Jack Henry & Associates Q4 2021 Earnings Call Transcript

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Provided by Quartr
August 17, 2021

Key Takeaways

  • Strong Q4 top‐line growth: Total revenue rose 10% YoY on both GAAP and non‐GAAP bases, with Core up 4%/6%, Payments up 16%/17% and Complementary Solutions up 7% across the board.
  • Record sales performance: Q4 was the company’s best sales quarter ever, with 13 core competitive takeaways, 14 cloud migrations and 87 new clients on the Banno digital platform, among other key wins.
  • Banno digital momentum: Registered users jumped ~75% over the year to 5.6 million, adding roughly 30 financial institutions per month and driving higher recurring revenue.
  • Margin and earnings expansion: Q4 non‐GAAP operating margin expanded by over 230 bps to 20.1%, net income rose 25% to $76.9 million and EPS increased 30% to $1.04.
  • 2022 guidance delivered: Fiscal ’22 revenue is forecast to grow 7.5%–8.0% non‐GAAP with ~50 bps of margin expansion, and EPS guidance of $4.53–4.60 (+10% YoY) signals continued profitability.
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Earnings Conference Call
Jack Henry & Associates Q4 2021
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Operator

Good day, and thank you for standing by. Welcome to the Jack Henry & 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.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Thanks, Liz. Good morning, and thank you for joining us for the Jack Henry & 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. In just a minute, I will turn the call over to Dave to provide some of his thoughts about the state of our 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. 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.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

First, I need to remind you that this call includes certain forward-looking statements, including remarks or responses to questions concerning future expectations, events, objectives, strategies, trends, or results. Like any statement about the future, these are subject to a number of factors that could cause actual results or events to differ materially from those which we anticipate due to a number of risks and uncertainties. The company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our 10-K entitled Risk Factors and Forward-Looking Statements. 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.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Thank you, Kevin. 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 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.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Our payments 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 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.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

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 Banno 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 greater than $1 billion in assets. Additionally, we signed 35 contracts to move on-prem core clients to our private cloud, 219 new Banno Digital customers, and 55 new clients for our card processing solution.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Of course, we signed a variety of other contracts for 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 Banno digital banking platform. As of the end of the fiscal year, we were at roughly 5.6 million registered users. As a point of reference, on July 1st of 2020, we had about 3.2 million registered users. In one year, we saw an increase of approximately 75% in our user count. This is significant because, as I have stressed in the past, most of the revenue for a business like this is tied to the number of users on the platform.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

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 Banno, we have delivered many new and innovative solutions during the fiscal year. A few examples include our Symitar team delivered an automated database migration to almost all of our FIs 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 Banno Digital Toolkit, which provides a complete set of application programming interfaces, or APIs, to enable easy plugins to third-party solutions in our digital platform.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Our payments team continued the expansion of functionality and adoption of the PayCenter platform and delivered the Zelle Digital Toolkit to enable clients not using our digital platform to connect to the PayCenter hub for Zelle transactions. 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 on 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 Go Green.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Our business innovation groups are company-sponsored, associate-driven groups that provide a collaborative platform for people, ideas, and thoughts to intersect and help address business challenges. 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 retaining talented associates. To that end, we have recently implemented new technology to expand our remote recruiting efforts and broaden our pool of qualified and diverse talent. Our hope is that this approach will only serve to improve on the reputation as a great place to work that we currently enjoy in cities across the country.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Our consistent placement on best places to work lists is a testament to the workplace culture we have at Jack Henry, and our employee engagement scores reflect that strong culture. I'm pleased to share that nearly 2/3 of our associates participated in our most recent engagement survey, and our average 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 as our return-to-office date for those who would be returning in a full-time or hybrid basis.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

As the Delta variant 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 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's retirement, we have announced two changes to the board. Curtis Campbell has joined the board effective July 1st to fill the seat left vacant by Jack's departure. Curtis is President of Software for Blucora in Dallas.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

He brings extensive experience in infrastructure and cloud computing, as well as digital development and a keen focus on customer experience. I am very excited to see what new perspectives Curtis brings to our board discussions. Also effective July 1st, 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. 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 and board-level retirements and replacements.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Our sales teams are performing extremely well and have positioned us for another successful year of selling. 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.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Thanks, Dave. Our service and support line of revenue increased 6% in the fourth quarter of fiscal 2021 compared to the same quarter a year ago. As 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. Our service support revenue primary driver was our data processing hosting fees and our private cloud and public cloud offerings, which continued to show strong growth in the quarter compared to the previous year, growing by 7% for the quarter.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

However, the growth in this line is 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 quarter, which this line is obviously somewhat impacted by COVID. Our 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. Our Jack Henry digital revenue continues to show very strong growth as demand for our Banno 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. Excluding deconversion fees and divestitures, our non-GAAP grew 10% as well.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

For the full fiscal year, revenue is 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 costs compared to a year ago. Our research and development expense decreased 4% for the quarter of fiscal 2021 over the prior year quarter. The decrease is due primarily to a slightly higher percentage 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 2021 compared to the same quarter in the prior fiscal year. The increase is due primarily to increased personnel and professional services costs.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Our reported consolidated operating margins increased nicely from 18.7 last year to 21.4 in the current year quarter. On a non-GAAP basis, our operating margins expanded from 17.8% last year to 20.1% this year. Our payments segment saw the nicest margin expansion in the quarter after completing the payment platform migration in Q3, margins grew from 43% last year to 45% this year on the fourth quarter on a GAAP basis. On a non-GAAP basis, our payment segment margins grew from 42.3%-44.5%, so over 200 BP 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.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

The effective tax rate for the fourth quarter of fiscal 2021 was down slightly to 19.7% compared to 20% in the same quarter a year ago, primarily due to some 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 $1.04 for the current quarter, compared to $0.80 last year, or a $0.24 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 $20.3 million last fiscal year.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Depreciation was up slightly at less than 1% for the year compared to the prior fiscal year. During the year, we purchased 2.8 million shares of our Jack Henry stock for 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. 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.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Yesterday's press release inadvertently omitted the proceeds from dispositions line of net cash from investing activities within the cash flow summary. Amounts that should have been included were cash inflows of $6,187 in fiscal 2021 and $11,130 for fiscal 2020. The 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. A 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 our revolver. During Q4, we paid down $100 million of that balance. At June 30, we had $100 million on our revolver.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

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%. Our 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 continues to improve, but if things were to go differently than this, then guidance will be revised.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

For GAAP revenue growth for fiscal 2022, based on the amounts in the release yesterday, our revenue guidance is a range of 8.2%-8.7% growth over fiscal 2021 due to higher anticipated deconversion fees compared to FY 2021. For non-GAAP revenue growth, we are guiding to an initial range of 7.5%-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 2022 compared to last year, as we should have nice margins expansion in our payment 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 our private cloud.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Travel costs continue to increase significantly compared to the last year. At this time, we are still planning to host our Jack Henry annual conference and our Symitar EDGE conference in person this year. There will be some large costs returning this year compared to last year when there was very little travel. We do think that we will get at least 50 basis points of margin expansion in the fiscal year. Our effective tax rate for FY 2022 is projected to be slightly higher at approximately 22.5%-23%, compared to our actual rate this year of 21.7%. This is primarily due to the significant impact from equity awards that were deductible in FY 2021. Our initial FY 2022 GAAP EPS guidance is a range of $4.53-$4.60, which is a 10%+ increase from our FY 2021 finish.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

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

Operator

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 Vasundhara Govil with KBW.

Vasundhara Govil
Vasundhara Govil
Analyst at KBW

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

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Thank you, Vasu.

Vasundhara Govil
Vasundhara Govil
Analyst at KBW

I guess just the first question to follow up on the margin commentary there that you provided, Kevin Williams. I know that previously you had indicated about 100 basis points of margin expansion in fiscal 2022 and potentially even some upside to that. Now you seem to be indicating 50 basis points. I guess just wanted to understand what changed in your outlook versus what you were expecting before.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

I will 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. There's a lot of offsetting things out there. Just to be clear, I feel like both our revenue GAAP or non-GAAP revenue growth of 7.5%-8% and our margin expansion of 50 basis points are both conservative.

Vasundhara Govil
Vasundhara Govil
Analyst at KBW

Got it. Understood. I guess the second question, I was just hoping if you could provide some color on growth expectations by segment for fiscal 2022, particularly what you're expecting for the core and payment segments. I know with the core segment, do you expect sort of this improvement that we've seen on a non-GAAP basis to kind of continue into next year? The payment segment has already been quite strong. Is there room for further acceleration as some of the new wins on the card payment side start to flow in?

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Yeah, we saw some really nice margin expansion in the payment segment in Q4. We will see more in FY 2022. There is still additional costs that will be coming out by the end of the first half of fiscal 2022 in the payment segment. I think there will still be some really nice margin expansion, as we add additional customers, that will also expand the margins. Obviously, cards is still 60% of the payment segment.

Vasundhara Govil
Vasundhara Govil
Analyst at KBW

Thank you very much.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

You bet. Thank you.

Operator

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

Peter Heckmann
Peter Heckmann
Analyst at D.A. Davidson

Good morning, everyone.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Morning, Pete.

Peter Heckmann
Peter Heckmann
Analyst at D.A. Davidson

In terms of thinking about the record sales in the fourth quarter, is there a way of thinking about total bookings on like a TCV or ACV 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. There's wide variance in sizes. Given some of the difficulties over the last fiscal year, is there a way about thinking about the kind of percentage increase in overall bookings that might help us think about the outlook?

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

When you have a sales sense, Dave, by the way, Pete, when you have a sales quota the size of our sales quota, a percentage increase of more than 5% per year is a very significant increase. If I remember correctly, I don't think I have it exactly in front of me, but I think it was year-over-year, it was about 7% or 8%, somewhere in that range year-over-year as far as sales bookings. You know this well, we don't publish TCV numbers or anything like that. That's a good way to think about how we measure quota and how quotas are assigned. You can kind of use that logic in making some assumptions. If we're 7% or 8%-ish increase over the prior year as far as sales performance, that's a good way to think about it.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

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 2022, our starting point is last year's performance, and then we normally apply somewhere between 3% and 5% quota increase over the top of what the performance was last year. That's where the sales team is starting out this year is with a sales quota that is somewhere in the 3%-5% range larger than it was their actual attainment for the prior year.

Peter Heckmann
Peter Heckmann
Analyst at D.A. Davidson

Got it. That is helpful. Then just thinking about the cadence of term fees, the guide for term fees. No surprise with some of the uptick we've seen in M&A in the mid-tier space. In terms of the cadence, Kevin, would you specifically call out some level for the first quarter? Or when you might think those might hit just in terms of trying to get the quarterly forecast correct?

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

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

Peter Heckmann
Peter Heckmann
Analyst at D.A. Davidson

Got it. Okay. Thank you.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Yep.

Operator

Our next question comes from David Koning with Baird.

David Koning
David Koning
Analyst at Baird

Oh yeah. Hey, guys. Thank you and nice job. I guess my first question just, when we think of kind of the wallet providers, that space, there's a lot of investors that are just concerned that group is just going to take over the world and all bank accounts will kind of move to that over time. I guess a couple things. Are you seeing growth in your number of accounts? I don't know if you have some metrics on that in your total accounts. Also, 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?

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

That's a very intuitive question, Dave. In fact, I'm presenting at a conference in, I think it's February of next year on that very topic. Bankers are starting to realize that if you have a good digital platform on the front end, and if you take advantage of an open infrastructure like we have at Jack Henry, and that's the reason we talk about it all the time, you can do as a banker, essentially all those same things and draw customers to your platform as a bank with the FDIC 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. We're doing that today with a number of banks.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Part of the process for me is to educate bankers on what they can do, what they should be thinking about, how they compete in those areas. 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 types of fintech functions into that digital platform. 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 customers today. A great opportunity. To the first part of your question about customer growth. Yes, we are able to measure customer growth, whether it's members on the credit union platform or customers on the banking platforms.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Not only are we adding customers because we're winning share, we're winning new customers, so the net number of customers we serve is greater. 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.

David Koning
David Koning
Analyst at Baird

Okay. Great. Now, thanks. That's good to hear. Maybe secondly, growth in payments obviously really good. I assume that's debit transaction growth just off of a pretty low base. 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?

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

I think that's a good expectation. The other thing I'll highlight is, we talk and Kevin emphasized that 60% of our payments business is on the cards platform. Don't forget about the business we refer to as EPS, Enterprise Payment Solutions. That's our remote deposit capture and mobile capture business. That business has been growing nicely as well. It's a much smaller piece of the segment, but it's growing rapidly. I think you're going to continue to hear more about that business at Jack Henry as well. Both of those two, I've said it on many earnings calls, the bill pay business relatively flat for everybody. There's not a whole lot of new stuff happening in traditional bill pay. The card growth that you've seen, I think under or in the high single digits is a good expectation for the card growth.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

It'll be greater than that for the EPS business as far as what we're seeing right now because of the strength of that platform.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Dave, 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. Our full-service credit is growing basically from a base of zero.

David Koning
David Koning
Analyst at Baird

Yep. Got you. Well, thanks guys. Nice job.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Thanks.

Operator

Our next question comes from Kartik Mehta with Northcoast Research Partners.

Kartik Mehta
Analyst at Northcoast Research Partners

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. I'm wondering, in relationship to what you anticipated for cost savings out of that platform, would you have achieved that or exceeded that? How would you characterize the cost savings from the platform?

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Okay. Kartik, we completed the migration in Q3.

Kartik Mehta
Analyst at Northcoast Research Partners

Right.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

We had all customers on the new platform, and sometime in April, we started decommissioning the 4 mainframes that supported the 2 platforms that we used to have. I think those got completely decommissioned, I believe by mid-July, if I remember right. There's some other things that's going on here, Kartik. There were some other tools that we have to keep the talent on to rewrite and get some additional tools in place, which that will be done by the end of Q2. You'll see some additional costs coming out by then. By Q3 of this year, we will see the full benefit of the cost takeout that we guided to three years ago.

Kartik Mehta
Analyst at Northcoast Research Partners

Perfect. Dave, I think you've talked about maybe core demand now increasing as people kind of realize that COVID is still going on, and some of the decisions they didn't make, they're making. How would you characterize core demand today? Is it increasing or is it kind of back to normal?

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Yeah. I would say that it's back to normal. Normal for Jack Henry. Pre-pandemic, we were running at about one new competitive replacement per week. We are back to that level now. We did 15 last quarter, we did 13 this quarter. Everything that I'm seeing now would indicate that that's a pace that we can run at for a while, but it's definitely leading the industry by far as far as new core replacements, and that looks sustainable for us now.

Kartik Mehta
Analyst at Northcoast Research Partners

Perfect. Just one last question, Dave. Have you seen any change in the competitive nature for these core renewals, maybe as the market gets back to a little bit normal?

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

For core renewals? We've talked about this in the past. Consultants are now engaged every time there's a renewal. 10 years ago, it was rare to have a consultant involved in a renewal. Today, every single one of them has a consultant, and that's not just Jack Henry, it's in the industry. How does the consultant justify their role? It's by ensuring that it's a very competitive process. 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. They are encouraging a diligent review of pricing and all that kind of stuff. We know how to operate in that model, and we're comfortable with what's happening.

Kartik Mehta
Analyst at Northcoast Research Partners

Perfect. Thanks, Dave. I appreciate it.

Operator

Our next question comes from John Davis with Raymond James.

John Davis
John Davis
Analyst at Raymond James

Hey, good morning, guys. Kevin, just a quick clarification around the margin. You said 50 basis points. Just want to clarify, that's on a non-GAAP basis of expansion.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Correct.

John Davis
John Davis
Analyst at Raymond James

Just as a follow-up there. I think our math suggests that the payments platform migration would be about a 50-basis-point benefit this year. Is the right way to think about it that incremental travel and other expenses kind of offset normal operating leverage with maybe a little bit of upside? Given your conservative comments?

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Yeah. John, I saw in your note about the EPS and your calculation of margins. You also have to remember that our effective tax rate's going to go up from 21.7% to 22.5%-23% too. If you're just looking at EPS, that's also going to have a slight negative impact. We're still guiding EPS to grow more than 10%.

John Davis
John Davis
Analyst at Raymond James

Okay. You guys are guiding deconversion fees up about 70% year-over-year. Is that the right way to think about the increase in convert merge revenue? Any way you guys can give us an idea of what percentage of a normal year convert merge revenue is, percentage of your core segment revenue? Just trying to understand, because I think that was 1 of the areas that was a little bit weaker than you expected this year, and just how we should think about that bounce back coming in 2022.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Yeah. There was a significant headwind from convert merge revenue being down because there's no M&A activity. You're absolutely right. If deconversion revenue does pick up like we think, our customers will be buying just as much as our customers are getting acquired. Not only will it increase convert merge revenue, but it'll also increase bill travel because we'll have more people traveling out to do those convert merges. As a percentage of total revenue, off the top of my head, John, it's not a huge number. When you start talking several million dollars in convert merge revenue, we basically bill full boat for those. It's very nice margin business. It's actually the highest implementation margins we have. Not only does it help reduce the headwinds on revenue, but it also helps our overall operating margin.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

I will chime in here, John, on that topic. One of the things that is interesting in this business is when an existing customer is 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, but we're working on it. We want to make sure that we have a conversion slot 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." We have a good deal of visibility into the activity that's happening out there in the convert merge space. I can tell you right now, there is a lot of activity.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

There's a lot in the press 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." We can't exactly predict when those things are going to happen, but the activity levels are definitely back.

John Davis
John Davis
Analyst at Raymond James

Okay. Last one from me. Kevin, anything to call out from sequential cadence this year, either on the revenue side or margins? Should we just basically kind of look at two-year CAGRs on the top line and maybe remind us when your in-person conferences are and those expenses hit, which quarters those will be in? Thanks, guys.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Yeah. John, that's a good question. Actually, I thought about that as I 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 kind of be the same. Q1 should be really strong because of all-

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

All the software subscription revenue that we take the first of that quarter. It obviously gets a little weaker in Q2, and then just grows in Q3 and Q4 from there. As far as our user conference, they're actually a combined conference this year. Well, they're not really combined. They kind of overlap. Those are scheduled to be in October, so that'll hit Q2.

John Davis
John Davis
Analyst at Raymond James

Okay. Appreciate it, guys. Thanks.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Yep. Thanks, John.

Operator

Our next question comes from Dominick Gabriele with Oppenheimer.

Dominick Gabriele
Dominick Gabriele
Analyst at Oppenheimer

Hey, good morning. Thanks so much for taking my questions. The sales pipeline being just so much better, 7%-8%, versus your quota rather, of typically a raise of 3%-5%. Maybe we could talk about what's filling that gap. Is it a few large clients that you've won that have kind of raised that? Or 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. Is it just pure execution? Anything you could provide there, I'd really appreciate. Thanks so much.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Sure. Just to be clear, Dominick, when I was referring to the 7%-8%, I was talking about actual performance over prior years. 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 is things that have been booked in the past and are deals that have already been assigned with our customers. To answer the specifics of your question, no, this is not just a few large clients or something like that. This is a broad suite of solutions that we've been selling to a broad list of customers. Of course, the core success that we had this year was significant, that's a driver. I highlighted in my opening comments the number of Banno customers that we signed this year.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

219 brand-new Banno Digital customers. That is becoming an important driver for us as we go forward. It's all these other solutions, the treasury management and all the customers that we signed for our payments platforms, including, like I mentioned in my response to David Koning's question earlier, our EPS platform, which we're seeing some nice interest in that as a payments platform for customers going forward. It's just a broad variety of solutions. To the point about pent-up demand, that's a little bit of a tough one because we saw sales was lumpier during the height of COVID. When you look at it over the 12-month period, we didn't see sales slow down, but it was very lumpy. I have trouble characterizing it as pent-up demand because the sales happened. They were just not quite as smooth as what we're normally accustomed to.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

I think it's 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 that we deliver. I highlighted in my opening comments, the work that our Symitar team did around 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 PayCenter 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 year.

Dominick Gabriele
Dominick Gabriele
Analyst at Oppenheimer

Yeah, there's definitely no question arguing with the awesome sales wins numbers. Maybe just one more. When you talk about the revenue margin guidance being conservative, can you maybe walk through some of the puts and takes of that commentary? You went over this a little bit, when you think about beating the 50 basis points margin expansion, does that really coincide with you beating your revenue guidance? Perhaps what kind of investments do you think 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? Thank you.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Dominick, that's a good question. To beat the guidance we gave for non-GAAP revenue, it would mean that we would have some continued implementation of movements from some of our card customers. 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. Just the continued movement of moving our on-prem customers into our private cloud also helps our margins. There's several different drivers that could cause us to beat that non-GAAP revenue guidance. From what I'm seeing, I think that's probably going to happen. I'm not willing to step out on that limb and say how much at this point. Every one of those things that I just mentioned can also help to improve margin.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

As far as investments, we just finished our budget. I don't know that even if we beat revenue guidance, I don't know that there's any big investments out there that we need to make that we're not already making, either from a capitalized software development or from CapEx that's not already in the budget, which is part of that guidance.

Dominick Gabriele
Dominick Gabriele
Analyst at Oppenheimer

Really great. Thanks so much for taking all my questions.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

You bet.

Operator

Our next question comes from Kenneth Suchoski with Autonomous Research.

Kenneth Suchoski
Analyst at Autonomous Research

Hi. Good morning, David and Kevin. Thanks for taking the question. I just wanted to ask about Banno, since you had some really strong results there. I believe Banno is no longer restricted to the core base this year. I was hoping you could talk about how you expect Banno growth to trend now that that offering is open to the rest of the market. What's the size of that business today? You mentioned, I think it was 5.6 million users. What type of revenue does Banno contribute?

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

First off, just to be clear, Ken, what I've said is that we'll start selling Banno outside the base in calendar 2022. It's not this calendar year. It'll be next year. This year, the major deliverable for the Banno group is Banno Business, which if you think about all the functionality we have on the consumer side with Banno, in a couple of months here, we'll deliver all that same type of functionality on the business side of the solution. Then it'll be next calendar year that we'll start delivering outside the base. 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 and a mobile banking offering, and they are two different things, two different experiences.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Consumers don't want two 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're on a phone, on a tablet, on a PC, they expect to have the same experience. That creates opportunity for us both inside and outside our base. 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 Banno outside the base next year. As far as the size of the business, we don't call that out as a separate business. We have discussed at some point would we possibly do that as a segment, but we're not there yet. It's the 5.6 million users.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

I've been asked on these calls before. There are some pure play offerings out there that you can do the math and figure out based on their number of users what the revenue per user is. Is that transferable to Jack Henry? My answer is generally, yes, that's transferable, so you can figure out how large the business is. 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 Banno business is doing that for Jack Henry. It's continuing to grow nicely. Will it continue to grow nicely based on all the things we're seeing right now, the backlog of installs that we have right now?

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Will it continue to produce bottom-line operating results for our company?

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

I just thought one more thing in there. When we talk about digital, that's not just Banno. That includes a lot of different things, which it includes our predecessor NetTeller solution, which we still have several 100 FIs on our NetTeller solution and using our goDough Mobile solution. A lot of those will never move to Banno. When we talk about digital, we're talking about all that and Treasury and Geezeo and Volts, OpenAnywhere, which is some of the acquisitions we've done in the last three years. The term digital encompasses quite a few different products and offerings.

Kenneth Suchoski
Analyst at Autonomous Research

Yeah, that's really helpful. Very detailed answer there. I appreciate that. I know you guys aren't giving guidance for fiscal year 2023, but there's a lot of moving parts with the margin in terms of things opening up. You have the platform migration, but once that platform migration, I guess, is behind you, what's the right way to think about margins or margin expansion after fiscal year 2022? Just because when I look at your numbers, Jack Henry had call it a roughly 24.5% operating margin in fiscal year 2017. Is that a good benchmark for fiscal year 2023?

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Well, it depends on which numbers you're looking at for 2017. If you're looking for the restated numbers after ASC 606, or if you're looking at the previous numbers, because ASC 606 did have an impact on our margins. I'd answer it this way. I'm pretty comfortable that after we get through FY 2022, again, there's a lot of unknowns out there with COVID and other things, I think starting in FY 2023, we can go back to our normal 50-100 basis points expansion in our operating margin as we get everything put back in place this year.

Kenneth Suchoski
Analyst at Autonomous Research

Okay, that's really helpful. 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's quite strong. Just curious if you expect that to accelerate as you get back to seeing your customers in person?

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Yeah, I don't expect that you're going to see some great big pop in sales. As I said before, our quota is a very large number today. If you're growing at 3%-5% year-over-year on a very large sales number, that sets the company up pretty well because we're such a high concentration of recurring revenue. You assume that the recurring revenue is continuing to percolate and you're layering revenue in on top of it, and you're growing a sales quota at 3%-5% per year over the prior year performance, that's a pretty solid model. I'm happy with that model. Don't expect that we're going to see some great big pop in sales in the coming year. I think the performance will continue to be solid and consistent.

Kenneth Suchoski
Analyst at Autonomous Research

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

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

Good.

Operator

Our next question comes from Dan Perlin with RBC Capital Markets.

Matt Roswell
Matt Roswell
Analyst at RBC Capital Markets

Yes, good morning. It's actually Matt Roswell sitting in for Dan. Just a quick question. With the payments platform conversion done, are there any remaining major solutions that need to be kind of re-platformed onto the open architecture? With, theoretically, all those solutions on an open architecture, does that change the sort of accounting cadence between capitalization of software, timing or D&A, or the income statement components of CapEx?

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

I'll take the first part of your question, and Kevin can address any of the hard financial questions, the CFO stuff. First off, we have about 300 different solutions. They are all in some stage of either fully platformed on a complete open platform or they're in the process or some is done, and there are some that it isn't logical to take them to a new architecture. We, for example, 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 product? 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.

David Foss
David Foss
Board Chair, President, and CEO at Jack Henry & Associates

For all those that are the real high-demand solutions, they've either been put into a completely open environment or they're in process of offering that type of solution. Many have been ported to public cloud offerings. We're in both Azure and AWS today with some of our solutions. We have many in our private cloud. It's just because of the broad suite of products that we have, it's kind of naturally a variety of different platforms that we offer them on. For the kind of the key solutions, they either are today supporting open connectivity, open infrastructure, or we're well on our way to doing that. Then I'll let you take the hard part, Kevin.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Yeah. The other part, Dan, is if you look at us for basically the last 10+ years, and I actually have a chart that shows this. Our total R&D spend for R&D expense on the P&L and capitalized software on the cash flow statement has been 14% of revenue. Our total R&D spend has grown at almost the exact same pace as our top-line revenue for the last 10 years. I don't see that changing. I think we're going to continue to do that. I will tell you that we don't do really big bang productions. We do sprints and try to get modules rolled out as quick as possible and do additional modules. You're not gonna see any huge increase in amortization of software in any given year.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

It's just gonna 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 capitalized software on the balance sheet is in production being amortized. That hasn't changed for the last few years either. What that tells you is, as we're continuing to develop all that software, we continue to roll it out. At the same time, in five years, some of the stuff the amortization's done amortizing. You got an offset there. I don't think that we're gonna do anything crazy in the foreseeable future that's gonna have much of an impact on either cash flow or the P&L other than what you've seen in the last few years.

Matt Roswell
Matt Roswell
Analyst at RBC Capital Markets

Okay. Thank you very much.

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

You bet.

Operator

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

Kevin Williams
Kevin Williams
CFO and Treasurer at Jack Henry & Associates

Thank you. 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 and 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 our customers and our shareholders. Thank you again for joining us. Liz, would you please provide the replay number so it's in the transcript?

Operator

The replay of this all will be available until 11:59PM EST, August 25th 2021. You can access the replay by dialing 8005858367 or 4045373406 and entering conference ID 7929519. Thank you, and have a great day.

Executives
    • David Foss
      David Foss
      Board Chair, President, and CEO
    • Kevin Williams
      Kevin Williams
      CFO and Treasurer
Analysts
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