Q2 2021 Q2 Holdings Inc Earnings Call
Yeah.
Good morning, My name is Phyllis and I will be your conference operator today.
At this time I would like to welcome everyone to the Q2 holdings second quarter 2021 financial results conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
At that time, if you would like to ask a question. Please press star 1 on your telephone keypad. If you would like to withdraw your question press the pound key.
Thank you I would now like to turn the call over to.
Josh Yankovich Investor Relations Sir please begin.
Thank you operator, good morning, everyone and thank you for joining us for our second quarter 2021 conference call with me on the call today is Matt Flake, our CEO and David <unk> our CFO.
This call contains forward looking statements are subject to significant risks and uncertainties, including the future operating and financial performance of Q2 holdings.
6% sequentially.
We also added over 500000 users sequentially, resulting in a year over year increase of 16% that brings us to more than 18.8 million total registered users on our digital banking platform.
Overall, we had encouraging quarter of activity across the business. We saw on key deals across our product lines announced an important new offering that we believe will build on our competitive advantage in the market and we continued to execute at a high level and delivering our solutions. Although we continue to see uncertainty around the timing of purchasing decisions.
We believe that a return to more normalized living and working conditions will help the market improve which we are already beginning to see by an increase in customer evaluations of digital solutions and growth on our pipeline. So.
So we're pleased that we're seeing expansion on the number of opportunities across all areas of our business and as we look ahead to the back half of the year. We are optimistic that overall deal activity in the space will begin to return to prepandemic levels.
We also saw a resurgence in M&A activity within the banking space in the first half of the year, which we view as a positive for our business of the 22 mergers or acquisitions announced in the first half that involved a Q2 digital banking customer.
We were on the acquiring side and all but 1 instance, this reinforces a belief we've long communicated that because we tend to partner with financial institutions that are strategically looking to grow and are forward thinking around digital transformation Q2 customers are often on the acquiring side of M&A transactions.
If the acquiring company rolls, the new entity onto their existing digital banking solution <unk>.
These events can result in incremental users being onboarded without going through a typical sales or implementation process.
While the timing of revenue from M&A is difficult to predict we are optimistic that this recent M&A activity in the industry will benefit our business, which we find especially encouraging considering the industrywide slowdown in decision, making you saw during the pandemic.
We also view it as a testament to the quality and breath of our customer footprint.
Transitioning to our sales performance in the quarter, we signed key net new an expansion digital banking deals achieve broad based success within digital lending and continued to build momentum in the banking as a service arena on the digital banking fraud, we want a highly strategic credit Union deal in a competitive scenario.
This credit Union has a sophisticated internal product team so finding a provider with a strong based platform and the ability to extend that platform was a priority or innovation studio solution, which I'll discuss in more detail. Shortly was a key differentiator for this client.
As it provides them the flexibility to personalize the digital banking platform according to their own timeline and remember feedback and.
In the past we've discussed a growing trend in credit unions increasingly expanding into business banking and are into and digital banking platform has put us on a competitive position to capitalize on the shift.
That was the case on this deal where the combination of our platforms retail experience and our feature rich commercial sweet was another important selection criteria.
We also continue to generate meaningful expansion opportunities across our customer base a good proof point from the quarter was a $3 billion credit union that renewed their existing retail digital banking agreement.
While also adding our corporate banking solution. We believe examples like these demonstrate the growing value of a broad solution portfolio and our ability to leverage that breath to deepen relationships with existing customers.
We had several banner wins on the lending side of the business in the second quarter and I'm pleased with our traction, especially in North America with the events of the last 18 months, we're seeing financial institutions put an increased emphasis on streamlining their internal lending processes in order to provide a more competitive borrower experience and all alone origination salute.
<unk> on a natural fit for lenders looking to digitally transform their capabilities the.
The first you'll all highlight was a loan origination win with an enterprise top 30 U S Bank.
This is an important deal from a strategic standpoint as it helps demonstrate the quality and scalability of our origination solutions in the enterprise segment.
We also believe this will add momentum to our North American sales efforts. It also gives us a foothold with this day and we're optimistic that this initial relationship will create expansion opportunities for us as an example, this bank also made the decision to purchase our clicks with solutions quarter, which is intended to help the bank become a.
Primary financial institution for the retail customers.
In addition to a loan origination success, we continued to build traction with our loan pricing data and sales coaching solutions a representative within the quarter was worth a tier 1 top hundred U S bank, which not only purchased our loan pricing solutions, but also opted at our Syntrex risk management products.
Another example of a product breath, creating additional opportunities force.
This bank is looking to utilize our technology to create a competitive advantage and we'll use on loan pricing solutions to empower the relationship managers with valuable pricing data and coaching allowing them to design more profitable competitive loans in real time with their borrowers. We also signed the loan pricing agreement with an existing tier 1.
Digital banking client. This is our expansion mall on action. Our goal has always been to win a customer runs successful projects with them and earn more of their business over time, given the breath of our product set today, we're now on a position to partner with our customers on both sides of the balance sheet no matter, where they are on their digital transformation journey.
So when this client expressed an interest in providing loans pricing data to their commercial lenders. We were on a great position to partner with them on this initiative.
Our banking as a service team also had a solid color of activity partnering with syntax and new verticals that are driving innovation in financial services, 1 such win in the quarter was with night dig.
A leading technology and financial services firm dedicated to giving us consumers far easier access to buy sell and hold bitcoin. This is an exciting partnership force on multiple fronts first.
As a banking as a service client the leverage our bass platform to power their new payroll offering for corporate customers aimed at giving you S employees the ability to allocate a portion of their paycheck to investing in bitcoin.
First such offering in the country and beyond our banking as a service relationship we announced the collaboration to make night eggs custodial functionality available to Q2 digital banking customers as well.
Which will give our financial institutions customers the ability to offer bitcoin services to their account holders.
Expanding on innovation, we formally announced the Q2 innovation studio in the quarter. The culmination of years of hard work from our teams and input from our customer built.
Built on our award winning SDK the innovation studio allows our customers to extend and Personalised or digital banking platform either with in house developers outside development partners or a library of pre integrated Fintech partners traditionally financial institutions have been dependent on their vendors to deliver new products.
Third party integrations or custom functionality as the pace of change continues to accelerate in the industry Q2 innovation studio empowers our clients too rapidly design develop and distribute an innovative solutions to their account holders in the initial feedback from our customer customers has been extremely positive.
As the Chief product officer for Stanford Federal Credit Union put it we feel very empower for our size our ability to execute on our vision is a differentiator with innovation studio Q to have developed a true partner approach.
We're also seeing a strong reception from partners for whom our network of customers and end users provide a potentially valuable and rapidly accessible distribution channel for their products. Although we just formally announced Q2 innovation studio we already have more than 25 Fintech on development partners leveraging it today and as that number grows.
The value the innovation studio can deliver to customers will grow as well bye leveling the playing field and empowering our customers with equal access to technology. We believe the innovation studio is a powerful contributor to our mission.
And with its ability to help customers differentiate and deliver innovation rapidly. We believe Q2's innovation studio will give us a meaningful competitive advantage more engagement opportunities and drive high levels of customer satisfaction for years to come.
Shifting to product delivery, our teams continued to execute at a high level during the second quarter <unk>.
<unk> live event from a quarter was particularly noteworthy a coordinated launch was 6 financial institutions. All owned by the same hole holding company that is 1 of our largest digital banking clients. This loss was a tremendous effort from our team and I believe our track record in delivering solutions to sophisticated customers with complex environments.
On us to set us apart from competitors.
So when you combine our delivery execution with the expansion of the product portfolio and key wins on the sales side, we're pleased with a quarter and feel when a strong competitive position as we entered the back half of the year with that I'll hand over the call to David to walk through our financial performance.
Thanks, Matt and good morning, everyone.
As we hit the halfway mark of the year, we're pleased with our execution effectively bringing deals to revenue in our ability to deliver organic growth in the business, which has helped yield strong overall revenue growth exceeding the high end of our guidance.
We continue to grow investments on our solutions support delivery and people, while driving efficiencies, which have resulted in adjusted EBITDA also exceeding the high end of our guidance.
I'll begin by reviewing our results for the second quarter of 2021 in more detail and conclude with updated guidance from the third quarter and full year 2021.
Total non-GAAP revenue for the first quarter was $124.2 million, an increase of 26% year over year and up 6% sequentially.
Both the year over year and sequential increase in revenue was largely the results of growth and subscription revenue driven by new customer go lives and organic user growth.
In addition, the year over year increase was also due in part to go lives associated with Krossel products.
Year over year and sequential revenue growth also benefited.
From the contribution of quick switch, which we acquired on April 1st.
Transactional revenue representative 14% of total revenue for the quarter consistent with the prior year period and previous quarter.
Within transactional revenue, we're seeing an increasing contribution associated with the best business, which includes interchange as well as pass through fees for debit transactions.
This increase in revenue from the vast business combined with continued slowing growth and traditional bill pay revenue.
Has resulted in transactional revenue as a percentage of total revenue remaining constant.
Turning to backlog, we ended the quarter with approximately $1.3 billion in total backlog.
4% increase year over year.
And a sequential decline of $15 million.
The year over year increase in backlog was largely results of bookings added to renewal opportunities with our existing customers as well as the contribution of net new bookings.
As I mentioned in last quarter's earnings call.
We believe that backlog growth will be pressured in 2021 and.
In part due to our proactive approach and success in 2020, and renewing existing customers, which resulted in fewer customers targeted for renewal in 2021 relative to 2020.
We remain confident that net new bookings are going to be a bigger contributor to backlog this year compared to last but.
But we could continue to see pressure and the total backlog dollars due to the impact from fuel renewals from 2021.
Gross margin for the second quarter was 51, 9% down from 53.9% in the second quarter of 2020.
And down from 52.6% in Q1 of this year.
Year over year decline in gross margin was primarily attributable to expenses associated with the addition of implementation resources, which continue to benefit our effectiveness in delivering solutions.
We also increased investments focused on maintaining best in class security and uptime for our customers.
Sequential decline in gross margin was also impacted by a higher mix of transactional pass through revenue in the second quarter.
Total operating expenses in the second quarter were $57.9 million or 46.6% of revenue.
Compared to $48.3 million or 48, 8% of revenue in the second quarter of 2020.
And $54.9 million.
Or 46.9% of revenue in Q1 of 2021.
The year over year and sequential reduction in Opex as a percentage of revenue were driven by efficiencies and supporting growth in our business with G&A showing the greatest decline an expense as a percentage of revenue.
R&D exhibited the most pronounced opex growth.
As we continue to invest in our solutions such as banking as a service and Q2 innovation studio.
We feel strongly about continuing to invest in open solutions like these to benefit our customers Q2, and ultimately expand our addressable market.
Another driver of the sequential increase in R&D came from incremental head count on board a during the quarter related to the acquisition of quick switch.
Adjusted EBITDA was $9.9 million up from $8.1 million on the second quarter of 2020 and flat sequentially.
Year over year increase was largely attributable to maintaining a balanced approach to cost management <unk>.
Resulting in operating expenses scaling below the growth rate of revenue.
Which more than offset both the increased opex contribution from quick switch as well as the decline in gross margins.
We ended the quarter with cash cash equivalents and investments are $411.3 million down from $528.6 million at the end of the first quarter of 2021.
This declining cash was attributable to the acquisition of click switch and the repurchase of the majority of the remaining 2023 notes, we announced during the quarter in total these transactions reduced our cash balance by more than $120 million.
Cash flow from operations was $11.5 million on the second quarter compared to a use of cash from operations a $5.5 million in the first quarter.
In addition to discipline working capital management, the sequential improvement was due in part to the timing of payments for large vendor contracts.
As well as our annual bonus payout and payroll taxes associated with stock vesting.
Which were both paid out in the first quarter.
We encourage net capital expenditures of $8.3 million and generated free cash flow in the quarter of $1.7 million.
As a reminder, in the third quarter, we will make the final payout of our termination agreement with stone Castle.
Totaling approximately $7.6 million.
Now, let me wrap up by sharing our third quarter and updated full year guidance.
The forecast third quarter non-GAAP revenue in the range of 125 million to $126.5 million representing year over year growth of 19% to 21%.
And we are increasing our guidance for full year revenue to $497.5 million to $499.5 million representing year over year growth of 22% to 23%.
We forecast third quarter, adjusted EBITDA of 6.2 million to $6.8 million.
And we are increasing full year 2021, adjusted EBITDA guidance to 33.2 million to $34.7 million.
In summary, we delivered better than anticipated financial results from the second quarter.
Through effective and timely delivery of our solutions to our customers.
And we are increasing our guidance for both revenue and adjusted EBITDA for the full year.
We continue to invest in strategic opportunities, which we believe will benefit our customers and create long term value.
We are able to fund a portion of these investments through operational efficiencies and have confidence in our ability to continue executing in the back half of the year.
With that I'll turn it back over to Matt for some closing remarks.
Thanks, David and closing we continue to see signs of improved business momentum, we had important sales wins across our lines of business, adding strategic new clients and digital banking loan origination in pricing and banking as a service, while continuing to expand existing relationships and execute on cross pollination opportunities we.
Continue to further differentiate our solution portfolio with products like Q2 innovation studio, which enable financial institutions to design develop and distribute innovative solutions to their end users more quickly than ever before low.
Looking ahead were encouraged that our market is beginning to improve we're engaged in more and more sales opportunities, creating a strong pipeline and we expect prospecting customer decision, making timelines to improve through the end of the year.
And with that I'll turn it over to the operator for questions.
At this time, if you would like to ask a question. Please press Star then the number 1 on your telephone keypad will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Tom Roderic, Let's Stifel.
Everybody. Good morning, Thanks for taking my questions Uhm Mad I wanted to kind of being put a little bit of a finer point on the backdrop of the the business environment here I mean, I'm looking at the numbers, they're very good you're you're beating expectations your age and guidance and lots be excited about there, but it but it didn't seem like perhaps on your <unk>.
Comment you're pushing a little bit of caution and maybe that's just near term decision making vs. The pipeline building and things of that nature, and then and then David I'm, just trying to marry that tobacco log that would be down sequentially. So can you can you put a little bit of a finer point on what you're seeing with respect to new deal activity and the pace of decision making very.
First is what's in the pipeline and enthusiasm for what might be coming on the second half.
Yeah. Thanks, Tom.
So.
We are we are being cautious about this is our fifth quarter I guess in the pandemic and we've had to adjust and deal with the distractions that come with that.
But we are beginning to see.
We had a good quarter. If you look at it as an enterprise deal to cheer ones had a really a tier 2 on the digital banking side that looked like a.
Resembled a small tear 1 so it was good activity had some wins, but at the end of the day, we're beginning to see people coalesce around decisions on the tier 1 space in the tier 2 space on the digital banking side. It is also starting to come together on the on the lending side as well in North America. So.
It's just it's kind of I guess 5 quarters of explaining that were on a pandemic and trying to be cautious, but it certainly feels like we're beginning to see some decisions come together on the back half as I said on <unk> and the and the prepared remarks should look like Prepandemic numbers, and we're hoping to build on the momentum.
From that into 22, so it just trying to be cautious and transparent with with what's going on like we've always been but it it it feels like things are starting to come together.
All I can do this once but I got to put the the delta variant caution out there so.
And whether it's out of the response to it and that'll be different depending.
Depending on the geography is your in but that would be the only thing that I would say.
I can't I can't forecast that piece, but it feels really good I liked the activity that we had the pipeline numbers, just because I'm sure, they're gonna come up where up 36%.
Our demos were up 36% from the fourth quarter of last year.
We're looking at much.
Much better numbers, rfps or up 14% sequentially, 40% for over the fourth quarter of 2000. So we're beginning to see that activity come together I feel like we're well positioned in a lot of the deals and we're and we're also we continue to talk about this expansion opportunity within the existing base of customers that we've built so on.
All of those things feel good just want to have the the pandemic caution.
We're going to get back to what normal looks like a prepandemic looks like so it looks good and David.
Yeah, it's on it on the backlog side of things, Yeah, we talked last quarter, a little bit about the fact that we thought backlog would be pressured. This year. We saw an unprecedented number of renewals, we really need about a third of our customers last year.
And when you look at the mix of renewables of bookings overall.
Historically, if you go Prepandemic, we've had approximately 2 thirds to 3 quarters of our new bookings coming from either new business or cross-sell that was down closer 50% last year. So what we're seeing now is we're back in that Prepandemic historical range. So we feel good about how the business is trajecting at this.
But that's sort of some of the drivers a backlog with the cares program and some of the renewals. We did last year. We certainly feel like this year is going to be a little bit pressured from backlog standpoint.
Yeah makes makes good sense and thanks for the clarity and that's that's really helpful..1 quick follow up so you know the the banking as a service to bass piece, it's hard not to be enthusiastic when you talk about some of these different went to different vertical I think last quarter, you talked about credit Karma Uhm at what point does it start to move into.
A place where it impacts the numbers a little bit more than I guess, even in particular, David I would ask you about the gross margins cause I you know think about pass through an interchange they seem to be sort of pure margin. So it would seem like you've got the pieces on the chess board and sort of just waiting for the transactions to turn on a little bit what drives that and and and when do we start.
To start to see an impact that might even start to move gross margins up a little bit.
Yeah, Tom and you know, it's a good analogy actually with chest because it isn't checkers, it's gonna take longer to play out but.
But the way the way that this typically transpires is we win 1 of these opportunities when they launched the program. We talked about that is pretty extensively last quarter on when these programs are launched what's gonna happen is there's going to be a decent amount of pass through fees that we have and so those are obviously low margin in fact, no margin Uhm and then.
Once those pass through fees happened you start to see a gradual increase in mix over time of interchange fees, which are gonna be based upon the transactions that are taking place with the cards that are issued we saw the program launches that we had referenced happened and Q2 and we're obviously still seeing it now so there's a larger percentage now those those.
Pass through fees happening, but over time, we feel like we're going to have a much more meaningful lifts to gross margins associated with the interchange fees, but it is going to be 2 to 3 your time horizon as we start to see this become more and more meaningful it's not something that's going to happen over the course of a few months or even even the few quarters.
Yeah, that's great I'll jump back into Q. Thank you gentlemen.
Thank you I'll just on.
Your next question comes from the line of Terry Tilman with twist Securities.
Hey, good morning, Matt, David Josh and everyone else. It Q too thanks for taking my questions. Matt. It's always good to hear about new innovation, and so I would love to hear a little bit more about the innovation studio.
It was just kind of like a low code framework to just a little bit more about the studio technology and the monetization then I had a follow up for David.
Yeah, Terry Thanks for the question for US really excited about it this isn't something we did last quarter. We've been working on this for quite some time, if you think about it it really does for things force and our clients in particular number on speed to market allows us to get.
They are able to get whatever technology, they want integrated up and running faster, whether we do it they do it or a third party does it that helps drive differentiation and unique experiences to their users whatever it might be whether it's a for a business function on retail function, so you're driving.
A unique experience that allows them to drive their brand third thing is driving more engagement it'll drive more utilization of the of the product it'll drive more logins more activity different activity it could be accounting software it could be payable that could be CRM that we're going to integrate too and on the technology side is basically SDK is open to third parties.
Work with.
But 1 of the parts, it's very interesting here's the revenue piece, which is on.
There is a revenue share that goes on between the providers the financial institution and us and so we are moving this model from I'm going to extract as much money as possible out of a bank or a credit Union, which we are trying to help exist compete and differentiate and be a part of this economy to know we are.
Talking about how much revenue, where we got a split.
From products that they're selling to their customers or their generating revenue from so.
As others are really pushing to drive all grew up by selling more products and taking more money from their clients. Our conversations have shifted to we can help you generate revenue, which is very important in this interest rate environment that we're in noninterest income that it gets the Ceos years, so but very excited about this it's.
Early but there's a lot of activity on it and a lot on in a very strong reception to it in the marketplace. So very excited about.
That sounds great. It sounds like it's competition to jonathan's bass business here healthy competition.
Jonathan's overall, the emerging market stuff. So he he is going to compete with himself on it okay on it.
Yep. Yeah, then I just had a quick follow up for David can you. The deal closed in April with click switch you know I totally understand the value problem for the banks and credit unions, but if you could shed any more light on just kind of the size of the business or what it did in the quarter and then when you do these new deals like for things like click switch or even in the past grow is that a notably fat.
Time to revenue recognition vs. Just a big digital banking or Lindig deal. Thank you.
Yeah, it's good to hear from me absolutely, there's a much quicker time to revenue for a business like click switch and we are giving you. The some of the guidance. When we closed quick switch that we thought this was gonna be for this year. It was gonna be mid low to mid single digits in terms of revenue contribution in low to mid single digits.
Negative EBITDA for the year, we still believe that's the case 1 proof point of of successes. We've seen a few dozen quick switch opportunities end of the pipeline for existing digital banking customers. So we're really pleased with the activity that we're seeing right now on the ability to cross sell that solution into our existing base.
Thanks, Terry Thanks day.
Your next question comes from the line of Sterling, all tea with J P. Morgan.
Yeah, Thanks, Hi, guys.
A more sterling.
So we're gonna go back to Tom Roderick's question kind of ask it this way how should we think about you know traditionally we listen for when especially tier 1 <unk>. When I think about you know 9 to 12 months out for implementation and that's when you get the revenue contribution maybe reacceleration in revenue.
With the decline in backlog and all the elements you talk about 5 quarters into the pandemic, how should we think about the potential let's move forward and within the context, you've only giving guidance you know a little bit of guidance, but what should we be looking for on our side to indicate when we might see a reacceleration of the.
Top line should it be when backlog starts to grow again or is there any other indicators, we should look for.
Hey, Sterling.
It's David.
And what I, what I would say in answer to that question is first and foremost remember in your in your state of this it it takes about 3 to 5 quarters from from book Easter revenue. So that creates a natural revenue air pocket. We're just now starting to work through and as Madden mentioned, we've had 5 straight quarters of Covid impacted demand. So the improved bookings environment that we're expecting a on the second half.
That's really going to benefit our revenue trajectory twenty-three. So rich you are going to start to see is improved backlog over the course of a period of time not quarter to quarter with the mix of new becoming more and more which we've already stated we're seeing an improvement in that mix them in the first half of the your relative to last year.
And then obviously that starts to manifest itself into into revenue trajectory. The end of 22 or more importantly into twenty-three.
Alright understood and then wouldn't follow up when you talk about the top 30 bank loan origination when Luna Ridge Road origination for some investors is hard to wrap your head around because you've got mortgage loan origination. All these other pieces you got different players from the old Ellie made for the N C knows.
Where does this fit in so what are the vendors that you've competed against if you're if you're willing to you know to the name of them or at least conceptually tell us who you're competing against for that type of business and how might you be able to extrapolate so 2 more wins moving forward.
Yeah. So showing this is this was a a leasing opportunities. So they do Lisa This is Ah Ah Ah leasing division of the bank, where they rollout leasing products to their customers. The competition was both internal and external on I don't need to go through the names they can do it themselves and.
And so for US it's just a matter of you you go.
Have a a pretty strong leasing book on the card lending side internationally.
And so for US, it's just an opportunity for us to expand within the financial institution. We also sold clicked switched to that that that same entity at the same time. So it's a way to get your foot in the door and sell more and more of it and a lot of these financial institutions are are in leasing and doing more and more leasing. So it's an opportunity there, but it's a workload that we put in and bought them from the bill.
To originate the leash from the the ball all the way to the to the to the bank to simplify.
Simplify the process.
Makes sense. Thank you.
Thanks Sterling.
Your next question comes from the line, Brian Peterson with Raymond Jane.
Hi, everyone. Thanks for taking the question. So that it was kind of an interesting quaint on what you mentioned on M&A were you know a lot of your customers were on the acquiring and I'm curious how quickly do they make kind of I T or vendor decisions post that M&A is that something that you'd expect from the second half or does that get.
Pushed into 2022 I'm just curious how quickly those decisions are made as we think about kind of that that the revenue in backlog it back.
Yeah, Hi, Brian. Thanks for the question. It's it was something you know we've never really gotten into have we looked at the data twenty-two acquisitions and we were the buyer on 21 total customer base. It was a little bit more than 50, and we were the buyer on all but 3 so that that's you and as you work into different products may have a different impact.
But the thing that.
The the top line on that or the headline on that is our customers are strategic customers thinking about growth of our top of our tier 1 customers 20 of them have grown into into becoming tier ones through acquisitions and so this is a pattern that we think we're going to see continue to happen so as far as when when you see that.
The the the the.
Revenue line for us.
It's really tricky because you have regulatory approval you've gotta go through some banks want to do it as soon as it gets approved they want to do the conversion some some banks want to sit and wait and figure out how to put these together you know on the large the larger they are the longer they take to consolidate the systems.
But I think the point is is this is just a a tailwind for us that creates more opportunity within the base to go cross sell more products and expand and I think your time to revenue is probably going to look at anywhere between 12 to 18 months from the announcement of it if it's a really small 1 obviously won't have that big of an impact it'll happen a little.
Faster, but Ah root really interesting stat that we found in <unk> I don't know that there's many other vendors that could help those numbers and behind the only other thing I would add is it also gives us an opportunity to sit down with the customer and extend the existing contractual duration, 1 and then too there's there's opportunities as well across cell.
At that point exam.
Exactly exactly that that that's kind of what I was getting too there. So that's great to hear but maybe a follow up from me amount on how you can give a lot of comments on.
On on the second half and some optimism there I'm curious you know the third quarter are typically isn't as big of a bookings period as the fourth quarter.
Covid seasonality kind of gets thrown out the window right, but you know it any clarity on on what you were expecting kind of third quarter vs. Fourthquarter understanding that we're we're still trying to figure this all out here.
Yeah, I mean, that's tip.
Typically true I would anticipate a bigger force the third quarter, but I feel good about where things are on the third quarter I think you'll see.
On the digital banking side, I think you'll see more deals going down I I would anticipate more activity on the tier 1 side of things I'm hopeful that we could get 1 or 2 of those by the end of the year. So there's a lot of good activity. There. Yeah. We were gonna continue the path of 7 years of doing this in underpromise on over deliver on those but I feel very good about the pipeline.
Where we are on deals both into your 1 true too and even from tier 3 stuff and then on the lending and the bass side of the business. There's a lot of interesting things happening there as well so it it your point around the third quarter is a little tricky I think it's probably the the biggest vacation somewhere in the history of summers or at least in my lifetime.
Uhm that somebody has gone when you're trying to get a deal done.
But ultimately I think they're all going to return here in the coming weeks and we will start to get some of these deals wrapped up but I feel good about R. P.
Pipeline and the activity and then where we are on the decision, making cycles and I think you're gonna see a strong back half of this year from us.
Good to hear thanks, Matt.
Thanks, Brian Thanks.
Your next question came from the ninth of Robert and I'm, telling me with.
Blair.
Thank you and good morning, they just follow up I know, we feed around this quite a bit but what is it you're looking to 2022 with your backlog you know the trend in your backlog currently in I think.
Suggesting will see different numbers by the end of the year. How coughing are you in attaining your organic growth targets in 2022 on on the top line. If you went in and.
Which products are adding most to that is it is it passes it precisionlender cloud lending or is it gonna be just the pure digital banking peace.
Yeah, Hey, Bob it's David and just to sort of that a little bit more color. My earlier comment about that we we are really looking forward to seeing the second half trajectory, but we have to keep in mind that this the time to deliveries important variables to factor in in the long term growth.
Uhm.
Graeme work that we put in place, we still believing that long term growth framework, but that's over a period of time and when you have air pockets. Like this you can see a period of 3 or this case 3 to 5 quarters, where you do have some compress growth, but what you end up seeing is a reacceleration from that once you work through that air pocket.
So as you know when we're not giving guidance at this point in time for 22, but we do think it's important to to make sure you understand the flow of revenue from bookings and the fact that we're just now seeing a reacceleration coming out of the COVID-19 impact of quarters. So as you're thinking about how this trends over the next couple of years.
Those are going to be important variables to factor in.
Okay. Thank you and then just on the gross margin again, the the past the transaction revenue the interchange you're you're recognizing that gross or net I mean, if it's gross that would I guess that would pressure gross margin. If it's net it would be accretive.
It's gross Bob and that's that's why we called it out uhm in the prepared remarks in regards to gross margin because it did have an impact on some gross margin compression again, it's a good thing overall because it shows that these programs are launching effectively uhm cards are getting on the hands of the end users and eventually they're going to transact on those cards.
But it does have a short term impacts.
And then just lastly on Precisionlender. After you could give any update there and how you know that's progressing and and not only in the U S. But I think Europe internationally as a huge opportunity.
But any changes or any commentary around how precisionlender is doing.
Yeah, I know that Ah Ah Ah Ah Ah Ah really good quarter, considering that did the 2 tier 1 wins on a quarter I liked the pipeline that continues to be very active the the the existing customers there's growth on the cross sell side of things.
Anticipate us.
Be having a little more consistency quarter after quarter. After 2020 in North America on P. L. The pipeline looks good.
Europe is still lagging maybe we get 1 in in the back half of the year in Asia is as well. So those places are are just they're just behind where we are in North America, but very optimistic about the P. L pipeline and the activity that we're seeing and also is beginning to become part of net new deals that were signing as well as.
Part of the cross-sell motions that we're putting out there. So so very pleased with it the team is doing a great job on and it's such a differentiated products that I think you're just gonna continue to see growth in that business.
Thank you appreciate it.
Everyone.
Your next question comes from the line of Andrew Smith, Let's see any.
And that David cash because you'll well thanks for taking my questions.
Was hoping you could elaborate a little bit on the impacted gross margin.
Turned on within about the investments are making there is a technology infrastructure is deliberate cheese.
Little more color on the investments on that life would be helpful. Thanks.
And good to hear from you yeah. So <unk>, there's a few pockets of investments that were on the 1 is invest to grow obviously, that's investing in the technology stack and the capabilities a lot of focus on the the data solutions that we have which is what our customers are asking for a lot of folk.
<unk> on the customer experience, but what we're doing is also investing the scale and what I mean by that is finding ways that we can invest to have long term benefits to our overall margin profile. As an example, we're investing in ways to have continuous automated delivery on what that means essentially as we're gonna be able to upgrade Cup.
Estimates on a much more seamless fashion, reducing the workload by north of 50%. So it does require some short term investments and we're seeing that right now flowing through the P&L, but as we start to get into next year and in the following years, we feel we're gonna scale much more effectively in regards to things like delivery and you start to see the benefits of these.
Investments at that point in time.
Got it very helpful and then on the cloud lending side can see the the big Ben.
Mark to win should help from my perspective, but.
Is there anything change there from a go to market perspective.
The capability perspective, or simply function of just getting that murky clients and continuing to build a pipe.
I mean, we continue to enhance the broad like we're doing a lot of integration into the digital banking platform you'd think about treasury on boarding that is resonating with our prospects on customers. How do you make it easier for a corporate customer to become a to move from a competing bank to your bank or credit Union to your credit Union, It's Ali Differentia.
<unk> other people don't have it where it integrates with the digital banking solution. He tied in with precision lender. It makes for a very compelling offering. So we're continuing to build out asset classes feature functions and making sure that it's time together with our entire Sweet day manages both side of the balance sheet for the bank or credit Union. So just continue to invest in it.
Taken customers live we had a couple of really nice go lives on the quarter on the cloud lending solution for commercial or a small business and commercial functionality. So just continue to make progress 1 step at a time and really happy with the team and the and the progress they're making their.
Well, that's great to hear thanks, a lot guys I appreciate the comment thanks have standard.
Your next question comes from the line I'm, Matt Vanvleck with B T I G.
Okay. Good morning, guys. Thanks for taking my question I wanted to ask about the best business. It sounds like there's been a little bit of an expansion in terms of what the end and user is after obviously the night <unk> announcement was interesting on the the bitcoin side, but.
Curious in terms of how wide open that you're sort of casting on that opportunity what kind of maybe less banking focused types of of syntax or getting involved in wanting to at least add some services on the banking site on them.
In addition to that on somebody's Neil banks are you, having the lending conversations with them as they try to get into Ah more force suite of solutions.
Yeah. Thanks, Matt.
For us our last year I think we pointed out that we were we add in an environment, where the smaller send texts that are starting up in a little maybe just trying to get their their sea legs, we have them going into our sandbox and it's a very lightweight piece. So we're still doing those deals, but we're not focused on that as much those are inbound for us as much.
Is tier ones and then others that <unk> blue chip companies that may not be in may not be a bank and maybe an an embedded finance place that you can look at HR payroll retailers of all different sorts that we're talking with on the tier 1 side, so whether it's brands or tier 1 fintechs.
There's a lot of activity out there we have a very unique value prop to these we have Ah Ah Ah Ah Ah.
Credible group of references that are large brands that we can use to talk about the products as well as our banking or banking network. So we have really expanded our our net to cover more than just banks Fedex and neobank, but we're also chasing some of these these tier 1 players like I said that that I think could have some some really.
Interesting implications for us in 22 and beyond if you think about the the.
Some of the some of the ones we've referenced their amount of retail custom Mount a customers that they have in their marketing and acquisition engines are just incredible so it's been.
Obviously, a growth area for us, but the opportunity to expand in the space and are unique value prop is very differentiate from we're seeing a lot of good momentum there.
Great and and then on the centric side curious if you'd give us some kind of update in terms of the the total penetration and your customer base that are using a number of these solutions. Obviously fishing attempts another cyber crime is certainly on the rise Unfortunately, but uhm just curious on how.
Much of it attach right you have there and how frequently that's coming up in conversations as you go to these renewals and up so cross so opportunities.
Yeah, I just want to make sure you said sentrix.
Yeah Yeah.
Yeah, Yeah. So.
Sentrix I don't know the exact attach right I would think we have a couple of hundred we've partnered with those guys. Since we started before we even acquired them. So I think we'd have a couple of hundred but also keep in mind that are are risking for our day to analytics product in 2008, 9 that we rolled out that began looking at commercial transactions.
To see who you're paying when you ban how often you're paying and the amount is.
There's a risk in fraud tool that we continue to use enhance and protects our customers. So all of our risk and fraud technology, whether it's sentrix or whether it's R. A machine learning stuff is is is top 1 of the top 3 or 4 across cells every quarter for us and with 2020 people move.
More digitally you saw more fraud, unfortunately occur and so it's just a it's just a it's a staple for us and our sales process and it's just a rock solid product as we continue to enhance on the team up in Lincoln just doesn't incredible job with it. So it's it's obviously, it's always been important but even more as more people come on line and used product.
Alright, Thanks for taking my question.
Yeah. Thank you.
Your next question comes from the line of James Force set with Morgan Stanley.
Hey, this is Jonathan on Virginia. Thanks for taking my question I appreciate the optimism around the sales environment barring anything delta very unrelated how are you thinking about potential customer churn or the sales environment improves.
That's mature.
Yes.
I think I think with the.
As far as the logos perspective from our retention prospect from our retention perspective, what we did last year renewing a third of our customers plus M. P. S scores are as high as they've been in awhile, we've just really doubled down on diving in with our customers in solving problems thinking about how we can strategize together we had 5.
Tier 1 visits 3 C E o's in this quarter in the second quarter that came to see us and talk about strategy and direction. So I feel good about our churn number as far as the revenue churn number it should be on line 5 or 6% like it like it typically is and keep in mind. Some of that's M&A some of that products or and so feel very good.
The the where we are and and excited about the pick up that we anticipate seen in the back half of this year.
Helpful color and <unk>.
The last 1 on M&A, Yeah can you walk us through your approach I may going forward, how were you thinking about valuations on the current environment and do you think there there are still opportunities to be opportunistic with capital allocation.
Absolutely Yeah, we we look at a lot of deals that are out there valuations are high right now it just depends on what the what the product on the opportunity is if we look at plugging it into our model whether it's for lending whether it's for digital banking, whether it's for commercial functionality for data for retail functionality, all those Robert opportunities for us.
Including you know opportunities maybe on the bass side and so as we continue.
Continue to think about having the the customer base that we have in the M&A environment that we're seeing the the <unk> our customers doing the M&A and how we're on the winning side of that so much the opportunity to go expand within our customers and to build a product set out whether it's for deposit the pause deposits on the house of lending side of the house are all into.
Sting for us on the new ability to go on cross on more into the basis is a huge opportunity for so we're evaluating them will be judicious and that will be thoughtful and out in the deals that we do but there's nothing to report right now on M&A, but we are active and looking at things that are out there that could add value to the business of our customer.
Thanks for the color. Thanks.
Thanks, Jonathan.
I think that's all the questions. So thank you everybody I hope you have a great day, we'll look forward to seeing seeing on talking to people that are on the corner of the investor conferences.
Thanks, everyone.
Ladies and gentlemen that does conclude today's conference call. We thank you for participating you may now disconnect.
Goodbye.
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