Jack Henry & Associates, Inc. (JKHY) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary reveals strong financial performance, with increased revenue and EPS guidance, robust growth in cloud and payment segments, and positive technological developments. The Q&A section highlights strategic advantages over competitors, successful product adoption, and effective capital allocation. Although management was vague on certain aspects, overall sentiment remains positive due to strong metrics, optimistic guidance, and strategic initiatives. The market is likely to react positively over the next two weeks, driven by these factors.
Key Financial Performance
Non-GAAP Revenue $611 million, up 6.7% year-over-year. The increase was attributed to strong sales performance and innovation in services.
Non-GAAP Operating Margin 25.1%, representing a 355 basis points expansion year-over-year. This was driven by strategic cost management and leveraging existing workforce.
GAAP Revenue Increased 8% year-over-year. Growth was driven by strong performance in services, support, and processing revenue.
Cloud Revenue Increased 8% year-over-year. Growth was driven by strong demand for private and public cloud offerings.
Processing Revenue Increased 9% GAAP and 8% non-GAAP year-over-year. Growth was driven by increased digital, card, and faster payment processing revenue.
Recurring Revenue Exceeded 92% of total revenue. This reflects the company's focus on sustainable revenue streams.
Cost of Revenue Increased 5% year-over-year. This was due to higher direct costs, personnel costs, and amortization of intangible assets.
R&D Expense Increased 3% GAAP and 2% non-GAAP year-over-year. The increase was due to tempered net personnel costs.
SG&A Expense Decreased 13% GAAP and 10% non-GAAP year-over-year. This was due to the timing of the client conference and cost management efforts.
Free Cash Flow $103 million, a $74 million increase year-over-year. This was driven by strong operating cash flow and disciplined capital allocation.
Operating Cash Flow $153 million, a $63 million increase year-over-year. This reflects strong revenue growth and cost management.
Return on Invested Capital (ROIC) 23%, up from 19% year-over-year. This reflects high-quality capital allocation.
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Operating Highlights
Tap2Local merchant acquiring solution: Strong reaction to the new cloud-native solution, which is being rolled out in waves to Banno clients. 300 clients went live in November and December, with another 100 added recently. The solution is expected to help banks and credit unions win back deposits from SMBs.
Jack Henry Rapid Transfers: Early success with 75 clients live and 180 in onboarding stages. This solution allows SMBs and consumers to move funds quickly between accounts, cards, and wallets, targeting younger digital-native generations.
Stablecoin strategy: Beta testing with multiple financial institutions to send and receive USDC. Over 20 fintechs are being evaluated for infrastructure and compliance partnerships.
Embedded payments and Banking-as-a-Service: Integration of Victor Technologies is progressing well, enabling financial institutions to embed payment capabilities into third-party brands. This supports treasury management and corporate customer needs.
Core market share growth: Core market share among banks increased by 17% and credit unions by 40% over the past 8 years. Market share for institutions with over $1 billion in assets rose by 32% for banks and 12% for credit unions.
Competitive wins: 22 competitive core wins in Q2, with 68% including digital and card processing solutions. The company has outpaced competitors in core market share growth despite market contraction.
Cloud migration: 78% of core clients are now operating in the private cloud, with private cloud clients generating approximately 2x more revenue than on-premise clients.
Faster payment solutions: Outstanding growth with Zelle usage up 22%, RTP network up 26%, and FedNow up 32%. Payment transaction volume increased by 49% year-over-year.
Banno digital platform: Signed 84 new clients in Q2, with 15.2 million registered users, up 15% from last year.
Technology modernization: Development of 22 components on the public cloud-native API-first Jack Henry platform. Multiple clients will test new cloud-native deposit-only core functionality in Q2 of the calendar year.
M&A and consolidation strategy: Strong advantage in retaining clients during consolidation events, with relationships with over 80% of U.S. financial institutions.
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Risk or Challenges
Deconversion Revenue: Deconversion revenue was up approximately $6 million for the quarter, reflecting a steady pace of M&A activity among financial institutions. However, the dollar amount of deconversion revenue has little correlation with the number of transactions or annual revenue impact. Industry consolidation is seen as largely neutral to slightly positive for the business.
Medical Costs: Lower self-insured medical costs were noted as a benefit to margins in the first half of the year, but these are expected to return to normalized levels in the second half, which will noticeably impact results.
Cloud Migration Infrastructure Expense: Anticipated higher expenses related to cloud migration infrastructure in the second half of the fiscal year could put pressure on margins.
Workforce Expense Increases: The timing of workforce expense increases is expected to contribute to margin contraction in the second half of the fiscal year.
Onetime Revenue and Card Momentum: Anticipated slower momentum in onetime revenue and card revenue in the second half of the fiscal year could impact overall revenue growth.
Regulatory and Compliance Risks: The company is in beta testing for stablecoin-related initiatives and is evaluating over 20 fintechs for compliance and payment infrastructure. Regulatory hurdles and compliance risks could impact the rollout and adoption of these initiatives.
Economic Uncertainty: The company noted that industry consolidation and M&A activity among financial institutions are ongoing, which could introduce uncertainties in client retention and revenue stability.
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Guidance & Outlook
Fiscal 2026 Revenue Growth: Full year GAAP revenue growth guidance increased to a range of 5.6% to 6.3%. Non-GAAP annual revenue growth guidance updated to 6.4% to 7.1%.
Deconversion Revenue: Fiscal 2026 deconversion revenue guidance increased to $28 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 50 to 75 basis points. Margins are projected to contract in the second half due to normalized benefits costs and workforce expense increases.
Cloud Revenue: Projected to show continued strength in the second half of fiscal 2026.
Second Half Revenue Growth: Expected to be relatively lower compared to the first half, driven by slower momentum in one-time revenue and card.
Fiscal 2026 GAAP EPS: Updated guidance for GAAP EPS is $6.61 to $6.72 per share, reflecting growth of 6% to 8%.
Free Cash Flow Conversion: Full year free cash flow conversion outlook is 90% to 100%, with a bias to the higher end of the range.
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Shareholder Return Plan
Dividends Paid: $84 million in dividends paid through the end of the calendar year 2025.
Share Repurchases: $125 million in share repurchases with an average purchase price of $157 per share.
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Key Q&A
Q:Do you expect Q3 sales results to come in better than Q2, and are you seeing the impact from the core consolidation news from competitors?
A:The CEO stated that Q3 is starting off well but could not confirm if it will be better than Q2. The Q2 results had minimal impact from the competitor's core consolidation news as those deals were already in motion. The pipeline is growing across core opportunities and complementary products.
Q:What are you seeing in terms of pricing for core systems and ancillary services?
A:Pricing has been consistent over the last few years, with no significant changes due to competition or announcements. The company won 22 deals in the quarter, despite not being the lowest-cost provider.
Q:How do you think AI will impact your business model over the long term?
A:The CEO believes AI's impact on the business model is misunderstood. Jack Henry has been using AI in back-office operations and product development, which has helped control headcount costs and improve efficiency. AI is integrated into new platform products, but the complexity of building core systems limits AI's direct impact.
Q:Are you still confident that bank M&A will be net neutral or positive moving forward?
A:Yes, the CEO is confident. The company has seen significant market share growth and opportunities for complementary products even when acquisitions occur. They are optimistic about their ability to win core deals and offer complementary products as part of long-term strategies.
Q:Which segments exceeded expectations in the quarter, and how should we think about second-half growth rates by segment?
A:All three segments performed well. Complementary products exceeded expectations, driven by Financial Crimes Defender, treasury management, and digital products. Payments are expected to slow slightly in the second half due to seasonality and comps. Core revenue benefited from convert/merge activity and organic growth but may not grow at the same pace in the second half.
Q:Can you quantify the impact of lower medical insurance claims costs on margins, and will this benefit continue in the second half?
A:The margin benefit from lower medical insurance claims costs was significant but is not expected to continue in the second half. The company expects higher costs in the second half due to commissions, infrastructure, and data center initiatives.
Q:How do you see AI accelerating the modernization of core processing systems and improving competitive positioning?
A:Jack Henry has been using AI for years to modernize core systems and improve efficiency. AI has helped reduce headcount growth and accelerate innovation. The company has a head start in using AI for complex core system development and integration, which differentiates them from competitors.
Q:What are the competitive dynamics in the payments and card space?
A:The CEO noted that new entrants in the space are offering compartmentalized solutions rather than full-suite offerings. Jack Henry's strategy of bundling digital and card solutions with core deals has been successful, and they have not seen significant disruption from new entrants.
Q:How should we think about the revenue cadence from recent core wins, and what is driving the success in winning these deals?
A:Core wins take 15-18 months to impact revenue. Success is driven by Jack Henry's culture, service reputation, innovation, and consistent strategy. The company has been winning deals due to its ability to align with client needs and offer innovative solutions.
Q:What is the outlook for fiscal 2027 growth, and how confident are you in achieving the 7%-8% growth target?
A:The CFO stated it is too early to comment on fiscal 2027 but emphasized the importance of execution and the positive impact of recent investments. The company is optimistic about overcoming challenges and achieving growth targets.
Q:What is the adoption rate and long-term opportunity for SMB products like Rapid Transfer and Tap2Local?
A:Adoption is still early, with 400 customers onboarded in a few months. The company sees significant differentiation from competitors like Stripe and Square, including instant account approval and advanced reconciliation features. A long roadmap of SMB products is planned for the next 18 months.
Q:What are the capital allocation priorities, and is there an appetite for buybacks or M&A?
A:The company prioritizes dividends, M&A opportunities, internal development, and share repurchases. They have repurchased $125 million in shares year-to-date and are open to increasing this amount depending on market conditions and M&A opportunities.
Q:Has the new pricing strategy for renewals gained traction, and is it reflected in financial results?
A:Yes, the new pricing strategy has gained traction and is reflected in financial results. The company is negotiating renewals from a position of strength, which has improved market stability and financial outcomes.
Q:Are smaller banks hesitant to spend on technology due to consolidation trends?
A:Some smaller banks are hesitant to spend on technology, but those that do not invest in technology often become acquisition targets. Jack Henry focuses on providing innovative solutions to help banks grow and remain competitive.
Q:What is driving the success of trifecta wins (core, digital, and card solutions)?
A:Success is driven by improvements in the Banno solution set and commercial card platform, allowing Jack Henry to win larger deals and bundle solutions effectively. The strategy is designed to target new opportunities and consolidating banks.
Q:What is the opportunity with the new enterprise account opening platform?
A:The platform is in closed beta and not yet generally available. It will offer a single platform for consumer and commercial account opening with unique features, but more details will be shared once it is fully launched.
Q:How are complementary attach rates trending with competitive core wins?
A:Attach rates are consistent, with 35-50 products typically included in deals. The most lucrative products are card, digital, and financial crimes solutions. The company is also exploring modular approaches to drive opportunities outside of core deals.
Q:What are the execution requirements to capitalize on core platform consolidation opportunities?
A:The company is focused on aligning sales, operations, finance, and marketing teams to capitalize on opportunities. Significant pipeline growth is already evident, and operational readiness is a priority to handle increased demand.
Q:What is the outlook for the credit union market?
A:Jack Henry is benefiting from core consolidation among competitors and has improved its Symitar platform. The company is driving higher penetration rates for complementary and payment products in the credit union market.
Q:How does Jack Henry maintain its service differentiation as competitors improve their support?
A:Jack Henry's 50-year history of service excellence and cultural alignment with clients are key differentiators. The company continues to prioritize service and innovation to maintain its competitive edge.
Q:Review of Unclear Management Responses
A:Management avoided providing a direct answer to whether Q3 sales results will be better than Q2, citing uncertainty and the early stage of the quarter. They also did not quantify the impact of lower medical insurance claims costs on margins, only stating that the benefit is not expected to continue in the second half. Additionally, they did not provide specific details on the adoption rates or financial impact of SMB products like Rapid Transfer and Tap2Local, citing the early stage of rollout.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
APIs treasury
America Computer
America Loved
Banking Service
Companies honor
Complementary segment
Computer World
Defender module
FI way
Forbes list
Henry institution
IPO NASDAQ
President Investor
Rapid Transfers
TapLocal
anniversary
capability
client deposit
cloud contract
company
core banking
core consolidation
core market
fintechs
institution payment
market competitor
market share
merger
milestone
number institution
platform client
premise
provider
sale core
share bank
stablecoin
study
union client
year core
JKHY Transcript
Jack Henry & Associates, Inc. (JKHY) Q2 2026 Earnings Call Transcript
Positive2-4
The earnings call summary reveals strong financial performance, with increased revenue and EPS guidance, robust growth in cloud and payment segments, and positive technological developments. The Q&A section highlights strategic advantages over competitors, successful product adoption, and effective capital allocation. Although management was vague on certain aspects, overall sentiment remains positive due to strong metrics, optimistic guidance, and strategic initiatives. The market is likely to react positively over the next two weeks, driven by these factors.
Jack Henry & Associates, Inc. (JKHY) Presents at 53rd Annual Nasdaq Investor Conference Transcript
Neutral12-9
Jack Henry & Associates, Inc. (JKHY) Presents at UBS Global Technology and AI Conference 2025 Transcript
Neutral12-4
Jack Henry & Associates, Inc. (JKHY) Q1 2026 Earnings Call Transcript
Positive11-5
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.
JKHY Report
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