Jack Henry & Associates (JKHY) Q3 2021 Earnings Call Transcript

Jack Henry & Associates (JKHY 0.06%)
Q3 2021 Earnings Call
May 04, 2021, 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 2021 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Kevin Williams. Thank you.

Please go ahead.

Kevin Williams -- Chief Financial Officer and Treasurer

Thanks, Brandy. Good morning, and thank you all for joining us for the Jack Henry & Associates third-quarter fiscal 2021 earnings call. I am Kevin Williams, CFO and treasurer. And on the call with me today is David Foss, our president and CEO.

In just a minute, I will turn the call over to Dave to provide some of his thoughts about the state of our business, our financial and sales performance for the quarter, some comments regarding the industry in general and how we're dealing with COVID-19 and some other key initiatives that we have in place. Then after Dave concludes his comments, I will provide some additional thoughts and comments regarding the press release we put out yesterday after market close and provide comments regarding our guidance for our fiscal year '21, which we also provided in the release yesterday, and then we will open the lines up for Q&A. First, I need to remind you that this call includes certain forward-looking statements, including remarks or responses to questions concerning future expectations, events, objectives, strategies, trends, or results. Like any statement about the future, these are subject to a number of factors that could cause actual results or events to differ materially from those which we anticipate due to a number of risks and uncertainties.

The company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our 10-K entitled Risk Factors and Forward-Looking Statements. On this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income. The reconciliations for historical non-GAAP financial measures can be found in yesterday's press release.

I will now turn the call over to Dave.

Dave Foss -- President and Chief Executive Officer

Thank you, Kevin. Good morning, everyone. We're very pleased to report another quarter of revenue and operating income growth and an overall solid performance by our business. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our third fiscal quarter.

For Q3 of fiscal 2021, total revenue increased 1% for the quarter and increased 6% on a non-GAAP basis. Deconversion fees were down more than $18 million over the prior-year quarter, which impacts revenue in the current quarter negatively. But as I've highlighted many times in the past, this is good news for our company if you take a long-term view. Turning to the segments.

We again had a good quarter in the core segment of our business. Revenue decreased 4% for the quarter because of the reduction in deconversion fees but increased by 3% on a non-GAAP basis. Our payments segment performed very well, posting a 7% increase in revenue this quarter and a 10% increase on a non-GAAP basis. We also had a strong quarter in our complementary solutions businesses, with a 1% increase in revenue this quarter and a 5% increase on a non-GAAP basis.

As I mentioned in the press release, our core sales teams had an extremely solid quarter and are now seeing core activity consistent with our pre-pandemic run rate. During the quarter, we inked 15 competitive core takeaways, which is greater than the one-per-week run rate we saw in 2019. In addition to our success signing new core clients, we signed six existing on-prem core customers to move to our private cloud environment. As we continue to push into the larger regional bank space, I think it's significant to note that of the 15 new core deals in the quarter, five were with multibillion-dollar asset banks and credit unions.

As a reminder, regarding the topic of new core wins, at Jack Henry, we only call out new core deals when a banker credit union moves their entire core processing relationship from a competitor system to a Jack Henry core solution. We do not announce them as a new core win if they move from one Jack Henry core to another or if they simply purchase a new module from us. Think of it as a new logo on the Jack Henry core customer list that wasn't there previously. In addition to the tremendous success we saw with our core business this quarter, we continued to sign new clients to our new digital offerings.

During the third quarter, we signed 42 new clients to our Banno platform, and we continue to see increased interest in this offering, as well as the rest of our digital suite. In our April 6 press release regarding digital momentum, we shared that we had more than 400 financial institutions and more than 4.3 million users live on the Banno platform. As of May 1, however, we have added several more financial institutions, and we now have just over 5 million users live. We continue to enjoy the highest consumer rating in the App Store, and we are regularly recognized as the fastest application in the industry.

As I've said before, I expect our success in this area to grow as we continue to add new functionality and features to the platform. Regarding the ongoing migrations of our new card processing platform, as of the end of March, we have successfully completed the migration of all of our debit processing customers to the new platform, in accordance with the plan we've been discussing for more than three years. Here are a few statistics regarding this remarkably successful project. We did our first migration on October 30, 2017, and completed the project on March 26, 2021.

That's 1,243 days. During that time, we migrated 879 customers and added 151 new debit and credit customers to the platform. We currently support 1,030 banks and credit unions on the platform, and we're adding new clients every month. You will start to see the larger positive impact of this completed project on our financials in the fourth fiscal quarter, as we have emphasized throughout the process.

I'm very proud of our team and thankful to our partners and clients for working with us to achieve such a successful outcome. As you probably heard, M&A has become a topic again among bankers now that they're more confident about their operating models and the overall economy. Several of our clients have approached us recently to work with them as they prepare to complete acquisitions of smaller institutions. In fact, the CEOs of two regional banks currently processed by Jack Henry were quoted in an American Banker article last week regarding their desire to pick up where they left off before the pandemic brought everything to a halt.

We expect our activity and what we refer to as the convert-merge area of our business to pick up again as we get into the summer months and new deals are announced. Speaking of American Banker, hopefully, you all saw their article last month announcing that, once again, Jack Henry has been recognized by their team as a best place to work in fintech. American Banker only recognizes 50 companies each year. And as you can probably imagine, almost all of the companies on the fintech list generate less than $100 million in annual revenue, pretty much in keeping with the type of company most people think of when they hear the word fintech.

We are particularly proud of this recognition for a few reasons: first, the scores are based on surveys conducted with our employees by an independent agency; second, this is our fifth year in a row to receive this designation from American Banker; third, we are many times larger than almost any other company on the list; and fourth, none of our larger competitors have ever made this list. I think this recognition is indicative of the culture, entrepreneurial spirit, and commitment to developing truly innovative solutions found within the teams at Jack Henry. As you have undoubtedly already noted from yesterday's press release, we purchased a significant number of shares in the quarter. With a lack of good quality acquisitions for us to pursue and with our stock at an attractive price, we worked with the board to authorize an additional repurchase under the existing plan, which enabled us to buy 1,825,000 shares during the quarter.

This significant share repurchase does not foreshadow a change in our strategy in this regard. We will continue to be opportunistic in our approach to purchasing our own shares as we have excess cash and the lack of acquisition targets that fit our strategy. Hopefully, you've all seen the press release we posted this morning announcing the upcoming retirement of our longtime chairman, Jack Prim. Of course, many of you know Jack is the guy who sat in this chair before I became CEO at Jack Henry.

As I said in today's press release, Jack has given many years to our company as a business leader, a board member, and a friend to us all. He has had a significant impact on the success of our company and on me personally. And for that, I want to sincerely thank him on behalf of all of us at Jack Henry. Recognizing that Jack has been considering a potential retirement for some time, we were prepared for his decision and expect our process to allow us to fill the vacancy close in time to Jack's retirement date.

We hope to have more information to share regarding a new board member and a new chairman before the end of June. Slowly but surely, our customers are settling into a new mode of operation with the anticipation of most COVID restrictions being lifted in the coming months. We're still operating with well over 90% of our employees working full-time remote, but we are committed to our return to office date of July 1. We are finalizing plans for office usage and staffing that will employ a hybrid work-from-home, work-in-office strategy.

And we will continue to leverage remote sales and implementation tools, where possible. We still have some work to do and some things to learn, but I'm very optimistic about our ability to be successful as the work environment shifts again post COVID. As we look toward the end of our fiscal year, our sales pipeline is very robust, and we continue to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our customers, our ability to expand our customer relationships, the spending environment and our long-term prospects for success. I look forward to seeing and chatting with many of you at our virtual analyst conference next week.

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

Kevin Williams -- Chief Financial Officer and Treasurer

Thanks, Dave. For the quarter, our Services and Support revenue decreased 6% in the third quarter of fiscal 2021 compared to the same quarter a year ago. However, adjusting that Services and Support revenue for deconversion fees of $4.367 million in the current quarter and deconversion fees of $22.8 million and revenue from divestitures last year in the prior fiscal quarter, on a non-GAAP basis, this revenue line would have grown actually 2% for the quarter compared to the previous year, which, obviously, as Dave mentioned, that has a lot of pressure and headwinds from our convert-merge revenue and also hardware in the quarter. Year to date, our deconversion fees are now down $33 million compared to the prior year, which, if you remember the guidance that we provided back in August, that is right in line with the full-year impact.

Services and support revenue primary driver was data processing and hosting fees in our private and public cloud offerings, which continue to show strong growth in the quarter compared to the previous year. However, the growth in that line was totally offset by a decrease in our product delivery and services revenue, which, again, was due to our decreased hardware implementation revenue for on-prem customers; convert-merge implementations, which is also down to the significant decrease in M&A activity; pass-through revenue that is related to billable travel, primarily related to travel limitations by the COVID; and then, obviously, deconversion fee revenue for the quarter compared to the prior-year quarter, which was down almost $18 million. Processing revenue increased 13% in the third quarter of fiscal '21 compared to the same quarter last year. This increase was primarily driven by higher card volumes from new customers installed last year and also increased debit card usage from existing customers.

Our Jack Henry digital revenue experienced the highest percentage of growth of all revenue lines in both Q3 and year to date this year compared to the same periods last year. Our total revenue was up 1% for the quarter compared to last year on a GAAP basis and was up 6% on a non-GAAP basis. Cost of revenue was up 4% compared to last year's second quarter. The increase was primarily due to higher costs associated with our card processing platform and higher personnel costs related to increased headcount at March 31 compared to a year ago.

The increase in costs was partially offset by travel expense savings as a result of COVID travel limitations. Our research and development expense decreased 3% for the third quarter of fiscal 2021 over the prior fiscal year. This decrease was primarily due to a higher percentage of costs being capitalized for product development as we continue to invest in our products this quarter compared to a year ago. Our SG&A expense decreased 6% in the second quarter of fiscal '21 over the same quarter, and this decrease was primarily due to travel-related savings.

Our reported consolidated operating margins decreased from 21.4% last year to 21% this year, which is primarily due to the various revenue headwinds already pointed out and increased costs. However, on a non-GAAP basis, our operating margins increased nicely, and we saw a strong margin expansion from 18.1% last year to 20.3% this year primarily due to the items already mentioned. Our payments segment margins were impacted by deconversion fees in the quarter. But on a non-GAAP basis, our payments margin improved slightly with the completion of the platform migration.

Both our core and complementary segments had a decrease in GAAP margins, but both of them had a nice increase in non-GAAP margins. So our underlying operations continue to be very strong as we move forward through the year. The effective tax rate for the third quarter of fiscal 2021 was 21.5%, up from 19.7% in the same quarter a year ago. This increase in the effective tax rate is primarily due to the change in the timing of the release of respective reserves for uncertain tax positions resulting from varying statute limitation periods.

Our net income was $71.4 million in the third quarter, compared to $73.9 million last year, with earnings per share of $0.95 for the current quarter, compared to $0.96 last year. For cash flow, our total amortization increased 3% year to date compared to last year due to capitalized projects being placed in service in the prior year. Included in this total amortization is the amortization of intangibles related to acquisitions, which decreased $13.3 million -- or to $13.3 million this year, compared to $15.4 million last year. Depreciation is up 3% due to the -- they're primarily due to capex in the previous year and those assets being placed in service.

As Dave mentioned, we've purchased 2.5 million shares year to date for $384.4 million, and we paid dividends of just right at $100 million, for a total return to shareholders of $484.2 million year to date. Our operating cash flow was $266.3 million for the first nine months of the fiscal year, which is down a little from $276 million last year, which is also impacted by the significant decrease in deconversion fees this year to date compared to last year. We invested $116.7 million back into our company through capex and capitalized software year to date. Our free cash flow, which is operating cash flow less capex and cap software and then adding back net proceeds from disposal of assets, is $155.8 million year to date.

A couple of comments on our balance sheet. Our cash position is $70.1 million, compared to $109.5 million a year ago, so we still have decent cash for operations. We did draw down $200 million on our revolver during the quarter to fund our stock buybacks, but we have no other long-term debt on our balance sheet other than operating leases. Our return on invested capital for our trailing 12 months is 19.2%, and our return on equity for the trailing 12 months is 20.9%, which is very solid.

For update on our guidance, we did update both our GAAP and non-GAAP revenue guidance in the press release yesterday for the full fiscal year. However, just to be clear, this guidance continues to be based on the assumption that the country continues to open up and the economy continues to improve. But if things do go differently, then obviously, this guidance will be revised. We've been very consistent with our GAAP guidance that revenue from deconversion fees would be a decrease of approximately $33 million compared to last year, which we hit that mark, as I previously said, during our fiscal Q3.

And it now appears the deconversion revenue will actually be down by another $4 million in Q4 compared to the previous year, for a total decrease of approximately $37 million in deconversion fees compared to the last fiscal year. We continue to see no immediate M&A activity that would drive deconversion revenue at this point, which, in the short-term, will continue to hurt our revenue growth for the fiscal year. But in long term, as we have always said, that we don't like deconversion revenue as we would much rather keep the customer and the revenue for the long term. This means, based on the GAAP revenue guidance provided in the press release impacted by the decreased deconversion fees, we expect GAAP revenue to grow -- growth in FY '21 to be 3% to 3.5%.

The adjustments between GAAP and non-GAAP revenue guidance for FY '21 is the decrease in deconversion fees compared to the previous year and the small revenue impact from the Cruise divestiture during Q2 that was removed from FY '20 for comparison purposes. For non-GAAP revenue growth guidance provided in the release, we are now guiding to approximately 6% growth due to the ongoing headwinds previously discussed in the various lines of revenue. So we still anticipate we're going to grow 6% this year, which means Q4 is going to have a really nice revenue growth to get our slightly less than 5% year-to-date up to that 6% for the year. We anticipate GAAP operating margins for the full year of FY '21 to be down slightly at about 22% compared to last year, for all the reasons we discussed.

And non-GAAP margins should actually improve slightly compared to last year for the entire fiscal year, similar to what we've seen through the first three quarters. Our effective tax rate for the full year of FY '21 should be in line with FY '20 rate at around 22%, assuming there are no federal or state tax law changes between now and the end of the year that would impact our fiscal year. We've also increased our full-year EPS guidance for FY '21 again this quarter, which we provided last quarter a range of $3.85 to $3.90. We are now updating our EPS guidance for FY '21 to a range of $3.98 to $4.02.

The increase in guidance is primarily due to expense control, margin improvement for the year, and continued improved efficiencies, which is offsetting the impact of deconversion fees. With that, this concludes our opening comments, and we are now ready to take questions. Brandy, will you please open the call lines up for questions?

Questions & Answers:

Operator

Certainly. [Operator instructions] Your first question comes from the line of Peter Heckmann with Davidson.

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

Good morning, gentlemen. Thanks for taking the question. Just in terms of the payment platform migration, can you remind us of the cost saves from closing down the two duplicative platforms? And kind of just on a preliminary basis, what type of adjusted operating margin expansion do you think that sets us up for fiscal '22?

Kevin Williams -- Chief Financial Officer and Treasurer

So, Pete, what we've always said is we're going to get at least a minimum of $16 million cost savings out of that, and we're still sticking to that. Obviously, that's not going to all happen this quarter, and that's an annual run rate. We are in the process right now of decommissioning both those platforms. So there's -- all the cost savings is not going to be in this quarter.

In fact, there's some other things that we're still having to do through the end of December, I believe, for some programming and different things to get the full efficiencies out of the new platforms. So it's probably going to be Q3 of next fiscal year that we have the full quarterly impact of that $16 million-plus savings, but we're going to start getting some this quarter. So you will see some payments margin expansion in Q4, and then you'll see more in Q1 and Q2 and then even more in Q3 next year.

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

Got it. OK. That's helpful. And then just in terms of the marketplace and when you're talking to your financial institutions, are there -- have there been any shifts in priorities over the last three to six months? What are the hot button products that folks are interested in? And could you give us an update? I think you gave us a number of Banno in the quarter, but maybe refresh us on a year-to-date basis on some of the other newer solutions like treasury and loan origination?

Dave Foss -- President and Chief Executive Officer

Sure. So it's Dave, Pete. I won't say that there's been any major shift in this quarter. And we started to see a shift in the -- earlier in the fiscal year for the heavy emphasis on digital and things that would allow our customers' customers, so whether it's a consumer or a commercial customer, allow them to conduct more business without coming into the branch.

So the digital platform has, of course, been right at the front of that list. I'll reemphasize what I said in my opening comments here. In the press release we put out on April 6, we said we had around 400 institutions and 4.3 million users live. A month later, on May 4, we now have more than 5 million users live.

So it really, I think, emphasizes the dramatic shift that's happening among banks and credit unions to ensure that their consumers and their commercial customers have best-of-breed digital technology for them to view. So that's been a key driver for our customers and certainly for us. Treasury is another piece of that puzzle. So I didn't call it out.

And we have 12 so far this year as far as treasury, new customers that have signed to the treasury platform. Again, that's a move toward a more digital functionality, but for very large commercial customers. You don't install a treasury solution unless you have really large commercial customers. Otherwise, they just use cash management.

So that, I think, is indicative. And then on the lending side, I've highlighted this many times, that's allowing a commercial customer to do complex commercial loans online without having to drive to the branch with their financial statements and all that packet of information. The thing that we have just recently done there is we've added this lending marketplace functionality, where customers, if they have a credit that's too large for them to book, they can essentially sell that credit through a marketplace to other lenders who want to take on the responsibility for that credit. So there's a lot of activity in all of those areas, but it is this shift toward doing business more in a digital environment as opposed to coming into the branch.

That's what's driving all of those things that I just touched on.

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

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

Kevin Williams -- Chief Financial Officer and Treasurer

Oh.

Dave Foss -- President and Chief Executive Officer

It's around 75, right?

Kevin Williams -- Chief Financial Officer and Treasurer

Yes, it's around 75, Pete.

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

OK. Thanks much.

Operator

Our next question comes from the line of Kartik Mehta with Northcoast Research.

Kartik Mehta -- Northcoast Research -- Analyst

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

Dave Foss -- President and Chief Executive Officer

Actually, Kartik, that's one of the real pieces of good news in all this, and that's why I used the word robust pipeline in the press release. We have really successfully shifted to enabling our sales team and customers being accepting of doing business remote. They still like to have people come in once a while and some customers insist on the sales rep coming in, but we're doing a lot of this remote. A lot of the demonstrations that we do now are -- normally, where we would have had five or six people on site, we'll, maybe we have one or two on site, and the other four are on a team's call or on a Zoom call doing the demonstration.

So customers have really become to -- or gotten to the point where they'll accept that idea of much of this will be happening virtually. And so what that's created now is, and I think I've said this on calls before, a good gauge for us of how stout our sales pipeline is, is if we are at about 90% of our annual quota, so not a monthly quota, but the annual quota. At any given time on any given day, if we have about 90% of the annual quota in the pipeline, then we know that we've got enough happening, that we should be able to make our number. We are right at that mark right now.

And so what that tells me is customers are engaging with us. They have salespeople working with them on deals. And we were kind of back to a normal run rate that we would have seen in 2019, that's what we're seeing today in the sales pipeline. So the number of engagements and the volume of deals that are flowing through the pipe are about where we were in 2019.

Kevin Williams -- Chief Financial Officer and Treasurer

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

Those are all going to be next year. So all of those are going into our backlog, along with a lot -- all the other products that are being sold.

Kartik Mehta -- Northcoast Research -- Analyst

Kevin, I know you want to talk too much about FY '22. But based on Dave's comments and your comments, is there any reason that you shouldn't be able to continue to accelerate top line? I'm not talking about going from 6% to 9% but at least continue to see modest improvement in top line.

Kevin Williams -- Chief Financial Officer and Treasurer

Yes, I mean, obviously, Kartik, we're just starting the budget process for next year. But I feel very comfortable that revenue growth next year will be stronger than it was this year, again, obviously, as the economy continues to grow and do what we do, just getting through the -- and Dave can jump in here, just getting through the payments migration. And now, we can focus wholly on adding new customers instead of migrating all of our existing customers because that was such a major feat to get that done without disrupting our customers, I mean, that alone should help drive some nice payment growth. Our remote deposit capture -- I know check conversion is not sexy, but it just continues to be a major grower for us.

And then as we get back to the new core wins that we've seen and the migrations from end out, yes, I see no reason why our revenue growth in the next fiscal year can't be up nicely from where it was this year.

Kartik Mehta -- Northcoast Research -- Analyst

Well, thank you very much. Appreciate it.

Operator

Our next question comes from the line of David Togut with Evercore ISI.

David Togut -- Evercore ISI -- Analyst

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

Dave Foss -- President and Chief Executive Officer

Yeah. I don't have a crystal ball, Dave, so I can't give you exact prediction. But what we are seeing today, as I quoted in my comments, we are back to the run rate that we saw in 2019. And I talked about it many times on the calls at the time that we were on this run rate of booking one competitive takeaway per week.

Can I say with absolute certainty that we're going to do 52 deals next year? No. But it's certainly the pace right now. And everything that we'll see in the pipeline for the next coming months, the pace is definitely greater than it has been during COVID-19, during the depths of COVID-19, I guess, I'll put it that way. And it's logical.

I don't think anybody should be surprised that there was a slowdown in those core decisions during the pandemic. Because, as we've talked about before, when you're the CEO of a bank or credit union, you decide to switch out your core, that's essentially making a decision to do heart-and-lung transplant all at the same time for your institution. And it's a very disruptive -- no matter how smooth it goes, it's a disruptive process. And why would you make that decision unless you absolutely have to? Why would you make that decision in the midst of a global pandemic? And so I think it's totally logical that we're back to that pace.

If you take COVID out of the picture, all the other reasons for a customer to move to Jack Henry, those are all there still, just like they were in 2019. And so I think these bank and credit union executives are seeing that now. They know how to manage through in the COVID world, and now they're back to thinking about, "How do I find a best-of-breed provider on the core side? Then let's go talk to Jack Henry."

David Togut -- Evercore ISI -- Analyst

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

Dave Foss -- President and Chief Executive Officer

Well, let's be clear here. The platform conversion is done. All the customers have moved up the legacy platform. So we're done with the conversion.

It's the follow-on. Yes, you can't just flip the light switch and say, "OK, now, everything is turned off." So that's what Kevin was alluding to, and sorry to talk over you.

Kevin Williams -- Chief Financial Officer and Treasurer

No, you're fine. So, yes, I mean, maybe there is going to be a nice margin expansion next year. I mean, I said earlier that our non-GAAP is going to finish up pretty much in line, it's slightly up from where it was last year. We will gain more than 100 bps in operating margin in FY '22.

And could it be more than that? Yes. But I think, as I said earlier, it's going to take us some additional time. As Dave just said, it's going to take some time to take out all these costs taken out. And it's actually going to be by the end of the second quarter, I believe, when we get all the costs taken out.

So you're going to see some continued margin improvement throughout next fiscal year, and it will be Q3 when you see the full impact of what the cost takeout from the payment migration. But as we continue to add new payments customers, as we continue to add new core customers, as we continue to migrate our on-prem customers to our private cloud, all those things will help our margins. The other thing that I think a lot of people forget about is, with the M&A activity, obviously, our deconversion fees are down. But on the other side, that is in our -- both our GAAP and non-GAAP numbers is what -- and Dave alluded to in his opening comments, is our convert-merge revenue because our customers do a lot of acquiring as well.

So we've had some significant headwinds this fiscal year on our convert-merge revenue, we have done no risks or layoffs, so we still have all the costs. So just having some -- the M&A activity picking up will not only give us back some deconversion fee revenue, which we really don't want, that will also help with convert-merge revenue, which -- that will also help our operating margins. So there's so many positive things that's going to help our operating margins as these things get back to normal. Dave?

David Togut -- Evercore ISI -- Analyst

Understood. Thank you very much.

Dave Foss -- President and Chief Executive Officer

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

We're continuing to add customers to that platform, net new.

Operator

Your next question comes from the line of Steve Comery with g. Research.

Steve Comery -- g. Research, LLC -- Analyst

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

Kevin Williams -- Chief Financial Officer and Treasurer

Yeah. Thank you, Steve. It really has been -- the words that I used in my opening comments were about how amazing and successful this conversion has been. I mean, this has been a huge effort.

And so we've migrated all these customers. We've added 150 new customers, now another 13 in this quarter that weren't doing business with us before on the card platform. We are now positioned to sell credit and have been selling credit, which, of course, we didn't have before we put this new platform in place. Customer response has been terrific.

Our customers are much happier. They're definitely referenceable, which is what's leading to all of these successes in signing new customers to the platform. So it really has been the right move for Jack Henry. It was a long-term project, and there was pain along the way because you're disrupting all these customers, but it really was the right decision.

It's been a good move for us, for our customers. And so we're well-positioned for growth in the future. And the one thing I'll emphasize that we've talked about on previous calls, haven't talked about it in a while, but our old platform was dependent on a Jack Henry core system for those -- for the old platforms to function. This new platform is not dependent on a Jack Henry core system, which means we can sell debit and credit outside the Jack Henry core base, which we couldn't do in the past.

And so now we are positioned to start doing that, as well as adding new customers from within the Jack Henry core base.

Steve Comery -- g. Research, LLC -- Analyst

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

Dave Foss -- President and Chief Executive Officer

Yeah. It's a good question. There is a lot of opportunity within the Jack Henry core base. And what I've highlighted in the past is we are intensely focused right now on delivering Banno business, which is the other big chunk.

So Banno, so far, has been positioned as a consumer application. Banno business will be delivered later this year. And by the way, those of you who attend the Analyst Day next week, Ben, who runs digital for us, is going to update you on that Banno business and kind of what that means for us. But Banno business will be delivered later this calendar year.

And so once we have Banno consumer and Banno business all up and running and live and good to go, then we start selling outside the Jack Henry core base. So that will be later in 2020 -- calendar 2022 is when we'll start selling outside the core base. But we want to make sure that we have everything tight and right with our core customers before we start to go after sales outside the Jack Henry core base. But we definitely will be doing that.

And right now, the target is late calendar 2022.

Kevin Williams -- Chief Financial Officer and Treasurer

And I'd just add one thing to that is -- so if you think about it, Steve, I mean, right now, we are at about just over 20% of our core customers that are using Banno. So we've got an enormous amount of runway. And obviously, as Dave said, we want to take care of our core customers. The other thing I'd point out is we've actually -- and I've never seen this.

I've been in this business for a long time, I've never seen a complementary product actually win a core deal. And we've actually won some very nice core wins because we are only selling Banno to our core customers. So that's another reason to make sure we've taken care of all of our core -- our own core customers before we start going outside the base.

Steve Comery -- g. Research, LLC -- Analyst

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

Dave Foss -- President and Chief Executive Officer

That's a good question. I would say, a commercial customer tends to pay more for that functionality than a consumer does, but you don't have as many of them to work with at each institution. So depending on the makeup of the institution, if they're highly commercial-focused, I'd say there's a greater opportunity at that institution. If they're primarily consumer-focused retail, then there's a lesser opportunity.

So it just depends on the institution, the makeup of the institution. But if they're heavily commercial, there is a significant opportunity once we roll out that functionality. So if we'll go around to our existing customers who are running Banno consumer, yes, he'll be first on the list to say, "OK, now we have Banno for business. Let's add that." And that will be essentially the easy button for those customers that have already deployed the panel for their consumer base.

Steve Comery -- g. Research, LLC -- Analyst

Thank you. Thank you very much for taking my question, Dave.

Operator

Your next question comes from the line of John Davis with Raymond James.

John Davis -- Raymond James -- Analyst

Hey, good morning, guys. Kevin, I just want to start on the margin. I think 3Q was a good -- bit better than I think we and most people expected. But then the 4Q guide, I think, implies a little bit of a deterioration.

But historically, you've seen a little bit of a tick-up in 4Q. So maybe just the puts and takes of the margin sequentially as we enter the fourth quarter here.

Kevin Williams -- Chief Financial Officer and Treasurer

Yeah. So part of that, JD, is Q3 -- I mean, obviously, we had some very nice savings from travel-related savings costs. We are starting to pick up travel again. In fact, our corporate travel is almost back up to where it was pre-COVID.

Commercial is not quite there yet. But I think travel is going to pick back up even more in Q4, and that's really the only negative I see happening on the margins in Q4. Everything else is pretty much where it should be. Again, we're not seeing a lot of convert-merge revenue, which, those are very nice margins for us.

And I think as the M&A starts picking up, and Dave mentioned in his opening comments, there is starting to be a lot of clamor out there about M&A. And a lot of our customers are willing to get back to it. So I think that's going to pick right back up next fiscal year, but I just don't see it happening yet in Q4.

John Davis -- Raymond James -- Analyst

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

Dave Foss -- President and Chief Executive Officer

So there has been some impact on the debit business. We haven't tried to quantify that as a separate stand-alone number. Certainly, there has been a significant growth in the -- on the debit business. The interesting thing is stimulus payments have definitely been a driver for growth in digital.

So not just for Banno, but for anybody who's out there in the space, because of customers who have been looking to access that money and manage their money through the digital channel. That has been a driver in transaction volume and also in growth of users. I think that's across the industry because so many consumers now have been actively trying to manage those stimulus payments. But as far as debit volume, we haven't tried to carve that out and segregate the impact of stimulus from the rest of the volume.

It's just baked in the numbers.

John Davis -- Raymond James -- Analyst

OK. Thanks. And then, Kevin, it's been a long time since I've seen you guys be this aggressive on a buyback. If my math is right, you guys spent about $275 million in the quarter on the buyback, obviously, still have a phenomenal balance sheet, plenty of firepower there.

So any reason why, maybe not to that level, but you wouldn't continue to buy back shares here? Just curious, any commentary, and maybe you can weave in if there's been any changes in the M&A environment, which I'm kind of doubting given valuations but just curious there, too.

Kevin Williams -- Chief Financial Officer and Treasurer

So that's one of the things I tried to be clear about in my opening comments, JD, was that this does not signal some significant change in our strategy. We've said, time and time again, that if we have excess cash, we don't see a good acquisition on the horizon, we will do stock buybacks. We're committed to our dividend policy, but we'll do stock buybacks, absent a good acquisition. One of the challenges that we've highlighted many times on these calls is valuations are getting pretty high on these potential companies that we could acquire.

Everybody has stars in their eyes about doing an IPO, and or possibly bounce back and getting some great big valuation. And so absent a really solid acquisition that fits our strategy, share buybacks continue to be an option for us, particularly when the share price is down, like it was here a few months ago. That's what really drove us to get more active with the board and make a significant move.

John Davis -- Raymond James -- Analyst

OK. And then last one for me, Dave, maybe a big picture here. Just the competitive dynamics in the core segment, maybe splice out credit unions versus banks. One of your competitors has made some noise about making some progress from credit unions lately.

So just curious there if anything's changed to the pandemic or kind of how you see it today.

Dave Foss -- President and Chief Executive Officer

Absolutely not. So of the deals that we've won this year, we've won 17 competitive takeaways on the credit union side of the business. So very strong in the credit union side. No change with the competitive landscape.

There is nobody winning as many deals as Jack Henry, as far as new core displacements. And that's that was true before the pandemic. It is true today. I don't think anything of any significance has changed because of the pandemic with regard to our positioning on the core side, or our ability to win on the core side.

Operator

Your next question comes from the line of Ken Suchoski with Autonomous Research.

Ken Suchoski -- Autonomous Research -- Analyst

Hi. Good morning, David and Kevin. Thanks. Thanks for taking my question.

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

Dave Foss -- President and Chief Executive Officer

Yeah. That is a misconception that absolutely drives me nuts, Ken. I just got to say that right here. Jack Henry has been a player in the multibillion-dollar space for well over 10 years.

So if we were having this call 15 years ago, I would totally agree with what you just said. We were not a player in the multibillion-dollar space. But for the past 10, 15 years, we have continued to grow in that space. We are the dominant player on the credit union side, almost 50%, and you'll see the numbers next week at the analyst conference.

I can't quote it exactly off the top of my head, but close to 50% of the over $1 billion credit unions run our Jack Henry Episys solution. So we are by far the dominant player on the credit union side with a single platform. On the banking side, we have somewhere around 23% to 25% of the multibillion-dollar market running on -- almost all of them on our SilverLake platform. We have continued to push upmarket.

It is a key part of our strategy. We have continued to add functionality over the years, and we are winning in that space regularly, just as I emphasized on the call today. So we are not the little brother in the multibillion-dollar banking space. We are definitely a player.

But the question for us is, historically, we have been below about $50 billion. And so one of the things that Stacey will talk about at the Analyst Day next week is that we do have an initiative to move above $50 billion because that has not been a market that we've been in historically. We've been below $50 billion, but we have teams, and we've been actively working in that space as well. So we definitely are not targeting smaller banks.

In fact, if you're a credit union below about $100 million in assets or a bank below about $200 million in assets, Jack Henry, generally, is not the fit. We're the fit for a -- right around $1 billion is a real sweet spot for us. But as I mentioned, we've continued to grow upmarket here for many years.

Ken Suchoski -- Autonomous Research -- Analyst

Right. OK. That's really helpful. And then I guess when we think about margins for fiscal year '23, the platform migration will be behind you.

I mean, what's the right way to think about margins or even margin expansion after fiscal year '22? And I'm just looking back at some numbers here. I mean, Jack Henry had a roughly 24% operating margin in fiscal year '18. Is that a good benchmark for fiscal year '23?

Kevin Williams -- Chief Financial Officer and Treasurer

Yeah, it probably is, Ken. I mean, once we get next year behind us, get FY '22 behind us, and get the full benefit of the payment migration platform migration, we should go back in FY '23 to the typical 50 to 100 bps margin expansion that we saw historically before we started. And if you think about it, I mean, '18 is about when we started this -- the payment platform migration. So there was already some degradation on our margins even in '18 that kind of grew since then.

So we should see some nice margin -- very nice margin expansion in '22 and again in '23.

Ken Suchoski -- Autonomous Research -- Analyst

Right. Yeah, I think that's right. Yeah, I think the margins came down about 30 bps, it looks like, in '18 versus '17. And then just maybe one last question for me.

I think if I do the math right, you're going to accelerate your non-GAAP revenue growth to kind of high single digits, maybe even low double digits here in fiscal 4Q. Can you talk about the sustainability of that growth rate? And do you think fiscal year '22 can grow at a similar level? Or is it something below that a good assumption?

Kevin Williams -- Chief Financial Officer and Treasurer

No. So there's a couple of things that you got to remember in Q4 is we've got some pretty easy comps from last year, especially on the payment side. So you are right in your math, right? I mean, non-GAAP, you're going to see very high single-digit growth, maybe even low double, but it's probably in the 8% to 9% in Q4 to get us to that 6% non-GAAP growth for the year. But like I answered a previous question, I think for FY '22, you're probably going to see us grow faster than we did in FY '21.

That's not going to be high single digits. It's probably going to be in the 7% to 8% range like we saw before the pandemic hit.

Ken Suchoski -- Autonomous Research -- Analyst

Got it. OK. Helpful. Thanks.

Thanks for taking my questions. Really appreciate it.

Operator

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

Dominick Gabriele -- Oppenheimer & Company -- Analyst

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

Thanks.

Kevin Williams -- Chief Financial Officer and Treasurer

So the retention -- our retention rate is incredibly high, and we talk about that regularly. I'm concerned that you may have just a little bit of a misconception about deconversion fees. So when we get deconversion fees, that's because one of our customers has been acquired by somebody else. And so they are buying their way out of the existing contract that we have.

We have no control over whether somebody is being acquired by another institution. We do have a good track record of doing -- of saving those accounts by convincing the acquirer to switch to the Jack Henry system. Those are hard to do, and it's rare that you are able to do that because the acquirer is making all the decisions, and the acquiree is having to respond to those decisions. But we have, several times, convinced the acquiring bank to convert to the Jack Henry system.

But those are hard, and those are rare. So what drives deconversion revenue is one of our customers being acquired away. It's not that they're angry with Jack Henry and decide to leave us, and now they got to pay to get out of the agreement. It's -- 100% of the time, I'd say it's because they've been acquired by somebody else.

So that really doesn't come into the retention rate conversation. And again, our retention rates are well into the upper 90s as far as the core base.

Dominick Gabriele -- Oppenheimer & Company -- Analyst

OK. Great. And then maybe if you could talk about your -- just kind of a small item, but if you could you talk about the R&D expense and kind of what some of the projects you're working on there? And where you're expecting your R&D expense to be trending over the next, whatever, time frame, I guess, you feel like providing? That would be really, really helpful. It was just -- it was a little lower than I would have expected.

Thanks.

Dave Foss -- President and Chief Executive Officer

So we tend to run at about 14% of revenue, all in, for R&D. So it's cap software, it's R&D expense, about 14% of revenue. And that's been five years, probably, we've been at that number, more than five years. Yes.

So about 14% of revenue for several years, that's a number I'm very comfortable with looking forward because we're committed to doing these innovative new solutions. So talking of those solutions, some of them we've talked about here. We have digital is on that list, continuing to do a lot of investment in digital. Continuing to do investment in the treasury platform because our larger banks that are serving larger commercial customers are continuing to look for additional functionality.

So that's on the list as far as R&D projects is concerned. We have our -- the core systems, we're continuing to do investment. That's something that you never say you're done. There's always ongoing investment in the core systems with new functionality and new look and feel.

The user experience is constantly being updated. Our lending platform, so I highlighted that a little while ago in this conversation, lots of ongoing investment there to expand the functionality, to allow our customers, particularly on the commercial side, to do online lending. But we've also, in the past year or so, been investing in new functionality for consumer lending and consumer deposits, to deliver best-of-breed functionality when it comes to originating accounts online. And then the last I'd highlight is in the area of fraud.

So a lot of investment going on in the fraud area, where new functionality to deliver a more digital experience, I guess, around managing fraud for our customers.

Kevin Williams -- Chief Financial Officer and Treasurer

And, Dominick, the other thing I remember, and I agree 100% with Dave, I mean, our total all-in for R&D and cap software is going to be 14%. The percentage of revenue that's in R&D expense on the P&L is going to fluctuate a little bit depending on the timing of projects and when they actually start capitalizing in and capitalizing because we'll obviously have to follow the accounting gods' rules for capitalization. And so there may be times that we're complete with projects, and we're not really ready to start another project capitalizing. So that quarter R&D expense may be 8% of total revenue, where, this quarter, it was 6%, because we actually were capitalizing a little higher percentage because we had so many projects, as Dave just pointed out, that were in flight.

Dominick Gabriele -- Oppenheimer & Company -- Analyst

Great. Thanks. That's really, really helpful. I really appreciate it.

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

Dave Foss -- President and Chief Executive Officer

Yeah. It's an interesting question. I wouldn't say that the credit union industry or the banking industry one is ahead of the other. Historically, credit unions have been more tech-forward, I guess I'll put it that way.

They've always been more apt to invest in technology just -- since even when I started in this business a long time ago. Credit unions have always put technology at the front of the line. They've used it as a differentiator against banks, and not just against big banks, but against banks just in general. And part of their rationale has been that they have money to spend on technology.

They haven't historically built as many branches that banks have. They've tried to use technology to be the differentiator. But I don't think there's been any change recently as far as one or the other kind of changing their profile or being more aggressive about going after new technology.

Dominick Gabriele -- Oppenheimer & Company -- Analyst

Thanks again.

Operator

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

Vasu Govil -- KBW -- Analyst

Hi. Thanks for squeezing me in here. I guess my first question is just a clarification question on the revenue guide. The delta between the GAAP and the non-GAAP, I think it was roughly $30 million prior quarter and now it's about $17 million.

But I think, Kevin, you talked about deconversion fees going down $4 million to $5 million, I thought. So like what's the remaining delta, kind of? If you could provide some clarification there.

Kevin Williams -- Chief Financial Officer and Treasurer

Well, I mean, a lot of it happened this quarter because, as I mentioned in my opening comments, our convert-merge revenue was not where we thought it was going to be this quarter. We're just not seeing the M&A activity. Hardware sales continue to be down. On-prem installations continue to be down.

So it's really not -- the change was not really in Q4, it was really Q3. We came up a little short. As most of you pointed out in your first call notes, we had a revenue miss. But yet, we were still very efficient and actually expanded our margins and still exceeded EPS consensus guidance for the quarter, and we raised it for the year.

So, yes, I mean, the delta changed a little bit, but it's really not a whole lot of impact on Q4 as what happened in Q3.

Vasu Govil -- KBW -- Analyst

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

Kevin Williams -- Chief Financial Officer and Treasurer

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

Vasu Govil -- KBW -- Analyst

Understood. And then I guess last one, sort of a broader question on the competitive environment. Several small point solution providers are sort of emerging. Many of them are going public.

How do you see that trend having an impact on your growth rates in the complementary segment if at all?

Dave Foss -- President and Chief Executive Officer

Yes. It's something that we watch pretty closely. And you're right, and it's essentially what I was alluding to earlier when I was talking about the M&A environment. Those companies who maybe would have put themselves up for sale in the past, they would have been a potential acquisition target for Jack Henry.

All of them, these days, are thinking going through an IPO. And so I think it's just a little bit different than the number that are trying to IPO and take advantage of the frothiness in the market right now. But none of them are doing anything that's particularly -- it's not a threat, and particularly threatening to Jack Henry, or new or different or anything like that. We are very well positioned to compete with the names that, I think, most of them that you would throw out at me if you were to throw out names.

I would tell you exactly how we're positioned and where we're positioned to compete with them, and we are not worried about our ability to compete with some of these folks. They're taking advantage of the times. And there's a lot of interest in fintech right now, and they're getting valuations that are exciting. And we'll see where they sit five years from now.

Vasu Govil -- KBW -- Analyst

Thank you. That's helpful.

Operator

And there are no further questions at this time.

Kevin Williams -- Chief Financial Officer and Treasurer

OK. Thanks, Brandy. As a reminder, as Dave mentioned, our virtual Analyst Day is scheduled next week, a week from today, actually, on Tuesday, May 11. It will be beginning at 1:00.

If you have not registered, but you would like to, you can contact Vance Sherard, that's [email protected], and he can send you a registration link to sign up for the event. Now, to wrap up the call, we are very pleased with the overall results from our ongoing operations, and I want to thank all of our associates for the way they have handled these challenges by taking care of themselves and our customers and continue to work hard to improve our company to continue moving forward for the future. All of us at Jack Henry continue to focus on what is best for our customers and our shareholders. With that, I want to thank you again for joining us today.

And, Brandy, would you please now provide the replay number for the call?

Operator

Yes. And at this time, this does conclude today's conference call. But if you would like to listen to the replay, you may do so by dialing 1-800-585-8367. [Operator signoff]

Duration: 63 minutes

Call participants:

Kevin Williams -- Chief Financial Officer and Treasurer

Dave Foss -- President and Chief Executive Officer

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

Kartik Mehta -- Northcoast Research -- Analyst

David Togut -- Evercore ISI -- Analyst

Steve Comery -- g. Research, LLC -- Analyst

John Davis -- Raymond James -- Analyst

Ken Suchoski -- Autonomous Research -- Analyst

Dominick Gabriele -- Oppenheimer & Company -- Analyst

Vasu Govil -- KBW -- Analyst

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