Prepared remarks
Good morning, and welcome to the Jack Henry Third Quarter Fiscal Year 2026 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Vance Sherard, Vice President, Investor Relations. Please go ahead.
Thank you, Danielle. Good morning, and thank you for joining the Jack Henry Third Quarter Fiscal 2026 Earnings Call. Joining me today are Greg Adelson, President and CEO; and Mimi Carsley, CFO and Treasurer. Following my opening remarks, Greg will provide an overview of our business, along with updates on our strategic initiatives. Mimi will then discuss the financial results and updated 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, and thank you for joining today's call. As always, I want to begin by recognizing our associates for their hard work and dedication. They consistently go above and beyond to serve our clients and drive our success. I will share three key takeaways from the quarter and will then provide additional detail on our overall business. First, our financial performance. We produced record third quarter results with non-GAAP revenue of $616 million, up 7.3% over last year's third quarter. Our non-GAAP operating margin was a strong 22.9% on par with last year's Q3. Second, our sales performance. Our sales and marketing team delivered an outstanding quarter with 17 competitive core wins, including five institutions with more than $1 billion in assets. This represents our strongest third quarter for new core wins in seven years and ties our best third quarter ever in over $1 billion wins.
Year-to-date, we have won 43 core deals, 11 of which are institutions over $1 billion. That's up from 28 wins and eight over $1 billion at this point last year. Based on our strong momentum, we are highly confident that we will exceed the 51 core wins achieved last year. Third, our higher-value core wins. We continue to see a higher number of trifecta solution wins. So far this year, 25 of our core wins, or 58% of the total, have included digital banking and card solutions. At this time last year, we only had eight core deals that included digital banking and card solutions, just 29% of the total won. This healthy growth in trifecta wins reinforces the strength of our integrated platform and supports deeper, more valuable client relationships. Now turning to our broader business. I will begin with our use of artificial intelligence, followed by updates on several innovative solutions and specific products.
As I have shared at recent investor conferences, we view AI as a significant strategic opportunity and have been operating and expanding our capabilities for more than 3.5 years by establishing strong governance processes that support a responsible, bold and balanced approach. Today, close to 100 AI tools are approved for internal use, ranging from general productivity platforms such as Gemini and Copilot to specialized business and development tools across all areas of our company. These tools support over 500 distinct use cases, delivering meaningful and measurable impacts. A few examples to share. In lending, developers working on our new Jack Henry origination solution and online account opening solution have increased productivity by roughly 90%, driven by faster coding and quicker issue resolution. In digital, as part of the new Jack Henry platform, we have built an AI-assisted recommendation system for exception item processing that is in closed beta with three banks.
They all report that AI is reducing the time to close exceptions each day by 70% to 80%. And in customer service, our AI adviser bot is supporting our frontline representatives and has assisted with more than 3,700 complex support interactions over the past two months with a 96% success rate, servicing answers in seconds from our knowledge resources. To further accelerate adoption, we have deployed an internal team of AI coaches who work directly with our associates through workshops and hands-on support. We are also seeing meaningful productivity and efficiency gains from natural language development, sometimes referred to as vibe coding. For example, a nontechnical associate recently developed an internal application for our travel program, allowing us to meet a business need without licensing additional software. This is one example of many where our teams have independently built more efficient ways to address specific business challenges.
Overall, we believe our approach to AI education and adoption significantly helps us minimize competitive risk. Additionally, regulatory requirements, network certifications and our role as the system of record make the banking industry very difficult to disintermediate. Shifting to our innovative solutions. We continue to make strong progress on our stablecoin strategy. Beta testing with clients to send and receive USDC is going well. And at this point, we are largely awaiting final regulatory guidance to proceed more expeditiously. We are delivering stablecoin processing through the public cloud-native Jack Henry platform. This is important because the platform is connected to all of our core systems, serving as a bridge between emerging capabilities and our foundational cores. This provides our clients fast integrated access to capabilities such as stablecoin and our initial SMB solutions, Tap2Local and Rapid Transfers.
Tap2Local, our SMB merchant payment solution, continues to see significant traction as clients look to better serve SMBs, increase deposits and recapture business from fintechs. At the end of April, more than 700 banks and credit unions were live with Tap2Local. Since beginning targeted marketing just a few days ago, active merchants have doubled to more than 1,600 with several thousand additional merchants currently in the enrollment process. We intentionally waited to begin marketing so we could ensure the product and infrastructure were fully operational. With that foundation now in place and marketing beginning to ramp up, we expect adoption to accelerate in the coming months. Client feedback has been very positive, particularly around Tap2Local's differentiated capabilities, including easy enrollment, tap-to-pay on both iOS and Android devices and continuous account reconciliation. As an additional validation to the product's uniqueness, Tap2Local recently won the Fintech Breakthrough Award for Small Business Payments Solution of the Year.
We are also seeing strong early momentum with Jack Henry Rapid Transfers, which enables both SMBs and consumers to quickly move funds between external accounts, eligible cards and digital wallets. Rapid Transfers is now live with over 110 banks and credit unions with an additional 190 at various stages of onboarding. Transaction volumes have been healthy, particularly given that marketing has not yet begun. The average transaction size is approximately $260, which is double our original projections and is being driven by stronger-than-anticipated inbound transfers. Larger inbound transfers deliver one of the key value propositions: increased deposits for the financial institution. With higher average transaction sizes and consistent monthly activity without any marketing, Rapid Transfers is currently tracking well ahead of our initial models, though we are still in the early innings of the rollout.
As another key part of the Jack Henry platform, we are developing a cloud-native deposit-only core. Client testing is underway and development was completed six months ahead of our original schedule announced in February of 2022. We will continue to broaden our testing as the year progresses. I also want to highlight early progress on our enhanced embedded payments capabilities following the acquisition of Victor Technologies last fall. The Victor platform, now branded as Jack Henry Payments Orchestrator, enables financial institutions to embed payment capabilities directly into third-party nonbank brands such as fintechs and commercial customers. In Q3, we signed one bank and onboarded three fintechs to the platform and have quickly grown our sales pipeline to more than 40 banks and/or fintechs. Moving on to our reporting segments. In core, in addition to the 17 competitive wins I mentioned earlier, we also secured four on-premise to private cloud contracts, including one institution over $1 billion.
So far this year, we have signed 23 in-to-out contracts with eight being institutions over $1 billion. In payments, we continue to see strong growth in faster payments. Over the past year, our clients' adoption of Zelle grew by 25%, RTP by 26% and FedNow by 31%. In the third quarter, payment transaction volume across these channels increased 47% year-over-year. In complementary, we signed 36 new Financial Crimes Defender and faster payment module contracts during the quarter. As of March 31, we have completed 168 Financial Crimes Defender installations and another 68 in various stages of implementation. We've also installed 168 faster payment modules with an additional 256 in progress. The Banno Digital platform had another strong quarter with 23 retail and 34 Banno Business signings. In total, we have 1,028 clients live on Banno, including 466 on Banno Business. The platform now serves more than 15.5 million registered users, up 13% from a year ago.
As a reminder, all of our Banno wins and growth thus far has occurred within our core base. As we look ahead, we believe we are at a meaningful inflection point. We now have a competitive feature set, along with increased willingness among certain competitors to operate as open providers. As a result, we see an opportunity to begin expanding Banno beyond our existing base and more closely align it with our payment product strategy, where we have successfully sold outside the base for many years. We will provide more updates as we progress with this strategy. On the technology spending front, we recently released results from our eighth annual Strategy Benchmark survey, which highlights technology spending priorities. While we monitor a number of industry surveys, this one is particularly meaningful because it reflects direct input from the CEOs of our bank and credit union clients. The results point to a clear and growing commitment to technology investment.
Eighty-eight percent of respondents expect to increase their technology budgets over the next two years, up from 76% last year. Of those, the largest segment, 41%, plans to increase investments between 6% and 10%. These trends are consistent with other industry surveys pointing to increased technology spending. We ask CEOs where they plan to prioritize those investments. For the first time, artificial intelligence ranks as the top priority, cited by nearly 50% of the respondents, followed by digital banking and data analytics. These priorities align directly with where Jack Henry has been investing and delivering innovation. Last week, we highlighted our differentiated innovation at the Jack Henry Annual Strategic Insight Symposium in Salt Lake City. We featured presentations and panels that included both Jack Henry leaders and well-known industry experts covering key topics such as the macroeconomic environment, the Jack Henry Benchmark survey, our technology priorities and progress, fraud initiatives, AI education and use cases, the impact of stablecoins and tokens and meeting the needs of Gen Z. We will provide updates on many of these topics along with additional innovation updates at our Investor Day on September 15 in our Dallas offices.
We recently completed and published our 2026 sustainability report. The report is an outstanding information source on Jack Henry and is available to review on the Investor Relations page on jackhenry.com. The report coincides with our 50th anniversary and reflects our continued focus on preserving long-term value for our associates, clients, communities, stockholders and the environment through responsible business practices. As part of our 50th anniversary celebration, our Board is looking forward to ringing the closing bell at NASDAQ tomorrow, May 7. This is one of the many activities we are doing throughout the year to mark this significant milestone. In closing, we remain focused on culture, service, innovation, strategy and execution. These key differentiators will enable Jack Henry to continue to drive industry-leading revenue growth and margin expansion. With strong sales momentum, increased client technology spending and disciplined execution, we believe Jack Henry is extremely well positioned to capture the opportunities ahead. With that, I will turn it over to Mimi for more detail on our financials.
Thank you, Greg, and good morning, everyone. I would like to begin by thanking our associates who continually deliver value to our financial institution clients. The result is another quarter of solid revenue and earnings growth and continued momentum as we approach the end of our fiscal year. I will begin with our healthy third quarter results, then conclude with our updated fiscal '26 guidance. Q3 GAAP revenue increased 9%. Non-GAAP revenue increased 7% for the quarter and 8% year-to-date, a continuation of consistently strong performance. Third quarter deconversion revenue of approximately $19 million, which we previously announced, was up approximately $9 million for the quarter, reflecting a steady pace of M&A activity among financial institutions. As a reminder, the dollar amount of deconversion revenue has little correlation with the number of transactions or annual revenue impact, and the absolute amount of deconversion revenue can vary greatly quarter-to-quarter.
We continue to see industry consolidation as largely neutral to slightly positive for our business. Now let's look more closely at the details. GAAP services and support revenue increased 10% for the quarter, while non-GAAP increased 8%. Service and support growth during the quarter was primarily driven by strength in data processing and hosting revenue for both private and public cloud. Specific callouts include implementation services and license revenue. Private and public cloud offerings continue to drive strong growth. Cloud revenue increased 9% in the quarter. This recurring revenue contributor is 33% of our total revenue. Shifting to processing revenue, which is 43% of total revenue and another strategic component of our long-term growth model. We saw a solid performance with 7% GAAP and 6% non-GAAP growth for the quarter. Consistent with recent results, quarterly drivers included increased digital, card and faster payment processing revenue.
Completing commentary on revenue, I would highlight total recurring revenue was 91% for the quarter. Next, moving to expenses. Beginning with cost of revenue, which increased 7% on a GAAP and non-GAAP basis for the quarter. Drivers for the quarter are consistent with recent previous quarter results and include higher personnel costs, direct costs growing consistent with lines of revenue and increased amortization of intangible assets. For modeling purposes, amortization of acquisition-related intangibles was $6 million for the quarter. Next, R&D expense increased 15% for GAAP and 12% on a non-GAAP basis for the quarter. Quarterly increase was primarily due to higher personnel costs driven by an increase in headcount over the trailing 12 months. And ending with SG&A expense for the quarter on a GAAP basis, it increased 9% and an increase of 8% on a non-GAAP basis. Results reflect an increase in personnel costs, specifically from headcount additions over the 12 months.
We remain focused on generating annual compounding margin expansion. Q3 delivered consistent non-GAAP margin at 23%. Year-to-date non-GAAP margin improvement was 195 basis points with a non-GAAP margin of 25%. Non-GAAP margin benefits inherently from the leverage in our business model, strategic cost management and leveraging our existing workforce as we continue to focus on enterprise process improvement and AI utilization. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.71, up 12%. For the year-to-date period, GAAP earnings per share was $5.41, an increase of 20%. Reviewing the four operating segments, we see positive performance across the board. Core segment non-GAAP revenue increased 9% for the quarter, with operating margin contraction of 27 basis points due to temporary product mix of lower-margin revenue sources such as implementation and work orders.
Payments segment quarterly non-GAAP revenue increased 5%. The segment again had outstanding non-GAAP operating margin growth with quarterly results of 159 basis points. Card processing revenue showed steady growth and was partly offset by lower network incentive revenue. The segment also benefited from continuing shift and significant growth from faster payments. The complementary segment quarterly non-GAAP revenue increased an impressive 7% with healthy 99 basis points of non-GAAP margin expansion. Quarterly revenue growth continued to reflect demand for our digital solutions and a beneficial product mix with sales sourced from new core wins, existing core customers and noncore financial institutions. For the quarter, Corporate Services, formerly Corporate and Other, non-GAAP revenue increased 27%. This is primarily the result of increased hardware sales. Since the segment reflects expenses not allocated to other segments, we will not be discussing operating margins as it provides no meaningful insight.
Now a review of cash flow and capital allocation. Q3 operating cash flow was $186 million, a 72% increase over the prior fiscal year Q3. Quarterly free cash flow of $122 million delivered a 137% increase over the prior fiscal year Q3. Our consistent dedication to value creation resulted in a trailing 12-month NOPAT return on invested capital of 23% compared to the 20% in the third quarter of the prior year. We are very proud of the durability of this metric and how it reflects our high-quality allocation of capital for our shareholders. Additionally, I would highlight the following significant year-to-date capital decisions resulting from our strong free cash flow generation: $284 million in share repurchases, $127 million in dividends paid, plus the asset acquisition of Victor Technologies. We're proud to return meaningful cash to investors while maintaining a conservative balance sheet.
The average purchase price of the shares repurchased was $160. We ended the quarter with debt of $90 million, consistent with normal course revolver usage, but expect to end the fiscal year debt-free, barring acquisitions or other opportunities. During the quarter, we established a new $1 billion revolver credit facility to support future growth opportunities. I will now discuss our third consecutive increase to full year guidance. As you are aware, yesterday's press release included updated increases to fiscal 2026 full year GAAP guidance. Deconversion guidance will continue to follow the conservative methodology introduced in fiscal '24. Fiscal '26 deconversion revenue guidance has been increased to $37 million. Full year GAAP revenue growth guidance increases to a range of 6.1% to 6.6%. Based on our strong year-to-date results, we have tightened the range of non-GAAP annual revenue growth guidance, resulting in a new outlook of 6.6% to 7.1%.
Consistent with our budget plan and year-long messaging, Q4 will see relatively lower non-GAAP revenue growth compared to the previous three quarters. Drivers include projected digital revenue slowing from lower active user growth, card revenue growth seeing pressure from risk management and less one-time network incentive revenue. Expenses during the fourth quarter are expected to reflect relatively higher pressure from medical cost benefits returning to historical levels, cloud migration infrastructure expense and commissions. Our expectation on fourth quarter revenue is below current analyst consensus. At the same time, full year revenue growth consensus is aligned, reflecting that part of the difference is that some of the revenue analysts expected in the fourth quarter shifted to the third quarter. Margins are projected to contract in the fourth quarter based on previously disclosed factors.
However, based on the full year revenue growth and our robust financial model, we are increasing full year guidance for non-GAAP margin expansion to a range of 75 to 95 basis points from the original 20 to 40 basis points on the August call. As a reminder, we see fluctuations in quarterly results related to software usage license components along with the timing of implementations. Therefore, the correct performance indicator for our business is the consistently strong fiscal year financial results. Q4 results are not aligned with our early expectations for fiscal '27. The presented results and guidance metrics are indicative that our business operations remain healthy and sound with growth opportunities across all four operating segments. The full year GAAP tax rate estimate for fiscal '26 is 23.25%. The above increased guidance metrics result in a stronger full year outlook for GAAP EPS of $6.78 to $6.87 per share, a growth of 9% to 10%.
As a reminder, even updated deconversion revenue guidance potentially understates GAAP EPS growth. Full year free cash flow conversion outlook for 95% to 105% for fiscal '26 with a bias towards the upper end of the range. Including, Q3 reflects another exceptional performance from our associates leading to increased guidance. We're pleased by the continued performance momentum and resulting fiscal year outlook. We remain strongly convinced that demand for our solutions aligned with continued technology spend by our clients and prospects, all supported by industry-leading service excellence from our associates will drive outstanding financial results and superior shareholder value. We appreciate the contributions of our dedicated associates that produce these superior results and our investors for their ongoing support. Danielle, please open the line for questions.
Questions and answers
The first question comes from Vasu Govil from KBW.
Greg, first one for you. It was another very strong quarter on new core wins. I'm curious what's driving this trend? And if you are starting to already see some benefits from the competitor platform consolidation or if that's still to come?
Yes. Thanks for the question. Yes, I think it's a combination of both. We've been talking a lot about what we've been doing on the innovative side. And so that's continued to play out with the products and the solutions. Obviously, our customer service hasn't wavered a bit. I will tell you, of the 17 core wins, 13 of them came from one provider and one competitive provider. But I will say that most of those, as you can imagine, the core processing contracting side takes anywhere from nine to 12 months typically. So a lot of those were already in motion ahead of whatever announcements were made. But we did take some from really everybody, just so you know. So we had some wins from really all of our competitors. But again, the bulk of them came from one.
And then maybe a quick one for you on the margin guide. The guide obviously implies a meaningful step down in the fourth quarter, and I caught your comment on the normalized medical expenses you're baking in. Any other drivers there? Or just trying to get a sense of whether there's any conservatism baked into the guide?
Yes, you're welcome. So yes, you're accurate, and I appreciate you hearing the commentary regarding Q4, which is not indicative of the full year performance, but more so due to some unique factors in Q4 that were expected as we thought about the cadence of the year. So you're right to call out the medical expenses returning to normalized levels. We also had some commission shift where we saw some benefit earlier in the year. We expect, based on the timing of those implementations, for some of that to hit in Q4. Additionally, just some of the mix we're seeing from some of the lower-margin business — some of it related to work orders and implementation — also lead to Q4 having less margin expansion or, in fact, margin contraction for the quarter. But again, the right metric for our business is the annual, and we're pleased to be able to increase guidance on full year margin expansion.
The next question comes from Peter Heckmann from D.A. Davidson.
I wanted to talk a little bit about Anthropic's Mythos. Has Jack Henry been able to set up a timetable to access Mythos to use — look at their own systems to identify any cyber vulnerabilities? And do you think that's something that bank customers are increasingly going to demand from their vendors on a periodic basis?
Yes, Pete, so this is Greg. A couple of things on Mythos. We've been heavily involved ever since it came out. I actually did a call with a lot of our competitors and others with the Head of Cybersecurity in Washington. As soon as everything was announced, we were pulled in. Our cyber teams have been involved in a multitude of meetings. Project Glasswing, which is now called Mythos Workshop, our teams are getting information associated with that and joining various meetings. We've obviously done a whole host of things that we need to do for operational readiness across the organization. But candidly, we were doing that already. The other thing is that you probably heard that on April 29, the administration raised some objections. And so there's still some delay on where some of this utilization will get done. But our teams are heavily involved both within our organization and with Mythos, and also across the entire landscape of our industry. All of our competitors and Jack Henry are working together with Washington to make sure that we protect our banks and credit unions.
And Greg, if I could add on to that. Mythos is just the current kind of attention in the industry, but we've made significant investments in fortifying and stepping up our cybersecurity posture from awareness and observability and a zero trust resiliency philosophy over the last several years. So we feel like we're in a much stronger position today than we had been over the last several years to be able to handle this type of situation.
The next question comes from Jason Kupferberg from Wells Fargo.
This is Tyler DuPont on for Jason. I wanted to just start by piggybacking off of the core questions and commentary. Given you signed 43 takeaways so far fiscal year-to-date, how should we be thinking about upside to that 50 to 55 annual target? If I heard correctly in the prepared remarks, Greg, you suggested that you have confidence in exceeding last year's number. But given last Q4, you guys won 23 deals, that would imply over 60 this year. So I guess just given the success you've seen so far year-to-date, I'm wondering if you can help put sort of a finer point on expectations as we look to the rest of the year.
Yes, I appreciate the question. I can't really give a finer point. I can tell you that I'm very confident that we will be north of 51 and probably north of 55, somewhere in that range. I don't know exactly — contracts are interesting as far as timing to get them done. We've been completing a couple of contracts recently that took a lot longer than we expected and sometimes they get kind of turned over to the next quarter. But in reality, it's not just the number of wins we have, but also the size of the wins. So as we referenced, we had 11 over multibillions, but we've also won just this past quarter, we won $3.5 billion. We've won $5 billion. We've won $7.5 billion. And just recently, we won an almost $10 billion client that is coming with 1.2 million accounts, which is actually about 25% larger than any customer we have today, including our largest asset size in the number of accounts.
Those contracts took a long time to secure. So as you continue to go upmarket, contracts take longer. So it's really hard to give you a definitive answer. But the answer I'll give you is our sales team is really kicking butt right now. And obviously, a lot of the things that are going on in the industry are providing opportunities for us. I think the best is still to come based on feedback and pipelines that we have. Our pipelines are extremely strong, not just in core, but in payments and complementary as well, and we're very bullish on that.
Great. That's great to hear. And I guess just as a quick follow-up, I just want to touch on free cash. The $122 million in the quarter was pretty meaningfully above both consensus and even your own historical trends. So can you maybe just touch on how we should be thinking about free cash flow going forward versus the 90% to 100% conversion guide — both as we look down the barrel to the final quarter and as we try to hone our models for next year?
Yes. So I would say, Tyler, there were a couple of things as we look at trailing 12-month free cash flow. First and foremost, a tremendously strong operational foundation that led to strong cash, but there was also positive impact from the tax bill change that we saw come to clarity as well as some small asset sales. But overall, we feel great. We are improving the color this year for free cash flow conversion to that 95% to 105% range, with a bias to the high side, sitting at around $108 million to $109 million year-to-date from a trailing 12 months. We feel very good that we're returning to the historical norm levels of our free cash flow.
The next question comes from Rayna Kumar from Oppenheimer.
Just given the volatile macro and political environment, as you talk to banks and credit unions, how are they thinking about IT spending for the next six to 12 months? And then separately, any initial read on FY '27 revenue growth and margins?
Yes, Rayna, I'll take the first one. As we talked about in my prepared remarks, and we just came out of our strategic initiatives meeting with our top 150 or so clients, the macro environment isn't affecting banks and credit unions' focus on what they need to get done in tech spending. In our benchmark survey, 88% said they will increase spending compared to 76% last year, and 41% plan to increase investments between 6% and 10%. These trends align with other surveys of bank directors. The only difference is where they're spending the money. AI for the first time became the top priority. Deposits, digital banking and fraud remain high priorities. We're seeing it across our pipelines in all parts of our business, not just core. We're getting larger institutions: as I referenced, we already won one nearly $10 billion institution this year with 1.2 million accounts, significantly larger than any of our existing customers, and that brings additional product opportunities.
And then Rayna, I can take the second half of your question building on that positive outlook. It's a little premature to talk about FY '27. We're just excited about ending '26 in a great spot. I would call out that the quarterly pace of the year is not indicative of any kind of launching off pad for '27. So although we are calling for a weaker Q4, it does not mean anything diminishes from our positive outlook for the full year and then next year. Even at roughly 91% recurring revenue, budgeting is rigorous here at Jack Henry. We are still working with operational leaders on next year's plan and prioritizing investments. We will give more color when we talk about full year results next quarter. Overall, we're thinking in a positive direction for FY '27.
The next question comes from Madison Suhr from Raymond James.
I just wanted to start on the trifecta wins. I think you mentioned 58% of wins this year were those trifecta wins. Given what you're seeing in the pipeline, do you think this elevated level of cross-sell is sustainable, not only for the quarter, but as we think about the next year or so?
I do. I appreciate you asking the question. We've seen the results of the work and innovation we've put into our digital and card platforms. We've reached feature parity in a lot of respects and are now winning against larger digital-only providers. We're seeing wins across all players, and not just in core wins. We're also getting current Jack Henry clients that were on competitive digital platforms to move to Banno. I feel strongly the work we've done, and ongoing additions like Rapid Transfers and Tap2Local, which aren't widely available elsewhere, are differentiators that will help sustain cross-sell over time.
Okay. Great. And then I did want to follow up just on the Payments business. It grew 5% in the quarter. From your vantage point, what are the key buckets or things that could accelerate growth in payments from here, given mid-single-digit growth is slightly below where you'd like to be?
We continue to see steady growth in card given the resilience of consumer spending. We are also seeing a boost from remittance and Bill Pay, with Bill Pay showing a positive resurgence post the Payrailz acquisition. On top of that, we have tremendous growth in faster payments — almost 50% year-over-year. So growth is coming from multiple areas: card volumes, Bill Pay and faster payments.
The next question comes from Dominick Gabriele from Loop Capital.
Jack Henry has focused on being an open platform versus a walled garden, which has benefited the business. Do you expect to partner with various AI providers with their products? How would you think about that relationship? Would it be similar to third-party partnerships, allowing their products to be on your platform and focusing on Jack Henry's added value when customers ultimately decide to choose Jack Henry products?
It's a good question. We are doing that today. Several AI-related companies are partnering with us today. That's how we're using some of the tools and incorporating them into products we are working on. We are being careful in how we define 'partner' because it can imply commercial revenue arrangements. In many cases, it's more of an integrated relationship or a licensing relationship. Several vendors provide tools we license and integrate, and others create revenue gains for both parties. That is happening today and will continue. We've hired people to evaluate these tools and are being careful because everybody has something new to talk about. We'll continue to evaluate AI and fintech opportunities one at a time and remain an open platform.
Great. Maybe as a follow-up, looking at the various segment growth rates, Core has been doing quite well and Complementary is strong. Can you help explain the implied reduction in the other two segments quarter-over-quarter given the momentum?
Sure. As we always say, don't focus on one quarter — look at the full year, particularly because some products have different installation timing. Although we're thrilled with over 50 core wins, the revenue we're getting today is based on wins we locked in previously, and complementary products can install sooner. The profile of customers and the mix of products affects revenue. One-time service revenue related to work orders and implementations also varies quarter-to-quarter and can be a nice added source of revenue. That's the biggest driver causing the Q4 variance, in addition to strong growth comparisons from last year's strength.
The next question comes from Eric Teller from Wolfe Research.
It's Eric from Wolfe. I wanted to understand a little bit more. At the beginning of the year, you called out pricing, M&A and some other variables, and you thought these could be potential risks or headwinds that might decelerate growth. Yet you're progressing well and outperforming earlier expectations. Putting all those pieces together, where do you see the business positioned now relative to your normal 7% to 8% growth trajectory? Do you think you have enough pillars for the business to sustain 7% to 8% in the next couple of years without specifically guiding to FY '27? I'm curious if the building blocks are there.
Eric, I appreciate the question. Even though some headwinds existed at the start of the year, we've grown over them. It's not that they've disappeared; we knew of some departures and contract renewals that would create renewal compression. We've been able to grow despite those. It's too early to refine guidance for next year, but I think the growth algorithm is still intact. New areas of innovation like SMB, faster payments, etc., will be a couple of years before they meaningfully contribute to revenue growth that pushes us to the upper bound of our algorithm. But we feel confident next year will be in line with our historical guidance.
The only thing I'd add is that M&A timing tends to even out over the year, and that's playing out as expected. We referenced changes we made in the renewal process and that has worked well. Combined with new products and services that are gaining traction, that gives us confidence for the longer term in achieving the growth rates you're discussing.
Okay. Greg, I just want to follow up on the core wins. I still want a better understanding of what's actually driving the incremental step up in the magnitude of the wins versus the run rate. These deals were mostly formed a few quarters ago, so it wasn't the recent industry changes causing the increase. What caused it to kick in earlier? If you add the industry competitive dynamics to that, could it be additive and push you beyond the 55 this year?
Yes, I agree with you. I keep referencing the differentiators because we're building things others aren't and executing at a high level. We're building unique capabilities and now can demonstrate them with live products. We're also maintaining strong customer service. That combination — a demonstrated roadmap of execution plus live features that matter to customers — is driving increased inbound interest, including from larger institutions and large consulting firms that are impressed with our technology. With competitor uncertainty in the market, clients are choosing a provider that is executing and delivering. I believe this will continue because we'll keep executing and our products will continue to extend their lead.
The next question comes from Ken Suchoski from Autonomous Research.
I wanted to get your high-level thoughts on how AI can play a role in the core processing industry. We noticed one bank with over $25 billion in assets expanding its collaboration directly with OpenAI. How much of a risk is there that banks or credit unions will work directly with these AI companies? And how involved is the core provider if that does happen? How would the core provider's role change?
I think there's a couple of things. Larger institutions may have the resources to work with AI providers directly, so you may see that happen sometimes. In the community bank space, which is where Jack Henry has a strong presence, most institutions don't have the wherewithal to build this out, so they're relying on providers like us. That's why we've been proactive for the last 3.5 years. We have multiple POCs under way and have embedded AI into solutions like Financial Crimes for SAR reports and exception item processing that provide efficiencies. So while a few large institutions may go directly to AI vendors, the majority of our client base will rely on a provider that integrates those capabilities responsibly and delivers operational readiness.
That makes sense, Greg. Maybe one for Mimi. On the payments non-GAAP revenue growth rate, I think I heard lower network incentives this quarter. Is that more of a one-time issue, or does that carry through to future quarters? Trying to think through growth and whether it can accelerate from the 5%.
The network incentive thresholds are negotiated year-by-year and sometimes intra-year. I don't see it as a structural headwind. It just happened to have a more noticeable impact in this year in Q4 on top of a strong year-over-year comparison. The underlying trends — card volume strength and growth in enterprise payments and faster payments — make me comfortable about ongoing growth in the segment.
The next question comes from Cris Kennedy from William Blair.
It's great to hear about the larger wins. It seems like you're making a lot of progress there. Can you remind us of the dynamics and/or the economics to Jack Henry as you move upmarket?
Thanks, Cris. The economics change based on how many products the institution buys from us. The large win I referenced recently is roughly $10 billion in assets, the second largest new core in our history by asset size, but more importantly it has 1.2 million accounts — about 25% greater than any of our current customers. They're buying a host of products from Jack Henry, which creates larger scale opportunity versus institutions buying only a few products. Trifecta wins matter because they drive three of our largest revenue products into a single client, and the rest becomes incremental. Economics really vary between customers, but larger multi-product deals are much more valuable to us.
The next question comes from Will Nance from Goldman Sachs.
Mimi, I wanted to pressure test a couple of things about Q4. You called out lower digital active user growth, normalized commissions and health care costs returning, and some of the public cloud duplication expense. Can you talk about why those wouldn't continue into next year or if they are, how you factor that into budgeting? What levers do you have to offset those items, given you have visibility on them today?
Happy to, Will. It's a little early for FY '27 specifics, but on Q4 headwinds: some of the digital account growth timing relates to the size and timing of wins from earlier periods; some wins are scheduled to come on and could impact next year's implementation timing. We feel good about competitive parity and the pipeline. Some expense savings we saw earlier in the year were timing-related — commission timing and lower medical claims — which gave a one-time benefit. We expect a normalization that could create a front-half grow-over challenge relative to the savings seen this past year. We will continue to refine and prioritize projects and positions and start next year conservatively while aiming to outperform that floor.
Will, one thing I want to emphasize on the digital backlog: the digital wins from current Jack Henry clients who were on competitors are twice the size of the core backlog. That underscores the strength of our position and the inbound opportunities we're seeing.
Got it. That's super helpful. And then a longer-term question: you've had one of the best years for margin expansion in many years despite a flattish back half. As you look out, especially with acceleration in core wins and sales momentum, how do you think about the long-term margin expansion target? With faster top-line growth, is there room to operate at the higher end of the margin expansion target while sales momentum is strong?
I think your goals are aligned with ours. Margin expansion is a key pillar for shareholder value creation, and we are motivated to drive that. Near-term tailwinds that will help include new higher-margin product mix, public cloud migration benefits, and AI and continuous improvement efficiencies. We believe there are opportunities to improve the margin profile of the company over time.
The next question comes from Dave Koning from Baird.
Nice job. One thing — Corporate grew very fast. Hardware you called out. I know that's lumpy. Historically, Corporate was kind of a decliner. Is there something changed there? Is it less lumpy or do you expect extra growth?
I appreciate the question, Dave. Hardware can be lumpy; we saw it as a headwind last year and an increase this year. It's hard to predict next year yet for hardware. In general, the Corporate segment has different operating characteristics than our other segments and tends to be more ancillary services. We manage it tightly, but it won't have the same consistent growth profile as core, payments or complementary.
That's fair. One last one on network incentives. From a magnitude standpoint, is that like a 1% to 2% headwind in Q3 and Q4, to help us normalize?
I would say, looking holistically across the components, that the impact is notable this year but not structural. Focus more on card volume itself as a forward indicator. Continued consumer strength should lead to reasonable network incentives; this year the threshold was pretty high which affected the magnitude.
The next question comes from Kartik Mehta from Northcoast Research.
Greg, I realize there hasn't been as much M&A activity so far in 2026 as some anticipated. If M&A activity picks up, do you think that impacts the number of RFPs that might be there for core over the next couple of years?
I do think M&A can impact RFP volumes both ways. Some institutions that are considering being acquired might delay an RFP, but M&A activity also creates opportunities for takeaways. Based on what we have seen, the average number of RFPs we typically talk about — roughly 200 a year — could be closer to 250 to 275 over the next couple of years given competitor uncertainty and M&A dynamics.
So even with increased M&A, that should increase opportunities overall?
In both ways, yes. We typically win more than we lose on the M&A side, and we expect to capture our fair share of pure competitive takeaways as well.
One last question. In the past, you've noted that some portions of the business are more sensitive to economic slowdowns. At this point, what percentage of the business could be at risk if the economy slows or banks get nervous?
Overall, we have not seen volatility related to economic or geopolitical issues. Historically, the card business has the most sensitivity to the macro environment, but overall we have not seen a big change in the exposure of the business to economic cycles.
To add, consumer sentiment drives a lot of card spend. The bulk of our card business is debit, which can be impacted, but we have not seen major shifts. Our SI event in Salt Lake reinforced that clients plan to continue technology spend to solve problems, so demand remains steady.
The next question comes from James Faucette from Morgan Stanley.
Greg, I want to circle back to a comment you made about increased engagement with consulting and systems integrators. With those conversations, do you view that as a potential source of better implementation efficacy, especially if you can enlist the SIs to do more work? Could that be an incremental channel or point of leverage?
I'm glad you asked. Absolutely. Those firms help validate what we're doing and provide entree into larger institutions. I've had inbound calls from institutions that came as references from consulting firms even before we've finalized any formal partnerships. They provide validation that Jack Henry can play in larger markets. They can also become implementation partners. We're entertaining those opportunities as they present themselves.
Greg or Mimi, on Tap2Local and related payment initiatives: how should we think about the margin profile of Tap2Local relative to the current Payments segment margin? Is the Moov economics model initially dilutive because of onboarding support, or can it be accretive because distribution runs through existing Banno and financial institution relationships? How should we think about trajectory over time?
Some of these initiatives are exciting on two fronts: top-line potential, though still early days, and margin contribution. Given the rev-share nature and limited development work required to bring the solution to market due to existing partnerships, we expect Tap2Local to have attractive margins. It's still small today but expected to grow nicely over the next several years and help accelerate payment size and overall growth rate for the business.
The next question comes from Timothy Chiodo from UBS.
I apologize if this was already addressed — I'm joining late. It's related to new competitors: with recent news of a large bank working with a vendor like Pismo and Visa, how are you thinking about them as a potential new competitor that might not have been part of the thought process two years ago and now appears to be gaining traction?
Tim, it's a good question. Pismo is not a full core; it provides ledgering capability but lacks deposit capabilities and many core functions. Some people call it a headless core, but it doesn't have full core functionality like deposits and lending. What Wells Fargo is doing involves many other dynamics, including Visa relationships and internal build decisions. I think there's some overreaction to Pismo's role today. We've validated with Visa, and based on conversations with our sales team, we are not seeing Pismo as a competitor in any single core deal today. We do see them sometimes in card initiatives, but not as a full-threat core provider in our pipeline.
This concludes our question-and-answer session. I would like to turn the conference back over to Vance Sherard for closing remarks.
Thank you, Danielle. Management will be participating in multiple investor events over the next few months, and we look forward to our conversations with investors. As Greg mentioned, we will be having our Investor Day on September 15 at our office in Dallas, and that will obviously be webcast. However, if you would like to attend in person, please reach out to Steve Fine on our IR team for more information. In conclusion, we extend our appreciation to all Jack Henry associates for their outstanding efforts, which have set us up to finish a successful fiscal 2026. Thank you for joining us today. Danielle, please provide the replay number.
The replay number for today's call is (855) 669-9658 and the access code is 4124634. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.