Thanks everybody for joining us, and thanks for joining us on the webcast here as part of the Morgan Stanley TMT conference. I'm very pleased to be joined in this session by Mimi Carsley, CFO and Treasurer of Jack Henry. I'm James Faucette, Senior Fintech Analyst at Morgan Stanley. Before we get started, I do have a quick disclosure to read. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Mimi, great to have you back at our TMT conference again.
Thank you.
We love having Jack Henry and you here to talk about the business. Maybe quickly, I know that, especially with everything going on and AI and so on, we've gotten a lot of inbound calls around, "Hey, what is this Jack Henry? What do they do?" et cetera. Maybe you could just provide a quick overview of kind of the three core businesses at Jack Henry. Well, let's talk about some of your customers.
Sure. This June, Jack Henry will be celebrating 50 years of business, which is a remarkable occasion, and we're quite excited by that. We serve banks and credit unions predominantly.
Mm-hmm
T he U.S. It is our mission to ensure that banks and credit unions have vibrant in the communities they serve and that they're able to compete across a very dynamic and evolving ecosystem.
Mm.
The products and services we offer, we operate in three main reporting segments. One is core. Think about core processing. That is mostly kind of back office operational. Think about account setup, mortgage interest calculations, a lot of the regulatory paperwork that you would need to have around client files, et cetera. The day-to-day, how to calculate interest, distribute, yield, think about deposits and lending. That's kind of core processing. We do that for over 1,700 customers, both banks and credit unions. An average institution side is of about a billion and a half on both. From there, you think about payments. That is card processing. We do card processing, predominantly debit card-focused. We serve over 1,100 banks in credit card and debit processing services.
We also do enterprise payment services. Think about there's still a lot of paper checks floating out there, especially in business today. A lot around the remittance business, helping on the bill pay business. We also have embedded payments business. In a lot of the exciting new evolving areas of payments around the Faster Payments.
Right.
You think about all the new rails that exist in the U.S., and that's also where a lot of our small business initiative is helping banks and credit unions to serve those small businesses. That's our payment segment. That can be outside our core customers and core customers alike. The last segment I always say, if it's not core and it's not payment, it's kind of the all other.
Right. Right. Right.
C atch-all bucket, which is complementary, and that's the suite of surrounding products to help a bank or credit union function every day. Think about fighting fraud, think about lending, thinking about account opening, thinking about a digital offering, all of the other ancillary services that would support them in growing.
Got it. Let's talk about this core business, which is, like you said, is kind of the central part of a, of a bank's operations. You know, interesting competitive dynamics, I think, in that part of the market and, certainly one that a lot of people are paying attention to and probably incrementally. That's because one of your main core competitors is on the cusp of a material platform consolidation. It seems like that should create a lot of incremental at bat opportunities, if you will, for Jack Henry, as some of those platforms are sunset and that competitor attempts to migrate them to new platforms. That can be incredibly disruptive for a lot of people, and if forced to do it, they may choose to look elsewhere anyway. A few questions on this topic.
For you, in the growing pipeline, what's changing more? RFP count or average deal size? Help us think about what's happening right now with the existing pipeline before we start to have impact from.
Sure
C ompetitor move.
If you think about today, the industry's been consolidating at roughly 4% a year for over four decades. There are roughly 9,500 banks and credit unions across the U.S. In a given year, our contract length's about seven years. In that 9,500, if you think about that as a pyramid from a stratification of assets perspective, we intentionally don't serve the largest, tier one banks. We don't find that to be a lucrative nor-
Mm
V aluable partnership arrangement. We serve the rest of that pyramid with a growing focus on the regional and super-regional capabilities. As our clients have grown, as we attract larger clients from the outside, that stratification has allowed us to kind of move up the pyramid. I say that because if our average contract length is about seven years, we say, like, there's probably around 200 banks or credit unions in a given year that are in play.
Right. Right. Right.
Now half of those probably won't make a change.
Mm-hmm. Mm-hmm.
They may make an RFP just to see what's out there.
Right
O r maybe it's required by their board or state regulator. Roughly call it 100 are truly kind of in motion.
Right. Right. Right.
Of that, we've won 50 to 55 cores a year for many years consistently.
Very consistently, yeah.
Yeah. This year, we not only think we're likely to win 50, we're feeling really good about the 50.
Right. Right. Right.
You know, this opportunity that you spoke about with one of our competitors in this space is a kind of, I won't say once in a lifetime opportunity, but certainly in our industry you don't have that many incremental opportunities in play. We're quite excited about what that could mean. In terms of your direct question of like what we're seeing from a dynamic in our pipeline changing, for the last 10 years, I would say the pipeline has grown in the size of the average account.
Right. Right.
A couple of years ago, if we were on stage, we probably would have said our average size is $700 million institution, whereas today it's almost a $1.5 billion size institution, both from who we're attracting in and them growing.
Right.
We talk about in our quarterly wins, we announce how many new core logos we win. Those are completely new core customers to Jack Henry. We call out how many are over $1 billion in size.
Right.
If there's any that are truly, you know, large, we also call that out. That number has been growing quite a bit in recent years just to demonstrate our success. I think to your question, the pipeline is filled with larger accounts.
Got it.
I think the size of the pipeline has grown overall, but the size of the accounts have been growing. Now with this new consolidation opportunity, we think there's gonna be more at bats in play because if you're, if you're being forced to make a change and you're going through all the change management that that kind of results in, why you wouldn't just see what's out there and explore...
Right
Do your fiduciary duty. Like, I think there's gonna be more opportunities.
Let's try to quantify that or at least have some idea. I think, when we look at the banks that are using these platforms that are intended to be consolidated away from them, it's about 1,500 banks or so on those platforms. When you think about other periods of platform consolidation, how would you think about what portion of those would typically look at an RFP? You mentioned 200 a year, that's-
Yeah
pretty typical. These 1,500, almost at least some significant portion of those would be incremental.
Yep
O f that 1,500, how many of those would you expect to eventually go through a process?
Yeah. We've heard the number like 1,400.
1,400, yeah.
I think certainly in the right ballpark.
Right.
It'll be interesting to track them over time because I think some of them will get consolidated away as well.
The banks themselves. Yeah.
The banks themselves.
Yeah.
You have a choice as a bank CTO and CEO, do you go through this conversion?
It's not painless.
It's not painless. Say on the other side, we're gonna grow and we're gonna be, you know, more nimble and faster and more agile. Do you say, "We were thinking about selling anyway or succession planning anyway.
Right. Right. Right. Right.
Okay, maybe this is the straw that breaks the camel's back, and then they do it.
Makes sense.
The challenge is in part, and you referenced it earlier, like there's no set timeline.
Mm.
It's a question I think we're in the first lap of might be like the first opening sprint, but it's gonna be a marathon of opportunity.
Right. Right. Right.
I view this as three to five years of-.
Okay
A potential opportunity. The way the sales cycle works in our industry is, let's say you have that 7-year contract, well, and you think you might be willing to make a change. You don't want that clock to run out on you.
No.
You have some time to. It's going to take you some time to make that change. You really start talking to vendors maybe two years in advance of making that termination of your existing contract. If it takes you a year to make a decision, to paper the deal, and make your selection, then you want to give yourself at least a year to make all the change management happen.
Right. Right. Right.
There has been some talk. I'm sure we're gonna talk AI.
Yeah.
It would not be a conference if we didn't talk AI, James. You know, part of that is today, that year to year and a half on that implementation, it's really due to the client readiness.
Okay.
It's not the data mapping on our side. We've mapped every core that there is. We could do that faster than a year for sure.
Mm. Yeah.
Yes, some banks might have some customization that might be interesting tweaks that we haven't seen before, but we know how to map to everything that's out there.
Mm-hmm. Mm-hmm.
What the harder part is on the institution side. They have to do all the training, all the readiness, all the procedural rewrites. All of that needs to happen to ensure to their regulators that they'll be just as confident operationally after the change as before the change. That's a lot of human change management to go through.
Right. Right. Right.
A s well as operational uplift. That could be a use case, an interesting use case for AI to say, "Hey, I'm on XYZ core today. I'm moving to SilverLake. Help me rewrite my procedure docs.
Right. Right. Right.
Help me train my employees faster." The interesting thing is, for us, if we could shorten that implementation time, that's great because.
Yeah
W e don't start collecting revenue until they're on the system.
Right. Right.
We're very much aligned. If there's something that helps them to ready themselves faster, we'd be all for it. If we think about that opportunity, that's why I say it's kind of a marathon because if they're starting to talk to us today.
Right
T hey probably have two years left on their contract. We're probably not seeing that revenue. We think there'll probably be some wins we announce related to it in FY 2027. We're a June 30 filer, but FY 2027 with revenue starting in FY 2028.
Right. Just to summarize that, so if there are people that wanna look. They choose you. You could see those announcements really in the next 18 months, and really starting 6 months from now.
Yeah
R oughly. You would start to see revenue beginning another year after that.
Yes. Yeah.
Right. it's really kind of fiscal year 2028.
Yeah
W here you might see some upwards.
We announced 22 new core wins this quarter. Some of those wins were off of those consolidating core customers.
Okay. Okay.
They've already been in our pipeline
Yeah, for a while.
A lready. What we're doing now is we're tracking all of those impacted customers, mapping out when we think or know their end dates are, doing outreach to them, and so that hopefully we can start to share more metrics of what that distribution looks like.
Right. Yeah. Yeah, yeah
Of contract end dates and sizes.
Got it. Let's ask about complementary attach, so other services and capabilities that can be attached to a core. Do you tend to see that incremental complementary attach at the time of core deal signing, or does it come in subsequent periods? Just trying to get a sense for the incremental revenue opportunity and where that might fall. If we imagine a world where you have announcements next fiscal year, and not just for, you know, these transitions, but generally.
Yeah.
Announcements next year, revenue the year after that, do you get this complementary attach and not revenue uplift at the time, or does that tend to come subsequent and in future fiscal years?
Yeah. It's a great question. No one buys core in a vacuum.
Right. Right.
While it is such a critical part of a bank operation, at the time you're making that change, there are complementary, not to use the word of the segment.
Yeah. Right. Right. Right.
There are systems that kind of plug into that stack very nicely.
I can see it. Yeah. Right.
Today, when someone is a new core customer, they tend to buy somewhere between 30 and 50 of our other services, whether that be complementary or payments-related services. Sometimes it's a day one, what we call a day one product.
Okay
Installed together. Sometimes it may be a more complex, and they may choose to bifurcate that in, into a day two. I would say it depends on the institution. The interesting thing is from a Jack Henry perspective, we offer contracts that are coterminous. If you buy the 30 complementary and payments products and core, and you went seven years, we say that's seven years for all of them. Not all of our competitors do that. It's actually a sticking point in the industry because some feel it locks you in.
Right
Y ou're always walking away. If you wanna walk away from your vendor, you're always gonna owe them something because you're always mid-cycle of one contract or another. The interesting thing on that is that's actually an opportunity for Jack Henry.
Mm-hmm
B ecause we can go and sell, particularly on these clients who are going to be impacted, we can start to sell them some of the other real anchor products to Jack Henry, so that then when the core comes up, it's an easier sale. We serve over 6,800 non-core customers, so most institutions in the U.S. have at least one Jack Henry product.
Got it. Let's talk about demand. You've routinely referenced the Bank Director Survey and noted that the median growth in tech spend is still really healthy. I'm curious, just given where we are in the deposit cycle and the prospect of accelerating loan growth for next year, which is kind of what our banks analyst team anticipates, I'm hoping you can help us to stratify the differences in demand from your customers for deposit attraction versus retention tools and lending and whether or not you're allocating incremental resources to the lending side of the ledger, especially since that seems to be where people are anticipating some acceleration.
Yeah, we put out an annual survey to our customers, it's actually going on right now, where we ask bank and credit union CEOs what their priorities are.
Right.
consistently for the last several years, the top three have been gathering deposits-
Yep
L ending, and then efficiency.
Right. Right. Right.
I think if I were to say a fourth, for most of them it's fighting fraud.
Yeah. Right. Right.
So
That's also permanent.
Yeah.
I'm not sure that moves.
Yeah. I think they're always looking. My point is, regardless of this, where we are in the cycle of deposits, they're always looking for some, and we're post the surge of COVID, where you saw...
Right
T his spike up in deposits and then this kind of trough. Now they're on the other side of that trough, and they need to get the deposits going again.
Right. Right. Right.
The challenge was because of both the stickiness of interest rates, the lack of turnover in real estate market, there wasn't a lot of car buying as well, like you didn't see a lot of new lending.
Mm-hmm
G oing on. Hopefully, the administration has talked a lot about kind of resuscitating the real estate market. If interest rates do come down, you also have a big pool of refi opportunities.
Yeah. Yeah.
T hat could hit for lending. I think there's some signs that there's some opportunities from a lending perspective.
Got it. Let's move to AI. We mentioned it in passing a moment ago.
We went 15 minutes without it, so yeah.
Yeah, yeah. No, exactly. It's time. It's time. Let's start with the existential questions first. Like, how do you think about AI and AI solutions and the ability for those to displace what Jack Henry does at your customers? Like, where might that make sense, if anywhere, and versus where do you think that probably does not make sense, and how do you think about that?
In general, we view it as more of an opportunity.
Okay
than a disruptor.
Okay.
We're excited both from the efficiency we've gained internally.
Mm-hmm. Mm-hmm.
We've been able to limit headcount growth to less than 1% for the last five years. We've always been a continuous improvement, zero-based budgeting kind of shop. The opportunity to just get higher productivity, Do more with the same as kind of our internal.
Mm-hmm
P hrasing around it is great. The throughput we're seeing from all of our developers who are now using... We have over 100 approved AI tools in use-
Oh, wow.
-in-house. We're seeing upwards of like 70%, you know, on greater throughput and productivity, which is fantastic, especially given more of our products are in the public cloud. You can get that innovation.
Mm-hmm.
in the hands
Right.
O f clients faster, what you have on some of the traditional software's annual updates and releases. In our new tech modernization and digital core, like, we'll be able to distribute that innovation quicker into the hands-
Right. Right. Right.
O f customers. In general, I think it's a positive. I think the dislocation you've seen in the market over the last several weeks has been unfortunate because I think people haven't really done the work to think about different business models and different moats.
Mm-hmm. Mm-hmm.
Yes, you can vibe coding certain things, and if you're small business, do you need Salesforce? You. Maybe not.
Right. Right.
Right? You probably weren't buying Salesforce anyway-
Yeah. What do you mean like-
if you're like
Right.
A 30-person shop. Could you now vibe coding something that's custom and bespoke to your own firm?
Right.
Sure. For the bulk of what we do is mission-critical operational systems. It's not a technological challenge. It's an operational challenge.
That's right.
It's an executional challenge.
Right.
It's what is the uptime reliability of that system? It is will your regulators feel comfortable in your audit, you know, for the super valence of that system? Do you know how it was made? Do you know the workload? Do you know how a bank operates? It's not just generic software. I think there's. You know, listen, if you wanna convert something to a PDF or back or forth or we have AI for contract management.
Yeah, yeah.
Redlining.
Yeah.
Great efficiencies and exciting opportunities from a use case. Even the use case we talked about before, rewriting procedures-
Mm-hmm. Mm-hmm. Mm-hmm.
O r audit docs. That's different than let me run my bank on software and be able to tell the regulators and be able to rely on it, and be able to rely on how that third-party systems.
Right
P lug into it as well. I think the reality is most institutions don't have the staffing to support not only the origination of that code, but the ongoing maintenance and support.
Yeah
of what that would be. I just don't think the mission-critical, highly regulated space. The reality is we compete with over 1,000 Fintechs today.
Right.
If you think about the European core entrants or the side core entrants in our marketplace, like, they haven't been able to gain significant traction, and it's not because of their feature set or their technology, it's because they can't show we know how to operate this, and we have, you know, 1,000 customers running-.
Right.
the system at scale every day with four nines of reliability. Like, That's the key of our industry. It's not necessarily like a mathematical problem to go solve that now we have the compute capacity to do.
Right. No, I think that's right, and I think there's, you know, I guess, I guess we could spend an hour talking about, like, the hurdles that would be tough to clear from a variety. You know, just like back to your point, it's like if 200 out of roughly 8,000 institutions are changing their cores at all, and forget about, like, moving from one to another, it's, you know, the returns and benefits are gonna have to be-
Yeah
Incredibly high.
Yeah
A lot to do there. Let me ask-
Let me just add on one thing, if I may, James.
Yeah.
Which is, I think what the exciting part of what AI can unlock is if there's a lot of manual processes.
Mm-hmm
In an operation of a bank. Like, there's a lot of actual physical paperwork still. There's a lot of rekeying that happens. We've already been moving people through straight-through processing, robotic, you know, bots and that type of workflow enhancement. This could really help a bank or credit union improve the efficiency of their own organization.
Right. Right. Right.
Nothing we sell is tied to the number of employees at a bank or credit union. It's their account holders or the number of members or active users.
Right. Right. Right. Right.
We love to make them more efficient.
Yeah.
If they can spend less on that, they can spend more with us in other areas to help growth for their business. One of the things, especially in our client segment, how they differentiate and compete against the bulge bracket, large banks and the new startup, you know, digital only, is service, trust, reliability. How do we, through the volumes of data that we have for them, their data that they can use, how do we help them to have personalization, ultra customization of offerings? How do they know that, you know, a certain population, a large population of a bank in Wisconsin all goes to the same-
Right.
Florida town in.
Right
Y ou know, the winter and open a branch there? You know, that they serve a significant number of dentist practice. Like, how do we get them the data, their data?
Right
In a way that's usable, digestible, so that they can put AI against that, or we can help them with AI and insights against that, so that it really can help them develop niche strategies to grow.
Let's take quickly the other side of that. If you can improve the benefits, if you will, from for your customers taking advantage of AI with your own development, et cetera. On the flip side, can that shorten implementation times, or is there a path to even increasing the churn of core systems? Because like I said, it's very low now.
Yeah. I think, you know, as we talked at the start, more of the implementation cycle time is driven by their readiness.
Got it.
Could AI help them? If I think about the wealth of information we have on knowledge enablement, for example.
Mm-hmm. Mm-hmm.
Training videos, white papers, tutorials, webinars, can we put that into a system to help them train their employees faster?
Maybe.
Potentially. You know, can we help them rewrite procedures faster? Potentially. Like, I think there may be use cases that...
Right. Right. Right.
Y ou know, to explore that help them on their readiness journey, that might shorten that cycle time, which would be a great thing for us. In terms of does it make someone less or more likely to switch core vendors, certainly having things that are in the public cloud so that you can take advantage of that faster development time that's coming through with AI tools is important.
Right.
If you only have software where you're getting an annual, you know, expectation of a release cycle, you're gonna fall behind quickly from an innovation perspective.
Mm-hmm. Mm-hmm.
O f your competitors. I think that will still be a driving force to get people to switch. The number of APIs that integrate a core system with a digital banking system, for example. There's over 50 API calls.
Right.
That's super important. I think it really comes down to the ability to ingest and deliver data in and out of the systems, the connectivity between systems, and then the pace that you're able to deliver innovation.
Right. Right. I wanna ask about a couple of, you know, at least interesting to me, ancillary businesses. You talked about, you know, the core and then the complementary. Within the payments there, you have a partnership with a company called Moov. You know, how meaningful is the Moov partnership going to be to the payments business in the next couple of years? When does it start, in your mind, to produce material revenue growth and uplift to the segment?
Yeah. We've talked about we have roughly 500 of our banks today.
Right
That have gone live with a top two logo, which is a small business merchant payment offering. We plan to have that available to all of our Banno banks.
Mm-hmm. Mm-hmm.
Eventually outside the base Banno banks. We're starting to see data on volume-
Okay. Yep. Yep
A s people are starting to use it, as people have gone from like a closed beta to like a full scale. We've done no marketing so far.
Wow.
it's on the pane of glass.
Right.
When you use Banno, and it's driving insights of like, "Hey, we think, James, you might have a small business on the side.
Yeah. Yeah. Yeah. Yeah.
Right? And even at that, we're seeing like the pull of customers on their own merchants. These are the customers of the financial institution starting to transact, get approved in a very frictionless way to accept those payments. Once we really turn on that engine and we start to see what are the adoption rates for merchants and then what's the dollar volume then we'll really know.
Right.
Our hypothesis is that in the next, call it three to five years, this could be the biggest segment of payments from a growth perspective and a meaningful revenue contributor. We've talked about that at the May upcoming earnings call, we'll have more data points to share.
Got it.
We just need to validate.
Yeah. Sure.
All of our hypothesis at this stage.
So quickly, just from a market fit or positioning standpoint, how do you compete with that solution versus somebody like a Stripe or a Square on pricing, if at all? Or is your edge really through the distribution of your bank partners, et cetera?
Yeah. I think the pricing will be pretty standard.
Okay
In the industry.
Okay.
I think the difference is I believe that people will be multi-acquiring.
Okay. Got it.
We don't need to take switchers to get growth.
Interesting. Yep.
The thing is, if you, let's say, you have a cafe or you have a store, a hardware store, you can accept at your register through whatever hardware unique device. When you go in home in particular...
Right. Right. Right. Right.
Like we think more the real micro side of small business, the sole entrepreneur, the people who come into your home. If I think about the piano teacher.
The lawn mower.
M y lawn, you know, care service provider, the plumber. You know, not every shop has like an iPad with vertical software and takes payments. A lot of people are like, "Call back to the office with your credit card.
Oh, yeah. Give it to them. Right.
I'll give you a paper invoice and you mail a check later to me." Like, those are the type of service providers that are on analog today and aren't accepting payments, or they can just be switchers, so they can have their terminal at their.
Right. Right. Right.
When they're at the farmers market, the phone is the device.
Right.
If you don't need special hardware, and you can get on within minutes to get approved and start collecting payments, through our, one of the other kind of selling features is the continuous reconciliation. Since we have all of the payments and core data, we can make it much easier to then go into Autobooks or QuickBooks or Xero or whatever your back-end system is as a small business. We think you can do both. You don't need to be a switcher.
Right. Right. Last couple of minutes here, Mimi. Capital allocation. Historically, Jack Henry's favored dividends, reinvestment, selective M&A over large-scale buybacks. How do you think about the magnitude of buybacks becoming a more meaningful lever in your capital allocation, especially given some of the recent tax-related free cash flow tailwinds you're experiencing, et cetera?
Yeah.
Does that make more sense to return to capital that way?
Yeah. A great question, one that's near and dear to my heart. Thinking about dynamic capital allocation and the ability to generate real shareholder value through it. As you said, we have a 22-year consistent growing dividend policy that we're very loyal to and serves a good constituency of our shareholder base. R&D is our first priority. You know, how do we continue to reinvest for the future? We are open to M&A. Historically, we've done a lot of tuck-in size M&A. There just isn't a lot interesting.
Yeah. Yeah.
The interesting thing is we don't have a lot of gaps at the moment either.
Right. Right.
It really needs to propel us forward in our tech modernization strategy to be compelling. We have zero debt at the moment, so it's a great opportunity, especially with the dislocation in the market, to lean in on buybacks.
Love it. Well, that's all the time we have. Mimi, thanks for joining us here at the Morgan Stanley TMT conference.
Always a pleasure, James. Thank you.
Thank you so much.
Thank you.