Jack Henry & Associates Inc
NASDAQ:JKHY
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
153.4767
186.12
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Jack Henry & Associates Inc
You don't have any saved screeners yet
Good day, ladies and gentlemen, and welcome to Jack Henry & Associates' Second Quarter Fiscal 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference, Mr. Kevin Williams, Chief Financial Officer. Please, go ahead sir.
Thanks, Kristi. Good morning. Thank you for joining us today for the Jack Henry & Associates second quarter fiscal 2018 earnings call. I'm Kevin Williams, CFO and Treasurer, and on the call with me today is David Foss, our President and CEO.
The agenda for this morning will be fairly normal. In a minute, I'll turn the call over to Dave to provide some of his thoughts about the state of the business and the performance for the quarter. Following that, I'll provide some additional thoughts and comments regarding the press release we put out yesterday, give some updated guidance and then I will open the lines up for Q&A.
I need to remind you the remarks and responses to questions concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements or deal with the expectations about the future. Like any statement about the future, these are subject to a number of factors, which could cause actual results or events to differ materially from those which we anticipate due to a number of risks and uncertainties. And the company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our 10-K entitled Risk Factors and Forward-Looking Statements.
With that, I'll now turn the call over to Dave.
Thank you, Kevin. Good morning, everyone. We're pleased to report another quarter with record revenue and earnings. As I've discussed many times, we can't achieve these results without the dedication and hard work of our associates, so I want to begin today by thanking them for continuing to provide outstanding solutions and service to our clients.
As you've already seen, there is a bit of noise in our numbers this quarter as a result of the tax law changes and the Ensenta acquisition. I'll focus my comments on the performance of our team with regard to ongoing operations and let Kevin break down the impacts of these unusual events in his remarks.
Total revenue increased 8% for the quarter and increased 7% excluding the impact of deconversion fees from both quarters. Organic revenue growth was also 7% for the quarter. We had a very solid quarter on the core side of our business. Revenue increased by 12% for the quarter and increased by 11% if you exclude the impact of deconversion fees from both quarters.
Our payments businesses also continue to perform well posting a 6% increase in revenue this quarter and a 6% increase excluding the impact of deconversion fees. Our complementary solutions business also posted a 6% increase in revenue for the quarter and a 5% increase excluding the impact of deconversion fees.
Our combined sales team had a very solid second quarter, finishing slightly ahead of quota. The core teams closed 16 new core deals, all of which were competitive takeaways, with nine on the banking side and seven on the credit union side. We also continued to see solid success with several of our key strategic solutions like Treasury Management, our new card offering and our Enterprise Risk Mitigation Solution.
As we've discussed in the past, we're continuing to move customers to our new card processing solution. We converted two banks in December and two more a couple of weeks ago. All conversions have been extremely successful. And all four banks are already taking reference calls. We will implement several other beta clients in the coming months and plan to start large scale card conversions in calendar Q2.
In late December, we announced the acquisition of Ensenta in Silicon Valley. We've combined this business with our Enterprise Payment Solutions group. As we highlighted in the press release, this solution set is highly complementary to our existing remote deposit capture business. Ensenta also brings added functionality to address ATM capture, shared branching services and the government payments business.
With regard to the recently enacted Tax Cuts and Jobs Act, we don't intend to announce $1,000 one-time bonuses as has become the rage. Instead, we'll be taking several steps in the coming months to share a portion of our tax savings with our associates do more meaningful and impactful programs. The first is a voluntary program for employees with significant tenure to pursue retirement or other opportunities. Kevin will highlight the financial impact of this program in his remarks and will include other planned impacts in his guidance in the future.
With that, I'll turn it over to Kevin for some detail on the numbers.
Thanks, Dave. The Services & Support line of revenue, which includes license, hardware, invitation services, in-house maintenance, bundled services and outsourcing increased 7% compared to the prior year quarter, or 6% if you exclude the deconversion fees from both quarters. Deconversion fees were up $2.8 million compared to year ago, and all of the deconversion fees were in this line of revenue.
The Processing line of revenue, which includes online bill pay, card processing, and remittance or remote deposit capture along with transaction and digital fees were up 8% compared to the prior year quarter. As Dave mentioned, total revenue is up 8% as reported or 7% excluding deconversion fees for both quarters.
Our reported consolidating operating margins were flat at 25% this quarter compared to last year. However, by excluding the deconversion fees from both quarters, our total operating margins decreased slightly from 23.6% to 23.3%. And this decrease is due entirely to three things: increased expense on our new payment platform and faster payments initiative that we've discussed from previous calls; our increased education conference cost due to combining ProfitStars and our JHA Banking Conference this year, which we did not even hold the ProfitStars Conference last year; and then also a small operating loss from the combined acquisitions that we did in the first half of the year.
For our segments, our operating margins were relatively flat. In our core segment, our margins were 56% this quarter, compared to 55.7% last year's quarter. Without deconversion fees, core improved again, 54.4% from 54.2%. In our payments segment, we had some headwinds from, again, the additional costs from our new payments platform and faster payments initiatives. Our margins decreased from 54% last year to 53.1% this year. Without deconversions, they decreased about the same 52.8% to 51.9%. Complementing margins remain relatively flat at 58.5% both years and 57.8% versus 57.9% excluding deconversions last year.
Our effective tax rate, which is, obviously, impacted significantly by the Tax Cuts and Jobs Act, or the TCJA, due to the adjustment of our deferred tax liabilities on the balance sheet from the old rate to the new. Excluding the effects of the TCJA and other tax reserve adjustments during the quarter, our effective tax rate for the quarter actually increased to 34.5% from 33.5% last year, which negatively impacted our EPS by a little over a penny (7:17) in the quarter.
Due to our fiscal year end, we will have a blended tax rate this year with half the year under the old rules and half the year under the new rules. Therefore, even though we continue to incorporate the sweeping tax changes of the TCJA, as of now, we project our effective tax rate in each of the next two quarters to be approximately 27% to 28%.
For cash flow included in the total amortization, which was disclosed in the press release and the cash reserve review last night, is the amortization of intangibles from acquisitions, which increased slightly to $7.4 million year-to-date this fiscal year compared to $7.3 million last year. Our free cash flow, which is defined as operating cash flow, less capital expenditures, cap software and proceeds from sale of assets, was $112.3 million year-to-date this year compared to $94.2 million last year, or a hefty 19% increase.
Year-to-date, we've deployed our capital by investing $65.2 million back into our company through CapEx and developing products, which is down from $70.5 million a year ago. We've also returned $77.9 million to shareholders year-to-date through stock buybacks and dividends. Our return on equity for the trailing 12 months was 32% or 32% if you exclude the one-time impacts of the TCJA.
At 12/31, we had $100 million drawn on our revolver related to the Ensenta acquisition in late December; however, we still have significant capacity on our revolver facility and, basically, an unlevered balance sheet, which provides significant flexibility as we go forward.
Some comments about the impact of the Tax Cuts and Jobs Act and some of our plans regarding the benefits we will get from those. As Dave mentioned, we are providing a voluntary program for early departure of certain long-term employees, which some of the expected benefits that we will achieve from this plan are: it offers a simple exit path for seasoned long-term associates and they will benefit financially with a calculated severance amount; it allows for talent movement within the company by creating opportunities for upward promotional paths throughout the organization; it will also allow us to zero base these certain roles and either not replace or have the benefit of replacing with the right resource.
It should also provide a savings in FY 2019 as not all positions will need to be backfilled or could be backfilled at a lower base pay rate. However, as I said, those electing to depart will benefit financially, which will be a cost for us in Q4 for the severance allowance that we will provide.
Based on the eligible participants that we estimate that this will be a one-time cost of approximately $8 million in Q4. However, we will have a better idea when we report Q3, but that is the amount I'm currently including in my guidance.
In addition, we'll be discussing other plans for potential uses of the benefits from TCGA (sic) [TCJA] later this week with our Board of Directors at our normal quarterly meeting. Obviously, we have historically increased dividends this quarter and I would anticipate that we will do that again this quarter.
Some other uses will be directed at employees in the future, which provide ongoing benefits to them and possibly some enhancements to our current benefits plans. However, those are all longer-term and we do not expect any impact on current fiscal year other than those items already discussed. And we will build any other plans into our future FY 2019 guidance.
And as for the remainder of FY 2018 guidance, we projected at the beginning of the year that our revenue from deconversion fees caused by the M&A activity would decrease in FY 2018 and cause a headwind, which even though Q2 was up a little, we were still down by $3 million year-to-date. This will continue to cause some noise, but we will continue to provide the deconversion revenue on a quarterly basis, so you can see how our true operations are performing.
Also, as we discussed on previous calls, there will be some revenue headwind, increased cost and margin pressure from recent divestitures, and also getting our new payment platform in place to get our payment customers converted to that platform over the next couple of years.
Therefore, for our fiscal Q3, we expect reported GAAP revenue to continue growing in the 6% to 7% range. Previous consensus had our EPS for Q3 at $0.79, which we commented last quarter that we were comfortable with that. However, with the impact of the currently projected lower effective tax rate of 28%, our Q3 EPS should be in the $0.85 to $0.86 EPS range.
For Q4, we expect reported GAAP revenue growth in the 5% to 6% with slightly lower deconversion fees, but the anticipated additional expense impact of $8 million from the plan previously discussed, offset by the lower estimated effective tax rate, we expect EPS in Q4 to be in the range of $0.90 to $0.91, which that would make the full-year EPS in the range of $4.57 to $4.59.
Obviously, there could be changes due to higher than expected deconversion fees or lower deconversion fees, stock buybacks or changes in our estimated effective tax rates, which we will provide updates in future earnings calls.
For FY 2019, we anticipate that our total effective tax rate will be in the 24% to 25% range. Also we anticipate doing a full retro restatement of reporting previous numbers for ASC 606, the new revenue standards that will be effective for us July 1, 2018, which we will also provide more clarity about that on our next earnings call as we start looking more into FY 2019.
This concludes our opening comments and we are now ready to take questions. Kristi, will you please open the call lines up for questions.
Our first question is from David Togut of Evercore ISI. Your line is open.
Thank you, good morning.
Good morning.
Good morning.
You highlighted 16 new core deals in the quarter, 9 from banks, 7 from credit unions all competitive takeaways. Any key themes in the signings, any particular wins due to certain product lines, anything to call out?
No, David, I don't know if there's anything in particular, it's pretty consistent with what we've been seeing for quite some time across the board, wins as far as the other core products that are out there, so nothing major or significant to call out.
And not heavily weighted towards any one other core provider out there.
Not one core product.
Yeah.
Yeah.
Core product.
Okay. Understood. And then second, any update you have on banks' spending intentions for calendar 2018 would be helpful, just given U.S. tax reform, rising interest rates, which likely help net interest margin.
Yeah, it's a good question. We have talked about it in the last two earnings calls, I think, that the bank spending seemed to pick up a little bit last year. I think it's holding pretty consistent. I will tell you that our sales teams ended Q2 with the largest pipeline they've ever had, those – that doesn't mean they turn into deals. But it's the largest pipeline in the history of the company.
But when you talk to bankers, there's not some great big flood of intention to go spend at a much higher rate. I think most of our clients are still waiting to see the actual impact of tax reform on their business. They're still trying to decide what to do with the savings that they have. I assume that at some point, we'll see some of that trickle into technology spending, but no major changes that I'm prepared to highlight right now.
Understood. And then there's been a lot of focus at least in the journal on continued bank closures, I think, an article yesterday calling out the last 12 months is the biggest year for bank closures. Is all that flowing through to increased demand for mobile and Internet banking?
I'm assuming you mean branch closures, not bank closures, right?
I'm sorry, branch closures.
Yeah. Okay. Yeah, so that would make sense. So, yeah, that's certainly stimulating demand for mobile. Our newer mobile solution is the Banno solution. We've continued to see good demand. We signed 28 new customers in the quarter for Banno Mobile. So I think your thesis there is probably on target that certainly some of that is being driven by continued branch closure and more focus on putting mobile technology in the hands of the consumer, so they don't have to have as many branches.
Great. Quick final question, Kevin, you highlighted the unleveraged balance sheet. Obviously, you've had a great balance sheet for a while. Are you changing the way you think about capital allocation now in light of tax reform?
No, not really David. As I said in the opening comments, I mean, obviously, we've increased dividends now for 26 consecutive fiscal years. This is typically the quarter that we increased dividend. So, I would anticipate that we'll do that. We might increase that a little more than typical. But again that's up to the board. We will use some of the additional cash, as I said, for some employee plans that we're strategizing right now. We're actually going to be talking to the board about those this week too.
But it does give us some additional cash, so it gives us the opportunity to maybe look at some potential M&A activity out there a little stronger. But, I'll tell you that the other thing and I've talked to our board about this, is in my mind and maybe I'm a little overly conservative, but we have to be a little cautious that we don't put some plans in place that then if administration changes in two to three years and all of a sudden these tax laws change and go away and we lose that benefit, we don't want to set ourselves up into a position that now we have to pull back dividends or change something for employees because now all of a sudden the free cash is gone.
So we're going to be a little cautious as we move forward. So that's a long way to answer your short question that I don't think there's many changes in the way we're going to deploy our capital. We're kind of going to continue going. Obviously, if the market continues correcting, gives us an opportunity to probably get in and buy some more of our stock back, which we've done that historically, so that's part of the way we're going to go forward, Dave.
Understood. Thank you very much.
You bet.
Thank you. Our next question is from Brett Huff of Stephens. Your line is open.
Good morning, guys.
Morning, Brett.
Two questions from me. One – or actually three, two on product. You mentioned a little bit about success in the press release of converting some folks to the issuing processing solution. And Kevin, I think, you said middle of fiscal 2020 is when you thought that the kind of full conversion would be done and you could start shutting some of the old systems down. Knowing what we know now, is that still the reasonable outlook timeline?
Yeah.
Yeah. That's the reason, Brett. And remember, we've got two platforms. So we've got two mainframe systems out there. And obviously, we have the backup systems for both those. And we're trying to get it where, hopefully, we can get the customers off one of those sooner rather than later. So we can go ahead and start taking some costs out and start getting some margins improvement.
So we are continuing to see some headwinds now that the costs in the quarter for those initiatives increase our cost base by about $700,000. So there is true cost in there. And as we move these customers over to the new platform, we're going to have to pay transaction fees on those. So there is going to continue to be some margin pressure, but we still anticipate and, obviously, we're still pretty early in it. But like Dave mentioned that the first four conversions have gone really well and so we think we're still on track to hit the target, to have them all moved over by mid-2020.
That's helpful. And then, on the enterprise fraud offering with your partnership with SAS, you're reselling SAS, how is that going? And kind of updates on that, it seems like that's a very unique offering in the space.
Yeah. We feel really good about it. We have five customers that are installed live now, Brett. We signed seven more in the quarter. Customer feedback, customer reaction has been very positive. And I think it's because most bankers knew about SAS, but SAS they were only targeted at the largest banks in the world. They had really no model to go below a $50 billion bank as far as their delivery model.
And so, most bankers knew about SAS, but always assume that that would never be an option for them. So, they're very excited about the fact that they get access to this technology, industry-leading technology, hosted by Jack Henry. So they don't have to go through the full install onsite at their financial institution and they get the analytics, all the tools that are available through the SAS offering. So there's a good buzz out there right now. As I said, we signed seven more in the quarter. So, I'm optimistic about that solution for the future.
Good.
And I'll go ahead and sort of plug in that that the ERMS solution and the faster payments and the card processing and Banno will all be at the Mini Tech Fair as part of our Analyst Day on May 7 in Atlanta, Georgia, which invites, we'll be going out shortly for that.
I'm excited to see that one. Last question was a just sort of a numbers one and I think I missed part of this. Kevin, can you remind us what you thought term fees were going to be and what they came in at, was there a difference in those in terms of the timing? I was trying to write, I don't think I got it all down.
Yeah. Well, right now, our term fees were $2.8 million ahead of where they were last year. In Q2, we actually thought Q2 was going to be relatively flat.
Okay. So they came in a little early, does that mean that those term fees, call it, $3 million that came in this time, won't – they came out of 3Q and 4Q?
No. There's no rhyme or reason when these things happen, Brett.
Okay.
I mean, it's one of those things, if I'm throwing a dart at the wall, you have no idea when it's going to hit.
And so, does that – did you give us – because I think, before, you said the full year is going to be up $8 million or down $8 million. I can't remember; one or the other. Is that number changed?
No. It's down $8 million, which we're still down about $3 million year-to-date; and, like I said in my opening comments, I think Q4 is going to be down from where it was last year, which is why the guidance on revenue growth in Q4 was down a little bit. So, we may not be down $8 million, but I think we're still going to be down probably $5 million to $6 million for the full year.
Okay. That's what I needed. Thanks, guys.
Thanks.
Thank you. Our next question is from Joseph Foresi of Cantor Fitzgerald. Your line is open.
Hi. So I want to get a sense of how fast outsourcing grew and were there any de novo wins?
Whether there were any de novo wins?
I'm just – maybe just give me a sense of like how fast outsourcing grew?
So, as far as the number of customers that we signed in the quarter, I think we signed nine banking clients and seven new core clients. The majority of them were outsourced. I think all of the banking clients were, and I think four of the credit union clients, so all of those will add to revenue in the future.
And then, in the out signings – and out meaning customers moving from in-house to outsourcing – we signed four on the banking side and five on the credit union side. That doesn't impact the financials in the quarter, but it sets us up for the future. And I'm just talking while Kevin's looking up the number as far as the actual change in the quarter, if you want to...
Yeah, in true outsourcing and cloud services, actually grew right at 10% for the quarter, which is pretty much in line with the guidance we've provided.
Okay. And any of those credit unions over $1 billion in assets?
We didn't sign any this quarter as far as new customers. We did – one of the in-to-outs that we signed was a $3 billion credit union, but there aren't that many over $1 billion credit unions, so it's common for a quarter to go by without signing a new one. We had the year, a couple of years ago, where we signed six in one year, which was pretty remarkable, but it's rare to sign a $1 billion credit union; but, we have some in our pipeline.
Yeah. There are several in the pipeline.
Yeah.
Okay. And then, the last one for me just on the margin trajectory, can you give us some color through the end of this year and any thoughts on what margins could do next year? Thanks.
Yeah. And like I said, with all the initiatives we have with faster payments and different things, I mean, it's going to create some headwinds on margins. Overall, operating margins were down slightly this quarter. I think they're going to probably be down, again, the next couple of quarters, but I think we're continuing to get leverage in other areas that's helping to offset those headwinds. So there's going to continue to be some slight margin pressure, but they should be relatively flat in FY 2019. Obviously, we'll give updated guidance later, but they should remain relatively flat to slightly down as we get all of these customers migrated over.
Okay. Thank you.
Yeah.
Thank you. Our next question is from Kartik Mehta of Northcoast Research. Your line is open.
Hey, good morning, Dave and Kevin.
Good morning.
Hey, Dave, you talked about that the pipeline in this second quarter was probably the largest you've seen in company history. I'm wondering, if you just talk about maybe the products that are creating this demand and what are you winning.
Yeah. It's across the board, and that's the thing that's really kind of heartening for me is our core business continues strong, signing 16 in a quarter is a, as far as I'm concerned, remarkable number, 16 takeaways in a quarter, but we didn't totally deplete the pipeline on the core side. So core is strong.
On the complementary side, we have lots of interest in the new payment solution that we highlighted earlier, the First Data and PSCU partnerships, so a number of deals in the pipeline there. And then, across the board, not only our newer solutions, like Banno and Treasury Management and Enterprise Risk Management, but across the suite, it's really kind of a robust pipeline across the board. So I wouldn't say there is anything that's particularly standing out other than the fact that the core business continues to look strong. After signing 16 in the quarter, I was a little worried that there'd be a big drop off, but there's still a lot in the pipeline as far as new core deals that are working.
Well, another thing, Kartik, is actually all three brands'...
Yeah
...sales pipelines are extremely robust right now.
Yeah.
And then, what about – I know, Kevin, you said term fees are going to be down this year compared to last year, but thoughts on bank consolidation, if you're seeing any activity that would lead you to believe that maybe we're going to see more bank consolidation as we head into year FY 2019?
All right. Again, I don't think it's going to pick up. I mean, it's going at about the same pace. I would tell you that our M&A teams are extremely busy, which means that our banks are buying quite a few banks out there just like we're losing some that are getting acquired by other banks. But yeah, I don't see much of a trend. I mean I think it's going to be in the 3% to 4% consolidation rate just like it has been for the last 15 or 20 years.
I think we highlighted two calls ago, Kartik, that we had added a conversion team just to handle M&A, another M&A team. And they've been in place, they are running in full steam. We don't anticipate any more right now. But the fact that we had to add one a couple of quarters ago, indicates that there's a lot of – and when we add a team, it's because our banks are acquiring other banks and so we end up doing the conversion work and so that pace is continuing pretty steady.
And then just, Kevin, just a clarification, when you were talking about margins, I think you said initially you thought FY 2019 would be flat. And I'm wondering would you not have the benefit that you're not going to have the $8 million expense next year that you're going to have this year for early retirement and won't there be some savings associated with that? So I just wanted to make sure that, maybe I was thinking about this the right way.
Yeah you're absolutely right, Kartik. I mean that won't be in there, but the other thing that I would say is that, and Dave and I both mentioned that, we have some other things that we're going to be doing for some of our associates throughout the organization, which could easily offset that $8 million. So we probably will have that same expense, if not more in FY 2019.
Okay. All right. Thank you. Thank you, both.
Yeah.
Thanks.
Thank you. Our next question is from Tim Willi of Wells Fargo. Your line is open.
Hi. Thank you and good morning. I have two questions somewhat related to Kartik's. But Kevin, if we can just go back through what you're talking about with sort of the programs et cetera for employees, just part of the tax saves. Ultimately, I guess, is there a way to think about the benefit in terms of average comp per FTE, I think, you talked about sort of creating some opportunities to bring on talent, maybe at lower compensation levels. And I'm just sort of trying to think is there another way to think about the ongoing benefit, once you get past some of the step up and implementation of a variety of programs. Yeah, go ahead.
Yeah, Tim, the problem is because of a program like this, we offered it to tenured personnel, which they have to be at certain age and they have to have a certain number of years with Jack Henry, and so that covers a pretty wide gamut of salaries that could be anywhere from a $30,000 salary to $150,000 salary. And we have no idea or no way of knowing which ones will actually accept this because it's truly totally voluntary.
Okay.
Now, like I said, when we report Q3, I will have that number and I'll be able to say you what's basically the impact is going to be on Q4 and in FY 2019.
Perfect. Thank you. That'll be great. I guess, sort of on the same topic, just thinking about sort of freeing up upward mobility et cetera for other associates, have you been seeing anything internally around recruiting or retention or just employee satisfaction did sort of – has created maybe an impetus to do this or is this something you guys have been thinking about for quite a while and you sort of get an opportunity here to do it without really disrupting the income statement?
Yeah, that's a good question, Tim. This is Dave. So we do, I think you're aware, we do employee engagement surveys every year, employee satisfaction surveys every year, we follow through with programs based on those on an annual basis.
One thing we've talked about with some of you guys and some investors on occasion is the fact that our turnover rate is very low, it's about half the industry standard rate. Well, there's really good news and potentially bad news on that. The really good news is, you're not having this constant churn in the talent. The potential bad news is as you have really talented people who want to move up, sometimes they're blocked because, again, we have very low turnover.
So, it's something that comes up, there's not some mass concern among the associates at our company about this topic, but it does come up. And so, this was an opportunity for us to create some movement and give some people that really have proven themselves, give some people the chance to move up in the organization and take on more responsibility. And at the same time, as Kevin has already highlighted, we believe it will have an impact as far as reducing overall compensation.
Great. My last question was just – go ahead, Kevin, I'm sorry.
Tim, we do have a number of retention programs that goes on and training programs for our associates, so we can identify which ones are those up-and-comers and make sure that they are aligned appropriately and that we have identified to where we want them to go.
Yeah.
Great. And the last question I have is just on the recent acquisition. I think you guys have been pretty successful over the years buying products, where you saw an opportunity to scale across a much larger customer base and sales force. I'm just sort of curious is this – this is, obviously, a reasonable mature company, I guess, with the purchase price, but I think when you look at their product set, your sales force, your customers, is this again just another one of those sort of transactions where you see a real opportunity to step up the growth rate by getting it into your product set, your sales force, your distribution channels or how should we think about the ramp and the performance of it?
Yeah. That's the idea, you've nailed it. The Ensenta team was very complementary to what we do with our Enterprise Payment Solutions business. So, if you look at our traditional business EPS, we are very strong on the banking side of the house, not so much on the credit union side. We're very strong with commercial businesses, not so much with consumers. Now you look at Ensenta, they're very strong with consumers, very strong on the credit union side, very much about mobile capture as opposed to our traditional business, which was scanner capture. So you put the two together, they're very complementary to each other.
The sales force that we already have at Jack Henry knows how to sell these things because we've been doing it for years. So we put that in the hands of our sales force and, by doing this, we become the largest provider in this space because we were the largest on the banking side and, essentially, we're the largest on the credit union side, now combined together we'll be the largest provider of that type of technology. And on top of it, it brought us some things that we didn't have. So the ability to support shared branching in the credit union space, for example, of a more robust ATM capture solution and some government payments options. And so it's a really nice complementary addition to what we already had in place with EPS.
Great. Thanks so much for the time.
Yeah.
Thank you. Our next question is from Glen Greene of Oppenheimer. Your line is open.
Thanks. Good morning. Just a few questions, clarifications for Kevin first. Kevin, you gave an EPS outlook of $4.57 to $4.59, I assume that was the GAAP number.
Yes.
Do you have the equivalent non-GAAP? What was the non-GAAP, more like $3.40 or something like that or $3.39?
You mean without the impact of the tax? Yeah, it'd be something like that, Glenn. I don't have that off the top of my head.
Okay. I just wanted to make sure we are okay. And then, just...
That is a true GAAP number with the impact of the Tax Cuts and Job Act (sic) [Tax Cuts and Jobs Act] in there for Q2 and beyond.
Okay. And could you just explain at a high level why the tax rate in the back half is that 27% to 28%, whereas it's going forward to 24% to 25%? Could you just walk through that, again?
Yeah. Because, again, we're a fiscal year-end company, so the first half of our year is still at the 35% rate and the second half is at a blended rate, which is not down to the 24%, it's more like a 25% or 26% for the second half to get the blended rate down. So to get the full year impact of a 29% or so average, we're going to have to use 27% to 28% in the second half to get to a full year blended rate. It's just the way the IRS tax rules work.
Okay. Fine. And I jumped on the call a little bit late, but did you give any indication of what the number of outsourcing – in-to-outsourcing decisions was in the quarter?
I touched on a little bit ago; so, in-to-outs, we had four on the banking side and five on the credit union side.
Okay. And then, Kevin, I know it's early, but do you have a high-level view of the impact of ASC 606?
No. I really don't. And I've said that in the opening comments, Glenn. I mean, we're still going through the conversion of all of our contracts in the system. We should have that completely converted. We've gone through one mock (36:48); we're going through another one. We should have that completely converted sometime in March. So then, we will be able to basically do dual reporting through the end of June, which is when ASC 606 actually comes into play for us. And so, when we report the end of the fiscal year, we will actually do retro reporting for the previous two years, and then going forward into FY 2019.
Okay. And then, Dave, maybe just a little bit more color on what you're seeing in the card processing side. Obviously, you're doing – in the process of converting a lot, but I'm interested in the incremental new demand from new clients on both the debit and the credit side, what you're seeing there. It's obviously early.
Yeah. So, we signed 17 new Banking debit customers in the quarter and four new Symitar debit customers in the quarter, and then three credit customers in the quarter. And, of course, those are all new because we didn't have credit in the past; so, good demand. As I mentioned earlier, the pipeline has a number of deals in it that are – some are renewals or customers renewing the business they already have, but a lot of new interest in this solution.
We've had some good press from some of the consultants. And I've commented on it before, it's rare for the consultants to give you good press and – the industry consultants, and they've really been impressed with this solution. So still early days in this and we still have a lot of work to do to get customers converted over, but I think as we continue to show success in converting existing customers to the platform, that will only drive more demand not only from our existing customers, but from new prospects. So, I'm feeling very good right now about the solution and where we're at in the sales process.
All right. Great. Thanks a lot.
Thanks, Glenn.
Thank you. Our next question is from Dave Koning of Baird. Your line is open.
Yeah. Hey, guys, thanks. And I guess one just quick follow-up on Glenn's question on tax rate. Are we right that Q2 was 34.5% tax rate normalized, I think, is what you said, and then Q3 and Q4, 27% to 28%, and then all next year you said 24% to 25%, those are all the right numbers, right?
Yes. That is correct, Dave.
Okay. Okay. Good. And then, secondly, where does that $8 million cost fall? Is it in the cost of sales in one of the line items or is it in G&A? Where would that be?
It will be wherever the person resides at, Dave. So the lion's share of it will be in cost of sales, but there'll be some in R&D and some in SG&A.
Okay. Got you. And then, I guess the last thing, is it fair to think of – I think you said – for growth in Q3, I think you said 6% to 7% reported. There's also, I guess, there's the 2% tailwind from acquisitions, and then a 1% headwind each from term fees and divestitures, so the net of all the stuff is kind of neutral. Is that the right way to think of Q3?
That would be the right way to think about it.
Okay. Cool. I think, that's all we got. Thank you.
Thanks, Dave.
Thank you. Our next question is from Peter Heckmann of D.A. Davidson. Your line is open.
Hi, guys. This is Alexis Huseby on for Pete. I'm hoping you can give some insight on what the margins look like in the Ensenta business, and then also has Jack Henry been licensing any tech from Ensenta?
So, on the second question, have we been licensing any tech from Ensenta, was that the question?
Yes. Thank you.
Yeah, we did not have a relationship with Ensenta prior to the acquisition. They were a competitor of ours. So, we competed with them heads up. And as I highlighted earlier, they were much stronger than we were on the consumer side of the business, we were much stronger on the business, meaning serving business clients than they were, which is why we were so happy with the complementary nature of this acquisition. So, we were not licensing technology from them, they were a competitor. And as far as...
Yeah. The margins currently are quite a bit lower than our corporate average, primarily because of the high depreciation and amortization, that's included in those because of purchase price accounting. Obviously, we've only owned them for 45 days now. So, it's a little tough to say we've gotten any of the synergies put in place yet, which those should be in there by the end of fiscal year. So basically by FY 2019, their margin should be up pretty much in line with our corporate average operating margins.
Okay, great, thank you. And then could you provide any update on Banno uptake? And is that planned to be replacing NetTeller product at all?
So, the strategy is not for Banno to replace NetTeller unless the customer chooses to do that. NetTeller is a fully functioning very popular Internet banking solution. We have a mobile banking solution tied directly to it called goDough. A lot of customers use it. They're happy with it. There is no intent to displace those customers.
Banno is designed to be kind of that premium solution sold, certainly, to some customers who're currently running NetTeller, but more focused on net new customers. So, we signed 28 new customers in the quarter and have signed 47 so far this fiscal year.
Great. Thanks. And then, finally, do you expect to see any uptick related to their current expected credit loss accounting standard requirements for loan portfolios?
So, we rolled out our (42:34) solution, I don't know, about a year ago probably. And so, we already have – those sales have been happening for about a year and have been baked into our numbers for a year. So, I expect that'll just continue at the current trend. There won't be some big spike as a result of (42:51). We've been in that business now for about a year.
Okay, great. Thank you.
Thanks.
Thanks
Thank you. And that does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Kevin Williams for any further remarks.
Thanks, Kristi. Again, we're 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 on what is best for our customers and our shareholders. I want to thank you again for joining us today. And Kristi, will you please provide the replay number?
The replay number is 1-855-859-2056. Again, that is 1-855-859-2056. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Thanks. Everyone, have a great day.