ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section provides management's view of the Company's financial condition and results of operations and should be read in conjunction with the audited consolidated financial statements, and related notes included elsewhere in this report. All dollar and share amounts, except per share amounts, are in thousands and discussions compare fiscal 2025 to fiscal 2024. Discussions of fiscal 2023 items and comparisons between fiscal 2023 and fiscal 2024 that are not included in this Form 10-K can be found in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024.
OVERVIEW
Jack Henry & Associates, Inc. is a well-rounded financial technology company headquartered in Monett, Missouri, that employs approximately 7,240 full-time and part-time associates nationwide, and is a leading provider of technology solutions and payment processing services primarily to community and regional banks and credit unions. Our solutions serve approximately 7,400 clients and consist of integrated data processing systems solutions to banks ranging from de novo to multi-billion-dollar institutions with assets up to $55 billion, core data processing solutions for credit unions of all sizes, and non-core highly specialized core-agnostic products and services that enable banks and credit unions 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.
Each of our solutions shares the fundamental commitment to provide high-quality business systems, service levels that consistently exceed client expectations, and integration of solutions and practical new technologies. The quality of our solutions, our high service standards, and the fundamental way we do business typically foster long-term client relationships, attract prospective clients, and have enabled us to capture substantial market share.
Through internal product development, disciplined acquisitions, and alliances with companies offering niche solutions that complement our proprietary solutions, we regularly introduce new products and services and generate new cross-sales opportunities. We provide compatible computer hardware for our on-premise installations and secure processing environments for our outsourced solutions in our private and public cloud. We perform data conversions, software implementations, initial and ongoing client training, and ongoing client support services.
We believe our primary competitive advantage is client service. Our support infrastructure and strict standards provide service levels that generate high levels of client satisfaction and retention. We consistently measure client satisfaction using a variety of surveys, such as an annual survey on the client's anniversary date and randomly-generated surveys initiated each day by routine support requests. Dedicated surveys are also used to grade specific aspects of our client experience, including product implementation, education, and consulting services.
Our two primary revenue streams are "services and support" and "processing." Services and support includes: "private and public cloud" revenues that predominantly have contract terms of six years at inception; "product delivery and services" revenues, which include revenues from the sales of licenses, implementation services, deconversions, consulting, and hardware; and "on-premise support" revenues, composed of maintenance fees that primarily contain annual contract terms. Processing includes: "remittance" revenues from payment processing, remote capture, and ACH transactions; "card" revenues, including card transaction processing and monthly fees; and "transaction and digital" revenues, which include transaction and mobile processing revenues. We continually seek opportunities to increase revenue while at the same time containing costs to expand margins.
We have four reportable segments: Core, Payments, Complementary, and Corporate and Other. The respective segments include all related revenues along with the related cost of revenue.
A detailed discussion of the major components of the results of operations follows.
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RESULTS OF OPERATIONS
FISCAL 2025 COMPARED TO FISCAL 2024
In fiscal 2025, total revenue increased 7.2% or $159,745, compared to fiscal 2024. Reducing total revenue for deconversion revenue of $33,905 in the current fiscal year and $16,554 in the prior fiscal year, results in a 6.5% increase, or $142,394. This increase was mainly driven by growth in data processing and hosting within cloud revenue as new clients were added and volumes expanded, card processing revenue primarily from expanded fraud detection and prevention risk management services and monthly service fees, digital revenue as active monthly users and volumes increased, and payment processing revenue from expanding volumes and new client revenue.
Operating expenses increased 4.7%, or $80,421, in fiscal 2025 compared to fiscal 2024. Reducing total operating expenses for deconversion costs of $6,242 in the current fiscal year and $3,408 in the prior fiscal year and for VEDIP related costs of $16,443 in the prior fiscal year, results in a 5.5% increase, or $94,031 (The VEDIP program was a Company voluntary separation program offered to certain eligible associates who chose to participate in the program from July through December 2023, including immaterial payments that continued into calendar 2024). The increase in operating expenses was primarily due to higher direct costs generally commensurate with increases in the related lines of revenue, higher personnel costs including increases in compensation costs during the trailing twelve months, and higher internal licenses and fees from price increases and more deployments in the current fiscal year.
As we move into fiscal 2026 – our 50 th year in business – we are excited and confident about our future, and we remain well-positioned to deliver durable, consistent growth and attractive results for our shareholders. Technology spending by financial institutions remains strong, and there is clear demand for our differentiated and innovative technology solutions. We have a very healthy sales pipeline and a proven ability to attract and win deals, especially with larger financial institutions. Our unwavering focus on culture, service, innovation, strategy, and execution continues to set us apart in the market and will enable us to drive continued industry-leading revenue growth with strong margin expansion, benefiting our associates, clients, and shareholders.
A detailed discussion of the major components of the results of operations for the fiscal year ended June 30, 2025 compared to the fiscal year ended June 30, 2024 follows.
REVENUE
Services and Support Revenue
Year Ended June 30,
% Change
Services and support
Percentage of total revenue
Services and support includes: "private and public cloud" fees, which predominantly have contract terms of six years at inception; "product delivery and services" revenue, which includes revenue from the sales of licenses, implementation services, deconversion fees, consulting, and hardware; and "on-premise support" revenue, which is composed primarily of maintenance fees with annual contract terms.
In the fiscal year ended June 30, 2025, services and support revenue increased 6.7% compared to the prior fiscal year. Reducing total services and support revenue by deconversion revenue for each year, which totaled $33,905 in fiscal 2025 and $16,554 in fiscal 2024, services and support revenue grew 5.4%. This increase was primarily driven by higher data processing and hosting within cloud revenue as new clients were added and volumes expanded and increased consulting, work order, and release revenues, partially offset by the decrease in license and hardware revenues, year over year.
Processing Revenue
Year Ended June 30,
Change
Processing
Percentage of total revenue
Processing revenue includes: "remittance" revenue from payment processing, remote capture, and ACH transactions; "card" fees, including card transaction processing and monthly fees; and "transaction and digital" revenue, which includes transaction and mobile processing fees.
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Processing revenue increased 7.9% for the fiscal year ended June 30, 2025, compared to the fiscal year ended June 30, 2024. This increase was driven by growth in card from expanded fraud detection and prevention risk management services and monthly service fees, digital revenue as active monthly users and volumes increased, and payment processing revenue from expanding volumes and new client revenue.
OPERATING EXPENSES
Cost of Revenue
Year Ended June 30,
Change
Cost of revenue
Percentage of total revenue
Cost of revenue for fiscal 2025 increased 4.7% compared to fiscal 2024. Reducing total cost of revenue for deconversion costs of $3,517 in the current fiscal year and $2,231 in the prior fiscal year results in a 4.6% increase. This increase was driven by higher direct costs consistent with increases in the related revenue and higher personnel costs including increases in compensation costs during the trailing twelve months. Cost of revenue decreased 2% as a percentage of total revenue for fiscal 2025 compared to fiscal 2024.
Research and Development
Year Ended June 30,
Change
Research and development
Percentage of total revenue
We devote significant effort and expense to develop new software and service products and continually upgrade and enhance our existing offerings. We believe our research and development efforts are highly efficient because of the extensive experience of our research and development staff and because our product development is highly client driven.
Research and development expenses for fiscal 2025 increased 9.8% compared to fiscal 2024. This increase was primarily due to higher personnel costs including increased compensation costs and employee headcount additions in the trailing twelve months and internal license and fees expenses from price increases and more deployments in the current fiscal year. The increase in this expense category for the current fiscal year reflects our continuing commitment to the development of strategic products. Research and development expense remained consistent as a percentage of total revenue for fiscal 2025 compared to fiscal 2024.
Selling, General, and Administrative
Year Ended June 30,
Change
Selling, general, and administrative
Percentage of total revenue
Selling, general, and administrative costs included all expenses related to sales efforts, commissions, finance, legal, and human resources, plus all administrative costs.
Selling, general, and administrative expenses for fiscal 2025 increased 1.7% compared to fiscal 2024. Reducing total selling, general, and administrative expense for deconversion costs from each year, which totaled $2,725 in fiscal 2025 and $1,177 in fiscal 2024 and VEDIP program expenses of $16,443 in the prior fiscal year, results in a 7.5% increase. This increase was primarily due to higher personnel costs, excluding severance, including increased compensation and employee headcount additions in the trailing twelve months, increased travel expenses, and higher contract labor, partially offset by the gain on the sale of assets in the current fiscal year compared to the loss on the sale of assets last fiscal year. Selling, general, and administrative expenses decreased 1% as a percentage of total revenue for fiscal 2025 compared to fiscal 2024.
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INTEREST INCOME AND EXPENSE
Year Ended June 30,
Change
Interest income
Interest expense
Interest income increased over the prior fiscal year due to increased interest earned on balances fiscal year over fiscal year. Interest expense decreased in fiscal 2025 mainly due to the timing and amounts of borrowed and repaid balances ending the current fiscal year with no remaining debt outstanding.
PROVISION FOR INCOME TAXES
Year Ended June 30,
Change
Provision for income taxes
Effective rate
The decrease in the Company's effective tax rate in fiscal 2025 compared to fiscal 2024 was the result of differences in the change in uncertain tax positions between the two periods as well as a favorable state law change in the current fiscal year.
NET INCOME
Year Ended June 30,
Change
Net income
Diluted earnings per share
Net income grew 19.4% to $455,748, or $6.24 per diluted share, in fiscal 2025 from $381,816, or $5.23 per diluted share, in fiscal 2024. The diluted earnings per share increase fiscal year over fiscal year was 19.3%. This increase was primarily due to organic growth in our lines of revenue and the decrease in one-time severance expenses related to VEDIP fiscal year over fiscal year, partially offset by higher operating expenses in fiscal 2025 compared to fiscal 2024 .
REPORTABLE SEGMENT DISCUSSION
The Company is a well-rounded financial technology company and is a leading provider of technology solutions and payment processing services primarily to community and regional banks and credit unions. 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 accountholder 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/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.
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Immaterial adjustments between segments were made in fiscal 2025 to reclassify cost of revenue that was recognized in fiscal years 2024 and 2023. These reclasses were made to be consistent with the current allocation of cost of revenue by segment. Cost of revenue reclassed for the fiscal year ended June 30, 2024, from Complementary to Corporate and Other, was $4,922. Cost of revenue reclassed for the fiscal year ended June 30, 2023, from Core and Complementary to Corporate and Other, was $64 and $5,206, respectively.
Core
% Change
Revenue
Cost of Revenue
In fiscal 2025, revenue in the Core segment increased 7.0% compared to fiscal 2024. Reducing total Core revenue by deconversion revenue from both fiscal years, which totaled $14,765 in fiscal 2025 and $7,292 in fiscal 2024, Core segment revenue increased 6.0%. This increase was primarily driven by organic increases in our data processing and hosting revenue within cloud. Cost of revenue in the Core segment increased 3.5% for fiscal 2025 compared to fiscal 2024. Reducing total Core cost of revenue by deconversion costs from both fiscal years, which totaled $2,096 in fiscal 2025 and $1,065 in fiscal 2024, Core segment cost of revenue increased 3.1%. This increase was primarily due to increased direct costs associated with the organic growth in cloud revenue. Core segment cost of revenue decreased 1% as a percentage of revenue for fiscal 2025 compared to fiscal 2024.
Payments
% Change
Revenue
Cost of Revenue
In fiscal 2025, revenue in the Payments segment increased 6.8% compared to fiscal 2024. Reducing total Payments revenue by deconversion revenue from both fiscal years, which totaled $11,159 in fiscal 2025 and $5,836 in fiscal 2024, Payments segment revenue increased 6.2%. This increase was primarily driven by growth within card revenue and payment processing within remittance revenue. Cost of revenue in the Payments segment increased 4.1% for fiscal 2025 compared to fiscal 2024. This increase was primarily due to increased direct costs related to growth in the card and remittance revenue lines, increased personnel costs including higher compensation costs in the trailing twelve months, and increased internal licenses and fees expense from more deployments and pricing in the current fiscal year. Deconversion and/or severance costs did not significantly affect the Payments segment cost of revenue fiscal year over fiscal year. Payments segment cost of revenue decreased 1% as a percentage of revenue for fiscal 2025 compared to fiscal 2024.
Complementary
% Change
Revenue
Cost of Revenue
Revenue in the Complementary segment increased 9.2% for fiscal 2025 compared to fiscal 2024. Reducing total Complementary revenue by deconversion revenue from both fiscal years, which totaled $7,709 in fiscal 2025 and $3,217 in fiscal 2024, Complementary segment revenue increased 8.5%. This increase was primarily driven by organic increases in hosting and digital revenues within cloud and higher maintenance fee revenue. Cost of revenue in the Complementary segment increased 5.5% for fiscal 2025 compared to fiscal 2024. Reducing total Complementary cost of revenue by deconversion costs from both fiscal years, which totaled $1,119 in fiscal 2025 and $903 in fiscal 2024, Complementary segment cost of revenue increased 5.4%. This increase was primarily due to higher direct costs related to the organic growth in the digital and hosting within cloud revenue lines, increased personnel costs including higher compensation costs in the trailing twelve months, and higher amortization of capitalized software. Complementary segment cost of revenue decreased 1% as a percentage of revenue for fiscal 2025 compared to fiscal 2024.
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Corporate and Other
% Change
Revenue
Cost of Revenue
Revenue in the Corporate and Other segment decreased 1.8% for fiscal 2025 compared to fiscal 2024. Reducing total Corporate and Other revenue by deconversion revenue from both fiscal years, which totaled $272 in fiscal 2025 and $209 in fiscal 2024, Corporate and Other segment revenue decreased 1.9%. This decrease was mainly due to decreased hardware revenue, partially offset by increased processing fee revenue and software usage and subscription revenues within support.
Cost of revenue for the Corporate and Other segment includes operating expenses not directly attributable to any of the other three segments and increased 6.1% for fiscal 2025 compared to fiscal 2024. This increase was primarily related to higher direct costs, increased personnel costs including increased compensation costs and employee headcount additions in the trailing twelve months, and higher cloud consumption costs. Deconversion and/or severance costs did not significantly affect Corporate and Other cost of revenue fiscal year over fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $101,953 at June 30, 2025, from $38,284 at June 30, 2024. The following table summarizes net cash from operating activities in the statement of cash flows:
Year Ended
June 30,
Net income
Non-cash expenses
Change in receivables
Change in deferred revenue
Change in other assets and liabilities
Net cash provided by operating activities
Cash provided by operating activities for fiscal 2025 increased 12.9% compared to fiscal 2024, primarily due to the increase in Net income and the net changes in prepaid expenses, deferred costs and other and accrued expenses within Change in other assets and liabilities fiscal year over fiscal year. Cash from operations is primarily used to repay debt, pay dividends, repurchase stock, and for capital expenditures.
Cash used in investing activities for fiscal 2025 totaled $232,163 and included: $172,445 for the ongoing enhancements and development of existing and new product and service offerings; capital expenditures on facilities and equipment of $53,358, mainly for the purchase of computer equipment; $5,363 for the purchase and development of internal use software; and $2,000 for the purchase of investments. These expenditures were partially offset by proceeds from investments of $1,000 and $3 of proceeds from the sale of assets.
Cash used in investing activities for fiscal 2024 totaled $240,165 and included: $167,175 for the ongoing enhancements and development of existing and new product and service offerings; capital expenditures on facilities and equipment of $58,118, mainly for the purchase of computer equipment; $8,646 for the purchase of investments; and $7,130 for the purchase and development of internal use software. These expenditures were partially offset by $904 of proceeds from the sale of assets.
Financing activities used cash of $345,672 for fiscal 2025 and included: $164,644 for dividends paid to stockholders; borrowings and repayments on our credit facilities which netted to repayments of $150,000; and $35,051 for the purchase of treasury shares. These expenditures were partially offset by $4,023 of net cash inflow related to stock-based compensation.
Financing activities used cash in fiscal 2024 of $301,835 and included $155,877 for dividends paid to stockholders; borrowings and repayments on our revolving credit facility which netted to repayments of $125,000; and $28,055 for the purchase of treasury shares. These expenditures were partially offset by $7,097 of net cash inflow related to stock-based compensation.
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Capital Requirements and Resources
The Company generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures totaling $53,358 and $58,118 for fiscal years ended June 30, 2025, and June 30, 2024, respectively, were made primarily for additional equipment and the improvement of existing facilities. These additions were funded from cash generated by operations. At June 30, 2025, the Company had $58,182 of significant outstanding purchase commitments related to property and equipment. We assessed our liquidity needs throughout fiscal 2025, and determined we had adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated funding needs. We will continue to monitor and assess these needs going forward.
At June 30, 2025, the Company had contractual obligations of $1,700,611, including operating lease obligations, and $1,643,789 related to off-balance sheet contractual purchase obligations. Included in off-balance sheet contractual purchase obligations was the strategic services agreement that offers full-service debit and credit card processing on a single platform to our customers. This agreement was signed in fiscal 2017 and amended in May 2025 to add two additional service years and $213,053 to contractual obligations, bringing the total remaining purchase commitment at June 30, 2025 to $1,022,283 over the remaining term of the contract, which now extends to January 2038, subject to certain renewal terms. Contractual obligations exclude $22,649 of liabilities for uncertain tax positions as we are unable to reasonably estimate the ultimate amount or timing of settlement.
On July 4, 2025, the President of the United States signed into law legislation referred to as “One Big Beautiful Bill Act” (H.R. 1), which enacts substantial changes to the federal income tax law. The legislation includes several business-focused provisions, such as the restoration of immediate expensing for domestic research and development expenditures and the reinstatement of 100% bonus depreciation for qualified property placed in service after January 19, 2025. The Act also permanently extends key provisions from the Tax Cuts and Jobs Act (TCJA). As the legislation was enacted after the June 30, 2025, balance sheet date, the financial implications are not included in the current fiscal year's financial statements. The Company is in the process of assessing the impacts of the new law and plans to incorporate updates in the financial results next fiscal year beginning in the quarter ending September 30, 2025.
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 short-term borrowings on its existing credit facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At June 30, 2025, there were 31,580 shares in treasury stock and the Company had the remaining authority to repurchase up to 3,411 additional shares. The total cost of treasury shares at June 30, 2025 was $1,895,224. During fiscal 2025, the Company repurchased 207 treasury shares for $35,051. At June 30, 2024, there were 31,373 shares in treasury stock and the Company had authority to repurchase up to 3,618 additional shares.
Credit facilities
On August 31, 2022, the Company entered into a five-year senior, unsecured amended and restated credit agreement. The credit agreement allows for borrowings of up to $600,000, which may be increased to $1,000,000 by the Company at any time until maturity. The credit agreement bears interest at a variable rate equal to (a) a rate based on an adjusted Secured Overnight Financing Rate ("SOFR") term rate or (b) an alternate base rate (the highest of (i) 0%, (ii) the Prime Rate for such day, (iii) the sum of the Federal Funds Effective Rate for such day plus 0.50% per annum and (iv) the Adjusted Term SOFR Screen Rate (without giving effect to the Applicable Margin) for a one month Interest Period on such day for Dollars plus 1.0%), plus an applicable percentage in each case determined by the Company's leverage ratio. The credit agreement is guaranteed by certain subsidiaries of the Company and is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the credit agreement. As of June 30, 2025, the Company was in compliance with all such covenants. The credit facility terminates August 31, 2027. There was $0 and $60,000 outstanding under the amended and restated credit facility at June 30, 2025, and June 30, 2024, respectively.
Term loan facility
On May 16, 2023, the Company entered into a term loan credit agreement with a syndicate of financial institutions, with an original principal balance of $180,000. Borrowings under the term loan facility bore interest at a variable rate equal to (a) a rate based on an adjusted SOFR term rate or (b) an alternate base rate (the highest of (i) 0%, (ii) the Prime Rate for such day, (iii) the sum of the Federal Funds Effective Rate for such day plus 0.50% per annum and (iv) the Adjusted Term SOFR Screen Rate (without giving effect to the Applicable Margin) for a one month Interest Period on such day for Dollars plus 0.75%), plus an applicable percentage in each case determined by the Company's leverage ratio. The term loan credit agreement was guaranteed by certain subsidiaries of the Company
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and was subject to various financial covenants that required the Company to maintain certain financial ratios as defined in the term loan credit agreement. The term loan credit agreement matured on May 16, 2025, and at the maturity date the Company was in compliance with all such covenants. There was $0 and $90,000 outstanding under the term loan at June 30, 2025, and June 30, 2024, respectively.
Other lines of credit
The Company had an unsecured bank credit line which provided for funding of up to $5,000 and bore interest at the prime rate less 1.0%. The credit line expired on April 30, 2025. There was no balance outstanding at June 30, 2025, or 2024.
On October 31, 2024, the Company entered into a discretionary line of credit demand note, which provides for funding of up to $50,000 and bears interest at the prime rate less 2.0%. The note does not constitute a committed line of credit. The line of credit expires on October 31, 2025. There was no balance outstanding at June 30, 2025.
On July 18, 2025, the Company entered into a new unsecured committed revolving line of credit facility with a commercial bank in the amount of $50,000, which bears interest at the prime rate less 1.0%. The line of credit expires on July 17, 2026.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Guidance
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. The Company adopted this ASU effective for the fiscal year ended June 30, 2025, with retrospective application of the additional segment information for the fiscal years ended June 30, 2024, and 2023. Additional information regarding the Company's reportable segments is included in Note 14—Reportable Segment Information.
Not Adopted at Fiscal Year End
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.
In November 2024, the FASB issued ASU No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which requires more detailed disclosures of certain categories of expenses such as employee compensation, depreciation, and intangible asset amortization that are components of existing expense captions presented on the face of the consolidated statements of income. The ASU is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.
CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in accordance with U.S. GAAP. The significant accounting policies are discussed in Note 1 to the consolidated financial statements. The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as disclosure of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements.
We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b)
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the impact of changes in the estimates and assumptions would have a material effect on the consolidated financial statements.
Revenue Recognition
We generate revenue from data processing, transaction processing, software licensing and related services, professional services, and hardware sales.
Identification of performance obligations
We enter into contracts with clients that may include multiple types of goods and services. At contract inception, we assess the solutions and services promised in our contracts with clients and identify a performance obligation for each promise to transfer to the client a solution or service (or bundle of solutions or services) that is distinct — that is, if the solution or service is separately identifiable from other items in the arrangement and if the client can benefit from the solution or service on its own or together with other resources that are readily available. Judgment is used in the identification and accounting for all performance obligations. We recognize revenue when or as we satisfy each performance obligation by transferring control of a solution or service to the client.
Determination of transaction price
The amount of revenue recognized is based on the consideration we expect to receive in exchange for transferring goods and services to the client. Our contracts with our clients frequently contain some component of variable consideration. We estimate variable consideration in our contracts primarily using the expected value method, based on both historical and current information. Where appropriate, we may constrain the estimated variable consideration included in the transaction price in the event of a high degree of uncertainty as to the final consideration amount. Significant judgment is used in the estimate of variable consideration of client contracts that are long-term and include varying transactional volumes.
Allocation of transaction price
The transaction price, once determined, is allocated between the various performance obligations in the contract based upon their relative standalone selling prices. The standalone selling prices are determined based on the prices at which we separately sell each good or service. For items that are not sold separately, we estimate the standalone selling prices using all information that is reasonably available, including reference to historical pricing data.
Contract costs
We incur incremental costs to obtain a contract as well as costs to fulfill contracts with clients that are expected to be recovered. These costs consist primarily of sales commissions, which are incurred only if a contract is obtained, and client 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.
Capitalization of software development costs
We capitalize certain costs incurred for use in our cloud-based services and to develop commercial software products. For internal use software, capitalization begins at the beginning of application development. Costs incurred prior to this are expensed as incurred. Significant estimates and assumptions include determining the appropriate amortization period based on the estimated useful life and assessing the unamortized cost balances for impairment. Amortization begins on the date the software is placed in service and the amortization period is based on estimated useful life
For software that is to be sold, significant areas of judgment include: establishing when technological feasibility has been met and costs should be capitalized, determining the appropriate period over which to amortize the capitalized costs based on the estimated useful lives, estimating the marketability of the commercial software products and related future revenues, and assessing the unamortized cost balances for impairment. Costs incurred prior to establishing technological feasibility are expensed as incurred. Amortization begins on the date of general release and the appropriate amortization period is based on estimates of future revenues from sales of the products. We consider various factors to project marketability and future revenues, including an assessment of alternative solutions or products, current and historical demand for the product, and anticipated changes in technology that may make the product obsolete.
A significant change in an estimate related to one or more software products could result in a material change to our results of operations.
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Purchase accounting
We account for our acquisitions using the purchase method of accounting. This method requires estimates to determine the fair values of assets and liabilities acquired, including judgments to determine any acquired intangible assets such as computer software and client-related intangibles. Third-party valuation firms may be used to assist in the appraisal of certain assets and liabilities, but even those determinations would be based on significant estimates provided by us, such as forecast revenues or profits on contract-related intangibles. Numerous factors are typically considered in the purchase accounting assessments, which are conducted by Company professionals from legal, finance, human resources, information systems, program management and other disciplines. Changes in assumptions and estimates of the acquired assets and liabilities would result in changes to the fair values, resulting in an offsetting change to the goodwill balance associated with the business acquired.
