JKHY - NASDAQ

Good morning, everyone. Welcome to the Jack Henry Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions]. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Vance Sherard, Vice President, Investor Relations. Please go ahead.

Thank you, Jamie. Good morning, and thank you for joining the Jack Henry Fourth Quarter and Fiscal 2025 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 and full year financial results, operational metrics and the outlook for fiscal 2026. Mimi will then discuss the financial results and full year fiscal 2026 guidance provided in yesterday's press release, which is available in 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, everyone. I appreciate each of you joining today's call. I'd like to begin by thanking our associates for their hard work and dedication to our success. They consistently go above and beyond to take care of our clients. That, combined with our unwavering focus on culture, service, innovation, strategy and execution continues to differentiate us in the market. I will share 3 main takeaways from the quarter and fiscal year, and then we'll provide additional detail about our overall business. First, our financial performance. Our fourth quarter and fiscal year 2025 results reflect solid overall performance. In Q4, our non-GAAP revenue increased 7.5% and our non-GAAP operating margin was 23.2%, representing a strong 146 basis points of margin expansion over last year. For the fiscal year, we again produced record revenue and operating income. Our non-GAAP revenue was $2.3 billion, and our non-GAAP operating income was $541.1 million. As you saw in the press release, we shared guidance for fiscal year '26. We do anticipate some slight revenue headwinds from industry consolidation, the impact of renewal pricing pressure and macroeconomic uncertainty. However, we remain committed and bullish on continuing to realize solid margin expansion growth along with strong free cash flow metrics for the year. We are confident that our technology innovation and execution will continue to drive our sales engine and position us very well for the long term. Mimi will discuss more of the fiscal '26 specifics in her comments. In addition, I want to communicate openly regarding the large bank merger that was recently announced and includes a Jack Henry core payment and complementary solution client. It has been speculated that Jack Henry's technology would not be selected for the combined financial institution. After conversations with both parties, there has been no indication of an intent to terminate any agreements. If contract changes were to take place, they would happen in fiscal '27 and not in fiscal '26. Second, continued industry-leading sales momentum. For Q4, our sales team had an impressive 23 core wins, topping the 22 wins we had in Q4 of fiscal '24. For the full fiscal '25, we signed 51 new core deals, 31 banks and 20 credit unions. Additionally, we signed 37 contracts to move existing in-house core clients to our private cloud, including 11 in Q4. We now host 77% of our core clients in Jack Henry's private cloud environment. Third, we continue to win larger new core deals. Over the past 3 years, the total assets of new core clients won has nearly tripled. We had 47 wins totaling $19 billion in assets in fiscal '23, 54 wins totaling $39 billion in fiscal '24 and 51 wins totaling $53 billion in fiscal '25. Of the 51 core wins this fiscal year, 16 were institutions that have over $1 billion in assets. In fiscal '24 and '25 combined, we won 31 core deals in this segment as compared to only 16 in fiscal '22 and '23 combined. Our strategy is also resonating with the $5 billion to $10 billion asset institutions as well. Of our 16 greater than $1 billion wins, we won 4 in the $5 billion to $10 billion segment after winning only 1 in fiscal year '24 and none in fiscal year '22 and '23. Now for more detail on our overall business, starting with some accolades for the team. We're proud to have recently received recognition in 3 prominent publications, U.S. News and World Report's Best Companies to Work for, Time Magazine's Best Midsized Companies and Newsweek's Greatest Workplaces. These awards are important because they reflect our people-first culture and deep commitment to doing the right thing for our employees and ensuring they are valued. I also want to recognize the tremendous effort of our team and our clients on the highly successful migration of Fedwire Funds to ISO 20022 standard on July 14. This was a major industry-wide event for the United States payments infrastructure, aligning it with international standards and enhancing crucial capabilities such as fraud detection and data sharing. Related to the migration, we had 5 clients go live with the new wires component of our cloud-native Jack Henry platform, including one of our largest credit union clients. They did this at the same time as the migration, and it went extremely well. This is a strong validation of our component strategy for easing concerns about large-scale migrations and conversions. Next, I will provide a few updates on specific products and new solutions that are part of our technology modernization and SMB strategies. Within our Payments segment, we now have 376 clients on the

Thank you, Greg, and good morning, everyone. The relentless dedication of our associates in serving our financial institution clients and delivering shareholder value led to another quarter of solid revenue and earnings growth. I will begin with fourth quarter and full year results, then conclude with our fiscal '26 guidance. Q4 GAAP revenue increased 10% and non-GAAP revenue increased 8%, a continuation of consistently solid performance. Full year growth was 7% on a GAAP basis and 6% on a non-GAAP basis. Fourth quarter deconversion revenue of approximately $20 million, which we previously announced, was up approximately $14 million, reflecting the increasing pace of M&A activity among financial institutions. Full year deconversion revenue of $34 million, $17 million more than the prior fiscal year exceeded guidance. Now let's look more closely at the details. GAAP services and support revenue increased 11% for the quarter, while non-GAAP increased 7%. For the year, the increase was a healthy 7% for GAAP and 5% on a non-GAAP basis. Services and support growth during the quarter was the result of volume increases in data processing and hosting revenue, consulting work orders and release revenue. The full year growth rate for services and support revenue was due to similar drivers, partially offset by lower hardware and license revenue. Private and public cloud offerings continue to drive impressive growth. Cloud revenue increased 11% in both the quarter and the year. This reoccurring revenue contributor is 32% of our total revenue and has a multiyear track record of double- digit growth. Shifting to processing revenue, which is 43% of total revenue and another strategic component of our long-term growth model. We saw healthy performance with 9% non-GAAP growth for the quarter and GAAP growth of 9% for the quarter and 8% for the full year. Consistent with recent trends, quarterly drivers included increased card, digital and payment processing revenue. Completing commentary on revenue, I would highlight total recurring revenue exceeded 91%. Next, moving to expenses. Beginning with cost of revenue, which increased 5% on both a GAAP and non-GAAP basis for the quarter and full year. Drivers for the quarter and full year were consistent and included higher direct costs and higher personnel costs. Next, R&D expense increased 7% on both a GAAP and non-GAAP basis for the quarter and 10% for the year for both GAAP and non- GAAP. The quarterly and full year increase was primarily due to the higher net personnel costs, increased internal license and fees. Ending with SG&A expense for the quarter, non-GAAP basis, it increased 8% and 9% on a GAAP base. For the year, the increase was 7% on a non-GAAP basis and 2% under GAAP. The quarterly increase was due to higher net personnel costs, increased professional services and higher deconversion costs, partially offset by gain on assets versus previous loss on assets for the prior year quarter. The full year increase included all of the previous factors plus higher travel and contract labor costs. We remain committed to generating annual compounding margin expansion. Q4 delivered 146 basis points increase in non-GAAP margin to 23%, resulting in a notable 70 basis point non-GAAP margin of 23% for the full year. Non-GAAP margin benefited from a continuing focus on cost management and leveraging the existing workforce. For the year, headcount increased a net 72 positions or 1%. For the last 5 years, excluding the Payrailz acquisition, we've added less than 1% annually, showing a continued commitment to efficiency. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.75, up 26%. Fiscal '25 fully diluted EPS was $6.24, up 19%, benefiting from strong operational results and higher deconversion activity. Breaking down the results into the 3 operating segments, we're pleased to see positive performance across the board for both the quarter and the full year. Our core non-GAAP segment revenue increased 7% for the quarter, with operating margin increasing a robust 274 basis points. We continue to gain benefits from private cloud trends and disciplined cost management. Full year non-GAAP core segment revenue growth was 6% and the associated margin increased 113 basis points. Payments non-GAAP segment quarterly revenue increased 6%. The segment again had strong non-GAAP operating margin growth of 99 basis points. Full year non-GAAP revenue growth was 6% with non-GAAP margin expansion of 109 basis points. Revenue growth was due to the continued growth in our card-related services, EPS and a large percent growth on Faster Payments granted on a smaller dollar amount. Margin benefited from operational efficiencies and disciplined cost management. Finally, Complementary segment non-GAAP quarterly revenue increased an impressive 11% with 155 basis points of margin expansion. Fiscal year non-GAAP revenue and margins strongly increased 9% and 117 basis points, respectively. Both quarterly and full year revenue growth continued to reflect digital solution demand, beneficial product mix sales, sources from both core wins and noncore financial institutions. Now a review of cash flow and capital allocation. Fiscal '25 operating cash flow was a record $642 million, a $73 million increase over the prior fiscal year. Excluding proceeds from sale of assets in both fiscal years, free cash flow was $410 million, significantly more than the $336 million the last year. Full year free cash flow was positively impacted by timing of certain contract payments and tax payments unrelated to recent tax legislative changes. Free cash flow conversion was an impressive 90%, and I will provide more details when discussing the full year guidance. Our consistent dedication to value creation resulted in a trailing 12-month return on invested capital of 22%. Additionally, I would highlight other notable return of capital metrics for the year, including $35 million in share repurchases, more than offsetting annual dilution, $150 million in debt reduction and $165 million in dividends. We're pleased to announce 0 debt at fiscal year-end, providing us with maximum flexibility for future capital deployment. For modeling purposes, our amortization of acquisition-related intangibles was $6 million for the fiscal quarter. Heading into a new fiscal year, I will conclude with guidance. As you're aware, yesterday's press release included fiscal 2026 full year GAAP guidance. Deconversion guidance will continue to follow the conservative methodology introduced in fiscal '24. Fiscal '26 deconversion revenue guidance is $16 million. And as we confirm more activity during the year, we will update the quarter outlook. For the full year, GAAP revenue growth guidance is 4.2% to 5.4%. This is understated due to the conservative deconversion revenue guidance. Non-GAAP revenue growth guidance is 5.8% to 7%. Based on the above revenue growth and our predominantly SaaS-like operations, we expect to again generate sustainable accretive sources of margin. We are guiding for the third year in a row to annual non-GAAP margin expansion of 20 to 40 basis points. All of the above are indicative that our business operations remain healthy and consistent. The full year GAAP tax rate estimate for fiscal '26 is 23.75%. The above guidance metrics result in a full year outlook for GAAP EPS of $6.32 to $6.44 per share, a growth of 1% to 3%. As a reminder, due to the conservative deconversion revenue guidance at the beginning of the year, GAAP EPS growth is understated as a result. Fiscal '26 is expected to have a strong free cash flow conversion due to the recently passed tax legislation. Highlights of the tax legislation include bonus expensing of R&D costs from Section 174 and bonus tax depreciation will have a meaningfully positive impact. We will be making an election in the coming months on how we will implement the tax law changes resulting in one of the following 2 scenarios. We could see a more significant impact in fiscal '26 with limited nonrecurring impact in fiscal '27 or we could elect to take the benefits spread across the fiscal years '26 and '27. Overall, this legislation will allow for free cash flow conversion of approximately 85% to 100% in future years. Our current view has the cadence of fiscal '26 non-GAAP revenue being strongest in Q1, lower in Q2 and increasing on a reported basis for quarters 3 and 4. Our annual customer conference, Jack Henry Connect will be held in Q1 this year, partially driving higher revenue during that quarter and the lower performance in Q2. Absent the timing switch of this revenue growth in quarters 1 and 2 would result in the first 3 quarters showing similar growth and Q4 showing moderate sequential increase. Our Jack Henry Connect conference will revert back to Q2 in fiscal '27 and stay in that quarter for several years, ending this occasional timing mismatch. Consequently, Q1 estimation for non-GAAP revenue growth is approximately 7% to 7.5%. 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 of our business is a consistently strong fiscal year financial results. In conclusion, Q4 and full year results reflect solid performance and meeting or exceeding provided guidance. We enter fiscal '26 with positive momentum and high expectations to deliver on our full year guidance targets. Demand for our solutions and the fiscal strength of our clients remain strong, which we expect to drive superior shareholder value. We appreciate the contributions of our dedicated associates that achieved these strong results and our investors for their ongoing confidence. Jamie, please open the line for questions.

[Operator Instructions]. Our first question today comes from Dan Perlin from RBC.

I wanted to kind of circle back maybe on the -- I guess, the aggregate demand environment, but coupled with kind of expectations around implementation cycles. So very clearly, the demand -- you won 51 core, so that's very much on track with, I think, the expected run rate you guys have been putting up for a number of years. And it sounds like you're talking about larger wins, obviously. I'm just wondering to try and reconcile that with maybe last quarter's commentary around some large capital purchase delays and maybe some implementation cycles for noncore projects. I'm wondering if those 2 are still kind of at odds with one another? Or has that gap closed a little bit?

Yes, Dan, thanks for the question. Yes. So a couple of things. So one, from the sales demand and our ability to continue to go up market, I think hopefully, you were able to hear all my comments on that. So that's definitely happening and definitely something that is a huge focus of ours. From back to your question from last quarter, yes, some of that gap has significantly improved, I would say, mostly on the consulting side and things along that line. Some implementation still a little bit delayed, but nothing, I guess, to the same level they were last quarter. But if you remember, I also pointed out that there were some delays on some of our consulting engagements, especially around our Financial Crimes Defender solution and things like that, that have all now finally caught back up again. And as I indicated, that happens occasionally throughout the year. But because it was more pronounced and it was the kind of be part of our -- the end of our quarter, it ended up pushing it into this fiscal year. So that's also part of that -- why I called it out.

Got it. Okay. That's great to hear. And then Mimi, just -- this is maybe nuanced a little bit, but like the revenue guidance range is a little bit wider. I think it's 120 basis points relative to 100 for the past several years. And so I'm just wondering what kind of drove that decision. I don't think it's a function of the deconversion revenue, but I just wanted to make sure I understood what was driving the wider range.

Thanks for the question, Dan. Yes. I think overall, as we set our budgeting process and we look at the macroeconomic variables that are beyond our control and as we get to just larger total revenue size, having a 1% historical spread in the guidance, we felt was a little bit constricting. We wanted to make sure we're very much committed to hitting the guidance and executing on that. So just giving us a little bit more flexibility as we collaborate with sales and operations just to think about the risks and opportunities before us. So not much -- I wouldn't call it anything structurally different, just providing more operational flexibility.

Our next question comes from Nik Cremo from UBS.

First, I just wanted to circle back to the fiscal 2026 revenue outlook. How should we think about growth between the various segments on a relative basis? I know that the Payments segment was called out to have some headwinds, and it looks like the number of new Banno wins in fiscal '25 versus fiscal '24 was a little bit lower, so maybe a little slower in the complementary segment relative to the core segment.

So as we think about '26, I think some of it is going to be trends that are continuing recently. We expect that certainly core will remain solid again. Payments relative to the long-term growth algorithm, probably slightly below or towards the bottom end of that range of the near-term target. And complementary, we actually expect solid growth for '26, closer to the higher end of that growth algorithm range.

Our next question comes from Vasu Govil from KBW.

I guess just the first one, you guys called out short-term revenue headwinds from bank M&A. Any way to quantify how much that's weighing on the 2026 outlook? And then, Greg, I know you called out the large bank merger you alluded to it in your comments, not baked into this year's outlook. So are you saying that, that's going to be a headwind the following year, if not this year? And then more broadly, if bank M&A continues at an accelerated pace, are we potentially looking at multiple years of maybe slightly softer top line growth than the 7% to 8% we're used to seeing from you guys?

Yes. So let me answer the middle question first. So what I am stating emphatically is that we have not received any guidance that of what will happen. In fact, we've had really good conversations with both parties. And so there hasn't been any indication that Jack Henry will not have an opportunity to either win the overall deal or continue to have additional products in the solution set that -- even if it is in our core. So all those conversations are really actually happening now. So short answer is yes. So I don't expect anything in fiscal year '26. But I don't know what will happen yet and so what the impact will be. And again, as we've reiterated several times, we don't have any client that is a substantial amount of our revenue. So this client is actually an in-house client. So from a revenue perspective, it actually will probably have less impact than some of our outsourced clients if they were to leave. So it isn't as substantial as maybe some maybe project. Number two is that from a headwind standpoint in an M&A, it really is about the fact that we have -- if you look at the balance of what's happened so far, it's basically equal, almost in exact numbers of how many have been Jack Henry to Jack Henry and how many have been Jack Henry to -- have been acquired by a competing core. But what ends up happening is, as you can imagine, a lot of the deconversion revenue is mostly predicated on how much time is left on the agreement. And so not every deal is actually equal. You could have a deal that has less than a year. You've got a deal that's got 5 or 6 years, and that's a more substantial impact. So even some of our Jack Henry to Jack Henry deals, because of the way the pricing was set up or the size of the actual acquisition, it didn't hit the next level of the trigger for us to get an immediate impact on revenue growth. So it may stunt the growth for a short period of time, but it isn't a long-term thing. So I guess most people are viewing this M&A market. You have to put all of those factors into play, meaning that not every loss or every win is created equal depending on term. So again, so some of that based on what has happened is creating some short-term revenue. And I think still, as we stated last time and as I will continue to state that I think it's a balance. If you look at over the last several years of the number, even when M&A was more prevalent a few years ago, we continue to grow at pretty nice numbers. And if you look at what we're guiding to right now, it's still significantly higher than the competition is. And I continue to believe that, that will only be advanced as we get through some of these short-term headwinds.

And if I could just add on to that relative to the third part of your question, we see no structural change in the long-term opportunities for the company. The company is solid and extremely healthy. We expect if we think about the 3-year CAGR versus the algorithm targets, they're still very much valid and intact. And as Greg talked about, we have a lot of exciting new opportunities before us that we think will leverage to future growth.

Yes. Vasu, if you don't mind me just adding one other point just in case it doesn't come up, I think it's really important that we also talked about some renewals and some of the pricing piece. Just to put this in perspective, from a renewal standpoint, we did 12% increase in overall renewals for the year. Some of those are actually predicated a little bit earlier than we would originally expect because it is a Jack Henry to Jack Henry conversion or migration and the particular acquiring entity wants to renew ahead of the game. And so there's some things that become a little bit more unplanned. But what I really wanted to emphasize was that in fiscal year '24, of all the renewals we did, it totaled $94 billion in assets. But for fiscal year '25, it totaled $223 billion in assets. So they were a lot of our larger clients. And so we were able to renew them. Obviously, there's some short-term price compression. We sell them new products, so it takes a couple of years for those to get implemented and things along that line. But that's part of the reason. And I would say that, that's probably a little more prevalent than even the deconversion component.

I appreciate all the color and all the detail. That was very, very helpful. I guess as my quick follow-up, one of the other things you guys mentioned in the release is just this slower account growth, and that is something we've heard from some of your peers as well. So hoping you can give a little bit more color on what kind of change you've seen in the trend line? Any dimensionalization of what the magnitude of that change is and expectations going forward?

Yes. It's really started over the last several years in the credit union part of our market. And I think there's a lot of reports that have actually shown that. And I think, yes, 1 or 2 of our competitors pointed it out as well on the banking side. I think some of it is predicated on what's happening with the neobanks and some lost accounts that are going there. Some of it also is predicated just on how pricing occurs. Some of the institutions as they change their deposit growth strategies and things along that line, sometimes they end up purging accounts that aren't really growing or would be more what I would call dormant accounts. And so a lot of them change their strategy because they don't want to pay for those. So there's some of that from an organic growth, some of it going to neobanks. And that's why we've been so focused on our SMB strategy to bring those deposits back into our financial institutions to allow that -- what's going out to the stripes and the squares and into the chimes and others to be able to stay within our financial institutions. So again, that's a big part of our overall strategy.

Our next question comes from Kartik Mehta from Northcoast Research.

Greg, I know just in the previous question, you talked a little bit about pricing pressure related to renewals. And I'm wondering, is the pricing pressure you're seeing just related to the fact you're renewing and that's just the way business is done? Or are you seeing any incremental pricing pressure on new or renewals?

Good question, Kartik. Yes, I mean it's happening in both. I mean there's -- but I won't say that it's really that much -- it's new. Pricing pressure on renewals is always. I mean there's only a handful, as we've talked about before, roughly 100 opportunities a year where people really are making decisions. So those get to be pretty competitive out in the market as people start to talk through it. And again, candidly, we're as transparent as anybody in the industry by sharing the number of core wins. I mean you don't really hear our competitors do that. And I think we do it because we've been very successful and continue to do that and again, continue to go upmarket. But the pricing pressure itself, there's always -- it's always going to occur. Everybody wants something for less. But we've done a really good job. Honestly, one of the things that we were really focused on this year that I think will help us in the future is to really get more granular on how we look at renewals. So both the pricing approach, the timing of how we handle compression, even how we compensate our sales team, we've changed all of that in the back half of this last fiscal year, and we saw some of the improvements in the fourth quarter. And that will continue. And I think that's going to help us with kind of our process and approach going forward. But there will always be pricing pressure because, again, everybody is trying to go after the same 100 opportunities.

And just one follow-up, Greg. Your partnership with Moov, I think it started obviously last fiscal year. And I'm wondering how it's progressing in line kind of as opposed to your expectations? Is it going in line with your expectations? Or is it any different than you expected?

Yes. I appreciate the question because actually, it has exceeded my expectations. We were told a year ago when we actually announced this at Investor Day that it would take both Visa and Mastercard and Apple and others have told us it usually takes 18 to 24 months to get fully certified through all of the various things and we did it in 10 months. Both Visa and Mastercard told us they've never seen that before. They both have seen the transactions and they've seen the live demos and they've been blown away by what we're able to do. So there is significant interest and excitement, and we will be blowing it out at Jack Henry Connect by really doing some really cool things on stage with our clients. We're purposely holding off rolling this out until after Connect. But we plan, as I mentioned, to roll it out over the next 2 to 3 months to all 1,000 Banno clients. And we're already -- like I said, the people that are already having it have been very excited, and we've seen some nice numbers. Now it will take a few months for us to get some real traction and to have kind of a guide on what we're seeing. But both our development teams have candidly exceeded my expectations.

Our next question comes from James Faucette from Morgan Stanley.

I want to just ask quickly on margin expansion for '26. Can you walk us through kind of what the key levers are? I know you guys always highlight maybe including today, how you've been able to drive improved efficiencies through hiring, et cetera. But just wondering if we can get a little more detail on kind of what you think the key components are, et cetera.

Thanks, James, for the question. It's one of the metrics, Greg and I monitor quite closely and hold in very high regard. We know that, that's a key part of the investor story is that the nature of the business itself inherently lends itself to margin expansion. I'd say it's a couple of things. One is the continued culture around process improvement, efficiency. Greg will probably talk a little bit more about what we're doing in AI. But trying to -- as I called out in some of my commentary, we really manage the headcount growth through that both zero-based budgeting, but looking for opportunities to drive efficiency throughout the organization, not just in shared services, but in product and development as well. So that's a large part of it. One of our largest expense lines is just headcount. And so by keeping some of that headcount much tighter in the way we open new positions, the way we manage positions, we've been able to, over the last several years, deliver margin expansion. But then there's other structural trends that we see continuing. Greg mentioned the number of wins we have from a migration perspective. So continuing to move to private cloud helps us. We're further in the journey of our public cloud migration. So from an infrastructure cost, we're starting to see kind of the plateaus of some of -- for a while, we had some dual costs as we are migrating some of those products into the public cloud space. So those are some of the drivers as a whole to margin expansion.

Yes. James, I'll just add just as Mimi mentioned around AI, but we've had a significant focus on process improvement for years around here. Roughly 35% of our staff are green belts and trained and taught in the classroom. So we started that many years ago, and that continues today. We also take a very unique approach, I think, to how we handle both process improvement and AI initiatives by giving a mantra of doing more with the same instead of doing more with less. And that really enables our associates to have more of a focus, not thinking that they're immediately going to lose their job because they came up with a great idea or better utilization of a tool. So that's why we've been able to minimize the amount of headcount that we've had over the last several years with that focus, and that will continue. But we have a lot of things that we have going on, not only in development, but also in things like HR and how we hire, our legal approach, finance. I mean, really, all of our groups have really embraced the AI component. And then lastly, I think I mentioned this in my script, but around the work that we're doing in our tech modernization platform has allowed us to lessen the amount of people we need in certain areas because we're not duplicating efforts anymore in building out the same things. So I mentioned authorization or entitlements. Those used to be built in all the products individually. Now they're built once and utilized across the organization.

Great. And then I wanted to just touch quickly on Banno and just dig in a little bit there. Wondering how has early transaction trended with Banno Business? And can you update us on the go-to-market motion, particularly given some of the implications on the competition front with some of the competing core platforms?

Yes. I mean, so Banno Business, as I mentioned, just won a really nice award from Datos Insights. We're starting to get a lot of the -- as I mentioned, I guess, it was last year at Investor Day, but also throughout our meetings that we were kind of in a catch-up mode with some of the key features with some of our key competitors. We're almost there. And as a byproduct of that, we are starting to win some of those deals from them where we weren't previously because we were behind on the business front. So from a revenue standpoint, it's obviously contributing to the growth of the Banno platform in general and our digital. But there's other things that we've built as well that are helping to contribute as part of what we call add-ons and Banno Business would be considered one of those. But I'll be really, really frank with you, James, is that I think the things that we're adding within Tap2Local and Jack Henry Rapid Transfers tied with the Banno Business application is going to allow us to really differentiate in the market because nobody has the Tap2Local and Jack Henry Rapid Transfers at this point in time.

Our next question comes from Dave Koning from Baird.

And I guess, first of all, the change in contract with the third-party provider, that $16 million headwind, that's pretty big in context of -- I don't think many of your clients are over 1%. So that's close to 1% revenue headwind. Maybe describe a little more. I assume it's a reseller partner with revenue shares maybe going down a little bit, but maybe describe that. And then are we right about $12 million in Q1 and then $16 million headwind starting in Q2?

Yes. I can answer that a little bit more, Dave. So in this instance, it was a contract renewed. We're actually the reseller of the product. It's a bundle of products. So essentially, the way I would think about it is the net economic impact is unchanged. So it's just -- the revenues received is a royalty bundle under the contract. You're accurate in stating the $16 million in totality, $12 million of that will occur in Q1. And just for a little extra color, that's within the core segment.

Okay. Okay. That's great. And then, I guess, secondly, the gain that you're getting during '26, which quarter is that in just so we get the EPS cadence correct?

It's mostly in Q1, but it's a little bit across the year. We'll give more color as the year goes on. It's around some larger asset sales.

Our next question is from Will Nance from Goldman Sachs.

I wanted to come back to the free cash flow topic. I mean you've had several years where free cash flow was negatively impacted. And as you look out the next couple of years with a better cash flow outlook, just looking for your updated thoughts on capital allocation and if there's anything that's sort of top of mind for you as you kind of come into this new degree of flexibility on the free cash flow side?

Thanks for the question, Will. It's certainly been a journey looking back 3 years when we were at 55% free cash flow conversion and first hit with the legislative change, it's quite the journey back to 90% that we are to get and then guidance of that 85% to 100% in the future. So I think there's no reason that, that 85% to 100% is not going to be where we consistently land year-to-year. So we're just excited to get this new legislative change kind of both from a certainty perspective that it's not just short term, but just a clarity now to move forward and have strong cash flow. As to the second part of your question from a capital allocation, as I said in my comments, having a much stronger free cash flow position and 0 debt, which is a pretty remarkable balance sheet from a fortitude perspective, does allow more flexibility. We think that our intention is to be able to increase the size of our share repurchases. We've had to constrain them over the last couple of years as we focus more on accretively paying down the debt. That now as we have 0 debt. If I had to say we probably likely have the ability to ramp up share repurchases of at least $100 million, hopefully more and still remain open to M&A opportunities and again, always looking to have strong growth in our internal development efforts as well.

Got it. That's helpful. And then, Greg, I wanted to ask, I recall when you took over the CEO role, a big part of sort of your priorities centered around looking at some of the assets that you have from either a divestiture perspective or an efficiency perspective and trying to -- I'll just say, maybe clean house a little bit. And I'm just wondering if you could give an update or your kind of latest thinking on any opportunities internally to increase efficiencies, any asset sales that you have contemplated or any thoughts on kind of cost savings and margin structure outlook as you're coming up on a couple of years on the job?

Yes. Thanks for asking the question. And yes, so that has absolutely still remained a priority. We had a couple of assets that we are strongly considering that potentially could be part of a sale at this point. We're still evaluating a couple of opportunities there. We have announced the end of life of 9 different small -- very small products. But one of those that isn't as small is our NetTeller product. So we have announced that to our clients. We have all but one of our very small cores, and there's some specifics to why that particular core hasn't been sunset yet. But our 2 bigger banking cores and our credit union core have been announced. So that's another big one. And that will continue. So we're looking at opportunities. We, again, started the communications. But we give our customers roughly 24 months as part of our end-of-life process. And so we'll transfer some of our assets over to newer products or we'll just shut down some functionality that we were actually paying and investing in that we no longer do. That was also a big part of our budget process this year where we approached all of our teams with the same light of, hey, we're not going to be investing in some of these products that we're at a point where we don't think they're going to be long-term players for us. So I appreciate the question, and that will continue, and we can continue to update you on that.

Our next question comes from Ken Suchoski from Autonomous Research.

Can we just revisit the quarterly cadence on non-GAAP revenue growth? And maybe we could touch on the cadence in the back half of fiscal year '26 because I think there were some comments that fiscal 1Q would be in that 7% to 7.5% range. I think fiscal 2Q a little softer and then increasing on a reported basis for 3Q and 4Q. So I just wanted to confirm that's on a non-GAAP basis because I think the press release said fiscal 3Q is slightly weaker. So just trying to figure out if that's relative to the full year or fiscal 2Q.

Thank you for the question, Ken, and the opportunity to clarify. It is on a non-GAAP basis, that's the way we manage the business. And you're accurate in your summary of it, Q1 being the strongest, then Q2 a little weaker and then increasing from 3% to 4% for the remainder of the year.

Okay. That's helpful. And then maybe just a higher level one on -- I know it was asked about earlier, but just on the pricing dynamics in the industry. I think you've talked about one of your competitors becoming increasingly aggressive on pricing. Can you just talk about where they are pricing more aggressively, whether that's on the core itself? Or is it the surrounding solutions. And I'm curious, in your opinion, what changed in the industry that led to this? I know Jack Henry has typically commanded premium pricing versus peers. It's a concentrated industry. So I'm just curious how you're thinking about that.

Yes, ken, thanks for the question. So a couple of things. One, I would say that both of our primary competitors have had that approach, maybe one longer while the other one was a little bit distracted. That distraction is now more gone. But most of the competitive pricing that we see is candidly in them keeping their own customers as we're going after new core wins. We see some of that competitive pricing, obviously, in our own renewals, as I mentioned. But because we have a lot more leverage and the ability to showcase what we've done for those particular clients over whatever term of agreement they've been with us, we still demand or command the highest pricing in the industry. We hear that from consultants all the time that we still -- so there's -- when you look at the overall pricing, even of the 51 core wins that we mentioned, I can guarantee we were never the lowest price in any of those 51. So that is just part of it. But it ends up being a decision based on price sensitivity or technology innovation. And I tell CEOs of institutions all the time, you got to decide what's more important. And do you want the long-term growth and ability for us to take you into the future with what we're doing with tech modernization and a lot of our innovative products like Tap2Local and others? Or do you want the short-term win while others are trying to figure it out. So obviously, you get a mixed bag. But as you know, we won our fair share and continue to win upmarket. But I would say the dynamic isn't that much different, and it's mostly on them protecting what they do have today.

Our next question comes from Dominick Gabriele from Oppenheimer.

Compass Point. I really appreciate the question. So I just wanted to go back to the account growth at your partners, and you mentioned some neobanks there. Are there any other factors besides just maybe takeaways from what some may say traditional finance companies to neobanks. Are there any other dynamics that play into why account growth could be slowing, say, 1% to 2% versus '23?

Yes. I mean I think a lot of it is -- it's not just the neobanks, but as I mentioned before, it's also some of the SMBs taking their products to other to other providers that are offering solution sets. I think I referenced this early on or maybe it was even at Investor Day a year ago, that only about 16% of folks that have retail accounts at the community and regional banks actually have their business account there. So another reason why we're continuing to really push our SMB strategy to keep those deposits and accounts at those institutions. But between neobanks, between digital wallets, between opportunities for folks to keep money in other places, dormant accounts, as I mentioned, where if those accounts -- if they're paying for that particular account for a period of time, but there really isn't any activity there, then they want to cancel that account. So that slows the actual growth of what maybe we had experienced in years prior. I assume that's very similar to what our competition is experiencing as well. But those are some of the high-level things.

If I could add on to as well, this is not a Jack Henry specific, but things you'll see across the industry. But until recently, you're not seeing a ton of new car sales, which will lead to new loans and autos, with the housing market kind of being frozen and not seeing a lot of transactions in real estate, and that's been a national issue, again, less mortgages, less account opening. So we're seeing some of that tied to lending volumes as well.

It's certainly not a Jack Henry only issue. Sorry, go ahead.

Yes. No, I'm sorry to interrupt you. I just was going to say we also have a mixed bag of clients that have asset-based pricing and some that have per account pricing. So it really depends. But as the customers get larger and really dependent on whether they're more business focused or retail focused, that has a stronger indicator of what type of pricing that we would have in place with them.

Maybe just lastly, maybe the complementary business, really some pretty stunning growth this quarter. Maybe just talk about -- I know you said that it should -- you're going to see a near high end of the range for that business. Could you just remind us what that range is? And then how you think about the fourth quarter grow over since this quarter was just so good on the revenue.

Yes. So Dom, it's a great question. As you recall, the complementary segment is a whole portfolio of products. You have some anchor tenants like digital that continue to have impressive growth. Then you have other things like Financial Crimes Defender, which is really leading to some strong momentum. And some of the broad-related solutions as it relates to faster payments are also another driver of growth. So those trends, we think, are going to continue, and that's why we expect to see that continuation for next year. And if you think about that range, it's about 8% to 9%, just as a reminder from the growth algorithm perspective.

Our next question comes from Chris Kennedy from William Blair.

Greg, just wanted to follow up. I mean it's clear you're excited about Banno for Business and Tap2Local. Can you just kind of give an update on the SMB strategy, kind of where you are relative to your initial expectations?

Yes. Thanks for asking, Chris. Yes, like I said, I'm extremely excited, and I would say we're ahead of where I expected us to be just because as we really got into building everything out and we're told it would be an 18- to 24-month process, but our team was able to complete it with move in 10 months. So that is significantly ahead of where we thought we were going to be. And as I mentioned, we're going to start rolling this out in a heavy, heavy way post our client conference in early September. So early indications from the card associations and from the clients that have been in our closed beta have been tremendous. So excited is an understatement. The entire SMB strategy, we actually have a road map that we've created that will cover over the next 18 to 24 months of a variety of different activities that we will be adding to the overall solution set. Some are actually kind of point-to-point solutions that we have today at Jack Henry that haven't been positioned as well as maybe we should have in the past to put them in this SMB strategy. Others are things that we're working, again, independently and with Moov that we'll be rolling out. But candidly, my big message to our team is that nobody is going to care about the next solution until the first one is successful. So we are highly focused on making sure that, that is the case.

And our next question from John Davis from Raymond James.

Greg, I just want to take a big step back here. If we think about the '26 revenue outlook, it's about 100 basis points at the midpoint below what I think normalized growth. And you said you haven't really seen -- you don't consider any real structural changes in the Jack Henry growth rate. you're winning larger banks, which I think would accelerate growth. You called out the industry headwinds. Is there any change in guidance philosophy, understanding your first year a little bit below revenue? Just trying to think about the puts and takes. Are these industry headwinds more than 100 basis points and that's offsetting some of the larger bank wins? Is there added conservatism? Just trying to think through the puts and takes of the guide in '26 versus how you think about normalized growth of Jack Henry.

Yes, it's a great question. And so no, there isn't anything, as we said, that's structurally different. There isn't anything that makes up 100 basis point of concern. What it is, is some level of us being -- there's macro things that we're still not sure about that we're still kind of hedging on because we're not really sure. But the bigger part is what we talked about with the renewals and the M&A activity. So though we tend to win more than we lose, as I mentioned, it doesn't really matter from that perspective. it's really about the timing of the activity, the M&A activity and what is left on that particular contract or if the Jack Henry to Jack Henry deals happen, are they actually going to be accretive for us because some of them haven't hit their next tier level of pricing through that acquisition. So all of those are parts of running the business and doing the day-to-day activity that we do. But there isn't anything in that. And to your point about us winning larger deals, a lot of those will start to come on in the back half of the year, the ones that we won last year. As I mentioned before, us winning these larger deals has really only happened over the last 2 fiscal years. So we'll start to see the -- it takes anywhere from typically 15 to 24 months before core activity actually comes on board. Obviously, you get drag along with other payment and complementary products with that as well. But -- so that will really start to happen from 2 fiscal years ago or, I guess, fiscal year just to be specific, from fiscal year '24 happening at the back half of this year in fiscal year '25 and then ongoing. So that's why we remain bullish on where we're going, what we're doing, the activities that we have related to SMB and other tangential things like even stablecoin stuff that I mentioned before. So hopefully, I answered your question, but I wanted to make sure I covered a couple of parts of that.

Yes. The only thing I want to follow up on a little bit is given a little bit more uncertainty this year, given the M&A environment, given some of the industry slowdown, also, you gave a wider range after missing kind of the initial guide last year is maybe there a little bit more conservatism given a little bit more uncertainty coming into this year? Just any change in guidance philosophy in year 2 since you've taken over?

No, no real -- I mean, not in philosophy at all. I mean, obviously, we did extend by a little bit from a 20 basis points perspective. But I mean, we've been talking about that. When you look at our company, 1% is $23 million, 0.5% is $11.5 million. There's not a lot of flexibility in that range. So that was something that we looked at. We'll continue to look at to be candid, in future years. But we thought we'd start off there and kind of go with that approach. But other than that, as Mimi articulated, and I've been trying to articulate here, too, nothing else fundamentally has changed.

Okay. And then just one last quick one, if I can, on complementary. So now that Banno is product parity plus Tap2Local, rapid transfers, where are we in kind of selling that outside the base? And then also maybe just quickly, complementary outside of Banno, what are the puts and takes there? What's going well? What's maybe -- I know you're sunsetting some products there. Just trying to think about kind of the ex Banno growth and also kind of where we are selling Banno outside the base.

Yes. I'm glad you asked that. I was prepared and was hoping somebody would ask me, if not, I was going to bring it up myself. Yes, we're very excited and very focused on continuing to work. As I mentioned before, we've taken a couple of different paths for outside the base. I won't get into all the specifics. There are opportunities like today, we can actually sell and we will sell Tap2Local and rapid transfers outside of the Jack Henry base, but we can do that today. We actually are also going to increase the TAM over the next couple of years by providing some opportunities for even our key digital competitors to sell that and for us to be part of the equation there. But by the end of this calendar year, our teams will start selling opportunities outside of the Jack Henry core base with the belief that we could start implementing the latter part of our fiscal year. So in the May, June time frame, we would hope to have a couple of beta clients that would be live. But that is the approach. We're actually taking 2 different approaches and kind of doing them both using some of the technology that we've built on the platform as well as technology that we're building through core integrations with some outside providers. But all of that is in play, specifically for Banno, but other products will follow suit as well over time. But Banno will be the first one of the ones that are not outside the base today.

[Operator Instructions]. Our next question comes from Rayna Kumar from Oppenheimer.

This is Abigail on for Rayna. I just wanted to talk about hardware revenue, which faced some persistent headwinds in FY '25. What does this outlook look like as we enter FY '26? And what's the impact on guidance, do you think? And then can you help us also look at the size and the decline in hardware revenue from delayed sales and implementations versus just the clients that are migrating to the cloud?

Sure. So Abigail, I would say, as it pertains to the upcoming fiscal year '26, because we've had such headwinds in '25 growth, due to lower hardware sales, it will be less of an impact in '26. So we don't expect a massive rebound by any means in hardware, but we don't expect it to be as much of a material headwind because we're going from a lower base of FY '25. And that is all built into the guidance. As to the latter half of your question, as we continue to see clients migrating from on-premise to private cloud, there's less hardware purchase needs in the future. That said, most of the wins we get today are in the cloud. Very few new client wins are ever on-premise. So we are not -- from a hardware demand perspective, I think those trends will continue because of it correlated to now being 77% private cloud.

Ladies and gentlemen, with that, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to Vance Sherard for any closing remarks.

Thank you, Jamie. In the remainder of our first quarter, we will host approximately 3,000 clients at our upcoming Jack Henry Connect conference, and management will be participating in investor meetings across various U.S. cities and internationally at the end of the month. We would like to thank all Jack Henry associates for their efforts and commitment, which contributed to another successful fiscal year. Thank you for joining us today. Jamie, please provide the replay number.