CNBC TechCheck+ chats with Jack Henry CEO David Foss following SVB collapse — 3/14/23

Happy to join you, Frank.

Banks and credit unions focused in the United States. The way I always tell the story is that if you're running a bank or credit union in the United States, pretty much any technology that you need to do that you can get from Jack Henry if you choose to do that. We specialize in serving credit unions of all sizes and then banks starting at around 500 million up to about 50 billion in assets. So that super-regional space is not an area that we focus on significantly, but pretty much all the other banks in the space other than the very largest are our area of specialty. As we are talking to bankers, and obviously in the last couple of days I've done a lot of that, one of the challenges that they're — and frankly I would say they're frustrated — because there is this conflation between capitalization and what we saw at Silicon Valley Bank. We are not specializing in serving clients who are focused in cryptocurrency, as we saw with Signature. They're not specialized in serving fintechs, as we saw with Silicon Valley Bank. Most of our clients are serving some area, some community, and they're serving those customers who are small and medium business clients and certainly retail clients, but a lot of small and medium business clients. So they don't have or they don't feel that they have that same exposure to what we've seen at Silicon Valley Bank or a couple of other banks that have been in the news here recently. So I think the good news for our customer base is generally they're well capitalized, generally they don't have the liquidity challenge. But even if they did, the actions that the Treasury Department, the Fed, FDIC, and the White House have taken here in the past few days have really helped to shore up confidence.

Yeah, so there are a few different aspects of this. Number one is if M&A picks up again. And it's ironic because I was in New York just a couple of weeks ago doing investor conferences, and that's why I'm here today. I'm speaking at a conference later this afternoon. I've been doing these for the last several weeks since our earnings call, and I've been talking a lot about the fact that M&A has essentially come to a stop in our space. There was really little M&A activity in 2022. So now the question is, will this fuel M&A again? When M&A happens, generally Jack Henry is a beneficiary because a Jack Henry bank acquires another bank, they need services from us to add that acquired bank into our platforms. And then the way they pay us is based on number of accounts or number of registered users or number of transactions. So whenever a bank is acquiring another bank and they're folding onto one of our platforms, our revenue goes up. So that's normally a very good thing for us when M&A happens. Ironically, as I say, M&A had come to a stop. The big question right now is will this fuel M&A or not? And of course I have no way of accurately predicting that as I sit here at this moment.

Yeah, so they don't normally name names in those conversations, but I talk to CEOs all the time of banks in our space, and there's been a real appetite for M&A here going on for quite some time. One of the real reasons for that is that during the pandemic, a lot of stimulus money went into the economy. People put that money into their bank or credit union. They were spending away on those deposits, on that money, and so the deposit balances have been shrinking a little bit. And yet commercial loan demand has been going up. So you have bankers out there trying to find banks that had maybe an overabundance of deposits to do the acquisition. Now I have deposits to fund the loan demand that I have. So there is definitely a lot of interest. I just spoke at a conference in January, and the name of the conference is 'Acquire or Be Acquired.' The whole idea is they attract bankers there, buyers and sellers, some speed dating going on, trying to find those matches of people that are looking to sell their bank potentially and people that are looking to acquire a bank. And I will tell you, the overwhelming number of bankers there were on the acquire side. They were looking for somebody to acquire because they had that loan demand and they needed the deposits.

Yeah, yeah. So I think what's happening right now, particularly in the past few days, is most bankers, rather than saying 'I gotta go talk to Jack Henry about a potential acquisition,' most of them have really buckled down to make sure that their customers understand the financial health of their institution. So a lot of outreach to their customers, a lot of communication with their customers. They've been very active on social media trying to make sure that they kind of calm people down and say there isn't some great big flaw in the U.S. banking system. This isn't 2008 all over again. This is a group of very specialized banks that are serving a group of specialized customers. There's an issue happening over here. You all need to understand that your bank is fine. So I think that's the number one priority for most bankers right now. With that said, I'm sure a lot of them are also watching for those opportunities because again, just a month or two ago, many of them had that type of thing top of mind. So they're out looking for those opportunities right now. But I think the number one priority is to make sure that their existing customers are comfortable with the model that the bank is following.

Yeah, so I think it's important to understand that we are a debit-centric business. And so all I was trying to telegraph was a little bit of a slowdown in the growth, not that we were going to flatten out in any way, but a little bit of a slowdown in the growth. And our experience and our projections are consistent with what both Visa and Mastercard have been reporting. Over the past several months, back to my reference earlier about stimulus checks, people had put a lot of money into their deposit accounts with those stimulus checks. Those balances were high. They've been chipping away at those balances using their debit card. And now as they're continuing to have a little concern about the overall economy, some were switching a little bit of activity to a credit card as opposed to their debit card because they weren't exactly sure what the near-term future looked like. Jack Henry is a major debit issuer. We are not a major credit card issuer. And so for us, a little bit of a shift from debit to credit has a modest impact on our revenue. We have a June 30 fiscal year-end. And so for us, this was our mid-year update. We issue guidance annually, but it was our mid-year update, and we were seeing a couple of things that prompted us to say we need to drop guidance just a little bit on the debit processing side because of the shift that we saw coming. And again, consistent with what both Visa and Mastercard have said.

Yeah.

And my response is no, we absolutely have not seen that. We had a record sales quarter in the December quarter, and I talked all about it on the February earnings call. We followed that with the pipeline as it sits today is larger than it's ever been in the history of our company. So a really significant demand for Jack Henry technology solutions and services. In our space, we're known as the premier provider of service in our space, a key provider of innovative technology to our space. And so the demand environment for Jack Henry has never been stronger. But we have to juxtapose that against the messaging that's coming from our major competitors. Of course, I can't comment accurately on what's happening to anybody else. All I can tell you is what's happening with our company.

Yeah, deals are not taking longer to close. So I'll clarify that on the front end of your question. Absolutely not. Every deal, any larger deal that we do, there's always a consultant involved, there's always an attorney involved. It takes time, but definitely have not seen an elongation of the sales cycle. But to your second point, absolutely a legitimate point. We talk about it a lot with our customers. We have thousands of customers, and I would challenge many of them that they're not using the full capability of the systems that they already have. We sell, we have online training options, and so we push our customers: 'You're free to use it, go out and learn more about how to get more value out of the systems that you have today.' But it's a balancing act. We certainly are in the business of selling additional solutions. We want to continue to do that, but we know our customers are happier if they're getting the full use out of the systems they already purchased from Jack Henry, which is why we are constantly pushing that message.

Yeah, so it's an interesting thing being in the space that we're in. First off, as a large public company, we have a conservative balance sheet. So the rising rate environment has certainly had an impact on us, but it's not something significant. The flip side, and kind of the good news if you will, is because of our payments business, we tend to keep balances at some of our banks, and so we're earning interest on that now that we haven't earned any measurable interest on in a long time, just like everybody else. So that's an offset for us, the interest that we earn on balances that we're keeping with our financial institutions. But then the really good news has been for the last several quarters now in this rising rate environment, because almost all of our customers are banks and credit unions, loan rates have been going up. You haven't seen them raise deposit rates very much. And so for the first time in many years, they actually have an NIM spread that they can operate with. And so bankers have been really pretty positive up until this week. Now, of course, there's a lot of concern. But the point is, even if deposit rates haven't gone up much, as I've stressed to people, even if deposit rates go up and that NIM margin closes again, our customers have been running in that environment for years. The rates have been much lower, but it's a skinny little spread. Same idea: if deposit rates go up, they know how to run their franchise in that type of a setting because they've been doing it for years very successfully as interest rates have been so low. So for the moment, we've got customers with more money to spend. They're actually seeing a NIM margin, and so that's been good news for us. And I think that's going to hold true for the foreseeable future here. Again, depending on what all shakes out here this week, I think that model continues to hold true.

Yeah, so it's — and you know, Frank, I'm passionate about the topic of M&A. I ran the practice at Jack Henry for about 11 years where we were doing deals, and then I would run the deal after we did the acquisition. We did, I think, 32 or 33 deals during that period. So I'm very passionate about the topic. And we are a good operator. We know how to do good deals. We know how to integrate them into the company. I said on the call in a response to a question about M&A that I expected 2022 was going to be the year where things were really going to get back into action again. Because my expectation was during the summer, I thought that funding for a lot of the startups was going to dry up for the private companies, and I thought the public companies were already taking a beating at that time. And so I thought some reality would set in and that would create some opportunities for Jack Henry to do some really creative deals for our company, to pick up some products that would be of real interest to our customer base. Well, it didn't happen last year, much to my surprise. Private equity money continued to flow in during the summer of last year and even into the fall. And even though some of the fintech stocks took a beating, their investors seem to be willing to continue to fund them. So we didn't see the opportunities that I thought we would see. But I think now, with what's happened this week, I think we will see some nice assets. When we look at companies, again, we're a very disciplined acquirer. We've done a lot of deals, so we know what to look for. Culture is always top of mind for us. If you read anything about Jack Henry, you'll understand that we have a really unique culture, and so that's important to us. And we're always looking for things that will be additive to our customers, things that our customers will look at and say, 'Yeah, that makes sense. I would buy that from Jack Henry.' We don't look to do transformational acquisitions. We have a wonderful company here. We're not looking to transform the company. We're looking for things that will be additive to our product set and that customers will look at and say, 'Yeah, I think I'd like to add that to my suite of solutions.' So to answer your question directly, I absolutely think that we'll be seeing some opportunities here as a result of what's happened this week.

Yeah, so we rarely do a pre-revenue acquisition. We're always trying to make sure that somebody has proven the model, that somebody would actually buy this thing, whatever it is. So rarely have we done a pre-revenue, but we've done several that are pre-earnings. That's common in our space. And so normally when we're doing the analysis, we have to do projections. Knowing the way we run our business, we know this business really well. I've been in this space for 38 years. I'm a technologist at heart, by the way. So when I look at companies, I look at their technology and try to think about how it would fit into our ecosystem. We do a lot of analysis on these deals to try and figure out the best option for us to take. We are not known as the acquirer that will pay the highest price normally. We come in at a competitive price, but we come in with a reputation for doing good deals where we take care of the customer and take care of the employees. And a lot of sellers, including PE, we've done a number of deals where we've acquired away from PE, where the PE has put a value on the fact that they know we're going to take care of their employees and their customers. And we sometimes aren't the high bidder, and yet we win the deal because of the reputation we have for doing really good deals, deals that are good for the employees and the customers. So all of that stuff comes into effect. On any larger deal, I'm usually personally involved again because I have a lot of experience in that area.

Well, thank you, Frank. I think David's on a serious note. Great to have you on. Thank you very much, David Foss, CEO of Jack Henry. Thank you again.