Jack Henry & Associates, Inc. Q1 FY2026 earnings call

• Financial Performance: Record first quarter results with non-GAAP revenue of $636 million, up 8.7% year-over-year. Non-GAAP operating margin was 27.2%, a 227 basis points expansion. - Sales Performance: 7 contracts signed to move clients to private cloud with 60% higher asset size of migrating clients over 12 months. 4 competitive core wins in Q1. Q1 deal mix was 44% new core sales and 56% renewals. - Client Conference: Record 2,651 clients at Jack Henry Connect, with 91 prospects from 30 banks and credit unions. - Acquisitions: Acquisition of Victor Technologies closed on September 30, integrating with existing systems and enhancing payment capabilities. - Product Updates: Completed stablecoin proof of concept, launched cloud-native Tap2Local merchant-acquiring solution and Jack Henry Rapid Transfers. Payments segment saw growth in faster payment solutions. Complementary segment had 38 new Financial Crimes Defender and faster payment module contracts, and Banno platform signed 18 new clients with 14.7 million registered users. - AI: Over 100 internal AI use cases developed to improve back-office efficiency.

Core segment: Non-GAAP revenue increased 6% on the quarter with operating margins increasing 114 basis points. Payments segment: Quarterly non-GAAP revenue increased 8% with 170 basis points of operating margin growth. Complementary segment: Quarterly non-GAAP revenue increased 9% with 75 basis points of margin expansion. Core segment benefits from private cloud trends and cost management. Payments segment driven by card-related services and faster payments growth. Complementary segment reflects digital solution demand and sales from new core wins and noncore financial institutions.

• Full year GAAP revenue guidance increased to 4.9% - 5.9%. - Non-GAAP revenue guidance increased to 6% - 7%. - Non-GAAP margin expansion guidance 30 - 50 basis points. - GAAP EPS guidance $6.38 - $6.49 per share, growth 2% - 4%. - Full year free cash flow conversion outlook 85% - 100%.

• Risks related to forward-looking statements involving uncertainties that could cause actual results to differ materially from expectations. - Competitive pressures in the core banking and fintech space, including potential impact from core consolidations by competitors. - Uncertainties around the pace of M&A activity and its impact on recurring revenue and core activity.

Q: Nice results here. We saw some solid margin expansion in the quarter. And as you mentioned, Mimi, R&D was down 1%. Can you talk about how sustainable this type of margin expansion is going forward? And maybe how margin could look for the remainder of the year by quarter?

A: Thanks for joining us this morning, Rayna, and your question. I think R&D has the same profile that you've seen in SG&A and other areas consistent with across our expense, which is the thoughtfulness in which we planned this year's budget being modestly conservative out the gate. We're being very disciplined around headcount increases while still investing for growth. So as we look to the remainder of the year, some of that is timing related. Some of that is things that we're expecting to kind of reverse, if you will, some benefits-related net personnel costs and the timing of some of the spending we have for projects. But overall, I would say there's consistency that's going to drive the full year margin expansion, which is our general control of spending, our limited head count growth for the year and efficiencies in AI.

Q: I was wondering if you could expand a little bit on the pricing and competitive environment out there. And in particular, there's been a lot of focus around some of the core consolidation happening at the competitors. Are you guys seeing an increased willingness to explore converting cores in the market? And how are you feeling about your chance of maybe shaking loose a couple of those opportunities?

A: Will, thanks for the question. I think we're not seeing anything more significant. I know, obviously, there were some recent announcements on collapsing the number of cores for one of the providers and things along that line. It's still early. I think our pipeline is still remains very significant. As I mentioned in my script, we've already seen some nice wins for the quarter. And so I anticipate that will continue to be at a fairly normal pace. I haven't seen anything out there that has seen any more intense competitive pressure than I would have said 6 months ago, though, at this point in time.

Q: I just wanted to maybe revisit the sales momentum here and the conversions into private cloud. So I think you said you signed 7 clients to convert to private cloud. You're at 77% today. So you're getting pretty high on the penetration rate there, which is clearly a positive for the revenue uplift. I guess what I'm ultimately getting at is, as you think about the strategy to increasingly sell outside the core, can you just maybe update us on where that progress is? I know you've got a lot of initiatives underway, but it would be helpful to kind of refresh that strategy here.

A: Sure. Thanks, Dan. Yes. So as I mentioned, we're still -- we're right at 77%. As we've talked about, we still see a good 5 to 6 years of continued progress at the numbers that we've been seeing based on -- over the last several years, we've been averaging between 35 and 45 of those migrations. We believe we're on track to do that again this year. As I did mention, some of those are larger customers just based on a lot of the larger customers are more reluctant at the time to make those changes. But to answer your question about outside the base, yes, so we are highly focused on all of the new Jack Henry platform components that we've built are all core agnostic. So every one of those have opportunities to be sold outside the Jack Henry base and creating opportunities for us to leverage larger opportunities. That's been something that we've talked about for the last several years. We had 2, we had a regional -- a very large regional and a super regional at our client conference in September, again, exploring the various opportunities there. We talked about Banno going outside the base. Our team will start selling that and having opportunities in January of '26. So we'll be out actively working, and we already have a couple of potential opportunities identified, but Banno will be something that will continue to create opportunities. And then everything we're building today in the platform even related to our SMB strategy. So the Tap2Local or the Rapid Transfers, we've created companion apps that will allow us to sell all of those to competing digital providers and allow them to utilize that technology and creating a consistent revenue stream for us as part of that. But we're -- obviously, we're launching first with our Banno clients and eventually, we'll be offering that more broadly out in the market. So it's going to create a continuous opportunity for us to connect with outside the base core opportunities as well as complementary and payment products. And by the way, Victor, the Victor acquisition will also allow us to do that, creating opportunities with some of the non-Jack Henry core clients as well.