We'll go ahead and get started here. Thank you to all of us for joining us this morning, here to chat with Mimi Carsley, CFO of Jack Henry. Before we get started with Mimi, I do have an important disclosure to read. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/research_disclosures. If you have any questions, please reach out to your Morgan Stanley rep. Maybe just as a preamble, Mimi, for those that aren't familiar, could you just give us a brief overview of your business, and what are the problems or the, you know, the types of solutions Jack Henry is trying to bring to market, and where do you fit in the value chain for banks and credit unions?
Sure. Happy to. Thanks, James. Jack Henry is a public company. We are a well-rounded financial technology company. We serve primarily domestic U.S. banks and credit unions. We offer a number of solutions, but if you think about our three segments, there is core, which is kind of the heart and soul of a credit union or a bank that allows them to kind of operate on a daily basis. There's the payments. We do a lot in payments. We say we're not a payments company, but we do a lot in payments.
Uh-huh.
That's our ACH, our bank payments business. There's a lot there. There's also a credit and debit business in that segment, and there's also the bill pay, and our latest acquisition, Payrailz, is in that segment. Then there's the complementary segment when that's about 250 solutions. In terms of value proposition, I like to think about it as we allow banks and credit unions to have access to the technology that allows them to stay competitive.
Right. Right. Right. One of the things, you know, and I'm not asking you to opine on the market itself, but one of the key starting points of conversation around Jack Henry that we often get from investors is, "Hey, you know, historically, Jack Henry's traded at a pretty big and material premium to names like FIS or Fiserv or Global Payments." The question we get is, like, what on paper in the description they looks like similar businesses, but what really differentiates Jack Henry from your perspective, compared to the some of those comparables?
Yeah. I mean, first, I would say a couple of years ago, it probably would've been a more accurate comparison.
Okay.
As those businesses have diversified into the merchant acquiring business, there's more of a roughly kind of 30% overlap with Jack Henry. We chose by design, by strategy, very intentionally not to enter the merchant acquiring business. We had done number of years of study of what it took to be in that business and did not find it, you know, to be attractive.
Right.
I think to your question on differentiation of that multiple, there's a couple of things. One is Jack Henry's long-standing history of executional performance. There's also the service brand that we have for excellent customer service. I would also point to transparency, both in reporting, the openness of which we engage. You know, things like our higher IRRC, just the reoccurring revenue stream, strong performance overall.
Got it. On this point of your position is, you know, obviously there's lots of questions about like if we're entering into a slowing macroeconomic environment and at least a more uncertain one, et cetera, what does that imply for technology spend of banks? You know, how willing are they going to be to engage with, you know, Jack Henry, et cetera? I think David, the CEO, had mentioned on the last earnings call that most bank and credit union executives are looking at 5%-10% year-over-year growth in their technology spend. You know, is that realistic and has that changed at all? Have smaller banks and credit unions tend to spend more than their larger counterparts or less? Just kinda give us the landscape of your customers?
Sure
Their behavior.
Sure. Typically we love to share third-party data. Unfortunately, the third-party data did not ask one of the most salient questions this year, which was what was their expectations for IT spend. Unfortunately, I can't share there. Most of the feedback I'll share is anecdotal.
Uh-huh.
We did meet with over 250 bank CEOs, fairly recently and they quoted about 7% on average for this year's budget. That's not necessarily like where they're thinking about. That's actual planning for this year. Overall, I would say our customers are feeling quite healthy.
Mm-hmm.
They're continuing to spend. That's their total spend, not necessarily just planned spend with us.
Right.
Those businesses, you know, have to continue to invest in order to stay competitive. They're also talking about long-term roadmap strategies that you can't really just kinda take your foot off the gas for. You're talking about mission critical or rev generation or things that drive automation or things that drive deposit capture, things that they need in this day and age. I think overall, where they're investing, the type of things they're investing, we're gonna see resilience into that.
What is their... You know, if we look back historically in their spend activity, how does that tend to relate to interest rates or particularly NII, I mean, if we're in a period of better earnings, do they wanna reinvest that? What's your sense of how to tie out that piece of the equation?
Yeah. I mean, they're certainly enjoying a healthy net interest spread today, but they know it's going to end.
Mm-hmm.
You know, we're sort of slowly seeing deposit rates tick up as they're attempting to go gather those deposits. They're still getting attractive lending rates. They know how to operate on those compressed margins. They've been doing it for years in a zero interest rate-
Right
... Environment. They have found other ways to generate fees and revenue. The reality is they really just can't put pause.
Right. Right.
... You know, to the type of investments they're making, and it's important for them to stay competitive. You asked a question in terms of the differentiation between the FIs that we serve and the larger FIs. Just so from a segmentation perspective, we choose by strategy not to serve those tier one, call it the top 12 banks in the U.S.
Mm-hmm.
We choose not to proactively go after the very teeniest of institutions. That leaves a lot of area and institutions to kind of play in. Those guys have done a great job of modernizing their backend.
Okay.
You know, if you think about the underlying architecture. Where they're investing is more in the digital presentation, the forward front end customer engagement segments, versus the tier one guys.
Mm-hmm
Are... You know, they have a lot of mainframes, they have a lot of COBOL.
Yeah.
They have a lot of like duct tape and, you know, chewing gum putting together their architecture, but they've invested in the front end.
Right.
While it may look cool on a mobile app, they actually have problems from the underlying architecture. Those are things that since they're not customer-facing, they could hit pause on more.
Right
... Versus our customers, you know, it's around how they stay competitive and how they engage with their end customers.
Got it. They have a different need. One of the things that's interesting, or at least I find interesting about Jack Henry and the modernization strategy that Jack Henry's trying to enable, is building more modularized solutions and of making those available to the market. The question that occurs to me a little bit at least is, does that have the potential to cannibalize some of your existing core revenue? Then also how does that, a modularized solution set change or go to market in engagement with customers?
Yeah. It was about a year ago today that we announced the tech modernization roadmap. I would say it's a strategy. It wasn't a product launch. It's not a product launch today.
Mm-hmm.
We have a couple of modules out there, domestic wires, international wires is coming. We are publishing six-month roadmaps for that strategy. It's gonna be a while till, you know, it's being sold and in the market.
Right. Right.
Much more around us wanting to communicate to prospects and existing customers where we were heading over the next 10 years. part of that is taking the benefits of a digital cloud-native core, so that core that bled of the bank and credit union, their ERP system, if you will, and modernizing that. There's a lot of benefits, not just the componentization of that. I don't think that's a word, but the modularization.
Yeah
... Of that. First just being digital cloud-native itself has some benefits that we're gonna see in terms of speed, bursting capabilities, security environment, the tools, the DevOps tools that come from a modern architecture. Then there's the modules that you talked about.
Right.
You know, one of the ways we're thinking about that is the core system today, if you think about core, it's about 30 key pieces of functionality that now will be an à la carte. We still expect at the end of the day, people will choose a bundle that fairly resembles a bundle that core is today.
Okay.
They will have the option to do it piecemeal. They will have the option to buy a bundle. Dave had a great analogy the other day, which was cable TV. Like it used to be you paid for cable TV, and you got your 100 channels, and now through streaming services, you probably have three or four individual subscriptions. On the whole, you're probably paying more than you did for before with cable.
Right.
You know, that's our expectation around the tech modernization. That even though it will be in components, you'll probably end up with a fairly reasonable package that looks similar to the functionality you have today at a higher price point. To your point about the modules, you know, we didn't build it for the intention of being able to go to larger institutions.
Mm-hmm.
Our largest institution today is roughly about $35 billion. Historically, we didn't attract a $35 billion customer.
Mm-hmm
... They joined us and then have grown. That customer and other customers we suspect, if I'm sitting here 3 years from today, hopefully with you, James, we'll say, "Oh, we have a $50 billion or a $75 billion dollar client.
Right. Right.
Because they're gonna continue to grow." One of the positive benefits we've seen out of this tech roadmap that we've been talking to customers about is large institutions, call it a $20 billion-$30 billion financial institution, are proactively coming to Jack Henry because they love that strategy. One of the things, it's funny, as you replace core because it's so pervasive within a financial institutions, we hear from CEOs and CIOs that they would rather die or retire before changing out their core system.
Right.
It's pretty sticky, and it's pretty pervasive within institutions.
Right.
This allows them. A typically a conversion happens over one weekend.
Wow.
Think about like every single employee of that bank and credit union learning a new processes, you know, do new training, all the new account numbers, like every screen of the bank is different and new if you change providers. That's a lot of risk.
Yeah
... Institution. By this modernization strategy, they could say, "Oh, let's just up our modern for deposits, or let's do account opening." They could de-risk the conversion by taking it piecemeal. It's brought a lot of people to Jack Henry excited to have that conversation and some of them looking to switch to us today 'cause they know in the future then they'll be able to use these modules.
On that though, how do you manage with the pricing? Like one of the, you know, benefits that or one of the characteristics of Jack Henry over the years has been that you have very good margins and very good ROI. If you're taking a module like that or some part of the functionality into a larger organization, what do you need to do from a services perspective, integration? Does that somehow impact the at least the initial profitability? How should we think about that as an opportunity and the puts and takes?
I think on the whole, our expectation is we wouldn't be making the investment unless we thought it was an uplift.
Right. Okay.
It's not a minor feat of our percentage for our R&D. There's that. I mean, I think in terms of larger, like truly large, we've initiated something called the Regional Banking Office, which supports our existing customers today and prospects who are in that upper tier space, not that tier one space, but you know, just right after.
Right. Right. Right.
Who maybe want to grow. We've also done testing to say on a transactional basis in our labs, we can support a $75 billion or a $100 billion dollar size institution today. It's not a technology question. It's, to your point, it's a support question. It's a go to market question. We've developed this cross-functional team to say how, what are the needs of those clientele and how do we support them in growth? Not concerned in terms of a margin or price impact. It's still early innings here.
Yeah
On our tech roadmap, but I think what it's gonna do is allow us to go into segments we wouldn't have gone into.
Right
... Previously, which is additive.
If you're communicating a kind of a framework and a roadmap for customers and prospective customers, you know, what's a realistic timeframe that we should expect to see you being able to talk about customer wins and then initial revenue, et cetera, for some of these modules?
Yeah. I think it's still you're a couple years away.
Okay.
I mean, today we have, you know, just pieces of that on the periphery, like domestic wires, international wires is coming. We're gonna have more tools out there. We'll publish metrics around that adoption. The reason why it's not today isn't necessarily. Like, no customer demand is demanding it today.
Okay.
It's mostly because the regulators aren't ready for it.
Interesting.
They don't want core PII or, you know, personally identifiable information in the public cloud. We have public cloud-native apps today and function today. Like if you think about Payrailz and payments or fraud, that is digital cloud-native today. That's not the core PII of a bank or credit union, the regulators just aren't there yet. We anticipate over the next three years-five years, those who are at the most forefront, tip of the spear, will have interest and we'll be ready for them at that point. I think it'll be a number of years before you see real adoption into the, into that module.
Got it. I've been dominating the conversation here with Mimi. If anybody has any questions or follow-ups that you wanna to raise, just give us indication with the hand and we'll get you a microphone. Otherwise I can keep going here. Let's turn to Banno and Banno Business. Maybe you just give an outline of what Banno is, what the intended solution set is there, and let's start with that as a product.
Sure. Banno is our digital banking platform. It's the number one app in the App Store.
Okay.
It allows a credit union or bank to white label and have a digital banking offering.
Mm-hmm.
Today, either people have no digital strategy or they may have a laptop strategy, but it's not the same experience as the mobile phone strategy.
Got it.
This helps have a ubiquitous digital presence. When we talk about digital, it is everything you would wanna do to engage and serve a client without having them walk into a branch. Today we have over 8 million active users. Only Banno Retail product is out thus far. We're about to go GA on this year on Banno Business. Quite excited about what that will also have some treasury lite type functionality to help small and medium sized businesses. It's been a great grower for us and really exciting.
I think one of the things that I grapple with to conceptualize a little bit is that, you know, a lot of times we think about banks, you know, being for consumers, et cetera, but a lot of times in the segment that you participate in, these are more commercial banks.
Yeah.
And you know, I was taken aback a couple of years ago when one of the other analysts at Morgan Stanley was talking about that group of customers that Jack Henry serves is actually growing deposit share because of their commercial banking relationships.
Yeah.
Does Banno Business, seems like it has potential to be quite an important product for your customers.
Yeah
... If that's a fair assessment.
Yeah. Because the pricing model is based on active users, we may each have Banno Retail and we're all active users. Let's say we run, you know, a construction company. Well, five of us need to be on the system. Well, that's five active users, you know, at a higher price point. Not every bank or credit union does commercial business.
Right.
You know, credit unions for instance, are more retail-focused. It's not going to be a one-for-one take, it is going to be a driver of active users and active revenue at a premium price point.
As that goes GA, then is that when we should assume the initial revenue will start to flow? Or how should we think about that ramp?
Yeah. We have over 300 customers today.
Okay
...That have signed contracts for Banno Business. We also have some customers that were waiting for Banno Business to install Banno Retail, so that's also gonna drive some retail. It will take you know, a little bit of time to implement them all. One of the things that we should talk about, because it was a little bit maybe vague on our last earnings call.
Uh-huh
... Was our strategy outside the base.
Right. Exactly.
Today, we have over 1,700 banks and credit unions that use our core. That life, you know, blood kind of heart and soul of the bank or credit union. We have 6,000 FIs that use some other complementary product to Jack Henry, and on average, they take about three out of our 250 solutions. Today, Banno Retail is only available to those inside the base users.
Right.
Eventually, you know, originally, we had talked about Banno Business and opening the floodgates to go outside the base. What we've been seeing is that Banno is such a differentiator that it's helping us win core win takeaways, competitive takeaways. When we get a new core win, people tend to sign up for about 30-40 new products in addition to Banno. We certainly don't wanna stop that train from going because it's been a huge boost to our sales pipeline. We're just gonna be really thoughtful as to what outside-the-base products we go to. We actually heard some funny anecdotal evidence from competitor salespeople who said, "Please bring Banno to us," because they thought it would shore up their own core and fill the gap of their own digital banking-
Right. Right. Right.
... Options. We're certainly not in that market of helping support competitors. We're just gonna really be thoughtful and tactical as to when we go outside of our base.
As you think about that, though, is like what should be the evolution or what do you envision being the evolution of that strategy? You know, are there potential changes in the economics where you're like, "Okay. Well, maybe we use Banno Business as a lead generation or something like that, then tie it to something else." Just wondering, you know, how to think about that with as it impacts the P&L.
Yeah. today, you know, you're seeing the impact from just core-
Mm-hmm
sales. You're seeing the pull-through that it leads to new core and other complementary products. We do report the metrics of Banno users on a quarterly basis. We'll be transparent about the number of business users as well on a go-forward. You know, in terms of that go-to-market strategy, whether we price at a different price point or a different time to market, you know, we're figuring out what that will be, so as to ensure that we're doing all that we can on from a core sales win.
Got it. Turning now to actual, you know, revenue and pipeline, et cetera, inflation obviously has remained elevated, and it sounds like Jack Henry continues to implement some of the CPI escalators that are built into your contracts. For 2023, fiscal year 2023, non-GAAP revenue growth outlook was just over 7% at the midpoint. Can you give us a sense of how much of that is price contributing versus the relative mix? Like how much benefit incrementally are you getting this year?
Yeah. It's a great question. All of our contracts have, or predominantly all of our contracts have CPI escalator language in them. It has for some time. Jack Henry has never utilized that.
Mm-hmm
... We did not see it as a mechanism to fuel growth. We think our customers are quite astute, and they know what's going on, especially in the economy. Until we recently, when we did see inflationary pressures, we have not chosen to implement the CPI escalators.
Yep. Yep. Yep.
This past year we did because we saw some inflationary pressures. We did it modestly, not to the max allowable under the contract. I would say it was not material in terms of the revenue contract. As I said, it's not a crutch we're using to fuel growth. I suspect if the current environment stays the way it is, we'll probably adopt them for next year as well.
Mm-hmm.
We look on a case-by-case basis. I would say our customers have been quite understanding, and the reception has been, you know, really accepting because they know we're not being egregious in it.
Got it. If I could play back and summarize for my own benefit at least, is that historically, you know, whatever growth that you were putting up, you probably weren't getting much benefit from.
None
... None-
None
... From the CPI escalators that were built into the contracts but you weren't exercising. Now you're doing it a little bit more, but it doesn't sound like it's anywhere near like what the contract would allow.
Correct.
Like CPI is six, but you're not doing anywhere close to six.
Correct.
Right. It is on a case-by-case basis. I think it would make sense, as you're saying, is that the. You know, everybody realizes the costs have gone up, and so like the appetite or willingness to accept that is probably okay. Let's talk about pipeline. You know, management has continued to reiterate that pipelines are the largest they've ever been. How should we think about the prospect of converting that pipeline in the difficult macro environment? Like what's leading to the big pipelines, and then what are you seeing in terms of conversion, et cetera?
Yeah. you know, we were a little bit nervous, to be frank.
Mm-hmm.
We had a record year last year. With that kind of drained some of the pipeline, we were a little nervous. Not only have they restocked it, but it's been growing to our largest level. I would say, you know, to the point made earlier that these institutions have long roadmaps, you know, a core is about a 12- month- 18-month implementation.
Okay
... Not because of our timing, but because of the training that needs to go on, the new process engineering that needs to go on, just the readiness of that financial institution. You know, people don't take those decisions lightly, and so when they make a decision, you know, they're gonna move forward with that. I would say the robustness of our portfolio of new products, we have Financial Crimes Defender, the treasury products, the new Payrailz product, Banno-
Mm-hmm
...T hat we talked about.
Mm-hmm
... Has been great for the salespeople to talk about new product generation. I would also say that just the demand that need to stay competitive from our financial institutions. They're feeling healthy at the moment. You know, they're feeling healthy, and they're gonna continue to invest.
Wanna turn quickly to acquisitions. Historically, Jack Henry's been quite astute acquisitive, but astute in doing so. You know, what's the general appetite right now to do acquisitions? What are you seeing from a valuation perspective? Are you finding compelling opportunities, et cetera?
Yeah. Jack Henry has a long history of acquisitions. I would say we're an experienced but very disciplined buyer. We didn't do a lot in the last three years.
Yep
When we're not a chaser. You know, it has to be strategic. It has to be a really strong cultural fit matters a lot to Jack Henry, not just the financials. We did not do a lot of deals in the last three years when there was just like this run-up evaluation. We were quite excited and thought, "Oh, the prospects are gonna be like overflowing.
Right. Right. Right.
... You know, it has yet to truly materialize. I think the last five weeks, we would say we're seeing more inbound. You know, public companies, a little bit easier to face the reality maybe of their valuations. Private companies, if they have funding, are kind of just holding tight. I suspect towards the latter half of the calendar year, we're gonna start to see more pickup. You know, it's been part of our growth history, but it's not a requirement.
Right.
We have a really strong engineering team. We spend over 14% in R&D. I would also say it's opportunistic. There aren't a lot of strategic gaps in our portfolio of complementary solutions. It really needs to be additive. If you think about our Payrailz acquisition, we had something in that space, you know, bill pay solution. It needed some modernization. Through Payrailz, we've been watching them for about 3 years, a smaller startup company. We thought very highly of them. They were starting to get traction competitively in the marketplace. They were digitally cloud-native. We got additive functionality, plus we got to accelerate and leapfrog the development we would've had to do on our, on our platform. Those are the types of acquisitions that make the most sense. You know, we're gonna continue to be a disciplined buyer.
On Payrailz, we've had some investors ask, like, were there some misjudgments or issues with the integration, et cetera, just because it seems like the contribution maybe didn't ramp as fast as at least some of us in the market would've anticipated, especially given, you know, the newer technology and the trajectory they seem to have been on pre-acquisition.
Yeah, no, it's early days. We closed the deal in September. You know, I think from an investment thesis perspective, things are coming out better than we had anticipated.
Mm-hmm.
The quality of the product, the quality of the people, we've done that, in early integration of teams and product roadmaps. We have the sales team now focused on selling it. You know, the reality is from a contribution, it's pretty de minimis. I mean.
Right. Right.
Call it $12 million-$15 million a revenue size on a $2 billion revenue company. I think it's getting more attention because it's one of the first deals we've done in a couple of years.
While, yeah.
It was a decent price point.
Right
... You know, we have every confidence in terms of driving that to accretion and the trajectory for it. I wouldn't say that there's been stumbles. I would say it's going as planned.
Got it. Just lastly to wrap up, I mean, you know, last year, you know, good year, but there was certainly a bit more wage pressure and cost pressure than maybe was anticipated at the beginning of the calendar year. What has been your perspective on the headlines we've seen around fintech and technology layoffs? Is this, you know, giving you the opportunity to hire a little bit better? What are you feeling in terms of like your own costs and cost base?
We definitely saw at the start of the year, we anticipated from a budget cycle perspective, headwinds on inflation, both the full year impact from hiring at higher wage levels. There was increases in third-party costs, including like insurance and cyber and Adobe. Like, there were some known things that we were guiding to a flat to down on a margin basis. You know, we are very disciplined on thinking about expense management. Especially given a little bit of the softness of deconversion revenue, a little bit less overly optimistic in terms of the payments business and cards. We're managing expenses, we're being thoughtful. We zero-base every new and replacement head that we have. We're cutting back a little bit on travel and the like, but we're continuing to hire.
We're taking advantage of, you know, tech talent, especially in the marketplace. Jack Henry does not believe in layoffs. We'll do other mechanisms. During downturns, we've cut salaries, highest at management and below. We have a bonus pool that is tied to operating income. You know, we're very actively on managing the cost on that side of the house to ensure margin expansion in the long term.
Mimi, that's all the time we have today. Thank you to everybody for joining us, and thanks for chatting with us about Jack Henry today.