Q3 2021 Q2 Holdings Inc Earnings Call

Good morning, My name is Misty and I will be your conference operator today.

At this time I would like to walk him every one to the queue to holding start corner 2021 financial results Conference call.

Oh, why it's happening placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone. Thank you I would now like to turn the call over to Josh Yankovich Investor Relations, Sir can I begin.

Thank you operator, good morning, everyone and thank you for joining us for third quarter of 2021 conference call with me on the call today is Mats Lake R. C E O David <unk>, our CFO, Jonathan Pryce or executive Vice President of emerging businesses corporate business development.

A quick reminder, that we will be hosting our virtual investor day on December 14th 2021 registration is now open and there will be a live webcast replay available on the Investor Relations section of our website following the event.

This call. It contains forward looking statements that are subject to significant risks and uncertainties, including statements regarding our expectations for the future operating and financial performance Q2 Holdings.

Actual results may differ materially from those contemplated by these forward looking statements and we can give no assurance that such expectations or any of her forward looking statements will prove to be correct.

Important factors that could cause actual results to differ materially for those reflected in the forward looking statements are included in our periodic reports filed with the SEC, including our most recent quarterly report on Form 10-Q, and subsequent filings and the press release distributed yesterday afternoon regarding the financial results, we will discuss today.

Forward looking statements that we make on this call based on assumptions only as of the date 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 and on that basis, a discussion of why.

We use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which may be found on the Investor Relations section of our website and our form 8-K filed with the SEC yesterday afternoon.

Let me now turn the call over to Matt.

Thanks, Josh I'll start today's call by sharing our third quarter results and highlights from across the business. I'll, then hand, the call over to Jonathan to give you more insights into the emerging businesses organization he overseas.

Given the long term strategic importance of banking as a service and Q2 innovation studio. He is joining today's call to provide updates and share. His perspective, David will then discuss our financial results in more detail as well as guidance for the fourth quarter and full year.

In the third quarter, we generated non-GAAP revenue of $127.3 million.

Up 22% year over year and 3% sequential.

We also added close to 400000 users a year over year increase of 12% that brings us to approximately $19 2 million total registered users on our digital banking platform.

Throughout the years I've shared our optimism that the financial services industry would continue to recover from the impacts of the of the pandemic as the year progressed, leading the gradual improvement and the buying environment in the back half of 2021 and.

And then the third quarter, we saw strong sequential and year over your bookings growth that we believe is consistent with our optimism net.

Net new bookings were up 88% compared to the third quarter, a year ago, and we had a strong quarter of both renewal and cross sale activity as well.

I've also shared the general sentiment from our customers that in spite of creating short term uncertainty complexity and competing priorities. The pandemic is ultimately serving as a catalyst for them to digitally transform their businesses.

Insistent with that sentiment, we are starting to see more financial institutions evaluate multiple aspects of our solution set like digital banking and lending at the same time as they look to unify their customer experience across the digital channel. We also are observing this digital acceleration with non traditional providers as evidenced by several key lending and.

Banking is a service wins with Fintechs brands and all <unk> in the quarter.

So with that I'd like to take some time to discuss a few sales highlights that we believe illustrate this improvement in customers buying behavior and are favorable position in the marketplace.

I'll start with digital banking, where we sided broad mix of strategic customers, including three new tier one financial institutions. The first of the top 10 credit Union that signed for our commercial banking sweet.

Was a highly competitive deal where our Indian commercial solution set was a key driver of their selection from Onboarding to digital banking to risk management.

The second tier one when was with the bank did selected us for retail digital banking.

The queue to innovation studio played a big role in this wind and a scenario where many of our competitors were evaluated.

And the third tier one digital banking deal was with a bank that selected are full digital banking platform, including retail small business and commercial while also adding our account opening solution Q too smart and risk management products were pleased to see tier one activity increase on the digital banking side and I think the fact that we saw star.

And alone retail and commercial deals along with a full digital banking platform win speaks to a differentiation in this segment.

We had several significant wins in the tier two and three spaces as well, both net new and cross sale.

We had a meaningful expansion when with the tier two credit Union that purchased our commercial banking Sweet in 2019 and has now decided to adopt a broad set of retail solutions from us as well.

Cleaning digital banking risk management and account opening.

We have more than 450 digital banking customers, many of which start with one aspect of the digital banking platform like retail or commercial.

Wins like these continue to highlight the expansion opportunity we have within our existing customer base. In this example, we also extended the duration of the existing relationship and added substantial incremental revenue and.

And over the past several quarters I've discussed the growing trend of financial institutions bundling more and more of our solutions as part of their initial agreement with us whether it's digital banking risk management lending or retail and commercial onboard.

Highlighting this trend we sided tier two bank and what we would consider a full digital transformation win as they purchased our digital banking and loan origination platforms concurrently simultaneously running the evaluation due diligence and executing an agreement for both solutions.

Going deeper into the digital lending activity in the quarter, we continued decided new deals and expand existing relationships, we're seeing compelling wind with our loan origination solution in.

In addition to the digital transformation deal I mentioned earlier, we signed an agricultural lender that will use our solution to modernize their borrower experienced and simplify their internal operations.

I believe these words demonstrates the flexibility of our loan origination solution, which enables us to compete for a broad set of digital lending opportunities from traditional financial institutions looking to modernise their lending up experiences to alternative finance companies operating within specialty markets on the loan pricing front.

One key when was a large expansion deal with an existing global enterprise client in this case the customer I purchased a loan pricing platform several quarters ago. During the third quarter. The bank purchased incremental functionality in order to broaden their use of our solutions meaningfully growing the revenue associated with this relationship. This is a great example of our ability to explore.

And our footprint with existing digital lending customers, whether it's cross selling additional functionality as was the case here extending into new business lines or into new geography supported by the financial institution.

So clearly I'm encouraged by the sales performance from the quarter in recent acknowledgement from industry analysts is further validated our product portfolio and our vision.

We were recognized by IDC for the openness of our technology in partnership with one of our customers visions Federal credit Union visions was one of the first customers to adopt the queue to innovation studio, which they which they've used to substantially accelerate their ability to deliver innovation to their members and and we were recently named a top vendor and I can't <unk>.

His group annual group's annual digital banking and cash management vendor reports, where they mentioned are expanded view of digital banking to orchestrate the into inexperience from acquisition to customer management as unique in the space.

Recognition like this is important customers look for validation from firms like IDC and 18 of vodka group when they are evaluating new partners and we view being increasingly recognised for the breath and strength of our portfolio is another driver of the market's belief in our product strategy when you're a couple that validation with the improving buying buying environment.

I believe we are well positioned to build on the sales success, we saw in the third quarter.

And with that I'll pass passed the call to Jonathan to talk more about banking as a service and Q2 innovation studio.

Matt over.

Over the past several quarters, we've discussed the digital transformation of financial services.

And this transformation applies not only to traditional financial institutions looking to refresh their technology, but also to non traditional players as well fintech companies and brands that are looking to provide banking services directly to their customers.

To do so they have to find ways to partner with financial institutions, both for the regulatory infrastructure and the expertise they provide.

Likewise, many financial institutions are beginning to recognize that partnerships with Fintechs and best in class digital solutions can be a driver of their ability to grow and differentiate and they're highly competitive markets.

We believe this convergence could play a significant role in helping to shape the financial services space over the years to come.

And whether through bank is a service, where our technology enables fintechs or brands to partner with financial institutions to launch their own banking products or Q2 innovation studio, which allows financial institutions to easily embed cutting edge fintech solutions into their own digital offerings.

We believe we are in a unique position to facilitate these emerging partnerships and business models.

And demonstrating our traction with these solutions, we generated strong momentum with both banking as a service and Q2 innovation studio during the third quarter.

On the bass side, we signed multiple net new deals extended a key existing relationship and supported our launch event with one of our strategic clients.

This client is one of the largest use fintechs and has now launched multiple products, including traditional savings accounts and certificates of deposit powered by our bass platform.

This is an example of the type of growth opportunity, we associate with large bass park partnerships.

As adoption increases among our clients and customers, we have the opportunity overtime to earn meaningful incremental revenue to the initial deal.

This launch also represents an early entry into business account functionality for a bass platform, which will expand our solution sets and we believe will represent a competitive advantage for us in the bank as a surface space over time.

Turning to queue to innovation studio, we're beginning to see this program serve as a differentiator for our digital banking platform.

Both with net new prospects and existing customers and.

In the third quarter, we signed several new partners to the innovation studio ecosystem and added many of our financial institution customers to the program.

As Matt mentioned earlier and Q3, we close the digital banking opportunity with a tier one customer which cited our innovation studio as a key reason for selecting Q too.

This situation underscores the growing strategic importance of a more open platform in today's market and the differentiation in the queue to innovation studio can deliver to both prospects and our existing customers.

Our customers are able to leverage due to innovation studio to accelerate their pace of innovation.

It provides them the ability to extend their platform deliver new functionality and embed fintech and other third party products into their digital channels with launch timelines that can be much faster than traditional delivery models.

Combined we believe Q2 bass and Q2 innovation studio will add new layers of value to our business and over time will play a strategic role in expanding our cam.

In order to capitalize on that opportunity, we expect to continue making investments in these areas of the business.

And by enabling the spy directional partnership between traditional financial institutions in this emerging ecosystem. We believe Q2 as in a highly differentiated position to facilitate this convergence and help to power. The next generation of financial services and.

And with that I'll pass it to David.

Thanks, Jonathan and good morning, everyone.

Following a couple of quarters of improved deal related activity were encouraged by the strong bookings performance we saw it in Q3.

We delivered solid revenue growth that exceeded the high end of our guidance based on delivered revenue as well as organic growth within existing customers as we benefited from increasing adoption of our solutions from customers that see the value in the wide range of solutions we offer.

Our ability to continue delivering revenue effectively and finding efficiencies in operations, even as we continue to make important investments in our solutions resulted in EBITDA, which also exceeded the high end of our guidance.

I'll begin by reviewing our results for the third quarter of 2021 in more detail and conclude with updated guidance for the fourth quarter and full year.

Total non-GAAP revenue for the third quarter was $127.3 million, an increase of 22% year over year and up 3% sequentially.

Both the year over year and sequential increase in revenue was largely the result of growth and subscription revenue driven.

Driven by new customer go lives inorganic user growth.

In addition sequential increase was also due to growth in services revenue associated with implementations as well as Premier services.

Transactional revenue represented 14% of total revenue for the quarter consistent with both the prior year period and previous quarter.

Transactional revenue dollars in total declined slightly sequentially largely from a decline in traditional bill pay revenue for the quarter, partially offset by growth and bass related transactional revenue.

Turning to backlog.

We ended the quarter with approximately $1.3 billion in total backlog Ah.

A 3% increase year over year in a sequential increase of $15 million.

Year over year and sequential increase in backlog was the result of bookings added renewal opportunities. In addition to the contribution of net new bookings.

Gross margin for the third quarter was 51.9% die.

Down from 52.5% in the third quarter of 2020, and consistent with the second quarter of 2021.

The year over year decline in gross margin was primarily attributable to expenses associated with implementation resources required to deliver and host new customer go lives as we continue to make investments and implementation resources aligned with.

With the net new bookings strength.

Total operating expenses in the third quarter were $62.4 million or 49.1% of revenue.

Impaired $250 million or 47, 8% of revenue in the third quarter of 2020 and.

And 57.9 million or 46.6% of revenue in the second quarter of 2021.

The year over year increase in Opex as a percent of revenue was largely related to R&D as we continue to invest in differentiate it innovation.

This innovation includes investments we have made in our emerging businesses and our commercial banking and lending offerings that we believe will drive long term value and growth.

In addition, some of the increase in R&D was driven by incremental head count associated with the acquisition of quick switch which were concentrated in R&D.

The sequential increase in Opex as a percent of revenue is largely the result of increases within sales and marketing driven by the first full quarter of expenses associated with Q2 stadium naming rights as well as key demand generating resources and programs intended to position us for the market opportunity that lies ahead.

Adjusted EBITDA was $7.3 million for the quarter.

Down from $8.1 million in the third quarter of 2020 at nine $9 million in the second quarter of 2021.

The year over year and sequential decline was largely attributable to a slowdown in revenue growth as a result of fewer go lives in the quarter.

Which was the direct result of the pandemic impact on demand and prior periods that we have previously discussed.

We ended the quarter with cash cash equivalents of investments of $394.6 million.

Down from $411.3 million at the end of the second quarter 2021.

Cash used in operations was $14.4 million in the third quarter compared to cash flow generated from operations of $11.5 million in the second quarter.

The sequential decline was due in part to the final payout of our termination agreement with Stonecastle totaling approximately seven $6 million.

In addition, the timing of payroll resulted in an extra payroll run in the quarter occurring the day prior to quarter clothes.

Also totaling approximately $7.6 million.

These two items also influenced our free cash flow in the quarter, resulting in a use of $17.7 million.

We expect that the normalization of these two items, coupled with a more favorable seasonality of other working capital items should result in positive cash flow generated from operations in queue for.

Now, let me wrap up by sharing our fourth quarter and updated full year guidance.

We forecast fourthquarter non-GAAP revenue in the range of $131.3 million to $132.8 million.

Representing year over year growth of 20% to 21%.

And as a result, we are increasing our guidance for full year revenue to 499.8.

$501.3 million.

Representing year over year growth of 23%.

We forecast fourth quarter, adjusted EBITDA of 7.3 million to seven $9 million.

And as a result, we are increasing full year 2021, adjusted EBITDA guidance to $34 4 million to $35 million.

Representing 7% of non-GAAP revenue for the year.

In summary, we delivered better than anticipated results in the third quarter and.

And we're increasing a full year guidance for both revenue and adjusted EBITDA.

Based on the improving sales performance and customer response to our solutions, we have observed as the years progressed.

We are increasingly confident in our ability to continue capitalising on and improving buying environment in Q4 and into 2022.

With that I'll turn it back over to Matt for some closing remarks.

Thanks, David before I hand, the call over to the operator for your questions I want to emphasize that I was pleased with the increase in bookings activity in the quarter, we've been optimistic about having a strong back half of the year and our bookings execution in the quarter was early evidence that this is this is materializing.

We had a strong quarter renewal and crossrail activity and grew net new booking substantially both sequentially and year over year, we send abroad makes a net new and expansion deals across our <unk>, our lives of business and market segments.

Which is a trend we expect to continue and looking forward, we feel good about the pipeline and the opportunity ahead of us.

We have a solution set that matches up with where the market is going and we're seeing validation among customers and industry analysts alike.

With all of this considered I believe were extremely well positioned to capitalize on the widespread digital transformation in financial services that is upon us.

With that thank you for joining today, we look forward to sharing more about our evolving market strategic vision and our perspective on the business in our virtual Investor day on December 14th I'll now turn it over to the operator for questions.

At this time, if you would like to ask a question press star one on your telephone keypad again that is star and the number one and please limit yourself to one question.

Your first question comes from the lineup Tom Roderic with Stifel.

Yeah, Hi, everybody. Thank you for taking my question is great to hear from you congratulations on the success in the quarter.

Let me so the first one it.

I guess, if we could just go back 90 days it seemed like at the time you offered up some mildly cautious comments on the timing and pace of some of these tier one deals in the pipeline and I guess as we sit here today, it's pretty loud and clear it seems like any way that the business momentum has returned three tier one deals a number of.

Deals around new products solution sets.

So so I Wanna.

That's kind of two questions on that number one do I have that right is this really kind of the all clear signal that that you're that you're offering us.

And if so can you kind of comment on the momentum in the pipeline as well as the deals that you locked in in the in the big booking strength that you saw just in the corner that just passed.

And second question around that if I do have that right.

How should we think about how this all ripples through the model I mean, I know, it's too early to kind of issue formal guidance for for 22, but I'd I'd I'd love to hear any directional thought you might have as to how kind of just renewed momentum plays and into the model and I guess more than a point when should we all expect to see a little bit of renewed momentum or should I say.

Acceleration and the top line, it's a function of when these bookings kind of ripple through the model and the piano.

Yeah. Thanks, Tom So I'll I'll take the first one I'd have David kind of talk about the model and how this all the.

The bookings plays out but extremely pleased with the quarter obviously.

Whether it's the all clear sign or not I'm not sure, but I will tell you that I think Q4 looks better than Q3 did and I think the Q1 and 22 are shaping up to be.

Really really.

A much better than the past five quarters.

The opportunities whether it's on digital banking digital lending banking as a service digital acquisition data products corporate banking products.

The breath of the platform is is really differentiating and one of the things in the in the script that we talked about was we signed our first transformation deal, which is the bank started off looking at digital banking and ended up moving to digital lending we have a couple of those deals in the pipeline that I believe will materialize down the road, but I think those are opportunities.

That are very difficult to compete with us on and I think that talk track is really growing.

Within the customer base quite a bit so I think you're going to see this momentum continue into Q4 and hopefully into the first half of of 22, I'm a little leery to say all clear based on the world. We're living in now, but I feel really good about what we just did in the quarter with the team did there's a lot of things with the execution delivery, but the sales organization.

Really stepped up and that's cross sell net new banking as a service lending in digital banking, so really pleased with that group and we.

We look forward to kind of get in the last five quarters behind us and continuing the momentum that we had.

And coming into 2020, so David Yonder was model Yeah sure a job in regards to how this all plays out the model as you can imagine what right in the middle of our 22 planning process and there's some really important variables that we need to finalize the least of which is R. Two for bookings number.

As well as we're finding our model for our transactional vast business, but if we were to say, where we think the Florida's right now for next year would say, that's about 15% to 16% of growth.

For next year on the revenue side, but you catch the question in a way that I want to make sure that I elaborate on which is when do we start to see the momentum that we had in Q3 come back into the mall and if you. If you think about how this this revenue starts to manifest itself in the mountain looking to start the manifesto revenue in the model we.

Think we could see a acceleration of about 300 points and that's in excess of 300 basis points in FY twenty-three based.

Based upon the strength that we saw in Q3, and then assuming that we see that momentum continue in queue for and into 2022.

Super Super helpful. David really quick follow up for you just so I haven't clear on that and then that 15% to 16% floors is really helpful.

You consider some of these newer solutions jonathan's talking about that you know.

And if we think about say, perhaps precisionlender. There are certainly some of these where there's perhaps a little bit of a transaction will components are shorter revenue recognition cycle component that goes into it.

When you look at the pipeline and how those newer solutions with different Rev wreck policies might sort of impact the model. How are you contemplating the impact of those in in that kind of 15% to 16% does it really no assumption of those kind of clicking in in 22 do you have some assumptions would love to just.

Thematic Lee here, how that might impact the model and how you're thinking about it and that floor you just laid out.

Yeah.

That's why I said that was that was one of the key points that we're working on right now for our 22 planning because the more data that we have around these fast programs in terms of the program launched relative to what we start to see the revenue really kick in from the launch of these programs and the incremental users and the incremental transactions the more data we have.

And what we can incorporate that into the model the more intelligence model because so we want to refine that over the next few months offer 22 planning. So that we can give you a more defined answer so for both of those questions. Your question overarching on with the the trajectory looks like into next year as well as how vast plays a part in that how we model transactional we're gonna give you more.

Color and the Investor meeting.

December as well as in our guidance that will give you a formerly in February.

So we look forward to having that conversation with you will certainly talk about about 22 as well as our long term planning model, which will give you a little more color on 23 as well.

Fantastic I'll jump back in the queue. Thank you gentlemen, that's great.

And that comes from the lineup Terry Tilman, what's your security.

Yeah, Good morning, everyone and congrats on the the new business bookings uptick it's great to see in the commentary and <unk> as well I think the operator, so that I could ask one question I might have a lot of parts to the question. So just a heads up on that but the the the first part of my Multipart question is on the innovation studio at.

You know, maybe maybe it's we're talking to investors and trying to kind of keep it simple and understandable.

What exactly could be a couple of examples where innovation studio stood out in like that once you're one transaction I know the idea of open banking and that sort of thing, but like in any kind of more color on a specific situation, where yes. This part of innovation studio on what you're doing really was the tipping point for the deal.

Yeah, Jerry I'm Gonna have Jonathan join Us today and he runs the business. So he deserves a credit for that but I would say that.

We have we.

We had three really large customers in yesterday and today and the segments that we had with them. There was there was a slotted hour on innovation studios and it ended up being two two and a half hour conversation on places that they can go with that because there's a lot of different.

Ways. They can use this to drive innovation in partnership with intact, but let me have Jonathan kind of cover how he sees that plain out because.

He runs that business.

Yeah, Thanks to area so.

To get into your question when you think about the specific segments. They're looking at this is all really about how do they get the opportunity to engage more with their end users and so we're trying to figure out where in the financial journey of a consumer a small business or even a corporate end user Rob a bank or credit Union has the opportunity to engage with these applications in a in a more.

<unk> tangible way inside the bank, so think of areas like digital customer support there's a lot of technology vendors out there that are solving for that inside the FY channel, we're bringing those partners into the platform by opening up through the S. D K.

Areas like payments and money movements, HR payroll anywhere where they're basically adjacent to the financial journey and not a core product necessarily at the bank. How can we bring these best in class fintechs into their experience. So they can get that that incremental engagement with the end user and that's across like I said consumer and small business or the.

The most frequent and use their use cases, we're seeing.

And on that Jonathan would would you all get like residuals with some of these a third party tools, you're not in the HR payroll space digital customer support Likewise would you make money on through a reseller relationship and then I just have one final.

Question, Yeah, exactly and what will dive much deeper into the model of the Investor day, Terry, but you're kind of hit on it were striking Rev share arrangements with these partners and and in many cases through the marketplace model, we're sharing that revenue back with the financial institution to try and help drive a new non noninterest related revenue stream for the F. I.

But yeah, we're we're striking rapture relationships with these partners I am trying to incentivize adoption within the <unk>, but also make the channel attractive to these fintechs.

Okay and my final part of my three part question than sorry, Matt and David you guys are getting short shrift today since we have Jonathan performing is on the bass business I'm curious Jonathan there's been a lot of consolidation and some bass vendors that have been acquired or merged et cetera are you seeing any kind of dislocation or disruption, that's creating incremental off.

Attunity for you all to get new design wins, just maybe what the competitive environment like and kind of take away environment. Thank you.

Yeah, we we certainly see a lot of activity, whether it's consolidation fund-raising new startups in the space. It. It's obviously very early and then early innings and the bass markets and we think we're in a very differentiated position with our scale our flexibility our bank of record network and so what we're seeing it and we're watching it but we're also going after a very targeted segment of the market.

That is the largest tier one syntax and brands and so we we really feel that there are very few players that can serve that market at scale and and that's that's how we're differentiating right now and we think that as we move and we talked about business account functionality and we continue to invest in this business in the roadmap. We said we think we are in a good position, but you're right a lot of consolidation has happened.

And some of that consolidation is happening between theoretical competitors in the market, which makes customers potentially leery of of where to place their data what programs to work with et cetera. So it's it's interesting because <unk>, it's probably too early to tell how much the consolidation could drive opportunities, you know our way or or churn within existing competitors.

But we're we're clearly watching it and there's a lot of activity in the market.

Thanks Terry.

Your next question comes from the lineup Sterling.

J P Morgan.

Yeah. Thanks, Hi, guys Uhm so for for my question I want to ask on.

Of the supply side, another words on your sales and sales productivity and capacity, it's great to hear that the increased or the more positive tone around bookings where are you in terms of capacity utilization within the salesforce that you have today and what are the hiring plans that you have to kind of some.

Port that improve demand environment that you're seeing.

You know out there.

Yeah. Thanks, Sterling so from a planning perspective, as David said, we're putting our 22 plan together, but we added my van ask you joined US Chief revenue Officer, a lot of experience with big enterprise sales organizations.

What he's really doing the structuring enterprise account teams that are gonna go out and be able to get a lot more leverage out of of an existing customer or a prospective customer. So I think where we are now is there's not there's not gonna be a big spend on the sales sought sales side on the marketing side I think there's gonna be a little bit of an increase in <unk>.

<unk> to drive.

The messaging the one Q2 messaging more.

More demand Jen out there because we're really seeing uhm that our messaging is resonating with folks, but I don't see a big increase in spin David keep me honest here, but right now our our what Mike's doing both to expand within existing customers as well as to go when the net new deals I think you're gonna see a lot of efficiency out of that I think we've also become pretty efficient.

And the pandemic.

Working at a remote environment, where we're able to leverage more resources, whether it's our office of strategy, whether it's our our premier services are kind of a consult our advisory consulting groups to where we are able to get far more people in front of a customer without having to get on airplanes. So we get more coverage that way. So they are really really good about the coverage model. We have right now and also feel good.

Out where Mike our chief over the officers, taking it into 22 and beyond.

Got it thank you.

Yeah, just just just as of that I think as you look really I was 22.

That hit on the head in terms of the sales organization with a lot of the spend that we see is going to be directed on top of subtle pipeline Jen and that's gonna be with with marketing programs and there's going to be some sort of tactical spend that increases as well naturally like TNA. We're starting to see that ran back up in the second half, we don't expect it to get back to Prepandemic levels.

Next year, but we certainly expect it to be more like we exit this year than when we exited last year.

Understood. Thank you guys.

Hey, Thanks Sterling so.

You can ask questions comes from Bob Nepali with William Blair.

Hi, Thank you and good morning, I appreciate all the the information I'll just a question.

On the on the model on the law and I'm sure you'll get a lot more into this on December 14th but.

You've changed a mix of the business quite a bit and broaden out the business. What is the right gross margin and EBITDA and as I mean, the timing too.

Span does the margin EBITDA is that extended since you have what it seems like incremental investment opportunities.

Yes.

You're right, we do have incremental investment opportunities and we want to make sure we take advantage of those opportunities. However.

We're looking out to 2025 and beyond we certainly see a landscape for which we can expand our gross margins in our overall EBITDA margin substantially over a period of time I think it's gonna be really instructed to have those discussions with you in December because we will be able to show you. The shape of how we think that that can happen over a period of time and it's not going to be.

Linear as you can imagine, but we're gonna talk specifically about the opportunities that we see to drive efficiencies while at the same time, making these important investments many of which are happening now uhm, but yes, we do see the opportunity to expand those margins, we do see it over the course of the next three to four years, but we're not going to get into specifics quite yet.

Her mind that color and so.

<unk>.

And the backlog of just related that the the growth in the backlog can you go over the numbers on the year over year and sequential growth and is there any change and the timing of recognition in backlog over what you had historically.

No.

That's what was great. This quarter was when you look at the makeup of backlog in terms of how we added to the backlog year over year. It came from all all T buckets cross-sell renewals and knew we saw a really good growth in that new bookings year over year, which Matt mentioned call three quarters. This year, we've seen a really good year over year growth.

Ourselves and then we had the best quarter of renewables this quarter that we've seen in a while back a quarter for two three in terms of renewables that has a backlog was greater than the first half in its entirety.

So it was a great mix for us to see all three of those areas of business deliver.

And we certainly see Q4, historically has been a really strong renewal order.

Seen that opportunity again this Q4, I mean, if we pull some of those those renewables impromptu once it could put some pressure on to one backlog, but we feel really good about hours Q4.

Thank you.

Sure.

Your next question comes from the line of anti Semitic with C D.

Hey, guys. Thanks for taking my questions here and good to can see progress on the net new side, Uhm, alright, thinking a little bit on the control banking.

In an environment you can talk 11 about.

The competitive environment is evolving in your current engagement it seems like customers.

Customers are demanding multiple solution is getting a little bit more sophisticated that seems like an advantage for you and other skilled players, but but just curious.

A difference on the competitive side in terms of capabilities pricing anything like that relative to what we would see prepandemic. Thanks.

Yeah. Thanks, Andrew No I mean, it's the competitive environment largely the same you know there's new named that have come to the surface with you guys, but in general I would continue to say that as far as of full platform are you looking for retail and commercial banking solutions.

Whether it's a bank or credit union or both we do very well on those scenarios. We are we want a standalone retail deal a standalone commercial deal in a in a combined retail commercial or corporate banking solution in the quarter on three tier one so and highly competitive deals. So we continue to differentiate in all those categories as I've said before the re.

Tailed digital banking space is pretty crowded and so we're trying to be cautious and those deals I think if you look at it from a when ray perspective, I I I I think that they are holding steady to what they've been historically I think there's a chance for a win rates to improve as we move forward into Q4, and and 22 based on the uhm wins that we're having right.

Now what I'm seeing in the pipeline, but it's.

It's still a very competitive environment, and we're doing very well in that environment.

Got it I appreciate the comments on that and and then maybe one for David.

Thought organically, 20% plus and a quarter was pretty pretty strong given that the can be air pocket in new.

<unk>, maybe we could break that down in terms of contribution from Oregon user growth transactions, maybe some small like full lives et cetera, and then Y E. And then you put up to 50% to 60% for for 2022, but if you're doing 20% an environment, where it is very very limited level.

Of sort of go live activity.

Why is that 20 per cent level not sustainable as we get this next year. Thanks.

Yeah. The biggest reason for that I know, we've been talking about this down for a few quarters is this air pocket concepts I mean, when when you were five quarters in a row, where you got COVID-19 and pandemic impacted demand slash bookings that that ends up manifesting itself at some point in time and with our.

Delivery model of of nine to 16 months in terms of the most complex at 16, we ended up.

We're gonna be seeing is those five quarters impact the 22 revenue fairly significantly and you'll you'll see that right now in our queue for guidance rhetoric, you for guidance is 20th 21% revenue growth, which to drop off from where we've been here today, we certainly expect that to continue in terms of going lower obviously with a 15.

16% for the reference, but then we'll start to see the benefit of the Q3 bookings SEC.

Second half of next year, we talked about those three tier once those those tier ones. Most of those are gonna go live in the third quarter and maybe the fourth quarter of next year. So you start to see that revenue come onboard late next year, you start to see that revenue acceleration as we exit F Y 22, and then see the real benefit of that and that's why I <unk>.

Three and I would add Andrew that if you think about David wasn't here at the time, but if you think about 2016, we had talked about a slowdown in decision, making and there were three quarters of an air pocket that we work through those work through 2017. It's the same thing that you have here you just have a longer set of quarters that that you.

Add pressure on on on bookings, so that air pocket will work its way through 22 and sets up a really nice twenty-three.

Got it makes a lot of sense I appreciate the Comcast.

And last question comes from the line of peat Heckman with da Davidson.

Hey, good morning, Thanks for taking my call I wanted to follow up with it on Precisionlender. It seems that the in each of the last three quarters. The company has been announcing either new deals or expansion for a loan pricing and I'm curious.

Do you think precision lenders poised to meet or exceed kind of your original goals for $30 million to $35 million in revenue at the time of acquisition sometime.

Get to that run right sometime here in the next couple of quarters.

Yeah, I'll comment I'll, let Debbie comment on the run right side of it but for me.

Precisionlender <unk> is really had a strong 21 and they even had some enterprise deals that we were working that pushed into queue for that we're working now but the pipeline looks good the activity looks good you see the partnership announcement that we had with B C. G around them building a product around Precisionlender I I feel very good about the pipeline where it.

And I think that that they are going to meet if not exceed the expectations that we had.

When we when we acquired the business it's been they.

They had a rough go in 20, but because of the decision making at the enterprise level with these bank, but right now it's it's coming out I feel really good about the pipe for for the queue for as well as for 22.

Yeah just on.

Keep in mind that you know they were impacted obviously and we talked about this fairly extensively on numerous earnings call that appealed business wasn't back to buy the pandemic. So the original business case was done without contemplating that impact we do feel like with the momentum that Matt referenced strong pipeline that we've gotten P O and all of the.

The things that we see lining up over the course of the next few quarters that run rake certainly be achieved within the next couple of quarters. In other words do you take that quarterly revenue that we see coming from keel over the next couple of quarters run rate that out.

Certainly be at or above those those levels in reference.

Okay, great. Thanks, Andrew.

There'll be actually.

Your next question comes from the line of Alex <unk> with Raymond James.

Okay.

<unk> I'm Gonna ask kind of just bigger picture in the post pandemic trends in that kind of as it relates to the strong bookings this quarter, but but are you starting to see more urgency from from the F is kind of modernize the digital banking capabilities in order to retain customers or is there. Some other commonality that kind of drove the bookings activity kind of across the finish line and what's normally a seasonally slower quarter. Thanks.

Yes, Thanks, Alex I think what you're seeing is the customers our customers as we've talked about their <unk> their their number one focus during the pandemic was their customers and how they were going to help them get out of the pandemic and survive whether it's the P. P P or whatever so what you're having now is they're <unk>, they're back and whether it's a sense of.

Urgency or the criticality of digital <unk> is an experienced moves forward I am seeing far more executives involved in decision, making I'm seeing uhm.

There's a there's a change in the reporting structure and a lot of these financial institutions, where you have a cheap digital banking officer, a digital officer now that's reporting directly to the C. E O and so they are it's moving to the importance of it has become clear in the decision, making around and I think some of the decisions that were made in two.

21 were just they were just extending contracts with existing vendors knowing that they were going to have to make a change what they had to kind of.

Sort out what was going to happen in the <unk> in the market with the pandemic and so what you're seeing now is a lot of these decisions that were delayed in 20 or 21 or coming to fruition for us in the pipeline in Q4, and Q and 22 and so.

My optimism is is that.

We're gonna see this bookings momentum continue and I think we are as I've said multiple times, we are extremely well positioned with the breath of our platform our experience with the integrations. The type of customers. We have the number of times. We've done this and so I feel very good about how things look moving forward and I think we're aligning with our customers and our prospects.

On what they are trying to solve for and even innovation studios, we're having conversations with customers about revenue generating opportunities for them as opposed to just selling them more software, we extra where we just extract money from them in those conversations are what banks and credit unions want to talk about right now which is how can I generate revenue from this channel and how can I drive means.

Full engagement and experiences and cross sell them expand my relationship with my existing customer. So we're in a very good position. We just we just have to continue to execute and focused on the customer's prospects in in the culture and the employees. This company.

Got it. Thank you and then just one quick follow up we're talking about the M&A activity amongst your customer base last quarter is kind of a potential driver of users and I'm. Just wondering if you've been able to get any more confidence around the potential to come in your thanks.

Yeah, I mean, if you look at the numbers.

Year to date, I think we've had total and the customer base eighty-three acquisitions or M O. He's.

That have occurred total and 78 of those have been where we have been the acquire or the or the <unk> merger of equals so 94% of those deals are gone away and then just on the digital banking side year to date I think we're at 36 total acquisitions, 34, where where the acquire or you know the.

The merger of equals so for me those numbers are phenomenal they align with what we've said all along which is we have there's a law of attraction that occurs the most strategic financial institutions want to partner with us those <unk> those financial institutions are taking a long term view on technology. They therefore gonna be the acquires they're gonna grow in their regions and so those numbers are very difficult.

Built to refute that so I feel really good about the the mergers and acquisitions I could do activities coming in our favor. The only challenge right. Now is the federal reserve has got a backlog in the delay around these mergers is is <unk>. That's another thing, it's probably not going to contribute much to 22, you're looking at nine and.

In some cases, maybe even 12 months of approval of some of these these acquisitions, but beyond that also take it. It is it is something we are going to get down the road when it comes on and it's growing a base and it goes or opportunity to expand within them. So the the <unk> activity continues to be extremely favorable for us and a tailwind.

Got it thanks man.

I think your bills and.

The next question is from Matt Danvy with B.

T I D.

Yeah. Thanks for taking my question guys with shoveling the quarter I guess when you look at a number of these new opportunities around digital banking both from the animation studio in some of the other acquisitions made and then also on the lending side. It seems like you're finally seeing some some strong success.

Ross selling and in one case this quarter, even smelling it altogether.

I guess the bigger question following on one earlier as well, but what's the what's the deal impact when when you are able to sell multiples of these products over the top of digital banking, how much of an uplift to whether it's recurring revenue from a deal or total contract value.

Should we think about some of these adding in and then in the case of adding the lending components to digital banking, how frequently is that now being discussed and that new deals.

Yeah.

So if you work through the products and as we go through like the cross cells that we have the top products that were sown into our customers. Now are are data driven or digital acquisition. So onboarding, whether it's a retailer commercial customer risk management products like things like Sentrix and and our fraud products.

And then innovation studios is becoming a big part of the cross. So so those all have very different uplifts in and they can be depending on the significance can depend on the size or or what the customer wants to do with it as far as digital banking and digital lending goes those are <unk>, we're not seeing price pressure on.

When you sell digital banking, you've got a reduced digital lending because those are very different products that I think the customer and prospects understand require support and implementation. So it's hard to put a number on it but I think if the real value here is on the net new side you provide <unk> tell a story, that's very difficult for somebody to come to.

Compete with because the banks and credit unions don't Wanna go cobble together other vendors and other technology does not integrated built together and they Wanna have one vendor to deal with the tie all of this together. So the differentiation is going to lead to what I believe as I said earlier, probably better when rates than we've seen in the past, it's gonna be a huge expansion opera.

Attunity for us within within the business and it just kind of leads to this optimism we have going into 22 at these banks have kind of feel confident that their customers are healthy and gonna <unk> gonna continue to do well and.

And that they're gonna begin to invest in technology, because they've seen the efficiency and the opportunity to go drive whether it's revenue or better engagement with our customers. So they don't know if you can provide more color on it but yeah.

It's interesting because you take the baseline of just a retail digital banking deal and then you say hey, what what's that is expanding either over time with existing customer or for a given opportunity and you add commercial and they were you add risk management you add account on morning, you ads on digital lending solutions it becomes a lot.

<unk> of that original deal it's not just a 50 60, 70% we're talking about multiples of the original deal. So you see significant amounts of opportunity on top of that original.

Digital banking retail deal referenced earlier to use as a baseline on the other thing that's important that you references in jonathan's here in the room as we also layer and there are much different economic model with the transactional nature of the innovation studio.

It's one that we feel is gonna be really rich and creates this flywheel approach going forward and we're really excited that quite frankly, so you have the traditional subscription based model and again as you start adding on more and more of these products that becomes a significant.

Incremental revenue stream relatives.

<unk> digital banking retail deal and then you add different economic model and its transactional in nature. When you add the innovation studio component to it.

Alright, very helpful. I guess on a quick follow up on somebody you mentioned earlier that you know a number of these deals now you're sort of extending the duration as you add on products, but uhm as we look back to you know the last day or pocket, you mentioned and kind of the 16 17 time frame, we're now getting to the point where.

I presume those the original contracts on that sort of average five year term are coming up for renewal should we expect the cycle of renewals to be at an elevated level for the next four to six quarters here Uhm or is there anything that you know over the last couple of years, you've you've sort of kicked that can down the road and it's a little smoother.

On the the renewal cycle here on a go forward basis.

No that actually you know last year, we saw an outsized amount of renewals occur in a lot of that was market driven.

As we talked about last year, we saw a lot of customers reach out to us proactively to renew with us given the uncertainty with the pandemic. We also have programs that we ran uhm acute care program as an example to insert customers to renew with us and give them some economic relief.

So that resulted in an outsize year last year and that not only include you what was in target, but it also include a bringing in some out of target renewals, but now when I bring this the short term I mentioned this earlier, we do see typically Q4 is a big renewal quarter and this year will probably be no exception and you typically then see a dip in Q1 so.

Just for modeling purposes understand that as you're thinking about how backlog starts to play out over the next couple of quarters, but I would not expect next year to be an outside you're in terms of renewables because we put so much that is why 20th.

Alright, great. Thank you for all of the card.

Thanks Man thanks.

Your next question comes from the line of James Facet with Morgan Stanley.

Hey, guys Jonathan on for James I. Appreciate you, taking our questions I wanted to build on Andros question from earlier account as a new bookings environment <unk> for you its and presumably also improving for competitors can you talk through how you're thinking about potential customer churn, perhaps the pricing environment given they've renewal the renewal.

<unk> for Q4.

Yeah sure Jonathan I mean, right now, we're really comfortable with our position with our customers, we're seeing churn rates that are.

Align with what we said entering the year, which was sort of a 5% to 6% range. So we feel good about how we're entering 2022, we obviously have an account by account builder of of what.

What customers are up for renewal last year and the relationships with all of our customers know specifically a renewal of 2022 or Joey good we feel like what we provided you earlier in regards to insure rate is still an accurate reflection of what we're saying.

Got it that's helpful. In a quick follow up on them and a you know you talked about I made a customer base, but I want to touch on cuties potential for emanate. How are you thinking about that tragic going forward how're you thinking that valuations in the current environment do you still think you can be opportunistic with capital deployment.

Yeah Shaun.

Jonathan on our side I can take that I mean, we are always looking at M&A candidly. The pipe is as robust as it's ever been but the reality is the valuation backdrop is challenging from a buyer's perspective, and so you know we got to be disciplined and and the quality the quality of the assets. It's clear that a lot of people are in market trying to take advantage of that valuation backdrop. So.

Obviously, we were looking and we're always interested but at the end of the day, we gotta be prudent from evaluation standpoint, and we've got to find the right strategic fit in marrying those two things together and the last throughout 2021 outside of the quick switch deal is obviously not been something that we found but there's lots of opportunity out there and we're we're always gonna be looking it's just a question of those two things coming together.

Hello caller, thanks, guys.

Okay. So there are no further questions at this time I will now tend to call back I went to the sneakers for closing remarks.

Thanks, everybody for joining us today, we look forward to diving deeper into the business in the future of the business on December 14th at our virtual Investor Day Conference. So if you need any information please reach out to Josh. Thank you very much excited about the quarter. We had to look forward to a strong finish it a year in a in a really strong 22. So thank you very much and have a great day.

This concludes today's conference call you may now disconnect.

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