Jack Henry & Associates (JKHY) 10-Q2024 Q3 Quarterly report

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements may appear throughout this report, including without limitation, in Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “seek,” “anticipate,” “estimate,” “future,” “intend,” “plan,” “strategy,” “predict,” “likely,” “should,” “will,” “would,” “could,” “can,” “may,” and similar expressions. Forward-looking statements are based only on management’s current beliefs, expectations and assumptions regarding the future of the Company, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, those discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, in particular, those included in Item 1A, “Risk Factors” of such report, and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Any forward-looking statement made in this report speaks only as of the date of this report, and the Company expressly disclaims any obligation to publicly update or revise any forward-looking statement, whether because of new information, future events or otherwise.

Jack Henry & Associates, Inc. and subsidiaries (“Jack Henry,” or the “Company”) is a well-rounded financial technology company. Jack Henry was founded in 1976 as a provider of core information processing solutions for banks. Today, the Company’s extensive array of products and services includes processing transactions, automating business processes, and managing information for approximately 7,500 financial institutions and diverse corporate entities.

The condensed consolidated financial statements include the accounts of Jack Henry and all of its subsidiaries, which are wholly owned, and all intercompany accounts and transactions have been eliminated.

Comprehensive income for the three and nine months ended March 31, 2024 and 2023, equals the Company’s net income.

The Company monitors trade and other receivable balances and contract assets and estimates the allowance for lifetime expected credit losses. Estimates of expected credit losses are based on historical collection experience and other factors, including those related to current market conditions and events.

Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Accumulated depreciation at March 31, 2024, totaled $475,245 and at June 30, 2023, totaled $466,711.

Intangible assets consist of goodwill, customer relationships, computer software, and trade names acquired in business acquisitions in addition to internally developed computer software. The amounts are amortized, with the exception of those intangible assets with an indefinite life (such as goodwill), over an estimated economic benefit period, generally 3 to 20 years. Accumulated amortization of intangible assets totaled $1,240,498 and $1,149,913 at March 31, 2024, and June 30, 2023, respectively.

At March 31, 2024, and June 30, 2023, the Company had an investment in the preferred stock of Autobooks, Inc. (“Autobooks”) of $18,250, which represented a non-controlling share of the voting equity as of that date. The total investment was recorded at cost and is included within other non-current assets on the Company's balance sheet. There have been no events or changes in circumstances that would indicate an impairment and no price changes resulting from observing a similar or identical investment. An impairment and/or an observable price change would be an adjustment to recorded cost. Fair value will not be estimated unless there are identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.

The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or borrowings on its existing line of credit. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At March 31, 2024, there were 31,323 shares in treasury stock and the Company had the remaining authority to repurchase up to 3,667 additional shares. The total cost of treasury shares at March 31, 2024, was $1,852,118. During the first nine months of fiscal 2024, the Company repurchased 129 shares. At June 30, 2023, there were 31,194 shares in treasury stock and the Company had the remaining authority to repurchase up to 3,796 additional shares. The total cost of treasury shares at June 30, 2023, was $1,832,118 and the Company repurchased 151 shares during the first nine months of fiscal 2023.

Deferred tax liabilities and assets are recognized for the tax effects of differences between the financial statement and tax basis of assets and liabilities. A valuation allowance would be established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based upon the technical merits of the position. The tax benefit recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Also, interest and penalties expenses are recognized on the full amount of unrecognized benefits for uncertain tax positions. The Company's policy is to include interest and penalties related to unrecognized tax benefits in income tax expense.

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) applicable to interim condensed consolidated financial statements, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes, which are included in its Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended June 30, 2023.

In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly in all material respects the financial position of the Company as of March 31, 2024, the results of its operations for the three and nine months ended March 31, 2024 and 2023, changes in stockholders' equity for the three and nine months ended March 31, 2024 and 2023, and its cash flows for the nine months ended March 31, 2024 and 2023. The condensed consolidated balance sheet at June 30, 2023, was derived from audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements.

The results of operations for the three and nine months ended March 31, 2024, are not necessarily indicative of the results to be expected for the entire fiscal year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements included in its Form 10-K for the fiscal year ended June 30, 2023. For the three and nine months ended March 31, 2024, there have been no new or material changes to the significant accounting policies discussed in the Company’s Form 10-K for the fiscal year ended June 30, 2023, that are of significance, or potential significance, to the Company.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company adopted the ASU effective July 1, 2023, and will apply it prospectively to business combinations occurring after that date.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which improves the disclosures about a public entity's reportable segments through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and should be applied retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances the transparency and decision usefulness of income tax disclosures. The ASU requires additional disclosure related to rate reconciliation, income taxes paid, and other disclosures to improve the effectiveness of income tax disclosures. The ASU is effective for annual periods beginning after December 15, 2024, and applied on a prospective basis. Early adoption and retrospective application is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.

The Company generates revenue from data processing and hosting, transaction processing, software licensing and related services, professional services, and hardware sales.

The tables below present the Company's revenue disaggregated by type of revenue. Refer to Note 11, Reportable Segment Information, for disaggregated revenue by type and reportable segment. The majority of the Company’s revenue is earned domestically, with revenue from customers outside the United States comprising less than 1% of total revenue.

The following table provides information about contract assets and contract liabilities from contracts with customers.

Contract assets primarily result from revenue being recognized when or as control of a solution or service is transferred to the customer, except where invoicing is contingent upon the completion of other performance obligations or payment terms differ from the provisioning of services. The current portion of contract assets is reported within prepaid expenses and other in the condensed consolidated balance sheet, and the non-current portion is included in other non-current assets. Contract liabilities (deferred revenue) primarily relate to consideration received from customers in advance of delivery of the related goods and services to the customer. Contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.

The Company analyzes contract language to identify if a significant financing component does exist and would adjust the transaction price for any material effects of the time value of money if the timing of payments provides either party to the contract with a significant benefit of financing the transaction.

During the three months ended March 31, 2024, and 2023, the Company recognized revenue of $83,083 and $83,179, respectively, that was included in the corresponding deferred revenue balance at the beginning of the periods. For the nine months ended March 31, 2024, and 2023, the Company recognized revenue of $226,419 and $215,263, respectively, that was included in the corresponding deferred revenue balance at the beginning of the periods.

Amounts recognized that relate to performance obligations satisfied (or partially satisfied) in prior periods were immaterial for each period presented. These adjustments are primarily the result of transaction price re-allocations due to changes in estimates of variable consideration.

As of March 31, 2024, estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period totaled $6,493,836. The Company expects to recognize approximately 24% over the next 12 months, 20% in 13-24 months, and the balance thereafter.

The Company incurs incremental costs to obtain a contract as well as costs to fulfill contracts with customers that are expected to be recovered. These costs consist primarily of sales commissions, which are incurred only if a contract is obtained, and customer conversion or implementation-related costs. Capitalized costs are amortized based on the transfer of goods or services to which the asset relates, in line with the percentage of revenue recognized for each performance obligation to which the costs are allocated.

Capitalized costs totaled $464,563 and $442,012, at March 31, 2024, and June 30, 2023, respectively.

For the three months ended March 31, 2024, and 2023, amortization of deferred contract costs totaled $41,107 and $37,381, respectively. During the nine months ended March 31, 2024, and 2023, amortization of deferred contract costs totaled $133,195 and $114,222, respectively. There were no impairment losses in relation to capitalized costs for the periods presented.

For cash equivalents, certificates of deposit, amounts receivable or payable, and short-term borrowings, fair values approximate carrying value, based on the short-term nature of the assets and liabilities.

The Company's estimates of the fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available. The three levels of the hierarchy are as follows:

Fair value of financial assets included in current assets is as follows:

Minimum Sublease Payments

The effective tax rate increased for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, with an effective tax rate of 23.7% of income before income taxes, compared to 23.2% in the prior fiscal year quarter. The increase in the Company's tax rate was primarily due to certain discrete period benefits recognized during the prior fiscal year quarter.

For the nine months ended March 31, 2024, the effective tax rate increased compared to the nine months ended March 31, 2023, with an effective tax rate of 23.6% of income before taxes, compared to 23.3% for the same period last fiscal year. The increase in the effective tax rate for the nine months ended March 31, 2024, was primarily due to the difference in impact of share-based compensation that vested during each of the periods.

The Company paid income taxes, net of refunds, of $70,686 and $103,251 in the nine months ended March 31, 2024, and 2023, respectively. The decrease in paid income taxes for the nine months ended March 31, 2024, compared to the nine months ended March 31, 2023, was primarily the result of additional cash flow benefits achieved with changes in the impact of Internal Revenue Code Section 174, requiring certain research and development costs to be capitalized, due to related guidance released by the Internal Revenue Service in the current fiscal year.

At March 31, 2024, the Company had $13,999 of gross unrecognized tax benefits before interest and penalties, $12,225 of which, if recognized, would affect our effective tax rate. The Company had accrued interest and penalties of $2,800 and $1,635 related to uncertain tax positions at March 31, 2024, and 2023, respectively.

The U.S. federal income tax returns for fiscal 2020 and all subsequent years remain subject to examination as of March 31, 2024, under statute of limitations rules. The U.S. state income tax returns that remain subject to examination as of March 31, 2024, under the statute of limitation rules varies by state jurisdiction from fiscal 2016 through 2019 and all subsequent years. The Company anticipates potential changes due to lapsing of statutes of limitations, and examination closures could reduce the unrecognized tax benefits balance by $1,500 to $4,500 within twelve months of March 31, 2024.

Our operating income for the three months ended March 31, 2024, and 2023, included $6,924 and $6,915 of stock-based compensation costs, respectively. Our operating income for the nine months ended March 31, 2024, and 2023, included $22,404 and $21,459 of stock-based compensation costs, respectively.

On November 10, 2015, the Company adopted the 2015 Equity Incentive Plan (“2015 EIP”) for its employees and non-employee directors. The plan allows for grants of stock options, stock appreciation rights, restricted stock shares or units, and performance shares or units. The maximum number of shares authorized for issuance under the plan is 3,000.

Under the 2015 EIP, terms and vesting periods of the options are determined by the Compensation Committee of the Board of Directors when granted. The option period must expire not more than ten years from the option grant date. The options granted under this plan are exercisable beginning three years after the grant date at an exercise price equal to 100% of the fair market value of the stock at the grant date. The options terminate upon surrender of the option, ninety days after termination of employment, upon the expiration of one year following notification of a deceased optionee, or ten years after grant.

During the nine months ended March 31, 2024, there were no options granted, forfeited, or exercised. At March 31, 2024, 12 options were outstanding at a weighted average exercise price of $87.27 with an aggregate intrinsic value of $1,010.

At March 31, 2024, there was no compensation cost yet to be recognized related to outstanding options. All of the options are currently exercisable, with a weighted average remaining contractual term (remaining period of exercisability) of 2.25 years as of March 31, 2024.

The following table summarizes non-vested restricted stock unit awards and performance awards as of March 31, 2024:

Of the 154 unit awards granted in fiscal 2024, 95 were restricted stock unit awards and 59 were performance unit awards. The restricted stock unit awards were valued at the weighted average fair value of the non-vested units based on the fair market value of the Company’s equity shares on the grant date, less the present value of expected future dividends to be declared during the vesting period, consistent with the methodology for calculating compensation expense on such awards.

24 of the performance unit awards granted in fiscal 2024 were valued at grant by estimating 100% payout at release and using the fair market value of the Company equity shares on the grant date, less the present value of expected future dividends to be declared during the vesting period. The payout at release of approximately half of these performance unit awards will be determined based on the Company's compound annual growth rate for revenue (excluding adjustments) for the three-year vesting period compared against goal thresholds as defined in the award agreement. The performance payout at release of the other half of these performance unit awards will be determined based on the expansion of the Company's non-GAAP operating margin over the three-year vesting period compared against goal thresholds as defined in the award agreement. 35 of the performance unit awards have market conditions and were valued at grant using a Monte Carlo pricing model as of the measurement date customized to the specific provisions of the Company’s plan design. Per the Company's award vesting and settlement provisions, the performance unit awards that utilize a Monte Carlo pricing model were valued at grant on the basis of Total Shareholder Return (“TSR”) in comparison to the compensation peer group made up of participants approved by the Compensation Committee of the Company's Board of Directors for fiscal year 2024. The Monte Carlo inputs used in the model to estimate fair value at the measurement date and resulting values for these performance unit awards are as follows:

At March 31, 2024, there was $26,784 of compensation expense that has yet to be recognized related to non-vested restricted stock unit and performance stock unit awards, which will be recognized over a weighted average period of 1.25 years.

The following table reflects the reconciliation between basic and diluted earnings per share.

On August 31, 2022, the Company acquired all of the equity interest in Payrailz, LLC (“Payrailz”). The final purchase price, following customary post-closing adjustments to the extent actual closing date working capital, cash, debt, and unpaid seller transaction expenses exceeded or were less than the amounts estimated at closing, was $230,205. Pursuant to the merger agreement for the transaction, $48,500 of the purchase price was placed in an escrow account at the closing, consisting of $2,500 for any final purchase price adjustments owed by the sellers, which amount was released to the sellers on December 15, 2022, in connection with post-closing purchase price adjustments, and $46,000 for indemnification matters under the merger agreement, which amount was released to the sellers September 20, 2023.

The primary reason for the acquisition was to expand the Company's digital financial management solutions and the purchase was funded by our revolving line of credit (Note 6) and cash generated from operations. Payrailz provides cloud-native, API-first, AI-enabled consumer and commercial digital payment solutions and experiences that enable money to be moved in the moment of need.

Management has completed a purchase price allocation and assessment of the fair value of acquired assets and liabilities assumed. The recognized amounts of identifiable assets acquired, and liabilities assumed, based on their fair values as of August 31, 2022, and taking into account the post-closing purchase price adjustment described above, are set forth below:

The goodwill of $117,339 arising from this acquisition consists largely of the growth potential, synergies, and economies of scale expected from combining the operations of the Company with those of Payrailz, together with the value of Payrailz's assembled workforce. The goodwill from this acquisition has been allocated to our Payments segment and $117,339 is expected to be deductible for income tax purposes.

Identifiable intangible assets from this acquisition consist of customer relationships of $6,109, computer software of $112,505, and other intangible assets of $1,254. The amortization period for acquired customer relationships, computer software, and other intangible assets is over a term of 15 years, 10 years, and 15 years, respectively.

Current assets were inclusive of cash acquired of $577. The fair value of current assets acquired included accounts receivable of $978, none of which were expected to be uncollectible.

The Company’s operations are classified into four reportable segments: Core, Payments, Complementary, and Corporate and Other. The Core segment provides core information processing platforms to banks and credit unions, which consist of integrated applications required to process deposit, loan, and general ledger transactions, and maintain centralized customer/member information. The Payments segment provides secure payment processing tools and services, including ATM, debit, and credit card processing services, online and mobile bill pay solutions, Automated Clearing House (“ACH”) origination and remote deposit capture processing, and risk management products and services. The Complementary segment provides additional software, hosted processing platforms, and services, including digital/mobile banking, treasury services, online account opening, fraud/anti-money laundering ("AML") and lending/deposit solutions that can be integrated with the Company's Core solutions, and many can be used independently. The Corporate and Other segment includes revenue and costs from hardware and other products not attributed to any of the other three segments, as well as operating expenses not directly attributable to the other three segments.

The Company evaluates the performance of its segments and allocates resources to them based on various factors, including performance against trend, budget, and forecast. Only revenue and costs of revenue are considered in the evaluation for each segment.

Immaterial adjustments have been made between segments to reclassify revenue and cost of revenue that was recognized for the three and nine months ended March 31, 2023. These reclasses were made to be consistent with the current allocation of revenue and cost of revenue by segment. Revenue reclassed for the three and nine months ended March 31, 2023, from Core to Corporate and Other was $1,797 and $5,456, respectively, from Payments to Corporate and Other was $7 and $24, respectively, and from Complementary to Corporate and Other was $135 and $243, respectively. Cost of revenue reclassed for the three and nine months ended March 31, 2023, from Core to Corporate and Other was $1,711 and $5,004, respectively, from Payments to Corporate and Other was $662 and $1,923, respectively, and from Complementary to Corporate and Other was $329 and $989, respectively.

This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q for the fiscal quarter ended March 31, 2024.

Jack Henry & Associates, Inc. is a well-rounded financial technology company and is a leading provider of technology solutions and payment processing services primarily to community and regional financial institutions. Our solutions consist of integrated data processing systems solutions to U.S. banks ranging from de novo to multi-billion-dollar institutions with assets up to $50 billion, core data processing solutions for credit unions of all sizes, and non-core highly specialized core-agnostic products and services that enable financial institutions of every asset size and charter, and diverse corporate entities outside the financial services industry, to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. Our integrated solutions are available for on-premise installation and delivery in our private and public cloud.

For the third quarter of fiscal 2024, total revenue increased 5.9%, or $30,010, compared to the same quarter in fiscal 2023. Total revenue less deconversion revenue of $843 for the current fiscal quarter and less deconversion revenues of $6,143 for the prior fiscal year third quarter results in an increase of 7.0%, quarter over quarter. This increase was primarily driven by growth in data processing and hosting, Jack Henry digital, including Banno, card, and payment processing revenues.

Operating expenses increased 6.6%, or $26,301, for the third quarter of fiscal 2024 compared to the third quarter of fiscal 2023. Deconversion and/or acquisition costs did not significantly affect operating expenses quarter over quarter. The increase was primarily driven by higher personnel costs, higher direct costs, and increased internal licenses and fees.

Operating income increased 3.4%, or $3,709, for the third quarter of fiscal 2024 compared to the third quarter of fiscal 2023. Removing from total operating income the effects of deconversion operating loss of $6 for the current fiscal quarter* and deconversion operating income of $5,130 for the prior fiscal year third quarter results in an increase of 8.6%, quarter over quarter. This increase was primarily driven by revenue growth partially offset by increased operating expenses detailed above.

The provision for income taxes increased 10.2%, or $2,500, for the third quarter of fiscal 2024, compared to the third quarter of fiscal 2023, primarily driven by the increase in income before income taxes. The effective tax rate for the current fiscal third quarter was 23.7% compared to 23.2% for the same quarter a year ago. The increase in the effective tax rate was primarily due to certain discrete period benefits recognized during the prior fiscal quarter.

Net income increased 6.8%, or $5,550, for the third quarter of fiscal 2024, compared to the third quarter of fiscal 2023. Removing from total net income the effects of deconversion net loss of $5 for the current fiscal quarter,* and deconversion net income of $3,899 for the prior fiscal year third quarter, results in a 12.2% increase quarter over quarter. This increase was primarily due to net organic growth in our lines of revenue for the third quarter of fiscal 2024 compared to the same quarter last fiscal year.

Operating income increased 2.0%, or $7,275, for the nine months ended March 31, 2024, compared to the same period in fiscal year 2023. Total operating income less deconversion operating income of $7,552, removing the effects of the VEDIP program of $16,443 and an acquisition operating loss of $2,237 for the current fiscal year period, less deconversion operating income of $14,459 and removing the effects of the gain on sale of assets, net, of $7,384 for the prior fiscal year period, results in a 12.0% increase period over period. This increase was primarily driven by revenue growth partially offset by increased operating expenses detailed above.

The provision for income taxes increased 6.3%, or $5,141, for the nine months ended March 31, 2024, compared to the same period in fiscal year 2023, primarily driven by the increase in income before income taxes. The effective tax rate for the nine months ended March 31, 2024, was 23.6% compared to 23.3% for the same period a year ago. The increase in the effective tax rate was primarily due to the difference in impact of share-based compensation that vested during the comparative periods.

Net income increased 4.4%, or $11,870, for the nine months ended March 31, 2024, compared to the same period a year ago. Total net income less deconversion net income of $5,739, plus net loss for the acquisition and the VEDIP program of $3,539 and $12,497, respectively, for the current fiscal year period, and less net income for deconversions and the gain on sale of assets, net, of $10,989 and $5,612, respectively, for the prior fiscal year period, results in a 15.4% increase period over period. This increase was primarily due to net organic growth in our lines of revenue for the nine months ended March 31, 2024, compared to the same period last fiscal year.

A detailed discussion of the major components of the results of operations for the three and nine months ended March 31, 2024, follows. On August 31, 2022, the Company acquired all of the equity interest in Payrailz, LLC (“Payrailz”). Payrailz (“acquisition”) related revenue and operating expenses mentioned in the nine months ended March 31, 2024, discussions below are for the first two months of the period only.

Discussions compare the current fiscal year's three and nine months ended March 31, 2024, to the prior fiscal year's three and nine months ended March 31, 2023.

Services and support revenue increased 4.5% for the third quarter of fiscal 2024 compared to the same quarter a year ago. Reducing services and support revenue for deconversion revenue from each quarter, which was $843 for the current fiscal year quarter and $6,143 for the prior fiscal year quarter, results in growth of 6.4% quarter over quarter. This increase was primarily driven by double-digit growth in data processing and hosting revenues as new and existing customers migrate to our private cloud and processing volumes expand.

Services and support revenue increased 6.3% for the nine months ended March 31, 2024 compared to the same period a year ago. Reducing services and support revenue for deconversion revenue from each period, which was $9,861 for the current fiscal year period and $17,042 for the prior fiscal year period, and acquisition revenue of $2 for the current fiscal year period, results in growth of 7.2% period over period. This increase was primarily driven by double-digit growth in data processing and hosting as new and existing customers migrate to our private cloud and processing volumes expand, software usage as customers continue moving to time-based licenses rather than perpetual, hardware, and consulting revenues.

Processing revenue increased 7.8% for the third quarter of fiscal 2024 compared to the same quarter last fiscal year. Deconversion and/or acquisition revenue did not significantly affect processing revenue quarter over quarter. This increase was primarily driven by growth in Jack Henry digital revenue (including Banno) from higher active users and expanding volumes from existing products and the introduction of new products, growth in card revenue primarily from organic growth from expanding volumes, higher payment processing revenues from expanding volumes and new customer revenue, and increased other processing revenues.

Processing revenue increased 8.8% for the nine months ended March 31, 2024, compared to the same period last fiscal year. Reducing processing revenue for acquisition revenue of $1,943 for the current fiscal year period, results in growth of 8.5% period over period. This increase was primarily driven by growth in card revenue primarily from organic growth from expanding volumes, growth in Jack Henry digital revenue (including Banno) from higher active users and expanding volumes from existing products and the introduction of new products, increased payment processing revenues from expanding volumes and new customer revenue, and higher other processing revenues.

Cost of revenue for the third quarter of fiscal 2024 increased 6.8% over the prior fiscal year third quarter. Reducing cost of revenue for deconversion costs from each quarter, which were $671 for the current fiscal year quarter and $470 for the prior fiscal year quarter, results in a 6.7% increase quarter over quarter. This increase was primarily due to higher direct costs, generally consistent with increases in the related revenue, higher personnel costs due to an increase in employee headcount in the trailing twelve months and increased bonus attainment quarter over quarter, and increased internal licenses and fees from increased pricing and deployment. Cost of revenue increased 1% compared to the prior fiscal year quarter as a percentage of total revenue.

Cost of revenue increased 6.8% for the nine months ended March 31, 2024, compared to the same period last fiscal year. Reducing cost of revenue for deconversion costs from each period, which were $1,562 for the current fiscal period and $1,435 for the prior fiscal period, and for acquisition costs of $3,334 from the current fiscal period, results in a 6.4% increase period over period. This increase was primarily due to higher direct costs generally consistent with related increases in revenue, higher personnel costs due to an increase in employee headcount in the trailing twelve months and increased bonus attainment period over period, and increased internal licenses and fees from increased pricing and deployment. Cost of revenue remained consistent compared to the prior fiscal year period as a percentage of total revenue.

Research and development expense increased 4.0% for the third quarter of fiscal 2024 compared to the prior fiscal year third quarter. Deconversion and/or acquisition costs did not significantly affect research and development expenses quarter over quarter. This increase was primarily due to higher cloud consumption costs, net of capitalization. Research and development expense for the quarter remained consistent compared to the prior fiscal year quarter as a percentage of total revenue.

Research and development expense increased 4.0% for the nine months ended March 31, 2024, compared to the same period last fiscal year. Reducing research and development expense for the effects of acquisitions of $656 for the current fiscal year period results in a 3.4% increase period over period. This increase was primarily due to an increase in personnel costs, net of capitalization, including increased bonus attainment period over period. Research and development expense for the current fiscal year period remained consistent compared to the prior fiscal year period as a percentage of total revenue.

Selling, general, and administrative expense increased 7.0% in the third quarter of fiscal 2024 over the same quarter in the prior fiscal year. Reducing selling, general, and administrative expense for deconversion costs from each quarter, which were $178 for the current fiscal year quarter and $543 for the prior fiscal year quarter, results in a 7.7% increase quarter over quarter. This increase was primarily due to higher personnel costs from commissions and medical benefits expenses. Selling, general, and administrative expense increased 1% as a percentage of total revenue this fiscal quarter versus the prior fiscal year quarter.

Selling, general, and administrative expense increased 22.7% in the nine months ended March 31, 2024, compared to the same period last fiscal year. Reducing selling, general, and administrative expense for the effects of deconversions from each period, which were $747 for the current fiscal year period and $1,148 for the prior fiscal year period, for VEDIP program expenses of $16,443 and the effect of the acquisition of $192 in the current fiscal year period and removing the effect of the gain on sale of assets, net, of $7,384 in the prior fiscal year period, results in an 8.7% increase period over period. This increase was primarily due to higher personnel costs, including commissions and medical benefits expenses, and a decrease in the gain on sale of assets, net, period over period. Selling, general, and administrative expense increased 2% as a percentage of total revenue this fiscal year period versus the prior fiscal year period.

The effective tax rate increased for the three and nine months ended March 31, 2024, compared to the three and nine months ended March 31, 2023, with an effective tax rate of 23.7% and 23.6%, respectively, of income before taxes, compared to 23.2% and 23.3%, respectively, of income before taxes for the same periods last fiscal year. The increase in the effective tax rate for the comparative quarters was primarily due to certain discrete period benefits recognized during the prior fiscal year quarter. The increase in the effective tax rate for the comparative year-to-date periods was primarily due to the difference in impact of share-based compensation that vested during each of the comparative periods.

Net income increased 6.8% to $87,099, or $1.19 per diluted share, for the third quarter of fiscal 2024 compared to $81,549, or $1.12 per diluted share, in the same quarter of fiscal 2023. Increasing net income by deconversion net loss of $5 for the current fiscal quarter, and decreasing net income by deconversion net income of $3,899 for the prior fiscal year third quarter, results in a 12.2% increase quarter over quarter. This increase was primarily due to net organic growth in our lines of revenue for the third quarter of fiscal 2024 compared to the same quarter last fiscal year.

Net income increased 4.4% to $280,743, or $3.85 per diluted share, for the nine months ended March 31, 2024, compared to $268,873, or $3.68 per diluted share, in the same period of fiscal 2023. Removing from net income the effects of deconversion net income of $5,739, the net loss from the acquisition of $3,539, and the net loss from the VEDIP program of $12,497 for the current fiscal year period, and for the effects of deconversion net income of $10,989 and the gain on sale of assets, net, of $5,612 for the prior year fiscal period, results in a 15.4% increase period over period. This increase was primarily due to net organic growth in our lines of revenue for the nine months ended March 31, 2024, compared to the same period last fiscal year.

The Company’s operations are classified into four reportable segments: Core, Payments, Complementary, and Corporate and Other. The Core segment provides core information processing platforms to banks and credit unions, which consist of integrated applications required to process deposit, loan, and general ledger transactions, and maintain centralized customer/member information. The Payments segment provides secure payment processing tools and services, including ATM, debit, and credit card processing services; online and mobile bill pay solutions; ACH origination and remote deposit capture processing; and risk management products and services. The Complementary segment provides additional software, hosted processing platforms, and services, including digital/mobile banking, treasury services, online account opening, fraud/AML and lending/deposit solutions, that can be integrated with our core solutions, and many can be used independently. The Corporate and Other segment includes revenue and costs from hardware and other products not attributed to the other three segments, as well as operating expenses not directly attributable to the other three segments, except for items that are deemed unassigned and excluded from any segment.

Revenue in the Core segment increased 7.4% and cost of revenue increased 3.1% for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. Reducing Core revenue for deconversion revenue in both quarters, which totaled $1,291 for the three months ended March 31, 2024, and $2,315 for the three months ended March 31, 2023, results in an 8.2% increase quarter over quarter. This increase was primarily driven by growth in data processing and hosting revenues as new and existing customers migrate to our private cloud and processing volumes expand. Deconversion and/or acquisition costs did not significantly affect Core cost of revenue quarter over quarter. The Core cost of revenue increase was primarily due to higher direct costs generally consistent with increases in revenue. Core cost of revenue decreased 2% as a percentage of Core revenue for the third quarter of fiscal 2024 compared to the same quarter in fiscal 2023.