Jack Henry & Associates Inc

NASDAQ:JKHY

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen and welcome to the Jack Henry & Associates Second Quarter Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] Pleased be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Williams, Chief Financial Officer. Please go ahead, sir.

[Kevin Williams, Chief Financial Officer and Treasurer]

Thank you, Sherrie. Good morning. Thank you for joining us for the Jack and Associates second quarter fiscal year 2020 earnings call. I’m Kevin Williams, CFO and Treasurer and on the call with me today is David Foss, our President and CEO. In just a minute, I will turn the call over to David to provide some of his thoughts about the state of our business and performance for the quarter and then I will follow that up with some additional thoughts and comments regarding the press release we put out yesterday after market close and then I will also provide some updated guidance for FY20 and then we will open the lines up for Q&A. First, I need to remind you 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, which 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. Also on this call we will discuss certain non-GAAP financial measures including non-GAAP revenue and non-GAAP operating income. The reconciliation for historical non-GAAP financial measures can be found also in yesterday's press release. I will now turn the call over to Dave.

[David Foss, President and Chief Executive Officer]

Thank you, Kevin and good morning everyone. We are pleased to report another quarter with strong revenue and earnings growth. As always, I would like to begin today by thanking our associates for all the hard work that went into producing those results for our second fiscal quarter. For Q2 of fiscal 2020 total revenue increased 9% for the quarter and increased 8% on a non-GAAP basis. The conversion fees were up about $1 million over the prior year quarter, so although that variance contributed to our overall revenue performance, it wasn't the explanation for this very strong quarter. Turning to the segments, we again had a solid quarter in the core segment of our business. Revenue increased by 7% for the quarter and increased by 6% on a non-GAAP basis. Our payments segments also performed well posting a 10% increase in revenue this quarter on both a GAAP and non-GAAP basis. We also had a strong quarter in our complimentary solutions businesses with a 10% increase in revenue this quarter and an 8% increase on an non-GAAP basis. As I mentioned in the press release, our sales teams again had a very solid quarter and total sales bookings are now running 18% ahead of last year's record pace. In the second fiscal quarter, we booked 17 competitive core takeaways and 20 deals to move existing in-house customers to our private cloud environment. We also saw very strong bookings and our payments and complimentary solution segments. We signed 30 new clients to our new debit card processing solution and three new clients on the credit card side of the business. All of those 33 card contracts and 17 competitive core takeaways represent new revenue to Jack Henry. Our banner digital platform also experienced very strong demand with 25 new clients signing for the full digital suite. As you may have noticed, we published a press release last Thursday regarding the availability of our new JHA bank anywhere solution. I'm happy to announce that we currently have four banks in live production on bank anywhere and have several more in the queue to be installed. This solution is a cloud based core and digital banking solution offered to digital only banks. It leverages the complete set of open APIs built by our - team to enable easy connectivity to the core and other complimentary functions. If the digital bank is our new charter, we can provide the core and the API connectivity they need to integrate solutions from virtually any Fintech provider. If the digital bank is an offshoot of a traditional brick and mortar institution, we can deploy bank anywhere regardless of the core system that traditional bank is running. This solution is just another example of the many innovative technology solutions being offered today by Jack Henry to help our banking clients compete in the digital world. Regarding our new debit and credit processing solution, we now have well over 600 customers live on the new platform. This count includes 73 customers installed as new debit clients rather than as migrations and 13 new full service credit clients now live on the platform. We have approximately 300 of our debit clients yet to migrate, but as I mentioned on the last call, we suspended our migrations during the holidays, because banks and credit unions don't like to implement changes to their card programs during that time of the year. We completed another round of migrations in January and remain on-track to complete the migration process during calendar 2020. Although we haven't done a press release on this, I'm happy to announce during December we became the first processor in the country to bring a financial institution live with the real time payments network through the clearing house, and we will bring the second customer live later this month. As I mentioned on the last call, our pace center solution has been designed to allow us to connect clients to the real time payments network in groups rather than one at a time. Additionally, we provide connectivity through this single platform to multiple providers, which facilitates a more logical and efficient approach for our clients than any other processor in the market today. As we begin the second half of our fiscal year, we continue to be optimistic about the strengths of our technology solutions, our abilities to deliver outstanding service to our customers, our ability to expand our customer relationships, the spending environment, and our long-term prospects for success. With that, I will turn it over to Kevin for some detail on the numbers.

[Kevin Williams, Chief Financial Officer and Treasurer]

Thanks, Dave. The service and support line of revenue increase 8% compared to the prior year, quarter. Our license and related in-house support created some headwinds both being now combined $3.1 million for the quarter compared to last year, which primarily is due to the continued moving the customers to our private cloud, which actually is good for us and our shareholders long-term in many ways. Outsourcing and cloud services were up nicely again this quarter at an increase of 16% compared to last year. As Dave mentioned, deconversion fees were up a little over million dollars compared to your go quarter. The processing line of revenue, which is all of our transaction, remittance, card and digital grew a very nice 10% compared to the prior year quarter. Total revenue was up 9% for the quarter or the last year and on a non-GAAP basis, our revenue was 8% for quarter by excluding the deconversion fees. Reported consolidate operating margins were down slightly from 20.8% last year to 22.4% this year primarily due to lower license fees and the continued increase in additional costs related to our card processing platform migration, which we will continue to see these margin headwinds through the remainder of this fiscal year and into next fiscal year until we can eliminate the additional costs related to the platform migration. With the cost reductions that we have talked about on previous calls that we will see the impact from in the first and third quarters of FY21, the impact those cost reduction will have on our quarterly and fiscal margins will remove those headwinds and allow us to return to a position of leveraging our operating income margins. Our segments operating margins continue to be very solid with small fluctuations and our payments segment will continue to have that increased margin headwind going forward as additional costs continue to increase as we migrate customers to the new payments platform until we can get the last core customers off in Q4 of this fiscal year. The effective tax rate for the quarter was relatively flat with last year at 23.2% this year compared to 22.9% last year. For cash flow included in the total amortization was disclosed in the press release is the amortization of intangibles related to acquisitions, which decreased to 4.9 million year-to-date this fiscal year compared to 5.2 million last year. Our depreciation is up year-to-date, primarily due data center CapEx in the first half of last and hardware upgrades this fiscal year which are in production and our non-acquisition amortization was up due to more of our internally developed products being placed into production. Operating cash flow was 215 million for year-to-date, which is up from 192 million last year. During first half the year, we invested 94.2 million back into our Company through CapEx and developing products, which is up - over 5% from 89.7 million a year ago. To update your FY20 guidance. As we have discussed previously, we have no control over the timing of recognized deconversion fees that we received. However, at this time, we anticipate deconversion revenue to be relatively flat for the remainder of the year compared to last year’s second half, which means FY20 will be up over the previous year due to the large first quarter and the small increase we had in Q2. In addition, revenue from our processing and private cloud customers will continue to grow nicely. And therefore, total GAAP revenue should grow a little over 9% for full-year FY20, compared FY19. And then, excluding deconversion fees for both years an incremental revenue contributed to this year from an acquisition of Geezeo which will be about approximately $10 million for the full-year. Our non-GAAP revenue should grow a little over 8% compared to last year. With increased deconversion fees, offset by the continued decreased license and related implementation revenue and additional cost headwinds from our payments platform migration, we project operating income will grow at a slight discount to revenue growth at a little above 8% on a GAAP basis. Then, excluding revenue and related costs associated with deconversion fees and the small net operating income impact from the acquisition, our operating income should grow between 6% and 6.5% on a non-GAAP basis for the full fiscal year. We will continue to experience revenue and operating income fluctuations between our fiscal quarters due to license, implementation, platform migrations and software subscription usage. We anticipate GAAP operating margins for the year to be mostly in-line with FY19 at approximately 22% for the year and excluding all the things just mentioned, we expect non-GAAP operating margins of approximately 21%. Our effective tax rate for the full fiscal year will continue to be between 23% and 23.5%. We project Q3 EPS to be in a range of $0.80 to $0.82 and for the full-year of FY20, we are increasing our EPS guidance from the previous range of $3.60 to $3.64 we provided last quarter to a current projected range of $3.70 to $3.72. This concludes our opening comments and we are now ready to take questions. Sherrie, will you please open the call lines up for questions.

[Operator]

Of course. [Operator Instructions]. Our first question comes from Vasu Govil with KBW.

[Vasundhara Govil, Keefe Bruyette & Woods]

Hi. Thanks for taking my question and congrats on a great quarter. I guess the first question, you have already seen pretty strong top-line performance and we are seeing the guidance raise here. Could you talk about like outside of deconversion fees where you are seeing more strength versus what you had anticipated coming into the year and also the sustainability of this 8% non-GAAP revenue growth beyond 2020?

[David Foss, President and Chief Executive Officer]

So, I will comment first and then I will ask Kevin to add on anything that he wants to add. So first off, I think the win rates that we are seeing on the core side of the business and virtually every core customer that we are signing now is a hosted core customer, which means you don't just get revenue prop on the front end, you get revenue - layers in and as sustainable. Normally those customers are signing a seven year contract these days, sometimes 10-year contracts. The payments business, so we have talked many times on this call about the reason that we went through the conversion to the new payment - the card platform. The reason was we were not only not winning customers five years ago, but we were starting to lose customers because the functionality wasn't there. Today, we are signing new customers, bringing new revenue in because of the functionality on the payments platform that we didn't have before, and we certainly are seeing a good demand as referenced on the call. I pointed out, we signed 30 new debit and three new credit customers just in this single quarter. So, that certainly is adding and is sustainable for us. The interest that we have on the digital side of the house, so I referenced 25 new clients for our full suite digital banking platform, that is continuing to grow and we are continuing to see strong demand in that area. So, and I could list a number of other products, but those are kind of the headlines as far as where a lot of the product growth is coming from and that growth is still out there. The pipeline is solid. I mentioned the sales team is running well ahead now this year and not just ahead of what their quota was, but ahead of last year's record pace. That is the important point here, they are running ahead of last year's record sales year. So a lot happening as far as new product sales and then Kevin, whatever are you going to add to that?

[Kevin Williams, Chief Financial Officer and Treasurer]

The only thing I would add to that is if you remember last fiscal year we signed 57 new core customers. We signed 22 new core customers this year-to-date. So we are keeping pretty much on a pace of one a week actually for the last couple of years, as we continue to convert and migrate those customers over to our platforms that is going to continue to drive both core complimentary revenue. And as Dave mentioned this on his comments, we continue to see a very solid move of our existing in-house customers from in-house to outsourcing, which is just very nice built in organic revenue as we move those customers over and we get a larger wallet share out of those institutions.

[Vasundhara Govil, Keefe Bruyette & Woods]

Great, thanks, that is very helpful. And just a quick follow-up on the sort of M&A environment that we are seeing in the banking industry. There has been a couple of merger of equals where I guess you guys are the core provider, for one of the parties and these are potentially larger than average client relationships for you. And I just wanted to get a sense for how you were thinking about your competitive positioning about winning these conversions or if you think, so your competitors may have a better hand given that they are more dominant players up market?

[David Foss, President and Chief Executive Officer]

Sure. Well you know it is no secret that some of our competitors have more dominant position in the upper tiers of the market. But we are well positioned; we have talked many times on these calls about all the solutions that we have been rolling out to serve larger financial institutions. The thing that I would encourage you to keep in mind though and I feel great about our position with some of these deals that are happening right now. But you know, the thing to keep in mind is these days the core represents certainly a nice piece of the business. But because so many of our solutions are offered through the Profit Stars candles today, meaning they are provided regardless of what the core solution is. It is possible for us these days to lose on the core side and still have it be a win for Jack Henry. Because those larger institutions oftentimes are in-house rather than hosted and so they are not paying nearly the rate of the hosted customer, you know on our private cloud. And if they retain some of the complimentary solutions which are hosted in private cloud at Jack Henry, now that can end up being a real win for Jack Henry. So we are in several of those deals and we are well positioned to win those deals. But as you point out, we are not the dominant player in that space. And so if we were to lose on the core side, there is still a tremendous amount of opportunity for Jack Henry in the non-core piece of business with those customers.

[Kevin Williams, Chief Financial Officer and Treasurer]

And just a reminder of those customers are typically in-house customers. So if we would have to lose them we are losing in-house maintenance and none of those customers represent more than 1% of our revenue.

[Vasundhara Govil, Keefe Bruyette & Woods]

Got it. Thanks for the color.

[Operator]

Thank you. Our next question comes from Kartik Mehta with Northcoast Research.

[Kartik Mehta, Northcoast Research]

Hey, good morning Dave and Kevin. Dave I wanted to just ask a little bit about a migration you are doing on your debit and credit customers. And I think last time you talked about retention was really good. You are not seeing any leakage of clients. I just wanted to find out you know where that stood and where you stand in terms of net clients as you roll out this new platform.

[David Foss, President and Chief Executive Officer]

Yes. So it is a good question Kartik . So I didn't want to give the impression on the last call and I certainly wouldn't on this call that we haven't lost any customers. But the good news is, I think every one of them, I maybe shouldn't say every, but the vast majority that have gone away, and there aren't that many, have been because they were acquired along the way. So we have had 30 or so customers 40 somewhere in that range that have been acquired or merged along the way. And so, you know, when they get acquired, sometimes their business is combined with somebody else, if it is a Jack Henry customer, they potentially go to a different platform. So we have lost a few along the way because of mergers, but I don't know of more than a handful that we have lost, because they have decided that you are going to put us through a conversion we ought to maybe look at other solutions, let's look at going someplace else. So, that has been a very small number, but there have been some as I mentioned, have been lost because of M&A. But, I would offset that with all of these new customers that we have signed, I have headlined in here the 73 are live already and we have a number in the queue, 73 that we are not paying Jack Henry of anything before on the debit processing side, before - this new platform.

[Kartik Mehta, Northcoast Research]

And Kevin, I know the savings from this platform you had articulated in the past a little bit and I was wondering as you get more into it, have your thoughts changed at all as to the dollar amounts you can save from this conversion?

[Kevin Williams, Chief Financial Officer and Treasurer]

No. I mean, the dollar amounts I gave previously Kartik, I think are still pretty solid. I think there is still some potential upside to those numbers. You know, we always try to be somewhat conservative and cautious when we give numbers like that. The numbers I gave for savings that we are going to see as we shut the two platforms down in Q4 this year and Q2 of next year. Obviously as Dave mentioned, we are still on course to get all of our core customers off in Q4 and then the remaining non-core customers off the second platform off by the end of Q2. So, we will see those nice costs and obviously if you kind of take those costs savings that we are going to see that I have provided in the past and just throw those into this year's quarter, obviously the margins look a whole lot better.

[Kartik Mehta, Northcoast Research]

And then finally, Kevin, I just want to make sure on the deconversion fees, as of now from what you can see, you would expect second half of this fiscal year to be the same as second half of last fiscal year?

[Kevin Williams, Chief Financial Officer and Treasurer]

That is what it looks like right now.

[Kartik Mehta, Northcoast Research]

Okay. Thank you very much.

[Kevin Williams, Chief Financial Officer and Treasurer]

Yes.

[Operator]

Thank you. Our next question comes from John Davis with Raymond James.

[John Davis, Raymond James]

Hey, good morning, guys. David, maybe I want to start out on the bookings number, I think 18% is pretty robust, but also trying to remember last time you gave that on kind of a quarterly basis. So, how does that compare with either last quarter or last year and then how long does it take for those bookings to turn into revenue typically?

[David Foss, President and Chief Executive Officer]

Okay. I can't give you an accurate number as far as last quarter, but you know my key point there was we are up 18% year-to-date over last year at this time. So again, it is not a comparison to quota, it is a comparison to actual performance last year by the sales team bookings up 18%. I can't give you an accurate number as compared to last quarter. Last quarter was strong, but the second quarter combined with the first quarter produced this really outstanding run rate for the half of the year. As far as when things translate to revenue, because today most of the solutions that we sign are – we are delivering as a hosted solution regardless of whether it is core or any of the other things we deliver, it is rare for us anymore to sell a licensed copy of software. And so in every one of those instances then where it is hosted in the cloud delivery, that revenue is layered in overtime. So, with core conversion usually you start to see processing revenue a year or so after we signed the deal. Payments, contract you can start to see revenue often times within a quarter or two. So, it just depends on what the solution is, what the timing is, and sometimes that is driven by us, you know we need X amount of time in order to complete the conversion. Sometimes it is driven by the financial institution because they need to do training and make sure everybody's ready for whatever it is that we are delivering. So, it is all over the Board as far as when things get layered in when the revenue starts to produce. But I think the key point in that is today it is rare for us to see it in the same quarter or the next quarter, because it is so rare for us to sell a licensed version of the solution.

[John Davis, Raymond James]

Okay, that is helpful. And then maybe just quickly dive in a little bit on payments growth and - of acceleration. It was North of 10% this quarter and you called out some of the, the new wins there, but how should we think about that kind of going forward? Keep waiting for it to come back down a little bit as comps get tougher but it is kind of growing faster. So you know how should we think about that going forward? Is this a business that can grow double-digits in the near-term or kind of any changes to the longer term outlook of that business.

[Kevin Williams, Chief Financial Officer and Treasurer]

So John this is Kevin. I mean, we have talked about this many times, if you think back three to four years ago when we started this migration, we were losing quite a few customers off our debit platform, because we did not have the technology they wanted. When we made this move, little over two years ago and came out and told the world that we were going to make this move, we kind of stopped the bleeding, but we were still losing customers. We had customers that had already signed to leave at the time. So about a year ago, we finally - totally stopped the bleeding. We started signing a few new customers as David mentioned. We signed quite a few new customers last year. We continue to sign them this year and we are not losing those customers now. So the growth that we are seeing right now, and I predicted this a year ago and I was very hesitant to do it, I think as accelerated payments growth is going to - we are going to see that for the foreseeable future because of the new wins that we are having. And obviously the new wins that Dave mentioned, we signed this quarter, none of those are even producing any revenue yet.

[John Davis, Raymond James]

Got you. And then quickly just on the revenue guide for the full-year, I think about a 70 basis point tailwind from the new deal, even if I back that out, it looks like you guys are calling for deceleration in the back half of the year. Despite, I think what would be easier comps, I know last year we had a lot of accounting related noise that messed up this kind of the quarterly cadence - from an accounting perspective or otherwise.

[David Foss, President and Chief Executive Officer]

Well John, we still have the same accounting noise, because remember under 606, Q1 is going to continue to be a very strong quarter, because of all the software's and service that we sell in subscription software. We recognize 100% of that revenue in Q1. So I mean Q2 was actually strong enough. Otherwise going to be Q3 and Q4 will be a little slower growth in the first half just because Q1 will continue to be our strongest quarter under the new 606 rules.

[John Davis, Raymond James]

Okay. Alright, thanks guys.

[David Foss, President and Chief Executive Officer]

Yep.

[Operator]

Thank you. Our next question comes from Joseph Foresi with Cantor Fitzgerald.

[Joseph Foresi, Cantor Fitzgerald Securities]

Hi. My first question is just around the competitive environment. Obviously your competitors are going through some massive M&A at this point. What are you seeing from a day-to-day win perspective? How distracted do you think those players are and is this creating an environment where you are allowed to take you know more market share?

[David Foss, President and Chief Executive Officer]

It is a good question, Joe. I have been hesitant on these calls in the past to say that our major competitors are so distracted that that is going to create a whole bunch of opportunity for Jack Henry. I have had a number of people in the industry suggest that that is happening, it is probably going to happen. Our win rates is running right now on the core side at a little over one new core deal per week, and we have been at that pace for about two and a half years now. We see a lot of interest in Jack Henry solutions as I mentioned before, sales are up overall. Can I attribute that to our competitors taking their eye off the ball? I don't know that I'm prepared to do that yet. But we are certainly engaged in a lot of deals right now and the pace of activity with Jack Henry is, I don't know if I can say at an all time high, but it is probably about an all time high right now as far as interest in Jack Henry solutions and the pace of interest that we see out there in the market. And I'm not ready to describe that to anything specific happening with our competitors, I just know there is a lot of interest in Jack Henry technology solutions.

[Joseph Foresi, Cantor Fitzgerald Securities]

Got it. And then you talked a little bit about, and we have seen some solid results from some of the upgrade of your offerings, that is my read on it. And I'm wondering, do you feel like you have got the full suite in place now and that maybe that upgrade, I'm just trying to get at what is causing sort of a pickup over the last 12 months to 24 months in deal wins. Do you feel like you did see improvement in your suite of offerings and that some of the card upgrades or product upgrades on the card side are leading to it? I'm just trying to get a sense again of what has caused the uptick.

[David Foss, President and Chief Executive Officer]

Yes, I do. I think it is a solid observation. So, we have spent a lot of time, particularly in the last year and a half or two years talking about all these new technology solutions we have rolled out, treasury management and the Banno suite and digital suite and our enterprise risk management solution. I just today talked about I think anywhere, we have been in the market almost a year, but we haven't talked about it on this call yet, because we wanted to make sure that everything proved out. And so, yes, I think you are right. It is a combination of new look and feel, new user experience for some of the solutions that we have had for awhile. Then we rolled out a number of new technologies from the ground up, new technology to our customers and prospects that we just didn't have two or three years ago. And so I think you are on the right track there with the idea that it is kind of a refreshed and a much broader suite than we had previously. And then you add to that some of the acquisitions that we have done recently. So, we haven't done - the recollections you have seen us doing in the last two, three years haven't been needle movers as far as revenue is concerned, but they have definitely been needle movers from a strategic point of view. So, we have created this very robust commercial lending center suite now that is getting a lot of attention. I didn't even talk about it on today's call, but I have talked about it many times in past. So, that was a very intentional move of - few - little acquisitions that we put together to create that new solution. The Geezeo acquisition, Kevin highlighted the revenue contribution on the call earlier. That is not a needle mover for Jack Henry, but from a strategy point of view, it definitely makes us a differentiated solution with our digital suite. So, I think the combination of all of those things has positioned us well. The challenge when you are in our business is, you are never done. You constantly have to be re-examining your solutions and refreshing and trying to find that opportunity to differentiate from everybody else. But, I feel great about how we are position today with the things that we have been talking about on these calls for the last couple of years.

[Kevin Williams, Chief Financial Officer and Treasurer]

And one of the things there Joe is, again, I think we have very clear focus. We go to the market primary with two flagship products, SilverLake on the bank side and [X] (Ph) from the credit side, and those are the products that we spend our R&D dollars on. And you know, SilverLake was ticked last year by [indiscernible] is the best core system for banks in the $1 billion to $50 billion space. So, when you get that reputation and you have the core products to wrap all that new technology that Dave mentioned around those things. The combination of all that I think is why we continue to win and continue to win in the market.

[Joseph Foresi, Cantor Fitzgerald Securities]

Got it. And then the last one for me, and Kevin, I'm glad you said something. It is for you. We have been waiting for the margins to expand and free cash flow to pick up, due to the sunset of the products. I know you said that it is a next year event. Can you just give us an update on your level of confidence that we are finally going to see that next year and maybe a little bit of detail around why you have that level of confidence. Thanks.

[Kevin Williams, Chief Financial Officer and Treasurer]

Well, I mean, Joe obviously we know what our cost is in the platforms that we are running on those for our debit card systems today. We know the personnel that will be going away, so we know what those hard dollar costs are and there is additional cost throughout the organization that we will also be able to eliminate. So for the numbers that I gave and the numbers that are going to go away kind of in two big tranches in Q4 this year and Q2 of next year, I’m extremely confident that those costs will go away and we will see very nice increase in margins in both Q1 and Q3 of the next fiscal year.

[Joseph Foresi, Cantor Fitzgerald Securities]

Alright. Thank you.

[Kevin Williams, Chief Financial Officer and Treasurer]

Yep.

[Operator]

Thank you. Our next question comes from Peter Heckmann with Davidson.

[Peter Heckmann, D.A. Davidson]

Good morning gentlemen. Thanks for taking the question. Could you talk about any regulatory deadlines including Cecil that maybe playing into some of the bookings and anything else that is on the radar that needs to act as a catalyst for some upgrade.

[David Foss, President and Chief Executive Officer]

Yes. Good question Peter. Two years ago or a year and a half ago or whenever it was Cecil was definitely a catalyst for us and I was excited to talk about Cecil back then. Today, although we had the first wave, I guess January 1st went into effect. For the second wave, the timeline has been extended and so Cecil is definitely not a driver right now. Everybody who needed it by January 1, has it. And for those that needed it in the second wave, the smaller institutions, they have been given an extra reprieve. So there is not much action right now when it comes to Cecil. And beyond that no major regulatory change that is driving revenue for us or any of our competitors, you know, there is just not a lot happening there that is producing revenue. Obviously we have a lot of expense around regulation. We are constantly having to ensure that our systems comply, but no revenue drivers right now being fueled by regulatory change.

[Peter Heckmann, D.A. Davidson]

Got it. And then just another question on the commercial lending, where does that product sit in the competitive landscape? What are some of the differentiating aspects more on the origination or management reporting side?

[David Foss, President and Chief Executive Officer]

That is the unique piece of that solution is that it does all of those. So it is designed to be an online commercial lending solution. Meaning the borrower can apply for a commercial loan online, all electronic. So they don't have to drop off paper forms at the financial institution. They can do everything electronic. It has a quick decision engine that came through one of the small acquisitions that we did. So if the bank chooses, they can automate the decision process. So for a smaller commercial loan, the borrower can get an automated decision back in an hour or 30 minutes or whatever the bank sets. For larger loans, they would normally send it to a loan committee or at least some more formal review, but still can provide the response to online to the commercial borrower. And then for the bank. So it is not just the front end origination of the loan to the borrower, it is for the bank to manage the loan through the life of the loan. So as requirements come up, for example, on an annual basis for the banker to receive financial statements and review and approve those financial statements. That is all automated into the same platform. So, the backend functionality at the bank is there as well. So, it is completely differentiated as compared to any other solution out there that is doing online commercial lending offering. So, people who kind of dig into it, commercial lenders who dig into it are pretty impressed and love the solution. And the Chief Loan Officer for the financial institution likes it, because it is a tool that allows the lender to be more efficient and spend more time with their clients and less time administering or dealing with [administrative] (Ph). So, being widely tailed by lenders as a productivity tool as well.

[Peter Heckmann, D.A. Davidson]

Great. I appreciate it.

[Operator]

Thank you. Our next question comes from Glenn Greene with Oppenheimer.

[Glenn Greene, Oppenheimer]

Hello. Thanks. Hey, good morning Dave and Kevin.

[David Foss, President and Chief Executive Officer]

Good morning.

[Glenn Greene, Oppenheimer]

I guess just the first question, you sort of alluded to the number of competitive takeaways. I think it was 17 in the quarter. Can you just sort of - first of all, what was it year-to-date and can you sort of frame that relative to a typical year? It strikes me as an acceleration, like improved competitive position for you.

[David Foss, President and Chief Executive Officer]

Well for the quarter it was Glen. But, if you look at the first half of the year, so that is 23 or 24 for the first half of the year, which is why I said earlier, our pace for the last two and a half years has been one a week, and we are continuing on that pace. So, you know sometimes the thing about core decisions is they can lapse over into the next quarter, so we didn't have as many as normal in the first quarter, but a lot of those were really close to signing, they fell into the second quarter, so it kind of evens out. So, I'm very comfortable saying we are on the same pace, which is leading the industry by far, the same pace that we have been on for the last two and a half years or so, which is about one new core customer per week.

[Glenn Greene, Oppenheimer]

Okay. And then to an earlier question, you alluded to sort of I think the pace of demand that at an all time high, I guess the question is why, you could sort of allude to a number of factors, market environment, you alluded to a better product suite. I don't think you want to go there, but maybe a better competitive situation given your competitors may be distracted. Is there any way to sort of frame it and why you are seeing sort of an all time pace with demand?

[David Foss, President and Chief Executive Officer]

Yes, I wish I could give you an absolute answer, Glenn. I think it is a combination of several of those things, as I highlighted earlier on the call. I think these new solutions that we have rolled out here in the past two, three years are getting a lot of attention, a lot of demand, the payments platform, the treasure management solution, the Banno Digital suite, commercial lending center suite, enterprise risk, all these things that we have been talking about that we have rolled out in the last couple of years are creating demand not only for the solutions, but they are creating kind of a refreshed view objective - in the space as a leader when it comes to new technology and doing innovative things with technology. I think it is a combination of a variety of things and when you are winning at the pace that we have been on the core side, people hear about that. And so, then there is some of that chatter that happens. How come these guys are winning these core deals? They must be doing something right. And I think it is a combination of all those things coming together and right now, we don't see that slowing down.

[Glenn Greene, Oppenheimer]

Okay. And then Kevin, I think you said outsourcing grew 16% in the quarter, my guess is that new deals sort of converting on, but is sort of mid-teens is sustainable?

[Kevin Williams, Chief Financial Officer and Treasurer]

Well, I don't know if mid-teens is sustainable Glenn, but I mean, if you look back over the last two years, our outsourcing has been growing at the 12% to 13% range. So, I mean, it popped up a little bit, but I think in that 12% to 14% is very sustainable.

[Glenn Greene, Oppenheimer]

Okay. thanks guys.

[David Foss, President and Chief Executive Officer]

Yep.

[Operator]

Thank you. Our next question comes from David Koning with Baird.

[David Koning, Robert W. Baird]

Hey guys, great job. I just got a few numbers questions, I guess just to make sure, I think you said before there is about 16 million cost savings once you kind of move off the old platform and I think you said a third and fiscal Q1 of 2021, so if we think that 16 million, it is kind of four million per quarter, a third of that four million comes off in fiscal Q1 and then the full run rate is off by Q3 is that still the right way to think of it?

[Kevin Williams, Chief Financial Officer and Treasurer]

Yes.

[David Koning, Robert W. Baird]

Okay, good. And then the second one is just free cash flow. The pattern changes quarter, like you had an outstanding cash flow, usually fiscal Q1 and Q4 are really strong and Q2 and Q3 are weak just normal seasonal patterns, but Q2 was like really strong this quarter. Is that a new pattern or did something change like just for just for this time?

[Kevin Williams, Chief Financial Officer and Treasurer]

Well, a couple of things Dave. I mean If you look over historical numbers, you are absolutely right. We have always been extremely strong in Q1 and Q4 because of our annual maintenance billings, but as our business continues to shift to more, not only recurring, but more of a monthly billing and a cash inflow from our private cloud and our outsourcing and also for our payments, then our Q2 and Q3 are no longer cash burning quarters. They are both starting to generate nice cast. So it is starting to level out a little bit. And to that point, if you look back our trailing 12 months, we are just a little over 99% conversion of net income to free cash flow. So we are getting right back up to that 100%. I think, again when we get into FY21, I think our conversion rate is going to be well back up by 100% conversion, as we are able to take those additional costs out.

[David Koning, Robert W. Baird]

Okay, great. And just one last quick one. You know, last year the organic growth pattern starting in Q1 went eight, seven, five, four. This year, now it seems more like, I think Q1 was nine, Q2 was eight and it kind of feels like the rest of the year is going to be right around eight. So it is a much more stable year, I know Q1 is a little is a little higher still, but is this year more than normal now, Q1 a little higher and then the rest of you are about the same compared to last year where it kind of decelerated through the year?

[Kevin Williams, Chief Financial Officer and Treasurer]

You are exactly on point. So the rest of year is going to be bright at 8% and we are going to finish the year gap like I said over 9% and non-GAAP a little over 8% for the year.

[David Koning, Robert W. Baird]

Now it is really good. Thank you.

[Kevin Williams, Chief Financial Officer and Treasurer]

Yep.

[Operator]

Thank you. Our next question comes from Brett Huff with Stephens.

[Brett Huff, Stephens, Inc.]

Good morning Kevin and Dave.

[David Foss, President and Chief Executive Officer]

Good morning.

[Kevin Williams, Chief Financial Officer and Treasurer]

Good morning Brett.

[Brett Huff, Stephens, Inc.]

Three questions me, number one. Dave, you mentioned the treasury and cash management solution that is kind of a favorite of mine to understand because it is such a new product and such a fragmented market. Any data on the wins there or any uptick or downtick or kind of how is the interest in progress on that one?

[David Foss, President and Chief Executive Officer]

Sure. We signed seven a treasury in the quarter. We have 36 lives now. And I didn't bring the statistics with me. I just got the numbers for a number of businesses and number of users, live on the platform, it is impressive, the number of businesses and the end users at those businesses using the platform. But 36 institutions live today.

[Brett Huff, Stephens, Inc.]

That is helpful. And then to the point of moving up market, you kind of framed this up before and talked about the card business and how that product was needed to kind of service some of the larger banks. I think the same thing with the cash management. I think it is sort of similar with the commercial lending. I know there is a couple of others I'm probably missing. But as we sort of arm ourselves to compete more effectively as we move up market, how is the conversation going with those bigger banks, be they banks for whom you do ProfitStars things and are trying to sell them a core off a competitor or maybe you are just going in cold to a bank, whether you don't have much relationship at all? And this is also framed in the context of these couple of big deals that are mergers or M&A that, how all those conversations going and what are you hearing from those banks? Where are you scoring points and where is the negotiation still sort of ongoing?

[David Foss, President and Chief Executive Officer]

I'm not going to talk specifically about any negotiations. But just in general, I think the banks of that size, it has been interesting a lot of those conversations because there is a great deal of dissatisfaction, in fact, more than I realized. I have been in this business 34-years. A great deal of dissatisfaction among the banks of those size, around the topics of integration, and the ease of connecting to third-parties, whether it be through a traditional tool or an API set. There is a lot of frustration, a lot of demand among those customers. So that bodes well for Jack Henry. We have a great track record of open connectivity, developing tools that really make life easier for the institution, put that together with all of these new solutions that we have been rolling out that are specifically designed for larger institutions. We are scoring a lot of points there. Now, it is no secret, and I referenced it earlier on the call, you know if you don't have a track-record in that space, say about $50 billion in assets, that is a difficult decision for somebody to say, okay, I think I will be the first one to partner with these guys to go into that space on the core side. So there are ongoing conversations, we are scoring points, but then there are things that work against us and we are just going to continue hammering away at it. But for Jack Henry, we are committed to moving up market and you have seen us make a lot of moves here in the past a few years, and that we are going to continue moving in that direction. But you know, we don't have to be the dominant player among the $100 billion banks to be successful. We have lots of runway here doing what we are doing and have been doing kind of slowly but surely growing up into that space.

[Brett Huff, Stephens, Inc.]

That's helpful. And then last one for me, just this whole Mitek, Wells Fargo, USAA thing that is going on, it is hard for us to kind of figure out when you pull that string, who might get smeared in that. Does that relate to you all in any way or how do we think about that? Anything to worry about there?

[David Foss, President and Chief Executive Officer]

I don't know that there is anything to worry about. It potentially affects all of us that are in this space that offer imaging solutions, whether it be image viewing through an internet or digital banking solution, whether it be capturing text and converting them to images. All of those technologies, which all of us that are major players in the space offer those technologies, those are - potentially come into play for all of us. But at this stage of the game, I wouldn't categorize it as something to worry about, but it certainly is something that we have our eyes on.

[Brett Huff, Stephens, Inc.]

Great. Thanks for the time guys. I appreciate it.

[David Foss, President and Chief Executive Officer]

You bet.

[Operator]

Thank you. Our next question comes from David Togut with Evercore ISI.

[David Togut, Evercore ISI]

Thank you. Good morning. As you sit down with the bank and credit union CEOs, can you comment on their 2020 IT budget growth outlook, top spending priorities and then any nuance you might offer, let's say between larger banks and smaller banks would be greatly appreciated. Thank you.

[David Foss, President and Chief Executive Officer]

Sure Dave. I will get survey information here within the next month or so I think. There are a couple of surveys that we depend on every year. So, everything I will share with you is anecdotal. But the thing that I can say is, in the fall of each year, I think you know, I host a CEO conference on the banking side and separate one credit union side. And so, those conversations, we usually have, you know, 200, 300 CEOs at those meetings, those conversations often we ended up talking about the future for spending, their demand for technology and so on. And I can tell you as of this late fall, just before the holiday season, CEO optimism and their commitment to continue to spend was still there. I mean in particular things like digital. So that is why I think a lot of demand we have talked about here around digital, any of them are trying to figure out how to modernize the consumer experience for their consumers and what are the tools they can use to monetize that. So that brings into play the online commercial lending center suite we talked about, it brings into play the Banno suite that we talked about. So CEO optimism continues to be high. They have kind of adjusted to the interest rate environment that they live in. They are not happy about it, but they have adjusted to it and we don't see that slowing down. And that is anecdotal. I will get more formal survey information here certainly before the next earnings call, but I don't expect a major shifts just based on what I'm hearing from the CEOs talk to.

[David Togut, Evercore ISI]

I appreciate that. And then just any nuance or kind of anecdotal information from your conversations between let's say mid to large size banks and smaller banks, you had good traction with treasury management in the up market space. So when you speak to some of the larger banks are there any difference in terms of spending priorities? You know, demand picture for 2020?

[David Foss, President and Chief Executive Officer]

Yes. It is a good question. I think for me the only nuance there would be the larger banks are intensely focused on their efficiency ratio and are looking for what are those tools that can help drive their efficiency ratio up. The smaller banks, the efficiency ratio is a topic, but they are not as intensely focused, not as ready to go spend money just to improve efficiency ratio with larger banks that is absolutely a key topic for them. That is probably the major difference that I see in the conversations.

[David Togut, Evercore ISI]

Understood. Thank you very much.

[David Foss, President and Chief Executive Officer]

Thank you David.

[Operator]

Thank you. [Operator Instructions] Our next question comes from [indiscernible] with Wells Fargo.

[Unidentified Analyst]

Hi. Good morning. And thank you for taking my question. I was hoping you could comment on the long-term margin profile of the overall business given some of the momentum you have generated in some newer solutions that may not have been as material contributors in the past. So wondering if we look past 2021 and the elimination of some of the redundant card platform fees if the revenue mix changes. Do you envision any material changes to the overall margin profile or any seasonal patterns?

[Kevin Williams, Chief Financial Officer and Treasurer]

Well, so this is Kevin. I don't think you are going to see much seasonal change because I mean we are 86% recurring revenue now and that is only going to get bigger. Payments continue to make up about 36% of our revenue. Our outsourcing and private cloud offerings are about 25% or 26% of our revenue and the balance of the recurring revenue is in-house maintenance, which is slowly shifting over to outsourcing, which those margins continue to improve a little bit as our payments business continues to get larger. So as I said in my opening comments, once we get through the first half of 2021 and get those additional costs taken out, we are going to go back to our more traditional margins and at that point we will go back to getting some traditional margin expansion of 50 to a 100 bips a year for the foreseeable future.

[Unidentified Analyst]

Great. I appreciate the color. Thank you.

[Kevin Williams, Chief Financial Officer and Treasurer]

Yep.

[Operator]

Thank you. I am showing no further questions in the queue at this time. I would now like to turn the call back over to management for any further remarks.

[David Foss, President and Chief Executive Officer]

Thanks Sherrie. First of all, I would like to point out that, once again we will be holding our Annual Analyst Day in the Dallas, Texas area on Monday, May 11th and to Brett Huff’s point something we will have the Mini Tech Fair again. So, some of the products that we will be highlighting there would be our digital solutions, the commercial lending platform, our payments platform that we have spent so much time talking about and treasury and cash management. So, invitations will be going out in the next few weeks for that event. We hope many of you on this call and others can make it to the event this year. Now, we are pleased with results from our ongoing operations and the efforts of all of our associates to take care of our customers. Our executives, managers and all of our associates continue to focus on what is best for our customers and our shareholders. I want to thank you again for joining us today. And Sherrie, will you please now provide the playback number.

[Operator]

Yes. The playback number will be 800-585-8367 with conference ID number 8218009. Again, that's 800-585-8367, conference ID number, 8218009. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.