All right. We are going to get started kicking us off the afternoon sessions. Greg Adelson, President and CEO of Jack Henry. Greg, thanks for joining us again.
Yeah. Thanks for having me, Will.
Really appreciate you taking time being up here. Particularly ahead of the upcoming Investor Day, I know that's a big lift for the team, so appreciate you carving out the time.
Absolutely.
All right. So maybe we will talk about the year that you guys just ended, just reported. You closed the books on a strong year, 7% non-GAAP revenue growth, a record 58 core wins, over 90 basis points of margin expansion, third straight year of 60 basis points or more. Coming out of that, you set up 2027 more or less in line with the long-term growth algorithm. As you sit here today, what are the two or three strategic priorities you're most focused on, and what does the organization need to get right in order to hit them?
Yeah. Thanks for that. We did have a record year. Some of the priorities that we still have today are in place from the day that I took the seat about two years ago. One of them was to go upmarket and be more strategic in core wins with larger institutions. Over the last three years, we've had 45 of those multi-billion-dollar wins compared to 22 the three years prior to that. That's one example. Our SMB strategy, which we actually came out with two years ago at our Investor Day, which we've been very successful at rolling that out. We now have over 900 institutions live on our Tap2Local and about 150 on our Jack Henry Rapid Transfers, which is all part of that. We're going to actually talk a lot more about SMB next week at our Investor Day.
I think the Jack Henry Platform itself, which has been an announcement that we made four years ago, where we talked about building on top of our existing cores and having full integration, that's far different than what anybody else in the space has been doing. We've built almost 30 components onto that platform today over the last four years, all public cloud native API first. It's created a nice headwind or a nice tailwind for us with going upmarket and the overall success of the company. Those are the three. There's other ones, but as you know, it's all about execution. One of the things that we pride ourselves on is doing what we say we're going to do, and we've been very successful with those three initiatives.
Yeah. Let's maybe pivot to the Investor Day. You've got that coming up in Dallas. Mimi has said the 2028 outlook is going to be a big part of that story, along with some live demos. You said publicly that 2027 looks a lot like 2026, but you're more bullish on 2028. Without front-running the event too much, what are the main messages you're hoping investors will walk away with?
Yeah. The main message is that we are going to put our money where our mouth is, where we talk a lot about culture, service, innovation, strategy, and execution being the five differentiators for our company. We're going to showcase those five things. We're going to show live demos of the technology that we have built, and again, especially show the progress that we've made since the last Investor Day two years ago to give a strong indication. We're not only just going to show a preview of what 2028 looks like, we're going to give a preview into 2029 as well at a top line. Those are something we've never done before at an Investor Day. We've never really looked past the current year.
Back to the excitement that we've had on the year we just had and where we think we're going, and we've been signaling that 2027 would be similar to this year, but 2028 and 2029 would have some step up, so we're going to show that.
Yeah. No, sounds exciting. We're looking forward to that. One of the things that you've been highlighting is the momentum on the core side, 58 competitive core wins. You've continued to stress the move-up market at the same time. I think you're talking another step up in core wins this year, 58 to 65, I believe. Given the lag between signing and revenue, how should investors think about when that accelerating backlog starts to show up in the financials that we see?
Yeah. So a typical core win is usually there's contract term left. So one of the gating items of even going live is how much contract term is left, and it's usually 12 to 24 months or so. Then you actually have to train the bank or credit union's personnel, their staff, and everything on what products they're buying. So when we sell a core deal at Jack Henry, it usually comes with about 40 complementary and payment solutions. So it's about a 12 to 24-month lag for those reasons. It has nothing to do with any other thing other than contract term and training and things like that. We are using AI to speed up some of the data conversion stuff. That's great, but it doesn't necessarily help us in a new core win.
You can use the math there to realize that the deals that we're implementing this year were deals that we sold last year or the year prior to that based on term. So we have good visibility. We know exactly when a core is sold. We know when they plan to go live. So we can map that out, which again, part of the reason why we're going to be able to show that level of guidance for the next two years. But again, that's just standard and people ask me all the time, "Well, isn't AI going to help speed some of that out up?" It doesn't necessarily help speed up the contract term size or the training size.
It does help with the data conversion, and where it does help us immediately is in a Jack Henry to Jack Henry merger, where we can actually have a shorter timeframe to bring them live with that.
Yeah. Makes sense. Okay. The public cloud strategy has also been a big talking point over the last couple of years. It has been deliberately incremental. I think componentize the core, integrate each module back to the existing foundational cores. Could you just provide an update on where you are in the investment cycle and just how you think about the pace of product adoption from here?
Yeah. The investment cycle continues. four years ago, we announced it. We had started it roughly a year before that. We have been on track, actually have been building it ahead of schedule and ahead of budget from both of those standpoints, which I think is, again, another strong indication of our level of execution. As I mentioned earlier, we have roughly about 30 components that are live today. And basically what we are doing is we are decomponentizing the core. The key things that run the deposit functionality, the lending functionality. We have done what is necessarily on the deposit side, the lending side, which is the more difficult side to build. And if you look in the industry today, nobody has built out the lending side in a public cloud native philosophy.
We will be talking more about what we are going to do to accelerate the lending side later this year. We actually will not be talking about it next week because we are still finalizing some details, but we will talk about it later this year. And then from a client adoption standpoint, we have roughly about 100 clients that have adopted some portion of the component. These are existing Jack Henry clients that have said, "I want to replace my wires platform with your new wires platform. I want to use your new general ledger to replace your general ledger." So we have roughly 100 that have done that. But what it has been is a true driver of opportunities with these larger institutions.
We are talking to $50 billion institutions and $30 billion institutions because of the incremental strategy that we put in place that allows them to take on changes within their core environment without going through the full heart and lung surgery, which is a core conversion.
Yeah. Makes sense. Speaking of some of the ancillary products around the core, you have emphasized the momentum and trifecta wins this year. This is core wins that come with both payments and banking. I was hoping you could talk about how much of that change is coming from improvements in the product versus changes in the distribution, and just how you think about continuing that momentum.
It is a combination of both. I keep going back to Investor Day two years ago because that was an important timeframe for us, where we actually made an announcement that our digital offering, Banno, was lacking in business capabilities. We were going to go fill the gap between us and the larger digital-only competitors that are out in the space, and we went and did that. Because we built out the features and we now have feature parity, we have been much more successful in winning digital deals. Our trifecta win rate, which is core digital and card, our card processing solution, went from 39% last year to 59% this year. We are expecting to be on about that range or better for this next upcoming fiscal year.
We changed a little bit of the focus of the teams, and we made it a lot more impactful for the sales team to be successful selling the trifecta. But most of it starts, and always starts with the product itself. If the product is not up to speed, you cannot sell it. We had to build out the feature parity. We have now done that both in card and in digital with the advancements that we have made in that product.
Makes sense. There was a lot of investor focus earlier this year on AI as potentially a disruptive force in bank tech, particularly whether banks that historically couldn't manage a long tail of vendors might not have more ability to do that and stitch together different vendors that are on their own. You talked about how you're seeing the opposite, more trifecta wins, more people buying a bundle from Jack Henry. How do you think about the way that AI could reshape the industry and the way people think about technology decisions?
In our industry in particular, regulators play a big part in everything that we do. As AI and public cloud and other things have become more prominent, the regulators have really become much more impactful in decisions for institutions. They're actually looking for institutions to have less vendors than more vendors. That best of suite mindset is really starting to come back. That's back to your point about trifecta wins. What we're seeing is that if a core provider like us can provide the AI capabilities, the AI guidance, we're actually doing consulting services now as well, it's enabling them to have more trust in that provider, meaning they don't need to look for other alternatives. That makes the regulators happy, it makes the bank or credit union happy as well.
That's a big part of driving that, and we're going to continue to double down on that. We'll talk more about AI I know in a minute, but the reality is if we weren't proving those points out, then you would see our customers looking for more third parties to work with.
How are banks just responding to this desire to invest in AI in such a regulated environment? What do they look to Jack Henry to do? What do they want to do, and what are you helping them accomplish?
Yeah. They're looking to, like everybody, build efficiencies. A lot of our customers don't have large development groups, so it's less about the speed of development, more about building efficiency. Efficiency ratios are really one of the highest-rated things that a bank is measured on. We're always looking for ways to make them more efficient. We build automated workflows that they can utilize. We've built our own AI solutions that allow them to utilize those within the institution as well. Things that we can sell, things that are part of our existing product set. That's really what they're looking for. Speed and efficiency, opportunities to build out a product set that is a differentiator. A lot of them compete with the tier ones, and so they want to have something that's on par or differentiated from them.
Yeah. Makes sense. Let's talk about the opportunity for Jack Henry on the efficiency side. R&D was up 16% in the fourth quarter, mostly on headcount. Mimi has framed some of the benefits as projects taking two years instead of three, rather than an in-year cost takeout. As those gains compound over time, does that change the level of R&D spend needed to fund your existing roadmap?
Yeah. As of right now, we've been averaging about 14%-15% of reinvestment from a top line over the last seven or eight years, and that's made up of really three components. Pure expense that's in the development side, the capitalized software of that development, and then some of the additional internal use software that we have, and that's all aggregated into a single number which equates to the 14%-15%. With the speed of innovation and change in our market in particular, whether that be stablecoin, tokenized deposits, embedded finance, things along that line, and the way that we are building our own technology ourselves, I don't see that number going down, at least not in the next couple of years.
What Mimi's point is a really good one, which is, Mimi, by the way, is our CFO, is that you have the ability to do things faster. Projects that used to take us three years now are taking us two years or 18 months. That's where the speed and the efficiency is, and it allows us to do what we call more with the same. That's the mantra that we have across the organization. It's not about doing more with less, which is why we have such a strong culture and background for our associates to feel empowered to come up with great AI ideas because they don't feel like they're going to lose their job because they came up with the idea.
I think with the way the advancement of our industry is, the components that we need to do, it's going to speed up the time, but not necessarily change the dynamic of how much we're investing.
Got it. As it relates to how AI can reshape the products that you mentioned having 22 AI-enabled products in market, more on the way, how do you measure what AI-enabled products do for the business from the monetization perspective? Do banks get enough value for these features to pay a premium? Are they table stakes? Is it an engagement and a sales momentum?
It's a little bit of all three. Of the 22 that are already in market, a large majority of those are embedded in the product to make it a more palatable product and a differentiator in the space. It isn't necessarily becoming an accelerator of cost or revenue, but a differentiator in penetration. Our ability to penetrate more of the product obviously will drive longer-term revenue. There are other products and features that we are able to necessarily upcharge. A lot of those live in the platform that I mentioned earlier. Whereas we're building out core modules, all of the 30 core modules that we built all have AI built into them. Some of them as big differentiators from what we offer today. If let's just take our general ledger.
If you're replacing our existing general ledger with our general ledger that has AI built in, we can sell that as a premium. It's going to show up as a core module add and not necessarily AI-generated, but the reason why we're able to upcharge is because of the AI component. It's a mix of all those, and will continue to be. The one differentiator I will say is that I mentioned AI consulting. We are going in as a separate line item to sell AI consulting services to our institutions, whether it be governance or building the efficiencies. We've been doing AI for four years. We built a really strong framework with the regulators, and so we're able to pass that on to our institutions.
Yeah. Okay. I wanted to shift over to card and payments. Payments grew 6% in the fourth quarter, still at the low end of the 7%-9% range, I think driven largely by a little bit slower card growth. What gets payments back to that historical range? Which of the pieces of that business is going to do the most work looking ahead?
Yeah, a lot of that came from some one-times that happened with, we talked about incentive dollars and other stuff that we get from the card association. Some of that driver of growth and differences came on one-times. We're seeing back to our normal transaction growth this year at this point. We think consumer sentiment has actually remained pretty strong. If you look at our overall card business, about 98% of the transactions are debit-based. Debit continues to be very strong. All you have to do is look at Visa and Mastercard's analysis of that. But where we think the growth is going to come from is the differences we've built into our credit side of our business.
As I mentioned on the earnings call, we had our best year ever selling credit, actually by double of any other year, and that continues because of feature functionality we've added. I think a lot of the growth in the card side of our business will come from the additive credit versus the debit. Payments in general will be driven by a lot of things in the faster payments world. If you look at Zelle, real-time payments through The Clearing House, FedNow, things along that line, they're all truly drivers today of what we call receive-only transactions. As the government and others start to change the mindset of use cases for send transactions, and there's a better balance on the risk mitigation of that, which we're working on as well, I think that's where you're going to see another lift in growth.
Between card, between the faster payments, between what we're doing in SMB that I mentioned earlier, that's where I think you're going to see, and you'll start to see some of that this year, but you'll definitely see more of it in 2028 and 2029.
Yeah. Maybe talk a little bit about the SMB opportunity. I know that's something you've been passionate about, long history with the payment segment. What is the opportunity as you see it over the next couple of years?
Yeah, a lot of it is just to go after a market for all financial institutions that are being disintermediated by the Stripes and Squares and others of the world. We wanted to build a solution set that was sold through the institutions and not around them. Unfortunately for our institutions, as the Stripes and Squares and others get into their market, they're pulling customers away, they're pulling deposits away. We wanted to build a solution that had a level of differentiation. I don't have time to go through all the differentiators here, but we have a couple of key ones, actually two that we're patenting, that are different today, but also to drive the ability to bring deposits back in and create more lending capability.
Next week at Investor Day, we'll talk about some new initiatives that we've added to that SMB functionality. Today it is our Jack Henry Rapid Transfers, which allows for real-time transfer of money from foreign bank accounts into your current bank account, either in or out. That creates a real-time component that only Tier 1 institutions have. Tap2Local is our answer to merchant acquiring within the institution, which allows them to not have to buy a device, use in their phone, and has a bunch of really cool differentiation for the small business itself.
Yeah. Makes sense. Just on the faster payment side, it sounds like that's a big driver in the near term. How are banks approaching just this kind of broad set of alphabet soup of ACH, RTP? What are they looking to their technology providers to do to help organize that into a coherent offering for clients?
Yeah, a lot of them want these hubs that we created, which is what we call our JHA PayCenter hub, where you can have all of this flavors in a singular platform. The good news, bad news is in payments is that no payments ever go away. That's why we still have check and we still have a lot of other things, but we keep adding to it. So not only faster payments, but now stablecoin, tokenized deposits. We're working on all of those initiatives as we speak. The key is that for us to give a complete offering that gives them optionality, and that's what we've been building and continue to provide.
Yeah, makes sense. Just on the card side, I think one of the questions that we've gotten is just around the competitive dynamics. Visa and Pismo is now marketing an all-in-one debit and credit offering, kind of Pismo plus the Visa DPS product. Visa DPS has long been a large player on the debit side. Pismo is more nascent. You say you haven't seen Pismo in core deals, but you've seen them in cards. So how do you think about competitive risk in the card processing business going forward?
Yeah, and just want to clarify. So to your point, we have not seen them in core, but we've only seen them in one card deal this whole past year. So today they're marketing as a single platform. It's not a single platform today. So Visa DPS is a debit, as you said, and Pismo gives the credit options. The good news for Jack Henry and our clients is that we operate on a single transaction platform today that has a debit and credit already integrated into that platform. So they operate on a single platform. One of our other competitors has made a recent acquisition and they're pushing to meld their debit and credit together as well. So at this point in time, we're really the only one that is operating, besides one other competitor operating on a single platform.
Do I believe that they will continue to evaluate and move into various parts of the market that we're in? Yeah, at some point I do. But at this point in time, we haven't seen them other than one deal.
When you think about just the bundled offering that you have that maybe some of the new entrants don't, how does working with Jack Henry for debit, credit, core, digital, is there a compelling message on the go-to-market side that you have that articulates why those should be together and under Jack Henry?
Yeah, the compelling message is really the integration. The advantage you have of working with at least Jack Henry, maybe not all core providers, but with us, is a very tight integration. When you look at those key products, so digital card and core, especially digital and card, work very much hand-in-hand, including Bill Pay and other aspects of that. Everything is driven off of the front door of the digital offering, so you need that tight integration. That's one of the advantages. There's key features that every provider has. We're pretty bullish on the things that we've created as differentiators. But back to the original question, our trifecta wins have significantly increased this year because of those things.
Yeah. Makes sense. Okay. Pivoting to another big topic. Cybersecurity has moved up the priority list very quickly. The focus on increasing frontier model risk to just broader security environments has been a big topic at this conference so far. How is that changing purchasing behavior, conversations with clients? Maybe where in the portfolio do you have products that might address some of those concerns?
Yeah. So it definitely has changed. For those that don't know, so we operate today, about 79% of our clients live inside the Jack Henry private cloud where we operate. Of the 21% that are still left, a lot of them are larger institutions that like to run their own shops and things like that. Well, that's changing. We are having a lot more inbound requests because of the frontier models scaring folks of the speed of vulnerabilities and the speed that you have to address those. We've been part of Glasswing for the last three months, which is less than about 100 companies in the world that are operating with that today. We've been able to get a front door seat to seeing how fast you have to actually adhere to vulnerability management.
I won't get into a whole bunch of detail on what it entails, but speed is of the essence, and the utilization of AI to fix it is of the essence. All things that we're doing, and all things that most of our institutions that we support are not capable of doing on their own. It's going to create opportunities within our out-of-network market, and we're already seeing that. The other question or the other comment was around specific products that we have. We have a whole suite of products that are in what we call our Gladiator suite, and there's a bunch of hosted solutions and things that we do to help manage fraud and cybersecurity and other components that we already sell to the banks.
We're starting to see an uplift in those products, and we expect most of the products in that suite to be some big drivers for us for this year.
Something we chatted about earlier is this idea of the core processing stacks being these major choke points in critical infrastructure in the country. There's a lot of focus on hardening those systems as quickly as possible. How do you think about this process near-term and longer-term, the investment cycle required to harden those systems versus the opportunity and the new business that brings in the door?
Well, I think one is the other. If you don't spend the time and the money to do the investments, you won't have the opportunities for the others.
Got you.
One of the things that, and I am sure it is not just us, but just speaking from our perspective, is that we are taking the time and attention to invest in working with the models, understanding the models, making the changes, making the right investments in the infrastructure, talent that we brought in. All of those things are extremely important, because if you are not shoring up the walls, there will not be any future opportunities. But because of that and because of the level of differentiation where there is only a handful of core providers that truly are doing what we are doing, it creates a competitive differentiation as well. For some of the smaller core providers, most people do not know, there is really 26 core providers that are out there today.
Most of them you have never heard of, but they are out there, and that creates a level of differentiation for us and some of our competitors as well.
Yeah. On the broader demand environment, clearly fraud and cyber and things that address these specific issues are top of mind. Have you seen any kind of rising tide where everything related to Financial Crimes Defender, for instance, just sort of a rising tide demand environment for anything related to fraud detection, management of risk, and over time, I do not know what the four version of trifecta is, but does Financial Crimes Defender become a bigger part of the selling story?
Yeah, and actually we've talked about that as FCD being a part of the Quadfecta or whatever, Quadfecta.
Whatever it's called.
Yeah, but you're right. And we had a very successful year with our Financial Crimes product last year. We sold 189 in the year. We actually have more of a foundational product that we've had for a while, Yellow Hammer, that we have a chance to start to flip some of those clients as we built out feature parity. But as I mentioned earlier, it's not just about Financial Crimes, it's also the solutions that sit in our Gladiator suite. So if you take each of those from a fraud perspective, from a cyber perspective, from a hosted networks perspective, all of those we think have some nice upside, not just this year, but for years to come.
Great. Okay, I wanted to pivot to Banno. Banno signings were up 24% this year to 219. You're at 15.8 million registered users, and you said you're close to announcing your first true out-of-network win. So how are you thinking about the momentum in digital, the competitive positioning of the product, you talked a little bit about that earlier, and maybe the growth runway ahead?
Yeah. 219 wins is significant when you were about 70% penetrated into the Jack Henry core base. As of today, we were only selling only into the Jack Henry core base. A lot of those 700 other institutions are using competitive products, which gives us more bites at the apple. To the point we made earlier, the advancement of the product, especially on the business side, is allowing us to go back and win some of those deals that we didn't win on the first round. Outside the base is important for us to grow the digital presence for non-Jack Henry core clients. That's going in to our largest competitors and other competitors to displace the digital provider they're using, whether that be the core provider's digital solution or some of the digital-only companies that are out there.
Part of our strategy is not only to go in and have opportunities with the core base, but to sell the platform and the digital as part of an overall offering. It allows us to give them, some of these larger institutions in particular, if they want to move one or two core components at a time, but they're also not happy with their digital provider, we can bring them a blended solution to do all that at the same time. Digital's only one of those key products that we're planning to take outside the base. All of our core modules we'll be able to take outside the base, meaning they can integrate with any of the competing cores.
That's going to create a lot of opportunity over time, not just within the Jack Henry base, but the full TAM of the market of the 8,000 institutions that are out there.
Yeah.
Remembering, we have over 7,000 clients today that use at least one of our products, so each of those becomes an opportunity in itself.
As you think about just the next two years, it sounds like a lot of momentum on the top line heading into the next two years. How significant is the out-of-network market strategy to-
In the numbers you are going to see next week, it is not meaningful because it is a slow process. What you need to do is have some wins in a couple of core opportunities to create momentum. Honestly, once you have built the integrations out and things like that, it creates a lot. It is not meaningful in the numbers you will see next week.
Got it. You are starting fiscal 2027 at 20 to 40 basis points of margin expansion. Mimi is saying, sounds like cautiously optimistic that that range could move up over the course of the year. Margin optimization has been, I think, more of a focus for you since you took the role. How should investors think about that 20 to 40 basis points relative to the last couple of years being north of 60?
Yeah. To your point, the last three years we have done 60 basis points or better, 60, 70, 92. We also guided those years at 20 to 40. Our message is, at this point in time, that 20 is what we consider a floor minus a macro event. Forty is not a ceiling. As we continue to operate, we do have additional costs. We have some headwinds this year that we publicly announced with where we are self-insured, so from a medical claims side, our medical claims got kind of out of whack where the first half of the year, they were way lower than we expected. The back half, they were more, so we got to kind of normalize that.
Same thing with the way we did commissions, where we had a much higher base of wins in the new versus renewals, and we were commissioning those. Those have got to balance out. Then a big project we have called EC 2030, which is the consolidation of our data centers to actually move out of our own data centers into public cloud or into colos. With that being said, Mimi's point is being, hey, we're a pretty conservatively based company. We do what we say we're going to do, and we don't try to get out above our skis. We believe we'll do north of 20, and if everything goes right, we'll do north of 40. But at this point, we're guiding 20 to 40 as we did every other year.
But the one thing that I think we do a good job of is that we update every single quarter on how we believe that those numbers could move or not. This year being another one. But as we continue to grow the revenue side of it, again, which we'll talk about next week, you can pretty much ascertain that the margin side will continue to move up, too.
Yeah, makes sense. Okay, final question here on capital allocation. Free cash flow was up pretty significantly last year. You returned over 100% of it to shareholders. M&A recently has been a relatively small part of the capital allocation framework. How are you thinking about M&A from here? What would it take for you to do something more sizable? In the absence of M&A, what's the framework for capital allocation?
Yeah. So we were very aggressive last year with buybacks. We did roughly $445 million compared to $35 million the year before, mainly because the stock was much lower than what we believe it should be. So we took advantage of that. We have 10b5-1 plans in place, and we continue to operate. Mimi and her team do a great job. So we'll continue to look at things that are advantageous to take advantage of that in the market. But we are still very active in the M&A. We got kind of down to the two yard line with an acquisition opportunity recently, as little as the last month. We ended up walking away mainly because of some concerns we had on rebuilding the technology.
But the culture, we really focus on culture, technology, innovation, and where they are in their evolution, because if we're going to rewrite a bunch of things and to be public cloud native API first, we want to make sure we get the right price point. As you know, price valuations still continue to be a challenge. But we're very disciplined in our approach. We've done 51 acquisitions in 50 years, so we've always been very acquisitive, but we're not going to just buy something to buy something. I will tell you that though we've typically done tuck-ins, we're not afraid to look at something that's a little bigger if it fits the strategy.
Makes sense. Well, I think that's about all the time we had. Greg, thanks for joining us today.
Yeah. Thank you, Will.
Appreciate it.
Good to see you.