Earnings Call Transcript - JKHY Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Jack Henry & Associates Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question and answer session. 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.

Kevin Williams, CFO and Treasurer

Thanks, Brandy. Good morning and thank you all for joining us for the Jack Henry & Associates Third Quarter Fiscal 2021 Earnings Call. I'm Kevin Williams, CFO and Treasurer. And on the call with me today is David Foss, our President and CEO. In just a minute, I will turn the call over to Dave to review some of his thoughts about the state of our business, our financial and sales performance for the quarter, some comments regarding the industry in general, and how we're dealing with COVID-19 and some other key initiatives that we have in place. And after Dave concludes his comments, 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 FY 2021 which we've also provided in the release yesterday, and then we will open the line up for Q&A. First, I need to remind you that this call includes certain forward-looking statements, including remarks or responses to questions concerning future expectations events, objectives, strategies, trends or results. Like any statement about the future, these are subject to a number of factors that could cause actual results or events to differ 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. Also on this call, we would discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income. The reconciliations for historical non-GAAP financial measures can be found in yesterday's press release. I will now turn the call over to Dave.

David Foss, President and CEO

Thank you, Kevin, and good morning, everyone. We are very pleased to report another quarter of revenue and operating income growth and an overall solid performance by our business. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our third fiscal quarter. For Q3 of fiscal 2021, total revenue increased 1% for the quarter and increased 6% on a non-GAAP basis. Deconversion fees were down more than $18 million over the prior year quarter, which impacts revenue in the current quarter negatively, but as I've highlighted many times in the past, this is good news for our company if you take a long-term view. Turning to the segments, we again have a good quarter in the core segment of our business revenue decreased 4% for the quarter, because of the reduction in deconversion fees, but increased by 3% on a non-GAAP basis. Our payment segment performed very well posting a 7% increase in revenue this quarter, and a 10% increase on a non-GAAP basis. We also had a strong quarter in our complementary solutions businesses with a 1% increase in revenue this quarter and a 5% increase on a non-GAAP basis. As I mentioned in the press release, our core sales teams had an extremely solid quarter and are now seeing core activity consistent with our pre-pandemic run rate. During the quarter we inked 15 competitive core takeaways, which is greater than the one per week run rate we saw in 2019. In addition to our success signing new core clients, we signed six existing on-premise core customers to move to our private cloud environment. As we continue to push into the larger regional bank space, I think it's significant to note that of the 15 new core deals in the quarter, five were with multibillion-dollar asset banks and credit unions. As a reminder, regarding the topic of new core wins, at Jack Henry, we only call out new core deals when a bank or credit union moves their entire core processing relationship from a competitor system to a Jack Henry core solution. We do not announce them as a new core win if they move from one Jack Henry core to another or if they simply purchase a new module from us. Think of it as a new logo on the Jack Henry core customer list that wasn't there previously. In addition to the tremendous success we saw with our core business this quarter, we continue to sign new clients to our new digital offerings. During the third quarter, we signed 42 new clients to our Banno platform, and we continue to see increased interest in this offering as well as the rest of our digital suite. In our April 6th press release regarding digital momentum, we shared that we had more than 400 financial institutions and more than 4.3 million users live on the Banno platform. As of May 1st, however, we have added several more financial institutions and we now have just over 5 million users live. We continue to enjoy the highest consumer rating in the App Store, and we are regularly recognized as the fastest application in the industry. As I've said before, I expect our success in this area to grow as we continue to add new functionality and features to the platform. Regarding the ongoing migrations of our new card processing platform, as of the end of March, we have successfully completed the migration of all of our debit processing customers to the new platform, in accordance with the plan we've been discussing for more than three years. Here are a few statistics regarding this remarkably successful project. We did our first migration on October 30, 2017, and completed the project on March 26, 2021. That's 1,243 days. During that time, we migrated 879 customers and added 151 new debit and credit customers to the platform. We currently support 1,030 banks and credit unions on the platform, and we're adding new clients every month. You will start to see the larger positive impact of this completed project on our financials in the fourth fiscal quarter. As we have emphasized throughout the process, I'm very proud of our team and thankful to our partners and clients for working with us to achieve such a successful outcome. As you've probably heard, M&A has become a topic again among bankers now that they're more confident about their operating models and the overall economy. Several of our clients have approached us recently to work with them as they prepare to complete acquisitions of smaller institutions. In fact, the CEOs of two regional banks currently processed by Jack Henry were quoted in an American banker article last week regarding their desire to pick up where they left off, before the pandemic brought everything to a halt. We expect our activity and what we refer to as the convert-merge area of our business to pick up again as we get into the summer months and new deals are announced. Speaking of American Banker, hopefully you all saw their article last month, announcing that once again, Jack Henry has been recognized by their team as a best place to work in Fintech. American Banker only recognizes 50 companies each year, and as you can probably imagine, almost all of the companies on the Fintech list generate less than $100 million in annual revenue, pretty much in keeping with the type of company most people think of when they hear the word Fintech. We are particularly proud of this recognition for a few reasons. First, the scores are based on surveys conducted with our employees by an independent agency. Second, this is our fifth year in a row to receive this designation from American Banker. Third, we are many times larger than almost any other company on the list, and fourth, none of our larger competitors have ever made this list. I think this recognition is indicative of the culture, entrepreneurial spirit and commitment to developing truly innovative solutions found within the teams at Jack Henry. As you have undoubtedly already noted from yesterday's press release, we purchased a significant number of shares in the quarter with a lack of good quality acquisitions for us to pursue, and with our stock at an attractive price, we worked with the board to authorize an additional repurchase under the existing plan, which enabled us to buy 1,825,000 shares during the quarter. This significant share repurchase does not foreshadow a change in our strategy in this regard. We will continue to be opportunistic in our approach to purchasing our own shares, as we have excess cash and a lack of acquisition targets that fit our strategy. Hopefully, you've all seen the press release we posted this morning, announcing the upcoming retirement of our longtime Chairman, Jack Prim. Of course, many of you know Jack is the guy who sat in this chair before I became CEO at Jack Henry. As I said in today's press release, Jack has given many years to our company as a business leader, a board member and a friend to us all. He has had a significant impact on the success of our company and on me personally. And for that, I want to sincerely thank him on behalf of all of us at Jack Henry. Recognizing that Jack has been considering a potential retirement for some time, we were prepared for his decision and expect our process to allow us to fill the vacancy close in time to Jack's retirement date. We hope to have more information to share regarding a new board member and the new chairman before the end of June. Slowly but surely, our customers are settling into a new mode of operation with the anticipation of most COVID restrictions being lifted in the coming months. We're still operating with well over 90% of our employees working full-time remote. We are committed to our return to office date of July 1st. We are finalizing plans for office usage and staffing that will employ a hybrid work from home, work in office strategy, and we will continue to leverage remote sales and implementation tools where possible. We still have some work to do and some things to learn. And I'm very optimistic about our ability to be successful as the work environment shifts again, post COVID. As we look toward the end of our fiscal year, our sales pipeline is very robust, and we continue to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our customers, our ability to expand our customer relationships, the spending environment, and our long-term prospects for success. I look forward to seeing and chatting with many of you at a Virtual Analysts Conference next week. With that, I'll turn it over to Kevin for some detail on the numbers.

Kevin Williams, CFO and Treasurer

Thanks, Dave. For the quarter, our services and support revenue decreased 6% in the third quarter fiscal 2021 compared to the same quarter year ago. However, adjusting that services and support revenue for deconversion fees of $4,367,000 in the current quarter, and deconversion fees of $22.8 million and revenue from divestitures last year in the prior fiscal quarter. On a non-GAAP basis, this revenue line would have grown actually 2% for the quarter compared to the previous year, which obviously, as Dave mentioned, has a lot of pressure and headwinds for our convert-merge revenue, and also hardware in the quarter. Year-to-date, our deconversion fees are now down $33 million compared to the prior year, which if you remember the guidance that we provided back in August, that is right in line with the full year impact. Services and support revenue primary driver was data processing and hosting fees and our private and public cloud offerings, which continues to show strong growth in the quarter compared to the previous year. However, the growth in that line was totally offset by the decrease in our product delivery and services revenue, which again was due to our decreased hardware, implementation revenue for on-prem customers, convert-merge implementation, which is also down to the significant decrease in M&A activity, pass-through revenues that is related to billable travel, primarily related to travel limitations related to COVID. And then obviously, deconversion fee revenue for the quarter, compared to the prior year quarter, which is down almost $18 million. Processing revenue increased 13% in third quarter fiscal 2021, compared to the same quarter last year. This increase is primarily driven by higher card volumes for new customers installed last year, and also increased debit card usage from existing customers. Our Jack Henry digital revenue experienced the highest percentage of growth of all revenue lines in both Q3 and year-to-date this year, compared to the same periods last year. Our total revenue was up 1% for the quarter compared to last year on a GAAP basis and was up 6% on a non-GAAP basis. Cost of revenue was up 4% compared to last year second quarter. The increase was primarily due to higher costs associated with our card processing platform, and higher personnel costs related to increase headcount in March 31 compared to a year ago. The increase in costs was partially offset by travel expense savings as a result of COVID travel limitations. Our research development expense decreased 3% for the third quarter of fiscal 2021 over the prior fiscal year. This decrease was primarily due to a higher percentage of costs being capitalized for product development as we continue to invest in our products this quarter compared to a year ago. Our SG&A expense decreased 6% in the second quarter fiscal 2021 over the same quarter, and this decrease was primarily due to travel-related savings. Our reported consolidated operating margins decreased from 21.4% last year to 21% this year, which is primarily due to the various revenue headwinds already pointed out an increased cost. However, on a non-GAAP basis, our operating margins increased nicely, and we saw a strong margin expansion from 18.1% last year to 20.3% this year, primarily due to the items already mentioned. Our payments segment margins were impacted by deconversion fees in the quarter, but on a non-GAAP basis, our payments margin improved slightly with the completion of the platform migration. Both our core and complementary segments had a decrease in GAAP margins, but both of them had a nice increase in non-GAAP margins. So our underlying operations continue to be very strong as we move forward through the year. The effective tax rate for the third quarter of fiscal 2021 was 21.5%, up from 19.7% in the same quarter year ago. This increase in the effective tax rate is primarily due to the change in the timing of the release of respective reserves for uncertain tax positions, resulting from varying statute of limitation periods. Our net income was $71.4 million in the third quarter compared to $73.9 million last year, with earnings per share of $0.95 for the current quarter compared to $0.96 last year. For cash flow, our total amortization increased 3% year-to-date compared to last year due to capitalized projects being placed into service in the prior year. Included in this total amortization is amortization and intangibles related to acquisitions, which decreased $13.3 million this year compared to $15.4 million last year. Depreciation is up 3% primarily due to CapEx in the previous year, and those assets being placed into service. As Dave mentioned, we've purchased $2.5 million shares year-to-date for $384.4 million, and we paid dividends of just right at $100 million for a total return to shareholders of $484.2 million year-to-date. Our operating cash flow was $266.3 million for the first nine months of fiscal year, which is down a little from $276 million last year, which is also impacted by the significant decrease in deconversion fees this year-to-date, compared to last year. We invested $116.7 million back into our company through CapEx and capitalized software year-to-date. Our free cash flow, which is operating cash flow less CapEx and capital software and then adding back net proceeds from disposal of assets, is $155.8 million year-to-date. A couple of comments on our balance sheet. Our cash position is $70.1 compared to $109.5 million years ago, so we still have decent cash for operations. We did draw down $200 million on a revolver during the quarter to fund our stock buybacks. But we have no other long-term debt on our balance sheet other than operating leases. Our return on invested capital for our trailing 12 months is 19.2%, and our return on equity for the trailing 12 months is 20.9%, which is very solid. For update on guidance, we did update both our GAAP and non-GAAP revenue guidance in the press release yesterday for the full fiscal year. However, just to be clear, this guidance continues to be based on the assumption that the country continues to open up and the economy continues to improve. But if things do go differently, then obviously this guidance will be revised. We've been very consistent with our GAAP guidance that revenue from deconversion fees would be a decrease of approximately $33 million compared to last year, which we hit that mark as I previously said during our fiscal Q3. And it now appears that deconversion revenue will actually be down by another $4 million in Q4 compared to the previous year for a total decrease of approximately $37 million in deconversion fees compared to the last fiscal year. We continue to see no immediate M&A activity that would drive deconversion revenue at this point, which in the short term will hurt and will continue to hurt our revenue growth for the fiscal year. But in the long term, as we've always said, we don't like deconversion revenue as we would much rather keep the customer and the revenue for the long term. This means based on the GAAP revenue guidance provided in the press release impacted by the decrease in deconversion fees, we expect GAAP revenue growth in FY 2021 to be 3 to 3.5%. The adjusted between GAAP and non-GAAP revenue guidance for FY 2021 is the decrease in deconversion fees compared to the previous year and the small revenue impact from the cruise divestiture during Q2 that was removed from FY 2020 for comparison purposes. For non-GAAP revenue growth guidance provided in the release, we're now guiding to approximately 6% growth due to the ongoing headwinds previously discussed in the various lines of revenue. So we still anticipate we're going to grow by 6% this year, which means Q4 is going to have really nice revenue growth to get our slightly less than 5% year-to-date up to that 6% for the year. We anticipate GAAP operating margins for the full year of FY 2021 to be down slightly at about 22% compared to last year for all the reasons further discussed. And non-GAAP margins should actually improve slightly compared to last year for the entire fiscal year, similar to what we've seen in the first three quarters. Our effective tax rate for the full year of FY 2021 should be in line with that FY 2020 rate at around 22%, assuming there are no federal or state tax law changes between now and the end of year that would impact our fiscal year. We've also increased our full-year EPS guidance for FY 2021 again, this quarter, which we've provided last quarter range of $3.85 to $3.90. We are now updating our EPS guidance for FY 2021 to a range of $3.98 to $4.02. The increase in guidance is primarily due to expense control, margin improvement for the year and continued improved efficiencies which is offsetting the impact of deconversion fees. With that, this concludes our opening comments. And we are now ready to take questions. Brandy, will you please open the call lines up for questions?

Operator, Operator

Your first question comes from the line of Peter Heckmann with D.A. Davidson.

Peter Heckmann, Analyst

Hey, good morning, gentlemen. Thanks for taking the question. Just in terms of the payment platform migration, can you remind us the cost savings from closing down the two duplicative cloud platforms? And kind of just on a preliminary basis, what type of adjusted operating margin expansion you think that that sets us up for, for fiscal 2022?

Kevin Williams, CFO and Treasurer

So, Pete, we have consistently stated that we expect to achieve at least $16 million in cost savings from this initiative, and we remain committed to that goal. However, not all of that will materialize this quarter as it reflects an annual run rate. We are currently in the process of decommissioning both platforms, which means the associated costs won't all be accounted for in this quarter. In addition, there are other tasks we need to complete by the end of December, including programming and various activities, to fully realize the efficiencies from the new platforms. Therefore, we anticipate that the complete quarterly impact of the $16 million cost savings will be seen in Q3 of the next fiscal year, although we will start to see some benefits in this quarter. You can expect to observe some payments and margin expansion in Q4, with additional growth in Q1 and Q2, and even more in Q3 of next year.

Peter Heckmann, Analyst

Got it. That's helpful. Regarding the marketplace and your discussions with financial institutions, have there been any shifts in priorities over the past three to six months? What are the key products that people are interested in? Also, could you provide an update? I recall you mentioned Banno's performance for the quarter, but could you refresh us on the year-to-date performance of other newer solutions like treasury and loan origination?

David Foss, President and CEO

Sure. It's Dave, Pete. I won't say that there have been any major changes this quarter. We began to notice a shift earlier in the fiscal year focusing more on digital solutions that enable our customers' customers, whether they are consumers or commercial users, to conduct more business without needing to visit a branch. The digital platform has definitely been at the forefront of this trend. I want to emphasize what I stated in my opening comments. In the press release from April 6th, we noted that we had approximately 400 institutions and 4.3 million users live. As of May 4th, we now have over 5 million users live. This highlights the significant shift occurring among banks and credit unions to provide their customers with top-notch digital technology. This has been a crucial driver for both our customers and for us. Treasury services are also an important part of this picture. We have added 12 new treasury customers to our platform this year, which again shows the move towards more digital functionality. However, large commercial customers typically require a treasury solution, while smaller clients generally use cash management services, indicating the scale of customer engagement. On the lending side, I've mentioned this before, we are enabling commercial customers to manage complex loans online without needing to visit the branch for their financial statements and other documentation. We have recently introduced a lending marketplace feature that allows customers to sell credits that are too large for them to manage to other lenders willing to take on that responsibility. There is a lot of activity in all these areas. The overarching trend is a shift towards conducting business in a digital environment rather than physically visiting the branch. That is what is driving all of the initiatives I just discussed.

Peter Heckmann, Analyst

Got it. Thanks. So just housekeeping. Kevin, what would you say would be ending diluted shares for the period?

Kevin Williams, CFO and Treasurer

It's around 75, right.

David Foss, President and CEO

Yes. That's right around 75, Pete.

Kartik Mehta, Analyst

Hey. Good morning, Dave and Kevin. Dave, I was just wondering if you could talk about what you think the backlog has been for your sales pipeline. I know you talked about it last quarter, and seems like things were really improving. Now, I'm wondering if that momentum is continued, and/or if there's any headwinds, because you might still not be able to see your customers face-to-face?

David Foss, President and CEO

Actually, Kartik, that's one of the real pieces of good news in all this. That's why I refer to it as a robust pipeline in the press release. We've successfully transitioned to enabling our sales team and customers to do business remotely. While they still appreciate in-person visits occasionally, and some customers insist on having the sales rep come in, we are conducting a lot of this remotely. Many of the demonstrations we now perform, which previously required five or six people on site, now often only involve one or two on site. The others join through Teams or Zoom for the demonstration. This shift has made it acceptable for much of the sale to occur virtually. A key indicator for us of the strength of our sales pipeline is if we are at about 90% of our annual quota at any point in time. If we maintain around 90% of the annual quota in the pipeline, it suggests that we have enough momentum to meet our targets. We are currently at that mark, which indicates that customers are engaging with us, and salespeople are actively working on deals. We're seeing a normal run rate similar to what we experienced in 2019. The number of engagements and the volume of deals flowing through the pipeline are aligned with what we saw back in 2019.

Kevin Williams, CFO and Treasurer

And Kartik, the other part of your question was about the backlog. I mean, remember, and we've talked about this for years, the vast majority of our products have anywhere from a nine to 18 month backlog of installs at any given time. And so, we have some of those backlogs have gotten a little smaller, but all of our backlogs, all our products are still very solid, very strong. And as Dave mentioned on his opening comments, we signed 15 new core deals, and none of those are going to be installed this fiscal year. Those are all going to be next year. So all those are going into our backlog along with all the other products that are being sold.

Kartik Mehta, Analyst

And so, Kevin, I know, you don't want to talk too much about FY 2022. But based on Dave's comments and your comments, is there any reason that you shouldn't be able to continue to accelerate top line? I'm not talking about going from 6% to 9%. But at least continue to see modest improvement in top line?

Kevin Williams, CFO and Treasurer

Yes, Kartik, we are beginning the budget process for next year. I am confident that revenue growth will be stronger next year compared to this year. As the economy evolves, we are focusing on completing the payments migration so we can concentrate on gaining new customers rather than just migrating our existing ones. Successfully completing that migration without disrupting our customers is a significant accomplishment. This should positively impact our payment growth. Additionally, our remote deposit capture, while not flashy, remains a strong and growing factor. Looking ahead to the new core wins and the migrations we have from end to out, I believe there is no reason our revenue growth in the next fiscal year shouldn’t increase nicely from this year.

David Togut, Analyst

Thank you. Good morning. Could you comment on the sustainability of this improvement in the quarter to 15 core deals up from what we've seen prior to this during COVID of about six to seven? Is this the new high watermark that you're shooting for in the next kind of 12 months or so?

David Foss, President and CEO

Yes. I don't have a crystal ball, Dave. So I can't give you exact prediction. But what we are seeing today, as I've quoted in my comments, we are back to the runway that we saw in 2019. And I talked about it many times on the calls of the time that we were on this run rate of booking one competitive takeaway per week. Can I say with absolute certainty that we're going to do 52 deals next year? No. But it's certainly the pace right now, and everything that we see in the pipeline for the next coming months, the pace is definitely greater than it has been during, during COVID-19, during the depths of COVID-19, I guess I'll put it that way. And it's logical. I don't think anybody should be surprised that there was a slowdown in those core decisions during the pandemic. Because as we've talked about before, when you're the CEO of a bank or credit union, and you decide to switch out your core, that's essentially making a decision to do heart and lung transplant all at the same time for your institution. And it's a very disruptive, no matter how smooth it goes, it's a disruptive process. And why would you make that decision unless you absolutely have to? Why would you make that decision in the midst of a global pandemic? And so I think it's totally logical that we're back to that pace all. If you take COVID out of the picture, all the other reasons for a customer to move to Jack Henry, those are all they're still just like they were in 2019. And so I think these bank and credit union executives are seeing that now. They know how to manage through in the COVID world. And now they're back to thinking about how do I find the best-of-breed provider on the core side. And let's go talk to Jack Henry.

David Togut, Analyst

Thanks for that. And just as a follow up, what are your preliminary expectations for fiscal 2022 adjusted operating margin? Kevin, you noted that you would complete the full platform conversion in payments by the third quarter of fiscal 2022. Does that lead to a significant margin boost next year?

David Foss, President and CEO

Well, let's be clear here. The platform conversion is done. All the customers have moved off the legacy platform. So we're done with the conversion. It's the follow on, you can't just flip the light switch and say, okay now, everything's turned off. So that's what Kevin was alluding to, and sorry to talk over.

Kevin Williams, CFO and Treasurer

You're fine. So yes, there may be a nice margin expansion next year. As I mentioned earlier, our non-GAAP results will end up pretty much in line and slightly above last year's figures. We expect to gain more than 100 basis points in operating margin for FY 2022. Could it be more than that? Yes, but as I said before, it's going to take us some additional time to eliminate all these costs. I believe we will have everything streamlined by the end of the second quarter, so expect continued margin improvement throughout the next fiscal year. The full impact of the cost reduction from the payment migration will be seen in Q3. As we continue to acquire new payments and core customers, and as we migrate our on-premise customers to the private cloud, all these factors will enhance our margins. Another important aspect that many overlook is the effect of M&A activity on our deconversion fees, which are down. However, as Dave mentioned, our convert-merge revenue is also impacted. Our customers are actively acquiring, which has resulted in significant challenges to our convert-merge revenue this fiscal year. We are managing the risks and have made some layoffs, but we still have all the associated costs. Therefore, an increase in M&A activity will not only restore some of the deconversion fee revenue that we are not looking to pursue, but it will also benefit our convert-merge revenue, ultimately helping our operating margins. There are numerous positive developments that will support our operating margins as conditions stabilize, Dave.

David Togut, Analyst

Understood. Thank you very much.

David Foss, President and CEO

One, one comment I'll add here while you're shifting to a new question. I didn't call it out in my comments. But just since Dave asked about, the impacts of this platform conversion. Kevin pointed out that we're continuing to add new customers. I didn't call it in my comments. But we added 13 more brand new customers to that platform during the quarter. So this really is a growth driver for us now that we're through the migration. We're continuing to add customers to that platform net new.

Steve Comery, Analyst

Hey, good morning. I was actually going to get to ask him about that. You know, just some high-level thoughts on the feedback from customers. Now that the card platform has totally transitioned. Any momentum selling the new platform and kind of just general high-level thoughts on what the opportunity is there?

David Foss, President and CEO

Yes. Thank you, Steve. The conversion has been amazing and successful. We've put in significant effort to migrate our customers, adding 150 new customers, with another 13 this quarter who weren't previously using our card platform. We're now in a position to sell credit, which was not possible before the new platform was implemented. Customer feedback has been outstanding, and they are much happier, which contributes to our success in acquiring new customers. This has proven to be the right move for Jack Henry. It was a long-term project that had its challenges, but it has ultimately been beneficial for our customers and positions us well for future growth. I want to emphasize that our old platform relied on the Jack Henry core system for the debit platforms to operate. In contrast, the new platform doesn't depend on the Jack Henry core system, allowing us to sell debit and credit outside of the Jack Henry core base, which we could not do before. This puts us in a strong position to attract new customers both from outside and within the Jack Henry core base.

Steve Comery, Analyst

Yes. And actually, my next question is on the same topic. So Banno, I think historically has been primarily marketed to Jack Henry core customers. Just any sort of thoughts on the puts and takes, as far as marketing that outside the Jack Henry Core base? Or is there still a lot of empty space to go into current Jack Henry core customers there?

David Foss, President and CEO

Yes. It's a good question. There is a lot of opportunity within the Jack Henry core base. And what I've highlighted in the past is we are intensely focused right now on delivering Banno business, which is the other big chunk. So Banno so far has been positioned as a consumer application. Banno business will be delivered later this year. And by the way, those of you who attend the Analyst Day next week, the person who runs digital for us is going to update you on that Banno business and kind of what that means for us. But Banno business will be delivered later this calendar year. And so once we have Banno consumer and Banno business all up and running and live and good to go, then we start selling outside the Jack Henry core base. So that'll be later in calendar 2022 is when we'll start selling outside the core base. But we want to make sure that we have everything tightened right with our core customers before we start to go after sales outside the Jack Henry core base. But we definitely will be doing that. And right now the target is late calendar 2022.

Kevin Williams, CFO and Treasurer

I'll just add one thing to that. Currently, we have just over 20% of our core customers using Banno, which gives us significant growth potential. As Dave mentioned, our priority is to support our core customers. Additionally, I've observed something unique in my long experience in this industry; we've successfully secured some key core deals thanks to Banno, where other complementary products have not achieved similar results. This reinforces the importance of ensuring our core customers are well taken care of before we expand our sales efforts beyond our existing base.

Steve Comery, Analyst

Then just one final clarification there on the Banno consumer versus Banno business? Is the revenue opportunity similar for each product? Or how would you handicap that?

Kevin Williams, CFO and Treasurer

That's a good question. I would say, a commercial customer tends to pay more for that functionality than a consumer does. But you don't have as many of them to work with at each institution. So, depending on the makeup of the institution, if they're highly commercial focused, I'd say there's a greater opportunity at that institution. If they're primarily consumer focused retail, then there's a lesser opportunity. So it just depends on the institution, the makeup of the institution. But if they're heavily commercial, there is a significant opportunity once we roll out that functionality. So we'll go around to our existing customers who are running Banno consumer, you'll be first on the list to say, okay, now we have a Banno for business, let's add that, and that will be essentially the easy button for those customers that have already deployed Banno for their consumer base.

John Davis, Analyst

Hey, good morning, guys. Kevin, just want to start out on the margin. I think Q3 was a good bit better than like we and most people expected, but then the Q4 guide I think implies a little bit of a deterioration. Historically, you've seen a little bit of a hiccup in Q4. So maybe just know the puts and takes of the margin sequentially as we enter the fourth quarter here?

Kevin Williams, CFO and Treasurer

Yes. Part of that JD is Q3. We had significant savings from travel-related costs. We're beginning to ramp up travel again. Our corporate travel is nearly at pre-COVID levels, while commercial travel is still lagging. I believe travel will continue to increase in Q4, which is the only negative impact I foresee on margins in that quarter. Everything else is roughly where it should be. Additionally, we aren't seeing much in terms of convert-merge revenue, which typically offers us good margins. As M&A activity starts to gain momentum—and as Dave mentioned, there is a lot of interest in M&A—our customers are eager to reconnect with us. I anticipate that this will pick up in the next fiscal year, but I don’t expect significant activity in Q4.

John Davis, Analyst

Okay. That's helpful. And then, any comments on stimulus impacts? Was there in the guide before that's what's driving the modest uptick in the non-GAAP deconversion fee revenue. Just curious if you guys have seen any kind of impact on your debit processing business from stimulus?

Kevin Williams, CFO and Treasurer

So there has been some impact on the debit business, we haven't tried to quantify that as a separate standalone number. Certainly, there has been a significant growth on the debit business. The interesting thing is stimulus payments have definitely been a driver for growth in digital, so not just for Banno but for anybody who's out there in this space. Because customers who have been looking to access that money and manage their money through the digital channel, that has been a driver in transaction volume, and also in growth of users. I think that's across the industry. Because so many consumers now have been actively trying to manage those stimulus payments. But as far as debit volume, we haven't tried to carve that out and segregate the impact of stimulus from the rest of the volume, it's just baked in the numbers.

John Davis, Analyst

Okay. Thanks. And then, Kevin, it's been a long time since I've seen you guys be as aggressive on the buyback. My math, right, you guys spent about $275 million in the quarter on the buyback, obviously, still have a phenomenal balance sheet, plenty of firepower there. So any reason why maybe not to that level, but you wouldn't continue to buy back shares here? Just curious commentary. And maybe you can leave in if there's been any changes in the M&A environment, which I'm kind of doubting in given valuations, but just curious that too?

Kevin Williams, CFO and Treasurer

So that's one of the things I tried to be clear about in my opening comments, JD was that this does not signal some significant change in our strategy. We've said time and time again, that if we have excess cash, we don't see a good acquisition on the horizon. We will do stock buybacks. We're committed to our dividend policy, but we'll do stock buybacks absent a good acquisition. One of the challenges that we've highlighted many times on these calls is, valuations are getting pretty high on these potential companies that we could acquire. Everybody has stars in their eyes about doing an IPO and/or possibly us back and getting some great big valuation. And so, absent solid acquisition that fits our strategy, share buybacks continue to be an option for us, particularly when the share price is down like it was here a few months ago. That's what really drove us to get more active with the board and make a significant move.

John Davis, Analyst

Okay. And that last one for me. Dave, maybe a little clear picture here. Just the competitive dynamics in the core segment. Maybe splice out credit unions versus banks. One of your competitors has made some noise about making some progress on credit unions lately. So just curious there if anything's changed through the pandemic, or kind of how you see it today?

David Foss, President and CEO

Absolutely not. So, we have the deals that we won this year. We've won 17 competitive takeaways on the credit union side of the business. So very strong on the credit union side, no change with the competitive landscape. There is nobody winning as many deals as Jack Henry as far as new core displacement. And that was true before the pandemic. It is true today. I don't think anything of any significance has changed because of the pandemic with regard to our positioning on the core side or ability to win on the core side.

Ken Suchoski, Analyst

Hi, good morning, David and Kevin. Thanks for taking my question. I think you mentioned that five out of the 15 core competitive takeaways were multibillion dollar institutions. And I believe Jack Henry historically has focused primarily on smaller institutions in the market. So can you talk about your appetite to move upmarket? And then, are there any features or capabilities you need to add to really push upmarket and be successful there?

David Foss, President and CEO

That is a misconception that really frustrates me. Jack Henry has been involved in the multibillion dollar space for over 10 years. If we were having this discussion 15 years ago, I would have agreed with your point, as we weren't a player in that market back then. However, for the past 10 to 15 years, we have been growing significantly in that space. We hold a dominant position on the credit union side, with nearly 50% of credit unions over a billion dollars using our Jack Henry Episys solution. We are clearly the leading player on that side. On the banking side, we serve approximately 23% to 25% of the multibillion dollar market, predominantly through our Silver Lake platform. Our strategy involves pushing further up-market, and we’ve been enhancing our functionality over the years, allowing us to consistently win in this segment, as I pointed out during the call. We are not a minor player in the multibillion dollar banking space; we are very much a contender. Historically, we have focused on institutions below about 50 billion dollars, but we are now making efforts to move above that threshold, which has not been our traditional market. We do not aim to target smaller banks; our ideal clients are credit unions with around a billion dollars in assets, as those are where we fit best. Over the years, we have been successfully expanding into the up-market space.

Ken Suchoski, Analyst

Right. Okay. That's really helpful. And then, I guess, when we think about margins for fiscal year 2023, the platform migration will be behind you. I mean, what's the right way to think about margins, or even margin expansion after fiscal year 2022? And I'm just looking back at some numbers here. I mean, Jack Henry had a roughly 24% operating margin in fiscal year 2018. Is that, is that a good benchmark for fiscal year 2023?

Kevin Williams, CFO and Treasurer

Yes, that's likely. It's Kevin. Once we move past next year and fully realize the benefits of the payment and platform migrations, we should return in fiscal year 2023 to the typical margin expansion of 50 to 100 basis points that we historically experienced before starting this process. If you consider that we began the payment platform migration in 2018, there was already some decline in our margins back then, which has continued to worsen since. Therefore, we can expect significant margin expansion in both 2022 and again in 2023.

Ken Suchoski, Analyst

Right. Yes. I think that's right. Yes. I think the margins came down about 30 basis points, it looks like in 2018 versus 2017. And then just maybe one last question for me, I think if I do the math right, you're going to accelerate your non-GAAP revenue growth to kind of high single digits, maybe even low double digits here in fiscal 4Q. Can you talk about the sustainability of that growth rate? And do you think fiscal year 2022 can grow at a similar level? Or is it something below that a good assumption?

Kevin Williams, CFO and Treasurer

No. So there's a couple of things that you got to remember. In Q4 is, we've got some pretty easy comps from last year, especially on the payment side. So you're right and your math, right. I mean, non-GAAP, you're going to see very high single digit growth, maybe even low double, but it's probably going to be in a 8% to 9% in Q4 to get us to that 6% non-GAAP growth for the year. But like I answered a previous question, I think for FY 2022, you're probably going to see us grow faster than we did in FY 2021. There's not going to be high single digits. It's probably going to be in the 7% to 8% range like we saw before the pandemic hit.

Vasu Govil, Analyst

Hi. Thanks for squeezing me in here. I guess my first question is just a clarification question on the revenue guide. The delta between the GAAP and the non-GAAP, I think it was roughly $30 million prior quarter, and now it's about $17 million. But I think, Kevin, you talked about deconversion fees going down four to five million I thought. So like, what's, what's the remaining delta kind of you could provide? Some clarification there?

Kevin Williams, CFO and Treasurer

A lot happened this quarter. As I mentioned earlier, our convert-merge revenue fell short of expectations. We're not seeing much M&A activity, and hardware sales continued to decline, as did on-prem installation. The significant changes weren't really in Q4; they were primarily in Q3. We came up a bit short, as many of you noted in your call notes, resulting in a revenue miss. However, we managed to be efficient, expand our margins, exceed EPS consensus guidance for the quarter, and have raised it for the year. So while there was some change, the impact on Q4 is not as significant as what occurred in Q3.

Vasu Govil, Analyst

Understood. And then I guess continuing on the 3Q trends. The core and the payment segment, if I look at the non-GAAP growth rate, payments was a lot better in core improvements with a little bit less than we would have thought just given also the easier comps in core. So if you could talk about like the puts and takes and sort of what drove the growth rate and what you're expecting for the fourth quarter?

Kevin Williams, CFO and Treasurer

So again, in core is because of on-prem installations and convert-merge revenue not being where we thought they were going to be as we guide it. And we just don't see those coming back in Q4 either.

Operator, Operator

Your next question comes from the line of Dominick Gabriele with Oppenheimer.

Dominick Gabriele, Analyst

Hey, everybody. Thanks so much for taking my questions. You mentioned the $37 million decrease year-over-year in deconversion fees. And I'm actually not even asking about that. But what I'm curious about is the dynamic between winning new deals, and the lack of switching among your existing clients and how your retention rates have changed over time? And how that's really the retention rate is baked into your forecasts, moving forward? Thanks.

David Foss, President and CEO

Our retention rate is exceptionally high, and we frequently discuss it. There might be some misunderstanding regarding deconversion fees. These fees arise when one of our customers is acquired by another company, leading them to pay to exit their existing contract with us. We cannot control whether a customer is acquired. However, we have a positive history of persuading the acquiring company to switch to the Jack Henry system, although these instances are infrequent and challenging since the acquiring firm makes all the decisions. There have been occasions when we've successfully convinced the acquiring bank to transition to our system, but such cases are hard to achieve. Therefore, the source of deconversion revenue is the acquisition of one of our customers, not because they are dissatisfied with Jack Henry and choose to leave. It is always due to their acquisition. This situation does not impact our conversation about retention rates, which remain well over 90% for our core customer base.

Dominick Gabriele, Analyst

Okay, great. And then maybe if you could talk about the R&D expense, and kind of what some of the projects you're working on there? And where you're expecting your R&D expense to be trending over the next whatever timeframe, I guess, you feel like providing, that'd be really, really helpful? It was a little lower than I would have expected. Thanks.

Kevin Williams, CFO and Treasurer

We typically allocate about 14% of our revenue for research and development. This encompasses both capital software and R&D expenses, and we have maintained this figure for over five years. I feel confident in this percentage moving forward as we are dedicated to developing innovative solutions. Some of these solutions include significant investments in digital initiatives and enhancements to our treasury platform, which larger banks that serve bigger commercial clients continue to seek. We are also focused on our core systems, where we consistently invest to add new features and improve user experience. Additionally, our lending platform is a priority, with ongoing investments aimed at expanding functionality, particularly for commercial online lending. We have also recently enhanced capabilities in consumer lending and deposits to provide top-notch online account origination. Lastly, we are making considerable investments in fraud prevention, aiming to improve the digital experience for our customers in managing fraud.

Dominick Gabriele, Analyst

Great. Thanks. That's really, really helpful. I really appreciate it. And maybe just one more. Is there any difference between the conversations within your sales force between actually obtaining new credit union versus bank clients as a whole? And I guess, all I'm asking is, is there one that's ready to re-accelerate their tech stack into the future versus one and clearly, you guys are a big leader in the credit union space? So thank you so much. I really appreciate it.

David Foss, President and CEO

It's an interesting question. I wouldn't say that the credit union industry is ahead of the banking industry or vice versa. Historically, credit unions have tended to be more forward-thinking in terms of technology. They have always been more willing to invest in technology, dating back to when I first started in this business many years ago. Credit unions have prioritized technology, using it as a way to stand out from banks, not just large banks, but banks in general. One reason for this is that they generally have more resources to allocate toward technology since they haven't historically built as many branches as banks. They've focused on technology as a differentiator, but I don't see any recent changes in either sector regarding their approach or aggressiveness in pursuing new technology.

Vasu Govil, Analyst

Kevin Williams, CFO and Treasurer

A lot happened this quarter. As I mentioned earlier, our convert-merge revenue did not meet our expectations. We are not seeing much M&A activity, hardware sales continue to decline, and on-prem installations are also down. The significant changes actually occurred in Q3, not Q4. We fell short of revenue expectations, as many of you noted in your first call notes. However, we maintained efficiency, expanded our margins, and exceeded earnings per share consensus guidance for the quarter, which we have also raised for the year. The change in our projections is minor and does not significantly affect Q4 compared to what occurred in Q3.

Vasu Govil, Analyst

Kevin Williams, CFO and Treasurer

So again, in core is because of on-prem installations and convert-merge revenue not being where we thought they were going to be as we guide it. And we just don't see those coming back in Q4 either.

Operator, Operator

And there are no further questions at this time.

Kevin Williams, CFO and Treasurer

Thanks, Brandy. As a reminder, as Dave mentioned, our Virtual Analyst Day is scheduled next week, a week from today, actually, on Tuesday, May 11. It'll be beginning at one o'clock. If you have not registered, but you would like to, you can contact Vance Sherard. That's [email protected]. And he can send you a registration link to sign up for the event. Now wrap up the call. We're very pleased with the overall results from our ongoing operations. And I want to thank all of our associates for the way they've handled these challenges by taking care of themselves and our customers and continue to work hard to improve our company to continue moving forward for the future. All of us at Jack Henry continue to focus on what is best for our customers and our shareholders. With that, I want to thank you again for joining us today. And Brandy, would you please now provide the replay number for the call.

Operator, Operator

Yes. And at this time, this does conclude today's conference call. But if you would like to listen to the replay, you may do so by dialing 1-800-585-8367. Again, that's 1-800-585-8367. Thank you. And have a great day.