We have Mimi Carsley, who is the Treasurer and CFO. Mimi is quickly finishing her first year as CFO of the company, so a bunch of firsts here. Mimi, thank you for being with us. We greatly appreciate it. Given the fact that, you know, you are coming up on your one-year anniversary, tell us a little bit about your background before you were Jack Henry. What attracted you to the opportunity?
Well, first of all, thank you for being sponsoring us and for launching coverage. We're really excited about that. As you mentioned, I'm coming up on about a year anniversary here at being the CFO at Jack Henry. Delighted to be a part of the firm. It's really a remarkable organization. I've spent my career at the intersection of finance and technology. I consider myself to be a true CFO kind of geek. I love data and reporting and capital markets and the like, what's really important to me was culture, and I don't think I could have found a better home than Jack Henry. It's this unique blend of a 46-year-old executional excellence type of company, mixed with innovation and a customer mindset.
We like to say at Jack Henry, our motto is, "Do the right thing, do whatever it takes, and have fun," and we really live that day to day. When I was growing up, I'm a bit of a book nerd as well, and I loved business books. One of my first business books that I remember, and just to even to this day, is so distinct in my memory, is In Search of Excellence, which I don't know if you know the book, Jason, but it profiles these unique companies that differentiate based on service and culture. I really feel.
Mm-hmm.
you know, that led to their success, and I really feel like I've joined one of those organizations.
Sounds like it's been a great fit so far.
It has. It might be make sense, Jason, before we jump into a lot of the questions, is for those who aren't as familiar with Jack Henry
Please.
for me to just kind of give a super high level about what we do.
That'd be great.
Jack Henry is. We like to consider ourselves a well-rounded financial technology firm. We operate in three main segments. One is Core. That is kind of your lifeline of a credit union or a bank, the every night, the ERP system that operates the institution. Payments. We do a lot in payments. We're not a payments company, but we do a lot in payments. Complementary, which is about 200 + solutions. It's really around delivering mission-critical risk management, revenue, you know, efficiency type of technologies for primarily domestic financial institutions.
Right. You really are kind of the beating heart of the technology portion of these financial institutions, particularly the community banks, right? The credit unions. I guess it's interesting, right? You started, I think September first.
We did.
was officially your start date as CFO. Six months later, we see this banking sector turmoil emerge, which hadn't seen since 2008, 2009. Reflect back, I guess, now, on the last three months since all of that started.
Mm-hmm.
What has changed for Jack Henry? What hasn't changed? There's been a lot of speculation in the market around buyer behavior, obviously in this sector, in the wake of all that turmoil, which hopefully the worst is past us.
Yeah. Well, Vance and I were in a conference like this that week in March, that fateful week in March.
Oh, okay.
I think every question, everyone was, like, trying to digest live and in New York, like what was going on?
Yeah, real time, right.
The reality is, once you move outside of the coast, it really is not impacting Main Street American institutions. We like to say that we serve Main Street America financial institutions. What we've seen is, I think, a conflation between creditworthiness and liquidity.
Mm.
What happened, it was an unfortunate situation, because some of these had been unfolding for quite some time. You had Silvergate, which, you know, had a crypto problem, Credit Suisse, which had been having issues for a number of years, and then you had SVB, and then First Republic since. Some of that was just a run on liquidity of public market companies, and some of it was driven by a really particular niche strategy.
Yeah.
Those aren't the institutions we serve.
Mm-hmm.
At the time, our CEOs and CIOs did outreach to their customers, ensuring them of their financial health, but they really have not seen a lot of ramification. You know, since that, we have not seen deposit churn. If anything, the way Jack Henry builds on a lot of our software is on number of accounts and number of members. As people have diversified in saying, "Oh, I don't want to have just one financial institution as my primary bank or credit union," we've actually benefited from some of those diversification efforts. I think there'll be some open questions as to the lingering implication. We've already seen some implications from, lower valuations in some of the startups, less funding for startup technology, some layoffs in the technology section. Then there's some questions around what happens on regulatory.
Will there be, you know, legislation that comes out of Washington that addresses some of these?
Mm-hmm.
Even Congress has been very favorable to smaller regional
Mm-hmm.
They know the importance that these institutions, community banks and regional banks, play in the U.S. economy and in these markets. I think most of their focus will be, you know, towards the larger institutions. If the proposed special assessment from FDIC is any indication.
Mm-hmm
They're really focused on those larger Tier One banks. Most of our clients have been exempt from that.
I guess, what, so what are the top, I don't know, two or three challenges that your core customer base really is facing now, right? If we take sort of liquidity out of the equation, right, they run those banks pretty conservatively, right? Didn't have this asset liability mismatch situation, right? What, what is top of mind for them? Is there anything that is top of mind that is introducing any more hesitancy into their decision-making process around, let's say, embarking on a new core replacement or even some ancillary, you know, complementary offerings to surround the core? Have you seen any of that in your pipeline data or your sales cycles?
Yeah. We just hosted our investor day, just a couple of weeks ago, and I recommend that anyone come to our IR site , because we just published a benchmark survey. We reached out to 180 bank and credit union CEOs to talk about just that, what are their priorities? I would say that their top three priorities while they've shifted in kind of some of their ranking, they're some of the priorities that they've been working on for many years now.
Mm-hmm.
It's around how do they build digital offerings? How do they lend and finding lending opportunities? Their number one priority at the moment is around deposit and new account and gathering new deposits. Particularly the gap on Gen X and Gen Y.
Mm.
You know, that newer generation, in ensuring that gap.
Yeah
from a customer base.
Right. Right, right. Based on those priorities, how is that translating to your business?
Yeah.
Maybe as part of that, can you touch on Banno a bit, which is your digital product? You've been talking a lot more about it in recent quarters.
Yeah.
Maybe just level set with the group on what Banno is, how it helps your clients enhance their service to their end customers.
Yeah. The first is we've seen no change from an IT demand behavior.
Okay.
Either from the data we presented at our Q3, just recently, you know, pre-SVB, post-SVB, there was no material change in the number of new contracts signed. A lot of these decisions are multi-year in the making, particularly on the core side. It may be a one-year process around the RFP, around the strategic decision. It's about a year on the implementation. These aren't decisions people take lightly. In fact, the joke we like to say that has been told to us from CIOs and CEOs of banks and credit unions, is they would rather die or retire. Which is pretty strong language, to rather die or retire than to change out their core system. These are not kind of like a quick decision.
Right
take lightly.
Yeah, right.
If you think about the breadth of the offerings we have, it's around helping them gather those deposits that they so critically need right now. It's about helping them with revenue generation opportunities. It's around fraud, which is going nowhere, but, you know, up in terms of concerns around cyber and fraud. It's around operating efficiency to help them maintain margins and expand. It's about helping them diversify revenue streams, not just around that NIM spread, which has been compressing.
For sure.
The things we do, I don't consider discretionary.
Right
type, products and services.
Right.
These are really helping, which is why we haven't seen any drop off in demand from our pipeline.
Mm-hmm. Excellent. Yeah, let's go a little deeper into Banno.
Yeah, let's talk about Banno.
Yeah. Yeah.
We're super excited. For those who aren't as familiar, Banno is our digital offering. We like to think about it as anything that allows an end customer to open an account, to make a deposit, to put a check into their account, to apply for a loan. Pretty much any service they would get from their bank or credit union without walking into a branch. Which was critically important during the pandemic when branches were closed. It's not just a short-term need. Most people are reliant on being able to do things without walking into a branch. Banno really makes sure that our credit unions and banks stay at the forefront or the hub of that customer experience, so they don't get disaggregated or disintermediated.
Mm-hmm
...from all of the financial fintechs, you know, you have. You probably have 30 apps on your phone right now.
Right.
Multiple relationships-
Right
...across different providers.
Yeah.
Banno acts as that hub that allows the FI to decide what they want to embed into that. They could decide to embed a fintech that helps them with crypto, or they could decide to embed, you know, another offering. This is not through screen scraping. We have agreements with all four big data aggregators that allows an open API architecture, that allows the FI to decide what will be in that digital offering.
I see. Banno is sort of the brains behind the bank's app, essentially.
Yeah
...enabling all these different use cases?
Yeah.
Okay.
It's like a white-label solution.
Yeah, right.
...that essentially is a digital bank-
Yeah
in their pocket.
Right.
It allows them to do anything that they would want to do. We have over nine million active users, and that's on Banno Retail only. Banno Retail came out before Banno Business. We have over 700 customers, FI customers, leading over nine million active users on Banno Retail.
Hmm.
Banno Business is about to be launched, shortly. We have over 300, roughly 350, customers, ready signed contracts, and we have about 40 or so in beta today. We're really excited that we now have a complete solution of both the retail and the business side-
Mm-hmm
... in the offering in the marketplace.
How do you price Banno, and can you dimension revenue contribution? I mean, your fiscal 2024 is starting very soon.
Yeah
In a few weeks. Does Banno move the needle on revenue this coming fiscal year?
It does. It helps as a driver, a lot. Most of the time, when we get a new core.
Mm-hmm.
Banno comes along with it.
Is it bundled essentially?
It's not bundled-
Okay.
It is kind of a...
Okay
you know, from a pull-through perspective. Also, when we win a new core, they also take over 30 other complementary solutions, so it's a really key stakeholder.
Right
to help drive that win.
Is it considered part of complementary?
Yeah, it is in the complementary segment.
Okay.
Um-
Okay.
We don't give product-specific revenue numbers, but if you think about it from a contribution perspective, it certainly is an anchor tenant in our complementary segment. Banno Business, those 350 contracts that I mentioned, most will go live in FY 2024 off of a base of nothing in FY 2023.
Right.
It's a good tailwind in and of itself, and it's also a nice pull-through for the greater pipeline.
Banno Business is really for the SMB customer of the FI.
Yes
-who might have different needs than the retail customer-
Yeah
of the FI.
Yeah.
Yeah.
Today, we would all be Banno Retail users...
Right
-individually-
Right
-for our private homes.
Right.
Let's say I have a landscaping business.
Yeah.
I may need three or four of my employees to have access to Banno Business. Because our model is on a per active user basis, you're going to have more active users through business on a, you know, institution-by-institution basis than retail. Not every customer, every FI customer will take Banno Business. Those who don't do a lot with commercial businesses obviously will not have as much Banno Business as Banno Retail. On a per basis of.
Mm-hmm
you know, those businesses, I think it'll drive a lot of active users and revenue.
Banno, how long does, I guess, the, You said you have 350, right, Banno Business contracts?
Yes.
Kinda they're signed, right? They're ready. I mean, the product's ready. It's just a matter of, I guess, kind of slotting them into an implementation schedule. Is that essentially it, or?
we go GA this summer.
Okay.
So-
Okay
... we have about 40 that are in active live, today in a beta situation, and then we'll go GA this summer. The bulk of that 350 will get implemented this year.
Okay.
This upcoming fiscal year.
Okay. How long does it take to implement?
It varies depending on the institution, but it is nowhere as long as, like, a core implementation.
Right. Right, right.
Yeah.
Thankfully.
Yes.
Right, exactly. I wanna talk a little bit about competition, because it's a question that comes up a lot. There's obviously different ways to segment the market. I think Jack Henry has traditionally talked about, what? one to two wins per week, which is kind of an interesting way to frame it. Maybe take us through that in terms of like, what % of those are outright competitive takeaways versus an insource to an outsource type of situation, just so we can unpack
Yeah
I have a few follow-ups on competition.
Yeah
Let's start there.
We try and be as transparent and clear as we can be. When we say a new core win, it is just that. It's a completely new logo to Jack Henry.
Yeah.
This is not switching from one product to another. This is completely new organization to our network.
Okay.
As you stated, it's about 50-55 per year.
Mm-hmm.
I wouldn't say it's as even as one per week.
Yeah, sure.
It certainly depends.
Right
We get a lot towards year-end.
Yeah
both our year-end and the calendar year-end.
Right
... it's been about 50 to 55 per year for the last several years. COVID, we saw a very brief pause in RFP activity, but by and by, it's been about 50 to 55 per year. Now, that's different than that shift you mentioned from on-premise to the cloud.
Right.
We host our own private cloud environment. We have about 69% of our core customers in that private cloud environment today. That's been growing similarly at about 50 a year conversion. Why they're doing that is many of those financial institutions, if you're not in a town that maybe has a nice tech college, you know, nearby where you have access to talent.
Right
... and you're a bank or credit union, you then need to have a CTO. You need to have your own cyber insurance. You need to be running, you know, BCP.
Mm.
You know, you're managing a whole data infrastructure. Not every bank and credit union wants to be in that business. They wanna be in the business of serving their account holders and members.
Mm-hmm
Not running a data center, so.
Right
... we've seen that migration. There's probably, at that healthy clip of 50 a year.
Mm-hmm
... we probably have another seven years roughly to go. I think you probably get to the 90 %'s eventually, but also within that timeframe, you're gonna then have people leapfrog to the public cloud environment.
Right. Is that revenue accretive to Jack Henry when they go from on-prem to private cloud?
Extremely.
I mean, it sounds like it, right?
Yeah, extremely.
Yeah.
The FI spends about the same dollars, It's shifting those dollars.
Right.
Instead of doing all those activities I just mentioned, they're spending that money with us, who are managing that data on their behalf.
It's just a matter of spending internally versus externally.
Yeah.
Right.
To them, it's about the same spend, a lot less headaches.
Yeah.
To Jack Henry, it can be 2x the revenue, and because we're SaaS multi-tenant, it's really a healthy margin.
Right. Right, right. Let's come back to a little bit more on the competitive landscape. I mean, what's the lay of the land right now? Because I think sometimes it's easy for the investment community to sort of conflate, like, competition for true core versus more, I'll call, complementary, 'cause that's why, what you guys call it, where there's a lot of point solution providers out there. How do you segment it? How would you encourage us to think about it?
Yeah. I think the core decision, because it is such a significant one for an institution, is something that and it also depends on when they are coming up for renewal.
Yeah
-will kind of keep going. If a bank or credit is making that momentous a decision, it's not really going to change. That's a strategic decision for a bank or credit union. Oftentimes, they are, if they're not a Jack Henry core, and it's a new core competitive takeaway win, they may be on a core that they're not seeing a lot of innovation on, or they may not be getting the best service, or it may not have a product like Banno to help them with their digital. We're seeing a lot of demand on the core side. On the complementary side and payment side, it's a portfolio theory approach, right? We have over 200 products. We have a lot that are new or modernized right now.
Mm-hmm.
Our Financial Crimes Defender product, our LoanVantage product, our Treasury management product. It's a really exciting time from a portfolio perspective, and that's been generating a lot of interest.
Mm-hmm.
For the most part, these are tools, as I mentioned, that help a financial institution gain revenue, drive cost out of their system.
Mm-hmm
... efficiency-
Mm-hmm, mm-hmm
and manage risk.
how do you frame kind of the remaining core market opportunity? I mean, you guys have been around for almost 50 years. Others have been doing something similar-.
Yeah
for decades, too.
Yeah. Today we have, call it in that $500 million-$10 billion space, we have about 25% market share of banks and about 48% market share of credit unions.
Mm-hmm.
Still revenue, still upside to go from a market share perspective.
Right
in those markets that we, that we intentionally target. Those institutions are also growing. While the number of institutions in the U.S. has been going down for over a decade, the number of assets in the U.S. financial system has been going up.
Yeah.
We've been there supporting our customers as they grow, both organically and inorganically, and feel like there's a lot of growth across the three segments.
I want to make sure we spend some time on payments. I think it's a little bit less understood. Right? Frame that up for us. How big is it in the scheme of overall Jack Henry? Talk about where you've operated traditionally in that segment, and, you know, I think you're kind of expanding your focus a little bit within payment processing.
Yeah.
Walk us through that.
our payments business has three main segments or pieces of functionality. One is our Cards business, and we can talk a little bit of that, but we are both a credit and debit provider-
Yep
... to financial institutions. We have something we call our EPS, our enterprise payments business. You can think about that as remote deposit capture, ACH, business, and then we have our Bill pay business, which is a bit more mature business.
Mm-hmm.
That's also where our Payrailz, our most recent acquisition, is in that payment space. A lot of exciting stuff going on there, both through the acquisition of Payrailz, which is not just a modern bill pay, you know, it's a platform.
Mm-hmm.
It has account to account, it has a B2B, it has an open-loop P2P. It's digitally cloud-native, which is something that really accelerated the tech modernization work that we would have to do on our own product.
Right, the iPay product.
Yeah
that you added to the cloud environment.
Which is pretty saturated-
Yeah
at this point.
Yeah.
The exciting new stuff happening around FedNow, that's also exciting for us.
Yeah. Yeah, I think we'll save some time for that, but I wanted to delve in a little bit more on the card part of the payments business. I think historically, it's been pretty debit-centric, vis-a-vis credit, but maybe you can give us some numbers around that. How should we think about, you know, kind of the profitability profile between debit and credit? I think you guys have been talking more recently about trying to push the credit side a little bit more, so maybe you can talk about how you're actually, you know, executing on that.
Yeah. We've been a debit provider, for many years now. We have over 900 institutions that we provide debit services for.
Mm-hmm
... and about 50 that we provide credit for.
Okay.
We've only restepped back into credit over the last couple of years, and most people may think, "Oh, they're the same, the cards look the same." You know.
Yeah
... they're quite different.
Yeah, for sure.
You know, especially at the back end.
Yeah.
You know, we've been building capabilities from a sales force perspective, from an operation perspective, a lot of fraud and risk management.
Mm-hmm
... to help credit. A lot of the banks and credit unions we serve didn't want to come in credit. People either are in credit today, in which case they have a long-term contract, or they didn't want to play in credit. In part, because until very recently, monitoring fraud was something that only the larger players, like a B O A, could do you know, cost efficiently. It was quite prohibitive for a smaller institution. Through the new technologies that are out there, the smaller institutions we serve, call it that $500 million-$10 billion institutions, can now manage fraud as well as a Tier 1 player.
Mm.
We've seen a lot of interest. Banks and credit unions have been looking for new, different sources of revenue.
Mm-hmm.
Credit is an opportunity for them to enter into this space, through the new tools, you know, we've had some interest. You won't see something dramatic happen, like in any one quarter, where all of a sudden, the big shift.
Yeah.
You know, most people, want to have the same service provider for debit and credit.
Yeah.
It will take people having their renewals come up, then thinking about making switches.
Right
... or getting a new, someone who is a new entrant into the credit space to come along.
Okay, so some longer sales cycles there. One of the interesting themes, just in general, in the banking sector for decades has been consolidation, M&A. It happens every year. Jack Henry is always very transparent about, you know, the deconversion revenue that you might be expecting in a given fiscal year. I guess historically, you know, what percent of the time do you come out on sort of the right side versus the wrong side of the M&A?
Yeah. For those a little less familiar, we call deconversion revenues. We have long-term SaaS contracts with the bulk of our core customers. Deconversion happens when one of our customers gets acquired by someone else, and it's essentially a termination fee of the remaining value of their contract. The challenge part, Jason, is you never know when it's gonna come.
Yeah.
We're not the first call when a bank gets acquired.
Right.
We're probably the last call.
Yeah.
It also is not correlated with either the size of the bank necessarily.
Yeah.
You know, it tends to be more so how much life remains on that contract.
Mm-hmm.
If you're a larger institution, but you're about six months up from renewal.
Right
like, there's not a lot of remaining life in that. If you're an institution that just signed with us-
Mm-hmm
on a seven-year contract, there's a long tail there.
Right.
It's really hard to predict. It's the revenue. I mean, it's nice from a cash flow perspective, don't get me wrong, as a CFO, but it's the revenue you don't want. It means you've just lost a customer. On the other side of M&A is when our customers acquire, which is a great means for growth for a lot of our customers. When our customers acquire another, we're one of the first calls that happen-
Right
... because they want us to.
They need you, yeah.
They need us.
Right
... to help them put our software into their newly acquired bank or institution.
Right.
We call that convert merge. That tends to be some consulting implementation.
Mm-hmm.
Because of the SaaS model, the next, very next month, the number of accounts or members now just got escalated.
Right
... we're able to bill on that higher level. by and by, we tend, over the longer term, even though deconversion can be upfront larger sums.
Yeah
... over the longer term, we've benefited from the growth. Our customers have gone out and acquired firms.
Okay. net positive for you, right?
It is a net positive.
Right. I guess-
This has been a hard year. It's been a challenging year.
Yeah. Yeah, it's been hard to predict.
Yeah, it has been very hard.
Yeah.
We try and be very much a transparent reporter.
Yeah
which is why we have deconversion in, you know, taken out from a reporting perspective.
Right
... as we look at non-GAAP.
Yeah. Yeah.
We have to be, I think, one of the only companies where non-GAAP is lower than GAAP revenue, so.
Yeah, that's pretty conservative.
Yeah.
Speaking of conservative, in about a couple of months, you're gonna be giving guidance for the first time as CFO of the company for fiscal 2024. What are, you know, what are just some of the puts and takes investors should be thinking about as they start to sharpen their pencils on the models for F-2024?
Yeah
... in the P&L?
I thought you were gonna try and trick me into saying FY 2024 details.
Yeah, no.
It's too early.
No, no.
I know we disappointed people. ... by not saying it at our May conference. Vance and I are really strategizing on when to have that conference, so that we can have a meaningful discussion around it.
Sure.
You know, I think the beauty of the SaaS model is you're layering on these long-term contracts. A couple of years ago, we would've said we grow at about 6%-7%, and today we're talking about growing at 7%-8% on a $2 billion. Off of a bigger base, we've increased the growth rate.
Mm-hmm.
Part of the job, and our teams are hard at work today, we're at what we call the most wonderful time of year. We call that budget season, and you know, we are thinking about what products are launching when
Mm-hmm
... what the implementation calendars look like, so we can try and predict those revenues. A lot of the harder part is really on the cost side.
Yeah.
You know.
Yeah, what's your philosophy there?
Yeah, having those really detailed, hard, challenging conversations about trade-offs-
Right
and prioritization.
Right.
you know, there's no shortage of ideas. It's just a question.
Yeah
a rigorous prioritization because we know margin expansion is a key part of our investment story.
Mm-hmm.
In recent years, we've all seen inflationary headwinds, and we're trying to offset that as much as possible.
I mean, is margin expansion like a commitment, you would say Jack Henry has, and it's just a matter of magnitude in a given year? You know, theoretically, could there be a year where you go, you lean in more heavily on investment and margins are down a little bit?
Yeah, I would say 100% it's a commitment. We believe that margin expansion is a strong part of our investment thesis, and we believe that the model is completely capable of it. The beauty of being a SaaS multi-tenant strategy is, as revenue grows, you know, it's kind of the write -once and repeat kind of often theory, and that's kind of the magic of software, and so we very much are focused on it. That being said, we have a lot of third-party costs. We have a commitment to our people.
Yeah.
We're all trying to think about one day, people are talking about, you know, merit increases of 3%-4% in the industry, and then Microsoft said they're doing zero.
Right.
you know, we're all trying to think about what the right thing is for the long term of the company.
Lot to juggle. All right, 20 seconds on capital deployment strategy.
20 seconds?
30 seconds is fine.
30 seconds. I think more will stay the same than will change.
Okay. Yeah.
We're a conservative company. We are committed to our dividend policy.
Yeah.
We have increased the dividend over 34 fiscal years. I can't say calendar years, fiscal years.
Yeah.
We believe in reinvesting in the business. We spend about 14% a year on R&D to reinvest, and we're a rare breed in that we can either build or buy.
Mm-hmm.
We have that capability in-house. We really very much believe in internal development. We are a skilled and experienced acquirer, and hopefully the market will present itself with some opportunities there. We are disciplined in terms of the valuations.
Mm
... we're looking to pay. We happy to return capital to shareholders, you know, if we don't see other opportunities.
A lot to be said for the consistency. Thank you.
Yeah.
We really appreciate the thoughts.
Thank you, Jason.
Okay.
Thank you, everyone.