Q3 2023 Jack Henry & Associates Inc Earnings Call

Welcome to the Jack Henry third quarter earnings Conference call.

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Please note. This event is being recorded I would now like to turn the conference over to Mister Vance <unk> Vice President Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Jack can read fiscal 2023 third quarter earnings call. Joining me on the call today is David or chair and CEO maybe cars.

Lee CFO , and Treasurer, and Greg Adelson, President and C O O.

After my opening remarks, I will turn the call over to Dave for his thoughts about the state of our business.

And sales performance for the quarter industry comments, another key initiatives.

Dave concludes his comments.

We'll provide additional commentary regarding the financial results in 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 include certain forward looking statements, including remarks are responses to questions concerning future expectations events objectives strategies friends or results like any statement about the future of these are subject to multiple factors that could cause actual results for events to differ materially from.

Those which we anticipate.

Multiple risks and uncertainties.

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 Argentina 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 reconciliation for non-GAAP financial measures are in yesterday's press release.

Now turn the call over to Dave.

Thank you and good morning, everyone. We're very pleased to report another strong quarter of revenue growth and an overall solid performance by our business is always I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our third fiscal quarter.

For Q3, a fiscal 2023 total revenue increased 6% for the quarter and increased 8% a non-GAAP basis.

Consistent with our prior comments regarding the reduction in bank M&A. This year the conversion revenue was down approximately 65% as compared to the prior year quarter.

Turning to the segments, we again had a good quarter and the core segment of our business revenue increased 4% for the quarter and increased by 8% on a non-GAAP basis or.

Our payments segment performed very well posting a 6% increase in revenue this quarter and a 7% increase I don't know I'm got basis.

We also had a strong quarter in a complementary solutions businesses with a 6% increase in revenue this quarter and an 8% increase under non-GAAP basis.

As I highlighted in the press release, our sales professionals posted an extremely strong quarter led by the corps sales team.

On our last quarterly call I mentioned that the sales team set an all time sales booking record and our fiscal Q too. Although we didn't break that record. This quarter. We did set a record for the strongest Q3 in history.

During the quarter, we inked 13 competitive core takeaways. So we continue at the approximately one deal per week run right I've discussed in the past.

In addition to our success signing Nucor clients, we signed 13 existing on premium core customers to move to our private cloud environment.

In addition to the tremendous success, we've experienced in our core business. This quarter, we continued to attract new clients to our digital banking sweet.

During the third quarter, we signed 39, new clients to our banner retail platform with another 35 clients signed up for <unk> business.

Regarding our band on digital Sweet as of March 31st we now have just over 9.3 million users live on the battle platform we.

We continued to enjoy the highest consumer rating in the App store and we are regularly recognized as the fastest application in the industry.

The feedback from our 30 <unk> business beta testing clients has been outstanding and we remain on track to deliver battle business into general availability later this quarter.

Let me take a moment to address the banking landscape related to the liquidity challenge is experienced by a couple of large regional banks in March and earlier this week.

Although I'm not aware of any Jack Henry core clients, who have tapped into the fed reserves New bank term funding program I think the announcement has had a positive effect on the overall concern in the market regarding bank liquidity and I applaud the fed on their swift and decisive action.

Since those events grabbed the headlines members of our team was spoken with hundreds of our clients and I personally have visited with a large number of C E o's at our client banks.

I'm pleased to say that our banking clients have indicated they had been largely unaffected by these events with the exception of several whoever reported an influx of new accounts as business clients look to diversify their deposit balances.

Our clients typically have a diversified customer base sort of small and medium businesses and consumers in their local communities and have long standing and loyal customers. So I think it's logical that they wouldn't see an adverse impact as a result of a few extreme scenarios.

Also remember that a large part of our business is focused on the credit union industry with approximately half of all credit unions with more than $1 billion in assets partnered with Jack Henry as their primary technology provider.

Those clients also report being largely unaffected by the challenges in the banking sector.

In late April <unk> conducted a survey, which generated responses for more than 550 Bank C. E O's presidents and C. F OS primarily at banks with less than 10 billion in assets.

Approximately 77% of the respondents saw no significant inflows or outflows of deposits.

14% said they saw deposits declined by two per cent or more than 9% said they saw an increase of at least 2% and deposits I.

I think these results are consistent with what we've heard anecdotally from our clients.

We have seen no hesitation on the part of our clients to move ahead with technology decisions since the middle of March and as I mentioned earlier. This was the largest third quarter in terms of sales bookings in the history of our company.

What's more our sales pipeline is now larger than at any other time, including a recognizable uptick in opportunities since our last quarterly call in February .

I'm well aware of the challenges banker's face in today's economy and understand that things could change, but as we speak today, our clients are generally performing well and banks and credit unions are continuing to prioritize modernization of their technology stack to remain competitive and serve the evolving needs of their account holders.

Hopefully have all seen the new corporate sustainability report that we published on March 31st I think it's an excellent representation of the key initiatives and accomplishment we've been working on since we published to our last report.

In this new version, we provided a more detailed review of Jack Henry's demographic make up a summary of the results of her annual <unk> engagement survey, an overview of our data privacy and cyber security practices and an outline of our commitment to setting science based targets to the science based targets initiative or S. P. T I to address the reduction of greenhouse gas emission.

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Additionally, the report highlights some of the public recognition we've received from organizations like Newsweek Computerworld and linked in's top companies list.

As we look towards the end of the fiscal year. Our sales pipeline is much larger than it's ever been and we continued to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our customers our ability to expand our customer relationships and our long term prospects for success.

I look forward to seeing and chatting with many of you at our Investor day in Denver, and a couple of weeks with that I'll turn it over to Mimi for some detail on the numbers.

Good morning, everyone <unk>, Jack Henry had a successful third quarter and I will call out the details driving those results and our outlook for the remainder of the year.

Prevent the third quarter and first nine months of our fiscal year total revenue is at six per cent on a gap basis, and solidly up 8% on a non-GAAP basis.

Now onto the third quarter detail on.

On a gap atheist services and support revenue increased 3% and by the third quarter and your date.

Insistent with friends over the past few quarters services and support or negatively impacted a D conversion revenue decreased 11 million for the quarter and $31 million a year to date. It's remains in line with unlimited broader market activity acquisition activity in our space.

With only a couple of months left we're projecting approximately 20 million in D conversion revenues this fiscal.

All year however.

However, forecasting D conversion activity is always challenging given the unlimited advance notice and general uncertainty of M&A.

Are private and public cloud offerings show robust growth this quarter growing 11% and 10% year to date.

Product delivery and services decreased 10 per cent in the quarter 11 per cent ear to date impacted by lower D conversion revenue and convert merge activity offset by higher license and hardware revenue.

On a non-GAAP basis services and support revenue grew 8% for the quarter and seven per cent ear to date, which serves to highlight the consistent strength of our business model.

Processing revenue increased 11% on a gap agents for the quarter and 10 per cent ear to date.

On a non-GAAP basis, the growth was 10% for the quarter and 9% in here today.

The increases were driven by the higher card volumes and services plus robust digital demand.

Now reviewing costs.

Cost of revenue was up 9% for the third quarter and 8% year to date.

<unk> [noise] drivers included increased card processing costs, consistent with card revenue growth hire personnel costs and amortization expense.

Drivers are consistent across our year to date results.

Research and development expense increased 13% during the quarter, mostly due to hire personnel cough and license fees furthering innovation.

To date these expenses increased 19% based on the same factors.

S G and a rose 9% for the quarter driven by increases in personnel related costs.

Year to date, the increase with 8% driven by personnel travel.

Professional services cost, partly offset by the gain on sale of assets earlier this year.

We remain focused on actions involving facility rationalization headcount and travel controls procurement wins and other expense management collectively these efforts are helping offset inflationary pressures and driving positive operational results.

Despite a decline in net income primarily related to D conversion revenue and partially offset by a lower tax rate, we delivered fully diluted earnings per share $1.12 for the quarter.

Thanks to our hard working and dedicated associates gap and non-GAAP results, but the third quarter nine months of the year are consistent with internal expectations and set us up for a strong conclusion to FY twenty-three.

As a reminder for transparency the impact from the gain on sale of assets.

<unk> acquisition and D conversion revenue are shown as part of the non-GAAP adjustments in the press release.

Turning our attention to cashflow.

To date operating cash flow with 207 million down from 301 million in the same period last year.

Lower deacon version revenue and the timing of taxes.

The tax payments were significant significant outflow at 64 million in the quarter related to a change in the timing of the deductibility of development expensive free.

Free cash flow, which is operating cash flow less capex and sock cap software.

<unk> proceeds from the sale of assets was 82 million year to date.

Excluding the previously discussed tax payments and keeping year to date Deacon version revenue flat free cash flow would have been approximately $163 million.

Wow balancing repurchase activities with maintaining a conservative balance sheet, we repurchased 151000 shares during the quarter.

We also returned capital to shareholders through a dividend at 52 cents per share representing a 6% increase.

R capital allocation priorities remain consistent.

Focused on maintaining ample liquidity investing in our business defeo growth evaluating acquisitions paying dividends and opportunistically repurchasing our stock.

This consistent dedication to value creation resulted in a trailing 12 months return on invested capital at 21%.

With that let's review our outlook for the completion of our fiscal year.

The press release included updated full year gap guidance.

<unk> guidance remains inclusive of the payrolls acquisition gain an asset sales and D conversion revenue.

We expect the year to date trends to continue for the remainder of the fiscal year impacting GAAP results.

Most significantly.

And continued minimal consolidation in our customer base D conversion revenue will remain needed.

Considering year to date activity, we expect approximately $20 million in annual D. Converging revenue, representing a 5 million an increase from our previous guidance provided on the last call.

To be transparent on our August full year earnings call, we will outline our new approach to providing guidance for D conversion revenue.

Well the integration of payrolls continues to meet expectations. There has been third party implementation delays impacting FY twenty-three revenue amounting to a shortfall of 3 million.

Revenue remains in our pipeline, we remain confident in the strategic value in financial performance trajectory.

We expect full year gap revenue growth for physical twenty-three to be between 5.5% to 5.9 per cent.

With respect to full year gap G. P. S. We expect $4.85 to $4.87 per share with improvement driven from positive impacts from a modestly higher expected D conversion revenue lower tax rate, partly offset by a slight increase in pay real dilution.

non-GAAP guidance remains unchanged due to the continued impressive inconsistent performance of our business model.

So in closing we delivered another quarter of strong operational and financial results.

Maine solidly optimistic about the inclusion of this fiscal year.

We thank all of our investors for their continued confidence and Jack Henry.

Debbie will you. Please open the call for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speaker phone. Please pick up your handset before pressing the keys too.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question is from <unk>.

<unk> Kumar with you B S.

Please go ahead.

Good morning, David and the pumpkin spoken about to happen.

<unk> to non Jack Henry core customers, how is that progressing in in general are using the opportunity to sell your core processing services to larger financial institution.

Yeah. Good morning, Reynoso two questions in their first first off as far as bandwidth concerned so and I think I talked about this on the last earnings call I know I've talked about it and some some of the the fireside chats that I've done with some of your we had in fact, a plan to start selling banner outside the base here in the fall of this past year and what.

We learned much to our surprise was that some of our competitors had identified that as an opportunity for them to hang onto their core customers. The fact that their core customer was going to be able to use <unk>. They were essentially using that as a as a selling point for those customers to retain their their legacy core system, because they would get the best of breed.

<unk> banking system without having to change out the Coors and that is certainly was not part of our strategy and so we've kind of backed off on that we were prepared in the fall to start.

So we also have the base, we backed away from that now we're really reworking that strategy with a more targeted approach and so you'll hear more about that from US I think later this year as far as how we're going to go to market with banner outside the core base.

As far as the no you'll have to remind me the second part of your question.

And we're setting up alright swelling of Oregon, Good thing I have help here in the room swelling up market. So yeah. The the first off we're having great success with silver Lake in the banking side and of course, we are the dominant player on the credit Union side already a market. So approximately 50 per cent of the credit union industry with us until.

1 billion are already Jack Henry core customers. So we're already the dominant player on the credit inside of the business on the banking side. We've had great success here in the past few years moving up market with particularly with our Silverlake core system, what's been interesting now with the with the Tech modernization strategy, we are engaging.

The number of customers now that are significantly larger than you would normally think of as a jacket Henry core customer.

Very interested in what we're doing and are now seeing Jack Henry is is the very probable technology partner that they want to partner up with going forward. So more to come on that you know it's early days for us with some of these very large customers that were that we're talking to but the prospects I think are pretty bright and much of that being driven by the tech modernization strategy that we've been taught.

But lately.

Very helpful. And then if I can fit one inform me me.

<unk> could you just comment on the debit processing volume in the corner and second secondly, if you can just give us your preliminary thoughts on how F Y 24 revenue and operating margin <unk> could pan out given that you're close to your fiscal year and thank you.

Thanks, Rena Uhm, yeah. So we continue to see the trends that have have happened for the first nine months of the year and are consistent with the broader market data that you're getting from other industry players in terms of slightly slower as it relates to the consumer sentiment impacting those trends.

And a and a little bit more going to the credit side than the debit side and as you know we have a much bigger profile on debit and our business. So our guidance incorporates the continuation of that trend and then to your second question. Unfortunately, it's a little premature at this point to talk about F. Y 24, our teams are still a heads down.

And collaborating on the budgeting process and will probably share that more on the August call. Then we will today.

And can I add one comment on the debit the drugs. So I think there was a bit of a misunderstanding. After the last call. You know we attributed a part of our guide change to the fact that the debit volumes. We saw going forward, we're going too slow just a little bit and certainly that's true but that doesn't mean the debit business is is underperforming the debit side.

Thank you.

The next question comes from Dan per line with our D. C capital markets. Please go ahead.

Thanks, Good morning, Dave I had a question you know going back to the demand environment I feel like there's this huge disconnect in the market with the stocks and kind of what we hear from the banks versus what you're saying I'm. Just wondering if maybe we're getting it wrong a little bit like is is the is the <unk>.

Pressure that the banks are feeling right now driving more tech demand to you as opposed to maybe to converse, which is I think what most people are expensive.

Yeah, It's an insightful question down and I think what you're saying is generally correct. So if you're running a bank or credit Union the United States today.

Been performing pretty well and we all know the challenges that they're under and raped increases in cost of capital and that kind of stuff, but if you're running a bank or credit in the United States today, you for almost all of them they need to continue to focus on modernising their technology stack for one of two reasons, one you're trying to attract new customers to your institution.

And customers aren't coming into the branch anymore right, they're expecting to do things through some type of digital presentation layer. So for most banks are great you into that requires them to continue on this modernization track and make sure that they have the tools to attract not just consumers Bud business customers small medium business customers are the lifeblood of our of our customers and how they operated on.

The banking side and so there's that driver, but then the other side of the equation is efficiencies no fruit. So for most bankers. They can quote the efficiency ratio immediately to you without looking at any piece of paper that you can pull it off the top of their head because they are all focused on efficiency and trying to figure out where are those areas, where we can drive efficiency through the operation will <unk>.

Generally technology is at the is that the the crux of of where they're gonna find efficiency and so there are two Jack Henry is in the mix, having those conversations with our customers and then you throw into that you're on top of that fraud, and cyber security and all those kind of things all of that stuff is driven by technology.

So yeah I think there is a bit of a disconnect in this in this sense that because there are some turmoil in the industry. Jack Henry sales are going to be negatively impacted they're just not you know the the the the businesses continue to run and they need to continue to find technology solutions to help them with all those things, but I just highlighted.

No that sounds.

Somewhat counterintuitive, but it clearly makes sense in the current contact.

Quick question or follow up on on margins here I know you'll want to go out there to next year, but I I would appreciate it if you could maybe talk about some of the the key drivers and levers that you're gonna be able to have here, whether it be expense control specifically.

Mix of the business just as we start to think about the margin expansion story again. Thank you.

You're damn great question. So as we talked about previously we continue to see margin expansion throughout the year. When you would be you know a modest amount. This year earlier in the year. Our original guidance was for flat to you know for the year, we're hopeful that and we're on track for a small increase in margin expansion.

I would say the things we're working on our consistent we do at Hunter around efficiency continuous improvement we've done a lot on internal Ottoman atomization and procurement has been a huge win for us as we think about streamlining partnerships and really prioritizing that spend so we're being.

Really thoughtful uncontrollable spend like travel head count physicians, I'm really thinking about each position from a zero-base perspective, but there's nothing structurally that concerns me in terms of the ability to once again continue back now that we have the normalization of some of the headwinds we've seen.

In past years and return it out of Covid environment that will return back to your margin expansion story.

That's great to hear thank you.

The next question is from next Primo with Credit Suisse. Sir. Please go ahead.

Congrats on a strong result, thanks for taking my question.

Was hoping to get some more color on the performance and the payments.

Orders across the various business lines. If you received any of one time benefits related to the banking turmoil turmoil like some of your competitors and just as my follow up or is there still expecting <unk> to be modestly accretive in F. Y 24. Thank you.

So, let's do payrolls first Greg Griggs prepared to give you an overview of <unk> and they were talking about the the rest of the payments business, Yeah, and I think you know so I'll go ahead and start with payrolls, but a couple of things. So one you know Mimi alluded to the fact that in her opening comments around we do have some some challenges with a couple of third parties and I think some of it.

You know head count related and and other constraints that they have to get some of the work done to allow some of our contracts that are already done in in the implementation queue to be brought into the production queue. So there's a few of those constraints and things that were working through but the good news is is that since September .

Remember when we made that acquisition, we've actually sold 40 nude 48, new contracts and 17 add ons add ons or things like the Peter P solution, we have a loan payment solution things like that so the sales engine is starting to move and a lot of the sales that were done previously before we acquired pay rails, we're really <unk>.

Dominantly done through that third party channel. So of course, we have a much larger salesforce and folks that are focus on selling more direct deals. So we're pretty you know very optimistic on on what's happening in the sales side of this we just need a couple of the integration partners to be able to get you know some of their their work done that will help us.

Celebrate the revenue in fiscal year 24.

And I can start on the payment side too. So I think you know and and made me alluded to what was going on on the on our card business, which continues to go very very strongly as far as growth, but when you look at the rest of our payment businesses. There's a there's a nice mix of growth maybe not to the same level that we had remote deposit capture.

In our EPS business with significant during the pandemic, obviously folks or you know not going into branches at all though that continues for the most part that business says is not growing at the same pace it did but still and a double digit growth in in our in our in our portfolio. So things that we're doing in our patient.

Our business around general payments in preparation for fed now, which we can talk about at some 0.2, but in our in our clearinghouse business and what we've done with Zell. We continue to have about 60% of all the clearinghouse customers that are out there. There's only about 300 clearinghouse and we have over 180.

That are alive on Jack Henry today that continues to grow nicely and so you know that business continues to have a lot of upside.

Yeah, I would just add that there's consistency <unk> greatest binders consistency across <unk> cards payments also led by things like the fraud and other risk management solutions that are add ons. So I would say that trend from a consistency of growth will continue and then added by the benefit of <unk>.

Okay. The next question comes from David <unk> with.

Evercore I S I.

Thank you good morning, you've called out you do sales pipeline at a record level could you walk through what are the biggest drivers of that is that new tech modernization modules has it been oh business silverlake, what what are the underlying components so that strength.

And you know one thing I'll highlight as I go through this you know when I talk about pipeline and I know there's been some confusion in the past I'm not talking about individual deals you know how many core customers are in the in the pipeline or anything like that I'm talking about the you know the dollar amount essentially <unk>. This is a non-GAAP number but it's the dollar amount that we track as far as the value of each contract. So it's.

You know in theory that all converts into revenue at some point after deals are sign in and they're implemented.

Far as the drivers so core continues to be king for us when it comes to a driver we have just a tremendous amount of core activity right now both banking and credit Union.

R as customers that are talking to Jack Henry about trading out their existing technology. Some of that is certainly driven by tech modernization, but I don't think it's as much driven by you know I want to sign <unk> for the Tech monetization module right now today. It is more about Jack Henry has a strategy that makes sense to us as bank and credit Union executives there.

[noise] strategy makes sense, we need to look at them now and get to Jack Henry now because we Wanna, we Wanna be partnered with them as they continue to evolve and so there's a lot of that that's driving interested in our existing core customers silverlake, primarily on the banking side and of course scimitar on the credit Union side, but then on top of that battle continues to be.

A driver and that's why I call. It out on these calls almost every time, there's a tremendous amount of interest in in battle or new financial crimes defender solution that we've talked about on this call. That's rolling out here very soon we're just we have a lot of customers that are looking at financial crimes defender because it's because it's the first brand new ground.

Public cloud native fraud solution in the industry and many years until lots of interest not only inside our core base, but outside the core base in that solution or Treasury management solution is getting great reviews. Today. So continued interest in Treasury management, certainly cards, we talked about the number of customers that.

<unk>, we've been adding to the cards business so <unk>.

Continuing to to drive interest there are online commercial lending solution, a tremendous amount of interest in that so it's just a broad variety of solutions. The I think the common thread and all of that is almost all of those non-core solutions have been written and rolled out within the past 234 years. So it's a new technology that <unk>.

Are interested in and then of course on the core side you know all about our tech modernization initiative, there and so you put all those things together much of what's driving this is the the recognition in the industry. The Jack Henry has put a tremendous amount of investment into brand new technology, and new solutions to help our customers. So.

Problems and so that's what's giving us a lot of attention.

I'd like this is Greg I'd like to add irrelevant example, so we actually just got an inbound request from a large regional.

At hadn't talked to her since 2010, and they came to US and said hey, we'd like to renew conversations based on what we've heard about you in the industry. The tech modernization story and and things in General and that's irrelevant example, because you know these are these are larger institutions that we typically wouldn't have seen in the past that again that.

Inbound to us because of the things that we're doing <unk> stuff that they've just described.

What's the asset size of that large regional bank Greg.

It's greater than 50.

<unk> and.

And we are engaged today day with a number in the in the mid 20 billion space. Several banks in mid twenties are talking to us today and I think a lot of it is because of what they've seen with tech modernization and but they're not talking about moving right to that platform, they're talking about silverlake, and then evolving to that platform.

Understood and just as a follow up what's your latest view on.

Timing of rollout of fed now you know Jack Henry's role in how material could fed now beta Jack Henry you know over the next 12 months.

Yeah. This is Greg I'll take that question as well so great. Good insightful question. We we are absolutely ready we're already fully certified and on July the 19th when the first transaction takes place we will be part of that transaction process. We have 20 institutions that will be going live between the <unk>.

July 19th timeframe and sometime in late August based on just roll out with those institutions. We can go as fast as they want to go we have 51 contracts that are already sold and a significant number of of others that are in process. Just based on interest I think to your point about significant.

Of where this is in our in our portfolio time that you know time will tell a lot of it's gonna be based on use cases, and there's a lot of rumors that the the fed in general will be mandating. Several use cases that will be important for institutions to be set up on the received now at least aspect.

Of of the equation, allowing them to receive payments. If one comes to them. So we are having a very detailed conversations with a lot of our institutions about the importance of at least being set up on the receive aspect, even if they're not ready to go to the <unk> to the sand aspect, but again, we're very bullish on on there.

This the clearinghouse there had been some you know some challenges just because some institutions that we that we work with we're a little leery of of working with the the larger conglomerate that onto the clearinghouse versus the fed being a part of this so we we think we're going to see a little more uptick.

<unk> in the fed now solution that maybe that we saw so far in the <unk> in the clearinghouse one just to emphasize day of the level of our involvement with the fed on this project I was just in Washington D. C. On Monday, So two days ago meeting with some of the fed presidents and the fed now team and the president of our payments Division was with me talking strategy talk.

Being rollout this was a Jack Henry only meeting with these fed president. So we are very engaged with the fed and very very it's top of mind for us to make sure that we're helping our customers take advantage of this opportunity.

Understood. Thank you.

The next question is from <unk> with K B W. Please go ahead.

Hi, Thank you for taking my question I guess, the first one I know you will share more on your Investor day, but just thinking about next.

Next year.

Puts and takes that we should consider.

I've asked it well I appreciate the question that you know we're still in the midst of planning in fact this afternoon will be spending all afternoon with the sales team on their planning for next year I would say overall as Dave mentioned, a continuation of the transition and implementation from a great pipe.

A line from the last two years plus you know the continued interest in some of these new products <unk> business wasn't in the ear numbers for F. Y 23 will be in 24, so that's a nice bump as well, but I would say, it's gonna be a continuation of a diverse portfolio growing.

Very well.

That's helpful. And then just to follow up on the complementary segment.

A big driver there maybe David you could talk about what are the some of the other products advised at the top in terms of growth drivers.

And that is we think about that segment longterm is mid single digits.

He's going forward or do you see that accelerating.

I'm sorry, I missed the last part of your question is what it's Oh mid single digits, Okay sorry.

Alright, Yeah. So you know as you know about the the complementary segment is a little bit of a challenge you wanted to talk about because there are so many solutions in there, but I understand your point in trying to figure out what are the key drivers. So there are several I already highlighted the financial crimes defender solution that we're just not rolling out. So we definitely expect that to be a key driver for us.

In the coming your banner is in that segment and so banner will of course continue to be a driver as we're rolling up Anno business Treasury management that I called out a little while ago Treasury as in that that segment that will continue to be a a driver for us most of the fries solutions that are not specific to payments. So the payments fraud pieces show up on the payments.

Segment, but the other fraud type things with security solutions. For example, those are all in that segment that has always top of mind for our customers. So that continues to be a driver for us as well. So it's it's just a lot of a lot of different things and then as I mentioned earlier, our online commercial lending of solution that is.

Has really picked up here in the past several months, we've had that solution and market for probably four years now but in the past few months, it's really picked up as far as the level of engagement with customers and prospects and so a bunch of a bunch of different pieces and so to the second part of your question about mid single digits. I think that is a good assumption because with so many solutions.

You have some that are growing quickly and some that are kind of.

Just study performers and so I I think that's a good assumption for that segment for the long term.

Great and just done that online commercial lending solution sort of any drivers by using that is getting more traction now.

Yeah, well I think it's because it's an interesting thing when you work with with banks and banks most banks C. E. O's grew up in the bank as a commercial lender that's their background for most of them commercial lenders. They they're the moneymakers in the bank right, but you can talk all day long about all the consumers and what Rhonda wonderful relationships you have with your consumers, but what.

Really makes money for a bank is the commercial lending business and so that's you know small medium business customers and then of course, even larger larger customers commercial lenders tend to have a process that they follow their the moneymakers, they're the they're the people.

People, who have a process that they followed a 10 they have tended traditionally to be averse to using more technology.

And but now with so many people, particularly on the back side of the pandemic. So many people not wanting to go to the branch they've gotten used to this idea.

Being able to do everything through some kind of a digital layer commercial lenders are getting a lot more comfortable with the idea and I don't say they like it but they're accepting it they're getting more comfortable with the idea that their customers small medium businesses expect to be able to apply for a loan and interact with the bank using a commercial presentation layer, that's exactly what our <unk>.

<unk> does it's a complete commercial lending solution that is hosted online where the borrower can do everything that you need to do through that presentation and then the lender can interact with them again through that technology. So I think it's a result of the backside of the pandemic customer expectation has changed and and <unk>.

<unk> are kind of oftentimes grudgingly accepting the fact that their customers want to do things differently in there now thinking about how do we adopt different technology to make sure we take care of our customers.

Alright, Thank you very much.

Certainly.

The next question is from Peter Heckman with D. A Davidson. Please go ahead.

Most of my questions and answered, but I wanted to follow up on said now.

Repression that would fit now.

Primary use case is gonna be.

Enterprise for you to be and then likely replacing same day a C H.

You know related to that or are you aware of any other use cases.

Might involve the consumer or other certain these processes at that you think you're gonna need.

Be strong right out of the gates.

Yeah actually I I think you know that could be one example, I think what we have seen even with some of the other solutions that are out there that we think will be the primary use case is with the gig workers the gig workers, taking the payments that they're getting and moving them using bremmer the fed now solution actually.

Is truly real time, the clearinghouse solutions still has kind of a batch settlement on the back and and so the ability, though they have access to their funds immediately the process is different but using the gig workers to move those funds into their their F. I accounts, we see that today with with a lot of the stuff that we have with the clearinghouse in in the fed.

Believes that to be a big one the other one is having the F I customers the financial institution customers actually moving money from external wallets into the depository accounts as well. So there's a whole host of of of of use cases that are being built out of those two scenarios as well as.

As in and Dave was just there you know there's going to be some some I don't know if I would call them mandates, but there's going to be some strong requests for things to be done through the fed now account for stuff like various tax payments in one.

One of the things we talked about Monday was V. A benefits yeah, yeah. So there's going to insurance payments things like that things that the that the treasury and the fed can control, they're going to be pushing that so that's why it's important for four processors like Jack Henry who can really kind of help get to that last mile of of.

Petitions to to get that receive now turned on so regardless of where that that payment has been initiated from it has a place to land.

Okay. That's helpful. And then just just to clarify.

Primarily.

Some form of a C H or or your bank transferred today, how you see it.

No I I do I do see you know some some reasonableness to some of the card products, there's various things that happened today and the beat of be world that were transactions that typically would've gone out paper, maybe would have gone out through a virtual card program or things.

Like that where there's interchange and some of those programs could be disintermediated because of this type of solution. So I think there's going to be some heavy focus on btb's solutions as well because there's so much paper in the in the process today and other types of car payments may be at at a at a merchant law.

Level, where depending on how the merchant is set up you know could those transactions to them or from them ended up going through that channel as well. So you have to be determined, but but I think the card.

Card part of this specifically on on merchant side, and specifically in beta be payments could could have some chances for disintermediation.

Okay, great and a couple of things.

Sure.

The next question is from car Tech meta with Uhm Northern Northcoast Research. Please go ahead.

Hey, Dave I knew you and I've talked about this a little bit, but you know what.

One of the things I think that gets misunderstood is how strong your pipeline is and how much visibility you have on revenue and I'm wondering if you could just talk about you know you've talked about how the pipeline has grown just looking at the pipeline and what kind of visibility you have and what kind of confidence that gives you over the next 12 to 18 months.

Yeah. Thanks for <unk>. So you know it's an interesting thing in this the business that we're in with the recurring model recurring revenue model that we build so first off you know when it comes to the contracts that we already have signed we of course have a tremendous amount of visibility because we're almost.

Almost 90 per cent recurring revenue as far as the the contracts that we have in house and the kind of watching the the revenue builder and those contracts and then you know that once we sign a customer oftentimes depending on the product. It can take one month to 12 months, depending on what the.

Purchase from us for that revenue to start layer in leering M. So we see the visit and we have visibility into that and then as far as the pipeline is concerned so when you've been doing this as long as I have and I've been doing this a long time, we have a very.

Predictable model. So you know I can I'm not gonna quote numbers here, but I can tell you with a pretty high degree of accuracy of the pipeline is X then why percentage of the pipeline is very likely to close because we have years and years and years of of history doing this and so we know that that's going to translate into Z dollars of revenue over time, and so we can kind.

Do that math and and predict pretty accurately what the what the impact is going to be the challenge again is some of those solutions you sign a contract today and we won't see you. The first dime practically of revenue for nine to 12 months. Some of them you sign a contract today and you have revenue flowing in one month and so there's some there's some art to this but.

There is a lot of science to it as well just based on all the experience that we have doing this for as long as we have an understanding the way these contracts works and the way customers make decisions.

With some time, you'll have to give us X y and Z Dave [laughter].

[laughter] so <unk>.

You know just thinking about I didn't want to call. It a banking crisis, just the issues that are out there and looking at Jack Henry when the last crisis happened and how.

How you looked at the business, then and what happened and if there's any lessons you could take from that and what's happening today, alright, I know, they're very different but just trying to get a feel for maybe.

Well, we could clean.

Yeah. That's it it is a very different environment today from 2007 2008 for sure and of course, if you go back in time and look at Jack Henry's performance during the period of the great recession, we performed really well, even though there were hundreds of banks that were being shut down at that time and of course, many of them were our customers that were being being shut down.

So I think the the major difference if you look specifically a Jack Henry between then and now is at that time, we were still very dependent on license fees and maintenance revenue. So when when customers kind of pull their arms and and said we're not spending on anything you know.

Our revenue had the potential to drop significantly because we were so dependent on license fees and when the when the reseller license you see the impact in the quarter as opposed to being spread like we do today today of course. So back then we were you know maybe maybe 50, 60% hosted today were recurring revenue today, we're 90 per cent <unk>.

Revenue, so very different from a Jack Henry perspective, as far as the predictability of revenue because of a bank is challenged unless they shut down they don't quit spending spending money with US you know they don't decide all of a sudden we're just gonna quit processing loans you have to still process loans, which means you still have to pay Jack Henry for that service and so today I would draw <unk>.

Significant contrast, as far as our business and the resilience of our business is is bankers are going through what they're going through right now that does not say where bulletproof. It doesn't say, we're totally immune to any challenges out there, but I think we have a much more resilient model. Then we had during the great recession at that time and again, if you go back and look at all we prefer them during that period.

We performed pretty well and so my expectation is that we should be able to weather. This storm right now and of course much of this storm is the result, I mean these are runs on the banks that are happening right. So you'll get some headlines somewhere that says this bank is as liquidity challenged by the way your liquidity and capitalization those had been conflated over.

And over in these conversations two totally different topics and yet.

The run on the banks are happening because wildfire.

Breads like wildfire through social media that there's some challenge the bank everybody uses their digital banking solution to withdraw money from the bank and all of a sudden they're in trouble and so I just view this as two totally different scenarios, but if I look specifically at our company. We are in a much better position to weather the storm than we were even in 2008, and we prefer them really well.

Perfect. Thank Dave I really appreciate it.

Certainly.

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

Hey, Good morning, maybe you just wanted to follow up on Dan's question around margins. So I think the guide implies about a 250 basis point year over year.

Improvement in the fourth quarter, so anything to call from a timing perspective, or what kind of gives you confidence in that ramp and for a few margins.

Yeah. Thanks G. At a great question, Yeah, I think that 250 is a good explanation I think we feel good about that we always knew that it would be grow as the ear continued kind of situation and we're seeing that transpires. So I I feel good with that estimation.

Okay, and then when you called up tax payment timing.

Yeah. Great question, then J D I love that you're looking at it on an annual basis versus a quarterly just because of the lumpiness at any one quarter can have in this quarter in particular between the Deacon version and then you know the larger tax payments and just kind of going into that you know we were waiting for some legislative priority around I R.

C 174, I like a lot of companies that impacted the capitalization that <unk> the ability of that capitalized labor. Unfortunately with lack of legislative clarity you know we had to make a payment uhm. So you would've normally have seen that kind of made me spread over a couple of quarters. That's a timing thing it doesn't impact our tax rate.

That will reverse over several years and kind of normalized out I think that obviously will not be a part of the queue for as you said, we have a large inflow uhm. So you'll certainly see an uptick I think the reality is because a D conversion revenue. We also have a couple of larger renewals have some third party X.

Fences in third quarter, I think it will be light of our target of the 100 per cent that free.

Cash flow conversion that we target, but I think it'll definitely be an uptick from third quarter.

Okay that last one for me, Dave you talked about some of the impacts from all the banking turmoil has been kind of increase in account growth. So maybe how should we think about your business like what percentage of revenue ballpark is priced on kind of a per account basis versus transaction or anything else just to kind of help us understand what the account.

Both can mean for a revenue perspective boy.

Boy I don't know that I know the answer to that question anybody you want to.

Guess more I mean, the payment businesses, but he's talking about account account base. So it's the core business system.

25 per cent, Okay, we'll go with 25 per cent.

Okay, Alright, thanks, guys.

Sure.

The next question is from Dave Conic with Bird. Please go ahead.

Maybe I guess first of all just on queue for kind of the implied guide is for somewhere around six per cent I think kind of non-GAAP revenue growth, which the the rest of the course of you I think we're kind of six to eight and the hassle, it's a little slower what's what's the reason for for the slower in Q4.

Yeah, Hi.

Hi, Dave morning, I would say if anything I think there's a little bit of conservatism in that I would expect us to maybe be a slightly biased towards the higher side of that range. You know I think with a little bit of uncertainty still in the consumer sentiment. You know, we just wanted to think about a little bit conservative, but the trends I feel are still quite.

Strong for the year and in terms of getting us to our full here number or better.

Okay, Okay, and then can I guess.

<unk> eight year to date, you you add back the the loss from acquisitions to non-GAAP March and I believe and I think it's trying to like around $10 million a year to date lost so probably a little more by the end of the year is is that <unk>.

All going away in 24, the in basically is that why you can get two accretion in 24 like is that just you know the.

The main which is kind of goes away.

So it will not be part of non-GAAP in 24 for sure. So that will be one component, but I also think it's just a question of having let some of that is inflationary pressures like they're great resignation that wage inflation, we saw that some of the third party one time cost like job at her now in our normalized base rate, but he was specifically talking about <unk>.

<unk> he was talking about the impact on March Okay. So I think we're still set for a margin expansion 24, because of the base now running through the twenty-three numbers, where it wasn't in the 22 number. So I think we're still in good shape as well as some of the efficiency measures that we're continuing to focus on internally.

Gotcha, Thank you and I appreciate it.

The next question is from James Fossette with Morgan Stanley . Please go ahead.

Hey, good morning, everybody. Thanks, a lot for time I think most of the question Brown demand and sell cycle, etc. Uhm you guys have at least a draw.

A little bit I wanted to ask quickly on capital capital allocation.

Damn rolling raise the kind of change in sentiment in in the morning, and it clearly that come back to you.

Talk at the same time.

Continue to wonder about M&A. So just give me comments, how you're thinking about capital allocation and what looks attractive to you right now and how do you prioritize.

Yeah. So nothing has changed their James as far as capital allocation is concerned you know we're committed to our dividend policy and maybe emphasize that in her comments we.

As we've said many times before M&A is always at the top of our list, we do share buybacks when it makes sense for us and Mimi highlighted that of course inner comments as well but.

But M&A, we are a <unk> many times, where a solid acquirer, we know how to do integration well of companies. Once we acquire them were very disciplined and only pursuing acquisitions that we think are really going to be additive to our business in the long term I think payrolls is a great example of that you've seen that.

It's a little challenged in the short term, but when we look at what we're doing with that business in the long term I think it's <unk> I'm, absolutely convinced it's going to be a real home run for Jack Henry the longterm and that's the way we think about doing M&A. We're always looking for those things that we believe we can take advantage of as a long term solution for our customers to help or our customers perform.

Perform better now you know.

I was hoping and I've said this in many forums that <unk>.

By this time and even several months ago that there would have been a lot more interesting M&A opportunity for Jack Henry we have been looking at some companies. We continued to look at some companies to acquire but there just hasn't been anything that is kind of jumped over that bar for us so far here, even though the deal flow hasn't been particularly.

Strong we have been looking at some deals, but nothing's jumped over the bar here recently, but we're going to continue to look.

Okay. The only thing I would add to that.

Okay. Let me just add one more thing you know, which is consistent with our priorities is paying down the debt through our normal cash flow from operations and so you would expect to see that over the next several months ears, and we're gonna continue to decline that that balance.

Thanks for that maybe and then you know.

We spend a lot of headline brown technology lay off and headcount reductions et cetera, how is that impacting.

Your ability to go out and hire an added talent to the Jack Henry pool, and and maybe even out of your customer.

You can talk about there.

Yeah. So we've it's been an interesting time since the great resignation you know we went from the great resignation, where everybody was <unk> resigning their jobs and going to find the the the pot of gold at the end of the Rainbow to within about three months all of a sudden companies were doing these massive layoffs and so you know a lot of a lot of heads were spinning.

I think among employees and a lot of these companies so for US here in the recent recent past we have picked up some really good new hires and we've had some wonderful well we refer to hear as Boomerangs, you know people, who left because they wanted to chase the pot of gold and then they realize the pot of gold wasn't there in the they called US up and said couldn't come back in those are great.

<unk> to us because they already know our company. They know how we do things in there often times really talented folk. So we've had a number of boomerangs come back we are attracting some great talent from some other companies in our space that had been challenged and so they understand the industry. They understand what we do may not understand the Jack Henry.

Products completely but we found some really good talent people that were a little shaken by what's happening at other companies in the industry, who are looking for a study provider and so they have joined Jack Henry So.

Where.

We're not just hiring left and right now we're being very judicious about when we are and where we are and and so we're trying to be very selective about who we choose to join the Jack Henry team, but I think the overall message would be we've had some great additions to our team in the last two or three or four months.

That's very great color too.

Mmm.

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

Hey, great good morning, everybody.

David I don't know the best way to ask this so I'm just gonna go ahead and ask I I guess.

The sole survivor of the big four companies and core platform as far as C. E. O's go from pre pandemic.

<unk>.

You know a lot of our clients actually do ask about you know.

What is the long term.

Succession plan, if they're even should be one you've had a major contribution to this this enterprise.

In General <unk> Garcia and I'm, not saying you should Lee [laughter] [laughter].

Your your old Dave So what's the plan no. So dumb it's a it's a reasonable question you know, obviously I can't share specifics about about either my timing or you know succession planning a Jack Henry but I will tell you and then of course I'm also board chair Jack Henry and so this is a real focus for us is making sure that we have.

A solid succession plan in place as a matter of fact, so next week is our quarterly board meeting and May The board meeting in May is when I always review with the governance Committee My personal succession plan I also review with the entire board the succession plans for the entire leadership team. So I'll have all the members of the <unk>.

<unk> team with their successors or what the plan is so if it's an internal candidate I'll highlight that for the board. If it's a plan to do a search then we.

I'll highlight that as well and so you know all of those options are on the table what I normally do as I walk into the governance Committee meeting with some suggestions of internal candidates and also external candidates I've I know a lot of people in the industry and I know people, who might be a decent fit for a role like this and so I try to give the board a good.

Kind of overview of who potential candidates might be and then ultimately of course, it's the board's decision to hire or fire [laughter]. The C E O and and so but we have a very rigorous exercise that we go through around the topic of succession not just for me, but for all members. So the leadership team of check Henry.

Excellent excellent. Thank you so much on that one.

And and maybe you know.

You mentioned in the prepared remarks, a few times about personal personnel related costs, increasing year over year and this was kind of talks about the last question, but not exactly is there a way to kind of break up new hires verses wage inflation versus tech talent <unk>.

And in those growth rates are just to kind of parse out you know largest factor least important factor as we think about the go forward growth and expenses for personnel I got much. Yeah. Good question, you know I would say you know the head count on account basis has been modest we're about three per cent in.

Kris and head count from a number of positions year on year, which is a much lower percentage then obviously that the fully baked cost of that you know as Dave mentioned were being very judicious on where those heads, though we've been focusing on customer facing rawls like service roles as well as R&D roles.

And then we look at every we're all on a zero based budgeting perspective, when we're thinking about that I can't really give you a lotta break out in arms, because we just don't provide that level of detail in terms of vacancies versus new in rollovers, but I would just say, we're being really judicious about it.

Great. Thanks.

The final question is from Mark Feldman with William Blair. Please go ahead.

Hi, guys. This is mark on for Chris. Thanks for taking my questions. Here. So just wanted to ask <unk> do you have you guys have any information regarding the size of the institutions that are you, saying you know the primary uptake from bateau any interest in it and I guess Additionally added onto that data.

For business to do for your sales forces ability to close banter signings that they didn't have before without offering.

Yeah. So we have about 700 ish clients that are alive today on <unk> and they are all over the board as far as asset size I would say that the the primary adopters have been a little bit on the larger side. So, let's say you know I'm, averaging closer to $1 billion, probably as opposed to something smaller than that.

So that's been the primary adoption, but we continue to see great demand across asset sizes, so and as I highlighted earlier, most banks and credit unions need to modernize their technology presentation to consumers through or in business customers through a digital presentation as far as the band on business. So if you think about.

Traditional battle. It is designed for the retail consumer so you or me in all the functionally all the functionality is retail in nature <unk> business provides that a similar functionality, but for business customers. So specific with things like cash management and the ability within the application for the let's see the CFO of the small biz medium business.

And the C E O to communicate about financial transactions within the application. So it's a really interesting and robust application designed specifically to help our business manage their business and communicate about financial transactions and decisions within the business, but in the financial applications. So it's Ah.

The revolutionary New solution and we have a lot of anchors that are very excited about the rollout of this of this platform.

Great. Thanks, and if I can ask you just one more on cards with credit cards I know in the past you. Originally didn't have the sales force that could go out to the infrastructure to go out and sell the product do you have any update on where that is today and once we can when we can start seeing some deals getting signed with credit cards.

Thank you Hey, Mark this is Greg I can take that one so yes, we have a dedicated salesforce. We also have dedicated install an operational folks now I'll have the experience. So that is starting to ramp up. We also added if you saw a press release, we did a couple of months ago on an agent program that we've added we know.

Have a lot of interest in that agent program and that's typically for smaller institutions that they themselves don't have the the folks or the infrastructure to really support that type of full service credit solution. So that's giving us another angle to sell the credit side of our business. We already have I think two or three now in the.

The in the pilot phase of that and we have a pipeline of about 10 or more just in the last two to three months. So that's starting to to grow but that you know all of those products will continue to accelerate overtime.

Great. Thank you.

Sure.

This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.

Thank you Debbie.

We have additional upcoming investor engagement opportunities with management is multiple investor events the.

The first one is going to be our annual Investor day, which will be held in Denver on the afternoon of Monday may 15th at one P. M Mountain time.

The agenda includes presentations from wide selection of the checking remains routine and reception that will include demos with some of our newest solutions. We look forward to hosting those attending in person and via the web cast. We're pleased with the quarterly results and thank all Jack Henry Associates for their efforts in producing these results.

Thank you for joining us today and Debbie would you. Please provide the replay number.

Yes, the replay number for today's call is 8773.

344.

7529.

And the access code is 145.

2467.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.