall payments platform that does P to P account to account and business to business payments and so acquiring payrolls was to kind of fill.
That need for a public cloud native payments platform, our choices where to essentially rewrite I pay you and add functionality that I pay or go acquire something that was already public cloud native and integrated into our into the solution. So as Greg just highlighted.
<unk> is up and running the integration work is being completed but not much left to do as far as integrating into the rest of the rest.
The rest of the solution.
Public cloud environment that we've created so it's it's progressing beautifully as far as I'm concerned from a technology point of view.
Great that's very helpful and for my follow up.
You've mentioned a Jack Henry began leaning more on CPI escalators last year as inflation climbed to kind of record levels. Now there is expectations of inflation to moderate in 2023 could you just walk us through how this could impact Jack Henry's business if at all.
Well at this point, we're continuing to implement CPI escalators, so I stress to the two calls ago I think you know that.
That's not a one and done thing of Jack Henry We don't do that at one time and then we're done doing that as contracts come up for renewal those CPI escalators.
Our implemented for those customers and we're continuing to do that so until we see some significant change in the overall economy. We are going to continue to implement those changes to the level that we think is appropriate and that our customers are expecting we will continue to implement CPI escalators. We just did another batch last week and so.
That's this is not something that we're we're kind of evaluating.
As a as a point in time that we're going to stop or that we're going to do something different we are continuing to do the activities that we've been doing and we will do that until we see some change in the overall economy that warrants a change in our practice.
The only add on I would say there is it's quite early from a fiscal 'twenty four we haven't even started it you know budget cycle planning sell in terms of being able to indicate utilization and you know for next year I think its premature I would say, we're not reliant on that as a core strategy of our ground though.
Great. Thank you.
Thank you and the next question comes from James Faucette with Morgan Stanley .
Hey, good morning. Thank you so much Dave maybe wanted to get your perspective, a little bit on the prospect for vendor consolidation in the current environment.
Yes, I'm wondering if I'm a bank or credit you today I'm using Jack Henry for core processing, but in the past have elected.
To do best of breed software.
From from other lending partners.
Am I looking to consolidate those activities in some form or fashion.
How does that give you Oh, what does that do for your sales and sales cycle et cetera.
That is yes.
Yeah, that's a really interesting topic, James and I could probably talk for about two hours on this one I wont, but I could so what's what's happening right. Now. So there are couple of competing forces here when it comes to talking about that first off you have a real desire among banks and credit unions to continue to look for best of breed solutions. It's why.
We have so many best of breed products in the in the Jack Henry product family. It was the it was the whole basis for the profit stars initiative that we ran until we just changed our branding here. We still have all the solutions. We still have that strategy. We still have a salesforce that only calls on customers outside the Jack Henry core base, you know that is still a wonderful business for for Jack Henry because they are.
Those customers, who demand and expect best of breed solutions.
<unk> solutions to connect into their core at the same time, you have regulators that are pushing pretty hard on those same customers to say you shouldnt be trying to manage so many vendors you're introducing more risk into your environment. If you have so many different vendor a vendor partnerships.
So you know part of our strategy has been we can we can do both we can be the best of breed provider for somebody who is not running a Jack Henry core they limit the number of vendors they work with by working with Jack Henry on Noncore solutions, because we have such a broad suite of noncore solutions. So we were a positive in that sense to those vendors who are those.
Customers, who were looking to do best of breed, but limit the number of.
Of our vendors that they're working with but again there is this real push because of the disruptive factors are disruptive forces there that are happening in the banking space in general there is this real push among bankers to find those fintech solutions those best of breed solutions to offer to their clients and so it's that that balancing act, but it's something that we've been what.
<unk> for quite some time I feel strongly that Jack Henry is really well positioned to to serve both ends of that spectrum and as part of the reason why we continue to look for some of those best of breed solutions to acquire like pay rails. So that we can continue to be a force among those customers looking for best of breed.
Got it and I wanted to ask also I guess, a more specific product related question and that's related to fed now.
Given how close you are to fed now I was hoping you could give us an idea of the general readiness and implementation capabilities that the regional community banks that you work with apt to implement that and start to use fed now and I guess on a high level, what's your take on the timeline.
On how J J P Center.
To accommodate the rollout thanks.
Hey, James This is Greg I'll take that one so a couple of things. So one we are positioned to be the first processor live starting in July .
So we've been working with the fed for over two years directly on.
Kind of preparedness for that so we will we will be launching it looks like somewhere between 25 and 30 institutions will be part of our initial launch.
So the interest level with the community institutions has very high part of the reason why is that the clearinghouses owned by the larger banks and so there's always been a little bit of a of a concern about doing business with the larger banks, but with the fed.
The smaller community banks are very excited about the especially about some of the use cases that are that are being talked about so in short. It just as a reminder, we have about 60% of the clearinghouse institutions are Jack Henry institutions. Today, If you look at the at whose live with about 60%.
Jack Henry So we will be the first processor going live with the fed now product.
In this summer.
Great Thanks for that.
Thank you and the next question comes from Chris Kennedy with William Blair.
Good morning, Thanks for taking the question.
I know credit's, a small percentage of your overall business today, but can you talk about the agent program that you guys launched in January and how meaningful that could be.
Yes. This is Greg I'll take that one as well so we did just launch it we have three.
Customers that are in and some type of pilot with US right now since we just got it going but.
But what we really believe is going to happen is that the smaller community institutions that were had credit programs or wanted to be part of credit programs. They didn't have the staffing our expertise to handle the full service solution. So just like Dave mentioned that we were gearing up and we brought in people to help us with it they didn't have the <unk>.
Horses as well so we really believe the agent program is going to be a nice opportunity for more folks to take advantage of a credit offering and the way we position. The the solution said is is that at some point in time, if they would like to actually move to a full service solution, we will let them take that portfolio with them. So thats.
Also pretty advantageous.
So again more to come on that but we do believe that there'll be more uptake in the agent program, then maybe especially in the smaller community institution space.
Great very helpful. And then just a follow up on pay rails, so a little bit slower than initially expected, but you're still anticipating it to be accretive next year, the dilution going away.
Yes, we're still working through that but yes, I mean, we're working through everything we can we can do related on the sales side, making sure that the sales engines going to the point that we needed to and as long as that happens we feel very confident about that.
Great. Thanks, a lot.
Thank you and then last question kind of Dave Koning with Baird Baird.
Yeah, Hey, guys. Thank you and I guess first of all the non-GAAP revenue I know you took down the year by 20 to 25 and you walk through that but EBIT. You mentioned too is it's still non-GAAP EBIT still stable, meaning you were taking the $20 million to $25 million of cost out.
With cost controls I guess, I'm wondering where are you taking costs out and then is that sustainable into next year or will some of that just flex back up.
As you grow into next year.
So Dave I think that's a great question.
It's a combination of factors I think that disciplined focus.
As Dave mentioned previously we look every head count renewal every ask on a like a row by row. There are some more pre spooning theres somewhere you know just kind of eliminating completely and its Sunday drove back in next year, we're making kind of mindful choices.
Travel is another example, where we are just kind of being disciplined about the amount of travel, but that may not be a structural and long term and so I suspect some of that might come back, but then theres other factors.
Including performance management and other things that are.
Well help us this year.
This is Greg I'll add one piece, we have a very strong focus on process automation here.
Not only tools, but just in people so about 25% of our staff is.
Really certified and some level of what we call Carter in the classroom and so as part of that we've been driving a lot of operational savings and some of the head count reductions as part of our initiatives to be better automated and various things that we do so that's also another contributing factor.
And that's something that will go on forever at Jack Henry David I think the key point there is that what Greg just highlighted that isn't a one and done exercise that's something we're trying to ensure is embedded in our culture going forward, we'll continue to look for those opportunities always.
Gotcha. Thank you and maybe just a follow up I know pay rails I know the year, it's supposed to be 12 million and Q2 was like $2 6 million or something but the rest of your needs to be four point to per quarter to get to the full year and I'm wondering you know why does it step up from $2 six up to $4 two in the <unk>.
Core to the rest of the year is there something seasonal et cetera.
Yes. There is there's there are a couple of decent sized deals out there that we're working on.
And feeling pretty good about so that's part of it and again its also getting the these add on solutions when we call add on solutions to the IP business and moving those on and that's really where a lot of that is baked.
Gotcha. Thank you.
Youre welcome.
Thank you and then next question Dominic Gabriel with Oppenheimer.
Hey, guys everybody.
Thank you for taking my question so.
Could you just talk about the demand for and forgive me I missed the beginning of the call can you just talk about the demand for Jack Henry core and the sentiment around the tech modernization and uptake of interest in your conversations with potential new and existing clients versus conversations say six months ago.
Yeah. So it's a it's becoming a significant part of many of the conversation. So I highlighted at the beginning of the call Dominic that we signed 12, new core deals in the in the quarter with a significant call out that I made there was three of them are multibillion dollar institutions that all signed on December 30th. So December 30th was kind of a fun day.
Around here, but the other thing that I've talked about already on the call is the fact that we're.
We have larger.
Institutions I think overall demand is moving larger.
And I think some of that is definitely being driven by the technology modernization story. So we have it's become a part of most conversations with core prospects is not necessarily part of the conversation with people who are not looking to bring their quarters, Jack Henry but for poor prospects. It certainly is a part of the conversation usually and we are trending up.
As far as the size of customers that are coming to Jack Henry wanting to talk about tech modernization, because they've been looking for that company that will help them develop a strategy in the future that gets them to the public cloud and its a more Ah I think rational strategy about how you do the core side of the business and tie in Fintech solutions complementary.
Solutions into that experience for their customers. So conversations have been great I personally have been involved in a lot of them because as I've stressed before when that's a larger institution and the CEO wants to be in the conversation I am normally involved in those and its pretty fun right now.
Alright, great.
And I actually had one of them are really large card provider admit to me that they.
I just can't keep up with the investment that's being provided to modernize these tech stacks with you and some of your largest peers. So they made a switch to do so.
If I just think about the.
You know the the complementary grows.
And kind of how it slowed a little bit and then the comments around the second half.
And also deconversion fee expectations do you think that some of that would suggest that there is some level of tech spend retrenching at some of the F. EIS versus previously as they kind of look at the macro outlook and try to hold on to the cash that they have do you think that's fair.
Sure.
Well, so what I talked about in the early part of the call is we don't have any of the major.
Surveys that I can quote to you this year, but I have a number of smaller surveys where smaller sample sizes and then I hosted the CEO Roundtable discussion just two weeks ago and these were Ceos of larger institutions, Jack Henry core and not so it was a variety of Ceos and kind of the overall feel and these are people who have their budgets in place now for 2023 so they.
Werent speculating they were sharing with me real numbers that they plan for 2023, the kind of the average settled in at around 7% Theyre expected increase for 2023 and that's that's in line with what we're seeing in the sales organization and the sales pipeline is very robust larger than it's ever been so I don't see any slow.
Down or any to.
So any kind of pullback when it comes to the commitment that.
Folks in our space have on continuing to spend in the technology area.
Sorry, I missed that commentary maybe just one one last one have you seen the pace about just from that further.
Beginning comment I made about a large EFI outsourcing are you know.
Are you seeing more pay higher pace of outsourcing than you have in the past versus say like six months ago with client willingness to outsource their tech capabilities that speeding up or do you think it's fairly stable over the last few years the willingness I'd say, yes, I'd say, it's pretty stable it's <unk>.
Grabbed that before as a religious conversation when you talk to a a bank or credit union. They either believe in being in house with with the either everything where some things or are they believe in outsourcing and they just have this kind of ingrained belief and normally it requires some driver that has nothing to do with Jack Henry to get them.
To talk about outsourcing so it might be that they've lost somebody in their tech group that they were very dependent upon and know that and they can't hire replacement it might be that the regulators are giving them a pressuring them because they're trying to do things themselves that they maybe shouldnt be doing themselves it might be a change in leadership at the institution and you know this is a new CEO comes in and says I don't know why you guys are doing.
This yourselves, we really ought to be outsourcing. This so it's some kind of driver normally that's external to Jack Henry <unk>.
Prompts them to bring their business into an outsourced environment.
I don't think anything has changed in that regard in the past six months or even in the past six years.
Okay, great well. Thank you so much for taking all my questions.
Certainly.
Thank you and this concludes our question and answer session and now I'd like to turn the conference back over to management for any closing comments.
Thank you Keith.
Additional investor engagement opportunities for management participation multiple investor conferences, and non deal road shows over the next month. Additionally, please save the date is our annual Investor day will be held in Denver, Colorado on the afternoon of Monday may 15th if you're interested in attending in person. Please contact me for additional details.
Otherwise, we hope you join us via the webcast.
We are pleased with the results from our operations and remain enthusiastic and focused on our future. We think all Jack Henry Associates for their efforts that produced these results. Thank you for joining us today and Keith will you. Please provide the replay number yes. Thank you three main number for today's call is 8773 or four for <unk>.
529.
And the access code is 4711955.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.