Ladies and gentlemen, thank you for standing by, and welcome to the Jack Henry & Associates Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question and answer session. [Operator Instructions]. Please be advice that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today Kevin Williams. Thank you. Please go ahead.

Thanks Brandy. Good morning and thank you all for joining us for the Jack Henry & Associates Third Quarter Fiscal 2021 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 Dave to review some of his thoughts about the state of our business, our financial and sales performance for the quarter, some comments regarding the industry in general, and how we're dealing with COVID-19 and some other key initiatives that we have in place. And after Dave concludes his comments, I will provide some additional thoughts and comments regarding the press release we put out yesterday after market close. And provide comments regarding our guidance for our FY 2021 which we've also provided in the release yesterday, and then we will open the line up for Q&A. First, I need to remind you that this call includes certain forward-looking statements, including remarks or responses to questions concerning future expectations events, objectives, strategies, trends or results. Like any statement about the future, these are subject to a number of factors that could cause actual results or events to differ materially from those, which we anticipate due to a number of risks and uncertainties. The Company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our Form 10-K entitled Risk Factors and Forward-Looking Statements. Also on this call, we would discuss certain non-GAAP financial measures, including non-GAAP revenue and non-GAAP operating income. The reconciliations for historical non-GAAP financial measures can be found in yesterday's press release. I will now turn the call over to Dave.

Thank you, Kevin, and good morning, everyone. We are very pleased to report another quarter of revenue and operating income growth and an overall solid performance by our business. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our third fiscal quarter. For Q3 of fiscal 2021, total revenue increased 1% for the quarter and increased 6% on an on-GAAP basis. Deconversion fees were down more than $18 million over the prior year quarter, which impacts revenue in the current quarter negatively, but as I've highlighted many times in the past, this is good news for our company if you take a long-term view. Turning to the segments, we again have a good quarter in the core segment of our business revenue decreased 4% for the quarter, because of the reduction in deconversion fees, but increased by 3% of non-GAAP basis. Our payment segment performed very well posting a 7% increase in revenue this quarter, and a 10% increase on an non-GAAP basis. We also had a strong quarter in our complementary solutions businesses with a 1% increase in revenue this quarter and a 5% increase on an non-GAAP basis. As I mentioned in the press release, our core sales teams had an extremely solid quarter and are now seeing core activity consistent with our pre-pandemic run rate. During the quarter we inked 15 competitive core takeaways, which is greater than the one per week run rate we saw in 2019. In addition to our success signing new core clients, we signed six existing on-premise core customers to move to our private cloud environment. As we continue to push into the larger regional bank space, I think it's significant to note that of the…

Thanks Dave. For the quarter, our services and support revenue decreased 6% in the third quarter fiscal 2021 compared to the same quarter year ago. However, adjusting that services and support revenue for deconversion fees of $4,367,000 in the current quarter, and deconversion fees of $22.8 million and revenue from divestitures last year in the prior fiscal quarter. On a non-GAAP basis, this revenue line would have grown actually 2% for the quarter compared to the previous year, which obviously as Dave mentioned, that has a lot of pressure and headwinds for our convert merge revenue, and also hardware in the quarter. Year to-date, our deconversion fees are now down $33 million compared to the prior year, which if you remember the guidance that we provided back in August, that is right in line with the full year impact. Services and support revenue primary driver was data processing and hosting fees and our private and public cloud offerings, which continues to show strong growth in the quarter compared to the previous year. However, the growth in that line was totally offset by the decrease in our product delivery and services revenue, which again was due to our decreased hardware, implementation revenue for on-prem customers, convert merge implementation, which is also down to the significant decrease in M&A activity, pass-through revenues that is related to billable travel, primarily related to travel limitations related to COVID. And then obviously deconversion fee revenue for the quarter compared to the prior year quarter, which is down almost $18 million. Processing revenue increased 13% in third quarter fiscal 2021, compared to the same quarter last year. This increase is primarily driven by higher card volumes for new customers installed last year, and also increased debit card usage from existing customers. Our Jack Henry digital revenue…

[Operator Instructions] Your first question comes from the line of Peter Heckmann with D.A. Davidson.

Hey, good morning, gentlemen. Thanks for taking the question. Just in terms of the payment platform migration, Can you remind us the cost saves from closing down the two duplicative cloud platforms. And kind of just on a preliminary basis, what type of adjusted operating margin expansion you think that that sets us up for, for fiscal 2022?

So, Pete, what we've always said is we're going to get at least a minimum of $16 million cost savings out of that, and we're still stick to that. Obviously, that's not going to all happen this quarter, and that's an annual run rate. We are in the process right now of decommissioning both those platforms. So there's -- all the costs, it is not going to be in this quarter. In fact, there's some other things that we're still having to do through the end of December, I believe, for some programming different things to get the full efficiencies out of the new platforms. So it's probably going to be Q3 of next fiscal year that we have the full quarterly impact of that $16 million plus savings, but we're going to start getting some this quarter. So you will see some payments, margin expansion in Q4. And then you'll see more in Q1 and Q2, and then even more in Q3 next year.

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

Sure. So, its Dave, Pete. I won't say that there's been any major shifts in this quarter. We started to see a shift in the earlier in the fiscal year toward a heavy emphasis on digital and things that would allow our customer's customers. So whether it's a consumer or commercial customer, allow them to conduct more business without coming into the branch. So the digital platform has, of course been right at the front of that list. I'll reemphasize what I said in my opening comments here. In the press release, we put up on April 6th, we said, we had around 400 institutions and 4.3 million users live month later, on May 4, we now have more than 5 million users live. So it really I think emphasizes the dramatic shift that's happening among banks and credit unions to ensure that their consumers and their commercial customers have best-of-breed digital technology for them views. So that's been a key driver for our customers and certainly for us. Treasury is another piece of that -- another piece of that puzzle. So I didn't call it out. And we have 12 -- so far this year, as far as treasury new customers that are assigned to the treasury platform. Again, that's a move toward a more digital functionality. But for very large commercial customers, you don't install a treasury solution unless you have really large commercial customers, otherwise, they just use cash management. So that I think is indicative. And then on the lending side, I've highlighted this many times, that's allowing a commercial customer to do complex commercial loans online without having to drive to the branch for their financial statements and all that packet of information. The thing that we have just recently done there is we've added this lending marketplace functionality where customers, if they have a credit that's too large for them to book, they can essentially sell that credit through a marketplace to other lenders who want to take on the responsibility for that credit. So there's a lot of activity in all those areas. But it is this shift for doing business more in a digital environment as opposed to coming into the branch. That's what's driving all of those things that I just touched on.

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

It’s around 75, right.

Yes. That's right around 75, Pete.

75. Okay. Thanks much.

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

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

Actually, Kartik, that's one of the real pieces of good news and all this. And that's why I use the word robust pipeline in the press release. We have really successfully shifted to enabling our sales team and customers being accepting of doing business remote. They still like to have people come in once a while, and some customers insist on the sales rep coming in. But we're doing a lot of this remote, a lot of the demonstrations that we do now are -- normally, where we would have would have had five or six people on site, we'll maybe have one or two on site. And the other four are on a team's call or on a zoom call doing the demonstration. So that's where it's a really become to -- gotten the point where they'll accept that idea of much of the sale happening virtually. And so what that's created now is, and I think I've said this on calls before, we -- a good gauge for us of how stout our sales pipeline is, is if we are at about 90% of our annual quota. So not a monthly quota, but the annual quota at any given time on any given day, if we have about 90% of the annual quota in the pipeline, then we know that we've got enough happening that we should be able to make our number. We are right at that mark right now. And so what that tells me is, customers are engaging with us. They have salespeople working with them on deals. And we're kind of back to a normal run rate that we would have seen in 2019. That's what we're seeing today in the sales pipeline. So the number of engagements and the volume of deals that are flowing through the pipe are about where we were in 2019.

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

And so, Kevin, I know, you don't want to talk too much about FY 2022. But based on Dave's comments and your comments, is there any reason that you shouldn't be able to continue to accelerate top line? I'm not talking about going from 6% to 9%. But at least continue to see modest improvement in top line?

Yes. I mean, obviously Kartik, we're just starting the budget process for next year. But I feel very comfortable that revenue growth next year will be stronger than it was this year. Again, obviously, as the economy continues to grow and do what I do, just getting through, and Dave, can you jump in here. Just getting through the payments migration. And now we can focus totally on adding new customers instead of migrating all of our existing customers. Because that was such a major feat to get that done without disrupting our customers. I mean, that alone should help drive some nice payment growth, our remote deposit capture -- I don't check conversion is not sexy, but it just continues to be a major grower force. And then as we get back to the new core winds that we've seen and the migrations from end to out, guys, I see no reason why our revenue growth next fiscal year can't be up nicely from where it was this year.

Well, thank you very much. Appreciate it.

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

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

Yes. I don't have a crystal ball, Dave. So I can't give you exact prediction. But what we are seeing today, as I've quoted in my in my comments, we are back to the runway that we saw in 2019. And I talked about it many times on the calls of the time that we were on this run rate of booking one competitive takeaway per week. Can I say with absolute certainty that we're going to do 52 deals next year? No. But it's certainly the pace right now, and everything that we see in the pipeline for the next coming months, the pace is, is definitely greater than it has been during, during COVID-19, during the depths of COVID-19, I guess I'll put it that way. And it's logical. I don't think anybody should be surprised that there was a slowdown in those core decisions during the pandemic. Because as we've talked about before, when you're the CEO of a bank or credit union, and you decide to switch out your core, that's essentially making a decision to do heart and lung transplant all at the same time for your institution. And it's a very disruptive, no matter how smooth it goes, it's a disruptive process. And why would you make that decision unless you absolutely have to? Why would you make that decision in the midst of a global pandemic? And so I think it's totally logical that we're back to that pace all. If you take COVID out of the picture, all the other reasons for a customer to move to Jack Henry, those are all they're still just like they were in 2019. And so I think these bank and credit union executives are seeing that now. They know how to manage through in the COVID world. And now they're back to thinking about how do I find the best-of-breed provider on the core side. And let's go talk to Jack Henry.

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

Well, let's be clear here. The platform conversion is done. All the customers have moved off the legacy platform. So we're done with the conversion. It's the follow on, you can't just flip the light switch and say, okay now, everything's turned off. So that's what Kevin was alluding to, and sorry to talk over.

You're fine. So yes, I mean, maybe there is going to be a nice margin expansion next year. I mean, as I said earlier, that our non-GAAP is going to finish up pretty much in line and slightly up from where it was last year. It's -- we will gain more than 100 bps in operating margin, FY 2022. And couldn't be more than that? Yes. But I think, as I said earlier, it's going to take us some additional time. As Dave just said, to get all these costs taken out. And it's actually going to be by the end of the second quarter, I believe, when we get all the costs taken out. So you're going to see some continued margin improvement throughout next fiscal year. And it'll be Q3 when you see the full impact of what the cost take out for the payment migration. But as we continue to add new payments customers, as we continue to add new core customers, as we continue to migrate our on-prem customers to private cloud, all those things will help our margins. The other thing that, I think a lot of people forget about is with the M&A activity, obviously, our deconversion fees are down. But on the other side that is in our both our GAAP and non-GAAP numbers is what -- and Dave alluded to it is on the comments is our convert merge revenue. Because our customers do a lot of acquiring as well. So we've had some significant headwinds this fiscal year on our convert merge revenue, we have done the risks or layoffs. So we still have all the costs. So just having some of the M&A activity pick up, will not only give us back some deconversion fee revenue, which we really don't want, that also help with convert merge revenue, which that will also help our operating margins. So there's so many positive things, it's going to help our operating margins as things get back to normal, Dave.

Understood. Thank you very much.

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

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

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

Yes. Thank you, Steve. It really has been -- the word I -- the words that I used in my opening comments were about how amazing and successful this conversion has been. I mean, this has been a huge effort and are -- so we've migrated all these customers. We've added 150 new customers, now another 13 in this quarter, that weren't doing business with us before on the card platform. We are now positioned to sell credit and have been selling credit, which of course, we didn't have before we put this new platform in place. Customer response has been terrific. Our customers are much happier. They're definitely referenceable, which is what's leading through all of these successes in signing new customers to the platform. So it really has been the right move for Jack Henry. It was a long term project. And there was pain along the way, because you're disrupting all these customers. But it really was the right decision, has been a good move for us for our customers. And so, we're well positioned for growth in the future. And one thing I'll emphasize that we've talked about on previous calls, haven't talked about in a while. But our old platform was dependent on Jack Henry core system for the old debit platforms to function. This new platform is not dependent on a Jack Henry core system, which means, we can sell debit and credit outside the Jack Henry core base, which we couldn't do in the past. And so now we are positioned to start doing that as well as adding new customers from within the Jack Henry core base.

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

Yes. It's a good question. There is a lot of opportunity within the Jack Henry core base. And what I've highlighted in the past is, we are intensely focused right now on delivering Banno business, which is the other big chunk. So Banno so far has been positioned as a consumer application. Banno business will be delivered later this year. And by the way, those of you who attend the Analyst Day next week, and who runs digital for us is going to update you on that Banno business and kind of what that means for us. But Banno business will be delivered later this calendar year. And so once we have Banno consumer and Banno business all up and running and live and good to go, then we start selling outside the Jack Henry core base. So that'll be later in 2020 -- calendar 2022 is when we'll start selling outside the core base. But we want to make sure that we have everything tightened right with our core customers before we start to go after sales outside the Jack Henry core base. But we definitely will be doing that. And right now the target is late calendar 2022.

And I'll just had one thing to that. So, if you think about Steve, and right now we are at about just over 20% of our core customers that are using Banno. So, we've got an enormous amount of runway. And obviously, as Dave said, we want to take care of our core customers. The other thing I'd point out is we've actually and I've never seen this, I've been in this business for a long time. I've never seen a complementary product, actually win a core deal. And we've actually won some very nice core wins, because we're only selling Banno to our core customers. So it's -- that's another reason to make sure we've taken care of all our core -- our own core customers before we start going outside the base.

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

That's a good question. I would say, a commercial customer tends to pay more for that functionality than a consumer does. But you don't have as many of them to work with at each institution. So, depending on the makeup of the institution, if they're highly commercial focused, I'd say there's a greater opportunity at that institution. If they're primarily consumer focused retail, then there's a lesser opportunity. So it just depends on the institution, the makeup of the institution. But if they're heavily commercial, there is a significant opportunity once we roll out that functionality. So, we'll go around to our existing customers who are running Banno consumer, you'll be first on the list to say, okay, now we have a Banno for business, let's add that and that will be essentially the easy button for those customers that have already deployed Banno for their consumer base.

Thank you very much for taking my question.

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

Hey, good morning, guys. Kevin, just want to start out on the margin. I think 3Q was a good bit better than like we and most people expected, but then the 4Q guide I think implies a little bit of a deterioration. Historically you've seen a little bit of a hiccup in 4Q. So maybe just know the puts and takes of the margin sequentially as we enter the fourth quarter here?

Yes., So part of that JD is Q3. I mean, obviously, we had some very nice savings from travel related savings costs. We are starting to pick up travel again. In fact, our corporate travel is almost back to where it was pre COVID. Commercials not quite there yet. But I think travel is going to pick back up even more in Q4, which is -- and that's really the only negative I see happening on the margins in Q4. Everything else is pretty much where it should be. Again, we're not seeing a lot of convert merge revenue, which those are very nice margins for us. And I think as M&A starts picking up and Dave mentioned in his comments, there is starting to be a lot of clamor out there about M&A. And a lot of our customers are wanting to get back to us. So I think that's going to pick right back up next fiscal year, but I just don't see it happening yet in Q4.

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

So there has been some impact on the debit business, we haven't tried to quantify that as a separate standalone numbers. Certainly there has been a significant growth on the debit business. The interesting thing is stimulus payments have definitely been a driver for growth in digital, so not just for Banno but for anybody who's out there in this space. Because customers who have been looking to access that money and manage their money through the digital channel, that has been a driver in transaction volume, and also in growth of users. I think that's across the industry. Because so many consumers now have been actively trying to manage those stimulus payments. But as far as debit volume, we haven't tried to carve that out and, and segregate the impact of stimulus from the rest of the volume, it's just baked in the numbers.

Okay. Thanks. And then, Kevin, it's been a long time since I've seen you guys be as aggressive on the buyback. My math, right, you guys spent about $275 million in the quarter on the buyback, obviously, still have a phenomenal balance sheet, plenty of firepower there. So any reason why maybe not to that level, but you wouldn't continue to buy back shares here? Just curious commentary. And maybe you can leave in if there's been any changes in the M&A environment, which I'm kind of doubting in given valuations, but just curious that too?

So that's one of the things I tried to be clear about in my opening comments, JD was that this does not signal some significant change in our strategy. We've said time and time again, that if we have excess cash, we don't see a good acquisition on the horizon. We will do stock buybacks. We're committed to our dividend policy, but we'll do stock buybacks absent a good acquisition. One of the challenges that we've highlighted many times on these calls is, valuations are getting pretty high on these potential companies that we could acquire. Everybody has stars in their eyes about doing an IPO and/or possibly us back and getting some great big valuation. And so, absent, really solid acquisition that fits our strategy, share buybacks continue to be an option for us, particularly when the share price is down like it was here a few months ago. That's what really drove us to get more active with the board and make a significant move.

Okay. And that last one for me. Dave, maybe a little clear picture here. Just the competitive dynamics in the core segment. Maybe splice out credit unions versus banks. One of your competitors has made some noise about making some progress on credit unions lately. So just curious there if anything's changed through the pandemic, or kind of how you see it today?

Absolutely not. So, we have the deals that we won this year. We've won 17 competitive takeaways on the credit union side of the business. So very strong on the credit union side, no change with the competitive landscape. There is nobody winning as many deals as Jack Henry as far as new core displacement. And that was true before the pandemic. It is true today. I don't think anything of any significance has changed because of the pandemic with regard to our positioning on the core side or ability to win on the core side.

Okay. All right. Thanks guys.

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

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

Yes. That is a misconception that absolutely drives me nuts. Ken, I just got to say that right here. Jack Henry has been a player in the multibillion dollar space for well over 10 years. So if we were having this call 15 years ago, I would totally agree with what you just said. We were not a player in the multibillion dollar space. But for the past 10, 15 years, we have continued to grow in that space. We are the dominant player on the credit union side, almost 50%, then you'll see the numbers next week at the analyst conference, I quoted exactly off the top of my head, but close to 50% of the over a billion dollar credit unions run our Jack Henry Episys solution. So we are by far the dominant player. On the credit union side with a single platform. On the banking side, we have somewhere around 23% to 25%, of the multibillion dollar market running on almost all of them on our Silver Lake platform. We've continued to push up market. It is a key part of our strategy. We have continued to add functionality over the years and we are winning in that space regularly, just as I emphasized on the call today. So, we have -- we are not the little brother in the multibillion dollar banking space. We are definitely a player. The question for us is historically, we have been below about 50 billion. And so, one of the things that Stacy will talk about at the Analyst Day next week is that we are -- we do have an initiative to move above 50 billion, because that has not been a market that we've been in historically, we've been below 50 billion. But we have teams and we've been actively working in that space as well. So, we definitely are not targeting smaller banks. In fact, if you're a credit union below about 100 million in assets or a bank below about 200 million in assets. Then Jack Henry generally is not the fit. We're the fit for a right around a billion dollars is a real sweet spot for us. But as I mentioned, we've continued to grow up market here for many years.

Right. Okay. That's really helpful. And then, I guess, when we think about margins for fiscal year 2023, the platform migration will be behind you. I mean, what's the right way to think about margins, or even margin expansion after fiscal year 2022? And I'm just looking back at some numbers here. I mean, Jack Henry had a roughly 24% operating margin in fiscal year 2018. Is that, is that a good benchmark for fiscal year 2023?

Yes, Probably. Its Kevin. I mean, once we get next year behind, just get FY 2022 behind us, and get the full benefit of the payment migration, platform migration. We should go back and FY 2023, to the typical 50 to 100 bp margin expansion that we saw historically, before we started. And if you think about, I mean, 2018 is, is now when we started this the payment, platform migration. So there was already some degradation on our margins, even in 2018, that kind of grew since then. So, we should see some nice margin -- very nice margin expansion in 2022. And again, in 2023.

Right. Yes, I think that's right. Yes. I think the margins came down about 30 bps, it looks like in 2018 versus 2017. And then just maybe one last question for me, I think if I do the math, right, you're going to accelerate your non GAAP revenue growth to kind of high single digits, maybe even low double digits here in fiscal 4Q. Can you talk about the sustainability of that growth rate? And do you think fiscal year 2022 can grow at a similar level? Or is it something below that a good assumption?

No. So there's a couple of things that you got to remember. In Q4 is, we've got some pretty easy comps from last year, especially on the payment side. So you're right and your math, right. I mean, non-GAAP, you're going to see very high single digit growth, maybe even low double, but it's probably going to be in a 8% to 9% in Q4 to get us to that 6% non GAAP growth for the year. But like I answered a previous question, I think for FY 2022, you're probably going to see us grow faster than we did in FY 2021. There's not going to be high single digits. It's probably going to be in the 7% to 8% range like we saw before the pandemic hit.

Got it. Okay. Helpful. Thanks for taking my questions. Really appreciate it.

You bet.

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

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

So the retention rate, our retention rate is incredibly high. And we talked about that regularly. The concern that you may have a little bit of a misconception about deconversion fees. So when we get deconversion fees, that's because one of our customers has been acquired by somebody else. And so they are buying their way out of the existing contract that we have. We have no control over whether somebody is being acquired by another institution. We do have a good track record of doing -- of saving those accounts by convincing the acquirer to switch to the Jack Henry system. Those are hard to do and it's rare that you are able to do that. Because the acquirer is making all the decisions and the acquiree is having to respond to those decisions. But we have several times convinced the acquiring bank to convert to the Jack Henry system. But those are hard. And those are those are rare. So what drives deconversion revenue is one of our customers being acquired away. It's not that they're angry with Jack Henry and decide to leave us and now they got to pay to get out of the agreement. It's 100% of the time, I'd say it's because they've been acquired by somebody else. So that really doesn't come into the retention rate conversation. And again, our retention rates are well into the upper 90s as far as the core base.

Okay, great. And then maybe if you could talk about [Indiscernible] kind of a small item. But could you talk about the R&D expense, and kind of what some of the projects you're working on there? And where you're expecting your R&D expense to be trending over the next whatever timeframe, I guess, you feel like providing, that'd be really, really helpful? It was a little lower than I would have expected. Thanks.

So we tend to run at about 14% of revenue all in for R&D. So it's cap software, its R&D expense, about 14% of revenue. And that's been five years, probably we've been at that number, more than five years. So about 14% of revenue for several years. That's a number I'm very comfortable with looking forward, because we're committed to doing these innovative new solutions. So talking to those solutions. Some of them we've talked about here. We have digital is on that list, continuing to do a lot of investment in digital, continuing to do investment in the treasury platform, because our larger -- banks that are serving larger commercial customers are continuing to look for additional functionality. So that's on the list as far as R&D projects is concerned. We have our -- the core systems, we're continuing to do investment. That's something that you never say you're done. There's always ongoing investment in the core systems with new functionality and new look and feel, the user experience is constantly being updated. Our lending platform. So I highlighted that a little while ago in this conversation. Lots of ongoing investment there to expand the functionality to allow our customers particularly on the commercial side to do online lending. But we've also in the past year or so been investing in new functionality for consumer lending and consumer deposits to deliver best-of-breed functionality when it comes to originating accounts online. And then the last I'd highlight is in the area of fraud. So a lot of investment going on in the fraud area of a new functionality to deliver a more digital experience, I guess around managing fraud for our customers.

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

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

Yes. It's an interesting question. I wouldn't say that the credit union industry or the banking industry, one is ahead of the other. Historically, credit unions have been more tech forward, I guess I'll put it that way. They've always been more apt to invest in technology just since even when I started in this business a long time ago. Credit unions have always put technology at the front of the line. They've used it as a differentiator against banks, and not just against big banks, but against banks, just in general. And part of their rationale has been that they have money to spend on technology. They don't -- they haven't historically built as many branches of banks have. They've tried to use technology to be the differentiator, but I don't think there's been any change recently, as far as one or the other, and of changing their profile or being more aggressive about going after new technology.

Thanks.

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

Hi. Thanks for squeezing me in here. I guess my first question is just a clarification question on the revenue guide. The delta between the GAAP and the non GAAP, I think it was roughly $30 million prior quarter, and now it's about $17 million. But I think, Kevin, you talked about deconversion fees going down four to five million I thought. So like, what's, what's the remaining delta kind of you could provide? Some clarification there?

Well, I mean, a lot of it happened this quarter, because as I mentioned in my opening comments, our convert merge revenue was not where we thought it was going to be this quarter. We're just not seeing the M&A activity. Hardware sales continued down, on-prem installation continue to be down. So it's really not -- the change was not really in Q4, it was really Q3. We came up a little short, as most of you pointed out in your first call notes. We had a we had a revenue miss. But yet we were still very efficient and actually expanded our margins and still exceeded EPS consensus guidance for the quarter and we raised it for the year. So yes, I mean, the delta changed a little bit. But it's really not a whole lot of impact on Q4 as what happened in Q3.

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

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

Understood. And then I guess last one, sort of a broader question on the competitive environment. Several small point solution providers are sort of emerging, many of them are way public. How do you see that trend having an impact on your growth rates in the complimentary segment, if at all?

It's something that we watch pretty closely. And you're right, and that's essentially what I was alluding to earlier, when I was talking about the M&A environment. Those companies who maybe would have put themselves up for sale in the past and would have been a potential acquisition target for Jack Henry, all of them these days are thinking that they're going to IPO and so. I think it's just a little bit different than the number that are they're trying to IPO and take advantage of the frothiness in the market right now. But none of them are doing anything that's particularly, it's not threatened, particularly threatening to Jack Henry or new or different or anything like that. We are very well positioned to compete with the names that I think most of them that you would throw it at me, if you were to throw out names, I would tell you exactly how we're positioned and where we're positioned to compete with them. And we are not worried about our ability to compete with some of these folks there. They're taking advantage of the times and there's a lot of interest in Fintech right now and they're getting valuations that are exciting and we'll see where they sit five years from now.

Thank you. That's helpful.

And there are no further questions at this time.

Okay. Thanks, Brandy. As a reminder, as Dave mentioned, our Virtual Analyst Day is scheduled next week, a week from today, actually, on Tuesday, May 11. It'll be beginning at one o'clock. If you have not registered, but you would like to you can contact Vance Sherard. That's vsherard@jackhenry.com. And he can send you a registration link to sign up for the event. Now wrap up the call. We're very pleased with the overall results from our ongoing operations. And I want to thank all of our associates for the way they've handled these challenges by taking care of themselves and our customers and continue to work hard to improve our company to continue moving forward for the future. All of us at Jack Henry continue to focus on what is best for our customers and our shareholders. With that, I want to thank you again for joining us today. And Brandy, would you please now provide the replay number for the call.

Yes. And at this time, this does conclude today's conference call. But if you would like to listen to the replay, you may do so by dialing 1-800-585-8367. Again, that's 1-800-585-8367. Thank you. And have a great day.