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Edited Transcript of JKHY earnings conference call or presentation 5-Feb-20 1:45pm GMT

Q2 2020 Jack Henry & Associates Inc Earnings Call

MONETT Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Jack Henry & Associates Inc earnings conference call or presentation Wednesday, February 5, 2020 at 1:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David B. Foss

Jack Henry & Associates, Inc. - President, CEO & Director

* Kevin D. Williams

Jack Henry & Associates, Inc. - CFO & Treasurer

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Conference Call Participants

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* Brett Richard Huff

Stephens Inc., Research Division - MD

* Charles Joseph Nabhan

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* David John Koning

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* David Mark Togut

Evercore ISI Institutional Equities, Research Division - Senior MD

* Glenn Edward Greene

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* John Kimbrough Davis

Raymond James & Associates, Inc., Research Division - Research Analyst

* Joseph Dean Foresi

Cantor Fitzgerald & Co., Research Division - Analyst

* Kartik Mehta

Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst

* Peter James Heckmann

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Vasundhara Govil

Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Jack Henry & Associates Second Quarter Fiscal Year 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker, Mr. Kevin Williams, Chief Financial Officer. Please go ahead, sir.

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [2]

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Thank you, Sherri. Good morning. Thank you for joining us for the Jack Henry & Associates Second Quarter Fiscal 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 to provide some of his thoughts about the state of our business and performance for the quarter. Then I will follow that up with some additional thoughts and comments regarding the press release we put out yesterday after market closed, and then I will also provide some updated guidance for FY '20, and then we'll open the lines up for Q&A.

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

Also 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 also in yesterday's press release.

I'll now turn the call over to Dave.

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [3]

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Thank you, Kevin. Good morning, everyone. We're pleased to report another quarter with strong revenue and earnings growth. As always, I'd like to begin today by thanking our associates for all the hard work that went into producing those results for our second fiscal quarter.

For Q2 of fiscal 2020, total revenue increased 9% for the quarter and increased 8% on a non-GAAP basis. Deconversion fees were up about $1 million over the prior year quarter. So although that variance contributed to our overall revenue performance, it wasn't the explanation for this very strong quarter.

Turning to the segments. We again had a solid quarter in the core segment of our business. Revenue increased by 7% for the quarter and increased by 6% on a non-GAAP basis. Our payments segment also performed well, posting a 10% increase in revenue this quarter on both a GAAP and non-GAAP basis. We also had a strong quarter in our complementary solutions businesses, with a 10% increase in revenue this quarter and an 8% increase on a non-GAAP basis.

As I mentioned in the press release, our sales teams, again, had a very solid quarter, and total sales bookings are now running 18% ahead of last year's record pace. In the second fiscal quarter, we booked 17 competitive core takeaways and 20 deals to move existing in-house customers to our private cloud environment. We also saw very strong bookings in our payments and complementary solutions segments. We signed 30 new clients to our new debit card processing solution and 3 new clients on the credit card side of the business. All of those 33 card contracts and 17 competitive core takeaways represent new revenue to Jack Henry.

Our Banno digital platform also experienced very strong demand, with 25 new clients signing for the full digital suite. As you may have noticed, we published a press release last Thursday regarding the availability of our new JHA BankAnywhere solution. I'm happy to announce that we currently have 4 banks in live production on BankAnywhere and have several more in the queue to be installed.

This solution is a cloud-based core and digital banking solution offered to digital-only banks. It leverages the complete set of open APIs built by our Banno team to enable easy connectivity to the core and other complementary functions. If the digital bank is a new charter, we can provide the core and the API connectivity they need to integrate solutions from virtually any fintech provider. If the digital bank is an offshoot of a traditional brick-and-mortar institution, we can deploy BankAnywhere regardless of the core system the traditional bank is running. This solution is just another example of the many innovative technology solutions being offered today by Jack Henry to help our banking clients compete in the digital world.

Regarding our new debit and credit processing solution, we now have well over 600 customers live on the new platform. This count includes 73 customers installed as new debit clients rather than as migrations and 13 new full-service credit clients now live on the platform. We have approximately 300 of our debit clients yet to migrate. But as I mentioned on the last call, we suspended our migrations during the holidays because banks and credit unions don't like to implement changes to their card programs during that time of the year. We completed another round of migrations in January and remain on track to complete the migration process during calendar 2020.

Although we haven't done a press release on this, I'm happy to announce that in December, we became the first processor in the country to bring a financial institution live with the real-time payments network through The Clearing House, and we'll bring the second customer live later this month. As I mentioned on the last call, our PayCenter solution has been designed to allow us to connect clients to the real-time payments network in groups rather than one at a time. Additionally, we provide connectivity through this single platform to multiple providers, which facilitates a more logical and efficient approach for our clients than any other processor in the market today.

As we begin the second half of our fiscal year, 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.

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

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [4]

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Thanks, Dave. The services and support line of revenue increased 8% compared to the prior year quarter. Our license and related in-house support created some headwinds by both being down a combined $3.1 million for the quarter compared to last year, which primarily is due to the continued movement of customers to our private cloud, which actually is good for us and our shareholders, long term, in many ways.

Outsourcing and cloud services were up nicely again this quarter at an increase of 16% compared to last year. As Dave mentioned, deconversion fees were up a little over $1 million compared to the year ago quarter. The processing line of revenue, which is all of our transaction, remittance, card and digital, grew a very nice 10% compared to the prior year quarter. Total revenue was up 9% for the quarter compared to last year. And on a non-GAAP basis, our revenue was up 8% per quarter by excluding the deconversion fees.

Reported consolidated operating margins were down slightly from 22.8% last year to 22.4% this year, primarily due to lower license fees and the continued increase in additional costs related to our card processing platform migration, which we will continue to see these margin headwinds for the remainder of this fiscal year and into next fiscal year until we can eliminate the additional costs related to the platform migration.

With the cost reductions that we have talked about on previous calls that we will see the impact from in the first and third quarters of FY '21, the impact those cost reduction will have on our quarterly and fiscal margins will remove those headwinds and allow us to return to a position of leveraging our operating income margins. Our segment's operating margins continue to be very solid with small fluctuations. But our payments segment will continue to have that increased margin headwind going forward as the additional costs continue to increase as we migrate customers to the new payments platform until we can get the last core customers off in Q4 of this fiscal year.

The effective tax rate for the quarter was relatively flat with last year at 23.2% this year compared to 22.9% last year. For cash flow, included in the total amortization, which was disclosed in the press release, is the amortization of intangibles related to acquisitions, which decreased to $4.9 million year-to-date this fiscal year compared to $5.2 million last year. Our depreciation is up year-to-date, primarily due to data center CapEx in the first half of last year and hardware upgrades this fiscal year, which are in production. And our nonacquisition amortization was up due to more of our internally developed products being placed into production.

Operating cash flow was $215 million for year-to-date, which is up from $192 million last year. And during the first half of the year, we invested $94.2 million back into our company through CapEx and developing products, which is up a little over 5% from $89.7 million a year ago.

To update your FY '20 guidance, as we have discussed previously, we have no control over the timing of recognized deconversion fees that we receive. However, at this time, we anticipate deconversion revenue to be relatively flat for the remainder of the year compared to last year's second half, which means FY '20 will be up over the previous year due to the large first quarter and the small increase we had in Q2. In addition, revenue from our processing and private cloud customers will continue to grow nicely, and therefore, our total GAAP revenue should grow a little over 9% for full year FY '20 compared to FY '19.

And then excluding deconversion fees from both years and the incremental revenue contributed this year from the acquisition of Geezeo, which will be about approximately $10 million for the full year, our non-GAAP revenue should grow a little over 8% compared to last year. With the increased deconversion fees offset by the continued decreased license and related implementation revenue and additional cost headwinds for our payments platform migration, we project operating income will grow at a slight discount to revenue growth at a little above 8% on a GAAP basis.

Then excluding the revenue and related costs associated with deconversion fees and the small net operating income impact from the acquisition, our operating income should grow between 6% and 6.5% on a non-GAAP basis for the full fiscal year. We will continue to experience revenue and operating income fluctuations between our fiscal quarters due to license, implementation, payment platform migrations and software subscription usage. We anticipate GAAP operating margins for the year to be mostly in line with FY '19 at approximately 22% for the year. And excluding all the things just mentioned, we expect non-GAAP operating margins of approximately 21%.

Our effective tax rate for the full fiscal year will continue to be between 23% and 23.5%. We project Q3 EPS to be in the range of $0.80 to $0.82. And for the full year of FY '20, we are increasing our EPS guidance from the previous range of $3.60 to $3.64 we provided last quarter to a current projected range of $3.70 to $3.72.

This concludes our opening comments, and we're now ready take questions. Sherri, will you please open the call lines up for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Vasu Govil with KBW.

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Vasundhara Govil, Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst [2]

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Congrats on a great quarter. I guess the first question, you've clearly seen pretty strong top line performance, and we're seeing the guidance raised here. Can you talk about, like outside of deconversion fees, where you are seeing more strength versus what you had anticipated coming into the year? And also the sustainability of this 8% non-GAAP revenue growth beyond 2020.

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [3]

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So I'll comment first, and then I'll ask Kevin to add on anything that he wants to add. So first off, I think the win rate that we're seeing on the core side of the business and virtually every core customer that we're signing now is a hosted core customer, which means you don't just get the revenue pop on the front end, you get revenue that layers in and is sustainable. Normally, those customers are signing a 7-year contract these days, sometimes 10-year contract.

The payments business -- so we've talked many times on this call about the reason that we went through the conversion to the new payment -- to the card platform. The reason was we were not only not winning customers 5 years ago, but we are starting to lose customers because the functionality wasn't there. Today, we're signing new customers, bringing new revenue in because of the functionality on the payments platform that we didn't have before, and we certainly are seeing a good demand. As referenced on the call, I pointed out, we signed 30 new debit and 3 new credit customers just in this single quarter. So that certainly is adding and is sustainable for us.

The interest that we have on the digital side of the house -- so I referenced 25 new clients for our full-suite digital banking platform. That is continuing to grow, and we're continuing to see strong demand in that area. So -- and I could list a number of other products, but those are kind of the headlines as far as where a lot of the product growth is coming from. And that growth is still out there. The pipeline is solid. I mentioned the sales team is running well ahead now this year, not just ahead of what their quota was but ahead of last year's record pace. That's the important point here is that they're running ahead of last year's record sales here, so a lot happening as far as new product sales. And then Kevin, whatever you want to add to that.

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [4]

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Yes. The only thing I'd add to that is, if you remember, last fiscal year, we signed 57 new core customers. We signed 22 new core customers this year-to-date. So we're keeping pretty much on a pace of 1 a week, actually, for the last couple of years as we continue to convert and migrate those customers over to our platform. So that's going to continue to drive both core and complementary revenue. And as Dave mentioned in his opening comments, we continue to see a very solid move of our existing in-house customers from in-house outsourcing, which is just very nice built-in organic revenue as we move those customers over, and we get a larger wallet share out of those institutions.

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Vasundhara Govil, Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst [5]

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Great. That's very helpful. And just a quick follow-up on the sort of M&A environment that we're seeing in the banking industry. There's been a couple of merger of equals, where I guess you guys are the core provider for one of the parties, and these are potentially larger than average client relationships for you. And I just wanted to get a sense for how you're thinking about your competitive positioning about winning these conversions. Or if you're seeing, say, your competitors may have a better hand given that they are more dominant players upmarket?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [6]

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Sure. It's no secret that some of our competitors have a more dominant position than the -- in the upper tiers of the market. But we're well positioned. We've talked many times on these calls about all the solutions that we've been rolling out to serve larger financial institutions. The thing that I would encourage you to keep in mind, though -- and I feel great about our position with some of these deals that are happening right now. But the thing to keep in mind is, these days, the core represents a -- certainly a nice piece of the business.

But because so many of our solutions are offered through the ProfitStars channel today, meaning they are provided regardless of what the core solution is, it's possible for us these days to lose on the core side and still have it be a win for Jack Henry because those larger institutions oftentimes are in-house rather than hosted. And so they're not paying nearly at the rate of a hosted customer, like, on our private cloud. And if they retain some of the complementary solutions, which are hosted in the private cloud at Jack Henry, now that can end up being a real win for Jack Henry.

So we are in several of those deals, and we are well positioned to win those deals. But as you point out, we're not the dominant player in that space. And so if we were to lose on the core side, there's still a tremendous amount of opportunity for Jack Henry in the noncore piece of the business with those customers.

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [7]

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And just a reminder, those customers are typically in-house customers. So if we were to happen to lose them, we're losing in-house maintenance. And none of those customers that you're talking about represent more than 1% of our revenue.

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [8]

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Yes.

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Operator [9]

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Our next question comes from Kartik Mehta with Northcoast Research.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [10]

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Dave, I wanted to just ask a little bit about migration you're doing on your debit and credit customers. And I think the last time you talked about the retention was really good. You're not seeing any leakage of clients. I just wanted to find out where that stood and where you stand in terms of net clients as you roll out this new platform?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [11]

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Yes. I think -- so it's a good question, Kartik. But the -- so I didn't want to give the impression on the last call, and I certainly wouldn't on this call that we haven't lost any customers. But the good news is, I think every one of them -- I maybe shouldn't say every, but the vast majority that have gone away, and there aren't that many, have been because they were acquired along the way. So we have had 30 or so customers, 40, somewhere in that range that have been acquired or merged along the way. And so when they get acquired, sometimes their businesses combined with somebody else. If it's a Jack Henry customer, they potentially go to a different platform.

So we've lost a few along the way because of mergers. But I don't know of more than a handful that we've lost because they've decided that, "Oh, we're -- you're going to put us through a conversion. We ought to maybe look at other solutions. Let's look at going someplace else." That's been a very small number. There have been some that, as I mentioned, have been lost because of M&A. But I would offset that with all of these new customers that we've signed. I headlined in here is 73 are live already, and we have a number in the queue. 73 that were not paying Jack Henry anything before -- on the debit processing side before we offered this new platform.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [12]

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And Kevin, I know the savings from this platform, you've articulated in the past a little bit. And I'm wondering, as you get more into it, have your thoughts changed at all as to the dollar amounts you can save from this conversion?

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [13]

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No. I mean the dollar amounts I gave previously, Kartik, I think, are still pretty solid. I think there's still some potential upside to those numbers. We always try to be somewhat conservative and cautious when we give numbers like that. But the numbers I gave for savings that we're going to see as we shut the 2 platforms down in Q4 this year and Q2 of next year. Obviously, as Dave mentioned, we're still on course to get all of our core customers off in Q4 and then the remaining noncore customers off a second platform off by the end of Q2. So we'll see those nice costs. And obviously, if you kind of take those cost savings that we're going to see that I've provided in the past and just throw those into this year's quarter, obviously, the margins look a whole lot better.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [14]

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And then finally, just, Kevin, I just want to make sure. On the deconversion fees, as of now, from what you can see, you would expect second half of this fiscal year to be the same as second half of last fiscal year?

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [15]

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That's what it looks like right now, Kartik.

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Operator [16]

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Our next question comes from John Davis with Raymond James.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [17]

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Dave, maybe I want to start out on the bookings number. I think 18% is pretty robust, but I'm also trying to remember the last time you gave that on kind of a quarterly basis. So how does that compare with either last quarter or last year? And then how long does it take for those bookings to turn into revenue typically?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [18]

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I don't -- I can't give you an accurate number as far as last quarter, but it's -- my key point there was we're up 18% year-to-date over last year at this time. So it's -- again, it's not a comparison to quota. It's a comparison to actual performance last year by the sales team, bookings up 18%. I can't give you an accurate number as compared to last quarter. Last quarter was strong, but the second quarter, combined with the first quarter produced this really outstanding run rate for the half of the year.

As far as when things translate to revenue, because, today, most of the solutions that we sign are -- we're delivering as a hosted solution, regardless of whether it's core or any of the other things we deliver, it's rare for us anymore to sell a licensed copy of software. And so in every one of those instances then, where it's a hosted in-the-cloud delivery, that revenue is layered in over time. So a core conversion, usually, you start to see processing revenue a year or so after we sign the deal. Payments contract, you can start to see revenue oftentimes within a quarter or 2. So it just depends on what the solution is, what the timing is. And sometimes that's driven by us. We need x amount of time in order to complete the conversion. Sometimes it's driven by the financial institution because they need to do training and make sure everybody's ready for whatever it is that we're delivering.

So it's all over the board as far as when things get layered in and when the revenue starts to produce. But I think the key point in that is, today, it's rare for us to see it in the same quarter or the next quarter because it's so rare for us to sell a licensed version of the solution.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [19]

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Okay. That's helpful. And then maybe, just quickly, dive in a little bit on payments growth. I think third straight quarter of acceleration. It was north of 10% this quarter. I think you called out some of the new wins there. But how should we think about that kind of going forward? You keep waiting for it to come back down a little bit as comps get tougher, but it keeps kind of growing faster. So how should we think about that going forward? Is this a business that can grow double digits in the near term? Or kind of any changes to the longer-term outlook of that business.

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [20]

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So John, this is Kevin. I mean -- and we talked about this many times before. I mean if you think back 3 to 4 years ago when we started this migration, we were losing quite a few customers off our debit platform because we did not have the technology they wanted. When we made this move a little over 2 years ago and came out and told the world that we were going to make this move, we kind of stopped the bleeding. But we were still losing customers because we had customers that had already signed to leave at the time. So about a year ago, we finally totally stopped the bleeding. We started signing a few new customers. But as Dave mentioned, we signed quite a few new customers last year. We continue to sign them this year, and we're not losing those customers now. So the growth that we're seeing right now -- and I predicted this a year ago and I was very hesitant to do it, but I think this accelerated payments growth is going -- we're going to see that for the foreseeable future because of the new wins that we're having. And obviously, the new wins that Dave mentioned that we signed this quarter, none of those are even producing any revenue yet.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [21]

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Got you. And then quickly, just on the revenue guide for the full year. I think there's about a 70 basis point tailwind from the Geezeo deal. Even if I back that out, it looks like you guys are kind of calling for deceleration in the back half of the year despite, I think, what would be easier comps. I know last year, we had a lot of accounting-related noise that messed up this -- the kind of the quarterly cadence. But any reason from an accounting perspective or otherwise?

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [22]

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Well, John, we still have the same accounting noise because, remember, under 606, Q1 is going to continue to be a very strong quarter because of all the software-as-a-service that we sell in subscription software that we recognize 100% of that revenue in Q1. So I mean Q2 was actually a little stronger than I thought it was going to be. Q3 and Q4 will be a little slower growth than the first half just because Q1 will continue to be our strongest quarter under the new 606 rules.

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Operator [23]

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Our next question comes from Joseph Foresi with Cantor Fitzgerald.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [24]

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My first question is just around the competitive environment. Obviously, your competitors are going through some massive M&A at this point. How -- what are you seeing from a day-to-day win perspective? How distracted do you think those players are? And is this creating an environment where you're allowed to take some more market share?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [25]

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It's a good question, Joe. I've been hesitant on these calls in the past to say that our major competitors are so distracted that, that's going to create a whole bunch of opportunity for Jack Henry. I've had a number of people in the industry suggest that that's happening and is probably going to happen. Our win rate is running right now on the core side at a little over 1 new core deal per week,

and -- but we've been at that pace for about 2.5 years now.

We see a lot of interest in Jack Henry solutions. As I mentioned before, sales are up overall. And can I attribute that to our competitors taking their eye off the ball? I don't know that I'm prepared to do that yet. But we are certainly engaged in a lot of deals right now. And the pace of activity with Jack Henry is -- I don't know if I can say at an all-time high, but it's probably about an all-time high right now as far as interest in Jack Henry solutions and the pace of interest that we see out there in the market. And I'm not ready to ascribe that to anything specific happening with our competitors. I just know there's a lot of interest in Jack Henry technology solutions.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [26]

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Got it. And then you talked a little bit about -- and we've seen some solid results from some of the upgrade of your offerings. That's my read on it. And I'm wondering, do you feel like you've got the full suite in place now in that -- maybe that upgrade? I'm just trying to get at what is causing sort of the pickup over the last 12 to 24 months in deal wins? Do you feel like maybe you see improvement in your suite of offerings and that some of the card upgrades or product upgrades on the card side are leading to it? I'm just trying to get a sense again of what's caused the uptick.

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [27]

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Yes, I do. I think it's a solid observation. So we've spent a lot of time, particularly in the last 1.5 years or 2 years, talking about all these new technology solutions we've rolled out. Treasury management and the Banno suite -- digital suite and our enterprise risk management solution. And now, I just today talked about BankAnywhere. We've been in the market almost a year, but we haven't talked about it on this call yet because we wanted to make sure that everything proved out.

And so yes, I think you're right. It's a combination of new look and feel, new user experience for some of the solutions that we've had for a while. Then we've rolled out a number of new technologies from the ground up, new technology to our customers and prospects that we just didn't have 2 or 3 years ago. And so I would -- I think you're on the right track there with the idea that it's a kind of a refreshed and a much broader suite than we had previously.

And then you add to that some of the acquisitions that we've done recently. So we haven't done -- the acquisitions you've seen us do in the last 2, 3 years haven't been needle movers as far as revenue is concerned, but they have definitely been needle movers from a strategic point of view. So we've created this very robust commercial lending center suite now that is getting a lot of attention. I didn't even talk about it on today's call, but I've talked about it many times in the past. That was a very intentional move of a few little acquisitions that we put together to create that new solution.

The Geezeo acquisition, Kevin highlighted the revenue contribution on the call earlier, that's not a needle mover for Jack Henry. But from a strategy point of view, it definitely makes us a differentiated solution with our digital suite. So I think the combination of all of those things has positioned us well. The challenge when you're in our business is you're never done. You constantly have to be reexamining your solutions and refreshing and trying to find that opportunity to differentiate from everybody else. But I feel great about how we're positioned today with the things that we've been talking about on these calls for the last couple of years.

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [28]

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And one other thing I'd throw in there, Joe, is, again, I think we have very clear focus. We go to the market primarily with 2 flagship products: SilverLake on the bank side and Episys on the credit union side. And those are the products that we spend our R&D dollars on. And SilverLake was picked last year by [ITAE] as the best core system for banks in the $1 billion to $50 billion space. So when you get that reputation, and you have the core products to wrap all that new technology that Dave mentioned around those things, the combination of all that, I think, is why we continue to win. And we will continue to win in the market.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [29]

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Got it. And then the last one for me -- and Kevin, I'm glad you said something. It's for you. We've been waiting for the margins to expand and the free cash flow to pick up due to the sunset of the products. I know you said that it's a next-year event. Can you just give us an update on your level of confidence that we're finally going to see that next year? And maybe a little bit of detail around why you have that level of confidence?

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [30]

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Well, I mean, Joe, obviously, we know what our cost is in the platforms that we're running on those -- on the -- for our debit card systems today. We know the personnel that will be going away. So we know what those hard dollar costs are. And there's additional costs throughout the organization that we'll also be able to eliminate. So for the numbers that I gave and the numbers that are going to go away, kind of in 2 big tranches in Q4 this year and Q2 of next year, I am extremely confident that those costs will go away. And we'll see very nice increases in margins in both Q1 and Q3 of next fiscal year.

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Operator [31]

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Our next question comes from Peter Heckmann with Davidson (sic) [D. A. Davidson].

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [32]

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Could you talk about any regulatory deadlines, including CECL, that may be playing into some of the bookings? And anything else that is on the radar that may act as a catalyst for some upgrade?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [33]

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Yes, that's good question, Pete. 2 years ago or 1.5 years ago, whenever it was, CECL was definitely a catalyst for us, and I was excited to talk about CECL back then. Today, although we had the first wave, I guess, January 1 went into effect. For the second wave, the time line has been extended.

And so CECL is definitely not a driver right now. Everybody who needed it by January 1 has it. And for those that needed it in the second wave, the smaller institutions, they've been given an extra reprieve. So there's not much action right now when it comes to CECL.

And beyond that, no major regulatory change that's driving revenue for us or any of our competitors. There's just not a lot happening there that is producing revenue. Obviously, we have a lot of expense around regulation. We're constantly having to ensure that our systems comply, but no revenue drivers right now being fueled by regulatory change.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [34]

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Got it. Got it. And then just another question on the commercial lending. Where does that product fit in the competitive landscape? What are some of the differentiating aspects, more on the origination or management reporting side?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [35]

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That's the unique piece of that solution is that it does all of those. So it's designed to be an online commercial lending solution, meaning the borrower can apply for a commercial loan online, all electronics, so they don't have to drop off paper forms at the financial institution. They can do everything electronic. It has a quick decision engine that came through one of the small acquisitions that we did. So if the bank chooses, they can automate the decision process. So the borrower -- for a smaller commercial loan, the borrower can get an automated decision back in an hour or 30 minutes or whatever the bank sets. For larger loans, they would normally send it through a loan committee or at least some more formal review but still can provide the response online to the commercial borrower. And then for the bank -- so it's not just the front-end origination of the loan to the borrower, it's for the bank to manage the loan through the life of the loan.

So as requirements come up, for example, on an annual basis, for the banker to receive financial statements and review and approve those financial statements, that's all automated into the same platform so the back-end functionality of the bank is there as well. So it's completely differentiated as compared to any other solution out there that's doing a commercial -- online commercial lending offering.

So very -- people who kind of dig into it -- commercial lenders who dig into it are pretty impressed and love this solution. And the Chief Loan Officer for the financial institution likes it because it's a tool that allows the lender to be more efficient and spend more time with their clients and less time administering or dealing with administrivia, so being widely hailed by lenders as a productivity tool as well.

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Operator [36]

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Our next question comes from Glenn Greene with Oppenheimer.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [37]

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I guess just the first question, you sort of alluded to the number of competitive takeaways, I think it was 17 in the quarter. Can you just sort of -- first of all, what was it year-to-date? And can you sort of frame that relative to a typical year? It strikes me as an acceleration, like, improved competitive position for you?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [38]

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Well, for the quarter, it was, Glenn. But if you look at the first half of the year -- so that's 23 or 24 for the first half of the year, which is why I said earlier, our pace for the last 2.5 years has been 1 a week. And we're on -- we're continuing on that pace. So sometimes the thing about core decisions is they can lapse over into the next quarter. So we didn't have as many as normal in the first quarter, but a lot of those were really close to signing. They fell into the second quarter. So it kind of evens out. So I'm very comfortable saying we're on the same pace, which is leading the industry by far. The same pace that we've been on for the last 2.5 years or so, which is about 1 new core customer per week.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [39]

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Okay. And then, Dave, to an earlier question, you alluded to sort of, I think, the pace of demand at an all-time high. And I guess the question is why? You can sort of allude to a number of factors, market environment. You alluded to better product suite. I don't think you want to go there, but maybe a better competitive situation given your competitors may be distracted. Is there any way to sort of frame it at why you're seeing sort of an all-time pace of demand?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [40]

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Yes. It's -- I wish I could give you an absolute answer, Glenn. I think it's a combination of several of those things, as I highlighted earlier on the call. I think these new solutions that we've rolled out here in the past 2, 3 years are getting a lot of attention, a lot of demand: the payments platform, treasury management solution, the Banno digital suite, commercial lending center suite, enterprise risk.

All these things that we've been talking about that we rolled out in the last couple of years are creating demand, not only for the solutions, but they're creating kind of a refreshed view of Jack Henry's face as a leader when it comes to new technology and doing innovative things with technology. I think it's a combination of a variety of things. And when you are winning at the pace that we have been on the core side, people hear about that. And so then there's some of that chatter that happens, "How come these guys are winning these core deals? They must be doing something right." And I think it's a combination of all those things coming together. And right now, we don't see that slowing down.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [41]

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Okay. And then, Kevin, I think you said outsourcing grew 16% in the quarter. My guess is it's new deals sort of converting on, but is sort of mid-teens sustainable?

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [42]

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Well, I don't know if mid-teens is sustainable, Glenn. But I mean if you look back at the last 2 years, our outsourcing has been growing at the 12% to 13% range. So I mean it popped up a little bit, but I think in that 12% to 14% is very sustainable.

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Operator [43]

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Our next question comes from Dave Koning with Baird.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [44]

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And I just got a few numbers questions. I guess just to make sure, I think you've said before, there's about $16 million cost savings once you kind of move off the old platform. And I think you said 1/3 in fiscal Q1 of '21. So if we think that $16 million, it's kind of $4 million per quarter, 1/3 of that $4 million comes off in fiscal Q1 and then the full run rate is off by Q3. Is that still the right way to think of it?

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [45]

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Yes.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [46]

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Okay. Okay, good. And then the second one is just free cash flow, the pattern changed this quarter, like you had an outstanding cash flow. Usually, fiscal Q1 and Q4 are really strong, and Q2 and Q3 are weak, just normal seasonal patterns. But Q2 was like really strong this quarter. Is that a new pattern? Or did something change like just for this time?

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [47]

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Well, a couple of things, Dave. I mean we have -- if you look back over historical numbers, you're absolutely right. We've always been extremely strong in Q1 and Q4 because of our annual maintenance billings. But as our business continues to shift to more not only recurring but more of a monthly billing and cash inflow from our private cloud and our outsourcing and also from our payments, then our Q2 and Q3 are no longer cash-burning quarters. They're both going to start -- they're both starting to generate nice cash. So it's starting to level out a little bit.

And to that point, if you look back at our trailing 12 months, we're at just a little over 99% conversion of net income to free cash flow. So we're getting right back up to that 100%. I think, again, when we get into FY '21, I think our conversion rate is going to be well back up above 100% conversion as we are able to take those additional costs out.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [48]

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Okay, great. And just one last quick one. Last year, the organic growth pattern starting in Q1 went 8%, 7%, 5%, 4%. This year, now it seems more like, I think, Q1 was 9%, Q2 was 8%, and it kind of feels like the rest of the year is going to be right around 8%. So it's a much more stable year. I know Q1 is a little higher still, but is that more -- is this year more the norm, now Q1 a little higher and then the rest of the year about the same compared to last year where it kind of decelerated through the year?

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [49]

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You're exactly on point. So the rest of the year is going to be right at 8%. And we're going to finish the year, GAAP, like I said, over 9%, and non-GAAP a little over 8% for the year.

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Operator [50]

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Our next question comes from Brett Huff with Stephens.

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Brett Richard Huff, Stephens Inc., Research Division - MD [51]

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Three questions from me. Number one, Dave, you mentioned the treasury and cash management solution, that's kind of a favorite of mine to understand because it's such a new product in such a fragmented market. Any data on the wins there or uptick or downtick? Or kind of how is the interest and progress on that one?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [52]

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Sure. Yes, we signed 7 treasury in the quarter. We have 36 live now. And -- oh, I didn't bring the statistics with me. I just got the numbers for a number of businesses and a number of users live on the platform. It's impressive, the number of businesses and end users at those businesses using the platform. But 36 institutions live today.

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Brett Richard Huff, Stephens Inc., Research Division - MD [53]

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That's helpful. And then to the point of moving upmarket, and you kind of framed this up before and talked about the card business and how that product was needed to kind of service some of the larger banks. I think the same thing with the cash management. I think they're sort of similar with the commercial lending. I know there are a couple of others I'm probably missing.

But as we sort of arm ourselves to compete more effectively as we move upmarket, how is the conversation going with those bigger banks, be they banks for whom you do ProfitStars things and are trying to sell them a core of a competitor? Or maybe you're just going in cold to a bank where there you don't have much relationship at all. And this is also framed in the context of these couple of big deals that are mergers or M&A that -- how are those -- how are all those conversations going? And what is the -- what are you hearing from those banks? Where are you scoring points? And where -- is the negotiations still sort of ongoing?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [54]

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I'm not going to talk specifically about any negotiations. But just in general, I think the banks of that size, it's been interesting a lot of those conversations because there's a great deal of dissatisfaction, in fact, more than I realized. I've been in this business 34 years. Great deal of dissatisfaction among the banks those size around the topics of integration and the ease of connecting to third parties, whether it be through a traditional tool or an API set. There's a lot of frustration, a lot of demand among those customers, so that bodes well for Jack Henry.

Now we have a great track record of open connectivity, developing tools that really make life easier for the institution. Put that together with all of these new solutions that we've been rolling out that are specifically designed for larger institutions, we're scoring a lot of points there. Now it's no secret, and I referenced it earlier on the call, if you don't have a track record in that space, say about $50 billion in assets, that's a difficult decision for somebody to say, "Okay, I think I'll be the first one to partner with these guys to go into that space on the core side."

So they're ongoing conversations. We're scoring points, but then there are things that work against us, and we're just going to continue hammering away at it. But for Jack Henry, it is a -- we are committed to moving upmarket. And you've seen us make a lot of moves here in the past few years, and we're going to continue moving in that direction. But we don't have to be the dominant player among the $100 billion banks to be successful. We have lots of runway here, doing what we are doing and have been doing to kind of slowly but surely growing up into that space.

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Brett Richard Huff, Stephens Inc., Research Division - MD [55]

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That's helpful. And then last one for me. Just this whole Mitek, Wells Fargo, USAA thing that's going on, it's hard for us to kind of figure out when you pull that string, who might get ensnared in that. How does that -- does that relate to you all in any way? Or how do we think about that? Anything to worry about there?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [56]

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I don't know that there's anything to worry about it. It potentially affects all of us that are in this space that offer imaging solutions, whether it be image viewing through an Internet or digital banking solution, whether it be capturing checks and converting them to images. Those -- all of those technologies, which -- all of us that are major players in this space offer those technologies. Those are potentially -- potentially come into play for all of us. But at this stage of the game, I wouldn't categorize it as something to worry about, but it certainly is something that we have our eyes on.

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Operator [57]

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Our next question comes from David Togut with Evercore ISI.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [58]

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As you sit down with bank and credit union CEOs, can you comment on their 2020 IT budget growth outlook, top spending priorities? And then any nuance you might offer, let's say, between larger banks and smaller banks would be greatly appreciated.

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [59]

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Sure, Dave. I'll get survey information here within the next month or so, I think. There are a couple of surveys that we depend on every year, so everything I'll share with you is anecdotal. But the thing that I can say is, in the fall of each year, I think you know, we host -- I host a CEO conference on the banking side and a separate one on the credit union side. And so those conversations -- we usually have 200, 300 CEOs at those meetings. Those conversations often -- we end up talking about the future for spending and their demand for technology and so on.

And I can tell you, as of this late fall, just before the holiday season, CEO optimism and their commitment to continue to spend was still there. I mean, they're -- in particular, things like digital, so that's why I think a lot of demand we've talked about here around digital. Many of them are trying to figure out how to modernize the consumer experience for their consumers and what are the tools they can use to modernize that. So that brings into play the commercial lending center suite that we talked about, it brings into play the Banno suite we talked about.

So CEO optimism continues to be high. They've kind of adjusted to the interest rate environment that they live in. They're not happy about it, but they've adjusted to it. And we don't see that slowing down. Again, that's anecdotal. I'll get more formal survey information here, certainly before the next earnings call. But I don't expect a major shift just based on what I'm hearing from the CEOs I've talked to.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [60]

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Appreciate that. And then just any nuance or kind of anecdotal information from your conversations between, let's say, mid- to large-sized banks and smaller banks. You've had good traction with treasury management in the upmarket space. So when you speak to some of the larger banks, are there any difference in terms of spending priorities, demand picture for 2020?

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David B. Foss, Jack Henry & Associates, Inc. - President, CEO & Director [61]

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Yes, it's a good question. I think the -- maybe the only nuance there would be the larger banks are intensely focused on their efficiency ratio and are looking for what are those tools that can help drive their efficiency ratio up. The smaller banks, the efficiency ratio is a topic. But they're not as intensely focused, not as ready to go spend money just to improve efficiency ratio. With larger banks, that is absolutely a key topic for them. That's probably the major difference that I see in the conversations.

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Operator [62]

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(Operator Instructions) Our next question comes from Charles Nabhan with Wells Fargo.

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Charles Joseph Nabhan, Wells Fargo Securities, LLC, Research Division - Associate Analyst [63]

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I was hoping you could comment on the long-term margin profile of the overall business, given some of the momentum you've generated in some newer solutions that may not have been as material contributors in the past. Just wondering, as we look past '21 and the elimination of some of the redundant card platform fees, as the revenue mix changes, do you envision any material changes to the overall margin profile or any seasonal patterns?

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [64]

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Well, so this is Kevin. I don't think you're going to see much seasonal change because, I mean, we're 86% recurring revenue now, and that's only going to get bigger. Payments continue to make up about 36% of our revenue. Our outsourcing and private cloud offerings are about 25% or 26% of our revenue. And the balance of our recurring revenue is in-house maintenance, which -- that's slowly shifting over to outsourcing, which those margins continue to improve a little bit as our payments business continues to get larger.

So as I said in my opening comments, once we get through the first half of '21 and get the cost of -- those additional costs taken out, we're going to go back to our more traditional margins. And at that point, we'll go back to getting some traditional margin expansion of 50 to 100 bps a year for the foreseeable future.

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Operator [65]

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I am showing no further questions in the queue at this time. I would now like to turn the call back over to management for any further remarks.

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Kevin D. Williams, Jack Henry & Associates, Inc. - CFO & Treasurer [66]

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Thanks, Sherri. First of all, I'd like to point out that, once again, we'll be holding our annual Analyst Day in the Dallas, Texas area on Monday, May 11. And to Brett Huff's point, so we will have the mini-tech fair again. So some of the products that we'll be highlighting there will be our digital solutions, the commercial lending platform, our payments platform that we've spent so much time talking about and treasury and cash management. So invitations will be going out over the next few weeks for that event. We hope many of you on this call and others can make it to the event this year.

Now to wrap up the call. We are pleased with the results from our ongoing operations and the efforts of all our associates to take care of our customers. Our executives, managers and all of our associates continue to focus on what is best for our customers and our shareholders. I want to thank you again for joining us today. And Sherri, will you please now provide the playback number.

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Operator [67]

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Yes. The playback number will be (800) 585-8367, with conference ID number 8218009. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.