Q3 2020 Q2 Holdings Inc Earnings Call
Good morning, My name is Marcella and I will be your conference operator today.
I'd like to welcome everyone to the queue to holding third quarter, 2020th financial results Conference call.
I wanted to play so I need to prevent any background noise.
The speaker's remarks, there'll be a question and answer session to ask the question during the session I'll need to press star one on your telephone if you'd like to withdraw your question press the pound key I would now like to turn the call over to Josh Yankovic Investor Relations. Sir you may begin.
Thank you operator, good morning, everyone and thank you for joining us for the third quarter of 2020 conference call with me on the call today is mats like R. C E O and Jennifer Harris are CFO. This call. It contains forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial perform.
That's a cute too holdings actual results may differ materially from those contemplated by these forward looking statements and we can give no assurance 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 the forward. Looking statements are included in our periodic reports filed with the F. C. C included in 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 date discussed 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 a non-GAAP basis and discussion of why we use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable gap 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. E C yesterday afternoon.
Let me now turn the call over to Matt.
Thanks, Josh and thanks to everyone for joining the call today today I plan to provide a recap of our third quarter performance followed by an update on our outlook for the fourth quarter and beyond.
In the third quarter, we generated non-GAAP revenue of $104.8 million up 31% year over year. We also added approximately 800000 users in the quarter, bringing us to 17.1 million total registered users a 21% increase year over year.
Overall I was pleased with the performance of the business in the third quarter. We continue to see a large number of users added to the platform through a combination of new customer installed and sustained organic user growth as.
As I've stated on previous calls are delivery team has been performing in an extremely high level in this remote environment. This theme continued in the third quarter, where we had a record number of new digital banking customers go log on the platform on the sales side performance and a quarter was consistent with themes. We discussed on our last earnings call net new activity was slower than normal it's.
Financial institutions continue dealing with the many distractions brought on by Covid.
Nevertheless, Arnett new sales team turned into a solid performance that included some banner wins.
Also across sale and renewal teams had another strong quarter, which helped offset some of the slowdown on the net new side.
Riley I believe that our overall financial performance for the quarter serves as a great reminder of the underlying strength of our business mall.
Non material portion of our total revenue, but we do believe Europe represents a strategic growth opportunity for us over the long term.
Our banking as a service team also had a solid quarter, including one, particularly noteworthy deal in which one of the largest us centex selected our cloud based core as their system of choice to support a new digital only bank initiative.
As is often the case with Q2 vast wins. This is exciting because we believe there is significant long term opportunity to grow with this partner as they work to drive adoption, we hope to be able to share more about this partnership in the future as this customer nears their public launch.
Next cross sales and renewal activity within our existing base was strong yet again, which helped to mitigate some of the slowdown weve seen in the net new market.
The cross sell activity is happening within both our banking and lending customer bases in the digital banking arena, our Centrix risk management product line has been a substantial contributor accounting for nearly a third of the total cross sell bookings in the quarter and on the lending side, we had two significant renewals with global banks, which we view as an endorsing.
The strategic value of our lending solutions with even some of the world's largest financial institutions in general I'm incredibly proud of the way that we weathered the storm as a team the quarter played out largely as we expected and in spite of this we were still able to exceed our cobot adjusted bookings expectations.
As we head into the fourth quarter and 2021, our expectation today based on feedback from customers on our sales teams is that we should see improvements in the predictability of purchasing decisions and the corresponding steady increase in bookings over the quarters ahead.
And because we believe many of the deals we've been working have simply pushed out into the future rather than being cancelled altogether I'm optimistic about the state of our pipeline across our lines of business.
Since our inception, we have considered land and expand a key component of our growth strategy and I believe our cross sales performance indicates that the strategy is alive and well and has played a vital role for our business in recent quarters, given the considerable evolution of our product suite I expect expansion to play an even more critical role in our sales success going forward.
We believe the breadth of our product portfolio today, with Onboarding lending and digital banking from retail to corporate all with modern open data first technology is unique in the market. It equips us to approach multiple lines of business within a financial institution, giving us a large surface area to land new.
Customers wherever they are in their digital transformation and as we continue to integrate our major solution said, we believe the value proposition for our customers to start with one product and expand over time becomes even more compelling as we shared data across these systems to create better experiences for account holders and drive efficiencies and more.
Informed decision, making for our customers. We started to see this type of expansion gain momentum in recent quarters as our sales teams became more familiar with products across the portfolio and.
And we are continuing to properly align our sales efforts. So that we can continue driving this trend so in the quarters to come we expect to see this cross pollination continue to be a driver of our bookings performance.
The breadth of our portfolio also creates substantial runway to develop new highly differentiated innovation as we integrate key aspects of our product suites were able to deliver compelling and cohesive features and functionality that due to the often silos nature of legacy technologies differentiate our product.
From those in the market today, we had one such example in the quarter, what we're calling our treasury Onboarding solution in general the comprehensive Onboarding of customers remains a major opportunity for digitization, particularly on the commercial side, we're onboarding a new client requires greater documentation today may.
Any commercial financial institutions rely on a combination of paper based processes and legacy technologies that they must string together to onboard a new commercial client a process that within some customers can take as much as 30 days. This is a sub optimal experience for many new commercial clients by connecting key components of our commercial digit.
Banking offering with elements of our account opening and lending solutions. Our teams developed an end to end commercial enrollment tool to materially improve this critical process Treasury Onboarding help digitize, both the backend and customer facing processes of Onboarding, a commercial client, which can substantially reduce.
Onboarding time and in turn increases the productivity of commercial banking staff.
Solutions like this that can replace multiple technologies and manual processes and have a quantifiable impact on time to revenue for customers.
And another differentiator net new deals now as I conclude my prepared remarks.
On our third quarter performance I wanted to briefly address a piece of news we disclosed in our press release issued yesterday afternoon Jennifer.
Jennifer Harris, our Chief Financial Officer is planning to retire in the first half of 2021 with David Minogue during Q2, as our new CFO I'll, let her share more information, but for now I want to thank Jennifer for her unparalleled contributions to Q2, our customers our employees and our shareholders over the past eight years, you will never find someone who is harder working and have higher Intel.
As well as the number of customers live on our digital banking platform.
The year over year revenue increase also benefited from the revenue contribution of precision lender, which we acquired in the fourth quarter of 2019.
Transaction revenue represented 14% of total revenue for the quarter down from 15% in the prior year period and consistent with the previous quarter.
It costs previously mentioned.
Total operating expenses were $50 million up 25% from the prior year period and up 4% from the previous quarter.
The year over year increase was primarily related to the additional expenses associated with precision lender.
$3.2 million for the quarter.
Now, let me turn to our updated guidance.
We are forecasting fourthquarter non-GAAP revenue in the range of $105 million to $107 million and we are revising full year revenue guidance to the range of $402.5 million to $404.5 million, representing a 27% year over year growth.
Our updated guidance reflects the increasing revenue contribution generated from our existing customer base thrill organic user growth as well as the implementation of cross sold products, which carry a quicker time to revenue compared to that of net new installations.
Our updated guidance also takes into consideration the timeliness of larger projects scheduled to go live in the fourth quarter.
As we've discussed in the past projects that do not been alive prior to Thanksgiving are susceptible to being delayed to the following year as our customers work through the holiday season.
<unk> are in a much stronger position than most would've predicted in March.
The Swift action of the government distress testing that became a requirement as a result of the 2008 crisis and the digital investment many have made over the past several years have helped or target financial institutions remain solvent and mitigate fallout related to covid.
While the last few quarters have understandably slowed some financial institutions decision, making I continue to hear the digital transformation is no longer a choice it's an imperative.
Such we anticipate gradual improvement in the net new buying environment into the fourth quarter and and 2021.
Or it's just there's just so much more engagement right now over the last 30 days.
And we're seeing people trying to get some decisions done and that's across the board in North America at least as far as the lending side of the business the vast side of the business and the platform side of the business.
That makes sense. Thank you.
Thanks Sterling.
Tom Roderick from Stifel. Your line is open.
Great Hi, Jennifer Thanks for taking my question, Jennifer I'll I'll start with you as well congratulations on your read on your retirement, it's been a heck of a run and I think I speak for a lot of less than seven months eight months now in quarantine.
A desire to spend more time with your family speaks to a great family. So congratulations on that.
Immature to provide 21 guidance uhm, but based on what I know today and the visibility that I have into the existing pipeline and what I think is going to happen over the next 60 to 90 days I certainly wouldn't expect our year over year growth rate next year to be any lower than 20% at this point and.
Eager to switch core systems at a time, where its been all hands on deck for the last seven eight months.
Yes, I think that one of the things has been interesting Tom is it just over the last probably 60 or 90 days, we've had several opportunities. It started off as digital banking just evaluations and then.
We are beginning to talk about this roadmap to digital transformation, which moves not just your digital banking system, but how do you begin to transfer form your onboarding. How do you begin to transform your lending process. Your digital Onboarding new lending process. How are you connecting the two of those to use data and so to some extent, where we are elongating the sales process, but in.
In the long run we're going to get much better deals much longer deals more integration or more deeper relationships with the customers.
But ultimately it's really about their banks are really focused on several things right now credit risk known and unknown.
Cross selling for noninterest income and then also trying to drive more profit through the interest income.
There is a little bit of a holding pattern around when is the stimulus or is this demand is going to come out and do they need to be prepared for more government lending, whether its PPP or more mainstream.
And then yes, there are saddled with this remote work environment, which puts pressure on the digital transformation side and then there's some there's some things around LIBOR. So for which is the benchmark rates up it's it's a little distracting to them. They have a lot of stuff on their plate right now that makes it difficult to really sit down and focus on these opportunities that I have been play.
Pleased with the amount of engagement, we have and the deals we have and.
Do I.
Yes.
Because they are signing up for committed minimums or per fees based on asset size of the bank.
For those new modules are cross sales as they are taking so it definitely increases the.
The large cross sales force in the opera as we begin selling it and I think your point is is accurate, which is the timeliness of it is critical and just to simplify what treasury Onboarding does is one of the toughest things at a bank has to do is convinced the business to convert to their <unk> to move to their new systems and nobody really.
Now, it's a manual process when they go out to the commercial customer to gather the information the customer have to fill out the application than that information comes back in the back office at the bank has to manually enter that what we've done is automated that process and made it a fraction of the time to do that and it's integrated into the digital banking system. So it would be clear.
The cloud lending development team built this product and it's integrated into our digital banking platform and so we're just.
So it's a very unique experience, it's early and we're beginning to figure out the easiest way to install it and roll it out but the fact that we're doing it with such a big bank right now and it's been really cutting her teeth and getting ready to go. It's it's an exciting opportunity for us and the timeliness of it is is to you're pointed it couldn't be better right now to make it easier for a bank to onboard a new customer.
Trailing 12 month revenue retention and about a 120% so.
Okay. Thank you and congrats gentlemen.
Thanks, Eric Barry.
Andrew Schmidt from Citi. Your line is open.
It it it wasn't it was more about us looking at the future. They they weren't really holding us back as much as it's just giving us more freedom and we're seeing some of those opportunities come to fruition and the economics are going to get better for us in the long run so that that was as we said that was an amicable split <unk> both of us were.
Pleased with it and we're I'm really excited about the opportunities you're gonna come with us moving forward.
Got it and that that makes sense and just follow up on just a just a product question and bill pay it seems like there's a significant opportunity to just help the banks due bill pay <unk> legacy Bill pay is his date. It seems like there's a lot of new solutions out there can can reduce.
Friction wondering whether that might be on the road map at some point I know you have some.
Third party partnerships and you also have bill a direct withdrawal that a few years ago, but but just curious if that street to teach a comparative for ya.
Yeah, I mean, I think if you think about the bill pay business. It's not it's it's kind of a drag on our growth, but it's a it's a big part of the digital banking experience, but what you're saying is is a reduction in the number of payments each individual makes uhm and some of that because of the gig economy, that's happening and if you look at the card swap product that we rolled out with the top 510 bank.
The world, what we're able to do is it's effectively making it easier for the for the <unk> the financial institution or the Fintech too issue new cards to keep the top of the wallet. It makes the switching cost less for them and less likely because it it automates the process in which you can get a new card and then.
Update your subscriptions with your whether it's Apple Spotify Hulu Netflix it takes revenues up for the transactional revenues up for the financial institution and so bill pay is changing our bill direct product continues to gain some momentum, but it's really about how do you solve the payment problems for the customers base.
On the new world that they're in because if you think about your you know you used to have a home phone Bill and Internet Bill and then your cell phone Bill those <unk> your cable bill those would be consolidated into one or two bills now and so what we're trying to do is to is to match the payment processing with the way that the users rabbit with who the users are actually paying so I don't.
Platform, but those on the digital banking customer base have purchased proximately, 25% of those solutions with some of our customers actually being as high as 50% penetration. So we still have a lot of opportunity for expansion with Oliver within all of our digital banking customers and if.
They were hypothetically to take all of the solutions that we have.
That are applicable to their institution it would roughly double our current subscription revenue just again in our digital banking customer base and then we have ample opportunity to expand.
And take our digital banking platform into those customers, who are centrix, only or precision lender, our cloud lending only customers and that would grow at even more.
Hey, Thanks, and good morning, and congratulations Jennifer a lot of people I'm sure wish they could do what you're getting ready to do here and enjoy some time with the family. So wish you well.
Thank you.
A quick question.
Two things one is on pricing I I guess I'm, just sort of curious if you've seen any changes around the the the pricing environment for any of the product set. So I guess you would feel are critical to the pipeline and and to revenue in general or whether it should have been pretty stable.
Any thoughts you might have there about what you're saying.
You know I would say that on our side of the business. Some you know that.
That I have that correct and then the last one just on margin.
I guess one of the things that we get asked a lot as people sort of get introduced to the story is the margin side of the business I.
I think people appreciate the topline in the secular tailwinds.
They always seem to come back to Where's the scale.
I guess when they are new to the story and so any thoughts on sort of what the margin trajectory I guess.
So maybe the scalability from this point I mean, obviously precision and cloud lending you are clear that these are investments opportunities and that obviously.
Impacts I guess the margin equation, but if there's no other really large acquisitions in the immediate future out there.
Wouldn't be there with the right way to think about things the that we should start to see that scale come through whether it be at the grocer just down at the adjusted EBITDA margin.
Yes, I mean, I think that's the right way and the one thing I would caution you on is don't get out over your skis in 2021 remember we had planned to make some fairly significant investments in precision lender and with the impacts to the markets that they were serving EMEA and the large and.
Surprise clients, we really held back from some of that investment this year, which is part of the improvement you saw.
Being in our adjusted EBITDA line.
But I'm very optimistic based on their pipeline, especially in North America, and you're going to see us start making some of those investments now going into 2021. So for 2021 I would say you know on an adjusted EBITDA margin you would see somewhere between call. It 150 and 200 base.
This points improvement and if you look back historically before the large acquisitions, we were posting roughly two to 300 basis points of improvement and I think once we get through 2021 absent any other large acquisitions that we would have to invest in we would return to those similar level.
Awesome. Thank you very much for the time.
Hi, Tim.
As a reminder, pioneer sales to one question. If you have follow up please re queue.
Our next question comes from the line of Robert Napoleon from William Blair. Your line is open.
Thank you.
And congratulations Jennifer you set a high bar.
Yes, really respect your decision is going to be a hard job too to leave.
Lot of exciting things going on there.
Yes, it is I feel like I'm, leaving one baby for two others, but thanks.
[laughter].
I, just like to take a little bit more into the treasury Onboarding solution and maybe what that had the additional services that uli.
Maybe looking to provide Mack Cali.
Okay to your bank business clients like adding to the office of the CFO are there other products and services that you're looking to add like.
Like anywhere in the invoicing or payments or.
You know that side of the due to the accounts receivable side is there are there more investments that you want to add through the banks for the office of the CFO If you would.
Yes, but those are all places that we.
Are definitely going to be looking at going out right now it's still early for Treasury Onboarding.
Last week I want to see that gains more traction the maturity of the product, but we're also looking at third party products that we could potentially push through the system as well I think one of the things that kind of gets lost when people put user accounts out there is seven.
17.2 million end users everybody thinks those are just retail customers, we have more than a million businesses on this platform and those businesses need things like background checks to your point account receivable technology and banks can be places, where they could offer that those solutions and we could integrate those into our platform to make it easier.
So we don't even necessarily have to build it as much as we can integrate it integrate it with our eyes. So there's a lot of different third party CFO apps that we could be integrating we're building on our own so the opportunity in our customer base.
It's not just the consumer side of the business is the business side and there is a lot of opportunity to solve problems and integrate the technology to the CFO can do all these things from a mobile phone or tablet or desktop.
And we will be the the.
The central station that the log into when they get get to work and spend their day looking at it or when they're out in about using their technology to manage their cash flow.
Great. Thank you very helpful.
Thank you Bob.
Joe Vern Rick from Baird. Your line is open.
Great Hi, everyone and my congrats to you Jennifer.
I wanted to go back to the new sales environment and ask whether you're seeing any different trends emerge depending on maybe the account size or type I think theres been some commentary recently.
Much of the regional banks.
That suggests maybe if you're a smaller institutions that you're pretty.
Fred maybe the stick with your incumbent vendor, if you're pursuing a greater investment in technology, but if you're maybe more in the tier one level. There actually is maybe a preference to rerun vendor assessments, maybe inject some some new technology into the organization does that.
Fit at all with what Youre seeing or any sense of how that might trend into fourq you in next year.
Yes.
I would look at it would be.
It's not as much the size of the entity as much as it is the mindset of the ownership and the leadership of the financial institution I was going to add up.
At aboard dinner, a two weeks ago.
With a 1 billion dollar financial institution that has an owner who is extremely aggressive unless use technology as a way to differentiate and compete and they're looking at a transformation project that rollout they roll that product out earlier this year and he has the mindset of bank of America Wells Chase Citi. Whoever you want to think about this aggressive that's out there trying to use 10.
LG is way to compete there certainly are smaller financial institutions that may have a different.
Deferred or even larger institutions that have different economic situations, where they need to.
I won't be disparaging, but they'll take a lesser product because of the cost associated with it one of the things is critical our pipeline analysis and we're working with prospects is to determine who that is first because that's not who we're going after were not a hamburger shopper steak shops, and if we find that bank that wants to do a digital transformation project, we're going to go in.
We're going if I like how we're going to win the deal we're going to be patient were going to cross sell all the products, we've talked about and so yes that may lead the trend towards smaller financial institutions, but I'm more than happy to partner with a $500 million bank or $200 million credit Union. If they want to use technology is way to compete and differentiate and not as a shield.
So for US I don't I think the trends are more about the ownership and where the financial institution is and do they want to be around for a long time, because if you think back of the history of this company. We have added more end users to the platform platform through M&A than we have lost and I think thats indicative of our customer base by.
As a new technology platform to compete because they want to be around for a long time and so therefore, they are the net acquirers of these businesses out there and we're going to stick to that philosophy moving forward because it's paid off for US I think you're going to see more M&A and I want to continue to be on the right side of it.
Great. Thanks for that that's helpful. Yes.
Thank you and operator, we're running tight on time I want to make sure we get everybody's questions and.
Not a problem Josh back from KBC I'm. Your line is open.
Thank you and Jennifer Congrats I think it's a pretty impressive that you kept your title and retirement of both.
[laughter] common path, but but you pulled it off.
You will have.
Have covered a lot and I know you'll be talking about this big fintech.
The current on your best service later, but just would like to hear maybe competitively.
What.
You think really got you across the line with them and really what was distinctive you're obviously not the only offering in the market and why there was a good partnership there.
Yes, I think to some extent we have.
A track record with some of the larger fintechs and delivering it to the cloud technology that weve built to suit the simplicity of that they start right. There in the sandbox and writing against our avionics within two weeks, it's quick to market our network.
The relationship we have with banks, where we can put them in a depository relationship with the bank that is less than 10 billion and undertook under durbin. So the economics are better.
Its best in class technology, and whether its credit Karma or these other guys. We continue to be highly differentiated in those offerings and so.
Yeah, that's a simple it would be it's cloud it's quick and it's it's best in class.
Okay, great. Thank you.
Thanks have a great day.
Steve Carmie from GE Research your line is open.
Hey, Good morning, just wanted to ask a question on the growth that I think has been asked but maybe a little more directly or differently. So for customers, who have and close deals that are in negotiations I mean, what do they need to get there I know, Matt you mentioned the election and the potential stimulus and questions around.
But ex those two pieces are any bank customers looking for more clarity on profit credit losses, before making decisions and have their feelings changed on that topic now versus versus June 30 for instance.
Well I think the election was a big piece of it but if you go to the very first question of this.
Earnings call. It was about the difference in 16, and 20 and I would say the big difference is the macro environment around cobot as it leads to uncertainty where there's going to be government lending program. If the government rolls out other stimulus program I think it's probably good for the businesses and the customers are the banks that the bank has to shift their focus.
Got to make sure they can distribute those funds immediately and so the macro environment is probably the long pole in the 10, all a lot of these decision delays.
And then the evaluation of credit risk, but to some extent government lending programs go hand in hand with credit risk because you're helping the customers that may be in trouble. So that would be what I would I would say are some of the the the delays after post I don't know if it's post election, but post is whenever we find out who the president and everything else that's going to be probably the thing.
Thats going to continue to drive to delay decision, making somewhat but.
Other than that.
Other than the shooting how's the play Miss Lincoln I mean, that's a pretty big deal for US right now and so we're trying to get through.
Yes, those issues, but we're navigating and pretty well and I feel good about the first this quarter and then the next day and in a moment momentum going into 2001.
Okay. Thank you. Thank you.
As Ed Romani from Sandler Your line is open.
Hi.
Thanks for taking my question.
And.
Let me, let me Echo what do you what are you going to Jennifer.
Jennifer Congrats on your retirement.
I just wanted to actually ask about yard as high a partnerships.
Talked about expanding system integrator partnerships and the potential impact on driving bullet.
Revenue growth as well as improving margins.
And.
Product offering continues to expand and your relationships are larger banks pension expense.
They haven't any update on sort of expanding your insight.
Hi partnerships.
Yes, I mean, I think ultimately all but as we've always said the customers we sell to which are about.
The 100 billion in revenue below.
In assets and below on the on the.
Digital banking side, one want us to deliver their products.
They want.
One one person to person to build the products to deliver them and support them now we are seeing some partnerships with other.
The systems integrators to maybe help the project, but ultimately I don't think you're going to see a significant portion of sales systems integrators come on the platform side on the cloud lending side with force Dot Com, we do have system integrators that we're working with.
But in general you're not going to see a lot of system integrators come into play in this space on the direct banking side, but when the club lending side there are opportunities for us.
To do that.
Great. Thank.
Thank you.
Thanks, I appreciate you sticking in there too and I would just thank everybody for their time and also thank Jennifer for everything she has contributed and so I hope everybody has a great day and we'll be in touch I look forward to everybody getting a chance to meet me hock in the coming weeks. Thank you very much and have a great. We thank you all.
This concludes today's conference call you may now disconnect.
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