Q2 2021 Jack Henry & Associates Inc Earnings Call

February 9, 2021

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Jack Henry and Associates second quarter 'twenty 'twenty One earnings Conference call. Please note that today's call is being recorded net.

At this time, all participants in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Ask your question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero.

Now I would like to turn the call over to Kevin Gilligan, Kevin the floor is yours. Thank you Jay Good morning. Thank you for joining us for the Jack Henry Associates second quarter fiscal 2021 earnings call I'm, Kevin Williams, CFO and Treasurer and on the call with me today is David Foss, our president and CEO and just Matt I'll turn the call over to Dave and he is going.

To provide his thoughts about the state of our business the performance of the quarter and some comments relating to the impact from COVID-19 thoughts on our recently published corporate sustainability report and some other key initiatives that we have in place.

And then after that I'll provide some additional thoughts and comments regarding the earnings release, we put out yesterday after market closed and then provide comments regarding our guidance for our FY 'twenty one provided in the release and then we will open the lineup for Q&A.

First I need to remind you that this call includes certain forward looking statements, including remarks or responses to questions concerning future expectations events objectives strategies trends or results like any statement about the future. These are subject to a number of factors that could cause actual results or events to differ materially from those which we.

Due to a number of risks and uncertainties. The company undertakes no obligation to update or revise these statements for a summary of these risk factors and additional information. Please refer to yesterday's press release and the sections in our form 10-K entitled risk factors and forward looking statements.

Also on this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income income as disclosed in the press release yesterday, the reconciliations for historical non-GAAP financial message measures can be found in yesterday's press release I'll now turn the call over to day.

Thank you Kevin and good morning, everyone. We're pleased to report another quarter of strong revenue growth and an overall solid performance by our business as always I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our second fiscal quarter, particularly in light of the challenges posed by conducting business in the midst of a global pandemic.

We remain extremely thankful for the fact that very few of our employees or their family members have been directly affected by the COVID-19 virus. Our HR teams continue to work closely with all groups around our company to be sure anyone who is affected is receiving the care and the combinations they require.

We're still operating with well over 90% of our employees working full time remote and have now updated our return to office date to July one at.

At this point I don't anticipate us extending that date, although I definitely expect long lasting changes to our in office work model.

Most of our customers now have many people physically in their locations every day and we regularly receive requests to deliver onsite sales engagements and system implementations as I mentioned on the last call. Our sales teams are routinely doing sales presentations and executing contracts with no onsite presence at the customer location we.

We have also completed many 100% remote implementations with great success, including several full core conversions.

With that let's shift our focus to a look at our performance for the quarter. We completed in December for Q2 of fiscal 2021 total revenue increased 1% for the quarter and increased 2% on a non-GAAP basis deconversion fees were down more than $5 $5 million over the prior year quarter, which impacted the current quarter.

<unk>, but as we have highlighted in the past is good news if you take a long term view.

Turning to the segments, we again had a solid quarter in the core segment of our business revenue increased by 1% per the quarter and increased by 4% on a non-GAAP basis.

Our payment segment also performed well posting a 2% increase in revenue this quarter and a 3% increase on a non-GAAP basis.

We also had a strong quarter in our complementary solutions business with a 3% increase in revenue this quarter and a 4% increase on a non-GAAP basis.

As I mentioned in the press release, our sales teams again had a very solid quarter as they book the fifth largest sales quarter in the history of the company, we inked six competitive core takeaways and 12 deals to move existing in house customers to our private cloud environment.

On previous calls I highlighted the fact that our competitive core signings have slowed a bit as a result of the pandemic and that was also true in Q2.

With that in line you may ask how it was possible for us to book, the fifth largest quarter in history with less and the new core wind category of course. This happens because the sales teams have had tremendous success with our broad suite of complementary offerings, including digital fraud and payment solutions.

During the quarter, we signed 61, new clients to our bandwidth digital suite six new clients on our Treasury management platform and 11, new clients on our card processing solution.

Of course, all of these contracts represent new revenue to Jack Henry.

As I mentioned last quarter, we continued to implement more than 30, new financial institution clients every month on our banner digital platform.

As of February one, we now have more than 4 million users on the platform, but that number continues to grow rapidly.

At the same time, our <unk> platform has been recognized by FY navigator as having the highest consumer rating in the App store and we are continuing to receive accolades as the fastest application in the industry.

If you combine our inroads in the digital banking space with our ongoing success with digital lending and digital account opening we see great things ahead for Jack Henry as a leader in this area.

Regarding our new card processing platform as of the end of December we have successfully completed the migration of all of our core clients and many of our non core clients.

We will complete all of the migrations next month as previously announced.

You will start to see the larger positive impact on our financials in the fourth fiscal quarter as we have emphasized throughout the project.

Im very proud of our team and thankful to our partners and clients. We are working with us to achieve such a successful outcome.

Recently, the Federal Reserve announced that fed now team has been working closely with a few companies over the past year to help them design and develop the fed now network.

We've been very active with the fed now team for more than a year and we're excited to participate in their pilot program. We look forward to bringing many financial institutions live through our payments hub, which we have branded Jack Henry pace Center.

As Ive discussed previously our pace center solution was designed to provide connectivity through a single platform to multiple real time payments providers, which facilitates a more logical and efficient approach for our clients than any other processor in the market today.

Additionally, it allows us to connect clients to the real time payments network in groups rather than one at a time, which is a significant enhancement over any other offering in the industry.

In addition to working with the fed on the fed non program. Many of you know that we have also been very involved in the rollout of the PPP program through the first two rounds last year and the latest round earlier this year.

Currently working with many of our financial institution clients to help submit in process thousands of PPP loans with their current pipeline totaling almost $1 billion in loans to small businesses around the country.

Hopefully many of you noticed that we released our first corporate sustainability report on December 31.

Although I am very proud of the reported in its contents I think it's important to note the Jack Henry <unk> practice, the concepts of corporate responsibility since our founding this report is our way of summarizing the standards and practices, we've been dedicated to from more than 40 years, and which are evident every day as we strive in all cases to adhere to our guiding principle of doing the right thing.

In the report, we discuss our commitments to our five key stakeholders, our employees customers stockholders communities and the environment.

Our investment in corporate responsibility is embedded embodied through our commitment to enabling our associates to engage in meaningful work that they love.

Providing innovative financial solutions to our customers to support responsible business decisions and keep their clients connected delivering.

Delivering a strong return on investment to our stockholders, while maintaining long term sustainability for our business model.

Encouraging our communities to flourish by connecting people with technology.

Pursuing environmentally friendly practices to support a strong future for us all.

In January cornerstone advisors published the results of their annual survey of Bank and credit Union executives. According to that study 73% of banks in our target market expect to increase their technology spending as they rebound from the pandemic in 2021 with 22% of them, indicating an.

Increase of greater than 10% year over year.

This correlates with information, we're receiving from other sources, which puts the average expected increase in tech spending for 2021 in our market at around 5%.

I think that pent up demand as reflected in the continued influx of Rfps, we're receiving and the ongoing interest in Jack Henry Technology solutions.

As we began the second half of our fiscal year. Our sales pipeline is very robust and we continue to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our customers our ability to expand our customer relationships the spending environment.

And our long term prospects for success.

With that I'll turn it over to Kevin for some detail on the numbers.

Next day service support revenue line of revenue decreased 2% in the second quarter of fiscal 2021 compared to the same quarter a year ago. However, adjusting service and support revenue from the deconversion fees of $2 1 million in current quarter and deconversion fees of $7 7 million revenue and divestitures of $1 2 million in the prior.

Fiscal year quarter. This revenue line would have grown 2% per the quarter compared to the previous year.

Services support revenue primary driver was data processing and hosting fees in our private cloud, which continues to show very strong growth in the quarter compared to the previous year.

However, the growth from that line was totally offset by a decrease in our product delivery services revenue, which was due to decreased license hardware and implementation revenue for primarily on premise customers.

Pass through revenue, which is related to our billable travel primarily ready to travel limitations related to COVID-19.

And our Jack Henry Annual conference or J C, which was held virtually and therefore, no registration fees for customers or vendors for our tech there and then obviously as mentioned deconversion fee revenue for the quarter compared to the prior year, which is all all those lines were a decrease.

Processing revenue increased 5% in the second quarter of fiscal 'twenty, one compared to the same quarter last fiscal year. This increase was primarily driven by higher card volumes from new customers installed last year and increased debit card usage from existing customers Jack.

Jack Henry digital revenue experienced the highest percentage growth of all revenue lines in both Q2 and year to date this year compared to the same periods last year.

Our total revenue was up 1% for the quarter as David mentioned compared to last year on a GAAP basis and was up a little over 2% on a non-GAAP basis, excluding the impact of deconversion fees and revenue from divestitures.

Our cost of revenue.

That was up 3% compared to last year second quarter. This increase was due primarily due to higher costs associated with our card processing platform and higher personnel costs related to increased head count at December 31, compared to a year ago quarter.

Increase in cost was partially offset by travel expense savings as a result again of Covid travel limitations, a research development expenses decreased 1% for the quarter compared to last year. This decrease was due primarily to a slightly higher percentage of our overall costs being capitalized for product development this quarter.

Impaired to a year ago.

SG&A expenses decreased 10% in the second quarter of fiscal 'twenty, one over the same quarter in the prior fiscal year. This decrease was primarily almost completely due to travel related expense savings as a result of COVID-19, which required us to hold our J AACE virtual this year as previously mentioned and also due to the gain on.

Hosel of assets in this quarter of this year.

Our reported consolidated operating margins decreased slightly from 22, 4% last year to 22, 2%, which is primarily due to the various revenue headwinds already discussed and our increased cost.

On a non-GAAP basis, our operating margins increased from 21, 1% last year to 21, 3%. This year, primarily due to the items already mentioned our payments segment margins continued to be impacted by the additional costs related to our card processing platform migration as Dave mentioned as he discussed in his opening comments our core.

Segment operating margins increased slightly during the quarter compared to last year on both a GAAP and non-GAAP basis, while complementary segment margin decreased slightly on a GAAP basis, but improved on a non-GAAP basis compared to last year.

The effective tax rate for the quarter was essentially flat at 23, 1% this year compared to 23, 2% last year.

And our net income was 72 million from the second quarter compared to $72 1 million last year with earnings per share of <unk> 94 in both quarters.

For cash flow, our total amortization increased 4% year to date compared to last year due to capitalized projects being placed into service in the past, including in the total amortization is amortization of intangibles related to acquisitions, which decreased to $8 $9 million year to date this fiscal year compared to $10 five.

Last year.

Our depreciation was up 5% year to date, primarily due to capex in the previous year and those assets being placed into service.

We purchased 675000 shares of Jack Henry stock year to date for $110 million and we paid dividends of $65 5 million for a total return to shareholders of $175 $5 million year to date.

Free cash flow, which is operating cash flow less capex and less cap software and then adding back net proceeds from disposal of assets was $163 8 million year to date.

Couple of comments on our balance sheet as of December 31, our cash position is still in very good shape at a $147 8 million down a little from 213 million at June 30, due to the previous items discussed there is nothing drawn on our revolver, which has a maximum capacity of 700 million. So we've got a lot of dry powder and we had no other long term debt on the balance.

Other than the capitalized operating leases.

And in the press release yesterday, we confirm both GAAP.

And non-GAAP revenue guidance.

Yesterday, and they were basically guided as previously in line. However, just to be clear that this guidance continues to be based on the assumption that the country continues to open up and the economy continues to improve obviously, if the country is forced to shut down again due to the pandemic or the economy stalls or actually versus in this guidance.

Will be revised.

So I'd like to emphasize that in our GAAP guidance that we continue to forecast revenue from deconversion fees for FY 'twenty, one will be down approximately $33 million from what we saw in FY 'twenty, we have seen $14 6 million decrease in the first half of the year alone and we will see a significant decrease in Q3.

That was the largest quarter for deconversion revenue last fiscal year, and the largest increase year over year.

We see little to no current M&A activity that would drive the conversion revenue at this point, which in the short term as David mentioned will hurt revenue growth, but in the long term as we have always said that we don't like deconversion revenue, because we would much rather keep the customer and the revenue from long term. This means based on the GAAP revenue guidance provided in the press release impacted.

By the decreased deconversion fees, we continue to look at a GAAP revenue growth of 3% to four plus percent.

Adjustments between GAAP and non-GAAP revenue guidance for FY 'twenty, one is the decrease in deconversion fees compared to the previous year.

And the small revenue impact from the cruise divestiture in Q2.

It was removed from FY 'twenty for comparison to FY 'twenty one.

For non-GAAP revenue.

<unk> has not changed from Q1, the difference all deconversion fees and revenue from the divestiture.

We anticipate GAAP operating margin for full year of FY 'twenty, one to be down just slightly at about 22% from last year for all the reasons previously mentioned and our non-GAAP margins to actually improve slightly compared to last year for the entire fiscal year.

Our effective tax rate for FY 'twenty, one should be in line with FY 'twenty at around 22%.

And with the significant headwinds created by the projected significant decrease in deconversion revenue.

In our third fiscal quarter, we are guiding Q3 EPS to be in 83 to 87.

Which I believe is generally in line with the current consensus.

However, we have increased our full year EPS guidance for FY, 'twenty, one, which we provided last quarter to be in the range of $3 10 per access to $3.90 and we are now updating our EPS guidance.

For FY 'twenty, one to the range of $3 85 to $3 90.

With no change to our projected impacted or a decrease in deconversion fees. The increase in guidance is primarily due to expense control margin improvement for the year and continued improved efficiencies.

This concludes our opening comments, we are now ready to take questions. Jay will you. Please open the call lines up for questions.

Thank you and as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key.

Our first question comes from the line of Kartik Mehta from Northcoast Research. Your line is open.

Hey, good morning, Kevin and Dave Hey, Kevin I apologize could you just walk through the revenue guidance part again.

I'm just trying to understand maybe what was in the press release. This time versus what you guided last time I thought there was about a $30 million difference but.

I just wanted to make sure I understood.

So kartik I mean, so the GAAP guidance that we're providing is a $1 762 million 770, and basically you take the $30 million decrease in deconversion fees out and Thats, how you get to the one 730 Warmington 40, obviously theres a lot of other moving parts in rounding and different things in there, but by the time you get by the time you get everything adjusted in.

A rounding taken into effect, which obviously takes a pretty insignificant spreadsheet youre still looking at the six to six 5% non-GAAP revenue growth over last year's adjusted number.

So the $1 730 day.

$1 million from $40, the non-GAAP revenue that Youre guiding to then yes okay.

And then Steve.

Just wondering as you look at your migration.

Platform and demand from your bank.

I know in the past you had said that you thought there would be demand for banks to get into the credit card business.

Wondering where that stands now and if you're seeing.

That come to fruition.

Yes, Kartik I won't say, we never said that we expected it to be a huge demand, but we certainly are continuing to see demand. We've signed five so far brand new credit card customers. So far this year there.

<unk> had kind of and I've talked about this on previous calls we've kind of kept the breaks a little bit on credit because we wanted to successfully complete the debit side of the conversion and didn't want our implementation fee implementation teams to be focusing on trying to add new credit customers because thats a separate different implementation. So we've had the brakes on a little bit on the sales side on the <unk>.

<unk> side, but there is demand there we expect to see demand going forward, but again it won't be we don't expect to be a major issuer in the future, but we certainly are seeing demand from our customers.

And then just one last question Dave.

What are your customers doing about or trying to do about some of the fintech.

Competition may have whether it would be.

Time or any of these other guys are you seeing demand for different type of products or how concerned are your customers about goes fintech competitors.

There's a few different aspects of that question. So first there are some that are trying to figure out whether or not the neo banks are truly competitors are not oftentimes the neo banks are attracting.

The customer who is looking for free.

<unk>.

Our customers like any customer have trouble, making money on free so sometimes theyre not terribly distressed if some of those customers leave to go to somebody like time I think that explains when these neo banks aren't aren't making any money but.

The short term view and we take a long term view or are they going to attract the customer and then build on that customer for the long term. So a lot of our customers are trying to figure out how to compete in that space. Many of them have launched.

Digital only banks digital only brands and of course, we support that we've talked about that on the call before where we're hosting a separate brand in our Jack Henry private cloud separate processing environment separate marketing by the bank to make sure that they have an opportunity to attract those customers. The other approach that some banks are taking is trying to figure out how to partner more closely with fintech.

So not necessarily with the neo bank, but with other fintech to enable the same type of number.

I'll say cool experience make sure that they are provide.

Providing that connectivity and of course as I've discussed many times on this call Jack.

Jack Henry is very supportive of that environment, where we provide the hooks provide the connectivity.

For our Fintech to connect into our infrastructure and help our bank's chief success that way. So you know it depends on the bank.

Maybe put their head in the sand a little bit of others, who are being aggressive about launching digital only banks and then you have some that are that.

That are working with fintech to create a whole new experience in some other way and it just depends on the profile of the bank and Theyre feeling of the competitive nature of <unk>.

Those players.

Okay. Thanks, David I appreciate it.

Thank you next question comes from the line of Peter Heckmann from D. A Davidson your line is open.

Good morning. This is Carson non for Pete just one quick question I believe you had previously said that the company expects to recognize around $16 million reduction in annualized direct costs of revenue at legacy debit processing platforms were shut down, but perhaps 30% to 40% of this showing up in fiscal 'twenty one is it.

About right.

Uh huh.

I don't know that 30 or 40% of it was because that was that was kind of the guide. We gave went before we moved everything out a quarter. So it's probably going to be a little less than that that we see the impact in Q4, because remember that that number that we gave was for the full year annual cost savings. So.

We're probably going to see more like 15% to 20% of it in this year and then we'll see the full amount in FY 'twenty two.

Got you. Thank you.

Thank you next question comes from the line of Steve <unk> from G. Research. Your line is open.

Hey, good morning, I wanted to ask about sort of the dichotomy between core demand and complementary demand as far as like what's holding back demand in the core side and what's driving it on the complementary side.

Sure.

The biggest thing on the call.

Sure.

If you think about a core replacement.

He will make that decision, but the thing I would say all the time as if you're the CEO of a bank or credit Union, when you decided to make a quarter.

Replacement.

Most difficult technology decision you will ever make in your role as the CEO of the bank or credit Union, because when you replace the core it touches everything right, you're replacing the entire guts of your of your processing operation and so in this environment the pandemic environment, where everybody had people working from home that type of.

And in that type of disruptive move was a little bit challenging for a lot of Ceos to make that move but they still wanted to offer innovative new technologies and you need to take care of the customers, particularly because all of their consumers. We're living it working from home and expected to have an outstanding digital experience. So they needed to continue to implement these.

These are smaller point solutions complementary solutions to augment the services that they provide to their consumers and they provide internally to their to their employees and so that's where we have this broad suite of complementary solutions and I highlighted a few of them on the call today, that's where a lot of those things have really stepped up particularly around.

Digital so those digital banking, which we used to call online banking and mobile banking there is digital lending.

<unk> digital account origination you all of those things have been hot commodities here lately because of that move to remote work and.

And one other thing I'd throw out there.

There's roughly 11000 banks and credit units in that state and a very small percentage of those actually go through a core system evaluation on an annual basis, but at a very high percentage of that 11005 need to upgrade their digital or other things as Dave mentioned.

That's a big driver or big difference from the two.

Yes.

Okay, Yeah. So so.

Should I read that as there is some degree of pent up demand.

Yes, just from companies not doing evaluations this year not executing on their desk, yes. So on the.

I think it was the.

I know the November November call I highlighted there that the RFP pace for new core deals had really started to pick up and that so youre absolutely right. There is pent up demand people just kind of put a stop on it but they still need to upgrade their infrastructure. So we saw rfps start to pick up in the late fall I'll say I highlighted on the November.

Recall and.

That's absolutely true today, so we are today.

Look at our sales pipeline today. It is as full as it was will say 18 months ago. So 18 months ago, Let me backup a second we normally think in terms as we run the business. The sales pipeline you want to be and want to have about 90% of the annual quota for the company in any given day the sales pipeline should be at about nine.

80% of the full year's quota because some deals aren't going to happen and some will happen and so on and we're back to that level now. So we're almost about 90% of our annual quota within the pipeline today and Thats why I say, where the engine is running again, where our core demand has picked up and that's part of the reason that I'm pretty optimistic about.

Sure.

Opportunity per sales success going forward.

Okay and then maybe just finally is the trigger for actually executing on these core contracts are starting implementations as the trigger people actually coming back into the office or is there sort of a different trigger where banks sort of lap the credit risk.

It's not not necessarily them coming back into the office I think we're to the point today, where there are all of our banks and credit unions have figured out their operating model. So there are people in the office. They are people working remote I don't know of any of them that have gone back to a 100% in office they figured out their operating model and so I don't expect.

I'll say ever maybe that's too dramatic, but I don't expect ever to get back to.

Operating model for banks and credit unions to be like it was two years ago they'll have a remote workforce going forward just like we will.

That is not from but not the trigger I think now it's them.

Understanding how to run the business with a combination of them in office and remote and they recognize they need to do a technology upgrade okay, now, let's get down to business and make that decision and move forward with a technology upgrade and then we can do conversion core conversions, 100% remote now I highlighted in my opening comments, we're doing 100%.

Convergence, most banks and credit unions don't particularly like that they prefer to have at least a few people on site, but we are fully capable of doing that.

Okay. Thank you.

Thank you next question comes from the line of John Davis of Raymond James Your line is open.

Hey, good morning, guys, Kevin I appreciate the comments on the Street <unk> EPS guide.

Obviously your full year guide implies roughly 8%.

Non-GAAP growth revenue growth in the back half of the year any help there.

You think about that sequentially <unk>.

Well I mean, there's obviously a lot of conversions that are going to be happening. Some of those were pushed out from the first half J D.

Obviously, the payment engine is really picking up pace. The digital continues to grow very nicely.

Yeah.

Especially on the payment side Q4 is going to be a little easy comp compared to last year because of the impact of Covid as last year. So it's a combination of things theres not just one thing I'd really point to J D.

I mean, we have.

Monthly calls with all of our Vps and senior Vps, David I do.

And I can assure you that in fact, we had one just earlier this week or last week.

And they all still very feel very very good about forecast and the guidance that we're giving out there for the balance of this fiscal year.

Okay, but I would assume that all else equal youre going to have stronger growth in <unk>, just given given the easier comps. So we're trying to build sequentially.

Absolutely I mean, non-GAAP is going to grow faster in Q4 than Q3, GAAP definitely because like I've mentioned them in my opening comments. The day conversion impact on Q3 is just is just huge compared to last year.

Okay, No that's fair.

First of all in a little bit I, just wanted to focus on on payments in the quarter for a second maybe talk a little bit about the pieces house Bill pay doing I assume some of the weakness in this quarters, just from lower transactions, but ADP kind of normalized per transactions like what payments will flow.

Just trying to understand kind of the pieces, there and how we should think about that as the economy recovers.

Yes, so youre absolutely right on so overall transaction count in the payments business is up around 11% year over year for this is for the same quarter. So payments volume is back as far as I'm concerned, but it is bill pay that is the kind of a laggard. So bill pay is only up about 2% year over year, it's a very mature.

This just not growing very fast and we are continuing to add customers, but nowhere near the pace that we were several years ago. So between the card platform and then don't forget our.

<unk> origination platform that continues to grow.

Real time payments and all the fun stuff, we're doing there people tend to think of <unk> as being as being old and of course that has been around for a long time, but it still grows rapidly.

There's still a lot of volume going through that platform as well so between our AC transmission platform and the card platform.

Our growth is back I guess I'll put it that way.

Okay, and then I think pre pandemic.

Talked about approaching double digit growth in payments is there any reason why once everything comes back and normalize from the pandemic. That's that's not still on the table.

Well I mean, yes, Jamie I mean, we talked about that and I think that's still a very extreme possibility.

But again like I said it won't come as long as the economy continues to open up and pick up and goes forward with some of the new wins that we're having on both debit and credit and even on our bill.

Bill pay and direct OPEC, I think payments could could get back close if not to double digit growth.

Okay. Thanks, and last one from me Kevin the margin was obviously quite a bit better this quarter.

The margin guide.

<unk> guide would assume that maybe not all of this is sustainable considering you get 90 basis points in <unk> from <unk>.

Payments platform migration. So just just trying to think about it is there.

The potential upside of the margin where you guys was there anything specific in this quarter, that's more kind of one time ish and any changes to the call. It 50 to 75 basis points.

Normalized.

The rating leverage once we kind of get the other side of it.

From the payments platform migration.

J D. So that's a good question.

There's a lot of moving parts a lot of strange things going on in our financials right now.

Is there some potential upside for Q4, absolutely, but when you look at Q3 I mean, some of the big savings. We've got we're we're definitely travel related.

Are people, just arent moving because of restrictions and different things, but that also impacts revenue. So I've made several comments I mean license hardware implementation.

Billable travel is all down.

And so when we do get to start traveling again and travel expenses will go up and we and our salespeople are starting to get out there and move a little bit in some of our installs are are moving a little bit more so our travel cost going to go up yes. Some of Thats billable, which also increased revenue, but remember that in our business. The revenue, it's all kind of delayed so even though our travel.

Expenses May go up and other costs go up the revenue related to that travel is probably not going to happen for a quarter or more.

So there is good.

Tangible for some negative impact on margin in the short term, but it's going to drag along all of that revenue. So so you are absolutely right. There is some potential upside from our Q4 and once we get in get passive and into more of a regular cadence I think we can go right back into that regular margin expansion that we've seen historically.

Okay, Alright, thanks, guys. Thanks Jay.

Thank you next question comes from the line of Fukushima from Credit Suisse. Your line is open.

Hey, Thanks, guys I just wanted to follow up on the core segment.

I mean, just given the RFP pipeline strength that you guys have been calling out since last summer into the fall and this quarter I mean should we start to see an inflection back towards pre COVID-19 levels of new core wins.

Core segment, starting in the back half of 'twenty, one or early 'twenty two and then just as my follow up how should we think about the impacts of the core segments growth next year, just given the relatively lower level of new wins.

But again.

Yes.

Another question, you've asked there, but you know what to expect.

The best guidance I can give you there is that the.

The pipeline the incoming pipeline as far as the deal volume that we're working today is back to the level that it was pre pandemic now can I predict exactly exactly when things will sign and close.

It's more art than science when it comes to timing on those things, but if we.

Assume that we will win at the same rate they were winning that we were winning pre pandemic and we know that the pipeline is at about the same level as it was pre pandemic logically we can assume I think that.

Sometime later this calendar year the rate of wins will be similar to what we were experiencing pre pandemic.

And then the <unk>.

Thing to keep in mind is once we sign a new core deal the revenue doesn't hit the P&L.

The majority of the revenue doesn't hit the P&L oftentimes for at least a year afterwards.

Once we start our conversion that conversion has a major impact to defensive institution as I was highlighting earlier.

Some people call it rip and replace where you've taken everything out and replacing it with a brand new system well that takes many months of planning and an operation to get that conversion completed so the revenue the big chunk of revenue normally follows oftentimes a year after we signed the contract or announced.

Women.

Understood great. Thanks for the color.

Thank you once again, if you would like to ask a question. Please press Star. One next question comes from the line of Ken <unk>.

<unk> research your line is open.

Hey, Thanks, Thanks, Kevin and Dave for taking the question I really appreciate it.

I was just wondering if you could talk about how you expect your new sales to trend as the economy reopens it looks like.

<unk> pipeline is quite strong.

And I was just curious if you expect that to accelerate.

As you as you get back into the.

The customers in person so any expectation there would be.

Helpful. Yeah. Its a good question as I highlighted in my opening comments the quarter. We just finished was the fifth largest sales booking quarter, we've ever had in the history of the company well that's pretty good so saying that I expect it to accelerate significantly probably isn't a reasonable position to take.

But what I do expect as we just talked about in the last.

The question is more on the core signing side and I expect as we go forward that will start to see more on the corresponding side. The thing that will be interesting to watch is can we sustain the pace that we've seen on the complementary side, because if we can increase core bookings and sustain the complementary bookings that's that significant thats meaningful.

Not ready to say that that's achievable, but that will certainly be our objective and I think we have the opportunity to do that because we're getting all of this great recognition for some of this wonderful technology that we've been rolling out here, particularly in the area of digital so we will have to see how that goes as time goes forward, but that's my hope.

Mhm.

That's helpful.

I guess just the longer term.

The margin question I mean, it looks like your margins have declined versus where they were maybe six seven years ago. I mean can you just talk about the main drivers of that and is there an opportunity to get those margins back to those levels or even above those levels.

Yes, so the big thing I mean, if youre going to go back six or seven years and.

And you really can't go back that far because you can really you can really only go back to 2017, because when we restated for ASC 606 that was the farthest back. We went so you really can't look beyond that and get a true comparison of margins because ASC 606 definitely changed how we recognize revenue and had a significant.

Impact on margin, but from 17 forward.

Primary impact on our margin has been two things one the migration to the new card platform has increased our cost because we haven't been able to reduce any costs until we get through the migration, which as Dave said in his opening comments is going to be complete at the end of March. So we will start to see that cost savings, we'll see a nice rebound in margins in Q4.

And then a full year of that cost reduction in FY 'twenty two.

The thing that's happened since 2017, as we had literally sold no new core business. So theres been virtually no new core license revenue, which is very high margin business happening in the last three or four years I mean on the bank side I think we've sold maybe three or four in house deals.

Since 2017 on the crediting side not bearing any more than that and most of those were smaller bank deals.

For our core director solution so.

So those are the two primary drivers as Cogs that margin come down now whats going to happen is like I said, you'll see margin improve in Q4, we will continue to see that improve and falling year. We have gone through the transition of getting our license and hardware revenue is now very small percentage of our total revenue so very little impact from that so as we continue.

To migrate our in our on Prem customers to our private cloud and continue to sell additional card business and our card and our private cloud business continues to become a much larger percentage of our total revenue that's very high margin business our margins will continue.

And getting back to the historical rates in FY 'twenty three and beyond.

Thank you that makes a lot it and if I could just squeeze one last one here just the.

Net divestiture what was the revenue impact in the in the base here that you're assuming for the full year I know you gave it for the three months ended.

Six months that just curious what the full year impact was so so the revenue per for the core business. That's really what we sold was the core business occurs which was 140 <unk> very small credit unions that we do.

Divested.

October one and the quarterly revenue from that with right at $1 $2 million just like represented in the press release this quarter. So the total the total for this fiscal year on the on the GAAP to non-GAAP adjustment will be just under $3 $7 million for the three quarters in this fiscal year.

Okay really helpful. Thanks, a lot appreciate it congrats again.

Thank you once again, if you would like to ask a question. Please press star one.

There are no further question at this time I would like to turn the call back over to Kevin for closing remarks. Thanks Jay.

First of all I want to let everybody know that we are planning an analyst day. This spring.

Virtual event and again it will be held virtual is planned to be held on Tuesday may 11th. So please mark your calendars to save the day, we will be sending out an invitation with a schedule of events timing and an online registration soon and it will be sent to individuals' US. Please don't.

Share because we want to know who's actually attending this virtual event, but please be looking for this invite in your email inbox in the near future now wrap up the call. We are very pleased with the overall results from our ongoing operations I want to thank all of our associates for the way. They have handled these challenges by taking care of themselves and our customers and continuing to work.

Hard to improve our company on so many fronts for the future all of US as Jack Henry continue to focus on what is best for our customers and our shareholders with that I want to thank you again for joining us day and Jay If you would please provide the replay number I'd appreciate it.

Thank you and ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

Yes.

Okay.

Right.

For the replay please dial 805 8586.

<unk> seven <unk>.

Again for it.

The replay please dial 800 585.

P 67.

<unk>.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Jack Henry <unk> Associates second quarter 'twenty 'twenty, One earnings conference call.

Note that today's call is being recorded.

All participants in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask your question. During the session you will need to press star one on your telephone if you require any further assistance. Please press star zero now.

Now I would like to turn the call over to Kevin Gilligan, Kevin the floor is yours. Thank you Gerry good morning. Thank you for joining us from the Jack <unk> Associates second quarter fiscal 2021 earnings call.

Kevin Williams, CFO and treasurer and on the call with me today is David Foss, our president and CEO and just men I will turn the call over to Dave is going to provide his thoughts about the state of our business.

<unk> of the quarter and some comments relating to the impacts of COVID-19, and thoughts on our recently published corporate sustainability report and some other key initiatives that we have in place.

After that I'll provide some additional thoughts and comments regarding the earnings release, we put out yesterday after market closed and then provide comments regarding our guidance for FY 'twenty one per.

In the release and then we will open the lineup for Q&A.

Also on this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income net income it was disclosed in the press release yesterday, the reconciliations for historical non-GAAP financial last message measures can be found in yesterday's press release I'll now turn the call over to day.

We remain extremely thankful for the fact that very few of our employees or their family members have been directly affected by the COVID-19 virus. Our HR teams continue to work closely with all groups around our company to be sure anyone who was affected is receiving the care and the combinations that you require.

We are still operating with well over 90% of our employees working fulltime remote and have now updated our return to office date to July one.

At this point I don't anticipate us extending that date, although I definitely expect long lasting changes to our in office work model.

Also we have also completed many 100% remote implementations with great success, including several full core conversions.

With that let's shift our focus to a look at our performance for the quarter. We completed in December for Q2 of fiscal 2021 total revenue increased 1% per the quarter and increased 2% on a non-GAAP basis.

Conversion fees were down more than $5 $5 million over the prior year quarter, which impacts the current quarter negatively but as we have highlighted in the past is good news if we take a long term view.

Turning to the segments, we again had a solid quarter in the core segment of our business revenue increased by 1% per the quarter and increased by 4% on a non-GAAP basis.

Our payment segment also performed well posting a 2% increase in revenue this quarter and a 3% increase on a non-GAAP basis.

We also had a strong quarter in our complementary solutions business with a 3% increase in revenue this quarter and a 4% increase on a non-GAAP basis.

On previous calls I highlighted the fact that our competitive core signings have slowed a bit as a result of the pandemic and that was also true in Q2.

With that in mind, you may ask how it was possible for us to book, the fifth largest quarter in history with less and the new core wind category of course. This happens because the sales teams have had tremendous success with our broad suite of complementary offerings, including digital fraud and payment solutions.

During the quarter, we signed 61, new clients to our bandwidth digital suite six new clients on our Treasury management platform and 11, new clients on our card processing solution.

Of course, all of these contracts represent new revenue to Jack Henry.

As I mentioned last quarter, we continued to implement more than 30, new financial institution clients every month on our banner digital platform.

As of February one, we now have more than 4 million users on the platform, but that number continues to grow rapidly.

If you combine our inroads in the digital banking space with our ongoing success with digital lending and digital account opening we see great things ahead for Jack Henry as a leader in this area.

Regarding our new card processing platform as of the end of December we have successfully completed the migration of all of our core clients and many of our non core clients.

We will complete all of the migrations next month as previously announced.

You will start to see the larger positive impact on our financials in the fourth fiscal quarter as we have emphasized throughout the project I'm very proud of our team and thankful to our partners and clients, we're working with us to achieve such a successful outcome.

Recently, the Federal Reserve announced that fed now team has been working closely with a few companies over the past year to help them design and develop the fed now network.

We have been very active with the fed now team for more than a year and we're excited to participate in a pilot program. We look forward to bringing many financial institutions live through our payments hub, which we have branded Jack Henry pace Center.

Additionally, it allows us to connect clients to the real time payments network in groups rather than one at a time, which is a significant enhancement over any other offering in the industry.

Hopefully many of you noticed that we released our first corporate sustainability report on December 31.

In the report, we discuss our commitments to our five key stakeholders, our employees customers stockholders communities and the environment.

Our investment in corporate responsibility is embedded embodied through our commitment to enabling our associates to engage in meaningful work that they love.

Providing innovative financial solutions to our customers to support responsible business decisions and keep their clients connected delivering.

Delivering a strong return on investment to our stockholders, while maintaining long term sustainability for our business model.

Encouraging our communities to flourish by connecting people with technology and.

And pursuing environmentally friendly practices to support a strong future for us all.

An increase of greater than 10% year over year.

This correlates with the information, we're receiving from other sources, which cause the average expected increase in tech spending for 2021 in our market at around 5%.

I think that pent up demand as reflected in the continued influx of Rfps, we're receiving and the ongoing interest in Jack Henry Technology solutions.

And our long term prospects for success with that I'll turn it over to Kevin for some detail on the numbers. Thanks day, our services support revenue line of revenue decreased 2% in the second quarter of fiscal 2021 compared to the same quarter a year ago. However, adjusting services support revenue from the deconversion fees of $2 1 million.

Current quarter, and deconversion fees of $7 7 million revenue and divestitures of $1 2 million in prior fiscal year quarter. This revenue line would have grown 2% from the quarter compared to the previous year.

Services support revenue primary driver was data processing and hosting fees in our private cloud, which continues to show very strong growth in the quarter compared to the previous year.

However, the growth from that line was totally offset by a decrease in our product delivered services revenue, which was due to decreased license hardware and net mutation revenue for primarily on premise customers.

<unk> revenue, which is related to our billable travel primarily ready to travel limitations related to COVID-19.

And our Jack Henry Annual conference or our JC, which was held virtually and therefore, no registration fees for customers or vendors for our check there and then obviously as mentioned deconversion fee revenue for the quarter compared to the prior year, which is all all of those lines were a decrease processing revenue increased 5%.

In the second quarter.

<unk> 21 compared to the same quarter last fiscal year. This increase was primarily driven by higher card volumes from new customers installed last year and increased debit card usage from existing customers.

Jack Henry digital revenue experienced the highest percentage growth of all revenue lines in both Q2 and year to date this year compared to the same periods last year.

Our total revenue was up 1% per the quarter as David mentioned compared to last year on a GAAP basis and was up a little over 2% on a non-GAAP basis, excluding the impact of deconversion fees and revenue from divestitures.

Our cost of revenue.

The increase in cost was partially offset by travel expense savings as a result, again of Covid travel limitations, our research and development expense decreased 1% per the quarter compared to last year. This decrease was due primarily to slightly higher percentage of our overall costs being capitalized for product development this quarter.

Compared to a year ago.

Our SG&A expense decreased 10% in the second quarter of fiscal 'twenty, one over the same quarter in the prior fiscal year. This decrease was primarily almost completely due to travel related expense savings as a result of COVID-19, which required us to hold our J AACE virtual this year as previously mentioned and also due to the gain on this.

<unk> assets in this quarter of this year.

Our reported consolidated operating margins decreased slightly from 22, 4% last year to 22, 2%, which is primarily due to the various revenue headwinds already discussed and our increased costs.

On a non-GAAP basis, our operating margin increased from 21, 1% last year to 21, 3%. This year, primarily due to the items already mentioned our payments segment margins continued to be impacted by the additional costs related to our card processing platform migration as David mentioned this is heath.

As discussed in his opening comments, our core segment operating margin increased slightly during the quarter compared to last year on both a GAAP and non-GAAP basis, while complementary segment margin decreased slightly on a GAAP basis, but improved on a non-GAAP basis compared to last year.

The effective tax rate for the quarter was essentially flat at 23, 1% this year compared to 23, 2% last year and our net income was $72 million from the second quarter compared to $72 1 million last year with earnings per share of <unk> 94 in both quarters.

For cash flow, our total amortization increased 4% year to date compared to last year due to capitalized projects being placed into service in the past <unk>.

Included in the total amortization is amortization of intangibles related to acquisitions, which decreased to $8 $9 million year to date this fiscal year compared to $10 5 million last year, our depreciation was up 5% year to date, primarily due to capex in the previous year and those assets being placed into service.

We purchased 675000 shares of Jack in your stock year to date for $110 million and we paid dividends of $65 5 million for a total return to shareholders of $175 5 million year to date.

Our operating cash flow was $194 million for the first six months from the fiscal year, which is down a little from $215 million last fiscal year, we invested $76 6 million back into our company through Capex and capitalized software and our free cash flow, which is operating cash flow less capex and less cap software and then adding back net.

Proceeds from disposal of assets was $163 8 million year to date.

Couple comments on our balance sheet as of December 31, our cash position is still in very good shape at $147 8 million down a little from 213 million June 30, due to the previous items discussed there is nothing drawn on our revolver, which has a maximum capacity of 700 million. So we've got a lot of dry powder and we had no other long term debt.

She'd other than the capitalized operating leases.

And in the press release yesterday, we confirm both GAAP.

And non-GAAP revenue guidance.

Will be revised.

Also I'd like to emphasize that in our GAAP guidance that we continue to forecast revenue from deconversion fees for FY 'twenty, one will be down approximately $33 million from what we saw in FY 'twenty, we have seen $14 6 million decrease in the first half of the year alone and we will see a significant decrease in Q3.

Is that was the largest quarter for deconversion revenue last fiscal year and the largest increase year over year, we see little to no current M&A activity that would drive the conversion revenue at this point, which in the short term as David mentioned will hurt revenue growth, but in the long term as we have always said that we don't like deconversion revenue as we would.

Much rather keep the customer in the revenue from long term. This means based on the GAAP revenue guidance provided in the press release impacted by the decreased deconversion fees. We continue to look at a GAAP revenue growth growth of 3% to four plus percent the adjustments between GAAP and non-GAAP revenue guidance for FY 'twenty. One is the decrease in deconversion fees.

Prior to the previous year.

Small revenue impact from the cruise divestiture in Q2.

It was removed from FY 'twenty for comparison to FY 'twenty one.

Our non-GAAP revenue.

<unk> has not changed from Q1, the difference is all deconversion fees and revenue from the divestiture.

We anticipate GAAP operating margin for the full year of FY 'twenty, one to be down just slightly at about 22% from last year for all the reasons previous mentioned and our non-GAAP margins to actually improve slightly compared to last year for the entire fiscal year, our effective tax rate for FY 'twenty, one should be in line with FY 'twenty at.

Around 22%.

And with the significant headwinds created by the projected significant decrease in deconversion revenue.

In our third fiscal quarter, we are guiding Q3 EPS to be in 83 to 87.

Which I believe is generally in line with the current consensus.

However, we have increased our full year EPS guidance for FY, 'twenty, one, which we provided last quarter to be in the range of $3 10 per access to $3 90.

And we are now updating our EPS guidance.

For FY 'twenty, one to the range of $3 85 to $3 90.

This concludes our opening comments, we are now ready to take questions. Jay will you. Please open the call lines up for questions.

Our first question comes from the line of Kartik Mehta from Northcoast Research. Your line is open.

Hey, good morning, Kevin and Dave Hey, Kevin I apologize could you just walk through the revenue guidance part again.

I'm just trying to understand maybe what was in the press release. This time versus what you guided last time I thought there was about a $30 million difference but.

I just wanted to make sure I understood.

So kartik I mean, so the GAAP guidance that we're providing is a $1 $761 million 770, and basically you take the $30 million decrease in deconversion fees out and Thats, how you get to the $1 731 minutes and 40, obviously theres a lot of other moving parts in rounding and different things in there, but by the time you get by the time you get everything adjusted in.

Rounding taken into effect, which obviously takes a pretty significant spreadsheet youre still looking at the six to six 5% non-GAAP revenue growth over last year's adjusted number.

So the $1 730 day one.

$1 million from 40 is the non-GAAP revenue that you're guiding to then yes. Okay.

And then David.

Just wondering as you look at your migration of platform and demand from your bank.

I know in the past you had said that you thought there would be demand for banks to get into the credit card business.

Wondering where that stands now and if you're seeing that.

That come to fruition.

Yes, Kartik I won't say, we never said that we expected it to be a huge demand, but we certainly are continuing to see demand. We've signed of five so far brand new credit card customers. So far this year there.

<unk> had kind of and I've talked about this on previous calls we've kind of kept the breaks a little bit on credit because we don't wanted to successfully complete the debit side of the conversion and didn't want our implementation fee and our implementation teams to be focusing on trying to add new credit customers because thats a separate different implementation. So we've had the brakes on a little bit on the sales side on the <unk>.

But side, but there is demand there we expect to see demand going forward, but again it won't be we don't expect to be a major issuer in the future, but we certainly are seeing demand from our customers.

And then just one last question Dave.

What are your customers doing about or trying to do about some of the fintech.

Competition, they have whether it would be.

Chime or any of these other guys are you seeing demand for different type of products or how concerned are your customers about those fintech competitors.

Our customers like any customer I have trouble, making money on free so sometimes theyre not terribly distressed of some of those customers leave to go to somebody like time, I think that explains what Ed These neo banks aren't making any money, but thats. The short term view and we take a long term view or are they going to attract the customer and then build on that customer for the long term so a lot of our customers.

They are trying to figure out how to compete in that space many of them have launched.

Digital only banks digital only brands and of course, we support that we've talked about that on the call before where we're hosting a separate brand in our Jack Henry private cloud a separate processing environment separate marketing by the bank to make sure that they have an opportunity to attract those customers. The other approach that some banks are taking is trying to figure out how to partner more closely with fintech.

So not necessarily with the neo bank, but with other fintech to enable the same type of.

Well, it's a cool experience make sure that they are.

Providing that connectivity and of course as I've discussed many times on this call Jack.

Jack Henry is very supportive of that environment, where we provide the hooks provide the connectivity.

For our fintech to connect into our infrastructure and help our banks achieve success that way so it depends on the bank.

Maybe put their head in the sand a little bit you have others, who are being aggressive about launching digital only banks and then you have some that are.

That are working with fintech to create a whole new experience in some other way and it just depends on the profile of the bank and Theyre feeling of the competitive nature of those players.

Thanks, David I appreciate it.

Thank you next question comes from the line of Peter Heckmann from D. A Davidson your line is open.

Good morning. This is Carson non for Pete just one quick question I believe you had previously said that the company expects to recognize around $16 million reduction in annualized direct cost of revenue as the legacy debit processing platforms were shut down, but perhaps 30% to 40% of this showing up in fiscal 'twenty one is it.

About right.

Uh huh.

I don't know that 30 or 40%. It was because that was that was kind of a guide. We gave went before we moved everything out a quarter. So it's probably going to be a little less than that that we see the impact in Q4, because remember that that number that we gave was for the full year annual cost savings. So.

We're probably going to see more like 15% to 20% of it in this year and then we will see the full amount in FY 'twenty two.

Got you. Thank you yes.

Thank you next question comes from the line of Keith <unk> from G. Research. Your line is open.

Hey, good morning wanted to ask about sort of the dichotomy between core demand and complementary demand as far as like what's holding back demand on the core side and what's driving it on the complementary side sure.

So the biggest thing on the core.

If you think about a core replacement anybody who makes that decision, but the other thing I would say all the time as if you're the CEO of a bank or credit Union, when you decided to make a quarter.

Replacement.

Difficult technology decision you will ever make in your role as the CEO of a bank or credit Union because when you replace the core it touches everything right, you're replacing the entire guts of your of your processing operation and so in this environment, the pandemic environment, where everybody who had people working from home that type of.

And in that type of disruptive move was a little bit challenging for a lot of Ceos to make that move but they still wanted to offer innovative new technology, they need to take care of the customers, particularly because all of their consumers, we're living and working from home and expected to have outstanding digital experience. So they needed to continue to implement these.

Leaves a smaller point solutions complementary solutions to augment the services that they provide to their consumers and they provide internally to their to their employees and so that's where we have this broad suite of complementary solutions and I highlighted a few of them on the call today, that's where a lot of those things have really stepped up particularly around <unk>.

Digital so those digital banking, which we used to call online banking and mobile banking there is digital lending.

Digital account origination all of those things have been hot commodities here lately because of that move to remote work and.

And one other thing I would throw out there is there.

Roughly 11000 banks and credit United States, and a very small percentage of those actually go through a core system evaluation on an annual basis, but at a very high percentage of that 11005 need to upgrade their digital or other things as Dave mentioned.

That's a big driver or big difference in the two.

Okay.

Okay, yes so.

Should I read that as there is some degree of pent up core demand.

Just from companies not doing evaluations this year not executing on their desk, yes, so on the.

I think it was the <unk>.

No. The November November call I highlighted there that the RFP pace for new core deals had really started to pick up and that so youre absolutely right. There is pent up demand people just kind of put a stop on it but they still need to upgrade the infrastructure. So we saw rfps start to pick up in the late fall I'll say I highlighted on the November.

Call and.

That's absolutely true today. So we are today, if you look at our sales pipeline today. It is as full as it was let's say 18 months ago. So 18 months ago, Let me backup a second we normally think in terms as we run the business. The sales pipeline you want to be and want to have about 90% of the annual.

Quota for the company in any given day the sales pipeline should be at about 90% of the full year's quota because some deals aren't going to happen and some will happen and so on and we're back to that level now. So we're almost about 90% of our annual quota is in the pipeline today and that's why I'd say, where the engine is running again, where our core demand is.

Fixed up and that's part of the reason that I am pretty optimistic about our.

Opportunity per sales success going forward.

Okay and then maybe just finally is the trigger for actually executing on these four contracts are starting implementations as the trigger people actually coming back into the office or is there sort of a differentiator where banks sort of lapped the credit risk.

It's not it's not necessarily them coming back into the office I think we're to the point today, where there are all of our banks and credit unions have have figured out their operating model. So there are people in the office. They are people working remote I don't know of any of them that have gone back to a 100% in office.

Figured out their operating model and so I don't expect I'll.

Say ever maybe thats too dramatic, but I don't expect ever to get back to.

Our operating model for banks and credit unions to be like it was two years ago. They will have a remote workforce going forward just like we will.

That is not but not the trigger I think now it's them understanding how to run the business with a combination of them in office and remote and they recognize they need to do a technology upgrade okay, now, let's get down to business and make that decision and move forward with a technology upgrade and then we can do conversion core conversions, 100% remote and I'll highlight a day.

In my opening comments here, we're doing 100% remote conversions, most banks and credit unions don't particularly like that they prefer to have at least a few people on site, but we're fully capable of doing that.

Okay. Thank you.

Sure.

Thank you next question comes from the line of John David of Raymond James Your line is open.

Hey, good morning, guys, Kevin I appreciate the comments on the Street <unk> EPS guide.

Obviously your full year guide implies roughly 8%.

Non-GAAP growth revenue growth in the back half of the year any help there how we should think about that sequentially <unk>.

Well I mean, there's obviously a lot of conversions that are going to be happening. Some of those were pushed out from the first half J D.

Obviously, the payment engine is really picking up pace. The digital continues to grow very nicely.

<unk>.

Especially on the payment side Q4 is going to be a little easy comp compared to last year because of the impact of Covid last year.

I mean, it's a combination of things Theres not just one thing I'd really point to J D.

I mean are we.

We have.

Monthly calls with with all of our Vps and senior Vps, David I do.

Ensure you that in fact, we had one just.

Earlier, this week or last week.

They all still very feel very very good about forecast and the guidance that we're giving out there from for the balance of this fiscal year.

Okay, but I would assume that all else equal youre going to have stronger growth in <unk>, just given given the easier comps. So we're trying to build sequentially.

Absolutely I mean, non-GAAP is going to grow faster in Q4 than Q3, GAAP definitely because like I mentioned in my opening comments the the.

Deconversion impact on Q3 is just <unk>.

Huge compared to last year.

Okay, No that's fair.

You touched upon a little bit I, just wanted to focus on on payments in the quarter for a second maybe talk a little bit about the pieces house Bill pay doing I assume some of the weakness in this quarters just from lower transactions with ADP kind of normalized per transactions like what payments would've grown just trying to understand kind of the pieces there.

How we should think about that as the economy recovers.

Yes, so youre absolutely right on so overall transaction count in the payments business is up around 11% year over year for this for the same quarter. So payments volume is back as far as I'm concerned, but it is bill pay that is the kind of a lagger. So bill pay is only up about 2% year over year, it's a very mature business.

It's just not growing very fast.

We are continuing to add customers, but nowhere near the pace that we were several years ago. So between the card platform and then don't forget our ACO.

<unk> origination platform that continues to grow.

Real time payments and all the fun stuff, we're doing there people tend to think of as being as being old and of course. It has been around for a long time, but it still grows rapidly.

There's still a lot of volume going through that platform as well so between our AC transmission platform and the card platform.

Our growth is back I guess I'll put it that way.

Okay, and I think pre pandemic.

Talked about approaching double digit growth in payments is there any reason why once everything comes back and normalize from the pandemic. That's that's not still on the table.

Yeah, Jeremy I mean, we talked about that and I think that's still a very extreme possibility.

But again Biosimilar income as long as the economy continues to open up and pick up and goes forward with some of the new wins that we're having on both debit and credit and even on our.

Bill pay and direct OPEC, I think payments could could get back close if not to double digit growth.

Okay. Thanks, and last one from me Kevin the margin was obviously quite a bit better this quarter.

The margin guide I guess, the implied guide would assume that maybe not all of this is sustainable considering you get 90 basis points from <unk> from <unk>.

Payments platform migration. So just just trying to think about it is there.

The potential upside of the margin where you guys was there anything specific in this quarter, that's more kind of one time ish and any changes to the call. It 50 to 75 basis points.

Normalized operating leverage once we kind of get to the other side of that as I mentioned the payments platform migration, yes, J D. So that's a good question, obviously theres some theres a lot of moving parts and a lot of strange things going on in our financials right now.

Is there some potential upside for Q4, absolutely, but when you look at Q3 I mean, some of the big savings. We've got we're we're definitely travel related.

Are people, just arent moving because of restrictions and different things, but that also impacts revenue. So I've made several comments I mean license hardware implementation bill.

Billable travel is all down.

And so when we do get to start traveling again and travel expenses will go up and we and our salespeople are starting to get out there and move a little bit in some of our installs are are moving a little bit more so our travel cost going to go up yes. Some of Thats billable, which also increased revenue, but remember that in our business. The revenue is all kind of delayed so even though our travel expenses.

It may go up and other costs go up the revenue related to that travel is probably not going to happen for a quarter or more so.

So there is.

Okay, Alright, thanks, guys. Thanks Jay.

Thank you next question comes from the line of Fukushima from Credit Suisse. Your line is open.

Hey, Thanks, guys I just wanted to follow up on the core segment.

Another question, you've asked there, but you know what.

What to expect.

The best guidance I can give you there is that the the pipeline the incoming pipeline as far as the deal volume that we're working today is back to the level that it was pre pandemic now cannot predict exactly when things will sign and close.

It's more art than science when it comes to timing on those things, but if we.

Assume that we will win at the same rate that we're winning that we were winning pre pandemic and we know that the pipeline is at about the same level as it was pre pandemic logically we can assume I think that.

Sometime later this calendar year the rate of wins will be similar to what we were experiencing pre pandemic.

And then the <unk>.

Moving to keep in mind is once we sign a new core deal the revenue doesn't hit the P&L.

The majority of the revenue doesn't hit the P&L oftentimes for at least a year afterwards.

Once we start our conversion that conversion has a major impact to the financial institution as I was highlighting earlier.

Some people call it rip and replace where you've taken everything out and replacing it with a brand new system.

Takes many months of planning and.

In operation to get that conversion completed so the revenue of the big chunk of revenue normally follows oftentimes a year after we signed the contract or announced.

With.

Understood great. Thanks for the color.

Thank you once again, if you would like to ask a question. Please press star.

<unk> next question comes from the line of Ken <unk>.

In this research your line is open.

Hey, Thanks, Thanks, Kevin and Dave for taking the question I really appreciate it.

I was just wondering if you could talk about how you expect your at your new sales that trend as the economy reopens. It looks like the sales pipeline is quite strong.

And I was just curious if you expect that to accelerate.

As you as you get back in queue.

From the customers in person so any expectation there would be really helpful. Yeah. Its a good question as I highlighted in my opening comments the quarter. We just finished was the fifth largest sales booking quarter, we've ever had in the history of the company well that's pretty good so saying that I expect it to accelerate significantly probably is.

A reasonable position to take.

I do expect as we just talked about in the last.

<unk> is more on the core signing side and I expect as we go forward that will start to see more on the corresponding side. The thing that will be interesting to watch is can we sustain the pace that we've seen on the complementary side, because if we can increase quarter bookings and sustain the complementary bookings.

That's significant that's meaningful I'm, not ready to say that thats achievable, but that will certainly be our objective and I think we have the opportunity to do that because we're getting all of this great recognition for some of this wonderful technology that we've been rolling out here, particularly in the area of digital so we'll have to see how that goes as time goes forward.

That's my hope.

Mhm.

That's helpful.

I guess just longer term.

Margin question I mean, it looks like your margins have declined versus where they were maybe six seven years ago. I mean can you just talk about the main drivers of that and is there an opportunity to get those margins back to those levels or even above those levels.

Yes, so the big family, if youre going to go back six or seven years do you can.

Can you really can't go back that far because you really you can really only go back to 2017, because when we restated for ASC 606 that was the farthest back. We went so you really can't look beyond that and get a true comparison of margins because ASC 606 definitely changed how we recognize revenue and had a significant.

Impact on margins, but from 2017 forward.

And then a full year of that cost reduction and FY 'twenty two the other thing has happened. Since 2017 is we have literally sold no new core business. So theres been virtually no new core license revenue, which is very high margin business happening in the last three or four years I mean on the bank side.

I think we've sold maybe three or four in house deals.

Since 2017 and on the crediting side not bearing any more than that and most of those were smaller bank deals.

For our core director solution so.

So those are the two primary drivers as Cogs at margin come down now what's going to happen is like I said Youll see margin improve in Q4, we will continue to see that improve and following year. We have gone through the transition of getting our license and hardware revenue is now very small percentage of our total revenue so very little impact from that so as we continue.

To migrate our and our on Prem customers to our private cloud and continue to sell additional card business and our card and our private cloud business continues to become a much larger percentage of our total revenue that's very high margin business our margins will continue.

And get back to the historical rates in FY 'twenty three and beyond.

Thank you that makes a lot of sense and then if I could just squeeze one last one here just the.

Net divestiture what was the revenue impact in the in the base here that you're assuming for the full year. I know you gave it for the three months ended six months that just curious what the full year impact was so so the revenue per for the core business. That's really what we sold was the core business occurs which was 140 <unk>.

Very small credit unions that we divested.

October one and the quarterly revenue from that was right at $1 $2 million just like represented in the press release this quarter. So the total the total for this fiscal year on the on the GAAP to non-GAAP adjustment will be just under $3 $7 million for the three quarters in this fiscal year.

Okay really helpful. Thanks, a lot appreciate it congrats again.

Thank you once again, if you would like to ask a question. Please press star one.

There are no further questions at this time I would like to turn the call back over to Kevin for closing remarks. Thanks Jay.

First of all I want to let everybody know that we are planning an analyst day. This spring.

The virtual event and again it will be held virtual is planned to be held on Tuesday may 11th. So please mark your calendars to save the day, we will be sending out an invitation with a schedule of events timing and an online registration soon and it will be sent to individuals' us. Please.

Don't share because we want to know who's actually attending this virtual event, but please be looking for this invite in your email inbox in the near future.

Now to wrap up the call. We are very pleased with the overall results from our ongoing operations I want to thank all of our associates for the way. They have handled these challenges by taking care of themselves and our customers and continuing to work hard to improve our company on so many fronts for the future all of US at Jack Henry continue to focus on what is best for our customers and our shareholders.

<unk> with that I want to thank you again for joining day and Jay If you would please provide the replay number I'd appreciate it.

Thank you and ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

For any of you. Please please dial 885 decreased six seven.

Dan.

The replay.

805 to eight five.

Six seven.

<unk>.

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