Q1 2024 Jack Henry & Associates Inc Earnings Call
Good morning, and welcome to the Jack Henry first quarter 'twenty 'twenty four earnings conference call, all participants will be in listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over to bats, Girard Vice President Investor Relations. Please go ahead.
Good morning, and thank you for joining us for the Jack Henry first quarter 2024 earnings call.
Joining me on the call today is David Foss Board Chair, and CEO, <unk>, <unk> CFO and treasurer.
And Greg Adelson, President and COO.
After my opening remarks, I will turn the call over to Dave for his thoughts about the state of our business and some industry comments.
After David concludes his comments, Greg will provide additional insight on our new solutions pay rules and other key initiatives at Jack Henry.
He will then provide insight regarding our financial results and updated guidance is included in the press release issued yesterday that is available from the Investor Relations section of the Jack Henry website, we.
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.
Really 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 Dan Good morning, everyone as Vince mentioned, Greg is joining me. This morning to provide an update on several innovative new solutions. We've recently launched followed by Mimi, who will take a deeper dive into our financial performance I'm pleased to report another strong quarter of revenue and operating income growth for our company as always I'd like to thank our associates for all the hard.
Work and commitment that went into producing those results for the quarter for.
For the first quarter of fiscal 2024 total revenue increased 8% on both a GAAP and non-GAAP basis at the same time deconversion fees were down 8% as compared to the prior year quarter.
Turning to the segments, we had another solid quarter in the core segment of our business revenue increased by 8% for the quarter on both a GAAP and non-GAAP basis, our payment segment again performed very well posting a 7% increase in revenue this quarter and a 6% increase on a non-GAAP basis.
We also had another strong quarter in our complementary solutions businesses with a 9% increase in both GAAP and non-GAAP revenues.
As I've discussed previously the first quarter is normally our lightest sales bookings quarter, because our fourth quarter tends to be extremely strong and the sales pipeline is depleted as a result as you may recall the June quarter was the strongest sales quarter in the history of the company. So we certainly expect that that historical trend to hold true. This.
This year. However, our sales pipeline was the largest ever entering a new fiscal year in the first quarter, we booked 10 competitive core takeaways and another 10 deals to move existing in house customers private cloud environment. This.
This strong start leaves us confident that we are well positioned to achieve approximately 50 to 55 competitive takeaways this fiscal year.
We continue to see success with our card processing solution, signing seven new debit processing clients this quarter and two new credit clients. We also continue to see success signing clients tour ban or digital suite with 44, new contracts in Q1, including 21 contracts for our new banner business Hopper.
Speaking of our digital suite at the end of Q1, we had more than $10 5 million registered users on the platform.
That number is now growing at approximately 200000 users per month.
At the end of Q1 last year, we had about $8 3 million registered users on the platform. So we've experienced a 27% increase over the past 12 months.
The continued success, we've seen with sales and the adoption of our digital suite is consistent with results in the Bank Director Technology Survey published in September.
As they do every year bank director surveyed their subscribers during June and July regarding a variety of technology prioritization and spending topics.
More than 50% of the responses they received from bank Ceos and board members and more than 80% of the respondent banks have greater than 500 million in assets.
Most respondents said their banks technology budgets grew over the prior year with a median increase of 10%.
That level of spending is consistent with our own strategic priorities benchmark study published last spring.
And as to the Bank Director survey named digital business account opening payments capabilities and digital business lending as their top three planned investments.
One of the interesting items from this year's Bank Director Survey was the analysis of technology and used by responded banks as it relates to their ability to serve different generational groups.
Fully 96% of the respondents said they have the technology in place to serve baby boomers, but only 18% said they have the necessary technology in place to effectively serve Gen Z years.
Of course, it's primarily the younger generations that expect to conduct all banking services without ever entering a branch.
Clearly the innovative the initiative for all banks to get the digital presentation layer has a long way to go all of this bodes well for the future of our digital suite as well as the other innovative solutions offered by Jack Henry that help financial institutions facilitate an improved customer experience through a digital front door.
Digital banking was one of the many topics discussed at our annual client conference held last month in Indianapolis. This is our largest conference of the year and this year, we hosted more than 160 prospect attendees, an all time record.
Of the financial institution prospects over 30 have more than 1 billion in assets with a couple of in the $10 billion to $30 billion range.
Additionally, more than 253rd party Fintech participated in the trade show, which underscores our approach to accessibility and open banking.
Of course events like this not only present, a wonderful opportunity for relationship building and education, but they also generate a substantial number of new sales leads we saw strong interest in our technology modernization strategy and our ongoing development of a single public cloud native platform that can run the entire financial institution.
We have now branded that solution as simply the Jack Henry platform, and we were able to demonstrate some of the current functionality at the conference.
And one of the most talked about main stage sessions, our Chief Technology Officer hosted an executive from Google and one of our bank Ceos to highlight the use of generative AI on the platform as well.
As we normally do at Jack Henry connect I hosted our annual CEO Forum attended this year by nearly 150 clients Ceos.
Although we did not conduct a formal survey during the meeting the general feedback was that while attendees are concerned about the overall economy. They continue to invest in technology to enhance their digital capabilities improve the efficiencies and position their businesses for the future.
During the quarter, we were proud to be included in several national workplace rankings, we placed 11th in Newsweek's list of top 100, most loved workplaces up six spots from last year. We also made newsweek's greatest workplaces list, earning five stars, which is the highest possible rating.
Additionally, we were named the top company in our sector by U S News and World report based on work life balance stability and professional development.
We are honored to be recognized in these national rankings, because they reflect our our people first culture and the engagement energy collaboration and client focus that our employees bring to work each day.
Next week, we'll conduct our annual shareholder meeting in person and moment, we're excited to be able to meet with our shareholders and once again will offer an option for people to observe remotely.
As we move forward I remain extremely optimistic regarding our robust sales pipeline the demand environment. The strong interest in the solutions, we are delivering and the strategies we're executing we.
We remain committed to our disciplined approach to running the company and we expect that focus to continue to provide stability and solid performance for our employees customers and shareholders with that I'll turn it over to Greg.
Dave as we continue to execute on both our operational and technological strategic priorities. We're pleased to announce the general availability of a few new solutions in the first quarter. In addition, we continue to make outstanding progress on our technology modernization strategy in the develop of our cloud Native API first Jack Henry platform.
He will provide an update on those platform components currently in beta or going into beta on our February call.
As we mentioned during the August call, our cloud Native banner business solution developed for small and medium sized businesses is now generally available for our silverlake banking clients and the response has been outstanding.
At the end of September we had approximately 60 banks live in more than 70 additional clients in various stages of implementation.
We are currently in beta with several credit Union clients and planned to be generally available for that base of Jack Henry customers by the end of the calendar year.
We delivered financial crimes defender, our real time fraud in anti money laundering compliance platform into general availability for our silver Lake banking clients in September.
We also released our real time faster payment financial crimes defender fraud module for Zelle in September the faster payment module uses artificial intelligence and machine learning to detect fraud and money laundering in real time.
We plan to we plan to release additional defender modules in late 2023, and early 'twenty 'twenty four for both the fed now and RTP networks. We currently have more than 120 clients in our implementation queue for financial crimes, a defender of which more than 50 include utilizing the real time payments module.
In addition, we remain on track to launch financial crimes defender to our credit Union clients in late December.
As we also mentioned on our August call. We were among the first service providers to support live transactions on the federal Reserve's, New fed now instant payment networks when it launched on July 20th.
We now have all four Jack Henry cores connected deferred now through our pay center offering and continue to provide the most comprehensive implementation process requiring almost no effort from our clients to go live on the network we.
We currently have more than 40 clients live on fed now with over 150 contracts and the implementation queue. We expect to have approximately 150 live customers on the network by the beginning of 2024.
Day every client is set up for receive only but we expect to see more clients want to add say send capabilities in early to mid 'twenty 'twenty four as use cases become more defined.
As a matter of comparison, we have over 210 clients live on the Clearinghouses RTP network and another 100 in the implementation queue. We continue to see tremendous transaction growth from our RTP clients over the past year.
When comparing September 2022 to September 2023 we have realized a 66% transaction growth with the majority of these transactions stemming from digital wallet transfers to bank accounts Ada a transfers from tier one institutions and payroll are gig worker payments.
Speaking of payments has been a little more than a year. Since we acquired payrolls. We have successfully integrated the team in large portions of the technology stack into our culture and technology modernization strategy, we continue to find develop and execute additional back office synergies, while but building a premier payment acceptance platform.
Capable of handling bill payment P to P. H E b to B and much more.
As part of our planned strategy, we've created one Jack Henry Bill payment group that provides product and operational support for both our legacy solution I pay and for pay rails as well over the next 18 months, we will finalize the build out of a single cloud native API first payment platform that will include all the key features of both I pay in payroll.
As well as additional new features not offered in either solution today.
Specific to pay rails, we now have more than 100 clients live another close to 50 clients in various stages of implementation and additional 20 that were recently signed.
A question that is regularly as winter all these new innovative solution is going to be sold outside of the Jack Henry core base.
I'm pleased to report that we have finalized our strategy to sell each of these solutions as well as components from the Jack Henry platform to several targeted competitive course, we've aligned our strategy with the competitive cores. We believe will bring the best mutual value and have a need for premier digital fraud in real time payment solutions each.
Of our components is being developed to go outside of the Jack Henry core base and will be available to do so as they move to general availability.
We expect to start selling some of these solutions early next fiscal year.
On the operational side, we've been highly focused on ensuring that Jack Henry is the easiest core provider to work within the industry.
We operate with full transparency, while collaborating across business units to deliver a consistent enterprise experience. We call. This program one Jack Henry and you've heard me talk about in detail at our annual Investor day event in the past few years.
We continue to receive tremendous validation of our efforts through meetings with industry consultants prospects clients and our associates are industry, leading survey and service scores continue to move up into the right at a time, where that is not happening across our industry. Furthermore, the work we are doing around one Jack Henry is aligned with the objectives outlined by the <unk>.
American Bankers Association core platforms Committee those objectives include fair and transparent contracts exceptional customer service responsive and open communication open banking and the highest standard of data protection and privacy.
In closing, we all came back from our Jack Henry connect client conference in mid October with a little extra Pep in our step after hearing from our clients and our prospects that our technology modernization strategy coupled with the work we are doing to focus on roadmap execution and service excellence is truly a differentiator in our industry.
I want to thank all of our talented and dedicated associates for helping US move. This strategy forward, we wouldn't be where we are today without them I will now turn things over to me for some detail on the numbers.
Thank you, Greg and good morning, everyone.
Our continued focus on serving our community and regional financial institution clients.
Growing our business.
And our future and delivering shareholder value led to another quarter of solid revenue and earnings graph I'll begin with the details driving our positive first quarter, and then conclude with our full year guidance update.
We're encouraged by Q1, GAAP revenue and non-GAAP revenue, increasing 8%, establishing a healthy start to our year and setting us up for a fantastic fiscal 'twenty 'twenty four.
Deconversion revenue of $4 1 million, which we pre released last week was down approximately 400000, reflecting continued temporary.
Angela.
They change now consolidation.
As a reminder, given the September 1st 2022 closed the payroll acquisition. The first two months of Q1 2024 Rep. So are excluded from non-GAAP financial.
At September 1st onwards pay round. The results are included in both GAAP and non-GAAP.
Now, let's look more closely at the details.
First on a GAAP and non-GAAP basis services and support revenue increased a healthy 7%.
Services and support growth was the result of increases in data processing and hosting software usage and subscription and hardware.
We continue to experience robust growth in our private and public cloud offering which increased 10% in the quarter.
This revenue contributor has long been a double digit growth engine.
Shifting to processing revenue, we saw vigorous performance with 10% growth on a GAAP basis, and 9% growth on a non-GAAP basis for the quarter.
Consistent with prior period results drivers include a combination of higher card volumes and services plus strong digital demand.
Next moving to expenses.
I'll begin with cost of revenue, which increased 8% on a GAAP basis and 7% on non-GAAP.
Drivers include higher direct costs personnel and benefit costs and internal licenses and b.
Next R&D expense increased 12% on a GAAP basis, and 10% on a non-GAAP basis, reflecting higher personnel and benefit costs net of capitalization.
This is in support of our continued solution innovation, maintaining competitiveness and our technology modernization strategy, including the Jack Henry platform.
Okay.
Finally on a GAAP basis, SG&A rose, 38% for the quarter, primarily due to the $16 4 million one time cost related to the voluntary early departure incentive program beat it.
This cost was lower than the 17 to 18 million estimate based on the final participation in the program.
As a reminder, all V chip cards are in this quarter and there will be no additional P&L impact as we near three here.
When these one time dip costs in last year's $6 2 million gain from real estate divestitures are adjusted and non-GAAP SG&A decreased 2% during the quarter Ethan.
These adjusted figures reflect our ongoing commitment to cost control.
We remain focused on generating compounding margin expansion in the quarter results delivered 121 basis points increase non-GAAP margin, which was 26, 1%.
This increase was partially driven by the timing shift of our connect customer conference in Q2 compared to Q1 last year.
These strong quarterly results produced fully diluted GAAP earnings per share of $1.39.
Breaking down non-GAAP results, we're pleased by the consistent solid performance achieved by the three operating segments. Our core segment revenue increased 8%.
The GAAP and non-GAAP basis, with non-GAAP operating margins, increasing five basis points to 59% leased.
Benefit from positive tailwind from winning share.
<unk> migration from on premise to private cloud and customer growth.
The payments segment revenue increased 7% on a GAAP basis and 6% for non-GAAP.
Segment had impressive non-GAAP operating margin to 69 days to 46%.
This was due to an increase in card transaction and related revenue plus growth in our E. P. S isn't it.
The fed recently announced its considered change or change the debit card interchange it would translate to an approximate 28% decrease in interchange for issuers.
It should be noted that our revenue model for card processing is transactional and not reliant on interchange.
Finally, our complementary segment revenue increased 9% in both the GAAP and non-GAAP basis with strong non-GAAP operating margin expansion of 47 basis points to 61 votes that.
Our diverse mix of solutions, including he headliners like banner lung damage Treasury management. In addition to the numerous additional solutions contribute to the strong growth trend.
And our news broad financial crimes defender solution didn't contribute to the growth in this segment as well.
Now, let's turn to review the cash flow and capital allocation.
Quarterly operating cash flow was 157 million, a 20 million increase over prior year, producing free cash flow of 107 million slightly less than the $116 million last year.
Last year included 26 million contribution from asset sale that was non reoccurring in nature.
Our consistent dedication to value creation resulted in an annual return on invested capital of 20%.
Additionally, I'd like to highlight notable return of capital, including $20 million in share repurchases offsetting annual duration 30 million in debt reduction and 38 million in dividends during the quarter.
With Q1 in our rear view, we shift our focus to the remainder of the 'twenty 'twenty four and I will conclude with guidance change highlights.
As Youre aware Yesterdays press release included updated fiscal 'twenty 'twenty four full year guidance, along with the reconciliation to non-GAAP guidance metrics.
As a reminder, we filed an 8-K on August 3rd that described how starting in the current fiscal year, we're using a revised approach for deconversion guidance.
Based on current trends, we expect to see minimal financial institution consolidation in the first half of fiscal 'twenty 'twenty four with possible acceleration in the second half.
As such we're maintaining and reiterating full year deconversion revenue guidance of $16 million.
Based on our positive Q1 results from strong execution and near term visibility, we see upside over our prior guidance. We now expect to generate full year non-GAAP revenue growth of seven 2% to eight 2% compared to the 7.0% to eight zero.
<unk> provided on the August call.
This corresponds to an increased full year GAAP revenue guidance of six 4% to seven 4% or fiscal 'twenty 'twenty four.
In tandem with our increased revenue outlook and continued focus on cost efficiency. We now expect an increase in annual non-GAAP margin expansion of 30 to 35 basis points compared to the 20 to 25 basis points previously provided.
The full year tax rate remains unchanged at approximately 24%.
Incorporating the noted positive update.
Your guidance for GAAP EPS is revised upward to $4 98 to $5.04 per share from previous guidance at $4 90, twos that at $4.99 per share.
As a reminder, the conservative guidance or deconversion revenue compared to actual fiscal 2023, deconversion revenue is slightly lower due to severance related costs and the nonrecurring gain on asset sales resulted in an approximate 37 cent headwind for fiscal 'twenty 'twenty four of GAAP EPS.
And lastly, some additional modeling commentary.
As previously highlighted we recently hosted our customer conference J H connect.
The associated revenue and expenses will be.
Be reflected next quarter. Please recall in FY2023 the related financial impact within Q1, we.
We believe this timing shift has led to an approximate one to set higher consensus Q2 EPS estimate.
Our full year guidance at 50% free cash flow conversion remains consistent given the continued impact of tax deductibility timing on development expenses, resulting in higher cash taxes and.
In the relative near term, we expect to return to historical norms that conversion.
We appreciate the contributions of our hardworking and dedicated associates that drove these strong quarterly results.
In conclusion Q1 was a strong start to our fiscal year and we remain exceptionally positive about our ability to deliver innovation and valued solution. The resiliency of our clients are focused on execution growth accelerators and shareholder value creation.
We think all Jack Henry investors for their continued confidence.
M. J could you please open the call for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
Your question. Please press Star then two.
Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Jason.
Kupferberg with Bank of America. Please go ahead.
Hi, Good morning, everyone. This is Tyler Dupont on for Jason. Thank you for taking the questions.
So I wanted to start on the growth side of things it looks like it's pretty solid across dimensions, particularly on the corporate side and complementary. So I was just wondering if you can speak to kind of specifically what drove that outperformance during the quarter.
And then on the other side it looks like.
<unk> growth was healthy, but a little bit lower than what you expected on the quote unquote normalized growth rate of eight 9%. So I just wanted to ask what dynamics, you're seeing there and any expectations going forward. Thanks.
I'll take the first half and I'll, let Greg respond on the payments. So a portion of the state for us by the way. So I think that the growth when it comes to the other areas other than payments, primarily driven by the success that we're seeing now in the bandwidth area in the complementary product groups. So the bandwidth product line I highlighted some of the performance metrics there the <unk>.
Additional new customers and all the new registered users on that platform. So the dental platform success, our financial crimes defender, we signed a whole bunch of contracts in the quarter, but you really won't see the P&L impact of financial crimes defender until until next quarter and then the following quarters after them, but then it's just a variety of other solutions.
Again, primarily in that complementary solution area. So we're continuing to see great success with things like Treasury in and you know.
Some of the other complementary solutions that we didn't specifically call out, but all of them have become real nice drivers of revenue many of them New solutions in the past couple of three years, we've highlighted them on these calls in the past as new solutions that are not new anymore, and you know, they're a year old, but they're continuing to drive great demand and and nice revenue improvement for <unk>.
Jack Henry and I'll, let Greg comment on what's happening in the payment side.
Yes, I would say, there's probably two components. The one you know we're kind of dealing with the aftermath of excessive.
Excessive growth in our remote deposit capture business during the pandemic and so we're seeing a little bit of a lessening of that growth and then the card volume growth I think is kind of indicative to what you've heard both card associations talk about as well. So again the majority of our card business is on the debit side that business isn't growing as fast.
It wasn't just during some of the things that are going on with the economy right now, but those are the two biggest drivers I think on the payment side everything else is fairly a fairly in sync.
Okay, Great. That's helpful. I appreciate it and then just a follow up I want to shift gears to margins.
And just the dynamics, you're seeing across the business. It looks like during the quarter margins came in ahead of at least what we were anticipating on an adjusted basis full year, as well, which raised a bit.
Curious to hear more about what you're seeing that drove that uplift during the quarter and the full.
You raised a N.
Generally to that as well, but sort of on a separate line.
Given where we're sitting now when do you anticipate pay where else will become margin neutral to the business.
Yes, I can take that the first part of that so you're correct in terms of them great margin expansion. We saw in Q1 now typically Q1 is our largest performing corner from a margin basis, because you have the subscription related revenue there from a renewals perspective.
But we saw higher revenue across the board, which just been flowed through I wouldn't have as a reminder, though the impact from connect conference. The timing of that did have a pretty significant impact from the margin improvement on a year over year basis, but I would say the most part it was just the revenue flow through in <unk>.
<unk> expense control.
And then the payroll so on the payroll side. So I think we are tracking to the guidance that we gave back in August.
So I think everything's on track based on what we provided back in August.
Okay, great appreciate the color thanks, a lot.
Thank you. The next question comes from David Toga with Evercore ISI. Please go ahead.
Thank you.
Morning, David Mimi I, just like to start with a question about the pace of core competitive takeaways in the quarter. It looks like it fell from 16 in the June quarter, which was well above trend to 10 in the current quarter any call outs on the competitive environment any changes or was this more of a timing related issue.
Hugh.
Hey, good morning, David It's interesting that you called that out as a negative that we went from 16 to 10 I'm thrilled with him because normally the first quarter is a very light quarter last year as a comparator. We had six in the first quarter, we tend to see a real push in the fourth quarter every year. So for us to produce 10 in the quarter was great.
Great news as far as I was concerned and that's what led me to say I think $50 to 55, new wins for this year based on what we saw in the first quarter and what I'm seeing in the AR and the pipeline gives me great confidence that we're going to have a really really strong year and now with that said you know talking about what's happening in our environment I think all of you know pretty well what.
Happening in an environment with all of our competitors in some of the disruption that's happened and so on.
Those types of events create opportunity for us. These are still very long sales cycles. You know you don't have a banker who suddenly wakes up one day and said Hey, I think I'll go through our core conversion they they're they're very long that's a very disruptive process to go through a core conversion and so nobody takes it lately, but we definitely are seeing.
Some impacts in our sales pipeline.
That are being produced by some of the disruption that's happening in our space around the topic of core.
Got it and then you.
Moving up market to the bigger banks has long been up.
Focus area of yours, and you called out the success of Treasury management.
You know, which is part of that effort to move up market can you can you update us on broader initiatives to move up into the bigger bank space. You started talking about this a couple of years ago with Tech modernization, you know where are you in this process and where do you expect to be within 12 to 18 months.
Sure. So in my prepared remarks, I pointed out that we had a couple of the banks in the $15 billion to $30 billion range that we're at or our prospects I should say that we're at our client conference I don't recall I've been doing this for a long time I may have forgotten, one, but I don't recall us ever having a brand new prospect over $10 billion come to our client conference to <unk>.
To us about core so they have two in that range I think is pretty indicative of the success that we're having now and it's really being driven by tech modernization. The story that we have now in our ability to actually demonstrate things that we're doing with this new platform is getting a lot of attention to my larger institutions, because they're trying to figure out how to get to the public cloud.
Environment and they can't see a path forward with their current provider they see that path with Jack Henry So.
I can't predict when we will sign one of these.
The larger institutions as a new client, but I think the activity right now it gives me great confidence that our that you'll see some announcements in the future that are of significant wins in that regional banking space.
Understood. Thank you.
Sure.
Thank you. The next question comes from the bathroom go though with K B W. Please go ahead.
Hi, Thank you for taking my questions I guess first I just wanted to follow up on the previous question about the payment segment.
Just wondering when something like a grow over issue with some of the remote deposit capture will be kind of behind us and what should we expect for growth there for the remainder of D. R.
But let me start with that so I would say the Q1 trends for the patent payment segment, we're pretty much in line with what we saw for the full year last year and we're continuing to see strength in that business. So I think where were very positive.
Optimistic very optimistic about it it's not just transactional there's also ancillary revenues in there and services that we continue to expand upon from a portfolio perspective. So that in itself is derisking, you know yesterday exposure to transactional.
I think he was so basically it seems like we should expect this rate <unk> rate to continue through the remainder of the year any puts and takes there.
I think that's I think that's a good assumption.
Got it and then a quick one for you Dave banner. It seems its been a tour a success story for you. It's been a growth driver for several years now I'm wondering if it's big enough, where you might be willing to give us more visibility on how big it is and how fast it's growing.
And you know as you think about your total addressable market within your client base, how penetrated I'll be there today with battle.
Within the existing client base, yeah, we're we're becoming well penetrated where over 50%, but we still have a lot of opportunity, particularly on the credit Union side.
Our business, it's no secret we started with ban on the banking side and really started to push hard on the banking side, we have not.
Then as a forceful maybe we didn't have it ready on the credit Union side, and we haven't been as first of all on the credit Union side, but that certainly is an area of focus for us. So you'll continue to see penetration, but when you have the the leading digital banking solution in the industry.
We expect most all of our core customers will want to consume that at one point or another because they see the differences between that and anything else in the market as to the first part of your question. So you know, we we don't tend to try to size individual products.
As part of this segment, we provide guidance per segment, but as with everything else. We do a check and we don't try to size as far as revenue is concerned on products I don't expect us to change that my real goal in giving you. The user kind of just like we have has been to try and give you as much of ammunition to two tier model effectively and.
And kind of create your own view of what we're doing at Jack Henry but I don't expect that we're going to start to provide revenue.
Visibility on guidance on a specific product like that.
Got it appreciate the color. Thank you very much.
Right.
Thank you. The next question is from Kartik Mehta with Northcoast Research. Please go ahead.
Good morning, maybe just on free cash flow I know you said still anticipate about 60% for the year I'm wondering is it just timing that it's in the the first quarter was as good or do you think now maybe that 60% might be a little conservative here as we go throughout the year.
Good morning, Kartik, I would say that the quarterly cadence and sometimes be choppy. Our Q1 is always a very strong cash flow quarter, we have the annual maintenance and other strong cashless coming in in Q1. So I would say this year might be more of a U shape than you anticipate.
You know, maybe a little bit more steep than last year, but we're still on track and optimistic about that 60%.
And then Dave just I'm sure all banks are talking about AI, just like every other business and I'm wondering if J J connect if that was a topic.
That was discussed and if so if there are ways, where Jack Henry could help banks that want to maybe use AI.
Yeah, so definitely a topic everybody who is anybody seems to be talking about AI. These days and trying to figure out what they are talking about as they're talking about it.
So two things to keep in mind here you know, there's two flavors of AI, there's the kind of traditional artificial intelligence machine learning version of AI, and then Theres generative AI, the new kind of hot topic chat G. P. T. If you will so we've been deploying our traditional AI for many years. So we've had a.
Artificial intelligence machine learning baked into our bandwidth solution, that's baked into our call center solution and we do a lot with that and have for quite some time and this especially in our our fraud. The area. We use that technology. So we've been definitely that is able to talk about it effectively for quite some time, the new twist is regenerative AI and as I mentioned in my.
Prepared remarks, we show a generative AI working on the Google platform with our platform solution at the connect conference. So we had one main stage session. Our Chief Technology Officer was on stage with an executive from Google and a bank CEO, who by the way is a beta customer for us he specifically.
The trip to connect so he could be on stage.
Talk about what are our generative AI solution, what he thinks it's going to do to change the operating environment for their bank, we're not in production with that yet. This is beda, but we definitely expect that we'll be a player in that space and we'll be able to help our customers using generative AI and of course, the good news is with the Jack Henry platform.
It's all written on the Google Cloud and Google has we believe the best Jenny I solution in the market, partly because they have guaranteed built predict protect II. So private information as as we roll this out and so we're very bullish on the opportunity from the future to use that technology to help our help our customers.
<unk>.
Alright, Thanks, Dave appreciate it.
Sure.
Thank you. The next question is from John Davis with Raymond James. Please go ahead.
Hey, good morning, guys, maybe I just wanted to follow up on free cash flow I believe you made a comment that you would.
Expect to return to normal historical levels for our free cash flow conversion perspective, and I was just curious is it still kind of in the three to four years once we lap the non Doug.
City of R&D expense.
Just want to clarify the comment about returning to historical levels.
And great question J D. If I had a crystal ball for Washington, I'm, I'd, probably be in a little bit of a different role, but we're hopeful that there might be a consideration of changing the legislative nature of that tax deductibility of development expenses, you're starting to hear more and more technology companies talk about the negative.
Packed to Dan if that and we're not banking on that happening you know if that does not occur I would agree with you.
At this point I would say a couple of years out hopefully more than you know or so but for right now we feel pretty comfortable for this year sticking with the 60% guidance and J D. If I can tag on this is Dave So I'm just going to add a little clarity to everybody out there you know one of the things Jack Henry is getting great recognition for right now.
All of these innovative solutions that we're rolling out we've been spending a lot on new development, New R&D brand new products. The Jack Henry platform is just one of them you know, Greg highlighted bandele business and financial crimes defenders with all these new things that we've been rolling out that's great for the company. It's great for the success of the future success of the company and its really crew.
David This reputation for Jack Henry as being the innovation leader in our space. The Bad news is because of what's happening on the tax side, it's it's hitting our free cash numbers and so you know we have concerns about free cash, which is all being driven by the fact that we are leading the industry. When it comes to innovating and really delivering great solutions for the.
To sustain the future growth of this company.
Okay. No. Thanks, that's helpful and then Greg a quick one for you on pay rails I heard you earlier say youre kind of on track it looks like at least for the first two months revenue was a little bit lighter than last year. I think you talked about some implementation delays with partners. So just curious kind of an update there you guys seem really excited about the long term, but but how's that going from an integration.
Spectrum are there still implementation delays just any sort of update there would be helpful.
Yeah. Great question, Yes short answer is we've worked through the integration delays.
So we've been able to get through that component of some of it is just rebuilding up the pipeline with that group, but the reality is we've gotten through the challenges there. The other thing that's important is that the.
Some of the additional synergies that we've been able to build as we build out the product has helped us as well. So we're kind of we're working through some of the sales delays with a lot more of the operational synergies that we've been able to find and things. So everything that's why everything continues to be on track must reemphasize J D. The number as Greg shared in his prepared remarks, so 100 clients live now 50.
That are in the process of implementation, so they're not paying us yet, but they are in process and then 20 more new contracts that have just been fine.
Okay.
Okay, Great and then Dave just if I can squeeze in one more quick one just on capital allocation you pay down a little bit of debt you bought back a little bit of stock in the quarter.
How do you think about debt paydown versus buybacks with the stock here and then any update on from M&A perspective, whether valuations rationalized yet just any color there would be helpful.
Yeah. So I'll answer the last part first not a lot happening when it comes to M&A in the in the industry and I've had some interesting conversations with some some.
From investment bankers about what they're seeing as far as opportunities in that space.
Nothing really intriguing right now when it comes to M&A. So that leaves a share buy back the debt pay down of course, we're committed to our dividend policy and so the other two topics are balancing share buyback with that debt pay down that is definitely going to be a topic at our board meeting on Monday.
So you know in this time that.
That needs to be something that we analyze fully so we are very focused on those two topics I'm trying to prioritize appropriately but that will require a board discussion.
Okay. Thanks.
Yeah.
Thank you. The next question comes from Dominic Gabriel with Oppenheimer. Please go ahead.
Hey, good morning, everybody. Thanks for taking the questions.
Dave should the move to sell products outside the core that you mentioned indicate that you have found a way to stop competitors sale dynamics of core upgrades I mean, I think on one of the previous calls you mentioned that.
That your products are so good that are competing salesforce would basically say keep our cordless upgrade with Jack Henry.
Is this an indication that you found a way to stop some of that nice I have a follow up thanks, so much.
Yeah, you're characterizing my previous comments correctly, Dominic that's exactly what I said it was a shocker to us and so we stepped back and made sure that we didn't didn't kind of a mess ourselves up in this process, but the answer is yes, we're very confident that we have by targeting a few specific quarters with a few specific.
Messages in an approach.
That leverages the Jack Henry platform. So one of the good news one of the good things is and Greg highlighted in his prepared comments. These new solutions, we're talking about a ban on financial crimes defender and so on they are living on the Jack Henry platform today the platform, we've talked about for <unk>.
Core modernization those are already on that platform and so we've created a a strategy that takes advantage of the fact that those are on the platform. We believe it will create an opportunity for us in these targeted cores and so yes. We believe we have an answer now and as Greg pointed out we're talking about the beginning of our next summer.
So that will really be active in sales do you want to add something but just two things that so one of the other component of this is our ability to bundle. We've found some pretty good bundles that we think we can sell into that so that we think that will also help with the success rate and using what Dave said, you know kind of leveraging the technology platform and some of the modules that we have.
Coming out the other part is the integration work that it does take so it does take some while to get some of that integration work done before you can actually go out and close the deal. So we're working on all of that in the background as well.
Great great. Thank you so much for that color.
And I guess.
Now that we have a modest D conversion expectation.
Going forward and the way you structured your guidance.
The ROIC C of the quarter was 20%.
I was wondering if and I know you don't set a target for this but do you believe that the company has kind of hit the floor Rois C. A level now and maybe you could help provide some sort.
So dynamics.
Why that might move around given some of the investments you're making thanks so much.
Sure Jon So first let me say that I think 20% ROIC is quite attractive and would be envious of a lot of the company. So you know it's a commitment to us we believe that our thoughtful.
And conservative approach both from a fortress balance sheet, how we think about capital allocation has led to attractive rois. These historically and it's something that we know is a matrix. We're following we know you're following it quite closely prominent sustainability of that shareholder value creation, I would say theres a little bit.
The math challenge just from the metric itself so.
Cause our net income is growing and because right now we are focused on debt pay down. We did some share repurchases are 35 years of fiscal years that dividend growth those take cash so well the net income increase is the shareholder.
Therefore, it reduces unless we continue to grow that dividend and do large buybacks or debt pay down.
The very nature of mathematically that ROIC is going to give it a touch and so I think it's just more of the hangover effect from the debt we had from the payrolls acquisition and as we pay down that debt as we do more share repurchases and return that you know net income back to investors.
You'll see that rebound number so it's just for the trailing 12 month impact of that and then growing net income into equity that that has that impact on the map.
That's super helpful and 20% is very attractive.
So much for the help.
Thank you. The next question comes from Dave Koning with Baird. Please go ahead.
Yeah, Hey, guys. Thanks, so much nice job.
I guess, you've mentioned a bunch of stuff on pay rails already but just a couple just questions around there how fast year over year is that just growing just as a standalone entity and then it looks like you lost a couple of million in the quarter, which is pretty similar I think from a pace standpoint, as what you've been losing recently is that getting better.
And then it looks like you changed the revenue guidance just to touch not not much but just kind.
Kind of all of those things it seems.
Few moving parts there right now.
Good morning to you let me start by taking it and then I'll, let Greg add Ian from a strategic perspective, I would say the acquisition remains on track as Greg mentioned, we feel confident in our ability to hit the previous guidance revenue is growing at a nice clip. So I would say the visibility because you're only looking at two months.
It's not I wouldn't annualize that to take it more of a trend and it is so we still feel very confident in terms of that growth in the in their journey to profitability.
Yeah, and I would say as I've as I kind of mentioned earlier, you know we've kind of unhedged some of the barriers that we've had where a lot of the payrolls solutions.
<unk> solutions in the past were sold through resellers. So now that we brought in and have a lot of our direct sales folks focus on that and working through the issues that we have with the resellers. We feel very strongly that we're back on track and the technology itself is again is even stronger than we anticipated as we've gotten in and had been able to work through some of the.
Challenges there.
Okay.
Okay Gotcha.
Thank you and then the one other thing just between the GAAP operating income guidance and GAAP EPS.
Two items would be interest income it seems like you're almost guiding for that to be net zero and then tax rate would be the other is that like 24, 5% just those two numbers to kind of get us to GAAP EPS.
Yeah, and Dave I would say continue to use 24% from a tax rate at this point, it's too early in the year to see anything materially changing off of that so I would still recommend using a 24%.
The one positive from a at a higher interest rate as you're starting to see a little bit of interest income as well helps as an offset to interest expense Oh I was just so those are probably share count a little bit we did some buyback in Q1, but I would look at the totality.
At that but most of the change in EPS is really coming from the operational impact of flow through from revenue growth I would highlight just that last year. As a reminder, the gains last year from the asset sale and the impact from the debt this year.
Gotcha, Yeah. Thank you so much.
Thank you. The next question is from Chris Kennedy with William Blair. Please go ahead.
Good morning, Thanks for taking the questions.
David you talked about innovation can you just talk about kind of how the module progression for origin or the Jack Henry platform is going.
Actually I'll defer to Greg for that one he's more are in the day to day with the team on what we're doing there. So go ahead, Greg Yeah, sure and as I mentioned, we have a couple of modules that are out in beta right. Now. So we're we're tracking exactly to the timeframes that we have we do have a public roadmap that we share with our customers.
We do not share outside of our customer base, but we have a roadmap, we're executing and actually to the T of that particular roadmap and as I mentioned earlier, we're going to be pretty excited to be able to share where some of those modules are in their evolution and other modules that we've created back to a full monetization strategy.
That we have going for the rest of this year and into next and Greg is going to give you that detail Chris on the February call correct.
Look forward to that and then just a quick update panel for business that attracting kind of customers that are outside of your core base. Thank you.
Yeah, So we're not selling outside the core base, yet as I mentioned earlier, but it definitely has got attention from people outside the core base and so we're laughing because.
It's one of those you want to go and sell it right away, but you've got to make sure that everything is lined up and ready to be that to be effective and it's part of a larger strategy than simply telling selling bantle business outside the base. So yes, we definitely are getting attention. We definitely are preparing to to get sales are out there actively selling outside the base, but it's.
Of that broader strategy that we talked about earlier.
Because it goes with the retail banner as well and in a lot of that sales will not happen until next year. So yeah.
Understood. Thanks for taking the questions.
Sure.
Thank you. The next question is from James Fawcett with Morgan Stanley. Please go ahead.
Great. Thank you so much I know, we've talked a little bit about payrolls and implementation et cetera, but can you help us think about like the time to revenue and how that scales like windows. When do we start to see contribution from implementations and then how long does it take to get that fully up.
<unk> scaled within the P&L.
Yes, well as far as implementations I mean, typically as we have with any of those type of bill pay and payment providing products. It really is somewhat dependent on the customer we can actually install within 90 days typically so some of it is dependent on the customer some of it's dependent on core core deal where in <unk>.
We will pay rails, maybe part of that core deal. So theyre waiting to implement that so some of those contracts could have longer tail before they're actually implemented but as I mentioned earlier with the 100 that are actually on the platform now the 50 that we have in the implementation queue in the 'twenty that were just sold.
We have the ability to start moving the needle as I mentioned earlier, we are on track for the guidance that we gave in August for the revenue.
Numbers, which is again I think a substantial amount of of drive, but again, even even those percentages. Obviously, we started with a small number so we're driving the ability to get the technology in place to get all of the things that we wanted to do from a tech mountain monitor origination strategy and driving that as part of a while.
We're waiting for some of these contracts to go but the technology itself is going to drive the longer term part of the strategy not just the immediate parts that we're doing with.
With the current payroll offering and let me just layer on there James and good morning, just as a reminder, the payment sector, which is 36% roughly of our total revenue of that bill pay let's call. It about 15%. So this is really a reinvent duration of that IP business that was you know pretty mature.
Sure and so as.
We won't be able to see periodically you have itself, but that together that combine business plus the added innovation of new features that neither existing platform had on their own you'll start to see over the upcoming quarters, a reinvigoration that'll help that total segment.
Got it got it got it I appreciate that and then I wanted to ask on the competitive landscape one of your competitors and at least in the adjacent market announced a new product initiative targeting banks and credit unions that and enable them to have more of a lightweight core for digital deposit products and I think.
They're trying to go at it with a low price point I know you don't compete on price, but just curious how youre thinking about the competitive environment generally for banjo, especially as you kind of work to get that into the installed base and I'm thinking about opportunities outside the installed base.
And we refer to that as a sidecar we've been doing that for years. So that's you know that's not a requirement of the digital banking applications necessarily it's a requirement of having core functionality, where you can actually process. Those accounts, we've been doing that for a long time, certainly we have that integrated with our <unk> solution, but the.
Nice thing about our offering is that if the customer simply wants to do it for deposit gathering we can do that if they want to host a complete digital bank as they continue to grow. It's the same platform. It's the exact same solution. We can offer loans in G L and everything else through that offering so that's not something.
New to Jack Henry we've been doing that for quite some time.
I appreciate that Dave Thanks.
Sure.
Thank you. This concludes our question and answer session I would like to turn the conference back over to Vince Gerard for any closing remarks.
Thank you M D.
As Dave mentioned next week on Tuesday, the 14th we hope you will join us either in person or virtually as we host our annual shareholder meeting.
Additionally, we look forward to seeing many of you at upcoming Investor events During November and December in conclusion, we thank all Jack Henry Associates, whose efforts produced these strong financial results.
Thank you for joining us today, and then Jay will you. Please provide the replay number.
Of course, thank you Dan.
Replay number for today's call is 877344.
Seven five to nine and the access code is two nine.
One <unk>.
710.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect your lines.
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