Jack Henry & Associates Inc

NASDAQ:JKHY

Earnings Call Analysis

Record Revenue and Positive Outlook with New Core Wins and Revenue Guidance

The company reported strong financial performance in Q4 and fiscal year 2024, achieving record revenue of $2.2 billion and operating income of $489.4 million. Revenue increased by 7%, with Q4 alone showing a 5% rise. The company secured 15 new core contracts, significantly more than the previous year's five. For fiscal 2025, the revenue guidance is set for a 7-8% increase, and non-GAAP margin expansion is projected between 25 to 40 basis points. The company's successful digital solutions drive is reflected in the high demand for their products, such as the Banno platform, which saw substantial client growth.

Record-Breaking Financial Performance

In fiscal year 2024, the company experienced significant growth, achieving record revenue of $2.2 billion and operating income of $489.4 million. This performance reflects a strong execution of the company’s technology modernization strategy and the launch of several new innovative solutions. Notably, revenue for the fourth quarter increased by 5% on a GAAP basis and 6% on a non-GAAP basis year-over-year. For the full fiscal year, revenue grew by 7% on both GAAP and non-GAAP bases, while operating income increased by 2% on a GAAP basis and 10% on a non-GAAP basis.

Outstanding Sales Achievements

The sales team set new records in fiscal 2024, with all-time highs for sales bookings in both the fourth quarter and the entire year. There were 22 competitive core wins in Q4 and 57 for the fiscal year, significantly higher compared to previous years. Additionally, the company signed 15 new core contracts with institutions holding over $1 billion in assets, indicating successful penetration into larger-scale clients.

Expansion of Core Client Assets

There’s a discernible trend in the growth of core client assets, with an average asset size increase of 27% for bank clients and 34% for credit union clients over the past four years. For FY 2024, the average asset size for new bank clients was $1.35 billion, and for credit union clients, it was $1.27 billion, demonstrating the company’s increasing foothold among more substantial financial entities.

Increasing Cloud Adoption

The transition to cloud services continues to gain traction, with 15 additional contracts signed in Q4 to move existing in-house core clients to the private cloud. By the end of the fiscal year, 73% of core clients were hosted in the company’s private cloud, illustrating an ongoing trend towards digital transformation and cloud utilization.

Strong Performance Across Complementary and Payment Solutions

The company saw extraordinary demand for its complementary and payment solutions. The digital suite was highly sought after, evident from signing 45 new Banno retail platform clients and 50 new Banno Business deals in Q4. For the fiscal year, the company added 179 new Banno retail contracts and 164 Banno Business contracts. The payments segment also marked an 8.4% revenue growth in Q4 and 6.7% over the whole fiscal year, propelled by the EPS business and strong card growth amid fraud and card-related services.

Expense and Margin Management

Expenses increased across various categories, with the cost of revenue rising by 6% to 7% and R&D expenses by 3-4%. Full-year SG&A expenses grew by 18% on a GAAP basis due to one-time costs but only 10% on a non-GAAP basis. Despite these increases, the company maintained a strong focus on margin expansion, achieving a full-year non-GAAP operating margin of 23%, a 60 basis points improvement from the previous year.

Cash Flow and Capital Allocation

Fiscal year 2024 saw a significant increase in operating cash flow, reaching $568 million, driven by lower cash tax payments. Free cash flow amounted to $336 million, a considerable rise from the $175 million recorded the previous year. The company repurchased $28 million in shares, reduced debt by $125 million, and paid dividends amounting to $156 million, reflecting a robust return on invested capital (ROIC) of 20% over the trailing 12 months.

Guidance for Fiscal Year 2025

Looking ahead, the company provided a balanced outlook for fiscal year 2025. Guidance includes GAAP and non-GAAP revenue growth of 7% to 8%, an annual non-GAAP margin expansion of 25 to 40 basis points, and a projected GAAP EPS of $5.78 to $5.87, indicating an 11% to 12% increase. The company anticipates a free cash flow conversion of 65% to 75%, attributing the reduction from the previous year to non-recurring tax benefits and collection timing issues.

Constant Focus on Innovation and Client Satisfaction

The company remains committed to technology innovation and client service excellence. Fiscal year 2024 saw implementation of cutting-edge solutions ahead of the competition, maintaining high client satisfaction scores averaging 4.74 out of 5. This strong client and associate engagement underpins the company’s ability to secure steady new wins and contract renewals.

Earnings Call Transcript 2024-Q4

[Operator]

Good morning, and welcome to the Jack Henry Fourth 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]

Thank you, Drew. Good morning, and thank you for joining us for the Jack Henry Fourth Quarter and Full Year 2024 Earnings Call. Joining me on the call today is President and CEO, Greg Adelson; and Mimi Carsley, CFO and Treasurer.

After my opening remarks, I will turn the call over to Greg for his comments on our fourth quarter results and observations related to our business and the industry. Mimi will then provide commentary around the financial results and fiscal '25 guidance, including 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 Greg.

[Gregory Adelson, executive]

Thank you, Vance, and hello, everyone. I appreciate all of you joining this morning's call. We are very pleased to report strong sales and financial performance in the fourth quarter and for all of fiscal 2024. I want to especially thank all of our associates for your hard work, dedication and unwavering commitment that significantly contributed to these outstanding results.

I will begin with a summary of what I believe are the three main takeaways and then provide additional detail on all areas of our business.

We produced record revenue and operating income for fiscal '24 with $2.2 billion in revenue and $489.4 million in operating income. Our sales team set an all-time record for sales bookings for both the fourth quarter and the fiscal year that included 22 competitive core wins in the quarter and 57 for the fiscal year.

We signed 15 new core contracts this fiscal year with financial institutions that have over $1 billion in assets compared to only 5 in fiscal 2023. This was a direct result of our technology modernization strategy and execution, One Jack Henry initiative and several new innovative solutions.

Now for more detail on each of the takeaways. For the fourth quarter, total revenue increased 5% and increased 6% on a non-GAAP basis. For the fiscal year, total revenue increased 7% on a GAAP and non-GAAP basis. Operating income increased 1% for the quarter and increased 5% on a non-GAAP basis. For the fiscal year, operating income increased 2% and increased 10% on a non-GAAP basis.

As I mentioned, the fourth quarter was the highest quarter for sales bookings in the history of the company, and we set a new record for sales bookings for the fiscal year. I am very proud of the remarkable year by our sales team. The 15 core clients signed with over $1 billion in assets also was a new fiscal year record. Of those clients, 10 are banks and 5 are credit unions.

Over the past 4 years, we have continued to see an increase in the average asset size of our core clients. Average assets for our bank clients have increased to $1.35 billion, a 27% increase over the past 4 years. Average assets for our credit union clients have increased to $1.27 billion, a 34% increase over the past 4 years.

In addition to the 22 competitive core takeaways in the quarter, we re-signed one long-term client with about $6 billion in assets that had provided the termination notice to us a little more than 2 years ago. That client never deconverted to the competing core platform. They've now re-signed with us for multiple years and multiple new solutions. While this contract is not in our new core win numbers, it is noteworthy that they decided their best choice was to stay with Jack Henry for multiple more years.

For the quarter, we also signed 15 contracts to move existing in-house core clients to our private cloud environment. We finished fiscal '24 with 44 existing clients agreeing to move to our private cloud. We now host 73% of our core clients in our private cloud.

Several of our complementary and payment solutions also experienced extremely high demand with our digital suite leading the way. For the quarter, we signed 45 new clients to our Banno retail platform as well as 50 new Banno Business deals. For the fiscal year, we closed 179 new Banno retail contracts and 164 new Banno Business contracts.

Banno continues to experience exceptional growth. We currently have 12.2 million registered Banno users as compared to just 3.2 million at the same time in 2020. We have 924 Banno retail clients, and of those, 147 are live with Banno Business and another 81 are in various stages of implementation.

We also continue to see increasing success with our card processing solution, signing 21 new card processing clients this quarter and 56 for the fiscal year. We received 16 new Financial Crimes Defender contracts in Q4 and 52 for the fiscal year. In addition, we signed 53 new contracts for the Financial Crimes Defender faster payment fraud module for the quarter and 134 for the fiscal year. This real-time solution is designed to help mitigate fraud in Zelle, FedNow and real-time payment transactions. As of June 30, we had 52 Financial Crime installations completed and another 115 in various stages of implementation. We also have 22 faster payment modules installed and 154 in various stages of implementation.

I am asked regularly why I believe we continue to see significantly more new competitive core wins than our competition. While I believe there are many reasons, I've tried to boil it down to three primary things.

First, our associates. We have a happy and engaged workforce, and we believe that leads to having a do whatever it takes attitude with our clients. Our associate engagement scores are well above the industry benchmark, and we consistently win best workplace awards each year. We are pleased to recently receive recognition in three national publications: U.S. News & World Report's Best Companies to Work For, Time Magazine's Best Midsized Companies and Newsweek's Greatest Workplaces.

Second, our service quality which is a direct result of our engaged and dedicated associates. We have long been known for providing exceptional customer service, and this year was no exception. In fiscal year 2024, our client satisfaction score when rating the engagement with a client service representative averaged 4.74 per month on a 5-point scale. On that scale, a meets expectation is 3.0 and extremely satisfied is 5.0. You have to have a lot of 5s to average a 4.74.

The third thing is technology innovation. We continue to invest in technology to help our clients remain vibrant financial institutions in the markets they serve. We are executing on our technology modernization strategy while bringing new leading-edge solutions to the market before our competition.

A couple of final items. We are looking forward to our annual client conference, Jack Henry Connect, in October. This is a great opportunity every year for us to meet with prospects, clients and partners. Last year, 17 of our new core wins were with prospects who attended the conference.

As I reflect back on fiscal 2024, I want to again thank Dave Foss for his outstanding leadership as CEO for the past 8 years. I am honored and humbled to take over as CEO and excited, along with our entire leadership team, about the opportunities ahead.

We are executing on our strategy and our associate engagement and client satisfaction scores are consistently strong. Technology spending by financial institutions remains robust, and there's clear demand for our differentiated and innovative technology as validated by our strong quarter and fiscal year. We are very well positioned for future success.

I look forward to seeing and speaking with many of you at our Investor Day in Dallas on September 5. We have an exciting agenda, and we'll have several of our new business leaders available for a meet and greet as well.

With that, I will turn it over to Mimi for more specifics on our financials.

[Mimi Carsley, executive]

Thank you, Greg, and good morning, everyone. Our continued focus on serving our community and regional financial institution clients and delivering shareholder value led to another quarter of solid revenue and earnings growth. I will start with the details driving our fourth quarter and full year results then conclude with the fiscal '25 guidance.

Q4 GAAP revenue increased 5% and non-GAAP revenue increased 6%, a continuation of the consistently solid performance. Full year growth was 7% on both a GAAP and non-GAAP basis.

Fourth quarter deconversion revenue of approximately $7 million, which we pre-released, was down approximately $8 million, reflecting minimal financial institution consolidation of our clients. Full year deconversion revenue was $17 million, $15 million less than the prior year, was consistent with guidance.

Now let's look more closely at the details. GAAP services and support revenue increased 2% while non-GAAP increased 4%. For the year, the increase was a healthy 5% for GAAP and 6% on a non-GAAP basis. Services and support growth during the quarter was the result of volume increases in data processing and hosting revenue and consulting revenue, partly offset by decreases in deconversion, implementation and maintenance fee revenue.

We continue to experience impressive growth in our private and public cloud offerings, which increased 11% in the quarter, 10% for the year. This recurring revenue contributor is 31% of our total revenue and has long been a key double-digit growth engine.

Shifting to processing revenue, which is 42% of total revenue and another key component of our long-term growth model. We got robust performance with 9% growth on both a GAAP and non-GAAP basis for the quarter and for the year. Consistent with recent results, quarterly drivers included increased card, digital and payment processing revenue. Completing commentary on revenue, I would highlight the total reoccurring revenue exceeded 91%.

Next, moving to expenses. Beginning with the cost of revenue, which increased 6% on both a GAAP and non-GAAP basis for the quarter, and 7% for GAAP versus 6% for non-GAAP for the whole fiscal year. Drivers for the quarter included higher direct costs, higher personnel costs and increased internal licenses and fees.

Next, R&D expense increased 4% on both a GAAP and non-GAAP basis for the quarter. The quarterly increase was primarily due to increased consulting and other professional services net of capitalization and higher cloud consumption cost net of capitalization. For the year, R&D expense increased 4% on a GAAP basis and 3% for non-GAAP.

Ending with SG&A expense for the quarter. On a GAAP basis, it increased 6% and 13% on a non-GAAP basis. The quarter GAAP increase was due to higher personnel costs and increased professional services. The non-GAAP quarterly increase was impacted by the onetime expense from the write-off of capitalized software development related to internal software tools. Without this onetime expense, the quarter increase would have been 8%.

Full year SG&A expense increased 18% on a GAAP basis and 10% non-GAAP. The primary GAAP impacts were the $16 million in onetime costs related to the voluntary early departure incentive program, VEDIP, and a prior year period $5 million gain on asset sales. The non-GAAP increase is driven primarily by higher personnel costs.

We remain focused on generating compounding margin expansion. While the quarter results delivered 22 basis points decrease in non-GAAP margin to 22%, full year margin expansion was 60 basis points on a non-GAAP margin of 23%. Non-GAAP margin benefited from the focused process improvements and disciplined management of our workforce.

These strong quarterly results produced a fully diluted GAAP earnings per share of $1.38, up 3%. Fiscal '24 fully diluted EPS was $5.23, up 4%, facing a $0.37 headwind from previously mentioned VEDIP, a gain on asset disposal from prior year and lower deconversion rate.

Breaking down the results into the three operating segments, we are pleased to see positive performance across the board. Our core segment revenue increased 4% for the quarter on a non-GAAP basis against a tough comp. Non-GAAP operating margin increased 171 basis points. Core continues to benefit from private cloud trends and strong cost control. Full year non-GAAP revenue was 7% and the associated margin increased 135 basis points.

Payment segment quarterly revenue increased 8% on a non-GAAP basis. The segment had impressive non-GAAP operating margin growth of 183 basis points. Revenue growth was due to continuing growth in our EPS business and strong card growth from fraud and card-related services with delivered growth consistent with U.S. consumer spending trends. Margin benefited from focused cost management. And for the full year, non-GAAP revenue growth was 7% with 124 basis points of margin expansion.

Finally, complementary segment. Quarterly non-GAAP revenue increased 6% with 75 basis points of margin contraction. Margin contraction was due to direct support cost, amortization and licenses and fees. Fiscal year non-GAAP revenue increased 8% with 2 basis points of margin expansion. Full year growth continued to reflect digital solution demand and beneficial overall product mix.

Now let's turn to a review of cash flow and capital allocation. Fiscal '24 operating cash flow was $568 million, $186 million increase over the prior period. Excluding proceeds from sale and assets, free cash flow was $336 million, significantly more than the $175 million generated last year. Free cash flow conversion was 88%.

Our commentary entering the year included an elevated level of cash tax payments based on the negative 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 approximate $29 million overpayment last fiscal year.

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 on capital metrics for the year, including $28 million in share repurchases, more than offsetting the annual dilution; $125 million in debt reduction and $156 million in dividend.

Heading into a new fiscal year, I will conclude with guidance. As you are aware, yesterday's press release included fiscal 2025 full year GAAP guidance along with an enhanced transparency reconciliation to non-GAAP guidance metric. While the press release also includes a fiscal '25 non-GAAP EPS metric, this is not intended to be a new guidance metric. The purpose is to provide additional clarity on our numbers, for example, current acquisition year-over-year comparison. And it should be noted that a 24% tax rate is used.

Deconversion guidance will continue to follow the methodology introduced in fiscal '24. And for fiscal '25, deconversion revenue guidance is $16 million. Full year GAAP and non-GAAP revenue guidance is 7% to 8%. Based on the above revenue growth that generates sustainable accretive sources of margin, we're guiding to an annual non-GAAP margin expansion of 25 to 40 basis points.

All of the above are aligned with our near-term targets as the business operations remain healthy and consistent. Full year tax rate estimate for fiscal '25 is 24%. The above guidance metrics results in a full year guidance for GAAP EPS of $5.78 to $5.87 per share, a growth of 11% to 12%.

Fiscal '23 had lower-than-expected free cash flow conversion due to cash tax overpayment which resulted in fiscal '24 having a better-than-expected conversion metric. Absent further legislative action, fiscal '25 will be a reversion to the expected trend line resulting from the expiration tax benefits in Section 174. As such, our full year expectation for free cash flow conversion is 65% to 75%.

Our current view has cadence of fiscal '25 non-GAAP revenue and margin increasing sequentially throughout the year. This increase in cadence will result in a strong second half that will be more pronounced than typical. Consequently, Q1 is expected -- expectation for non-GAAP revenue growth is approximately 5.25% and non-GAAP margin to contract approximately 100 bps. This is due to slower growth rate on on-premise annual maintenance and card processing.

An additional factor is several long-term software usage contracts closing in Q1 of the prior year which delivered significant allocation of license fees in that same quarter. The rest of the year improved strongly with limited risk, resulting in a full year guidance remaining consistent with our near-term target.

As a reminder, we see fluctuations in quarterly results relating to software usage license component along with the timing of implementation. Therefore, the correct performance indicator for our business is the consistently strong fiscal year financial results.

In conclusion, Q4 and full year results reflect strong performance and achievement of our targeted goals. We entered fiscal '25 with positive momentum and expect to drive impressive revenue growth and margin expansion. We remain exceptionally positive about demand for our solutions and the strength of our clients, resulting in superior shareholder value creation. We appreciate the contributions of our dedicated associates that drove these strong results and our investors for their ongoing confidence.

Drew, please open the line for questions.

[Operator]

[Operator Instructions] The first question comes from Andrew Schmidt with Citi.

[Andrew Schmidt, analyst]

I guess just to drill down on the fourth quarter core and complementary performance. And I know you're right, fiscal year metrics are the best way to look at the business. But is there anything for the fourth quarter that affected revenues there? Timing shifts or perhaps the -- some of the things you called out for the fiscal first quarter that impacted the results? Or was it truly kind of tough comps?

[Mimi Carsley, executive]

I appreciate the question. Although I would reiterate, just as you just mentioned, the importance of looking at our year on a year-long basis rather than the quarters. I don't see any trends that I think structurally will continue that we would call out.

I think it was mostly just you always have to look at what is the installation queue, what's going on, what's going on with that shift from on-premise to outsourcing. And so I think this should be a matter of this quarter playing out in that pattern.

[Andrew Schmidt, analyst]

Got it. Appreciate that. And maybe I could ask a question on just the new win side. The step-up in new core signed above $1 billion in assets, it's a pretty bright spot. What -- obviously, there's multiple factors that drive that. But is it possible to distill that down? Is it product? Is it go-to-market focus?

What's driving the move up market? I know that's been a theme in the past several years, but it seems like you're making faster progress towards shifting towards higher-asset-size institutions. So I would love to get some more color there.

[Gregory Adelson, executive]

Sure. Andrew, this is Greg. So yes, thanks for the question. I think as I tried to reference a little bit in the script, but more importantly, it is about our level of execution. We're hearing this on a regular basis that, I think you know this, and most people do that we do provide to our clients what our road maps are. And we show what we're going to be doing and when we're going to be doing.

And I think there's a level of trust and belief. And so the more that we're executing, the more that our technology innovation is getting out there. And they're seeing the results, and it's providing really an opportunity for us to get in front of these larger customers, first of all.

And then second of all, as we mentioned, our associates and our client service reputation continues to truly shine, especially at a time when maybe it's not in the rest of the industry. So those have been big.

And then I think we've also hired some really good and talented sales individuals that have come with experience in selling into these larger institutions, and that's continued to help us as well. But I think it's a combination of all those things that are coming to fruition and allowing us to be successful.

[Operator]

The next question comes from Vasu Govil with KBW.

[Vasundhara Govil, analyst]

First one for you, Greg. Just as you have taken over the wing, any sort of strategic changes that you are envisioning for the company that the company might need? And where are you focusing more of your efforts at this point?

[Gregory Adelson, executive]

Yes. No. I mean, fortunately, I took over for an individual that did a pretty good job. So nothing significant. I mean, we've been able to really make a very -- what I would say, a very smooth transition. And so we're focused on some things I've talked about.

Obviously, the execution of the tech modernization strategy and what we've been doing with One Jack Henry continues. I've talked a little bit and we'll talk a lot more at the Investor Day about our SMB strategy and where we're going with that. So there's a lot of excitement behind that, that we'll be unveiling.

And then there's a couple of things that we've talked around product rationalization and really looking at things primarily in the complementary group that maybe aren't growing at the same pace as the rest of our company or have the margins, and looking at what we want to do with those particular things. A lot of them are very small. But again, just making sure we stay focused on the things that really do move the needle.

But I wouldn't say anything else really outside of that, and just staying true to who we are as a company and our leadership team.

[Vasundhara Govil, analyst]

That's very helpful color. And then a quick one for you, Mimi. Just on the payments segment, it was good to see the acceleration in revenue growth there. I know you called out fraud-related services. I guess just maybe if you could put a finer point on whether all of the acceleration will be value-added services. Because I think the debit numbers we saw from Visa, Mastercard were pretty consistent sequentially.

[Mimi Carsley, executive]

Yes. The payment segment had an 8.4% growth for Q4, and more importantly, the 6.7% growth for the full year. It was a big year for payment, especially given throughout the year, some economic uncertainty around the strength of the U.S. consumer. We're seeing the trends from that being in line with our expectations, still healthy but not overexuberant from a spending perspective.

The nice thing about our payments business, it's not just cards. We have other businesses. We have the EPS business. We have the pay center business. Those are doing quite well. We're seeing a lot of win, especially as the continuation of real-time payments excitement, the fraud solutions that are helping people feel more comfortable in going to these newer solutions. So those two businesses are doing quite well from a processing, and the remit business overall has been healthy.

Within card, as you mentioned, we do have a whole portfolio of complementary services that surround the card transaction, and we're continuing to see nice demand for those services. So that's really helping us from a total portfolio perspective.

[Operator]

The next question comes from Jason Kupferberg with Bank of America.

[Jason Kupferberg, analyst]

I just wanted to start on the margin side. I know that you comfortably beat your initial fiscal '24 guidance on the margin line. The initial fiscal '25 guide calls for less margin expansion than in 2024. So is this reflective of some ongoing conservatism? Or were there some transitory tailwinds last year you don't expect to recur? I know you're starting off the year down about 100 basis points in Q1, but just wanted to get a little bit more color on the margin outlook, please.

[Mimi Carsley, executive]

I appreciate you bringing up that important point. Margin expansion is one of the key elements that we are focused on as a management team. We're quite disciplined as we think about the cost of the organization and yet building for scale of future success.

I would say there's a couple of things. I don't think it's an excess of conservatism. I think that's what we feel confident that the market and the model generates. But there are some headwinds as we leave FY '24 into '25 that helps us in '24, things like the slowing back-build of the VEDIP departures. Particularly, that's part of the reason why you'll see the guide for Q1 a little bit weaker, is that really helped us in Q1 of FY '24. As well as we had a onetime shift in the timing of our annual merit increase cycle. So those are some issues that create just kind of a grow-over challenge next year.

But in general, we feel quite confident that the model continues to produce margin expansion at a nice clip. So we're excited about the year guidance. And we always aim and strive for more, but we want to put a number out there that we feel confident in our ability to deliver.

[Jason Kupferberg, analyst]

Okay. That's helpful. Just a follow-up on the payments segment. I wanted to hone in on card production a little bit. I know on the issuer processing side, sounds like things are pretty stable. But there had been some softness in card production earlier in the year. Did you see some reversal of that? What are you expecting for F '25 on the card production side?

[Mimi Carsley, executive]

Yes. I think that was more of a onetime issue that we've worked through. It was not an issue in Q4. We don't expect it to be an issue going forward. It's resolved itself.

[Operator]

The next question comes from John Davis with Raymond James.

[John Davis, analyst]

Greg, I wanted to circle back to core wins. I think you called out 15 were greater than $1 billion in assets versus 5 just a year ago. Just curious where that stacks up historically. Has it always kind of been in the low to mid-single digits and now we had a big step up?

And then also, you called out that your average client is larger today. Any context behind that? Like it's X percent bigger than it was 5 years ago? Or any color to help us contextualize the kind of moving up market?

[Gregory Adelson, executive]

Yes, for sure. So I appreciate the question, JD. So I'll start with the first one. So yes, 15 is by far a historical number for us. So 5 last year was more on the average. So we would typically be in the 4 to 6 ranges, something like that, on an average year. So 15 is a big step up for us.

And again, I think a lot of it is what I had mentioned earlier on -- I believe it was Andrew's question, and was around just kind of what we've been doing on our level of execution and showing the innovation that we have. I really truly believe that we are now viewed in the industry as the innovative leader, especially when it comes to core processors in this space. So I think that has helped us a lot.

To your second question. Yes, I think I had referenced over 4 years, I can tell you over 5, but over 4, we have grown our banking assets by 27% and our credit union assets by 34%. And those were over the last 4 years.

So that is an aggregation of a few things. One, the continued growth of our customers and what we've been able to do to help them grow deposit growth. Obviously, some things may have been helped through PPP at the time. But the reality is their assets continue to grow. Some of the products that we provide, Banno and products like that, definitely have a really big impact on deposit growth. And then, of course, some of it is the wins that we've had as well.

[John Davis, analyst]

Okay. That's super helpful. And then, Mimi, I want to drill in on free cash flow a little bit. Obviously, much better in the fourth quarter, I think at least we expected and for the full year relative to your initial outlook.

But if I jump out the $29 million of overpayment in '23 that I guess you got back in '24, I still get free cash flow conversion around 80%. So maybe just help me kind of walk from the 80% to the, call it, midpoint of 70% that you're talking about for -- we're expecting in fiscal '25.

[Mimi Carsley, executive]

Yes, happy to, JD. Free cash flow is one of my favorite topics. So let me give you a little bit more of the walk color there because I think there's two major components. If you take the 88% that we just released for the full year, versus the prior year of 55%, there's two components that overstated the FY '24 conversion.

One is, as we just talked about, that $29 million of essentially an overpayment in FY '23 taxes. The other thing is the collection timing of our annual maintenance. And this year, as you know, those invoices go out in the late spring, early summer. We start collecting on them in the June, July time frame. And just depending on in any given year, how many people pay them as soon as they get them versus in July, sometimes in a given year, that shifts the timing of that collection and impacting free cash flow.

So this year, I would say there was probably about $60 million of timing collection-related benefit to the free cash flow conversion in FY '24. So if you adjust both of those, you're roughly talking probably a 65% free cash flow conversion, which is in line with where we think for FY '25, hopefully a little better than that as we did in our guidance range. But that is the math.

[Operator]

The next question comes from Will Nance with Goldman Sachs.

[William Nance, analyst]

I just wanted to follow up on the 1Q guidance, sort of the trajectory over the course of the year. I know there are some kind of seasonal impacts that typically hit the first quarter on the annual maintenance. I think you kind of just touched on that.

But I think you also referenced processing on the payment side. So maybe can you just drill down on sort of expectations? I guess, maybe stripping around -- stripping out the annual license impact, what are the kind of embedded assumptions around the payments segment in 1Q? Should we expect that kind of 8% level to continue into next year?

And then maybe just talk about drivers of the acceleration of the course of the year outside of some of the annual things that you just hit on.

[Mimi Carsley, executive]

Yes. Will, I appreciate the question. And I would say, this year, we gave probably a little bit more color than we have in past years only because of the way we think the pattern will play out. We don't guide to a quarterly. We manage the business on an annual basis. But in an effort to make sure that people weren't surprised by the way that Q1 might play out, we wanted to give a little bit more specificity there.

I think if you look at the some of the drivers, we expect a modest Q1 from a payments perspective, but that's coming off -- payment usually grows throughout the year, so that's usually just your typical restart from an annual basis.

The other thing to look at is we have a very strong -- in hardware this past year in FY '24. So that from a just the nature of the cycle of hardware sales, our clients, the new hardware that comes out, we think that probably FY '25 may not be as robust as the very strong first half of FY '24. So I think that's some of the things.

And then as you mentioned, that very important software usage contracts and particularly the new software licensing part of that as we see more people, over time, those renewals and how that reseller works. Last year, we just saw a wave of first half renewal that we think the pattern this year will be a little less in the first half. So we wanted to call that out.

[William Nance, analyst]

Yes. That's all super helpful. And then maybe just more big picture on the payments segment. I got a lot of questions on just what the building blocks for growth there, knowing that issuer processing is a big part of that business.

There's been a lot of discussion around the kind of domestic debit transaction trends kind of more broadly and just what the growth outlook is there. I guess in a world where debit transactions are growing 6%, what is -- what do you see as kind of the most important driver for growing more in line with sort of how you frame the long-term targets in the segment? You called out enterprise payments, I believe, today. Just what in your mind are kind of the big building blocks to get to the segment targets there?

[Gregory Adelson, executive]

Sure. Will, this is Greg. I'll take that one. So I think there's a couple of things. I think EPS has -- there's some things that we're doing in that product base that could have some additional growth. But I think that most of it is going to come from really the other two payment groups.

So as you know, what we're doing with our bill pay and turning that into more of a bill management solution with the Payrailz acquisition, and what we've done to combine the back end of the iPay solution, the very -- and the front end of the Payrailz solution and kind of rolling that out in what we call journey to one.

And that will be -- is continuing to get completed and executed on time. We'll have that done by the end of the fiscal year. But the reality is, is that we've already seen some nice uptake there with clients that are very interested in what we're doing and how we're going about that. And so there's some opportunities there.

And the other big one comes from the PayCenter application. And what we've done today on the receive side, where we have roughly over 300 institutions on all three of those faster payment rails today, including the FedNow, and which is roughly about 40% of the RTP clients that are live and roughly about 30% of the FedNow clients.

But we're working with our clients today because of the fraud modules that we've been able to create with Financial Crimes Defender, and I referenced a lot of those sales. We're working with our clients on the use cases to be able to do send. And once the send capabilities get out and we get some more leverage on that and some things that get changed, I think with a few of the use cases in particular, I think there's some real upside in that particular group as well.

So as Mimi referenced, it isn't all about card. Obviously, card is the biggest driver. But there's a few of these -- of the ancillary solutions within payments that I think have some upside over the next couple of years.

[Operator]

The next question comes from Chris Kennedy with William Blair.

[Cristopher Kennedy, analyst]

Clearly, new sales activity has been very strong, but you're going with larger institutions. Is there any impact on kind of the timeline to implementation of some of these newer wins?

[Gregory Adelson, executive]

No, Chris. I'll take that. This is Greg. So no, I mean typical -- and just as a reminder really for everybody that typically, when we win these new core deals, it's usually a 12- to 18-month process. So depending on who that institution is, really what the timeliness is of their existing contract.

Some clients like to get out ahead of their termination window. And so there's negotiations and things that take place. And then there's a kind of a wait-and-see period for -- not wait and see, but wait period for that implementation. But we're still in that 12- to 18-month typical window for those implementations.

So really anything that we just sold those 22 aren't going to see -- for the most part aren't going to see any real revenue for Jack Henry in this fiscal year. Obviously, the ones we sold last year, and Mimi referenced an increasing opportunity for us in our quarters over time, that some of that is a byproduct of the timing of some of those implementations. But we're not seeing anything today that has extended beyond what we had typically seen in the past.

[Cristopher Kennedy, analyst]

Great. And then just a quick one on return on invested capital. Obviously, it's very high, but it has come down over the last couple of years. Any thoughts on kind of the long-term opportunity with that metric?

[Mimi Carsley, executive]

Sure. Yes. Part of being a disciplined capital allocator, we're being really thoughtful around that. I think the ROIC, while 20% is an enviable number and something we're quite proud of, it has come down a little bit just based on the math of as we had to take on the debt for the Payrailz acquisition. We're now paying that down, and we've paid down that substantially this past year.

So as we continue to pay down the debt and have the flexibility to do more in the form of repurchases or more in the form of other activities, that will drive our ROIC. So it's just the very tail end of working through that process. So we expect that to continue on a positive trend and an upward trend.

[Operator]

The next question comes from Kartik Mehta with Northcoast Research.

[Kartik Mehta, analyst]

Greg, I wanted to just get your perspective on the core business. I know the focus should be the year, but after saying that, I'm going to talk about the quarter, so I apologize for that.

Fourth quarter, maybe a little bit lower than expectations. But I'm wondering, as you look at FY '25, considering all the core wins you've had, is that a business that you think -- segment that continues to grow kind of in line with the overall revenue growth of the company?

[Gregory Adelson, executive]

Yes. Kartik, yes, thanks for the question. For sure. I mean, I think as we have articulated throughout, I mean, it's a full year of business for us and how we manage the business. It was a little tougher comp from last year compared to this particular one. But there is no concern on what we're doing, where we're going with that particular business.

And so the significance of the core wins, the significance of the products that we're bringing in there, the significance of what we're doing in technology modernization in general. So I mean the short answer to your question, Kartik, is it's just as a full year gain for us. That's really what it is.

[Mimi Carsley, executive]

And Kartik, this is Mimi, if I could just add on. The tremendous fourth quarter that Greg talked about, the step up of the sales, I mean, that's at the very end of our year. So if you think about that cycle for readiness for implementation on the client side, when you'll start to see that revenue is not an FY '25 picture for the core.

[Kartik Mehta, analyst]

Makes sense. And then just on pricing, I know this is always a competitive industry. And whenever you have renewals, pricing gets competitive. But just in general, any change in the environment in the last 3, 6 months that you've noticed?

[Gregory Adelson, executive]

I'll take that. Yes, I mean, not necessarily. I think our competition has continued to kind of do what they typically do and kind of how they "go to battle." And so we haven't seen anything significantly changed there.

Some of their stories are changing, and some of their approaches are changing. But in reality, it is really about what have you done for me? And so as you can imagine, within 22 competitive core wins, a lot of those came from the normal players out there that you would know.

And so it's really about our ability to execute, our ability to service, our reputation for doing that, our consistency of how we go about things, the consistency of our team. Our turnover rate is very low at the company and so you just get a consistency with that.

So again, the short answer for you, Kartik, is I don't feel that there's anything significantly changing out in the marketplace other than some of the stories that they go with it.

[Operator]

The next question comes from Peter Heckmann with D.A. Davidson.

[Peter Heckmann, analyst]

I wanted to follow up on Banno little bit and just see, I mean, 927 on Banno retail, I think you said. That's really impressive. And can you talk about how many clients you still might have on NetTeller or maybe your mobile digital banking product? And how do you think about the growth of Banno once you've substantially upgraded most of your clients from the older systems?

[Gregory Adelson, executive]

Yes, it's a great question, Pete. So not to get in the minutia, but just with 924, I just want to make sure we have our numbers right. So 924, and so that continues to be a huge opportunity for us, and there's a lot of runway still in the credit union space, right, so -- and the banking space. But really in the credit union space where we have been attacking that part of our core business. So there's still a lot of upside.

When you think about that we have roughly 1,700 core clients. So there's still a lot of runway within our own base. But of course, we're working on outside the base strategy as well. And so we're working with some of our competitors to get what we need to make that successful, sometimes not as easy as we had hoped to make that happen. But the reality is we're making a lot of progress, and we still expect to do what we said we were going to do, which is get that out in the latter part of this fiscal year or the second half of the calendar year. So that's still on point.

To answer your question around NetTeller. I don't know exactly, but it's roughly a couple of hundred left on the NetTeller platform.

[Peter Heckmann, analyst]

Okay. All right. That's helpful. And then just in terms of M&A, clearly, the pace of M&A has slowed. And just curious like how much of that is Jack Henry's suite of solutions is largely filled out and there's no longer any holes? But are there other effects to the extent that like the industry is less fragmented, there's not as many small players? Or valuation? How are all those playing into the outlook for M&A?

[Gregory Adelson, executive]

Yes. I think you hit on all of them. I think it is a combination of much of what you described. We continue to look at opportunities that make sense. The difference is, is that really, our approach hasn't changed, just what we're looking for has changed.

So when you think about our tech modernization strategy, we're really looking, first and foremost, at what is already public cloud-native. And so we don't have to rewrite the technology once an acquisition takes place. Obviously, Payrailz was one of those examples where it was already public cloud-native.

Looking to your point about gaps. We don't have the gaps that we had many years ago. And again, maybe the opposite of where we want to focus, which is about that product rationalization, where we're looking at things that just don't make sense as they launched it maybe 10 years ago. And so we're looking at that.

But I think when you look at the opportunities in front of us, public cloud-native, number one. Number two is do they help us accelerate some of the things that we're looking at in payments or in the SMB strategy that we'll be talking about more? Or in some of the things that we're doing to roll out in our, I would say, the key products of digital, enterprise, account opening, fraud, things along with that line. Those are really where our focus would be.

[Operator]

The next question comes from Charles Nabhan with Stephens.

[Charles Nabhan, analyst]

You had mentioned that roughly 73% of your clients are now in the public cloud. I think that's up from 69% at the Investor Day last year. My question is how much runway is left to move your client base to the cloud?

And if you could talk about what that could mean for revenue uplift. I think you had cited 2x revenue uplift in the past from additional cross-sell as well as some margin benefits as well. Any commentary around that would be helpful.

[Gregory Adelson, executive]

Sure, Chuck. I'll take it, and Mimi can add some commentary is -- yes, I think -- so it is up from where we were. I don't know if I remember if it was 69%, but definitely up from where we are.

So roughly, we don't expect to get 100% of movement there. I would say that the 93%, 95% range is probably a reasonable number for us to think through.

The other thing is that as we've kind of moved and as we've moved to the type of clients that are left in there, which tends to be a lot of the larger ones, that number actually has kind of gone down. So it's more about 1.75% now than it was at the 2% through the years. And so still significant but down a little bit.

But we're continuing to stay focused. We still have several years of runway on them. So if you think about it, there's a couple of hundred left really on each side. And so if we're averaging somewhere between 40 and 45 a year, you got 3, 4, 5 years left based on that to get kind of to our numbers. But that will continue to be a focus and an opportunity.

And I think there'll be other opportunities to move from the private cloud to the public cloud over time, too. So we can't just focus only on what we'll be moving to the private cloud because, at the same time we're winding that down, we'll have opportunities to move customers from the private cloud to the public cloud around the same time frame.

[Charles Nabhan, analyst]

Got it. I'm sorry if I cut you off. But my follow-up was around sort of a follow-up to Kartik's question around segment outlook. If I compare fiscal year '24 results to your normalized guide, it looks like core came in a little ahead, whereas complementary and payments were a little below the normalized guide.

And just putting aside quarterly cadence, I know you had cited some softness in maintenance, which I think flows through core. Could we expect more of a normalized annual cadence of revenue growth next year, more with core coming in the 6% to 7% range and payment, complementary in the 8% to 9% range?

[Mimi Carsley, executive]

Yes. Chuck, this is Mimi. I think our intention for the growth algorithm is to have an indicator. It's not a precision. And so I do think the nice -- the beauty of it is we have a whole portfolio. And so sometimes they counterbalance each other in different ways.

So the great year this year at core has higher than the growth algorithm, right. That somewhat compensated for the lower complementary. Payments, you had the question of what happens with the economy and geopolitical and election and a lot of other issues. So I think in general, we still expect that the growth algorithm holds. But it's illustrative on like any new year. They could plus and minus a little bit and to offset each other.

[Operator]

The next question comes from Dave Koning with Baird.

[David Koning, analyst]

Yes. And I guess my question is a little similar just on what normalized growth is. I guess if Q1 is 5.25%, the rest of the year had to average around 8.25% to hit the midpoint of the range. And I guess that's a little above normal. And I guess are any segments going to outsize kind of accelerate from Q1? Or is it really just hitting all segments in that 8% range kind of the rest of the year?

[Mimi Carsley, executive]

Yes, Dave. I would say in general, we don't -- we're not going to give color quarter-by-quarter at this point as we live into the year. We think that we want to call out something a trend we're seeing, we'll certainly be transparent on that.

I agree with your math that we expect it to sequentially grow throughout the year with the second half being stronger than the first half. So I think Q1 is more pronounced, that's why we gave the color with more specificity. But I would say Q2 overall is going to be a higher growth than Q1. And I think that is pretty fair to say across the board, across all of the segments.

[David Koning, analyst]

Yes. Okay. And maybe one, just I guess one follow-up question. Net interest income if we look at the interest income less interest expense, was a positive $5 million or so in the quarter. It was better than it's been in a while. But you have a net debt position. So I'm wondering how you get a pretty sizable net interest income when you have a debt position. And if that's sustainable.

[Mimi Carsley, executive]

Good question, Dave. So how we get that interest income and the impact it has on net interest, as you did call out. We do have debt, we've been paying it down pretty significantly this year in a pay down, and we expect that to continue for '25.

But we do have -- we administer cash settlement balances. And as part of that administrative services, we get some of the revenue from those cash settlement accounts. Through negotiations we've had with partners and the like, we've been able to increase the yield in those accounts. Now that does have some correlation to interest rate environment, so depending on what the Fed does in '25. But overall, I would say that it's sustainable. It is subject to some interest rate sensitivity, but it is sustainable.

[Operator]

The next question comes from James Faucette with Morgan Stanley.

[James Faucette, analyst]

I wanted to just ask a quick follow-up question on a couple of points. First, on your customers and their priorities. Given where we are in the deposit cycle and the prospect of a return to loan growth next year with lower interest rates, et cetera, how have you seen, if at all, your customers change prioritization in terms of where they're looking to invest between deposit attraction and retention tools versus lending? Are we seeing any change in your customers' focus and priorities right now?

[Gregory Adelson, executive]

Yes, it's a great question, James. And so I have a couple of different reference points for you, too. So I know Northcoast Research did their own survey, and then of course we do our annual benchmark survey that we have. Both of them kind of showed the priorities being fairly the same as far as deposit growth being at #1.

The one thing that I will reference from our benchmark survey is this, which is that, in 2023, growing deposits was 43%. It's still #1, but 43% of the CEOs named that as #1. This year, it was 54%. So significant growth in both of those numbers, but again, same as a priority.

The other two, just since you asked, have kind of stayed fairly consistent, which is improving operational efficiency and growing loans. But both of those have gone up slightly from 2023 to 2024. But again, those are typically the top 3. And you can throw in fraud as a really core #4 for priorities.

[James Faucette, analyst]

Great. Appreciate that. And Greg, I wanted to follow up on the comment you made in terms of implementation queues and how -- wondering how those are trending broadly. And how are you thinking about the puts and takes between the margin expansion you're delivering right now versus potential for additional resource allocation to speed up those implementations broadly?

[Gregory Adelson, executive]

No. It's a great question, one that we address on a regular basis with our team. So we do -- we work through that on a regular basis, so there's a lot of short business cases that we do. But the reality is, if we can implement the revenue faster, we absolutely find ways to do that.

Sometimes it is a reflection on the actual product. Sometimes it's a reflection of the complementary or payment product that was sold with the core. And so sometimes those don't get implemented until the core is implemented. So you have some of those timing delays. Core, in particular, is as I described. It's a 12- to 18-month process most times, maybe a little longer on a couple, but most of the time in that.

But for our other products, so let's just take Financial Crimes Defender. We've already increased our resources on that this year to kind of work through our installation queues and to get that down into smaller numbers to ensure that we continue to keep our customers happy.

[Operator]

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, Drew. Please don't forget that our Investor Day is fast approaching. It will take place on Thursday, September 5, in Dallas, starting at 1 p.m. Central Time. You can join us via webcast, or if you'd like to attend in person, please let us know and we will get you the specifics.

In addition to Investor Day, during the coming weeks, we will be traveling to attend various investor events in the U.S. and Europe.

We'd like to take this opportunity to thank all Jack Henry associates for their hard work and dedication which has led to our outstanding results. Thank you for joining us today.

And Drew, will you please provide the replay number?

[Operator]

Yes, sir. The replay number for today's call is [phone], and the access code is 7192153. That will be available in about 1 hour.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.