Jack Henry & Associates Q2 2023 Earnings Call Transcript

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Provided by Quartr
February 8, 2023

Key Takeaways

  • Total revenue rose 2% on a GAAP basis (6% non-GAAP) in Q2, but full-year GAAP revenue growth was trimmed to 5.4%–5.8% due to a $20 million drop in deconversion fees and slower debit card volumes, with disciplined cost controls helping to mitigate the headwind.
  • Sales teams achieved a new quarterly record by winning 12 competitive core takeaways, migrating 15 existing core clients to private cloud, signing 12 new card processing clients and securing 36 contracts for the Banno digital suite.
  • Significant progress on the technology modernization strategy includes unbundling core processing modules on Google Cloud, beta testing real-time data streaming for payments and fraud detection and preparing to launch the public-cloud native Financial Crimes Defender platform.
  • Banno digital solutions now boast over 8.8 million registered users, top App Store ratings and more than 308 institutions under contract for the upcoming general release of the Banno Business platform.
  • Jack Henry signed a commitment letter with the Science Based Targets Initiative to set science-based climate targets, with a detailed low-carbon transition plan to be disclosed in its March sustainability report.
AI Generated. May Contain Errors.
Earnings Conference Call
Jack Henry & Associates Q2 2023
00:00 / 00:00

There are 15 speakers on the call.

Operator

Good morning, and welcome to the Jack Henry Second Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr.

Operator

Vance Harard, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning, and Thank you for joining us for the Jack Henry fiscal 2023 Second Quarter 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 these opening remarks, I will turn the call over to Dave for his thoughts about the state of our business, financial and sales performance for the quarter, industry comments And other key initiatives. After Dave concludes his comments, Mimi will provide additional commentary regarding the financial results And fiscal year 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 and A.

Speaker 1

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 ks 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.

Speaker 1

I will now turn the call over to Dave.

Speaker 2

Thank you, Vance, and good morning, everyone. Today, we're pleased to report another strong quarter of revenue and operating income growth. As always, I'd like to begin today by thanking our associates Thank you for all the hard work and commitment that went into producing those results for our Q2. For Q2 of fiscal 2023, Total revenue increased 2% for the quarter and increased 6% on a non GAAP basis. This variance was primarily due to a reduction in deconversion revenue, which I'll detail in a few minutes.

Speaker 2

Turning to the segments. We again had a solid quarter in the core segment of our business. Revenue was flat for the quarter, but increased by 6% on a non GAAP basis. Our Payments segment also performed well, posting a 3% increase in revenue this quarter and a 6% increase on a non GAAP basis. We had a very strong quarter on our complementary solutions businesses with a 4% increase in revenue this quarter and an 8% increase on a non GAAP basis.

Speaker 2

Yesterday's press release included revised guidance, which Mimi will outline in her comments. One of the key drivers behind this change in guidance was the actual and forecasted reduction in deconversion revenue for the year. As we disclosed yesterday, deconversion fees are down $20,000,000 year to date and this was the primary driver of the variance in GAAP versus non GAAP revenue As a reminder, we receive deconverting revenue when one of our clients is acquired by another institution and is required to pay us a fee to terminate their contract prior to the end date. I normally reference this as the revenue you don't want to see because it indicates we've lost a This lack of consolidation by financial institutions is also impacting our services revenue associated with convert and merge activities. Because of the impacts to bank stocks and valuations, M and A is down overall in the banking space and the Experts in the industry don't see any significant rebound for at least a couple of quarters.

Speaker 2

Of course, consolidation is outside of Jack Henry's control The other primary item impacting our guidance is the recent change in consumer spending behavior. Due to economic conditions, Consumer card usage is slowing and transactions are shifting from debit to credit. Our card processing business is significantly weighted to debit processing, so We are revising guidance to reflect what we believe to be a temporary economic trend. As I've said many times in the past, Our financial model is very resistant to significant swings resulting from changes in the overall economy, but we're not completely bulletproof. Despite these external factors, our primary businesses remain strong and continue to perform very well.

Speaker 2

As I mentioned in the press release, our sales teams again had an outstanding quarter with a number of notable wins. In fact, Q2 A new quarterly sales record for Jack Henry, breaking the record we set in the June quarter last year. In the second quarter, we inked 12 competitive core takeaways and an additional 15 deals to move existing in house core clients to our private cloud environment. December 30 was a particularly memorable day for us at Jack Henry as we signed 3 core We continue to see good success with our new card processing solution, Signing 12 new card processing clients this quarter. We also continue to see great success signing clients to our Banno digital suite With 36 new contracts in Q2.

Speaker 2

Speaking of our digital suite, our Banno Business solution is scheduled to go into general release next quarter. We already have 18 institutions live in early adopter With the feedback being extremely positive from those users. We have 308 clients under contract for this solution And we're positioned to bring them into full production at a very rapid pace once we achieve general availability. We are also continuing to implement new financial clients on the retail Banno platform at a similar pace to recent quarters. At the end of Q2, we surpassed 8 point 8,000,000 registered users on the platform and Banno continues to hold 1 of the highest consumer ratings in the App Store.

Speaker 2

Normally in January, I share with you the results of bank spending survey projections from the publications we follow closely. Unfortunately, this year, none of those major I have received a number of smaller surveys and we conducted our own informal survey at a banking CEO roundtable last month With the results being all relatively consistent, the average increase appears to be settling at around 7% for calendar 2023 with the most popular range being a 5% to 10% increase. I'll continue to watch for firm objective data and we'll share as it becomes available. As you may have noticed last month, we took a major step forward with our environmental efforts by signing a commitment letter indicating our intention to set science based climate targets With the Science Based Targets Initiative or SBTI, science based targets are aligned with the level of to meet the goals of the Paris Agreement to limit global warming to 1.5 degrees Celsius above pre industrial levels. Jack Henry will pursue validation for near term greenhouse gas emissions reduction targets through SBTI.

Speaker 2

This commitment follows extensive analysis and discussion and is supported by our low carbon transition plan, which outlines several mitigation tactics to reduce our greenhouse gas emissions. More information regarding this plan will be disclosed in our next sustainability report, which will be released on March 31 through the Investors site on jackhenry.com. As you will recall, it was on this call last year that we announced our new technology modernization strategy. We developed this multiyear strategy We are continuing to make great progress on the strategy's 4 main objectives. 1st, We're redefining the core processing system by unbundling services that traditionally would be in the core and building them as standalone modules on the public cloud.

Speaker 2

In September, we announced plans to build these services on the Google Cloud and we've been testing our wire processing and authorization management services modules On the Google Cloud since that time, we currently have 6 clients live in early adopter status with domestic wires and plan to offer general availability for this solution in July. We expect to launch the international wire solution for early adopters in April and expect that module to be generally available late in the 4th calendar quarter this year. 2nd, we're working to provide multiple data integration options utilizing our open philosophy and technology. Our newest offering in this area is real time data streaming, Simultaneous constant streaming of necessary data to all systems on the platform. We're currently in beta with real time data streaming, which is essential to support real time payments and fraud detection.

Speaker 2

We expect this functionality to go into live production later in this calendar year. Delivering industry leading capabilities across a single next generation platform is the 3rd objective. BANO is a key element in this part of the strategy, but we're working on several other additional solutions to build upon this commitment. As an example, in September, we added Payrails, a public cloud native digital payments platform to our suite of payment solutions. Additionally, this summer, we're launching Financial Crimes Defender, our next gen financial crimes platform with enhanced capabilities, including machine learning And artificial intelligence.

Speaker 2

This new fraud solution has been built entirely on our public cloud native platform. The last step in the strategy is to move from acting as a core processor to offering a full banking ecosystem. This includes our own capabilities plus access to leading Fintechs through a single platform that prioritizes openness, agility, speed and optionality. A year ago, I announced that we had more than 850 FinTech Providers in our ecosystem. Today, it's closer to 9 And the number continues to grow.

Speaker 2

We're also the only platform provider that has relationships with all 4 major financial data aggregators: Finicity, Plaid, Yodlee and Acoia. Through these companies, financial institutions can give account holders a complete financial picture in a safe, secure manner That eliminates screen scraping. We've seen strong interest in this strategy from both prospects and customers. Anecdotally, I can tell you that we are currently in conversations with a number of prospects who have indicated that the technology modernization strategy I just described is the primary driver for them to engage with Jack Henry to help develop their technology strategy for the future. Community and regional financial institutions are the lifeblood of Main Street America.

Speaker 2

Many of them, however, are at a crossroads. The personal service and experience they are known for is being disrupted by technology as nontraditional financial service providers Have entered the market and the way people bank has fundamentally changed, especially for the younger generation. As a well rounded financial technology company, Jack Henry is in a unique position to provide modern technology and services to help community and regional financial institutions capitalize on this opportunity and strengthen connections with their account holders. The key takeaway is that while we're successfully meeting the needs of our clients today, As shown by our performance results, we're also preparing them for the future. We're pleased with the progress we've made on this exciting strategy and we'll share more updates At our Investor Day in May.

Speaker 2

As we begin the second half of our fiscal year, our sales pipeline is very robust and we continue to be optimistic about Our ability to deliver outstanding service to our clients, our ability to expand the client relationships, The spending environment and our long term prospects for success. With that, I'll turn it over to Mimi for some detail on the numbers.

Speaker 3

Thanks, Dave. Good morning, everyone. As highlighted by Dave's comments, Jack Henry had a successful second quarter, and I will discuss the details driving those results. Total revenue was up 2% for the quarter on a GAAP basis and solidly up 6% on a non GAAP basis. Fiscal year to date GAAP revenue was up 5% and non GAAP revenue increased 7%.

Speaker 3

So let's jump into the details. On a GAAP basis, services and support revenue decreased 2% in the 2nd quarter, but increased 3% year to date. Services and support were negatively impacted as de conversion revenue decreased $21,000,000 for the quarter, $20,000,000 year to date. This is consistent with the broader market lack of acquisition activity in our space. We now anticipate approximately $15,000,000 in deconversion revenue this fiscal year.

Speaker 3

However, forecasting deconversion revenue remains Challenging given the limited advance notice and the general uncertain nature of M and A. Our private and public Cloud offerings showed robust growth this quarter, growing 11% 10% year to date. Product delivery and services decreased 26% in the quarter, impacted by lower deconversion fees and convert merge activity, offset by slightly higher implementation related revenue. As a reminder, user group conference related to our major customer conference Shifted into Q1 this year, contributing to the year over year Q2 revenue decline. Year to date, Product delivery and services revenue decreased 11%, influenced by similar drivers as the quarter.

Speaker 3

On a non GAAP basis, services and support revenue grew 6% for the quarter and 7% year to date, which serves to highlight our consistent fundamental business strengths. Processing revenue increased 9% On a GAAP basis for both the quarter year to date. On a non GAAP basis, the growth was 7% for the quarter and 8% year to date. The increases were largely driven by higher card volumes despite a slight decrease in the rate of growth. Additionally, digital revenue continues to show rapid growth led by robust demand for our Banno digital platform.

Speaker 3

Now turning to costs. Cost of revenue was up 8% for both the quarter year to date. Quarterly drivers included increased card Processing costs consistent with card revenue growth, higher personnel costs and amortization expense. These drivers are consistent across our year to date results. Research and development expense increased 22% for the quarter, mostly due to higher personnel costs and licensing fees.

Speaker 3

Year to date, these expenses increased 23% based on the same factors. SG and A rose 2%, driven by increases in personnel, travel, professional services, partly offset by the gain on sale of assets. Year to date, the increase was 7% influenced by similar drivers. The quarter and the remainder of the year benefit from disciplined focus and actions involving facility rationalization, Headcount and Travel Control, Procurement Wins and Other Expense Management. These collective efforts help to offset inflationary pressures and mitigate lower revenue.

Speaker 3

As we have previously mentioned, Some compensation and travel related cost increases result from the lower cost comparisons from our first half of fiscal twenty twenty two. Due to previously mentioned management rigor on cost controls, we concluded Q2 with strong operational results. Despite net income declining 16%, primarily due to lower deconversion fees and increased interest expense, The quarter saw a fully diluted earnings per share of $1 tab. Our GAAP and non GAAP results The quarter and year to date are consistent with internal expectations and set us up for a strong finish to fiscal year 2023. As a reminder, for transparency, the impact from the gain on the sale of assets, including this quarter's sale of an Albuquerque property Yielding a $1,200,000 gain, the Payrails acquisition and deconversion fees are shown as part of non GAAP adjustments in the press release.

Speaker 3

Turning our attention to cash flow. Operating cash flow was $191,000,000 for the year to date, Down from $197,000,000 for the same period last year, essentially due to lower deconversion revenue. Total R and D investment remains slightly elevated, but should normalize by next fiscal year. Free cash flow, which is operating cash flow less CapEx and Cap Software, plus proceeds from the sale of assets With $119,000,000 We remain committed to maintaining ample operating liquidity, reinvesting for growth, Evaluating financially sound strategic acquisitions, paying dividends and opportunistically repurchasing our stock. This consistent dedication to value creation resulted in a trailing 12 month return on invested capital of 21.4%.

Speaker 3

Focusing ahead, let me discuss updated guidance. The press release included revised GAAP and non GAAP full year guidance. The GAAP guidance remains inclusive of Payrail's acquisition, gain on asset sales and deconversion fees. We expect the trends impacting Q2 results to continue for the remainder of the fiscal year, impacting both GAAP and non GAAP results. Most significantly, assuming minimal industry consolidation, deconversion fees will likely remain muted at approximately $15,000,000 for the Fiscal year, representing a $20,000,000 decrease from our previous guidance.

Speaker 3

Secondly, Languishing Bank M and A related consolidation negatively impacted our outlook for our convertmerge services revenue for the fiscal year. As a reminder, this revenue is driven by our clients acquiring and implementing Jack Henry Solutions at their newly purchased institution. Finally, in line with announced payment network activity, we're experiencing a slower rate of growth than anticipated For debit transaction volumes in our card processing business, primarily driven by a combination of lower consumer spending and the spending shift to credit cards. As a reminder, card processing is approximately 22% of our total revenue and as Dave highlighted, More heavily weighted to debit card business. As a result of these impacts, GAAP revenue growth for fiscal 2023 is now expected 5.4% to 5.8%.

Speaker 3

Guidance for non GAAP revenue growth is now 7% to 7.3%. Outlook's full year GAAP operating margin is now approximately 22.9%, which is negatively impacted by the lower deconversion fees and is inclusive of the impact from both gain on sales assets and the Payrails acquisition. Full year non GAAP operating margin guidance due to strong management expense control is now expected to deliver slightly margin improvement For the fiscal year compared to previous guidance of flat to slightly down, the management team remains focused on returning to margin expansion in fiscal 2024. Full year GAAP EPS guidance is now a range of $4.79 to $4.83 The midpoint of $4.81 is an $0.11 decrease from previous guidance, even though those lower deconversion fees drives a $0.20 reduction. The headwind caused by lower deconversion fees is mitigated by the team's collaborative and disciplined cost control, Gain on sale of assets and lower net income.

Speaker 3

We expect the remainder of fiscal year 2023 Quarterly non GAAP revenue growth momentum to deliver increases in both in the 3rd and 4th quarters to achieve our revised full year guidance targets. We anticipate similar growth patterns for non GAAP Operating margin delivering the revised increased full year guidance. So in closing, we delivered another quarter of strong operational and and remain solidly optimistic about the success of our business model. We thank all of our investors for their continued confidence in Jack Henry. Keith, will you please open the call for questions?

Operator

Yes. And just to thank you. We will now begin the question and answer And the first question comes from Vasu Govil with KBW.

Speaker 4

Hi, thank you for taking my questions. I guess the first question on just the non GAAP revenue weakness. It seems like most of that is basically related to the payment segment with more Shift from debit to credit spending, any changes anticipated in any other segments based on what you were thinking before? And then Dave, just for you, any update on macro? I know you're sort of still seeing good momentum in new client signings, but Has anything changed in the quarter in terms of bank decision making for new deals, whether it's taking some more time to close deals or the Size of deals that you are seeing, just any update there would be super helpful.

Speaker 2

I'll take the second part first, Vasu, and then I'll turn it over to Mimi. As far As the overall macro environment, I would say things are continuing to look very strong. Our pipeline, I just mentioned in my Prepared remarks that we set another sales record in Q2, which I was not expecting given the huge performance we saw in Q4, the June quarter last year. So to set another overall sales performance record was a surprise to me, but the environment is very strong. The pipeline is larger than it's ever been.

Speaker 2

I would say that on the core side of the business, we are trending larger. So I highlighted, we signed 3 multi $1,000,000,000 institutions on December 30 alone, Core takeaways on December 30th. And I think if you look at the core side of the business, the accounts that we're currently involved in are definitely trending Bigger institutions coming to Jack Henry looking to make a change. I certainly believe part of that's driven by the technology modernization strategy. They're looking for that Partner that will really help them modernize.

Speaker 2

But I think the other driver for that is just the reputation Jack Henry has for delivering great technology And great service. So I would characterize the overall environment for us as far as sales as very strong right now. And as I said in my prepared remarks, although we don't have any of the big surveys that I can quote because nobody has published results, I have a whole bunch of More anecdotal bits of feedback and that CEO roundtable that I hosted 2 weeks ago in Phoenix And there the kind of average spend increase for calendar 2023 and this is them knowing that their budgets are in place for 2023 already. So it's them quoting to me what they have planned. The average was around 7% as far as an expected spend increase.

Speaker 2

And by the way, this CEO forum that I hosted was not just Jack Henry core customers. This was a variety of CEOs from a variety who are running a variety of different solutions. So that would be my comment in the overall and I'll turn over Mimi to answer your first

Speaker 3

Thanks, Dassie, for the question. I would say on the non GAAP revenue change, yes, I think your Rate in terms of predominantly is around card, with the based on that we were optimistic In terms of now the slowing consumer is a little bit slower than we anticipated. And so I think that's led to A modest deceleration of growth, but still an attractive growth rate, I would call out. And so, it's predominantly around cards.

Speaker 2

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

Speaker 4

That's super helpful. And if I may ask a follow-up on Banno. I know there are a number of new players out there that are trying So digital banking and to bank some of them who might be your core customers. But I was just curious when you go to sell Venu and it's a competitive Like what sort of win rate do you see typically for your product? And then have you started to sell BANO outside of your core base of clients already?

Speaker 4

And if not, what's the roadmap for that? Your core base of clients already and if not, what's the roadmap for that?

Speaker 2

Yes. So I don't think, Vasu, So I can quote you accurately on what our win rate is. I mean, I think pretty much every deal where we're selling digital banking is a competitive deal. So I couldn't quote you an accurate Percentage as far as what our win rate is, I just know it's very high because Vanno has this outstanding reputation. As far as selling outside the base, so we're From a technology point of view, we're prepared to do that right now.

Speaker 2

It's a strategy point of view that has kind of prompted us to back off a little bit and I think I talked about this on a previous call. We see opportunities outside the base, As I said, from a technical point of view, ready to deliver outside the base, but we have learned that for some of our competitors, us Selling into their base, they perceive to be a real positive, a real win because it gives them a better solution overall. And so we're weighing The opportunity for us to sell Banno versus the potential negative for us in selling the core side, If a competitor says, oh my gosh, we finally have Banno in our base now, so our customers won't be as likely to leave us on the core side of the business, It's not necessarily a good thing for Jack Henry. So we're being very strategic about how we position this and which core bases we go after. And I'd rather on the side of making sure the strategy is right and rather than just chasing after a few dollars that might damage us long term from a strategic point of view.

Speaker 4

Understood. That makes sense. Thank you very much.

Operator

Certainly. Thank you. And the next question comes from David Togut with Evercore ISI.

Speaker 5

Thank you. Good morning. Dave, given you completed the transition of processing over to First Data, At least using their back end for debit and credit card processing. Are you able to leverage their capability at all to build out your credit card processing Capacity to offset some of the shift from debit to credit?

Speaker 2

Yes, certainly. We're able to use that platform and we already have Customers in production on the credit side and customers that we've signed. But as I've highlighted in another setting, it's not A matter of going to a customer and saying, hey, we have credit now, you want to sign up. They have if they're in the credit space, they already have an agreement with somebody. And so normally they need to Allow that agreement to anniversary, you also have to buy the contract out.

Speaker 2

The other thing that I've been pretty transparent about on these calls is we've been building up our Expertise in the credit space. Credit is a different business from debit. We need to literally hire people to sell, hire people to service That side of the business and so we've been building up that capability over time. So it's a combination of those things that has It'll be kind of a slow role for us as far as being in the credit space, but as far as being positioned today to offer credit when a customer is ready to get into the credit We have the programs, we have the sales organization, we have the technical abilities to deliver. And so it's a matter of us finding those customers and converting them.

Speaker 5

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

Speaker 2

Yes, we do. And so and we published that for our clients. We have a roadmap out on our customer portal. So our clients can go and see what the roadmap looks like. And so we're being very transparent with our clients and with prospects.

Speaker 2

Initially, I had hoped to publish that for everybody to see, But we've realized that again competitors are very, very eager to see what Jack Henry is doing. They're trying to figure out how And so we backed off on being quite that transparent, but we're being very transparent with our existing customers and with prospects who are looking at tech modernization help define their strategy for the future.

Speaker 5

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

Speaker 2

Yes. I'll so I'm going to turn it over to Greg here just to give you a couple of Again, we're not going to go into great detail at this point, but Greg can give you a couple of highlights of what to expect. Now I will point out that in my prepared remarks here, highlighted the fact that we have some of these things rolling out. We have our domestic wire solution coming into full production here in just a couple of months. We have our international wire solution coming into full production later this year.

Speaker 2

So I've already highlighted a few of those things, but I'll turn it over to Greg for a little more color.

Speaker 6

Yes. There's a few other things we're doing. So we basically have planned out for the next 3 years. So we have various targets that we've assessed. But Things around authorization management is a big one.

Speaker 6

Dave actually mentioned that as some of the testing that we're doing already in the Google Cloud. That's a big one. There's a lot of components that we're doing with real time to help us with some solutions that we're going to Look to roll out over the next 18 months or so that we're not prepared to talk about publicly, but components of that. And then of course a lot of the other key modules, general ledger itself, other components that will be done. But each of those is Already bracketed by year for what we plan to get done over the next 3 years.

Speaker 5

Got it. And just finally, The 3 big core wins you signed on December 30, Dave, what were the key to those wins? Like what capability drove those wins and how big were those banks? Were they above $10,000,000,000 in assets?

Speaker 2

None of them were above $10,000,000,000 My recollection is they were mostly been in the 3 ish range, 3 to 5 somewhere in there. And I'm not I'm just doing that off the top of my head, but somewhere in that range for those customers. And I think it's the same story that you've heard from us time and time again, Dave. It's a combination of Great technology, a great reputation for service, a very focused strategy. So if you come to do business with Jack Henry, you know which Core on the core side, we're going to be supporting for the go forward.

Speaker 2

There's no question about what our strategy is regarding core. So I think it's all those things rolled together plus this reputation we have for openness. And today, Most banks and credit unions want to connect to FinTech solutions and they want a partner who embraces that idea of open connectivity. And so you roll all those things together, it's the same things that we've been talking about for a long time. Those are the primary drivers for this in these wins.

Speaker 5

Understood. Thanks very much. Certainly.

Operator

Thank you. And the next question comes from Kartik Mehta with Northcoast Research.

Speaker 7

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

Speaker 2

Yes. We actually have a report, Kartik, I look at every month that shows the number of we refer to it as slots. So the number of conversion slots, The number of conversions that we're prepared to do in any given quarter and it shows how many of those Slots are already booked, how many of them are being held because there's a deal that's in process where a customer has said, hey, I want to convert in 9 months as opposed to 18 months And then how many are open? And our backlog on the core side is well into the next fiscal year as far as those slots Being held. Now once in a while when I say things like that, people will say, well, hey, you ought to just go hire more people and speed that up.

Speaker 2

The thing you have to remember is this isn't about Hiring more people and we can do a conversion in a month. Conversion when you're doing an entire core conversion, normally we plan for 12 months And that's not because Jack Henry is so slow, we can't do it any faster. It's because there is so much to be absorbed on the customer side. They're trying to run the Bank or Credit Union and at the same time, They're learning all new systems and all new processes and they're validating data to be converted and it's just a very large Massive project. And so we manage our backlog really well.

Speaker 2

I think our conversion teams manage the backlog well. We do a similar exercise for every other product that we have. The core backlog is the one that normally gets a lot of attention, but every product we have, we have That exercise and that reporting and so we can staff up and staff down as we need to generally fairly easily. Certainly, there are some roles that are very specialized and you can't simply move people from one group and not to another And you can't simply move people from one group to another based on demand. But generally, we can do that pretty easily and manage our backlog effectively.

Speaker 7

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

Speaker 6

Yes, Kartik, this is Greg. I'll take that one. So a couple of things. So even in the Payrails acquisition, we have a fraud module that we're actually rolling out with our open loop P2P. So again, it provides an extra layer of fraud protection for that.

Speaker 6

Actually, there's a unlike Zelle, which It's irrevocable and a couple of the other faster payment solutions. There's an option as when the receiver gets it to Designate how they want to receive the payment and as part of that process, we have an extra kind of fraud layer there. The other thing is Dave mentioned our Financial

Speaker 2

Crimes Defender product. That one is

Speaker 6

going to be specifically tailored Crimes Defender product that one is going to be specifically tailored for the opportunity to help with both Zelle fraud and other because it's got real time components to it. And so those will be 2 things. We're actually in beta right now With the Financial Crimes Defender product and it is getting significantly really good fanfare from our clients in the beta process. So we're pretty excited, but those are just 2 of several other things. We actually have a committee here at Jack Henry that we kind of aggregate all of our Kind of defense projects or fraud products and we have a team that is looking to kind of consolidate some of that and drive The right strategy for our customers.

Speaker 7

Thanks, Greg. I appreciate it. Thank you.

Operator

Thank you. And the next question is from John Davis with Raymond James.

Speaker 8

Hey, good morning guys. Mimi, just on the updated EPS guide, It looks like the better margin on a non GAAP basis kind of offset the little bit weaker revenue. And then the deconversion fees looks like it'd be about 0.20 Hit EPS, but you only took down the midpoint by $0.11 So just curious, is there tax rate or anything below the line or anything else that drives that kind of smaller EPS hit?

Speaker 3

Yes. Thanks for the question, J. D. You're right in terms of the deconversion revenue driving about $0.20 If it were to stand on its own, a couple of things. 1, to just follow on to my prepared remarks, the disciplined focus on expense controls in the second half is driving part of that upside.

Speaker 3

Additionally, we are seeing because of the higher interest rates, We are seeing some positivity from an interest income perspective that's helping as well. And then on a GAAP basis, you have The Albuquerque sale, as well. So that's just not a lot of changes on the tax rate, but just between management control And a little bit of interest rate savings, so I would say are the primary drivers of that change.

Speaker 2

I'm glad you called that out though, J. D, because I think As Mimi just detailed, there are several things in there, but the primary driver of that difference between the $0.20 and the 0.11 Management expense control. We have a team here who has really dug in to make sure that we're doing the right things on the expense side. And so If it were just for the slowdown in deconversion revenue, we'd see a $0.20 hit, but the team has really put in the extra effort to make sure that we're doing the right things And I think that's a significant call out for the management team at Jack Henry.

Speaker 8

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

Speaker 3

Yes. It's a good question, J. D. I mean, I would say and similar to our comments last quarter, that the first half is slower and we see a pickup as the year goes on, Both from a revenue with Q2 expected to have been our lowest quarter and growing as the year continues. So I wouldn't say that there's a dramatic difference between 3Q and Q4, but just the second half favorability versus first half.

Speaker 8

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

Speaker 2

Yes, that type of detail is not something that we've disclosed. I think the best way for us For you all to track what's happening in our business is just the overall macro environment kind of following what's happening in the overall macro environment. This is not unique Jack Henry, this is what's happening overall. It's consistent with what's been reported by the major card vendors, Mastercard and Visa. And I think that's the best way to kind of anticipate what's happening at Jack Henry is what's happening overall in the industry because we follow the industry when it comes to Things like debit volume and any kind of shift between debit and credit.

Speaker 8

Okay. I'm going to sneak one last one in here. Free cash flow conversion, trailing 12 months is Down a little bit relative to history for Jack, somewhere in the 80s versus the 100% or so target. Any thoughts there on timing? Are you still comfortable with getting back to 100 For the full year for free cash flow conversion?

Speaker 3

Yes. I think you're right, J. D. In terms to look at it on a longer cycle, I wouldn't recommend looking at it on Quarter, but rather on a year to date. And so on a Q1 because of the timing of Q1 versus Q2, year to date This year, we're about $119,000,000 versus prior year $96,000,000 That's with asset sales without Pretty comparable.

Speaker 3

If you would adjust for deconversion revenue, we'd be pretty comparable on a 6 month basis. So, I think all in all, I think Not a lot to kind of call out for the second half there. I think trends will kind of continue to normalize.

Speaker 9

Okay. Thanks.

Operator

Thank you. And the next question comes from Ken Zukastian with Autonomous Research.

Speaker 10

Hi, good morning. This is Ben Vargo on for Ken. Thank you for taking my questions. So firstly, I wanted to ask about payrolls. It looks like the asset generated about $2,500,000 of revenue in the 2nd quarter and you're guiding to $12,000,000 for the year.

Speaker 10

So I would love to get an update on The performance in the quarter and kind of what drives the assumption behind the in place step up in the second half?

Speaker 6

Yes. So from a sales perspective, we're starting to really see some nice wins, a little bit slower than we had I hope to kind of start out the 1st few months, but we're starting to pick that up. We're also through the integration efforts that we've been doing, we're able to sell Some separate modules, so some of those components that we bought from Payrails, we can actually sell into our existing Ipay business. So the open loop P2P that we mentioned, the A2A components and even the fraud module, we're able to sell. So we're starting to get that geared up.

Speaker 6

We're completing some integration. So we're pretty bullish that we're going to have an opportunity to continue To sell into the Ipay space as well as what we have in the prospect list for the Payrails customers pre acquisition and post.

Speaker 10

Got it. That makes sense. And secondly, just as we think about your guidance, how should we expect the updated Targets to really flow through the segment results in 3Q and 4Q. Is it expected to spread out evenly? Or where are you expecting the biggest impact relative to the prior guide?

Speaker 3

I can take that one, Ben. So I would say, year to date trends that we've seen, Core being up about 6%, driven mostly by cloud, strength payments up about 7% growth and complementary about 8%. For the full year and that's on a non GAAP basis. For the full year, we're seeing some consistency in those trends. So, I would say particularly around Core and payments consistently full year versus kind of year to date.

Speaker 3

And on complementary, I think growing slightly in the second half to kind of land us up a little bit there. So that's kind of the direction I would call out.

Speaker 10

Got it. Thank you so much for taking my questions.

Speaker 3

Of course.

Operator

Thank you. And the next question comes from Rayna Kumar with UBS.

Speaker 11

Good morning. This is Aditya Kulkarni filling in for Rayna Kumar. I guess to start, I appreciate the details on the Tech Modern strategy, but can you touch on how this Is progressing and particularly if there are any notable developments on this front within the payments business since the acquisition of Payrail? And then I have a follow-up.

Speaker 2

So Payrails is part of the strategy. The idea was That by acquiring Payrails, we acquire a public cloud native bill pay and overall payments platform that does P2P account to account and business Business payments and so acquiring Payrails was to kind of fill that need for a public cloud native Payments platform, our choices were to essentially rewrite iPay and add functionality to iPay or go acquire That was already public cloud native and integrated into the solution. So as Greg just highlighted, payrolls It's up and running. The integration work is being completed, but not much left to do as far as integrating into the Rest of the solution in the public cloud environment that we've created. So it's progressing beautifully as far as I'm concerned from a technology point of view.

Speaker 11

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

Speaker 2

Well, at this point, we're continuing to implement CPI escalators. So I stressed Two calls ago, I think, that's not a one and done thing at Jack Henry. We don't do that at one time and then we're done doing that. As contracts come up for renewal, those CPI escalators are implemented for those customers and we're continuing to do that. So until we see some Significant change in the overall economy.

Speaker 2

We are going to continue to implement those changes to the level that we think is appropriate and that our customers are expecting. We'll continue to implement CPI escalators. We just did another batch last week. And so this is not something that We're kind of evaluating as a point in time that we're going to stop or that we're going to do something different. We're continuing to do The activities that we've been doing and we'll do that until we see some change in the overall economy that warrants a change in our practice.

Speaker 3

The only add on I would say there is it's quite early from a fiscal 2024. We haven't even started Budget cycle planning, so in terms of being able to indicate utilization and for next year, I think it's premature. I would say we're not reliant on that as a core strategy of our growth though.

Speaker 11

Great. Thank you.

Operator

Thank you. And the next question comes from James Westat with Morgan Stanley.

Speaker 12

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

Speaker 12

And How does that give you a what does that do for your sales and sales cycle, etcetera, if that is?

Speaker 2

Yes, that's a really interesting topic, James, and I could probably talk for about 2 hours on this one. I won't, but I could. So What's happening right now, so there are a couple of competing forces here when it comes to talking about that. First off, you have A real desire among banks and credit unions to continue to look for best of breed solutions. It's why we have so many best of breed products in the Jack It was the whole basis for the ProfitStars initiative that we ran until we just changed our branding here.

Speaker 2

We still have all those solutions. We still have that strategy. We still Salesforce that only calls on customers outside the Jack Henry core base, that is still a wonderful business for Jack Henry because there are those customers who demand and Best of breed solutions to connect into their core. At the same time, you have regulators that are pushing pretty hard on those same Customers to say you shouldn't be trying to manage so many vendors. You're introducing more risk into your environment if you have so many different vendor partnerships.

Speaker 2

And so part of our strategy has been we can do both. We can be the best of breed provider for somebody who's not running a Jack Henry core. They limit the number of vendors they work with by working with Jack Henry on non core solutions because we have such a broad suite of non core solutions. So we're a positive in that sense to those vendors who or for those customers who are looking to do best of breed but limit the number of vendors that they're working with. But again, there is this real push because of the disruptive factors or disruptive forces That are happening in the banking space in general, there is this real push among bankers to find those FinTechy solutions, those best of breed solutions to offer to their clients.

Speaker 2

And so it's that balancing act, but it's something that we've been watching for quite some time. I feel strongly that Jack Henry is really well positioned to serve both ends of that spectrum and as part of the reason why we continue to look for some of those best of breed solutions to acquire like Payrails so that we can continue to be a force among those customers looking for best of breed.

Speaker 12

Got it. And I want to ask also, I guess, A more specific product related question and that's related to FedNow. Given how close you are to FedNow, I was hoping you could Give us an idea of the general readiness and implementation capabilities that the regional community banks that you work with Have to implement that and start to use FedNow. And I guess on a high level, What's your take on the timeline on how JJ Pay Center is positioned to accommodate the rollout? Thanks.

Speaker 6

Hey, James, this is Greg. I'll take that one. So a couple of things. So one, we are positioned to be the 1st processor live starting in July. So we've been working with the Fed for over 2 years directly on kind of preparedness for that.

Speaker 6

So we will be launching, it looks like Somewhere between 2530 institutions will be part of our initial launch. So the interest level with the community institutions is very high. Part of the reason why is that the clearinghouse is owned by the larger banks. And so there's always been a little bit Of a concern about doing business with the larger banks, but with the Fed, the smaller community banks are very 60% of the clearinghouse institutions are Jack Henry institutions today. If you look at who's live, it was about 60% are Jack Henry.

Speaker 6

So we will be the 1st processor going live with the FedNow product in this summer.

Speaker 12

Great. Thanks for that.

Operator

Thank you. And the next question comes from Chris Kennedy with William Blair.

Speaker 9

Good morning. Thanks for taking the question. I know credit is a small percentage of your overall business today, but Can you talk about the agent program that you guys launched in January and how meaningful that could be?

Speaker 6

Yes, this is Greg. I'll take that one as well. So we did just launch it. We have 3 customers that are in some type of pilot with us right now, so since we just Got it going. But what we really believe is going to happen is that the smaller community institutions that were Had credit programs or wanted to be part of credit programs, they didn't have the staffing or expertise to handle the full service solution.

Speaker 6

So just like Dave mentioned that we were gearing up and we brought in people to help us with it. They didn't have the resources as well. So we really believe the agent program is going to be a nice opportunity for more folks to take advantage of a credit offering And the way we position the solution set is that at some point in time, if they would like to actually move to a full service Solution, we will let them take that portfolio with them. So that's also pretty advantageous. So again, more to come on that, but we do believe that there'll be more Take in the agent program then maybe especially in the smaller community institution space.

Speaker 9

Great, very helpful. And then just a follow-up on pay rails. It's a little bit slower than initially expected, but, you still anticipating it to be accretive next year, the dilution going away?

Speaker 6

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

Speaker 9

Great. Thanks a lot.

Operator

Thank you. And the next question comes from Dave Koenig with Baird.

Speaker 13

Yes. Hey, guys. Thank you. And I guess, first of all, the non GAAP revenue, I know you took down the year by 20 25,000,000 and you walked through that, but EBIT, you mentioned too is still non GAAP EBIT still stable, meaning you're taking the $20,000,000 to $25,000,000 of costs out with Cost controls. I guess I'm wondering where are you taking costs out?

Speaker 13

And then is that sustainable into next year? Or will some of that just Flex back up as you grow into next year?

Speaker 3

So Dave, I think that's a great question. I think it's a combination of factors. I think the disciplined focus, as Dave mentioned previously, we look on Every headcount renewal, every ask on a like a roll by roll, there are some more postponing, there's some more just kind of eliminating completely. Some may dribble back in next year. We're making kind of mindful choices.

Speaker 3

Travel is another example where We are just kind of being disciplined about the amount of travel, but that may not be a structural kind of long term. So I suspect some of that might come back, but then there's other factors,

Speaker 6

including performance management and other things that are that Will help us this year. This is Greg. I'll add one piece. We have a very strong focus on process automation here, Not only tools, but just in people. So about 25% of our staff is really certified In some level of what we call CATA in the classroom.

Speaker 6

And so as part of that, we've been driving a lot of operational savings And some of the headcount reductions as part of our initiatives to be better automated in various things that we do. So that's also another contributing factor.

Speaker 2

And that's something that will go on forever at Jack Henry, Dave. I think the key point there is that what Greg just highlighted, that isn't a one and done exercise. That's something We're trying to ensure is embedded in our culture going forward. We'll continue to look for those opportunities always.

Speaker 13

Got you. Thank you. And maybe just a follow-up, I know Payrails, I know the year, is supposed to be $12,000,000 and Q2 was like $2,600,000 or something, but the rest of the year needs to be $4,200,000 per quarter to get to the full year. And I'm wondering why does Step up from 2.6 up to 4.2 per quarter the rest of the year. Is there something seasonal, etcetera?

Speaker 6

Yes, there are a couple of decent sized deals out there that we're working on and feeling pretty good about. So that's part of it. And again, it's also getting these add on solutions, what we call add on solutions to the iPay business and moving those on and that's really where a lot of that is

Speaker 5

baked. Got you. Thank you.

Speaker 6

You're welcome.

Operator

Thank you. And the next question comes from Dominic Gabriel with Oppenheimer.

Speaker 14

Hey, guys. Hey, everybody. Thank you for taking my question. Could you just talk about the demand for and forgive me, I missed the beginning of the call. Can you just talk about the demand Jack Henry Kaur and the sentiment around the tech modernization and uptake of interest in your conversations with potential new and existing clients versus Clients versus conversations say 6 months ago?

Speaker 2

Yes. So it's becoming a A significant part of many of the conversations, so I highlighted at the beginning of the call, Dominic, that we signed 12 new core deals In the quarter, the significant call out that I made there was 3 of them were multibillion dollar institutions that all signed on December 30. So December 30 was kind of a fun day around here. But the other thing that I've talked about already on the call is the fact that we have larger Institutions, I think overall demand is moving larger, and I think some of that is definitely being driven by the technology modernization story. So we have it's become a Part of most conversations with core prospects is not necessarily part of the conversation with people who are not looking to bring their core to Jack Henry, but for core prospects, It certainly is a part of the conversation usually and we are trending up as far as the size of customers that are Coming to Jack Henry, wanting to talk about tech modernization because they've been looking for that company that will help them develop a strategy in the future that gets them to the public cloud.

Speaker 2

And it's a more, I think, rational strategy about how you do the core side of the business and tie in FinTech solutions, complementary solutions into that Experience for the customers. So, conversations have been great. I personally have been involved in a lot of them because as I've stressed before, when it's a larger institution and the CEO wants to be in the conversation, I am normally involved in those and it's pretty fun right now.

Speaker 14

Great, great. And I actually had one of a really large card provider admit to me that they just can't keep up with the Investment that's being provided to modernize these tech stacks with you and some of your largest peers, so they made a switch to do If I just think about the complementary growth And kind of how it slowed a little bit and then at the comments around the second half, do you and also the conversion fee expectations,

Operator

do you think

Speaker 14

that Some of that would suggest that there is some level of tech spend retrenching at some of the FIs versus previously as they Kind of look at the macro outlook and try to hold on to the cash that they have. Do you think that's fair?

Speaker 2

Well, so what I talked about in the early part of the call is we don't have any of the major surveys that I can quote to you this year, but I have a number of smaller surveys with smaller sample sizes and then I hosted the CEO roundtable discussion just 2 weeks ago And these were CEOs of larger institutions, Jack Henry Kaur and Knott. So it was a variety of CEOs and kind of the overall feel. And these are Settled in at around 7%, their expected increase for 2023 and that's in line with what we're seeing in the sales organization. The sales The sales pipeline is very robust, larger than it's ever been. So I don't see any slowdown or Jenny, kind of pull back when it comes to the commitment that folks in our space have on continuing to spend in the technology area.

Speaker 14

Great. Sorry, I missed that commentary. Maybe just one last one. Have you seen the pace of out just from that further Beginning comment I made about a large FI outsourcing, are you seeing more higher pace of outsourcing than you have in the past, versus say like 6 months ago with client willingness to outsource their tech capabilities, is that Speeding up or do you think it's fairly stable in the last few years, the willingness?

Speaker 2

I'd say yes, I'd say it's pretty stable. It's I have described it before as a religious conversation. When you talk to a bank or credit union, they either believe in being in house With either everything or some things or they believe in outsourcing and they just have this kind of ingrained belief. And normally, It requires some driver that has nothing to do with Jack Henry to get them to talk about outsourcing. So it might be that they've lost somebody in their tech group They were very dependent on and now they and they can't hire a replacement.

Speaker 2

It might be that the regulators are giving them pressuring them because they're trying to do things that they maybe shouldn't be doing themselves. It might be a change in leadership at the institution and this new CEO comes in and says, I don't know why you guys are doing this yourselves. We really ought to So it's some kind of driver normally that's external to Jack Henry that prompts them to bring their business Into an outsourced environment, and I don't think anything has changed in that regard in the past 6 months or even in the past 6 years.

Speaker 14

Okay, great. Well, thank you so much for taking all my questions.

Speaker 2

Certainly.

Operator

Thank you. This concludes our question and answer session. I'd now like to turn the conference back over to management for any closing comments.

Speaker 1

Thank you, Keith. We have additional investor engagement opportunities for management participation at multiple investor conferences and non deal roadshows over the next month. Additionally, please save the date as our Annual Investor Day will be held in Denver, Colorado on the afternoon of Monday, May 15. We are pleased with the results from our operations and remain enthusiastic and focused on our future. We thank all Jack Henry associates for their efforts that produce these results.

Speaker 1

Thank you for joining us today. And Keith, will you please provide the replay number?

Operator

Yes. Thank you. The replay number for today's call is 877344

Speaker 12

7,529

Operator

and the access code is 4,701,915. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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