Jack Henry & Associates - Earnings Call - Q4 2020

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the Jack Henry & Associates Fourth Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Kevin Williams. Thank you. Please go ahead, sir.

Kevin Williams (CFO)

Thank you, Gigi. Good morning. Thank you for joining us for the Jack Henry & Associates Fourth Quarter and Fiscal Year End 2020 Earnings Call. I'm Kevin Williams, CFO and Treasurer, and on the call with me today is David Foss, our President and CEO. In just a minute, I'll turn the call over to Dave so he can provide some of his thoughts about the state of our business, the performance for the quarter and fiscal year, as well as some comments relating to the impacts of COVID-19 and some other key initiatives that we have in place, and then after that, I will provide some additional thoughts and comments regarding the press release we put out yesterday after market close and provide comments regarding our guidance for our fiscal year 2021 provided in the release, and then open the lines for Q&A.

First, I need to remind you that this call includes certain forward-looking statements, including remarks or responses to questions concerning future expectations, events, objectives, strategies, trends, or results. Like any statement about the future, these are subject to a number of factors that could cause actual results or events to differ materially from those which we anticipate due to a number of risks and uncertainties. The company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our Form 10-K entitled Risk Factors and Forward-Looking Statements. On this call, we will discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income. The reconciliations for historical non-GAAP financial measures can be found in yesterday's press release. With that, I will now turn the call over to Dave.

David Foss (CEO)

Thank you, Kevin. Good morning, everyone. We're pleased to report another strong quarter of revenue and operating income growth. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our fourth quarter and for the entire fiscal year, particularly in light of the challenges posed by conducting business in the midst of a global pandemic. Before we get into the discussion of our results for the quarter and the full year, I think it's appropriate to review some of the ongoing impacts we're seeing as a result of the pandemic. We remain extremely thankful for the fact that very few of our almost 7,000 employees or their family members have been directly affected by the COVID-19 virus.

Our HR and benefits teams are working closely with all the groups around our company to be sure anyone who is affected is receiving the care and accommodations they require. We continue to operate with well over 90% of our employees working full-time remote and have recently extended our return-to-office date to January 4th of next year. We extended that date for a couple of key reasons. First, we have a strong commitment at Jack Henry to put our associates first as we make key decisions about how we run the company. With all the concerns expressed by our teams about returning to an office environment and with so many members of the Jack Henry team struggling to make plans for their school-aged children in the fall, we decided to remove the worry for our employees by extending the date.

And second, we have had great success in all areas of our business adapting to a work-from-home status, and we see no reason why that can't and won't continue. So the decision was easier than you might otherwise think. Speaking of our success working from home, we are now several months into working with a modified set of processes for many of our groups. We are routinely doing sales presentations and executing contracts with no on-site presence at the customer location. We've completed many 100% remote implementations with great success, including several full-core conversions. And our customer service teams continue to deliver outstanding service through remote channels while keeping our customer satisfaction ratings at an even higher level than they were before the pandemic. I continue to be amazed and impressed by the adaptability and commitment of our team members throughout our organization.

They continue to execute in this new environment with the success of the customer always foremost in their mind. As I mentioned on the last call, many of you have commented in the past about the unique culture at Jack Henry, a culture built on the do-the-right-thing-and-do-whatever-it-takes mantra. Never has that culture been on display in a more meaningful way than what we've witnessed during this pandemic. I'm extremely proud of our team and their ongoing commitment to our customers and our company. With that, let's shift our focus to a look at our performance for the quarter we completed in June. For the fourth quarter of fiscal 2020, total revenue increased 4% for the quarter and increased 4% on a non-GAAP basis. Deconversion fees were up just slightly over the prior year quarter but down significantly as compared to our fiscal third quarter.

Turning to the segments, we had a solid quarter in the core segment of our business. Revenue increased by 4% for the quarter and also increased by 4% on a non-GAAP basis. Our payments segment also performed well, posting a 3% increase in revenue this quarter and a 3% increase on a non-GAAP basis. We had a very strong quarter in our complementary solutions businesses with a 9% increase in revenue this quarter and a 6% increase on a non-GAAP basis. As I highlighted in our press release, despite the obvious COVID-19-related challenges for the sales team, June was the strongest sales month in the history of the company, and the fourth quarter was our strongest sales quarter ever. All three sales groups exceeded their quota for the full year and for the quarter.

This is remarkable to me because we made no adjustments to quotas for our sales teams as a result of any COVID-19 expected impacts. In the fourth fiscal quarter, we booked seven competitive core takeaways and nine deals to move existing in-house customers to our Private Cloud environment. Several of our complementary offerings saw very strong demand in the quarter, with, as you might guess, our digital suite leading the pack. We signed 53 new clients to our Banno Digital Platform in the quarter, and we signed 13 new clients to our new card processing solution. For the full year, then, we signed 43 competitive core takeaways, with six of them greater than a billion in assets and six to de novo banks. Additionally, we signed 45 contracts to move in-house core clients to our Private Cloud, 167 new Banno digital customers, and 81 new clients for our card processing solution.

Of course, we signed a myriad of other contracts for many of our other solutions as well, but it's important to note that almost all of these contracts represent long-term recurring revenue commitments to Jack Henry for a wide variety of our solutions. Speaking of our new card processing platform, on the last call, I pointed out that prior to the onset of COVID-19, we were poised to wrap the migration of our core clients by June 30th and had all 136 of those clients scheduled to convert in April, May, and June. In early April, however, several of the clients on those lists asked us to delay the schedule because they had minimized their employee presence in their offices and didn't want to introduce any new payment solutions while their employees and customers were working remote.

As disappointed as we were to introduce a delay in a project that has been moving along so well, we determined it was definitely the right thing to do. In July, however, we resumed the migration process and now expect to have all of our core customers migrated by the end of the current quarter and all of our non-core clients completed by the end of our third fiscal quarter. We are prepared and anxious to wrap these migrations and expect no further delays from our customers. One topic I haven't discussed previously on these calls is all the work we've been doing in the area of diversity and inclusion for the past several years.

In the spirit of doing the right thing and attempting to always put our associates first, we formally launched our D&I program more than two years ago with a variety of training initiatives followed by the launch of our first Business Innovation Group. We added a full-time diversity leader to our team more than a year ago, and we now support five very active and successful Business Innovation Groups within the company. Our D&I team provides ongoing training, they facilitate panel discussions, and work with the Jack Henry leadership team to ensure that our work environment provides a safe space for our employees to thrive. Given all the social unrest in our country today, I am particularly grateful to our team for the outstanding progress and long list of successes we've seen with this program so far.

As you have undoubtedly noted from the press release, we have decided that we will stick with past practice and provide guidance for the new fiscal year at the conclusion of today's call. As we've discussed in the past, although our business model is not impervious to impacts from the current economic environment, it is resistant to significant swings caused by economic disruption. After much discussion and despite the obvious challenges in trying to predict the future in the midst of a global pandemic, we believe we have enough information to provide reasonable insights and assumptions, and sharing that information with you today is the right thing to do. As I reflect back on fiscal 2020, even with the extraordinary challenges in the environment at the close of our fiscal year, I view it as a very good year for our company.

We have made great strides with our diversity and inclusion initiatives, and our employee engagement scores remain very high. Our levels of customer engagement and customer satisfaction scores are also very high. Our sales teams are performing extremely well and have positioned us for another successful year of selling, and overall demand for Jack Henry technology solutions remains high in all segments of our business. As we move forward, we will continue to implement minor changes to our delivery and service models, and we have every expectation that we will end next calendar year with a greater percentage of full-time work-from-home employees than we had before the pandemic. We have a commitment to doing the right thing for our constituents that we believe will serve us well as we adjust to the new normal.

We will continue with our disciplined approach to running the company and expect that approach to help provide stability for our employees, customers, and shareholders. As we begin the new fiscal year, I continue to be very optimistic about our future. With that, I'll turn it over to Kevin for some detail on the numbers.

Kevin Williams (CFO)

Thanks, Dave. I appreciate it. The service and support line of revenue, which is made up of two product groups, which are outsourcing and cloud and product delivery services, increased 3% compared to the prior year quarter. Outsourcing cloud services within our Private Cloud were, again, the big driver in this line of revenue, with an increase of 13% compared to the same quarter year ago and an increase of 14% for the entire fiscal year. The headwind on this line of revenue in the quarter were decreases within the product delivery and services. License, hardware, implementation services, and pass-through costs, primarily related to billing for our implementation team's travel, decreased a total of $7.4 million compared to the prior year quarter. This was partially offset by a small increase in deconversion fees, as Dave pointed out, which is included in this line during the quarter of $845,000.

The processing line of revenue, which is our remittance and card and our transactional and digital lines of revenue, grew 7% to the prior year quarter and increased 9% for the fiscal year. Within this line, though, remittance and card processing only grew a little over 2% in the quarter compared to last year due to the impacts of COVID-19 in Q4 of this fiscal year. Which, for comparison, remittance and card was growing 9% through the first three quarters of the year compared to the prior year, compared to only 2% for Q4. However, this headwind was mostly offset by continued strong growth in our transactional and digital revenue during the quarter, which was impacted positively by the CARES Act and related legislative changes and grew 16% for the fiscal year.

Total revenue was up 4% for the quarter compared to last year on both a GAAP and non-GAAP basis. Our cost of revenue was up 6% compared to last year's fourth quarter, but on a sequential basis compared to Q3, cost of revenue was actually down due primarily to lower costs of hardware and travel-related expenses compared to the previous year quarter. Research and development was up 20% compared to the prior year quarter, primarily due to increased personnel costs, and sequentially, R&D was up a little more than 3%, again, primarily due to personnel costs in Q4. SG&A was essentially flat compared to the prior year fourth quarter and down a little over 3% sequentially, again, primarily due to travel-related expenses.

Total expense was up 6% compared to a year ago quarter, but compared to Q3 sequentially, it was actually down a little over 1%, again, primarily due to lower costs of hardware sold and lower travel-related expenses as our employees were mostly working from home. Our reported consolidated operating margins decreased from 20.2% last year to 18.7%, which this decrease is primarily due to the various revenue headwinds already discussed and the increased costs. On a non-GAAP basis, our operating margins decreased from 18.9% last year to 17.8% this year, again, primarily due to items already mentioned. Our payment segment continues to be impacted by the additional costs related to our card processing platform migration, as Dave discussed in his opening comments. Our core segment operating margins improved slightly during the quarter compared to last year, while complementary segment margins were down just slightly.

The effective tax rate for the quarter decreased to 20% this year compared to 23% last year. The quarter-over-quarter difference is primarily related to changes in our effective and deferred state tax rate as we remeasure our state estimated rate when we file our state tax returns in Q4 and perform a return-to-provision true-up. Last year, we had an unfavorable impact in Q4 of about 1.5%, and due to some effective tax planning by our tax department over the year, we had a favorable impact this year of approximately 1.5% to give you the 3% difference compared to last year. Net income was $61.3 million for the fourth quarter compared to $61.0 million last year, and earnings per share was $0.80 this year compared to $0.79 last year. Some comments on cash flow.

Our total amortization increased 5% to the year compared to last year due to capitalized projects being placed into service. Included in the total amortization of intangibles related to acquisitions, which decreased to $20.3 million year-to-date this fiscal year compared to $20.8 million last year. Depreciation was up a little over 10% for the fiscal year, primarily due to CapEx increases in the previous year and those assets being placed into service and receiving a full year of depreciation this year, while this year's total CapEx spend was basically flat with last fiscal year's total spend. Our operating cash flow was $510.5 million for the fiscal year, which was up nicely from $431.1 million, or 18% compared to last fiscal year.

During the year, we invested $177.5 million back into our company through capital expenditures and capitalized software from developing additional products and enhancements, which the total amount capitalized is up 4% from $170.8 million spent a year ago. Our free cash flow, which is operating cash flow less CapEx and Cap software, and then adding back net proceeds from sale of assets, was $344.2 million, which compared to net income means that we had a conversion of free cash flow to net income for the year of 116%. A couple of comments on our balance sheet as of June 30th. We were in a cash position of $213.3 million, up from $93 million a year ago.

Remember, in February, we increased the maximum borrowings on our $700 million line of credit, and as of June 30, there was nothing drawn on that line, and we had no other long-term debt on our balance sheet other than leases, which obviously increased this year significantly due to the adoption of ASC 842 last July 1st, which means we had to put the operating leases on our balance sheet. Some comments about the guidance we provided in the press release yesterday. As you noticed, we did provide both GAAP and non-GAAP revenue guidance in the press release.

Just to be clear, this guidance is based on the assumption that the country continues to open up, the economy continues to improve, and obviously, if the country is forced to be shut down again due to COVID-19 and the economy stalls or actually reverses, then obviously this guidance will require to be revised. You will also note that our GAAP guidance that we're forecasting revenue from deconversions to be down $33 million from what we saw in FY20, which during FY20, we had $53.9 million of deconversion revenue. Currently, we see no to little M&A activity that would drive deconversion revenue at this point, which in the short term, this will hurt our revenue growth, but in the long term, as Dave and I have always said, we don't really like deconversion revenue as we would much rather keep the customer and the revenue for the future.

This means based on the GAAP revenue guidance provided in the press release impacted by the decreased deconversion fees, we're looking at GAAP revenue growth of 3% to slightly above 4%. Since our single acquisition last year, which was Geezeo, anniversary on July 1st, the only adjustment between GAAP and non-GAAP revenue guidance is the decrease in deconversion fees. Obviously, if we see changes during the year and anticipate deconversion revenue, we will update you on future earnings calls. Obviously, we were impacted by COVID-19 just like everybody else, especially in Q4 of FY20, as highlighted in our comments about our card growth and product delivery. And we expect to continue to have some headwinds on revenue, especially in the first half of the year for several reasons.

Some ongoing delayed implementations at customer's request, the continued shift of our customers to our Private Cloud will continue to put additional headwinds on our license, hardware, and on-prem implementation, and our annual education conferences will now be virtual events this year, which will also impact revenue in the first half of the year. Not much impact on operating income, but it will have an impact on revenue. Therefore, for your models, for non-GAAP, again, non-GAAP revenue growth, I would suggest using 3%-5% revenue growth in the first half of the year and somewhere in the 6%-8% range growth in the second half to get you to our guidance of 5.5%-6.5% growth for the entire fiscal year of non-GAAP revenue. We anticipate GAAP operating margins for all of FY21 to be down slightly to 20%-21% for all the reasons previously discussed.

However, as we complete the migrations and the new payment platform during the fiscal year, we will see margin improvement in fiscal Q4 as we have guided previously. Our effective tax rate for FY21 should be in line with FY20 and be somewhere between 22% and 22.5%. That concludes our opening comments. We are now ready to take questions. Gigi, will you please open the call lines up for questions?

Operator (participant)

As a reminder to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Peter Heckmann from D.A. Davidson. Your line is now open.

Peter Heckmann (Managing Director and Senior Research Analyst)

Hey, good morning, everyone. Thanks for taking my questions. Dave, could you maybe try and quantify, if you could, year-over-year bookings growth and then maybe talk about the current backlog and compare it to prior years in terms of whether the implementation delays resulted in a larger than normal backlog?

David Foss (CEO)

Yeah, so thanks, Peter. We of course don't discuss the details of the backlog, but just to kind of give you some high-level expectation. So there have been some delays, but it's not hugely significant. It's just people moving things around. And so normally, if we have a customer who says, "We want to delay this implementation," we go find another customer who wants to move up in the schedule. So it's created lumpiness in the schedule for the implementation operations groups. But it's not as though there's a major push to move things out. It's more the inconvenience and the inefficiency in moving things around a little bit is the way I would characterize the delays as far as install are concerned.

To the first part of your question on sales, so you'll note we've been running at a pace of one new competitive core takeaway per week for two and a half to three years. And that part has slowed down a little bit. So our sales weren't as dependent on new core takeaway, competitive core takeaways, as they have been in the past. But what was really fascinating to me, I guess, was that the other product groups not only filled in that gap, but exceeded any other sales month and any other sales quarter that we've ever had. And so what were those things? Well, I highlighted a few of them. We've continued to have really good success with the new payments platform.

We've sold a whole bunch of the Banno Digital Platform, which, as I highlighted in my opening comments, probably is not a shocker to anybody, but really great traction there. We've seen a number of in-house to outsourced conversions that have been signed in the quarter. And then a whole bunch of other things, online lending and just a wide variety of products. So the thing I would highlight is the fact that even though the new core sales slowed and that it's just the industry that slowed because people were not making as many of those decisions, so even though that slowed, the sales teams filled in with all kinds of other sales of all kinds of other products. And so now those backlogs are robust. I'm not worried about them.

It's not that we can't handle the installs, but those have kind of filled in around where we would have signed more new core takeaways.

Peter Heckmann (Managing Director and Senior Research Analyst)

Gotcha. Gotcha. And then that leads me to my second question. I think last quarter you had said you had signed five core takeaways in April, and so that would indicate just two in May and June. And that just might be situational. But in terms of how the relative profitability and outlook for financial institutions has changed because of the pandemic and lower rates, how do you see that affecting overall IT spending amongst banks and credit unions over the next year?

David Foss (CEO)

Yeah. So the good news for us, first off, the pipeline is after a record month and record quarter. We just did a sales review with the sales leadership team on Monday of this week, and the pipeline is filling back up again, which that's always a concern when you have a blowout month and a blowout quarter. Then you got to go fill the pipe again with new opportunities. So the pipeline is filling again, had a big month in July as far as new opportunities that are going back into the pipeline. I'll add to that that the American Banker published a survey about a month ago, probably, but it was a post-COVID survey of CEOs talking about technology spending, and there is no slowdown in their minds regarding their plans for technology spending.

They may have shifted a little bit to thinking about things that we can do without everybody in the office and how do I live in a world where not all of my customers are coming to the branch as often as they used to. Those types of things are top of their list more than they were before, probably, but no slowdown in spending as compared to the pre-COVID numbers, which was what we were looking for. It was compare what are bankers saying and credit union executives saying post-COVID as compared to what they were saying back in December, and there was absolutely no slowdown in their expectation of spending, and we're seeing that now, so now that everything's kind of settled back in, we saw a big influx of RFPs, for example, in July, particularly in the banking group. People kind of settled in.

They kind of put the brakes on a little bit, but now they've settled in and decided, "Okay, we got to get back to reviewing technology now that we understand how dependent we're going to be on technology going forward," and so big influx in RFPs, and we're excited about that for new core competitive takeaways. A reminder on the core deals is those are very long sales cycles, right, so all these RFPs that came in in July, we won't report any of those wins probably for nine to 12 months because they're long sales cycles, but it's really kind of heartening to see the industry getting back to focusing on evaluating technology and making those decisions, even the major decisions like core replacement.

Peter Heckmann (Managing Director and Senior Research Analyst)

Good. Good. That's good to hear. Thanks for the update.

David Foss (CEO)

You bet.

Operator (participant)

Thank you. Our next question comes from the line of Karthik Mehta from North Coast Research. Your line is now open.

Karthik Mehta (Executive Managing Director, Principal, and Director of Research)

Hey, good morning, Dave. Dave, one of the concerns around banks is that all of a sudden you're going to have a lot of loan losses, and that could just put pressure on the P&L statement, and I'm wondering if your customers have shown any concern related to that and if that's impacting any budgets. I know you said they're continuing to spend, and it sounds like they're spending even more in 2021 versus 2020, but I'm just wondering, any level of concern on loan losses?

David Foss (CEO)

Well, you'd have to be living in a cave to not have any concern, probably. But it's not an overriding theme with our customers. They're not pulling in saying, "Oh my gosh, I've got some real balance sheet risk here that I've got to hunker down and can't do anything." So it's the opposite. We are seeing a tremendous amount of interest on the sales side. Now, I will tell you, in two weeks, I think it is, I'll be hosting a whole bunch of credit union CEOs, exclusive event for credit union CEOs, and that'll be one of the topics. And then about a month after that, we'll do, and there'll be a virtual event. And a month after that, I'll do the same thing with our banking CEOs. So it'll be only CEOs, and that'll be a topic.

So, I'll have a lot of group input on that topic. But anecdotally, no major shifts and no major expression of concern. But like I say, you'd have to be living in a cave not to have some level of concern about what's going on. But we don't see any slowdown right now from our customers.

Karthik Mehta (Executive Managing Director, Principal, and Director of Research)

All right. So I've talked to a few bankers, and I will add this one thing that the ones I talked to really beefed up their loan loss reserve at the end of March quarter in anticipation of this. So I think a majority of the P&L impact has already flushed through their P&Ls.

David Foss (CEO)

That's a great point. I highlighted before the whole CECL thing. All these bankers were so frustrated with CECL. CECL did them a great service now. Them really getting focused on projecting credit losses has really done them a service in this difficult time. As much as they were irritated with CECL a couple of years ago, I think they're thankful that they went through all that stuff, as Kevin has highlighted.

Karthik Mehta (Executive Managing Director, Principal, and Director of Research)

That makes sense. Hey, Dave, I think you and Kevin both mentioned the interest in your Private Cloud. And I'm wondering, are your banks showing an interest for them wanting to go to the Amazon Web Services to outsource to that type of platform?

David Foss (CEO)

It comes up rarely, but it's not most banks and credit unions still, traditional banks and credit unions. I'm not talking about the online-only banks, the neobanks. But traditional banks and credit unions are still pretty wary of putting everything out in a public cloud environment. So we have some of our solutions today in a public cloud environment, but not the core, kind of the crown jewels piece. That's still not a lot of demand for that. We talk about it with our customers, and we're very active in that space with other products, and we have a lot of things in the works as far as core is concerned, but not demand today for that.

Karthik Mehta (Executive Managing Director, Principal, and Director of Research)

And Kevin, just one last question. You talked about deconversion fees of about $33 million. Any thoughts on maybe just how it would go each quarter just so that I don't know if there's any lumpiness or you think just straightlining it is good enough right now?

Kevin Williams (CFO)

Yeah. So Karthik, I mean, last year, and again, deconversion fees is something that is very hard to predict. I mean, typically by this time on an earnings call in mid-August, we have an idea of what's going to happen, at least in this quarter, and we typically have an idea of next quarter. And I mean, right now, I mean, the pipeline is just pretty empty. And as a reminder, last year, we had four large customers that got acquired, which those four customers were about equal to the decrease in the deconversion fees we're predicting this year. So if you take the adjusted $21 million deconversion revenue that, and again, we have no idea where that's coming from, but we have to put something in the forecast because we know there will be some.

I would say probably just put that in pretty much straight line, and you're not going to miss by much, Karthik.

Karthik Mehta (Executive Managing Director, Principal, and Director of Research)

All right. Well, thank you very much. Appreciate it.

David Foss (CEO)

You bet.

Operator (participant)

Thank you. Our next question comes from the line of John Davis from Raymond James. Your line is now open.

John Davis (Analyst)

Hey, thanks for waiting, guys. Kevin, just one quick clarification on the EPS guidance. So assuming flat year-over-year term fees, you would have guided to something in the $4.03-$4.08 range. I just want to make sure I'm not missing anything there.

David Foss (CEO)

That's absolutely correct, John.

John Davis (Analyst)

Okay. And then as I think about the COVID impact, I appreciate your commentary on the first half of the year, call it 3%-5%, back half 6%-8%. So if I run that out, is it fair to say that COVID, based off what you know today, is one point to one and a half impact to non-GAAP revenue growth in 2021?

David Foss (CEO)

Yep. Yep. That's probably pretty close to right.

John Davis (Analyst)

All right. And then I want to talk a little bit about the impact on the financials of the shift to cloud. I know it's two and a half times more profitable over the life of the contract. But is there a near-term revenue headwind from kind of that shift to the cloud? I know there's been an uptick in demand for outsourcing, and just curious if it's a near-term revenue headwind from lower license sales or how that kind of flows through the P&L.

Kevin Williams (CFO)

It's licensed hardware on-prem. If you think about it, John, licensed and hardware this year created a $4.5 million headwind, not even counting the pass-throughs and different things. That was for the year. Obviously, the biggest chunk of that was in Q4, but that was a headwind. That's very similar to the headwind we saw in the past three years. As we continue to shift 45-50 existing in-house customers to our Private Cloud each year, we will continue to sell less and less add-on license products and hardware upgrades as they make that move. We're continuing to add recurring revenue, and you're right. It's literally two times the revenue we're getting out of them or more, but you don't get the big bump in license revenues when you sell a nice complementary product in a licensed environment.

We're going to continue to have the $4 million-$6 million headwind again next year on our product delivery line.

John Davis (Analyst)

Okay. That's helpful. And then lastly, we just wanted to hit on the margin. I think last quarter, you guys commented you expected the adjusted operating margin to kind of be flat to slightly up. It looks like guidance implies it's going to be down, call it 25-30 basis points. First, is that correct? And what's driving the change? And maybe is there an added layer of conservatism given the macro backdrop? That's it for me. Thank you, guys.

David Foss (CEO)

That is correct, John, and it's primarily all going to be in the first half of the year. Again, we've still got the additional cost from the additional payment platform until we get through the first quarter, so we set out those additional costs, plus the delayed license implementations and some hardware deliveries that we anticipate going to be in the first quarter and some in the second quarter. That's all going to have some negative margin impact in the first half of the year, but we anticipate margin improvement in the second half of the year. Best case scenario, I think we could wind up flat for the year, but we're trying to be a little conservative and guide down just slightly.

John Davis (Analyst)

All right. Thanks, guys.

David Foss (CEO)

Thanks, John.

Operator (participant)

Thank you. Our next question comes from the line of Vasu Govil from KBW. Your line is now open.

Vasu Govil (Managing Director and Senior Equity Research Analyst)

Thank you. Thanks for taking my question, and nice to talk to you guys. I guess just first, Kevin, thank you for the color on the quarterly cadence on revenue growth. Could you also tell us what's embedded in the guide in terms of segment-wise expectation in terms of core payments and complementary segments? Were you expecting most of the impact from COVID to show through?

Kevin Williams (CFO)

So most of the COVID will probably be on the complementary line, if I was guessing. Well, actually, core and complementary because it's going to delay some implementations, especially the few in-house implementations we have out there. Payments, and Dave can confirm, payments is kind of back to where we were pre-COVID. So unless there's another flare-up in COVID-19 and they start shutting the economy back down, I don't think you're going to see the impact on the payments line. I think it's going to be another two segments.

Vasu Govil (Managing Director and Senior Equity Research Analyst)

Got it. Thanks. That's helpful. And then, Dave, you sort of made some comments on what great success you guys have had working remotely, and some of these practices could continue longer term. Do you think there's potential for some cost saves down the line as a result of this?

David Foss (CEO)

For sure. Yeah. So a few things to keep in mind there, and my expectation is not that we will do every install for every product as a remote install going forward. That's not what our customers want. That's not the most efficient way in some regards to do implementation, so it'll end up being a mix. I think the things that work really well remote, we will continue to do really well. The things that are a little awkward doing remote, we'll go back to having people on-site for those things, but that introduces efficiency, and when you have efficiency, then in theory, you probably don't need as many people. We won't have to add as many people as we look forward into the future for some of those things because we'll have a more efficient process. There is travel.

So there's not only the dollar expense involved in travel, but the wear and tear on people that are traveling to do those implementations. And there's the facility cost. If we can do some of these things, and if we have employees who want to continue working from home as opposed to working remote in and off, meaning doing an implementation for a customer but doing it from the office, if we continue to do that from home, there is the potential that we will need less office space. And we're examining that. I alluded to it in my opening comments. We're examining what will the future look like for Jack Henry as far as office space requirements. We currently have 42 locations around the country. We need all those.

So there are a lot of those things that are in play for us that are kind of rolled up into that question. I can't tell you exactly what those will be today, but there absolutely will be savings in that in the long run.

Vasu Govil (Managing Director and Senior Equity Research Analyst)

Great. Thank you very much.

Kevin Williams (CFO)

Sure.

Operator (participant)

Thank you. Our next question comes from the line of David Togut from Evercore ISI. Your line is now open.

Josh Siegler (Analyst)

Hello. This is Josh Siegler on behalf of David Togut. Good morning. Can you please discuss your top areas of investment in FY21? You mentioned digital platforms in your press release. Can you discuss what investments need to be done in digital?

David Foss (CEO)

Sure. It's a big topic. Digital, it's not that we're lacking anything. Our Banno Digital Platform is leading the industry as far as feature function is concerned, but we're continuing to build that out, so expanding as far as business functionality on that platform is a key area of focus for us this year, and just continuing to broaden the offering. We're integrating in the Geezeo personal financial management platform. We are doing online account opening through that platform. There's lots of things that we're just continuing to integrate and make sure that the consumer, so the bank's customer or credit union's customer, make sure the consumer has a consistent user experience across all those different functions through the single digital channel, so that is definitely a big area of focus for us, but then beyond that, we're constantly investing in our core solutions.

have our two flagship cores, Episys on the credit union side and SilverLake on the banking side. We continue to do a lot of investment in both of those products as our flagships. We also invest in our other legacy cores, but those are areas of focus. Our treasury management solution; we've talked about a lot on this call. Lots of demand for that solution, a lot of growth in that area, but you have to continue to enhance that solution as you get more sophisticated customers taking that platform. We're not done with the migration to the new card processing platform, so that's included in that number, and then online lending, so we've talked a lot on this call about our Commercial Lending Center suite. It competes and wins regularly, by the way, against nCino, and you've all seen the nCino IPO that happened recently.

Our Commercial Lending Center suite wins regularly in those deals. But we have to continue to invest in that platform to stay ahead of the game there. So a number of things. And the last area I would highlight is fraud. So a lot of demand among our customers. We have our Yellowhammer fraud solution that we're really focused on this year, ensuring that that's a best-of-breed fraud solution. So those are a relatively short list of a very long list of things that we're continuing to invest in.

Josh Siegler (Analyst)

Great. Thank you. Appreciate the color. Can you please help quantify the revenue and earnings benefit from the Paycheck Protection Program from your lending solutions in 4Q?

David Foss (CEO)

So you're talking about a P&L benefit to Jack Henry? Or what are you talking about for our customers?

Josh Siegler (Analyst)

For Jack Henry.

David Foss (CEO)

It was a relatively minor dollar amount. We didn't sell license fees. What we did was we stood up a platform to provide that solution to our customers. By the way, we were live before the SBA was ready to fund any loans. We're pretty proud of that because most platforms were not live before the SBA, but we were up and running and live before the SBA was ready to fund loans, and so what we did was we charged customers on a consumption basis, but it wasn't a huge needle mover for Jack Henry. I don't know what the number was, but it was a consumption model where if you decided to do one loan, you only paid a little fee for that one loan.

If you did 2,000 loans, you paid something for every one of those 2,000 loans, just a click charge for each loan that you funded through the platform. There is no ongoing charge for our customers. There's no maintenance. It's not something they're obligated to pay us for ongoing. It was just us trying to do the right thing to help them serve their customers in that moment of need. Like I said in my opening comments, it did help our transactional digital during the quarter and helped to offset some of the card. But our transactional digital was already growing at around 13% through the first three quarters and ended up growing just under 16%. I mean, the total impact was probably a couple of pennies, maybe during the quarter that helped to offset the decreased growth in card.

Josh Siegler (Analyst)

Perfect. Thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Dave Koning from Baird. Your line is now open.

David Koning (Senior Research Analyst)

Yeah. Hey, guys. Thank you. And I guess my first question, when you think about the debit processing platform, it sounds like Q1 is still higher expenses year over year. There'll still be those costs. But maybe how do we think of the full year this year? Maybe what's baked in? It seems like you might get kind of a weighted average half-year benefit this year, and then maybe the last half-year benefit next year. Kind of what are the dollar savings from that?

David Foss (CEO)

So as we've historically said, Dave, I mean, the savings that we're going to see are essentially the same. It's staggered a little bit differently. But as Dave mentioned in his opening comments, we are on course to have all the core customers off the platform by the end of the Q1. All non-core customers are on schedule to be off the other platform by Q3. So we've indicated in the past that there's a minimum of $16 million in cost savings that will come in. Some of that will come in in Q2. The rest of it will come in in Q4.

So, with the impact of COVID and some of the things we've talked about in Q1 and Q2, so you're going to see some benefit in Q2, but because of the impacts of COVID, it's not going to be quite what we had talked about in the past, which obviously COVID was kind of hard to foresee. But we will see the margin improvement in Q4 that we've always kind of indicated we'll see.

David Koning (Senior Research Analyst)

Okay. That's helpful. And then I guess when I think about incremental margins this year, it seems like you're guiding ex term fees for revenue to grow, what, $80 million-$100 million, something in that range of core revenue growth. And then EBIT growth, if you take out term fees again, the decline in term fees, probably up $10 million-$15 million, something like that. And that includes the cost benefits of the platform conversion. So it just doesn't seem like there's that much profit growth coming from the revenue. Is that conservatism, or are there some other costs that are happening right now that are just different than normal?

David Foss (CEO)

There's two things. One, we anticipate another probably $6 million or so headwind and decreased license fees and hardware this year that's going to happen, which we've been seeing for the last few years. So obviously, when you take license revenue down, which is 100% margin, that's going to have an impact on your overall margins until you can offset that with recurring revenue, which is really good margins, but it's obviously not close to 100% like license revenue. So I think at this point, with COVID and everything else, Dave, we're just trying to be a little conservative on our guidance going into the year. I mean, hopefully, things turn out better than that. But we thought it was important for us to provide guidance and where we think we're going to be in this new unchanged world that we're in.

David Koning (Senior Research Analyst)

Yeah. That makes sense. And I guess the corollary to that, it seems like the long term, the next five years, 10 years, whatever, the margin progression could be for you and really the industry better than normal because the shift to digital, outsourcing, those types of things that are higher margin than average. Is that kind of a fair way to think about it?

Kevin Williams (CFO)

That is definitely a fair way to think about it. And as Dave pointed out in his opening comments, we've been signing a number of new card customers, which none of those are on the platform yet. I mean, those are all sitting in backlog to be converted over, and those are all competitive takeaways. So that's going to be new revenue. And we've really been a little hesitant on really going aggressively for new sales until we get this migration done. So once we get the migration done, I think our sales team is going to be even more aggressive getting stuff. And at that point, we'll be able to start selling it through ProfitStars.

David Koning (Senior Research Analyst)

Gotcha. Well, great job, guys. Thank you.

David Foss (CEO)

Thanks, Dave.

Operator (participant)

Thank you. As a reminder to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Our next question comes from the line of Brett Huff from Stephens Inc. Your line is now open.

Brett Huff (Managing Director and Equity Research Analyst)

Good morning, David and Kevin. Hope you guys are both well.

Kevin Williams (CFO)

Morning. Yep. Morning, Brett.

Brett Huff (Managing Director and Equity Research Analyst)

Two questions. Number one, Kevin, thanks for the breakdown of the revenue kind of tenor through the next year. That's very helpful. Coming out, I think the guidance was 6 to 8% pro forma growth. As we think about even beyond that, if we look to fiscal 2022, which I know is a long way from a crystal ball point of view, you guys have kind of grown, I mean, probably 7%-ish pretty consistently over the long haul. Is that a good jumping-off point for thinking about fiscal 2022 and beyond, or are there other ups or downs that we should think about starting around that, say, midpoint of 7%?

Kevin Williams (CFO)

So Brett, obviously, the unknown is what COVID is going to be and what the lingering effect of that is going to be. But barring that, then I think 7% is a very good place to look at for FY22. And once we get through the migration, depending on the output of some of the RFPs that Dave mentioned, which those would be impacting FY22, not FY21, and all the card activity we've got going on, I think 7% would be a conservative number for FY22.

Brett Huff (Managing Director and Equity Research Analyst)

Okay. That's really helpful. And then bigger picture question, you all have a great balance sheet, kind of a hallmark of your company. I know at one point, kind of many years ago, you had sort of a spate of sort of smaller deals that you did, took advantage of some price dislocations in the market. Are you seeing assets out there that are interesting to you, maybe bolt-ons, maybe technology that gets you faster to where you want to be, consolidating, anything like that? Any sort of thoughts on pricing of deals and/or interest increasing because of some of the things going on? Thank you.

David Foss (CEO)

Thank you, Brett. That's a good question. Many weeks ago, Kevin and I sat down and said, "Okay." As we kind of saw this all starting to unfold in the industry, we sat down and said, "Okay. We got to be ready here because something's going to pop. We're going to find a deal that is going to be a really good deal for Jack Henry. So let's be ready." We made sure we were prepared as far as cash on the balance sheet and lines of credit, and let's go get aggressive and try and find something. And so now we're probably been eight weeks since we had that conversation, and there is almost nothing. It's frustrating for us because you know us well. We've done a lot of acquisitions in our history. I feel strongly we're a solid acquirer. We know how to choose companies.

We know how to integrate them in successfully. We don't go looking for crazy expense synergies on the front end of the deal. We're a disciplined acquirer, as I've said many times, and so we were very ready to find some deals and integrate them. We've had a few come along. Pricing has been a little out of line on the ones that we have been interested in, but we're continuing to look, so I'm still hopeful that we'll find something that fits our profile and that will be a good addition for Jack Henry, but so far, it's been a little bit more frustrating than I expected.

Brett Huff (Managing Director and Equity Research Analyst)

Great. Thanks for the color.

Operator (participant)

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Kevin Williams for closing remarks.

Kevin Williams (CFO)

Thanks, Eugene. Considering the challenge that we've had in the second half of fiscal 2020, we are very pleased with the overall results from our ongoing operations. And I especially want to thank all of our associates for the way they have handled these challenges by taking care of themselves and our customers and continue to improve our company on many fronts for the upcoming fiscal year and the future beyond that. Our executives, managers, and all of our associates continue to focus on what is best for our customers and you, our shareholders. With that, I want to thank you again for joining us today and.