All right, I think we're going to go ahead and get started. I'm John Davis, the Payments and FinTech Analyst here at RayJ. We're excited to have Jack Henry CEO Greg Adelson with us this morning. This is going to be a fireside, but I'll try and make sure and leave time for Q&A at the end. So first off, Greg, thanks for joining us.
Yeah, thanks for having me, JD.
So this is a generalist conference, so maybe just start with a brief overview of Jack Henry and kind of the main drivers of your revenue growth.
Sure. So Jack Henry, we consider ourselves a well-rounded financial technology company that services U.S.-based banks and credit unions. So if you think about market share, kind of the zero to $50 billion on the bank side, we're about 25% of the market share, and zero to $50 billion on the credit union side, we're about 50% of the market share. We segment our revenue into really three distinct segments. So our core segment, which is roughly about 31% of our revenue, our payments segment, which is roughly about 37% of our revenue, and then our complementary segment, which is really everything that's not core and not payments, which is about 32% of our revenue. So if you think about kind of from a standpoint of kind of how we focus on our operating metrics, we gave guide in August of 7%-8% top-line growth.
We're seeing somewhere between we gave guide of 25-40 basis points in margin expansion. We're usually right around 20% for ROIC. And then our free cash flow with Section 174 has hovered right around 70%-75% as well after historic numbers higher than that, but it's really based on Section 174. So that's kind of where we are at this point.
Perfect. Just want to touch a little bit on just the state of financial institution, both credit union and bank spending. Obviously, you're a beneficiary of that. So kind of what trends are you seeing there?
Yeah, there's several different surveys that we either take part in or actually host our own with bank and credit union CEOs. So really over the last 12 months, there's been three distinct surveys that have come out. And we've continued to see, and this has been a track record for the last couple of years, continue to see a 5%-10% planned increase in spending, in tech spending. And if you think about the market that we are predominantly in today, though we are moving up market, we can talk about that later, is we're continuing to see in that space that if you really want to survive and thrive in the banking and credit union space, you need technology.
And that's really the only way you're going to grow deposits, the only way you're going to grow your lending, build operational efficiency, and fight fraud, which are the four main drivers that institutions are focused on. So we're seeing that as really kind of a telltale sign. One other, I think, affirmation of that is that for Jack Henry in particular, our last four segments, or I'm sorry, our last four quarters that we've had was we've actually had record attainment for our sales team four consecutive quarters. And so when you look at that and you look at the fact that we've won 104 competitive core wins, that means we're taking them from somebody else. Competitive core wins in the last two years really is a great indication that our technology and our story is resonating in the market.
Okay. And if we just take a step back, you guys have been growing revenue in that kind of 7%-8% range for a while now, clearly outgrowing the market. So maybe just help us understand the building blocks of how you get to that 7%-8% top-line growth.
Yeah. So typically we see, and right now this is kind of where we average. So I mentioned our three segments before. So in our core segment, we see right around 7%-8% growth. Really, 6%-7% has been historic. We're seeing 7%-8% at this point. Our payments is right around kind of a 6%-8% growth rate. And then our complementary segment is more like 7%-9%. And that's really kind of how the breakout is of the three segments in the growth.
Okay. And you touched a little bit on it earlier, but I did want to dive into some of the success, especially as you move up market. So I think last quarter you called out three wins over $1 billion. One was over $7.5 billion. So just talk a little bit about the core sales pipeline. What's driving the kind of success up market?
Yeah. So a couple of things. So one, so far this year, we've actually won six what we call multibillion, so over a billion in assets. We've won six, but two of those have actually been $7.5 billion . Last year, fiscal year, our fiscal year, by the way, is July 1 to June 30th. So we're in the back half of our fiscal year right now. We won 15 of those multibillion, but we didn't win any of the larger, the $7.5 billion and the $8 billion . So that's already a really good sign for us for this year. Compared to the year before, we only won five. And so the question is, why are we winning more than we did before? So one, it's a focus. We've had a much stronger focus on that segment.
Two, it's really about what we talk about as a differentiation in the space. We believe that our culture, and we have an unbelievable people-first culture at Jack Henry. By the way, in the history of the company, we've never done a layoff in 48 years, and so second is our service reputation, which is second to none. In fact, the ABA Core Survey just came out. For the first time in the history, they've actually named the core providers, and the title of the survey was, "Not all core providers are the same," and we agree, and so when you look at the survey scores, we actually are at the very top, while our biggest competitors are at the very bottom from really all different aspects, but service being the other one.
Technology innovation, we've been building out a lot of our own technology over the last six years in particular. So we've been much more intentional about what we do. We invest 14%-15% of our top line goes back into technology innovation. And we've seen the byproduct of that with our wins and our opportunities and the customers that we're presenting to and prospects that we're presenting to. We also are very intentional about delivering on a very transparent strategy. So we've articulated that strategy out to the market a few years ago in our tech modernization. And I assume we'll talk a little bit about our SMB strategy that we recently announced when I became CEO. By the way, I've been CEO just since July of last year, but I've been with the company for 14 years.
And so the other part would be is the level of execution. So one of the things that we're pretty proud of is that we don't just have a strategy that we talk about. We have a strategy that we execute on. And we have very tangible results of that strategy that we share out into the market. And that is absolutely a differentiation today of what I call doing what you say you're going to do. And that really drives and resonates with a lot of the larger prospects that are not necessarily getting that today from their current providers.
Yeah. You touched a little bit on it, but just the competitive landscape. We've heard from the channel that at least one of your competitors has been a little bit more aggressive on price. Just how do you see the competitive landscape today? Has it evolved at all over the last couple of years?
Yeah. So one of our competitors has always been very competitive on price. I mean, and look, I don't throw shade at any competitor, but the reality is a lot of that came with their focus on the payment side of their business and really driving opportunities to keep customers to allow them to have the other side of the business, which has really been their primary focus for the last six or so years. So that hasn't changed. The other competitor you're talking about that we primarily see has changed a little bit of their focus. And again, candidly, I think when you look at the ABA Core Survey results, their results have significantly dropped. And so one of the ways to combat a lack of technology and a lack of service is price.
And so I would call there's some level of what I would call a rational pricing that has gone on more than maybe it used to, specifically from that provider. And we've never been the lowest cost provider, and candidly, we never will be. We believe we provide way too much value. And again, I mentioned we won 104 competitive deals in the last two years, not being the lowest cost provider. So it really comes down to the decision that the executive team has to make at the bank or credit union. Do you want to take the cash and kind of build up your balance sheet or whatever else you want to do over the next few years, or do you truly want to innovate and move forward and drive the four key things that I talked about before: deposits, loans, efficiency, and fight fraud?
And so if you want to do those things, then you're more likely to pick Jack Henry than one of our competitors. So the irrational pricing is something that we've seen before, but I would say it's a little bit more prevalent than it was maybe a couple of years ago.
Yeah. No, that's a great segue into kind of the tech modernization strategy. Maybe for those who aren't familiar, discuss a little bit about what exactly that is and kind of where you are in that process.
Yeah. So three years ago, literally in February three years ago, our former CEO, who's still our board chair, Dave Foss, he actually announced the strategy. We had been working on it for about a year and a half prior to that. And what it is is that we had made a decision that we wanted to move forward with a public cloud-native core. But the difference is, and really a huge difference from what our competition has done, as well as even the entrants that are coming from outside of the U.S., is that this is a complete componentized cloud-based core. So we are basically taking roughly the 30 key components that make up a core from both, if you think about the general ledger, you think about deposits, you think about lending, there's roughly about 30 different key components or features.
And we are breaking all of those out, and we have rewritten them in a public cloud-native platform. So they can either be consumed as individual components. So if you want to just buy the general ledger, you want to just buy exception processing, you want to just buy domestic wires, whatever you want to buy, or you can consume them in a more holistic fashion. And so as I mentioned, we announced the journey three years ago. Part of that announcement was that we would have a deposit-only core, public cloud-native deposit-only core for both consumer and commercial clients available in calendar year 2026, so next year. And kind of the driver there was as we were leading a little bit more towards the back half of 2026.
So back to your question about where we are on our projection, we are now projecting to be on the first half of 2026. So we're actually about six months ahead of schedule. We've already completed 10 of those components that really are important for the deposit side. Most of those are in what we would call generally available. So some of our clients are starting to consume those. We have other solution sets like our General Ledger that's in what we would call early adopter. So we have made significant progress. And it was what I was referencing before when we're able to show a true depiction of what our execution rate is on not just the tech modernization for core, but also several other products that I think we'll get to that were part of our tech modernization strategy.
Part of our Banno Business application, which is our digital online and mobile offering, our Financial Crimes Defender, which is the only real-time product that's out there in the market today, things along that line.
Excuse me. That's a great segue to Banno. Obviously, had a lot of success on the retail side. Talk about the opportunity on the commercial side. Maybe what are the challenges? What excites you the most about Banno?
Yeah. So Banno, as I mentioned, is our digital application. So we bought the company in 2014, but we really kind of redirected it to build a public cloud-native from the ground up digital application. So it is the only one today that was built public cloud-native multi-tenant out in the market today. And so the other big providers that you know were not built public cloud-native. And so 2018, we actually launched the product. In roughly six years, a little over six years, we already have 13.2 million users on that product on the retail side. The one thing that we lacked and we did not build in the beginning was really the commercial application. And so that commercial application, there were reasons why at the time we did not roll that out.
Some of it was honestly to get a foothold in our core space where we were losing some market share with our old product, but the bigger part was that we wanted to make sure that we did it right, so to answer your question, we were a little bit behind, well, actually a lot behind in our two biggest competitors in the digital space on the commercial side. The retail side, we have 1,000 clients now on Banno that make up that 13.2 million users, and that's out of a core base of 1,700 clients, but on the business side, we decided to build the functionality. We started to roll that out just about a year ago. We now have 212 customers live on Banno Business, and we have another 110 that are in the implementation queue.
The important part of that is roughly 30% of our retail penetration has already been accomplished on the business side. What I announced at Investor Day last year was that we needed to get to more feature parity with our two biggest providers, and that was a focus. By this summer, we believe that we'll be on full feature parity with our two biggest digital providers. We're already seeing our win rates against those competitors increase than we had previously because not only of what we've accomplished, but where we told these customers of where we're going. We have a proof point of doing what we say we're going to do, and that's helped us win more deals. From an excitement standpoint, we've really kind of driven a lot more innovation in this product than just digital applications.
We've added a product called Banno Conversations that allows an authenticated chat that happened between the bank or credit union client and the bank personnel all through authentication. So if you had a problem with what you thought maybe was a transaction you didn't do, you could upload the transaction, shoot it through the application, and be able to work directly with the bank's personnel in an authenticated manner. Nobody has that feature today. We've now just released a new part of that, which has AI built into it. And we're working with a couple of our customers on that application. We've been able to now, through AI, create Banno applications in different languages. And so we now have Spanish available. We have other languages available depending on the market. So a lot of things that we're doing there.
And then the last question that you probably will want to get to is, well, okay, you have 1,000 of your clients inside of a Jack Henry core base of 1,700 clients. When are you going to take it to the competitor's cores? Well, we've tried that. We didn't get a ton of cooperation from our competitors. And so we've actually announced on the last earnings call that we have a new way of going about this, and it will dovetail into maybe our SMB strategy. And we're leveraging what we're doing with our SMB strategy to give us access to cores outside of the Jack Henry base through digital applications. So it's a lot more complicated than what I just said, but it gives us a way to do this.
It will take us a little bit longer than we had hoped, but we do have a focus on it.
Yeah. I did want to touch on the SMB strategy. It's probably one of the bigger announcements that you've made since you took over as CEO last summer. So maybe for folks who aren't familiar, talk about the partnership with Moov and kind of what the overall SMB strategy is.
Yeah. So Moov is a, if you're not familiar with Moov, so they're based out of Denver. They have backing from Andreessen Horowitz, Visa, Commerce Ventures. And actually, their CEO was the former co-founder of Banno when we acquired Banno. And so we know him very, very well. There's a huge trust factor. I go all the way back to 2012 with him personally. And so when you think about what they have built, so they are the very first public cloud acquirer processor that's in the market in the last five years. So they have direct connections with Visa, Mastercard, all the card associations. And so what we wanted to do is that when our competitors in 2018 decided that they wanted to get into the merchant acquiring space, I actually, by the way, have a merchant acquiring background.
I've been, like I said, at the company for 14 years. We made the decision we weren't going to do that. It flew in the face of what we thought was important for this industry, which was to not sell around our clients, but to sell through our clients. We're a big believer of making sure that community and regional financial institutions are around for a long, long time. Selling around them does not keep them at the forefront of the economy and everything else. Our focus was, how do we get to a point where we could have a very unique offering that would compete with Stripe and Square and others that would allow us to be able to take this product through our institutions and, again, allow them to increase their deposits, keep business customers there, and things along that line.
So what we did is with what we're building on our tech modernization really enabled this to happen. And so our CTO, who was the other co-founder of Banno and Wade at Moov, they got together. I joke over a lot of tequila and figured out some really good ways to do this. So what it is is we just announced that we have a very unique way to work with Jack Henry and Moov to deliver two initial products. One we just announced in a press release a few weeks ago, which was what we call rapid transfers. So rapid transfers, the most easy way to define it is this: if you want to move money today instantaneously between, let's just say, your Raymond James Bank account and your community bank account, you don't have an easy way to do it.
And definitely, you can't do it in real time. And so through the Visa Direct rails and the Mastercard Send rails, we have the ability to do that in real time for you to move money bank to bank, card to card, or even digital wallet to digital wallet all through that. So there's only a handful of institutions that actually even offer this today, a couple of neobanks and a couple of the larger financial institutions. So we just rolled that out. We actually were ahead of schedule on that as well to get it out. And then the second part is what you would think of as more traditional merchant acquiring. And as I mentioned before, is that the merchant acquiring goes through the institution and not around them.
And so for us to compete with the likes of Stripe and Square and whomever else, we needed some uniqueness. And so here's four key things for you to take away from that level of uniqueness. One, instantaneous approval or decline. We are able to push this out through our Banno application. So again, 1,000 institutions will literally get this by the end of the summer all at one time. We'll push it out through the Banno application. Then the SMB, most SMBs in this environment are sole proprietors. 98% of all SMBs are sole proprietors. You have the ability to say, "Yeah, I'm interested in this." Fill out the application online, and you get instantaneous approval or decline. We can do that because we have all their information on the core. We know everything about that particular client.
Second part is that we're able to fish out the SMB from a retail account. So most sole proprietors live within a retail account because they don't want to pay the small business fees that the banks have. So we can fish them out through the data that we have on the core and everything else to see who truly is an SMB or living in an LLC type of environment. And then once they are approved, they get an instantaneous message to their phone that says, "You are now able to use Tap to Pay." So Tap to Pay is using your phone as the point- of- sale device. So there's no Clover device, there's no dongle, there's no whatever from a standpoint. It's all using your phone as the point- of- sale device.
So think of a plumber who's out doing a job and wants to get paid instantaneously. They don't have to carry another device with them. They're actually able to just use their phone to take that payment and application. We'll be the first provider live with both iOS and Android, the very first that will have both available. Third one, and this is a big one. So there's actually eight settlement windows that can occur through Visa and Mastercard. So most people don't use them because they most don't have the ability to actually do it eight times a day. Through our relationship with Moov and what we built on the back end at Jack Henry, we're able to use all eight windows.
So think about an SMB that's from a cash flow perspective that they actually can get their money eight times a day from a standpoint of getting that. That's a huge, huge value to them. And then the fourth one, which I think is the most important, is what we call continuous account reconciliation. And what that really means is that most of the time in today's world, an SMB gets their money two or three days later from the days that they actually do the transaction. That's just kind of how it works. It's usually through ACH. And even if they do get it more quickly than that, it's still usually not the same day. And then they have to go back and reconcile every single transaction that they did that equaled that deposit that hit their bank account.
And that typically takes the small SMB, and we've run some proof of concepts, about five to six hours a week of time that they don't have. They're not selling. They're not doing other things that they need to do. So what we're able to do, regardless of whether they use one window or eight windows, they have the ability to get all of their transactions reconciled immediately on their phone. So they'll see the deposit. They'll see every single transaction that made up that deposit. Then they can upload that to QuickBooks or Xero or whatever it is. And they have to be able to do that. So again, saving them literally 20 hours a month of time through our proof of concept. So we're patenting that with some of the applications that we've built.
But those are four key distinguishing factors that, again, are not in the market today. So we will roll this out in our early adopter phase in May. And then, as I mentioned, by the summer, we expect to have 1,000 clients live on it.
All right. Great. Maybe switching gears a little bit. I did want to touch on kind of the back half acceleration and revenue that's implied in the guidance. So about 5.5% growth in the first half. And again, your fiscal year ends in June. So back half, closer to 9%. So maybe talk about the drivers of that acceleration. You do have a little bit easier comps, about 150 basis points. And then what could cause you to kind of be at the low end or the high end of that 7%-8% range for the full year?
Great question, and I will start with the fact that part of it is the comps from a standpoint, so we had much tougher comps in the beginning and much lighter. We actually view, and we'd like for our investors to view us in a full year and not quarter to quarter. We don't run the company quarter to quarter. We run it for a full year and long term, and that's the way that we'll continue. But to answer your direct question, so a lot of it is coming from what we call cloud revenue. So I mentioned earlier about the number of wins that we have from a core perspective. What I didn't mention is that every core that we get, so those 104 that I mentioned earlier, for the average bank, we get 50 attached products from our complementary and payments.
From the average credit union, we get 35. So when we're able to move those into what ends up being our private cloud, which is where we host literally over $1 trillion of assets today in that market. So we've had a big increase in wins. We've had a big increase in the size of the institutions. So it is a big part of the increase for the back half is seeing the fruits of our labor in the back half in cloud revenue. As I mentioned before, complementary and payments get attach rates. So there's opportunities for those. And then I mentioned earlier about tech modernization. So I talked about Banno Business. So lots of opportunity and growth with that that continues to happen. And we're seeing the implementation queues and what we're going to implement over the next several months.
Financial Crimes Defender, which I didn't necessarily touch on, but it's a new product that we created a little over a year ago, rolled out. We're starting to get a lot of fanfare and a lot of wins, especially compared to some of the larger players in the space. And we're starting to see the ramp up of those implementations as well. So those are two key products that tie in, plus cloud is the big driver. But the good news is at Jack Henry is we have about 90% visibility from a recurring revenue stream. And the other 10% that we don't have has variability. But if you think about the low range of what we gave in the guide, 7%-8%, it's roughly $25 million between 7% and 8% of revenue on a $2.2 billion company. So it's a small window.
And so the variability that we are waiting to see over the next several months will really be the determinant whether we're at the low end or the high end of that. So time will tell over the next couple of months. But that's where the variability is.
Okay. Great. And then obviously, there's been a lot of discussion about Bank M&A picking up under the new administration. Maybe remind folks. I think there's been a misconception for years that bank M&A is bad for you. So maybe just talk a little bit about, A, are you starting to see anything? What are the conversations with the bank CEOs you talk to? And then how does it impact Jack Henry over the longer term?
Yeah. So back to the misconception. So bank M&A has happened for the last 40 years, and we're still growing at a greater rate than anybody else in the market. So that's number one. Number two is that the average asset size at Jack Henry has grown about 30% both on the banking and credit union side. So our average bank and credit union now is $1.3 billion, and that's an average. So everybody says, "Oh, well, Jack Henry only deals with the smaller institutions." By the way, we also have 21 institutions over $15 billion, and our largest is $52 billion. So it's not like we just only have small banks and credit unions. So back to the question about M&A, definitely increasing.
We've already seen announced, well, actually announced and moving towards execution, is 44 deals between banks and credit unions so far in the first two months of the year. So I think it was 25 banks and 19 credit unions. And then we've seen roughly about another 40 that have been announced but have not been executed yet. And so for us, the real, I guess, validation is that there have been several that have already been executed where it was either a Jack Henry institution and one of our competitor institutions merged, and they were roughly about the same size. We call those mergers of equals. And of the four that have happened so far, Jack Henry's won three of them. And so I would say when you go back several years ago, that probably wasn't the case at those size institutions.
In fact, two of those brought us a combined $15 billion institution, and one of them was over a $20 billion institution. So when you look at two sevens or two tens or whatever merging together, we're having good success there. And I think it goes back to what I originally referenced. It's the culture, the service, the innovation, the strategy, and the execution that are helping us win those.
Okay. Great. I think we have a minute or so left if there's any questions in the audience. All right. So last one for me, Greg. Just you took over the helm about eight months ago. Obviously, you've been at the company 14 years. But maybe what surprised you? And more importantly, what are you most excited about over the next few years at Jack Henry?
Yeah. I honestly don't think much has surprised me. I was very fortunate to have a great mentor and our former boss, our former CEO, Dave Foss. So between he and the board positioned me really well. I was COO for four and a half years before taking this role and ran our payments business for the time prior to that. So not really much of a surprise. Obviously, doing these types of things are new, but I do a lot of public speaking, so that's not necessarily an issue. The biggest part that I'm very fortunate to be CEO of this company, I think, as I mentioned before, we've got a great culture, and we have a great associate base. What I'm the most excited about, I think, is really just what we are doing right now in the space is unique.
And again, we continue to hear it from our tech strategy, from our SMB strategy. And my big focus is we didn't get into acquisitions, but I'll dovetail it in real quick. I mean, acquisitions are still a big part of what we are focused on looking at. But also, we have such an amazing opportunity in front of us with the strategies we've already put in front. So execution is the most important part to me. If we do what we say we're going to do, we're going to be just fine. If we find an acquisition that we can dovetail in, great. But my excitement is really about our strategy and our level of execution and our level of differentiation, especially in the SMB space.
Okay. Great. I think we're going to have to wrap it there. Thanks, Greg. The breakout.