Jack Henry & Associates Inc Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Jack Henry & Associates Fourth Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Williams. Thank you. Please, go ahead, sir.

Thank you, Gigi. Good morning. Thank you for joining us for the Jack Henry & Associates fourth quarter and fiscal year-end 2020 earnings call. I'm Kevin Williams, CFO and Treasurer. And on the call with me today is David Foss, our President and CEO. In just a minute, I'll turn the call over to Dave, so he can provide some of his thoughts about the state of our business, the performance for the quarter and fiscal year, as well as some comments relating to the impacts of COVID-19 and some other key initiatives that we have in place. And then after that, I will provide some additional thoughts and comments regarding the press release we put out yesterday after market close and provide comments regarding our guidance for our fiscal year 2021 provided in the release and then open the lines for Q&A. First, I need to remind you that this call includes certain forward-looking statements, including remarks or responses to questions concerning future expectations, events, objectives, strategies, trends or results. Like any statement about the future, these are subject to a number of factors that could cause actual results or events to differ materially from those which we 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 Form 10-K entitled Risk Factors and Forward-Looking Statements. On this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income. The reconciliations for historical non-GAAP financial measures can be found in yesterday's press release. With that, I will now turn the call over to Dave.

Thank you, Kevin, and good morning, everyone. We're pleased to report another strong quarter of revenue and operating income growth. 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 in the midst of a global pandemic. Before we get into the discussion of our results for the quarter and the full year, I think it's appropriate to review some of the ongoing impacts we're seeing as a result of the pandemic. We remain extremely thankful for the fact that very few of our almost 7,000 employees or their family members have been directly affected by the COVID-19 virus. Our HR and benefits teams are working closely with all the groups around our company to be sure anyone who is affected is receiving the care and accommodations they require. We continue to operate with well over 90% of our employees working full-time remote and have recently extended our return-to-office state to January 4 of next year. We extended that date for a couple of key reasons. First, we have a strong commitment at Jack Henry to put our associates first as we make key decisions about how we run the company. With all the concerns expressed by our teams about returning to an office environment and with so many members of the Jack Henry team struggling to make plans for their school-aged children in the fall, we decided to remove the worry for our employees by extending the date. And second, we have had great success in all areas of our business adapting to a work-from-home status and we see no reason why that can't and won't continue, so the decision was easier than you might otherwise think. Speaking of our success working from home, we are now several months into working with a modified set of processes for many of our groups. We are routinely doing sales presentations and executing contracts with no on-site presence at the customer location. We have completed many 100% remote implementations with great success, including several full core conversions. And our customer service teams continue to deliver outstanding service through remote channels, while keeping our customer satisfaction ratings at an even higher level than they were before the pandemic. I continue to be amazed and impressed by the adaptability and commitment of our team members throughout our organization. They continue to execute in this new environment, with the success of the customer always foremost in their mind. As I mentioned on the last call, many of you have commented in the past about the unique culture at Jack Henry, a culture built on the do the right thing and do whatever it takes mantra. Never has that culture been on display in a more meaningful way than what we've witnessed during this pandemic. I'm extremely proud of our team and their ongoing commitment to our customers and our company. With that, let's shift our focus to a look at our performance for the quarter we completed in June. For the fourth quarter of fiscal 2020, total revenue increased 4% for the quarter and increased 4% on a non-GAAP basis. Deconversion fees were up just slightly over the prior year quarter, but down significantly as compared to our fiscal third 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 also increased by 4% on a non-GAAP basis. Our payments segment also performed well, posting a 3% increase in revenue this quarter and a 3% increase on a non-GAAP basis. We had a very strong quarter in our complementary solutions businesses with a 9% increase in revenue this quarter and a 6% increase on a non-GAAP basis. As I highlighted in our press release, despite the obvious COVID-19-related challenges for the sales team, June was the strongest sales month in the history of the company and the fourth quarter was our strongest sales quarter ever. All three sales groups exceeded their quota for the full year and for the quarter. This is remarkable to me because we made no adjustments to quotas for our sales teams as a result of any COVID-19 expected impacts. In the fourth fiscal quarter, we booked seven competitive core takeaways and nine deals to move existing in-house customers to our private cloud environment. Several of our complementary offerings saw very strong demand in the quarter with, as you might guess, our digital suite leading the pack. We signed 53 new clients to our Banno Digital platform in the quarter and we signed 13 new clients to our new Card Processing Solution. For the full year then, we signed 43 competitive core takeaways with six of them greater than 1 billion in assets and six de novo banks. Additionally, we signed 45 contracts to move in-house core clients to our private cloud, 167 new Banno Digital customers, and 81 new clients for our Card Processing Solution. Of course, we signed a myriad 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. Speaking of our new card processing platform, on the last call I pointed out that prior to the onset of COVID-19, we were poised to wrap the migration of our core clients by June 30 and had all 136 of those clients scheduled to convert in April, May, and June. In early April, several of the clients on those lists asked us to delay the schedule because they had minimized their employee presence in their offices and didn't want to introduce any new payment solutions while their employees and customers were working remotely. As disappointed as we were to introduce a delay in a project that has been moving along so well, we determined it was definitely the right thing to do. In July, however, we resumed the migration process and now expect to have all of our core customers migrated by the end of the current quarter, and all of our non-core clients completed by the end of our third fiscal quarter. We are prepared and anxious to wrap these migrations and expect no further delays from our customers. One topic I haven't discussed previously on these calls is all the work we've been doing in the area of diversity and inclusion for the past several years. In the spirit of doing the right thing and attempting to always put our associates first, we formally launched our D&I program more than two years ago with a variety of training initiatives followed by the launch of our first business innovation group. We added a full-time diversity leader to our team more than a year ago and we now support five very active and successful business innovation groups within the company. Our D&I team provides ongoing training, they facilitate panel discussions and work with the Jack Henry leadership team to ensure that our work environment provides a safe space for our employees to thrive. Given all the social unrest in our country today, I am particularly grateful to our team for the outstanding progress and long list of successes we've seen with this program so far. As you have undoubtedly noted from the press release, we have decided that we will stick with past practice and provide guidance for the new fiscal year at the conclusion of today's call. As we've discussed in the past, although our business model is not impervious to impacts from the current economic environment, it is resistant to significant swings caused by economic disruption. After much discussion and despite the obvious challenges in trying to predict the future in the midst of a global pandemic, we believe we have enough information to provide reasonable insights and assumptions and sharing that information with you today is the right thing to do. As I reflect back on fiscal 2020, even with the extraordinary challenges in the environment at the close of our fiscal year, I view it as a very good year for our company. We have made great strides with our diversity and inclusion initiatives and our employee engagement scores remain very high. Our levels of customer engagement and customer satisfaction scores are also very high. 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. As we move forward, we will continue to implement minor changes to our delivery and service models and we have every expectation that we will end next calendar year with a greater percentage of full-time work from home employees than we had before the pandemic. We have a commitment to doing the right thing for our constituents that we believe will serve us well as we adjust to the new normal. 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 our future. With that, I'll turn it over to Kevin for some detail on the numbers.

Thanks, Dave. I appreciate it. The service and support line of revenue, which is made up of two product groups, which are outsourcing and cloud and product delivery and services increased 3% compared to the prior year quarter. Outsourcing cloud services within our private cloud were again the big driver in this line of revenue with an increase of 13% compared to the same quarter a year ago, and an increase of 14% for the entire fiscal year. The headwind on this line of revenue in the quarter were decreases within the product delivery and services license, hardware implementation services and pass-through costs, primarily related to billing for our implementation teams' travel decreased a total of $7.4 million compared to the prior year quarter. This was partially offset by a small increase in deconversion fees as Dave pointed out, which is included in this line during the quarter of $845,000. The processing line of revenue, which is our remittance in card, and our transaction in digital lines of revenue grew 7% to the prior year quarter and increased 9% for the fiscal year. Within this line though remittance and card processing only grew a little over 2% in the quarter compared to last year, due to the impacts of COVID-19 in Q4 of this fiscal year, which for comparison remittance and card was growing 9% through the first three quarters of the year compared to the prior year compared to only 2% for Q4. However, this headwind was mostly offset by continued strong growth in our transaction and digital revenue during the quarter, which was positively impacted by the CARES Act and related legislative changes and grew 16% for the fiscal year. Total revenue was up 4% for the quarter compared to last year on both a GAAP and non-GAAP basis. Our cost of revenue was up 6% compared to last year's fourth quarter, but on a sequential basis compared to Q3 cost of revenue was actually down, due primarily to lower cost of hardware and travel-related expenses compared to the previous year quarter. Research and development was up 20% compared to the prior year quarter, primarily due to increased personnel costs. And sequentially, R&D was up a little more than 3% again primarily due to personnel costs in Q4. SG&A was essentially flat compared to the prior year fourth quarter, and down a little over 3% sequentially, again, primarily due to travel-related expenses. Total expense was up 6% compared to a year ago quarter but compared to Q3 sequentially it was actually down a little over 1%, again, primarily due to lower cost of hardware sold and lower travel-related expenses as our employees were mostly working from home. Our reported consolidated operating margins decreased from 20.2% last year to 18.7%, which this decrease is primarily due to the various revenue headwinds already discussed and the increased cost. On a non-GAAP basis our operating margins decreased from 18.9% last year to 17.8% this year, again, primarily due to items already mentioned. Our payments segment continues to be impacted by the additional cost related to our card processing platform migration as Dave discussed in his opening comments. Our core segment operating margins improved slightly during the quarter, compared to last year while complementary segment margins were down just slightly. The effective tax rate for the quarter decreased to 20% this year compared to 23% last year. The quarter-over-quarter difference is primarily related to changes in our effective and deferred state tax rate as we re-measure our state estimated rate when we file our state tax returns in Q4 and perform a return to provision true-up. Last year, we had an unfavorable impact in Q4 of about 1.5% and due to some effective tax planning by our tax department over the year, we had a favorable impact this year of approximately 1.5% to give you the 3% difference compared to last year. Net income was $61.3 million for the fourth quarter compared to $61.0 million last year and earnings per share was $0.80 this year compared to $0.79 last year. Some comments on cash flow. Our total amortization increased 5% for the year compared to last year due to capitalized projects being placed into service. Included in the total amortization of intangibles is related to acquisitions which decreased to $20.3 million year-to-date this fiscal year compared to $20.8 million last year. Depreciation was up a little over 10% for the fiscal year, primarily due to CapEx increases in the previous year and those assets being placed into service and receiving a full-year depreciation this year, while this year's total CapEx spend was basically flat with last fiscal year's total spend. Our operating cash flow was $510.5 million for the fiscal year, which was up nicely from $431.1 million or 18% compared to last fiscal year. During the year, we invested $177.5 million back into our company through capital expenditures and capitalized software from developing additional products and enhancements, which the total amount capitalized is up 4% from $170.8 million spent a year ago. Our free cash flow, which is operating cash flow less CapEx and capital software and then adding back net proceeds from sale of assets was $344.2 million which compared to net income means that we had a conversion of free cash flow to net income for the year of 116%. A couple of comments on our balance sheet as of June 30th. We were in a cash position of $213.3 million up from $93 million a year ago. And remember in February, we increased the max in borrowings on our $700 million line of credit. And as of June 30th, there was nothing drawn on that line and we had no other long-term debt on our balance sheet other than leases which obviously increased this year significantly due to the adoption of ASC 842 last July 1st, which means we had to put the operating leases on our balance sheet. Some comments about the guidance we provided in the press release yesterday. As you noticed, we did provide both GAAP and non-GAAP revenue guidance in the press release. Just to be clear this guidance is based on the assumption that the country continues to open up, the economy continues to improve. And obviously, if the country is forced to be shut down again due to COVID-19 and the economy stalls or actually reverses then obviously, this guidance will require to be revised. You will also note that our GAAP guidance that we're forecasting revenue from deconversions to be down $33 million from what we saw in FY '20, which during FY '20, we had $53.9 million of deconversion revenue. Currently, we see no to little M&A activity that would drive deconversion revenue at this point, which in the short term, this will hurt our revenue growth, but in the long term as Dave and I have always said, we don't really like deconversion revenue as we would much rather keep the customer and the revenue for the future. This means based on the GAAP revenue guidance provided in the press release impacted by the decreased deconversion fees, we're looking at GAAP revenue growth of 3% to slightly above 4%. Since our single acquisition last year, which was Geezeo anniversaried on July 1st, the only adjustment between GAAP and non-GAAP revenue guidance is the decrease in deconversion fees. Obviously, if we see changes during the year and anticipate deconversion revenue, we will update you on future earnings calls. Obviously, we were impacted by COVID-19 just like everybody else especially in Q4 of FY '20 as highlighted in our comments about card growth and product delivery and we expect to continue to have some headwinds on revenue, especially in the first half of the year for several reasons. Some ongoing delayed implementations at customers' request, the continued shift of our customers to our private cloud will continue to put additional headwinds on our license, hardware and on-prem implementations. And our annual education conferences will now be virtual events this year, which will also impact revenue in the first half of the year. Not much impact on operating income, but it will have an impact on revenue. Therefore for your models for non-GAAP, again non-GAAP revenue growth, I would suggest using 3% to 5% revenue growth in the first half of the year and somewhere in the 6% to 8% range growth in the second half to get you to our guidance of 5.5% to 6.5% growth for the entire fiscal year non-GAAP revenue. We anticipate GAAP operating margins for all of FY '21 to be down slightly to 20% to 21% for all of the reasons previously discussed. However, as we complete the migrations in the new payment platform during the fiscal year, we will see margin improvement in fiscal Q4 as we have guided previously. Our effective tax rate for FY '21 should be in line with FY '20 and be somewhere between 22% and 22.5%. That concludes our opening comments. We are now ready to take questions. Gigi, will you please open the call lines up for questions?

Our first question comes from Peter Heckmann from D.A. Davidson. Your line is now open.

Good morning everyone. Thank you for taking my questions. Dave, could you provide some guidance on year-over-year bookings growth? Also, could you discuss the current backlog and how it compares to prior years, particularly regarding any implementation delays that may have led to a larger-than-normal backlog?

Thank you, Pete. While we don’t disclose specific details about the backlog, I can share some general expectations. There have been some delays, but they are not overly significant; it's mainly due to the rearrangement of priorities. Typically, when a customer wants to postpone an implementation, we find another customer willing to expedite their schedule. This has led to some fluctuations in our implementation operations schedule, but there isn’t any major push to extend timelines. I would describe the delays more as inconveniences related to rearranging schedules. Regarding your question about sales, we've maintained a pace of securing one new competitive core takeaway each week for the past two and a half to three years, though that aspect has slowed recently. Our sales have become less reliant on new core takeaways compared to the past. Interestingly, other product groups not only filled that gap but also surpassed our previous sales records for individual months and quarters. We’ve had notable success with our new payments platform and have sold a significant number of Banno Digital platform units, which shouldn't come as a surprise, given the traction we've seen there. Additionally, we've signed a number of in-house to outsource conversions during the quarter, along with various other products, including online lending. Despite the slowdown in new core sales—largely attributed to decreased decision-making in the industry—the sales teams have successfully diversified into different products. Consequently, our backlogs are healthy, and I have no concerns about managing installations. The backlogs have been complemented where we would have usually signed more new core takeaways.

Got you got you. And then that leads to my second question. I think last quarter you had said you had signed 5 core takeaways in April and so that would indicate just 2 in May and June and that just might be situational. But in terms of how the relative profitability and outlook for financial institutions has changed because of the pandemic and lower rates, how do you see that affecting overall IT spending amongst banks and credit unions over the next year?

Yes. So the good news for us first off the pipeline is after a record month and record quarter, we just did a sales review with the sales leadership team on Monday of this week, and the pipeline is filling back up again which that's always a concern, when you have a blowout month and a blowout quarter, and then you've got to go fill the pipe again with new opportunities. So the pipeline is filling again had a big month in July as far as new opportunities that are going back into the pipeline. I'll add to that that the American Banker published a survey about a month ago probably, but it was a post-COVID survey of CEOs talking about technology spending, and there is no slowdown in their minds regarding their plans for technology spending. They may have shifted a little bit to thinking about things that we can do without everybody in the office and how do I live in a world where not all of my customers are coming to the branch, as often as they used to. Those types of things are top of their list more than they were before probably. But no slowdown in spending as compared to the pre-COVID numbers which is what we were looking for was compare what our bankers are saying and credit union executives are saying post-COVID as compared to what they were saying back in December and there was absolutely no slowdown in their expectation of spending. And we're seeing that now. So, now that everything is kind of settled back in, we saw a big influx of RFPs. For example, in July particularly in the banking group people kind of settled in they've kind of put the brakes on a little bit, but how they've settled in and decided, okay, we've got to get back to reviewing technology now that we understand how dependent we're going to be on technology going forward, and so big influx in RFPs and we're excited about that for new core competitive takeaways. A reminder on the core deals is those are very long sales cycles, right? So all these RFPs that came in in July, we won't report any of those wins probably for 9 months to 12 months because they're long sales cycles, but it's really heartening to see the industry getting back to focusing on evaluating technology and making those decisions even the major decisions like core replacement.

Good. Good. That’s good to hear. Thanks for the update.

Thank you. Our next question comes from the line of Kartik Mehta from Northcoast Research. Your line is now open.

Good morning, Dave. One of the concerns surrounding banks is the potential for significant loan losses, which could negatively impact the profit and loss statement. I’m curious if your customers have expressed any worries about this and whether it's affecting their budgets. You mentioned they're continuing to spend, and it seems like their spending will increase in 2021 compared to 2020, but I’m interested in any concerns about loan losses.

You would have to be completely unaware not to feel some concern, but it's not a dominant issue among our customers. They're not expressing panic about significant balance sheet risks that would require them to withdraw and refrain from taking action. Quite the contrary, we are experiencing significant interest in our sales. In two weeks, I will be hosting an exclusive event for credit union CEOs where this will be one of the topics discussed. A month later, I will hold a similar virtual event for banking CEOs addressing the same subject, which will allow for collective input. Anecdotally, there have been no major shifts or significant expressions of worry. However, it is natural to have some level of concern regarding the current climate. Still, we do not see any decline in activity from our customers at this time.

I have spoken to a few bankers, and I want to mention that those I spoke with significantly increased their loan loss reserves at the end of the March quarter in preparation for this. Therefore, I believe that most of the impact on the profit and loss statement has already been accounted for.

That's a great point. I've mentioned before how frustrated many bankers were with CECL. However, CECL ultimately benefited them. Their focus on projecting credit losses has really served them well during these challenging times. So, even though they were annoyed with CECL a couple of years ago, I believe they now appreciate having gone through that process, as Kevin has highlighted.

That makes sense. Dave, I think, you and Kevin both mentioned interest in your private cloud and I'm wondering is there are your banks showing an interest for them wanting to go to the Amazon Web Services to outsource to that type of platform?

It doesn't happen often, but traditional banks and credit unions remain quite cautious about fully transitioning to a public cloud environment; this excludes online-only and neo banks. While some of our solutions are currently offered in a public cloud environment, the core, which is the most critical aspect, is not in high demand for that. We discuss this topic with our customers and are actively engaged in that area with other products. We're also working on several initiatives related to the core, yet there isn't significant demand for that at this time.

Kevin, I have one last question. You mentioned deconversion fees of around $33 million. Can you share your thoughts on how this might trend each quarter? Is it likely to be consistent, or do you expect some variability?

Yes, Kartik. Last year, deconversion fees are difficult to predict. Typically, by this time during an earnings call in mid-August, we have some understanding of what will happen this quarter and usually an idea for the next quarter as well. Currently, the pipeline is quite empty. As a reminder, last year we had four large customers that were acquired, and those four customers accounted for the decrease in deconversion fees that we are forecasting this year. If we consider the adjusted $21 million in deconversion revenue, we have no clear source for that, but we need to include something in the forecast because we know there will be some. I would suggest treating it as a straight line estimate, and you won't be far off, Kartik.

All right. Well, thank you very much. Appreciate it.

You bet.

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

Hey, thanks. Good morning guys. Kevin just one quick clarification on the EPS guidance. So assuming flat year-over-year term fees, you would have guided to something in the $403 million to $408 million range. I just want to make sure I'm not missing anything there.

That's absolutely correct John.

Okay. And then as I think about the COVID impact, I appreciate your commentary on the first half of the year call it, 3% to 5% back out 6% to 8%. So if I run that out, is it fair to say that COVID based on what you know today is one point to 1.5 points impact to non-GAAP revenue growth in 2021.

Yeah. Yeah. That's probably pretty close to right.

I want to discuss the impact on the financials from the shift to cloud. I understand it's 2.5 times more profitable over the life of the contract. Were there any short-term revenue challenges due to this shift to the cloud? There's been an increase in demand for outsourcing, and I'm curious if this presents a short-term revenue challenge from reduced license sales or how that affects the profit and loss statement.

Well, it's license hardware on-prem. So if you think about John, so license and hardware this year created a $4.5 million headwind not even counting the pass-throughs and different things, so that was for the year. Obviously, the biggest chunk of that was in Q4, but that was a headwind and that's very similar to the headwind we saw in the past three years as we continue to shift 45 to 50 existing in-house customers to our private cloud each year. We will continue to sell less and less add-on license products and hardware upgrades as they make that move. So we're continuing to add recurring revenue. And you're right, it's literally two times the revenue we're getting from it or more, but you don't get that the big bump in license revenues when you sell a nice complementary product in a license environment. So we're going to continue to have the $4 million to $6 million headwind again next year on our product delivery line.

Okay. That's helpful. And then lastly I just wanted to hit on the margin. I think last quarter you guys commented you expect that the adjusted operating margin to kind of be flat to slightly up. It looks like guidance implies it's going to be down call it 25 to 30 basis points. First, is that correct? And what's driving the change? And maybe is there an added layer of conservatism given the macro backdrop? That's it for me.

That is correct, John. Most of the impact will occur in the first half of the year. We are still facing additional costs from the new payment platform until we complete the first quarter. We have also accounted for the delayed license implementations and some hardware deliveries expected in the first and second quarters, which will negatively affect our margins in the first half of the year. However, we anticipate margin improvement in the second half. In the best-case scenario, we could end up flat for the year, but we are taking a slightly conservative approach with our guidance.

Okay. Thanks guys.

Thanks, John.

Thank you. Our next question comes from the line of Vasu Govil from KBW. Your line is now open.

Thank you. Thanks for taking my question, and nice to talk to you guys. I guess just first Kevin, thank you for the color on the quarterly cadence on revenue growth. Could you also tell us what's embedded in the guide in terms of segment-wise expectation in terms of core payments and complementary segments where you're expecting most of the impact from COVID to show through?

Most of it will likely be in the complementary line, and also in core, due to delays in some implementations, particularly the few in-house ones we have. Payments are returning to pre-COVID levels, and unless there is another resurgence of COVID-19 leading to economic shutdowns, I don't anticipate a significant impact on the payments line. It seems we are looking at two additional segments.

Got it. Thanks. That's helpful. And then, Dave, you sort of made some comments on what success you guys have had working remotely, and some of these practices could continue longer term. Do you think there's potential for some cost saves down the line as a result of this?

Certainly. There are a few points to consider. I don’t expect that we will shift all installations to remote methods moving forward, as that is not what our customers prefer and may not always be the most efficient approach. Instead, we'll likely adopt a hybrid model. We will continue to excel at remote implementations for tasks that suit that format, while for tasks that are less effective remotely, we will revert to on-site solutions. This approach can enhance efficiency, and theoretically, it means we'll need fewer personnel in the future due to more streamlined processes. Travel remains a factor, not just in terms of cost but also the physical toll on employees traveling for these implementations. Additionally, there are costs associated with office facilities. If we can manage certain tasks remotely from home, rather than in the office, we may find that our need for office space decreases, which we are currently assessing. I've mentioned this in my initial remarks. We are exploring what our office space needs will be moving forward. Presently, we operate from 42 locations across the country, and all of these are necessary. There are many elements currently being evaluated that tie into this topic, and while I can’t provide exact figures today, we are anticipating long-term savings.

Great, thank you very much.

Sure.

Thank you. Our next question comes from the line of David Togut from Evercore ISI. Your line is now open.

Hello. This is Josh Siegler on behalf of David Togut. Good morning. Can you please discuss your top areas of investment in FY 2021? You mentioned digital platforms in your press release. Can you discuss what investments need to be done in digital?

Sure. Digital is a significant topic for us. We believe that our Banno Digital Platform is leading the industry in terms of features and functions, and we're dedicated to enhancing it further. This year, we are focused on expanding the platform’s business functionalities and broadening the offerings. We’re integrating the Geezeo personal financial management platform and implementing online account opening through it. We aim to ensure that consumers, including both bank and credit union customers, have a consistent user experience across all functions within a single digital channel. This remains a major focus for us. Beyond that, we continuously invest in our core solutions, particularly our flagship products emphasizing credit unions and Silver Lake for banking. We are also investing in our legacy cores, with special attention to our treasury management solution, which has seen high demand and growth. We recognize the need to enhance this solution as our customers become more sophisticated. We’re still in the process of migrating to our new card processing platform. Regarding online lending, our Commercial Lending Center suite is performing well and regularly competes against nCino, especially following their recent IPO. We need to keep investing in that platform to maintain our competitive edge. Lastly, there's a growing demand for our Yellow Hammer fraud solution, which we are committed to ensuring is a top-tier option in the market. This highlights just a few of the many areas we are focusing our investments on.

Great. Thank you. Appreciate the color. Can you please help quantify the revenue and earnings benefit from the Paycheck Protection Program from your lending solutions in 4Q?

So you're talking about a P&L benefit to Jack Henry? Or you're talking about for our customers.

Sorry, for Jack Henry.

It was a relatively small dollar amount. We did not sell license fees. Instead, we established a platform to provide that solution to our customers. We were operational before the Small Business Administration was ready to fund any loans, which we take pride in since most platforms weren't ready at that time. We charged our customers based on their consumption, but it wasn't significantly impactful for Jack Henry. I don't recall the exact number, but it operated on a consumption model where if a customer processed one loan, they paid a small fee for that loan. If they processed 2,000 loans, they were charged for each of those loans with a simple fee for every loan funded through the platform. There were no ongoing charges for our customers, and no maintenance fees. It was our way of supporting them in their moment of need.

Like I said in my opening comments, it did help our transaction in digital during the quarter and helped to offset some of the card. But our transaction in digital was already growing at around 13% through the first three quarters, ended up growing just under 16%. So I mean the total impact was probably a couple of pennies maybe during the quarter that helped to offset the decreased growth in card.

Perfect. Thank you very much.

Thank you. Our next question goes from the line of Dave Koning from Baird. Your line is now open.

Yeah. Hey guys. Thank you. I guess, my first question when you think about the debit processing platform, it sounds like Q1 still higher expenses year-over-year. There still will be those costs. But maybe how do we think of the full year this year, maybe what's baked in? It seems like you might get kind of a weighted average half year benefit this year. And then maybe the last half year benefit next year. What are the dollar savings from that?

As we've stated in the past, the savings we anticipate will be similar, though the timing is slightly different. As Dave mentioned in his opening remarks, we expect to have all core customers transitioned off the platform by the end of Q1, with all non-core customers scheduled to be off the other platform by Q3. Previously, we indicated that there would be a minimum of $16 million in cost savings, some of which will be realized in Q2 and the remainder in Q4. Due to the impact of COVID and other factors we discussed for Q1 and Q2, while you will see some benefits in Q2, they won't be as significant as we previously projected because the effects of COVID were hard to anticipate. However, we do expect to see the margin improvement in Q4 that we have consistently mentioned.

Okay. That's helpful. And then, I guess, when I think about incremental margins this year, it seems like you're guiding ex term fees for revenue to grow what $80 million, $90 million, $100 million something in that range of core revenue growth. And then EBIT growth, if you take out term fees again, the decline in term fees is probably up $10 million, $15 million something like that and that includes the cost benefits of the platform conversion. So it just doesn't seem like there's that much profit growth coming from the revenue. Is that conservatism? Or are there some other costs that are happening right now that are just different than normal?

We expect to face about $6 million in reduced license fees and hardware this year, a trend we've observed over the past few years. Naturally, any decrease in license revenue, which has a 100% margin, will affect our overall margins until we can balance that with recurring revenue, which, while it has good margins, does not reach the same level as license revenue. Given the uncertainties with COVID and other factors, we are being cautious with our guidance for the year. We hope for a better outcome, but we felt it was necessary to share our projections in this unchanged environment.

Yeah, that makes sense. And I guess the corollary to that, it seems like the long-term, the next five years, 10 years whatever, the margin progression could be for you and really the industry better than normal because the shift to digital outsourcing those types of things that are higher margin than average. Is that a fair way to think about it?

It's definitely a fair way to think about it. And as Dave pointed out, in his opening comments, we've been signing a number of new card customers, which none of those are on the platform yet. I mean those are all sitting in backlog to be converted over. And those are all competitive takeaways. So that's going to be new revenue. And we've been a little hesitant on really going aggressively for new sales, until we get this migration done. So, once we get to migration done, I think our sales team is going to be even more aggressive to good stuff. And at that point, we'll be able to start some of them through ProfitStars.

Got you. Okay, great, chat guys thank you.

Thanks, Dave.

Thank you. Our next question comes from Brett Huff from Stephens, Inc. Your line is now open.

Good morning, David and Kevin. Hope you guys are both well.

Good morning.

Good morning, Brett.

Two questions, number one, Kevin thanks for the breakdown of the revenue kind of tenor through the next year. That's very helpful. Coming out I think, the guidance was 6% to 8% pro forma growth. As we think about even beyond that if we look to fiscal 2022, which I know is a long way from a crystal ball point of view, you guys have kind of grown I mean probably 7%-ish pretty consistently over the long haul. Is that a good jumping off point for thinking about fiscal 2022 and beyond? Or are there other ups or downs that we should think about starting, around that say midpoint of 7%?

So Brett obviously the unknown is what COVID is going to be. And what the lingering effect of that is going to be. But barring that, then I think 7% is a very good place to look at for FY 2022. And once we get to the migration, depending on the output of some of the RFPs that Dave mentioned which those would be impacting FY 2022, not FY 2021. And all the card activity we've got going on. I think 7% would be a conservative number for FY 2022.

Okay. That's really helpful. And then bigger picture question, you all have a great balance sheet kind of a hallmark of your company. I know at one point kind of many years ago you had sort of a spate of sort of smaller deals that you did took advantage of some price dislocations in the market. Are you seeing assets out there that are interesting to you maybe bolt-ons, maybe technology that gets you faster to where you want to be, consolidating anything like that? Any sort of thoughts on pricing of deals, and/or interest increasing because of some of the things going on? Thank you.

Thank you, Brett. It's a good question. A few weeks ago, Kevin and I discussed the situation unfolding in the industry and agreed that we needed to be prepared for opportunities. We ensured we had enough cash on the balance sheet and lines of credit, and we were determined to find a solid deal for Jack Henry. Now, several weeks have passed since that conversation, and we haven't found much, which is frustrating for us. We've successfully completed many acquisitions in the past and are confident in our ability to identify and integrate companies effectively. We're not seeking unrealistic expense synergies upfront; we're disciplined in our approach. Although we've seen a few opportunities, the pricing hasn't aligned with our expectations. We're still actively searching and remain hopeful that we will find a suitable acquisition that enhances Jack Henry, but the process has been more challenging than I anticipated.

Great, thanks for the color.

Okay.

Thank you. At this time I'm showing no further questions. I would like to turn the call back over to Kevin Williams, for closing remarks.

Thanks, Gigi. Considering the challenge that we've had in the second half of fiscal 2020, we are very pleased with the overall results from our ongoing operations. And I especially want to thank all of our associates for the way they have handled these challenges, by taking care of themselves and our customers. And continue to improve our company on many fronts, for the upcoming fiscal year and the future beyond that. Our executives, managers and all of our associates continue to focus on what is best for our customers and you our shareholders. With that I want to thank you again for joining us today. And Gigi, will you please provide the replay number?

Ladies and gentlemen, a replay is available for this call, please dial, 1-800-585-8367 or 404-537-3406 for the replay. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.