Q4 2021 Jack Henry & Associates Inc Earnings Call

August 18, 2021

[music] well.

Good day, and thank you for standing by welcome.

Welcome to the Jack Henry and Associates fourth quarter fiscal year 2021 earnings Conference call.

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

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

To ask a question during the session you will need to press Star then 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 to reach an operator.

I'd now like to hand, the conference over to your Speaker today, Kevin Williams, Chief Financial Officer.

Thanks, Liz good morning, and thank you for joining us for the Jack <unk> Associates fourth quarter and fiscal 2021 year end earnings call I'm, Kevin Williams, CFO and Treasurer and on the call with me today is David Foss, Our board chair President and CEO.

Just a minute I will turn the call over to Dave to provide some of his thoughts about the <unk> business financial and sales performance for the quarter. Some comments regarding the industry in general and then some other key initiatives that we have in place.

And then after Dave concludes his comments I'll provide some additional thoughts and comments regarding the earnings press release, we put out yesterday after market close and provide comments regarding our guidance for our fiscal year 2022 provided in the release and then we will open the lines up 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 material materially from those.

Which we anticipate due to a number of risks and uncertainties.

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.

Also on this call we will be discussing certain non-GAAP financial measures, including non-GAAP revenue non-GAAP operating income the reconciliations for historical non-GAAP financial measures can be found in yesterday's press release.

With that I'll now turn the call over to Dave.

Thank you Kevin and good morning, everyone. Today, we are very pleased to share details with you of a quarter that produced record revenue and operating income as well as record sales bookings 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 fourth quarter and for the entire fiscal year, particularly.

Really in light of the challenges posed by conducting business, while dealing with the ongoing effects of the pandemic.

For the fourth quarter of fiscal 2021 total revenue increased 10% for the quarter and increased 10% on a non-GAAP basis.

Deconversion fees were essentially flat as compared to the prior year quarter.

Turning to the segments, we had a solid quarter in the core segment of our business revenue increased by 4% for the quarter and increased by 6% on a non-GAAP basis, our payment segment performed extremely well posting a 16% increase in revenue this quarter and a 17% increase on a non-GAAP basis.

We also had a strong quarter in our complementary solutions businesses with a 7% increase in revenue this quarter and a 7% increase on a non-GAAP basis.

As I highlighted in our press release, the fourth quarter was the strongest sales quarter in the history of the company June was also the strongest sales month ever and it propelled all three sales groups to exceed their quota for the quarter.

While they were signing all of those contracts in the fourth quarter. The sales team also did an outstanding job of refilling the pipeline with new opportunities to set us up for success going forward. I think this is a good sign of the health of our market and bodes well for the start of the new sales year.

In the fourth fiscal quarter, we booked 13 competitive core takeaways and 14 deals to move existing on premise customers to our private cloud environment.

Several of our complementary offerings also saw very strong demand in the quarter with as you might guess, our digital suite, leading the pack, we signed 87, new clients to our bandwidth digital platform in the quarter 10, New Treasury management clients and 22, new clients to our card processing solution.

For the full year, we signed 41 competitive core takeaways with eight of them are greater than $1 billion in assets. Additionally, we signed 35 contracts to move on Prem core clients to a private cloud 219, New banner digital customers and 55, new clients for our card processing solution.

Of course, we signed a variety of other contracts for many many of our other solutions as well, but it's important to note that almost all of these contracts represent long term recurring revenue commitments to Jack Henry for a wide variety of our solutions.

At our analyst conference in May I shared with the attendees that we had just surpassed 5 million registered users on our banner digital banking platform.

As of the end of the fiscal year, we were at roughly a $5.6 million registered users.

As a point of reference on July one of 2020, we had about $3.2 million registered users. So in one year, we saw an increase of approximately 75% and our user count.

This is significant because as I've stressed in the past most of the revenue for a business like this is tied to the number of users on the platform.

We continued to onboard clients and their users at a pace of about 30 financial institutions added to the platform each month.

In addition to our ongoing success with panel, we have delivered many new and innovative solutions during the fiscal year a.

A few examples include our.

Our scimitar team delivered an automated database migration to almost all of our emphasis clients, which allowed them to move to the new database structure with no effort or client impact.

Our lending team delivered the Jack Henry loan marketplace, which allows banks and credit unions to easily engage through a digital experience in the buying selling and participation of loans.

Our digital team delivered the banner digital toolkit, which provides a complete set of application programming interfaces or Apis to enable easy plug ins to third party solutions in our digital platform.

Our payments team continued the expansion of functionality and adoption of the pace Center platform and delivered the zelle digital toolkit to enable clients not using our digital platform to connect to the pace Center hub for zelle transactions and of course, the payments group completed the three and a half year project to upgrade our card payments platform.

Almost all of these new deliverables are built an entirely new technology stacks and are designed to make it easier for our customers to leverage our open architecture tools and philosophy to deliver cutting edge solutions to their account holders.

As you May know, we have a number of active projects at Jack Henry centered on the topic of corporate responsibility. We continue to advance our environmental stewardship commitment and recently announced that on Earth day, Our associates launched a new business innovation group called Bill Greene.

Our business innovation groups, our company sponsored associate driven groups that provide a collaborative platform for people ideas and thoughts to intersect and help address business challenges our.

Our associates decided that a business innovation group focused on our planet was appropriate and necessary for us to make meaningful progress on this initiative.

As the labor market continues to heat up we are focused more than ever on attracting and maintaining and retaining talented associates to that end. We have recently implemented a new technology to expand our remote recruiting efforts and broadened our pool of qualified and diverse talent. Our hope is that this approach will only serve to improve on the reputation as a great play.

The work that we currently enjoy in cities across the country.

Our consistent placement on best places to work list is a testament to the workplace culture, we have at Jack Henry and our employee engagement scores reflect that strong culture.

I am pleased to share that nearly two thirds of our associates participated in our most recent engagement survey and our average engagement engagement score was 83% well above the industry benchmark.

Like most employers we have spent a good bit of time in the past few weeks wrestling with decisions around the right timing and approach to move employees back to work in our company facilities.

We worked with our leadership teams earlier in the calendar year and determined that more than half of our workforce would continue to work remote indefinitely.

We had targeted July 1st is our return to office state for those who would be returning in a full time or hybrid basis.

As the Delta variance surged, we reverted to our previous operating model with only essential employees in our offices every day.

We have proven that we can operate effectively in a remote posture and we will continue in that mode until we determined it is safe to make a change.

As I referenced on the last earnings call our longtime chairman Jack Prim has retired as of the end of June.

Jack had been with our company for many years in various leadership roles and as a board member and chairman.

As a result of jacks retirement, we have announced two changes to the board.

Curtis Campbell has joined the board effective July one to filled the seat left vacant by Jack's departure.

Curtis as president of the software for Blue Cora in Dallas, He brings extensive experience in infrastructure and cloud computing as well as digital development and a keen focus on customer experience.

I'm very excited to see what new perspectives Curtis brings to our board discussions.

Also effective July one I was elected to be the New Board Chair I was humbled and honored by the confidence expressed by the other board members and I look forward to leading the Jack can reward to even greater success.

As I reflect back on fiscal 2021, I can confidently say it was a very good year for our company our employee engagement scores remain very high and we've made great strides with our diversity and inclusion initiatives our levels of customer engagement and customer satisfaction scores are also very high we have successfully completed several leadership.

Chip and board level of retirements and replacements. Our sales teams are performing extremely well and have positioned us for another successful year of selling and overall demand for Jack Henry Technology solutions remains high in all segments of our business.

We have a commitment to doing the right thing for our constituents that we believe will continue to serve US well, we will continue with our disciplined approach to running the company and expect that approach to help provide stability for our employees customers and shareholders.

As we begin the new fiscal year I continue to be very optimistic about the future.

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

Our service and support revenue line of revenue increased 6% in the fourth quarter of fiscal 2021 compared to the same quarter a year ago.

Dave mentioned, our deconversion fees for the quarter were pretty flat with last year's fourth quarter. However for the full year, our deconversion fees were down $33.3 million for the full fiscal year compared to the prior year, which is actually the guidance that we provided a year ago on this call for service support revenue primary driver was our data processing hosting fees in our private.

Cloud and public cloud offerings, which continue to show strong growth in the quarter compared to the previous year growing by 7% for the quarter.

However, the growth in this line has slowed significantly due to product delivery and service revenue, which includes deconversion fees license hardware implementation and convert merge revenue, which only grew 2% compared to the prior year quarter, which this line is obviously somewhat impacted by Covid.

<unk> processing revenue increased 15% in the fourth quarter of fiscal 2021 compared to the same quarter last fiscal year.

The increase was primarily driven by our higher card volumes from new customers installed last year and increased debit card and credit card usage from existing customers.

Jack Henry Digital revenue continues to grow show very strong growth as demand for our banner digital platform continues to be very strong as Dave highlighted.

Our total revenue was up 10% for the quarter compared to last year on both a GAAP and non-GAAP basis, So excluding deconversion fees and divestitures, our non-GAAP grew 10% as well for the full fiscal year revenue was up 4% on a GAAP basis, and 6% on a non-GAAP basis again, excluding deconversion fees.

And revenues from divestitures.

Our cost of revenue was up 8% compared to last year's fourth quarter. The increase primarily due to higher costs associated with our card processing and higher personnel cost compared to a year ago, Our research and development expense decreased 4% for the quarter, our fiscal 'twenty one over the prior year quarter. The decrease was due primarily to a slightly slightly higher person.

<unk> of costs being capitalized for product development this quarter compared to a year ago.

Our SG&A expense increased 3% in the fourth quarter fiscal 'twenty, one compared to the same quarter in the prior fiscal year.

The increase is due primarily to increased personnel and professional services costs.

Our reported consolidated operating margins increased nicely from $18 seven last year to 21, four in the current year quarter and on a non-GAAP basis, our operating margins expanded from 17, 8% last year to 20.

1% this year.

Our payments segment saw the nice margin expansion in the quarter after completing the payment platform migration in Q3.

Margins grew from 43% last year to 45% this year on.

On our fourth quarter on a GAAP basis and on a net net non-GAAP basis, our payments segment margins grew from $42 three to $44 five so over 200 bps margin expansion. Our core segment operating margins decreased slightly during the quarter compared to last year on both a GAAP and non-GAAP basis, while our complementary segment margins increased slightly on both the GAAP.

And non-GAAP basis.

The effective tax rate for the fourth quarter fiscal 'twenty, one was down slightly to 19, 7% compared to 20% in the same quarter a year ago, primarily due to some some tax state tax deductibility timing.

Our net income grew 25% to $76.9 million for the fourth fiscal quarter compared to $61.3 million last year with earnings per share of $1 <unk> for the current quarter compared to 80 since last year or.

Or a 24% or 30% increase over the prior year.

Our cash flow total amortization increased 3% for the fiscal year compared to last year, primarily due to capitalized projects being placed into service.

Last year included in the total amortization is the amortization of intangibles related to acquisitions, which decreased to $17.7 million this fiscal year compared to $23 million last fiscal year.

Depreciation is up slightly at less than 1% for the year compared to the prior fiscal year.

During the year, we purchased two 8 million shares of our deck here in your stock for Treasury.

For $431.5 million and we paid dividends of $133.8 million for a total return to shareholders of $565.3 million for the year.

Our operating cash flow was $462.1 million for the year, which was down from $510.5 million last fiscal year, which this decrease was primarily due to the timing of various operating assets and liabilities and timing.

We invested $157.8 million back into our company through Capex and capitalized software.

Our free cash flow, which is operating cash flow less capex less cap software and adding back net proceeds from disposal of assets was $310.5 million for the year, which represents a 99, 7% net income to free cash flow conversion.

Yesterday's press release inadvertently omitted the proceeds from dispositions line of net cash from investing activities within the cash flow summary.

<unk> should have been included where cash inflows of 66.6 million $1.87.

In fiscal 'twenty, one and 11 million $1.30 for fiscal 2020.

Totals for investing activities were correct. This omission was corrected in the version of the earnings press release filed yesterday on form 8-K, and the one located on our website.

Couple of comments on our balance sheet, our cash position of $51 million compared to $213 million a year ago, primarily down due to the significant stock repurchase we did.

You'll remember at the end of Q3, we had $200 million drawn down a revolver. During Q4, we paid down a $100 million of that balance. So at June 30, we had $100 million on our revolver. We had no other long term debt on our balance sheet other than operating leases.

For the year, our return on average assets for the fiscal year was 13, 1% a return on invested capital for the fiscal year was 21% and our return on equity for the year was 21, 7%.

Yesterday, we provided both GAAP and non-GAAP revenue guidance in the press release for fiscal 2022.

We also provided a reconciliation of GAAP to non-GAAP revenue guidance in the release following the segment information in the press release.

Just to be clear this guidance continues to assume that the country continues to open and the economy continue to improve but if things work yo differently than this and guidance will be revised.

For GAAP revenue growth for fiscal 'twenty, two based on the amounts of the release yesterday, our revenue guidance is a range of eight two to eight 7% growth over fiscal 'twenty one.

Due to higher anticipate deconversion fees compared to FY 'twenty, one and for non-GAAP revenue growth, we're guiding to an initial range of seven 5% to 8% growth for the fiscal year. Obviously these will be updated during the year on future earnings calls.

We do anticipate GAAP and non-GAAP operating margins to improve a little in FY 'twenty two compared to last year as we should have nice margin expansion in our payments segment.

And anticipate higher deconversion fees I am somewhat cautious on guiding to too much of an improvement in operating margin as we will continue to have headwinds on license revenue as we continue to move core customers from on Prem to a private cloud.

Also travel costs continued to increase significantly compared with last year and at this time, we are still planning to host our Jack Henry Annual conference and are similar to our AG conference in person. This year. Therefore, there will be some large cost returning this year compared to last year. When there was very little travel. However, we do think that we will get at least 50 bps.

Margin expansion in the fiscal year.

Our effective tax rate for FY 'twenty, two is projected to be slightly higher at approximately 22, 5% to 23% compared to our actual rate. This year of 21, 7% and this is primarily due to the significant impact from equity awards.

Your deductible in FY 'twenty one.

Our initial FY 'twenty to GAAP EPS guidance is a range of $4.53 to $4.60, which is a 10% plus increase in our FY 'twenty one finish.

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

If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.

Draw your question press the pound key.

Our first question comes from Joseph <unk> with K B W.

Hi, Thanks for taking my question and I wanted to congratulate David on becoming chairman of the board.

Thank you Vanessa.

The first question.

Follow up on the margin commentary that you provided Devin I know that previously you had indicated about 100 basis labor margin.

And this goes to my door and potentially even some upside to that now.

And we are getting placebo guang, sorry, guys just wanted to understand what changed.

No questions lately I think before.

I would tell you that the biggest change is the impact of Covid, because obviously, we had some really nice margin expansion. This year with no travel related costs. Obviously, there was also a decrease in revenue from convert merge revenue and other things. So there is there's a lot of offsetting things out there and I mean just to be clear.

I feel like both our revenue GAAP or non-GAAP revenue growth of 7%, 8% and our margin expansion of 50 bps are both conservative.

Got it.

Understood and I guess the second question I was just hoping if you could provide some color on growth expectations by segment for fiscal two baidu, particularly what youre expecting for the Cowen Goldman Zechman I know with the core segment do you expect further improvement that we've seen on a non-GAAP basis youre kind of been Danielle.

The next year and then payments segment has already been quite strong I mean is there room for <unk>.

Further acceleration of some of the new wins on the card payments might start Darryl.

Yes, so I mean, we saw some really nice margin expansion in the payments segment in Q4, we will see more.

In FY 'twenty two there is still additional costs that will be coming out.

By the end of the first half of fiscal 'twenty two in the payments segment. So I think there'll still be some really nice margin expansion and as we add additional customers that will also expand the margins and obviously cards is still 60% of the payment segment.

Thank you very much.

Thank you.

Our next question comes from Peter Heckmann with D. A Davidson.

Good morning, everyone.

Good morning, Pete.

In terms of thinking about.

The record sales in the fourth quarter.

Is there a way of thinking about total bookings, unlike PCB or ACB basis in terms of thinking about year over year increase I think in the prior year you had.

43 competitive core takeaways of course, not all financial institutions are equal to a wide variance in sizes, but.

Given some of the difficulties over the last fiscal year.

Yes.

But thinking about the kind of percentage increase.

Overall bookings that might help us think about the outlook.

Yes.

Sales sense, Dave by the way.

When you have the sales organization or the sales quota of the size of our sales quota.

A percentage increase of more than 5% per year is a very significant increase and if I remember correctly I don't think I haven't exactly in front of me, but I think it was year over year. It was about seven or 8% somewhere in that range year over year as far as sales bookings that we know.

This well, we don't publish <unk> numbers or anything like that but it's that's a good way to think about how we measure quota and how quotas are assigned so.

You can you can kind of use that logic in making some some assumptions. So if we were 7% 8% ish increase.

The increase over the prior year as for our sales performance. That's a that's a good way to think about it now the other thing I'll point out is when we assign quotas for the next year, meaning for the year. We're in now fiscal 'twenty. Two we are starting point is last year's performance and then we normally apply of somewhere between 3% and 5% quota increase over the top of what.

The performance was last year, so that's where the sales team is starting out this year is with a sales quota that is somewhere in the 3% to 5% range larger than it was there actual attainment for the prior year.

Got it that is helpful.

And then just thinking about the cadence of term fees.

Guidance for term fees.

No surprise with some of the uptick we've seen in M&A in the mid tier space, but in terms of the cadence that Kevin would you specifically call out.

Some level for the first quarter.

Or when you might think those might head just in terms of trying to get a quarterly forecast correct.

Well I mean, obviously, we've been hearing a lot about M&A activity, which obviously thats what drives deconversion fees that we have not seen a lot of actual activity yet. So I think that's going to grow over the year. So I have a feeling that the bulk of the deconversion fees are probably going be in the second half of the year.

Got it okay. Thank you.

Yes.

Our next question comes from Dave Koning with Baird.

Oh, Yeah, Hey, guys. Thank you and nice job.

And I guess my first question just when.

When we think of kind of the wallet providers that space. There's a lot of investors that are just concern that that that group is just going to take over the world and all bank accounts will kind of move to that over time, but I guess a couple of things are you seeing growth in your number of accounts I don't know if some metrics on that near total accounts, but also.

No.

Is there any reason that the banks can't do exactly the same thing and provide all the same services.

Plus have FDIC insurance and all those things that make most consumers rather just have a bank account over time.

Yes.

Very intuitive question, Dave in fact, I'm presenting at a conference and I think it's February of next year on that very topic.

Because bankers are starting to realize that.

If you have a good digital platform on the front end and if you if you.

Take advantage of an open open infrastructure like we have at Jack Henry and the reason we talked about it all the time you can do as a bank are essentially all of those same things and draw customers to Europe platform as a bank with the FDA.

Insurance backing it there's a real opportunity for bankers to take advantage of this desire and demand among consumers today for solutions like that so we are doing that today with with a number of banks, but part of the channel.

Process for me is to educate bankers on what they can do what they should be thinking about how they compete.

In those areas, so lots of opportunity for our customers and for Jack Henry but it's based on a really outstanding digital platform and then having all the connectivity to connect those.

Those types of fintech functions into that digital platform and we have all of those things in production today at Jack Henry This isn't wish for the future. This is in production today with with customers today, so great opportunity and so the first part of your question about.

Customer growth. So, yes, we are able to measure.

<unk> growth, whether its members on the credit union platform or customers on the banking platforms and not only are we adding customers because we're winning share we're winning new new customers.

So the net number of customers. We served is greater but because there is same store sales growth happening, particularly on the credit Union side of the business.

It's happening on the banking side, but it's been strong on the credit Union side of the business as well.

Okay, great. Thanks, that's good to hear.

And then maybe secondly.

Growth in payments, obviously really good I assume that's debit transaction growth just off of a pretty low base, but how do we how do you expect that to grow through the year I would think Q1 would still be pretty high off kind of easier comps and then maybe the rest of the year, a little below double digits or something like do you have any sort of cadence for that.

Yes, I think that's a good expectation and the other thing I'll highlight is we talk and Kevin emphasized that 60% of our payments business is on the <unk> platform, but don't forget about the <unk>.

Business, we refer to as EPS enterprise payment solutions that are our merchant.

Our remote deposit capture and mobile capture business and that business has been growing nicely as well. So it's a much smaller piece of the segment, but it's growing rapidly and I think youre going to continue to hear more about that business.

At Jack Henry.

Well so both of those two and I've said it on many earnings calls.

Bill pay business relatively flat for everybody you know theres not a whole lot of new stuff happening in traditional bill pay with the card growth that you've seen I think under in the high single digits is a good expectation for the card growth, but it will be greater than that for the EPS business as far as what we're seeing right now because of the strength of that platform.

And they remember it's not just debit we now offer full service credit right as well because we could not offer that before we got moved over to the new platform. So our full service credits growing basically from a base of zero.

Gotcha, Thanks, guys nice job.

Thanks.

Our next question comes from Kartik Mehta with Northcoast research.

Hey, good morning.

Kevin I, just wanted to ask a little bit about the credit card platform conversion it looks like that's going well and you talked about a little bit more.

What's coming out of the payments business I'm wondering.

Relationship to what you anticipated for cost saving volatile platform would.

Would you have achieved that or exceeded that how would you characterize the cost savings are on the platform.

Okay. So Kurt we completed the migration in Q3, so we had all that all customers on the new platform and.

Sometime in April we started decommissioning.

The four mainframes that supported the two platforms that we used to have and I think those got completely decommissioned I believe by mid July if I remember right.

But there are some other things thats going on here cards. So there were some other tools that we have to keep the talent on there.

Rewrite and get some get some additional tools in place, which that will be done by the end of Q2, and so youll see some additional costs coming out by then so so by Q3 of this year, we will see the full benefit of the cost takeout that we guided to three years ago.

Perfect.

I think.

You've talked about maybe core demand now increasing as people.

Realize that Covid is still going on in some of the.

Decisions, they didnt make they're making how would you characterize.

Demand today.

Is it increasing or is it kind of back to normal.

I would say that it's back to normal so normal for Jack Henry So pre pandemic, we were running at about one new.

Complacent replacement per week, we're back to that level now than we did 15 last quarter. We had 13 this quarter everything that I'm seeing now would indicate that that's a pace that we can run it.

For a while but it's it's definitely leading the industry by far as far as Nucor replacements, and Thats that look sustainable for us now.

And just one last one have you seen any change in the competitive nature for these core renewals, maybe as the market gets back to a little bit normal.

For our core renewals.

We've talked about this in the.

Consultants are now engaged every time theres a renewal so 10 years ago 10 years ago. It was rare to have a consultant involved in a renewal today every single one of them as a consultant and Thats not just Jack Henry it's in the industry and how does the consultant justify their role it's by ensuring that it's a very competitive process. So.

That's been going on it started before the pandemic. It is definitely in place today or every single renewal for all of us.

There is a consultant engaged they are they are encouraging.

Diligent review of pricing and all that kind of stuff and so we know how to operate in that in that model and.

We're comfortable with what's happening.

Perfect. Thanks, Dave I appreciate it.

Sure.

Our next question comes from John Davis with Raymond James.

Hey, good morning, guys, Kevin just a quick clarification around the margins. So you said 50 basis points I just want to clarify that's on a non-GAAP basis for all of the expansion and then a follow up there I think our math suggests that the payments platform migration will be about a 50 basis point benefit this year, so that the right way to think about it.

Incremental travel and other expenses kind of offset normal operating leverage with maybe a little bit of upside.

Right you are conservative comments, and then John I saw I saw in your note about the EPS in your calculation of margins. You also have to remember that our effective tax rate is going to go up from 21, 7% to 22, 5% to 23% to so if you're just looking at EPS.

That's also going to have a slight negative impact, but we're still guiding EPS to grow more than 10%.

Okay.

And then you guys are guiding deconversion fees of about 70% year over year is that the right way to think about the increase in convert merger revenue and then any way you guys can give us an idea of what percentage of normal year convert regimen.

<unk> revenue as a percentage of your core.

Segment revenue I'm, just trying to understand I think that was one of the areas a little bit weaker than you expected. This year and just how we should think about that bounce back coming in 'twenty two.

Yes, there was there was a significant headwind from convert merge revenue being down because there is no M&A activity and Youre absolutely right I mean, if deconversion revenue does take up like we think our customers will be buying just as much as our customers are getting acquired so not only would increase.

<unk> merged revenue, but also increase build travel because we will have more people traveling out to do those convert mergers.

As a percentage of total revenue on top of my head John I can't.

It's not a huge number.

But when you start talking several million dollars in <unk> revenue that we missed it the full boat for those so it is very nice margin business are probably some of them.

Actually the highest implementation margins, we have so not only does it help reduce the headwinds on revenue, but it also helps our overall operating margin.

We have a lot of visibility into that because they will contact us to say we're working on this deal we may not consummate the deal that we're working on it and we want to make sure that we have the conversion slots available and we have time on the Jack Henry calendar, because we want to be able to do that as quickly. After we close the deal as possible. So we have a good visibility good deal of visibility into.

The activity that's happening out there in the <unk> space and I can tell you right now there is a lot of a lot of activity. So there's a lot in the press about about M&A activity coming back and we're certainly seeing it in the number of our customers who are coming to us saying, we're looking at acquiring another institution, we want to make sure you guys are ready to help us So we can't exactly.

Actually predict when those things are going to happen, but the activity levels are definitely back.

Okay, and then last one for me.

To call out from.

Sequential cadence this year on the revenue side, while margins are so we just basically kind of look at two years two year CAGR on the top line and maybe remind us when you're in person conferences are in those expenses hit which quarters those will be in thanks, guys. Yeah. So so John it's a good question.

Bottom half of that was what was driving over here for this meeting this morning on cadence. The one thing I'd say is we've now been on ASC 606, now for four years.

The cadence of growth is going to be the same in Q1 should be really strong because of all the software subscription revenue that we take the first that quarter.

It obviously gets a little weaker in Q2, and then just grows in Q3 and Q4 from there.

And as far as R. R.

User conference or actually a combined conference this year.

They're not really combined the kind of overlap and those are those are scheduled in October so that will hit Q2.

Okay I appreciate it guys. Thanks, yes, thanks, Sean.

Our next question comes from Dominic Gabriel with Oppenheimer.

Hey, good morning, Thanks, so much for taking my questions.

The sales pipeline being just so much better 7% to 8% versus your quarter. Your quota rather of typically a raise of 3% to 5% maybe you could talk about what's filling that gap is it is it a.

A few large clients that you won that have kind of raise that al.

Is it perhaps some pent up demand that's coming in.

Recently that was lagging previously maybe you could walk us through the puts and takes of what buyer is just pure execution.

If you could provide there I'd really appreciate it. Thanks, so much sure and just to be clear Dominic So when I was referring to the 78% I was talking about actual performance over prior years. So pipeline just so we're all clear on terminology when I talk pipeline I'm talking about the opportunities that we're working currently that may close in the future.

As opposed to quota attainment as things that had been booked in the past.

Deals that have already been signed.

Signed with our with our customers, but to answer the specifics of your question. No. This is not just a few large clients or something like that this is a broad.

Our broad suite of solutions that we've been selling to a broad list of customers.

Of course, the the <unk>.

Our success that we've had this year was significant and so that's a driver I highlighted in my opening comments the number of customers that we signed this year. So a 219 brand new nano digital customers that is becoming an important driver for us as we go forward, but then it's all these other <unk>.

<unk>, So treasury management and all the customers that we signed to R. R.

<unk> platforms, including like I mentioned in my response to that.

Dave Cummings question earlier, our EPS platform, which we're seeing some nice interest in that as a payments.

Payments platform for our customers going forward. So it's just a broad variety of solutions to the point about pent up demand and that's a little bit of a tough one because we saw.

Sales sales was lumpier than during the height of Covid, but we didn't see when you look at it over the 12 month period, we didn't see sales slow down but it was very lumpy. So I have trouble characterizing it as pent up demand because the sales happened they were just not quite as smooth as well.

We're normally accustomed to so I think its interest in Jack Henry it's customers coming to Jack Henry who just haven't done business with us before.

It's because of this broad suite of solutions that we have and all of the new technology will deliver so I highlighted in my opening comments the work that our scimitar team did around database database migration and delivering an entirely new database the lending team with all the new functionality that we deliver there this year, the digital team, which I've already highlighted.

The payments.

Just on a platform that I talked about in my opening comments, where we now enable all these real time payments through a brand new ground up payments platform.

It's a variety of different things that add them all together and it was just a really successful sales here.

And there's definitely no question argument with the awesome salesman's numbers.

And then maybe just one more when.

When you talk about the revenue and margin guidance being conservative can you maybe walk through some of the puts and takes of that commentary and you went over this a little bit but when you think about beating the 50 basis points margin expansion expansion does that really coincide with you beating your revenue guidance.

Perhaps what kind of investments do you think.

You can look you could see where even if you beat on the revenue guidance. There's some additional investments you'd like to make that might just keep you around that 50 basis points overall for margin expansion for the year.

So that's a good question so.

Beat the guidance, we gave for non-GAAP revenue it would mean that we would have.

Some some continued implementation of movements from some of our card customers. So move move some large debit customers over the continued success in our credit card platform processing.

M&A activity, which would drive the convert merge revenue and billable travel that we talked about earlier.

And then just implementing and then obviously the continued movement of moving our on Prem customers into our private cloud.

Also helps our margins.

There are several different drivers that could cause us to beat that non-GAAP revenue guidance.

And from what I'm seeing.

That's probably going to happen, but I'm not willing to step on that limb and say how much at this point any and every one of those things that I just mentioned and also helped to improve margin as far as investments I mean, we just finished our budget.

I don't know that even if we beat revenue guidance I don't know that theres any.

Big investments out there that we need to make that were not already making either from a cap software development ore from Capex, that's not already in the budget, which is part of that guidance.

Great. Thanks, so much for taking all my questions you bet.

Our next question comes from Ken <unk> with Autonomous research.

Hi, Good morning, David and Kevin Thanks for Thanks for taking the question.

I just wanted to ask about bandwidth since you had some some really strong results there I.

I believe <unk> is no longer restricted to the core basis here.

So I was hoping you could talk about how you expect <unk> growth to trend now that that offering is open to the rest of the market.

And what's the size of that business. Today, you mentioned I think it was $5.6 million users I mean, what type of revenue does that contribute.

So first off just to be clear and what I've said is that we will start selling them outside of the base in calendar 2022. So it is not.

This calendar year it'll be next year. This year the major deliverable for the banner group is <unk> business.

Which is the.

Do you think about all of the functionality we have on the consumer side with panel.

In the couple of months here will deliver all of that same type functionality on the business side of the solution and then it'll be next calendar year.

We'll start delivering outside the base, but as I've stressed on these calls in the past most banks and credit unions in the United States I'm, not just talking about Jack Henry core customers I'm talking in general most of them have an internet banking offering in a mobile banking offering and they are two different things to different experiences consumers don't want to different experiences anymore.

They expect to have a single.

Experience when they go to access their information from their financial institution and it doesn't matter what the form factor is if they are on a phone on a tablet on the DC. They expect to have the same experience and so that creates opportunity for us both inside and outside our base and so and that's not changing anytime soon.

There are thousands of institutions out there who will over the next several years upgrade their digital experience and we plan to be there.

With annual outside the base next year as far as the size of the business and we don't we don't call that out as a separate business. We have we have discussed.

At some point that would be possibly do that as a segment, but we're not there yet.

The $5.6 million users I have been asked on these calls before there are some pure player.

<unk> play offerings out there that you can kind of do the math and figure out based on their number of users.

The revenue per user is is that transferable to Jack Henry and my answer is generally yes. It's transferable. So you can kind of figure out how large the businesses. The thing that I will stress is for that business. Our digital business operates under the same rules as our other businesses at Jack Henry which means you don't get a pass on making money you have to produce operating.

Income operating results. In addition to revenue growth and certainly the nano business is doing that for Jack Henry So it's continuing to grow nicely. We will continue to grow nicely based on all the things we're seeing right now the backlog of installs that we have right now and we will continue to produce operating bottom line operating results for our company.

One more thing in there so when we talk about digital that's not just banner that includes a lot of other things which includes our.

Predecessor, net tower solution, which we still have several hundred.

<unk> on our net power solution and using our Goto mobile solution.

A lot of those will never moved to <unk>, so, but when we talk about digital we're talking about all of that in treasury, and Geo and Molson, which.

Open anywhere which is some of the acquisitions we've done in the last three years. So so the term digital encompasses quite a quite a few different products and offerings.

Yes, that's really helpful very very detailed answer there I appreciate that.

And I know you guys, you guys aren't giving guidance for fiscal year 'twenty three but just I mean, there's a lot of moving parts with the margin in terms of things opening up yet the platform migration, but.

Once that platform migration I guess is behind you.

What's the right way to think about margins or margins that margin expansion after fiscal year 'twenty two just because when I look at your numbers I mean, Jack Henry had call. It a roughly 24, 5% operating margin in fiscal year 17, I mean is that is that a good benchmark for fiscal year 'twenty three.

Well it.

Depends on which numbers you are looking at for 2017, if youre looking for the restated numbers after.

606, or if you're looking at the previous numbers because ASC 606 did have an impact on our margins.

But I would say I would answer it this way.

I'm pretty comfortable that after we get through FY 'twenty, two again theres a lot of unknowns out there with Covid and other things, but I think starting in FY 'twenty three we can kind of go back to our normal 50 to 100 basis points.

Expansion in our operating margin.

As we get everything kind of putting back in place this year.

Okay. That's really helpful. And then maybe my last question just I guess as you think about new sales and how they're expected to trend as the economy reopens.

The pipeline is quite strong just curious if you expect that.

They accelerate as you get back to senior customers in person.

Yes, I don't expect that Youre going to see some great big pop in sales.

As I said before our quota is a very large number today and so if youre growing at.

3% to 5% year over year on a very large sales number that's.

Sets the company up pretty well because we're such a high concentration of recurring revenue. So you assume that the recurring revenue is continuing to percolate and youre layering revenue in on top of it and Youre growing a sales quota at 3% to 5% per year over the prior year performance that that's a pretty pretty solid.

Model, So I'm happy with that model, both expect that we're going to see some great big pop in sales in the coming year.

I think that performance will continue to be solid and consistent.

Okay. That's really helpful. Thanks, Thanks, a lot David and Ken really appreciate it.

Yes.

Our next question comes from Dan Perlin with RBC capital markets.

Yes, good morning, it's actually Matt Roswell sitting in for Dan just a quick question.

The <unk> platform conversion done are there any.

Remove major solution that need to be re platform onto the open architecture.

And then which.

Hey, you're radically August solutions on an open architecture does that change the sort of accounting cadence between capitalization of software.

Well our DNA.

Sure.

The income statement components of Capex.

So I'll take the first part of your question and Kevin can address any any of the hard financial questions. The CFO stuff.

First off we have about 300 different solutions and so they are all in some stage of either fully platform on a complete open.

Platform or.

We're in the process or some is done and there are some that isn't logical to take them to an open to a new architecture. We for example have a.

Have a payroll solution that.

It's been around for a long time it was a successful product nobody is buying payroll solutions from them.

Provider like US anymore, we haven't sold a copy in 20 years why would we put the effort into re platforming that products. So if you look at the broad suite of solutions that we offer it isn't logical to try and move everything to a new platform, but for all those that are.

The real high demand solutions, they've either been put into a completely open environment or they are in process of offering that type of solution.

Many have been important to public cloud offerings. So we are at in both Azure and AWS today with some of our solutions. We have many in our private cloud. So it is just because of the broad suite of products that we have just kind of naturally.

A variety of different platforms that we offer them on but for the kind of the key solutions. They either are today.

<unk> open connectivity opened infrastructure or we're well on our way to doing that.

And then I'll, let you take the hard part Kevin Yes. So the other part then is if you look at US free Bird basically last 10, plus years and I actually have a chart that shows us.

Total R&D spend.

For R&D expense on the P&L and cap software on the cash flow statement has been 14% of revenue. So our total R&D spend has grown almost exact same paces our topline revenue for the last 10 years I don't see that changing.

We're going to continue that and I will tell you that we don't do.

Big Bang.

Productions, I mean, we do sprints and do and do.

Try to get modules rolled out as quick as possible and do additional module. So theres no theres no not going to see a huge increase in amortization of software in any given year, it's just going to kind of slowly grow because at any given time, there's actually a chart I show the board every quarter at any given time about 85% or 86%.

Of our total cap software on the balance sheet is in production being amortized so and that Hasnt changed for the last couple of last few years either so what that tells you is we're continuing to develop our software we continue to roll it out but at the same time.

Five years, some of the stuff amortization done amortizing. So you've got an offset there. So I don't think that were going to do anything crazy in the foreseeable future. It's going to have much of an impact on either cash flow or the P&L other than what <unk> seen in the last few years.

Okay. Thank you very much.

You bet.

That concludes today's question and answer session I would like to turn the call back to Kevin Williams for closing remarks.

Thank you and thank you all again for joining US we continue to be very pleased with the overall results of our ongoing operations I do want to thank all of our associates for the way they've handled these challenges by taking care of themselves on our customers and continuing to work hard to improve our company to continue moving forward for the future all of US at Jack Henry continue to focus on what is best for.

For our customers and our shareholders.

Thank you again for joining us and Liz would you. Please provide the replay number so it's in the transcript.

A replay of this call will be available until 11.59 PM Eastern time August 22021.

Can access the replay by dialing 805, 8583, 67, or 4045373406 and entering conference I'd seven nine to 951 night.

Okay.

Thank you and have a great day.

[music].

Good day, and thank you for standing by welcome.

Welcome to the Jack Henry <unk> Associates fourth quarter fiscal year 2021 earnings conference call.

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

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

To ask a question during the session you will need to press Star then one on your telephone keypad.

Please be advised today's conference is being recorded.

If you require any further assistance. Please press star then zero to reach an operator.

I'd now like to hand, the conference over to your Speaker today, Kevin Williams, Chief Financial Officer.

Thanks, Liz good morning, and thank you for joining us for the Jack <unk> and associates fourth quarter and fiscal 2021 year end earnings call I'm, Kevin Williams, CFO and treasurer and on the call with me today is David Foss, Our board chair President and CEO.

Just a minute I will turn the call over to Dave to provide some of his thoughts about the favorite business financial and sales performance for the quarter. Some comments regarding the industry in general and then some other key initiatives that we have in place.

Then after Dave concludes his comments I will provide some additional thoughts and comments regarding the earnings press release, we put out yesterday after market close and provide comments regarding our guidance for our fiscal year 2022 provided in the release and then we will open the lines up 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 result, like any statement about the future. These are subject to a number of factors that could cause actual results or events to differ material materially from those.

Which we anticipate due to a number of risks and uncertainties.

Also on this call we will be discussing 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.

With that I'll now turn the call over to Dave.

Yeah.

Thank you Kevin and good morning, everyone. Today, we are very pleased to share details with you of a quarter that produced record revenue and operating income as well as record sales bookings.

As always I'd like to begin today by thanking our associates for all the hard work and equipment that went into producing those results for our fourth quarter and for the entire fiscal year, particularly in light of the challenges posed by conducting business, while dealing with the ongoing effects of the pandemic.

For the fourth quarter of fiscal 2021 total revenue increased 10% for the quarter and increased 10% on a non-GAAP basis deconversion fees were essentially flat as compared to the prior year quarter.

Turning to the segments, we had a solid quarter in the core segment of our business revenue increased by 4% for the quarter and increased by 6% on a non-GAAP basis.

Our payments segment performed extremely well posting a 16% entry increase in revenue this quarter and a 17% increase on a non-GAAP basis.

We also had a strong quarter in our complementary solutions businesses with a 7% increase in revenue this quarter and a 7% increase on a non-GAAP basis.

In the fourth fiscal quarter, we booked 13 competitive core takeaways and 14 deals to move existing on premise customers to our private cloud environment.

Several of our complementary offerings also saw very strong demand in the quarter with as you might guess, our digital suite, leading the pack, we signed 87, new clients to our <unk> digital platform in the quarter 10, New Treasury management clients and 22, new clients to our card processing solution.

For the full year, we signed 41 competitive core takeaways with eight of them are greater than $1 billion in assets. Additionally, we signed 35 contracts to move on Prem core clients to our private cloud 219, New banner digital customers and 55, new clients for our card processing solution.

Of course, we signed a variety of other contracts for many many of our other solutions as well, but it's important to note that almost all of these contracts represent long term recurring revenue Mr. Jack Henry for a wide variety of our solutions.

At our analyst conference in May I shared with the attendees that we had just surpassed 5 million registered users on our ban on digital banking platform.

As of the end of the fiscal year, we were at roughly a $5.6 million registered users as.

As a point of reference on July one of 2020, we had about $3.2 million registered users. So in one year, we saw an increase of approximately 75% and our user count.

This is significant because as I've stressed in the past most of the revenue for a business like this is tied to the number of users on the platform.

We continued to onboard clients and their users at a pace of about 30 financial institutions added to the platform each month.

In addition to our ongoing success with panel, we have delivered many new and innovative solutions during the fiscal year a.

A few examples include our.

Our scimitar team delivered an automated database migration to almost all of our emphasis clients, which allowed them to move to the new database structure with no effort or client impact.

Our lending team delivered the Jack Henry loan marketplace, which allows banks and credit unions to easily engage through a digital experience and the buying selling and participation of loans.

Our digital team delivered the ban on digital toolkit, which provides a complete set of application programming interfaces or Apis to enable easy plug into third party solutions in our digital platform.

Our associates decided that a business innovation group focused on our planet was appropriate and necessary for us to make meaningful progress on this initiative.

The work that we currently enjoy in cities across the country.

Our consistent placement on best places to work list is a testament to the workplace culture, we have a Jack Henry and our employee engagement scores reflect that strong culture.

I'm pleased to share that nearly two thirds of our associates participated in our most recent engagement survey and our average engagement engagement score was 83% well above the industry benchmark.

Like most employers we have spent a good bit of time in the past few weeks wrestling with decisions around the right timing and approach to move employees back to work in our company facilities.

We worked with our leadership teams earlier in the calendar year and determined that more than half of our workforce would continue to work remote indefinitely.

We had targeted July one is our return to office state for those who would be returning in a full time or a hybrid basis.

Is the Delta variance surged, we reverted to our previous operating model with only essential employees in our offices every day.

We have proven that we can operate effectively in a remote posture and we will continue in that mode until we determine that it is safe to make a change.

As I referenced on the last earnings call our longtime chairman Jack Prim has retired as of the end of June.

Jack had been with our company for many years in various leadership roles and as a board member and chairman.

As a result of Jack <unk> retirement, we have announced two changes to the board.

Curtis Campbell has joined the board effective July one filled the seat left vacant by Jack's departure.

Curtis as president of <unk> software for Blue Cora in Dallas, He brings extensive experience in infrastructure and cloud computing as well as digital development and a keen focus on customer experience.

I'm very excited to see what new perspectives Curtis brings to our board discussions.

Also effective July one I was elected to be the New Board Chair I was humbled and honored by the confidence expressed by the other board members and I look forward to leading the Jack Henry Board to even greater success.

We have a commitment to doing the right thing for our constituents that we believe will continue to serve US well, we will continue with our disciplined approach to running the company and I expect that approach to help provide stability for our employees customers and shareholders.

As we begin the new fiscal year I continue to be very optimistic about the future.

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

Thanks, Dave.

Our services support revenue line of revenue increased 6% in the fourth quarter of fiscal 2021 compared to the same quarter a year ago.

Dave mentioned, our deconversion fees for the quarter were pretty flat with last year's fourth quarter. However for the full year, our deconversion fees were down $33.3 million for the full fiscal year compared to the prior year, which is actually the guidance that we provided a year ago. On this call are serviced for revenue primary driver was our data processing hosting fees in our private.

Cloud and public cloud offerings, which continue to show strong growth in the quarter compared to the previous year growing by 7% for the quarter.

<unk> processing revenue increased 15% in the fourth quarter of fiscal 2021 compared to the same quarter last fiscal year.

The increase was primarily driven by our higher card volumes from new customers installed last year and increased debit card and credit card usage from existing customers.

Jack Henry Digital revenue continues to grow show very strong growth as demand for our banner digital platform continues to be very strong as Dave highlighted.

And revenues from divestitures.

Our cost of revenue was up 8% compared to last year's fourth quarter. The increase primarily due to higher costs associated with our card processing and higher personnel costs compared to a year ago, Our research and development expense decreased 4% for the quarter, our fiscal 'twenty one over the prior year quarter. The decrease was due primarily to a slightly slightly higher person.

<unk> of costs being capitalized for product development this quarter compared to a year ago.

Our SG&A expense increased 3% in the fourth quarter of fiscal 'twenty, one compared to the same quarter in the prior fiscal year.

The increase is due primarily to increased personnel and professional services costs.

Our reported consolidated operating margins increased nicely from $18 seven last year to 21, four in the current year quarter and on a non-GAAP basis, our operating margin expanded from 17, 8% last year to 20.

1% this year.

Our payments segment saw the nice margin expansion in the quarter after completing the payment platform migration in Q3.

Margins grew from 43% last year to 45% this year.

<unk> fourth quarter on a GAAP basis and on a net net non-GAAP basis, our payment segment margins grew from $42 three to $44 five so over 200 bps margin expansion. Our core segment operating margins decreased slightly during the quarter compared to last year on both a GAAP and non-GAAP basis, while our complementary segment margins increased slightly on both a GAAP and.

Non-GAAP basis.

The effective tax rate for the fourth quarter of fiscal 'twenty, one was down slightly to 19, 7% compared to 20% in the same quarter year ago, primarily due to some tax state tax deductibility timing or.

Our cash flow total amortization increased 3% for the fiscal year compared to last year, primarily due to capitalized projects being placed into service last year included in the total amortization is the amortization of intangibles related to acquisitions, which decreased to $17.7 million this fiscal year compared to <unk>.

$23 million last fiscal year.

Depreciation is up slightly at less than 1% for the year compared to the prior fiscal year.

During the year, we purchased two 8 million shares of our deck here and just talk to the treasury.

For $431.5 million and we paid dividends of $133.8 million for a total return to shareholders of $565.3 million for the year.

We invested $157.8 million back into our company through Capex and capitalized software.

Yesterday's press release inadvertently omitted the proceeds from dispositions line of net cash from investing activities within the cash flow summary.

<unk> should have been included where cash inflows of $66.6 million $1.87 and.

Fiscal 'twenty, one and 11 million $1.30 for fiscal 2020 the toe.

Total for investing activities were correct. This omission was corrected in the version of the earnings press release filed yesterday on form 8-K, and the one located on our website.

Couple of comments on our balance sheet, our cash position of $51 million compared to $213 million a year ago, primarily down due to the significant stock repurchase we did.

Remember at the end of Q3, we had $200 million drawing down our revolver. During Q4, we paid down $100 million of that balance. So at June 30, we had $100 million on our revolver. We had no other long term debt on our balance sheet rather than operating leases.

For the year, our return on average assets for the fiscal year was 13, 1% a return on invested capital for the fiscal year was 21% and our return on equity for the year was 21, 7%.

Yesterday, we provided both GAAP and non-GAAP revenue guidance in the press release for fiscal 2022.

We also provided a reconciliation of GAAP to non-GAAP revenue guidance in the release following the segment information in the press release.

Just to be clear this guidance continues to assume that the country continues to open and the economy continue to improve but if things work yo differently than this the guidance will be revised.

For GAAP revenue growth for fiscal 'twenty, two based on the amounts in our release yesterday, our revenue guidance is a range of eight 2% to eight 7% growth over fiscal 'twenty one.

Due to higher anticipated deconversion fees compared to FY 'twenty, one and for non-GAAP revenue growth, we're guiding to an initial range of seven 5% to 8% growth for the fiscal year. Obviously these will be updated during the year on future earnings calls.

We do anticipate GAAP and non-GAAP operating margins to improve a little in FY 'twenty two compared to last year as we should have nice margin expansion in our payments segment.

And anticipate higher deconversion fees I am somewhat cautious on guiding to too much.

<unk> operating margin as we will continue to have headwinds on license revenue as we continue to move core customers from on Prem to a private cloud.

Also travel costs continued to increase significantly compared with last year and at this time, we are still planning to host our Jack Henry Annual Conference and our cemetery Edgy conference in person. This year. Therefore, there will be some large cost returning this year compared to last year. When there was very little travel. However, we do think that we will get at least 50 bps.

Margin expansion in the fiscal year.

Our effective tax rate for FY 'twenty, two is projected to be slightly higher at approximately 22, 5% to 23% compared to our actual rate. This year of 21, 7% and this was primarily due to the significant impact from equity awards that were deductible in FY 'twenty one.

Our initial FY 'twenty to GAAP EPS guidance is a range of $4.53 to $4.60, which is a 10% plus increase in our FY 'twenty one finish.

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

If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to withdraw your question press the pound key.

Our first question comes from Matthew <unk> with <unk>.

Hi, Thanks for taking my question and I wanted to congratulate David on becoming chairman of the board.

Thank you Vanessa.

I guess the first question.

Follow up on the margin commentary that you provided Devin I know that previously you had indicated about 100 basis points.

And this goes to my door and potentially even some upside to that now.

But getting placebo Guang, sorry, guys just wanted to understand what changed.

And your outlook worsens, what you are expecting before.

Sure.

I'd tell you that the biggest change is the impact of Covid, because obviously, we had some really nice margin expansion. This year with no travel related costs. Obviously, there was also a decrease in revenue from convert merge revenue and other things. So there is there's a lot of offsetting things out there and I mean, just to be clear, yes, I feel like both our revenue GAAP or <unk>.

Non-GAAP revenue growth of 7%, 8% and our margin expansion of 50 bps are both conservative.

Got it.

Understood and I guess the second question I was just hoping if you could provide some color on growth expectations by segment for fiscal <unk>, particularly what youre expecting for the Cowen Goldman Zechman I know with the core segment do you expect further improvement that we've seen.

Non-GAAP basis to kind of been Danielle.

The next year and then payments segment has already been quite strong and is there room for further acceleration of some of the new wins on the women's denim.

Yes.

Yes, so I mean, we saw some really nice margin expansion in the payments segment in Q4, we will see more.

In FY 'twenty two there is still additional costs that will be coming out.

Thank you very much.

Thank you.

Our next question comes from Peter Heckmann with D. A Davidson.

Good morning, everyone.

Good morning, Pete.

In terms of thinking about.

The record sales in the fourth quarter.

Is there a way of thinking about total bookings, unlike PCB or ACB basis in terms of thinking about year over year increase I think in the prior year you had 43 competitive core takeaways of course, not all financial institutions are equal the wide variance in sizes, but.

Given some of the difficulties over the last fiscal year.

Either way about thinking about the kind of the percentage increase in overall bookings that might help us think about the outlook.

Yes.

When you have a sales sense, Dave by the way Pete when you have a sales organization or the sales quota the size of our sales quota.

This well, we don't publish <unk> numbers or anything like that but it's that's a good way to think about how we measure quota and how quotas are assigned so.

You can you can kind of use that logic in making some some assumptions. So if we were 7% 8% ish.

Increase over the prior year as far as sales performance. That's a that's a good way to think about it now the other thing I will point out is when we assign quotas for the for next year, meaning for the year. We're in now fiscal 'twenty two.

Our starting point is last year's performance and then we normally apply of somewhere between 3% and 5% quota increase over the top of what the performance was last year. So that's where the sales team is starting out. This year is with a sales quota that is somewhere in the 3% to 5% range larger than it was there actual attainment for the prior year.

Got it that is helpful.

And then just thinking about the cadence of term fees.

Guidance for term fees.

No surprise with some of the uptick we've seen in M&A in the mid tier space, but in terms of the cadence that Kevin would you specifically call out.

Some level for the first quarter.

Or when you might think those might head just in terms of trying to get a quarterly forecast correct.

Well I mean, Pete obviously, we've been hearing a lot about M&A activity, which obviously thats what drives deconversion fees that we have not seen a lot of actual activity yet. So I think that's going to grow over the year. So I have a feeling that the bulk of the deconversion fees are probably going to be in the second half of the year.

Got it okay. Thank you.

Yes.

Our next question comes from Dave Koning with Baird.

Oh, Yeah, Hey, guys. Thank you and nice job.

And I guess my first question just when.

When we think of kind of the wallet providers that that space. There's a lot of investors that are just concern that that that group is just going to take over the world and all bank accounts will kind of move to that over time, but I guess a couple of things are you seeing growth in your number of accounts. They I don't know if you have some metrics on that near total accounts, but also.

No.

Is there any reason that the banks can't do exactly the same thing and provide all the same services.

Plus have FDIC insurance and all those things that make most consumers rather just have a bank account over time.

Yes.

And very intuitive question, Dave in fact, I am presenting at a conference and I think it's February of next year on that very topic.

Because bankers are starting to realize that if you have a good digital platform on the front end and if you if you.

Take advantage of an open open infrastructure like we have a Jack Henry and the reason we talked about it all the time you can do as a bank are essentially all those same things and draw customers to Europe platform as a bank with the FDA.

Insurance backing it and there's a real opportunity for bankers to take advantage of this desire and demand among consumers today for solutions like that so we are doing that today with with a number of banks, but part of the channel.

Process for me is to educate bankers on what they can do what they shouldnt be thinking about how they compete.

In those areas, so lots of opportunity for our customers and for Jack Henry.

It's based on a really outstanding digital platform and then having all of the connectivity to connect those.

Those types of fintech functions into that digital platform and we have all of those things in production two day at Jack Henry This isn't wish for the future. This is in production today with with customers today, So a great opportunity and so the first part of your question about.

Customer growth. So, yes, we are able to measure.

<unk> growth, whether its members on the credit union platform or customers on the banking platforms and not only are we adding customers because we're winning share we're winning new new customers. So the net number of customers. We serve is greater but because there is same store sales growth happening, particularly on the credit Union side of the business.

<unk>.

Is happening on the banking side, but it's been strong on the credit Union side of the business as well.

Okay, great. Thanks, that's good to hear.

And then maybe secondly.

And payments, obviously really good I assume that's debit transaction growth just off of a pretty low base, but how do we how do you expect that to grow through the year I would think Q1 would still be pretty high off kind of easier comps and then maybe the rest of the year, a little below double digits or something like do you have any sort of cadence for that.

Yes, I think that's a good expectation and the other thing I'll highlight as we talk and Kevin emphasized.

60% of our payments business is on the <unk> platform, but don't forget about the.

Business, we refer to as EPS enterprise payment solutions that are our merchant.

Our remote deposit capture and mobile capture business that business has been growing nicely as well. So it's a much smaller piece of the segment, but it's growing rapidly and I think youre going to continue to hear more about that business.

At Jack Henry.

Well so both of those two and I've said it on many earnings calls the bill pay business relatively flat for everybody and theres not a whole lot of new stuff happening in traditional bill pay with the card growth that you've seen I think under in the high single digits is a good expectation for the card growth, but it will be greater than that for the EPS business.

As far as what we're seeing right now because of the strength of that platform and they remember it's not just debit we now offer full service credit as well because we could not offer that before we got moved over to the new platform. So our full service credits growing basically from a base of zero.

Yes got you thanks, guys nice job.

Thanks.

Our next question comes from Kartik Mehta with Northcoast research.

Hey, good morning.

Kevin I, just wanted to ask a little bit about the credit card platform conversion looks like that's going well and you talked about a little bit more cost coming out of the payments business.

In relationship to what your anticipated cost savings out of the platform would.

Would you have achieve that or exceeded that how would you characterize the cost savings or more platform. Okay.

Okay. So correct, we completed the migration in Q3, so we had all that all customers on the new platform and.

Sometime in April we started decommissioning.

Four mainframes that supported the two platforms that we used to have and I think those got completely decommissioned I believe by mid July if I remember right.

But there are some other things going on here cards. So there were some other tools that we have to keep the talent on there.

Rewrite and get some get some additional tools in place that will be done by the end of Q2, and so youll see some additional costs coming out by then so so by Q3 of this year, we will see the full benefit of the cost takeout that we guided to three years ago.

Perfect.

I think.

You've talked about maybe core demand now increasing as people plan rollout that COVID-19 is still going on in some of the.

Decisions, they didnt make or making how would you characterize core demand today.

Is it increasing or is it kind of back to normal.

I would say that it's back to normal so normal for Jack Henry So pre pandemic, we were running at about one new.

Competitive placement replacement per week, we're back to that level now than we did 15 last quarter. We had 13 this quarter everything that I'm seeing now would indicate that that's a pace that we can run it.

For a while but it's it's definitely leading the industry by far as far as the new quarter replacements, and Thats that look sustainable for us now.

And just one last question have you seen any change in the competitive nature for these core renewals, maybe as the market gets back to little bit normal.

For core renewals.

What we've talked about this.

The past consultants are now engaged every time theres a renewal so 10 years ago 10 years ago. It was rare to have a consultant involved in a renewal today every single one of them as a consultant and Thats not just Jack Henry it's in the industry and how does the consultant justify their role.

By ensuring that it's a very competitive process. So that's been going on it started before the pandemic. It is definitely in place today, where every single renewal for all of us.

There is a consultant engaged there.

Encouraging.

Diligent review of pricing and all that kind of stuff and so we know how to operate in that in that model and.

We're comfortable with what's happening.

Perfect. Thanks, Dave I appreciate it.

Our next question comes from John Davis with Raymond James.

Hey, good morning, guys, Kevin just a quick clarification around the margin. So you said 50 basis points I just want to clarify that's on a non-GAAP basis profit expansion and then a follow up there I think our math suggests that the payments platform migration would be about a 50 basis point benefit this year. So the right way to think about it but.

Incremental travel and other expenses kind of offset normal operating leverage with maybe a little bit of upside.

Brian you are conservative comments.

And then John I saw I saw in your note about the EPS in your calculation of margins. You also have to remember that our effective tax rate is going to go up from 21, 7% to 22, 5% to 23% to so if you're just looking at EPS.

That's also going to have a slight negative impact, but we're still guiding EPS to grow more than 10%.

Okay.

And then you guys are guiding deconversion fees up about 70% year over year is that the right way to think about the increase in convert merger revenue and then any way you guys can give us an idea of what percentage of that normal year convert.

<unk> merged revenue as a percentage of your core.

Yes, there was there was a significant headwind from convert merge revenue being down because there is no M&A activity and Youre absolutely right I mean, if deconversion revenue does pick up like we think our customers will be buying just as much as our customers are getting acquired so not only would increase.

Convert merge revenue, but also increase until travel because we will have more people traveling out to do those convert mergers.

As a percentage of total revenue our top of my head John I can't.

It's not a huge number.

But we.

When you start talking several million dollars in <unk> revenue that we missed it bill full boat for those so it is very nice margin business a price on it.

It's actually the highest implementation margins, we have so not only does it help reduce the headwinds on revenue, but it also helps our overall operating margin.

And I will chime in here done on that topic, we one of the things that is interesting in this business is when a an existing customers looking at acquiring another institution, whether it's a bank or credit Union, we have a lot of visibility into that because they will contact us to say we're working on this deal we may not consummate the deal that we're working.

On it we want to make sure that we have a conversion slots available we have time on the Jack Henry calendar, because we want to be able to do that as quickly. After we close the deal as possible. So we have a good visibility good deal of visibility into the activity that's happening out there in the <unk> space and I can tell you right now there is a lot of a lot of activity.

So theres a lot in the press about about M&A activity coming back and we're certainly seeing it in the number of our customers who are coming to us saying, we're looking at acquiring another institution, we want to make sure you guys are ready to help us. So we can't exactly predict when those things are going to happen, but the activity levels are definitely back.

Okay, and then last one for me.

I'm going to call out from.

The sequential cadence this year on the revenue side, while margins are so we just basically kind of look at two years to your CAGR on the top line and maybe remind us when you're in person conferences are in those expenses, which quarters. Those will then thanks guys. Yeah. So John it's a good question.

Bottom half of that was driving over here for this meeting this morning on cadence. The one thing I'd say is we've now been on ASC 606, now for four years.

So the cadence of growth is going to be the same in Q1 should be really strong because of all the software subscription revenue that we take the first that quarter.

It obviously gets a little weaker in Q2, and then just grows in Q3 and Q4 from there.

And as far as our our.

User conference or actually a combined conference this year.

They're not really combined the kind of overlap and those are those are scheduled in October so that will hit Q2.

Okay I appreciate it guys. Thanks, yes, thanks, Sean.

Our next question comes from Dominic Gabriel with Oppenheimer.

Hey, good morning, Thanks, so much for taking my questions.

The sales pipeline being just so much better 7% to 8% versus your quarter your quota rather.

Typically a raise of 3% to 5% maybe we could talk about what's filling that gap is it is it a.

A few large clients that you won that have kind of raise that al is it perhaps some pent up demand that's coming in.

Recently that was lagging previously maybe you could walk us through the puts and takes of what wire is just pure execution.

If you could provide there I'd really appreciate it. Thanks, so much sure and just to be clear dominance. So when I was referring to the 78% I was talking about actual performance over prior years. So pipeline just so we're all clear on terminology when I talk pipeline I'm talking about the opportunities that we're working currently that may close in the future.

As opposed to quota attainment as things that had been booked in the past and are deals that have already been.

Signed with our with our customers, but to answer the specifics of your question. No. This is not just a few large clients or something like that this is a broad.

Broad suite of solutions that we've been selling to a broad list of customers.

Of course the <unk>.

<unk> success that we had this year was significant and so thats a driver I highlighted in my opening comments the number of customers that we signed this year. So 219 brand new nano digital customers that is becoming an important driver for us as we go forward, but then it's all these other <unk>.

Solutions, So treasury management and all the customers that we signed to our payments platform, including like I mentioned in my response to that.

Dave Koning question earlier, our EPS platform, which we're seeing some nice interest in that as a payments.

Payments platform for our customers going forward. So it's just a broad variety of solutions.

Point about pent up demand and that's a little bit of a tough one because we saw.

Sales sales was lumpier than during the height of Covid, but we didn't see when you look at it over the 12 month period, we didn't see sales slowed down but it was very lumpy. So I have trouble characterizing it as pent up demand because the sales happened there, we're just not quite as smooth as it were.

Normally accustomed to so I think its interest in Jack Henry it's customers coming to Jack Henry who just haven't done business with us before.

Because of this broad suite of solutions that we have and all of the new technology will deliver so I highlighted in my opening comments. The work that are similar to our team did around database database migration and delivering an entirely new database the lending team with all the new functionality that we've delivered there this year, the digital team, which I've already highlighted.

The payments.

Centered platform that I talked about in my opening comments, where we now enable all these real time payments through a brand new ground up payments platform.

It's a variety of different things that add them all together and it was just a really successful sales here.

And there's definitely no question argument with the awesome sales wins numbers.

And then maybe just one more when you talk about the revenue or margin guidance being conservative can you maybe walk through some of the puts and takes of that commentary and you went over this a little bit but when you think about beating the 50 basis points margin expansion expansion does that really.

Coincide with you, beating your revenue guidance and perhaps what kind of investments do you think you could look you could see where even if you beat on the revenue guidance. There's some additional investments you'd like to make that might just keep you around that 50 basis points overall for margin expansion for the year.

So I think Thats a good question so.

To beat the guidance, we gave for non-GAAP revenue.

Would mean that we would have.

Some some continued implementation of movements from some of our card customers. So move move some large debit customers over the continued success in our credit card platform processing.

M&A activity, which would drive the convert merged revenue and billable travel that we've talked about earlier.

And then just and then obviously the continued movement of moving our on Prem customers into our private cloud.

So helps our margins. So there is there are several different drivers that could cause us to beat that non-GAAP revenue guidance.

From what I'm seeing I think thats, probably going to happen, but I'm not willing to step on that limb and say how much at this point any and every one of those things that I just mentioned and also helped to improve margin as far as investments I mean, we just finished our budget.

I don't know that even if we beat revenue guidance I don't know that there is any.

Big investments out there that we need to make that were not already making either from a cap software development ore from Capex, that's not already in the budget, which is part of that guidance.

Great. Thanks, so much for taking all my questions you bet.

Our next question comes from Ken <unk> with Autonomous research.

Hi, Good morning, David and Kevin Thanks for Thanks for taking the question.

I just want to ask you about bandwidth since you had some some really strong results there.

I believe band.

No longer restricted to the core base this year.

So I was hoping you could talk about how you expect <unk> growth to trend now that that offer is open to the rest of the market.

And what's the size of that business. Today, you mentioned I think it was $5.6 million users I mean, what type of revenue does that contribute.

So first off just to be clear and what I've said is that we will start selling dental outside the base in calendar 2022, So it's not.

This calendar year it will be next year. This year the major deliverable for the banner group is <unk> business.

Which is the.

Do you think about all of the functionality we have on the consumer side with panel.

In the couple of months here, we will deliver all of that same type of functionality on the business side of the solution and then it'll be next calendar year that will start delivering outside the base, but as I've stressed on these calls in the past most banks and credit unions in the United States I'm, not just talking about Jack Henry core customers I'm talking in general most of them.

And Internet banking offering and our mobile banking offering and they are two different things to different experiences consumers don't want to different experiences anymore. They expect to have a single.

There are thousands of institutions out there who will over the next several years upgrade their digital experience and we plan to be there.

With annual outside the base next year as far as the size of the business. We don't we don't call that out as a separate business. We have we have discussed.

At some point that would be possibly do that as a segment, but we're not there yet.

It's a $5.6 million users I have been asked on these calls before there are some pure player.

Your play offerings out there that you can kind of do the math and figure out based on their number of users.

With the revenue per user is is that transferable to Jack Henry and my answer is generally yes. That's transferable. So you can kind of figure out how large the businesses. The thing that I will stress is for that business. Our digital business operates under the same rules as our other businesses the Jack Henry which means you don't get a pass on making money you have to produce operating.

Income operating results. In addition to revenue growth and certainly the <unk> business is doing that for Jack Henry So it's continuing to grow nicely. We will continue to grow nicely based on all the things we're seeing right now the backlog of installs that we have right now and we will continue to produce operating bottom line operating results for our company.

One more thing in there so when we talk about digital that's not just the banner that includes a laundry with things which includes our.

Predecessor, net tower solution, which we still have several hundred.

<unk> on our net power solution and using our Goto mobile solution.

A lot of those will never move to banner, so, but when we talk about digital we're talking about all of that in Treasury, and Geo and Molson, which is.

<unk> opened anywhere which is some of the acquisitions. We've done the last three years. So so the term digital encompasses quite a quite a few different products and offerings.

Yes.

Really helpful very very detailed answer I appreciate that.

And I know you guys, you guys arent, giving guidance for fiscal year 'twenty three but just I mean, there is a lot of moving parts with the margin in terms of things opening up yet the platform migration, but.

Once that platform migration I guess is behind you.

It's the right way to think about margins or margins that margin expansion after fiscal year 'twenty two just because when I look at your numbers I mean, Jack Henry had call. It a roughly 24, 5% operating margin in fiscal year 17, I mean is that is that a good benchmark for fiscal year 'twenty three.

Well it depends.

It depends on which numbers you are looking at for 2017, if youre looking for the restated numbers after.

606, or if you're looking at the previous numbers because ASC 606 did have an impact on our margins.

But I would say I would answer it this way.

I am pretty comfortable that after we get through FY 'twenty, two again theres a lot of unknowns out there of Covid and other things, but I think starting in FY 'twenty three we can kind of go back to our normal 50 to 100 basis points.

Expansion in our operating margin.

As we get everything kind of put back in place this year.

Okay. That's really helpful. And then maybe my last question just I guess as you think about new sales and how they are expected to trend as the economy reopens.

The pipeline is quite strong just curious if you expect that.

To accelerate as you get back to seeing your customers in person.

Yes, I don't expect that Youre going to see some great big pop in sales.

As I said before our quota.

<unk> large number today and so if youre growing at.

3% to 5% year over year on a very large sales number that's.

Sets the company up pretty well because we're such a high concentration of recurring revenue. So you assume that the recurring revenue is continuing to percolate in Europe layering revenue and on top of it and Youre growing a sales quota at 3% to 5% per year over the prior year performance that that's a pretty pretty solid.

Model, So I'm happy with that model, both expect that we're going to see some great big pop in sales in the coming year.

I think that performance will continue to be solid and consistent.

Okay. That's really helpful. Thanks, Thanks, a lot David and Kevin really appreciate it.

Yes.

Our next question comes from Dan Perlin with RBC capital markets.

Yes, good morning, it's actually Matt Roswell sitting in for Dan just a quick question.

The payment platform conversion done are there any.

Remaining major solution that needs to be kind of re platform onto the open architecture.

And then with <unk>.

Radically honest solutions on an open architecture does that change sort of accounting cadence between capitalization of software.

Well our DNA.

The income statement components of Capex.

So I'll take the first part of your question and Kevin can address any any of the hard financial questions. The CFO stuff.

So first off we have about 300 different solutions and so they are all in some stage of either fully platform on a complete open.

Platform or.

We're in the process or something is done and there are some that isn't logical to take them to an open to a new architecture. We for example have a have a payroll solution that.

It's been around for a long time it was a successful product nobody is buying payroll solutions from.

A provider like US anymore, we haven't sold a copy in 20 years why would we put the effort into re platforming that products. So if you look at the broad suite of solutions that we offer it isn't logical to try and move everything to a new platform, but for all those that are.

Real high demand solutions, they've either been put into a completely open environment or they are in process of offering that type of solution and many have been important to public cloud offerings. So we are in both azure and AWS today with some of our solutions we have many in our private cloud. So it's just because.

The broad suite of products that we have.

That's kind of naturally.

A variety of different platforms that we offer them on but for the kind of the key solutions. They either are today.

Supporting open connectivity opened infrastructure or we are well on our way to doing that.

And then I'll, let you take the hard part Kevin Yes, so the other part.

And.

If you look at us free up basically the last 10 plus years and I actually have a chart that shows as <unk>.

Our total R&D spend.

For for R&D expense on the P&L and cap software on the cash flow statement has been 14% of revenue. So our total R&D spend has grown almost exact same paces our topline revenue for the last 10 years I don't see that changing.

I think we're going to continue that and I will tell you the way we don't do.

Really big Bang.

Productions, I mean, we do sprints and do and do.

Try to get module has rolled out as quick as possible and do additional module. So theres nothing theres no not going to see a huge increase in amortization of software in any given year is just going to kind of slowly grow because at any given time and that's actually a chart I showed the board every quarter.

Any given time about 85 or 86% of our total cap software on the balance sheet is in production being amortized so and that Hasnt changed for the last couple of last few years either so what that tells you is we're continuing to develop our software we continue to roll it out at the same time in five years some of that some of the stuff amortization is done.

Amortized and so you've got an offset there. So I don't think that were going to do anything crazy in the foreseeable future. It's going to have much of an impact on either cash flow or P&L other than what <unk> seen in the last few years.

Okay. Thank you very much.

You bet.

That concludes today's question and answer session I would like to turn the call back to Kevin Williams for closing remarks.

Our customers and our shareholders.

Thank you again for joining us and Liz would you. Please provide the replay number so it's in the transcript.

A replay of this call will be available until 11.59 PM Eastern time August 2005.2021.

Can access the replay by dialing 805.8583.

Seven or 4045373406 and entering conference I'd seven nine to 951 night.

Okay.

Thank you and have a great day.

Q4 2021 Jack Henry & Associates Inc Earnings Call

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