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Jack Henry & Associates (NASDAQ:JKHY)
Q3 2020 Earnings Call
May 06, 2020, 8:45 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Jack Henry & Associates third-quarter fiscal-year 2020 earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker, today, Kevin Williams, chief financial officer. Please go ahead, sir.

Kevin Williams -- Chief Financial Officer

Thank you Stephanie. Good morning. Thank you for joining us for the Jack Henry & Associates third-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 David to provide some of his thoughts about the state of our business and performance of the quarter as well as some comments about our response related to the impacts of COVID-19. And then after that I will provide some additional thoughts and comments regarding the press release we put out yesterday after market closed, and provide comments regarding the guidance Q4 and full year, FY '20 provided in the release. And then, we'll open the lines up for questions and answers.

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.

On this call, we will also discuss certain non-GAAP financial measures including non-GAAP revenue and non-GAAP operating income. The reconciliations for historical non-GAAP financial measures can be found in yesterday's press release. With that, I'll now turn the call over to Dave.

David Foss -- President and Chief Executive Officer

Thank you  Kevin and good morning everyone. Those of you who listened to our earnings calls on a regular basis may recall that I've started every earnings call I've ever done by thanking our employees for their hard work and dedication to our customers and our company. At no time have I ever been more passionate about that point than I am today. Since the onset of this pandemic, the Jack Henry team has moved mountains to address the unprecedented needs of our customers, while at the same time, demonstrating true commitment to each other and our communities.

To give you a sense of what that effort has included, here are just a few of the key initiatives completed by our team since early March. Our crisis management team began conducting daily meetings at the beginning of March to provide an ongoing review of information and plans for every aspect of our business. They have been instrumental in our planning and success as the world around us has changed so significantly. Early in March, our human resources team enhanced our healthcare program to cover 100% of COVID-19 related medical treatment for all employees.

We announced that we were offering full-time work-from-home status on March 16, and our corporate technology services team successfully transitioned 96% of our employees by the end of that week, the other 4% are required in a Jack Henry location every day to manage one of our data center operations. Those employees began receiving bonuses immediately after we moved to a work-from-home status. Our lending solutions team launched an online paycheck protection program offering for our customers within three business days of the CARES Act being passed in early April. We had customers processing loans for their small businesses.

Two days before, the SBA was ready to start funding those loans. We also expanded our lending network to provide support to our clients who are unable to book a loan for one or more of their small business clients. To date, we have helped our clients process almost 70,000 loans through the PPP program. And lastly, as you can probably imagine, call volumes in our call centers have increased exponentially as our customers and their consumers moved out of their offices due to the various stay-at-home orders.

During that time, not only have the Jack Henry customer service team has risen to the occasion, but they did it while improving on our already industry-leading response times and customer service ratings, truly remarkable. These are just a few examples of the outstanding efforts put forth by our team during this crisis. In the past, many of you have commented on the unique culture at Jack Henry. The culture built on the do the right thing and do whatever it takes mantra.

Never has that culture been on display in a more meaningful way than what we've witnessed during the past couple of months. I could not be more proud of our team and their ongoing commitment to our customers and our company and I thank every one of them for weathering the storm with grace and passion. Of course, we are not at the end of the road when it comes to dealing with the ongoing impacts of COVID-19. We continue to operate primarily in a remote status, and our customers continue to get comfortable with their new operating model.

Although most of our clients are still unsure about the long-term impacts on their businesses, we're seeing many get back to focusing on the day-to-day. A good measure of this shift is the level of engagement we saw with our sales teams in April as things started to settle a bit. Of particular note, we've already signed five new core competitive takeaways in April as well as a variety of other new contracts, and the combined sales organization exceeded their quota for the month of April. We will be closely monitoring sales performance and sales pipelines as the fourth quarter continues to progress.

With that, let's shift our focus to a look at our performance for the quarter we completed in March. For the third quarter of fiscal 2020, total revenue increased 13% for the quarter and increased 9% on a non-GAAP basis. Deconversion fees were up almost $15 million over the prior-year quarter with almost all of that variance attributed to a single customer in New York. If you exclude the deconversion revenue variance and focus on the non-GAAP number, you can see we posted a very strong overall revenue quarter.

Turning to the segments. We again had a solid quarter in the core segment of our business. Revenue increased by 12% for the quarter and increased 7% on a non-GAAP basis. Our payments segment also performed well, posting an 11% increase in revenue this quarter and an 8% increase on a non-GAAP basis.

We also had an extremely strong quarter in our complementary solutions businesses, with a 16% increase in revenue this quarter, an 11% increase on a non-GAAP basis. Despite the obvious COVID-19 challenges for the sales team at the end of the quarter, all three of our sales groups again hit or exceeded their quota, and for the year, they continue to run ahead of last year's record pace. In the third fiscal quarter, we booked 14 competitive core takeaways and 11 deals to move existing in-house customers to our private cloud environment. Our Banno digital platform continues to see very strong demand, with 24 new clients signing for the full digital suite in the quarter.

We also signed 16 new clients to our new card processing solution. Speaking of the new card processing platform, we have been providing regular updates on our progress during these calls for the past several quarters. We are now 82% complete with the migrations, and we ended March with almost 750 financial institutions on the new platform. Prior to the onset of COVID-19, we were poised to wrap the migration for our core clients by June 30 and had all 136 of those clients scheduled to convert in April, May and June.

In early April however several clients on those lists asked us to delay the schedule because they had minimized their employee presence in their offices and didn't want to introduce any new payment solutions while their employees and customers were working remote. As disappointed as we were to introduce a delay in a project that has been moving along so well, we determined it was definitely the right thing to do. As a result, we have delayed any migrations previously scheduled in our fiscal Q4 into Q1 of fiscal 2021. I anticipate the migrations for our 86 noncore clients will also be delayed as a ripple effect so we now plan to see those migrations happen in fiscal Q3 of 2021.

Regarding implementations for our other solutions, we are working closely with our customers who are scheduled for on-site delivery of our solutions to ensure their needs are met while taking all necessary safety precautions for our employees when they're required to be at a customer site. Delays of customer system installations due to COVID-19 have been very limited, and we've developed processes to handle remote installations when applicable. We expect these processes to provide flexibility and value, both during and after the pandemic. We will continue to work as a partner with our customers regarding implementation plans, customer service needs and support for their end consumers to ensure they get the help they need during this difficult time.

Despite the uncertainty caused by the ongoing pandemic, let me remind you of a few of the fundamentals about our company. Fundamentals we emphasize regularly in our discussions with investors and analysts. First, more than 85% of our revenue is recurring in nature. Second, we have very little debt on the balance sheet, and we continue to operate with a solid cash position.

Third, we've paid a dividend for 119 consecutive quarters, and we continue to be committed to our dividend policy moving forward. Fourth, we have an extremely engaged workforce as evidenced by our employee engagement survey results and Best Place to Work awards. And finally, remember that we weathered the financial crisis 12 years ago with very few bumps or bruises. As we move forward, we will inevitably continue to implement minor changes to our delivery and service models, but we don't anticipate the need to make any significant changes in the way we serve our customers.

We have a commitment to doing the right thing for our employees, customers and shareholders that we believe will serve us well as we adjust to the new normal. We will continue with our disciplined approach to running the company and expect that approach to help provide continued stability for our company as we move to the other side of this pandemic at some point in the future. With that, I'll turn it over to Kevin for some detail on the numbers.

Kevin Williams -- Chief Financial Officer

Thanks Dave. The services and support line of revenue increased 15% compared to the prior-year quarter. Our outsourcing and cloud services continue to be a big driver in this line of revenue with an 18% compared to last year. As Dave mentioned, deconversion fees were up $14.7 million compared to a year-ago quarter and all of those are included in this line of revenue.

If you back out deconversion fees and contribution from acquisition, this line of revenue on a non-GAAP basis grew by 8%. And the processing line of revenue which is all of our transaction, remittance and digital grew 9% compared to the prior-year quarter. And again, there are no deconversion fees in that line of revenue. Our total revenue was up 11% for the quarter compared to last year.

And on a non-GAAP basis, revenue was up 9% for the quarter which is slightly ahead of our previous guidance. Our reported consolidated operating margins increased slightly from 20% last year to 21.4% which is primarily due to the increase in deconversion fees. On a non-GAAP basis, our operating margins decreased slightly from 18.5% last year to 18.1% this year primarily due to the continued increase in additional costs related to our card processing platform migration. With the delayed migrations that Dave mentioned, we will continue to see these margin headwinds for the remainder of the fiscal year and into next fiscal year through Q3 of FY '21, until we can eliminate the additional costs related to the platform migration.

With this shift in timing and the impacts of COVID-19, at this point, it is hard to determine exactly when we will see margin improvements next fiscal year, but we will definitely see margin improvements in our payments segment in Q4 of FY '21 which will get the full-year impact in FY '22. The impact of these cost reductions at that point will remove headwinds and allow us to return to a position of leveraging our operating income margins in FY '22. Our core and complementary segment operating margins continued to improve, but the continued pressure from our payment segments we just discussed is offsetting that improvement. The effective tax rate for the quarter decreased to 19.7% compared to 22.4% last year which this is primarily due to the difference in the uncertain tax positions which were reserved annually under FIN 48 according to IRS and with the lapsing of statute of limitations between the two periods, respective reserves are released.

This quarter was impacted a little more heavily due to the additional and above normal releases related to the Tax Cuts and Jobs Act eliminating the Section 199 deduction, so there were no new reserves to offset those Section 199 that were released. Net income was $73.9 million for the third quarter compared to $59.3 million last year with earnings per share of $0.96 this year compared to $0.77 last year. The $0.96 for the quarter included positive impacts from deconversion fees and taxes which were offset by the negative impact from the loss on disposal of assets. Considering these adjustments, our earnings per share related to operations came in slightly ahead of the consensus estimate for the quarter of $0.80.

For cash flow, our total amortization increased 5% year to date compared to last year due to capitalized projects we placed into service. And included in the total amortization is amortization of intangibles related to acquisitions which decreased to $15.4 million year to date this fiscal year compared to $15.6 million last year. Our depreciation is up year to date primarily due to the timing of data center capex that we talked about a year ago being placed into service last fiscal year and getting a full nine months of depreciation this year. Our operating cash flow was $276.4 million for the year to date which was up from $233.4 million a year ago.

We invested $126.8 million back to our company through capex and developing products which is up 2% from $123.9 million a year ago. Couple of comments on our balance sheet. We currently have a cash position of $109.5 million. We'll be sending out annual maintenance billings at the beginning of June.

In February this year, we renewed our revolver with a 5-year term and increased the maximum borrowings to $700 million. There was a $55 million draw on our revolver at the end of the quarter at March 31. However, we do anticipate paying that off by June 30 in the net cash. We have no other long-term debt on our balance sheet other than leases.

We are closely monitoring and monitoring all lines of revenue and watching relative key performance indicators. We're focused in monitoring cost controls, especially in significant areas of costs like headcount, travel, meetings and discretionary spend. In our guidance, we're anticipating a slow rebound in debit card usage as parts of the company reopen -- or parts of the country reopen, I'm sorry. At this point, it appears that income from deconversion fees will be down approximately $1 million compared to last year's Q4 which just to remind you, we have no control over the timing of recognizing deconversion fees that we receive.

As reported in the press release, our GAAP guidance for revenue for Q4 is a range of $408 million to $415 million with EPS of $0.77 to $0.79 per share. Our full-year revenue guidance was increased to a revenue range of $1.695 billion to $1.702 billion with a full-year earnings per share of $3.83 to $3.85. We will continue to experience revenue and operating income fluctuations between our fiscal quarters due to various things, such as license revenue, implementation timing, our ongoing payment platform migrations, and also software subscription usage which obviously you'll see in Q1 of next year. We anticipate GAAP operating margins for Q4 to be down a little from last year's fourth quarter so for the full fiscal year, it should be mostly in line with FY '19 at approximately 22.5% operating margins.

Our effective tax rate for FY '20 should end up at approximately 23% for the full fiscal year. As we have historically done, we will be providing revenue and earnings guidance for FY '21 during our Q4 and year-end earnings call that we will have in August. We are currently in the process of developing our budget for FY '21 and evaluating the overall impact to be anticipated and expected from COVID-19. At the same time, developing our FY '21 budget, we will be focused primarily on targets and forecasts, specifically for Q1 of FY '21 to assist with the guidance we will provide in August.

However, let me remind you as I know you will be working on your models before we provide official guidance. As Dave mentioned, our recurring revenue year to date is over 85%. And if you remove the onetime deconversion fees from total revenue, our recurring revenue is actually a little over 88% of our total revenue. So you shouldn't use those as you're building your models for FY '21 before we give official guidance at our year-end earnings call.

This concludes our opening comments. We are now ready to take questions. Stephanie, will you please open the call lines up for questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Dan Perlin with RBC Capital Markets.

Dan Perlin -- RBC Capital Markets -- Analyst

Thanks. Good morning and I hope everyone is healthy and safe. I wanted to start off just at a high level in terms of -- as you've had conversations or both of you have had conversations with your bank partners, I'm wondering what type of insight they're providing back to you in terms of the health of that channel. Like right now, it feels like things are relatively stable, but it does also feel like things are likely to get worse there.

And so I'm just wondering where -- what kind of anecdotal evidence you're hearing from those partners?

David Foss -- President and Chief Executive Officer

Good morning Dan. It's Dave. So good question. Obviously, probably not a surprise to you that we've been talking to a lot of our customers here in the past several weeks, talked to a few CEOs just in the past three, four days.

And I think the consistent feedback from them is -- so first off, this crisis that we're in right now was caused by a health crisis, it's not by a financial crisis. Obviously, it's created ramifications throughout the U.S. economy. But the banks and credit unions that we work with and the CEOs that I'm talking to have emphasized over and over again that the health of their institutions was really very solid before this came on.

So they're well capitalized, their credit quality is high, plenty of liquidity. And so they're feeling generally pretty strong about the opportunity in the future going forward. They -- for those who chose to participate in the PPP program, they were being paid by the SBA to process those loans. So there is an income stream for them there, and that's helping for some institutions.

Some have been very successful in the PPP program. And so they feel strongly about the fact that they're not only helping small business and helping save Main Street by being administrators of that program and working with small businesses to help them out. But there is the benefit that there's some revenue coming into the financial institution that helps -- that participates in PPP. So generally, although everybody is concerned about what future looks like here and when do things return to normal.

Generally, they're pretty upbeat that they can weather the storm. And yes, they'll have to deal with some businesses that may be troubled, and they may have some mortgage payments that they're going to have to accept the idea of delaying a mortgage payment and so on. But they're generally pretty positive about the picture. And I think it's because they recognize that although this is turning into a financial crisis, it wasn't caused by banks like the one that we went through 12, 13 years ago.

Kevin Williams -- Chief Financial Officer

Yeah. And to Dave's earlier point, I mean, we came out of that one in 2009, 2010, pretty much unscathed. And that was a financial crisis. So I mean obviously  there's going to be some issues with the financial industry coming out of this.

But obviously, the good thing, as Dave said, most financial institutes winning this were very well capitalized with strong balance sheets, and they seem to be still in a pretty good place.

Dan Perlin -- RBC Capital Markets -- Analyst

That's great. And just as a quick follow-up in terms of trying to understand the implementation cycle impact. I mean, I think you gave some good color there. But it does seem like there's going to be some air pockets that get created.

And so what I'm -- what I'm actually interested in is, can you just help us understand how you would do kind of a digital knowledge transfer if you couldn't be physically on-prem for some of these if this was much more protracted than, say, the one quarter that you're kind of alluding to pushing to kind of I think the first quarter of next year? Thank you.

David Foss -- President and Chief Executive Officer

Sure, sure, yeah. And it's been fun and exciting and kind of remarkable frankly to see the implementation teams shift gears into a new mode of delivery. So a lot of the solutions that we deliver were already delivered virtually. And we do training online, we do training.

We weren't using a whole lot of video to do training before, we are now, as people become much more comfortable with the video technology, but we did a lot of implementations remote previously. Now many of our teams have adapted the way they do implementations, adapt to the way they do training. They're taking advantage of virtual tools like video to do training. So it really hasn't interrupted, as I mentioned in my opening comments, it hasn't interrupted our implementation pipeline much at all.

In fact, I think it was two weekends ago, we did three core conversions on that same weekend. It was either two or three weekends ago. And we're installing Banno Digital suite, has always been installed virtually -- not always, but for year or so has been installed as a virtual install. So the teams have adapted and we're delivering things differently.

There are some customers who aren't 100% comfortable all the time. They want somebody there to hold their hands. And so we kind of work through that. But most of our solutions now, we're in a position to implement virtually.

Kevin Williams -- Chief Financial Officer

And Dan, for some invitations, I mean, we still are sending people on site which is one of the nice things about having our own corporate planes. So we can safely take our employees to the facilities and work for the banks through a safe distancing relationship. And also, we have always done a lot of classroom training virtually which we are doing that. We've got several classrooms set up with multiple monitors to do training.

So that was already in place. So the nice thing about this is we were already -- 27% of our employees were working remote anyway and probably another 25% or 30% were promoted during -- at some point during the week. So this was a pretty easy adaptation for us to get where we are today.

Dan Perlin -- RBC Capital Markets -- Analyst

That's great to hear. Thank you so much.

Kevin Williams -- Chief Financial Officer

Yup.

Operator

Your next question is from the line of Vasu Govil with KBW.

Vasu Govil -- KBW -- Analyst

Hi. Thanks. Good to talk to you and glad everyone is doing well. I guess just the first question on the revenue deceleration in the fourth quarter.

I mean, even excluding the deconversion fees, it feels like there would be a slight slowdown. Could you talk about what's driving the impact by segment? Is it mostly the payment segment where you were expecting to see the weakness? If you could give us some color there?

Kevin Williams -- Chief Financial Officer

Yeah. I mean the primary drive we're seeing and what we're projecting in Q4 is we did see a slowdown in our debit card usage in the last half of March. Even though we still had strong payments growth for the quarter. And so we continue to see that slower debit usage in April.

And like I said in my comments, we are assuming and predicting that we will see some rebound in June as the country opens back up. That is -- that's the primary drag on the revenue growth in Q4.

Vasu Govil -- KBW -- Analyst

Got it. That's helpful. And I guess, I know you will get guidance for 2021 next quarter, but if you could give us some high level color, like do you think the fourth quarter will be the trough in terms of growth rates or could there be a lag effect depending on what you see on sales? And if you could perhaps compare and contrast how the impacts this time might be different from what you saw in the great financial crisis. Back then I guess revenue sort of went from double-digit to flat.

And then recovered back pretty quickly. Like what kind of sort of a recovery curve might you see this time? Thank you.

Kevin Williams -- Chief Financial Officer

So I think it's a little different now to look at our financials compared to what you saw back in the financial crisis. And the difference is ASC 606. Because remember, we're now under different rev rec rules than we were back then. So when we were able to start delivering software little quicker back then which obviously we don't deliver a whole lot of software now, so you're not going to see a sudden rebound.

However, we've been under ASC 606 for two years now or we will be by the end of this fiscal year. So now you kind of see the fluctuations created in our financials the last couple of years which Q1 is typically a high quarter now because of all the software usage and subscription revenue that has to be recognized at the beginning of the year which that grows every year as we continue to sell those throughout the year. And then it kind of tapers off throughout the year from Q1 to Q4 which is kind of opposite from the way it used to be. So I think, as I said in my opening comments, with recurring revenue being 88% of our total revenue, we still have a solid backlog.

Through Q1, our sales bookings were still up 12% over last year. As Dave pointed out in his opening comments, we actually exceeded quota for April. So do we anticipate some headwinds on sales? Yes. But having said all that, I feel really good going into FY '21 at this point.

Vasu Govil -- KBW -- Analyst

Thank you. That's very helpful.

David Foss -- President and Chief Executive Officer

I think a key point to remember there is that when we sign a new core customer, we don't see any of that revenue for months after that customer is signed. And then once we do start to see revenue, it layered in as opposed to getting a pop in that revenue. So -- and that's core. Now many of our other solutions are maybe a little shorter implementation time line.

But it is rare for us to sell. We're not a sell and bill kind of company normally. We're going to sell and put it in the backlog and it gets rolled out and the revenue gets layered in. So that's part of the predictability of the model.

Operator

Thank you. Your next question comes from the line of David Togut with Evercore ISI.

David Togut -- Evercore ISI -- Analyst

Thank you. Good morning. Kevin and Dave, hope you're both staying well. Just bridging to the earlier question, could you talk about potential inflection points in the business as a result of COVID-19, for example, you've had very strong demand for a while for Banno Digital suite.

But do you expect to see an accelerating shift toward digital banking as more consumers perhaps don't want to walk into bank branches?

David Foss -- President and Chief Executive Officer

It's a good question, Dave. And definitely, I think you're on the right track there. So the things that we're seeing right now -- it was interesting as the whole COVID-19 thing was coming into play here. So I think back to the beginning of March and into mid-March, there was a lot of speculation that people would immediately try to upgrade their digital presence.

Well, in fact, the reaction was kind of the opposite. I don't want to mess with anything right now. My customers are all -- my consumers are all changing their behavior. I just want to leave things alone right now.

But now that that's settled in, we have a lot of customers realizing that the -- that for them to be successful going forward, they do have to seriously look at upgrading their digital presence. And that's not just what we used to call mobile banking. It's the entire digital banking suite including opening accounts online and so on. So we definitely are seeing a shift in interest, a shift in conversation about that as people are thinking about the future and trying to make sure they're positioned well for the future.

And I think there will be more things. Commercial -- online commercial lending. We've talked many times in these calls about the outstanding technology we developed for commercial lending online. We had signed a number of banks and some credit unions for that technology, but many of them still viewed commercial lending as opposed to consumer retail lending, commercial lending, they viewed us that function where somebody has to come into the branch, you can't possibly do a commercial loan without looking that person in the eye.

Well, now today, guess what? They're doing a lot of commercial lending over the -- digitally. And so we have a number of customers looking at upgrading that piece of technology as well. So I think you're absolutely spot on as we look toward the future, digital will be much more of a topic than it has been.

Kevin Williams -- Chief Financial Officer

Yeah. And the other thing I'd throw out there, David, and obviously, it's too early to tell, but as Dave pointed out in his opening comments, we signed 11 additional existing core customers to move from end to out. I think COVID-19 is going to continue, if not accelerate that trend somewhat. And I think our hosted network services offering will probably grow even faster than it was because I think some of these clients are realizing that they really don't want to -- have to mess with any of the technology and I'd rather us do it.

Again, it's -- that's a prediction on my part. It's too early to tell, but I have to believe that that is going to be part of this whole conversation in FY '21 going forward.

David Togut -- Evercore ISI -- Analyst

Thanks for that. Just a follow-up question on capital allocation priorities. Kevin, you highlighted the strength of the balance sheet. How are you thinking in this environment about capital deployment when you look at your share price obviously  dividends have been a priority for many years and then potential acquisitions to the extent seller expectations have come down versus let's say six months ago?

Kevin Williams -- Chief Financial Officer

Yeah. So I mean obviously, we're in a very good capital position. As Dave pointed out, we've paid dividends for 119 straight quarters. I don't see us breaking that string.

We have a board meeting next week. So at that point, we'll probably be announcing another dividend. And of course, that's up to the board, not me. So dividend is a priority.

But you're absolutely right. We continue to talk to bankers about potential M&A activity out there. And we think that there will be some better opportunities later in this calendar year and into next calendar year. In fact, I've got emails from three different bankers this morning, wanting to set up calls to talk about potential deals and different things.

So obviously, No. 1 priority is to continue to look at those acquisitions that give our shareholders a continued strong return. We will continue to increase dividends. And we'll continue to look at buying stock back.

I think under the circumstances right now, I don't know that that will be viewed extremely well for us with buy back stock. But obviously, if there was a dip in our stock price, we would probably jump and we'll see.

David Togut -- Evercore ISI -- Analyst

Thanks very much. Be well.

Kevin Williams -- Chief Financial Officer

Thanks David.

Operator

Your next question is from Kartik Mehta with Northcoast Research.

Kartik Mehta -- Northcoast Research -- Analyst

Good morning Kevin and Dave. Kevin, just to get your perspective. I know in August, you'll provide a lot more about FY '21. But Dave and you talked a little bit about credit card -- card migration and impact on margins.

As you look at FY '21 early on, would you expect non-GAAP operating margins to be flat in FY '21 or are there headwinds that could prevent that?

Kevin Williams -- Chief Financial Officer

So -- and again, we're just working on our budget and quarters at this point, Kartik, but so margins, non-GAAP margins in Q1 should be slightly better because of all the software usage and software subscription revenue that gets recognized with very little cost in the first quarter which should be enough to offset the increased cost for the payments migration. After we do the migrations in Q1, we should get some relief. I'm not sure exactly right now what that relief will be off the payments migration as we're able to start shedding some things down. So Q2, you might see basically flat.

I think Q3 will continue to go down a little bit because of the continued pressure from the migration. And then we should see a nice pop in margins in Q4. So again, we're still in early budget stages. So what I'm hoping for, Kartik, is that margins for next fiscal year or at least equal to this year.

But again, it's really too early for me to even make that prediction.

Kartik Mehta -- Northcoast Research -- Analyst

No, that's helpful, Kevin. And then, Dave, you talked a little bit about one of the things that COVID-19 is bringing is maybe more in-house customers looking at going to outsource. What kind of revenue contribution or growth contribution has that had in the past? And it seems like that could help accelerate revenue. So I'm just trying to understand maybe how much of a benefit that's been in the past? And what you think it could do as we go in the future?

David Foss -- President and Chief Executive Officer

Yeah. Thanks, Kartik. Essentially, when you go from in-house to outsourcing, the revenue to Jack Henry has doubled because we're taking on all the processing responsibility for that customer. I think you could probably figure out that our costs aren't doubled because we rolled them into an existing infrastructure.

So revenue essentially doubles and usually, when we sign a customer go from in-house to our host -- or private cloud environment, usually, they also take on other products at the same time. So there's this add-on effect of them adding products. Those decisions are easier for them in that environment because there isn't a capital outlay. Usually that decision to add a product doesn't need to go to the board for approval, they can just add it into their monthly fees.

So they're usually pretty comfortable talking about adding things that they wanted to add for a long time. So that move has definitely been a key driver for us in the past and will continue to be for quite some time. Even if we speed up the rate of migrations here, we have many, many quarters of customer activity in that area before that runs out. So lots of runway yet.

Kevin Williams -- Chief Financial Officer

Yes. Right now, Kartik, we're at -- 61% of our core customers are currently in our private cloud. So almost 40% of our close to 1,900 core customers are still in-house that has the opportunity to move over. And as far as revenue contribution, in any given quarter or year, I mean, if you go back to the last 8 or 10 years, I mean, we've averaged about 45 to 50 a year, but the revenue contribution in any given year can be so significantly different, based on the size of the institutions that we move in any given quarter or year.

Kartik Mehta -- Northcoast Research -- Analyst

Thanks Kevin. Thanks Dave. Really appreciate it.

Kevin Williams -- Chief Financial Officer

Yup.

Operator

Your next question comes from John Davis with Raymond James.

John Davis -- Raymond James -- Analyst

Hey. Good morning guys. Glad to hear you're doing well. Kevin, I just want to talk on the Payments business for a second.

If you assume Jan and Feb were probably a double-digit growth. I think March probably exited down low to mid-single digits. Yes we've seen an improvement in April and then kind of what's embedded? Do you have positive payments growth embedded kind of in the guide for 4Q? Any color there would be helpful.

Kevin Williams -- Chief Financial Officer

So for the entire quarter, is it going to be some growth? Yes, JD, but it's going to be back-end loaded in the quarter because April, we continue to see some headwinds from lack of usage as people were staying at home. I think as now we're seeing countries are to open up again, so it's pretty early to tell. But I think we're going to see some increase in May and then hopefully a decent rebound in June. But it's not going to be much growth over last year's number.

David Foss -- President and Chief Executive Officer

I think one important thing to keep in mind here is so that's focused on our debit business, our card processing business. But there are three aspects of our payments business, and they include bill pay and our EPS, ACH origination and remote deposit capture business, both EPS and iPay, our bill pay business, both are performing well. They did not see a big -- they saw a dip for one week, that week in March where nobody knew what was going to happen tomorrow. But absent that one week, volumes continue to be up year over year.

Those are a part of the key payments infrastructure, not a lot of discretion in a lot of that stuff. So those continue to be up year over year even though there's this impact on the debit switch. I think that's important to keep in mind that that helps offset some of the potential challenge in the debit business.

John Davis -- Raymond James -- Analyst

OK. And then on complementary obviously  really strong growth in the quarter, significantly better than I had thought. Anything to call out? And how should we think about sustainability of that growth which I think adds over into the double digits in the third quarter?

Kevin Williams -- Chief Financial Officer

Yeah. So part of it is digital. So digital is in that bucket. And certainly, a big chunk of that was our continued implementation of digital solutions, our treasury management solution, some of the things that we've talked about here recently, online commercial lending.

So a number of those things are in that bucket, and we had a strong order in all those areas. Will it be as strong next quarter? I don't know that I can say that, but it certainly is an area of growth for us, and it's a particularly strong area of focus for our customers. So I think you can assume that that segment will continue to perform well.

John Davis -- Raymond James -- Analyst

OK. Last one for me. I think April to date, I think you cited four competitive takeaways which is not too far off the run rate that you've been kind of averaging. But any commentary on what new RFPs look like? Because assuming that those competitive takeaways you want in April, those were kind of well under way.

Have we started to see RFPs go back out or are banks kind of just hunkering down for the meantime?

David Foss -- President and Chief Executive Officer

Actually, I quoted five for the month of April. And of course, that first-time ever -- first time I've ever quoted on an earnings call, what's happening in the current quarter that we're talking about. But I thought it was important for you all to know that sales has really continued to perform well. But to your question, RFPs, we've had some RFPs come in.

I think it's logical for you to assume. And for anybody to think that the RFP volume has slowed down a little bit. But I will tell you that our pipeline has not dropped at all. So what that means is as you're booking deals, as deals are getting signed going out the funnel, there are new opportunities coming in the funnel so that we ended April with essentially the same size pipeline that we started April with, even though the sales team exceeded their quota for the month of April.

So I think that's a good sign that there are still activity out there. And as I mentioned, a lot of bankers now that are starting to think more in terms of returning to focusing on the day-to-day. I won't say they're thinking about returning in normal because they still don't know what normal is. But they're focused on the day-to-day, and they're thinking about things like digital and about -- Kevin mentioned our HNS, hosted network solutions service, things that will help them with efficiency, things that will help them with expense control.

There is a lot of talk about bankers now focusing on moving to a single source provider which is great news for Jack Henry because we have such a broad suite of solutions. And so we believe that may help us pick up some business where customers maybe were using a small third-party for one piece of their -- one piece or 10 pieces of their solution set. Maybe they'll bring one or two or three of those to us as they're focused more on minimizing risk and working with a single source provider. So I think there are a lot of things happening right now that bode well for Jack Henry.

But we need a little more time under our belt here to really say, with confidence, that the sales process isn't going to be negatively impacted.

Kevin Williams -- Chief Financial Officer

The other thing I'd point out, JD is obviously back in 2009 which was obviously different times and different circumstances that it was still kind of a hailstorm that the financial institutions are going through today. And I would tell you, in 2009, our core system evaluations actually increased from what they were before the financial crisis started. We did have a lag in some of our complement products, but I don't think we can see that this time because of the increased demand for digital and some of the other things that Dave, mentioned like commercial lending. So I think we continue to be in a very good position to face these challenges going forward.

John Davis -- Raymond James -- Analyst

OK. All right. Thanks guys.

Kevin Williams -- Chief Financial Officer

Thanks John.

Operator

Your next question comes from the line of Peter Heckmann with Davidson.

Peter Heckmann -- D.A. Davidson -- Analyst

Good morning. Thanks for taking the question. How are you going to handle user conferences, trade shows? And how much do those typically contribute to sales of ancillary products?

David Foss -- President and Chief Executive Officer

Yeah it's a good question. We actually -- I'm dressed up today for the first time in six weeks. I've actually got a sport coat on because as soon as we end this call, I'm going to go and record a virtual presentation for our first client conference since the pandemic struck. So what we've done, we normally host a client conference in April and one in May.

And the one in May of course normally leads up to the analyst conference that we plan to visit with all of you at. Both of them have been turned into a virtual conference. And so we have -- and these are smaller conferences as opposed to our large conferences at the end of the year. So I think I saw this morning, we have somewhere over 400 attendees currently that are registered for this conference.

So we'll be doing that virtually, continuing to share information with them virtually. We have the next -- our normal -- our big annual conferences would be in September and October. We're still talking about what we're going to do with those conferences. So will people be comfortable gathering in a large group for an industry conference in September and October.

As I sit here right now, I don't know. So that's a big topic for us. And as you point out, those are good opportunities for us on the sales side to share information about product and so on. So we're doing a lot of remote demonstrations today the sales organizations pretty quickly move toward focusing on remote demonstrations back in March.

And so if we aren't able to host the large client conferences at the end of the year, I'm confident that we'll be doing virtual conferences and included in those conferences will be opportunities for us to demonstrate solutions. The good news in all of that is, when you do a remote conference, you tend to get a lot more people who sign up because there's no travel expense. And so it may expose us to more eyeballs than we would in person, but we're not at that point yet where we're ready to make that decision.

Kevin Williams -- Chief Financial Officer

Pete, the education conferences, we have the big ones for credit unions and then for the JAC for bank and ProfitStars. I mean, those are truly education conferences. Is there some sales opportunities come out of those? Yes, and there are sort of quite few leads, typically, yes. But those are truly education conferences.

And if we do have to go virtual, we will still do large education portions of that for people who want to sign up because that's what we want to do to make sure that our customers continue to learn how to better use our products and make their institutions more efficient.

Peter Heckmann -- D.A. Davidson -- Analyst

Got it. Got it. OK. And then one other question I had just on real-time payments and the release you had out earlier in the week.

Can you talk about some of the use cases for real-time payments and what the fees might look like the bank might charge to the payer? And then lastly, what will those payments conditions shared from?

David Foss -- President and Chief Executive Officer

Yeah. It's a good question. I think that opportunity is still developing, not only for us, but certainly for our customers. I think a lot of our customers aren't exactly sure yet what the two depths of the opportunity is for them.

But all of us, I think our customers and Jack Henry, we view the real-time payments opportunity very differently from the Zelle opportunity. So Zelle real-time P2P, but as we've stressed many times on these calls, there is not really much of a money-making opportunity when it comes to Zelle. It's hard to make money on free, right? So Zelle has not been a focus as far as the money-making opportunity. For real payments, there definitely is a money-making opportunity there because not only will it be used for consumer payments, but we see it being used for commercial payments.

So our expectation is that it will definitely impact check volume because keep in mind, today, most of the paper check volume that's out there is in business payments. So I think it will play a role when it comes to check volume. I think it will play a role in displacing ACH transactions that are happening out there today. So that is an opportunity as far as we're concerned.

And then card, maybe, but I think it's much more likely to replace ACH and current paper check as two real-time payments start to roll out.

Peter Heckmann -- D.A. Davidson -- Analyst

OK. That's helpful. Thanks Dave.

David Foss -- President and Chief Executive Officer

Yup.

Operator

Your next question comes from Dave Koning with Baird.

Dave Koning -- Baird -- Analyst

Yeah. Hey guys. Thank you. Yes.

And I guess, first of all, just a follow-up kind of on Kartik's question. When you talked about margins, was that all kind of ex-term fees? When you said you expected up somewhat in fiscal '21, was that ex-term fees and including term fees, I would imagine it might be down a little just given you had the big term fee this quarter?

David Foss -- President and Chief Executive Officer

That would be true. Yes.

Dave Koning -- Baird -- Analyst

OK. And I guess one other one just on margins. Is -- we can see the margins coming down a little bit obviously  with the implementation and all that. Is the core margin, like if I take -- like in term fees, take out all implementation stuff, is -- are the core margin still going higher and what's driving that, just core revenue growth?

Kevin Williams -- Chief Financial Officer

So you kind of cut out there, Dave. So to recap. I think what you said, what's driving the core revenue growth and offsetting the negative in payments, is that right?

Dave Koning -- Baird -- Analyst

Yeah. I was just trying to understand to make sure that the core margins are still going up when you exclude all the one-off stuff.

Kevin Williams -- Chief Financial Officer

Oh, yes. I mean, you can just -- you can look at the just the segments. And yes, both GAAP and non-GAAP went up for the quarter on margins for payments and complementary. And obviously, the big driver there is the continued growth and into outlook, I've said in my opening comments when our hosted in cloud services was up 18% this quarter over a year ago and up still double digits, I think on a non-GAAP basis, we're still like 12% or 13% for the year.

So that's been the same for the last three or four years. I don't see that changing going forward or even into next year. Complementary continues to be driven by a lot of our private cloud products like digital and other things, but a lot of other products that are added into our private cloud core customers. So both of those segments grew nicely and essentially offset the decrease in margins in the payment segment.

Dave Koning -- Baird -- Analyst

Yeah. Gotcha. OK. That's helpful.

And then finally, is there any big difference between like what your core clients are doing in an environment like this relative to your like ProfitStars clients, like is there at all the divergence in kind of how you see activity over the next couple of quarters? One, growing a lot faster than the other or is it just all pretty good still?

David Foss -- President and Chief Executive Officer

No. I'd say it's all -- there's no difference between core and ProfitStars as far as sales success what we're seeing. So I emphasize the core deals that we've done in April just because I knew that would be on your all's minds, wondering whether that big revenue driver is totally stopped. But now ProfitStars performed really well in April and has continued at about the same pace.

Dave Koning -- Baird -- Analyst

All right. Thanks. Stay well and great job.

David Foss -- President and Chief Executive Officer

Thanks Dave.

Operator

[Operator instructions] Your next question comes from the line of Brett Huff with Stephens Inc.

Brett Huff -- Stephens Inc. -- Analyst

Good morning guys. Glad to hear that Jack Henry is doing OK, and thanks for the questions. First is one is both of you mentioned I think the relative optimism of banks I think probably relatively better than me and many on this call would have assumed, is there something unique about the group that you hear is more optimism from? Are their balance sheets different? Are they different sized? Are they different focused banks, more commercial, less commercial or is it fairly broad based?

David Foss -- President and Chief Executive Officer

I'd say it's fairly broad-based. I would -- I tend to talk to CEOs of banks and credit unions that are on the larger side of our base. So we'll say our largest customers today run-up in the $30 billion space. And it's rare for me to talk to the CEO of a financial institution that's $250 million.

It's much more common for me to talk to somebody who's in the $1 billion range. And I think the consistent theme there is what I emphasized earlier that they feel strongly that the balance sheet is strong. They're well capitalized. They haven't taken on risky loans.

Yes, they have deals they're going to have to work through with their customers, but the PPP program, many of them have gotten into that in a big way. And the PPP program includes a forgiveness component which we'll be working on with a lot of these -- of our customers going forward. And they tend to know their customers. And so they know that -- what their situation is and their ability to work through these things over time.

Now they can't predict the future any better than you or I, but I think they're generally fairly optimistic that they'll be able to weather the storm and be OK because they know about the strength of their balance sheet and the strength of their overall portfolio.

Kevin Williams -- Chief Financial Officer

And the other thing, remember, Brett, I mean, yes, I mean, net interest margins absolutely went away. But I mean, they're essentially back to where they were three years ago. And they weathered that storm by figuring out a way to get noninterest fee income and different things. So I mean, it basically pull out the playbook that they were using three years ago.

Brett Huff -- Stephens Inc. -- Analyst

That's helpful. And then just in terms of digital usage. You talked about a pause in evaluation of digital products. I think, Dave, you said maybe for a week or two.

And then the conversations resume which is a good sign. But we've gotten a lot of questions on actual usage. So I guess, sort of same-store users what a typical bank, XYZ that might have had 5,000 Banno or NetTeller, whatever the product is they're using, goDough. Did that go up meaningfully as folks got more fearful of going into a branch.

I mean, do you just the absolute number of users spike?

David Foss -- President and Chief Executive Officer

The number of users went up for sure. I can't -- I don't have those numbers in front of me, but the number of users went up -- active users went up significantly. The thing that was really startling to me was -- so we entered this period of pandemic and everybody staying home. And so the number of registered users, active users, volume went up.

There was -- over the first couple of weeks there, there was about a 40% increase in volume of transactions. The thing that caught me offguard, thankfully, our team was ready for it. When the stimulus checks started to come out. So that Monday, and April, whatever that Monday was, on that single day, we saw a 63% spike in usage and people hitting their account as compared to the prior week.

And that week had been up, as I mentioned earlier, over weeks prior to that. So what people were doing was they have gone and see is my stimulus check there yet? No. And then five minutes later, is stimulus there? No -- is my stimulus check there? No. Every five minutes, they were hitting their account.

So volumes just went through the roof. So it wasn't that all of a sudden, there were a whole bunch of new active users, it was people just over and over checking to see if they had their stimulus check deposited. That's all settled down now. But the real -- the true run rate per day is up, like I say, roughly 40% over what we saw before all of this started.

Brett Huff -- Stephens Inc. -- Analyst

Great. That's helpful. Always appreciate the insight guys. Stay safe.

Operator

[Operator instructions] Your next question comes from Tim Willi with Wells Fargo.

Tim Willi -- Wells Fargo Securities -- Analyst

Thanks and good morning Kevin and Dave. Just one question I had. Regarding I guess digital and spending by the banks, there's -- I guess there's always been a long debate about are the bigger banks winning because they have these large budgets for their own discretionary investments and strategies. The counterargument has always been that people like yourself are able to arm, the mid- to small-sized banks to be just as effective as those large ones.

And I guess, given again sort of the acceleration in the technology curve that's happened over the last couple of years. Could you just sort of address your thoughts about where sort of your core customer base is competitively and then to the extent that you're actually sort of keeping an eye on fundamentally because a lot of them are private entities as opposed to public. Is there actually quantifiable evidence when you look at their deposit growth, their loan growth that shows that, yes, absolutely, by working with people like yourself or your competitors, these mid- to small size institutions are actually very competitive and performing versus the big monolithic entities that get a lot of airtime on CNBC, etc., about their technology investments? And then I had a quick follow-up.

David Foss -- President and Chief Executive Officer

You packed a lot into that question, Tim. So let me talk for about an hour and a half here to answer your question, but I'll try and do it concise -- in a concise manner. So first off, you're right. The major players are spending a lot when it comes to technology and has been a lot on digital.

I would challenge your statement about us trying to position our banks to offer the same service as those banks. That is not what we're doing. We have been very I think thoughtful in the way that we've designed our digital solutions to offer a competitive edge to our customers as compared to those solutions in the functionality. The functionality is just different.

And I won't go through all the puts and takes here, but I feel very strongly that we've created a better solution because we know that for our customers, for our banks and credit unions to differentiate against those players in a digital world when that whole aspect of walking into the branch and facing a smiling face across the teller line is not there anymore. The technology has to help you differentiate. And we've done that with our solutions. So we believe strongly that we've delivered something that truly is a differentiator.

Our customers, I don't know that we have customers who can say to you, well, on the loan growth side, we can point to the digital presence. I believe that's there, but I don't think people are tracking it as much as on the deposit growth side. And we have a number of customers who absolutely can point to the digital platform as providing new opportunities for them to grab customer growth and overall deposit growth through that channel. So there is anecdotal evidence, and you'll see more and more press releases and marketing releases from us on those types of topics as we continue to see more.

One of our customers who is kind of a power user of the Banno suite, recently did a podcast with the ABA and emphasized how significant the opportunity has been for them. It's a large -- about a $25 billion bank -- I think, $20 billion bank. They did a podcast with the ABA, and this was a key part of their discussion was how this solution has differentiated them in this world of digital. So like I say, I could talk all day, but that's kind of the short answer to your question, as short as I can make it.

Tim Willi -- Wells Fargo Securities -- Analyst

Yeah. Thank you. And my quick follow-up was just on M&A, but more from a perspective of your customers. So you've also, over time, sort of showed that the sweet spot of your customer base probably are more likely to be acquirers at the low end or sort of MOE situations where your customers tend to get larger.

Periodically, you'll lose one that gets sold. I'm just sort of curious when you -- are your bankers, were they in the mode of 10 years into a recovery prior to COVID in a mode of looking to do M&A as they rebuild their balance sheets and move forward. And then again, just sort of assuming that that mentality will come back as we sort of come through this period of time. Did you feel as if your customers were out on outlooking for deals in M&A to build their own franchises? Had that changed at all?

David Foss -- President and Chief Executive Officer

So you're right, many of them were active in M&A. In fact, a little while ago, I referenced the fact that we did the core conversions on one weekend, one of those was a brand-new court of Jack Henry that was converted to that day. But two of them were existing customers converting acquired institutions into their bank. And so our customers were definitely on the M&A track, acquiring other institutions prior to COVID-19.

I'll be honest with you, I haven't heard anybody, one way or the other, say, whether they thought this was going to provide an opportunity for them or if they were going to -- this was really going to put them off the idea of doing more M&A, have not had those conversations. Everything I've been talking to people about has been the future as far as their balance sheet and their interaction with their customers and that kind of thing. But I would expect that once recovery starts to happen, those bankers will be out looking for acquisitions, just like we are today actively looking for acquisitions. They'll be looking to see if there are opportunities.

Tim Willi -- Wells Fargo Securities -- Analyst

Great. Thanks very much.

David Foss -- President and Chief Executive Officer

Thanks Tim.

Operator

[Operator instructions] There are no additional questions at this time. Sir, I'll turn it back over to you for closing remarks.

Kevin Williams -- Chief Financial Officer

Thanks Stephanie. Thanks for joining us today. Again, we are very pleased with the results from our ongoing operations and the efforts of all of our associates to take care of our customers. Our executives, managers and all our associates continue to focus to do what is best for our customers and shareholders.

Again, thanks for joining us today. And with that, I would like for Stephanie to please replay the -- provide the replay number.

Operator

As a reminder, today's conference will be available for replay. To access the replay, please dial 1800-585-8367 or 1855-859-2056, internationally, please dial 404-537-3406. When prompted, please enter your conference ID 7674994. [Operator signoff]

Duration: 63 minutes

Call participants:

Kevin Williams -- Chief Financial Officer

David Foss -- President and Chief Executive Officer

Dan Perlin -- RBC Capital Markets -- Analyst

Vasu Govil -- KBW -- Analyst

David Togut -- Evercore ISI -- Analyst

Kartik Mehta -- Northcoast Research -- Analyst

John Davis -- Raymond James -- Analyst

Peter Heckmann -- D.A. Davidson -- Analyst

Dave Koning -- Baird -- Analyst

Brett Huff -- Stephens Inc. -- Analyst

Tim Willi -- Wells Fargo Securities -- Analyst

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