Good morning, everyone. My name is Dave Koning. I'm a Senior Analyst at Baird, covering payments and IT services, and, you know, very excited to have Jack Henry with us today. It feels like probably the 30th year in a row they've been at our conference, so it's exciting. And, we have Greg Adelson with us, President and COO, and in about a month, he's gonna take over as CEO. That was announced several months ago now, but he's the incoming CEO. And so, you know, maybe, maybe with that, I mean, I think you guys all know, Jack Henry is one of the leading, core bank providers of software.
They run, I don't know, 1,500, 1,600 banks in our country, so a very big market share there. Maybe, Greg, you could kind of kick us off a little bit with your philosophy about running Jack Henry, and, you know, what might be the differences from Dave Foss's leadership?
Yeah. So first of all, thanks for having me today, and, we appreciate that. So, I've been with the company 13 years, been fortunate to work my entire career for Dave. So for those of you that know Dave, we have a very similar philosophical approach to the business, both on how we treat our associates and making sure that, you know, we talk about our three pillars of taking care of our associates first, and they'll take care of our clients and ultimately our shareholders. But the other part is that we're very much aligned on how strategically, the things that we're working on. So I've been, you know, very integral into the strategy that we're embarking upon now in our tech modernization strategy, which, you know, I think we can dive into a little bit.
But it's basically us uncoupling the core, and building out, discrete components, where we're actually taking the top 30 or so key core components, building them in a public cloud, native API-first, structure. And we're actually already have been embarking on that. I know we're going to talk about that a little bit later. But then the other part is, just so you know, so from a strategy standpoint, we'll continue down that. We'll continue down the one Jack Henry stuff, that we've been focused on, which is making ourselves a an easier company to do business with. You know, we're an amalgamation of about 48 acquisitions over a 48-year period. By the way, we just hit 48 years yesterday, which was Jack Henry and Jerry Hall, founder of our company.
From that standpoint, I have a few other things that I'll be adding, an SMB strategy that we're focused on through the financial institutions, and some product rationalization, where we're looking at really some of our products that don't grow at the same level from a revenue standpoint or even from a margin standpoint, and either looking at divesting of those particular products, cashing them out. Some of them will go away just through pure sunsets with what we're doing with our tech modernization, but really getting focused on what really moves the needle for us, for our customers, for our shareholders.
Yeah. Great. Well, thanks for that. And, maybe we can kick it off. What's changed over the last several years in terms of just how contracts are, are structured, right? I mean, I remember years ago, it was often a five-year contract. It seems like contracts are longer now. What are just the, the dynamics now of,
Yeah, from a contract term, what I would say our average core term is either 6 or 7 years. Typically is what we don't really go with 5-year core terms, but we've seen them as high as 12 and 15 years. And of course, there are several that fall in between that. But 6 and 7 is on average. The things that I would say, and then for our complementary products or payment products, we typically see 3-5 years, depending on if they're sold as point-to-point solutions. If they're sold as part of the core deal, a lot of times they're co-terminus with the core deal. So it really depends on how that particular product was added and when it was added.
Just for context, though, we actually include about 50-60 complementary and payment products with a banking core deal, and we see about 35 complementary and payment products for a credit union deal. So that gives you some context on that. The only other thing I would say that really has potentially changed is there's been some focus from the ABA, and their core committee and really looking at, you know, kind of how SLAs work and things along that line. So you see some movement in really the contract negotiations of that, but the terms themselves are basically as I described.
How many complementary products does a core client typically have? And maybe how has that changed from five, 10 years ago?
So really, it hasn't changed significantly. Like I said, 50-60 on the banking, 35 on the credit union. That number has really stayed pretty consistent the last five, six, seven years. I would say the dynamic of what they're selecting, just because we've changed what we're including in that with Financial Crimes Defender, Banno, obviously is, is in most core. Our card, you know, we had some challenges when we made our card, changes several years ago that we've, you know, worked through, and now that's a really growing business. So but that's really the dynamic. It really depends on what the mix is.
Gotcha. Okay. And what makes Jack Henry special? You know, when we think of companies, there might be almost no companies in the country that have such low attrition, right? And what is it that has allowed, A, your clients to just stick with you for just decades, and B, you tend to win more than your competitors. Why?
Well, I think it starts with the very first thing I said earlier. It starts with our associates. So we have very low turnover at our company. So even with a contact center and over 7,000 employees, our turnover is 11%. And it's been like that even through the great resignation, it rose a little bit. So back to taking care of your associates, they're going to continue to be motivated to take care of your clients, which is why we have exceptional customer service, industry best, and have for many, many years, and that will continue under my watch for sure. Both of those things. I think the other component is what I mentioned around the Tech modernization strategy.
So, we have been validated by both, by our customers, by prospects that we're talking to, by the consultants that serve our industry, that the strategy that we are embarking upon is different than what they've seen from anybody else in the market. And that includes the European companies that are coming in trying to, to kind of get into the U.S. based market. So it's not only the strategy that's different, but we're actually executing on the strategy. So we share six-month roadmaps with our clients, really on about 70 of our products, and we show how we execute. I think that's very different from what most people do. We hold ourselves accountable with our clients, and we do the exact same thing with the roadmap for our tech modernization strategy.
So we are now two years into that strategy, and not only are we executing to the exact dates that we said we were, we're under budget. Those are two things that don't typically happen for a project of this size. And so, so again, we're gaining a lot of confidence and credibility in the marketplace because candidly, five, six years ago, Jack Henry wasn't really known as a technology innovator. They were known as a great service company with good technology, but not innovative technology. And I think now that people are viewing us differently, they wanted to make sure that we could actually execute, and we're showing that we can.
Yeah, great. And then what about... So for years, the shift to outsourcing has been a catalyst, we think maybe adding 1% or maybe a little more to revenue growth. So the shift from clients that took a licensed delivery, where they would buy your software and then run it with a few of their own employees, move it to your servers, and all of a sudden, you double the contract value, right? So it's a really good shift. We're about 70% of the way there. We're getting close to fully penetrated. How many years left, and then what is the next driver, kinda that comes after that?
Yeah, that's a great question. So we've been focused on this for many years. We're actually 72% penetrated as we speak today. That's both on the credit union and the banking side. We're still moving on average, about 40-50 of our clients into our private cloud a year. We're still on pace for that this year. We're expecting to be on pace for that for the next several years. So from a runway standpoint, you know, we expect not to get to 100%, obviously. Somewhere between 90%-95%, we believe to be the expectation. But what will happen over the next several years, and there's still three, four, five years of good runway for that to happen at the growth rates that I talked about, the 40-50.
But when you look at, if you look at where we're going with our tech modernization strategy, we see several of our clients that may actually skip from going from on-prem to our private cloud, to going on-prem to the public cloud. And so, though, to your point, we've mentioned that we're about two times the revenue when we move from on-prem to private cloud, we expect to be two plus, moving from on-prem to public cloud. So not only from a revenue aspect, but then from a cost standpoint, the public cloud is cheaper to run for us in the long run. So you're gonna get that aspect.
And then when somebody moves from, say, the private cloud to the public cloud, which will start to happen as well over time, you're not gonna get a 2x lift, but, you know, you might get 20%-25% lift, is what we're seeing, you know, right now. So that's kind of the trajectory of where we expect to go with that business and again, a lot of runway on both sides.
Is the shift from your private cloud to the public cloud, so 20%-25% revenue lift, is there actually a cost reduction when that happens, too?
There should be, yes.(crosstalk)
Yeah.
So, well, not should be, there will be. So what will end up happening as we end up moving more and more to the public cloud, we have less and less need for the servers and the, and the infrastructure that we have. We're also moving from our own data centers to colos. So we actually can build up and pull down when we need to, a lot easier than we can when you own the data centers themselves. So over the next several years, you're gonna see a migration from our own data centers to Colos, and to the public cloud, as both of them being cost-saving opportunities.
Gotcha. Good, good. Well, and when we think of the business, I'm gonna ask about Banno in a minute. You know, we think two-thirds of it is just the bank technology to run, kind of the software, the core—you know, half of that's core and half of it's complementary products. Banno is kind of the gold star of the complementary products. It's been growing like a little fintech, right? And kind of exploding. Maybe describe a little bit about, you know, how penetrated you are with Banno, how much room for growth there is left, how fast maybe that's growing.
Yeah, so great. So we actually built Banno, which is our digital banking platform, around 2017. Actually, slow, kind of slow-launched it in 2018. So roughly since 2018 to today, we have 850 clients and 11.6 million registered users. So it is the fastest growing platform that's out there today based on those time frames. But when you look at what we've built inside of that, we originally launched that product with a retail-only focus, and there was many reasons why. I won't get into that today. But we've now since gone back and built a lot of the business functionality that our customers, you know, need. And so when you look at a competitive landscape from us to a Q2 or an Alkami, what Banno was missing in the space really was the business functionality.
So we've been highly focused on delivering that, and we slowly started to deliver features and functionality. So as a by-product, we've actually now have 124 clients that are live on that platform, that are using the business functionality. So that's 124 of the 850, and I'll get back to that in a minute. And there's a little over 70 that are in the implementation queue and growing. What we're end up doing is that we'll continue to add feature functionality throughout the rest of this fiscal or calendar year. And our expectation is, by the end of the calendar year, that we will be on full feature parity with our competitors, which will allow us to take Banno outside of the Jack Henry base as well.
That's part of the strategy that we'll continue to embark upon that we've announced recently. Lots of runway in that. From a penetration standpoint, we're more highly penetrated into our banking business than we are our credit union business. We still have a lot of runway in the credit union side and in the banking side, but once we take it outside the base and add the business functionality, I expect... I actually said this on the last earnings call, that I expect this to be somewhere between 60%-70% penetrated into the Banno base, and if you remember, Dave joked and said it would be a 100% 'cause he was leaving. But anyway, we're on track right now. We're only about 10% penetrated- into that base, and have a long runway for that, too.
Yeah. And are you getting the interest from kind of non-core clients that want it?
Very much. In fact, you know, that's one of the reasons why we changed our strategy initially. We were gonna open it up to more cores, but candidly, the interest level got to be too, a level of too much excitement, that we were worried about a little bit about what would happen on the core side of our business. Because today, a lot of people make changes to come to Jack Henry so they can get Banno. But what we're actually focused on, if you think about the 200 or so core opportunities in the space every year, about 100 don't make a decision, 100 do make a decision, and 50-55 come to Jack Henry.
Those 100 that don't make a decision, either haven't decided because of a core or they're digital or whatever, we now have an opportunity to sell that, the digital into the 100 we didn't win or didn't make a decision on the core side, and start to kind of put ourselves in play for core decisions. So if you think about the three hardest things to move, if you're a client: moving your core, moving your digital, moving your card. And so we're gonna go in with a bundled solution that has digital card and Financial Crimes Defender as a bundled solution, and sell into those opportunities into select cores.
Gotcha. Okay, great. In one question we've probably asked every year, people, I always wonder, how in the world do you guys grow 6%-8% so regularly in a consolidating market, right? Banks were over 30,000 banks and credit unions, I think in the early 1990s. Today, we're maybe at 9,000?
9,000. Yep.
Like, how does that happen?
Yeah, so you know, interestingly, the market has been going through this evolution for the last 40 years.
Mm-hmm.
So, about a 4% decline, but most of them, if you look, are under the $500 million market. There are some exceptions for sure, but most of them come in the $250-$500, and even less in a lot of cases. Especially early years, it was a $100 million, $50 million on the credit union side, things like that. So that's not really a space that we really focus on, and that's number one. Number two is that we have a large number of our institutions that are acquiring these institutions. So, and you know, the way we actually do our revenue model, our revenue model isn't necessarily based on assets, it's more based on transactions for number of accounts, active users, things along that side that really drive. Asset size is really immaterial.
Mm-hmm.
In fact, just to put this in perspective, probably our tenth or eleventh largest credit union is our largest revenue producer on the credit union side of our business. So it really is more about how many complementary products and payment products do they buy, and which ones do they buy that have higher revenue potential and higher margin potential, much like the Banno, the payments, and the Financial Crimes.
Gotcha. Okay. No, that's good. So if we move to payments, and remember, so the core client base, we're running, the deposit accounts, that's a third of revenue, then complementary products are a third. The last third is payments, right? So this is where you're doing debit processing, keep track of every debit swipe for a bank, bill pay, et cetera. Debit processing is the biggest part of payments, right? It's like 60% of payments. How do you see the long run in that business? With two kind of questions here. One is, you know, Mastercard and Visa talk a little bit about decelerating volume growth and kind of towards retail, so that's a little bit of a factor. But then also, you have a processing relationship with Fiserv. So maybe talk about those two parts of the debit business.
Yeah. So, let me go to the second question first to lay the groundwork. So around 2000... I ran our payments group, by the way, until 2019 when I became COO. So I was heavily involved in the creation of the strategy and the direct contract negotiations with FDC at the time-
Mm.
... and PSCU. And really the message there was, you know, it's a build by partner kind of mindset. We had some parts of our card business that was not performing to a level that any of us wanted, and we were concerned about time. So building it really wasn't an option from a time standpoint, and we looked at a couple acquisitions, and they didn't materialize to what we wanted, so we ended up going the partner route. And it's turned out to be really, a really good relationship, which is ironic for a lot of reasons, right? Because we're staunch competitors on the core side. But from the business itself, we're about 98% of our transactions— Well, let me back up.
One other thing that we wanted to do is that when we built this relationship, we wanted our card customers to have a single platform to process debit and credit on a single platform. There wasn't really anybody else in the industry that could do that, except for, at the time, FDC. And so, we wanted that single platform experience for them for a variety of reasons. So we added credit to our, to our, list of products in 2019, when after we, we, we moved all of our debit clients. And so that's been a slow growth. We only, you know, we have roughly 100 customers.
We have roughly about 98% of our transactions are debit transactions today, 2% credit, but about 10% of our revenue, even on those 100 clients, is coming from the credit side. So it's a much higher revenue stream. As compared to Visa, Mastercard, and even PSCU, because we get data from really all of them, our debit volume is really kind of mirrored what's happened in the card network space. It has for the last several years. If you kind of look at debit transactions today, in some cases, the dollar amount may have increased, but that doesn't affect Jack Henry. We don't really play in the interchange side of that model.
So if it's a $1 transaction or a $100 transaction, it doesn't matter really to Jack Henry, other than the transaction itself. So seeing that volume, it has stabilized a little bit, but we're still you know continue to be optimistic based on what's going on in the economy that those things will continue to rise. But you know I don't see anything that is going to keep us from either underperforming what the market is doing. And there's some things that we're adding from a feature functionality and really kind of a what we call adoption programs that could help drive more and more transaction volume. But for right now, we'll probably stay right where the card associations are.
Gotcha. And yeah, I often think of you guys as growing a little faster in debit, just because, A, you have some of the smaller, less penetrated banks than the big money center banks on the coast and stuff, so that might help a little bit, and then just you tend to take a little bit of share over time anyway, so those two.
It's a great point because a lot of our smaller institutions don't want to do credit, so debit is their only-
Mm-hmm
you know, transaction opportunity. But, you know, you also got to recognize that not everything in that bucket is tied to just transaction volume, right? So there's fraud transactions that go in there and other things, and as we've gotten better and better at fighting fraud, there's less and less of those transactions that come up or alerts that go up. So it's a by-product of a lot of things that we've continued to improve, to make it a better experience for the consumer and for our institution.
Gotcha. I guess while we're on that topic quick, and this goes back to some of the complementary products, but fraud was even called out in—it's been called out at some points in your filings as a driver of growth, both some of the Yellow Hammer product, I think-
Mm-hmm
... the debit processing fraud. Like, how is this growing well above normal, normal growth?
I wouldn't say well above normal. I mean, I think where the call out for the card side was, was I was referencing before. So when card fraud was rampant across most of the industry, there was a huge uptick for that.
Mm-hmm.
So as we and others have built better, you know, mousetraps to be able to stop the fraudsters, then there's less of that uptick that's happening. Where you're gonna see the uptick for Jack Henry is really in our Financial Crimes Defender product, which is a... It's AI-based, it is a single platform. Yellowhammer was two separate platforms for fraud and BSA, but it's a single platform to fight, to fight fraud and BSA. Basically today, it's got wires, ACH, you know, check, anything, really, from any of the payment rails that happen today that are in there, and we're getting a lot of fanfare for that. So we have only 10 clients live, but we have 174 in our implementation queue, and mainly because it sold even faster than we expected it to do.
So there's about a quarter of those are Yellow Hammer migrations moving from our old product to our new one, but the rest of those are new takeaways from our competitors. And so we continue to see. The other big dynamic of that product, especially in a world where real-time payments creates more real-time fraud, we're the only platform that's out there today that has real-time capabilities. So that's a significant opportunity for the Zelle market, for the RTP market, for the FedNow market, because we've created a module that allows all of our clients to leverage those, that module, to fight fraud in real time for each of those.
So we're hoping that based on what we're seeing in our POCs and some of the initial customers, is that customers are gonna have more of an affinity to drive Zelle and other transactions, 'cause today they're a little bit afraid of it, right?
Mm-hmm.
Zelle, for an institution, creates no revenue stream, right? Because they can't charge for it, and all it does is create fraud.
Mm.
So a lot of people have kind of backed away. You put it in if you have to. If you're a big institution, you... fraud's just part of your number. But for our small community and regional institutions, it's a big deal.
Mm-hmm.
So I think, you know, what we're starting to see is more of an appetite to test that.
Yeah. Yep, no, that sounds good. Enterprise Payments, about 20% of the payment segment, what do you do there? I, you know-
Yeah
... we've covered the stock for about 20 years, and I always... That's the one part of the business I'm always like, "What exactly is going on?" And, and maybe is this where you're talking about some of the SMB-type payments, is that here?
No, it won't be in there.
Okay.
But I can go back to that in a second.
Yeah.
So EPS itself, which just stands for Enterprise Payment Solutions, so it's one of... Today in our payments segment, so we have the card, as we mentioned already, which is roughly 25% of the company and 60% of the payment revenue. We also have EPS, Enterprise Payments, which is ACH origination, which we are one of the largest ACH originators in the company, or in the country. But what we are the largest is we're the largest remote deposit capture solution provider. We have over 3,000 institutions. We do both consumer and commercial capture, and a lot of that has come through the acquisitions that we've made through the years.
Mm.
The most recent one was when we acquired Ensenta about 5 or 6 years ago. That really kind of rounded out our offering and made us the largest provider. So that's the bulk of what's in there. We do a few other things, but that's really it. And then the other arm is our bill pay business-
Mm-hmm
... which is iPay, which today really consists of iPay, our Payrailz acquisition, which we're blending those two products together, and taking the back end and the front end, and creating more than a bill pay solution. We're creating a bill management solution, because we believe the days of traditional bank bill pay are going away. You know, we've seen, we've seen what's happened with growth rates across the industry. But a bill management solution allows you to do other things. It allows you to do consumer and commercial payments. It allows you to do P2P, you know, straight into the platform. It will allow you to leverage all the rails that are out there today. So we'll be able to use RTP, we'll be able to use ACH.
We'll do a least cost routing kind of mindset for a lot of that. So that's all part of that evolution. And then the last part is our PayCenter business, which is really our real-time payments hub that we created. So we have real-time connections into the Fed, RTP, Zelle. We have over 300 clients live on each of those platforms. And we actually are about 60% of all the RTP clients that are live today on the network are Jack Henry clients.
Gotcha. And why does that... I know bill pay, the bill pay part, you know, grows kind of low single digits, but that enterprise part with the ACH and some of the RTP-
Mm
... that grows, like, 15%+. Why does that-
Well, it slowed down, but it grew a lot through the pandemic because think about Remote Deposit Capture. Nobody was going into the institution.
Yeah.
So a lot like my mother, who had never used remote deposit capture before, she started using remote deposit capture. So there was an increase, and so we're kind of coming down off of that. So we have a leveling effect of people that are using it and not going into the institution. But a lot of that growth in EPS came from during the pandemic.
Gotcha, okay. No, that's, that's great. And then a couple questions, we've got a few minutes. There's a couple of questions just on financials. As you're stepping into the CEO role, now you have to answer these financial questions.
Yeah, yeah.
Do you like doing that?
Yeah, well, I have an accounting background, so yeah.
Oh, perfect. Okay, this is good. So margins for the last five years or so have been pretty flattish between wage inflation, right, that created a little bit of a headwind. The original implementation of the First Data processing. There were a lot of little headwinds. What do you see the next five years? Like, are those headwinds behind now and it's just leverage kicking in?
So there are some points of leverage kicking in. But, you know, you gotta remember, as a company that's, you know, taking care of literally 1,700 core clients and almost 8,000 total clients-
Mm
... we have to make sure that our cybersecurity and our compliance and everything else. So we have made significant investments in both of those from a tools, technology, people. We've added a lot of staff in all of those areas. Unfortunately, after SVB and Signature and others, the compliance world has definitely you know, peaked as far as a lot of scrutiny and a lot of things that we're you know, we have to look at you know, as like everybody else. So there's been a lot of investment. So we still have... And we're building out, like, a sales force implementation right now, and we had some increases in costs.
So we have several things that have increased from a standpoint of building the scale, building what we have to do to really run the business. But a lot of that should dissipate over time just because, you know, we already have made a lot of the significant investments, and so there'll be a leveling off there.
But what we are seeing is that, you know, what we're doing from a continuous improvement standpoint, what we're doing from an AI standpoint, to build a lot of our technology with inside of the walls, you know, we're taking an approach that we're calling responsibly bold and balanced, where we're actually making sure that we manage inside the walls of the company, leveraging tech opportunities, leveraging, you know, service and bots and other stuff that you can do, both from an AI and generative AI. So I think you're gonna continue to see opportunities for us to lessen costs and headcount. We've done a really good job of headcount over the years, we always have.
But doing that, and our big mantra with our team, back to culture and back to, is, we've never done a layoff in the history of our company. So, 48 years, that's pretty remarkable when you've got 7,000 employees. And so that's back to culture. So what we end up focusing on is that our mantra to our team is, "We do more with the same, not more with less." And that's really the message. So we end up not hiring people that we would have hired because we're able to do more with the same.
Yeah. Gotcha. And then maybe finally, just cash flow. Some investors have been, you know, I guess, a little cautious on the stock with cash flow to a couple of things. One, just the core cash flow, about 85% conversion to earnings, but then I think this year, a tax impact caused even a little less than that. Maybe talk through that a little.
Yeah, so we're overperforming what we gave as guide at the-
Yeah
... beginning of the year for both margins and for forecasted cash flow. So we just did the last, you know, we're around 75% now. You know, really what's happening, and I think most of you know, so the development cost, the ability to fully amortize those, and development costs came away, you know, ended with Section 174, kind of, you know, expiring. So we're looking at it two different ways. So one is that we feel that in 2025, you know, with whether there's a administrative change or not, you know, in the president's office, you know, we feel that there's going to be a an opportunity to solve for this in 2025.
If there isn't, for some reason, we are actually taking the approach that over the next few years, we'll be able to continue to increase our cash flow as we're able to build up, you know, kind of a reservoir of development costs that you can depreciate over that five-year period. So we're highly focused on that. I can tell you from a leadership team and a management team, we're focused on our 7%-8% and hopefully getting closer to the 8%+ over time, margins of 20%-40%, as we mentioned, and hopefully getting above the 40%, and then from a free cash flow, getting closer and closer to that 90%-100% that we've had in years past.
Yeah. Well, that's a great, a great review. Thanks so much.
Yeah.
And yeah, that's all the time we have. Please join me in thanking Jack Henry and Greg Adelson.
Thank you.
Thanks, Greg.
Thank you.