Jack Henry & Associates Inc at Morgan Stanley US Financials, Payments & CRE Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: James Foster - Morgan Stanley - Analyst : Sure. So let's start and I want to spend some time looking at each of those different segments and how Jack Henry is positioned and delve a little more into the capabilities that you have there from a product perspective. But let's talk about the demand environment. How would you characterize without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JUNE 10, 2024 / 3:00PM, JKHY.OQ - Jack Henry & Associates Inc at Morgan Stanley US Financials, Payments & CRE Conference the overall demand environment for your solutions right now? It feels like you continue to set bookings record every quarter, while pipelines seem like they're being quickly replenished. So what are some of the key dynamics driving that and how would you summarize the demand environment right now?

Question: James Foster - Morgan Stanley - Analyst : Got it. As a follow-up to that. It seems like tech spend growth at year end customers has been remarkably stable, 6% to 10% growth range. Maybe given us stability of the businesses, there is some variation there, but it's certainly not what we see in the broader economy. Have you noticed any differences in demand between that spend growth for core banking versus digital banking or even digital lending?

Question: James Foster - Morgan Stanley - Analyst : Right. So what progress through the various businesses, and we'll start with core. Adjusted growth, there has been fairly healthy at around 8% through the first half of your fiscal '24. And we've seen about '24 competitive takeaways this year, putting it on a run rate. Broadly in line but maybe slightly below what you've seen historically, and we're not adjusting for size just in terms of the number of takeaways that you've had. For those competitive takeaways specifically, are the customers getting larger on average? And are they consuming more of your solutions upfront relative to historical trends? Just give us a sense of what those competitive takeaway dynamics look like right now?

Question: James Foster - Morgan Stanley - Analyst : Got it. As a follow-up on to that, Greg has made a comment recently that as you continued to win customers from larger competitors in the core space, those larger competitors have gotten increasingly willing to concede on pricing or tried to retain that core business. How would you characterize the pricing environment right now for both renewals and net new opportunities.

Question: James Foster - Morgan Stanley - Analyst : So can I ask you -- historically, one of the key on drivers on any given year was deconversion fees, right? So that was typically where your customer -- a customer of yours was acquired by another bank unusually. And then that larger bank usually had a different system and they would choose to stay with that. And so you'd basically get paid out for the rest of your contract and that kind of thing. A couple of things there. First, it doesn't seem like there's as much of that happening right now as there has been historically, maybe give a little context for if that's true or not. But secondly, as Jack Henry becomes larger and can do more, in the future, if there is more M&A, should we expect to see maybe a little less deconversion fee revenue generally just because you're more likely to retain the customers overall?

Question: James Foster - Morgan Stanley - Analyst : Got it. Thanks for that. So what's sort of the payments business -- growth is tracking at roughly 6% through the fiscal third quarter? If we look at volume growth at the card networks, it's probably closer to 5%. So you're still in line to maybe even slightly better than the networks broadly. But growth is still a little bit below your historical normalized range of 8% to 9%. Recognizing we're still going through the budgeting process, but how should we be thinking about the building blocks that could cause a reacceleration in the next year? Or do you think we're kind of brushing down into a slightly slower growth algorithm? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JUNE 10, 2024 / 3:00PM, JKHY.OQ - Jack Henry & Associates Inc at Morgan Stanley US Financials, Payments & CRE Conference

Question: James Foster - Morgan Stanley - Analyst : Got it. So finally, let's talk about the complementary business, like you said, kind of everything else. And in particular, within that, the rollout of Banno business seems to be gaining nice traction with a fair number of clients being live and many others in the implementation phase. I think you're at about an 8% penetration of Banno users now with the ultimate intention of getting the 60% to 70% eventually, how are you thinking about the potential uplift to ACV there?

Question: James Foster - Morgan Stanley - Analyst : Okay. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JUNE 10, 2024 / 3:00PM, JKHY.OQ - Jack Henry & Associates Inc at Morgan Stanley US Financials, Payments & CRE Conference

Question: James Foster - Morgan Stanley - Analyst : Got it. As a follow-up to that, do you think there's potential to change the growth profile of this complementary segment? Or do you still expect it to operate in the historical range? What's the historical range for that business? And what could, if anything, do you think move it up into a higher rate?

Question: James Foster - Morgan Stanley - Analyst : Got it. So let's talk about margins. Margin for -- I know this is an area that you've been spending a lot of time on in order to deliver more predictability and consistency to the shareholder base. So I have two questions unrelated to that. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JUNE 10, 2024 / 3:00PM, JKHY.OQ - Jack Henry & Associates Inc at Morgan Stanley US Financials, Payments & CRE Conference So my first question is with the ongoing transition to public cloud, Jack Henry is still running some of its own data centers given the residual on-prem mix. With the tech modernization strategy, are you envisioning any step-function changes in margins associated with that transition or will it continue to be fairly gradual?

Question: James Foster - Morgan Stanley - Analyst : Okay.

Question: James Foster - Morgan Stanley - Analyst : So quickly, you mentioned regulators not quite ready for public cloud for core. What's your guesstimate is to when we might start to see that be more palatable?

Question: James Foster - Morgan Stanley - Analyst : Yeah, it should be.

Question: James Foster - Morgan Stanley - Analyst : Got it. So let's go to my second margin question. How are you thinking about the steady-state margin potential of the business longer term?

Question: James Foster - Morgan Stanley - Analyst : Got it. So let's talk about free cash flow conversion. I know there have been quite a few developments recently. Just in terms of some of the tax treatment of development expenses. Last quarter you had outlined to pass one that Congress passes that legislation, which will result in a swift return back to 80% to 100% free cash flow conversion, or secondly, it would be a quote journey back to historical levels of free cash flow conversion. Any update there that we should be aware of?

Question: James Foster - Morgan Stanley - Analyst : Got it. Last couple minutes here. I want to touch on capital allocation and M&A, particularly historically, Jack Henry has been a very good acquirer of other companies, both in terms of the ability to integrate, get leverage on those businesses and just expand the overall offering of Jack Henry. Dave, on the most recent call sounded the most negative on potential M&A prospects that I've ever heard of or at least in quite some time. To the extent the deals remain hard to come by, how are you thinking about the relative trade-off between a sizable buyback versus allowing cash to build on the balance sheet until the right deals start to present themselves?

Question: James Foster - Morgan Stanley - Analyst : Got it. Well, that's all the time we have. Mimi, I appreciate you being here today.

Question: James Foster - Morgan Stanley - Analyst : Thank you very much. Reach out to us. Take care.