Jack Henry & Associates Inc

NASDAQ:JKHY

Earnings Call Analysis

Solid Performance and Upbeat Guidance

Jack Henry & Associates has demonstrated robust growth with an 8% increase in GAAP and non-GAAP revenue, signaling a promising start to fiscal 2024. Key drivers include the launch of Financial Crimes Defender and significant contract signings, with over 120 clients queued for implementation. Moreover, services and support revenue has risen 7%, with private and public cloud offerings growing by 10%. Operating margins have improved across core, payments, and complementary segments. With vigilant cost control and a focus on operational excellence, non-GAAP margin expansion is forecasted to be 30 to 35 basis points, exceeding previous estimates of 20 to 25 basis points. Anticipating stronger performance, the GAAP EPS guidance for the year has been revised to $4.98 to $5.04, an uptick from the prior $4.92 to $4.99 range.

Launching Cutting-Edge Solutions and Growing the Financial Crimes Defender Platform

The company has successfully delivered its Financial Crimes Defender platform, a cutting-edge real-time fraud and anti-money laundering compliance platform, to SilverLake banking clients and released a real-time payment fraud module for Zelle. Aiming to expand on these solutions, additional Defender modules for the FedNow and RTP networks are slated for late 2023 and early 2024 releases. With over 120 clients in the implementation queue and plans to cater to credit union clients by late December, the prospects of this segment are promising.

Enhancing Payments Portfolio with Acquisition and Roadmap Execution

Since acquiring Payrailz over a year ago, the company has been integrating the technology into its portfolio and plans to build a comprehensive payment platform, combining features from the iPay and Payrailz solutions, along with new ones. The strategy is to start selling these solutions outside the Jack Henry core base early next fiscal year, with more than 100 clients already live on Payrailz and another 50 in various stages of implementation.

Strong Financial Performance with Guidance Update

The company reports a robust 8% increase in both GAAP and non-GAAP revenue for Q1 and growth in services and support revenue by 7%. Furthermore, the projections for the year are positive, with non-GAAP revenue growth expected to be between 7.2% and 8.2%, an increase from the previous 7% to 8%. In line with revenue growth, non-GAAP margin expansion is projected to be 30 to 35 basis points. The full-year tax rate remains at approximately 24%, with GAAP EPS guidance increased to $4.98 to $5.04 per share.

Maintaining Focus on Innovation and Product Development

The company continues to maintain its leadership as an innovator, dedicating considerable resources to R&D and new product development. This commitment has culminated in both recognition within the industry and the potential for future success, notably with the Jack Henry Platform, which includes Banno Business and Financial Crimes Defender.

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and welcome to the Jack Henry First 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.

[Vance Sherard, executive]

Good morning, and thank you for joining us for the Jack Henry First Quarter 2024 Earnings Call. Joining me on the call today is: David Foss, Board Chair and CEO; Mimi Carsley, CFO and Treasurer; and Greg Adelson, President and COO.

After my opening remarks, I will turn the call over to Dave for his thoughts about the state of our business and some industry comments. After Dave concludes his comments, Greg will provide additional insight on our new solutions, Payrailz and other key initiatives at Jack Henry. Mimi will then provide insight regarding the financial results and updated guidance included in the press release issued yesterday that is available from the Investor Relations section of the Jack Henry website. We will then open the lines for Q&A.

As a reminder, this call includes certain forward-looking statements, including remarks or responses to questions concerning future expectations, events, objectives, strategies, trends or results. Like any statement about the future, these are subject to multiple factors that could cause actual results or events to differ materially from those which we anticipate due to multiple risks and uncertainties. The company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our 10-K entitled Risk Factors and Forward-Looking Statements.

On this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income. The reconciliations for non-GAAP financial measures are in yesterday's press release.

I will now turn the call over to Dave.

[David Foss, executive]

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 7 new debit processing clients this quarter and 2 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 3 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 6 spots from last year. We also made Newsweek's Greatest Workplaces list, earning 5 stars, which is the highest possible rating.

Additionally, we were named a top company in our sector by U.S. 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.

[Gregory Adelson, executive]

Thank you, Dave. As we continue to execute on both our operational and technological strategic priorities, we're pleased to announce the general availability of a few new solutions in the first quarter. In addition, we continue to make outstanding progress on our technology modernization strategy and the development of our cloud-native, API-first Jack Henry Platform. We will provide an update on those platform components currently in beta or going into beta on our February call.

As we mentioned during the August call, our cloud-native Banno Business solution developed for small- and medium-sized businesses is now generally available for our SilverLake banking clients. And the response has been outstanding. At the end of September, we had approximately 60 banks live and more than 70 additional clients in various stages of implementation. We are currently in beta with several credit union clients and plan to be generally available for that base of Jack Henry customers by the end of the calendar year.

We delivered Financial Crimes Defender, our real-time fraud and anti-money laundering compliance platform, into general availability for our SilverLake banking clients in September. We also released our real-time faster payment Financial Crimes Defender fraud module for Zelle in September. The faster payment module uses artificial intelligence and machine learning to detect fraud and money laundering in real time.

We plan to release additional Defender modules in late 2023 and early 2024 for both the FedNow and RTP networks. We currently have more than 120 clients in our implementation queue for Financial Crimes Defender, of which more than 50 include utilizing the real-time payments module. In addition, we remain on track to launch Financial Crimes Defender to our credit union clients in late December.

As we also mentioned on our August call, we were among the first service providers to support live transactions on the Federal Reserve's new FedNow instant payment network when it launched on July 20. We now have all four Jack Henry cores connected to FedNow through our PayCenter offering and continue to provide the most comprehensive implementation process, requiring almost no effort from our clients to go live on the network.

We currently have more than 40 clients live on FedNow with over 150 contracts in the implementation queue. We expect to have approximately 150 live customers on the network by the beginning of 2024. Today, every client is set up for receive-only. But we expect to see more clients wanting to add send capabilities in early to mid-2024 as use cases become more defined.

As a matter of comparison, we have over 210 clients live on The Clearing House's RTP network and another 100 in the implementation queue. We continue to see tremendous transaction growth from our RTP clients over the past year. When comparing September 2022 to September 2023, we have realized a 66% transaction growth with the majority of these transactions stemming from digital wallet transfers to bank accounts, A2A transfers from Tier 1 institutions and payroll or gig worker payments.

Speaking of payments, it's been a little more than a year since we acquired Payrailz. We have successfully integrated the team and large portions of the technology stack into our culture and technology modernization strategy. We continue to find, develop and execute additional back-office synergies while building a premier payment acceptance platform capable of handling bill payment, P2P, A2A, B2B and much more.

As part of our planned strategy, we have created one Jack Henry bill payment group that provides product and operational support for both our legacy solution, iPay, and for Payrailz as well. Over the next 18 months, we will finalize the build-out of a single cloud-native, API-first payment platform that will include all the key features of both iPay and Payrailz as well as additional new features not offered in either solution today.

Specific to Payrailz, we now have more than 100 clients live, another close to 50 clients in various stages of implementation and additional 20 that were recently signed. A question that is regularly asked, when are all these new innovative solutions going to be sold outside of the Jack Henry core base? I'm pleased to report that we have finalized our strategy to sell each of these solutions as well as components from the Jack Henry Platform to several targeted competitive cores.

We have aligned our strategy with the competitive cores we believe will bring the best mutual value and have a need for premier digital fraud and real-time payment solutions. Each of our components is being developed to go outside of the Jack Henry core base and will be available to do so as they move to general availability. We expect to start selling some of these solutions early next fiscal year.

On the operational side, we've been highly focused on ensuring that Jack Henry is the easiest core provider to work with in the industry. We operate with full transparency while collaborating across business units to deliver a consistent enterprise experience. We call this program One Jack Henry. And you've heard me talk about it in detail at our annual Investor Day event in the past few years.

We continue to receive tremendous validation of our efforts through meetings with industry consultants, prospects, clients and our associates. Our industry-leading survey and service scores continue to move up and to the right at a time where that is not happening across our industry.

Furthermore, the work we are doing around One Jack Henry is aligned with the objectives outlined by the American Bankers Association Core Platforms Committee. Those objectives include fair and transparent contracts, exceptional customer service, responsive and open communication, open banking and the highest standard of data protection and privacy.

In closing, we all came back from our Jack Henry Connect client conference in mid-October with a little extra pep in our step after hearing from our clients and our prospects that our technology modernization strategy, coupled with the work we are doing to focus on road map execution and service excellence, is truly a differentiator in our industry. I want to thank all of our talented and dedicated associates for helping us move this strategy forward. We wouldn't be where we are today without them.

I will now turn things over to Mimi for some detail on the numbers.

[Mimi Carsley, executive]

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 2 months of Q1 2024 results are excluded from non-GAAP financials, but that September 1 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 5 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 3 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 '23, 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?

[Operator]

[Operator Instructions] Today's first question comes from Jason Kupferberg with Bank of America.

[Tyler DuPont, analyst]

This is Tyler DuPont on for Jason. 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.

[David Foss, executive]

I'll take the first half and I'll let Greg respond on the payments portion. This is Dave Foss, by the way. So I think the growth when it comes to the other areas other than payments is primarily driven by the success that we're seeing now in the Banno area, in the complementary product groups of the Banno product line. I highlighted some of the performance metrics there, the addition of new customers and all the new registered users on that platform, so the Banno platform success.

Financial Crimes Defender, we signed a whole bunch of contracts in the quarter. But you really won't see the P&L impact of Financial Crimes Defender until next quarter and then the following quarters after that. But then it's just a variety of other solutions, again primarily in that complementary solutions area. So we're continuing to see great success with things like treasury and some of the other complementary solutions that we didn't specifically call out.

But all of them have become real, nice drivers of revenue. Many of them new solutions in the past couple 3 years. We've highlighted them on these calls in the past as new solutions. They're not new anymore, and they're a year old. But they're continuing to drive great demand and nice revenue improvement for Jack Henry. And I'll let Greg comment on what's happening in the payments side.

[Gregory Adelson, executive]

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.

[Tyler DuPont, analyst]

Okay, great. That's helpful. I appreciate it. And then just a follow-up. I want to shift gears to margins and just the dynamics you're seeing there across the business. It looks like during the quarter, margins came in ahead, or at least what we were anticipating on an adjusted basis, full year as well was raised.

I'd be curious to hear more about what you're seeing that drove that uplift during the quarter and thus the full year raise. And tangentially to that as well but sort of on a separate line, given where we're sitting now, when do you anticipate Payrailz will become margin neutral to the business?

[Mimi Carsley, executive]

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.

[Gregory Adelson, executive]

And then Payrailz, so on the Payrailz side, so I think we are tracking to the guidance that we gave back in August. So I think everything is on track based on what we provided back in August.

[Operator]

The next question comes from David Togut with Evercore ISI.

[David Togut, analyst]

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?

[David Foss, executive]

It's interesting that you called that out as a negative that we went from 16 to 10. I'm thrilled with 10 because normally, the first quarter is a very light quarter. Last year, as a comparative, we had 6 in the first quarter. We tend to see a real push in the fourth quarter every year.

So for us to produce 10 in the quarter was great news as far as I was concerned. And that's what led me to say, I think, 50 to 55 new wins for this year. Based on what we saw in the first quarter and what I'm seeing in the pipeline gives me great confidence that we're going to have a really, really strong year.

Now with that said, talking about what's happening in our environment, I think all of you know pretty well what's happening in our environment with all of our competitors and some of the disruption that's happened and so on. Those types of events create opportunity for us. These are still very long sales cycles.

You don't have a banker who suddenly wakes up one day and says, "Hey, I think I'll go through a core conversion." They're very long. It's a very disruptive process to go through a core conversion. And so nobody takes it lightly. But we definitely are seeing some impacts in our sales pipeline that are being produced by some of the disruption that's happening in our space around the topic of core.

[David Togut, analyst]

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?

[David Foss, executive]

Sure. So in my prepared remarks, I pointed out that we had a couple of banks in the $15 billion to $30 billion range that were at our prospects -- I should say that were at our client conference. I don't recall -- I've been doing this for a long time, I may have forgotten one. But I don't recall us ever having a brand-new prospect over $10 billion come to our client conference to talk to us about core. So to have two in that range, I think, is pretty indicative of the success that we're having now. And it's really being driven by tech modernization.

The story that we have now and our ability to actually demonstrate things that we're doing with this new platform is getting a lot of attention among larger institutions because they're trying to figure out how to get to the public cloud environment, and they can't see a path forward with their current provider. They see that path with Jack Henry. So I can't predict when we'll sign one of these larger institutions as a new client. But I think the activity right now gives me great confidence that you'll see some announcements in the future that are of significant wins in that regional banking space.

[Operator]

The next question comes from Vasu Govil with KBW.

[Vasundhara Govil, analyst]

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?

[Mimi Carsley, executive]

Let me start with that. So Vasu, I would say that the Q1 trends for the payments segment were pretty much in line with what we saw for the full year last year. And we continue to see strength in that business. So I think we're very positive and optimistic about it. It's not just transactional, there's also ancillary revenues in there in services that we continue to expand upon from a portfolio perspective. So that in itself is derisking just the exposure to transactional.

[Vasundhara Govil, analyst]

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?

[Mimi Carsley, executive]

I think that's a good assumption.

[Vasundhara Govil, analyst]

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?

[David Foss, executive]

Within the existing client base, yes, we're becoming well penetrated, we're over 50%. But we still have a lot of opportunity, particularly on the credit union side of our business. It's no secret, we started with Banno on the banking side and really started to push hard on the banking side. We have not been as forceful maybe.

We didn't have it ready on the credit union side. And we haven't been as forceful on the credit union side. But that certainly is an area of focus for us. So you'll continue to see penetration. I mean, when you have the leading digital banking solution in the industry, we expect almost all of our core customers will want to consume that at one point or another because they see the differences between that and anything else in the market.

As to the first part of your question, Vasu, we don't tend to try to size individual products. It's part of a segment. We provide guidance per segment. But as with everything else we do at Jack Henry, we don't try to size as far as revenue is concerned on products. I don't expect us to change that.

My real goal in giving you the user counts like we have has been to try and give you as much ammunition to model effectively and kind of create your own view of what we're doing at Jack Henry. But I don't expect that we're going to start to provide revenue visibility guidance on a specific product like Banno.

[Operator]

The next question is from Kartik Mehta with Northcoast Research.

[Kartik Mehta, analyst]

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?

[Mimi Carsley, executive]

I would say that the quarterly cadence can sometimes be choppy. Our Q1 is always a very strong cash flow quarter. We have the annual maintenance and other strong cash flows coming in Q1. So I would say this year might be more of a U shape than anticipated, maybe a little bit more steep than last year. But we're still on track and optimistic about that 60%.

[Kartik Mehta, analyst]

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.

[David Foss, executive]

Yes. So definitely a topic. Everybody who's anybody seems to be talking about AI these days and trying to figure out what they're talking about as they're talking about it. So two things to keep in mind here. There's two flavors of AI. There's the kind of traditional artificial intelligence/machine learning version of AI. And then there's generative AI, the new kind of hot topic, ChatGPT, if you will.

So we've been deploying traditional AI for many years. So we've had artificial intelligence and machine learning baked into our Banno solution, that's baked into our call center solution. And we do a lot with that and have for quite some time. And especially in our fraud area, we use that technology. So we've been demoing that and been able to talk about it effectively for quite some time.

The new twist is with generative AI. And as I mentioned in my prepared remarks, we show generative AI working on the Google platform with our platform solution at the Connect conference. So we had one main stage session. Our Chief Technology Officer was onstage with an executive from Google and a bank CEO, who, by the way, is a beta customer for us. He specifically made the trip to Connect, so he could be onstage and talk about what our generative AI solution -- what he thinks it's going to do to change the operating environment for their bank.

We're not in production with that yet. This is beta. But we definitely expect that we'll be a player in that space, and we'll be able to help our customers using generative AI. And of course, the good news is with the Jack Henry Platform, it's all written on the Google Cloud. And Google has, we believe, the best gen AI solution in the market, partly because they have guaranteed they'll protect PII, so private information, as we roll this out. And so we're very bullish on the opportunity for the future to use that technology to help our customers.

[Operator]

The next question is from John Davis with Raymond James.

[John Davis, analyst]

Mimi, I just wanted to follow up on free cash flow. I believe you made a comment that you expect to return to normal historical levels from a free cash flow conversion perspective. And I was just curious, is it still kind of in the 3 to 4 years once we lap the nondeductibility of R&D expense? Just want to clarify that comment about returning to historical levels.

[Mimi Carsley, executive]

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 4, so -- but for right now, we feel pretty comfortable for this year sticking with the 60% guidance.

[David Foss, executive]

And JD, if I can tack on, this is Dave. So I just want to add a little clarity to everybody out there. One of the things Jack Henry is getting great recognition for right now is all these innovative solutions that were rolling out. We've been spending a lot on new development, new R&D, brand-new products. The Jack Henry Platform is just one of them. And Greg highlighted Banno Business and Financial Crimes Defender. And we have all these new things that we've been rolling out that's great for the company, that's great for the success or the future success of the company.

And it's really created this reputation for Jack Henry as being the innovation leader in our space. The bad news is because of what's happening on the tax side, it's hitting our free cash numbers. And so we have concerns about free cash, which it's all being driven by the fact that we are leading the industry when it comes to innovating and really delivering great solutions for the -- to sustain the future growth of this company.

[John Davis, analyst]

Okay. 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 2 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.

[Gregory Adelson, executive]

Yes, great question. Yes, short answer is we've worked through the integration delays. So we've been able to get through that component. Some of it is just rebuilding up the pipeline with that group. But the reality is we've gotten through the challenges there.

The other thing that's important is that the -- some of the additional synergies that we've been able to build as we build out the product has helped us as well. So we're kind of -- we're working through some of the sales delays with lot more of the operational synergies that we've been able to find on things. So everything -- that's why everything continues to be on track.

[David Foss, executive]

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.

[John Davis, analyst]

Okay, great. And then Dave, just if I could squeeze in one more quick one, just on capital allocation. You paid down a little bit of debt. You bought back a little bit of stock in the quarter. How do you think about debt paydown versus buybacks with the stock here? And then any update on, from an M&A perspective, whether valuations have rationalized yet? Just any color there would be helpful.

[David Foss, executive]

Yes. 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]

The next question comes from Dominick Gabriele with Oppenheimer.

[Dominick Gabriele, analyst]

Dave, should the move to sell products outside the core that you mentioned indicate that you have found a way to stop competitors' sales dynamics of core upgrades? I mean, I think on one of the previous calls, you mentioned that your products are so good that the competing sales force would basically say, "Keep our core, just upgrade with Jack Henry." Is this an indication that you've found a way to stop some of that? And I just have a follow-up.

[David Foss, executive]

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?

[Gregory Adelson, executive]

Yes, just two things to add. So one, the other component of this is our ability to bundle. We found some pretty good bundles that we think we can sell into that. So we think that will also help with the success rate and, using what Dave said, kind of leveraging the technology platform and some of the modules that we have coming out. The other part is the integration work that it does take. So it does take some while to get some of that integration work done before you can actually go out and close a deal. So we're working on all that in the background as well.

[Dominick Gabriele, analyst]

Great. 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.

[Mimi Carsley, executive]

Sure, Dom. So first, let me say that I think 20% ROIC is quite attractive and would be the envy of a lot of companies. So it's a commitment to us. We believe that our thoughtful and conservative approach both from a fortress balance sheet, how we think about capital allocation, has led to attractive ROICs historically. And it's something that we know as a metric we're following. We know you're following it quite closely from a sustainability of that shareholder value creation.

I would say there's a little bit of a math challenge just from the metric itself. So because our net income is growing and because right now, we are focused on debt paydown, we did some share repurchase, our 35 years of -- fiscal years of dividend growth, those take cash. So while the net income increases the shareholder equity, therefore, it reduces. Unless we continue to grow that dividend and do large buybacks or debt paydown, by their nature mathematically, that ROIC is going to dip a touch.

And so I think it's just more of the hangover effect from the debt we had from the Payrailz acquisition. And as we pay down that debt, as we do more share repurchases and return that net income back to investors, you'll see that rebound number. So it's just for the trailing 12-month impact of that and the growing net income into equity that has that impact on that.

[Dominick Gabriele, analyst]

That's super helpful. And 20% is very attractive.

[Operator]

The next question comes from Dave Koning with Baird.

[David Koning, analyst]

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 stand-alone 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.

[Mimi Carsley, executive]

Let me start by taking it and then I'll let Greg add in from a strategic perspective. I would say the acquisition remains on track. As Greg mentioned, we feel confident in our ability to hit the previous guidance. Revenue is growing at a nice clip. So I would say the visibility because you're only looking at 2 months is not -- I wouldn't annualize that to take it more of a trend than it is. So we still feel very confident in terms of that growth and the journey to profitability.

[Gregory Adelson, executive]

Yes. And I would say, as I kind of 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.

[David Koning, analyst]

Okay, got you. And then the one other thing, just between the GAAP operating income guidance and GAAP EPS, the two items would be interest income, it seems like you're almost guiding for that to be net 0. And then tax rate would be the other. Is that like 24.5%, just those two numbers to kind of get us to GAAP EPS?

[Mimi Carsley, executive]

Yes, 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]

The next question is from Cris Kennedy with William Blair.

[Cristopher Kennedy, analyst]

David, you talked about innovation. Can you just talk about kind of how the module progression for origin or the Jack Henry Platform is going?

[David Foss, executive]

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.

[Gregory Adelson, executive]

Yes, sure. And as I mentioned, we have a couple of modules that are out in beta right now. So we're tracking exactly to the time frames that we have. We do have a public road map that we share with our customers. We do not share it outside of our customer base. But we have a road map.

We're executing actually to the T of that particular road map. And as I mentioned earlier, we're going to be pretty excited to be able to share where some of those modules are in their evolution and other modules that we've created back to a full monetization strategy that we have going for the rest of this year and into next.

[David Foss, executive]

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

[Gregory Adelson, executive]

Correct.

[Cristopher Kennedy, analyst]

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

[David Foss, executive]

Yes. So we're not selling outside the core base yet, as I mentioned earlier. But it definitely has got attention from people outside the core base. And we're lapping because it's one of those you want to go and sell it right away, but you've got to make sure that everything is lined up and ready to be effective.

And it's part of a larger strategy than simply selling Banno Business outside the base. So yes, we definitely are getting attention. We definitely are preparing to get sales out there, actively selling outside the base. But it's part of that broader strategy that we talked about earlier because it goes with retail Banno as well.

[Gregory Adelson, executive]

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

[David Foss, executive]

Yes.

[Operator]

The next question is from James Faucette with Morgan Stanley.

[James Faucette, analyst]

I know we talked a little bit about Payrailz and implementation, et cetera. But can you help us think about like the time to revenue and how that scales? Like when does -- when do we start to see contribution from implementations? And then how long does it take to get that fully implemented and scaled within the P&L?

[Gregory Adelson, executive]

Yes. 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.

[Mimi Carsley, executive]

And let me just layer on there, James. Just as a reminder, the payment sector, which is 36% roughly of our total revenue of that, bill pay, let's call it, about 15%. So this is really a reinvigoration of that iPay business that was pretty mature. And as so we won't be able to see Payrailz in and of itself, but that together, that combined business plus the added innovation of new features that neither existing platform has on their own, you'll start to see over the upcoming quarters a reinvigoration that will help that total segment.

[James Faucette, analyst]

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.

[David Foss, executive]

We refer to that as a side core. We've been doing that for years. So that's not a requirement of the digital banking application necessarily, it's a requirement of having core functionality, where you can actually process those accounts. We've been doing that for a long time. Certainly, we have that integrated with our Banno solution.

But the nice thing about our offering is that if the customer simply wants to do it for deposit gathering, we can do that. If they want to host a complete digital bank as they continue to grow, it's the same platform, it's the exact same solution. We can offer loans and GL and everything else through that offering. So that's not something new to Jack Henry. We've been doing that for quite some time.

[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.

[Vance Sherard, executive]

Thank you, MJ. As Dave mentioned, next week on Tuesday, the 14th, we hope you will join us either in person or virtually as we host our Annual Shareholder Meeting. Additionally, we look forward to seeing many of you at upcoming investor events during November and December.

In conclusion, we thank all Jack Henry associates whose efforts produce these strong financial results. Thank you for joining us today. And MJ, will you please provide the replay number?

[Operator]

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