Q1 2020 Earnings Call

2020 financial results conference call.

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After the speaker's remarks, there will be a question and answer session.

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Thank you I will now turn the call over to Steve Calk Director of Investor Relations. Sir Please begin.

Thank you operator, good morning, everyone and thank you for joining US where first quarter 2020 conference call with me as Matt Flaker, CEO and Jennifer Harris our CFO.

This call contains forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance at Q2 holdings actual results may differ materially from those contemplated by these forward looking statements and we can give no assurance that such expectations or any about forward looking statements will prove to be correct.

Certain factors that could cause actual results to differ materially from those reflected in the forward looking statements are included in our periodic reports filed with the FCC, including our most recent annual report on form 10-K, and subsequent filings and the press release distributed yesterday afternoon regarding the financial results, we will discuss today.

Looking statements that we make on this call it based on assumptions only as of today Skus investors should not assume that these statements were made operative at a later time, we undertake no obligation to update any such forward looking statements discussed in this call.

Also unless otherwise stated all financial measures discussed on this call will be on a non-GAAP basis, a discussion of why we use non-GAAP financial measure sent a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which may be found on the Investor Relations section of our website and in our form 8-K filed with the S.

See yesterday afternoon.

I'd now turn the call over to Matt.

Thanks, Steve and thank everyone for joining the call today, obviously, we're an unprecedented times the rapid spread of the Corona viruses forced all of us to change how we work live and bank.

So on todays call I will provide a brief update on our first quarter performance.

The majority of my prepared remarks discussing the impacts of the Kobin 19 pandemic on our employees and our customers and how we're responding.

Before I begin I'd, just like to say that I'm incredibly proud and encouraged by our employees have responded to this crisis. It didn't try times like these that we rally around our mission and I'm inspired by the work our teams have been doing to expand and ensure availability of critical digital banking systems, while working almost entirely remotely I would also like to thank.

All the first responders and health care professionals, who everyday put themselves in harm's way to protect and care for those afflicted with the virus with that let me briefly go through our first quarter performance.

In spite of the current macro environment. The first quarter was very positive for the business. Our strong start to the year carried us through the final 30 days or the quarter by which time shelter in place and become the norm in a vast majority of employees across the globe began to work from home.

No we are continuing to invest in our business and seeking to capitalize on opportunistic strategic talent when available in the market.

Now I'd like to discuss what we're hearing from our customers. Since early March we had been indirect contact with substantially all of our customers and if you seem to have emerged it's clear that many financial institutions have key processes and functions that are still very branch dependent they rely on older systems that provide employees with limited access outside.

The branch and while our customers have made tremendous progress in enabling digital customer experiences with things like opening an account or applying for a loan many of those underlying processes still require some degree of branch or in person intervention.

Despite our delivery teams remote capabilities as a result of some of our customers remote access challenges, we were seeing some slowdown in the scheduling and execution of the second quarter projects were finding that some f. eyes have difficulty remotely executing a larger projects like new implementation.

The scope and duration of these delays very varies by customer and we are monitoring just on a daily basis as we learn more and our clients continued to deal with urgent initiatives stemming from cobin 19, including the P.P.P. remote work in general business continuity and safety.

The good news is as I've always said our customers are typically healthy progressive financial institutions.

We look at the Bauer rating system, a one to five scale that measures financial institutions overall health with a five being the strongest as a general measure of our clients position in the market.

The average Bauer rating across our digital bank and customer base is 4.8. So I believe our customers are on a strong position to whether this situation, which we believe in turn should limit the wrist to our business in this environment in terms of engagement, we shifted our annual customer conference connect to a multi part virtual event and just.

Wrapped up the first part of our series last week.

Areas will run through June, which presents a timing shift from our typical case.

Even in the current macro environment, we still believe it is critical to provide a forum to listen to customers and share our strategic direction.

This brings me to what we are seeing with our prospects and how that impacts are pipeline for planning purposes, we've adjusted our second quarter bookings expectations down to varying degrees across all of our lines of business.

In spite of the distractions around the current operating environment, our customers are demonstrating a clear desire to expand their relationships with us in a time when digital is so critical so we're expecting the impact to our second quarter cross sell target would be less impacted the net.

We expect the impact of coping 19 on our bookings to vary by the type of customer we serve and the solutions that they purchase as such I wanted to provide additional commentary on our key customer segments you'd call. It supply both domestically and internationally, particularly in the enterprise space, where we have the most international activity and unless otherwise.

<unk> these comments apply exclusively to the second quarter, where we have the most visibility today I'll start with enterprise accounts financial institutions above $50 billion.

Where we have particular traction with cloud lending and precision lender here, we have seen a substantial slowdown in recent weeks as these larger companies were among the earliest to adjust to the new macro environment.

As a result, we've seen inflight opportunities put on hold while these institutions grapple with global challenges and their own internal allocation of resources.

That said I still believe weren't a very strong position to when many of these opportunities once the justice settled on the present situation.

We were in the contract phase with a number of these enterprise opportunities and I fully expect that we will resume our discussions once we are back in a more normal environment.

Sure one institutions those between five and 50 billion are reacting slightly differently. What we're seeing is that many of our inflight opportunities are progressing, albeit at a slower pace given the circumstances that said fewer of these institutions are entering into large digital evaluations at this time, which means fewer new.

Fast for a cure one teams and we're adjusting our second quarter pure one pipeline expectations accordingly in the tier two and three space those financial institutions under 5 billion in assets were expecting a slowdown of the existing opportunities and new pipeline.

These institutions generally have fewer resources and are more focused on the immediate impacts of the pandemic.

Things are more fluid in the Fintech and all fine and smart I expect the larger more established and tax we'll see this as an opportunity to go on the offensive and add to their product capabilities, while earlier stage companies will focus on their existing products and users.

We believe our lending and banking is a service capabilities position as well to work within tax looking to advance the ball and the coming months.

Now let me provide a few key updates on what we have done since March and what we are focused on in the coming months to help our customers through this crisis.

I'll start by highlighting that many of our customers have a key role in the administration of small business loan, resulting from the new Paycheck protection program, while the P.P.P. as an immediate opportunity for our customers. These financial institutions are scrambling to execute the application decisioning and disbursement processes digital with no in person intervention.

Choir in response to queue to cloud lending team created in India N.P.P.P. solution designed to help financial institutions conduct the entire application and disbursement process digitally.

While keeping robust records for loan forgiveness down the road <unk>.

This solution can be deployed in a matter of days and has already aided in the process and funding of these S.B.A. loans for a number of our customers.

Another key area focus for us has been helping drive education and adoption of our customers digital capabilities with in brass traffic all but eliminated. We believe the time is now for them to dry further adoption of digital capabilities. We are ramping up our assistance here by providing Turkey marketing packages the financial institutions can use to drive enrollment.

What'll banking and drive adoption of specific critical features like remote deposit capture and skip a payment functionality.

Finally are hosting teams and infrastructure are more critical than ever. The first thing we hear from most customers is that uptime is their highest priority with the rise of digital banking and this time of social distancing and the disbursement of the cares X. funds, we've seen record levels of log ins and usage across our platform and the <unk>.

Leading up to the crisis, we may have seen a total of a million log ends in a single day in recent weeks when stimulus checks were issued we had days, where we exceeded a million log ins per hour on multiple occasions. We believe our teams have responded.

We have some of our best engineers dedicated to managing through these high volume windows, given their ever increasing importance on system availability and record level demand on these systems, we were making incremental investments in our hosting an infrastructure capacity.

Looking beyond the next few months there are few themes that I believe will be a critical important both for q. too and the financial institutions, we serve.

Overall I believe this crisis will serve as yet another catalyst for digital transformation in my view there'll be some permanence to this sudden mandatory shift towards digital the current situation is highlighted that much of the digital transformation of financial services has been focused on the customer experience layer.

As I mentioned earlier the shut down of branches has uncovered that many back in processes and technologies are still dependent on a nine to five brick and mortar banking mall. So financial institutions are finding that using technology to improve the business processes that underlie the customer experience is critical to serving their customers in today's environment.

It's more than a channel digital was the way banking must be done in today's environment. When we emerged from the current situation I expect more financial institutions too rapidly explore and invest in using technology to innovate even further.

I believe things like fully digital account opening and loan facilitation for their customers and their staff will become the norm.

And with the key investments we've made in these areas I believe we are extremely well positioned to assist with the next wave of digital transformation.

Another question, we've heard from many customers is how can I sell or provide personalized service with no in branch interaction.

Over the past few years, we have seen branch traffic diminishing digital engagement grow.

Our belief that the insights we can generate from the data will be the primary method of understanding customers wants and needs.

With this in mind that we built solutions like cute too smart for marketing and Q2 Sentinel for security, both of which leverage behavioral data to help our customers better serve their account holders.

In addition, we believe that the precision lender suite with its rich lending data sets and data driven loan coaching is of even greater value. When there was a mass pricing dislocation and lending activity is primarily facilitated through the digital chattel.

We are prepared to continue operating in this environment for the foreseeable future, but if one thing has become imminently clear. It's a digital banking has never been as important as it has been in recent weeks and we believe we are powerful position to help financial institutions provide a superior experience to their customers, thanks, and with that I'll hand, the color to Jennifer.

<unk>.

It began by reiterating some of the points <unk> alluded to on the durability of our financial model then I'll review our results for the first quarter of 2020, and conclude with updated guidance or the second quarter and full year 2020.

Well covered 19 has caught some disruption to sales processes and implementation project.

<unk> and 2020 will be different across our lines of business, which cloud blending and precision when they're being impacted to a larger degree due to their international operations, where coded 19 hit first.

Additionally are cloud based lending solution typically convert to wrap anew quicker than bookings up our digital banking solutions. So the financial impact on the booking slow down in this space will be more immediate.

Especially true for precision lender, which is heavily focused on large enterprise deals and had the Rebecca pipeline in Europe. In this region, we have observed that distracted buying environment and delayed implementation.

Large enterprise customers focused existing resources on adapting to the new macro environment.

We were in active contract negotiations with several enterprise customers and these conversations were suspended given the widespread uncertainty and distraction of covet 19.

We believe these deals Vermont law, but rather just delayed until these enterprises began to regain some certainty as to the outcome of this pandemic him began to we focus their internal business resources on new project implementation.

In March we also began to see it slow down in decision, making by certain prospects related to not new digital banking details and we expect this slow down to continue until they have adjusted to the current environment.

However, given me extended time <unk> far not nude get your banking customers. The impact of this slow down with interior alive more slowly. We also don't know the extent to which any slow down will be mitigated by increased demand as market three open.

It's not mentioned digital banking bookings for Q. on were largely in line with our plan given the dependency of digital banking revenue on implementation timing any delay and <unk> booking during the second quarter would likely affect the case of our 2021 wrapping but only have a small empire.

On late 2020 wrap on him.

The 2020 impact to the digital banking portion of our business will be largely dependent on the ability of our financial institutions to continue moving implementation projects forward for the remainder of the year and our ability to successfully continue to cross sell new features and functionality into our existing customer base.

As Matt mentioned, well, it's not uncommon for our staff to deliver projects remotely. We are finding that some f. five may have difficulty remotely executing on projects such as new implementation and others have delayed projects as a result of their prioritization of urgent initiative in response to cope at 19.

Therefore, we do anticipate that the resource availability of our customers may fluctuate over the coming months.

However, existing customers are demonstrating a clear desire to expand their relationships with us at a time when servicing their account holders remotely is so critical and these cross sell Brookings have a quicker time to wrap any.

Therefore, I expect the mix to shift somewhat towards more cross sale bookings from new customer bookings, which I believe also will help mitigate any revenue impact in the current year.

[noise] in February we began taking proactive measures to mitigate the impact of reduced revenue on our profitability. We started by limiting tribal attendance at trade shows and conferences and postponing the onboarding of additional resources to deliver new booking.

Well, we ultimately feel our solutions will be in greater demand as our customers emerged from this disruption covered 19, and it's related circumstances have created uncertainties in the market and we are proactively managing our business accordingly, while continuing to position Q.T. for the longer term success.

Well now quickly review our results for the first quarter of 2020.

Please note that all numbers referenced in my remarks on and Nongaap basis, unless otherwise stated.

[noise] total non-GAAP revenue for the first quarter with $93.8 million, an increase of 32 per cent year over year end up six per cent from the previous corker.

Are increased revenue with largely the result of growth and subscription and services were happening.

Subscription revenue growth with driven by the combination of organic user growth and customer garage in the corridor. In addition to the increased revenue contribution from precision wonder.

We observed based full court ever Avenue on Q1 as compared to two months of revenue in the fourth quarter of 2019.

Services revenue also benefited from that new go lives in the corner as well as an increase in other professional services in particular, the growth and premiere services engagements within our tier one customer base during that period.

It's not mentioned nearly half of the <unk> that took place in the quarter came in March after our transition to working remotely.

Transaction revenue represented 14% of total revenue in the corridor down from 16% and the prior year period and consistent with the previous corridor.

Over your decline and transaction revenue as a percentage of total revenue is primarily attributable to the increase subscription revenue contribution from precision <unk>.

[noise], turning the backlog, we experienced a sequential increase of approximately $48 million or 4% ending the court or with a total committed backlog of over $1.2 billion, a 30 per cent increase over the ending backlog at March 31st 2019.

The addition of precision lender backlog contributed roughly 2.5% of the year over year increase.

Map spoke to the fact that much of our cross self access came from customer renewals on contract extension, which accounted for over a third of auditions the backlog during the quarter.

Perspective bookings related to renewal and contract extensions in the corridor well over three times higher than they were in the first quarter of 2019.

Gross margin was 53.1% up from 52.3% and the first quarter of 2019 and down from 56.8% in the previous quarter.

The year over year increase was attributable to growth in subscription revenue combined with a reduced mix of lower margin transaction revenue as well as the lower than anticipated travel related expenses during the quarter.

Results of restrictions related to cope at 19.

The sequential decline was primarily driven by the seasonal increase in hiring at typically occurs in Q. why as was increased payroll taxes, driven by the timing of annual bonus and commission payments combined with the reset of annual social security caps.

Increased hiring was focused primarily on adding implementation and support capacity to continue servicing our customer grow.

[noise] total operating expenses were $52.8 million up 32% from the prior year period and up 23% from the previous corridor.

The over your increase was primarily related to the acquisition of precision lender in the fourth quarter of 2019.

Excluding the addition of precision lender operating expenses would have been approximately 14 per cent year over year.

I've been primarily by increased headcount.

Sequential increase with also primarily driven from the head count additions unrelated employee expenses, including the fourth quarter impact of precision lender as opposed to only two months in the previous corridor.

The sequential increase an expense was concentrated within r. and d. and G.N.A. as precision lenders headcount with concentrated heavily in r. and d. and much of their security compliance and operating costs are included within G.N.A.

Sales and marketing expenses were lower than originally expected during the quarter due to the reduction in expenses associated with travel trade shows and other marketing event.

Adjusted EBITDA was negative $100000 down from positive $300000 in the first quarter of 2019 and down from $10.6 million in the previous corridor largely due to the acquisition precision lender.

These results were however, better than I previously issued guidance of negative $3 million to negative $2 million.

It was in large part because of the proactive steps, we took in restricting travel and the related decreases in trade shows conferences and other marketing expenses along with the fact that revenue came in near the high end of our guidance range.

During the first quarter. We also began to reprioritize internal resources moving them away from that new customer sales and marketing and towards the execution of ongoing implementation projects and reducing the existing backlog.

We intend to closely monitored situation and remain in a position to reengaging, new opportunities as our customers and prospects make new buying decisions and their internal resources become available.

We ended the quarter with cash cash equivalent and investments of $112.8 million down from $132.4 million at the end of the fourth quarter.

Nashville used in operations for the first quarter was negative $15.8 million driven largely by the timing of our annual bonus pay out R.S.U. vestings and they're related payroll taxes.

We incurred net capital expenditures, a $4.6 million and $300000 a software development capitalization, resulting in free cash flow of negative $20.7 million for the corridor.

Now, let me turn to all updated guidance, we're forecasting second quarter Nongaap revenue in the range of $94 million to $96 million and we are revising full year revenue down to a range of $393 million to $400 million, representing 24% to 26%.

Year over year gross.

This guidance range is wider than typically provided given the level of uncertainty around when new Brookings and project timelines will return to a more normal level.

I mentioned previously this guidance reflects revived expectations for our digital lending businesses due to their focus on the enterprise an international market.

Based on the data we observed that's far we're cautiously factoring in prolong delays and decision, making an implementation.

Enterprise and international customers as the focus for their lending personnel previously engaged in our implementation have been shifted to focus on critical covered 19 related initiatives.

We believe precision lenders total revenue contribution for the full year of 2020, we'll have a four in the mid 20 million dollar range as their revenue contribution will likely be concentrated around upsells and renewal to existing customers rather than the addition of new enterprise revenue streams.

In addition, we expect qual blending revenue for 2020 will likely see between a 5% and 10% decrease from our previous revenue forecast due to slow decision, making on new digital lending and leasing deals and implementation project delays.

Mentioned earlier in April we quickly launched an end to end digital lending solution to help our financial institutions have been tech customers distribute funds made available by the Paycheck protection program.

Guidance reflects the incremental revenue that we have visibility into that star and partially offsets the anticipated decrease in new revenue from our cloud blending businesses.

Now however that these incremental revenues were likely create a negative comparison and 2021.

These contracts are generally structured to be one year in <unk>.

The remaining reduction in full year revenue guidance reflects our current assumptions related to the potential impact of code at 19 on our digital banking and banking is a service businesses.

Include the combination of the anticipated slowdown in net new booking.

Delays in implementation projects and anticipated customer confessions or increases ensuring based on the economic impact our customers are experiencing as a result of this pandemic.

Map mentioned, we have a healthy customer base, but we're mindful of the potential exposure. We may have with some of our smaller financial institutions as well as those spend pet customers, who rely on additional funding to sustain their operation.

We're forecasting they overall impact to the digital banking and banking is a service businesses to equate to approximately a 2% reduction from my previous revenue forecast.

We forecast second quarter, adjusted EBITDA of $3 million to $4 million and we are pleased to reiterate our previous full year guidance range at $16 million to $19 million, despite the lower than anticipated revenue.

Melting and adjusted even a margins for the full year of approximately 4% to 5%.

The improved profitability as a result of us taking proactive steps to slow hiring combined with the travel facilities and other discretionary cost savings, we're experiencing due to travel and shelter and place restrictions related to cope at 19.

As I previously mentioned, we believe that our guidance today demonstrates that we intend to continue to monitor engagement with customers and prospects and manage our expenses and existing resources, accordingly, but still making investments that we believe position us to serve our customers as their focus and engagement normalizes over time.

We ended the first quarter with a strong balance sheet that we believe will continue to provide comfort to our customers and prospects alike. We remain confident in our ability to sustain business operations with the cash we have on hand today and manage the inflow of new business with any additional expenses required to service them.

And the second quarter, we will disperse the final earnout payment related to the crowd lending acquisition, which will be approximately $21 million. Additionally, I would expect an increase in the level of our capital expenditures for 2020, as we are making it a priority to ensure we have the data center infrastructure and capacity necessary to.

Support the elevated levels of digital engagement, our existing customers are experiencing as well as the increase in new users associated with go lives scheduled for later in the year.

Well, we have not yet experienced any material covered related impact to D.S. Those we may see an uptick in the third quarter due to the higher than normal volume of annual buildings that occur near the end of that quarter and typically are not collected until the beginning of the fourth quarter.

Additionally, any extended payment terms requested as a result of coded 19 impacts on our customers business could negatively impact our D.S. is.

I expect the increased investment necessary to handle the increased levels of user engagement.

Slow down and bookings and related upfront customer deposits and the potential impacts associated with any customer concessions could hinder our ability to be free cash flow positive for the year.

However, the increase in digital engagement will provide the opportunity for accelerated organic user growth going forward and when combined with the extension of existing customer contract terms and the related increasing committed backlog as this crisis that side, we believe Q2 will be extremely well positioned to capitalize on.

The next wave of digital transformation.

In summary, we will continue to partner with our customers and allocate our resources to service our customers in their greatest areas of neat.

We feel confident that we have the market positioning financial strength.

Skilled workforce and enhance procedures in place to manage to this crisis. Meanwhile, we will remain prepared so that we can continue to partner with and deliver for our customers as they move forward with their digital transformation.

With that I'll turn the call back to matter is closing remarks.

Hey, Jennifer beforehand, the call over to the operator I'd like to reiterate if you keep voice first we have adapted and taken action in response to the current environment, we're providing updated guidance for the second quarter and full year 2020 to reflect the slowdowns, we're seeing and customer decision, making as they deal with the distractions of the situation.

We expect the biggest impact of these slowdowns to come in the second quarter, but given the global uncertainty on on when things will return to normal we they seem to be conservative into guides.

<unk> I want to reiterate that the health and safety of our employees has been paramount in our planet.

We have been seamlessly working remotely since more early March and feel we are well positioned to continue operating this business in this environment for as long as the situation requires.

There, we believe we have a healthy and progressive customer base. These are financial institutions that have bought into digital transformation and in spite of some key challenges I've been impressed with their ingenuity during the sudden transition to digital.

Well many of them have shifted their focus to providing a median support to their communities. We are still engaging and frequent conversations with them and I believe they're developing an even greater appreciation for our solutions and our partnership.

Times like these were fortunate to have a strong financial foundation I believe our subscription model long term contracts and strong balance sheet equip us to endure the immediate situation and emerge in a great position to partner more deeply with new and existing customers.

Finally, when we do emerge from this crisis I expect to demand for digital transformation to be stronger than ever.

When that time comes I believe are unique product portfolio or financial model and our track record of execution put us on a tremendous position to capitalize on the next wave of digital innovation and financial services.

And without altering the call over to the operator for questions.

Thank you as a reminder, task a question you on each crestar one on your telephone with dry your question press the pound or hash key please limit questions to one question only.

Our first question comes from the line of Bob Nepali from William Blair Your line or something.

Thank you and and good morning, I guess, but here you are well and it just on.

The investments Matt what are you seeing that surprised you and this and how how if you adjusted.

<unk> the key investment products that you're.

Working on if you adjusted your your investment strategy at all because of <unk>.

Yeah. Thanks, Bob I think appreciate the world, which is hope you're will also <unk>.

I think that one of the things that we did almost immediately I think we're one of the first to go to a remote environmental March 3rd is we changed our mindset to adapt to the world that we're in today.

And you look at that whether it's digital banking or Onboarding product. We are <unk> are we invested quickly into that to make sure. We had capacity and scale, we improve the delivery process and timing on that so we can onboard customers faster, we talked about the infrastructure investment that we had to make on the hosting and borrow.

<unk> for the demand that came through the.

Stimulus packages. We we also began to roll out products like mobile remote deposit capture skipper payment as we mentioned in the call and then we did we had real heroics on the cloud lending side of the business and precision lender side of the business preparing for the S.B.A.P.P.P. program to put products in place to help our customers facilitate.

The distribution of those funds and so.

Standpoint, we we pivoted on a dime to begin to focus on the world that we're in today I'm really proud of the work that we've done that we're going to continue to operate in this environment as as a as a real time basis paying attention to demand and and and customer request to to be able to solve problems. So these customers can do things digit.

Really.

Thank you appreciate it.

<unk>.

And our next question comes from the line of Joe <unk> from Bears your line or something.

Great. Good morning, I come on and Jennifer Hope, you're both doing well.

You know I appreciate it they're pretty dynamic environment. So all the details on the guidance out that are helpful. I guess longer term when you think about a way you'd communicated in the past than a a structural.

Call it organic growth profile of 20% or better [noise]. You know if you had to re sites that thinking today, how would you kind of thinking about it and you know some of the observations just even in March Yeah, I I think you're online account days.

Added three or 4% a gross within just one month. So when you look at those trends are you thinking about.

Engagement on digital love It one day again, the amount of lead generation, that's happening right now and then could it ultimately be a lot higher or somewhat higher than 20%, but just the timing to get there is a bit on down right now.

Yeah I think.

You hit some of that on the head there with your last comment right. The timing is unknown. We do expect that if you listen to the comments in our guidance even with the you know expected 2% reduction from previous on the digital banking side that still insinuates at the top end of the guide about a 20%.

You're over your increase even with the the pressures that we're facing right now how quickly that comes back to be closer to the 25 of the 20% to 25% range that we mentioned before it really depends on how quickly the business starts to return and how much of this you know new opportunity were able to me to capitalize on but.

I would also remind you as we mentioned in the script that some of the P.P.P. lending products et cetera that we've done are really structure to be one year contract. So that will be a bit of a negative in our 2021 compares as those roll off if we can't convert those two more of the tree.

Additional lending platform that cloud lending or precision lender offers so that that plays a little bit into the timing as well, but I certainly believe that when the market returns, we will get back to that 20% to 25% and how far north that can go really depends on you know just the level of user activity the level of and gave.

Age meant and the one thing I would point out is yes, we had a large increase in the number of registered users during Q1, but don't get over excited about that being from code that why we did see a small increase from from March to April it's still too early to see what that longer trend is going to be.

Be a lot of the increase that you saw on Q1. If you remember we took several customers large customers live right at the end of 2019 as well as we pushed a couple of customers into 2020, and so it's not uncommon to see those kinds of large spikes the quarter after folks go live as.

Begin to roll those phases on and then the one that pushed for Q. for last year also hit in Q1 of this year.

Great. Thank you very like Joe.

Hi next question comes from the line of Tom Roderick from Stiefel your line or something.

[noise], Hey, Matt Hi, Jennifer Great to a great to hear from you. This morning. Thank you for all the details with respect to the various business lines of the first segments really really helpful. I know, there's a lot of moving parts <unk> you made some interesting comments, particularly around sort of the P.P.P. stuff, but you talk about a sudden shift digital.

So I guess, they're sort of two questions underneath the thought on that which your number one big picture.

As you think about some of these you know small and regional banks are two tier three really embracing the digital concept could we be thinking about longer term down the road the online banking and digital onboarding of some sort of the core systems the of record in a way that that they haven't been over the last 20 years and there's a big.

What's your question around like how banks see their customers and how they embraced their I.T. and then sort of a second more acquainted question on P.P.P. would love to hear just a little bit more detail again about how your structuring. These annual contract sounds like a lot of these are sort of net new customers, perhaps get some good some good.

Legion there aren't they transactionally, just love a little bit more detail around the new digital lending solution for P.P.T. Thank you.

Yeah. Thanks, so yeah on on the macro environment, where there's two or two two or three you know.

I'll think about a conversation or share a conversation I had with the C.E. over to your one financial institution about two weeks ago, which was essentially he just said <unk> three years to make these changes in an existing digital solutions Africa that he thinks he's got 12 to 24 months. If you look at the at the activity one of the things it's been interesting that we tractor everywhere.

60 days has been there had been more C.E.O. engagement in deals, especially in the two year, two two or three space and so.

All of these things are driving the understanding that when when you have to close a branch and you got to walk out to a curb to have somebody fill out alone paper have throughout the loan paperwork no matter. What it is they're beginning to realize that these legacy systems work design for digital experiences and so this is what we've been doing for more than 20 years and 16 years here.

It all lends itself to.

Significant upside once we get to whatever the new normal is going to be as far as a system of record. We've always made the case that the the general Ledger, though account system in the lending systems or repositories for data, which you get a much bigger picture of of an account holder through a digital banking system you have their couch you have their loans, but you also.

Behaviors their devices, what they do where they go and that type of data, which gives you a much bigger picture of who's somebody years, and then we begin to use data analytics to understand the behaviors or whether it's cashflow, who they pay when they pay or whether it's a potential opportunities to cross so loan or a new account we.

I believe that the digital banking system is the system of record of the future and then you tie in lending and the other applications that we have and they all becomes you get a much bigger picture of your customer, which is which is what everybody's trying to to figure out where their customers have other accounts with their cash position is what they're what they're <unk>.

Problems the financial institution consult form so we're very.

Bullish on on the fact that more people are going to move to leveraging the data and the digital lending and banking systems as far as the P.P.P. solution.

In less than 30 days, we created a system that allows you to on board up on board customers autumn in an automated fashion a lot of banks were out there just taking emails about vacations and keeping those and we I think at this point across as probably close to 20000 applications will have more data in the August call around.

Approvals and the and how many were approved in the and the actual dollar amounts that went through but there's multiple facets to the P.P. program that we're investing in in the platform that I I I'm going to share on the August call. Some of the some of the things I think or or unique to what we're offering but there's more there's more to this.

It was package.

Than just the P.B.P. piece and we're we're investing in that one of the things that was.

Just amazing as we were able to show in the last 30 days 100 customers are club lending product and that's the P.P. piece solution, but it's also so or the other pieces of the application for lending. So it would have taken us two to three quarters to get 100 demos out to our customers and in 30 days they were able to see the club lending product and see the power.

But it might have been focused on P.B.P., but they were able to see the quickness and which we can deliver it is the quality in the usability. So there's a there's a lot of good opportunity in in this.

Experienced that were drawn this old crisis, we're going through the we're trying to make the best we'll have more information on the output me outcomes of the PPP offerings in the August call, but we've been very pleased with it.

Great detail, thanks, not I'll jump back in the case, but.

Dot com.

And our next question comes from the line of Brian Peterson from Raymond James Your line is open.

Hi, ruined thanks for taking the question and I really appreciate all the detail and if you guys are doing well staying safe maybe less people question here, but I I wanted to understand with the the virtual services or the remote services deployments. It sounds like those have trend did really well I knew that services has been a little bit of.

Rag on gross margin.

Does this give you the opportunity to potentially rethink how you're delivering some of their services going forward in in I don't know, maybe we could think about that being a margin uplift versus what we saw freak of it.

Yeah, I would say that we have always been able to deliver support maintain build our products remotely. The thing that has been somewhat interesting as we go through this process is you know, we probably had two to three trips that would be either the client coming here or that's going to see the client.

I think we're beginning to realize that whether it's a zoom meeting we're just doing things remotely that we may not have to make as many of those trips were also beginning to see opportunities in process, where we can make that make it more efficient to deliver the software and we're creating new habits that I think could be lasting and could help on the gross margin side of the business the delivery the deliver.

<unk> slowdown or the delays if you think about if you're running a bank or credit Union right now.

They had this stop everything they were doing begin to work remotely which is something that they are not comfortable with on top of that they had to continue to run the back and then they had to distribute more you know close to a trillion dollars of funding through this program. That's run out that there's been rolled out so those distractions coupled with their customers have their own distractions as well these are the small.

Businesses around the country that we've all heard so much about that are trying to get through this so I think we're going to get to some normalcy here, we'll get back to it. We're just trying to make sure that that investors and analysts and everybody understands that this it's going to take some adjusting to go through this process, where we're fully couple delivering our software remotely, but our customers and their customers.

It may take a little bit of time. So do you think you'll see some opportunities for us to improve margins on delivery as well as get better as a as a company's we deliver these products remotely.

Good here. Thanks, Thanks right.

And our next question comes from the line of Joseph Safi, Your line or something.

Hi, guys. Good morning, just or a quick one on interest rate environment, and how you see that affecting the lending business and then obviously kind of P.P.P. aside just get a feel for.

Volume days revenue in in the lending business you know, it's the economy stays pretty soft here for a little while.

Yeah, you know, let me just share some data with you that we were able to get out of our precision lender a product, which is you know process more than two trillion dollars or looked at more than two trillion dollars or the loans in 2009 team.

The weaker for 17, we have it of April 17th we saw 3.75 times the loan count volume <unk> space increase.

Absent P.P.P., we saw 70% decline in low and count volume and 90% decline in low dollar volume basically what that tells you is that everything all the lending that was going or the vast majority lending was the P.D.P. program. This is going to continue to work through the system for the next.

I I can't prognosticate on that for some period of time and then we think you'll start to resist see lending resume to whatever the new normal will be obviously interest rates are low is there <unk> as as they can be right now, but we believe that our our solutions whether it's the sales in the <unk> you go shooting tool.

With helping people with pricing in this very uncertain of environment. The data, we can use that to help them with that or is it or the digital onboarding aspects of cloud lending from the borrowers perspective, all the way through the processing and servicing alone are going to be real opportunities for so I I I don't really want to prognosticate on when the lending Mark.

What is going to come back or what's gonna happen there, but I believe are are are the tools. We have are gonna be extremely helpful and they're going to be in high demand when when the the dust settles here.

Thanks.

Thank you.

And our next question comes from the line of Sterling audio from J.P. Morgan your line or something.

Yeah. Thanks high guys. So on the 800000 increase in digital users what portion of that came from recent go lies versus perhaps an increase in users from longstanding customers and just wondering maybe what's left to penetrate in those existing customers and how the grow.

The new users actually impact your revenue.

[noise] Yeah Sterling. So the 800000 users I would say was primarily focused this quarter on new users going live this quarter plus what I mentioned earlier in the call about the increase in users from those users who came on and Q4 because several of them.

Rolled their users on in waves, so even though they were alive in q. for they contributed quite a bit of growth to Q1 as well we did see some organic growth, but it was in line with what our historical organic growth rates have been which you know on an annual basis ranged from 9% to 11%.

And you know it's hard right now to tell how quickly that's going to increase or if it's going to increase because of the user engagement. We definitely seen use their engagement increase but I think a lot of that is just engagement increasing within users that are already on our system.

Checking for their stimulus packages et cetera, I do think there will be some new but we need a couple of months to try to get a couple of trends developed before we can report more realistically on that the other thing I would say is remember that are contracts have committed minimums and so not every user ads too.

Revenue some users add to the customer reaching their committed minimum and future revenue as they continue to add in the future, but but not necessarily day, one from adding that user and then the other thing that you know still offsetting that is trying to figure out exactly how many users push with some of these project.

Delays that were currently seeing so there's a lotta ins and outs and I think we just need more than one one month to be able to determine that trend there.

Understood. Thank you.

Thanks startling.

They certainly hope you're well.

And our next question comes from the line of Peter Hackman from Davidson Your line or something.

Hey, good morning, everyone I hate to ask you to repeat yourself. It went through the numbers very very quickly because you just go through those backlog numbers and entering help is characterized the you're ever you're poking through.

[noise], yeah. So the backlog increased about $48 million quarter of recorder and that was about four per cent increase the <unk>. It was that 30% increase over the March 31st 2019 balance.

30 per cent increase roughly two and a half per cent of that came from the addition of precision lender and Q4 of last year.

And then of the bookings that we saw in the digital banking side is map mentioning his prepared remarks.

Cost sales and customer contract extensions accounted for a large portion of that and just for some frame of reference the contract extensions related to renewals and cross cells. It was about three times more in Q1 of 2020 than what it was in Q1 of 2019.

Got it got it and if I just couldn't get the what amount of revenue to precision lender generate in the first quarter.

Mmm.

[noise] on a.

Gap basis.

And non gap basis.

It was roughly 4%.

Thank you.

<unk>.

And our next question comes from the line of Josh back from Keybank Your line or something.

[noise] thinks about Jennifer squeeze them in glad to hear every one is doing well you know it's would ask you know when you speak about the adoption curved on the corporate side. You know my view is that it was always lagged in detail and with this new resurgence in P.P.P. and big no effect.

You know reinventing some of their corporate and commercial projects could you could you see the curve look a lot different you know as we grow up in a couple of years and then Jennifer I don't know if you can comment but anything you can share how you're thinking about that revenue retention this year and beyond like so much.

Yeah, all I mean, our our corporate begging solution has been.

Obviously, a very strong product for us we continue to innovate on it and if you think about tying in.

Some of the P.P.P. stuff the onboarding of commercial customers Treasury onboarding of customers on the lending side of the business and then also on the on the commercial an entire precision lender into this our corporate banking opportunity is as big as it's ever been in our products just continue to get better and better we've signed some big customers that are really pushing us on the on the.

The innovation side that I think is going to be very helpful. For a lot of the other banks that can use the technology. So yes. It has been lagging the reason it lags a retail is because those are the crown jewels of a lot of these banks the ground rules that are business and so moving them has always been a very careful.

Assess for them, but I think the demand for digital user experience mobile phones, and tablets, which we do better than anybody on the corporate banking side is going to is is highly differentiated as <unk> going to continue to be a differentiator for us in the marketplace I'm very bullish on our corporate product and what the team has done with that as well as how are we.

Our customers to really.

Changed the way people use technology on the corporate side Jenna.

Yeah and on the trailing 12 month revenue retention for this year I would expect us to see very similar numbers to what we posted the last couple of years somewhere between 115 and 120%.

And I think going forward as we come out of this crisis and see and now I prefer to capitalize on the opportunity that we think there's going to before.

Hi, revitalization of the digital transformations I think you could see that increase, especially as we begin to cross out precision lender.

Products into our existing customer base as well.

[noise] very helpful. Like you go.

Thanks, you also have a good day.

[noise] [noise] and our next question comes from the line up Andrew Schmidt from city, you're line or something.

He met Jennifer can speak with U.M. think's wrong with comments.

Thanks.

[noise] crushing on just the the pipeline that.

Environment curious get your thoughts on decision, making by F. I do <unk>, none of uncertainty and clearly a lot of distraction to do you see a lot of instances and clients. Just you fall can tune in combat provider.

Perhaps missing out on this yeah.

The the R.F.P. altogether discourse get your thoughts around just decision, making processes pertains to the the applies in this environment.

Yeah, I'm, a what I would say is that we're monitoring activity whether it's the the weekly number of demos, we do the number of our peace we get the the amount of inbound interest I have a weekly call with the sales or work as well as the relationship management organization to.

You know get a feel for what's going on and the activity is similar to a little better than what we saw a year ago. At this time, they both March and April but the just the ability for the organization to come to a decision. We just believe is going to take a little bit more time as I said, there's more executive level engagement.

These opportunities.

And and that there's just a little bit of but the way no on the enterprise side of the business, which is separate them the <unk> three.

You know we had several deals in Europe and multiple deals in the United States that were enterprise deals that precision lender that literally.

They just pushed away from the table as we were negotiating contracts and said we are going to have to come back to this after we get through this crisis. So.

That was disappointing, but those deals are going to come back to us we're staying in touch with them as soon as things recover. So the pipeline. It continues to get it continues to grow it's more a matter of I I. Just don't know how these people are going to come to a decision and some of the environments are operating in with some of the distractions dollar for them.

Their customers, but you know engagement numbers are still where they need to be it's just a matter of I I just can't help but think there's going to be some slowdown in these decisions that are happening, especially in the second quarter and hopefully we return to some normalcy soon as soon as possible.

Got it that that's helpful context, if I could sneak one more in for Jennifer dinner for you mentioned, the 2% reduction digital banking revenues assume for this year.

<unk> eight I think you alluded to a higher level cross sells his potential off sex you speak to I I guess, what level of off offset you're assuming in the outlook from cross cells into digital banking channel.

You know I think it's hard to tell because that that's predicating s., knowing what's going to close in the future, but I think what we've done is tried to balance the amount of risk that we see in projects slips with the amount of inbound interest from our existing customers that we're seeing for new products such as.

Mobile remote deposit capture skip a payment et cetera that map mentioned earlier, so there's a lotta ins and outs on that but I think on average they ought to be able to offset to only amount to you know approximately 2% reduction in the overall digital banking business.

Understood. Thank you very much.

And our next question comes from the line of carry Tilman from Sun Trust. Your line is open.

<unk> mountains of for glad you're willing thanks for putting me and this is probably a tough question for you know, but it if it falls apart one of the park questions. When you kind of segment. This with enterprise deals and then the tier one deals which were kind of bread and butter deals for you guys. I know you think two q. is going to be tough, but like.

The too early to tell the some of these deals with pushed to the next fiscal year and the reason why is that it seems like maybe easier said than done but like look you guys are efficiency play too. So part of this could be a really about helping them at the bottom line on some of the packet processing for things like loans and things of that nature Sun just kind of curious if there's some way.

You can kind of changed the conversation a little bit that kind of get them off of of no. No go decision. Thank you.

Yeah. Thanks, Jerry.

Absolutely that's the play right now, though if you think about it the the focus is on understanding the loan blow up there with their exposure district distributing trillions of dollars for the funds and that's.

Globally right now you know Europe, or the U.K. in Europe or rolling out their own stimulus packages. So I think on the enterprise deals I'm hopeful that late third queue for they'll come back around.

But we didn't build this plan on my hope we build the plan on what we're seeing today and so that's that's really what we're focused on but I agree completely with it you know with the disjointed pricing that's occurring and all these other things precision lenders going to be extremely valuable in these conversations, but they've come up with things like the market analysis product to go help our customers understand.

Data like the data I shared earlier around what you're saying on the S. and beside and we're seeing a lot of interest in that product. So you were just we're just trying to make sure that were being cautious you know if you think about 2016. We did the same thing we were out in front of it and you were just trying to make sure that we're we're being cautious with this but in the August.

We will give you the same transparency and the update that we have but we're driving that same message to these customers. It's it is critical that you have as much data as possible in these uncertain times and you have tools that can help you maybe not price things based on your gut, but on data and I think it's start it's really resonating with a lot of the prospects were talking with.

They just have to get through this a distraction running the bank remotely getting their systems to work and some of the legacy systems or some of the problems for the distractions, but I think when they come out of it there are going to say we have to make a change in case, another pandemic or this comes back or whatever so it's certainly an opportunity thanks to.

Thank you.

We have time for one more question I think.

Our final question today will come from the line of James Fossett from Morgan Stanley here line or something.

Good morning, with his Jonathan on for transferring Sweet Man I'll look on my sex for the detail counter grow segments.

<unk> under users in your touch on his briefly but I was hoping for some clarification.

Can you provide any color as to whether any digital bank customers are over it is.

<unk> accessing digital banking.

So can you quantify impact on revenue.

Yeah.

Yeah. So we we saw Overages, we see averages every month, even even before we had the covert impact it's hard to quantify because we didn't see anything specific from February to March and obviously, we have to wait till the end of the month to get the usage data. So we've just got the April usage data.

On may 1st and are digging through and trying to quantify that but as I mentioned earlier, we haven't noticed anything that would.

That would indicate a larger spike than normal things to seem <unk> still seemed to be in line with the 9% to 11% annual growth.

That we've seen historically and I I would just add on top of the I want to be clear that the the increased volume that we saw in the system. When the stimulus Che checks came out was the hundred and 75 million Traunch and then those 50 million troche into the 30 million charge that came out was the actual existing users.

Our customers logging on to see if that check it hit they set the the the or the A.C.H. It hit and so that's where the volume came from this was this spike was not a bunch of new users coming on the system I just wanted to clarify that that that that people were logging in at unbelievable levels a million.

In an hour to see whether they're stimulus check hit which which is obviously important to them is the is that money was hitting their bank account. So just to point of clarification there.

Thanks <unk>. Thank you everybody apologized for some of the order on the on the on the call. We we had a little bit of trouble on the on the.

With the system, we were using here to to get the order and so apologies I. Appreciate everybody's time today. Thanks, everybody hope everybody stay safe safe and healthy and hope already has a great day.

Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may know disconnect.

[music].