Jack Henry & Associates, Inc. (JKHY) Q1 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary indicates strong financial performance with positive growth metrics and strategic initiatives. The Q&A reveals optimism about new product launches and market expansion, despite some pricing headwinds. The stable guidance and high retention rates further support a positive outlook. Although immediate impacts of new initiatives may not offset current challenges, the long-term growth potential and high customer demand are promising. Therefore, the overall sentiment is positive, suggesting a likely stock price increase over the next two weeks.

Key Financial Performance

Non-GAAP Revenue $636 million, up 8.7% year-over-year. This exceeded the anticipated increase of 7% to 7.5%. The growth was driven by strong sales performance, including migrations to the private cloud and increased client activity.

Non-GAAP Operating Margin 27.2%, representing a 227 basis points expansion year-over-year. This was attributed to inherent leverage in the business model, strategic cost management, and leveraging existing workforce.

GAAP Revenue Increased 7% year-over-year. Growth was supported by strong performance in services, support, and processing revenue.

Cloud Revenue Increased 7% year-over-year. This recurring revenue now constitutes 30% of total revenue, driven by private and public cloud offerings.

Processing Revenue Increased 10% year-over-year. Growth was driven by increased card, digital, and payment processing revenues.

Recurring Revenue Exceeded 91% of total revenue, highlighting the stability and predictability of the revenue stream.

Cost of Revenue Increased 1% on a GAAP basis and 4% on a non-GAAP basis year-over-year. This was due to higher direct costs consistent with revenue growth and higher personnel costs, partially offset by lower benefits.

R&D Expense Decreased 1% year-over-year on both GAAP and non-GAAP bases. The decrease was primarily due to tempered net personnel costs.

SG&A Expense Increased 14% on a non-GAAP basis and 9% on a GAAP basis year-over-year. The increase was driven by the timing of the Connect client conference, increased personnel service costs, and higher net personnel costs.

GAAP Earnings Per Share (EPS) $1.97, up 21% year-over-year. This was driven by consistent revenue growth and strategic cost management.

Operating Cash Flow $121 million, a $4 million increase year-over-year. This was positively impacted by annual maintenance billings and tax depreciation.

Free Cash Flow $69 million, a $10 million increase year-over-year. This was driven by strong cash collections and tax benefits.

Return on Invested Capital (ROIC) 22%, up from 20% in the prior year. This reflects strong operational performance and efficient capital allocation.

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Operating Highlights

Victor Technologies Acquisition: Acquired Victor Technologies to enhance payment capabilities, grow deposits, diversify fee income, and maintain compliance controls. Victor's platform is cloud-native, API-first, and integrated with Jack Henry's systems.

Tap2Local Launch: Introduced Tap2Local, a cloud-native merchant-acquiring solution targeting SMBs, enabling tap-to-pay on iOS and Android without additional hardware. Currently rolling out to Banno clients.

Rapid Transfers: Launched Rapid Transfers for instant fund movement between accounts, cards, and wallets. Collaborating with Visa and Mastercard for debit rail transactions. 48 clients live, 126 in implementation.

Stablecoin Development: Completed proof of concept for USDC transactions and developing wallet, custody, and settlement services. Positioned for stablecoin and tokenized deposits with advanced decimal support.

Private Cloud Migration: Signed 7 contracts for private cloud migration, including large financial institutions. Private cloud clients generate 2x more revenue than on-premise clients.

New Core Sales: Achieved 4 competitive core wins in Q1, including a financial institution with over $1 billion in assets. Improved balance between new sales and renewals.

Client Conference Impact: Hosted record-breaking Jack Henry Connect conference with 2,651 clients and 91 prospects. 20 new core wins last year were from conference attendees.

Cloud Revenue Growth: Cloud revenue increased by 7%, contributing 30% of total revenue. Strong growth in private and public cloud offerings.

Faster Payment Solutions: Significant growth in faster payment solutions like Zelle, RTP, and FedNow, with a 55% increase in payment transaction volume.

AI Utilization: Implemented over 100 internal AI use cases, improving back-office efficiency and controlling headcount additions.

Technology Modernization: Accelerated innovation with cloud-native, API-first infrastructure. Developed new solutions like Tap2Local and Rapid Transfers in under 10 months.

New Jack Henry Platform: Integrated new platform with existing cores, offering real-time processing, open API connectivity, and enhanced security. Positioned for public cloud-native deposit-only core launch in 2026.

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Risk or Challenges

Market Conditions: Attendees at the annual CEO Forum expressed less concern about the macro economy compared to last year, but there is still a need for continued investment in technology to enhance digital capabilities, fraud protection, and operational efficiencies.

Competitive Pressures: The company faces competitive pressures in new core sales, as evidenced by a decrease in competitive core wins in Q1 compared to the previous year (4 wins versus 6). However, the company remains optimistic about achieving similar annual results.

Regulatory Hurdles: No explicit regulatory hurdles were mentioned in the transcript.

Supply Chain Disruptions: No explicit supply chain disruptions were mentioned in the transcript.

Economic Uncertainties: Economic uncertainties were indirectly referenced through the need for financial institutions to continue investing in technology to modernize and improve efficiencies, despite less macroeconomic concern among attendees.

Strategic Execution Risks: The company is heavily reliant on its technology modernization strategy, including the development of cloud-native solutions and the integration of new acquisitions like Victor Technologies. Any delays or failures in these initiatives could impact operational and financial performance.

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Guidance & Outlook

Fiscal Year 2026 Revenue Growth: Full year GAAP revenue growth guidance increased to a range of 4.9% to 5.9%. Non-GAAP revenue annual growth rate guidance updated to 6% to 7%.

Deconversion Revenue: Fiscal '26 deconversion revenue guidance increased to $20 million, with updates expected as more activity is confirmed.

Non-GAAP Margin Expansion: Full year guidance for non-GAAP margin expansion increased to a range of 30 to 50 basis points.

Free Cash Flow Conversion: Full year free cash flow conversion outlook is 85% to 100%, with a bias to the higher end of the range.

Tax Rate Estimate: Full year GAAP tax rate estimate for fiscal '26 is 23.75%.

Earnings Per Share (EPS): Full year GAAP EPS guidance increased to $6.38 to $6.49 per share, reflecting growth of 2% to 4%.

Cloud Revenue Growth: Cloud revenue increased 7% in Q1, contributing to 30% of total revenue, with continued strong growth expected.

Payments Segment Growth: Payments segment quarterly non-GAAP revenue increased 8%, with strong growth in card-related services, EPS business, and faster payments.

Complementary Segment Growth: Complementary segment quarterly non-GAAP revenue increased 9%, driven by digital solution demand and beneficial product mix.

Technology Spending Trends: 71% of banks reported increased technology budgets for fiscal year 2025, with a median increase of 10%. Jack Henry's clients plan to increase spending over the next 2 years, focusing on digital banking, fraud prevention, automation, cybersecurity, and AI.

New Product Launches: Launch of cloud-native Tap2Local merchant-acquiring solution and Rapid Transfers solution, with phased rollouts and strong initial reviews.

Stablecoin and USDC Development: Completed proof of concept for USDC transactions and developing wallet, custody, and settlement services for clients. Positioned for stablecoin and tokenized deposits with advanced platform capabilities.

New Jack Henry Platform: Public cloud-native deposit-only core on schedule for launch in the first half of calendar 2026, integrated with existing cores for enhanced capabilities.

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Shareholder Return Plan

Dividends Paid: $42 million in dividends paid year-to-date.

Share Repurchases: $100 million in share repurchases year-to-date through October.

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Key Q&A

Q: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:Mimi Carsley explained that the margin expansion is sustainable due to disciplined headcount increases, controlled spending, and efficiencies in AI. Some factors like timing of benefits-related personnel costs and project spending may reverse, but overall, consistency in spending control will drive full-year margin expansion.

Q:Can you expand a little bit on the pricing and competitive environment out there? Are you seeing an increased willingness to explore converting cores in the market?

A:Gregory Adelson stated that the competitive environment remains stable, with no significant changes in core conversion willingness. The pipeline remains strong, and recent wins reflect normal competitive pressure. Mimi Carsley added that operational changes have stabilized pricing compression, and collaboration between sales and operational teams has been effective.

Q:Can you update us on the strategy to increasingly sell outside the core?

A:Gregory Adelson highlighted that 77% of clients have converted to private cloud, with a 5-6 year runway for continued progress. New platform components are core-agnostic, creating opportunities outside the Jack Henry base. Initiatives like Banno and SMB strategies (e.g., Tap2Local, Rapid Transfers) aim to expand offerings to non-Jack Henry clients and fintechs, creating consistent revenue streams.

Q:What type of impact do you expect consolidation and deconversion fees to have on recurring revenue into next fiscal year? Will core activity slow down due to M&A activity?

A:Gregory Adelson noted that convert merge activity has doubled compared to last year, leveling out prior headwinds. Core activity is expected to remain consistent at around 50 deals annually, with potential additional opportunities from competitor core consolidations. Mimi Carsley added that the FI segment remains resilient, with limited impact from industry consolidation.

Q:Could you clarify the average size of the wins you're seeing in the quarter and how that aligns with your strategy to move upmarket?

A:Gregory Adelson reported 4 core wins in the quarter, including one multibillion-dollar deal. Last year, 16 multibillion-dollar deals were closed, with 4 over $5 billion. The current pipeline aligns with expectations for moving upmarket.

Q:Can you stratify the differences in demand from your customers for deposit attraction versus retention versus lending?

A:Gregory Adelson stated that institutions are focused on deposit growth to support lending opportunities. There is concern about losing clients to neobanks and other competitors. Mimi Carsley added that both deposit gathering and lending remain top priorities, with a slight uptick in lending activity observed in Q1.

Q:Can you quantify the headwind of pricing over the last 12 months and how it went into your current guidance?

A:Mimi Carsley explained that pricing compression was a significant headwind last year, reflected in this year's P&L. Stabilization efforts have been effective, but the full impact will flow through this year. Gregory Adelson added that new processes and collaboration among teams have exceeded expectations, reducing the impact of pricing compression.

Q:Is the higher level of growth in card processing revenue sustainable?

A:Mimi Carsley attributed the growth to healthy consumer spending, ancillary services, and faster payments adoption. Gregory Adelson added that the Payrailz acquisition is contributing positively, with reduced compression and increased opportunities in bill pay and other services.

Q:Do you see newer areas like faster payments, Moov partnership, Tap2Local, and Rapid Transfers being material enough to offset headwinds this year?

A:Gregory Adelson expressed optimism about long-term growth from these initiatives but noted that their immediate impact may not fully offset current headwinds. Mimi Carsley emphasized their potential for future growth and validation of investment strategies.

Q:Have you noticed any changes in the competitive landscape or RFP activity due to core consolidation at competitors?

A:Gregory Adelson stated that while activity has not significantly increased yet, it is expected to rise. Jack Henry is prepared to handle increased RFPs and core wins. Mimi Carsley added that the lack of innovation from competitors has already created demand for Jack Henry's solutions.

Q:Can you talk more about the Victor acquisition and its target customers?

A:Gregory Adelson explained that Victor targets banking as a service within banking and credit union markets, fintechs, and treasury management. It facilitates embedded finance payments and integrated payables. The acquisition has already shown strong pipeline growth and diverse revenue opportunities.

Q:How should we think about margins for the rest of the year?

A:Mimi Carsley advised focusing on annual performance rather than quarterly fluctuations. Q1 outperformance was driven by personnel-related benefits and project timing, but full-year guidance reflects a balanced view of potential investments and savings.

Q:Will renewals be lower this year compared to last year? How are retention rates trending?

A:Gregory Adelson confirmed fewer renewals this year, with smaller institutions involved. Processes have improved focus on new opportunities and reduced price compression. Mimi Carsley noted that retention rates remain high, near 99%, excluding M&A.

Q:Review of Unclear Management Responses

A:Management avoided providing precise numerical details on the impact of pricing compression and the immediate financial contribution of new initiatives like Tap2Local and Rapid Transfers. Additionally, they did not quantify the exact margin expectations for the remainder of the year or the specific size of core activity increases due to competitor consolidations.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call summary indicates strong financial performance with increased free cash flow and high return on invested capital. Positive developments include a successful partnership with Moov and a promising Banno platform. Despite some pricing pressure and revenue headwinds from bank M&A, the optimistic guidance and strategic focus on margin expansion and technology modernization suggest a positive stock reaction. The Q&A section reinforced strong demand and operational improvements, supporting a positive outlook.

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