Q2 2020 Q2 Holdings Inc Earnings Call
[music].
Good morning, My name is my game and I'll be your conference operator today.
Time I'd like to welcome everyone to the Q2 Holdings second quarter 2020 financial results Conference call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session.
Good question during the session will need to press star one of your telephone keypad, Yeah, Steve Please limit yourself to one question.
Thank you I would now like to turn the call over to jockey because that's investor relations. Sir please begin.
Thank you operator, good morning, everyone and thank you for joining us for a second quarter 2020 conference call with me on the call today's mass like our CEO and Juniper 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.
May differ materially from those contemplated by these forward looking statements and we can give no assurance that such expectations or any of our forward looking statements will prove to be correct.
Important factors that could cause actual results to differ materially from those reflected in these forward looking statements are included in our periodic reports filed with the FCC, including our most recent quarterly report on form 10-Q, and subsequent filings in the press release distributed yesterday afternoon regarding the financial results, we will discuss today.
Forward looking statements that we make on this call are based on assumptions only as of the discuss investors should not assume that these statements will remain operative at a later time and 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 an ongoing basis discretion of why we use non-GAAP financial measures and a reconciliation of 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 FCC yesterday afternoon, Let me now.
During the call over to Matt.
Thanks, Josh and thanks, everyone for joining the call today on todays call I'll start by providing a recap of our second quarter performance followed by an update on our outlook for the third quarter and the remainder of the year in the midst of the cobot 19 environment.
In the second quarter, we generated non-GAAP revenue of 98.9 million up 27% year over year as a result of our success delivering our solutions and the Accelerative impacts of coated. We also added over 900000 users in the second quarter, bringing us to 16.3 million total registered users.
At quarter end, it 20% increase year over year.
I'll start by unpacking that user growth and providing some color on how it was in wasn't impacted by the Kobin 19 environment.
The 900000 users we added in the quarter came through a combination of new customer installed and organic growth consisting of new user adoption and some M&A activity.
We had a tremendous quarter of delivering new customers and I'm extremely encouraged by our ability to deliver the platform in a remote environment given the current operating environment, our teams and our customers had to rally together to execute the slate the planned installs during the quarter.
And I want to thank them for their diligence in executing these critical projects in the face of unprecedented circumstances. The delivery teams performance from the quarter is reassuring given that we expect to continue dealing with the ramifications of co bid for some time to come up.
I'm now very confident in our ability to operate key functions of the business like installing new customers in a remote environment.
With that said many of the go lives we had during the second quarter one progress prior to the second quarter.
And as many financial institutions continue to adjust to work from home growth in digital engagement and other changes brought by Cogan, we expect to see some customers seek to push out their target go live date, which could impact the timing of related revenue and cost.
On the organic growth side, we believe the sudden restrictions on bank branch access contributed partially to our user.
But it's difficult to predict the extent to which we will continue to see the adoption trends that we saw during the first few months of code.
For example in April we saw our largest spike of organic user growth in the quarter impart connected with to the government's distribution of PPP loans and stimulus checks.
However, through the month of May and June organic user growth trended towards historical levels digital usage continues to increase for specific products, particularly in areas that are most affected by branch closures and restricted physical access for example, mobile remote deposit transactions were up sharply during the call.
Quarter, roughly 30% higher than the previous quarter, a much higher growth percentage when compared to the modest quarter over quarter growth, we typically see.
Well product specific adoption trends may not necessarily meaningfully impact Q2 from a financial perspective in any particular period I do believe trends like these can help Q2, and our customers by driving deeper digital engagement and creating stickiness with accountable.
As the situation continues to unfold, we're working closely with our customers and monitoring digital adoption trends in order to anticipate the impacts of coated on our customers and our systems and solution roadmap in the coming quarters and long term.
On the sales side, we had a solid second quarter overall, given the general turbulence caused by the cobot 19 pandemic.
As we discussed in our last call, we adjusted back our second quarter sales expectations in light of the impact of cobalt our customers.
Well, our overall sales performance during the second quarter fell short of a pre cobot targets, we did outperform our cobot adjusted expectations. Thanks in part to a very positive renewal and cross sell quarter in a surge of P.P.P. related lending deals.
Backlog growth was largely driven by a strong quarter of renewal activity in which renewal bookings dollars will approximately double that of the first quarter of 2020.
I'm encouraged by the renewal activity in the quarter given the circumstances I believe it signals our customer strong confidence in our products roadmap and partnership together and as a positive indicator of the market opportunity in front of us.
On the net new side, we did see some slowdown in decision, making particularly in enterprise space, but our momentum from the first quarter the strength of our solution offerings and good sales execution in a difficult environment carried us through to a solid performance across the aggregate business in the second quarter.
Our digital banking team has some key net new wins, including two tier ones in recent quarters I talked about the cross pollination effect, we've begun to see as a result of our expand portfolio, which customers of one product line look to Q2 to provide solutions for other areas of their business one of the tier ones. We added in the quarter an 11.
Billion dollars bank on the West Coast provides an interesting example of this cross portfolio sales trends.
This bank is a longtime customer of our Centrix risk management solutions.
In late 2018, they acquired a bank that was using Q2 digital banking platform at the time the acquiring bag a just moved onto a new online banking system provided by their core provider with no plans to enter a new evaluation. However, given the positive experience the customers of the acquired bank Huh.
Add with Q2 digital banking solution and the strength of the Centrix relationship the bank decided to evaluate Q2 and after gathering extensive customer feedback made the decision to migrate both the retail and commercial customers of the combined entity to Q2.
Believed this win demonstrates the power and differentiation of our digital banking platform. In this example, convincing a bank that had just made an online banking decision to reevaluate and ultimately pivot to choosing Q2.
Our corporate banking suite played a key role in both our tier one wins and during the second quarter. Our commercial banking capabilities were cited as best in class in the I take group's 2020, leading providers of US cash management technologies report as I discuss often our corporate banking suite has played a large will net new and cross sales success.
In recent years and we're pleased to be recognized by highly regarded third party sources, the financial institutions rely on when making critical digital banking purchase decisions.
On the lending side of the business, we saw solid overall bookings performance, particularly with our cloud lending technology.
Which has played a key role and adding aiding clients to facilitate loans through the S.P.A. PPP program.
On our last call, we mentioned that our lending teams had quickly developed in India in solution for PPP and the sale of that solution helped offset the slowdown in certain sales activities in the second quarter.
Just a few months that our PPP solutions was active we help our customers fund more than 10000 applications for small businesses a neat.
And as we mentioned on prior calls these are one year deals with much of the revenue driven by usage and successfully funded applications.
Given the future uncertainties around these government sponsored lending programs such as PPP, we're being conservative in our expectations regarding future bookings and revenue related to them.
As such I believe the real long term value to Q2 and offering these PPP solutions will be the exposure, it's given us with new accounts and will remain laser focused on introducing these customers and prospects to the broader Q2 portfolio.
B a.
R Q2 open team also had a very positive quarter and I'd like to take this opportunity to provide a few key updates first during the second quarter, we announced the conclusion of our partnership with Stone Castle, who provided the deposit liquidity network for our banking as a service team.
This allows us to take direct control of or go to market strategy and simplify the business model, providing us more flexibility to pursue a broad range of sales opportunities and partnerships.
By capturing all of the economics of this business. We believe we will generate higher margin revenue from the program going forward I would like to take a moment to think stone castle for their strong partnership over the last few years, while both parties believe this was the best decision for our respective companies at this time, we look forward to future opportunities to collaborate and this rapidly Yvonne.
<unk> market.
We're also taking advantage of this moment to clarify the branding of banking as a service solutions and as such we will begin referring to this line of business simply is Q to bass.
And the market at large and in conversations with our Investor community.
The cue to bass sales team had a strong performance highlighted but one of the largest deals and the groups history. There pipeline has been growing and appear solid through the remainder of the year.
Believe many of the leading fintech that we target or treating cove, it as an opportunity to widen their gap over smaller competitors and are attempting to capitalize on the dislocation in the traditional financial services market by expanding their product portfolios.
Transitioning to the financing front, we executed a successful capital raise during the quarter, adding over $300 million and proceeds to our balance sheet.
This raise was intended to bolster our cash position for a few key reasons first.
The market's we sell into our generally very conservative the optics of our balance sheet are important to our sales momentum, particularly in the uncertain environment. We're in today second when the current environment begins to normalize we want to be in a position too rapidly scaled delivery and hosting capacity.
And finally.
While we don't have any specific targets are acquisition objectives, we want to be in a position to move quickly you should attractive M&A opportunities arise while we're still observing the short term short term impacts of Cove. It on our business I want to reiterate that do expect the situation to serve as a long term catalyst for digital transformation among banks credit unions and.
Fintech companies and I believe this raised puts us in an even stronger position to capitalize on the trends in the market.
Now, let's spend some time, providing key observations on <unk> business impact to us and our customers as well as an update on our outlook for the third quarter.
First our employees and internal business practices in general we're planning across the board the effect for the effects of Cove. It to continue for the foreseeable future. We're anticipating the country to remain more closed and open through the rest of the year and are planning accordingly.
We moved early too and all remote model for employees around the globe and our leadership team has been very pleased with our overall productivity. The fact that is underscored by our second quarter delivery performance.
Given the minimal disruption in moving to a remote work model, we're planning to keep our employees remote at least through the end of the year.
Still restricting business travel and plan to continue doing so for the foreseeable future likely through the end of the year as well.
We're still moderating are hiring pace and most of the additions we made to the team and the second quarter, we're focused within our implementation teams to ensure the timely delivery of customer scheduled to go live in future months.
In general with several months under our belt, we remain optimistic about our ability to operate our business remotely I believe that our ability to sell support and deliver our software in this model remains strong and any headwinds we anticipate in ourselves performance are driven more by market uncertainty and distractions created then by any means.
<unk> on our ability to perform key business objectives.
Moving onto our customers I believe they have responded effectively to cope it on the whole those with implementation projects already in flight were able to execute them in the second quarter, which carried us to a strong delivery performance.
We also saw an uptick in the number of cross sales related to delivery projects given the strong cross activity in the quarter and the comparatively light list of installing add on products versus full net new implementations. We do however, anticipate that some digital banking and lending customers will delay net new implementation projects given the current.
Environment and it's distractions in the second quarter. We also completed our first virtual client conference and considering the rapid shift from a physical to a digital event I believe the conference with well received by customers with more than 1000 attendees throughout the series I'd like to think our marketing team for making this ship less than 30 days before.
Original evince date.
The team did a hero job and making this such a success as I mentioned and our last call. We do typically see an acceleration and sales activity coming out of the conference and I believe some of our cross and renewal performance in the quarter was driven by a virtual conference finally, I'd like to reiterate the overall health of our customer base, which I believe is a reassuring sign above.
The stability of our revenue with several months worth of close customer interactions and the pandemic environment I'm confident that our platform will help our customers continue handling the rapid shift to digital and whether the current store.
On the prospect side, we've seen many of our predictions from the last quarter prove out and while we're pleased with our second quarter sales success and believe we're well positioned to take advantage of many of the emerging trends in the market, we recognize the challenges and uncertainties at the current environment creates for our prospects. So we are continuing to be conservative as we head into the third.
<unk> between the effects of the current situation on our FY customers. The uncertainty surrounding the November election, what is seasonally a slow quarter. We believe net new business will be more impacted and the third quarter than it was in the second court.
Our third quarter performance will of course have a greater bearing on 2021, but we believe it's still relevant to understanding the evolving state of the market <unk>.
Last but not least I'd also like to take this opportunity to welcome to new members of our board of directors, Peggy Taylor and Stephen Hooley. They both bring extensive valuable experienced to our board and we're extremely pleased to add them I'd also like to think our outgoing board members, Jim Shaper, and Mike Maples, they've spent a collective 20 plus.
Yours generously, providing their time and guidance to help cue to become the company is today.
So before I had the call over to Jennifer I want to reiterate that we are pleased with our second quarter performance and while we remained conservative going into the third quarter. Our teams have demonstrated their productivity, even while working remotely we continue to see positive trend trends towards the digital first model and financial services and I've been impressed with our customers ability to transition to this new <unk>.
<unk> with that I'll turn the call over to Jennifer.
Thanks, Matt before reviewing our second quarter results in detail I would like to address some of the major influences in the quarter that contributed to the better than expected results as compared to our previously issued guidance.
As you May recall, we quickly developed and implemented a cloud lending solution for our clients that carried a success base revenue component, which was dependent on the volume of successfully funded applications to the P. P. P program.
Due to the success of that solution, we were able to generate approximately $2 million of revenue in the second quarter alone.
We also added over 900000 users to the system. The most users ever added and a single quarter. As a result of successful remote installations. In addition to continued organic growth within our existing customer base.
The operational challenges our customer spaced in the corner, we were able to proceed with these project due to the momentum we had sustained on those projects beginning earlier in the year.
While we are certainly seeing an increase in digital engagement and user adoption. The strong organic growth we observed in the corner was in line with some of the strongest organic growth rates, we have observed in Pryor quarters.
Implying that the stronger than expected overall growth and users for the quarter may not be solely attributable to covid driven adoption, but rather a continuation of the trend we have observed historically.
In addition to the better than expected revenue contributions, we also observed less than anticipated expenses and the quarter due to other kind of it related and nonrecurring cost savings that I will discuss later in the call yielding higher than expected adjusted EBITDA.
While these are that have allowed us to exceed our previously issued second quarter guidance, we expect that certain drivers if our second quarter performance such as the success of our PPP solution did not represent long term trends that will have a significant impact on our financial results in future period.
With that I'll review, our second quarter results in greater detail before turning to updated guidance for the third quarter in full year 2020.
Total non gap revenue for the second quarter was 98 $9 million, an increase of 27% year over year and at 5% from the previous quarter.
As I previously mentioned approximately $2 million of the sequential and year over year increase in second quarter was due to the benefit from my PPP solution. As a result of successfully funded applications in the corner.
We do not expect to see any meaningful impact on our financial results from our P. P. P solution in future period.
Accordingly, a revised outlet does not anticipate any additional success bay speeds for the remainder of the year, rather just the remaining subscription components of those deals as they are recognized through their initial one year term.
In addition to the benefit from success base fees for PPP solutions, the growth and subscription services revenue, what's driven by the combination of organic user growth and customer go lives in the corner with the year over year increase also benefiting from the revenue contribution of precision lender, which was acquired in the fourth.
At 2019.
In addition, we saw an increased contribution an interchange revenue impacting are transactional revenue, which I will discuss just a bit later.
The user growth in the quarter was a result of net new go lives. In addition to organic growth from existing customers. We continue to believe that Cove. It will be a long term catalyst for a business, which is supported by the increased level of engagement, we're continuing to see from our existing customers.
However, while we did exhibit strong organic user growth from our customer base. We are continuing to remain cautious as it relates to our near term organic revenue growth expectation given our limited observations oncovin impact to increased user adoption over a longer period of time.
Transaction revenue represented 14% of total revenue in the quarter down from 16% and the prior year period and consistent with the previous quarter.
A year over year decline in transaction revenue as a percentage of total revenue primarily attributable to the increased subscription revenue contribution from precision lender.
As I previously mentioned, while transaction revenue as a percentage of total revenue remained consistent with the previous quarter. We did see an increase in absolute dollars I've just over $1 million in the quarter, which was in part due to the larger than anticipated sequential increase in interchange revenue.
Turning to backlog, we experienced a sequential increase of 5% over the first quarter, increasing a backlog as a quarter and by approximately $59 million and ending the second quarter with a total F over one $2 billion, 33% increase as compared to June 30th 2019.
The addition of precision lenders backlog contributed roughly 3% of the year over year increase as mat previously mentioned that renewal activity in the quarter was once again, a significant driver to the sequential increase of our ending backlog.
The total renewal dollars booked in the quarter over half of those were book as a result of the cue to cares program.
For those customers, who renewed an extended their existing contractor as part of our Q2 cares program. We provided concessions in the form of discounted rates for up to 12 months following the finding of their respective contract extension.
[noise] extent and duration of the discount rates applied to each renewal or dependent upon the term linked added to their existing contract with longer contract extensions receiving steeper near term discounts.
This is allowed our customers to put themselves in a better position to navigate the near term challenges they face all having minimal impact on our revenue due to the ratable revenue recognition treatment afforded by ASC six O six.
However, I would remind you that it will result in a negative impact to our near term cashflow during the period in which the customers are paying a discounted rates.
Gross margin was 53, 9% up from 52, 8% and the second quarter of 2000, 1953, 1% and the previous court.
Both the year over year and sequential gross margin improvements benefited from the impact of fees associated with funded P. P. P applications and the increased interchange revenue contribution and the quarter.
In addition, the year over year increase was also driven by increasing contribution of higher margin revenue businesses, including precision lender, which was acquired during the fourth quarter of 2019 as well as the decline in travel related expenses as a result of Cove at 19 restrictions.
Total operating expenses or 48 $3 million up 18% from the prior year period and down 9% from the previous quarter.
The year over year increase was primarily related to the additional expenses associated with precision lender <unk>.
Excluding the expenses associated with precision lender operating expenses would've been up approximately 1% year over year with that modest increase being a result of added head count.
The sequential decline was primarily attributable to a reduction in travel expenses as well as a decrease in payroll taxes.
As a reminder, the payroll taxes associated with bonus payments and <unk>, we're elevated in the first quarter due to the timing of our annual bonus payment and a seasonally higher quarter of <unk> taking place.
We also observed decline in expenses associated with contract workers as we isolated hiring to the most essential functions.
Kovac restrictions also drove a reduction in office related expenses as our employees worked fully remote during the second quarter.
We also received reimbursements from our often landlord as a result of reassessed tax valuations from prior years.
The sequential decline was also largely concentrated within sales and marketing where travel spend is typically most predominant with marketing expenses for trade shows and conferences and the quarter also down significantly due to covid restrictions that began developing in March and the conversion of our annual connect client conference to.
Virtual of that during the second quarter.
Adjusted EBITDA was eight $1 million up from three $2 million in the second quarter of 2019 and up from negative $100000 in the previous quarter.
As I mentioned at the onset of my prepared remarks are second quarter adjusted EBITDA results outperformed our expectations, primarily due to incremental revenue from PPP funded application fees. In addition, we also observed greater than anticipated savings and operating expenses as previously discussed.
We ended the quarter with cash cash equivalents and investments a 388 $9 million up from 112 $8 million at the end of the first quarter as a result of our successful capital raised in May which provided us with net proceeds with over $311 million.
As a reminder, the final cloud lending earn out payment was finalize near the end of the quarter at 21 $2 million with 18 $2 million being paid out prior to the end of the quarter and a final payment being made an early July.
We also issued an initial pay out at five $6 million in the second quarter associated with the termination of the stone Castle partnership, which Asmat mentioned will allow us to receive more favorable economics going forward and her banking as a service business.
Cashflow used in operations for the second quarter was negative 11 $4 million and was attributable in part to the first of two payments associated with the termination of this doesn't capital partnership.
In addition, we incurred net capital expenditures of $10 $1 million as a result of the accelerated investments to ensure we continue to have the proper datacenter infrastructure incapacity required to support elevated levels of digital engagement.
Resulting in free cash flow of negative 21 $7 million for the quarter.
As I mentioned during our call in May given the accelerated investments necessary to handle the increased levels of user engagement, the slow down and bookings and related upfront customer deposit.
And the impact associated with customer concessions granted through a cue to cares program I do not anticipate being free cash flow positive for 2020.
Now, let me turn to our updated guidance, we're forecasting third quarter non gap revenue in the range of $102 million to $104 million and we are raising a full year revenue guidance to the range of 398 $5 million to 402 $5 million representing.
26, 27% year over year growth.
Our updated guidance reflects the revised revenue run rates from customers that renewed through a cue to tears program as well as our expectations around the timeliness a project scheduled and the trajectory of organic growth rates for the remainder of the year is I noted previously it also anticipate a diminished contribution for a P. P.
P. P solution for the remainder of the year relative to the benefit received from that solution during our second quarter.
We forecast third quarter, adjusted EBITDA of six $5 million to seven $5 million.
And we are raising our full year guidance to arrange a $21 million to $23 million, resulting in adjusted EBITDA margins for the full year of approximately 5% to 6%.
We are still assuming a suppressed level of travel and hiring related expenses corresponding with the preparedness of our customer base to continue their digital transformation in this outlook is reflected in our revised guidance.
We believe that we will continue to remain in a position to accelerate investments as our customers and prospects regain confidence and purchasing decisions moving forward.
In summary, we delivered better than anticipated second quarter result, due to our ability to quickly develop and deliver critical solutions for our customers with lower than anticipated costs.
While the success of our PPP solution in Q2 cares program may create some challenging near term comparisons. We do believe we are positioning ourselves and our customers poor favorable longterm outcomes.
We also believe that providing certain customers with near term rate reduction in order to allow them to continue expanding their digital offerings will continue to strengthen the communities in which they serve well into the future, which remains a key component of our mission.
We added significant cash to the balance sheet that we believe will allow us to sustain a prolonged cove it impacted environment and position ourselves for success as the world gets a better handle on the coven 19 pandemic and related uncertainties.
As we move into the back half of the year. The bookings performance in these quarters are increasingly important as it relates to our 2021 financial outlook.
Given the uncertainty that is still present within our customers and the macro environment. We will continue to assess our customers willingness to sign up for new projects and take steps to make sure that we are appropriately resource to engage increased levels of growth win and add the environment improve and prospects in customers begin to <unk>.
Celebrate their digital transformation.
With that I will turn the call back to Matt for his closing remarks.
Thanks, Jennifer beforehand to cover the operator, all close with this or second quarter results exceeded are covered adjusted expectations and given our ability to continue executing this far we believe we are in a great position to continue operating our business effectively as we extend this remote work environment at least through the end of the year.
Like to thank each and every employee for their focus an effort in spite of some very challenging circumstances.
Our customer base remains healthy and has shown that they are embracing digital what choosing to expand and redo their relationships with us.
While uncertainty remains around covid, the upcoming election, and the typical slow down we see in the summer months, and we were expecting a slower than normal third quarter as it pertains to sales performance. We believe we are well positioned to continue driving rapid growth in this business over the longer term.
Ah spoken to dozens of customers in the recent months and what I hear that when the dust settles on the current environment financial institutions will have more incentive than ever to digitally transform all aspects of their business from onboarding to digital banking to consumer and commercial lending.
Given the breath of our product portfolio today, and a bolstered balance sheet from R capital raising the second quarter I believe we remain in a unique position to capitalize on the next wave of digital transformation in financial services, Thanks, and with that I'll turn the call over to the operator for questions.
At this time that you'd like to take any questions you have for us today.
Please press one on your telephone keypad to withdraw your question. Please please press the pound Keith.
[noise], we ask you please limit yourself to one question.
My first question is from Sterling with J P. Morgan Your line is open.
Hi, guys. This is Matt on for Sterling. Thanks for taking the question.
You you mentioned earlier in the call you know with regards to some customers.
Pushing out to go like date was wondering if you could give some some color on implementation timetables and when do you expect those go lives.
Dates to actually go through thanks.
Yeah, So Matt I'll take that one we did see about 4% of overall deals push during the quarter now on average they pushed somewhere between 60 and 90 days.
Some of the ones that pushed it early in the quarter, we actually did still get in the ground before the end of the quarter.
And the others are all scheduled to go live here in Q3, now 4% keep in mind as across all lines of business and they have different times to to revenue.
Just the net knew where we saw the majority of it we saw about 20% of the net new deals push during the quarter, but like I said a couple of those we were still able to get like before the end of the quarter and we're expecting the others to be live before the end of Q3 as the average slipped with only.
Like 60 to 90 days.
Great. That's very helpful. Thank you yes.
Thanks, Matt.
Our next question is from Tom Frederick with Stifel. Your line is open.
Hey, Hey, Jennifer Thanks for taking my questions and glad to hear you guys are are doing well.
Matt 90 days ago, I think the conversation was really more about we don't know what we don't know and now three months later.
You know a whole lot more of your customers know a whole lot more but it still seems to be just sort of balancing act for them between the risk of their business downstream, whether it's small business loans or just the uncertain environment and then the risk of doing nothing.
Watching this digital transformation sort of pass them by can you just give a little bit more sort of color on some of these customer conversations you're having regarding how they were thinking about digital transformation. I mean, you mentioned remote check capture mobile deposit your mobile usage.
Digital usage really going up in the quarter. How is this impacting the conversations and maybe the top of the top of the funnel of the pipeline for bank, So you've talked to and saying Hey, we know we need to do something and we need to change. It it's time to move into the next next generation, but how fast do you think they want to move on that front.
Yeah. It sounds good question.
Over the last 90 days it has been for them very challenging they've had to work remote they've had to deal with their customers, which are having some of them are are getting hammered pretty hard on top of that the head rollout a government lending program plus the stimulus checks and so the thing that I would tell you that I've seen in the conversations with the customers is.
The senior level engagement is far more than it used to be we used to have like operations folks and maybe a digital strategist on it most of the.
The executive briefings that I'm doing the CEO is on it or a C. C level person until the engagement is there and I don't really think it's a matter of whether whether they.
We'd like to do it.
As soon as possible, it's more about there's a lot of logistics to what they may be in a contract that has certain number of years left on it or they may have another project that they're working on them and just trying to manage the resources, but consistently across the board. It is we have to have a better experience for our account holders remembers if it's a banker credit union, we have to be able.
[noise] to automate.
All of these processes that we currently do manually whether it's onboarding a customer whether it's depositing a check whether it's originating alone paying off alone all of those things are the drivers and the conversations that we're having right now and so to me the pipeline looks good the activity looks good it's just about the pull through.
How long is it gonna take them to settle get through these challenges and make a decision.
Candidly, it's probably it's probably been extended a month or two from what we've seen in the past obviously, we put a lot of caution and the third quarter because of things that are typically things beyond <unk> an election year Osama those those are things that impacted but Tom the engagement level from executives the sense of.
[noise] has become a priority we've always talked about investing and run the bank versus change the bank and the conversation has become I need to put money into things that change the bank and change the way I interact with our customers and a member so.
A lot of engagement, it's just a matter now of the pull through and how do we.
But even from existing customers yeah, we've been circling up as we've talked about just a record number renewals and engaging with them, there's far more senior engagement with existing customers and that leads to them by more products as well so feel really good about the mindset of our customers out there. It's more just a matter of them getting organized.
Be able to make a decision but in the long run this is going to speed up the transformation that we've been waiting for it.
Yeah, It really really good color. Thanks, Matt Jennifer I'm really quick tactical are we just sort of numbers question for you. If I heard you write the P. P. P impact for the second quarters by $2 million. It sounds like for the next couple of quarters. The back half of the year that quarterly run right dissipates, a little bit from there can you just kind of give us a.
Sense as to what the holistic number should be for sort of a rolling for quarter run right until those contracts run off.
Just so that we have a sense of what won't be recurring on a subscription basis next year as you lap those P. P P deals.
Yeah. So in total between now and the end of Q2 next year when most of those deals roll off we will end up recognizing and that's the same no more additional.
Except they speeds, obviously other than what we've already recognized.
Luckily $6 million with about a million of that being in the first half of next year.
And as I said, we had $2 million of usage and cute too that we're not expecting to to return in Q3 and forward. It's just the run off of the subscription during the term.
Wonderful that's perfect. Thank you so much looks great.
Your next question is from Terry Tillman Securities. Your line is open.
Hey, Good morning Mountain, Jennifer and thanks for taking my question and for all the details on the caller really appreciate it also get to see the the the new wins in the quarter Mad I had a question as it relates to kind of three months. Later you were excited and the last you're buying precision lender then you get into the beginning of this year and then we have the pandemic hit you've had more time not a C.
Oh this business operate the value proper can provide banks and so I'm I'm just curious how do you feel mail about you signed a couple of tier ones in the quarter, what does the activity level. How resilient do you see demand now for P. L versus maybe three months ago as we move through the second half and then then the next year and that's my only question. Thanks.
Yeah sure I appreciate it.
More excited and we were when we bought it we can't control, but what went on and for the first half of the year, but what what has happened is precision Linda is really adopted their products and the last 90 days to help banks look a day to look at what's going all blending.
Provide the ability to optimize their pricing and times like this which I think is as important as ever. So we are seeing an engagement level with our customers are prospects around precision lender that has been.
<unk> extremely encouraging the team the way they have kind of fall through all of this over the last six months has been very impressive the leadership with the organization.
And I just think the opportunity given the backdrop of what's happening has become even greater than it was before.
So we are extremely encouraged by the pipeline in the activity I think is we send them to call the enterprise side of the business.
I'm still thinking first half of 21 is probably we're going to when you're going to see that pick up but the tier one the cross sale activity are.
You too relationship management team is getting their arms around the product more and more everyday the net new team is getting their arms around it will be getting to pitch it with a little more education than we were before so all of all signs point too very positive outcome for us all on the transaction and like I said the people in the products have lived up there.
Everything we expected.
Thank you Sir Okay. Thank you.
Alright next question is from James Closet with Morgan Stanley. Your line is open.
Hi, This is Jonathan on for James fixed for taking my question.
Alternatively was user groups driven more by girl lives or the incremental penetration an existing court.
Yes, Jonathan.
It was really a combination we did have a stronger.
Organic growth quarter than what we saw in Q1 that sad I will say that we saw March and April b, the largest organic growth months with it starting to trend back down but early indication is that we think that could.
Still come back historically, we've said organic growth within nine 211% range. We certainly expect that it's gonna be towards the high end of that range or maybe even slightly above.
For this year based on what we're seeing but it's still a little early with only four months of activity to determine exactly how how much more it may continue to grow.
We also during the quarter had a very strong contribution from M&A, where our customers acquired and brought on users from other banks. In fact, we added more users. This quarter then we have in the last eight from M&A.
And we also had a very strong Ah go live quarter as Mat mentioned in his prepared remarks. So it was really spread across all three of those.
Got it I appreciate the color and you know like 90 days ago, you mentioned that there weren't any sort of outsize overages in the quarter.
Would you say that.
There are there are more of this quarter and if so do you think they were driven buys her the geographic mixed up your client base.
I would certainly say there were more in April and I think it was driven primarily by the stimulus checks not so much the geography.
Helpful. Thank you.
Hey, Shawn.
Alright.
Next question is from Brian Peterson with Raymond James You line is open.
Alright, Thanks, and good morning everyone's so just just one question here on the users I know, we're at 50.4 million today, and we mentioned some organic growth rates any sense for what the penetration is that base today and to come in your digital core banking opportunity I'm. Just curious like if you have a sense for that and what the longer term penetration maybe ceiling.
Would look like down the road. Thank you.
Yeah. So just to because we finished a quarter was 16 $3 million.
From the 15.
Four last quarter.
In general Brian, we usually talk about the adoption in our customers at about 60% and that varies whether it's a bank or a credit union commercial versus retail.
60% of those account holders used digital banking have a log in idea at a password.
The variance there is you could have a credit union that has a lot of indirect loans auto loans are done to the dealership and so those those people may never convert to regular digital banking users, but in general we think there. If you look at a bank of America wells or chase. They all run in the mid nineties. So we think there's clearly some room between 60 and <unk>.
90, where we can continue to add digital use them to the platform and vanilla we have programs that go in drive some of that but yeah.
We are being cautious, but I do think you're just going to you're gonna see.
User adoption continue to take up is there is branches that are close long lines and drive throughs banks call centers pushing people to get statements check imaging balances transfers via mobile banking. So I think there's opportunity. There. We just want to it's something that we have to it's hard to predict we've got to just see what's.
[noise] happened with a new round the stimulus checks coming out as they are talking about that could lead to more growth, but we have to kind of look at that in arrears. So.
That's what I tell them to use or sauce.
Understood. Thanks, Matt.
Thank you, Brian I have a good day.
Your next question is from Boston.
William Blair Your line is open.
Alright. Thank you good morning Mad Jennifer.
Question on cue to Bash, I guess and your your plans for that business.
The the fees you pay to get out of that relationship obviously material. So I guess.
It sounds like you have big plans for that strategy I was hoping you could give some color on on what your plans are and what that means for the the economics you mentioned higher.
Margins coming out of that business.
With the change.
Yeah just.
Oh, let's don't cast a partnership as I mentioned it it was a very good partnership we both decided that it was probably more productive for us to part ways.
It is we've talked before it increases are flexibility gives our customers more flexibility, where they can deposit the money improves or economics and also we picked up the lead Jim side of that business. So.
It was an amicable separation and the judge you based on the customer and prospect reaction and it's been very positive in the marketplace as far as cute to bass goes could not be happier probably the shining star of the quarter was the cue to bass business.
We saw on one of the largest Bastille, we've signed in the history of the company. We can tell you to see wins within text Neil banks. We are <unk> said before we will continue to say we are going to continue to invest in this business not just on the sales cyber on the infrastructure support delivery development the opportunity is tremendous right.
Now, we don't want to Miss it, but we also want to provide world-class experiences for our customers because that that helps us sell more so it is it's a tremendous opportunity with a ton of momentum and it does not seem to be impacted by cove. It at this point so the leadership with that team and then the team. It's operating though did you want a great job and we're going to continue to invest in it. We think it is I'm gonna have it.
Tailwind for quite some time based on what's happening and where will continue to update on it but it's the pipeline looks fantastic. They had tremendous closing in the second quarter and I think you're gonna see you have a strong finished to the year and become a even a bigger part of our business and 21 and beyond and.
And Bob I'll comment on the economics, you mentioned the the large spy out.
One of the things that you have to remember was we had a fairly significant Rev. Sure. We were pretty much splitting revenue 50, 50 between us and camber on those deals that camera brought us.
And it was a longterm D. L. The original partnership was estimated to be 15 years and so we looked at the economics you know it didn't make sense for them to continue getting 50% unless they were gonna continue to drive significant scale.
And the scale as really being driven by cute too on the platform side of the business. So.
We felt like from an economics perspective, it with a no brainer a lot less than we would've ended up paying over 15 year agreement and gives us more control isn't that sad.
On the gross margin or margin improvement because of the way. The relationship was done we recorded it on a gross basis for accounting purposes, meaning we recorded all of the revenue so you're not necessarily going to see an increase in revenue. But then we also recorded the Rev. Sure as an expense and cost a sales with stone.
I'll send no longer having that Rev. Sure, we'll just inherently increased margins over time.
Okay. Thanks, Bob.
Your next question is from Peter Heckman with David.
On your line is open.
Hi, Matt Hi, Jennifer this is the Lexus on for Pete a couple of acquisition questions for Us. So do you have any updates to the expected revenue contribution from precision letter lender for 2020, I believe last quarter, you had sat around 25 million and then along that same line what was the acquired revenue include.
<unk> and <unk> Avenue in the second quarter.
Yeah. So the P. L revenue in non gap revenue in the second quarter was roughly 6% of total revenue.
And go forward you know last quarter, we said that the floor of 25 million.
We still expect the Florida be 25 million, how far north of 25 million. We can go really depends on how quickly in the back half of the year deals pick up I'm very bullish about the.
Pipeline activity that we're seeing there and some of the discussions that we're starting to have that keep in mind. The larger deals enterprise into your one typically take four to six months to get live.
And so unless we signed them here in the next few weeks, they're not really going to contribute much more revenue to 2020 at really contributes to at 2021 and beyond. So you know I still think we're tracking to somewhere in that mid $20 million range with 25 is before.
Got it that's very helpful and I just want another one.
Do you have Oh I'm sorry go ahead.
Go ahead.
Alright, do you have any updates to an intermediate term goal for adjusted EBITDA margins at this time.
You know I think it's still very fluid. We are obviously are longterm a model originally before the various acquisitions was 20% to 25% adjusted EBITDA margins. We now believe that we can actually get that up to 25% to 30% over.
The longer term.
And I think with our revised guidance. This year, you sauce post somewhere in the 5% to 6% range and I would expect a couple hundred basis points of improvement every year, assuming that we don't have a prolonged impact from Ah Cove, which right now it's still the <unk>.
Certainty. So we're continuing to look at the areas, where we've had savings due to cove. It in one of that can you know moved permanently into operating leverage next year, but it's still very fluid.
Great. That's very helpful. Thank you.
Thanks.
Your next question is from Andrew smaller City you line is open.
[noise], Hey, Matt Hey, Jennifer Thanks for taking my question.
Sure.
Oh.
Andrew.
Operator, they're going to move in the next question I think we lost Andrew.
Our next question is from.
Wells Fargo. Your line is open.
Thanks, and good morning, everybody two quick questions. One is Jennifer you mentioned in your earlier comments at the beginning of the call. The discussion around interchange benefiting you in the corner and I don't know if you called out what that why that wasn't if I missed it but could you just maybe go through that again, how interchange why it was will get better.
At this quarter, then in Pryor quarters for the call out.
It's hard to determine exactly why it's better than a prior corner because it's all generated based on folks adopting and utilizing their debit card. So it's their personal spending habits that drive that.
But what I would say is we did have some improvement in interchange as well as a result of the.
As a result of the stone castle partnership termination.
The interchange and float revenue was part of the revenue that was actually recorded night because it was paid to us from the bank of record or from Stone Castle. So we just recorded that net revenue and part of the dissolution of that partnership is that stone castle no longer shares in the interchange fees.
With the bank of record and with cue to end the Fintech customer. So we did get a bit smaller increase in interchange because of having stone castle sure.
Great and then one follow up and I'll I'll hop office, obviously demands robust. So I might got tells me as the pricing is probably not the first thing people want to talk about versus solving the problem or whatever it is that they need to do what their bank, but could you just I guess for the shake a discussion talk about.
Whether or not price sensitivity has.
Come a bigger deal or less I, you know Jack Henry is put some money behind their mobile solutions that they talk a lot about coming back out to market way. So I'm, just sort of curious where the price discussion falls as you move to these rfps in the discussions if it's.
Not as big of a focus right now or if it's becoming more of a focus and a doctor.
Yeah first of all and I say this with all due respect and love for these people, but price is always a go on the conversation part of the conversation when you're talking with bankers and cutting you folks, but I would say it it it just it sometimes depends right. If somebody's just looking at a standalone retail internet banking solution.
Pricing is bigger Congress is is a bigger part of the conversation, but as we begin to talk with a lot of these prospects in the deals you see is winning they are looking at Q2 is a solution where they may start with retail digital banking and small business banking, but they're going to move to lending precision Linda.
Our data or data tools. So it becomes less of a part of the conversation they begin to take a more strategic view when they look at it and also we're beginning to work on Roy is on the automation of these products and what does it look like and it's an oral eyes are far more real in the environment, where people can't walk into a branch or they can't meet with somebody.
[noise] in person so.
I have not seen major price erosion and Ah deals at this point.
But but it's all about the sales rep or the or the relationship managers, starting with a strategic conversation and driving it and then we allow our product set to do the talking from there. So I feel good about where we are in those in in that.
Conversation, but we've just got to continue to get better tying all these products together and providing the customer or the prospect with a sweet that can solve both sides of the balance sheet, where there's onboarding or borrowing or or data.
Great. Thank you very much.
Let me yourself to one question. Our next question is from Anderson ethnicity, you line is open.
Hey, guys. Thanks for taking my question, sorry about the interruption before work without power Internet here in the northeast, but no.
The numbers question, then I have a strategic follow up just in the fourth order the revenue growth looks like there's implike deceleration.
Wondering if there's if that's just conservatism that's built in or whether reflects something discrete or or something you're singing of our environment. Just just any any color there would be helpful.
So the conservatism that you see in Q for his part conservatism in part the fall off of the success base usage fees in in the P. P. P. Right. We had though thank you too had a little bit maybe in early July and then that falling off but then also remember that we were very <unk>.
Successful at the end of 2019 and the tier one space.
And so we have a couple of tier ones that are fairly large that we are anticipating to be able to get live right at the end of the year. However, as in prior years.
When you get into the holidays, then some of these banks get into code freeze and don't make any changes until you wanted the following year. So we're trying to make sure that we're accounting for the fact that we've got a couple of large deals right at the end of the year that could slip in the next year in our current guy.
Got it that's helpful and just as a quick follow up.
In terms of the the platform you guys are doing good job clearly building up appointment mechanically you up the bass opportunity you have the the partner marketplace opportunities was interesting Inorganically really bill tell your digital lending capabilities, just mad if you could talk a little bit about.
What we should expect a platform expansion it looks like going forward, maybe an organic inorganic basis that would be helpful.
Oh and are you talking from a product perspective.
Correct, yes product perspective.
Yeah, I mean, I think if you if you look at the accolades we got from <unk> on the corporate banking side of the business <unk>. There's <unk>, there's a lot of work to be done there as we continue to move up market. So the thing is going to be interesting on the digital on the platform side as we're beginning to integrate things certain products from cloud lending from precision Linda are beginning to take some of the data tools.
That we have and combining them to provide.
Assistance for the banker, but also for the customer of the bank to determine what's the best loan for them, what's the best next product for them.
And then from our bags perspective, what's the optimal weight a price alone. So there's a lot of different opportunities for us to tie all this technology together and cue to bass brings to the table.
A lot of the learnings from what to fend extra doing whether it's cold-bay savings.
Debit card transaction or data around debit cards, there's a lot of opportunity for us to to really provide this ecosystem for banks credit unions and send text as well as some other verticals that are looking to get into the into the financial services space. So tremendous opportunity ahead of us all the behavioral changes occurring out there for people that are no longer able to bank and <unk>.
Person.
Are are gonna be tailwind for us as we move forward.
Alright, Thank you very much guys.
Your next question is from joke with Bird you line is open.
Oh, Great Hi, everyone I hope, you're all doing well just to follow up on cloud wondering and I was curious how many of the customers that abuse. The P. P. P application R.
New customers take you too and then there's they're thinking that maybe next year, even though the P. P. P need goes down there that you're able to grab on for some of these M. N upsell I'd imagine that the full commercial lending sweet of Cloudland thing is substantially more accretive pay a C V.
The P. P P application and so <unk> it actually becomes still a tailwind N 2021 as opposed to you know just look at the headwind from P. P P kind of running off.
Yeah, I mean, we talked about that on the last one one of the data points that we have I think we had 150 more than 150.
Presentations of the cloud lending product, which was PPP and then some forgiveness.
And what they were able to see it was out of the cloud living product works.
I believe they begin to think about their other lives a business or lending business, where they can look at the products. So.
That was <unk>.
Usually converted into that we converted a lot of those deals into Pvp products I would I don't know the exact number but I would think less than 20 per cent of the.
P. P P deals where non Q too customers at the time, we really tried to hammer existing customers to help them solve the problem, but if you look at the cloud lending pipe I think we have like 80, new logos and the pipe right now for cloud lending so.
The opportunity around digital lending is continuing to grow every day and I think as we begin to cross sell it to existing customers incorporated on net new prospect sales and then selling you directly to people that are just looking for a a lending product the opportunity is going to continue to grow forest in it and it should.
B, a tail enforced and 21 for sure.
Great. Thank you for sure.
My final question is from.
[noise] Accord you line is open.
Hey, guys are good morning, Great results. Just wondering you know looking at at at the number of tier one wins and I understand that the products. That's much larger now than than it was a year or two ago, but just kind of looking at the number of tier ones and how we kind of used to look at the company a little bit more <unk>.
<unk>, you know, having one or two tier one winter quarter.
Do you think that you know the the current demand environment and coded like demand as is you know at this point sustainable to kind of.
I guess position the company more it kind of a new level of penetration and larger banks or do you think this was kind of a temporary phenomenon. Thanks.
Thanks, you well I hope it as a temporary if you think about it when we went public with one customer is greater than 10 billion and assets window have more than 60 that are greater than 10 billion analysis of the top hunter bags in the U S. Roughly a third of them are cute to customers.
And.
So when we have more than 130, what we call to your one customer zero about 5 billion. So.
I I think the interesting part about the five pier ones that we did in the quarter was it.
All five of them are potential targets for the other products that we have so the precision litter deals to look at cloud and they can look at the platform and the platform deals could look at precision under a cloud and so our ability to go cross pollinate our products into these to your ones is a huge opportunity for us and it is a customer this contracted the customers don't diligence.
Honest a customer that knows who we are it makes the sales process a little easier. If you look at the five serves and the F. I S. As in the Jack Henry's the world They kind of mastered that on the court processing side and we're just doing it on the front into the on the on the front end business, which where the customers interact with what we think is kind of the epicenter of what's happening right now so a lot of opportunity for us.
With these bigger banks and opportunity to go Cross Hill to them is tremendous and I think that all those things are things, we try to highlight every quarter.
Obviously from the call you can tell that we're trying to make sure that we set the right expectations for the third quarter, but the pipe looks good the activity looks good the products are performing the customers are happy we had record renewals and the first half of the you I think we renewed 100 <unk> extended contracts on more than 100 platform customers in the first six months of the year, that's about a quarter of our customer base in the first six am.
Months, while it helps us with visibility backlog and also makes a lot easier to sell things of those customers. So a lot of opportunity ahead of us feel good you just gotta go execute.
Great. Thanks, a lot ma'am. Thank you. Thanks I appreciate your patience.
We have no further questions. This time I turn the call back to presenters for clothing.
Thank you for your time today, we really appreciate it I hope everybody stay in shape out there and we look forward to send people on the virtual in New York wrong coming weeks. Thank you.
This concludes today's conference calls you may not disconnect.
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