Jack Henry & Associates, Inc. (NASDAQ:JKHY) Q4 2023 Earnings Call Transcript

Jack Henry & Associates, Inc. (NASDAQ:JKHY) Q4 2023 Earnings Call Transcript August 16, 2023

Operator: Good morning and welcome to the Jack Henry Fourth Quarter 2023 Earnings Conference Call. [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: Thank you, Anthony. Good morning, everyone, and thank you for joining us for the Jack Henry fourth quarter 2023 earnings call. Joining me today on the call 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, financial and sales performance for the quarter, industry comments, and other key initiatives. After Dave concludes his comments, Mimi will provide additional commentary regarding the fiscal – the financial results and fiscal year guidance included in the press release issued yesterday that is available from the Investor Relations section of the Jack Henry website.

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

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

David Foss: Thank you, Vance. Good morning, everyone. Today, we’re very pleased to share details with you for a quarter that produced record revenue and record sales bookings. As always, I’d like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our fourth quarter and for the entire fiscal year. For the fourth quarter of fiscal 2023, total revenue increased 11% for the quarter and increased 8% on a non-GAAP basis. Deconversion fees were up as compared to the prior-year quarter but were still down significantly for the full fiscal year. Turning to the segments, we had a solid quarter in the core segment of our business. Revenue increased by 11% for the quarter and increased by 10% on a non-GAAP basis.

Our payment segment performed well posting a 9% increase in revenue this quarter and a 7% increase on a non-GAAP basis. We also had a very robust quarter in our complementary solutions businesses, with an 11% increase in revenue this quarter and an 8% increase on a non-GAAP basis. As I highlighted in our press release, the fourth quarter was the strongest quarter for sales bookings in the history of the company. With those of you who follow us – those of you who follow us closely, you will know that in the fourth quarter of fiscal year ’22, we set an all-time sales record. We broke that record in the second quarter of fiscal ’23, and now we’ve set another new record in the fourth quarter of ’23. Additionally, we set a new annual sales record in fiscal year ’23.

All-in-all this has been a remarkable year for the sales teams. To provide a little detail regarding sales successes in the quarter, we booked 16 competitive core takeaways and an additional 19 deals to move existing on-prem core clients to our private cloud environment. Several of our complementary offerings also saw very strong demand in the quarter with, as you might guess, our digital suite leading the pack. We signed 63 new clients to our Banno Digital platform in the quarter and 19 new clients to our card processing solution. For the full year, we signed 47 competitive core takeaways with five of those institutions with greater than $1 billion in assets. Additionally, we signed 52 contracts to move on-premise core clients to our private cloud, 56 new clients for our card processing solution, and 198 new Banno Digital customers.

Of course, we signed a variety of other contracts for many of our other solutions as well. But it’s important to note that almost all of these contracts represent long-term recurring revenue came on to Jack Henry, for a wide variety of our solutions. Regarding the Banno Digital suite, we were at almost 10 million registered users at the end of the fiscal year. As a point of reference, on July first of 2020, we had about 3.2 million registered users. So in three years, we’ve seen our user count triple in size. This is significant because as I’ve stressed in the past, most of the revenue for a business like this is tied to the number of users on the platform. We delivered Banno business into general availability for our bank clients in late July, and the response has been outstanding.

More than 25 banks are live and we signed an additional 53 Banno business clients in fiscal Q4. On July 20, we became one of the first service providers to support live transactions on the Federal Reserves’ new FedNow instant payment service. More than 100 of our clients are in various stages of implementation and we expect to add 100s of financial institutions over the next 12 months. We plan to deliver Financial Crimes Defender, our real-time fraud and anti-money laundering compliance platform into general availability for our banking clients in late September and for our Credit Union clients late this calendar year. As you may recall, it’s been one year since we announced our corporate rebranding to retire the Symitar, ProfitStars, and Jack Henry Banking brands and go to market is simply Jack Henry.

I said on this call a year ago that uniting the brands reflects Jack Henry’s role as a well-rounded financial technology provider and enables us to speak from a single consistent brand voice. We’ve seen strong results during the year from our rebranding, including a 50% increase in website visits and a 30% increase in social media followers. I also mentioned on our last call that we recently published our 2023 sustainability report. I’m pleased to share that Jack Henry has been recognized as a 2023 Climate Leader by USA TODAY and Statista for our ongoing efforts to reduce greenhouse gas emissions. In addition, we were recently recognized as one of America’s Greatest Workplaces by Newsweek. Our consistent placement in Best Places to Work ranking is a testament to the workplace culture we have at Jack Henry and our employee engagement scores reflect that strong culture.

Our continuous listening program enables us to gather feedback from our associates throughout the year and I’m pleased to share that overall our participation rate this year was greater than 65%. We achieved an engagement capital score of 81% and 87% of our employees said that they believe in Jack Henry’s values, all well-above industry benchmarks. By taking care of our associates, they, in turn, are taking care of our clients, delivering outstanding customer service is a hallmark of our company and this past year was no exception. On surveys we send to customers, we scored an average of 4.6 out of 5 for overall customer satisfaction and 4.75 out of 5 for satisfaction with our customer service representatives, both are increases over our already industry-leading satisfaction scores.

We are encouraged by recent surveys of financial institutions showing positive growth and sentiment around technology spending for the balance of the calendar year. To that end, Bank Directors 2023 technology survey will be published in September and it will provide a helpful barometer of Bank sentiment relative to technology. I will plan to share these results with you on our November call. In today’s environment, we found that no matter what financial institution is trying to solve for, technology is almost always the solution. Our breadth of solutions regularly positions us well to participate in these opportunities. In Mimi’s comments, she will discuss the program we recently offered to a select group of associates who meet certain criteria.

Internally we refer to this offering as our Voluntary Early Departure Incentive Program. We have many employees who have been with us for a long-time and this program enables us to reward them while giving others a chance to move up in the organization. While there is a cost associated with this program, it is something we’ve offered in the past that has been well-received and produced positive long-term results for the company. As I reflect back on fiscal 2023, I can confidently say it was a very good year for our company. Our employee engagement scores remained high and our levels of customer engagement and customer satisfaction scores are also very high. Mimi has been in her role – in CFO role for nearly a year and her collaborative thoughtful leadership has had a visible impact on both you as investors and our associates.

Our sales teams are performing extremely well and have positioned us for continued success with the sales pipeline that is the largest we’ve ever had entering a new fiscal year. We believe that our commitment to doing the right thing for our constituents will continue to serve us well. We will continue with our disciplined approach to running the company, and expect that approach to help provide stability for our employees, customers, and shareholders. As we begin the new fiscal year, I continue to be very optimistic about our future. With that, I will turn it over to Mimi for some detail on the numbers.

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Mimi Carsley: Thank you, Dave, and hello, everyone. As always, we remain focused on serving our community and regional financial institution clients, growing our business, investing in our future, and delivering stockholder value. This focus led to another quarter of solid revenue and earnings growth. This morning, I’ll begin with the details driving Q4 and the full year 2023 Results, notable capital management items, and end with our initial outlook for fiscal year 2024. For the quarter, GAAP revenue increased 11% and non-GAAP increased 8%. Delivering solid results in the fourth quarter, we closed out a strong year for our business as full-year 2023 non-GAAP revenue grew 8% to over $2 billion. Now let’s look more closely at the quarter details.

Firstly, on a GAAP basis, services and support revenue increased 12% for the quarter and 5% for the full year. Services and Support were positively impacted during the quarter as deconversion revenue increased approximately $10 million. Despite the better-than-expected volume in Q4, full-year deconversion revenue was down approximately $22 million versus prior year and as we discussed all year, this was due to the limited market acquisition activity in our space. Of note, product delivery and services increased 27% in the quarter, driven by higher deconversion, license and hardware, and implementation-related revenue. For the full year, given the significant headwind of over 40% lower annual deconversion revenue, we’re pleased with the strong growth in all other areas, resulting in a modest 2% decrease.

Next, we continue to experience robust growth in our product – in our private and public cloud offering, which increased 10% in the quarter and for the full year. I would highlight that on a non-GAAP basis, services and support revenue grew 8% for the quarter and 7% for the year. Finally, shifting to processing revenue, we saw consistent strength with 10% growth on a GAAP basis for the quarter and the year, and on a non-GAAP basis, healthy growth of 9% for the quarter and the year. Noted on previous calls, performance continues to be driven by higher card volumes and services and robust digital demand. Next, moving to operating expenses. I’ll begin with the cost of revenue which was up 8% for the fourth quarter and full year roughly tracking revenue performance.

At a total company level, quarterly and full-year drivers were consistent and included higher direct costs, personnel costs, and amortization expenses. Similarly, R&D expense increased 13% during the quarter, mostly due to the higher personnel costs and internal license fees used to drive innovation. Based on the same drivers, these expenses increased 15% for the full year. And lastly, SG&A rose 9% for the quarter and 8% for the year driven by increases in personnel-related costs, reflecting talent market conditions. We continue to deliver savings across the company stemming from our disciplined focus on prioritization and efficiency. I’m happy to report a 22% increase in net income, driven by operations and increased deconversion revenue, resulting in a fully diluted earnings per share of $1.34 for the quarter.

We appreciate the collective contributions of our hardworking and dedicated associates that drove strong quarterly and full-year results. Now let’s turn to reviewing cash flow and capital allocation. Across the year, we faced large headwinds impacting cash flow, and therefore, our full-year operating cash flow at $382 million was down from $505 million posted last year. Impacting the decline was lower deconversion revenue, higher prepaid expenses, and legislative changes to the deductibility of development expenses, which shifted the timing of tax payments. Consistent with operating cash flow factors, we produced free cash flow of $203 million. Subsequent to fiscal ’23, we have paid down our debt by an additional $75 million to $200 million.

Regarding capital management, our capital allocation priorities remain consistent. We’re fully committed to our disciplined approach, which includes investing in our business, maintaining a strong balance sheet, pursuing high-return acquisitions where appropriate, and returning capital to shareholders. This consistent dedication to value creation resulted in an annual return on invested capital at 21.7%, and I would highlight that for the full fiscal year, we returned over $172 million to shareholders through share repurchases and dividends. So with that, I’ll conclude with guidance for the fiscal year 2024. As you’re aware, yesterday’s press release included fiscal 2024 full-year GAAP guidance along with the reconciliation to non-GAAP guidance metrics.

As a reminder, we filed an 8-K on August 3, which described how starting in the current fiscal year we’re using a revised approach for deconversion revenue. Of note, we’ve moved to deconversion revenue estimates in line with the recent historical low and with that framing in mind for fiscal year 2024, we’re guiding to $16 million evenly distributed across the year. Additionally, approximately 10 days prior to our quarterly earnings release, we will pre-release actual deconversion revenue figures, so that your models may be updated. This will allow us to focus our quarterly call on results from operations. And going forward, each quarter we will update guidance based on actual deconversion revenue which is expected to likely exceed the beginning full-year estimate.

It’s important to note the negative impact of this change. Based on the new approach, full-year GAAP EPS guidance will understate anticipated EPS growth since deconversion revenue was $32 million in fiscal year 2023. Pay close attention to the impact of GAAP EPS of $0.01 per $1 million of deconversion revenue using current share count. Based on current trends, we expect to see minimal fiscal institutional consolidation in the first half of fiscal ’24 with possible acceleration in the second half. Additionally important, in 2024 there will be a one-time impact from a Voluntary Early Departure Incentive Program, VEDIP for short, that was initiated at the start of this fiscal year. As Dave mentioned, the program opens pass for employees to move into more senior positions.

The financial impact from VEDIP for fiscal year 2024 is $17 million to $18 million in severance-related costs which will have an approximate negative $0.18 impact on our reported GAAP EPS. All of which will be in our Q1 results. Lastly, related to our latest acquisition, Payrailz has been successfully integrated into our payment segment. Therefore we will not provide specific metrics for FY ’24, and as a reminder, our financials will reflect two months of related non-GAAP results. Going forward for FY ’23 and ’24, non-GAAP results reflect 10 months of Payrailz aligned with the September first acquisition date. We expect full-year Payrailz revenue to more than double and become EBITDA positive starting in the first half and continuing to ramp for the full year.

Based on current momentum, strong execution and near-term visibility, we should generate 6.3% to 7.3% for full-year GAAP revenue growth for fiscal ’24. And, I would highlight non-GAAP revenue growth expectations, a 7.0% to 8.0%, consistent with our recent Investor Day discussions. To be helpful as it pertains to the expected cadence of non-GAAP revenue growth, we currently see Q1 being the low-point of the year at approximately 6.4% to 6.6% then a sizable increase in Q2 with sequential increases in Q3 and Q4. We will update this trend if we see changes. Driven by a combination of our year-over-year growth and continued focus on cost efficiency, we will deliver margin expansion in 2024. At a total company level for the full year, we expect non-GAAP margin expansion of 20 basis points to 25 basis points.

We expect the full year tax rate to be approximately 24% and we will provide updated guidance during the year, if applicable. Incorporating these discussed impacts, full-year guidance for GAAP EPS is $4.92 to $4.99 per share. And as a reminder, the conservative guidance for deconversion revenue the VEDIP severance-related costs, and the non-recurring gain on asset disposals, results in approximately $0.39 headwind assuming deconversion fees consistent with fiscal ’23. The expected trend of our quarterly GAAP EPS is consistent with current estimates where Q1 and Q4 are the best-performing quarters with slightly lower results in Q2 and Q3. Additionally, on last year’s Q1 call, we said we expected expenses related to our 2023 client conference to remain in Q1.

However, instead, we will be hosting our clients in October 2023 and the related cost impact will be in our fiscal Q2. Also of note, for fiscal 2024, we expect free cash flow conversion to be approximately 60% impacted by the higher one-time capital expenses, lower guidance deconversion revenue, and continuing high cash taxes from last year has changed in the deductibility of development-related expenses, the trend to increasingly higher prepaid, both for sales commissions and third-party relationships. Looking beyond this year to provide near term target, we expect non-GAAP revenue growth of 7% to 8%, as discussed at Investor Day in May, and we see annual non-GAAP margin expansion of 20 basis points to 40 basis points. These targets are based on stable economic conditions and do not incorporate potential significant macroeconomic headwinds.

So in closing, 2023 with a strong year for our business and I’m energized about the opportunities ahead. We thank all our investors for their continued confidence in Jack Henry. Anthony, will you please open the call for questions?

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Q&A Session

Operator: [Operator Instructions] First question will come from Peter Heckmann with D.A. Davidson. You may now go ahead.

Peter Heckmann: Good morning, everyone. Thanks for taking my question. I was wondering if, Dave, you could characterize in terms of record bookings for the fourth quarter and full year. I guess, could you characterize a little bit about year-over-year growth there as well as the attainment of your internal targets?

David Foss: Peter, well, yes, thanks for the question, Pete. We don’t – in the metrics that we use internally are not external metrics, so whenever I talk about year-over-year comparison or quarter-to-quarter comparison of the sales organization, it is comparing our performance to ourselves. There isn’t an external number that I quote, but it is – the fourth quarter was significantly higher than the second quarter, which was a record. And then, of course, then for the year, it was significantly higher. The thing that I think it’s important to note, I get the question once in a while as we set records, people assume that that’s all tied to the core business and it’s not. We have a number of other complementary solutions now that are really driving significant progress for Jack Henry.

The other thing that’s important to note is almost nothing that we sell today is the recognized – is the revenue recognized in the quarter that where we sell that deal are – oftentimes even in the next quarter. It’s almost all recurring revenue, it’s all layered in setting us up for continued growth into the future, which is what builds the confidence for meaning to say, in top-line revenue growth, 7% to 8% for the foreseeable future. That’s because we have so much visibility into all these deals that are being layered onto the recurring revenue stack that we already have. So the best I can do Pete and I’m not trying to be evasive, but the best I can do is just say using the internal metrics that we use, it was a significant increase in Q4 over any of the other quarters that we’ve ever experienced at Jack Henry.

Peter Heckmann: Okay, okay, that’s fair. And then, just confirming, so the early retirement program I believe you called it VEDIP, meaning that $0.18 is included in your full-year GAAP EPS guidance and you expect to record the full $0.18 in the first quarter, did I hear that correctly?

Mimi Carsley: That is correct. You heard it correctly. It will all occur in Q1 and it is an estimate. We are just kind of very at the tip of that program in terms of knowing the participation rate, but we do feel good about the estimate which is a little different than the last time we had the program in 2018, because by this point, people have kind of acknowledge their desire to participate, but all of that is already included in our guidance.

Peter Heckmann: Okay.

David Foss: And you may – just to chime in Pete, you may recall, we had done this twice before – since I’ve been at Jack Henry anyway, twice before, this has been a very successful exercise for us in the past and not only giving – rewarding people who have been here for a long time but also creating opportunities for people to move up in the organization. And so we expect that same level of success with the program this time.

Peter Heckmann: Good to hear. I appreciate it. Thanks.

Operator: The next question will come from Nik Cremo with Credit Suisse. You may now go ahead.