Operator:

Good morning, and welcome to the Jack Henry Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Vance Sherard, Vice President, Investor Relations. Please go ahead.

David Foss:

Thank you, Vance. Good morning, everyone. I'd like to begin today's call by remembering Jack Henry Board member, Laura Kelly, who passed away unexpectedly on March 15. Laura served on our Board for over a decade and was a cherished colleague and friend to all who had the privilege of working with her. With over 30 years of experience in senior leadership roles, she brought invaluable insights, wisdom and financial expertise to our organization. Beyond her remarkable professional achievements, Laura was known for her kindness, generosity and unwavering dedication to making a positive impact. Our thoughts and deepest condolences go out to John and Jake and the rest of Laura's family during this incredibly difficult time. Let's now transition to our quarterly results. We're very pleased to report another strong quarter of revenue growth and overall business performance. As always, I'd like to thank our associates for all the hard work and commitment that went into producing those results for the quarter. For the third quarter of fiscal 2024, total revenue increased by 6% for the quarter and increased 7% on a non-GAAP basis. Operating income increased 3% for the quarter and increased 9% on a non-GAAP basis. Turning to the segments. We again had a strong quarter in the core segment of our business. Revenue was up by 7% for the quarter and increased 8% on a non-GAAP basis. Our payments segment performed very well, posting a 5% increase in revenue this quarter and a 6% increase on a non-GAAP basis. We also had a solid quarter in our complementary solutions businesses, with a 5% increase in revenue this quarter and an 8% increase on a non-GAAP basis. As I highlighted in the press release, this was our best third quarter ever for sales bookings. During the quarter, we inked 11 competitive core takeaways with one of them being a multibillion-dollar institution. For the year, we've now signed six multibillion-dollar institutions topping last year's full-year total of five. Additionally, we signed seven deals to move existing in-house core clients to our private cloud environment. We are seeing strong interest in our new Financial Crimes Defender solution with 11 new contracts in Q3. Additionally, we signed 45 new contracts for our new Financial Crimes Defender fraud module, for the Zelle, FedNow and RTP payments networks that uses artificial intelligence and machine learning to detect fraud and money laundering in real time. We continue to see success with our card processing solution, signing 14 new card processing clients this quarter. Our Banno digital banking platform remains very popular with 69 new signings in Q3 including 37 contracts for Banno business. We now have over 11.6 million users live on Banno and we're continuing to add approximately 200,000 users per month. Even with our strong sales success in Q3, we continued to replenish our sales pipeline and keep it near an all-time high. As we look towards the end of our fiscal year, we remain very optimistic about the industry, the demand for our solutions our ability to deliver outstanding service and our long-term prospects for success. With that, I'll turn it over to Greg for more detail on our solutions and businesses.

Mimi Carsley:

Thank you, Greg, and good morning. Our continued focus on serving our community and regional financial institution clients, delivering shareholder value led to another quarter of solid revenue and earnings growth. I'll start with the details driving our third quarter and year-to-date results, then conclude with our full-year guidance update. Q3 GAAP revenue increased 6% and non-GAAP revenue increased 7%, a continuation of consistently solid performance and keeping us on track for a strong fiscal 2024. Year-to-date growth was 7% on a GAAP basis and stronger on non-GAAP at 8%. Deconversion revenue of approximately $800,000, which we pre-released last week, was down approximately $5.3 million, reflecting minimal financial institution consolidation of our clients. Year-to-date deconversion revenue is $9.9 million, $7.2 million less than the prior period. Now let's look more closely at the details. GAAP services and support revenue increased 4%, while non-GAAP increased a more robust 6%. Year-to-date, the increase was 6% for GAAP and 7% on a non-GAAP basis. Service and support growth during the quarter was the result of increases in data processing and hosting revenues. We continue to experience robust growth in our private and public cloud offerings, which again increased 10% in the quarter and for the year-to-date. This reoccurring revenue contributor is 32% of our total revenue and has long been a key to double-digit growth engine. Shifting to processing revenue, which is 43% of total revenue and another key component of our long-term growth model. We saw positive performance with 8% growth on both a GAAP and non-GAAP basis for the quarter and year-to-date delivered 9% for both. Consistent with recent results, drivers include positive demand for our digital solutions, card processing, other payment processing and other processing revenues. In closing out revenue commentary, I would like to highlight total recurring revenue exceeded 91%. Next, moving to expenses. Beginning with cost of revenue, which increased 7% on both a GAAP and non-GAAP basis for the quarter and 7% for GAAP versus 6% for non-GAAP year-to-date. Drivers for the quarter included higher direct costs consistent with increases in related revenue, higher personnel costs and increased internal license and fees. Next, R&D increased 4% on both a GAAP and non-GAAP basis for the quarter. The increase is primarily due to cloud consumption costs net of capitalization. For the year-to-date, R&D increased 4% on a GAAP basis and 3% for non-GAAP. And lastly, on a GAAP basis, SG&A rose 7% for the quarter and 8% on a non-GAAP basis primarily due to higher personnel costs. Year-to-date SG&A expense increased 23% on a GAAP basis and 9% on a non-GAAP basis. The primary GAAP differences are the $16.4 million in onetime related costs related to the voluntary early departure incentive program. [indiscernible] in Q1 and prior period $7.4 million gain on asset sales. For non-GAAP, the difference is primarily due to the higher personnel costs and absence of gain on sale of assets. We remain focused on generating compounding margin expansion and the quarter results delivered 30 basis points of increased non-GAAP margin, which was 20.8%. Non-GAAP margin benefited from focused process improvements and disciplined management of our workforce, while retaining key talent. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.19, up 7%. Separating results into the 3 operating segments, we're pleased to see across the board positive performance. Our core segment revenue increased 8% for the quarter on a non-GAAP basis, with non-GAAP operating margins increasing 216 basis points. We continue to benefit from private cloud trends and strong cost control. Year-to-date, non-GAAP revenue growth was 8% and the associated margin increased 124 basis points. Payments segment revenue increased 6% on a non-GAAP basis. The segment had impressive non-GAAP operating margin growth of 121 basis points. This was due to continuing growth in our EPS business, and moderate card growth consistent with U.S. consumer spending trends and a slightly tough comp combined with the focused cost management. Year-to-date, non-GAAP revenue growth matched the quarter at 6% with 103 basis points of margin expansion. And finally, complementary segment, non-GAAP revenue increased 8% with 33 basis points of margin expansion. Year-to-date, non-GAAP revenue also increased 8% with 28 basis points of margin expansion. Growth year-to-date reflects digital solution demand and beneficial overall product mix. Segment quarterly margins were impacted by moderate headwinds from direct support costs and license and fees. Let's now turn to a review of cash flow and capital allocation. Year-to-date operating cash flow was $336 million, $129 million increase over prior period. Excluding proceeds from the sale of assets, free cash flow was $172 million, significantly more than the $54 million last year. Our base case entering the year included an elevated level of cash tax payments based on the Section 174 impact. Based on legislative clarity and internal efforts, we were able to meaningfully lessen the impact. The net result was lower cash taxes equating to an approximately $29 million overpayment last fiscal year, as well as improved cash tax outlook this fiscal year. Our consistent dedication to share value creation resulted in a trailing 12-month return on invested capital of 19%. Additionally, I would highlight other notable return on capital metrics for the year-to-date period, including $20 million in share repurchase offsetting annual dilution, $25 million in debt reduction and $116 million in dividends. With three quarters of the year complete, we're nearing the conclusion of our fiscal year, and therefore, I'll conclude with guidance changes. As you're aware, yesterday's press release included updated fiscal 2024 full-year GAAP guidance along with a reconciliation to non-GAAP metrics. As a reminder, we filed an 8-K on August 3rd that described how starting in the current fiscal year, we're using a revised approach for deconversion guidance. While we reported third quarter deconversion revenue of approximately $800,000, we are reiterating our full year deconversion guidance of $16 million. We are reiterating both GAAP and non-GAAP revenue growth and expect non-GAAP growth to potentially have a bias towards the lower end of our 7.4% to 8.0% growth range. Due to the continued positive operational results and a focus on cost management, we now expect an increase in annual non-GAAP margin expansion of 45 to 50 basis points compared to the 35 to 40 basis points previously provided. The full-year tax rate estimate remains at 23.5%. Incorporating the noted positive update, full-year guidance for GAAP EPS is revised upward to $5.15 to $5.19 per share from the previous guidance of $5.09 to $5.13 per share. As a reminder, the guidance or deconversion revenue compared to actual fiscal 2023 deconversion revenue, VEDIP, severance-related costs and nonrecurring gain on asset sales results in approximate $0.37 headwind for GAAP EPS for fiscal 2024. Due to the better than initially anticipated cash tax payments, improved margins and contributions from favorable net interest, our full year guidance for free cash flow conversion has increased to 70% to 75% from the previous commentary of 60%. In conclusion, Q3 results reflected continued momentum of the strong execution we've seen thus far this year and we expect a solid finish for the remainder of the fiscal year. We remain exceptionally positive about our ability to deliver innovative and in-demand solutions, the resilience of our clients and our focus on execution and shareholder value creation. We appreciate the contributions of our diligent and dedicated associates that drove these strong results in Jack Henry investors for their continued confidence. Before I turn the call back over to Dave for closing remarks. While I haven't had the pleasure of working with Dave as long as others, I cherished our time together. I want to thank Dave for giving me the opportunity to work for this amazing company for being so incredibly generous with his wisdom and support for so many small and meaningful pieces of guidance over the past two years. He is a role model of service, leadership and doing the right thing. We are fortunate to have him lead the Jack Henry Board, and I look forward to this continued journey together. Dave?

Operator:

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Kartik Mehta of Northcoast Research. Please go ahead.

David Foss:

Thank you, Kartik.

David Foss:

So I'll give you my perspective, and then I'll ask Mimi to comment. So first off, I mentioned in the release and in my comments that this was a -- the best sales quarter we've ever -- best third quarter sales quarter we've ever had. And I also highlighted the fact that the sales pipeline has been replenished almost to that same record level that it was at last quarter. So as I see what's going on in the sales pipeline, but even more importantly, as I see what's happening here in the quarter that we're in right now, which, of course, we're not here to announce, I feel really bullish about the future opportunity as far as sales at Jack Henry and our ability to continue to deliver. So that's a sales perspective. I'll ask Mimi to go -- oh, did you want to say something.

Mimi Carsley:

Yes. The only thing I would add, Kartik, is that we feel really good about all three operating segments revenue. The total revenue is still very much in line with our long-term algorithm and what we thought about at the beginning of the year. There is a part of our business that does relate to economic factors in U.S. [indiscernible] that's the card business. So I think as we look out for the year, we feel really confident about our ability to hit that range.

Gregory Adelson:

Yes, it's a great question, Kartik. So the short answer is we are spending a lot of time on internal operational efficiency opportunities throughout our entire organization. In fact, we most recently had a corporate leadership team meeting where each of the individual business units and nonoperating business units all presented their ideas for utilization of AI and specifically generative AI. And so we're going through prioritization. We've done a really good job of spending time making sure that we're focused on building the efficiencies first. Getting the learnings and all the other stuff. We've just approved a couple of utilizations for the Microsoft copilot for internal use and the GitHub codeveloper stuff for the developers -- or copilot, sorry. And we're actually in the process of going through all of those things and looking for ways that we can continue to build efficiency and effectiveness first as we're actually doing some other things within some of our products that I announced as well.

Kartik Mehta:

Perfect. Thank you very much. Appreciate it.

Andrew Schmidt:

Hi, Dave, Greg, Mimi. Thanks for taking my questions. And Dave congrats again on the transition.

Andrew Schmidt:

Want to start on the margin front. Good performance here. Mimi, maybe you could put a finer point on this. I know that there were some -- you mentioned some operational efficiencies that drove this maybe some mix factors as well. But maybe a finer point on that. And then as we think about the go-forward margin trajectory, it seems like you're above this year, kind of what you've outlined for the longer term. So how does this -- this year's margin performance kind of inform the view on the longer-term margin progression? Thanks a lot.

Andrew Schmidt:

Perfect. And then maybe just digging into the average contract size of recent cohorts. I know the attach rates have gone up over the past few years, but maybe you can put just a finer point in terms of what you're seeing in terms of just a complementary product adoption and just average contract sizes perhaps recent periods versus maybe a year or two years ago. Thank you very much.

Andrew Schmidt:

No, it makes sense, yes. A lot of different shapes and sizes that they're [indiscernible]. Congrats again, Dave. Thank you very much.

David Foss:

Thank you.

Darrin Peller:

Thanks. And Dave, I want to -- also my congrats as well. [indiscernible] so always appreciate the help. Guys maybe just start off on a free cash discussion. If we could just revisit, it obviously has gone through its periods of strength above 80% and below 60%. Now you're saying back to 70%-plus. Maybe just give us a sense a little more on what the driving factors are and the sustainability of it now and -- maybe just help us understand if we're back to 80% going forward in the next couple of years?

Darrin Peller:

Okay. That's very helpful. Thanks. Greg maybe just on your side, if you just talk about what you're seeing in the market more specifically around demand for core commercial use order. Obviously, the cloud discussion we've had for some time now. Again just inflections you're seeing for specific products or offerings or maybe vice versa anything that's weaker? Any more color would be great. Thanks.

Darrin Peller:

Great. Thanks guys.

Vasundhara Govil:

Hi, thanks for taking my questions. I guess first quick one for Mimi. I know it's a little too early to talk about the '25 outlook, but just based on the new sales momentum that you've had this year, it seems like you're setting up for stable, if not accelerating revenue growth into next year. Any reason to think that may not be the case? And then Mimi if you could also specifically comment on the payment segment, trending slightly softer than we would have thought, just how it performed relative to internal expectations and what you're expecting for the go-forward trend line there?

Vasundhara Govil:

Thank you for that. And then, Dave, I want to add, I've really enjoyed working with you the last few years, and you will certainly be missed. One high-level question for you. Three big players that have the majority of the share in the industry, but the number of Fintechs that are going after the opportunity is larger today than it probably was a few years ago. So how do you see the competitive landscape evolving over the next three to five years?

Vasundhara Govil:

Thank you for the color.

Tyler DuPont:

Hi, good morning. This is Tyler on for Jason. Thanks for taking the question. I wanted to start by asking about the progress in rolling out some of the complementary solutions such as that a business financial tenders outside the core. Can you maybe just level set where we are today with that rollout. If I remember right, the target was some sort of implementation by the end of F '24 and just sort of when you think this might be needle moving going forward? Any clarity there?

David Foss:

Can I offer just one clarification to your question, Tyler, just to make sure we're on the same page here. So what Greg has talked about is these brand-new solutions that we're rolling into outside the base. But we have thousands and thousands of deployments of other solutions to non-Jack Henry core customers. So I just want to make sure there's no confusion about we've been selling outside the core base for many years, thousands of -- in fact, I think we have more customers, more banks and credit unions running our bill pay solution who are not Jack Henry core customers than who are Jack Henry core customers, and that's true for a number of other solutions. So I just want to make sure we're clear on the fact that we know how to sell outside the base. it's just the strategy around these brand new solutions that we've been really kind of talking about and thoughtful about.

Gregory Adelson:

Yes. Sure. This is Greg again. So I'll take that. So as we've mentioned previously, and there's still all in the queue, we have three $20 billion plus opportunities in our current pipeline, and we continue to work those and continue to make progress on those. But I would say that even in the multibillion space, let's just call it the $5 billion to $15 billion we're continuing to see more and more opportunities in there. And I would say the biggest drivers really are the technology modernization strategy that we have articulated and what folks are seeing for the future. And more importantly, what we've already executed on as you can imagine, most people want to see that it's not just a sales pitch. It's some level of execution, and we continue to show advancements on what we've done, where we're going. And things along that line. So that has really helped us continue to move and progress in the sales pipeline with many of these larger opportunities. So I think what you're going to continue to see is what we're doing on the technology side, what we've always been known from the service side continue to create those opportunities.

Operator:

The next question comes from Dave Koning of Baird. Please go ahead.

Mimi Carsley:

Yes, I think I wouldn't read anything into just like a one quarter. We did have -- relative to last quarter, we talked about that the annual merit increase is hit in Q3. So from a cost perspective, that's where you saw personnel cost go up. The revenue it could just be hardware or as you mentioned last quarter was the conference, but I would not read too much into that.

Mimi Carsley:

Yes. This is certainly a one-off. So as you know, for deconversions, we do get a little bit of notice once they start the file transfer process. So we were informed that a financial institution had planned to deconvert and then later postpone the timing and delay. And so there was a bit of a reversal on that transaction.

David Koning:

That's great to hear. Thanks guys.

James Faucette:

Great, thank you very much. And I also want to extend my thanks to Dave for all the hard work you put in on behalf of Jack Henry over the years. I wanted to quickly maybe take advantage of Greg and Dave being here and dig in a little bit on your commentary about customer sentiment. I'd love to get your thoughts on the regulatory scrutiny that banks are going through right now, which seems to be picking up as several of the banks have alluded to plans to adjust their capital liquidity and CRE concentrations over the next several quarters. That doesn't seem to be impacting your bookings and sales performance, but curious if the topic of greater regulatory scrutiny is coming up with customers and how you're thinking about what you can do to help those customers as they deal with that.

Gregory Adelson:

No, I think you were pretty complete. I think the part that I would say is that the technology component really is the driver here is that more and more folks are recognizing for them to continue to be able to punch above their weight, especially in the community bank space is that they're looking for technology to stay to the level of relevancy that they need to be. And that's why we've been so adamant on our focused execution on getting these products out and giving us and our institutions an opportunity to do that.

Gregory Adelson:

Yes, it's a great question. And it is absolutely something that we look at truly every month with our teams through -- we go through a very detailed financial analysis and variance reviews with each of our business unit leaders and those discussions always take place. And so Mimi already referenced the kind of business cases. And so we actually take a business case approach where we look at what we may need to add relative to enhancing the implementation queue, what kind of value are we able to provide both from an immediate revenue standpoint, helping kind of relieve some pressure on the sales side, things along that line. So we actually have done that multiple times this year where we've added resources to accelerate queues or to do things differently. We're also constantly looking at process improvements that we can do both from a systemic standpoint or just general process improvements, obviously, the questions that were asked about AI earlier, we're looking at ways that AI might be able to help us with some of those. But to answer your question, we are constantly evaluating both sides, but we also recognize as long as we can continue to move that queue forward and it makes sense, then we're going to add people to make sure that, that happens.

Gregory Adelson:

Sure.

Charles Nabhan:

Great, good morning. And thank you for taking my question. And I just want to echo everybody's gratitude and congratulations, Dave. It's been great working with you. I just want to wish you all the best. So I wanted to follow up with the earlier question on some of the progress you've made in the middle market and just get a better understanding of how we should think about some of those larger relative banks from an ARPU standpoint as well as their product consumption in terms of like what products there -- how it compares to some of your -- the smaller banks in your customer base, what they're buying, what they're not buying, and what's helping you win those deals as well.

Charles Nabhan:

Great. Thank you. And as a follow-up, I just wanted to get your general thoughts on M&A and consolidation in the bank space. There's been a handful of deals announced in the past month. And it seems like the regulatory scrutiny that you had alluded to could be a catalyst for consolidation. But as you think about the next year or two, I just wanted to get your general thoughts on M&A in the bank and the credit union space?

Mimi Carsley:

I would just add on that, that creates a little bit of a headwind for us this year. We talked about the lower deconversion revenue of people leaving that also impacts us from the convert merge. And in Q3, we saw approximately $3.5 million less year-over-year in convert merge revenue.

Charles Nabhan:

Got it, thank you.

John Davis:

Hey, good morning guys. And Dave, I'll echo my congrats. You'll be missed. But maybe before you go or maybe Greg can hop in here. But just thoughts on capital allocation. We're talking about free cash flow conversion going up. It looks like you guys haven't bought back stock in a couple of quarters. balance sheet is in good shape. So just broader thoughts on capital allocation, maybe more specifically, buybacks.

Gregory Adelson:

Well, I think we continue to look at opportunities to buy back. And I know Mimi has done a great job of presenting use cases and timing. So we're continuing to look at that. Obviously, we're focused on free cash flow and the opportunities of continuing to improve that. So the opportunities are closer to that than they were in the past.

John Davis:

Okay. Great. And then, Greg, it seems like Banno Business is off to a pretty good start. I just would love to get your thoughts longer term where you see the mix of like Banno Business versus retail. I know we're really early innings today, but just how you think about that over the next, call it, three to five years, just the mix between retail and business in Banno?

John Davis:

Okay. And then maybe just -- I really appreciate the clarification there, but maybe the better way to rephrase is, what kind of adoption or what percentage of banks adopting of your current base adopting Banno Business, would you guys kind of consider success over the next, let's call it, three or five years? Is it 30%, 40%, 80%? Just trying to some guidepost on how thinking about that longer term?

David Foss:

I won't be here anymore. Can I vote for 100%.

John Davis:

Okay, appreciate it. Thanks for the color.

Cristopher Kennedy:

Good morning. Thank you for fitting me in. And I'll echo all the comments for Dave. Just one last one. Just a follow-up to that last question. And clearly, Banno Business is a big initiative. But can you just talk about some of the other opportunities and initiatives that you have to capture that commercial banking opportunity, especially within small businesses?

Cristopher Kennedy:

Great, thank you. Thanks for fitting me in.

Operator:

The next question comes from David Togut of Evercore. Please go ahead.

David Foss:

Yes. I don't -- thank you, Dave. I don't think that it's a big item of consideration regardless of the size of the bank. It's all about where they are with their strategy, where they are with their relationship with whoever they're their process there is. The decision regarding core is a totally independent decision from who am I going to do debit and credit with and what am I looking for as far as functionality and all that. And I think that whole decision process has been conflated in the industry in the past few years as some of our competitors have tried to try to sell a narrative that if you have the quarter, you're going to get the card business that's not necessarily true. You have to provide great service and great product on the card side in order to win that business. So they're really divorced of each other. As far as the -- where are we at on the credit side, so I didn't mention in my script, but we did sign three additional credit customers in the quarter. So we're continuing to make progress there. But you'll recall, Dave, when I first started talking about our move and getting into credit, I said at the time, this will be a slow grower for us. It's not that everybody is looking for Jack Henry to offer credit, but there are some customers who want the same processor to provide debit and credit at the same time on the same platform. And so it was a necessary offering for us, but we never had an expectation that it was going to be a really fast grower or become a really significant part of our revenue stream and sure enough, that's the position that we're in today. But we have a very complete offering. We have a partnership with another entity to offer agent program. And so I think we're in a great position today, but it has lived up to the expectation that I set with you all years ago. Not a great big grower, not a great big piece of our portfolio, but a nice offering for those customers that want both together.

David Foss:

Thank you, Dave.

Kenneth Suchoski:

Hey, good morning. Thanks for taking the questions. Maybe I think I heard you say that for the full-year on non-GAAP revenue growth, I think you might come in towards the low end of that 7.4% to 8% growth range, which I think puts fiscal 4Q non-GAAP revenue growth, maybe slightly below 7%. So I just wanted to make sure I'm thinking about that right. Is there anything that would be driving maybe a slight deceleration. And I guess is that the right jumping off point for fiscal year '25.

Kenneth Suchoski:

Okay. No, that's really helpful. And then it sounds -- I mean, it sounds like there's a lot of momentum behind Banno and Crimes Defender, we got a few questions just on the slowdown in complementary revenue growth, just I guess -- is there anything to call out there in terms of that slowdown just because Banno, I think is becoming a bigger part of the business and the user growth is quite strong.

Kenneth Suchoski:

Yes. Okay. Great. Thanks so much. And Dave, congrats to you.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to Vance Sherard for any closing remarks.

Operator:

The replay number for today's call is 877-344-7529 and the access code is 2714678. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning, and welcome to the Jack Henry Second Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Vance Sherard, Vice President, Investor Relations. Please go ahead.

David Foss:

Thank you, Vance. Good morning, everyone. We're pleased to report another strong quarter of revenue and operating income growth. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for the quarter. For the second quarter of fiscal 2024, total revenue increased by 8% on both a GAAP and non-GAAP basis. Operating income increased 11% for the quarter and increased 14% on a non-GAAP basis. Turning to the segments. We again had a solid quarter in the core segment of our business. Revenue was up by 8% for the quarter on both a GAAP and non-GAAP basis. Our payments segment also performed well, posting a 6% increase in revenue this quarter on both a GAAP and non-GAAP basis. We had another strong quarter in our complementary solutions businesses, with a 7% increase in revenue this quarter and a 9% increase on a non-GAAP basis. As I mentioned in the press release, our sales teams again had an outstanding quarter with a number of notable wins. In fact, this was the best second quarter ever for sales bookings and second highest sales quarter in our history, trailing only our June quarter last year. In the second quarter, we inked 14 competitive core takeaways with four of them being multibillion-dollar institutions. Additionally, we signed 12 deals to move existing in-house core clients to our private cloud environment. We continue to see success with our card processing solutions, signing 12 new card processing clients this quarter. We also continue to see strong success signing clients to our Banno digital suite with 135 new contracts in Q2, including 56 contracts for our new Banno business offering. We also surpassed 11 million registered users on the Banno platform, which is a 25% increase over a year ago. I mentioned last quarter that our sales pipeline was at the highest level ever. It's logical to assume that it would be depleted after such a strong sales quarter in Q2. And However, we continue to add to our pipeline, and we ended the quarter on par with Q1, which projects very well for us for the remainder of the sales year. In late January, Cornerstone Advisors published the results of its annual survey of bank and credit union executives. According to that study, nearly 65% of banks and 75% of credit unions expect to increase their technology spending in 2024. This correlates with information we've seen from other sources, including bank director's technology survey last fall, in which a large majority of survey respondents said their bank's technology budget increased over the past year at a median rate of 10%. We are in the midst of conducting our annual Jack Henry strategic benchmark study and we'll share those results on our earnings call in May. We were pleased to have recently received two national workplace awards Newsweek's greatest Workplaces for Diversity and Computer World's Best Places to Work in IT. We also were named as one of America's most responsible companies by Newsweek for our corporate sustainability efforts. We are very proud of that recognition because we view corporate sustainability as a strategic investment for our stakeholders. I encourage you to read our 2024 sustainability report which will be published on March 29 on the Investor page at jackhenry.com. As you all know by now, a couple of weeks ago, I will retire from my current role on June 30 of this year. Greg Adelson will become CEO and President beginning July 1, and I will serve as Executive Board Chair effective on that same day. This transition plan has been carefully considered for some time and we are fortunate to have someone like Greg ready to step into the CEO role. As I said in the press release, it has been my immense pleasure to serve as CEO of this wonderful company for so many years. When I came into this role almost eight years ago, I had a number of large projects I wanted to address, and I'm happy that all of them have now been completed or are well on their way. I'm confident that Greg and the outstanding team we have in place today can continue our trajectory of strong growth, and I'm looking forward to working with them in my new role as Executive Board Chair. Of course, I'll be on the May earnings call, and I have a number of investor meetings scheduled between now and the end of our fiscal year. So, I look forward to speaking with many of you in the coming months. As we focus on the second half of this fiscal year, our sales pipeline is very robust, and we continue to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our clients, our ability to expand client relationships, the spending environment and our long-term prospects for success. With that, I'll turn it over to Greg for an operational update.

Mimi Carsley :

Thank you, Greg, and good morning. Our continued focus on serving our community and regional financial institution clients, investing in our joint future and delivering shareholder value led to another quarter of solid revenue and earnings growth. I'll begin with the details driving our as expected strong second quarter and year-to-date results, then conclude with our full-year guidance update. Second quarter GAAP and non-GAAP revenue increased 8%, a continuation of the strong start to our year and keeping us on track for a tremendous fiscal 2024 as year-to-date growth was 8% on both a GAAP and non-GAAP basis. Deconversion revenue of $4.9 million, which we pre-released last week, was down approximately $1.5 million, reflecting minimal financial institution consolidation. Year-to-date, deconversion revenue is $9 million, $1.9 million less than the prior period. As a reminder, effective September 1 onward, Payroll's results are included in both GAAP and non-GAAP figures. Now let's look more closely the details. Cap services and support revenue increased a healthy 7%, while non-GAAP increased a more robust 8%. The first half increased 7% for GAAP and 8% for non-GAAP basis. Services and support growth during the quarter was the result of increases in data processing and hosting and the timing of user group revenues. We continue to experience robust growth in our private and public cloud offerings which again increased 10% in the quarter and for year-to-date. This reoccurring revenue contributor has long been a double-digit growth engine. Shifting to processing revenue. We saw consistently positive performance with 9% growth on both a GAAP and non-GAAP basis for the quarter and first half from this reoccurring revenue source. Similar to recent results, drivers included a combination of higher card and other payment processing with strong digital demand. Next, moving to expenses. Beginning with cost of revenue, which increased 5% on both a GAAP and non-GAAP basis during the quarter, 7% for GAAP versus 6% non-GAAP year-to-date. Drivers for the quarter included higher direct costs consistent with increases in related revenue and internal license and fees. Growth in cost of revenue was limited to 5% due to active cost control and the timing of merit increases. Next, R&D expense decreased 3% on both a GAAP and non-GAAP basis for the quarter. The decrease was due to lower personnel expense, net of capitalization and inclusive of benefits. For the first half, R&D expense increased 4% on a GAAP basis and 3% for non-GAAP. And lastly, on a GAAP basis, SG&A rose 24% for the quarter, 21% on a non-GAAP basis, primarily due to the shift in our customer conference from Q1 to Q2 and was higher personnel and related costs. Year-to-date, SG&A expense increased 31% on a GAAP basis and 9% non-GAAP. The primary difference is the $16.4 million in one-time costs related to the voluntary early departure incentive program need in Q1. We remain focused on generating compounding margin expansion and the quarter delivered 111 basis points in non-GAAP margin at 21.3%. Non-GAAP margin benefited from operational performance, and a one-time shift in our merit increases from Q2 to Q3, offset slightly by the timing of our customer conference. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.26 and up 14%. Breaking down the results into the three operating segments, we're pleased by the consistent solid performance achieved. Our core segment revenue increased 8% on a non-GAAP basis, with non-GAAP operating margins increasing 166 basis points, benefiting from private cloud trends and strong cost controls. Year-to-date, non-GAAP revenue growth was 8% and the associated margin increased 80 basis points. Payments segment revenue increased 6% on a non-GAAP basis. This segment had impressive non-GAAP operating margin growth of 128 basis points. This was due to the strong growth in our EPS business, moderate card growth coupled with our scalable operating model and disciplined cost control. Year-to-date, non-GAAP revenue growth matched the quarter at 6% with 94 basis points of margin expansion. It should be noted that card revenue growth has been negatively impacted by lower card production among other non-processing revenue items. Excluding these impacts, processing-related revenue increased 8% for the quarter and 9% year-to-date. Finally, complementary segment non-GAAP revenue increased 9% with flat margin. Year-to-date non-GAAP revenue also increased 9% with 25 basis points of margin expansion. Growth year-to-date was driven primarily by digital, recently released solutions and overall product mix. Quarterly margins faced headwinds from direct support costs, amortization of new products and licenses and fees. Now let's turn to a review of cash flow and capital allocation. Year-to-date operating cash flow was $239 million, a $48 million increase over the prior period, producing free cash flow of $129 million, slightly more than the $119 million last year. Excluding asset sale impacts of $1 million and $28 million from the current year-to-date and prior period, respectively, free cash flow was $37 million higher through the first half of our current fiscal year. Additionally, the timing of tax payments this year represented a $15 million headwind to free cash flow. Our consistent dedication to value creation resulted in a trailing 12-month return on invested capital of 20%. Additionally, I would highlight other notable return of capital metrics for the first half of our fiscal year, including $20 million in share repurchases offsetting annual dilution, $20 million in debt reduction and $76 million in dividends. As we head into the second half of fiscal 2024, I will conclude with guidance highlights. As you are aware, yesterday's press release included updated fiscal 2021 full-year GAAP guidance along with a reconciliation to non-GAAP guidance metrics. As a reminder, we filed an 8-K on August 3. It describes how starting in the current fiscal year, we are using a revised approach for deconversion revenue, guidance. Based on current trends, we expect to see similar acquisition levels of our core customers for the second half of the fiscal year. As such, we're reiterating our full-year deconversion revenue guidance of $16 million. Based on positive year-to-date results from strong execution and near-term visibility, we are tightening our revenue growth outlook around the current midpoint. We now expect to generate full-year non-GAAP revenue growth of 7.4% to 8.0% compared to the 7.2% to 8.2% provided on the November call. This corresponds to an increased full-year GAAP revenue guidance of 6.6% to 7.2% for fiscal '24. In tandem with our revenue outlook, we now expect an increase in annual non-GAAP margin expansion of 35 basis points to 40 basis points compared to the 30 basis points to 35 basis points previously provided. The full year tax rate is now approximately 23.5% with potential bias slightly higher. Incorporating the noted positive updates Full year guidance for GAAP EPS is revised upwards to $5.09 to $5.13 per share from previous guidance of $4.98 to $5.04 per share. As a reminder, the guidance for deconversion revenue compared to actual fiscal 2023 deconversion revenue, VIP severance-related costs, and nonrecurring gain on asset sales resulted in an approximate $0.37 headwind for fiscal 2024 GAAP EPS. Lastly, some additional modeling commentary. We are comfortable with the current level of huge consensus for revenue growth, operating margin and GAAP EPS. Our full year guidance of 60% free cash flow conversion is reiterated. However, the legislation that passed the house last week would have a material beneficial impact on fiscal 2024 free cash flow and beyond. We are monitoring legislative progress and are hopeful for a swift and positive outcome. Based on the current bill language, it past our free cash flow conversion would rebound to historical normal levels either in fiscal '24 or fiscal year '25, depending on the timing of certain items. In conclusion, Q2 reflects the strong performance we've seen consistently in the first half and expect the remainder of our fiscal year. We are exceptionally positive about our ability to deliver innovative and in-demand solutions, the resilience of our clients and our focus on execution and shareholder value creation. We appreciate all the contributions of our hardworking and dedicated associates that drove these strong results. We thank all Jack Henry investors for their continued confidence. Laura, will you please open the call for questions?

John Davis :

Maybe just wanted to follow up on the free cash flow comments that you just made. Getting back to historical levels, I'm assuming you mean kind of right around 100%. So that would imply kind of 40 points of headwinds that will get reversed. I thought before it was maybe 25 points or 30 points. So just, a, I just want to make sure when you say historical levels, you're talking in and around 100%. And is it kind of 40 points of headwind this year?

John Davis :

Okay. No, that's helpful. And then just on second half margins, I think the guide implies margins will be down year-over-year after being up over 100% in the first half of the year. So maybe just talk a little bit about some of the headwinds that you do face kind of in the back half of fiscal '24.

John Davis :

Okay. Great. And then, Dave, one for you, but also congrats on your retirement, your move to Executive Chair. And Greg, congrats on the CEO role. But Dave, you talked a lot about the competitive environment being fairly favorable. We continue to break records on the sales front, pipeline is robust. Maybe you can talk a little bit about what specific products or is there a segment of the market that you're having outside of success the top line results and the sales have been very, very good over the last 12 months. And just maybe a little bit more color on what exactly is driving that.

Operator:

And the next question will come from Nik Cremo of UBS.

Mimi Carsley :

Thanks, Nick, for the question. So, I would really point to you on the card within card within payments, the processing related. So that's the reoccurring nature of within that segment, and that grew strongly at 8%. And so that is an indicator of the overall success of that segment and our ability to get back to what we view from the growth algorithm, the prospects for that segment. So, I would say some of the non-processing related, the pass-through of the card production is more temporary and expect that the processing engine will continue to drive the strong growth

David Foss :

So, do you want me to start with that one or do you want to? So, I'll start and then Greg will chime in here because this has been a -- as I'm sure you can imagine, a big topic of conversation for months around Jack Henry and lots of opportunities for us -- so on the per site. So. One thing I should be clear about. So traditional AI, it's a machine learning and robotic cross automation, Jack Henry has been in that business for years. So traditionally, we've been doing that for a long time. Generative AI, which is specific to your question, Nick, lots of opportunities there on the development side. The trick on the development side is our primary value is through our IP, right, our intellectual property. And so, when you're using generative AI to write code, you have to be really, really careful that nothing that you're doing becomes part of the public domain. And so, we're being very careful about what are we doing and how are we doing it, but we are active today with our development teams using generative AI, you pointed out customer service offering. So that is an area that we're focused on internally, and I'll let Greg touch on that. But we also rolled out at our client conference in October, a generative AI offering for our customers to serve their customers and that was well received at our client conference here in the fall. And then if you think about all the processes that we do within Jack Henry that have are not customer service and are not software development, just automating things we do within the company is another big area of focus. And I'll let Greg add his thoughts.

Operator:

Our next question will come from Jason Kupferberg of Bank of America Merrill Lynch.

David Foss :

Sure, Jason. I wouldn't say that there's a significant notable change in the composition of the pipeline. It's -- we have a number of core deals. So again, we just signed 14 -- or announced 14 deals here. That is not slowing down. I would say that the size of those core opportunities, meaning the size of the institution, has gone up and is continuing to go up. So, we're being recognized among the larger community and regional bank space as being a real player. And so, I think the overall size of the institutions bank and credit union has gone up. But then if you look at the rest of the mix, most of it are the things that I highlighted when I was kind of going through with JD, the hot topics today, what's driving that success. It's this all this brand-new technology that we have -- that we're offering today. So, two years ago, almost nothing of those except Banno was on the list. But now all these things have been rolled out in the last couple of years, and they are dominating the sales process today because they're brand-new technology, people have been hungry for these things, a Banno fraud solution that uses AI, I mean everybody is dying for that type of technology. And so here we are, we've just gone live with Financial Crimes Defender. And so much of it is because of these brand-new things that have been rolled out in the last year or two or three that's what's dominating a lot of the sales conversations today, and that's what's driving a lot of the strength in the pipeline because you look at what's happening with our competitors in the space, there's really nothing innovative that's been coming out in the last couple of years. And here, Jack Henry has a long list of brand-new innovative solutions.

David Foss :

Yes, I'd say no change at all. There's we compete against the traditional players. We've competed against the traditional players forever. There have been upstarts, trying to either come into the U.S. internationally or start from scratch, and none of those are really even showing up in RFPs with the exception of once or twice a year. So, I wouldn't say there's any change of any kind on the core side as far as the competitive landscape.

Mimi Carsley :

Yes, I think that's fair to say. And I think if anything, we're reiterating the guide, but there's probably a little bit of upside there, even without legislative change.

David Togut :

Thank you. Good morning, and congratulations to you both, Dave and Greg. Dave, I know when you initially became CEO eight years ago, one of your major priorities was the card migration platform, moving your kind of back-office processing of debit cards over to the back office of what was then First Data now Fiserv First Data and then obviously, adding the capability to do credit card processing on top of that. Where do we stand overall in this initiative in terms of the cost savings that's delivered to Jack Henry? And then where are you in terms of the uptake of the credit card processing offering?

Greg Adelson:

Yes, specifically on the credit card. So, we -- roughly between full-service card, agent card in-house card. We have roughly over institutions. And so -- and I think part of the challenge is some of the smaller institutions which is why we came out with an agent program was they really didn't want to go in with the full service just based on resources and some of the risk and things like that. So, I think we have done -- the team continues to sell it. We continue to have the number of deals come in just not to the same level as debit continues to grow. But also, we're continuing to add feature functionality to the services. As Dave mentioned, it is a tri-party relationship, and we continue to work with the other two parties to make sure that we stay innovative and ahead of the game. So, the relationship has actually gone well, which has actually contributed to the fact that the growth has been significant as well. So, both from a service side and a transaction processing side.

Mimi Carsley :

Yes. I wanted to say that it had a significant impact. That was a one-time charge related to kind of severance and the program. As we said, we didn't do it for kind of in-year savings. This wasn't a sneaky kind of design risk plan. This was a very talent-focused plan to ensure that we had the type of talent for the future needs of the organization. And in fact, the majority of those roles have been backfilled with rising talent in the organization, some at lower levels in the organization as we zero-base budget every position the majority of those roles have been filled. So, I wouldn't say it was a significant reason for the margin expansion or the expense savings this quarter.

Operator:

The next question will come from Vasu Govil of KBW.

David Foss :

The number of customers that we signed. Is that what you're asking, Vasu?

David Foss :

Yes, 11 million. Yes, we surpassed 11 million at the end of the quarter, so I quoted that 11 million. And so no, there's nothing -- I think part of what happened here is I quoted the number for the Banno business wins. And then beyond Banno business with the regular Banno platform, that number was up. I think the reason for that is because there were people out there waiting for Banno business before they would also sign to go at the regular Banno platform, which includes retail. And so that's the significant point now that Banno business is in market generally available, we had customers who said, "Okay, I've been holding off because I want to do both at the same time, both Banno business and regular Banno." That would be the only callout that I would have as far as the size of the wins.

Greg Adelson:

Yes. So, I think one thing that just to make sure that we clarify. So, you have to have Banno Retail to have Banno business. So, one of the things that Dave was just alluding to is that some of the folks who are waiting to get Banno business -- or Banno retail is because they're waiting on Banno business and they wanted them at the same time. You can buy Banno retail without buying Banno business, but you have to have retail to get the business side. So back to the 2x comment, I don't think it's a 2x component. It is an additive component to ensuring that, one, that we get the retail and we continue to add fee structures to that based on how we model that. But I wouldn't call it a 2x.

Mimi Carsley :

Good question, Vasu. I think generally, the tightening was more so based on our confidence as we're now halfway through the year with strong results in already banked in the ability to really center around that guide. So, I think it's more that than thinking about the top end coming down, just feeling more and more confident about that midpoint. We still have a second half to do here and a decent amount of growth that we have anticipated in our plans, especially in Q3 and Q4 around processing around card, around our payments business. So too early yet to say it's going to be higher than that, but very confident in our ability to deliver.

Kartik Mehta :

Steve, you've commented a lot on core and obviously, Jack Henry is doing well. But as you look at the market, what would you anticipate in terms of a number of core deals? I know when COVID happened, it’s kind of flipped and then we went back to kind of normal. So, as you look at 2024, what would you anticipate the number of deals that might show up in the marketplace?

Kartik Mehta :

Perfect. And you've talked about, obviously, the sales pipeline being very strong. I think Greg talked about maybe hiring more people. And as you look at your sales pipeline kind of look out forward, how much confidence can you look at that revenue that's going to come up in terms of the number of quarters you feel good that as that revenue converts that you'll be able to put up kind of this high single-digit revenue growth?

Mimi Carsley :

Kartik, if I can add on. The only add-on I would say, is we look at that on an annual basis. So, in any one quarter, depending on prior year, the comp of the size of the organization that was being implemented or migrated versus this year, the size of an organization still feels confident in that number, but it can vary quarter-to-quarter depending on just the roster of slots and the profile of those customers. So that's the only color I would add.

Mimi Carsley :

Yes. I think a couple of things that are coming in. One is just the certainty of the results that we have year-to-date. The other is, as we lowered the tax rate as part of the guide, that helps from a cash flow as well. So, there's just a couple of small components as we fine-tune the free cash flow forecast for the remainder of the year that makes me feel comfortable about there being upside there.

Cris Kennedy:

Good morning, and thanks for taking my question. Congratulations to Greg and David. Regarding the technology initiatives, is there a way to think about the revenue opportunity associated with that? And if you could maybe frame it against the private cloud transition that you guys have been going through for the last 10 years or so.

David Foss :

The other thing I'll add to this, Cris, it's important to keep in mind, there are components that will be offered now. This is not an apples-to-apples comparison of the old core versus new core. The way we used to think of core and now it's just the same thing, it's not a different platform. There are components that we'll be offering with this that nobody has ever offered before. And Greg alluded earlier to Data Broker. That has not been an offering. That has not been a thing as far as the industry is concerned. That's brand-new opportunity, brand-new revenue. It's part of the core offering, if you will, in the future, but there are several other examples like that, that create revenue upside opportunity, but it's not -- you just have to think about it differently than the way we've thought previously about converting a core from one platform to another.

Cris Kennedy:

Understood. And then just following up on -- in the press release, you talked about 28.5% growth of digital revenue in the first half of the year. Is there a way to think about the contribution from digital within the services and support revenue?

Operator:

The next question comes from Andrew Schmidt of Citi.

David Foss :

Yes, Andrew, I don't think there's anything notable. Again, with only 100 deals happening per year, we're in the 50 to 55 or have been down for a while, 50 to 55. So, we're winning more than half of those opportunities per year. I don't know that there's anything -- getting to 60 is a big deal for us. But from a percentage basis, that doesn't look real huge. So, I don't think I would call out anything as being significant. Our challenge and our job is to make sure we maintain that rate because, as I said before, we are by far leading the industry. And as long as we maintain that rate, that bodes well for us as far as our algorithm -- forward-looking algorithm of revenue growth and so on. So, nothing significantly notable there.

David Foss :

Yes. It's an interesting question, an interesting topic, frankly. I've been doing this for a long time and kind of listening to and talking to all the financial institutions that we talk to, they all want to get there. They're all trying to figure out how do we get there. They just -- many of them are not quite sure how to get there. And with the regulatory environment that we live in, regulators are not saying, "Hey, we think you should go do this." So, there's a lot of walk before you run happening where people -- and that's part of where our Jack Henry platform strategy really, really positions us well because our strategy allows people to do is adopt a modularized approach. I'm going to do wires in the public cloud and kind of see how that goes and make sure I don't have a regulator knock on my door and say, "What are you guys doing?" So, they can kind of ease into the public cloud environment. But we have several of our noncore solutions today, fully public cloud. Savanna was there, Financial Crimes Defender, some that we've talked about today. But as far as the core functionality, this whole strategy allows people to walk before they run, and that is appealing to a lot of folks that we're talking to. And so, we think that's going to help with the question that you're asking.

James Faucette :

Great. Greg and Dave extend my congratulations to both of you. I want to ask just in terms of the implementation resources. I think you've talked about 150-plus clients in implementation for Financial Crimes Defender and another 70 for Banno business. I'm just wondering if there's any benefit or should we think about potentially increasing committee increasing resources to accelerate those implementations a bit? Or do you feel pretty comfortable with the pacing that you've got right now?

James Faucette:

Got it. Got it.

James Faucette:

Okay. Got it. Got it. But for now, we should think about you feeling like that you're in pretty good shape from what you're spending off from an implementation standpoint, et cetera.

James Faucette:

Okay. And then just thinking about -- I know this topic that's been talked about for a long time, but any change in the overall environment around M&A? And it seems like there continues to be at least pull down of private valuations, et cetera. But I'm just wondering what you're seeing in that market and if their potential assets that are particularly attractive, especially from a technology perspective. Just taking your temperature on potential for M&A?

Operator:

The next question comes from Dave Koning of Baird.

Mimi Carsley :

So, on the EPS, I would say it's about $0.01 or $0.02 for operational. And then the remaining split is about 50-50 is the difference in the tax rate plus interest -- net interest income that we're earning based on higher interest rates.

Mimi Carsley :

Yes. I would say, overall, our volume transaction nears Visa and Mastercard domestic, pretty similarly, we did see the same experiences that they have talked about publicly about January weather and who knows right now is all the rains in California of that. But what we saw typically by the end of January with some rebounding from those very temporary lows.

Dominick Gabriele :

Thanks for everything, Dave, and looking forward to working with you, Greg. I guess we've been talking to investors in your quarter since the management team change announcement. And Greg, talk about what you've learned under Dave and being a part of the Jack Henry team over the years that should give investors’ confidence that the new management team, including Mimi, who's done a great job, obviously, since her start, we'll continue executing with the same consistency in the years to come.

David Foss :

Greg is a snappier dresser than I am.

Mimi Carsley :

So, I just want to make sure I understand your question, Dom. You're saying you're seeing a greater change in non-GAAP? Or you're saying you're seeing a greater change in GAAP?

Mimi Carsley :

Yes. Let me look further into it, but I have nothing that comes to mind. It should be more of a flow-through because we're keeping the deconversion guide for the full year at 16%. So, there's not much that's changing there. So, you should see a similar pattern non-GAAP and GAAP.

Mimi Carsley :

So, Dom, I would say a couple of things this quarter and that will also impact the full year and therefore, the guide. 2 things. One is the -- not just the timing of the Connect conference, but the Connect conference was even more successful than last year. So, from a profitability perspective, that helped for margins and expenses being lower. The other is the decision we made around a onetime change in the change in timing of our merit for our associate population. And so that also helps from a straight through to the bottom line from an expense perspective. But as always, and with consistency, we not only zero-based budget, but we look and think about the investments, the amount of spend going to our top projects and top products, the amount from a capitalization in R&D. You saw the consistency of the 14% of R&D spend. So, we're always thinking about how to invest for our future, thinking about what those business plans look like and what that ROI looks like and the bandwidth of the organization. So, I think there'll be more consistency from a spending towards future that you've seen in the past. And I think some of the margin expansion was just due to a heightened focus on cost control, and that some of the changes that we've made from the merit timing.

Ben Varga :

I just wanted to echo everyone else's congratulations on the leadership transition. My first question is about Banno business. It's great to see the initial client interest, I guess. In terms of the implementations that you have in the Q, how long does it typically take until those opportunities start contributing to revenue?

Ben Varga:

Got it. That makes perfect sense. And then as we think about the growth opportunity for Banno Retail, are these wins coming from greenfield opportunities for the most part? Or are you also kind of bumping up against some of the other digital banking providers?

Greg Adelson:

And I think it's fair to say there is no such thing as a greenfield opportunity at any point. So, everybody has something. We're displacing something every single time.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to Vance Gerard for any closing remarks.

Operator:

The replay number for today's call is (877) 344-7529 and the access code is 9025867. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning, and welcome to the Jack Henry First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Vance Sherard, Vice President, Investor Relations. Please go ahead.

David Foss:

Thank you, Vance. Good morning, everyone. As Vance mentioned, Greg is joining me this morning to provide an update on several innovative new solutions we've recently launched followed by Mimi who will take a deeper dive into our financial performance. I'm pleased to report another strong quarter of revenue and operating income growth for our company. As always, I'd like to thank our associates for all the hard work and commitment that went into producing those results for the quarter. For the first quarter of fiscal 2024, total revenue increased 8% on both a GAAP and non-GAAP basis. At the same time, deconversion fees were down 8% as compared to the prior year quarter. Turning to the segments. We had another solid quarter in the core segment of our business. Revenue increased by 8% for the quarter on both a GAAP and non-GAAP basis. Our payments segment again performed very well posting a 7% increase in revenue this quarter and a 6% increase on a non-GAAP basis. We also had another strong quarter in our complementary solutions businesses with a 9% increase in both GAAP and non-GAAP revenue. As I have discussed previously, the first quarter is normally our lightest sales bookings quarter because our fourth quarter tends to be extremely strong and the sales pipeline is depleted as a result. As you may recall, the June quarter was the strongest sales quarter in the history of the company, so we certainly expected that historical trend to hold true. This year however, our sales pipeline was the largest ever entering a new fiscal year. In the first quarter, we booked 10 competitive core takeaways and another 10 deals to move existing in-house customers to our private cloud environment. This strong start leaves us confident that we are well positioned to achieve approximately 50 to 55 competitive takeaways this fiscal year. We continue to see success with our card processing solution signing seven new debit processing clients this quarter and two new credit clients. We also continue to see success signing clients to our Banno digital suite with 44 new contracts in Q1 including 21 contracts for our new Banno Business offering. Speaking of our digital suite, at the end of Q1, we had more than 10.5 million registered users on the platform. That number is now growing at approximately 200,000 users per month. At the end of Q1 last year, we had about 8.3 million registered users on the platform, so we've experienced a 27% increase over the past 12 months. The continued success we've seen with sales and the adoption of our digital suite is consistent with results in the Bank Director Technology Survey published in September. As they do every year, Bank Director surveyed their subscribers during June and July, regarding a variety of technology prioritization and spending topics. More than 50% of the responses they received were from bank CEOs and Board members. And more than 80% of the respondent banks have greater than $500 million in assets. Most respondents said their bank's technology budgets grew over the prior year with a median increase of 10%. That level of spending is consistent with our own Strategic Priorities Benchmark Study published last spring. Responders to the Bank Director survey named digital business account opening, payments capabilities and digital business lending as their top three planned investments. One of the interesting items from this year's Bank Director Survey was the analysis of technology and use by respondent banks, as it relates to their ability to serve different generational groups. Fully 96% of the respondents said, they have the technology in place to serve baby boomers, but only 18% said they have the necessary technology in place to effectively serve Gen Zers. Of course, it's primarily the younger generations that expect to conduct all banking services without ever entering a branch. Clearly, the innovative the initiative for all banks to get to digital presentation layer has a long way to go. All of this bodes well for the future of our digital suite, as well as the other innovative solutions offered by Jack Henry that help financial institutions facilitate an improved customer experience through a digital front door. Digital banking was one of the many topics discussed at our annual client conference held last month in Indianapolis. This is our largest conference of the year. And this year, we hosted more than 160 prospect attendees an all-time record. Of the financial institution prospects, over 30 have more than $1 billion in assets with a couple in the $10 billion to $30 billion range. Additionally, more than 250 third-party fintechs participated in the trade show, which underscores our approach to accessibility and open banking. Of course, events like this not only present a wonderful opportunity for relationship building and education, but they also generate a substantial number of new sales leads. We saw strong interest in our technology modernization strategy and our ongoing development of a single public cloud-native platform that can run the entire financial institution. We've now branded that solution as simply the Jack Henry Platform. And we were able to demonstrate some of the current functionality at the conference. In one of the most talked about main stage sessions, our Chief Technology Officer hosted an executive from Google and one of our bank CEOs to highlight the use of generative AI on the platform as well. As we normally do at Jack Henry Connect, I hosted our annual CEO forum, attended this year by nearly 150 client CEOs. Although, we didn't conduct a formal survey during the meeting, the general feedback was that while attendees are concerned about the overall economy, they continue to invest in technology to enhance their digital capabilities, improve efficiencies and position their businesses for the future. During the quarter, we were proud to be included in several national workplace rankings. We placed 11th in Newsweek's list of Top 100 Most Loved Workplaces, up six spots from last year. We also made Newsweek's Greatest Workplaces list earning five stars which is the highest possible rating. Additionally, we were named a top company in our sector by US News & World Report, based on work/life balance, stability and professional development. We are honored to be recognized in these national rankings because they reflect our people-first culture and the engagement energy collaboration and client focus that our employees bring to work each day. Next week, we'll conduct our Annual Shareholder Meeting in person in Monett. We're excited to be able to meet with our shareholders. And once again, we'll offer an option for people to observe remotely. As we move forward, I remain extremely optimistic regarding our robust sales pipeline, the demand environment, a strong interest in the solutions we're delivering and the strategies we're executing. We remain committed to our disciplined approach to running the company. And we expect that focus to continue to provide stability and solid performance for our employees, customers and shareholders. With that, I'll turn it over to Greg.

Mimi Carsley:

Thank you, Greg, and good morning everyone. Our continued focus on serving our community and regional financial institution clients, growing our business, investing in our future and delivering shareholder value led to another quarter of solid revenue and earnings growth. I'll begin with the details driving our positive first quarter and then conclude with our full year guidance update. We're encouraged by Q1 GAAP revenue and non-GAAP revenue increasing 8%, establishing a healthy start to our year and setting us up for a fantastic fiscal 2024. Deconversion revenue of $4.1 million, which we pre-released last week was down approximately $400,000 reflecting continued temperate financial institutional consolidation. As a reminder, given the September 1, 2022 close of Payrailz acquisition the first two months of Q1 2024 results are excluded from non-GAAP financials, but that September one onwards Payrailz results are included in both GAAP and non-GAAP. Now let's look more closely at the details. First on a GAAP and non-GAAP basis services and support revenue increased a healthy 7%. Services and support growth was the result of increases in data processing and hosting software usage and subscription and hardware. We continue to experience robust growth in our private and public cloud offerings which increased 10% in the quarter. This revenue contributor has long been a double-digit growth engine. Shifting to processing revenue. We saw vigorous performance with 10% growth on a GAAP basis and 9% growth on a non-GAAP basis for the quarter. Consistent with prior period results drivers include a combination of higher card volumes and services plus strong digital demand. Next moving to expenses. I'll begin with cost of revenue which increased 8% on a GAAP basis and 7% on non-GAAP. Drivers include higher direct costs, personnel and benefit costs and internal licenses and fees. Next, R&D expense increased 12% on a GAAP basis and 10% on a non-GAAP basis, reflecting higher personnel and benefits costs net of capitalization. This is in support of our continued solution innovation maintaining competitiveness and our technology modernization strategy including the Jack Henry Platform. Finally, on a GAAP basis SG&A rose 38% for the quarter primarily due to the $16.4 million one-time cost related to the voluntary early departure incentive program VEDIP. This cost was lower than the $17 million to $18 million estimate based on the final participation in the program. As a reminder, all VEDIP costs are in this quarter. And there will be no additional P&L impact as we move through the year. When these one-time VEDIP costs and last year's $6.2 million gain from real estate divestures are adjusted to non-GAAP SG&A decreased 2% during the quarter. These adjusted figures reflect our ongoing commitment to cost control. We remain focused on generating compounding margin expansion. And the quarter results delivered 121 basis points increase in non-GAAP margin, which was 26.1%. This increase was partially driven by the timing shift of our Connect customer conference into Q2 compared to Q1 last year. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.39. Breaking down non-GAAP results we're pleased by the consistent solid performance achieved by the three operating segments. Our core segment revenue increased 8% on both a GAAP and non-GAAP basis with non-GAAP operating margin increasing five basis points to 59%. We benefit from positive tailwinds from winning share, continued migration from on-premise to private cloud and customer growth. The payments segment revenue increased 7% on a GAAP basis and 6% for non-GAAP. This segment had an impressive non-GAAP operating margin growth of 59, basis to 46%. This was due to increase in card transaction and related revenues plus growth in our EPS business. The Fed recently announced its considered change -- a change to the debit card interchange that would translate to an approximate 28% decrease, in interchange for issuers. It should be noted that our revenue model for card processing is transactional and not reliant on interchange. Finally, our complementary segment, revenue increased 9% on both a GAAP and non-GAAP basis with strong non-GAAP operating margin expansion of 47 basis points to 61%. Our diverse mix of solutions, including key headliners like Banno, LoanVantage, Treasury Management in addition to the numerous additional solutions contribute to this strong growth trend. And our new fraud Financial Crimes Defender solution will soon contribute to the growth in this segment as well. Now let's turn to a review of cash flow and capital allocation. Quarterly operating cash flow was $157 million a $20 million increase over prior year producing free cash flow of $107 million, slightly less than the $116 million last year. Last year included $26 million contribution from asset sales that was non-reoccurring in nature. Our consistent dedication to value creation resulted in an annual return on invested capital of 20%. Additionally, I'd like to highlight notable return of capital including $20 million in share repurchases offsetting annual dilution, $30 million in debt reduction and $38 million in dividends during the quarter. With Q1 in our rear view we shift our focus to the remainder of 2024. And I will conclude with guidance change highlights. As you're aware yesterday's press release included updated fiscal 2024 full year guidance along with the reconciliation to non-GAAP guidance metrics. As a reminder, we filed an 8-K on August third that described how starting in the current fiscal year we're using a revised approach for deconversion guidance. Based on current trends we expect to see minimal financial institution consolidations in the first half of fiscal 2024 with possible acceleration in the second half. As such, we're maintaining and reiterating full year deconversion revenue guidance of $16 million. Based on a positive Q1 result from strong execution and near-term visibility we see upside over our prior guidance. We now expect to generate full year non-GAAP revenue growth of 7.2% to 8.2%, compared to the 7.0% to 8.0% provided on the August call. This corresponds to an increased full year GAAP revenue guidance of 6.4% to 7.4% for fiscal 2024. In tandem with our increased revenue outlook and continued focus on cost efficiencies, we now expect an increase in annual non-GAAP margin expansion of 30 to 35 basis points, compared to the 20 to 25 basis points previously provided. The full year tax rate remains unchanged at approximately 24%. Incorporating the noted positive updates, full year guidance for GAAP EPS is revised upward to $4.98 to $5.04 per share from previous guidance of $4.92 to $4.99 per share. As a reminder, the conservative guidance for deconversion revenue compared to actual fiscal 2023 deconversion revenue, the slightly lower VEDIP severance-related costs and the non-reoccurring gain on asset sales results in an approximate $0.37 headwind for fiscal 2024 GAAP EPS. And lastly some additional modeling commentary. As previously highlighted we recently hosted our customer conference JH Connect. The associated revenue and expenses will be reflected next quarter. Please recall in FY 2023 the related financial impact was in Q1. We believe this timing shift has led to an approximate $0.01 to $0.02 higher consensus Q2 EPS estimate. Our full year guidance of 60% free cash flow conversion remains consistent given the continued impact of tax deductibility timing on development expenses, resulting in higher cash taxes. In the relative near-term, we expect to return to historical norms of conversion. We appreciate the contributions of our hardworking and dedicated associates that drove these strong quarterly results. In conclusion, Q1 was a strong start to our fiscal year. And we remain exceptionally positive about our ability to deliver innovation and valued solutions the resiliency of our clients our focus on execution, growth accelerators, and shareholder value creation. We thank all Jack Henry investors for their continued confidence. MJ could you please open the call for questions?

Tyler DuPont:

Hi, good morning everyone. This is Tyler DuPont on for Jason. Thank you for taking the question. So, I wanted to start on the growth side of things looks like growth is pretty solid across dimensions particularly on the corporate side and complementary. So I was just wondering if you can speak to kind of specifically what drove that outperformance during the quarter? And then on the other side it looks like the payments growth was healthy but a little bit lower than what's expected on the "normalized" growth rate of 8% to 9%. So, I just wanted to ask what dynamics you're seeing there and any expectations going forward? Thanks.

Greg Adelson:

Yes, I would say there's probably two components. So, one we're kind of dealing with the aftermath of excessive growth in our remote deposit capture business during the pandemic. And so we're seeing a little bit of lessening of that growth. And then the card volume growth I think is kind of indicative to what you've heard both card associations talk about as well. So, again, the majority of our card business is on the debit side. That business isn't growing as fast as it would just during some of the things that are going on with the economy right now. But those are the two biggest drivers I think on the payments side. Everything else is fairly in sync.

Mimi Carsley:

Yes, I can take the first part of that. So, you're correct in terms of the great margin expansion we saw in Q1. Now, typically, Q1 is our largest-performing quarter from a margin basis because you have the subscription-related revenue there from a renewals perspective. But we saw higher revenue across the board which just then flowed through. I would have as a reminder though, the impact from Connect conference. The timing of that did have a pretty significant impact from the margin improvement, on a year-over-year basis. But I would say, the most part it was just the revenue flow-through and good expense control.

Tyler DuPont:

Okay. Great. Appreciate the color. Thanks a lot.

Q – David Togut:

Thank you. Good morning, Dave and Mimi. I'd just like to start with a question about, the pace of core competitive takeaways in the quarter. It looks like it fell from 16 in the June quarter which was well above trend to 10 in the current quarter. Any call-outs on the competitive environment any changes? Or was this more of a timing-related issue?

Q – David Togut:

Got it. And then moving upmarket to the bigger banks has long been a focus area of yours. And you called out the success of treasury management, which is part of that effort to move upmarket. Can you update us on broader initiatives to move up into the bigger bank space? You started talking about this a couple of years ago, with tech modernization. Where are you in this process? And where do you expect to be within 12 18 months?

Q – David Togut:

Understood. Thank you.

Q – Vasu Govil:

Hi. Thank you. for taking my questions. I guess first I just wanted to follow up on the previous question about the payments segment. Just wondering, when some of the grow-over issues from the remote deposit capture will be kind of behind us? And what should we expect for growth there for the remainder of the year?

Q – Vasu Govil:

Thank you. So, basically, it seems like we should expect this rate 1Q rate to continue through the remainder of the year. Any puts and takes there?

Vasu Govil:

Got it. And then a quick one for you Dave. Banno it seems has been a clear success story for you. It's been a growth driver for several years now. I'm wondering if it's big enough where you might be willing to give us more visibility on how big it is and how fast it's growing. And as you think about your total addressable market within your client base how penetrated are we there today with Banno?

Vasu Govil:

All right. appreciate the color. Thank you very much.

Kartik Mehta:

Good morning. Maybe just on free cash flow. I know you said still anticipate about 60% for the year. I'm wondering is it just timing that it's in the first quarter was this good? Or do you think now maybe that 60% might be a little conservative as we go throughout the year?

Kartik Mehta:

And then Dave, just I'm sure banks are talking about AI just like every other business. And I'm wondering at JHA Connect if that was a topic that was discussed. And if so if there are ways where Jack Henry could help banks that want to maybe use AI.

Kartik Mehta:

Okay. Thanks, Dave. I appreciate it.

Operator:

Thank you. The next question is from John Davis with Raymond James. Please go ahead.

Mimi Carsley:

Great question JD. If I had a crystal ball for Washington, I'd probably be in a little bit of a different role. But we're hopeful that there might be a consideration of changing the legislative nature of that tax deductibility of development expenses. You're starting to hear more and more technology companies, talk about the negative impact to them. If that -- and we're not banking on that happening. If that does not occur, I would agree with you at this point I would say a couple of years out, hopefully more than four so -- but for right now we feel pretty comfortable for this year sticking with the 60% guidance.

John Davis:

Okay. No. Thanks. That's helpful. And then Greg, a quick one for you on Payrailz. I heard you earlier say you're kind of on track. It looks like at least for the first two months revenue was a little bit lighter than last year. I think you talked about some implementation delays with partners. So just curious kind of an update there you guys seem really excited about the long term. But how is that going from an integration perspective? Are there still implementation delays? Just any sort of update there would be helpful.

David Foss:

Let's reemphasize JD, the numbers Greg shared in his prepared remarks. So 100 clients live now 50 that are in process of implementation so they're not paying us yet but they're in process and then 20 more new contracts that have just been signed.

David Foss:

Yeah. So I'll answer the last part first. Not a lot happening when it comes to M&A in the industry. And I've had some interesting conversations with some investment bankers about what they're seeing as far as opportunities in that space. Just nothing really intriguing, right now when it comes to M&A. So that leaves share buyback debt paydown. Of course, we're committed to our dividend policy. And so, the other two topics balancing share buyback with debt paydown, that is definitely going to be a topic at our Board meeting on Monday. Because in this time that needs to be something that we analyze fully. So we're very focused on those two topics and trying to prioritize appropriately. But that will require Board discussion.

Operator:

Thank you. The next question comes from Dominick Gabriele with Oppenheimer. Please go ahead.

David Foss:

Yes, you are characterizing my previous comments correctly Dominick. That's exactly what I said. It was a shocker to us. And so we stepped back and made sure that we didn't kind of mess ourselves up in this process. But the answer is yes, we're very confident that we have by targeting a few specific cores with a few specific messages and an approach that leverages the Jack Henry Platform. So one of the good news one of the good things is and Greg highlighted it in his prepared comments these new solutions we're talking about Banno and Financial Crimes Defender and so on they are living on the Jack Henry Platform today, the platform we've talked about for core modernization, those are already on that platform. And so we've created a strategy that takes advantage of the fact that those are on the platform. We believe it will create an opportunity for us in these targeted cores. And so yes, we believe we have an answer now. And as Greg pointed out, we're talking about beginning of – or next summer that we'll really be active in sales. Do you want to add something to that?

Dominick Gabriele:

Great. Thank you so much for the color. And I guess now that we have a modest deconversion expectation going forward and the way you've structured your guidance, the ROIC of the quarter was 20%. I was wondering if – and I know you don't set a target for this. But do you believe that the company has kind of hit the floor ROIC level now? And maybe you could help provide some dynamics of why that might move around given some of the investments you're making. Thanks so much.

Dominick Gabriele:

That's super helpful. And 20% is very attractive. Thanks so much for the help.

Dave Koning:

Yes, hey, guys. Thanks so much. Nice job. I guess you've mentioned a bunch of stuff on Payrailz already but just a couple just questions around there. How fast year-over-year is that just growing just as a standalone entity? And then it looks like you lost a couple million in the quarter, which is pretty similar I think from a pace standpoint as what you've been losing recently. Is that getting better? And then it looked like you changed the revenue guidance just a touch not much. But just kind of all of those things it seems a few moving parts there right now.

Greg Adelson:

Yeah. And I would say as I mentioned earlier, we've kind of unhitched some of the barriers that we've had where a lot of the Payrailz solutions in the past were sold through resellers. So now that we brought in and have a lot of our direct sales folks focus on that and working through the issues that we have with the resellers, we feel very strongly that we're back on track. And the technology itself again is even stronger than we anticipated as we've gotten in and have been able to work through some of the challenges there.

Mimi Carsley:

Yeah, Dave, I would say continue to use 24% from a tax rate. At this point it's too early in the year to see anything materially changing off of that. So I would still recommend using the 24%. The one positive from higher interest rates is you're starting to see a little bit of interest income as well as it helps as an offset to interest expense. And I would just say those are probably -- share count a little bit we did some buyback in Q1. But I would look at the totality of that. But most of the change in EPS is really coming from the operational impact the flow-through from revenue growth. I would highlight just that last year as a reminder the gains last year from the asset sale and the impact from VEDIP this year.

Operator:

Thank you. The next question is from Cris Kennedy with William Blair. Please go ahead.

David Foss:

Actually I'll defer to Greg for that one. He's more in the day-to-day with the team on what we're doing there. So go ahead Greg.

David Foss:

And Greg is going to give you that detail Cris on the February call.

Cris Kennedy:

Okay, looking forward to that. And then just a quick update Banno for business, is that attracting customers that are outside of your core base? Thank you.

Greg Adelson:

And a lot of that sales will not happen until next fiscal year.

Cris Kennedy:

Understood. Thanks for taking the questions.

Operator:

Thank you. The next question is from James Faucette with Morgan Stanley. Please go ahead.

Greg Adelson:

Yeah. Well as far as implementations, I mean typically as we have with any of those type of bill pay and payment-providing products it really is somewhat dependent on the customer. We can actually install within 90 days typically. So some of it is dependent on the customer. Some of it is dependent on a core deal where an actual Payrailz may be part of that core deal so they're waiting to implement that. So some of those contracts could have longer tail before they're actually implemented. But as I mentioned earlier with the 100 that are actually on the platform now the 50 that we have in the implementation queue and the 20 that were just sold we have the ability to start moving the needle. As I mentioned earlier we are on track for the guidance that we gave in August for the revenue numbers which is again I think a substantial amount of drive. But again even those percentages obviously we started with a small number. So we're driving the ability to get the technology in place to get all the things that we wanted to do from a tech modernization strategy and driving that as part of -- while we're waiting for some of these contracts to go. But the technology itself is going to drive the longer-term part of this strategy not just the immediate parts that we're doing with the current Payrailz offering.

James Faucette:

Got it. Got it. Appreciate that. And then I want to ask on the competitive landscape. One of your competitors in at least an adjacent market announced a new product initiative targeting banks and credit unions that enables them to have more of a lightweight core for digital deposit products. And I think they're trying to go at it with a low price point. I know you don't compete on price. But just curious how you're thinking about the competitive environment generally for Banno especially as you kind of work to get that into the installed base and think about opportunities outside the installed base.

James Faucette:

Appreciate that Dave. Thanks.

Operator:

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Vance Sherard for any closing remarks.

Operator:

Of course. Thank you, Vance. The replay number for today's call is 877-344-7529 and the access code is 2951710. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Operator:

Good morning and welcome to the Jack Henry Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Vance Sherard, Vice President, Investor Relations. Please go ahead.

David Foss:

Thank you, Vance. Good morning, everyone. Today, we're very pleased to share details with you for a quarter that produced record revenue and record sales bookings. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our fourth quarter and for the entire fiscal year. For the fourth quarter of fiscal 2023, total revenue increased 11% for the quarter and increased 8% on a non-GAAP basis. Deconversion fees were up as compared to the prior-year quarter but were still down significantly for the full fiscal year. Turning to the segments, we had a solid quarter in the core segment of our business. Revenue increased by 11% for the quarter and increased by 10% on a non-GAAP basis. Our payment segment performed well posting a 9% increase in revenue this quarter and a 7% increase on a non-GAAP basis. We also had a very robust quarter in our complementary solutions businesses, with an 11% increase in revenue this quarter and an 8% increase on a non-GAAP basis. As I highlighted in our press release, the fourth quarter was the strongest quarter for sales bookings in the history of the company. With those of you who follow us - those of you who follow us closely, you will know that in the fourth quarter of fiscal year '22, we set an all-time sales record. We broke that record in the second quarter of fiscal '23, and now we've set another new record in the fourth quarter of '23. Additionally, we set a new annual sales record in fiscal year '23. All-in-all this has been a remarkable year for the sales teams. To provide a little detail regarding sales successes in the quarter, we booked 16 competitive core takeaways and an additional 19 deals to move existing on-prem core clients to our private cloud environment. Several of our complementary offerings also saw very strong demand in the quarter with, as you might guess, our digital suite leading the pack. We signed 63 new clients to our Banno Digital platform in the quarter and 19 new clients to our card processing solution. For the full year, we signed 47 competitive core takeaways with five of those institutions with greater than $1 billion in assets. Additionally, we signed 52 contracts to move on-premise core clients to our private cloud, 56 new clients for our card processing solution, and 198 new Banno Digital customers. Of course, we signed a variety of other contracts for many of our other solutions as well. But it's important to note that almost all of these contracts represent long-term recurring revenue came on to Jack Henry, for a wide variety of our solutions. Regarding the Banno Digital suite, we were at almost 10 million registered users at the end of the fiscal year. As a point of reference, on July first of 2020, we had about 3.2 million registered users. So in three years, we've seen our user count triple in size. This is significant because as I've stressed in the past, most of the revenue for a business like this is tied to the number of users on the platform. We delivered Banno business into general availability for our bank clients in late July, and the response has been outstanding. More than 25 banks are live and we signed an additional 53 Banno business clients in fiscal Q4. On July 20, we became one of the first service providers to support live transactions on the Federal Reserves' new FedNow instant payment service. More than 100 of our clients are in various stages of implementation and we expect to add 100s of financial institutions over the next 12 months. We plan to deliver Financial Crimes Defender, our real-time fraud and anti-money laundering compliance platform into general availability for our banking clients in late September and for our Credit Union clients late this calendar year. As you may recall, it's been one year since we announced our corporate rebranding to retire the Symitar, ProfitStars, and Jack Henry Banking brands and go to market is simply Jack Henry. I said on this call a year ago that uniting the brands reflects Jack Henry's role as a well-rounded financial technology provider and enables us to speak from a single consistent brand voice. We've seen strong results during the year from our rebranding, including a 50% increase in website visits and a 30% increase in social media followers. I also mentioned on our last call that we recently published our 2023 sustainability report. I'm pleased to share that Jack Henry has been recognized as a 2023 Climate Leader by USA TODAY and Statista for our ongoing efforts to reduce greenhouse gas emissions. In addition, we were recently recognized as one of America's Greatest Workplaces by Newsweek. Our consistent placement in Best Places to Work ranking is a testament to the workplace culture we have at Jack Henry and our employee engagement scores reflect that strong culture. Our continuous listening program enables us to gather feedback from our associates throughout the year and I'm pleased to share that overall our participation rate this year was greater than 65%. We achieved an engagement capital score of 81% and 87% of our employees said that they believe in Jack Henry's values, all well-above industry benchmarks. By taking care of our associates, they, in turn, are taking care of our clients, delivering outstanding customer service is a hallmark of our company and this past year was no exception. On surveys we send to customers, we scored an average of 4.6 out of 5 for overall customer satisfaction and 4.75 out of 5 for satisfaction with our customer service representatives, both are increases over our already industry-leading satisfaction scores. We are encouraged by recent surveys of financial institutions showing positive growth and sentiment around technology spending for the balance of the calendar year. To that end, Bank Directors 2023 technology survey will be published in September and it will provide a helpful barometer of Bank sentiment relative to technology. I will plan to share these results with you on our November call. In today's environment, we found that no matter what financial institution is trying to solve for, technology is almost always the solution. Our breadth of solutions regularly positions us well to participate in these opportunities. In Mimi's comments, she will discuss the program we recently offered to a select group of associates who meet certain criteria. Internally we refer to this offering as our Voluntary Early Departure Incentive Program. We have many employees who have been with us for a long-time and this program enables us to reward them while giving others a chance to move up in the organization. While there is a cost associated with this program, it is something we've offered in the past that has been well-received and produced positive long-term results for the company. As I reflect back on fiscal 2023, I can confidently say it was a very good year for our company. Our employee engagement scores remained high and our levels of customer engagement and customer satisfaction scores are also very high. Mimi has been in her role - in CFO role for nearly a year and her collaborative thoughtful leadership has had a visible impact on both you as investors and our associates. Our sales teams are performing extremely well and have positioned us for continued success with the sales pipeline that is the largest we've ever had entering a new fiscal year. We believe that our commitment to doing the right thing for our constituents will continue to serve us well. We will continue with our disciplined approach to running the company, and expect that approach to help provide stability for our employees, customers, and shareholders. As we begin the new fiscal year, I continue to be very optimistic about our future. With that, I will turn it over to Mimi for some detail on the numbers.

Operator:

[Operator Instructions] First question will come from Peter Heckmann with D.A. Davidson. You may now go ahead.

David Foss:

Peter, well, yes, thanks for the question, Pete. We don't - in the metrics that we use internally are not external metrics, so whenever I talk about year-over-year comparison or quarter-to-quarter comparison of the sales organization, it is comparing our performance to ourselves. There isn't an external number that I quote, but it is - the fourth quarter was significantly higher than the second quarter, which was a record. And then, of course, then for the year, it was significantly higher. The thing that I think it's important to note, I get the question once in a while as we set records, people assume that that's all tied to the core business and it's not. We have a number of other complementary solutions now that are really driving significant progress for Jack Henry. The other thing that's important to note is almost nothing that we sell today is the recognized - is the revenue recognized in the quarter that where we sell that deal are - oftentimes even in the next quarter. It's almost all recurring revenue, it's all layered in setting us up for continued growth into the future, which is what builds the confidence for meaning to say, in top-line revenue growth, 7% to 8% for the foreseeable future. That's because we have so much visibility into all these deals that are being layered onto the recurring revenue stack that we already have. So the best I can do Pete and I'm not trying to be evasive, but the best I can do is just say using the internal metrics that we use, it was a significant increase in Q4 over any of the other quarters that we've ever experienced at Jack Henry.

Mimi Carsley:

That is correct. You heard it correctly. It will all occur in Q1 and it is an estimate. We are just kind of very at the tip of that program in terms of knowing the participation rate, but we do feel good about the estimate which is a little different than the last time we had the program in 2018, because by this point, people have kind of acknowledge their desire to participate, but all of that is already included in our guidance.

David Foss:

And you may - just to chime in Pete, you may recall, we had done this twice before - since I've been at Jack Henry anyway, twice before, this has been a very successful exercise for us in the past and not only giving - rewarding people who have been here for a long time but also creating opportunities for people to move up in the organization. And so we expect that same level of success with the program this time.

Operator:

The next question will come from Nik Cremo with Credit Suisse. You may now go ahead.

Mimi Carsley:

I can take that question. Thanks, Nik. So, no, I would say, overall, it's a continuation of a strong product lineup as Dave mentioned, a robust pipeline there was if anything lower convert merge activity in our space. But overall, it was just continuing to be driven by cloud strong being continue to be driven by just implementation timing and the size of those kind of clients. So it is a little variable from quarter to quarter but overall, core had strong quarters throughout the year of FY '23.

Mimi Carsley:

We don't provide at the segment level guidance, but we can kind of follow-up that I would say, it's consistent with both the growth algorithm and the revenue growth for FY '23, we would say is consistent for '24 trends.

Operator:

Our next question will come from Rayna Kumar with UBS. You may now go ahead.

Mimi Carsley:

Thank you, Rayna. So, we tried to clarify both the impact for short-term guidance as well as long-term sustainability of guidance. So, for FY '24, you're correct. We're giving guidance about 20 basis points to 25 basis points. There's a little bit of a headwind from the bonus because the bonus was lower in 2023 restarting the clock at 100% accruals. There is a bit of a headwind, about a $6 million headwind from just both the growth and the refilling if you will of that bonus pool. There's also some third-party renewals and continued investment in areas like cyber and security compensation. So all of those are drivers to both 2024, but longer-term, we definitely see the sustainability of 20 bps to 40 bps of margin.

Mimi Carsley:

Yes. So on free cash flow, Rayna, I'd really recommend looking on an annual basis versus quarterly, because there can just be some, like, seasonality bids and, you know, with prepaid changing and just the timing of when we - even sometimes impacting annual based on the annual maintenance bills that go out in the summer-time, sometimes people pay in June, sometimes they pay in July, and so sometimes that can have a year-over-year impact, but we did have some noteworthy kind of headwind in 2023 from a free cash flow and free cash flow conversion. In particular, the largest being that change in the tax legislation around the deductibility of development-related expenses led to a $90 million cash tax payment. Now that doesn't go away in '24, that will still stay at a somewhat elevated level. Over the five years that does kind of reverse course but that will continue to present some headwind to '24 and beyond kind of near-term free cash flow. If I think about kind of a walk on the free cash flow and the free cash flow conversion for 2023, if deconversion revenue were about the same as '22, that's about, call it, roughly $20 million. There is asset sales and then the $90 million of taxes, you get to - closer to like a $280 million to $290 million of free cash, which would have been more of a round free cash flow conversion of about 85% versus the reported 55%.

Mimi Carsley:

Very welcome.

Dan Perlin:

Thanks. Good morning. And Dave, I just wanted to revisit the - you know the sales pipeline and demand environment in aggregate I mean you set records in three quarters or four quarters this year, which is pretty amazing, especially considering the backdrop. So some of that obviously is coming from movement over to the cloud, but, a lot of that also is coming from just competitive dynamics. And so I wonder if you could just speak to what you're seeing in the market today? How you guys think you're positioned relative to peers, because the commentary clearly coming from others is a very different narrative. So if you could just put a finer point on that, I'd appreciate it.

Dan Perlin:

Yes. It's been pretty consistent on that message so. Just a quick follow-up in terms of this one-time impact on the early departure incentive program. I certainly appreciate the charge. Can you talk about what the run-rate cost-savings are associated from or expected to be associated from the, I guess, the group of individuals going to take that package and how much is that influencing the margin expansion on the core base of 20 basis points and 25 basis points? Thank you.

Dan Perlin:

Okay, that's super helpful. Thank you, Mimi.

Operator:

Our next question will come from Vasu Govil with KBW. You may now go ahead.

Mimi Carsley:

Thank you, Vasu, for the question. I think, a part of it is what is normal, and the last several years have been, some ups and downs. We got great benefits from really the COVID-related lack of travel, some - then we saw some of the great recession, now we've seen inflation, so some of that is really modeling out what is to be expected from just the ongoing engine of the business. We're continuing to see, even though CPI and inflation is subsiding, we're continuing to see wage-related, employee-related, benefits cost, insurance costs, third-party renewal costs, continued investment in fiber, and so. You know, I think there is continued opportunity for margin expansion through the migration to cloud from on-prem hopefully through continued exciting products that we have, including our tech modernization. But at this point, probably safer to say 20 basis points to 40 basis points in the very near term.

David Foss:

Yes, Vasu, I'm happy to talk about it although Greg is sitting here. I'll ask Greg to chime in. So first off, I think for most community regional banks and credit unions, for most of them, they are talking about it, thinking about trying to figure out how does this play into what they do. But, I don't know of many that have a defined strategy today. They're still trying to figure out, is this a good thing or a - or potentially risks their environment. As for Jack Henry, so if you think about AI, it's important, I think, to include in that broader conversation, the idea of machine learning and robotic process automation, which Jack Henry - all three of those areas, Jack Henry has been in that business for a long-time. So you look at several of the solutions that we offer today, we have those types of technologies embedded in those solutions. I know when people talk AI today, it's usually about ChatGPT and about the idea of using it to write software and all that kind of stuff and we're certainly investigating those things. But we have been in this space for quite some time and leveraging these tools for some time. And I'll ask Greg to kind of share with you some of the detail around some of those things that we already do and that we're working on today.

Vasu Govil:

Thank you very much. That was very helpful.

Jason Kupferberg:

Good morning. Thanks for taking the question. I wanted to circle back on free cash flow just thinking beyond this year, Mimi, I know you made some comments, just around the tax law changes. I think you said there is a five-year duration around that which I guess, started in year F '23. So free cash flow conversion, I know, is 60% for F '24, is that kind of a baseline zip code to think about for the next few years beyond fiscal '24? I just want to make sure we have our expectations properly calibrated there. Thanks.

Jason Kupferberg:

Okay, okay. Understood. And then just coming back on the quarterly cadence of non-GAAP revenue growth. I know you highlighted Q1 being the trough of being below the full-year outlook. It sounds like will Q2 be above the full-year range and then we move kind of back into the range in the back half of F '24, and if you can just walk us through what's actually driving some of that quarterly fluctuation? Thanks.

Jason Kupferberg:

Right. And how much it's driving the fluctuations, like, why is Q1 lower?

Jason Kupferberg:

Okay, thanks, Mimi.

Operator:

Our next question will come from John Davis with Raymond James. You may now go ahead.

Mimi Carsley:

Yes, thanks, JD. So if I understand the question correctly, as it pertains to FY '24, so, the $6 million that I referenced is both have blended just the natural annual growth based on merit and hiring, et cetera, about 50% of it, and the other 50% is based on the change from FY '23 is lower bonus payment to the full replenishment, if you will, in FY '24. We at the moment, we have nothing baked-in from a savings perspective into the guidance related to the VEDIP program for 2024.

David Foss:

Yes, JD. I would say the competitive environment is probably the best it's been for quite a while. It's not that, as I said before, it's not that people are rushing into the door at Jack Henry and, say, let me in, I want to sign a - I can sign the contract, but we certainly saw no negative impacts during all the flurry of activity here back-in March with the shutdowns of some of those specialized regional banks that did not slow us down at all. I don't know that I would attribute a pickup in sales activity to anything to do with that. What I think is driving this is, and we just published our benchmark survey a month ago or so, and it was very clear in that survey, which by the way available online on jackhenry.com, it was very clear in that survey that customers today are looking for technology to help with revenue growth, deposit growth, and efficiency. Those are the three, by far, the three top areas of concern. Well, if you're looking to grow revenue, meaning deposit - or deposit, sorry, it was deposit growth, loan growth, and efficiency. If you're looking to grow deposits, you're not hoping that people will come into your branch and open a new account, they're going to do that online. How do you do that? Technology from Jack Henry. If you're looking to grow a loan volume in the commercial lending space are these small-business borrowers wanting to drive to your branch and sit down and talk, you know, they're looking online for those funding sources? Jack Henry provides that technology. If you're looking for efficiency in the back-office, is that just process re-engineering, it might be, but oftentimes process re-engineering involves technology. We have those tools. And so given those three major focuses for CEOs today, Bank and Credit Union, Jack Henry provides solutions to all of those problems that they're facing. And as I mentioned earlier, we are known in our space as the most focused on these concerns that our customers have. We only focus on serving financial institutions in the domestic US market and we have tied that together with the reputation for service and for being a great partner. I think all of those things together are what's driving the key interest in Jack Henry. But then as you point out, the competitive environment today, probably, better than it's been in a very long-time and we're taking advantage of that as much as we can.

Mimi Carsley:

I think that's a reasonable approach to thinking about it.

Operator:

Next question will come from Dominick Gabriele with Oppenheimer. You may now go ahead.

Gregory Adelson:

Hi, this is Greg. I'll start with some of that. So, I think if you look at what we've been doing and what we've - Dave has been talking about around the tech modernization strategy, you can definitely point to things that we're adding where a lot of times in the past several years ago we were doing more partnerships and instead, we're now building all this technology. So if you look at development, QA, resources, project management resources, things along that, those are all, in some cases additive to what we've been doing in the past. So again that ties into some of the margin discussion as well that, you know, with some of the questions that have come up. We're adding quality people. The good news is there's been a - in the industry, there's been a lot of quality people laid-off from other companies and we're able to go and pick a lot of those folks up and drive the business. So that's been a big part of our opportunity to bring on that type of talent and it's really tied to the tech modernization strategy in general. And then Mimi anything you want to add in there?

Dominick Gabriele:

Excellent. Thank you so much for all that to both of you. So and then, Dave, 47 core wins for the year. I know you talked, is about 1-ish a week, it's pretty close to that with the fact that you've gotten obviously multiple billion-dollar-plus wins. Maybe you could just talk to us about the expectation that you have given the pipeline about the win rate and the size of win rate next year versus this year?

Dominick Gabriele:

Perfect. Thanks so much.

Operator:

Next question will come from Cris Kennedy with William Blair. You may now go ahead.

Mimi Carsley:

Sure, Cris. So I think the drivers of margin expansion are similar to what they've been historically. You have the tailwind of the on-premise to cloud migration. We expect after that, there are also be people leapfrogging to the public cloud. So even though we're at roughly 70% on the hosted environment, there is more it's just has been a stable clip every year of continuing and Dave talked about some of those wind counts of continued migrations. And then some of those people will migrate to public cloud and then will leapfrog straight to public cloud. So that certainly at attractive margins. I think some of the things we're doing around the development approach will also lead to margin savings using the origin and tech modernization, common components, common workflows, common testing, Greg's organization has done just an amazing job to think through really streamlining that our approach to engineering and I think that will also lead to some longer-term benefits for our organization. I would also categorize, like, the current, call it, last, you know, couple of years and next couple of years is, a rebuild in terms of setting us for the future. A lot of the development work we're doing, a lot of the infrastructure work we're doing, even on Culture and Development, I think about my own team in finance putting in some tools and systems that will allow us to support the business as it scales. So, I think those investments will eventually kind of tail off now and will go to zero. Now we will continue to invest in cyber and security every year to fortify our infrastructure and that of our clients, but I do think in general, we will start to flatten out on some of these, but some of it is a question because we do have a lot of third-party relationships and so not all of our costs are within our own control. So that is sending a bit of a headwind in the near-term and unknown in terms of, like, the longer-term on that.

David Foss:

Yes. So thanks, Cris, and I - many of you know that that's a topic that I've been really interested in for quite some time. It was one of the reasons for the Payrailz acquisition. It wasn't a driver certainly but because Payrailz had that technology included, no customers live, nobody up and running, but it is an opportunity I think for us in the long term. So as we look at that business and I'll ask Greg to chime in here and describe a little bit more, but the key thing for me is, as we think about that business, as we move into that business in the future, we want to make sure that it's a business where we can work through our customers, not compete with our customers. Meaning, go to a bank or even a Credit Union for some of these smaller institutions that are bank by Credit Union, go to the bank and work through them to serve their small-medium business customers with that type of technology and I'll ask Greg to clarify some of that or chime in.

Cristopher Kennedy:

Great, thank you.

Ken Suchoski:

Hi, good morning. Thanks for taking the questions. Maybe just a follow-up on some of the questions from earlier around free cash flow and margin expansion. Can you guys just comment on how the shift to the cloud impacts your overall cost structure from an OpEx versus CapEx perspective? I guess said differently, where should we expect to see the increase in cloud vendor and cyber security cost flow through and what are some of the offsetting factors to that as you continue moving away from the on-prem offering?

Ken Suchoski:

Okay, great, that's helpful, Mimi. And then, I just had a question on the early retirement program that you're pursuing. Can you just talk about your headcount growth plans over the coming years? Is this of program that's more of a one-and-done type of deal? I mean overall headcount growth - overall headcount actually go down after this program is completed. Any thoughts there would be great.

Gregory Adelson:

Yes. I think I'll add. So I think we zero-base every role that we have and we will do the exact same that we do here. So basically, looking at the role of determining its value for the future. Again, as Dave mentioned, a lot of these opportunities are going to create levels of folks that will be able to move up in the organization and we may not need to backfill that particular position. There could be opportunities where we actually move those positions over to other roles that are growing our businesses that are growing and taking those resources that way. So there's a lot of that evaluation that's going on as we speak and it has been mentioned, but the ideal goal is that we would have some opportunity there to improve our headcount and in some cases, less than the headcount, but we're very diligent in that process at all times again we zero-base every single role.

Ken Suchoski:

Okay, great. Thank you both.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to Vance Sherard for any closing remarks.

Operator:

The replay number for today's call is 877-344-7529 and the access code is 7033565. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Welcome to the Jack Henry’s third quarter earnings conference call. All participants will be in listen only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Vance Sherard, Vice President, Investor relations. Please go ahead.

David Foss:

Thank you, Vance. Good morning, everyone. We are very pleased to report another strong quarter of revenue growth and an overall solid performance by our business. As always, I would like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our third fiscal quarter. For Q3 of fiscal 2023, total revenue increased 6% for the quarter and increased 8% on a non-GAAP basis. Consistent with our prior comments regarding the reduction in bank M&A this year, deconversion revenue was down approximately 65% as compared to the prior year quarter. Turning to the segments, we again had a good quarter in the core segment of our business. Revenue increased 4% for the quarter and increased by 8% on a non-GAAP basis. Our payment segment performed very well, posting a 6% increase in revenue this quarter, and a 7% increase on a non-GAAP basis. We also had a strong quarter in our complementary solutions businesses with a 6% increase in revenue this quarter and an 8% increase on a non-GAAP basis. As I highlighted in the press release, our sales professionals posted an extremely strong quarter led by the core sales team. On our last quarterly call, I mentioned that the sales team set an all time sales booking record in our fiscal Q2. Although we didn’t break that record this quarter, we did set a record for the strongest Q3 in history. During the quarter, we inked 13 competitive core takeaways, so we continue at the approximately one deal per week run rate, I have discussed in the past. In addition to our success signing new core clients, we signed 13 existing on-prem core customers to move to our private cloud environment. In addition to the tremendous success we have experienced in our core business this quarter, we continue to attract new clients to our Digital Banking suite. During the third quarter, we signed 39 new clients to our Banno Retail platform with another 35 clients signed up for Banno business. Regarding our Banno Digital suite, as of March 31, we now have just over $9.3 million users live on the Banno platform. We continue to enjoy the highest consumer rating in the App Store and we are regularly recognized as the fastest application in the industry. The feedback from our 30 Banno business beta testing clients has been outstanding, and we remain on track to deliver Banno business into general availability later this quarter. Let me take a moment to address the banking landscape related to the liquidity challenges experienced by a couple of large regional banks in March and earlier this week. Although I’m not aware of any Jack Henry core clients, who have tapped into the Federal Reserve’s new Bank Term Funding program, I think the announcement has had a positive effect on the overall concern in the market regarding bank liquidity, and I applaud the Fed on their swift and decisive action. Since those events grab the headlines, members of our team have spoken with hundreds of our clients and I personally have visited with a large number of CEOs at our client banks. I’m pleased to say that, our banking clients have indicated they have been largely unaffected by these events with the exception of several who have reported an influx of new accounts, as business clients look to diversify their deposit balances. Our clients typically have a diversified customer base, serve small and medium businesses and consumers in their local communities, and have longstanding and loyal customers, so I think it is logical that they wouldn’t see an adverse impact as a result of a few extreme scenarios. Also remember that, a large part of our business is focused on the Credit Union industry with approximately half of all Credit Unions with more than one billion in assets partnered with Jack Henry as their primary technology provider. Those clients also report being largely unaffected by the challenges in the banking sector. In late April, [Interfy] (Ph) conducted a survey which generated responses from more than 550 bank CEOs, presidents and CFOs primarily at banks with less than $1 billion in assets. Approximately 77% of the respondents saw no significant inflows or outflows of deposits, 14% said they saw deposits decline by 2% or more and 9% said they saw an increase of at least 2% in deposits. I think these results are consistent with what we have heard anecdotally from our clients. We have seen no hesitation on the part of our clients to move ahead with technology to since the middle of March. And as I mentioned earlier, this was the largest third quarter in terms of sales bookings in the history of our company. What is more, our sales pipeline is now larger than at any other time, including a recognizable uptick in opportunities since our quarterly call in February. I’m well aware of the challenges bankers face in today’s economy and understand that things could change. But as we speak today, our clients are generally performing well and banks and Credit Unions are continuing to prioritize modernization of their technology stack to remain competitive and serve the evolving needs of their account holders. Hopefully, you have all seen the new corporate sustainability report that we published on March 31st. I think it is an excellent representation of the key initiatives and accomplishments we have been working on since we published our last report. In this new version, we provided a more detailed review of Jack Henry’s demographic makeup, a summary of the results of our annual employee engagement survey, an overview of our data privacy and Cyber Security practices, and an outline of our commitment to setting science-based targets to the Science-Based Targets Initiative or SBTI to address the reduction of greenhouse gas emissions. Additionally, the report highlights some of the public recognition we have received from organizations like Newsweek, Computer World and LinkedIn’s top companies list. As we look toward the end of the fiscal year, our sales pipeline is much larger than it has ever been, and we continue to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our customers, our ability to expand our customer relationships, and our long-term prospects for success. I look forward to seeing and chatting with many of you at our Investor Day in Denver in a couple of weeks. With that, I will turn it over to Mimi for some detail on the numbers.

Operator:

[Operator Instructions] The first question is from Rayna Kumar with UBS. Please go ahead.

David Foss:

Yes. Good morning, Rayna. So two questions in there. First of as far as Banno is concerned. And I think I talked about this on the last earnings call. I know, I have talked about it in some of the fire side chats that I have done with some of you. We had in fact a plan to start selling Banno outside the base here in the fall of this past year. And what we learned much to our surprise was that, some of our competitors had identified that as an opportunity for them to hang on to their core customers. The that their core customer was going to be able to use Banno, they were essentially using that as a selling point for those customers to retain their legacy core system, because they would get the best of breed digital banking system without having to change out the cores, and that certainly was not part of our strategy. And so we kind of backed off on that, we were prepared in the fall to start selling outside the base. We backed away from that now, we are really reworking that strategy with a more targeted approach. And so you will hear more about that from us, I think later this year as far as how we are going to go to market with Banno outside the core base. As far as the - now you will have to remind me the second part of your question. We are selling up, sorry, selling up market. Good thing I have help here in the room. Selling up markets. So yes, first off, we are having great success with SilverLake in the banking side. And of course, we are the dominant player on the Credit Union side already a market. So approximately 50% of the Credit Union industry with assets over one billion are already Jack Henry core customers. So we are already the dominant player on the Credit Union side of the business. On the banking side, we have had great success here in the past few years moving up market particularly with our SilverLake core system. What has been interesting now was the tech modernization strategy, we are engaging with a number of customers now that are significantly larger than you would normally of as a Jack Henry core customer. We are very interested in what we are doing and are now seeing Jack Henry as the very probable technology partner that they want to partner up with going forward. So more to come on that, it is early days for us with some of these very large customers that we are talking to. But the prospects I think are pretty bright and much of that being driven by the tech modernization strategy that we have been talking about lately.

Mimi Carsley:

Thanks Rayna. Yes, so we continue to see the trends that have happened for the first nine-months of the year, and are consistent with the broader market data that you are getting from other industry players in terms of slightly slower as it relates to the consumer sentiment impacting those trends and a little bit more going to the credit side than the debit side. And as you know, we have a much bigger profile on debit in our business. So, our guidance incorporates the continuation of that trend. And then to your second question, unfortunately it is a little premature at this point to talk about FY 2024. Our teams are still heads down collaborating on the budgeting process, and we will probably share that more on the August call than we will today.

Operator:

The next question comes from Dan Perlin with RBC Capital Markets. Please go ahead.

David Foss:

Yes, it is an insightful question, Dan, and I think what you are saying is generally correct. So if you are running a banker credit in the United States today, they have been performing pretty well and we all know the challenges that they are under and rate increases and cost of capital and that kind of stuff. But if you are running a banker credit in the United States today - for almost all of them, they need to continue to focus on modernizing their technology stack for one of two reasons. One, you are trying to attract new customers to your institution and customers aren’t coming into the branch anymore, right. They are expecting to do things through some type of digital presentation layer. So for most banks and Credit Union that requires them to continue on this modernization track and make sure that they have the tools to attract not just consumers, but business customers small even the business customers are the lifeblood of our customers and how they operate on the banking side and so there is that driver. But then the other side of the equation is efficiency. For, so for most bankers, they can quote their efficiency ratio immediately to you without looking at any piece of paper. They can quote it off the top of their head because they are all focused on efficiency and trying to figure out where are those areas where we can drive efficiency through the operation. Well, generally technology is at the kind of the crux of where they are going to find efficiency. And so there too, Jack Henry is in the mix having those conversations with our customers. And then you throw into that, on top of that fraud and Cyber Security and all those kind of things, all of that stuff is driven by technology. And so, yes, I think there is a bit of a disconnect in this sense that because there is some turmoil in the industry, Jack Henry sales are going to be negatively impacted. They are just not, you know, the businesses continue to run and they need to continue to find technology solutions to help them with all those things that I just highlighted.

Mimi Carsley:

Sure, Dan, great question. So, as we talked about previously, we continue to see margin expansion throughout the year. We knew it would be, you know, a modest amount this year, earlier in the year our original guidance was flat for the year. We are hopeful that we are on track for a small increase in margin expansion. I would say that things we are working on are consistent, we do a ton around efficiency, continuous improvement, we have done a lot on internal automization and procurement has been a huge win for us as we think about streamlining partnerships and really prioritizing that spend. So we are being really thoughtful on controllable spend, like travel, headcount additions, really thinking about each position from a zero base perspective. But there is nothing structurally that concerns me in terms of the ability to once again, continue back, now that we have the normalization of some of the headwinds we have seen past years and return out of COVID environment, that will return back to a margin expansion story.

Operator:

The next question is from Nik Cremo with Credit Suisse. Please go ahead.

David Foss:

So let’s do Payrailz first, Greg is prepared to give you an overview of Payrailz and then we will talk about the rest of the payments business.

Mimi Carsley:

Yes. I would just add that there is consistency to Greg’s point, there is consistency across remit cards, payments, also led by things like the fraud and other risk management solutions that are add on. So I would say that from a consistency of growth will continue and then added by the benefit of Payrailz.

David Togut:

Thank you. Good morning. You have called out your new sales pipeline at a record level. Could you walk through what are the biggest drivers of that, is that new tech modernization modules, is it Banno business, SilverLake what are the underlying components of that strength?

Gregory Adelson:

This is Greg. I would like to add a relevant example. So we actually just got an inbound request from a large regional that hadn’t talked to us since 2010, and they came to us and said, Hey, we would like to renew conversations based on what we have heard about you in the industry the tech modernization story and things in general. And that is a relevant example, because these are larger institutions that we typically wouldn’t have seen in the past, but again that are inbound to us because of the things that we are doing and with stuff that Dave just described.

Gregory Adelson:

It is greater than 50 billion.

David Togut:

Understood. And just as the follow-up, what is your latest view on timing of rollout of FedNow Jack Henry’s role and how material could FedNow be to Jack Henry over the next 12 plus months?

David Foss:

Pleased to emphasize Dave, the level of our involvement with the Fed on this project, I was just in Washington DC on Monday, so two days ago, meeting with some of the Fed presidents and the FedNow team and our, the president of our payments division was with me talking strategy, talking rollout. This was a Jack Henry only meeting with these Fed presidents. So we are very engaged with the Fed and very - it is top of mind for us to make sure that we are helping our customers take advantage of this opportunity.

Operator:

The next question is from Vasu Govil with KBW. Please go ahead.

Mimi Carsley:

Hi Vasu, while I appreciate the question. You know, we are still in the midst of planning. In fact, this afternoon we will be spending the whole afternoon with the sales team on their planning for next year. You know, I would say overall, as Dave mentioned, a continuation of both the transition and implementation from a great pipeline from the last two-years, plus, the continued interest in some of these new products. Banno business wasn’t in the year numbers for FY 2023 will be in 2024, so that is a nice bump as well. But I would say it is going to be a continuation of a diverse portfolio growing very well.

David Foss:

I’m sorry, I missed the last part of your question, is what? Oh, mid-single digits. Okay. Sorry. Yes. So, as you know, Vasu, the complementary segment is a little bit of a challenging one to talk about because there are so many solutions in there, but I understand your point, trying to figure out what are the key drivers. So there are several, I already highlighted the financial crimes defender solution that we are just now rolling out. So we definitely expect that to be a key driver for us in the coming year. Banno is in that segment, and so Banno will of course, continue to be a driver as we are rolling out Banno Business, treasury management that I called out a little while ago. Treasury is in that segment that will continue to be a, a driver for us. Most of the fraud solutions that are not specific to payments, so the payments fraud pieces show up in the payment segment, but the other fraud type things that, security solutions, for example, those are all in that segment that is always top of mind for our customers. So that continues to be a driver for us as well. So it is just a lot of different things. And then, as I mentioned earlier, our online commercial lending solution, that has really picked up here in the past several months. We have had that solution in market for probably four years now, but in the past few months, it is really picked up as far as the level of engagement with customers and prospects. And so a bunch of different pieces. And so to the second part of your question about, you know, mid single digits, I think that is a good assumption because with so many solutions in there, you have some that are growing quickly and some that are kind of, you know, just steady performers. And so I think that is a good assumption for that segment for the long-term.

David Foss:

Yes, well, I think it is because it is an interesting thing when you work with banks, you know, in banks, most bank CEOs grew up in the bank as a commercial lender, that is their background for most of them. Commercial lenders, they are the money makers in the bank, right. But you can talk all day long about consumers and what wonderful relationships you have with your consumers. But what really makes money for a bank is the commercial lending business. And so that is small, medium business customers and then of course even larger customers. Commercial lenders tend to have a process that they follow. They are the money makers. They are the people who have a process that they follow. They have tended traditionally to be averse to using more technology. But now with so many people, particularly on the backside of the pandemic, so many people not wanting to go to the branch, they have gotten used to this idea of being able to do everything through some kind of a digital layer. Commercial lenders are getting a lot more comfortable with the idea and I don’t say they like it, but they are accepting it. They are getting more comfortable with the idea that their customers, small medium businesses expect to be able to apply for a loan and interact with the bank using a commercial presentation layer that is exactly what our solution does. It is a complete commercial lending solution that is hosted online, where the borrower can do everything they need to do through that presentation and then the lender can interact with them again through that technology. So I think it is a result of the backside of the pandemic. Customer expectation has changed, and lenders are kind of oftentimes grudgingly accepting the fact that, their customers want to do things differently and they are now thinking about how do we adopt different technology to make sure we take care of our customers.

David Foss:

Certainly.

Peter Heckmann:

Good morning. Most of my questions have been answered, but I wanted to follow-up on FedNow. I guess is it your impression that with FedNow, the primary use case is going to be enterprise B2B and likely replacing same day ACH. And related to that, are you aware of any other use cases that, might involve the consumer or other sort of niche processes that you think are going to be stronger and out of the gates?

David Foss:

And one of the things we talked about Monday was VA benefits.

Peter Heckmann:

Okay that is helpful. And then just to clarify though, again, with that now, it doesn’t sound as if there is a lot of applications that are currently either cash based or card based that will be replaced with real time payments. It is primarily some form of ACH or interbank transfer. Is that how you see it?

Peter Heckmann:

Okay, good that is helpful. Thanks.

Operator:

The next question is from Kartik Mehta with Northcoast Research. Please go ahead.

David Foss:

Yes thanks Kartik. So, it is an interesting thing in this the business that we are in with the recurring revenue model that we have built. So first off, when it comes to the contracts that we already have signed, we of course have a tremendous amount of visibility because we are almost 90% recurring revenue as far as the contracts that we have in-house and the kind of watching the revenue build on those contracts. And then that once we sign a customer, oftentimes, depending on the product, it can take one-month to 12-months depending on what they purchase from us for that revenue to start layering in so we see the visibility into that. And then, as far as the pipeline is concerned, so when you have been doing this as long as I have and I have been doing this a long time, we have a very predictable model. So, I’m not going to quote numbers here, but I can tell you with a pretty high degree of accuracy, if the pipeline is X, then Y percentage of the pipeline is very likely to close, because we have years and years and years of history doing this. And so we know that that is going to translate into Z dollars of revenue overtime and so we can kind of do that math and predict pretty accurately what the impact is going to be. Now, the challenge again, is some of those solutions. You sign a contract today and we won’t see you the first dime practically of revenue for nine-months to 12-months. Some of them, you sign a contract today and you have revenue flowing in and in one-month. And so, there is some art to this, but there is a lot of science to it as well. Just based on all the experience that we have doing this for as long as we have and understanding the way these contracts works and the way customers make decisions.

Kartik Mehta:

And then just thinking about, I don’t want to call it a banking crisis, just the issues that are out there and looking at Jack Henry when the last crisis happened and kind of how you looked at the business then and what happened, and if there is any lessons you could take from that and what is happening today. I know they are very different, but just trying to get a feel for maybe, you know, what we could clean.

Kartik Mehta:

Perfect. Thanks Dave. I really appreciate it.

Operator:

The next question is from John Davis with Raymond James. Please go ahead.

Mimi Carsley:

Yes, thanks JD. Great question. Yes, I think that 250 is a good estimation. I think we feel good about that. We always knew that it would be a grow as the year continued kind of situation and we are seeing that transpire. So I feel good with that estimation.

Mimi Carsley:

Yes, great question. And JD, I love that you are looking at it on an annual basis versus a quarterly just because of the lumpiness that any one quarter can have, in this quarter in particular between the deconversion and then the larger tax payments and just kind of going into that. We were waiting for some legislative clarity around IRC-174 like a lot of companies that impacted the capitalization, the deductibility of that capitalized labor. Unfortunately, with lack of legislative clarity, we had to make a payment. So you wouldn’t normally have seen that kind of maybe spread over a couple of quarters that is a timing thing. It doesn’t impact our tax rate that will reverse over several years and kind of normalize. So I think that, obviously will not be a part of Q4. As you said, we have a large inflow. So you will certainly see an uptick. I think the reality is because of deconversion revenue, we also have a couple of larger renewals of some third-party expenses in third quarter. I think it will be light of our target of the 100% free cash flow conversion that we target, but I think it will step definitely be an uptick from third quarter.

David Foss:

Really, I don’t know that I know the answer to that question. Anybody want to guess. I mean, the payment businesses, but he is talking about account base. So it is the core business essentially.

David Foss:

25% okay. We will go with 25% JD.

David Foss:

Sure.

David Koning:

Thanks. And Maybe I guess first of all just on Q4 kind of the implied guide is for somewhere around 6% I think kind of non-GAAP revenue growth, which the rest of the course of the year I think we are kind of 6% to 8.5%. So it is a little slower. What is the reason for the slower in Q4?

David Koning:

Okay. And then I guess on Payrailz, I think year-to-date, you add back the loss from acquisitions to non-GAAP margin, I believe. And I think it is trended like around $10 million year-to-date loss, so probably a little more by the end of the year. Is that all going away in 2024? And basically is that why you can get to accretion in 2024 like, is that just the main what just kind of goes away?

David Foss:

But he was specifically talking about Payrailz.

David Koning:

Got you. Thank you and I appreciate it.

James Faucette:

Hey good morning everybody, thanks a lot for the time. I think most of the questions around demand and sales cycle, et cetera, you guys have at least addressed a little bit. I wanted to ask, quickly on capital allocation, I think, Dan raised a kind accountability change in sentiment in the market, and clearly, that is impacted your stock at the same time continue to wonder about M&A. So just any comments how you are thinking about capital allocation and what looks attractive to you right now and how you would prioritize?

Mimi Carsley:

Let James, just to add one more thing, which is consistent with our priorities, is paying down the debt through our normal cash flow from operations. And so, you would expect to see that over the next several months, years that we are going to continue to decline the debt balance.

David Foss:

Yes, it has been an interesting time since the great resignation. We went from the great resignation where everybody was resigning their jobs and going to find the pot of gold at the end of the rainbow to within about three-months, all of a sudden companies were doing these massive layoffs. And so, a lot of heads were spinning, I think, among employees and a lot of these companies. So for us here in the recent past, we have picked up some really good new hires and we have had some wonderful, what we refer to here as boomerangs. People who left because they wanted to chase the pot of gold, and then they realized the pot of gold wasn’t there. And they called us up and said, can we come back? And those are great additions to us because they already know our company, they know how we do things and they are often times really talented folks. So we have had a number of boomerangs come back. We are attracting some great talent from some other companies in our space that have been challenged, and so they understand the industry, they understand what we do, may not understand the Jack Henry products completely, but we found some really good talent people that were a little shaken by what is happening at other companies in the industry who are looking for a steady provider. And so they have joined Jack Henry. So we are not just hiring left and right, we are being very judicious about when we hire and where we hire and so we are trying to be very selective about who we choose to join the Jack Henry team. But I think the overall message would be we have had some great additions to our team in the last two, three, four-months.

David Foss:

Sure.

Dominick Gabriele:

Hey, great. Good morning, everybody. David, I don’t know the best way to ask this, so I’m just going to go ahead and ask, I guess you are the sole survivor of the big four companies in core platform as far as CEOs go from pre-pandemic, a lot of our clients actually do ask about what is the long-term succession plan, if there even should be one, you have had a major contribution to this enterprise. And so I do get questions about if a succession plan ever came, would it be someone inside, outside? How do we think about that not thinking about timing, but what does a succession plan look like in the past for Jack Henry in general for CEO and I’m not saying you should leave.

Dominick Gabriele:

Excellent. Thanks so much, on that one. And Mimi, you have mentioned in the prepared remarks a few times about personnel related costs increasing year-over-year. And this was kind of talked about in last question, but not exactly. Is there a way to kind of break up new hires versus wage inflation versus tech talent demand in those growth rates or just to kind of parse out largest factor, least important factor as we think about the go forward growth and expenses for personnel? Thanks so much.

Dominick Gabriele:

Great. Thanks.

Mark Feldman:

Hi guys. This is Mark on for Chris. Thanks for taking the question here. So just wanted to ask on Banno, do you guys have any information regarding the asset size of the institutions that you are seeing the primary uptake from Banno and any interest in it? And I guess additionally adding on to that, what does Banno for business do for your sale forces ability to close Banno signings that they didn’t have before without the offering?

Mark Feldman:

Great, thanks. And if I can ask you just one more on with credit cards. I know in the past you originally didn’t have the sales force that could go out and infrastructure to go and sell the product. Do you have any update on where that is today and when we can start seeing some deals getting signed with credit cards? Thank you.

Mark Feldman:

Good. Thank you.

Operator:

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Operator:

Yes. The replay number for today’s call is (877) 344-7529 and the access code is 1452467. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Operator:

Good morning, and thank you for joining us for the Jack Henry Second Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I’ll now like to turn the conference over to Mr. Vance Sherard, Vice President of Investor Relations. Please go ahead.

David Foss:

Thank you, Vance. And good morning, everyone. Today, we're pleased to report another strong quarter of revenue and operating income growth. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our second quarter. For Q2 of fiscal 2023, total revenue increased 2% for the quarter, and increased 6% on a non-GAAP basis. This variance was primarily due to a reduction in deconversion revenue, which I'll detail in a few minutes. Turning to the segments, we again had a solid quarter in the core segment of our business. Revenue was flat for the quarter but increased by 6% on a non-GAAP basis. Our payments segment also performed well posting a 3% increase in revenue this quarter and a 6% increase on a non-GAAP basis. We had a very strong quarter on our complementary solutions businesses with a 4% increase in revenue this quarter, and an 8% increase on a non-GAAP basis. Yesterday's press release included revised guidance which Mimi will outline in her comments. One of the key drivers behind this change in guidance was the actual and forecasted reduction in deconversion revenue for the year. As we disclosed yesterday, deconversion fees are down $20 million year-to-date. And this was the primary driver of the variance in GAAP versus non-GAAP revenue and operating income performance for Q2. As a reminder, we receive deconversion revenue when one of our clients is acquired by another institution and is required to pay us a fee to terminate their contract prior to the end date. I normally referenced this as the revenue you don't want to see because it indicates we've lost a client to M&A. This lack of consolidation by financial institutions is also impacting our services revenue associated with convert and merge activities. Because of the impacts to bank stocks and valuations, M&A is down overall in the banking space, and the experts in the industry don't see any significant rebound for at least a couple of quarters. Of course consolidation is outside of Jack Henry's control and we normally update guidance for deconversion revenue as we become aware of pending M&A activity. The other primary item impacting our guidance is the recent change in consumer spending behavior. Due to economic conditions, consumer card usage is slowing and transactions are shifting from debit to credit. Our card processing business is significantly weighted to debit processing. So we are revising guidance to reflect what we believe to be a temporary economic trend. As I've said many times in the past, our financial model is very resistant to significant swings resulting from changes in the overall economy. But we're not completely bulletproof. Despite the external factors, our primary businesses remain strong and continue to perform very well. As I mentioned in the press release, our sales teams again had an outstanding quarter with a number of notable wins. In fact, Q2 set a new quarterly sales record for Jack Henry breaking the record we set in the June quarter last year. In the second quarter, we inked 12 competitive core takeaways, and an additional 15 deals to move existing in-house core clients to our private cloud environment. December 30, was a particularly memorable day for us to Jack Henry as we signed the three core takeaways of multibillion dollar financial institutions on the same day. We continue to see good success with our new card processing solution, signing 12 new card processing clients this quarter. We also continue to see great success signing clients to our Banno digital suite with 36 new contracts in Q2. Speaking of our digital suite, our Banno business solution is scheduled to go into general release next quarter. We already have 18 institutions live in early adopter status with the feedback being extremely positive from those users. We have 308 clients under contract for the solution, and we're positioned to bring them into full production at a very rapid pace once we achieve general availability. We are also continuing to implement new financial institution clients on the retail Banno platform at a similar pace to recent quarters. At the end of Q2, we surpassed 8.8 million registered users on the platform, and Banno continues to hold one of the highest consumer ratings in the App Store. Normally in January, I share with you the results of bank spending survey projections from the publications we follow closely. Unfortunately, this year, none of those major publications provided forward looking projections around the topic of expected tech spending in the banking segment. I have received a number of smaller surveys, and we conducted our own informal survey at a banking CEO roundtable last month with the results being all relatively consistent. The average increase appears to be settling at around 7% for calendar 2023, with the most popular range being a 5% to 10% increase. I'll continue to watch for firm objective data and we'll share as it becomes available. As you may have noticed last month, we took a major step forward with our environmental efforts by signing a commitment letter indicating our intention to set science-based climate targets with the Science Based Targets Initiative or SBTI. Science Based Targets are aligned with the level of decarbonization necessary to meet the goals of the Paris agreement to limit global warming to 1.5 degrees Celsius above pre industrial levels. Jack Henry will pursue validation for near term greenhouse gas emissions reduction targets through SBTI. This commitment follows extensive analysis and discussion and is supported by our low carbon transition plan which outlines several mitigation tactics to reduce our greenhouse gas emissions. More information regarding this plan will be disclosed in our next sustainability report, which will be released on March 31 through the investor site on Jack henry.com. As you will recall, it was on this call last year that we announced our new technology monetization strategy. We developed this multiyear strategy to help us deliver the public cloud native capabilities to Community and Regional financial institutions, allowing them to innovate, compete and meet the evolving needs of their account holders. We are continuing to make great progress on the strategies four main objectives. First, we're redefining the core processing system by unbundling services that traditionally would be in the core and building them as standalone modules on the public cloud. In September, we announced plans to build these services on the Google Cloud. And we've been testing our wire processing and authorization management services modules on the Google Cloud since that time. We currently have six clients live in early adopter status with domestic wires, and plan to offer general availability for this solution in July. We expect to launch the international wire solution for early adopters in April and expect that module to be generally available late in the fourth calendar quarter this year. Second, we're working to provide multiple data integration options utilizing our open philosophy and technology. Our newest offering in this area is real time data streaming, simultaneous, constant streaming of necessary data to all systems on the platform. We're currently in beta with real time data streaming, which is essential to support real time payments and fraud detection. We expect this functionality to go into live production later in this calendar year. Delivering industry leading capabilities across a single next generation platform is the third objective. Banno was a key element in this part of the strategy. But we're working on several other additional solutions to build upon this commitment. As an example, in September, we added Payrailz, a public cloud native digital payments platform to our suite of payment solutions. Additionally, this summer we're launching Financial Crimes defender, our next-gen Financial Crimes platform with enhanced capabilities, including machine learning, and artificial intelligence. This new fraud solution has been built entirely on our public cloud native platform. The last step in the strategy is to move from acting as a core processor to offering a full banking ecosystem. This includes our own capabilities, plus access to leading fintechs through a single platform that prioritizes openness, agility, speed, and optionality. A year ago, I announced that we had more than 850 FinTech providers in our ecosystem, today is closer to 950 and the number continues to grow. We're also the only platform provider that has relationships with all four major financial data aggregators, Finicity, Plaid, Yodlee, and Akoya. Through these companies, financial institutions can give account holders a complete financial picture in a safe secure manner that eliminates screen scraping. We've seen strong interest in this strategy from both prospects and customers. Anecdotally, I can tell you that we are currently in conversations with a number of prospects, who have indicated that the technology modernization strategy I just described is the primary driver for them to engage with Jack Henry to help develop their technology strategy for the future. Community and Regional financial institutions are the lifeblood of mainstream America. Many of them, however, are at a crossroads. The personal service and experience they are known for is being disrupted by technology as nontraditional financial service providers have entered the market. And the way people bank has fundamentally changed especially for the younger generation. As a well-rounded financial technology company, Jack Henry is in a unique position to provide modern technology and services to help community and regional financial institutions capitalize on this opportunity and strengthen connections with their account holders. The key takeaway is that while we're successfully meeting the needs of our clients today, as shown by our performance results, we're also preparing them for the future. We're pleased with the progress we've made on this exciting strategy. And we'll share more updates at our Investor Day in May. As we began the second half of our fiscal year, our sales pipeline is very robust, and we continue to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our clients, our ability to expand the client relationships, the spending environment, and our long-term prospects for success. With that, I'll turn it over Mimi Carsley for some detail on the numbers.

Operator:

[Operator Instructions] The first question comes from Vasundhara Govil with KBW.

David Foss:

I'll take the second part first, Vasu, and then I'll turn it over Mimi. As far as the overall macroenvironment, I would say things are continuing to look very strong. Our pipeline, I just mentioned in my prepared remarks that we set another sales record in Q2 which I was not expecting, given the huge performance we saw in Q4, the June quarter last year. So to set another overall sales performance record was a surprise to me. But the environment is very strong, the pipeline is larger than it's ever been. I would say that on the core side of the business, we are trending larger. So I highlighted, we assigned three-multibillion-dollar institutions on December 30th alone, core takeaways December 30th. And I think the if you look at the core side of the business, the accounts that we're currently involved in are definitely trending larger, bigger institutions coming to Jack Henry looking to make a change. I certainly believe part of that is driven by the technology modernization strategy. They're looking for that partner that will really help them modernize. But I think the other driver for that is just the reputation Jack Henry has for delivering great technology and great service. So I would characterize the overall environment for us as far as sales is very strong right now. And as I said in my prepared remarks, although we don't have any of the big surveys that I can quote, because nobody has published results. I have a whole bunch of more anecdotal bits of feedback and that CEO roundtable that I hosted two weeks ago in Phoenix, and they're the kind of average spend increase for calendar ‘23 and this is them knowing that their budgets are in place for ’23 already. So it's them quoting to me what they have planned, the average was around 7%, as far as an expected spend increase. And by the way, this CEO forum that I hosted was not just Jack Henry core customers. This was a variety of CEOs from a variety of, who are running a variety of different solutions. So that would be my comment on the overall and I'll turn it over Mimi, to answer your first part of your question.

David Foss:

I think that's important to emphasize that our growth rate year-over-year is for the payments business is very strong. Now we've backed off a little bit because what's happening in consumer behavior, but we should not lose sight of the fact that the payments business is up significantly year-over-year as far as overall growth.

David Foss:

Yes, so I don't think, Vasu, I can quote you accurately on what our win rate is. And I think pretty much every deal where we're selling digital banking is a competitive deal. So I couldn't quote you an accurate percentage as far as what our win rate. Win rate is, I just know it's very high because Banno has this outstanding reputation. As far as selling outside the base, so, we're from a technology point of view, we're prepared to do that right now. It's a strategy point of view that has kind of prompted us to back off a little bit. And I think I talked about this on a previous call. We see opportunities outside the base, as I said, from a technical point of view, ready to deliver outside the base. But we have learned that for some of our competitors are selling into their base, they perceive to be a real positive a real win, because it gives them a better solution overall. And so we're weighing the opportunity for us to sell Banno versus the potential negative for us in selling the core side. If a competitor says, oh, my gosh, wait, we finally abandoned in our base now. So our customers won't be as likely to leave us on the core side of the business. That's not necessarily a good thing for Jack Henry. So we're being very strategic about how we position this and which core basis we go after. And I'd rather err on the side of making sure the strategy is right. And rather than just chasing after a few dollars that might damage us long term from a strategic point of view.

David Togut:

Thank you. Good morning. Dave, given you completed the transition of processing over the first data, which used in their back end for debit and credit card processing, are you able to leverage their capability at all to build out your credit card processing capacity to offset some of the shift from a debit to credit?

David Togut:

Understood. And then on the tech modernization strategy, do you have specific timelines to roll out some of the key initial modules to clients?

David Togut:

We don't have access to the client portal, I mean, can you kind of share in any broad brushstrokes, what we should be expecting in terms of rollout of tech modernization strategy?

Greg Adelson:

Yes, there's a few other things we're doing. So we basically have planned out for the next three years. So we have various targets that we've assessed, but things around authorization management is a big one. Dave actually mentioned that as some of the testing that we're doing already, in the Google Cloud, that's a big one, there's a lot of components that we're doing with real time to help us with some solutions that we're going to look to roll out over the next 18 months or so that we're not prepared to talk about publicly, but components of that. And then, of course, a lot of the other key modules, General Ledger itself, other components that will be done. But each of those is already bracketed by year for what we plan to get done over the next three years.

David Foss:

None of them were above $10 billion. My recollection is they were mostly been a three-ish range. three to five, somewhere in there. And I'm not, I'm just doing that off top my head, but somewhere in that range for those customers. And I think it's the same story that you've heard from us time and time again, Dave. It's a combination of great technology, a great reputation for service, a very focused strategy. So if you come to do business with Jack Henry, you know which core side we're going to be supporting for the go forward. There's no question about what our strategy is regarding core. So I think it's all those things rolled together, plus, this reputation we have for openness. And today, most banks and credit unions want to connect to FinTech solutions, and they want a partner who embraces that idea of open connectivity. And so you roll all those things together. It's the same things that we've been talking about for a long time. Those are the primary drivers for us in these wins.

Kartik Mehta:

Hey, good morning. Dave in the past, we've talked about maybe the backlog in the business. I know you don't report that. But the one way I know you kind of look at revenue and your ability to kind of projected backlog of installed teams and seems as though you've been winning a lot. If you kind of look at that metric, over the next maybe 12-18 months, is that still look very good and give you confidence from a revenue standpoint?

Kartik Mehta:

And then just one of the issues that you always hear banks talk about especially maybe community banks and credit unions is having to deal with fraud, whether it's fraud related to P2P payments, or fraud related to their ATM business or checking accounts. And I'm wondering from Jack Henry's perspective, how you might be able to help your customers and how that might help Jack Henry in terms of selling products.

Operator:

And the next question comes from John Davis of Raymond James.

Mimi Carsley :

Yes, thanks for the question. JD, you're right, in terms of the deconversion revenue driving about $0.20. If it were to stand on its own. A couple of things, one, to just follow on to my prepared remarks. The disciplined focus on expense controls, and the second half is driving part of that upside. Additionally, we are seeing because of the higher interest rates, we are seeing some positivity from an interest income perspective, that's helping as well. And then on a GAAP basis, you have the Albuquerque sale, as well. So that's just not a lot of changes on the tax rate. But just between management control, and a little bit of interest rate savings. So I would say that’s a primary driver of that change.

John Davis:

Okay, thanks. And then the second half implied guide is a little very modest step up implies growth a little over 7%. Any callouts, Mimi, 3Q versus 4Q, should be relatively consistent. Just trying to think about cadence of revenue growth in the back half of the year.

John Davis:

Okay, thanks. And then, Dave, on the debit card revenue, I think I was called out. It's about 22% of revenue. Can you help us think about what's an account on file fee versus per transaction? Just trying to understand it, if macro slows further, it gets better how sensitive that card business is to spending levels?

John Davis:

Okay, let's take one last one in here, free cash flow conversion, trailing 12 months is down a little bit relative to history for Jack, somewhere in the 80s versus the 100% or so target. Any false there on timing, do you still comfortable with getting back to 100% for the full year for free cash flow conversion?

Operator:

And the next question comes from Ken Suchoski with Autonomous Research.

John Davis:

Yes, so from a sales perspective, we're starting to really see some nice wins, a little bit slower than we had hoped to kind of start out the first few months, but we're starting to pick that up. We're also through the integration efforts that we've been doing, we're able to sell some separate modules. So some of those components that we bought from Payrailz, we can actually sell into our existing iPay business. So the open loop P2P that we mentioned the A to A components and even the fraud module, we're able to sell. So we're starting to get that geared up, we're completing some integration. So we're pretty bullish that we're going to have an opportunity to continue to sell into the iPay space as well as what we have in the prospect list for the Payrailz customers pre acquisition and post.

Mimi Carsley :

I can take that one, Ben. So I would say year-to-date trends that we've seen core being about six driven mostly by cloud strength, payments up about 7% growth and complementary about 8%, for the full year and that's on a non-GAAP basis, for the full year, we're seeing some consistency in those trends. So I would say particularly around core and payments consistently full year versus kind of year-to-date. And on complementary, I think growing slightly in the second half to kind of land us up a little bit there. So that's kind of the direction I would call out.

Unidentified Analyst :

Good morning. This is a D J Kulkarni filling in Karina Kumar. Thanks for taking my question. I guess to start it. I appreciate the details on the tech modern strategy but can you touch on how this is progressing and particularly if there are any notable developments on this front within the payments business since the acquisition of Payrailz? And then I have a follow up.

Unidentified Analyst :

Great. That's very helpful. And for my follow up, you mentioned Jack Henry began leaning more on CPI Escalators last year, as inflation climbed to kind of record levels. Now there's expectations of inflation to moderate in 2023, could you just walk us through how this could impact Jack, Henry's business, if at all?

Mimi Carsley :

The only add on I would say there is it's quite early from a fiscal ‘24. We haven't even started it budget cycle planning. So in terms of being able to indicate utilization, and for next year, I think it's premature. I would say we're not reliant on that as a core strategy of our growth though.

James Faucette:

Hey, good morning. Thank you so much, Dave, Mimi. Wanted to get your perspective a little bit on the prospect for vendor consolidation in the current environment. I guess I'm wondering if I'm a bank or credit union today, I'm using Jack Henry for core processing, but in past have elected to do best-of-breed software from other lending partners. Am I looking to consolidate those activities in some form or fashion? And how does that give you, what does that do for your sales and sales cycle, et cetera? If that is doing.

James Faucette:

Got it. And I wanted to ask also, I guess, a more specific product related question. And that's related to FedNow, given how close you are to FedNow, as I was hoping you could give us an idea of the general readiness and implementation capabilities that the regional community banks that you work with, have to implement that and start to use FedNow. And I guess on a high level, what's your take on the timeline on how JHA PayCenter is positioned to accommodate the roll out? Thanks.

Operator:

And the next question comes from Cris Kennedy with William Blair.

Greg Adelson:

Yes, this, Greg, I'll take that one as well. So we did just launch it, we have three customers that are in some type of pilot with us right now since we just got it going. But what we really believe is going to happen is that the smaller community institutions that were had credit programs or wanted to be part of credit programs, they didn't have the staffing or expertise to handle the full-service solution. So just like Dave mentioned that we were gearing up, and we brought in people to help us with it, they didn't have the resources as well. So we really believe the agent program is going to be a nice opportunity for more folks to take advantage of a credit offering. And the way we position the solution set is that at some point in time, if they would like to actually move to a full-service solution, we will let them take that portfolio with them. So that's also pretty advantageous. So again, more to come on that. But we do believe that this -- there'll be more uptake in the agent program, then maybe, especially in the smaller community, institution space.

Greg Adelson:

Yes, we're still working through that. But yes, I mean, we're working through everything we can do related on the sales side, making sure that the sales engine is going to the point that we need it to. And as long as that happens, we feel very confident about that.

David Koning:

Yes. Hey, guys, thank you. And I guess first of all the non-GAAP revenue. I know you took down the year by $20 million to $25 million. And you walk through that, but EBIT, you mentioned too is still non-GAAP EBIT, still stable, meaning you're taking the $20 million to $25 million of cost out -- with cost controls. I guess I'm wondering where are you taking costs out and then is that sustainable into next year? Or will some of that just flux back up as you grow into next year?

Greg Adelson:

This is great. I'll add one piece, we have a very strong focus on process automation here. Not only tools, but just in people. So about 25% of our staff is really certified in some level of what we call caught in the classroom. And so as part of that, we've been driving a lot of operational savings, and some of the headcount reductions as part of our initiatives to be better automated, and various things that we do. So that's also another contributing factor.

David Koning:

Got you, thank you. And maybe just a follow up, I know Payrailz, I know the year is supposed to be $12 million and Q2 was like $2.6 million or something. But the rest of your needs to be $4.2 million per quarter to get to the full year. And I'm wondering why does it step up from $2.6 million up to $4.2 million per quarter the rest of the years or something seasonal et cetera?

Operator:

And the next question comes from Dominick Gabriele with Oppenheimer.

David Foss:

Yes, so it's becoming a significant part of many of the conversations. So I highlighted the beginning of the call Dominick, that we signed 12 new core deals in the quarter, it was a significant call out that I made, there was three of them were multibillion dollar institutions that all signed on December 30th. So December 30th was kind of a fun day around here. But the other thing that I've talked about already on the call is the fact that we have larger institutions, I think overall demand is moving larger. And I think some of that is definitely being driven by the technology modernization story. So we have, it's become a part of most conversations with core prospects is not necessarily part of the conversation with people who are not looking to bring their core to Jack Henry, but for core prospects, it certainly is part of the conversation, usually. And we are trending up as far as the size of customers that are coming to Jack Henry wanting to talk about tech modernization, because they've been looking for that company that will help them develop a strategy in the future that gets them to the public cloud. And it's a more, I think, rational strategy about how you do the core side of the business, and tie in FinTech solutions, complementary solutions into that experience for their customers. So conversations have been great. I personally have been involved in a lot of them, because as I’ve stressed before when it's a larger institution, and the CEO wants to be in the conversation. I am normally involved in those and it's pretty fun right now.

David Foss:

Well, so what I talked about in the early part of the call is we don't have any of the major surveys that I can quote to you this year, but I have a number of smaller surveys with smaller sample sizes. And then I hosted the CEO roundtable discussion just two weeks ago. And these were CEOs of larger institutions. Jack Henry core and not. So it was a variety of CEOs and kind of the overall feel. And these are people who have their budgets in place now for 2023. So they weren't speculating. They were sharing with me real numbers that they planned for 2023. The kind of the average settled in at around 7%, their expected increase for 2023. And that's in line with what we're seeing in the sales organization. The sales pipeline is very robust, larger than it's ever been. So I don't see any slowdown or any kind of pullback when it comes to the commitment that folks in our space have on continuing to spend in the technology area.

David Foss:

Yes, I'd say it's pretty stable. I've described it before as a religious conversation. When you talk to a bank or credit union, they either believe in being in-house with either everything or some things, or they believe in outsourcing, and they just have this kind of ingrained belief. And normally it requires some driver that has nothing to do with Jack Henry to get them to talk about outsourcing. So it might be that they've lost somebody in their tech group that they were very dependent on and now and they can't hire a replacement. It might be that the regulators are giving them, pressuring them because they're trying to do things themselves that they maybe shouldn't be doing themselves. It might be a change in leadership at the institution. And the new CEO comes in and says, I don't know why you guys are doing this yourselves. We really ought to be outsourcing this. So it's some kind of driver normally that's external to Jack Henry. That prompts them to bring their business into an outsourced environment. And I don't think anything has changed in that regard in the past six months, or even in the past six years.

David Foss:

Thank you, Keith. We have additional investor engagement opportunities for management participation at multiple investor conferences and non-deal roadshows over the next month. Additionally, please save the date, as our annual Investor Day will be held in Denver, Colorado, on the afternoon of Monday, May 15. If you are interested in attending in person, please contact me for additional details. Otherwise, we hope you join us via the webcast. We are pleased with the results from our operations and remain enthusiastic and focused on our future. We thank all Jack Henry Associates for their efforts that produce these results. Thank you for joining us today. And Keith, will you please provide the replay number?

Operator:

Good day, and welcome to the Jack Henry First Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Vance Sherard, Vice President of Investor Relations. Please go ahead, sir.

David Foss:

Thank you, Vance, and good morning, everyone. Before we get started today, I'd like to welcome the other folks in the room with me as introduced a moment ago by Vance. To begin, I'd like to welcome Mimi Carsley to her first quarterly call with Jack Henry. Mimi has been sitting in the CFO chair for a couple of months now and has spent a good bit of time immersing herself on the details of our business. Of course, you'll hear from her in a bit, and I'm happy to have the opportunity to introduce her for the first time to all of you. Additionally, I'd like to welcome our President and Chief Operating Officer, Greg Adelson, to his first earnings call. Many of you know Greg from our Investor Day and other events. Greg will be a participant in these calls going forward, but today, he will primarily focus on answering any questions regarding our recent Payrailz acquisition. And last, I'd like to welcome Vance Sherard to his first earnings call. As you probably know, Vance was recently promoted to Vice President of Investor Relations, and he will host these calls every quarter going forward. With that, let's move to the update section of our call. As I noted in the press release, I'm very pleased to report another strong quarter of revenue and operating income growth for our company. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for the quarter. For the first quarter of fiscal 2023, total revenue increased 8% for the quarter and also increased 8% on a non-GAAP basis. Deconversion fees were up slightly as compared to the prior year quarter. Turning to the segments. We had another solid quarter in the core segment of our business. Revenue increased by 6% for the quarter and also increased by 6% on a non-GAAP basis. Our payments segment again performed very well, posting an 8% increase in revenue this quarter and a 7% increase on a non-GAAP basis. We also had another strong quarter in our complementary solutions businesses, with an 8% increase in revenue this quarter and an 8% increase on a non-GAAP basis. As I've discussed previously, our first quarter is normally our lightest sales bookings quarter because our fourth quarter tends to be extremely strong, and the sales pipeline is depleted as a result. As you may recall, the June quarter was the strongest sales quarter in the history of the company, so we certainly expected that historical trends hold true. This year, however, although sales bookings didn't set a record, they were up by double digits over the prior year quarter with many notable wins. In the quarter, we booked six competitive core takeaways and five deals to move existing in-house customers to our private cloud environment. As some of you may recall, we started last year with six core wins and ended with a total of 52 for the year. Although I can't predict our full year performance with any certainty, the pipeline gives us optimism that we're likely to see that kind of trend this year as well. We continue to see success with our card processing solution, signing nine new debit processing clients this quarter and one new credit client. We also continue to see remarkable success signing clients to our Banno digital suite with 60 new contracts in Q1. Speaking of our digital suite, at the end of Q1, we were hosting approximately 8.3 million registered users on the platform, and that number is now growing at almost 200,000 users per month. At the end of Q1 last year, we had about 6 million registered users on the platform, so we've experienced more than a 38% increase in the intervening 12 months. We are currently expecting to have the Banno Business offering generally available in early 2023 and providing another avenue to increase the number of Banno users. The Banno digital suite continues on the path to becoming the industry-leading digital banking solution in our markets. The continued success we've seen with sales and adoption of our digital suite is consistent with the expectations coming out of the Bank Director Technology survey published in August. As they do every year, Bank Director surveyed hundreds of their subscribers during June and July regarding a variety of technology prioritization and spending topics. More than 50% of the responses they received were from bank CEOs and/or Board members, and more than 80% of the respondent banks were greater than $500 million in assets. Although this survey didn't predict spending for 2023, it did highlight that the median increase in expected technology spending this year was 11% as compared to the prior year. One of the interesting items from this year's survey was the analysis of technology and use by respondent banks as it relates to their ability to serve different generational groups. Fully 93% of the respondents said they had the technology in place to serve baby boomers, but only 25% said they have the necessary technology in place to effectively serve Gen Z-ers. Of course, it's the younger generations that expect to conduct all banking services without ever entering a branch. Clearly, the initiative for all banks to get to a digital presentation layer has a long way to go. All of this bodes well for the future of our digital suite as well as the other innovative solutions offered by Jack Henry, which helped facilitate an improved customer experience through a digital front door at the financial institution. On August 9, we announced a definitive agreement for Jack Henry to acquire Payrailz, and we completed the deal on August 31. Payrailz accelerates Jack Henry's technology modernization strategy by immediately adding next-generation digital payment capabilities to our public cloud-native technology stack and payments ecosystem. Payrailz also enhances Jack Henry's payments as a service strategy, enabling clients to simplify the complexity of payments, modernize their existing payments channel and remain at the center of their account holders' payment experiences. Acquiring Payrailz has strengthened our position in the payment space by providing our collective clients with additional functionality, optionality and flexibility that enhances their diverse digital and payment strategies. To that end, in mid-October, we announced the launch of a stand-alone person-to-person payment solution that further supports our real-time payment strategy. This offering is available for stand-alone implementation or as a strategic component of the full Payrailz payments platform. In addition to the Payrailz acquisition, we recently announced the release of our new Financial Crimes Defender application, an expanded partnership with Mastercard and a new relationship with Google. We're excited about these key relationships with Mastercard and Google and look forward to continuing the rollout of Financial Crimes Defender. All of these announced solutions and relationships support our ongoing mission to supply our community and regional financial institution clients with leading-edge public cloud-native financial technology offerings. As many of you know, we normally conduct our two largest client conferences in the fall each year. This year, we combined those conferences into one in-person event in San Diego called Jack Henry Connect. We hosted thousands of attendees at the conference, giving us the opportunity to interact directly with many of our existing clients and prospects. Of course, events like this not only present a wonderful opportunity for relationship building and education, but they also generate a significant number of new sales leads. During the Connect conference, I hosted our Annual CEO Forum, attended this year by more than 200 client CEOs. Although we didn't conduct a formal survey during the meeting, the general feedback was that the attendees are concerned about the general economy, but committed to using technology to position their businesses for the future. Last month, we were proud to be included in Newsweek's list of top 100 most loved workplaces. Jack Henry ranked 17th overall and second in the financial services category. The ranking came as a result of a survey conducted by Newsweek of almost 1.5 million employees at thousands of companies, large and small. The list recognizes companies that put respect, caring and appreciation for their employees at the center of their business model. This is an incredible honor for us in no small part because this list focused on several qualities which we aspire every day

Operator:

[Operator Instructions] And the first question will come from Vasu Govil with KBW.

Mimi Carsley :

Thanks, Vasu, and thanks for participating today. To address your question, the real estate was not contemplated at the time we reconfirmed guidance at the close of the acquisition. Relative to -- I believe your second question was around guidance, as I stated, the only changes that impacted our guidance was the acquisition and the gain on sale. And then your third question regarding margin outlook, it's still early in the year. We're optimistic, but we are facing inflationary headwinds as a business, but we feel optimistic that we will deliver as to our guidance target.

David Foss :

Yes. Thank you, Vasu. I would have been -- I would have felt left out if you hadn't asked me a question. So thank you for that. As far as the cadence of deal, there is no change. The pipeline that we have right now of potential deals is by far larger than it's ever been. The cadence of deal signings is consistent with what we saw last year, as I tried to highlight in the call today. And I'll point out to you with respect to larger deals, and you might not be surprised to learn this, but I personally am involved often times in larger deals. I don't certainly don't get involved in every deal, but I'm involved in larger deals. Just in the next two weeks, we have -- let me think about this. So we have our shareholder meeting next week. So the week after that, we have three different institutions coming in here to Dallas over the course of two days. So I'm hosting three different CEOs, three different financial institutions here in Dallas over the course of two days. And then the week after that, we have another one coming in that I'm hosting in Dallas. And again, I only get involved in larger deals. So I'll just tell you, from my perspective, and I've heard all the same things you've heard about the cadence of deals or the pace of deals slowing down. Jack Henry is not experiencing that. Our pipeline is robust and there is a lot of activity as far as deals that we're working on, both on the core side and with regard to the other products in our suite. And I just highlighted for you, we just signed 60 new Banno deals in the quarter, and that pace isn't slowing down either. So I'm -- we'll see as the election -- and by the way, I haven't seen a single thing about the election. I got up and came right here this morning. So I have no idea what happens as far as the election is concerned, but we'll see what the election results, what impact that has on people's sentiment around the economy. We'll see what makes out here over the next few weeks as far as the general economy. But what we're seeing right now, there's no slowdown in activity.

Rayna Kumar :

Congratulations, Mimi and Vance. Can you talk a little bit about how your technology modernization strategy is progressing? I think I heard earlier that you said you have five new wins onto your private cloud offerings. Just wondering if you're seeing anything on the public cloud yet, and just how your discussions with banks and credit unions are going on some of these new products?

Rayna Kumar :

That was really helpful. And then just a question here for Mimi. Your adjusted payment segment revenue that was up 7% in the quarter. If you could just break out the drivers for us? Then how should we think about payments revenue for the remainder of the year? I think on the fourth quarter call, we would think the guidance was high single digits. Is that still the right way to think about it?

Operator:

The next question will come from David Togut with Evercore ISI.

Mimi Carsley :

Dave, this is Mimi. I'll take that. So I would say that we're still very early in '23. So FY '24 is a long way away in a very uncertain global contracts. But we remain quite vigilant in our focus on expanding margin growth in FY '24. And some of the headwinds that we've seen in FY '23, some of them were onetime in nature, like the Java payment in terms of the year-on-year impact. And others, we're starting to see some loosening of inflationary pressure as it relates to personnel costs. So...

David Togut :

And just as a follow-up, could you update us on your capital allocation priorities? Maybe you underscored your responsible approach to capital allocation. How is your approach to capital allocation, perhaps different from Kevin? And then maybe more broadly, what are you seeing in terms of the acquisition pipeline, businesses that fit into your strategic priorities and which might also meet your kind of valuation threshold?

David Foss :

I'll take the second part, but you go ahead if you want to do the first part.

David Foss :

I'll just add in, Dave. I know that all of you who have listened to me talk know that for early months of this calendar year, I was very optimistic that as the year progressed, there were going to be some really nice opportunities as far as acquisition is concerned. I'll just say the pipeline of potential good companies to acquire is not nearly as robust as what I thought it was going to be. We were very bullish on Payrailz and what that does for us and for our customers, the opportunity that presents long term for us and for our customers. But there aren't a lot of Payrailz companies sitting out there. So we're looking -- we're always looking at potential deals. We're always looking at opportunities. But it isn't the market that I was hoping it was going to be as far as the opportunity for additional acquisition.

Nik Cremo :

I just wanted to ask about the Banno Business offering being rolled out early next year. Is there any way for us to think about the potential revenue uplift for that product on a stand-alone basis or on a per customer basis?

Nik Cremo :

Understood. And then for my follow-up, I wanted to just get an update and see what you're hearing from your customers in terms of their M&A pipeline and just the overall M&A environment as it pertains to your customer base and if you're still seeing the same type of slowdown that you called out last quarter.

Operator:

The next question will come from Kartik Mehta with Northcoast Research.

David Foss :

Yes, it's a good question. And I was a little frustrated. Normally Bank Director does project forward into '23. The other survey I always quote on these calls is the Cornerstone Advisors survey, which will come out, I think, the end of -- or mid-December, if I remember correctly. So normally, I highlight that on the February call. So everything that I know right now is anecdotal. It's me talking to bankers. I will highlight again, I said it in my opening comments, but I'll highlight again, we had more than 200 bank CEOs, and I'm just talking about CEOs in the CEO forum that's hosted by me in San Diego with us about a month ago. And they're generally a pretty optimistic group. I mean they are -- we've seen, of course, interest rate rise on the lending side, on the loan side have not had to raise rates as quickly on the deposit side, although that's coming and they know it. But for the first time in years, they have a spread, an interest margin spread to work with. And they are generally pretty upbeat, generally feel like they're pretty well capitalized. I don't have a whole lot of risky credits on the balance sheet. And so generally feeling like things are going to be okay. And of course, for them, then spending on technology, all of them are continuing to focus on what technology do we need to compete in the future. And that's where not only the tech modernization story that we have at Jack Henry, but the digital banking offerings that we have, both for consumers -- and now for commercial customers, for lending as well as deposits. Remember, we do a complete online commercial loan origination digitally through Jack Henry. So all of those things are topics today for our customers. And again, they're generally upbeat. Now as I stated earlier, I haven't seen anything about the election results. So that all may change day after tomorrow, I don't know. But as of a month ago, pretty optimistic about their opportunities and their interest in spending money on technology.

Greg Adelson :

Yes. Thanks, Kartik. Good to hear from you. So a couple of things. I think from a standpoint of differentiation, one of the things that you need to remember is that this is not a bill pay solution. It is a payments platform -- so it is different than our iPay offering from a standpoint that it actually drives all different kinds of payment solutions and can integrate directly in because of its API base into our PayCenter offering as well. So there's a lot of opportunity to utilize various components of that as part of our overall payments as a payments as a service type of strategy. So I think there's components that we were going to build out that we don't have to build out. There's things that they've already created. Dave alluded to the standalone P2P solution, which is actually an open-loop solution. So it creates the ability for both the receiver and the sender don't have to be in the same network. That's something that, again, will provide complementary opportunities to existing P2P solutions that are out there today and alternatives for our customers. There's a very slick account-to-account transfer solution that actually will create some opportunities within our existing base. But when you look at the overall landscape of payment players, especially ones that have multiple features, we really think that this one gives us the opportunity to accelerate what we were doing in the payments-as-a-service strategy and our technology modernization strategy.

Mimi Carsley :

Are you talking about the impact to our guidance? It's embedded within the full year guide.

Mimi Carsley :

Yes. So as I mentioned, the impact will be positively obviously, on the revenue contribution. And then from an EPS perspective, the ongoing operations, the amortization as well as the interest expense.

Peter Heckmann :

Great. I think most of my questions have been answered, but just a few little follow-ups. That onetime gain related to the sale, was that in SG&A?

Peter Heckmann :

Okay. And then in terms of Payrailz, the -- I guess, in terms of the -- I guess we can estimate what the per share impact was of the gain. But in terms of isolating kind of the dilutive impact of Payrailz for fiscal '23, it's somewhere along the lines of $0.10. And forgive me if you already answered it, but how do you see that tracking to breakeven into profits over the next year or two?

Peter Heckmann :

Great. And then the thoughts on just getting the business to breakeven and beyond or...?

Operator:

The next question will come from Dom Gabriele with Oppenheimer.

Mimi Carsley :

Dom, thanks for the question. We're not concerned. We feel good, as Dave alluded to, the health of our clients, the underlying credit quality of their loan portfolios, positive net interest margin. So the sales pipeline is very robust. So we're not concerned here. To your question on levers, I would look to the strong free cash flow generation and the reoccurring -- high reoccurring revenue percent for the business. And then I also would highlight, some of our exposure is different from our competitors in terms of high debit card, it's transactional, not interchange. So I would look to some of those in terms of the resiliency of our underlying business model.

Dominick Gabriele :

Great. And then maybe just, Dave, if you can talk about -- maybe update us on your ancillary product attach rate on average for new wins, so the extra products that you attach after or win, how that maybe has changed over the last year or two? And how that attach rate of extra products could change for public cloud wins?

Dominick Gabriele :

Excellent. Actually, maybe I could just sneak in one more here. Could you just help us on the growth rate of Payrailz that you're expecting on revenue And then maybe just the full year tax rate that you expect for the total company for 2023?

Mimi Carsley :

Yes, Dom. I would recommend using 24%.

James Faucette :

Just a couple of quick follow-up questions from me. First, Dave and Mimi maybe both expressed confidence in kind of your deconversion fee revenue and understanding the nature of that revenue. But just wondering, just from a modeling perspective, if where your sense of confidence in getting to that target or that level for this year is? Have you already had notifications and that kind of thing? Or just wondering kind of where that stems from?

James Faucette :

Okay. Got it. I suspect it as much, but I just wanted to be sure. And then the second thing I wanted to ask about is on Banno and just some of the things that we've seen and not in your space specifically, but in IT more generally. It's been interesting because we've seen some shifting around between fee versus usage-based models, et cetera. And Banno, in my understanding, is it's primarily priced on a user count basis. How does that stack up against your competitors that a lot of times are using usage or transaction-based models. And is that something that gives you an advantage right now? Or what is your sense on pricing type and the impact on market and ability to win with Banno?

Operator:

The next question will come from John Davis with Raymond James.

David Foss :

Yes. I've read those reports, JD. I have read the transcripts. We are not seeing that. That is not what Jack Henry's experiencing. I mean you have ups and downs all the time when it comes to individual decisions on individual deals where something may creep into an individual deal. But as far as the overall sales activity, the level of activity, the speed of deals, nothing has changed.

Mimi Carsley :

Thanks, JD, for the question. Nothing that I would say is worthy of a call out.

Mimi Carsley :

Yes, I agree.

Greg Adelson :

Yes, sure. Thanks for the question. I think a couple of things, and we alluded to a little bit earlier. So again, there's an acceleration of what we were doing already in our tech modernization strategy, kind of driving towards the ability to utilize again this payments platform to drive transactions in a variety of different areas. So I already mentioned the open loop P2P, which is very significant. Again, when you look out in the P2P space and look at the alternatives and the cost of those alternatives, it creates a really great option for our clients, our core clients, but also noncore clients to utilize an open-loop solution. So we have some strategies that we're going to be using around that. There's things that we're going to be able to do related to business to consumer payments and B2B payments that we're driving as part of that platform. A lot of lease cost routing options that we didn't have in our old platforms to be able to drive things around there. And then I think one of the other big ones is that they have a pretty sophisticated fraud solution that does real-time P2P fraud. So we're going to be able to utilize that not only into what we're doing with P2P, but also, as Dave has mentioned a couple of times on this call related to Financial Crimes Defender, there's going to be some ability to leverage some of that data, but not only the data but also the technology, the AI technology. into some of the components that we're building there. So there's a whole host of things that drive into our strategy in general that makes this acquisition very appealing and accelerates things that would have taken us a lot longer to do.

David Koning :

And I had a few more on Payrailz. I guess, first of all, it's in the payments segment, right?

David Koning :

Okay. Yes. And then secondly, in the $23 million of acquisition costs this year, is some of that nonrecurring stuff? Or is that more of the ongoing normal cost base?

David Koning :

Okay. And kind of the -- and the reason partly that I'm asking to get accretive next year, like if we just assume, let's say -- let's just say $20 million of revenue and 50% margins, so that you have $10 million of EBIT. But then between amortization and interest expense, it would just seem like it would be really hard to make that accretive. And I'm just wondering how you're -- like what kind of the formula is to get to accretion? Or maybe you're not including interest expense because you have enough cash over the next year to pay for it anyway? Or maybe just give us a little like on how you get to accretion?