Good day, ladies and gentlemen, and welcome to the Jack Henry & Associates’ Third Quarter FY 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today’s conference, Kevin Williams, Chief Financial Officer. Sir, you may begin.

Thanks, Justin. Good morning. Thank you all for joining us today for the Jack Henry & Associates third quarter fiscal 2019 earnings call. I’m Kevin Williams, CFO and Treasurer, and on the call with me today is Dave Foss, our President and CEO. The agenda for this morning will be opening comments by me, and then I will turn the call over to Dave to provide some of his thoughts about the state of our business and the performance for the quarter. And then, I will get back on and provide some additional thoughts and comments regarding the press release that we put out yesterday after market closed and then provide some guidance and then open the lines up for Q&A. I need to remind you that remarks or responses to questions concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements or deal with expectations about the future. Like any statement about the future, these are subject to a number of factors, which could cause actual results or events to differ materially from those which we anticipate, due to a number of risks and uncertainties and 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. With that, I will now turn the call over to Dave.

Thank you, Kevin. Good morning, everyone. We're pleased to report another strong quarter of revenue and operating income growth. As always, I'd like to begin today by thanking our associates for all the hard work that went into producing those results for our third fiscal quarter. On our last quarterly call, we highlighted the fact that we expected de-conversion revenue to be down significantly in the third fiscal quarter, and that expectation was realized. As we've discussed previously, in many respects, this is a good problem to have, because although we experienced a short term revenue impact, it indicates that far fewer customers are de-converting, and their long term revenue contribution stays in place. As you now know, de-conversion revenue is largely outside our control and very difficult to forecast. But we'll continue to do our best to set proper expectation on this topic, when we expect the revenue variances to be significant. For the third quarter, total revenue increased 2% for the quarter and increased 5%, excluding the impact of de-conversion fees from both quarters. Year to date, revenue is up 6% and is up 8% year to date, if you exclude the impact of de-conversion piece. The core segment of our business was the most heavily impacted by the decline of de-conversion revenue, but saw revenue increase of 1% for the quarter and an increase of 4%, if you exclude the impact of de-conversion fees from both quarters. Our payments segment performed well, posting a 3% increase in revenue this quarter, and a 6% increase, excluding the impact of de-conversion fees. Our complementary solutions businesses posted a 2% increase in revenue this quarter and a 5% increase, excluding the impact of de-conversion fees. As I mentioned in the press release, our sales teams again had a very solid…

Thanks, Dave. The service and support line of revenue decreased 1% compared to the prior year restated quarter. Remember, we restated the prior your numbers for ASC 606. Our license revenue was flat compared to last year. We continue to have headwinds from decreased implementation revenue due to almost all record installations electing the outsourced model or a private cloud with implementation revenue on these must be spread through the term of the contract under ASC 606, which is one of the reasons for the significant increase in deferred revenue compared to the prior year. In-house support was up and almost offset the decrease in implementation revenues. Outsourcing and cloud services were up nicely to help offset the decrease and de-conversion fees were down 10.3 million, as we highlighted on last quarter’s call that they're going to be down significantly this year over last year. The processing line of revenue grew 6% compared to the prior year and had no impact from de-conversion fees in this line of revenue. Total revenue was up 2% as reported and a little higher than 5%, adjusting for the de-conversion fees. Reported consolidated operating margins were down from 24% last year to 20% this year, primarily due to the significant decrease in de-conversion fees. Without the impact of those, our non-GAAP operating margins decreased from 20% to 19% for the quarter compared to last year due to the two headwind impacts on operating margins this year, as we've discussed on previous calls. The first, the additional cost of processing our debit card customers transactions until we get them all migrated to the new platform as Dave was mentioning in his opening comments. And then second is the additional cost for the employee pay for performance plans that are being funded with a portion of…

[Operator Instructions] Our first question comes from Joseph Foresi from Cantor Fitzgerald.

Hi, my first question is just around the competitive landscape. So now we've had two of your competitors by some fairly large merchant acquirers. I'm wondering, have you seen any change in the business from a core processing perspective? And I know FTC does some processing for you, maybe you can give us an update, if there's any change there.

It’s Dave. So first off, as far as the competitive landscape, no changes on the core side of the business, as I mentioned in my opening comments. We signed 18 brand new core customers, 17 competitive takeaways and one de novo. I don't recall a quarter ever where we signed that many. We've had several quarters in the mid-teens, mid-18 is a very strong quarter. So, there's no, no negatives, as far as what sales is experiencing currently or customer prospect sentiment. We've already obviously signed some customers in the current quarter that we will be announcing in August. And we've had lots of customer conversations. No, no great concern out there and no negatives, as far as customers or prospects are concerned on the core side. So my expectation continues to be very positive, regarding the core side of our business. As far as the relationship with First Data, it continues to be a very solid relationship. I think I've mentioned before, if not, on the call, certainly in conversations with some of you that our working relationship with First Data is terrific and continues to be really solid. We're converting customers at a rate of almost 50 or migrating customers at a rate of almost 50 a month now. And I see that continuing for the foreseeable future with virtually no issues of any significance. So really, really excellent relationship and continuing forward as it was before any of the announcements happened.

Okay, and then just on demand, your competitors seem to be implying at least FIS did that there's been an uptick in demand? Are you seeing that and anything to read into these new signings? Are you -- is the flip side happening, where you're getting some new signings because your competitors are distracted. So demand and maybe a little more color on where those signings are coming from?

Yeah, I know, the signings are coming again, record quarter, so they're coming from kind of the same place as we've always seen them. It would be hard for me to articulate an uptick in demand, because we've had such strong demand for the past, it's been since last June, I reported on the June, the call at the end of last June that we were at a record pipeline in the sales organization. And that has continued even with all these signings, the pipeline continues to be really strong. So it would be hard for me to say that I see some great big uptick coming, because we've been running at a really healthy pace here for quite some time. As far as competitors being distracted, I think it's early days and all of that to see, these are long decision making processes that our customers go through. And so, if there's distraction happening out there, that may come. I'd say we're all in the same competitive environment that we've been in for a long time, and I don't see any major changes right now. But obviously, that may change over time.

Got it. And the last question for me is just on margins, Kevin, any updates on what the short and long term margin outlook might be? And when we get some of the noise that we're currently seeing out of the numbers?

Yeah, Joe, I mean, obviously Q4, the guidance is the margins are going to go down, even a little more than they were this quarter because of the tough comp for license and install invitation revenue, continued decrease in de-conversion fees, margins for next year, we're still trying to kind of line those out. So, I mean, margin can be down a little bit in Q4, and what I'm planning on doing is on our year end, just give you full guidance for next year, which will include revenue and margins. And I'm going to try to break down by quarter, which again with 606, is a little tough, but that is my commitment to you all is to give that guidance in mid-August when I give next year's guidance.

Thank you. And our next question comes from Peter Heckmann from Davidson.

I wanted to talk a little bit more about the top line growth and acknowledging 5% adjusted growth and the impacts from either lack of implementation fees or deferral implementation fees, with five quarters of strong core signings and as well as complimentary signings, it seems like we should be getting adjusted revenue growth more towards the 7% to 9% range over the next four quarters. Can you talk us through like that change in the implementation fees and the deferrals, kind of quantify how much of that is impacting it. I mean, is that a 100 to 150 basis point impact?

Well, I mean, Pete, just think about, I mean, just Q4, the tough comp compared to last year, just in in-house license and in-house implementation revenue is 5 million to 6 million. That drops to the bottom line pretty quick, which that has a pretty significant impact on margins. So as we ramp up the outsourcing and get more of our -- these new customers on, that doesn't provide any license revenue or immediate implementation revenue because the implementation revenue, those spread over the life of the contract, so it's just going to layer on slowly and give us nice growth. So two things I’d say. One, with the decrease de-conversion fees, which is obviously a bad thing this year, but that means we're continuing to keep that revenue. And as we layer on this additional revenue, I mean, it should pick up revenue growth a little bit. I don't know we're going to get up to your -- the high level of yours. But like I said, the original budgets for next year, we're very comfortable saying that we're going to continue in the 6% to 7% range. And, Pete, we've always tried to hit exactly ahead or be conservative.

And then can you just give us an update on some of the new products, digital account opening, some of the new things that you've been rolling out more recently and maybe just a bit of an update on success in the marketplace?

Sure. And I'll highlight some of these things next week at the Analyst Day in some detail, but continued to see great success with our digital platform. In fact, 27 new customer contracts in the quarter. So, really significant demand as far as digital is concerned. I already highlighted what's happening in payments. We now, on our treasury management platform, have 20 customers live on that platform. We signed five additional customers in the most recent quarter. So that continues to progress well. One that we've talked about a lot in the past, but haven't really focused on here on the call recently is our hosted Network Solutions offering where we're running the entire back office, including the network infrastructure for a customer. We now have 126 customers live on that platform. So continuing to see good success there. So those are just a few highlights. But like I say, next week, we'll go through a fair amount of detail on some of those new platforms.

Thank you. And our next question comes from David Koning from Baird.

And congrats on all those core wins. That's impressive. I guess my first question is, it seems like with 606, there's been more lumpiness to revenue. You're still averaging that 6%, 7% just like you've been kind of doing for the last five, six years, but I think the first half of the year, this year, the organic core growth was kind of 7, 8, the back half, it seems like more like mid-single digits. Is there a new either seasonality that it creates or after we kind of anniversary this year, the next few years should just be kind of those -- a whole bunch of 7s in a row again, like we used to see.

Well, I think next year, Pete, there may still be a little more lumpiness. I think next year is going to be kind of the level setter. But there will still be larger growth, at least in Q1 because as we continue to sell more and more software subscriptions, that all gets recognized, basically the first day of the year, unlike it used to be. So as we sell software subscriptions through the year, all those now get recognized in Q1 under 606. But, and then you have the carve, which is basically throughout the year on each quarter, we have to go through and reanalyze our estimates on total contract value for all of our services yet to be provided and tweak those. So there's going to be some ups and downs. So there's still some tweaking of that, which that had a small impact this quarter, will have an impact every quarter, and actually that impact was a little more positive in the first half than it is in the second half. So, long answer for a short question. But I think next year is kind of going to be the base. But I think as we go through the budget, we're going to be able to do a better job of predicting what that is. And hopefully, when I give guidance, in August, I can give you better quarterly guidance of what that's going to be to us.

Okay, so that's helpful. And, I guess, the other seasonality question, it looks like historically, if you excel term fees, Q1 historically has been a little better on the margin front. And then the, usually Q3, I think, has often been the low point for margins on, if you exclude term fees, you can see it a little clear is, is that just kind of the natural cadence and why is that again?

Well, I think, Q3 is partially because all the fringe load of taxes, every things kick in for [indiscernible] and everything starts over again. But there's just some other costs that kind of kick in back in in Q3 of our fiscal year that a lot of companies kick in their Q1.

[Operator Instructions] Our next question comes from Brett Huff from Stephens.

Two questions for you. Dave, I know you're going to probably talk about this too from a product point of view, but one we've always been interested in that we don't talk as much about is your enterprise fraud solution. So could you give us a quick update on that? I mean, I know that was a really nice win on the partnership. And it sounds like it's – or at least based on conversation we've had, it's doing better maybe than some think?

Well, so yes, the partnership you're alluding to Brett is with SAS, so SAS of course known as the provider of enterprise risk solutions to the largest banks in the world, not just in the United States. That, as I disclosed early on, we didn't expect to sell this to every bank or credit union, this was something that was targeted at our larger customers. So we today have 15 customers live, we booked another new customer in the quarter. So it's progressing well. But again, I would emphasize, this is not a solution that we expect to sell to 2000 customers or anything like that. This was specifically targeted at our largest banks and credit unions, who had -- we're serving very broad markets, particularly commercial customers, and had a real need for significantly advanced fraud and analytics solutions in that area.

Second question is on the treasury management, it sounds like you guys are making good headway. I know, those are difficult deals to sell, they are big decisions for banks. And depending on who you talk to, there's some newer, newer products out there that are like yours, and there's some legacy products. How is that market dynamic or the competitive dynamic? I mean, is it still, are banks still frustrated with their choices? Or are they pleased that there's maybe some newer options or kind of where are we on that innovation curve on that market?

Yeah, it’s a good question. The pretty consistent feedback that I get is, thank goodness that somebody has created a brand new ground up, modern solution to address treasury management, and that somebody being Jack Henry. So, we have a couple of competitors out there that have good solid solutions. But as far as I know, our treasury management solution is the newest to the market, it was written ground up to be a cloud native solution with mobile functionality. And a lot of the legacy treasury solutions don't have good mobile functionality. In this day and age, if you're running a commercial business, you expect to be able to approve wires and so on through an easy mobile interface. So, it was written ground up to be cloud native, and with a nice, slick user experience and a slick mobile set of functionality. And so that's what's getting us the attention. But as you point out, it's a big decision to move to a new treasury management platform. I wouldn't put it in the same category as a core decision. But it's close because it has such a wide reaching impact on for a bank on your commercial customers. And your commercial customers are, of course, the group of customers that you don't want to disrupt in any way, shape, or form. And so it's a big decision. But as I pointed out, we've had good success, we signed another five customers in the quarter. And so I expect that to be a winner for us going forward. And the key thing to remember there was the reason we did all of this was because we've continued to position ourselves as a provider for larger institutions. And if you're really going to be a solid provider for those larger institutions, having a tool like this is a real feather in our cap when we go into a large multi-billion dollar bank, and say, we have the suite that you need to run your bank effectively going forward.

But what's really interesting is, as Dave said, we developed this thing, and we would only sell it to our largest customers. But we've actually sold it to some smaller customers and some really unique situations where one customer bought it for one customer. And then last week at our Symitar Strategic Initiatives, we actually had some interest in this from our credit union customers.

And then last question, this is a little bit more sort of blue sky. But one of the things we've been hearing or talking a lot about with clients and other industry participants is a lot more M&A going on, both in the bank world and I'm thinking BB&T and STI as the signature one. And then obviously, the core guys buying some merchant acquirers and payments businesses. But the underlying theme that we're hearing a lot is that scale matters, in particular, getting a bigger pot of money to spend more money on innovation in order to kind of stay ahead of the curve, both for banks, and for processors and technology vendors like you guys. I just wondered kind of where do you -- what's your take on that? Do we have enough money? Or how do we feel about our arsenal of money to develop things as quickly as we want? Or would we like to do it more quickly? And does that lead to partnerships or kind of give us a sense of where you are on that?

Well, I think your last point there is valid. So that is what has prompted a couple of the partnerships we've done recently. In the past, you didn't see Jack Henry doing partnerships very often. The partnership with SAS was a really unique opportunity. And it allowed us to not have to go and create that solution from the ground up as contrasted with treasury management, where we chose to do that as a ground up solution. So it's a question of prioritizing, regardless of size. It's a question of prioritizing and deciding what do you want to put your investment R&D dollars against and what are the things that maybe a partnership solves the problem as opposed to developing it yourself. So it's the reason we ticked up our commitment to R&D a few years ago, it's the reason that we're running up the pace we are today with R&D, you've seen us roll out a number of new solutions in the past few years and that pace continues. So we're definitely committed to ongoing R&D, but it is a question of prioritizing and deciding what are the things we have to do ourselves, what are the things we don't have to do, because we don't have to be everything to everybody. And then one of the things where we can solve a problem by partnering with a really good solid partner.

Yeah, I mean, our total R&D spend is about 14% of our total revenue. So we are reinvesting significantly. I'm not sure how much more we really need to do. So just that's, I think that's a good compare point.

Thank you. And I'm not showing any further questions. I would now like to turn the call back over to Kevin Williams, Chief Financial Officer for further remarks.

Thanks, Justin. I want to remind everyone again that we're having our Annual Analysts Day next Monday afternoon in Denver, Colorado. We will have presentations by all of our executives, our officers and our general manager sales, and there will be related Q&A time for each one of those sessions. The entire session will be webcast, if you're not able to attend in person, but if you are there in person, you will be able to see some of our hotter products being demoed in the mini tech fair that evening after the final Q&A. Again, we're pleased with the overall results of our ongoing operations and the efforts of all of 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 Justin, with that, will you please provide the replay number?

Thank you, sir. Ladies and gentlemen, this conference will be available today at 11:45 Eastern Standard Time through May 10, 11:59 Eastern Time. You may access the replay system at any time by dialing 800-585-8367 and entering the access code, which is 256-7034. International participants dial 404-537-3406. Those numbers again are 800-585-8367 and 404-537-3406. Access code is 256-7034. Thank you for participating in today's conference. This concludes today's program. You may all disconnect.