Jack Henry & Associates, Inc. (NASDAQ:JKHY) Q1 2024 Earnings Call Transcript

Jack Henry & Associates, Inc. (NASDAQ:JKHY) Q1 2024 Earnings Call Transcript November 8, 2023

Operator: Good morning, and welcome to the Jack Henry First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Vance Sherard, Vice President, Investor Relations. Please go ahead.

Vance Sherard: 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; Mimi Carsley, 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 Dave concludes his comments, Greg will provide additional insight on our new solutions, Payrailz and other key initiatives at Jack Henry. Mimi will then provide insight regarding the financial results and updated guidance included in the press release issued yesterday that is available from the Investor Relations section of the Jack Henry website.

We will then open the lines for Q&A. As a reminder, this call includes certain forward-looking statements including remarks or responses to questions concerning future expectations events, objectives, strategies, trends or results. Like any statement about the future, these are subject to multiple factors that could cause actual results or events to differ materially from those which we anticipate due to multiple risks and uncertainties. The company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday’s press release and the sections in our 10-K entitled Risk Factors and Forward-Looking Statements. On this call, we will discuss certain non-GAAP financial measures including non-GAAP revenue and non-GAAP operating income.

The reconciliations for non-GAAP financial measures are in yesterday’s press release. I will now turn the call over to Dave.

David Foss: Thank you, Vance. Good morning, everyone. As Vance 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 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 payments 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 revenue. As I have 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 expected that historical trend to hold true. 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 to our private cloud environment. 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 to our Banno digital suite with 44 new contracts in Q1 including 21 contracts for our new Banno Business offering. 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 200,000 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 were 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 bank’s 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. Responders 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 use by respondent 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 Zers. 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 to 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 in the $10 billion to $30 billion range. Additionally, more than 250 third-party fintechs 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’ve now branded that solution as simply the Jack Henry Platform. And we were able to demonstrate some of the current functionality at the conference. In 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 client CEOs. Although, we didn’t 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 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 a top company in our sector by US News & 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 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 in Monett. We’re excited to be able to meet with our shareholders.

And once again, we’ll offer an option for people to observe remotely. As we move forward, I remain extremely optimistic regarding our robust sales pipeline, the demand environment, a strong interest in the solutions we’re delivering and the strategies we’re executing. 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.

Greg Adelson: Thank you, 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 and the development of our cloud-native API-first Jack Henry Platform. We 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 Banno 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 and more than 70 additional clients in various stages of implementation.

We are currently in beta with several credit union clients and plan 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 and anti-money laundering compliance platform, into general availability for our SilverLake 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 release additional Defender modules in late 2023 and early 2024 for both the FedNow and RTP networks. We currently have more than 120 clients in our implementation queue for Financial Crimes 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 FedNow instant payment network when it launched on July 20. We now have all four Jack Henry cores connected to FedNow through our PayCenter offering and continue to provide the most comprehensive implementation process requiring almost no effort from our clients to go live on the network. We currently have more than 40 clients live on FedNow with over 150 contracts in the implementation queue. We expect to have approximately 150 live customers on the network by the beginning of 2024. Today, every client is set up for receive-only.

But we expect to see more clients wanting to add send capabilities in early to mid-2024 as use cases become more defined. As a matter of comparison, we have over 210 clients live on The Clearing House’s 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, A2A transfers from Tier 1 institutions and payroll or gig worker payments. Speaking of payments, it’s been a little more than a year since we acquired Payrailz. We have successfully integrated the team and 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 building a premier payment acceptance platform, capable of handling bill payment, P2P, A2A, B2B and much more. As part of our planned strategy, we have created one Jack Henry bill payment group that provides product and operational support for both our legacy solution iPay and for Payrailz 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 iPay and Payrailz as well as additional new features not offered in either solution today. Specific to Payrailz, 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 asked, when are all these new innovative solutions 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 cores. We have aligned our strategy with the competitive cores we believe will bring the best mutual value and have a need for premier digital fraud and 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 with in the industry.

We operate with full transparency while collaborating across business units to deliver our consistent enterprise experience. We call this program One Jack Henry. And you’ve heard me talk about it 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. Our industry-leading survey and service scores continue to move up and to 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 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 road map 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 Mimi for some detail on the numbers.

Mimi Carsley: Thank you, Greg, and good morning everyone. Our continued focus on serving our community and regional financial institution clients, growing our business, investing in our future and delivering shareholder value led to another quarter of solid revenue and earnings growth. 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 2024. Deconversion revenue of $4.1 million, which we pre-released last week was down approximately $400,000 reflecting continued temperate financial institutional consolidation.

As a reminder, given the September 1, 2022 close of Payrailz acquisition the first two months of Q1 2024 results are excluded from non-GAAP financials, but that September one onwards Payrailz 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 offerings 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 fees. Next, R&D expense increased 12% on a GAAP basis and 10% on a non-GAAP basis, reflecting higher personnel and benefits 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. 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 VEDIP.

This cost was lower than the $17 million to $18 million estimate based on the final participation in the program. As a reminder, all VEDIP costs are in this quarter. And there will be no additional P&L impact as we move through the year. When these one-time VEDIP costs and last year’s $6.2 million gain from real estate divestures are adjusted to non-GAAP SG&A decreased 2% during the quarter. These adjusted figures reflect our ongoing commitment to cost control. We remain focused on generating compounding margin expansion. And the quarter results delivered 121 basis points increase in non-GAAP margin, which was 26.1%. This increase was partially driven by the timing shift of our Connect customer conference into Q2 compared to Q1 last year. These strong quarterly results produced a 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% on both a GAAP and non-GAAP basis with non-GAAP operating margin increasing five basis points to 59%. We benefit from positive tailwinds from winning share, continued 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. This segment had an impressive non-GAAP operating margin growth of 59, basis to 46%. This was due to increase in card transaction and related revenues plus growth in our EPS business. The Fed recently announced its considered change — a change to the debit card interchange that 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% on both a GAAP and non-GAAP basis with strong non-GAAP operating margin expansion of 47 basis points to 61%. Our diverse mix of solutions, including key headliners like Banno, LoanVantage, Treasury Management in addition to the numerous additional solutions contribute to this strong growth trend. And our new fraud Financial Crimes Defender solution will soon contribute to the growth in this segment as well. Now let’s turn to a review of 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 sales 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 dilution, $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 2024. And I will conclude with guidance change highlights. As you’re aware yesterday’s press release included updated fiscal 2024 full year guidance along with the reconciliation to non-GAAP guidance metrics. As a reminder, we filed an 8-K on August third 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 consolidations in the first half of fiscal 2024 with possible acceleration in the second half. As such, we’re maintaining and reiterating full year deconversion revenue guidance of $16 million. Based on a positive Q1 result 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 7.2% to 8.2%, compared to the 7.0% to 8.0% provided on the August call. This corresponds to an increased full year GAAP revenue guidance of 6.4% to 7.4% for fiscal 2024. In tandem with our increased revenue outlook and continued focus on cost efficiencies, 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 updates, full year guidance for GAAP EPS is revised upward to $4.98 to $5.04 per share from previous guidance of $4.92 to $4.99 per share. As a reminder, the conservative guidance for deconversion revenue compared to actual fiscal 2023 deconversion revenue, the slightly lower VEDIP severance-related costs and the non-reoccurring gain on asset sales results in an approximate $0.37 headwind for fiscal 2024 GAAP EPS. And lastly some additional modeling commentary. As previously highlighted we recently hosted our customer conference JH Connect. The associated revenue and expenses will be reflected next quarter. Please recall in FY 2023 the related financial impact was in Q1.

We believe this timing shift has led to an approximate $0.01 to $0.02 higher consensus Q2 EPS estimate. Our full year guidance of 60% free cash flow conversion remains consistent given the continued impact of tax deductibility timing on development expenses, resulting in higher cash taxes. In the relative near-term, we expect to return to historical norms of 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 solutions the resiliency of our clients our focus on execution, growth accelerators, and shareholder value creation.

We thank all Jack Henry investors for their continued confidence. MJ could you please open the call for questions?

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Jason Kupferberg with Bank of America. Please go ahead.

Tyler DuPont: Hi, good morning everyone. This is Tyler DuPont on for Jason. Thank you for taking the question. So, I wanted to start on the growth side of things looks like growth is 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 the payments growth was healthy but a little bit lower than what’s expected on the “normalized” growth rate of 8% to 9%. So, I just wanted to ask what dynamics you’re seeing there and any expectations going forward? Thanks.

David Foss: I’ll take the first half and I’ll let Greg respond on the payments portion. This is Dave Foss by the way. So, I think the growth when it comes to the other areas other than payments is primarily driven by the success that we’re seeing now in the Banno area in the complementary product groups of the Banno product line. I highlighted some of the performance metrics there the addition of new customers and all the new registered users on that platform so the Banno platform success. 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 next quarter and then the following quarters after that. But then it’s just a variety of other solutions again primarily in that complementary solutions area.

So, we’re continuing to see great success with things like treasury and 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 three years. We’ve highlighted them on these calls in the past as new solutions. They’re not new anymore and they’re a year old. But they’re continuing to drive great demand and nice revenue improvement for Jack Henry. And I’ll let Greg comment on what’s happening in the payments side.

Greg Adelson: Yes, I would say there’s probably two components. So, one we’re kind of dealing with the aftermath of excessive growth in our remote deposit capture business during the pandemic. And so we’re seeing a little bit of 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 as it would 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 payments side. Everything else is fairly in sync.

Tyler DuPont: 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 there across the business. It looks like during the quarter margins came in ahead or at least what we were anticipating on an adjusted basis full year as well was raised. I’d be curious to hear more about what you’re seeing that drove that uplift during the quarter and thus the full year raise. And tangentially to that as well but sort of on a separate line given where we’re sitting now when do you anticipate Payrailz will become margin neutral to the business?

Mimi Carsley: Yes, I can take the first part of that. So, you’re correct in terms of the great margin expansion we saw in Q1. Now, typically, Q1 is our largest-performing quarter 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 then flowed through. I would 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 and good expense control.

Greg Adelson: And then Payrailz, so on the Payrailz side, so I think we are tracking to the guidance that we gave back in August. So I think everything is on track based on what we provided back in August.

Tyler DuPont: Okay. Great. Appreciate the color. Thanks a lot.

Operator: Thank you. The next question comes from David Togut with Evercore ISI. Please go ahead.

Q – David Togut: Thank you. Good morning, Dave and Mimi. I’d 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?

David Foss: Hi. 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 10, because normally the first quarter is a very light quarter. Last year as a comparative, 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 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 pipeline, gives me great confidence that we’re going to have a really, really strong year. Now with that said, talking about what’s happening in our environment, I think all of you know pretty well what’s happening in our environment with all of our competitors and 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 don’t have a banker, who suddenly wakes up one day and says “Hey, I think I’ll go through a core conversion.” They’re very long. It’s a very disruptive process to go through a core conversion. And so, nobody takes it lightly. 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.

Q – David Togut: Got it. And then moving upmarket to the bigger banks has long been a focus area of yours. And you called out the success of treasury management, which is part of that effort to move upmarket. 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. Where are you in this process? And where do you expect to be within 12 18 months?