JACK HENRY & ASSOCIATES INC Q3 FY2025 earnings call

Key Takeaways - Financial Performance: Non-GAAP revenue up 7%, non-GAAP operating margin 23% with 207 basis points of margin expansion. GAAP revenue saw Q3 deconversion revenue at $9.6 million, with full year deconversion revenue forecast $22M-$28M. - Fiscal '25 Guidance: Adjusted full year guidance for GAAP and non-GAAP revenue, margin expansion, and EPS due to macroeconomic concerns and softening nonstrategic revenue, but increased guidance on margin expansion and EPS growth. - Winning Larger Core Deals: Over past 2 years, aggregate assets of competitive new core takeaways more than doubled. This fiscal year, 28 new core wins secured, including 11 in Q3 with financial institutions totaling $30 billion in assets. - Technology Modernization: On track to deliver public cloud-native consumer and commercial deposit-only core in first half of calendar year 2026, 6 months ahead of previous communication. New enterprise deposit and loan account opening solution in closed beta. - SMB Strategy: Jack Henry Rapid Transfers in closed beta with 3 clients, merchant acquiring solution in partnership with Moov on track for closed beta in June. - Benchmark Survey: 76% of bank and credit union clients plan to increase technology spending over next 2 years, top areas include digital banking, fraud prevention, and automation.

The third quarter fiscal year 2025 results reflect solid overall performance. Non-GAAP revenue increased 7% and non-GAAP operating margin was 23%, with 76% of total revenue consisting of processing and cloud, growing at 9.8% versus 8.8% in Q3 fiscal year '24. GAAP revenue saw an increase in M&A activity, with Q3 deconversion revenue at $9.6 million, and full year deconversion revenue forecasted to be in the range of $22 million to $28 million. Core segment non-GAAP revenue grew 11%, payments segment non-GAAP revenue increased 7%, and complementary segment non-GAAP revenue rose 10%.

• Adjusted full year guidance for GAAP and non-GAAP revenue due to macroeconomic concerns and softening nonstrategic revenue. - Increased GAAP and non-GAAP guidance on margin expansion and EPS growth. - Full year deconversion revenue forecast $22 million to $28 million. - Non-GAAP revenue guidance revised to 6% to 6.5% from 7% to 8%. - Non-GAAP margin expansion expected to be 60 to 70 basis points. - GAAP EPS forecast $6 to $6.09.

• Macroeconomic concerns affecting nonstrategic revenue such as softening of hardware sales and nonrecurring customer projects. - Delays in start of signed nonrecurring projects like work orders and implementation of post-core conversion products. - Softening in debit card transactions similar to card associations' U.S. debit businesses.

Q: So I wanted to get back to the question, obviously, around like large capital purchases for hardware being down. The question is, are you seeing similar restraints when it comes to your more modernized projects and cloud migration?

A: Dan, yes, so it's almost all in the non kind of nonrecurring stuff. We are seeing a little bit in some of the complementary and payment products that I mentioned, so mostly in what we call kind of day 2 or kind of post conversion, where folks have a product set that they're either waiting for a contract to terminate with a competitor or they have an existing Jack Henry product, which is the case in most of these, where they're just delaying kind of putting the new one on.

Q: It's actually Oppenheimer now. Just in terms of the project delays that you experienced in the third quarter, what are you hearing on a time line? Like are these projects that could come in later this year? Or is it maybe a next year event?

A: Rayna, so yes, just -- you're right on. So where we are at the end of the year -- like I said, this happens throughout the year on a regular basis. Just -- we're seeing a little bit more than normal, but also ones that are getting pushed into the following year. So as I said, these are delays in products that they've already contracted for. And so it's not like they're walking away from a contract or things that are openings along that line. But there are just things that are getting pushed into -- out of the next quarter and into the next fiscal year.

Q: I guess the first one, Mimi, just for you to follow up on the change in the revenue guide for the fourth quarter. It sounds like it's mostly hardware and these contract delays. But I think you also mentioned conservatism in the guide. So if you could just break apart the big drivers for the change. And then also if there's a way to size the overall hardware revenue for us so we sort of have a sense for how much that can drive volatility in growth.

A: Sure, Vasu. So the guide for the remaining of the year is really just given the prudence and having conservative macro assumptions as it relates to what's going on in the economy as well as the trends we've seen in the third quarter. Particularly, the outlook for hardware is down. As Greg mentioned, we're seeing some customers delay big capital purchases, possibly due to economic uncertainty, also as they contemplate moving to the cloud, which is a good thing for Jack Henry. In fact, FIs maybe not wanting to make those pretty expensive hardware decisions may actually help push their decisions to the cloud. So I think in the long run, that could be a great thing for Jack Henry as we're already at 76% of our clients in our private cloud environment. The headwind on hardware is about $11 million for the year. I'll call out that 80% of that falls within the corporate segment with the remainder of that being in the core segment.