All right. I think we're already on the clock. Thanks, everyone, for joining us. I'm Michael Infante. I'm an equity analyst here covering fintech at Morgan Stanley. Very pleased to have Mimi Carsley, Jack Henry's Chief Financial Officer, to join us today. So, Mimi, great to have you again. For those that aren't familiar with your business, could you just give us a quick overview of the three core businesses at Jack Henry, as well as the cohort of bank and credit union customers that you serve?
Sure. So Jack Henry is a well-rounded financial technology firm. We support primarily U.S.-based financial institutions. We have three main reporting segments. So the Core Segment is the key processing engine that a bank or credit union would need to do the day-to-day functionality. So if you think about an ERP system for your bank or credit union, then you have our Complementary segment , which is a whole host of other solutions that a bank or credit union would need. So think about your lending, your fraud, your treasury management, your digital banking, all of those types of applications. That's about another third of our business. And the remaining third of our business is our Payments business . So that is where we provide card processing services, primarily on the debit side of the house. We also have an enterprise Payments business .
That's your ACH, remote deposit capture, things around enterprise payments, and then we have our bill pay platform, and that's where you'll also find around our PayCenter and some of the faster rail payments around FedNow and RTP-type payments, so those are the kind of, if you think about nine key bits of functionality, over 70 product families, over 300 individual solutions, and we serve over 1,700 U.S. banks and credit unions on the core side, and then we serve another 5,800 on the complementary and payment side.
That's a helpful overview. I appreciate that. I wanted to get into the impact of the incoming administration. If you look at net interest income across the banking industry from 2016 to 2018, you saw a multi-year step function change in what that net interest income generation looked like. And obviously, that's a leading indicator for bank technology spend more broadly. I think if you look at industry expectations for where that might trend in 2025 and 2026, we're getting, again, a really sizable inflection, at least as it relates to 2024. What are you hearing from your bank and credit union customers just in terms of their appetite to spend just with the regulatory and geopolitical clarity that we do have now?
So we do two bank surveys, one directly ourselves that we kick off around this time, the January time each year. Then we do one in coordination with Bank Director of both. And then we have anecdotal, like either customer visits, prospect visits. We just had our large client conference in Phoenix. So we get a lot of feedback from bank CEOs, CTOs all the time. Overall, they're feeling pretty healthy as a group. There were some concerns around things like bankruptcies, things like commercial real estate issues, interest rates in the U.S. For the most part, they're working their way through the system. It isn't kind of without any issues, but the banks are feeling pretty healthy.
To your point about net interest income and the NIM spread there, so during that time, you had an administration that was pushing for rates to kind of go as close to zero as possible, very business-friendly, and so what we're seeing right now is the expectation of the Fed cutting again. You have a number of economists calling for cuts throughout the remainder of this year and on to next year quite aggressively. The banks have diversified their sources of income from fee income and interest income to a lot of different sources, so they're, I think, in a more robust position today than they have been historically during the last time you had a Republican administration, but in general, I think the expectation is that a Republican administration and control over Congress as well, not a supermajority, but control over Congress, would lead to just a pro-business stance.
So whether that's on the supervisory regulatory front, less onerous future regulation or regulatory clarity even would be better, to potential for M&A and more approval. The challenge currently is not only do you have question as to the absolute decision on an M&A in the approval process, but you have an elongation of the process itself, which is quite damaging. So if you think that it will return back to a more favorable stance, you might see banks and credit unions tee up multi-successive acquisitions, which they like to do. It kind of de-risk the profile versus going for one large big acquisition.
Sure. Maybe just to piggyback on the bank consolidation point, if you look at where Bank M&A has trended over the last several years, sort of running well below post-GFC averages, I think most are expecting some unlock over the near term. How should we think about the impact of a return of Bank M&A on your business? I know there are several puts and takes, but just walk us through how you come out on the winning side of M&A.
Sure. So yeah, the last two years have been historical lows, as you call out, Michael. So then it hits us on a couple of fronts. Well, we'd love to retain all of our customers in ex-M&A. We have over a 99% client retention. Historically, you've seen going back a number of years, industry consolidation has been happening for 40 years in the U.S. We used to have over 20,000 banks in the U.S. We're down to like 9,000 financial institutions between banks and credit unions. So running about 4% consolidation a year with the last two years being lower than average. We think you'll see an uptick. We think you'll also see we've had clients calling us with their list of targets ready. We've even had some clients that are very acquisitive as part of their growth strategy talk about wanting customized, dedicated teams for implementation and migration.
So we're at the ready. We think that the volume will be there. Some of the ways it hits Jack Henry, one on the positive side is when two institutions converge into one, they tend to need some assistance. And so the consulting revenue we call convert-merge consulting revenue happens to help them and assist in that conversion. Additionally, particularly clients that are in our hosted environment, at the very next cycle of billing for the next month, if it's on a per-account basis or per-member basis, that larger institution size then sees an upcharge in their fees because they're just a larger institution. So we see that as well. It's also the opportunity to then talk to them about other solutions that they might need. It's just another opportunity to talk strategically.
Typically, in an acquisition, the acquirer, like they choose the management team, the acquirer typically chooses the technology that will win in the new combined organization. Sometimes you have a situation if the acquirer's technology is just not as compelling, not as innovative, not as robust, you have what is an opportunity we call win in a merger. So we have a dedicated playbook in this. We've seen some great traction lately where we've gone in and whether our FI has been the acquirer or the acquiree, at the end of the day, they're choosing Jack Henry technology.
Helpful. Maybe just on sales cycles, I think one of the broader themes for your business is sort of demonstrating the capacity to move up market. You have a $50 billion bank on your client roster. I know they have intentions to scale much larger than that. But maybe just on the impact to sales cycles more generally, clearly, as banks get bigger and bigger, the number of approvals goes up and up. And with AI sort of being a key factor in some of those sales processes, there could be the potential for more sales cycle elongation. So how do you think about sort of forecasting the business as you sort of move up market and you might see some elongation of those sales cycles?
The decision is complicated, for sure, and most bank CEOs or CTOs go through one, if any, of a core conversion in their whole career, so it's deeply embedded into every process within a financial institution, and so it's not something they take lightly. In fact, we think about 200 contracts come due in a given year. Only about 100 are making the decision going in that they're willing to make a change. The other 100, it's not even on the table as an option, so then of those 100 that are in play in any given year, we're winning 50 to 55, so we're winning tremendous success on that. I wouldn't say we've seen an elongation of the sales cycle by any means. It's a complicated sale. We usually start about two years prior to the renewal date.
It talks about every process in the bank being exposed and impacted. You're talking about other complementary solutions like Banno coming attached to it. They're making changes, whether that's a day-one change or a day-two follow-on add-on product. We haven't really seen we're making great traction in going up market, as you talked about, Michael. Our largest client today, $50 billion with aspiration of over $100 billion and winning. We have now over 15 clients that are over $15 billion. In fact, it's like over 20 clients that are over $15 billion in size. We have this misnomer that Jack Henry only plays in the small institution, and that's not the case. Our average size is roughly $1.3 billion on the bank side and $1.2 billion on the credit union side.
That's great. I wanted to tick through some of the various businesses and hit some of the high points. Firstly, on the Core Segment, Non-GAAP revenue growth of a little over 5% in the first quarter. I know there's obviously some puts and takes on a quarterly basis. You orient everyone to look at the business on an annual basis. I think one of the misconceptions we often hear from investors is just focusing on the number of core wins in any given quarter, and you don't necessarily know how big or small those core wins could be, so the P&L impact, even if you're seeing a smaller number of core wins, could actually be bigger than if you were to see a greater count of core wins.
So how do you sort of think about the drivers for just acceleration in the Core Segment throughout the year and the confidence in continuing to operate in that normalized growth range?
You brought up two really astute points that I want to emphasize. One is Jack Henry is really an annual company. We give annual look at guidance. We really think about the cycle on an annual basis and then compound it on a multi-year basis as it pertains to revenue growth and margin expansion. I wouldn't take too much of any one quarter as too heavy as a trend of like, "Oh, is that the new run rate?" And just for some of the reasons that you mentioned, in any given year, depending on who came on the calendar in that slot, we have certain conversion spots. Right now, every conversion spot is already taken. We already can see what's coming for the next several quarters. The size can vary.
So while we want to tell the number of core wins to give you guys an indication, the same way we talk about our sales pipeline is the most robust and has been replenished. It's just as an indication of the runway we have, not a precision. So it could be a year that you have smaller or a quarter that you had a smaller institution onboarded last year and a larger one this year or vice versa. So the profile of the cohort does matter as it pertains to in-quarter growth year-over-year. Some of the other trends as well, just on a macro basis and on a longer basis, you have the continuation from private cloud to on-premise to private cloud where the clients were hosting it in their own data center, now moved to Jack Henry data center.
That's at a 2x revenue plus a very attractive margin. So that helps from a revenue growth factor. And as you continue to see, while the number of institutions in the U.S. has gone down, the size of assets, the size of accounts under their purview has gone up. And so as they go up, they're hitting new tiers and having add-on services as well.
Great. Maybe just on the Payments segment , a little under 6% growth in the quarter. You generally track in line with some of the reported debit metrics from Visa and Mastercard. Sometimes the exposure, oftentimes the exposure is helpful in recessionary periods just given you don't price on an interchange basis. But how should we sort of think about what you're seeing in faster payments, how that can be a driver for acceleration in payments, and then we'll obviously get to Moov later as well?
Yeah, so within our Payments business , about 60% is related to the card business. As you mentioned, that's very heavily debit-focused, about 90% debit-focused. We are not participating in the interchange side of that. So we're more transaction volume perspective. So there is some tie to consumer sentiment overall. We're seeing a fairly stable and healthy U.S. consumer with the expectation that in the spring, there's going to be even greater transactional volume flow. So we're expecting kind of a continuation throughout the year of growth within our Payments business .
But that also comes with additional ancillary revenue services. So things like fraud detection and alerts, provisioning, rewards, all of the services you would expect as part of helping run a card portfolio on behalf of the FI. The other two aspects of the Payments business is you have the enterprise Payments business , a pretty stable and mature business.
You did see an uptick during COVID when there was a lot more mobile deposit checks and remote deposit capture for deposits. That's now kind of stabilized again as expected, and then the last is our iPay business, our Bill Pay business. Parts of that are pretty mature, like the Bill Pay business. Other parts are exciting and growing, like the faster payments, and so we've seen a lot of our FIs turn on RTP, turn on FedNow, mostly for receipts still, but we have seen some new business cases and use cases on the send side that it's really exciting for what the future can hold.
Perfect. On complementary, Banno is obviously a key component of this. I know there are several moving pieces with the complementary business in aggregate just with the impact of potential divestitures and sunsetting some products. But how do you sort of think about the outside-the-base strategy and what you're seeing from competitors and how you intend to navigate that?
So I think about the complementary really as a whole portfolio. That's where you're going to have the broadest diversification of our solutions. You do have big flagship areas like digital, which is more than just Banno. It is anything that you need to, whether it's an account opening, whether that's a loan, everything without having to kind of walk physically into a branch to service would be within digital. Certainly one of our double-digit growth engines within the Complementary segment . But you also have a lot of where the innovation has been spent. A lot of internal development over the last three years has been in the Complementary segment , not just in the core. So you have things like our new treasury management. You have our account opening process that's now going to be a seamless kind of account opening origination. You have our Financial Crimes Defender.
You have a lot of new and exciting products that are coming off of a pretty small base or off of a mature product migration story, so that's where a lot of that growth is coming from.
Great. Maybe just a follow-up on Banno. I know part of the growth there has obviously been driven by some of the conversion of the historical NetTeller clients. There's a pretty nice ACV uplift associated with that. How do you sort of think about how much runway is left there from a conversion perspective? And is this a function of sort of once that conversion sort of ceases, you'll get the uplift on Banno outside the base? How do you think about that?
Yeah. So we had a product called NetTeller. Now we have Banno. It's a bit of apples and oranges from a business model perspective. We have about a 60% penetration now from a conversion of those NetTeller customers to Banno. Banno is only sold to Jack Henry core customers. So that's 1,700 customers within our core today. We do have plans to go outside the base with that. But where NetTeller was more of a traditional license model, Banno is more of a consumption ARPU model. So as an FI, you turn on Banno Retail . You can think about that as Banno Platform for all of your active users. And then as we put out other solutions, that's more of an ARPU uplift. So we have Banno for Spanish or electronic statements. Banno Conversations is an exciting one where we have a lot of AI assist on that product.
So those products are, and that's, are just going to continue to have deeper penetration within an FI for active users, but also that drives it on higher ARPU. So that's kind of today. As we go future, we're thinking about outside the base. Originally, we thought about directly to competitive cores. Today, we're going to probably do an around strategy, but we're going to over time open that up to other customers.
Helpful. Maybe just progressing to the partnership front, there's a lot of exciting initiatives, particularly concentrated in the Payments segment with both Moov and Victor. I wanted to spend some time on Moov specifically. Can you just unpack the strategy for us there and the benefits that you think that that partnership will bring to Jack Henry?
Sure. So Moov is a leading-edge fintech, the first new payments rails provider in the U.S. in probably two decades. It is all public cloud native. So they are a payment processor. The founder of Moov, Wade, was co-founder with our CTO for Banno. So we have a long history with Wade and the company is cooperating. It's super exciting. So it is aimed at the small business. 98% of small businesses in the U.S. are really sole entrepreneurs or really micro businesses. And they're an underserved business. So most of the time as a small business in the U.S., you go online, you do your articles of incorporation, you get an EIN, a tax number, and then you walk into your local bank. Typically, it's where you have your banking as an individual and you'll open up business banking.
That's about what the services are today for most FIs to serve those small businesses, and then they go to some other person for vertical software or payments methodology. They take those deposits with them. Well, those deposits are about four times the size of a retail deposit, so an extremely valuable client to the FI. We want to make that FI the hub again. This is not a merchant acquiring story where we're going to go around the FI direct to the merchants. This is to help our FIs become the center point for services for small businesses. It's through Banno, so through Banno and through our knowledge of the core partnering together with Moov, we have all the information.
So if they're already on Banno, we can put in an advert or an information about, "Hey, we noticed you have this business account." Or if you don't have a business account, would you like a business account? Then we can do all the KYB, KYC, and account opening within seconds because the data is in the core. We can then turn on tap to pay within minutes for them because they don't have to wait for that processing or approval cycle because, again, we have all the information in the core. So from offer to actually starting to receive payments is seconds or minutes for an account. So very compelling from a seamlessness from the onset. But where the magic really happens is once they start using it. So Moov allows eight settlement windows a day. So if you're a small business, cash is critical for you.
Getting your payments directly into your account, into the Jack Henry FI, eight times a day is a dramatic change for them. The other thing we do, because we have the transactional information plus the core information, we have all of the detail of that transaction, so today, it's quite onerous to do all of the accounting and bookkeeping as a small business because most of the time you're seeing one bulk of all of the subtotals of the transactions. You're not seeing the actual individual information, well, because we have the payments data and we have the core data, we can give them that seamless account reconciliation, and because we have all of the open banking hooks between Finicity and things like Intuit and Autobooks and others, we can send that information back to their bookkeeping at the detailed level.
That's going to save them hours to go back and run their business, to spend with their family. It really is a truly differentiator, so I think the last point I would stress on this is people don't need to switch, so if today they have a piece of vertical software or a different provider, we believe that they will be multi-acquired. So if I run a coffee shop, I may have hardware on my counter. I may use my phone for some other service. But if I go to the farmer's market or something else, I can also use Banno, so the idea is that you can be multi-acquiring, and then the idea is if you're going to have eight settlement windows a day and better backend systems, we think over time we're going to see more of those transaction volume flows through the Moov solution.
Very helpful. I wanted to double-click on the sales motion specifically. This seems like you're pushing it more aggressively through the Banno base to those customers. Doesn't sound like there is a lot that the Jack Henry sales force specifically has to do to incentivize the adoption. But what are you doing just in terms of being able to drive this to scale? I know Visa and Mastercard play a part here. What are they doing to the extent that you can comment in order to really make this a needle-moving product for Jack Henry?
Both Visa and Mastercard are partners with us in this endeavor. They're super excited. They are world-class in their knowledge of how small businesses operate and the needs, as well as marketing engine behind it. They're going to support us from a marketing perspective as well. But as you said, this will not require any sales involvement. It's going to be turned on at the FI, free of charge. It is completely opt-in, already ready, out of the box for them. What we're trying to do is make it as frictionless as possible so that all the small businesses can start generating and using.
Great. Maybe pivoting to the Victor embedded payments platform. How would you characterize the difference between Victor and Moov and any difference in unit economics that we should be aware of?
Victor is a financial technology firm that's working with large institutions on specific use cases where they're going to leverage faster payment rails like FedNow or RTP to send money from businesses to consumers in this particular case. High volume, probably lower dollar amounts to start, but it's kind of a B2C and people kind of a P2P as well, of people wanting to make their own money back to them through Victor. Starting to see really interesting cases with that, tremendous volume flows, very small dollars. It's off of a base of zero, so it's kind of pennies you're collecting. But it's one of the first use cases that we're really starting to see strong volume flows. We turned on for most of our FIs, FedNow for receive, but you haven't seen a lot of send payments.
This is one of the first kind of use cases. But we hope that you're going to see more, particularly in the B2B space, we think could really drive traction.
Great. Maybe pivoting to free cash flow. I think one of the secondary benefits of the incoming administration is the potential for a difference in treatment of the tax deductibility of some of those R&D expenses. What could that mean for free cash flow and how are you thinking about use of free cash from a capital allocation perspective?
So let me step back for anyone who's not familiar. So about a year ago, you had a roll-off of legislation that for tax purposes, you were able to deduct the expense of any R&D spent immediately at the time. So P&L, GAAP purposes, you still amortize that over the useful life of whatever you're developing. But for tax purposes, you could 100% deduct that expense day one. That overnight went away. And it became a five-year for tax purposes amortization window for that deduction. And if you were an international company, it was a 15-year spread of that expense. So dramatic changes overnight. You had companies like Boeing having an extra $900 million in cash taxes due. It doesn't change the federal tax rate. It's just the timing of that payment. It impacted more free cash flow and the cash taxes paid.
So one, people expected it to be addressed legislatively. It was not. It has not been yet. We have had more clarity, though, in bulletins from the IRS and the Treasury since in the year that's passed. So it's somewhat diminished the huge impact it had, but it's still a meaningful amount. We do believe it will be on the legislative agenda for the new administration. The good news is we think they'll address it more permanently as well, rather than just temporarily addressing it. And we think that they will because it is a deterrent for U.S. domestic kind of research and development efforts. And so we think the purpose of encouraging businesses to innovate, we think that the government will address it.
Therefore, we think that it'll be. It depends on when it goes into effect and if it's retroactive, how meaningful it could be from a free cash flow. But we think it's going to be addressed, hopefully, at the start of the new year. But I would say, Jack Henry, we still believe if you look at Q1, the trailing 12 from our free cash flow at about 72% in line with the year's guidance, but we think we get back to a more historical norm of that 80%-100% + on free cash flow, even if they don't address the legislation.
Very helpful, Mimi. We're just about out of time. Thanks very much for joining us.