I cover fintech research here at Citi, and we're excited to have Jack Henry and CFO Mimi Carsley, who's going to go through a list of our questions. Hopefully we get a better understanding of some of the fundamentals at Jack Henry. With that, Mimi, thanks for being here.
Happy to be here. Welcome, everybody. Good morning.
I wanted to start with kind of the core win momentum. You've discussed, I think, 58- 65 wins this year. Given the 12- 24-month lag from signing to revenue, how should investors think about that accelerating backlog starting to show up in core revenue growth rate?
Well, first of all, we're happy to talk about the higher success rate we've been having. Historically, we've talked about winning 50- 55 in a given year, and the way we define that is pretty unique in the industry. That is completely new logos for core. That's not a switcher, that's not an upgrade or an in to out. That's a completely new logo. We are one of few, if not only, who really talks about our metrics publicly. What we're seeing is just a really robust pipeline right now. We're seeing the fruits of the investments we've been making in innovation, excuse me, and that is leading to more sales. The great news about a long sales cycle is the visibility you have to it. Sorry, getting over a cough here.
That gives us a really refined analytics to knowing the likelihood of when they are likely to sign, and therefore the likely implementation time. What we have also seen, though, through process improvement in AI, is we are seeing a shrinking of that implementation time. So typically, the longest pole in the tent on when someone implements is the remaining life of their contract. So people tend to start talking to you two to three years before their existing contracts actually terminate. They tend to talk to a vendor for about a year, whether they are going to do a full RFP, whether they have multiple vendors they are talking to. By the time you get the contracts in place, is about a year, and then it tends to historically take it about a year, anywhere between 12 and 18 months, for them to implement.
What we are seeing is that time shrinking. The reasons for that delay between signing and implementation is there is a lot of change management that has to happen. If you think about someone replacing the critical technology in your firm, it touches everything. It is not just back office, but it touches every employee. It is a lot of training. It is less on the data mapping. We have mapped to every core that exists out there, but it is more around that institution. The other is just how much time is remaining on their contract. So that is kind of what we are seeing, from when that goes from the full start of the sales cycle to the revenue implementation.
Got it. Given some of the disruption we have seen over the last 12- 18 months at Fiserv and then most recently again at FIS, is the competitive environment, does that give you the opportunity to win more and win rates improving as a result of those disruptions?
Sure, that definitely plays a factor. I like to say that it is a nice confluence of events. You have a time when we have more new technology in the hands of our customers. The platform that we have been working on for over five years now, we have 30 modules out live in different stages of availability in the hands of over 100 customers testing that out. So you have innovation, and this funnel of innovation that is coming out of Jack Henry. You have the consistency of high support and service quality, and then you have competitors that are in a weakened state. I think that confluence of that, at a time when people need to trust and rely on their software providers more than ever.
Given what is going on in the ecosystem, the speed of AI impacting their businesses, the cyber threats that are happening from vulnerability identification, there is more trust needed with your vendors more now than ever. I think those confluence of events are helping us drive more core wins. We have always had a very high client retention rate of over 99% ex-M&A, but it is really helping drive new customers to Jack Henry.
FIS in particular called out banking implementation delays, heavy bank consolidation in the industry, and then lower license fees. Are you seeing any of those things in the marketplace, or are those kind of company-specific issues?
Frankly, the challenges that others are talking about, we are just not seeing. We are continuing to hit on all cycles. We are not seeing the challenges from a slowdown. If anything, the surveys we do and the surveys we are seeing through firms like Bank Director are showing an increase in IT spend. We are not seeing any elongation in sales cycle. If anything, we are seeing that compression, and we are not seeing things that are negatively impacting a sales cycle or client retention.
Yeah. Okay, great. Public cloud and strategy and moving up market is kind of a key topic for you guys. Your public cloud approach has focused on the core and integrating each module back into existing foundational cores and letting clients adopt as ready. How do you think about the pace of adoption there?
Yeah. It has been a learning process over the last roughly five years that we've been on this journey. When we first started, we thought we would build a sidecar like others in the market are doing and had been doing. As we got into it, what we found was the hard part and the real value is in the integration. No one wants to run just a sidecar, because the challenge with that is it helps you set up a new brand potentially very quickly and gets you to be in a position to go after new deposits. What you don't see is a holistic view of your customers anymore then. You need a completely separate team to manage that instance of that separate core, and there's no reporting that consolidates it, which is real troublesome for an institution.
Our approach is, if you think about our foundational cores, I'll use the example of Symitar or SilverLake, those are really sturdy, robust systems that contain a lot of institutional knowledge at the financial institution. Then if you put on top a bridge or an extension, if you think about the digital platform being an enhancement to help them get newer technology and newer capabilities sooner without having to do a full change or migration. I'll use the example of wires, for example. SilverLake has a wires feature. The new technology platform has a wires feature. Someone can turn off the feature in SilverLake and turn it on in platform seamless. The other example I'll use is account management.
If you want to start a new type of accounts, or you want to do a separate brand, or if you want to do the new Trump Children's Accounts, or you want to do a digital asset account or something, new whiz-bang feature that you create based on your demographic of your institution, you can create that brand new account within platform. Then if you want to see your members or your account holders on a holistic basis, you might have a new account, but you might also have a mortgage that's sitting in SilverLake, or a joint account, or a custodial account with your children, right? You'll see all of that in your profile, that member-centric or account holder-centric view.
You'll see all of that as you're reporting or as you're managing risk or fraud at the institution, because the platform connects, all that plumbing connects to the foundational core. That's a unique approach that's really appealing to our clientele, both existing and prospects. The fact that you can buy modules or bundles approach de-risks that migration as well. That's been really appealing to the larger tier-size institutions, because they can start to enhance their strategy, their go after new growth paths, and have the technology to support them in a way that is de-risked.
I want to ask about the trifecta wins this year. I think the attach rate went from 39% of core wins last year to 59%. How much of the trifecta story is product from closing the Banno Business and the commercial card gaps versus the change in how the go-to-market teams are compensated?
Yeah.
Then maybe to follow on to that is, what kind of attach rate should we expect there?
Yeah. First, let me just define trifecta for anyone who's not aware. It's a term we've started using in the last several quarters. That is a new core customer who also takes on Banno and also takes on payments, so the card business particularly.
All three, yeah.
So three. If you think about those three anchor capabilities, they are really sticky on top of each other, have great seamless integration to each other, but really, from a deepening a relationship with a financial institution, if you are able to get all three of those critical functionalities at an institution, the likelihood that they will switch is much lower. The likelihood that they are going to have a longer tenure with you, much higher. From a revenue perspective, depending on the institution and their profile, any one of those three anchor capabilities could almost be equal in size from a revenue perspective. That also increases the average revenue basket, if you will, quite substantially of those wins. We have seen great success, to your call-out.
Part of that was the development we have put into Banno, the coming much further along on Banno Business, having a parity from both a retail and a commercial capabilities within digital. Having both credit and debit on card on a single rails platform also helped. So it is the maturity of both Banno and card from an offerings perspective. In terms of the number, I think it will remain quite high. Q1 was even higher than last year. It really comes down to also, who has those components up for RFP? Our contracts are coterminous. That is pretty rare in the industry. If you are at a competitive core provider, you may not have your card contract or your digital contract coterminous with your core contract. So it may just depend.
That metric, I think will continue to be quite high as reflective of the quality of our solutions. In any one quarter, you might see it bounce a touch. It may not just be up and to the right always, because it depends on if they are an available customer to go after. Are they up for renewal at that point?
Got it. Have to ask about the AI kind of risk. There is a lot of concern with investors about disruptive force, AI being in bank technology. How do you think about AI reshaping behavior or the competitive dynamics in the industry?
We view AI as an upside for us. We have been doing a lot with AI for quite some time, whether that be machine learning or past generations of AI. Our gen AI strategy started from a place of governance, started from a place of control, starting from a place of putting frameworks together. Now it has gone to then, okay, how do we drive adoption? How do we get that change management?
Now we have our associates embracing that. We have AI coaches that work with each product group to think about use cases, to think about tools evaluations, but we do it quite holistically, whether it is from vendor management all the way to deployment and monitoring of the costs, because it can be quite complicated, and it can be quite expensive. We are trying to be very thoughtful, and part of our mantra is always human in the loop.
We are a highly regulated industry. Our customers are highly regulated. Data is critical of privacy, and what our customers compete on at the end of the day is service, relationship, and trust. We need to make sure that there is a human in the loop. We need to make sure there are guardrails. I think our customers will rely on us as a vendor, as a trustworthy partner to help them deploy AI. We have now packaged a lot of the processes and tools that we have used internally to Jack Henry, and we are seeing things like 90% efficiency in some of the developer cases, et cetera. We have been packaging up that policies, how do you talk to boards about it? How do you get use cases? How do you manage the cost of tokens?
We packaged a lot of that, and now we are selling those services, whether that be AI consulting or that be things like we call AI Fabric, which are sandboxes, and how do you get something that is enterprise grade ready, not just vibe coded fun, but how do you get something AI enterprise grade out into your organization? We have been packaging and helping our clients come along that AI journey with us.
Yeah, I think you guys have talked about the speed that AI helps with implementations or just even thinking about certain projects taking two years instead of three. Other folks are kind of focused on, or at least a lot in the market, investors are thinking about cost cuts and obviously automation of the processes. How do we think about the change level of our R&D spend needed to fund the roadmap?
Yeah. Our first premise is do more with the same. We will do tactical layoffs. We are always looking zero-based budgeting from a headcount. We have been able to keep headcount growth at roughly 1% for the last five years. So it is doing more with the same. Similarly, we spend about 14%-15% of revenue on R&D, and that has been able to do all of the digital work, all of the treasury work.
We have new Financial Crimes Defender products, the platform work, as well as enhancing the legacy cores, our foundational cores. So, all of that work we have been able to do. I do not think our R&D has been constrained by dollars. If I am honest, I think it is constrained by the bandwidth of our customers. It is constrained by the bandwidth of the regulators to approve, and it is constrained by adoption.
We like to develop things just kind of skate to where the puck is sort of thing, of where we think the adoption will be ready for the product. So, over the long run, could we see that R&D spend come down? Sure. As you are getting these huge productivity gains, I could see R&D coming down in the future.
Yeah. Another big debate amongst investors is just thinking about how to monetize the AI. Are you seeing the banks, do they see this as a feature, a premium feature that they are willing to pay for, or is it more just the fact that everybody has got to be able to distribute AI products?
Yeah, I think it is a bit of both, and I think frankly, we are in early innings in general across the economy. I think there is a lot of test and learn. I think there are fewer places where you are seeing real positive concrete ROI being shown. I think that people have a higher expectation of what enterprise-grade software is going to have built in. I know that we are doing a change internally.
We are doing in finance a new ERP system, and what I expect from my vendors is AI embedded within. I do not want to have another vendor management where I have AI on top, or something that I have to manage. So, I think there is a blend of expectations that your true trusted partners are going to be there to help you, to give you the guideposts of where AI is going, and to embed some functionality.
But there's certainly going to be areas where the value delivered is considerable, and the willingness to pay, therefore, is high. I think it's going to be a blend of both. I think there's going to be some that help you just win, help you keep price where they are. I think there's some that's going to be, you can monetize because it is a distinct value add that didn't exist before. And I think there's going to be a blend of it as we kind of have these use cases proliferate.
I wanted to ask about the card and the payments growth algorithm. What's your outlook for card growth for the remainder of the year and the payments segment broadly as a major contributor to the overall growth of the firm?
Yeah. Payments is our largest of our three operating segments, and then our fourth operating segment being corporate and others. If we think about the payment segment, it's roughly around 38% of total revenue to 40% of total revenue, just from like a ballpark perspective. We've seen tremendous growth in payments, and I think it's come from a number of ways. We talk a lot about card. It's the biggest driver within payments. You continue to see the resiliency of the U.S. consumer. So we serve U.S. banks and credit unions. And again, we are predominantly debit-focused. Both in distribution as well as revenue, we are more debit-focused. And you're seeing just the continued strength of the U.S. consumer. We thought tariffs might pull back spending. We all know inflationary pressure is hitting across a number of everyday spending goods, and yet spending is still good.
That's part of what's driving the growth in that payment segment, is a continued growth in card, and then that drags along ancillary services. So you have fraud and monitoring and alerts and a lot of other services that are companion, help the institutions on payments. But the other thing that's helping is we're seeing a resurgence in bill pay. We did the Payrailz acquisition, and that with iPay, we blended those businesses together. We're also seeing really substantial growth in faster payments. It's still smaller volumes. Not a lot of people have, for example, FedNow Send on or doing a ton of send on RTP, but you have a lot of adoption. You're seeing a lot on the receive side.
Most of the send side is coming from the money center banks, but those use cases are starting to build up, and we think that that could be a big grower in the future.
Just on bill payment, that has been a weakness area for some others. How has that grown for you guys, and what is the sustainability of it?
Yeah. We did a lot of modernization, combining the Payrailz platform with the iPay platform, and it is still small single-digit growth rate, so it is much lower than the overall Jack Henry growth rate, but it is picking up. And so just that being less dilutive to our growth is really helpful, and that is just expanding the functionality, expanding the use, having more mobile strategies, having more integration with the cores from a seamless perspective, having more across our payment solutions, more integration with our enterprise payment solutions. So that is really what has been driving it.
And then just for the segment overall, do you think about it just growing at a similar growth rate of Visa and Mastercard, or because you are gaining share and growing the card number that you should be able to grow a little bit above that?
We tend to grow a little bit above the U.S. domestic numbers for debit out of Visa and Mastercard, just for the reasons you say, because we're getting new logos, we're getting new wins, and we also have ancillary businesses that support that card volume. It's a good proxy. It's a good proxy.
Yeah. I want to ask about cybersecurity and the Mythos changing purchasing behavior, and where do you have product alignment there?
Yeah. We do an annual strategic benchmark survey. It's out on our investor relations website as well, the highlights of that. For the first time, pretty consistently over the last five years, you had deposit gathering, efficiency in the institution, lending. For the first time, we're seeing AI really pop up on that priorities list, with a lot of clients saying that AI will be one of their top spending areas. We're helping them, again, through packaging some of the solutions we use in-house, helping them along that journey, but also with the absolute solutions that we're offering.
Got it. Margin leverage for you guys has always been something of a positive, and I think you're starting at fiscal year 2027 at 20-40 basis points again, and you're optimistic that maybe those ranges move up. How do we think about the margin optimization? It's clearly been a focus since you've taken the role, and should investors think about that 20-40 basis points being kind of more the floor than the target?
Yeah. I do think that's the way to think about it. So 20-40 kind of absent a macro event is what the model produces. More importantly, we're focused on compounding margin expansion. So we're on track for this being our fourth year of positive margin expansion, and we know that that is a critical part of the investment thesis of Jack Henry. So we are going to deliver. I also see that this year, we've talked about as part of that guide that there are some headwinds this year. So we're doing a lot of migration of loads from the Jack Henry data center to the public cloud, so there's some extra compute in there. We're also doing a big project that we call EC2030, which is getting out of the data center ownership business.
As we move to more colo, out of Jack Henry owned, there's planning and spending and kind of a big sophisticated project that goes around that. So that's a bit of a margin headwind as well. On top of that, the question you asked earlier around Mythos, we're spending a lot on frontier model vulnerability assessment and remediation. All of that is in the guide. So we think that there's upside from there. We're hopeful that this year, again, that we'll be able to drive some upside. We're only past Q1 for us right now, so a little too early to raise the guide on that. We did reiterate.
As I think about the next two to three years, I think there's great tailwinds that will continue from a margin expansion story as you continue to have on-premise shift to private cloud, which I think could accelerate in the current kind of vulnerability world, cyber world we're living in. Plus, you have the, once we get past the EC2030, the moving to the full public cloud and co-location managed data center business. The product mix says you have these new products with greater adoption. Those newer products already have even better margin profiles. So there's a number AI on top of that. So, on top of all of the continuous improvement and efficiency we're so focused on, you have AI that will drive margin expansion as well.
I think as I just kind of look a little bit wider aperture, out a couple of years, I think there's even more positive news from a margin expansion story.
What about headcount? I guess I think about it in two parts. Maybe the sales force headcount, are you still growing that? Is that still an area of growth? On the operations side, is there maybe a place to reduce some of the headcount due to some of the AI delivery now?
Yeah. As I said, over the last five years, we've been able to contain headcount growth at about 1% per year. We always look at it from a zero-based budgeting standpoint. We always look tactically of like, what are the needs? We're trying to also upskill our workforce to be, whether it be developers who can develop on API, public cloud native frameworks, down to operations, where are the needs going to be within the business? As I see it kind of going forward, we've increased sales a little bit, but frankly, we have the infrastructure and framework in play. There's nothing internally that constrains us from more wins, whether that be the RFP teams, to the sales teams, to the back office ops, to the billing, to the integration teams. We added two new implementation teams last year.
We have more than enough capacity if we continue to see the success on the new sales that we've been seeing as of late, and if that accelerates even, there's no capacity constraints within our organization. The beauty of the long sales cycle is you get great lead time visibility to what the people needs are in the organization. We feel really confident about that. But I think as we think about headcount overall, as we continue to drive productivity through AI tools, we're going to continue to find that right balance of keeping headcount flat, doing more with the same, to maybe eventually, within individual business units, reducing headcount.
Wanted to ask just overall the big picture on pricing and renegotiating contracts, and as contracts come up from renewal, especially in core, it always comes out that there's always a big reduction in some of the deals in order for the incumbents to keep the bank with the provider. We always were confused on why there would be
Yeah
such a reduction given that it's the pain to move and shift. Be curious your thoughts on pricing and renegotiating of the contracts in today's world.
Yeah, I do think if there's two fallacies about Jack Henry that we always try and correct in the market, one is that we only play in small banks, which is totally not true. We go up and down the size. We intentionally don't serve the money center banks, especially with core. Our largest core customer is about $50 billion in size, but in payments and complementary, we serve clients up to $200 billion in size. So that's kind of the first fallacy. The second fallacy is that we have pricing power. Unfortunately, we do not in our industry, and it's because of a couple of things. One, you have our customers hire consultants whose primary job is to drive down kind of price and get favorable terms, and they take their jobs very seriously. The other is the competitive dynamic of our industry.
I like to think of the end contract is based on a factor of service, innovation or technology quality, and price, right? Those are kind of your three levers of a stool kind of thing. At Jack Henry, we're never the lowest cost producer. We're a value player. We think we deliver great innovation, great technology. We have impeccable service quality numbers, and therefore, we are a premium player. But when you have competitors who don't necessarily have those same assets, they don't have the strength of great service quality, and they may not have the strength of the innovation or technology delivery, the only lever they have left in their arsenal is price. Sometimes you have an industry where competitors are much lower price, which ends up on a renewal. There's always the threat someone could leave, right?
Even though over 50% of our core customers have been with Jack Henry over 20 years, the reality is you just don't know, right? At that renewal time, there tends to be, on a like for like, there tends to be some price compression that happens. But we more than offset that on the total contract value because of the other solutions that they're buying at the time during that contract renewal.
On an annual basis, how many cores actually end up leaving because of price? Is it very few?
We have 99% client retention ex-M&A, so it's few.
Yeah.
It's few.
Yeah. Wanted to ask about capital allocation and how you're thinking about M&A versus share repurchase and dividends.
Yeah. We're always exploring and looking. We talked to Rick at Citi here for M&A, and always looking to see what might be on the landscape. But we have done over 50 acquisitions in Jack Henry's history. It's part of how we got to have the fulsome complementary solutions and products that we have today. But today, we have less gaps from a roadmap perspective than we've ever had before. I would say over the last five years, as you had valuations at some crazy levels, and as we had a clear focus on what our technology direction was going to be from a public cloud native API first, we did more building than we did buying. Today, we look at kind of every deal that crosses our desks, but there are not big gaps.
If we think about the functionality of what a bank or credit union does, we intentionally don't offer wealth services. We intentionally don't do kind of some of the mortgage cyclical underwriting. But pretty much everything else in that whole solution end-to-end, we have services and solutions to support them. From a capital allocation, we have very strong free cash flow conversion. We've forecasted 85%-100% free cash flow conversion this year. We have a longstanding dividend policy that we'll continue to maintain. Last year, we did the Victor acquisition at the beginning of last year, a small acquisition that got us into the embedded payment space, the payments as a service space that we're quite excited with. But we didn't see a lot of bigger acquisitions, and the net of that was we ended up doing over roughly $450 million worth of share repurchases.
I think that pattern will hold in the absence of M&A. We're already spending what we think is the right size allocation from our R&D perspective, the dividend policy, and then there'll be share repurchases.
Is there a formula you think about dividends every year, or do you try to increase a dividend with net income, or how do you think about it?
It's a bit of both. One, we're almost at aristocrat status, and we will get there on that. With EPS over the last couple of years being more modest because you had deconversions being lower. At the beginning of my tenure, there was a dearth of M&A in the industry, so it kind of held back some of the EPS growth. We didn't increase the dividend substantially then. We are a blend of a growth company focus, as well as an attractive dividend policy, so we'll look to see what we think EPS growth will be, and we'll also see, what do our shareholders want? Would they prefer it to be in dividend, or would they prefer the flexibility of share repurchases? We'll kind of hit a balance of that.
Okay, great. Mimi, we'll keep it there. Thanks for being here.
Appreciate it. Thank you all.