Good day and welcome to the Jack Henry & Associates, Inc. Third Quarter Fiscal Year 2025 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the conference over to Mr. Vance Sherard, the Vice President. Thank you and over to you.

Thank you, Myron. Good morning and thank you for joining the Jack Henry Third Quarter 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 insights and observations on our quarter and year-to-date financial results, operational metrics and outlook. Mimi will then discuss the financial results 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 turn the call over to Greg.

Thank you, Vance. Good morning and I appreciate each of you joining the call. I'd like to begin by thanking our associates for their hard work and dedication to our success, consistently going above and beyond and taking care of our clients. Our commitment to people-first culture, service excellence, technology innovation and a clear strategy backed by consistent execution continues to differentiate us in the market. I will share 3 main takeaways from the quarter, and then we'll provide additional detail about our overall business. First, our financial performance. Our third quarter fiscal year 2025 results reflect solid overall performance. Our non-GAAP revenue increased 7% and non-GAAP operating margin was 23%, representing an impressive 207 basis points of margin expansion over last year. In terms of GAAP revenue, we are starting to see an increase in M&A activity, and our Q3 deconversion revenue was $9.6 million. We expect a continuation of increased deconversion revenue in Q4. Thus, we are forecasting a full year deconversion revenue range of $22 million to $28 million. Second, our fiscal '25 guidance. As you saw in the press release and with 3 quarters now closed, we adjusted our full year guidance for GAAP and non-GAAP revenue, margin expansion and EPS. Despite revenue guidance revisions, our primary or key revenue consists mostly of processing and cloud with 76% of total revenue for the quarter and grew at 9.8% versus a growth rate of 8.8% for Q3 fiscal year '24. The adjusted non-GAAP revenue guidance is primarily due to macroeconomic concerns and the softening of nonstrategic revenue such as hardware purchases and consulting engagements. As most of you know, hardware is sold to our in-house processing clients at a time they desire to add or replace equipment. Similar to hardware purchases, we are seeing some customers delay…

Thank you, Greg, and good morning, everyone. I want to open by thanking the dedicated Jack Henry team for their steadfast focus on execution and support of our clients. While the quarter results differed modestly from our fiscal year expectations, it was another quarter of solid revenue and earnings growth. I will discuss the details behind our third quarter and year-to-date results then conclude with commentary on our updated fiscal '25 guidance. Q3 GAAP and non-GAAP revenue increased 9% and 7%, respectively, with GAAP revenue outperformance driven by notable uptick in deconversion revenue. Despite strong performance in previously identified key areas, overall non-GAAP revenue growth was tempered by lower nonkey revenue growth, especially from a slowdown in hardware sales and nonreoccurring revenue from customer projects. Excluding hardware impact, Q3 non-GAAP revenue growth would have been 8%. Quarterly deconversion revenue of approximately $9.6 million, which we released prior to our full earnings, increased $8.8 million compared to the same period last year, reflecting an accelerating pace of consolidation in the industry. In light of year-to-date results and fourth quarter pending agreements, we have raised our full year deconversion guidance to a range of $22 million to $28 million. Financial institution M&A activity will have minimal non-GAAP impact in fiscal '25 but potential for a meaningful impact in fiscal '26. Now looking closer to the quarterly results. In the quarter, GAAP and non-GAAP services and support revenue increased 8% and 6%, respectively. Data processing and hosting continue to dominate services and support growth for the quarter and year-to-date. Hardware revenue was down $4 million in the quarter and $11 million year-to-date, creating headwinds for services and support revenue. As a reminder, hardware revenue is both nonreoccurring and low visibility, making it a part of nonkey revenue. Our private and public cloud offering…

[Operator Instructions] We have the first question from the line of Dan Perlin from RBC.

So I wanted to get back to the question, obviously, around like large capital purchases for hardware being down. I completely understand that. The question is, are you seeing similar restraints when it comes to your more modernized projects and cloud migration? So are you starting to hear elongated implementation cycles in that kind of area? Or is it really just this nonrecurring stuff that we're seeing right now?

Dan, yes, so it's almost all in the non kind of nonrecurring stuff. We are seeing a little bit in some of the complementary and payment products that I mentioned, so mostly in what we call kind of day 2 or kind of post conversion, where folks have a product set that they're either waiting for a contract to terminate with a competitor or they have an existing Jack Henry product, which is the case in most of these, where they're just delaying kind of putting the new one on. So let's say, Yellow Hammer to our Financial Crimes Defender product, which, by the way, also affects some consulting revenue because the consulting revenue goes hand in hand with the Financial Crimes Defender stuff. So there are some examples of that. We're not really seeing any real delays in -- like as you described, from somebody going from in-house to outsourced. They usually fill those gaps and they want to take advantage of them. But also do want to remind you that we see delays regularly throughout the year. But because there's only 1 quarter left and where we are with kind of the environment, especially with pure hardware sales where folks that are in-house that are wanting to buy hardware and looking to either delay that decision for 1 of 2 reasons: one that they want to wait to kind of see timing-wise and see if they have an opportunity to wait as long as they can to make those purchases; but the other side is actually a really good reason, which is several of those folks are evaluating moving to our private cloud. And it's through that evaluation, they've also made decisions to delay those purchases as well.

Interesting. Yes. That's great color. Just a quick follow-up for Mimi. You -- Mimi, you talked about M&A impacts being really kind of de minimis to this year, but you took the opportunity to kind of throw out that there could be impacts to non-GAAP revenue growth for '26. So I'm just wondering if you want to put any kind of context or a finer point around that point.

Thank you, Dan, for the question. So yes, as we talked about, we have line of sight through known -- when people sign the deconversion agreement. That's when we start from a revenue recognition perspective, when folks are leaving. I would say we have seen an acceleration in that merger activity, roughly around 30 clients. The majority of these have been Jack-Henry-to-Jack-Henry mergers. And typically, they're cloud customers. So fantastic that we're retaining that revenue. There can be a little bit of a modest pricing impact from a tiered pricing perspective. What usually comes later in the merger cycle -- so when it's a Jack Henry client doing the acquisition, we get notified pretty early on in the cycle. They want to secure their slot. What happens when it's a Jack Henry customer getting acquired away to another platform, we tend to hear about that a little later in the cycle as well as the convert-merge services that we help them with during that consolidation when it's our clients doing this acquisition, are usually a little later post-approval cycle. So we don't -- that's why we're not really expecting to see much of that impact in FY '25, but you would see more of that probably longer in the improvement cycle. We're only a couple of months into the administration. We haven't seen a radical shift in the timing being shrunk and -- from an approval cycle. So as more deals happen and you get a little longer in that implementation and close of those deals is where we would expect to see the impact to our revenue from a positive perspective as well as any services that we would perform for them. So -- and just a final note on the point. On that convert-merge related Jack-Henry-to-Jack-Henry cloud, any of that -- you won't see any lumpiness because that is spread out over the remaining life of the contract. So it's doubtful that you would see anything noticeable in any 1 quarter.

We have the next question from the line of Rayna Kumar from Evercore.

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

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

Understood. That's helpful. And then it was nice to see the strong margin expansion in the quarter. And I know, Mimi, you've spoken about 20 to 40 basis points of margin expansion as a medium-term target. Just given the strength we saw in the high-margin revenue and cost management, is that target too low?

So cost management is something that is just bread-and-butter for Jack Henry. It's something we've always done from 0 baselining of every head count decision to a rigorous prioritization of our capital spend. I'll note that our R&D spend is 14.5% this year, down a little from last year. Now last year was elevated a touch related to the Payrailz acquisition and the integration needed between those 2 businesses. But we are always very mindful as a leadership team Certainly, as we've started to see a little bit of the softness related to that nonkey revenue, we've even turned up the dial a little bit more from discretionary spending control. I feel very comfortable in the 25% to 40%, representing the floor of what's achievable from the model from a year in, year out basis. That's always just a floor, and we aim for more. Too early to see from fiscal '26 perspective given where we stand in the budget timing cycle.

Yes. Rayna, one thing I want to add on that, so -- and Mimi said it. But historically, we've always done a really good job of managing our head count and the timing of that head count. And we've taken that to another level where we have new leaders. And really, they've been grained and trained to make sure that that's part of the process. So that will continue. And obviously, some of the things that we have to spend additional money on as far as infrastructure and other spends do vary each year. So some of that is -- as we're still going through the budget process, as you know, some of that is yet to be determined on where we will end up for next year.

And this year, we're up 1% on head count.

Yes.

We have the next question from the line of Vasu Govil from KBW.

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

Sure, Vasu. So the guide for the remaining of the year is really just given the prudence and having conservative macro assumptions as it relates to what's going on in the economy as well as the trends we've seen in the third quarter. Particularly, the outlook for hardware is down. As Greg mentioned, we're seeing some customers delay big capital purchases, possibly due to economic uncertainty, also as they contemplate moving to the cloud, which is a good thing for Jack Henry. In fact, FIs maybe not wanting to make those pretty expensive hardware decisions may actually help push their decisions to the cloud. So I think in the long run, that could be a great thing for Jack Henry as we're already at 76% of our clients in our private cloud environment. The headwind on hardware is about $11 million for the year. I'll call out that 80% of that falls within the corporate segment with the remainder of that being in the core segment. So I think the other is what Gregory touched upon, which is we're just seeing customers take a bit more of a cautious stance, delaying some of these nonreoccurring projects, mostly consulting work orders, some of the implementation of some of their post core. As Greg mentioned, and I just want to reiterate it, these are contractual commitments they've already signed for. So it's just more of a timing than a fundamental shift or a change in decision-making pattern. So historically, we've seen anywhere between after 18 months of implementation, but it can be as long as 36 months. And so that really comes down to their readiness versus our resources and capability to help them. We have not seen any meaningful changes to our implementation schedule. So I think it's more just out of an abundance of caution to be thoughtful. In terms of the payments impact, we just started to really see that in more in April as we sit here today. We all know that, that is -- the transaction volume is based on consumer spending and how they feel. It also depends on what's top of their wallet, whether it's debit or credit. So again, just prudent in the current environment to narrow that horizon aperture of our outlook. And it will be working down to what our original expectation was more of a really robust fourth quarter. So in absolute -- it's not that we're calling for it to drop off precipitously from the current trend. It's more just relative to our original expectations of being pretty robust.

Yes. One last point, Vasu, is that when you think about historically in tough economic times, folks tend to move to their credit versus their debit. And so based on what we saw in April -- and ironically, we've actually seen good volumes in May thus far, even though a short number of days so far. But the reality is based on historical around here, we've seen the use of credit accelerate over the use of debit during these times. So we're just -- as Mimi said, we're just being cautious with our approach and making sure that we provide that level of guidance.

Great. That's very helpful color. And then, Greg, one high-level one for you. Sort of any change in how you're thinking about your competitive positioning following the announcement from FIS to acquire the issuer business from Global Payments?

Yes. It's a great question. Thank you. No, I mean, I think -- look, here's what I would say: when you look at the fact that they added much other credit processing capabilities with that acquisition, that's -- good for them. We already had credit capabilities. I think one thing that we have that is still a differentiator is that we process on a single platform for both debit and credit. That's not the case for what they have today. And so it's too early to see from a competitive standpoint. We really -- specifically, that particular competitor, we didn't have a lot of challenges when it came to looking at their debit processing capabilities versus ours. So we'll have to wait and see. But they're still working in the same environment as they always have as far as the type of customers they're going after and the size of asset customers. So we'll continue to compete as we always have at that market. As I mentioned in my opening remarks, we're very bullish on our Q4 related to core opportunities. And as you know, most of those come with a lot of add-on products. So I'll leave it at that.

We have the next question from the line of Jason Kupferberg from Bank of America.

So it sounds like as we start thinking ahead to fiscal '26, there might be a couple of moving parts we need to consider on the revenue line. You've got the effect of the deconversion revenues that you highlighted as a potential headwind. Now we've got some delays in post-core add-ons being pushed into fiscal '26, which sounds like it could be a tailwind. So I'm just wondering how you think those 2 dynamics might net out and what the implications could be for revenue growth next year just in the context of the medium-term outlook of 7% to 8%. Is there any risk there?

So Jason, I'd love to share with you the full FY '26 picture. We're just too early in the process. Budgeting season is deeply underway here at Jack Henry, but it's not finalized yet for another several months. And so in this dynamic environment, we just can't commit on next year this far advanced. I will say to some of your comments in terms of the tailwinds and headwinds, our sales pipeline continues to be robust. We're seeing no elongation of the sales cycle. Greg mentioned the numerous account wins, including large FIs that are still making plenty of decisions and commitments, so seeing no change in trends from that perspective. In terms of any of the deals that are being pushed from an implementation perspective, as Greg mentioned, there's always some moving of calendar within the year. I'm not sure that, that will really create a tailwind. We always manage the implementation pretty tightly. So we'll see. If there's enough demand for another implementation team, we'll certainly add that if there's there. But I wouldn't say that that's a layering effect to the normal flow. It's just -- it'll -- it's a continuously evolving calendar. In terms of just the guide, again, too early to say for sure. But I would say as a preview, the width of the revenue guide will likely expand on that, and we'll talk more about that in August.

Okay. No, that's definitely helpful for now. So I wanted to come back to the key revenue, the cloud plus processing. Like you said, it's now 76% of total. And you did actually see acceleration in the growth, almost 10% versus 9% each of the past 2 quarters. Are we going to -- are we expecting to sustain, call it, that 10% level in Q4? And is there any reason to believe that something in that kind of general neighborhood couldn't sustain into next year?

I think it's -- I think you're on the right course in terms of the ballpark you're talking about. I feel pretty comfortable. Those are the long-term strategic growth of the business. You have things like digital, you have things like the new products, the cloud, the continued cloud migration. So all of those have been long sustainable trends for the business, and we fully expect that to continue. What has hurt us is the headwind from the nonkey business that has compressed at about 2%. So that's been more of the challenge. But as we got more and more as a percentage of the portfolio in that key revenue, and we will continue to thrive.

We have the next question from the line Darrin Peller from Wolfe Research.

You mentioned, obviously, the step-up in consolidation you're seeing in your end markets. So again, I mean, I know -- I think you just -- it was just brought up a little bit in the prior question around what it could mean for the future. But at the end of the day, there's positives and negatives, obviously. You have integration revenue if your customers are the acquirer or part of the merger. And then there's obviously the risk. Is -- so just number one, is this an environment that you'd say is big enough of a change in consolidation levels that you would anticipate it actually impacting growth in the next 12 to 18 months? Or are we just a little higher than normal and still watching to see? And just remind us of the positives versus the negatives, obviously, besides just losing a customer. What could be the positive offsets in a higher M&A environment for you guys?

Darrin, I'll take that. It's Greg. So a couple of things. So as mentioned, it starts with the size of the institution. So as you know, we've continued to grow -- last year, we sold 15 multibillion. We sold 8 so far this year, much larger ones, as I referenced from an asset size on the $30 billion on the 28 sold so far this year, meaning on average, we're selling over $1 billion in assets per deal sold. So again, that historically hasn't been the case. And so as we continue to able to go upmarket and have larger-sized institutions, they tend to be the acquirers, as you can imagine. Over the 40 years of kind of the market shrinking, most of that has happened at the $500 million-and-below asset size. So the larger we have, the more opportunity. So to answer the second part of your question, yes, so it happens to be kind of both. So if it's a Jack Henry client buying a Jack Henry client, there are some things that we can work through related to the deconversion fees and/or kind of convert and merge fees that end up being positive for us. When you look at a competitor buying one of our clients, obviously, we tend to get the full conversion fee, deconversion fee and push. And it really depends on how much time is left on that contract at the time that, that purchase happens. But what we typically see when it's Jack Henry to Jack Henry is not only do they -- do we retain the client, but they tend to buy additional products depending on what one of the -- which institution had which products. And we actually saw that this year with a large merger of $4 billion-plus institutions where one of them had our digital platform and one of them didn't. And we were able to get them to move to Banno for both. So it is a hit and miss depending on which institutions, what products they have, the timing of the -- how much time is left on the term of the agreement and things along that line.

And I'll just add that while in general over the multiyear period, it tends to be a positive for Jack Henry, as Greg mentioned, more of our clients are the acquirer than the acquired. It can produce some lumpiness, particularly as we moved upmarket. While deconversion revenue is a great thing for free cash flow and EPS, it does represent the loss of future revenue. And so if for some reason in this environment we were to lose any bulk of larger clients, we would call that out from headwind grow-over problem.

Yes. So I mean, where we are now? Are you -- what are you seeing? Is it -- do you see it more as a headwind or a tailwind for the next 1 to 2 years? And then really, the follow-up for me is more around you guys called out the things you're seeing around the project-related nonkey revenue items and then some cyclical impacts on spend on debit, for example. But what's the demand environment like for the core business, the key areas? If you just rank order what you're seeing the most demand for right now and how that's looking from the prior couple of -- it sounds pretty good for the sales pipeline standpoint, but I'd love more color.

Yes. Thanks. So I think from a sales pipeline, as we tried to articulate, was very, very robust, continues to be very robust, so not just for core itself but for the products that we have created. That level of innovation related to Financial Crimes into PayCenter components to what I just described as enterprise account origination, a lot of those key revenue products that continue to grow at a nice pace at that 9.8% that we referenced are hugely -- continue to be in demand. I think when you look at where -- the challenge was related to what we were trying to describe in the nonkey revenue, again, it's really that one-off stuff, the things that we don't control for timing and things that are typically done on a more as an as-needed basis than a must-have basis. And that's really where a lot of that delay happened.

So I would point to the Strategic Benchmark Survey that Greg mentioned in his opening remarks. That's up on the Jack Henry investor website and available. That talks about the 3 top priorities for both banks and credit union CEOs continuing to be around gathering deposits, accounts, efficiency. But the longer-term trends that we've talked about over several quarters now around digital, around fraud and around payment tend to be thematically the largest demand that we're seeing.

We have the next question from the line of Kartik Mehta from Northcoast Research.

Greg, I know you talked a little bit about the delay, a lot actually. I'm just wondering, has that been reflected at all in your conversations with financial institutions on their core decision? Is it -- are they kind of waiting at all to make those decisions? Or is that still business as usual, and it's only really impacting the smaller projects?

Yes. So Kartik, so it's 100% on the smaller, nonrecurring, non-must-have-type products or or hardware purchases, which can be delayed another quarter for them or delayed because of their evaluation of moving to the private cloud. That's really what it is. When you look at the core component, when you think about a core deal that takes typically anywhere from 12 to 18 months to even go through the sales cycle on a normal time, because most people are looking multiple years out from when their contract actually expires, so those decisions have not slowed down at all. And again, I'm very bullish about our success rates for next quarter based on what I've already seen and what I know is coming. So I don't see that as any part of the challenge. It's really just these -- if it wasn't the end of the third quarter, we may not be talking about some of these as. But some of them are going to move into the next fiscal year, and that's where the challenge comes.

And Greg, I know earlier in the call, you talked about the SMB product. And obviously, you have this partnership with Moov. And I'm wondering how that's going. I think you anticipated, hopefully, it would generate some revenue going into next fiscal year. And I'm wondering if you're seeing any uptake on the product or any update there?

Yes. So our Jack Henry Rapid Transfers, we've rolled out, we have 3 clients in what we call a closed beta. But we are now taking active enrollments from all of our clients. So there's a process they have to go through for Jack Henry Rapid Transfers that goes through our operational. It's not a contractual thing they have to go, but there is an operational component. So that's starting to move. We're very excited. We got a lot of fanfare and comments at our Strategic Insights meeting last week in particular. And then on the merchant acquiring side, as I mentioned, the partnership with Moov, we will have 2 clients and maybe more in a closed beta in June and moving. And our expectation is to try to roll that out to everybody by the end of the first quarter of fiscal year 2026. So we're working through that process as well. But again, the interest level from not only our clients but some of our distribution partners that we compete with, there's a lot of interest there. And actually, we've been talking to some non-Jack Henry clients, some very large non-Jack Henry clients that are very interested in the product as well. So like I said, the interest level is there and we are on track, as we stated, to roll that out in our space in June of this year.

We have the next question from the line of Andrew Schmidt from Citi.

I appreciate the comments on the total level of assets that you've won. It's an important distinction versus the number of FIs, so appreciate that. I know a lot of questions have been asked on the demand environment, and I'll ask in a slightly different way. I understand that these are long-term decisions, and obviously, a lot of confidence in terms of near-term conversions. Have there been any changes in terms of the mid- to upper funnel when we think about just how FIs are working through the decision-making process? Just curious when we get -- I know it's a little bit early, but just curious in terms of the earlier part of the funnel, if you're seeing anything there.

Yes. It's a great question. And thank you for calling out the addition of the asset size. We thought it was important to share that what we're talking about is actually happening. But related to your question, I have not -- I mean I talked to the sales folks and our sales leaders literally every week, and there hasn't been anything that has come to my attention from them that has said that anything in the lower half, the middle half or the ending half of making decisions have slowed down. Because, again, a lot of those decisions do not necessarily take place for an installation for 6, 9, 12 or 24 months, depending on core or what it is. So we have not seen any real elongation of the sales cycle at all. It's just been the short-term projects, as I mentioned before.

Got it. Super helpful. And then when we think about just the headwinds that you're seeing, obviously, a lot of this you mentioned is timing. But we have seen in previous cycles that discretionary projects get pulled back, and sometimes they don't materialize for some time. So is there an element -- how large is that discretionary component versus nondiscretionary component when we think about just the headwinds that we're seeing here?

Yes. The interesting thing is -- and Mimi and I have commented on this before. So these are contractual arrangements that they have. And we do have some clocks that tick to a certain point in time where we can literally start billing the customer at a certain point in time if the delay goes longer than it's expected. And so they haven't reached those thresholds and won't in the quarter. But the reality is because they're contracted and because there's an approach that we've taken with these, we literally could start billing our customers even if they didn't implement, and that's something that we can do. So I don't foresee any of these being things that get delayed or they'd try to cancel or things like that because it's things that they need. As I mentioned, the one that seems to happen a little bit more is that a customer that has our Yellow Hammer product, that wants to move to Financial Crimes, that needs some consulting and other things that go with part of the implementation, we've seen some delays in those. And so we've worked with our clients. They are already clients of ours using some of our products. But that's where some of that delay has happened. A little bit is our PayCenter products and payment initiatives as well and trying to get folks to use say, they come on with our send capabilities or most of them have received but moving to send capabilities, things like that. But again, nothing that's wholesale of a challenge. It's not core implementations and things along that line.

Andrew, it's Mimi. The only thing -- other that I would add from just a macro sense, as we always talk about, regardless of interest rate environment, regardless of economic conditions, the challenges facing financial institutions today are going to be solved through technology. It's not going to be solved through adding more bodies. So whether technology is the only part of the solution or the bulk of the solution, we feel pretty confident in the continuation of the demand. And the reality is, if you have an ROI, it's compelling. And we just our Strategic Benchmark Service -- Survey that efficiency is one of the top priorities. So if you show the ROI, they would spend.

We have the next question from the line of Andrew Bauch from Wells Fargo.

Just wanted to revisit how this business operates through the cycle. I know -- appreciate the defensiveness and the recurring nature of all of it. But if we were to go into a more pronounced recession, how would we kind of handicap the impact there? Is it just the trends that you would see today would be more pronounced? Would there be changes to kind of the core pricing strategy? Just trying to understand the recessionary scenario.

Andrew, appreciate this certainly a dynastic environment. It's a really meaningful question. First of all, I would say -- and no one asked the question specifically, but I would say relative to tariff exposure, we're certainly lucky to have very limited exposure to shifts in policy. As a company, we're monitoring our vendor pricing and resource availability as well as costs, for example, prescription costs for our associates. We do have very limited exposure on the direct. I think where more of the exposure is in general to our industry is on the commercial side of the business. We're all watching the health of businesses in the U.S., so through things like our remit business and our EPS, our enterprise payments businesses, that serve those commercial customers; as well as indirect through lending, things like Banno Business and treasury. But the reality is this is not a global financial crisis. The banks are well capitalized, has really learned their lesson in terms of mortgage origination and credit extension. They're working their way through various interest rate cycles. But we're not anticipating any mass closures of financial institutions. And as we said earlier, they need to continue to serve their account holders and members. They need to continue to drive efficiency. Fraud is top of mind for these institutions, digital experience as well. So a lot of them, because of the nature of the competitive market with the largest financial institutions in the country, they need to continue to innovate regardless of the economic cycle to retain their account holders and make sure that they get on the other side of the economic situation healthier and stronger.

Understood. And then if I could, just a follow-up question. Just wanted to put a finer point on the consolidation activity you've been seeing. Could you give us a sense on the -- a little bit more around what you're seeing? Is it from a bank size and be it AUM? Is it across banks versus credit unions? Just additional -- like a little bit more targeted on where you're seeing that activity pick up.

Yes. So the activity really is spread. So you probably have seen it, it continues to happen. I mean there are credit unions continuing to buy banks. In fact, we had a credit union of a competitor buy one of our banks recently. And that has continued to happen. We'll see if that continues to happen long term based on some of the things that they're trying to do in the market related to credit unions. But what I would say, I think we have been really well positioned, as I mentioned earlier, just because we've continued to grow the asset side. So we're seeing -- we've won things that we call winner mergers, where we've actually had an institution acquired by a competitor's institution. But because of the technology and innovation and products that we've delivered, they've made the decision to actually switch to Jack Henry versus maintaining their existing core and/or complementary products. And again, we don't win them all, but we've won more than our fair share, and that continues to be the trend. And I expect that because when you look at what's going on in the industry today -- and I recognize that our competition is working their way back into focusing on this space where they weren't for many years. We've never lost our focus. And so our focus on this space over the last 6 or 7 years has been unmatched. And when you look at what folks -- including what was in the ABA core survey, which I highly recommend all of you to go look at, it was significant differences between us and our competition and how our customers view us versus how their customers view them. And so as those kind of mentions continue to get out, it continues to help our sales pipeline, our execution and things along that. That's why all of these things that we've tried to articulate that are happening today we truly believe are short-term things, and we got to work through the macroeconomic stuff that we can't control. But the other things that we have, we believe are short term.

We have the next question from the line of James Faucette from Morgan Stanley.

Apologies for the background noise. Just wanted to follow up on that comment there, Greg, around competition, competitive intensity. Just wondering how that's -- if you've seen that manifest at all in terms of like your engagements or win rates or even pricing intensity thus far. And how are you expecting that to evolve, especially as there does seem to be some increased focus from historical competitors?

Yes. James, good to hear from you. I think a couple of things. We continue to see the pricing sensitivity as we've mentioned in other calls and really even other years. That hasn't significantly changed. Again, our win rates continue to be by far the best in the industry. As I mentioned, we're winning larger deals, which means we're winning those from them. So that continues to be, I think, a good benchmark for your question. And -- but I will say that they get aggressive and many times trying to keep their customers. And so there's times where we may walk away from a particular deal if that gets to be too rich for our blood. But I will tell you that I don't see -- I haven't seen anything strategically change in the market from what they're doing. Obviously, one of them has a brand-new CEO that was just formally announced. The other one has made some strategic decisions to rid themselves of one of their businesses and have talked that they're going to get more focused on our space. So time will tell. But I can tell you, as of right now and where we are in our pipeline and where we've been with customer feedback and prospect feedback, because I do go to a lot of our large prospect opportunities, I haven't seen any level of concern on our part as of today.

That's great color. And then, I guess, associated with that, I just want to ask back on Banno. How has traction trended with Banno Business? I know it's early, but can you update us on the go-to-market, particularly given some of the implications of -- on the competitive front and how you're thinking about that as a product enhancement to the portfolio?

Yes. It's, again, another good question and one that we're highly focused on. So we do have over 270 clients now live on Banno Business and a little over 1,000 on the platform itself. So that continues to roll out. We're really pushing to that feature parity that I've been talking about since the last Investor Day in September. We expect to see that this summer, as I mentioned as well. And I think that will be a real turning point for us to not only be able to continue to win more in our own core base but to take it outside the Jack Henry core base. And we've been, as I mentioned, very strategic in our approach, but also on the timing. We don't want to go out and try to sell something to a competitive core base until we're ready, and that will happen later this fall. So long story short is very much a big part of what we're doing. And candidly, it will play a big part in what we're doing in our SMB strategy as well.

We have the next question from the line of John Davis from Raymond James.

Greg, I just want to circle back on core wins. And I'll echo Andrew's comments that the asset size it's helpful. You've historically given us kind of a number of wins. Now you're giving us assets. But I guess the real question -- and maybe if you can help us directionally think about ACV, right? So if assets year-to-date are up almost 50%, I'm sure ACV has gone up 50%. But how do we think about number versus assets? And like what really matters, is kind of dollars of revenue contracted? And so maybe just help us directionally kind of correlate the asset size to kind of an ACV.

Yes. I mean, JD, it's a good question. I think it's very difficult to -- every core deal is its own core deal, right? So some of it is timing on what other products they have. Some of it is folks have best-of-breed approaches, some best-of-suite approaches, but every single deal literally has its own nuances to that. And so I think it's really hard for us to button that up and just say, "Hey, if we want a $100 billion deal and we want a $1 billion deal," not necessarily mean that the $100 billion deal long term is going to bring 100x the revenue, right?

But I guess it's safe to say that asset is more important than number. Is that a fair assessment?

The asset size -- well, it also ranges based on retail and commercial-based customers. So sometimes a larger asset institution is more commercially focused and has less accounts. So depending on the type of bank or credit union, it is and whether it's more retail-focused or commercial-focused. So that's why I'm saying there's such an ebb and flow related to asset pricing, per account pricing, number of attach rates on the products that it brings and all those. So it just isn't that easy to just give you a complete single answer to that.

Okay. No. Understood. Mimi, one quick one for you on margins. How should we think about the margin implication of kind of the nonstrategic revenue runoff? Is this lower-margin business, and therefore, could be a margin tailwind as that kind of revenue rolls off? Or is it higher margin? Just help us think about that and any impact that may have had, not only this quarter but for the full year guide as well.

So I would say, generally, JD, the noncore -- rather non-key nonstrategic revenue tends to be lower-margin mix. It has things like hardware, it has things like some of the consulting that is less software-oriented and tends to be lower margin on the whole.

Okay. And want to squeeze one last quick one in, if I can, Mimi, free cash flow. I think the midpoint of your guide would imply free cash flow below 100% in the fiscal fourth quarter. At least in my model going back, it's never been below, I think, like 120%. So just curious if there's anything specific around free cash flow that you see coming in the fourth quarter that we should be aware of or any other comments there would be helpful.

Well, it wouldn't have been an earnings call if we didn't have free cash flow. So I'm glad we were able to squeeze that one in, JD. I would say we are on a healthy pace. As you know, the trailing 12-month or an annual view is the best view to look at from a free cash flow perspective rather than any quarterly year-to-date free cash flow of $139 million. Definitely on track. We're at 71% from a conversion. So on track to that guide at 65% to 75%. And as we've talked about, that's a multiyear journey back to that 80%, 90%, 100-plus type of territory as we're now starting to rebuild solidly the cost basis for the R&D-related expenditures and we have greater clarity from a tax policy perspective. On the trailing 12, the prior year had some reflected of like over tax payment benefits on the prior year, plus there's a touch more on CapEx in the current TTM. So -- but we feel pretty good about staying on track here and hitting the guide for the full year. That's why we kept it unchanged.

This concludes our question-answer session. I would like to turn the conference back to Vance Sherard, the Vice President, for closing remarks.

Thank you, Myron. We appreciate all the interest in today's call. And in the upcoming weeks, management is planning to attend investor events across the U.S., providing additional availability for in-person meetings. We would like to again thank all Jack Henry associates for their outstanding efforts and dedication, which have contributed to our solid results. Thank you for joining us today. Myron, please provide the replay number.

Sure. Thank you very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect