Jack Henry & Associates, Inc. (JKHY) Q4 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Jack Henry & Associates Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] And as a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Kevin Williams, Chief Financial Officer. Sir, you may begin.

Thanks, Brian. Good morning. Thank you for joining us for the Jack Henry & Associates fourth quarter and fiscal year end 2019 earnings call. I’m Kevin Williams, CFO and Treasurer. And on the call with me today is David Foss, President and CEO of Jack Henry. In just a minute I will turn the call over to Dave to provide some of his thoughts about the state of our business and performance for the quarter. And then, I will provide some additional thoughts and comments regarding the press release we put out yesterday after market close. I will provide guidance for FY20. And then, we’ll open the lines up for Q&A. First, 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 form 10-K entitled Risk Factors and Forward-Looking Statements. With that I will now turn the call over to Dave.

Thank you, Kevin, and good morning, everyone. We're once again 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 fourth quarter and for the entire fiscal year. As we’ve discussed throughout the fiscal year, the changes associated with ASC 606 introduced some lumpiness in the financials for the year. But, if you look at our annualized numbers, we posted a very solid financial performance. For fiscal year 2019, revenue was up 6% and was up right in line with our guidance at 7%, if you account for the significant decline in deconversion fees in FY19 as compared to the prior year. The core segment of our business saw revenue increase of 5% for the year, as compared to fiscal year 2018, and an increase of 6%, if you exclude the impact of deconversion fees from both years. Our Payments segment performed well, posting an 8% increase in revenue for the year and a 9% increase excluding the impact of deconversion fees from both years. Our complementary solutions businesses posted a 6% increase in revenue in fiscal year ‘19 and a 7% increase excluding the impact of deconversion fees from both years. As I mentioned in the press release, our sales teams again had an extremely solid quarter in Q4. We booked 15 new core wins in the quarter with all of them as competitive core takeaways, bringing us to 57 new core clients signed in the fiscal year. Additionally, we booked 25 in-house outsourcing deals in the quarter, and we signed 17 new customers to our new debit processing solution. With all of that success though, the traction we’re getting with our Banno Digital suite is possibly most notable. We signed 41 clients to the full suite in the quarter, bringing our total to 122 for the full year. The combined sales organization exceeded quota again this quarter and continues to manage a solid pipeline as we head into fiscal year ‘20. Jack Henry's full suite of modern, cloud-enabled solutions continue to position us well to win share in the market. Regarding our new debit and credit processing solution, we now have 509 customers live on the platform, including 44 debit customers installed as new rather than migrated. We also have 9 new credit customers live on the platform. We have now migrated more than half of our existing core customers, and we're still on track to complete our core customer migrations by the end of fiscal 2020. As we discussed on the last call, we expect our non-core clients will extend our migration date until November of 2020 because of the extra programming and testing effort for those non-core customers. On July 1st, we announced the acquisition of Geezeo, best-of-breed personal financial management and analytics company, based just outside of Boston. The deal happened just after the close of our fiscal year. So, it has no impact on FY19. It is a terrific, strategic acquisition for us to start the New Year. As you may have read, we've known the Geezeo team for many years and had recently partnered with them. So, we understand their technology well. They’ve already done a good portion of the integration work required with our Banno Digital suite. So, we hit the ground running on this deal. This technology continues to move us forward toward our goal of offering the most robust, digital banking suite in the industry, including PFM, personal financial management, and deep analytics for the consumers who bank with our financial institutions. Overall, this was a very good year for our Company. Our employee engagement and customer satisfaction scores remained very high, our sales teams are performing extremely well and have positioned us for another successful year of selling, and overall demand for Jack Henry technology solutions remains very high in all segments of our business. As we begin the new fiscal year, I continue to be very optimistic about our future. With that, I'll turn it over to Kevin for some detail on the numbers.

Thanks, Dave. The service and support line of revenue increased 2% compared to the prior year’s restated quarter -- prior year numbers are restated for ASC 606 and then, we have revenue recognition rules. Our license hardware and implementation revenues were down $5.2 million in the quarter compared to last year as we continue to have headwinds from decreased license and on-prem implementation revenue because of the fact that almost all of our new core installs are electing our private cloud model, which is good for us long term. Our outsourcing and cloud services were up nicely to offset the decrease in license hardware and implementation revenues, and our deconversion fees were up slightly compared to year ago. The processing line of revenue, which is all of our transaction, remittance, card and digital, grew 7% compared to prior year. Total revenues were up 4% for the quarter and up 6% for the year compared to last year, and on a non-GAAP basis, revenues were up 4% for the quarter and 7% for the year. Our reported consolidated operating margins were down from 22% last year to 20% this year, primarily due to three headwind impacts: First, the significant decrease in our license revenue this quarter, compared to a year ago as license revenue is our highest margin revenue; second is the additional cost of processing our debit card customers’ transactions until we get them all migrated to the new platform; and then, third is the additional costs for the employee pay-for-performance plans that are being funded with a portion of the savings from the Tax Cuts and Job Act or the TCJA that we talked about at beginning of fiscal year. Our operating margins for the year were down from 24% last year to 22% this year for all the reasons just listed, plus the fact that our deconversion fees were down $15.9 million for the year compared to last year. So, all-in-all with all those headwinds, we feel very good about the operating margin we turned into the year. Our segments operating margins continue to be very solid with small fluctuations. However, payments segment will continue to have the increased margin headwind going forward as the additional cost continues to increase as we migrate our existing customer to the new payments platform. Our effective tax rate for the year was 23% this year compared to 19.6% last year. Remember, last year was low due to timing of tax benefits due to TCJA. For cash flow included in the total amortization, which is disclosed in the press release is the amortization of intangibles related to acquisitions, which increased to $20.8 million year-to-date this fiscal year compared to $18 million last year. Depreciation was up slightly for the quarter -- or down slightly for the quarter and non-acquisition amortization was up due to more of our internally developed products being put into production. Our operating cash flows were $431.1 million for the year, which was up 5% compared to last year, and we invested $176.8 million back into our Company through CapEx and developing products, which is up from $149.9 million a year ago with much of the increase in CapEx related to data center upgrades back in Q1 that we talked about on previous calls. Our free cash flow was $260.5 million or 96% conversion of net income for FY19. For FY20 guidance, as Dave mentioned, we're being very successful with core wins. But, out of the 57 new core wins this year, all but 4 have elected to go with our private cloud delivery model. And with continued migration of our existing in-house customers to our private clouds means continued decrease in license revenue and in-house segmentation revenue. In fact, we believe this could be a revenue headwind of roughly $15 million next year compared to the year just completed. Currently, we are projecting deconversion fee revenue to be flat to slightly up in FY20. However, revenue from all of our processing customers will continue to be -- grow very nicely. Therefore, our total revenue is projected to grow between 6.5% and 7% for FY20. With projected decrease, license revenue and additional cost headwinds from our payments platform migrations, we project operating income will grow approximately 5% on a GAAP basis and close to the 6% on a non-GAAP basis for FY20. We will continue to experience revenue and operating income fluctuations between our first quarter -- or fiscal quarters due to license implementation payment platform migrations and software subscription usage, which again is recognized in the first quarter of the year. Operating income and margins will be highest in Q1 due to the software subscription revenue, and then will drop off for the next three quarters, very similar to FY19 due to ASC 606. We anticipate operating margins for FY20 to be mostly in line with FY19 at approximately 22% for the year. Our effective tax rate for FY20 will be 23% to 23.5%, which is up from our actual effective tax rate of 21.7% for FY19 due to some state tax benefits and other benefits that we got this year from stock option restricted stock that we do not anticipate getting in FY20. Having said all that, our projected FY20 EPS is in the range of $3.60 to $3.64. And remember, due to software subscription revenue recognition is little frontend loaded, so EPS for Q1 FY20 should be in the range of a $1.02 to $1.05. Therefore, in summary, on a non-GAAP basis, revenue should grow 6.5% to 7%, operating will grow approximately 5.5% to 6%, and with the expected higher tax rate, our EPS for the year will be $3.60 to $3.64. As we discussed on the last call, we will not be finished with the migration to the new payment process platform by the end of June 20. As Dave mentioned, we're still on plan to have all of our core customers that we processed through debit [ph] and payments to be migrated by June 20 and all non-core customers to be moved by November 2020. However, these non-core customers are currently being processed on both platforms. And therefore, we will not be able to shut either platform down completely to recognize the significant reduction cost until the first half of 2021. We conservatively calculate a reduction of direct cost of revenue over $16 million once we get the migrations complete with approximately 30% of that savings that will be recognized by Q1 of FY21 and the balance of that savings will be recognized by Q3 of FY21. We also anticipate cap software to be up a little in FY20 compared to FY19. However, we expect CapEx to be down significantly from FY19, which means our total cap spend will be down to allow more leverage of net income to free cash flow in FY20 compared to FY19. This concludes our opening comments. We are now ready to take questions. Brian, will you please open the lines for questions?

Yes, sir. Thank you. [Operator instructions] And our first question will come from Vasu Govil with KBW. Your line is now open.

Hi. Thanks for taking my question. I guess, just first on the deconversion fees, you’re sort of calling them out to be flat next year. To the extent that deconversion fees are sort of seemed to be on a decline to flat trend, I’m assuming that means lower attrition in the business. Does that start to help elevate the overall growth rate at some point versus the historical 6% to 7%?

This is Dave. I would say, I don’t know that it’s going to accelerate significantly, and we have no control over deconversion fees. We talked about it on prior calls. So, that’s all a function of when one of our customers is acquired by somebody else, another financial institutions, that’s generally, when they end up paying deconversion fee. Now, if they’re in-house, they may have no fees associated with that. But if they are a cloud hosted customer, that’s when deconversion fees kick in. So, in theory, if there were no deconversion fees in the future and at the same time we’re layering in new customers, then your point would be well made. But, I don't know that that's a reasonable expectation because there is -- there continues to be churn in the space, there continues to be mergers happening. And again, we have no way to predict accurately what might happen because it’s just a function of when one of our customers decides they are going to sell their institution. So, I wouldn't be comfortable making that assumption because I think one of the underlying conditions there would be that the M&A would come to a stop and that just is not going to happen I think. We’ve seen a pace of about 4% per year for the last 30 years, and I believe that's going to continue going forward.

However, if deconversion fees are flat, that means we're not losing anymore customers that we lost this year. And based on our revenue models, which is based on asset size or number of accounts processed, then that should help to grow our businesses and not create a headwind.

That’s helpful. And then, just I guess another quick one. The second half seems to have been considerably stronger in terms of core singings that you’ve announced. Anything you would attribute this strength to? I mean, are you seeing an uptick in the overall demand in the market as things catch up with the latest technology, or do you think you may also be benefiting from perhaps your competitors being distracted with integrations?

I think, it’s too early to tie anything to our competitors being distracted. Although I certainly hope that they will be distracted going forward. I think, it really is a reflection of the recognition Jack Henry is getting. And this isn’t new. I’d say, over the past two years or three years now, I think the new technology solutions we’ve rolled and the significant enhancements we’ve made to our core solutions but then all of these other complementary solutions that we’ve rolled out, including treasury management and the new digital platform and all that, when you combine all of that, Jack Henry is getting a lot of recognition in our space for having a leading technology. I think that's what's driving that. And of course signings, they kind of are little -- they tend to be a little bit lumpy. I’ve said on many calls in the past, if you can do 10 new core signings in a quarter, that is very significant. We're on a pace here, this past quarter we did 15, the quarter before that we did 18. I mean, I don't see that slowing down. But again, the hurdle you should keep in mind is 10 is significant for a quarter. So, I guess, we see that continuing.

Thank you very much. If I could squeeze in a quick one for Kevin. Kevin, for 2020 guidance, you said 6.5% to 7% revenue growth, but then you said operating income growth would be lower at 5.5% to 6% but margins would be flat. I just wanted to understand, if margins are flat, why operating income is not going in line with the revenue growth.

Well, margins -- and that’s on a non-GAAP basis; on a GAAP basis, margins will be down slightly. And that's what I said, our operating income will grow roughly 5%.

Thank you. Our next question will come from line of David Togut with Evercore ISI. Your line is now open.

Were there any major themes in the 15 new core wins in the quarter in terms of size, the financial institution? You called out strength in treasury management, any other major takeaways from the wins from the quarter?

No, I don't know that there were any themes in the quarter. I mean, there were some nice size wins. We featured one. We featured Busey, for example, in a press release, a large multibillion dollar institution. So, I don't know that there any themes. The one thing that I would emphasize again, though, is this recognition we’re getting for offering a very complete solution, particularly with the digital offering on the front end, I think a lot of core customers that we’re talking to today are really recognizing that the Jack Henry Banno solution is an industry leading digital solution. And so, that is helping to influence some of these core decisions without any doubt.

Understood. And then, on the guidance, Kevin, you indicated 6.5% to 7% revenue growth for FY20. Could you give us an indication of how that breaks down by each of your three segments?

The three segments, I mean, obviously, all three of them should grow nicely. I mean, core will be probably the biggest one, David. I mean, this is probably going to grow in the 8% because of all the outsourcing activity we had going on. Payments should continue to grow nicely in the 6% to 7% range, and complementary should be right there at the 5% to 6% range. So, it's kind of blend together.

And just a quick final question. You've indicated, Dave, that you have no need to really participate in industry consolidation, at least at the level that we've been seeing it this year. Any updated thoughts in that regard? And then, are there any impacts, let's say on sales cycles, closing rates? Obviously, it was a good quarter, but just maybe the tenor of conversations in the market as two of your major competitors have completed large acquisitions?

So, no update as far as any plans, the Jack Henry has to do “transformational acquisition”, nothing changing there. And again, we don't have our head in the sand here. We're very aware of what's going on around this and very, very conscious of the decisions that are being made there. But, we don't see a need to do something, again, I use the word transformational pretty regularly. The topic certainly is coming up with prospects and customers out there. Generally, I would say the tenor is in the Jack Henry's favor. The fact that we're very focused on being a provider to banks and credit unions in the United States and offering best-of-breed technology solutions to those customers. So, I would say and again, it's early days, as I answered previously, I can't say there's traction going on with our competitors or anything like that. But, in early days, I would say the tone tends to be more favorable for Jack Henry, because we are so focused on our strategy, as opposed to any hand wringing about concerns about our strategy.

And the other thing, David that’s around there is obviously we have our annual education conferences in the fall, and our Symitar Educational Conference is next month, and we've already got record attendance signed up for it, and also record prospects that are signed up to come to that. It's little early to state what's going to happen at the Banking and ProfitStars conference. But I think that is a extremely good indication of all the activity we have coming to our education conference.

Thank you. And our next question will come from the line of Peter Heckmann with D.A. Davidson. Your line is now open.

Can you talk about, first, can you just go over for 2021, Kevin, your comments on the savings from eliminating the duplicate platforms and the number you provided as well as how you see that being realized over the first three quarters of the year?

So, Pete, what I said was we’re going to have -- right now, we've identified a little over $16 million of direct costs that will come out of the business. 30% of that will be recognized by Q1 of FY21, and the balance of that, the other 70% will be recognized by Q3 of that year. So, it's pretty easy to do the math. I mean, you're going to take out $4 million or so going into Q1 and you're going to take out the other $12 million or so going into Q3. So, we'll see the whole savings by Q3 of FY21.

Got it. Thank you. And then, can you talk about -- just really good activity on the new business side. Can you talk about your capacity for implementations and how the backlog for converting new business looks, is that getting extended at all?

The good news is, we're pretty flexible in our ability to absorb additional deals. We’ve been running at a pace of pretty significant sales pace here for quite some time. And it's been kind of slowly but surely escalating. So, we've been able to staff appropriately. We've seen what -- I think, our sales team is doing excellent job of forecasting for the operation side of the business. So, we've been able to staff appropriately as we add these deals. So, there are couple of areas where there is maybe a little bit of a backlog pressure, sure. But, that's one of those things that you manage all the time in a business like this, trying to make sure that you don't over staff and figure out is that demand going to be continuing or is that just a blip. And I would say, today, our ability to manage the backlog is everything is in hand and we have no major concerns there. The other thing I’ll point out, when it does come to us increasing staffing, we’ve emphasized many times in the past the fact that Jack Henry is constantly winning these best place to work awards around the country. And the Glassdoor ratings that Jack Henry maintains really gives us a leg up when it comes to recruiting people in this essentially full employment environment that we live in today. We are having no challenges in recruiting because of that recognition. So, I'm very comfortable that we’re in a position where we can maintain the backlog at appropriate rate, and deliver successfully for our customers.

Great. And just one more maintenance item, Kevin, implicit in your revenue guidance for the year, should we assume that Geezeo is going to contribute maybe $5 million to $10 million of revenue?

Yes. Geezeo is going to contribute somewhere around $9 million fee and have virtually no impact on our operating income in FY20. Obviously, there is a lot of integration efforts to get that in line. So, there's not going to be a whole bunch of new revenue. However, I will say that having that and having that in our plan will help drive additional Banno sales.

And our next question will come from the line of Kartik Mehta with Northcoast Research. Your line is now open.

Hey. Good morning, Kevin and Dave. Kevin, I wanted to go back to the platforms savings you talked about. Is $16 million the total amount of savings you anticipate or is that just a first part and you’re anticipating a lot more savings coming from platform consolidation?

That $16 million is what we've identified at this point. Do we think there is some additional leverage and additional opportunities? Absolutely. That's what we've identified and that's what I’m willing to state right now that will have an impact. Having said that, I mean, if I was able to take $16 million out right now, then, I’d be projecting operating income growth of 10% next year instead of 5% roughly. So, it sounds like a small number but it’s pretty significant.

Yes. I just wanted to make sure, obviously it sounds like there is other opportunities but this is what you’re willing to commit to at this point in time. Is that fair?

Yes. That’s fair.

Okay. Hey, Dave, as you talk to your customers and the banks, considering what happens to the yield curve and maybe some of the net interest margin squeeze that they might -- are already seeing or anticipating, is that changing their behavior, or are you seeing any difference in conversations with them about spending on technology?

That’s a good question, Kartik, and it’s a logical question because you would expect that would be happening, but it's actually the opposite. There is so much enthusiasm out there right now as we talk to customers about first off what Jack Henry is doing, enabling them with technology, but secondly, about the opportunities for them to grow their institutions. And yesterday, an American banker, there was an article published about banker optimism, and they quoted a survey they had just recently completed, banker optimism at the end of Q2 was higher than it's been in more than two years, and they said it was up significantly in the quarter as compared to the prior quarter. And so, I'm not -- I don't exactly understand what's happening there. But, I believe it because that's what we experience in the conversations that we're having with prospects and customers. They're really still maintaining this optimistic view about the future and their ability to grow their institution. And certainly, our sales pipeline hasn't slowed down, even though we had a huge sales quarter in Q4. The pipeline continues to be very robust. And so, there is still this optimism out there that seems a little counterintuitive, but it's definitely there.

And, Kevin, could you -- would you be willing to put some dollars around your CapEx? You said, it will be down significantly in FY20 compared to FY19 if I heard that right. So, what's significant?

Yes. I don't have that number right in front of me, Kartik. What I said was our total cash spend of cap software, internal software development in CapEx will all be down nicely next year compared to this year.

Thank you. And our next question will come from the line of John Davis with Raymond James. Your line is open.

Kevin, you mentioned that the in-house to outsourcing trend is definitely beneficial long term. Do you have an idea or can help us conceptualize when that can flip from kind of being a revenue headwind to a revenue tailwind, understanding that obviously given the upfront implementation and license revenue, and return for revenue down the road, when you get a backlog, should like -- when you go to ‘21, is it possible that becomes a tailwind instead of a headwind or is that multiyear headwind?

It's very possible, we could have it in ‘21, John. Because obviously we're -- as I said in my opening comments, we anticipate license and on-prem implementation to be down $15 million next year. And that's going to get down to a pretty low where it should not be much of a headwind anymore, and the fact that we have to defer the implementation revenues for all the outsourcing customers under the new rev rec rules, means that that will grow just like the outsourcing revenue grows and we'll get that get that implementation revenue growing as well. So, I'm not going to stand here and say it's going to be a huge driver, but it'll stop being a headwind and could actually help grow instead of go against us.

Okay. And then, I assume that would also help margins at the same time. Right? So, it would be -- there is some revenue headwind, it's also a margin headwind. So, that's going to be something out that would drive margins higher in ‘21 absent -- or outside of the payments platform winding down?

Absolutely, John, because obviously our license revenue is essentially 100% margin. So, if we can get license revenue stop declining and just stay flat, then that in and of itself, will be a benefit for operating margins.

Okay. And then, Dave, I just wanted to touch on, you've been calling out for a few quarters now, how well Banno has been doing. Maybe just talk a little bit about why it's running in the market, what people love so much about it, and I guess why they're taking Jack Henry and that product specifically? That'd be helpful.

Sure. So, the thing I think Banno is getting recognized for most significantly is first off the user experience, the design of the platform, the design of user experience because again this is not only being used by people in the bank, but primarily being used by their consumers. So, design, the user experience, intuitive design, those types of things. Now, everybody says they have an intuitive design, but we are getting a lot of recognition from experts in the space. People who work at these banks and credit unions who have been hired as the chief digital officer, they area people that are recognizing Banno in particular as being a best-of-breed solution. Then, I think the most significant thing often times is the fact that we've tried to design the solution to enable our customers -- and remember, our customers, community banks and credit unions, their primary competitors are the tier 1 banks, the JPMorgan Chases and BoAs of the world. And so, we’ve designed this system so to enable them to deliver the same level of service they are used to delivering when they are right across the teller line, but they can do it in a digital world. So, as opposed to pushing all the consumers away from ever interacting with a human, the Banno solution is designed, so that there is tools that the consumer can do things on their own if they want to, but if they want to engage with a human, the tools through that digital channels are designed to make it really easy for the consumer and really easy for the banker to assists their customer, a human touch that all credit unions and banks are known for -- community banks are known, a human touch but do it in the digital channel. That's where we’re getting I think great recognition is the fact that we've married the value of the community banks and credit unions have always tried to bring to the market. We’ve married that value with industry-leading digital experience for their consumers, and we’re the only ones out there doing that.

Okay. And last one for me, just want to touch on capital allocation a little bit more specifically, M&A. Obviously, there’s been a lot of chatter around B2B, payments and the ability for you to potentially buy something and push that through your banks. Is that something that’s on your radar that you are looking at, is there anything else from M&A perspective? Getting your comments, there is nothing transformative being contemplated currently, but some smaller deals, anywhere that you think would make sense for some small tuck-in deals or comments on B2B? And then, finally, just how you guys think about buybacks here? Thanks.

Sure. So, nothing -- so, B2B is a great big topic. So, as far as merchant acquiring, are we planning to do a larger acquisition in merchant acquiring space. The answer would be no, that's not a part of the strategic plan right now. Are we involved in that space? Yes. Are we involved in the B2B space? Yes. We have -- through our EPS platform, we have over 0.5 million small businesses that we serve through our Enterprise Payment Solutions platform today. And we’re continuing to add to the solution offering that we have there. We just don't feel that the merchant acquiring offering is the key to our success there. So, yes, we are continuing to add functionality. We’re always looking at acquisitions, not just tuck-in acquisitions. Although we’ve had great success with a lot of those, particularly smaller strategic deals like the Geezeo deal that we just did. But, we're always looking at potential acquisitions that would be additive to our suite, additive to the story for our customers, things that would help our customers and obviously our shareholders. So, we continue to be very active in the acquisition space as far as looking at potential deals. But, we don’t feel the need to go do some very large acquisitions to become a merchant acquirer.

And I now assume, absent M&A deals being available or sizable, you guys will just continue to buy back stocks, given kind of where the balance sheet is today.

Yes. That’s -- we’ve discussed that many times, the fact that we always have acquisition at the top of the list. I think, we have a very solid acquisition theme. We know how to do acquisitions well. So, that’s always a top of the list. But, then, we are opportunistic when it comes to share buyback as well. And we're committed to our dividend policy, of course.

Thank you. And our next question will come from the line of Brett Huff with Stephens. Your line is now open.

One of my questions -- a question was asked earlier about bank -- Dave, you answered a question about bank enthusiasm. And I'm wondering if you're still seeing the same mix of -- is that revenue driven or cost driven or is it banks realizing that they have a tech deficit and need to catch up with maybe the fin-techs? Are you seeing -- first of all, what are the drivers of that enthusiasm, and then, has it changed much recently?

Yes. It’s a good question. I wouldn't say that it has changed significantly recently. But, it has interesting. A lot of it is around finding tools that will help delivery efficiency within the institution. So, years ago, that was not -- was almost never on the list. And today, it's always one of the key topics as how do we improve our efficiency ratio within the institution, what are those tools that can help us when it comes to efficiency. The second driver is definitely around the topic of digital. And it's not just digital banking, as far as mobile banking and online banking, it's things like online loan origination, how do we get to commercial customers with an online experience, those types of things. So, that's been going on for a year or so. So, I wouldn't say that's a recent change, but it certainly is a driver that we have in place today that five years ago wasn't even a topic. Today, it's very much about enabling the digital experience for the customer, whether it's a commercial customer or a consumer, and then introducing efficiencies into the operation. And then, you mentioned the tech deficit. So, certainly, a lot of institutions feel like they've been in that space for a while now. So, they're trying to figure out how to improve their overall technology infrastructure. That helps us. But, I wouldn't say any of those are brand new in the quarter or even in the last six months. But, certainly, as compared to five years ago, it's a totally different environment.

And then, second one for me is, Kevin, thanks for the additional detail on the cost takeouts around the processing or the new card processing system. It's helpful. I wondered if you have any -- or willing to share with us any near or long-term outlook, your expectations around the revenue lift that you might get from that? I know, probably not from debit because you're sort of getting like-for-like, but what about the credit side? Is there -- have guys started sketching out what that might look like and would you want to give us any insight or is it a little too early?

Well, Brett, I think it's still little early there. I mean, as Dave said, we’re being very successful in signing new debit customers and new credit customers. So, we're going to get some nice lift. The fact is that credit card is still so new that I wouldn’t say -- we've signed 17 new credit card customers and not all those are even implemented yet. So, I think, it's a little premature to do that, Brett. I mean, probably by our Q2 earnings call, we could probably give you a much better idea because we’ll be way down the past migration, and have a much better idea of new implementations of both debit and credit.

The thing I will add to that Brett. So, we have 9 of those customers live now on the credit side. The thing that we're looking forward to is when we get to the point where we can start to sell both debit and credit outside our core base. Today, we're really focused inside the core base, because we need to get through these migrations and make sure we've got everything set. But then, when we hand this off as a ProfitStars offering to our ProfitStars sales teams to sell outside of the base, that opens up a lot of new prospects for this team and that will come sometime in -- not in fiscal ‘20; that will probably happen in fiscal ‘21.

And just one more reminder that I’d like to put out there, Brett. If you reminder, I mean, when we started down this path basically two years ago when we went with the build, buy or partner methodology, I mean, we did this, and the timing was because we were losing customers. And so, yes, we're going to have some nice uplift with the fact that were making this move actually stops us from losing customers and got rid of the headwinds. So, that's helping us right now in a large part.

[Operator instructions] Our next question will come from the line of Tim Willi with Wells Fargo. Your line is now open.

A couple of questions, first one is on the modeling side. Kevin, just thinking about the tax rate, which you called out as being a headwind for fiscal ‘20 versus ‘19, is this a good way to think about the steady state tax rate as we sort of start to think into the ‘21, ‘22 timeframe, or are there some variables out there around tax planning strategy, et cetera, that we can't really say that the tax rate you’re guiding to right now is probably a reasonable one to use on an ongoing basis?

No. I would say, Tim, the long-term 23% to 24% is the tax rate that you should be using from long-term modeling.

Okay, perfect. And then, a couple of follows-ups. Number one is the sort of the transition from software license into the cloud, et cetera. As you look at your current installed base, I guess, is there a way to think about maybe how much of that you have attributed that you’ve addressed -- that is addressable? I’m sure there would be some banks that are going to continue to do it the way they have. But, just in terms of thinking about how this headwind plays out, pretty much played through it with your installed base piece in-house to sort of outsource your cloud transitions?

No. We have years of that movement to go yet. So, we’re today around 60% -- 58% of our core base is installed in our cloud offering. And I’ve said many times before, I don't see us getting to a 100%. You always have some banks and credit unions that want to remain in-house. But, we have years -- at the pace that we are going today, we have years yet of that type of movement, in-house customers moving to the cloud. So, we're definitely not at the end of that road.

Is the headwind probably as large as you’d expect it to be, given that is still years to go on this transition, we shouldn’t expect that to be bigger than it is right now, as you discussed the revenue outlook for this year versus prior years?

I don’t think the headwind is going to be bigger, Tim. In fact, I think it’s going to be smaller, because as we continue to move more and more customers to outsourcing and we sell less licenses. So, I mean, if I license fees go down this year as much as we are projecting, then I don’t think going down much more in ‘21 because some number of our customers, especially some of our larger banks and credit union customers are continuing to be in-house, they are going to buy license fees which is why our in-house maintenance, even though we’ve had this significant shift from in-house [technical difficulty] our in-house support and services and our maintenance revenue continues to be very solid. In fact, we saw growth in that line again this year. And that headwind is more a function of us finding new customers who are not buying license this early, they are signing outsource customers, the move from in-house license -- somebody who is already a customer who is in-house moving to outsource environment, and that's all good news for Jack Henry right there, because most of those customers aren’t buying a lot of new license anyway.

Okay. Thanks for the clarification. The last one I have is just around card, tied it bit to Brett’s prior question. But, just thinking about what you are signing with new customers, and I guess even existing customers that are migrating to the new platforms. Is there any way to think about the wallet share, how robust the product set or the functionality is that they're signing up for? I know that was something you talked a lot about when you made this decision as the bells and the whistles and all the feature functionality you could bring to a card platform. So, just curious, you talked about a lot of wins, and a lot of new customers. Is the scope of the contract meeting or exceeding expectations?

Yes, definitely. So, when we talked about the -- having more opportunity for great wallet share, it was around the fact that because of the new platform we’d have the ability to sell an enhanced rewards program, for example, enhanced analytics, reporting packages, those types of things. And I would say -- so, not only is that happening with new customers that we’re signing, where they're signing up for most of those options, but the customers were migrating over from the existing platform are very often signing up for those new pieces of functionality that they didn't have before. So, keep in mind, we said when we announced this deal that an existing customer would transition to the new platform with the same pricing for the same function. But, our hope was, our expectation was that they would add functions which would add revenue, and that's definitely what we're seeing.

Thank you. Our next question will come from the line of Joseph Foresi with Cantor Fitzgerald. Your line is now open.

Hi. Most of the questions that I had were answered. But, I do have a couple kind of just building off of a lot of the conversation. The first one is, I know you said that you're not going to see $16 million until sort of FY21. But, what does the cadence of margins look like this year? Are they going to -- because CapEx is going to go down, are they going to start to build towards the end of this year and then really start to accelerate in FY21, or are they going to stay flat and then we don't start to see it into FY21? I just want to get a sense of how you think about the margin cadence.

So, Joe, I mean, it's -- because of what we're going through with the migrations, what you're going to see in FY20, as far as margins on a quarterly basis is going to be very similar to FY19. Margins are going to be very strong in Q1, because we're going to recognize all the annual software subscriptions revenues. In fact, we recognized those July 1, which -- obviously that's almost a 100% margins, because the software has been delivered. And then, margins will trail down from there as we continue to migrate our customers and the additional cost comes in. We will offset that some in the second half of ‘20 as we start doing some of the cost reductions in the second half. As I said, we will see at least 30% of that cost savings by Q1 of FY21. So, those savings will be coming out in the second half. The timing of that is not exactly not down but we know that's when it's going to come out. So, the margin will scroll down. And then therefore, going into FY21, you're going to see the margins really go up again in Q1 because again, a software subscription and the reduction of the cost that we take out in the second half of ‘20, the margins will go down a little bit in Q2 just like they have this year and next year, but then in Q3, you should see a really nice pop in margins, maybe 100 bps or so because of all the additional costs that come out in the second half of FY21.

Got it. So, it sounds like the back half of FY21 will really be when you start to see the acceleration on the margin side.

Q3 of ‘21 is when you should really see a lift in margins.

And then, just two others from a timing perspective, what does -- what could derail the plan that you've sort of laid out for us? And congratulations on the plan, because I know I've been asking you about it for about three or four quarters. But, what could derail that, or cause delays even further than what you've laid out?

We currently have more than half of our debit customers migrated over, Joe. So, everything is going according to plan. In fact, many of this week, we migrated I believe it’s 25 or 26 more customers, and with zero issues by the time we got them all migrated. So, the plan is working exactly way it is. We are having no -- and remember, the reason we're doing the plan we’re doing is because we did not have any impact on the end users and we've been extremely successful that -- because we’ve had to not have to reissue any new cards or have been no new pins by the end users. And so the end users don’t even know they’ve gone through a migration. So, it’s going extremely well. So, as far as the migration plan and in getting all of our core customers off by the end of June, I don't see hardly anything that could derail that. Obviously, there is -- we will be honest and come up and tell you what it is. But I don’t see any out. The noncore customers, the only challenge there is we are relying on a third-party, to provide some of the programming and different things for us. But, I don't see that being a problem and it shouldn't be really at all. If anything, it could potentially cause a slight delay. But, I don't see anything derailing it.

And then, just the last one for me. On the top line, we've been in sort of this, I guess, mid to upper single-digit growth rate area code. But, if I heard everything correctly on the call, the pipeline is very strong. There's less conversion fees, which means that there are more people in-house. You're taking CapEx down, and you've done a reasonable amount of the migration. And your competition is absorbing very-large acquisitions. Plus, you said that there's been really no change in spending, if anything, an acceleration. So, as we look at FY20 heading into FY21, I think you can guess my question. What is that -- could there be a revenue growth acceleration? All the data points we seem to be hearing would be implying that that could take place. But, I wanted to of course put that question to you guys.

So, Joe -- and let me answer this. Obviously, in this industry, when you start looking more to the year out, the crystal ball gets pretty cloudy in a hurry. But, as I said, so with the significant decline that we are projecting this year in license revenue, if that does as my crystal ball predicts, kind set a base line for us for license revenue going forward, with the -- once we get the migration complete and we continue to add new cards and we get to where we can sell as Dave mentioned earlier, so both debit and credit outside the base to non-core customers, I would say that you could see a lift in 2021 going out ‘20 in revenue. Is it going to be greater 10%? I don't think so. But, it could be higher than the 6.5% to 7% that we’ve been running pretty steady at now for the last three or four years, and what we’ve guided to do next year.

Thank you. And our next question will come from the line of Dave Koning with Baird. Your line is now open.

I guess, first of all, the cadence of revenue growth last year, I think went 8, 7, 5, 4 kind of through the year. And I know there were some 606 impacts and stuff. Is all that now kind of anniversaried, all that kind of turbulence in this year because of the way it all worked last year, the comps now are pretty normal, so that we get pretty similar growth rates for all quarters of this year?

Well, you're still going to have a little more growth in Q1, because of all the software subscriptions that we sold in FY19. That revenue will all be recognized in Q1. So, you're still going to have a little faster growth in Q1 than you do the rest of years. Now, having said that, once you get past Q1, the revenue growth in Q2 through Q4 should be somewhat flat -- I mean, stable throughout the year. However, there is some timing limitations and timing is -- of license revenue recognition and different things, you’re still going to have some lumpiness. But, it should be pretty stable once you get past Q1.

And was the 6.5% to 7% growth, was that like just GAAP revenue growth or was that…

Yes. That’s GAAP.

Okay. That's GAAP. Okay. On the margin side, I look back a couple years, I think you did -- in fiscal ‘18, you did about 22% adjusted margins, meaning adjusting out term fees and stuff. And this year, it looks like 21 or a little under 21. But, if you just fully add back this year, the $16 million of spending, you’d get back to around what the level was in ‘18. But why wouldn't core margins be up, like why are they only flat? Is it literally just that license revenue has continued to come down and your core margins...

Yes.

Okay. So, that's the only big reason?

It's all driven by the shift and what revenue you're really recognizing. So, when you take license down at 100%, and even though your payments margins are nice margins, they're nowhere near 100% margins. So, it's a trade off of the type of revenue that you're recognizing.

Okay. And then, finally, I know 2021 doesn't get the full $16 million benefit, but if it did, that's about a 100 basis-point annualized tailwind. So, would it be fair to say 2021, if you've got that full benefit, you get 100 bps from that and then it is 50 basis points core margin expansion, kind of normal, so it would be up 150 in like a kind of normalized type year?

As long as I know -- I'm going to say, yes, but I'm going to qualify that by saying as long as we don't see another significant decrease in license revenue in ‘21, compared to what we think we're going to see in ‘20.

Okay. And is 50 bps would be kind of a normal -- like, I know there's all the moving parts from term fees, implementation, but should we think longer term 50 would be pretty normal?

Yes.

Thank you. And that concludes our question-answer-session for today. So, now, it is my pleasure to turn the conference back over to Mr. Kevin Williams, Chief Financial Officer, for any closing comments or remarks.

Thanks, Brian. Again, we want to thank you all for joining us today for our year-end and fiscal Q4 earnings call. We're pleased with the results from our ongoing operations and the efforts of all of our employees, 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. Again, thank you for joining us today. And Brian, will you please provide the replay number?

Yes, sir. A replay of this conference will be provided following the conclusion of this call. To dial out and access this number toll free, you may dial 800-585-8367 and the total number is 404-537-3406. Again, those numbers are 800-585-8367 and 404-537-3406. Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody, have a wonderful day.