Jack Henry & Associates (JKHY) Risk Analysis

The markets for our products and services are characterized by changing client and regulatory requirements and rapid technological changes. These factors and new product introductions by our existing competitors or by new market entrants could reduce the demand for our existing products and services, and we may be required to develop or acquire new products and services. In addition, competitors and other third parties may incorporate artificial intelligence into products and offerings more quickly or more successfully than we do, which could impair our ability to compete effectively and adversely affect our results of operations. Our future success is dependent on our ability to enhance our existing products and services in a timely manner and to develop or acquire new products and services. If we are unable to develop or acquire new products and services to address the needs of our clients, or if we fail to sell the new or enhanced products and services in which we have invested, we may incur unanticipated expenses or fail to achieve anticipated revenues, as well as lose prospective sales.

Our business relies upon receiving, processing, storing, and transmitting sensitive information relating to our operations, associates, and clients. If we fail to maintain a sufficient digital security infrastructure, address security vulnerabilities and new threats, or deploy adequate technologies to secure our systems against attack, we may be subject to security breaches that compromise confidential information, including valuable intellectual property, proprietary information, trade secrets, know-how, or source code, which could lead to their theft, misuse, unauthorized disclosure, or misappropriation. Cybersecurity incidents, which, among other things, may result in unauthorized access to systems, service interruptions, malicious intrusions, exfiltration of data, ransomware, cyber-attacks, or operating failures, have become more sophisticated and more prevalent, have occurred in our systems in the past, and may occur in our systems in the future. Such incidents could adversely affect our ability to operate our business, damage our reputation and business, adversely affect our results of operations and financial condition, and expose us to liability. We rely on third parties for various business purposes, and these third parties face similar security risks. A security failure by one of these third parties could expose our data or subject our information systems to interruption of operations and security vulnerabilities. Our information systems rely on hardware, software, and other technological elements, whether developed in-house or provided by third parties, that occasionally need to be patched or updated to address existing or potential security vulnerabilities. If these vulnerabilities are not remediated in a timely manner, our systems and data may be at risk of compromise or interruption. Our services and infrastructure are heavily reliant on the internet. Computer networks and the internet are vulnerable to disruptive problems such as denial of service attacks or other cyber-attacks carried out by cyber criminals or state-sponsored actors. We are continually subject to attempts by unauthorized parties to access confidential information or to destroy data, often through the introduction of computer viruses, ransomware or malware, and cyber-attacks. The increasing sophistication of frontier artificial intelligence models is reshaping the cyber-attack landscape. The growing use of frontier AI models by unauthorized parties has changed the scale of cyber threats and speed and complexity of cyber-attacks, including automated phishing, deepfakes, the rapid development of new malware, and novel attack techniques targeting or leveraging AI systems and models. Further, the use of frontier AI allows these parties to identify and exploit software vulnerabilities faster and more broadly than ever before, including attacks targeting zero-day vulnerabilities that might not have been identified, or identified as quickly, without the use of frontier AI. The vulnerabilities targeted by these attacks are constantly evolving and can be difficult to identify, detect, prevent, or mitigate. We utilize technology, including artificial intelligence-enabled tools, to help defend against cybersecurity threats. However, threat actors are increasingly using similar technologies to identify vulnerabilities, automate attacks, and evade detection. If our security capabilities fail to keep pace with the evolving methods used by threat actors, our systems, data, operations, and reputation could be adversely affected. Those same parties may also attempt to fraudulently induce associates, clients, third-party service providers, or other authorized users of our systems through phishing schemes or other social engineering methods to disclose sensitive information to gain access to our data or that of our clients or their accountholders. We have experienced phishing attacks, social engineering attempts, and other cybersecurity incidents targeting our associates, clients, and systems. When successful, these coordinated attacks may result in data loss, exfiltration, and disruption to systems and services, and can damage our reputation as a secure financial technology company. We are also subject to the risk that our associates may, unintentionally or with malicious intent, intercept and transmit unauthorized confidential or proprietary information or that corporate-owned devices used by associates are stolen, or client data media is lost in shipment. An interception, misuse, or mishandling of personal, confidential, or proprietary information being sent to or received from a client or third-party could result in legal liability, remediation costs, regulatory action, and reputational harm, any of which could adversely affect our results of operations and financial condition. Like other financial institution service providers, we continually face third-party attempts to discover and exploit system weaknesses or to circumvent our security measures. We regularly experience attacks and other malicious activities targeting our systems, services, infrastructure, and data, as well as those of our clients, third-party service providers, and other vendors. These activities continue to increase in frequency and sophistication. Despite implementing security controls and infrastructure designed to protect our systems and data, we have experienced cybersecurity incidents in the past and may experience them in the future. We cannot be certain that our efforts will be sufficient to combat all current and future technological risks and threats. These risks are further heightened by the fact that a significant portion of our associates and contractors work remotely outside of Company-controlled facilities using networks and devices that are not physically controlled by the Company, potentially limiting the effectiveness of our security controls. Advances in computer capabilities, breakthroughs in cryptography, the accelerating development, sophistication, and deployment of artificial intelligence technologies, or other technical developments could materially enhance the ability of threat actors to identify vulnerabilities, bypass controls, or otherwise compromise our systems, thereby rendering our security measures inadequate. Security risks may result in liability to our clients or other third parties, damage to our reputation, and may deter financial institutions from purchasing our products. The significant amount of capital and other resources we currently expend to protect against the threat of security breaches may prove insufficient to prevent a breach. We cannot ensure that any limitation-of-liability provisions in our client and user agreements, contracts with third-party service providers, or other contracts are sufficient to protect us from liabilities or damages with respect to claims relating to a security breach or similar matters. The insurance coverage we maintain to address data security risks may be insufficient to cover all types of claims or losses that may arise, and there is no assurance that such insurance coverage will continue to be available to us on economically reasonable terms, or at all. In the event of a security breach, we may need to spend substantial additional capital and resources alleviating problems caused by such breach. Under state, federal, and foreign laws, including those requiring consumer notification of security breaches, the costs to remediate security breaches can be substantial. Addressing security problems may result in interruptions, delays, or cessation of service to users, any of which could harm our business.

Our income tax positions result in a significant net deferred income tax liability on our consolidated balance sheet. Unfavorable future tax law changes, including increasing U.S. corporate tax rates, could increase this net liability and negatively impact our provision for income taxes, net income, and cash flow.

We are subject to complex laws, rules, and regulations related to data privacy and cybersecurity, and each year, this regulatory landscape is rapidly changing. If we fail to comply with such requirements, we could be subject to reputational harm, regulatory enforcement, and litigation. The use, confidentiality, and security of private client information is under increased scrutiny. Regulatory agencies, Congress, state legislatures, and foreign regulatory and governmental bodies are considering numerous regulatory and statutory proposals to protect the interests of consumers and to require compliance with standards and policies that have not been defined. The number of state privacy and cybersecurity laws and regulations has grown tremendously over the past several years, resulting in an increasingly complex and fragmented regulatory landscape. This environment imposes comprehensive data privacy compliance obligations in relation to our collection and use of personal information, including a principle of accountability and the obligation to demonstrate compliance through policies, procedures, training, and audits. These laws often include industry-specific requirements and broad consumer data protection obligations. While many of these frameworks share common principles, each jurisdiction imposes unique compliance standards, definitions, and obligations that may not align with one another. This lack of uniformity, combined with frequent legislative updates and regulatory amendments, creates ongoing challenges for organizations seeking to maintain consistent and compliant data governance practices across multiple jurisdictions. Further, the Federal Trade Commission ("FTC") and state attorneys general may interpret federal and state consumer protection laws as imposing standards for the collection, use, dissemination, and security of data. In addition, compliance with these laws and regulations may require changes to our technology and our internal processes and procedures, including the way that we handle, process, and store data, which could divert company resources and negatively impact growth opportunities. We will also be affected by these regulations as a third-party provider to clients who are subject to such regulations and will seek our assistance in their compliance efforts.

We vigorously compete with a variety of software vendors and service providers in all our major product lines. We compete on the basis of product quality, reliability, performance, ease of use, quality of support and services, integration with other products, and pricing. Some of our competitors may have advantages over us due to their size, product lines, greater marketing resources, or exclusive intellectual property rights. New competitors, including smaller start-ups, regularly appear with new products, services, and technology for financial institutions. We are also experiencing increasing competition from nontraditional market participants, including financial technology companies, payment-focused providers, and technology platforms that offer products, services, or alternative delivery models that compete with portions of our solutions. Certain competitors may be able to devote greater financial resources to innovation, respond more rapidly to changing client demands, or accept business and operating risks that differ from our approach. If competitors offer more favorable pricing, payment or other contractual terms, warranties, or functionality, or otherwise attract our clients or prevent us from capturing new clients, we may need to lower prices or offer other terms that negatively impact our results of operations in order to successfully compete. Emerging technologies, evolving payment methods, and changing client preferences may alter how financial services products and services are delivered and consumed and could reduce demand for certain existing solutions or displace portions of traditional technology and payment processing models. If we are unable to adapt our products and services to these developments in a timely and cost-effective manner, our competitive position, revenues, growth prospects, and results of operations could be adversely affected. In addition, increased adoption of specialized point solutions may reduce demand for broader integrated offerings and result in the replacement of components of our existing product suite.

Our business currently utilizes AI and ML and we continue to evaluate and expand their use, including generative AI, to augment our products and services. While these technologies offer distinct business opportunities, they also bring evolving legal, regulatory, and operational risks. The regulatory landscape relating to these technologies is quickly and constantly evolving and requires significant resources to modify and maintain business practices to comply with applicable laws. Further, the ongoing tension between the states and the federal government regarding AI regulations is causing increased uncertainty and risk and compliance costs, particularly regarding the use of automated decision-making and other uses of AI technologies in high-risk industries, including the financial industry. This uncertainty has a broader impact than simply AI-targeted regulations and may expose us to claims of privacy rights violations or providing inadequate cybersecurity protections. From an operational standpoint, AI algorithms and training methodologies may create accuracy issues, unintended biases, factual errors, misrepresentations, offensive language, inappropriate statements, or other unexpected outcomes that could undermine product and service quality or lead to errors in our decision-making and solution development. Ineffective or inadequate AI development, testing, evaluation, deployment, content labeling, or governance may impair public acceptance or cause harm, resulting in offerings not working as intended, and we also face explainability risk from our potential inability to interpret or justify AI model decisions, which may lead to concerns about trust, regulatory compliance, and accountability. Furthermore, the uncertainty in the regulatory environment and our development and use of generative AI technologies expose us to evolving intellectual property risks, including the potential misuse of proprietary or confidential inputs, infringement of third-party rights, and uncertainty regarding the ownership of AI-generated outputs. Additionally, the use of AI tools by associates-whether authorized or not-for internal functions or business operations may result in unintended or unreliable outputs, which could negatively impact the quality, accuracy, or consistency of work product and decision-making. Our failure to accurately identify and address our responsibilities and liabilities in this new environment could negatively affect any solutions we develop incorporating such technology and could subject us to reputational harm, regulatory action, or litigation, which may harm our financial condition and operating results. These same risks apply to our third-party service providers who are implementing these tools into the products or services they provide to us. Any failures to manage and mitigate these risks by these third-party service providers may negatively affect the products and services we provide our clients.

We depend on the contributions and abilities of our senior management and other key associates, particularly for highly specialized technical personnel with expertise in cybersecurity, artificial intelligence, machine learning, and data science. Our Company has grown significantly in recent years and our management remains concentrated in a small number of highly qualified individuals. If we lose one or more of our key associates, we could suffer a loss of managerial experience, and management resources would have to be diverted from other activities to compensate for this loss. We do not have employment agreements with any of our executive officers. We continue to face a competitive market for hiring and retaining skilled associates, especially highly specialized technical personnel. Competition for these professionals has led to wage inflation in the technology sector. Difficulties in hiring and retaining skilled associates may restrict our ability to adequately support our business needs and/or result in increased personnel costs. These challenges are further compounded by the fact that a substantial portion of our workforce operate in hybrid or fully remote arrangements, which introduces additional complexities related to employee engagement, collaboration, training, and the preservation of corporate culture. As we navigate these dynamics, there is no guarantee that we will be able to attract and retain the personnel necessary to maintain the Company's strategic direction.

We rely on third-party service providers to support key portions of our operations. We also rely on third-party service providers to provide part, or all, of certain services we deliver to clients. As we continue to move more computing, storage, and processing services out of our data centers and facilities and into third-party hosting environments like public cloud infrastructure providers.as well as private cloud co-location facilities, our reliance on these providers and their systems will increase. The migration of our products and services to these new cloud-based systems is complex and requires substantial expenditures. Furthermore, we face risks inherent in the conversion to any new system, including potential data loss and operational disruptions. We rely on a limited number of third-party service providers that provide significant portions of our hosting and technology infrastructure. While we have selected these third-party service providers carefully and conduct ongoing diligence and monitoring, we do not control their actions or operations. Any disruption, capacity constraints, interference, failure, cybersecurity incident, service degradation, or other interruption of these services by a third-party service provider could result in degraded performance, data loss, or prolonged outages and adversely affect our operations and our ability to deliver services to clients. Such a failure could lead to damage claims, loss of clients, reputational harm, increased costs, contractual disputes, regulatory scrutiny, and, depending on the duration and severity of the failure, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Third parties perform significant operational services on our behalf. These third-party service providers are subject to similar risks as us including, but not limited to, compliance with applicable laws and regulations, hardware and software defects, breakdowns or malfunctions, cybersecurity incidents, human error, failures in internal controls, power losses, disruptions in telecommunications services, computer viruses or other malware, natural disasters or severe weather events, or other events. One or more of our third-party service providers may experience a cybersecurity event or operational disruption and, if any such event does occur, it may not be adequately addressed, either operationally or financially, by the third-party service provider. Certain of our third-party service providers may have limited indemnification obligations or may not have the financial capacity to satisfy their indemnification obligations. If a critical third-party service provider is unable to meet our needs in a timely manner or if the services or products provided by such a third-party service provider are terminated or otherwise delayed and if we are not able to develop alternative sources for these services and products timely and cost-effectively, our clients could be negatively impacted, and it could have a material adverse effect on our business.

Our contracts with our clients for outsourced data processing and electronic payment transaction processing services generally run for a period of six years. We will continue to experience a significant number of these contracts coming up for renewal each year. Renewal time presents our clients with the opportunity to consider other providers or to renegotiate their contracts with us, including reducing the services we provide or negotiating the prices paid for our services. Certain of our renewals have resulted in price compression between the former and renegotiated contracts. If that trend accelerates or becomes more pronounced, it could negatively impact our results of operations. If we are not successful in achieving high renewal rates upon favorable terms, revenues and profit margins will suffer. We may experience increased costs for services from our third-party service providers due to inflation or other cost expansion, but because our client contracts typically have longer terms than our third-party service provider contracts, our ability to pass on those higher costs to clients may be limited. If inflation or costs outpace our contractual ability to adjust pricing during the contractual terms of our client contracts, our revenues and profit margins could be negatively impacted.

We derive most of our revenue from products and services we provide to the financial services industry. If the general economic environment worsens, including if inflation or interest rates increase or remain at higher than recent historical levels, or if conditions or regulatory requirements within the financial services industry change-such as if financial institutions are required to increase reserve amounts, become subject to new regulatory assessments, or if tariffs or other trade restrictions are imposed or increased-clients may be less willing or able to pay the cost of our products and services, and we could face a reduction in demand from current and potential clients for our products and services, which could have a material adverse effect on our business, results of operations, and financial condition. In addition, a growing portion of our revenue is derived from transaction processing fees, which depend heavily on levels of consumer and business spending. Deterioration in general economic conditions could negatively impact consumer confidence and spending, resulting in reduced transaction volumes and our related revenues.

The occurrence of, or threat of, natural disasters, widespread public health crises, political unrest, war, acts of terrorism, other armed conflicts involving the United States or foreign countries, or general workforce shortages can result in significant economic disruptions and uncertainties and could adversely affect our business, results of operation, and financial condition. The conditions caused by such events may affect the rate of spending by our clients and their ability to pay for our products and services, delay prospective clients' purchasing decisions, interfere with our associates' ability to support our business function, disrupt the ability of third-party providers we rely upon to deliver services, adversely impact our ability to provide on-site services or installations to our clients, or reduce the number of transactions we process, all of which could adversely affect our results of operation and financial position. We are unable to accurately predict the impact of such events on our business due to a number of uncertainties, including the duration, severity, geographic reach and governmental responses to such events, the impact on our clients' and third-party service providers' operations, and our ability to continue to provide products and services, including the ability of our associates to work remotely. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.