Q3 2021 Jack Henry & Associates Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Jack Henry and Associates, the third quarter fiscal year 2021 2021 earnings conference call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your speaker today, Kevin Williams.
Thank you. Please go ahead.
Thanks, Randy Good morning, and thank you all for joining us for the Jack in the Associates third 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.
In just a minute I will turn the call over to David to provide some of his thoughts about the state of our business, our financial and sales performance of the quarter. Some comments regarding the industry in general and how we're dealing with COVID-19, and some other key initiatives that we have in place.
Then after David concludes his comments I will provide some additional thoughts of comments regarding the press release, we put out yesterday after market close and provide comments regarding our guidance for fiscal year 'twenty, one, which we also provided in the release yesterday and then we will open the lines of 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 of results like any statement about the future. These are subject to the number of factors that could cause actual results or events to differ materially from those which we.
Anticipate due to the 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 10-K entitled risk factors and forward looking statements.
On this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income the reconciliations for historical non-GAAP financial measures can be found in yesterday's press release, I will now turn the call over to Dave.
Thank you Kevin Good morning, everyone. We're very pleased to report another quarter of revenue and operating income growth and an overall solid performance by our business as always I'd like to begin today by thanking our associates for all of the hard work and commitment the went into producing those results for our third fiscal quarter.
For Q3 of fiscal 2021 total revenue increased 1% for the quarter and increased 6% on a non-GAAP basis.
The conversion fees were down more than $18 million over the prior year quarter, which impacts revenue in the current quarter negatively but as I've highlighted many times in the past. This is good news for our company. If you take a long term view.
Turning to the segments, we again had a good quarter in the core segment of our business revenue decreased 4% for the quarter because of the reduction in deconversion fees, but increased by 3% on a non-GAAP basis, our payment segment performed very well posting a 7% increase in revenue this quarter and the 10% increase on a non-GAAP basis.
We also had a strong quarter in our complementary solutions businesses with a 1% increase in revenue this quarter and a 5% increase on a non-GAAP basis.
As I mentioned in the press release, our core sales teams had an extremely solid quarter and are now seeing core activity consistent with our pre pandemic run rates during.
During the quarter, We Inc, 15 competitive core takeaways, which is greater than the one per week run rate we saw in 2019.
In addition to our success signing new core clients, we signed six existing on Prem core customers to move to a private cloud environment.
As we continue to push into the larger regional bank space I think it's significant to note that of the 15, new core deals in the quarter five were with multibillion dollar asset banks and credit unions.
As a reminder, regarding the topic of new core wins, the Jack Henry we only call out new core deals when a bank or credit Union moves their entire core processing relationship from a competitor system two of Jack Henry core solution, we do not announce them as the new core wins, if they move from one Jack Henry core to another or if they simply.
The purchase of new module from us.
Think of it as a new logo on the Jack Henry core customer list that wasn't there previously.
In addition to the tremendous success, we saw with our core business. This quarter, we continued to sign new clients to our new digital offerings. During the third quarter, we signed the 42, new clients to our <unk> platform and we continue to see increased interest in this offering as well as the rest of our digital suite.
In our April 6th press release regarding digital momentum, we shared the we had more than 400 per financial institutions and more than $4 3 million users live on the <unk> platform.
As of May 1st However, we have added several more of financial institutions and we now have just over 5 million users live.
We continue to enjoy the highest consumer rating in the App store and we are regularly recognized as the fastest application in the industry.
As I've said before I expect our success in this area to grow as we continue to add new functionality and features to the platform.
Regarding the ongoing migration of our new card processing platform as of the end of March we have successfully completed the migration of all of our debit processing customers to the new platform in accordance with the plan we've been discussing for more than three years here.
Here are a few statistics regarding this remarkably successful project.
We did our first migration on October 32017, and completed the project on March 26th 2021, that's 1243 days.
During that time, we migrated 879 customers and added 151, new debit and credit customers to the platform.
We currently support 1030 banks and credit unions on the platform and we're adding new clients every month.
You will start to see the larger positive impact of this completed project on our financials in the fourth fiscal quarter as we have emphasized throughout the process.
I'm very proud of our team and thankful to our partners and clients for working with us to achieve such a successful outcome.
As you probably heard M&A has become a topic again among bankers now that they're more confident about their operating models and the overall economy.
All of our clients of approached US recently to work with them as they prepare to complete acquisitions of smaller institutions.
In fact, the Ceos of two regional banks currently processed by Jack Henry were quoted in an American banker article last week regarding their desire to pick up where they left off before the pandemic brought everything to a halt.
We expect the our activity and what we referred to as the convert merged area of our business the pick up again as we get into the summer months and new deals are announced.
Speaking of American banker hopefully you all saw the article last month announcing that once again, Jack Henry has been recognized by their team is the best place to work in Fintech.
American banker only recognizes 50 companies each year and as you can probably imagine almost all of the companies on the Fintech list generate less than 100 million of an annual revenue pretty much in keeping with the type of company. Most people think of when they hear the word fintech.
We are particularly proud of this recognition for a few reasons first the scores are based on surveys conducted with our employees by an independent agency.
Second this is our fifth year in a row to receive this designation from American banker.
Third we are many times larger than almost any other company on the list.
And fourth none of our larger competitors have ever made this list.
I think this recognition is indicative of the culture entrepreneurial spirit and commitment to developing truly innovative solutions found within the teams at Jack Henry.
As you have undoubtedly already noted from Yesterdays press release, we purchased a significant number of shares in the quarter.
With the lack of good quality acquisitions for us to pursue and with our stock at an attractive price. We worked with the board the authorized an additional repurchase under the existing plan, which enabled us to buy of $1 million 825000 shares during the quarter.
This significant share repurchase does not foreshadow a change in our strategy in this regard we.
We will continue to be opportunistic in our approach of purchasing our own shares as we have excess cash and the lack of acquisition targets that fit our strategy.
Hopefully you've all seen the press release, we posted this morning announcing the upcoming retirement of our longtime chairman Jack Prim.
Of course, many of you know Jack is the Guy who sat in this chair before I became CEO of Jack Henry.
As I said in today's press release, Jack has given many years to our company as a business leader of board member and a friend to us all.
He has had a significant impact on the success of our company and on me personally and for that I want to sincerely. Thank him on behalf of all of us of Jack Henry.
Recognizing the Jack has been considering a potential retirement for some time, we were prepared for his decision and expect our process to allow us to fill the vacancy close in time to Jack retirement date.
We hope to have more information to share regarding a new board member and the new chairman before the end of June.
Slowly, but surely our customers are settling into a new mode of operation with the anticipation of most of COVID-19 restrictions being lifted in the coming months, we are still operating with well over 90% of our employees working fulltime remote but we are committed to our return to office date of July one.
We are finalizing plans for office usage and staffing that will employ a hybrid work from home work in office strategy, and we will continue to leverage remote sales and implementation tools where possible.
We still have some work to do and some things to learn but I'm very optimistic of our bill about our ability to be successful as the work environment shifts again post COVID-19.
As we look toward the end 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.
I look forward to seeing in chatting with many of you at of virtual Analyst Conference next week.
That I will turn it over to Kevin for some detail on the numbers. Thanks, Dave.
For the quarter, our services Port revenue decreased 6% in the third quarter of fiscal 2021 compared to the same quarter a year ago. However, adjusting that services support revenue for deconversion fees of four 4.367 million of the current quarter and deconversion fees of $22 8 million and revenue from the divestitures last year and the prior.
Fiscal quarter on a non-GAAP basis. This revenue line would've grown actually 2% for.
For the quarter compared to the previous year, which obviously as Dave mentioned that has a lot of pressure and headwinds from our convert merge revenue and also hardware in the quarter year to date, our deconversion fees are now down 33 million compared to the prior year, which if you remember the guidance that we provided back in August that is right in line with the full year impact.
Services support revenue primary driver was data processing and hosting fees in our private and public cloud offerings, which continue to show strong growth in the quarter compared to the previous year. However, the growth of that line was totally offset by the decrease in our product delivery and services revenue, which again was due to a decrease.
<unk> hardware implementation of revenue for on Prem customers convert emergent mutations, which is also down to the significant decrease in M&A activity pass through revenue that was related to billable travel primarily related to travel limitations related COVID-19 and then obviously deconversion fee revenue for the quarter compared to the prior year quarter, which was down almost 18 million.
<unk> processing revenue increased 13% in the third quarter of fiscal 'twenty, one compared to the same quarter last year. This increase was primarily driven by higher card volumes from new customers installed last year and also increased debit card usage from existing customers or.
Our Jack Henry digital revenue experienced the highest percentage of growth of all revenue lines in both Q3 and year to date this year compared to the same periods last year.
Our total revenue was up 1% per the quarter compared to last year on a GAAP basis and was up 6% on a non-GAAP basis.
Cost of revenue was up 4% compared to last year's second quarter. The increase was primarily due to higher costs associated with our card processing platform and higher personnel costs related to increased head count at March 31, compared to a year ago.
The increase in cost was partially offset by travel expense savings as the result of COVID-19 travel limitations.
Our research and development expense decreased 3% from the third quarter of fiscal 2021 over the prior fiscal year. This decrease was primarily due to a higher percentage of costs being capitalized for product development as we continue to invest in our products this quarter compared to a year ago, our SG&A expense decreased 6% in the second.
The quarter of fiscal 'twenty, one over the same quarter and this decrease is primarily due to travel related savings.
Our reported consolidated operating margins decreased from $21 four last year, 21%. This year, which is primarily due to the various revenue headwinds already pointed out and increased cost.
However, on a non-GAAP basis, our operating margins increased nicely and we saw strong margin expansion from $18 one per cent last year to 23%. This year, primarily due to the items already mentioned.
Our payments segment margins were impacted by deconversion fees in the quarter, but on a non-GAAP basis, our payments margin improved slightly with the completion of the of the platform migration.
Both of our core and complementary segments had a decrease in GAAP margins, but both of them had a nice increase in non-GAAP margins. So our underlying operations continue to be very strong as we move forward through the year.
The effective tax rate for the third quarter of fiscal 2021 was 2021, 5% up from 19, 7% in the same quarter a year ago. This increase in the effective tax rate is primarily due to the change in the timing of the release of respective reserves for uncertain tax positions, resulting from.
Bearing statute of limitation periods.
Our net income was $71 4 million in the third quarter compared to $73 9 million last year with earnings per share of 95 for the current quarter compared to 96% 96 last year.
For cash flow, our total amortization increased 3% year to date compared to last year due to capitalized projects being placed in service of the prior year Inc.
Included in this total amortization is the amortization of intangibles related to acquisitions, which decreased $13 3 million or $2 $13 3 million this year compared to $15 4 million last year.
Depreciation is up 3% due to the day, primarily due to capex in the previous year and those assets being placed in service.
As Dave mentioned, we purchased two 5 million shares year to date for $384 4 million and we paid dividends of just right out of 100 million for a total return to shareholders of $484 2 million year to date.
Our operating cash flow was $266 3 million for the first nine months of the fiscal year, which is down a little from 276 million last year.
Which is also impacted by the significant decrease in deconversion fees this year to day compared to last year.
We invested $116 7 million package of our company through Capex and capitalized software year to date, our free cash flow, which is operating cash flow less capex and cap software and then adding back the net proceeds from disposal of assets as of $155 8 million year to date.
Couple of comments on our balance sheet, our cash position of $70, one compared to $109 5 million a year ago. So we still have the.
Decent cash for operations, we did draw down $200 million on our revolver during the quarter to fund our stock buybacks, but we have no other long term debt on our balance sheet of operating leases.
Our return on invested capital for our trailing 12 months is 19, 2% and our return on equity for the trailing 12 months is 29% which is very solid.
For update on guidance, we did update both our GAAP and non-GAAP revenue guidance in the press release yesterday for the full fiscal year. However, just to be clear. This guidance continues to be based on the assumption that the country continues to open up and the economy continues to improve.
But if things do go differently than obviously the guidance will be revised.
We've been very consistent with our GAAP guidance of revenue from deconversion fees would be a decrease of approximately 33 million compared last year.
Which we hit that Mark as I previously said during our fiscal Q3 and it now appears the deconversion revenue will actually be down another $4 million in Q4 compared to the previous year for a total decrease of approximately $37 million in deconversion fees compared to the last fiscal year.
We continue to see no immediate M&A activity that would drive the deconversion of driven at this point, which in the short term will hurt will continue to hurt our revenue growth for the fiscal year, but in the long term as we've always said, we don't like Deconversion revenue is we would much rather keep the customer and the revenue from the long term. This means based on the GAAP revenue guidance provided the purse.
<unk> impacted by the decreased deconversion fees, we expect GAAP revenue to grow growth in FY 'twenty, one to be three to three 5%.
The adjusted 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. During Q2 that was removed from FY 'twenty for comparison purposes for.
For non-GAAP revenue growth guidance provided in the <unk>. We are now guiding to approximately 6% growth due to the ongoing headwinds previously discussed in the various lines of revenue. So we still anticipate we're going to grow 6%. This year, which means Q4 is going to have a really nice revenue growth to get are slightly less than 5%.
Year to date up to the 6% for the year.
We anticipate GAAP operating margins for the full year of FY 'twenty, one to be down slightly at about 22% compared to last year for all of the reasons for the discussed and non-GAAP margins should actually improved slightly compared to last year for the entire fiscal year similar to what we've seen through the first three quarters.
Our effective tax rate for the full year of FY 'twenty, one should be in line with FY 'twenty right at around 22%, assuming there are no federal or state tax law changes between now and the end of year that would impact our fiscal year.
We've also increased our full year EPS guidance for FY 'twenty, one again this quarter, which we provided last quarter of range of 385 to $3 90.
We are now updating our EPS guidance for FY 'twenty, one to a range of $3 98 to $4 <unk>.
The increase in guidance is primarily due to expense control margin improvement for the year and continued improved efficiencies, which is offsetting the impact of deconversion fees.
With that this includes our opening comments and we're now ready to take questions. Brandy. We please open the call lines up for questions.
Certainly at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Again, the discards and the number one we will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Peter Heckmann with Davidson.
Hey, good morning, gentlemen, thanks for taking the question.
In terms of the payment.
Payment platform migration.
Can you remind us.
The cost saves from from.
Closing down the to duplicate of flat platforms and kind of just kind of preliminary basis, what type of adjusted operating margin expansion do you think.
It sets us up for for fiscal 'twenty two.
What what we've always said is we're going to get at least a minimum of the $16 million cost of things out of that and we're still sticking to that.
Obviously, that's not going to all happen this quarter and Thats, an annual run rate.
We are we are in the process right now of of decommissioning both of those platforms. So there's the all of the cost savings is not going to be in this quarter and factors. Some other things that we're still having to do through the end of December I believe for some programming of different things to get the full efficiencies out of the new platforms.
So it's probably going to be Q3 of next fiscal year that we had the full quarterly impact of that $16 million plus savings, but we're going to start getting some this quarter. So you will see some some payments margin expansion in Q4, and then Youll see more in Q1 and Q2 and then even.
More in Q3 next year.
Okay.
Okay. That's helpful. And then just in terms of your of the marketplace and when you're talking to your financial institutions.
Are there hasnt been any shifts in priorities over the last three to six months.
What are the what are the hot buttons hot-button products that that folks are interested in and could you give us an update I think you gave us a number of banner on the quarter, but maybe refresh us on a year to date basis on some of the other newer solutions like treasury and loan origination.
Sure.
So David.
The I won't say that there's been any major shift in this quarter, we started the C a shift.
And the earlier in the fiscal year for the heavy emphasis on digital and things that would allow our.
Our customers' customers, so whether it's the consumer or commercial customer allow them to conduct more business without coming into the branch.
So the digital platform has of course been right at the front of that list I'll reemphasize, what I said in my opening comments here in the press release, we put out on April six we said we had a mill.
From 400 institutions in $4 3 million users live month later on May 4th we now have more than 5 million users lives. So it really I think emphasizes the.
Dramatic shift that's happening among banks and credit unions to ensure that their consumers and their commercial customers have.
Best of breed digital.
Technology for them to use so that's been a key driver for our customers and certainly for US Treasury is another piece of that another piece of that puzzle. So.
It didn't.
All of it out in the.
We have 12, so far this year as far as treasury, new customers that are assigned to the treasury platform.
Platform again, that's a move forward of more digital functionality, but for very large commercial customers you don't install of the treasury solution of unless you have really large commercial customers otherwise they just use cash management.
So that I think is indicative and then on the lending side.
The highlight of this many times.
Allowing our commercial customers to do complex commercial loans online without having to drive to the branch with their financial statements and all of that all of that.
And the whole packet of information the thing that we have just recently done there is we've added this lending marketplace functionality of where our customers. If they are of a.
Credit that's too large for them to book, they can essentially sell debt credit through of marketplace to other.
The other lenders who want to take on the responsibility for that credit. So there's a lot of activity in all of those areas, but it is the shift toward doing business more in a digital environment as opposed to coming into the branch that's what's driving all of those things that I just touched on.
Got it thanks, and then just housekeeping, Kevin what would you say with the ending diluted shares from the period.
Oh.
275, <unk> hundred seven.
<unk> 75.
Okay.
Thanks, so much.
Yep.
Your next question comes from the line of Kartik Mehta with Northcoast research.
Hey, Good morning, David Kevin Steve I was just wondering if you could talk about what you think the backlog has been for your sales pipeline I know you talked about last quarter and it seems like things were really improving the I'm wondering if that momentum has continued and.
Or if there's any headwinds because you might still not be able to see our customers face to face.
Actually kartik it's.
One of the.
Pieces of good news in all of this and that's why I used the word robust pipeline in the press release.
We have really successfully shifted to enabling our sales team and customers being accepting of doing business remote is still like to like to have people come in once in a while and some customers insist on the sales growth coming in but we're doing a lot of this remote a lot of the demonstrations that we do now are the <unk>.
Normally where we wouldn't be we would have would of had five or six people on site will maybe have one or two on site and the other four are on a teams call are on a zoom call doing the demonstration so that's worth of really become too.
That of the point, where they will accept that idea of much of the sale happening virtually and so what that's created now is and I think I've said this on calls before.
A good gauge for us of how stout. Our sales pipeline is is if we are at about 90% of our annual quota so not a monthly quota, but the annual quota in any given time on any given day, if we have about 90% of the annual quota in the pipeline than we know that we've got enough happening that.
We should be able to make our number we are right at that Mark right now and so what that tells me is customers are engaging with us they have salespeople working with them on deals and we're kind of back to a normal run rate that we would have seen in 2019, that's what we're seeing today in the sales pipeline to the number of engagements and the.
The volume of deals that are flowing through the pipe are about where we were in 2019 and cardica as part of your question. The backlog I mean, you remember and we've talked about this for years the.
The vast majority of our products have anywhere from a nine to 18 month backlog of installs at any given time and.
So so we have some of those backlogs have gotten a little smaller.
But all of our backlogs of all of our products are still very solid and very strong and as Dave mentioned on his opening comments when we signed 15 new core deals.
None of those are going to be installed.
This fiscal year those of all will be next year. So all of those are going into our backlog along with a lot of all of the other products are being sold.
And just Kevin I know you don't want to talk too much about FY 'twenty, two but based on Dave's comments and your comments.
Is there any reason that you shouldn't be able to continue to accelerate top line.
I'm not talking about going from 6% to 9%, but at least continued to see modest improvement in topline.
Yes, I mean, obviously kartik we're.
We're just starting the budget process for next year, but.
I feel very comfortable the revenue growth next year will be stronger than it was this year again, obviously as the economy continues to grow and to do what sue just getting through the and David can jump in here just getting through the payments migration.
And now we can focus totally on adding new customers instead of migrating all of our existing customers because that was such a major feat to get that done without disrupting our customers I mean that alone should help drive some nice payment growth our remote pumps capture of check conversion is not sexy, but it just <unk>.
<unk> to be a major grower for us and then as we get back to the new core wins that we've seen and the migrations from from in the out yes.
No reason why our revenue growth.
Next fiscal year can be up nicely from where it was this year.
Alright, well. Thank you very much appreciate it.
Your next question comes from the line of David <unk> with Evercore ISI.
Thank you good morning could you.
Comment on the sustainability of this improvement in the quarter.
The 15 core deals up from what we've seen prior to this during COVID-19 of about six to seven is this the new high watermark that youre shooting for in the next kind of 12 months or so.
Yes, I don't know of a crystal ball, David So I can't give you an exact.
Predictions, but what we're seeing today as I quoted in Mike in my comments, we are back to the run rate that we saw in 2019 and I talked about of many times on the calls of the time that we were on this run rate of booking one the competitive takeaway per week can.
Can I say with absolute certainty that we're going to do 52 deals next year no, but it's certainly the pace right now and everything that we see in the pipeline for the next coming months. The pace is definitely greater than it has been during.
During the COVID-19 during the the depths of COVID-19, and I guess I'll put it that way and it's logical I don't think of anybody should be surprised that there was a slowdown in those core decisions during the pandemic because as we've talked about before of when you're the CEO of of banker credit Union, the new decided to switch out year core that's essentially making the decision to do heart and lung transplant all of it.
The same time for your institution and at the very disruptive no matter how smooth it goes its a disruptive process and why would you make that decision unless you absolutely have to why would you make that decision in the midst of a global pandemic and so I think it's totally logical that we're back to that pays all of it if you take COVID-19 out of the picture.
All of the other.
<unk> for a customer to move the Jack Henry those are all of their still just like they were in 2019 and so I think these thank.
Bank and credit Union executives are seeing that now they know how to manage through the COVID-19 world and now they're back to thinking about how do I find the best of breed provider on the core side and let's go talk to Jack Henry.
Thanks for that and just as a follow up.
What are your preliminary expectations for fiscal 2022, adjusted operating margin. Kevin you noted that you would complete the full platform.
Conversion in payments by the third quarter of fiscal 2022 does that does that lead to a significant margin boost next year.
Well.
Let's be clear here the platform conversion is done all of the customers that moved off the legacy platform. So we're done with the conversion. It's the follow on you cant just flip the light switch and say okay. Now everything is turned off so thats, what Kevin was alluding to and sort of talk of fine. So so yes, I mean, maybe there is going to be a nice margin expansion next year.
I said earlier that our non-GAAP is going to finish up pretty much in line and slightly up from where it was last year.
We will gain more than a 100 bps and operating margin in FY 'twenty, two and sort of.
More than that yes, but I think as I said earlier, it's going to take us. Some additional time as David just said to get all of these costs taken out and it's actually going to be by the end of the second quarter I believe when we get all of the cost taken out so youre going to see some continued margin improvement throughout next fiscal year and it will be Q3, when you see the full impact.
Of what the cost take out from the the payment migration, but as we continue to add new payments customers as we continue to add new core customers as we continue to migrate our on Prem customers two of private cloud all of those things will help our our margins.
The the other thing that.
I think of lot of people forget about is with the M&A activity.
Obviously, our deconversion fees were down.
But on the other side that is in our both of our GAAP and non-GAAP numbers is what David.
As alluded to it in his opening comments is our convert merge revenue because our customers do a lot of acquiring as well. So we've had some significant headwinds this fiscal year on a convert merge revenue we have done the risks or lay off so we still have all of the cost. So so just having the M&A activity pick up will not only give us back.
The deconversion fee revenue, which we really don't want that also helped us convert merge revenue, which that will also help our operating margins. So theres of so many positive things is going to help our operating margins.
Getting back to normal day.
Understood. Thank you very much okay.
One comment I will add here, well, you're shifting to a new <unk>.
Questioner.
Didn't call it out of my comments, but just since Dave asked about.
Of the impacts of the platform conversion, Kevin pointed out the we're continuing to add new customers I didn't call out in my comments, but we added 13 more brand new customers to that platform. During the quarter. So this really is a growth driver for us now that we're through the migration, we're continuing to add customers to that platform net new.
Your next question comes from the line of Steve <unk> with G Research.
Hey, good morning, I was actually going to ask you about that just the.
The high level thoughts on the feedback from customers now that the card platform is as totally transitioned any momentum selling the new platform and kind of just general high level thoughts on what the opportunity is there.
Thank you Steve It really has been the.
The word.
The words that I used in the in my opening comments were about how amazed.
Amazing and then successful this conversion has been I mean, this has been a huge effort and.
So we've migrated all of these customers. We've added the 150 new customers now another 13 in this quarter that werent doing business with us before on the card platform. We are now positioned to sell credit and have been selling credit which of course, we didn't have before we put this new platform in place customer response has been terrific. We our customers are much happier.
Theyre definitely referenced the bowl, which is what's leading through all of these successes and signing new customers to the platform. So it really has been the right move for Jack Henry It was long term project and there was pain along the way because you are disrupting all of these customers, but it really was the right decision has been a good move for us for our customers and so we are well positioned.
<unk> for for growth in the future and the one thing I'll emphasize that we've talked about on previous calls Havent talked about it in a while but our old platform was dependent on of Jack Henry core system for those.
For the old node platforms. The function. This new platform is not dependent on the Jack Henry core system, which means we can sell debit and credit outside of the Jack Henry core base of which we couldnt do in the past and so now we're positioned to start doing that as well as adding new customers from within the Jack Henry core base.
Yes.
My next question is on the same topic is that as well so.
Benno I think historically has been primarily marketed to Jack Henry core customers, just any sort of thoughts on the puts and takes as far as marketing that outside the Jack Henry core base or is there still of lot of.
A lot of empty space to go at the current Jack Henry core customers there.
The good question there is a lot of opportunity within the Jack Henry core base and what I've highlighted in the past as we are intensely focused right now on delivering the <unk> business, which is the the other big chunk. So panel. So far has been positioned as a consumer application and <unk> business will be delivered of later this year and by the way those of you who attend the analyst day.
The next week.
And who runs digital for US is going to update you on that business and kind of what that means for us, but <unk> business will be delivered later this calendar year and so once we have annual consumer and Benno business, all up and running and live and good to go then we start selling outside of the Jack Henry core base. So that will be later in 2020.
The calendar 2022 is when we will start selling outside the core base, but we want to make sure that we have everything tightened right.
With our core customers before we start to.
The go after sales outside of the Jack in your core base, but we definitely will be doing that and right now of the target is late calendar 2022.
I'd just add one thing of that is so if you think about CEVA and right. Now we are at about just over 20% of our core customers that are using nano. So we've got an enormous amount of runway and obviously as Dave said, we want to take care of our core customers.
The other thing I'd point out is we've actually and I've never seen this I've been in this business for a long time I've never seen a complementary product actually win a core deal.
And we've actually won some very nice core wins, because we are only selling nano to our core customers. So.
That's another another reason to make sure we're taking care of all of our our core our own core customers before we start going outside the base.
Okay, maybe just one final clarification there on the data of consumer versus spin of business is the revenue opportunity similar for each product or how would you handicap that.
That's a good question I would say.
The commercial customer tends to pay more for the functionality than the consumer does but you don't have as many of them to work with at each institution. So.
The depending on the makeup of the institution if theyre highly commercial focused I'd say, there's a greater opportunity at that institution. If theyre, primarily consumer focused retail then there is a lesser opportunity. So it just depends on the institution of the makeup of the institution.
They are there.
They're heavily commercial there is a significant opportunity once we rollout that functionality. So will go around to our existing customers who were running nano consumer holding the first on the list to say, okay. Now we have.
Now for business.
Let's add that in the.
It'll be the essentially the easy button for those customers that have already deployed and for their consumer base.
Okay. Thank you very much for taking my question here.
Your next question comes from the line of John Davis with Raymond James.
Hey, good morning, guys, Kevin just want to start on the margin I think <unk> was a bit better than.
The most people expected, but then the <unk> guide I think implies a little bit of the.
The deterioration, but historically, you've seen a little bit of a tick up in the <unk>. So maybe just the the puts and takes of the margin sequentially as we enter the fourth quarter here.
Yes, so part of that JD is Q3, I mean, obviously, we had some.
Some very nice savings from from travel related savings cost, we are starting to pick up travel again in fact, our corporate travel is almost back up to where it was pre COVID-19 commercial's not quite there yet, but I think I think travel is going to pick back up even more in Q4, which is.
That's really the only negative I see happening on the margins in Q4 everything else is pretty much.
Where it should be.
Again, we're not seeing a lot of convert merge revenue.
Those are very nice margins for us.
Is the M&A starts picking up and David mentioned in his opening comments are is starting to be a lot of a lot of clamber out there about M&A in a lot of a lot of our customers of wanting to get back to it. So I think that's going to pick right back up next fiscal year, but I just don't see it happening yet in Q4.
Okay. That's helpful. And then any any comments on stimulus impact was that in the guide before and Thats whats driving the the modest uptick in the in the non-GAAP ex deconversion fee revenue of just just curious the can you guys have seen any kind of impact on your debit processing business from from stimulus.
So there has been some impact on the debit business, we haven't tried to quantify that as a separate standalone numbers certainly there has been significant growth in the.
On the the debit business. The interesting thing is the stimulus payments have definitely been of driver for growth.
The digital so not just for bandwidth for anybody who is out there in the space because customers who have been looking to access that money and manage their money through the digital channel that has been a driver and in transaction volume and also in growth of users I think that's across the industry because so many.
Consumers now have been.
<unk> actively trying to manage those stimulus payments, but as far as the debit volume we haven't tried to carve that out and segregate the the impact of stimulus from the rest of the volume.
<unk>.
It's just baked in the numbers.
Okay. Thanks, and then.
Kevin it's been a long time.
Since I've seen you guys do as aggressive on the buyback my maths right, you've got sort of about $275 million in the quarter on the buyback obviously still have the phenomenal balance sheet plenty of firepower there so.
Any reason why maybe not to that level, but you wouldn't continue to buy back shares here just curious commentary and maybe you can we've been if theres been any changes in the <unk>.
M&A environment, which I'm kind of doubting given valuations, but just curious there too.
So that's one of the things I've tried to be clear about in my opening comments J D was that this does not signal of some significant change in our strategy. We've said time and time again that if we have excess cash we don't see a.
Good acquisition on the horizon.
We will do stock buybacks, we're committed to our dividend policy, but we will do stock buybacks absent a good acquisition one of the challenges that we've highlighted many times on these calls is valuations are getting pretty pretty high on these potential companies that we could acquire everybody has stars in the rise about doing an IPO or possibly is.
Back and getting some great big valuation and so absent really solid acquisition that fits our strategy share buybacks continue to be an option for us, particularly when the share price is down like it was here a few months ago Thats, what really drove us to do.
Get more active with the board.
And make a significant move.
Okay and then the last one from me Dave David There.
Sure.
Picture here.
Just the competitive dynamics in the core.
Segment, maybe splice out credit unions.
<unk>.
One of your competitors has made some noise about making some progress from credit unions lately. So just just curious there if anything has changed from the pandemic or kind of how you see it today.
Absolutely not so we are of the deals that we've won this year.
117 competitive takeaways.
On the.
On the credit Union side of the business. So very strong in the credit Union side no change with the.
The competitive landscape there is nobody winning as many deals as Jack Henry as far as Nucor.
The Nucor completed the displacements and that's that was true before the pandemic. It is true today I don't think anything of any significance has changed because of the pandemic with regard to our positioning on the core side or the ability to win on the core side.
Okay. Thanks, guys.
Sure.
Your next question comes from the line of Ken <unk> with Autonomous research.
Hi, Good morning, David and Kevin. Thanks, Thanks for taking my question.
I think you mentioned that five out of the 15 core competitive takeaways were multibillion dollar institutions.
And I believe Jack Henry Historically is focused primarily on smaller institutions in the market. So can.
Can you talk about your appetite to move up market and then are there any features or capabilities you need to add to to really push up market and be successful there.
That is the misconception that absolutely drives me nuts, Ken I, just got to say that right here Jack Henry has been a player in the multibillion dollar space for well over 10 years. So if we were having this call 15 years ago I would totally agree with what you just said we were not of player.
In the multibillion dollar space, but for the past 10 15 years, we have continued to grow in that space. We are the dominant player on the credit Union side.
50%, then youll see the numbers next week at the Analyst Conference I can't quote it exactly off the top my head, but close to 50% of the over $1 billion credit unions run our Jack Henry emphasis solutions. So we are by far the dominant player in the credit Union side with the single platform on the banking side, we have somewhere around 23% to 25 per cent of the multibillion dollar.
Market running on almost almost all of them on our silver Lake platform.
We've continued to push up market. It is a key part of our strategy.
We have continued to add functionality over the years and we are winning in that space are.
Of regularly.
I emphasized on the call today. So we have we are not the little brother in the in the multibillion dollar banking space.
We are definitely a player the.
The question for US is historically, we have been below about $50 billion and so one of the things that Stacy will talk about at the analyst Day next week as the we are we do have an initiative to move above $50 billion because of that has not been of market that we've been in historically, we've been below $50 billion, but we have teams in.
And we've been actively working in that.
As well so we definitely are not targeting smaller banks in fact, if you're if you're a credit union blow of about $100 million in assets of a bank below about 200 million of assets.
Then Jack Henry generally is not the fit.
The fit for a.
Right around $1 billion is the real sweet spot for us, but as I mentioned, we've continued to grow up market here for many years right.
Alright, Okay. That's really helpful. And then I guess, when we think about margins for fiscal year 'twenty three of the platform migration will be behind you I mean, what's what's the right way to think about margins or even margin expansion after fiscal year 'twenty, two and I am just looking back at.
At some numbers here I mean, Jack Henry you had a roughly 24% operating margin in fiscal year 18 is that is that a good benchmark for fiscal year 'twenty three.
Yes, probably as Kent I mean, once we get next year behind us get FY 'twenty two behind us.
And get the full benefit of the pay.
Migration platform migration.
We should go back in FY 'twenty three to the typical <unk>.
The 100 bps margin expansion that we saw historically before we started.
And if you think about I mean 18 as of now when we started this the payment.
Platform migrations, so there was already some.
Degradation on our margins even in 2018, the kind of grew since then so we should see some nice margin very nice margin expansion in 'twenty, two and again in 'twenty three.
Right, Yes, I think Thats right, yes, I think the the margins came down about 30 bps. It looks like in 18 versus 17, and then just maybe one last question from me I think I think if I do the math right youre going to accelerate your non-GAAP revenue growth to kind of high single digits.
The low double digits here in fiscal <unk> can you talk about the sustainability of that of that growth rate and do you think fiscal year 'twenty. Two you can grow at a similar level or is it something below that of good good assumption.
So there's a couple of things that you got to remember in Q4 is we've got some pretty easy comps from last year, especially on the payment side.
So you are writing your math right I mean, non-GAAP, you're going to see very high single digit growth.
Maybe even low double but it's probably going into the 8% to 9% in Q4 to get us to that 6% non-GAAP growth for the year.
But like I answered a previous question I think for FY 'twenty. Two you are probably going to see us grow faster than than we did in FY 'twenty. One this is not going to be high single digits is probably going to be in the 7% to 8% range like we saw before the pandemic hit.
Got it okay helpful. Thanks for taking my questions really appreciate it you bet.
Your next question comes from the line of Dominic Gabriel with Oppenheimer.
Hey, everybody. Thanks, so much for taking my questions.
You mentioned, the $37 million decrease year over year in the deconversion fees and I'm actually not even asking about that but what I. What I'm curious about is the dynamic between winning new deals and the lack of switching among your existing clients and how your retention rates have changed over time.
And how thats really the retention rate is baked into your.
Your forecast moving forward. Thanks.
The retention rate of our retention rate is incredibly high and we talked about that regularly.
Concerning the you may of a dozen little bit of a misconception about deconversion fees. So when we get deconversion fees, that's because one of our customers has been acquired by somebody else and so they they are buying their way out of the existing contract that we have we have no control over whether some of these being acquired by another institution we do.
We do have a good track record of doing.
Of.
Saving those accounts by convincing the acquirer the switch to the Jack Henry system. Those are hard to do and it's rare that you were able to do that because of the acquirer is making all of the decisions and the acquiree as is having to respond to those decisions, but we have several times convinced the acquiring bank to convert from the Jack Henry system.
But those are hard and those are those of a rare. So what drives deconversion revenue is one of our customers being acquired away. It's not that they are there.
Angry with Jack Henry and decided to leave us and now they've got to pay to get out of the agreement.
100% of the time I'd say its because they have been acquired by somebody else. So that really doesn't come in from the retention rate conversation and again our retention rates are.
Well into the upper nineties.
As far as the core base.
Okay, Great and then maybe if you could talk about yours is kind of a small items, but.
Could you talk about the R&D expense and kind of what some of the projects Youre working on there and where you're expecting your R&D expense to be.
The trending over the next.
Whatever timeframe I guess, you feel like providing.
That'd be really really helpful is just it was a little lower than I would've expected. Thanks.
So we tend to run at about 14% of revenue all in for R&D. So its cap software, it's R&D expense of about 14% of revenue and that's been.
Five years, probably we've been at that number of more than five years. So about 14% of revenue for several years, that's a number I'm very comfortable with looking forward.
Because we're committed to doing these innovative new solutions. So talking of those solutions. Some of them. We've talked about here. We have digital is on that list.
<unk> to do a lot of investment in digital continuing to do investment in the treasury platform because of larger banks that are serving larger commercial customers are continuing to look for additional functionality. So that's on the list as far as R&D projects is concerned.
We have our.
Are the core systems and we're continuing to do investment that's something that you never say you're done there is always ongoing investment in the core systems with new functionality and new look and feel the user experience is constantly being updated.
Our lending platform, so I highlighted that a little while ago and this conversation lots of ongoing investment there to expand the functionality to allow our customers, particularly on the commercial side to do online lending, but we are also in the past year or so and investing in new functionality for our consumer lending and consumer deposits.
To deliver best of breed functionality when it comes to originating accounts online and then the last I'd highlight is in the area of fraud. So a lot of investment going on in the fraud area of new functionality to deliver a more digital experience I guess around managing fraud for our customers.
No I think I remember and I agree 100% day I mean, our total all in for R&D and cap software is going to be 14% the.
Percentage of revenue in R&D expense on the P&L is going to fluctuate a little bit depending on the timing of projects and when they actually start capitalizing and in capitalizing because we obviously have to follow the accounting gods rules for capitalization and so there may be times that the we're complete with.
Jack and we're not really ready to start another project capitalizing so that quarter R&D expense, maybe 8% of total revenue where this quarter. It was 6% because we actually were capitalizing a little higher percentage because we had so many projects as David just pointed out that were in flight.
Great. Thanks, that's really really helpful. I really appreciate it and then maybe just one more of where is there any is there any difference between.
The conversations within your sales force between actually obtaining new credit union versus being clients as a whole and I guess all of them asking is there one that's ready to reaccelerate.
Their tech stack into the future.
Versus one and clearly you guys are a big leader in the credit Union space. So thank you. So much I really appreciate it yes. It's an interesting question I wouldn't say that the credit union industry of the banking industry. One is the.
As ahead of the other historically credit unions have been more tech forward I guess I'll put it that way they have always been more apt to invest in technology just since since even when I started in this business a long time ago.
Credit unions of always put technology at the front of the line they've used it as a differentiator against the banks and not just against the big banks, but against banks just in general.
Part of their rationale has been that they have money to spend.
On technology, they don't they haven't historically built as many branches of banks have they've tried to use technology to be the differentiator, but I don't think theres been any change the recently as far as one of the other kind of changing their profile or being more aggressive about going after new technology.
Thanks again.
Your next question comes from the line of Vasu <unk> with K B W.
Hi, Thanks for squeezing me in here.
I guess my first question is just a clarification question on the revenue guide the debt.
Delta between the GAAP and the non-GAAP I think it was roughly 30 million prior quarter and now it's about 17, but I think Kevin you talked about deconversion fees going down four to five but then I thought there was like what what's the remaining debt with that kind of if you could provide some clarification there.
Well I mean, a lot of the happened this quarter because as I may Miss in my opening comments, our convert merge revenue was not where we thought it was going to be this quarter. We're just not seeing the M&A activity hardware sales continue to be down on Prem installations came down. So it's really not the change was not really in Q4 of them.
Really Q3.
Came up a little short as most of you pointed out in your first call notes, we had we had of revenue Miss that.
Yet we were still very efficient and actually expanded our margins it still exceeded EPS consensus guidance for the quarter and we raised it for the year. So yeah, I mean, the delta changed a little bit, but it's really really not a whole lot of impact on Q4 is that what happened in Q3.
Understood and then I guess, just going today and of the <unk> trend.
And the payments segment, if I look at the non-GAAP gross tweets payments with a lot better Inc.
Improvement with the little bit less than we would've thought just given also the easier comps in core. So if you could talk about the puts and takes and sort of what drove that.
The growth rate and what you're expecting for the fourth quarter.
So again when court.
Again in core is because of on Prem installations and convert merge revenue.
Not being where we thought they were going to be as we guided and we just don't see those coming back in Q4 either.
Understood.
And then I guess last one sort of a broader question on the competitive environment.
All of small point solution providers of sort of the margin many of them are quite public.
How do you see that strength, having any of that.
Danielle growth rates in the complementary segment of it.
Paul.
Yes.
Thing that we watch pretty closely and you are right.
Essentially what I was alluding to earlier when I was talking about the M&A environment, those companies, who maybe would've put them ourselves up for sale in the past and a little bit of <unk>.
The acquisition target for Jack Henry all of them. These days are thinking of them through an IPO and so.
I think it's just a little bit different than the number that are trying to IPO and take advantage of the frothiness in the market right now, but none of them are doing anything thats, particularly.
Threatened, particularly threatening the Jack Henry or new or different from anything like that we are very well positioned to compete with the names that I think most of them that you would throw it out of me. If you were to throw out names I would tell you exactly how we're positioned and where we're positioned to compete with them and we are not worried about our ability to compete with some of these folks there.
They're taking advantage of the times and there is a lot of interest in Fintech right now and Theyre getting valuations that are.
The exciting and we'll see where the five years from now.
Thank you that's helpful.
And there are no further questions at this time.
Okay. Thanks, Randy.
As a reminder, as Dave mentioned, our virtual analyst day is scheduled next week.
Week from today actually on Tuesday may 11th.
It'll be beginning at one o'clock, if you have not registered but where you would like to you can contact the <unk>. That's the S. H E. R. <unk> D at Jack Henry Dot Com and he can send you a registration link to sign up for the event now to wrap up the call. We're very pleased with the overall results from our ongoing operations and I want to.
Thank all of our associates for the way they've handled these challenges are taking care of themselves and our customers and continue to work hard to improve our company to continue moving forward for the future all of us of 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 Brandy would you. Please now provide the replay number for the call.
<unk>.
Yes, and at this time. This does conclude today's conference call, but if you would like to listen to the replay you may do so by dialing 1800585867 again thats. The one 805 85867, thank you and have a great.
Day.
Okay.
Moving forward.
[music].
<unk>.