Henry Jack & Associates Inc (JKHY) SEC Quarterly Report (10-Q) for Q1 2017

FORM 10-Q

Commission file number 0-14112

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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of April 30, 2017 , the Registrant had 77,651,594 shares of Common Stock outstanding ($0.01 par value).

TABLE OF CONTENTS

In this report, all references to "JHA", the "Company", "we", "us", and "our", refer to Jack Henry & Associates, Inc., and its wholly owned subsidiaries.

FORWARD LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, in Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements are identified at "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended June 30, 2016 . We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

See notes to condensed consolidated financial statements

See notes to condensed consolidated financial statements

See notes to condensed consolidated financial statements

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

Description of the Company

Jack Henry & Associates, Inc. and subsidiaries ("JHA" or the "Company") is a provider of integrated computer systems and services that has developed and acquired a number of banking and credit union software systems. The Company's revenues are predominately earned by marketing those systems to financial institutions nationwide together with computer equipment (hardware), by providing the conversion and implementation services for financial institutions to utilize JHA systems, and by providing other related services. JHA also provides continuing support and services to customers using in-house or outsourced systems.

Consolidation

The condensed consolidated financial statements include the accounts of JHA and all of its subsidiaries, which are wholly-owned, and all intercompany accounts and transactions have been eliminated.

Comprehensive Income

Comprehensive income for the three and nine months ended March 31, 2017 and 2016 equals the Company's net income.

Property and Equipment and Intangible Assets

Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets.  Accumulated depreciation at March 31, 2017 totaled $341,775 and at June 30, 2016 totaled $328,159 .

Intangible assets consist of goodwill, customer relationships, computer software, and trade names acquired in business acquisitions in addition to internally developed computer software. The amounts are amortized, with the exception of those with an indefinite life (such as goodwill), over an estimated economic benefit period, generally three to twenty years.  Accumulated amortization of intangible assets totaled $496,861 and $435,871 at March 31, 2017 and June 30, 2016 , respectively.

Common Stock

The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or borrowings on its existing line-of-credit. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At March 31, 2017 , there were 25,410 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,580 additional shares. The total cost of treasury shares at March 31, 2017 is $980,019 . During the first nine months of fiscal 2017 , the Company repurchased 1,202 treasury shares for $103,885 . At June 30, 2016 , there were 24,209 shares in treasury stock and the Company had authority to repurchase up to 5,782 additional shares.

Dividends declared per share were $0.31 and $0.28 , for the three months ended March 31, 2017 and 2016 , respectively. Dividends declared per share for the nine months ended March 31, 2017 and 2016 were $0.87 and $0.78 , respectively.

Interim Financial Statements

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America applicable to interim condensed consolidated financial statements, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and accompanying notes, which are included in its Annual Report on Form 10-K  ("Form 10-K") for the fiscal year ended June 30, 2016 . The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements included in its Form 10-K for the fiscal year ended June 30, 2016 .

In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial position of the Company as of March 31, 2017 , the results of its operations for the three and nine months ending March 31, 2017 and 2016 , and its cash flows for the nine months ending March 31, 2017 and 2016 . The condensed

consolidated balance sheet at June 30, 2016 was derived from audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements.

The results of operations for the period ended March 31, 2017 are not necessarily indicative of the results to be expected for the entire year.

Litigation

We are subject to various routine legal proceedings and claims, including the following:

In 2013 a patent infringement lawsuit entitled DataTreasury Corporation v. Jack Henry & Associates, Inc. et. al . was filed against the Company, several subsidiaries and a number of customer financial institutions in the U.S. District Court for the Eastern District of Texas.  The complaint sought damages, interest, injunctive relief, and attorneys' fees for the alleged infringement of two patents, as well as trebling of damage awards for alleged willful infringement.  A part of our defense was the filing of challenges to the validity of plaintiff's patents in post-grant proceedings at the Patent Trial and Appeal Board ("PTAB") of the U.S. Patent and Trademark Office. In 2015, the PTAB issued decisions holding that all relevant claims of the plaintiff's patents are unpatentable and invalid.  DataTreasury's appeal of the PTAB decisions to the U.S. Court of Appeals for the Federal Circuit was unsuccessful pursuant to decisions rendered on October 13, 2016. On March 20, 2017 the U.S. Supreme Court denied DataTreasury's petition for review.  On March 30, 2017 the US District Court for the Eastern District of Texas dismissed with prejudice all claims of DataTreasury against Jack Henry & Associates, Inc.

NOTE 2.    FAIR VALUE OF FINANCIAL INSTRUMENTS

For cash equivalents, amounts receivable or payable and short-term borrowings, fair values approximate carrying value, based on the short-term nature of the assets and liabilities.

The Company's estimates of the fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available. The three levels of the hierarchy are as follows:

Level 1: inputs to the valuation are quoted prices in an active market for identical assets

Level 2: inputs to the valuation include quoted prices for similar assets in active markets that are observable either directly or indirectly

Level 3: valuation is based on significant inputs that are unobservable in the market and the Company's own estimates of assumptions that we believe market participants would use in pricing the asset

Fair value of financial assets, included in cash and cash equivalents, and financial liabilities is as follows:

NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers in May 2014. This standard is part of an effort to create a common revenue standard for US generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The new standard will supersede much of the existing authoritative literature for revenue recognition. The

new model enacts a five-step process for achieving the core principle, which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB also issued ASU No. 2015-14 which deferred the effective date of the new standard by one year, but allows early application as of the original effective date. We do not intend to adopt the provisions of the new standard early, so the standard and related amendments will be effective for the Company for its annual reporting period beginning July 1, 2018, including interim periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08, which addresses principal versus agent considerations under the new revenue standard. ASU No. 2016-10, ASU No. 2016-12, and ASU No. 2016-20 also address specific aspects of the new standard. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect as of the beginning of the period of adoption. The Company is currently evaluating the newly issued guidance, including which transition approach will be applied, and continuing to assess all potential impacts of the standard. We expect the adoption of this standard to have a significant impact on our revenue recognition currently subject to Accounting Standards Codification (ASC) Topic 985.

The FASB issued ASU No. 2016-02, Leases, in February 2016. This ASU aims to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and requiring disclosure of key information regarding leasing arrangements. ASU No. 2016-02 will be effective for Jack Henry's annual reporting period beginning July 1, 2019 and early adoption is permitted. The Company is currently assessing the impact this new standard will have on our consolidated financial statements.

The FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, in March 2016. The new standard is intended to simplify several aspects of the accounting and presentation of share-based payment transactions, including reporting of excess tax benefits and shortfalls, statutory minimum withholding considerations, and classification within the statement of cash flows. The standard allows a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate them. ASU No. 2016-09 is effective for the Company's annual reporting period beginning July 1, 2017. Management elected to early adopt this standard as of July 1, 2016 and has elected to continue our current practice of estimating forfeitures. The adoption of this standard had the following impacts on our condensed consolidated financial statements.

ASU 2016-15 issued by the FASB in August 2016 clarifies cash flow classification of eight specific cash flow issues and is effective for our annual reporting period beginning July 1, 2018. Early adoption is permitted. We do not expect any significant impact to our financial statements as a result of this standard.

NOTE 4.    DEBT

Capital leases

The Company had previously entered into various capital lease obligations for the use of certain computer equipment, but has no capital lease obligations at March 31, 2017 . At June 30, 2016 , capital lease obligations totaled $200 .

Revolving credit facility

The revolving credit facility allows for borrowings of up to $300,000 , which may be increased by the Company at any time until maturity to $600,000 . The credit facility bears interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the highest of (i) the Prime Rate for such day, (ii) the sum of the Federal Funds Effective Rate for such day plus 0.50% and (iii) the Eurocurrency Rate for a one month Interest Period on such day for dollars plus 1.0% ), plus an applicable percentage in each case determined by the Company's leverage ratio. The credit facility is guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of March 31, 2017 , the Company was in compliance with all such covenants. The revolving loan terminates February 20, 2020 . At March 31, 2017 , there was a $50,000 outstanding revolving loan balance. There was no outstanding balance at June 30, 2016 .

Other lines of credit

The Company has an unsecured bank credit line which provides for funding of up to $5,000 and bears interest at the prime rate less 1% . The credit line was renewed in April 2017 and expires on April 30, 2019 . At March 31, 2017 , no amount was outstanding. There also was no balance outstanding at June 30, 2016 .

Interest

The Company paid interest of $418 and $748 during the nine months ended March 31, 2017 and 2016 , respectively.

NOTE 5.    INCOME TAXES

The effective tax rate was  32.1%  of income before income taxes for the quarter ended  March 31, 2017 , compared to 32.1%  for the same quarter in fiscal 2016 .

The Company paid income taxes, net of refunds, of $66,683 and $65,064 in the nine months ended March 31, 2017 and 2016 , respectively.

At March 31, 2017 , the Company had $5,492 of gross unrecognized tax benefits, $3,958 of which, if recognized, would affect our effective tax rate. We had accrued interest and penalties of $1,083 and $1,249 related to uncertain tax positions at March 31, 2017 and 2016 , respectively.

During the period ended June 30, 2016, the Internal Revenue Service commenced an examination of the Company's U.S. federal income tax returns for the fiscal years ended June 30, 2014 and 2015. The examination was completed during the quarter ending December 31, 2016 . The closing of the examination did not result in a material change to the Company's financial statements. 

The U.S. federal and state income tax returns for fiscal year 2014 and all subsequent years remain subject to examination as of March 31, 2017 under statute of limitations rules. We anticipate potential changes due to lapsing statutes of limitations and examination closures could reduce the unrecognized tax benefits balance by $500 - $1,500 within twelve months of March 31, 2017 .

NOTE 6.    STOCK-BASED COMPENSATION

Our operating income for the three months ended March 31, 2017 and 2016 included $3,132 and $3,101 of stock-based compensation costs, respectively. For the nine months ended March 31, 2017 and 2016 , stock-based compensation totaled $7,362 and $8,213 , respectively.

Stock Options

On November 10, 2015 , the Company adopted the 2015 Equity Incentive Plan ("2015 EIP") for its employees and non-employee directors. The plan allows for grants of stock options, stock appreciation rights, restricted stock shares or units, and performance shares or units. The maximum number of shares authorized for issuance under the plan is 3,000 . For stock options, terms and vesting periods of the options are determined by the Compensation Committee of the Board of Directors when granted. The option period must expire not more than ten years from the option grant date. The options granted under this plan are exercisable beginning three years after the grant date at an exercise price equal to 100% of the fair market value of the stock at the grant date. The options terminate upon surrender of the option, upon the expiration of one year following notification of a deceased optionee, or ten years after grant.

The Company previously issued options to outside directors under the 2005 Non-Qualified Stock Option Plan ("2005 NSOP"). No additional stock options may be issued under this plan.

A summary of option plan activity under these plans is as follows:

The Company utilized a Black-Scholes option pricing model to estimate fair value of the stock option grants at the grant date. All 32 options granted during the year were granted on July 1, 2016 . Assumptions such as expected life, volatility, risk-free interest rate, and dividend yield impact the fair value estimate. These assumptions are subjective and generally require significant analysis and judgment to develop. The risk free interest rate used in our estimate was determined from external data, while volatility, expected life, and dividend yield assumptions were derived from our historical experience with share-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances. The assumptions used in estimating fair value and resulting compensation expenses at the grant dates are as follows:

At March 31, 2017 , there was $375 of compensation cost yet to be recognized related to outstanding options. The weighted average remaining contractual term on options currently exercisable as of March 31, 2017 was 2.25 years .

Restricted Stock Awards

The Company issues both share awards and unit awards under the 2015 EIP, and previously issued these through the 2005 Restricted Stock Plan. The following table summarizes non-vested share awards as of March 31, 2017 , as well as activity for the nine months then ended:

At March 31, 2017 , there was $1,379 of compensation expense that has yet to be recognized related to non-vested restricted stock share awards, which will be recognized over a weighted-average period of 1.18 years .

The following table summarizes non-vested unit awards as of March 31, 2017 , as well as activity for the nine months then ended:

The Company utilized a Monte Carlo pricing model customized to the specific provisions of the Company's plan design to value unit awards subject to performance targets on the grant dates. The weighted average assumptions used in this model to estimate fair value at the measurement date and resulting values for 85 unit awards granted in fiscal 2017 are as follows:

The remaining 44 unit awards granted are not subject to performance targets, and therefore the estimated fair value at measurement date is valued in the same manner as restricted stock share award grants.

At March 31, 2017 , there was $12,548 of compensation expense that has yet to be recognized related to non-vested restricted stock unit awards, which will be recognized over a weighted-average period of 1.29 years .

NOTE 7.    EARNINGS PER SHARE

The following table reflects the reconciliation between basic and diluted earnings per share.

Per share information is based on the weighted average number of common shares outstanding for the three and nine months ended March 31, 2017 and 2016 . Stock options and restricted stock have been included in the calculation of earnings per share to the extent they are dilutive. There were 89 anti-dilutive stock options and restricted stock shares excluded for the three month period ended March 31, 2017 and no  shares excluded for the  three month period ended March 31, 2016 . For the nine months ended March 31, 2017 , there were 74 anti-dilutive shares excluded, and for the nine months ended March 31, 2016 , no shares were excluded.

NOTE 8.    BUSINESS ACQUISITION

Bayside Business Solutions, Inc.

Effective July 1, 2015 , the Company acquired all of the equity interests of Bayside Business Solutions, an Alabama-based company that provides technology solutions and payment processing services primarily for the financial services industry, for $10,000 paid in cash. This acquisition was funded using existing operating cash. The acquisition of Bayside Business Solutions expanded the Company's presence in commercial lending within the industry.

Management has completed a purchase price allocation of Bayside Business Solutions and its assessment of the fair value of acquired assets and liabilities assumed. The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of July 1, 2015 are set forth below:

The goodwill of $6,099 arising from this acquisition consists largely of the growth potential, synergies and economies of scale expected from combining the operations of the Company with those of Bayside Business Solutions, together with the value of Bayside Business Solutions' assembled workforce. Goodwill from this acquisition, none of which is expected to be deductible for income tax purposes, has been allocated in our Bank Systems and Services segment.

Identifiable intangible assets from this acquisition consist of customer relationships of $3,402 , $659 of computer software and other intangible assets of $944 . The weighted average amortization period for acquired customer relationships, acquired computer software, and other intangible assets is 15 years , 5 years , and 20 years , respectively.

Current assets were inclusive of cash acquired of $1,725 . The fair value of current assets acquired included accounts receivable of $178 . The gross amount of receivables was $178 , none of which was expected to be uncollectible.

During fiscal year 2016, the Company incurred $55 in costs related to the acquisition of Bayside Business Solutions. These costs included fees for legal, valuation and other fees. These costs were expensed as incurred and were included within general and administrative expenses.

The Company's consolidated statements of income for the third quarter of fiscal 2017 included revenue of $1,545 and after-tax net income of $270 resulting from Bayside Business Solutions' operations. For the third quarter of fiscal 2016 , Bayside contributed revenue of $1,191 and after-tax net income of $33 .

The results of Bayside Business Solutions' operations included in the Company's consolidated statements of income for the nine months ended March 31, 2017 included revenue of $4,721 and after-tax net income of $872 . For the nine months ended March 31, 2016 , Bayside Business Solutions' contributed $2,921 to revenue, with an after-tax net loss of $277 .

The impact of this acquisition was considered immaterial to both the current and prior periods of our consolidated financial statements and pro forma financial information has not been provided.

NOTE 9.    REPORTABLE SEGMENT INFORMATION

The Company is a provider of integrated computer systems that perform data processing (available for in-house installations or outsourced services) for banks and credit unions. The Company's operations are classified into two reportable segments: bank systems and services ("Bank") and credit union systems and services ("Credit Union"). The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue.

The Company has not disclosed any additional asset information by segment, as the information is not produced internally and its preparation is impracticable.

NOTE 10: SUBSEQUENT EVENTS

Purchase Commitments

On May 4, 2017 , the Company announced that it has entered into a strategic services agreement with First Data and PSCU to further expand the credit and debit card platform offered to financial institutions by its Card Processing Solutions group.  This agreement is for 12 years and includes total purchase commitments over that term in excess of $550,000 .

Dividends

On May 5, 2017 , the Company's Board of Directors declared a cash dividend of $0.31 per share on its common stock, payable on June 9, 2017 to shareholders of record on May 24, 2017 .

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q for the quarter ended March 31, 2017 .

OVERVIEW

Jack Henry & Associates, Inc. (JHA) is a leading provider of technology solutions and payment processing services primarily for financial services organizations.  Its solutions are marketed and supported through three primary brands. Jack Henry Banking® supports banks ranging from community to multi-billion dollar institutions with information and transaction processing solutions.  Symitar® is a leading provider of information and transaction processing solutions for credit unions of all sizes.  ProfitStars® provides specialized products and services that enable financial institutions of every asset size and charter, and diverse corporate entities outside the financial services industry, to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. JHA's integrated solutions are available for in-house installation and outsourced delivery.

A significant portion of our revenue is derived from recurring outsourcing fees and electronic payment transaction processing fees that predominantly have contract terms of five years or greater at inception. Support and service fees also include in-house maintenance fees which primarily contain annual contract terms, implementation services revenue, and bundled services revenue, which is a combination of license, implementation, and maintenance revenue from our revenue arrangements. Less predictable software license fees and hardware sales complement our primary revenue sources. We continually seek opportunities to increase revenue while at the same time containing costs to expand margins.

RESULTS OF OPERATIONS

In the third quarter of fiscal 2017 , revenues increased 6% or $20,581 compared to the same quarter in the prior year, with strong growth continuing in our support and service revenues, particularly in our outsourcing, electronic payments, and bundled services revenue streams. Cost of sales and gross margin each also increased 6% . The Company continues to focus on cost management. An increase in deconversion fees (fees charged when customer agreements are terminated prior to the end of their contracted term) of $6,740 in the third quarter of fiscal 2017 compared to the same quarter in fiscal 2016 contributed to the increased revenue. However, the third quarter of fiscal 2016 included $7,657 in revenue from the Company's Alogent product line, which was sold in the fourth quarter of fiscal 2016 . Excluding deconversion fees from both periods and Alogent revenue and cost from the prior year quarter, revenue increased 7% and gross margin increased 4% .

Operating expenses decreased 1% compared to the third quarter of fiscal 2016 , due to a gain on the sale of a business. Provision for income taxes increased 12% compared to the prior year quarter, mainly due to income before income taxes increasing 11% .

The increased revenue and above changes resulted in an 11% increase in net income for the third quarter of fiscal 2017 compared to the third quarter in fiscal 2016 . Excluding deconversion fees from both periods and Alogent revenue and cost from the prior year, net income increased 4% .

In the nine months ended March 31, 2017 , revenues increased 6% or $59,672 compared to the same nine months last year, with all of the growth occurring in our support & service revenue streams, particularly our outsourcing, bundled services, and electronic payment services revenue. Cost of sales increased 5% , gross margin increased 7% , and operating expenses increased 3% for the nine month period ended March 31, 2017 . Provision for income taxes increased 9% compared to the prior year-to-date period. The increased revenues and above changes resulted in a 10% increase in net income for the nine month period. Deconversion fees for fiscal 2017 year-to-date increased $10,792 over fiscal 2016 's first nine months, but the fiscal 2016 year-to-date period included Alogent revenue of $22,334 . Excluding deconversion fees from both periods and Alogent revenue and costs from fiscal 2016 , revenue and gross margin each increased 8% , and net income increased 7% for the first nine months of fiscal 2017 .

We move into the final quarter of fiscal 2017 following strong performance in the third quarter. Significant portions of our business continue to come from recurring revenues and our healthy sales pipeline is also encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these times they have an even greater need for our solutions that directly address institutional profitability, efficiency, and security. Our strong balance sheet, access to extensive lines of credit, the strength of our existing product line and an unwavering commitment to superior customer service position us well to address current and future opportunities.

A detailed discussion of the major components of the results of operations for the three and nine months ending March 31, 2017 follows. All dollar amounts are in thousands and discussions compare the current three and nine months ending March 31, 2017 to the prior year three and nine months ending March 31, 2016 .

REVENUE

Non-bundled license revenue for the third quarter was higher than for the same quarter of fiscal 2016 due to increased sales of standalone licenses. The year-to-date period of fiscal 2017 was lower than the same period of the prior year due to a reduction of standalone license sales in our Banking segment. Such license fees will fluctuate as non-bundled license sales are sporadic in nature.

There was growth in most support and service revenue components in the third quarter of fiscal 2017 compared to the same quarter last year, as well as in the year-to-date period ended March 31, 2017 .

In-house support and other services revenue decreased in the third quarter compared to the same quarter last fiscal year due to revenue from Alogent included in the prior year. The decrease was partially offset by increased revenue from work orders and consulting. Year-to-date, revenue from in-house support and other services increased despite the headwinds created from the Alogent sale, due mainly to increased revenue from work orders and from customers consulting with our Client Services Consulting group. The group's operational assessments help banks and credit unions maximize their operating efficiency and productivity, identify new revenue and market opportunities, and reduce costs.

Electronic payment services revenue continues to show growth. The revenue increase in both the quarter and year-to-date period is mostly attributable to increased revenue across debit/credit card transaction processing services, ACH processing, and related fees. Deconversion fees for the third quarter increased $2,719 compared to the same quarter of fiscal 2016 . Without the impact of these fees electronic payment services revenue grew 7% for the quarter. Deconversion fees within electronic payment services for the year-to-date period decreased $48 compared to the prior year.

Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to show a preference for outsourced delivery of our solutions. Revenues from outsourcing services are typically earned under multi-year service contracts and therefore provide a long-term stream of recurring revenues. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. The increases in outsourcing revenue in both the quarter and year-to-date period were mainly due to increased data processing fees. Deconversion fees also increased $3,637 for the quarter ended March 31, 2017 compared to the same quarter in the prior year, and $10,260 for the year-to-date period. Excluding the impact of deconversion fees, outsourcing revenue grew 11% in the third quarter compared to the prior year third quarter and 13% in the year-to-date period.

Implementation services include revenue from implementations for our electronic payment services customers as well as standalone customization services, merger conversion services, image conversion services and network monitoring services. Implementation services revenue was lower in both the current quarter and year-to-date periods due to revenue from Alogent included in the prior year.

Bundled products and services revenue is combined revenue from the multiple elements in our bundled arrangements, including license, implementation services and maintenance, which cannot be recognized separately due to a lack of vendor-specific objective evidence of fair value. Bundled products and services revenue increased quarter-to-date due to terminations of pending products and services on certain contracts that have allowed for the release of revenue that was being deferred until contract completion in our credit union core and complementary arrangements, as well as increased revenue being released due to completion of final installations and services on our banking and credit union multiple element arrangements. The increase year-to-date is due to terminations of pending products and services on both our banking and credit union core and complementary arrangements, as well as completion of final installations on our banking arrangements.

Hardware revenue decreased in the third quarter and year-to-date period of fiscal 2017 compared to the same quarter and year-to-date period a year ago due to decreases in revenue from power systems, scanners, and other hardware compared to the prior year. Although there will be quarterly fluctuations, we expect an overall decreasing trend in hardware revenue to continue due to the change in sales mix towards outsourcing contracts, which typically do not include hardware, and the general deflationary trend of computer hardware prices.

COST OF SALES AND GROSS PROFIT

Cost of license consists of the direct costs of third party software that are a part of a non-bundled arrangement. Non-bundled license sales are sporadic in nature, and shifts in the sales mix between the products that make up the associated costs cause fluctuations in the margins from period to period.

Cost of support and service increased 8% in the current quarter, generally commensurate with increased revenue, and gross profit margin was a consistent 42% of revenue in both the current and prior year third quarter. For the year-to-date period, cost of support and service increased just 6% while revenue increased 7% , contributing to an increase in gross profit of 8% .

In general, changes in cost of hardware trend consistently with hardware revenue. For the current quarter and year-to-date period, margins were lower due to a mix of sales that included lower margin hardware upgrade products.

OPERATING EXPENSES

Selling and marketing expenses for the third quarter of fiscal 2017 increased over the prior year quarter due mainly to increased commission expense. Selling and marketing expense was a consistent percentage of total revenue in both quarters. For the nine months ending March 31, 2017 , selling and marketing expense increased just 1% compared to same period of the prior fiscal year, due mainly to increased commission expense, but was a lower percentage of total revenue.

Research and development expenses increased for the quarter and year-to-date, primarily due to increased salary and personnel costs from increased headcount and annual pay increases, however remained consistent with the prior year as a percentage of total revenue.