Q1 2026 Earnings Call Transcript

Good morning, and welcome to the Jack Henry First Quarter and Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Vance Sherard, Vice President, Investor Relations. Please go ahead.

Thank you, Jeannie. Good morning, and thank you for joining the Jack Henry First Quarter Fiscal 2026 Earnings Call. Joining me today are Greg Adelson, President and CEO; and Mimi Carsley, CFO and Treasurer. Following my opening remarks, Greg will share his comments on our quarterly results, operational metrics and the outlook for the remainder of fiscal '26. Mimi will then discuss the financial results and updated fiscal '26 guidance provided in yesterday's press release, which is available on the Investor Relations section of the Jack Henry website.

Afterwards, we will open the lines for a Q&A session. Please note that this call includes forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from our expectations. The company is not obligated to update or revise these statements. For a summary of risk factors and additional information that could cause actual results to differ materially from such forward-looking statements, refer to yesterday's press release and the risk factors and forward-looking statements sections in our 10-K.

During this call, we will discuss non-GAAP financial measures such as non-GAAP revenue and non-GAAP operating income. Reconciliations for these measures are included in yesterday's press release. Now I will hand the call over to Greg.

Thank you, Vance. Good morning, and I appreciate each of you joining today's call. I'd like to begin by thanking our associates for their hard work and unwavering commitment to our key differentiators, culture, service, innovation, strategy and execution. I will share 3 key takeaways from the quarter and then provide additional detail about our overall business.

First, our financial performance. We produced record first quarter financial results with non-GAAP revenue of $636 million, up an impressive 8.7% over last year's first quarter. That significantly exceeds the 7% to 7.5% increase we anticipated in August. Our non-GAAP operating margin was 27.2%, representing a robust 227 basis points of margin expansion over last year's Q1. Second, our sales performance, starting with migrations from in-house processing to our private cloud.

In Q1, we signed 7 contracts to move existing clients to our private cloud, including a $11 billion asset credit union and an $8 billion asset bank. Notably, the asset size of clients migrating to our private cloud was 60% higher over the past 12 months, $43 billion versus $69 billion, while the number of deals has remained consistent with previous years. As a reminder, we earn on average approximately 2x more revenue from clients in the private cloud compared to those on-premise. Today, 77% of our core clients are operating in the Jack Henry private cloud.

Turning to new core sales. As many of you know, the first quarter is typically our lightest of the year. In Q1, our sales team earned 4 competitive core wins, including 1 financial institution with over $1 billion in assets. For context, last year, we started with 6 competitive core wins in Q1 and finished the year with 51. We remain confident that we will be within that range again this year as we are off to a very strong start in Q2. I also want to comment on the new sales procedures we implemented for the contract renewals about 6 months ago, which has resulted in a healthier balance between new sales and renewal contracts as well as improved pricing procedures.

Our Q1 fiscal year '26 deal mix was 44% new core sales and 56% renewals compared to 35% new sales and 65% renewals in Q1 last year. We expect this trend to continue throughout the fiscal year. Third, our annual client conference. In September, we hosted another highly successful Jack Henry Connect conference in San Diego, drawing a record 2,651 clients.

This is our largest event of the year and a major driver of new business opportunities. We had a record 91 prospects from 30 banks and credit unions. This is important to note because 20 of last year's new core wins came from prospects who attended Jack Henry Connect, underscoring the strategic value of this event. Additionally, the conference drew 48 consultants and our technology showcase featured 266 third-party fintechs, both all-time highs.

We also had a record attendance at our annual CEO Forum, hosting 211 CEOs. Overall, attendees expressed less concerned about the macro economy than last year and plan to continue investing in technology to enhance their digital capabilities, strengthen fraud protection, improve efficiencies and modernize their businesses. Next, I'd like to highlight several important announcements we made in the quarter. I'll start with our acquisition of Victor Technologies, which closed on September 30. We're excited to welcome the Victor associates to the Jack Henry family.

We are equally excited about this technology as we leverage the capabilities to create new opportunities for our clients and the many fintechs serving the financial industry. As you've heard me say, our acquisition strategy targets companies that have great teams, are cloud-native, API-first and accelerate our product road map, Victor fits that strategy perfectly. Victor's modern innovative platform with direct-to-core connectivity enables financial institutions to embed payment capabilities into third-party nonbank brands such as fintechs and commercial customers. This helps financial institutions grow deposits, diversify fee income and maintain compliance controls.

For Jack Henry, Victor provides a highly scalable solution that creates diverse revenue streams, enhances our payments-as-a-service capabilities and accelerates the delivery of emerging services like stablecoin. Victor was already integrated with our SilverLake core banking system and our Jack Henry PayCenter prior to the acquisition. We plan to extend its capabilities to serve our Symitar credit union and treasury management clients and to integrate directly with the new cloud-native Jack Henry platform. I will now provide an update on stablecoin as we've been actively developing and executing our strategy.

We just completed a proof of concept in less than 2 weeks to allow financial institutions to send and receive USDC. We continue to work with key vendors and emerging fintechs on other aspects of our strategy, which includes the development of wallet, custody and settlement services for our clients to service their account holders. Furthermore, the new Jack Henry platform supports 9 decimal places, well above the 6 required for USDC, positioning us very well for both stablecoin and tokenized deposits. By contrast, most, if not all, existing core support only 2 decimal places.

This advancement has already enabled us to facilitate cross-border stablecoin transactions for third parties through Banno. Another key development this quarter was the launch of our cloud-native Tap2Local merchant-acquiring solution. Tap2Local is offered exclusively through banks and credit unions, giving them a powerful way to win back deposits from small- and medium-sized businesses that have shifted their card acceptance activities to other providers. Tap2Local primarily targets the 82% of SMBs that are sole proprietors.

Today, only 16% of sole proprietors keep both their retail and commercial accounts at the same community financial institution, largely due to the lack of SMB-focused services. Built in partnership with Moov, Tap2Local delivers differentiated capabilities for SMBs, including easy enrollment, tap to pay on both iOS and Android devices without additional hardware and continuous account reconciliation to the accounting platform of their choice. We showcased a live demo of Tap2Local at Jack Henry Connect and received fantastic feedback. We are currently rolling it out in phases to our Banno clients.

We rolled out the initial phase of 40 clients on Monday of this week. We also did a live on-stage demo of Jack Henry Rapid Transfers at the conference. In partnership with Moov, we conducted more than 1,000 additional demos of this solution in the technology exhibit hall. Rapid Transfers enables both SMBs and consumers to instantly move funds between external accounts, eligible cards and digital wallets to manage day-to-day transaction and personal finances.

There are only a handful of institution offering this service today, 0 were community financial institutions until now. We are collaborating with both Visa and Mastercard to facilitate these transactions through their respective debit rails. Rapid Transfers is receiving strong initial reviews with 48 clients now live and 126 more in various stages of implementation. These unique solutions are all powered by the cloud-native API-first infrastructure we've built through our technology modernization strategy and are part of the Jack Henry platform.

This strategy has enabled us to accelerate our innovation at speeds not typically seen in our industry, especially from a core provider. We developed our Tap2Local and Rapid Transfers solutions in less than 10 months, including close to 40 external certifications. We developed a full proof concept of USDC in only 2 weeks, and we will be launching our public cloud native deposit-only core in only 3 years, still on schedule for the first half of calendar 2026. The new Jack Henry platform is integrated with all of our existing cores. Unlike most of our competitors, it's not a side core, which is a separate parallel system that runs alongside the primary core.

Side cores do not integrate directly with nor do they extend existing cores to enable new and enhanced use cases in the way the Jack Henry platform does. This integration delivers significant advantages to our clients, including real-time processing, streamline operations, open API connectivity, enhanced security and immediate continuous upgrades. Next, I'll provide a few updates on specific products. In our payments segment, we continue to experience outstanding growth in our faster payment solutions.

Over the past year, the number of financial institutions using Zelle has grown by 20%, the Clearing House's RTP network by 25% and FedNow by 32%. In Q1, payment transaction volume through these channels increased by 55% over the prior year Q1. In our complementary segment, we signed a total of 38 new Financial Crimes Defender and faster payment module contracts in the quarter. As of September 30, we have 148 financial crimes installations completed and another 66 in various stages of implementation. We also have 113 faster payment modules installed and 205 in various stages of implementation.

Speaking of Financial Crimes Defender, we are proud that our solution recently won a silver medal from Datos Insights for Best AML and Fraud Transaction Monitoring Innovation. Continuing with our complementary segment, we continue to see success with our Banno Digital Platform. For the quarter, we signed a total of 18 new clients to the Banno platform. We currently have 1,026 Banno retail clients and 390 live with Banno Business.

We finished the quarter with 14.7 million registered users on the Banno platform. At the end of Q1 last year, we had 12.7 million registered users, a 15% increase over the past 12 months. We are confident that the tech spending will remain strong based on recent surveys, direct feedback from our clients and our robust sales pipeline. In Bank Director's 2025 Technology Survey that came out in September, 71% of respondents reported an increase in their bank's technology budget for fiscal year 2025 with a median increase of 10%.

These results align with findings from our strategy benchmark published last spring. In that survey, 76% of our own clients said they plan to increase spending over the next 2 years with their top priorities being digital banking, fraud prevention, automation, cybersecurity and AI. Speaking of AI, we continue to focus on numerous product and internal use cases to help our clients and our staff improve back-office efficiency. Our new solutions are built with a human-in-the-loop approach.

And while reviews are still early, feedback has been extremely positive. We have created over 100 internal AI use cases, while we continue working through prioritization, these efforts have already enabled us to control headcount additions from the improvements we have seen across all lines of business. As a reminder, we do not sell any of our products utilizing a seat license model. So factors such as the number of branches or employees at the bank do not have a bearing on our revenue stream.

Looking ahead, we will hold our Annual Shareholder Meeting next week in Monett, Missouri and offer a webcast for remote viewers. We're also proud to recognize the 40th anniversary of our IPO this month and will commemorate the milestone with a bell ringing at NASDAQ on November 21. In closing, we are extremely pleased with our overall Q1 performance and remain highly optimistic about the rest of the year. I know -- I'll now hand things over to Mimi to walk through the financial details.

Thank you, Greg, and good morning, everyone. Our associates remain steadfast in serving our financial institution clients, delivering shareholder value, leading to another quarter of solid revenue and earnings growth. I will begin with our healthy first quarter results, then conclude with our updated fiscal '26 guidance. Q1 GAAP revenue increased 7% and non-GAAP revenue increased 9%, a continuation of consistently solid performance.

Non-GAAP revenue growth was positively impacted by the shift of our Connect client conference into Q1 from Q2. Even without this timing shift, quarterly revenue growth would have been a robust 8%. First quarter deconversion revenue of approximately $9 million, which we previously announced was up approximately $5 million, reflecting a steady pace of M&A activity among financial institutions. Now let's look more closely at the details. GAAP services and support revenue increased 6% for the quarter, while non-GAAP increased 8%.

Services and support growth during the quarter was primarily driven by strength in data processing and hosting revenue for both private and public cloud, revenue from our Connect conference and solution implementation. Private and public cloud offerings continue to drive strong growth. Cloud revenue increased 7% in the quarter. This reoccurring revenue contributor is 30% of our total revenue.

Shifting to processing revenue, which is 42% of total revenue and another strategic component of our long-term growth model. We saw a healthy performance with 10% GAAP and non-GAAP growth for the quarter. Consistent with recent results, quarterly drivers included increased card, digital and payment processing revenues. Completing commentary on revenue, I would highlight total reoccurring revenue exceeded 91%.

Next, moving to expenses. Beginning with the cost of revenue, which increased a modest 1% on a GAAP basis and 4% on a non-GAAP basis for the quarter. Drivers for the quarter included higher direct costs consistent with revenue growth, higher personnel costs, partially offset by lower benefits and increased amortization of intangible assets. For modeling purposes, amortization of acquisition-related intangibles was $6 million for the quarter.

Next, R&D expense decreased 1% on both a GAAP and non-GAAP basis for the quarter. The quarter decrease was primarily due to tempered net personnel costs. And ending with SG&A expense for the quarter on a non-GAAP basis, it increased 14% and 9% on a GAAP basis. The quarter increase was primarily due to the timing of our Connect client conference, increased personnel service costs, higher net personnel costs, partly offset by lower commission and benefit costs.

Without the Connect client conference costs, SG&A would have increased 12% on a non-GAAP basis and 7% on a GAAP basis. Aided by our consistent revenue growth, we remain focused on generating annual compounding margin expansion. Q1 delivered a 227 basis point increase in non-GAAP margin to 27%. Non-GAAP margin benefit from inherent leverage in our business model, strategic cost management and leveraging existing workforce as we continue to focus on enterprise process improvement and AI utilization.

These strong quarterly results produced a fully diluted GAAP earnings per share of $1.97, up 21%. Reviewing the 3 operating segments, we are pleased to see positive performance across the board. Core segment non-GAAP revenue increased 6% on the quarter with operating margins increasing a robust 114 basis points. We continue to gain benefits from private cloud trends and disciplined cost management.

The payments segment quarterly non-GAAP revenue increased 8%. The segment again had outstanding non-GAAP operating margin growth with quarterly results of 170 basis points. Revenue growth was due to resilience in our card-related services, consistent growth in the EPS business and large -- continuing large percentage growth on faster payments, albeit on a smaller dollar base. Margins benefited from operational efficiencies and disciplined cost management.

Finally, complementary segment quarterly non-GAAP revenue increased an impressive 9% with healthy 75 basis points of margin expansion. Quarterly revenue growth continued to reflect digital solution demand, beneficial product mix and sales sourced from both new core wins and noncore financial institutions. Now a review of cash flow and capital allocation. Q1 operating cash flow was $121 million, a $4 million increase over the prior fiscal year.

Quarterly free cash flow of $69 million delivered by a $10 million increase was positively impacted by the collection of remaining annual maintenance billings and full tax depreciation and development expenses related to recent tax legislation. Our consistent dedication to value creation resulted in a trailing 12-month return on invested capital of 22% compared to the 20% in the first quarter of the prior year. We're very proud of the durability of this metric performance. Additionally, I would highlight the following significant capital allocation decisions, $100 million in share repurchases year-to-date through October, the asset acquisition of Victor and $42 million in dividends paid.

We ended the quarter with a minimal amount of debt consistent with normal course revolver line usage but expect to end the year debt-free, barring acquisitions or other opportunities. I will now discuss the updated increased full year guidance. As you're aware, yesterday's press release included updated increases to fiscal '26 full year GAAP guidance. Deconversion guidance will continue to follow the conservative methodology introduced in fiscal '24. Fiscal '26 deconversion revenue guidance has been increased to $20 million.

Aligned with guidance methodology, we will update the outlook as we confirm more activity throughout the year. Full year GAAP revenue growth guidance increased to a range of 4.9% to 5.9%. This is driven by deconversion revenue increase, expected revenue contribution for the remainder of the year from the Victor acquisition. I will emphasize GAAP revenue remains almost certainly understated due to the conservative deconversion revenue guidance.

Based on our strong first quarter results and expected continued momentum, we have increased the lower end of the non-GAAP revenue annual growth rate guidance, resulting in a new outlook of 6% to 7%. As a reminder, fiscal '26 and the first quarter of fiscal '27, Victor acquisition-related financial impacts will be excluded as part of non-GAAP reporting. Based on the above revenue growth and our resilient financial model, we expect to again generate sustainable accretive sources of margin. We are increasing full year guidance for non-GAAP margin expansion to a range of 30 to 50 basis points.

All of the above are indicative that our business operations remain healthy and sound with near-term growth opportunities. The full year GAAP tax rate estimate for fiscal '26 is 23.75%. The above increased guidance metrics result in a stronger full year outlook for GAAP EPS of $6.38 to $6.49 per share, a growth of 2% to 4%. And as a reminder, updated conservative deconversion revenue guidance almost certainly understates EPS GAAP growth.

Fiscal '26 is expected to have superior free cash flow conversion due to recently passed tax legislation, and we have elected to take the accelerated election. Full year free cash flow conversion outlook is for 85% to 100% for the fiscal '26, matching our expected target but with a bias to the higher end of the range. As a reminder, we see fluctuations in quarterly results relating to software usage license components along with the timing of implementation. Therefore, the correct performance indicator for our business is the consistently strong fiscal year financial results.

In conclusion, Q1 results reflect outstanding performance leading to increased guidance. We're pleased by the start to our fiscal year and remain positive on the outlook. Demand for our solutions aligned with continued technology spend by our clients and prospects will drive superior shareholder return and value. We appreciate the contributions of our dedicated associates that achieve these superior results and our investors for their ongoing confidence.

Jeannie, please open the line for questions.

[Operator Instructions] The first question comes from the line of Rayna Kumar with Oppenheimer.

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?

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.

Your next question comes from the line of Will Nance with Goldman Sachs.

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?

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.

I think, Will, the only other add I would say to the point that Greg made in his prepared remarks, the changes we've made operationally around limiting the impact from pricing compression to your -- the first half of your question around pricing, we're starting to see the fruits of the labor paying off. So we're seeing stabilization from that headwind. We're quite excited by the collaboration between our sales, operational teams around that and going after that, and that's reflected also in the sales mix numbers that Greg talked about.

Your next question comes from the line of Dan Perlin with RBC Capital Markets.

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.

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.

Your next question comes from the line of Kartik Mehta with Northcoast Research.

Greg, I think you and Mimi both talked about the consolidation and obviously, increase in deconversion fees. Just a 2-part question on that. One is, what type of impact do you expect that to have on your recurring revenue into next fiscal year? And as we go into calendar 2026, do you think we'll have the same amount of core activity?

Or do you think that slows down because there's all this M&A activity and banks will want to wait to see how that plays out before committing to converting a core?

Yes. Thanks, Kartik. So I'll take your first question first. Yes.

So we had talked about in the August call, just we had timing. We typically win more than we lose. There was some timing based on some size deals, and we had talked about that being a headwind. We've actually started to see that kind of level itself out, especially in what we call convert merge activity, which is our customers buying other customers.

We're already seeing just in our banking segment, almost double the number of convert merge that are on the calendar for this year as compared to last year. So again, that's starting to level itself out. A lot of the impact that we saw for the year that was heavily weighted towards Q1, and there were some opportunities there that we, again, started to rightsize. To answer your question on the number of core activity, I think based on our pipeline, based on our typical success rate, I would say that we're going to be right where we typically are around that 50 number, and the team feels very confident about that as well.

There could be some additional opportunities, again, by what was announced with one of the providers in the consolidation of some of their cores. But that yet -- again, that was just recently announced and activity is still being built. But that could increase the number. Don't know, but a lot of those are also smaller deals.

So we'll have to see kind of where those fall and if they end up being ones that are acquired prior to making a core change.

If I could add a little bit more just from a context, you might find this metric interesting, Kartik, but it really shows to me the real resiliency and the attractiveness of our FI segment. But if you look at the last decade or so from like 2014 to 2024, within the M&A context, you'll see far less activity within the segments that really represent the majority of our customer profile. So within credit unions within the [ $100 million to $10 billion ] segment contracted 13% versus the total market contraction of almost 30%. And banks, it was even more apparent with actually growing that market segment 4%, while the total market contracted 30%.

So to me, that really shows the health and attractiveness and the limited impact overall from the continuation of the 4 decades of industry consolidation in our segments. And if anything, we've historically talked about that being a growth engine for a lot of our clients.

Yes. And I'll just tag on one other comment that I think is important, which I emphasized in my opening comments around our platform. Our platform strategy and our ability to innovate as quickly as we are is allowing us to keep a foothold on opportunities even when our institutions are being acquired. We're getting time at the table.

There's been several instances where we've been invited even though that we know that the acquiring institution is going to move off of their existing -- or keep their existing competitive core. We've been invited in to speak about what we're doing and where we're going as part of their future plans. So there's a lot more opportunity for Jack Henry in these deals than there was even a several years ago.

Your next question comes from the line of Jason Kupferberg with Wells Fargo.

Greg and Mimi, this is Tyler DuPont on for Jason. I just wanted to ask not to pile on core banking, but I just want to ask about the trends you're seeing. I heard in the prepared remarks you guys signed 4 takeaways, and you're comfortable with the 50 to 55 target. But just from an asset size perspective, could you maybe clarify the average size of the wins you're seeing in the quarter?

And how that sort of coincides with your longer-term strategy to move upmarket and to claim those larger wins?

Yes. So I appreciate the question. Yes, I mean, we closed 4 deals for the quarter. One was a multibillion-dollar deal. If you go back to last year, we closed 16 multibillion, 4 over $5 billion, and we're on track to do that or better this year. So based on what our forecasts are and what's in the pipeline, the first quarter results fall directly in line with what our expectations would be.

Your next question comes from James Faucette with Morgan Stanley.

Greg, you mentioned the Bank Director survey and the median growth in tech spend. I'm curious, just given where we are in the deposit cycle and the prospect of accelerating loan growth next year with change in interest rates. I was hoping you could help us to stratify the differences in demand from your customers for deposit attraction versus retention versus lending and how you are allocating resources to one side or the other, whether it would be to lending or the ledger side?

Yes. So I'll give you a couple of comments. I think Mimi has got a couple as well. So I think what I would say is that from a interest level, obviously, the loan portfolio is continuing to increase as with opportunities.

But the real concern with most of the institutions today is maintaining the deposit growth to allow that customer base to have opportunities for lending. And so when you look at the things that are happening in the market today, so whether that be neobanks or stablecoin or other things that -- and again, even what we've seen in the SMB market where a lot of these smaller customers or in this case, sole proprietors are banking at other outside of the community banking space for their SMB needs, that's where the real concern is because they're losing those clients without the right solution sets to keep that in.

So there's a lot of interest, obviously, to find opportunities on the lending. But today, I think their bigger focus is efficiency and deposit growth as of right now.

And the only add I would say is that we consistently see through our own survey that we do that both deposit gathering as well as lending remain in the top 4 priorities in the last 3 years. Sometimes they horse trade in terms of which is outpacing the other, but both are certainly top of mind. I would say in Q1, James, we started to see a little bit of the signs of an increasing pace of lending activity, whether that was some enthusiasm regarding the overall economy, inflation coming down, the expectations of the Fed starting to move, but we are starting to see a small uptick in the pace of lending, which is a very encouraging sign.

The next question comes from Dominick Gabriele with Compass Point.

I have to say, I think you guys sound pretty fired up on this call in the prepared remarks. And one of the things with Jack Henry is the level of revenue growth. And it sounds like you're limiting pricing compression and stabilizing that headwind. I was just curious, given where your current guidance is this year versus previous years, maybe you could -- is there any chance you could quantify that headwind of pricing over the last 12 months and how it possibly went into your current guidance and what those mitigation efforts like actually are in the business?

Is it like salespeople having different mechanics or something along those lines?

Sure, Dom. So I would say that we started to see that impact last year, which is why we called it out, but we're seeing it flow through the P&L this year. But from an encouraging sign, I would say we've seen a stabilization through the operational activities, the collaboration between sales, the programs that the leadership team has put in place, we're certainly seeing that headwind abate and we -- but we need to see the whole impact flow through this year. So I wouldn't give a precise number from an expectation, but it was certainly one of the larger causes for the lower guide this year versus our longer-term growth plan.

The other area was a modest expectation from consumer sentiment health and the spending. And thus far, we've seen a pretty robust consumer spending. We've seen card. That was part of the Q1 outperformance was card came in higher than expectation.

And while we still have a lot of the year to play out, we remain upbeat and optimistic on a modest continuation of that spending trend.

Yes, Dom, I'll add a couple of comments around kind of process stuff. Just yes, I mean, we took a very detailed approach with sales operations and finance. It took us several months to get it to where we wanted it to be. And we actually started to see the processes come together at the end of fiscal year '25, so in the fourth quarter, where we saw performance improve, and we've continued to see it through the first quarter.

But we still, as Mimi had mentioned, we still had some deals that were already done, especially some larger deals. As I noted last year, we did a lot of -- a lot more renewals than we did the year previously and a lot larger clients. So some of the impact was already felt. But the new processes that we put in place, the structure and the rigor of communication and collaboration amongst all of the teams to ensure that everybody was in sync was a big part of what we were focused on.

And honestly, it's exceeded my expectations this early. So we're very optimistic that things will continue down that path as well as having less renewals than we had last year by about 20-something percent. So that's another component of this. But again, a lot of what was baked into the original guidance was because it was already baked into the deals that were done in fiscal year '25.

The next question comes from the line of Dave Koning with Baird.

Good job. And I guess my question, card processing revenue accelerated about 2%, which was nicely better than industry trends, which were pretty stable to maybe a little acceleration, but 2% is a lot better. And I know you called out a lot of the newer types of payment services growing really well. And I guess the question is, is that sustainable, like this higher level of growth now?

Are those other things contributing enough to kind of keep this at a higher pace?

Dave, I would say it's a combination of a number of factors within the payments segment. One is, as we talked about, the U.S. consumer spending at a better clip than I think we were concerned about last year as an economy as a whole. So you're seeing that a healthy pace. I want to say it's a crazy pace of exuberance, but a healthy pace of the U.S. consumer spending.

The other is the ancillary services surrounding card have been very healthy. So we have a number of services that complement the payments card business. We've seen healthy uptick in growth in those businesses. The stabilization and positive performance from the EPS business really helps.

That's still a large segment portion of the payments segment. And then on the faster payments, even though it's off of small base numbers, we think there's a lot of upside from the solutions that are going to drive adoption and volume on the faster payments. So we're quite positive on the momentum there.

And Dave, I'd like to add one other component. We are actually starting to see a lot of the value of our Payrailz acquisition coming into play now. We're starting to see a nice uptick in Payrailz/iPay Bill Pay opportunities. We're seeing less compression.

We're seeing less deconversion. We're seeing all kinds of things that are generated as what we expected out of that acquisition starting to come to fruition now. So that's another key component based on the size of that business helping to help drive some of that as well.

The next question is from Darrin Peller with Wolfe Research.

Nice quarter. Just to clear up a little bit. I mean, I know when we came out of last quarter, there was obviously those few items called out. And you touched on some of the progress and what you're seeing around things, whether it's bank M&A or pricing and renewals and generally account growth at credit unions impacting your initial guide by a bit.

Clearly, you're seeing good outperformance, like you said, even on the card side. But when we think about where your confidence is around some of the newer areas, again, you mentioned faster payments, but Moov partnership, Tap2Local, Rapid Transfers. Do you see those being enough to spool up so that by the end of the fiscal year, you basically have 50 bps maybe plus that could have replaced what you -- some of the headwinds are impacting this year by. Is that going to be big enough and material enough in your view?

And just maybe a quick update on how some of those are trending as well.

Yes. I mean it's a good question, Darrin. I think the issue is that specifically tied to Tap2Local and Rapid Transfers, as I mentioned, we're just now rolling that out. I can tell you, we have very high expectations of what it will be long term.

And based on the feedback we got at our client conference and what we're seeing initially with customer excitement, we feel very strongly. Now whether it's going to be a 50 bps increase, I'm just going to probably say probably not. But if it is, we'll start to know more here in the next couple of quarters. But I can tell you that for the long-term growth, everything that we're doing in the SMB, which, by the way, this is only Phase 1. There's going to be multiple phases of what we're going to do in this space tied to driving opportunities in both our digital offerings and our payment space.

But related to faster payments, related to some of the things that we believe is going to happen, we had a call with the Fed recently. I think the Fed is going to get really serious about pushing various treasury activities and driving more opportunities on the send side of faster payments. That could create some additional revenue flow. But everything that we are doing and even what we've seen with some of the improvements, as I mentioned earlier, on renewals, obviously, the market environment with 10% being the spend with various core opportunities, all of that will help contribute to what we originally stated were going to be headwinds.

But it's still -- we're Q1, so it's still early to be able to fully determine what that will be yet.

Darrin, I would echo Greg's commentary. There's a lot of reasons to be pleased by the initial reaction and even the momentum we've seen from the uptake and the waves of installations that we have targeted. But I think at this point, the reason for sharing them is really as an indicator and a validation of our investment for growth and the level of innovation, less so the in-year impact from them. But as we think about what they could grow to be over the imminent next few years, it gives us great optimism around being within the range and to the upside of that range and opportunities to start thinking about the next new range possibility.

All right. That's helpful. And can I just follow-up quickly on the competitive landscape for a moment because I know this came up a bit earlier, but the core consolidation going on at one of your competitors, obviously, that's been talked about a lot. When you think about your -- I know you're reiterating your range of what you'd expect to add from a core standpoint.

But when you think about what you're seeing in the market in terms of the magnitude and level of RFPs even, have you noticed any changes more recently in the last, let's call it, 6 months or 12 months? And do you -- or are you hearing rumblings of more change to come on that front? And then I guess, capacity, when you think about your capability to handle if we were to get another 20 potentially, let's say, 50 went to 60 or 70, is that something you see yourselves being able to handle well?

Yes, it's a great question. And I'll tell you, from a standpoint of the time frames you gave, like I said, a lot of the news that has come out, I mean, obviously, they announced at their client conference, they were doing the consolidation of the cores, but it got a little more pronounced in the last week with other things. So the activity itself, I wouldn't say, has significantly increased any more than what it's been. I do anticipate that to happen just based on any time anybody announces core consolidations, there's just as an uptick.

To answer your question on capacity, yes, we are 100%. We can gear up. We do that already based on timing of things that we have happening in M&A, things that we have in M&A, I mean, in new core wins. So bringing on teams, we do that regularly.

We're good at it, and we're not concerned about that. And the other thing is we've done a lot on the AI side related to how we handle RFP responses and things like that. So our acceleration of being able to handle an accelerated amount of RFPs doesn't concern us. But the sales team is all over it, and I anticipate that to be a -- that's a siren, I guess, yes.

Sorry. But I don't anticipate that being -- yes, no worries. I don't anticipate that being a concern at all, Darrin. And we'll continue to update you as this goes on.

But I will tell you, that we are starting Q2 off with a very nice start to competitive core wins. The one thing I do want to call out is we continue to be the only one that actually announces the number of core wins. So a lot of people reference the number of increase that they have and all of that, but nobody else actually puts out a physical number. So we get held to a different standard, I think, than maybe some others.

If I could add on to the thoughtful comments that Greg had, our sales team does a remarkable job of working with prospects. And while I agree, we will see an enhanced kind of acceleration of interest an opportunity that comes from the core consolidation announcement of competitors, the lack of innovation that they've offered for a number of years has already created that demand for opportunities for us to talk and show the solutions -- the innovative solutions we have to offer. So to me, this is a potential acceleration. A lot of clients still are going to wait until the end of their client contract length to make a change, but it's certainly an exciting opportunity because it solidifies the message we've been talking about, which is they need to make a change.

They can't just stay on a nonmarketed, not innovative core to meet the needs of their financial institutions. So we're excited about what that could potentially be in the long run, but it's more of a consistency for our sales team.

The next question is from Cris Kennedy with William Blair.

Can you just talk a little bit more about Victor kind of who the target customer is for that? And what type of interest and opportunity you're seeing with that asset?

Yes. Thanks, Cris. A couple of things. So one, it creates opportunities for banking as a service within the banking and credit union market.

So as we mentioned already, we have SilverLake integration today. We have several of the Jack Henry core clients that are utilizing the service. So we were already partnered with Victor on that front. We'll be -- and we're connected to our PayCenter offering as well, and we'll be doing the credit union business.

But now it's creating opportunities in our treasury management platform. So embedded finance payments and the ability to drive additional payment types like integrated payables, things along that line are all candidates for that. There's also opportunities to work directly with fintechs to facilitate payments for them. So we have several fintechs that are actually already directly integrated into the Victor solution set, and we're processing those payments.

The pipeline in only 30 days has candidly grown to a pretty nice number. We're getting ready to already close our first new bank in 30 days, and we have several others that are very interested, but we have a long list of fintechs that are very interested. So it creates an opportunity for us with a diverse revenue stream, creates opportunities for the banks to have diverse revenue streams as well. So we're very bullish on what this is going to bring.

It creates some opportunities for some of our stablecoin strategy as well, and we're utilizing some of the technology in that front. But I view this acquisition as a real opportunity for Jack Henry to immediately play in a space that is expected to more than double in the next 2 to 3 years.

The next question is from Ken Suchoski with Autonomous Research.

This is [ JD ] on for Ken. I wanted to ask about margins. I think the 1Q margin looked really strong, and I think there's some seasonality in there, but you landed well above the full year range. I think you mentioned some of it is timing and you feel confident about the full year, but when we think about 2Q, you obviously have Connect moving to September from October last year, how should we think about margins next quarter?

And maybe if you can help us to shape the rest of the year. I want to make sure that we're not missing anything.

Sure. I think the first and foremost, I would encourage you to look at an annual basis for our performance. The individual quarters can have just different rhythms based on implementation or the comps from a year-over-year basis. And so while Q1, we're thrilled by the epic performance in Q1 and raising for the full year, I would say that there's things at play.

There's a modest conservatism as well just because of the nature of some of that savings being personnel-related benefits and others, some of it based on the timing of some of the projects, also just -- so some of that we expect from a catch-up perspective and other opportunities for investments for growth plans. We have a modest forecast, but it also allows the opportunity to enhance or accelerate some of the activities we're doing in AI and platform projects. So again, looking forward to the full year, pleased to see the uptick from a guidance perspective for the full year. I think that's a natural course of the levers that are inherent in our business.

Glad to see the compounding nature of the margin expansion, but I wouldn't look too much to any one quarter. Rather, I would look to the overall outstanding expectation for the year.

Great. And maybe if I can sneak one more in. I think you mentioned 56% of renewals in deal mix. I think that implies renewals were down quite a bit from last year. I guess is it fair to say that you'll see lower renewals this year compared to last year? And maybe if you could talk a little bit about how retention rates are trending.

Yes. And I apologize, but part of your, first part of your question broke up. So could you repeat the first part, please?

Yes. I think you mentioned in your prepared remarks how 56% of renewals were part of the deal mix, and I think that implies renewals are down year-over-year. So I just wanted you to comment on that.

Yes. So as I mentioned, last year, we had a significant number of renewals from even greater, I think it was 12% more than the year previous to that and much larger institutions that we renewed. It was $94 billion in assets versus $224 billion in assets. So just even last year, we had much larger renewals and a #2. So we have a smaller number of renewals this year and a smaller number of very large customers.

But the processes that we put in place, part of it was to focus on ensuring that we were going after a larger number of new deals and not relying on the renewal process, pulling in any renewal sooner than it should be and things along that line. So the team has done a great job of adhering to those things, focusing on the new opportunities and managing the relative price compression that we typically see much better than we have in years past.

I think the only add-on I would say is that we have not seen any change from the incredibly high retention rate that Jack Henry has experienced historically. So absent M&A, near over 99% retention. So no changes there. So not only are we having great success with new customers and new product -- new prospects and renewing existing, but we're not seeing departures.

This concludes our question-and-answer session. I would like to turn the conference back over to Vance Sherard for her closing remarks.

Thank you, Jeannie. As Greg mentioned, our Annual Shareholder Meeting is on Wednesday, November 12, at noon Eastern Time. We look forward to hosting those who attended our headquarters in Monett, or those who joined the webcast. Management will present in person at multiple investor events, both domestically and internationally prior to the calendar year-end, and we thank all Jack Henry associates for their outstanding efforts and commitment, which contributed to the start of another successful fiscal year.

Thank you for joining us today. Jeannie, please provide the replay number.

The replay number for today's call is (877) 344-7529 and the access code is 3613183. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.